Can I make a Deductible IRA Contribution?

Contributing to a Traditional IRA can allow you to not only put away tax-deferred savings into retirement, but you could also be eligible for a tax deduction in the year of contribution.  Read on to see if you can deduct your Traditional IRA contribution this year.

Do you or your spouse have earned income?                                                           

Earned income means income from wages, salaries, or bonuses.  Examples of unearned income include investment income and inheritances.  If you do not have any earned income for 2018, you will not be able to make an IRA contribution, deductible or not.  If you do have earned income, move on to the next question.

At the end of this year, will you be age 70.5 or older?

If you answered “yes”, you will be ineligible to make a contribution to a Traditional IRA.  However, you may still be able to contribute to a Roth IRA.  Check out our “Can I make a Roth IRA Contribution?” flowchart. If you will be younger than 70.5 at the end of the year, continue reading.

Did you make a full contribution to a Roth IRA?

If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit.  If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years.  Either way, move on to the next question.

Did the divorce occur at least two years ago?

If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits.  If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.

Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Key Questions for the Long-Term Investor

Focusing on what you can control can lead to a better investment experience.

At some point, most investors ask themselves questions like: “Do I have to outsmart the market to be successful?” or “Will a fund with strong past performance do well in the future?” A few key principles can help provide answers and improve the odds of investment success in the long run.

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself some of the questions below. Trying to answer these questions may be intimidating, but know that you’re not alone. Your financial advisor is here to help. While this is not intended to be an exhaustive list it will hopefully shed light on a few key principles, using data and reasoning, that may help improve investors’ odds of investment success in the long run.

Click here to read more:

Key Questions for the Long-Term Investor

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Retirement Math: Save Early and Often

Plus sensible catchup strategies if you’re behind

By Robert Pyle

Key Takeaways

  • The money you sock away during the early years of your career will likely grow the most.

  • Do you know your income replacement rate?

  • Don’t get bogged down in the math—keep it simple.

  • Don’t panic if you’re behind in your retirement savings—there are plenty of ways to catch up.

 

A recent Transamerica study found that “running out of money” was the chief retirement concern for almost half of Americans. What’s more, only one-third of American workers (36%) said they were “very confident” about the ability to retire comfortably. Today’s workers change will jobs more often than their parents and grandparents did—and have more temporary disruptions to their retirement savings. But an even bigger hurdle for achieving a worry-free retirement is that people are simply living a lot longer than they used to. It’s not uncommon to have a retirement lasting three decades or longer. That’s a long time to support yourself after leaving the workforce--even before you factor in the ever-rising cost of healthcare and eldercare.


Keep it simple
You’ve had a successful career. You’re very good at making money. But, you’re probably not an expert in financial planning. Just don’t think you need to do it alone.

When clients ask me how much they should budget for retirement I always tell them to keep it simple. You don’t need to calculate how much your spending on cable TV, cars, groceries and dining out. It’s nice to know that information—and I’m sure you could economize--but all you really need to know is what your (net) paycheck is—i.e. how much are you putting in your bank account every month and then subtract any additional savings from that amount. Example: If your net paycheck is $5,000 per month after 401(k) contributions, that means you’re spending $60,000 per year. If you were saving $400 per month in a taxable account from your net deposit, your spending would be $55,200 per year.    

Example: I recently started working with a new 401(k) plan enrollee. He had a nice military pension and wanted to have $7,000 per month in retirement (i.e. $84,000 per year). I told him he’d need to accumulate 25-times that $84,000 a year in retirement -- $2.1 million—if he expected to have $7,000 per month in his golden years. How did we come up with 25x?  That the reciprocal of 4 percent (.04), the recommended annual drawdown rate for many people.


Just don’t let retirement math overwhelm you. Again, the simpler you keep it, the easier it is to follow. For instance, this back-of-the-napkin estimate can get you pretty far down the road:

      How much do you need in retirement? $7,000

      How much do you expect from Social Security? $3,000

ANSWER: You’ll need $4,000 per month (i.e. $48,000 per year) from sources other than a paycheck and Social Security. Multiply that $48K by 25 and you get $1.2 million. That’s how much you’ll need to accumulate in retirement savings before taxes. This took less than a minute to calculate.

How do I know if I’m saving enough?

A good rule of thumb is to try to save one-sixth of your gross pay (16%) for retirement. I realize that’s tough when you might be savings for your first house and/or still paying off student loans. But look at ways to save. Do you really need the newest iPhone or other tech gadget every year? Could you eat at home more instead of dining out three or four times per week?

Do what you can. Your goal is to replace at least 40 percent of your pre-retirement income. Here are some recommended savings benchmarks:

Source: Dimensional Fund Advisors, How Much Should I Save for Retirement? By Massi De Santis, PhD and Marlena Lee, PhD, June 2013

Source: Dimensional Fund Advisors, How Much Should I Save for Retirement? By Massi De Santis, PhD and Marlena Lee, PhD, June 2013

For example, if you’re 65 and making $100,000 per year, you should have accumulated $1 million in your retirement accounts by now (10x $100K). If so, then you’d realistically be able to withdraw 4 percent of that nest egg every year (i.e. $40,000). The targets above are designed to replace 40 percent of your pre-retirement salary. Hopefully, your Social Security benefits will make up the rest, along with your spouse’s retirement savings and Social Security benefits. If not, you’ll need to set a higher income replacement rate.

See short video for more on income replacement rate https://videos.dimensional.com/share/v/0_r2tsjqhg or click on the video below:

 

According to Dimensional Fund Advisors, if you want to have a 90-percent probability of reaching your retirement goal (say 40 percent replacement of income) you would need to save 19.2% of your income every year if you start saving for retirement at age 35. If can start saving earlier in life--say age 30--you only need to save 15.4% of your income. If you can start at age 25, you only need to save 13.2% of your income.

I realize even 13 percent is a big chunk of your paycheck, especially when you are young. But, the data above shows how powerful compounding can be when it’s working in your favor.

 

Importance of saving early
I can’t stress enough the importance of saving early. Let’s look at three different savings scenarios: 

  1. Start saving $4,500 per year from age 18 - 25 and then no savings afterward.

  2. Start saving $6,000 per year from age 25 - 35 and then no savings afterward.

  3. Start saving $6,000 per year from age 36 – 65 without interruption.

    Assume an 8 percent annual rate of return under each scenario

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Clearly there is a big difference between in accumulated savings between Scenario 2 and Scenario 3. Under Scenario 3, you have $322,000 less in retirement savings with the same $6,000 annual contribution than you did under Scenario 2--even though you saved $120,000 more over your working life. This illustrates the power of compounding. Scenario #1 may not be realistic, but it further emphasizes the power of starting early.


Retirement savings catchup strategies

There are a wide variety of reasons that people don’t start saving for retirement until later in life. The reasons are too complex to go into in this article, but it’s never too late to play catchup. The simplest way to catch up is to max out your 401(k) by socking away $19,000 a year ($25,000 annually if you’re over age 50). Then set up an an IRA or Roth IRA for yourself (and your spouse) and make the maximum $6,000 annual contribution to each IRA ($7,000 each if you are over 50).

Your IRA contribution may not be deductible. But a non-deductible IRA will still grow tax deferred and you will pay tax on the gain only when you take it out of the IRA. Just note that with a nondeductible IRA, you aren’t allowed to deduct your contribution from your income taxes like you can with a traditional IRA.

Maxing out your 401(k) and contributing to an IRA could give you $31,000 to $39,000 per year. And, you can still contribute to a taxable account as well. The taxable account will grow partially tax deferred. You pay tax on the dividends and capital gains each year, but not on the price appreciation of the securities. Only when you sell the assets do you pay gains on the price appreciation of the securities.

The key to making any retirement strategy work is having an “automatic savings” plan in place. I can’t stress the importance of automating your retirement savings – i.e. automatic paycheck deduction—so you don’t have to think about it and so you can’t procrastinate.

Just make sure you don’t over-save. The risk with over-savings is that you don’t have enough ready cash available for your rainy-day emergency fund. We recommend having three to six months’ worth of living expenses on hand for your emergency fund—six to twelve months’ worth if you’re self-employed.

“Retirement age” likely to get pushed out

As record numbers of Boomers reach retirement age every day—and strain the Social Security system--policymakers continue to suggest raising the minimum age to receive full benefits. The minimum age is currently 66 years and 2 months for people born in 1955, and it will gradually rise to 67 for those born in 1960 or later. There’s a strong likelihood that the minimum age to draw full benefits will be pushed out to 70 by the time today’s young people reach retirement age. These changes are based on both increasing life expectancy and the government’s chronic mismanagement of the Social Security program. 

Bottom line: if you’re going to retire early, (say age 60), you’re going to be responsible for funding your own retirement longer--until your Social Security benefits kick in. By the way, the longer you can delay taking Social Security benefits the better. Did you know your benefit amount goes up by 8 percent a year for every year you wait between age 62 and age 70?


You don’t always get to decide when to stop working
Clients who are behind in their retirement savings tell me they’ll just keep working until they’re 70. Great, but you don’t always control that decision. Health complications can come out of left field at any time as you get older and sometimes your employer has the final say on when you stop working—not you. One of my clients who was intent on working till age 70 was forced into retirement at 67. Another who planned to work until 70-plus got an early buyout package at age 60. You need to be prepared for these scenarios. If you haven’t saved enough for retirement you have to keep your skills current and be prepared to switch careers late in life.

Conclusion

When it comes to saving for retirement, the variables are many and the math can be complex. If you take nothing else away from this article, start saving as early as you can and make your savings plan as simple and automatic as possible. If you or someone close to you has concerns about your retirement savings plan, please don’t hesitate to contact me.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.


Can I make a Backdoor Roth IRA Contribution?

The Roth IRA has one big advantage over the Traditional IRA: earnings are tax-free.  Unfortunately, there is one disadvantage over the Traditional IRA: it requires you to have a MAGI of $203,000 or lower in order to contribute to a Roth IRA.  There are some situations in which it makes sense to contribute to a Traditional IRA, and then immediately roll it over to a Roth IRA.  This is called a Backdoor Roth IRA Contribution.

Is your MAGI greater than $203,000 (married) or $137,000 (single)?

If your MAGI is lower than the amounts detailed above, you are able to contribute directly to a Roth IRA.  See the “Can I Contribute to my Roth IRA?” flowchart. If you are over the income limit, move on.

At the end of this year, will you be age 70.5 or older?

If you answered “yes”, you will be ineligible to make a contribution to a Backdoor Roth IRA Contribution.  If you are younger than 70.5 at the end of this year, move on to the next question.

Do you have an existing pre-tax Traditional, SEP, or Simple IRA?

If you answered “no”, you will be able to do a Backdoor Roth IRA Contribution.  If you do already have an existing pre-tax account, you will still be able to do a Backdoor Contribution, but you may be subject to aggregation and pro-rata rules.

Backdoor Roth IRA Contributions can have severe tax and penalty implications if they are not done correctly. Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Roth IRA contributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Second Generation Owners Are Often Different from Founders

Smart business families recognize this and adjust their vision accordingly

Key Takeaways:

  • Founding business owners and their children often have differing management styles, communication styles and expectations.

  • Founders appreciate directness and simple solutions.

  • Founders’ children often need more sophisticated solutions in which emotional considerations are as important as the financial ones.


Most business owners I know fall into one of two camps—first generation business owners or later generation business owners. Business families and their advisors who don’t take the time to understand the differing management styles, communication styles and expectations often run into trouble down the road.

Starting a business is incredibly demanding

Starting a business is hard work. Many founders work for years—and against all odds—to create a business that succeeds. Ask any successful business owner who has been around for a decade or two—they’ve experienced countless ups and downs. Often the downs have put the owners on the brink of losing their business. But they never give up!

To make it through the challenging times, entrepreneurs have to be very tough and resilient. They will tell you exactly what they think. They don’t pull punches and expect you to do the same.


First-generation business owners have a thick skin

The good part about first-generation business owners is that you can say almost anything to them as long as you do so with respect. But you’d better be direct and avoid legalese, MBA-speak and fancy marketing terms. If you don’t, you probably won’t be taken seriously.

Second and third generation owners tend to take a more nuanced view of the business. They’re more open to outside ideas than founders tend to be. However, Next Gen owners often make the mistake of thinking that founders will take their advice and implement it without knowing how the advice fits in with the business’s long-term or even short-term goals. If you don’t spend time understanding what drives founders, there’s a good chance they’ll just ignore you or cut you off mid-sentence.

Sure, many founders are gruff. But don’t walk on eggshells around them. To gain the trust of founders, you must get right to the point. If you’re able to do this, working with founders becomes much easier and more enjoyable.

First generation owners aren’t only tough at the workplace

The drive, resiliency and thick skin that it takes to start and build a business is one of brutal honesty. If you’re not brutally honest with yourself, it’s too easy to find excuses for things not working out.

In my experience, first-generation business owners aren’t only tough at work; they’re very tough at home. First-generation owners tend to be tough on their children. Tough love rather than unconditional love is more often their style. The children of business founders often feel they are under the thumb of their parents. This is especially true if children of founders decide to join their parents in the family business.

Second-generation owners are a different story
For their first 25 or 30 years of life, founders’ children will tell you they heard nothing but criticism from parents who had no patience for their mistakes and no tolerance for excuses. There’s something to be said about the value of tough love when so much of parenting today borders on coddling and “helicoptering.” But, this often leaves founders’ children feeling inadequate, with a strong need to prove themselves.

When founders’ children finally get a chance to run the family business, they often have no patience for founders and other advisors telling them where they’re wrong. Instead, they expect their employees, customers, clients and advisors to tell them how wonderful they are and how brilliant their ideas are.

A successful relationship with second-generation owners often means being a cheerleader instead of a true thinking partner. Although second-generation owners start their business careers with a huge advantage over where their parents started, they often struggle to maintain its success, much less take it to the next level. Without accepting honest feedback, it’s just too easy for second-generation owners to take the company in directions that hurt more than help.


The conundrum of second-generation owners

On the flip side, working with second-generation owners can be fun if they’re willing to be coached. You need to feed them ideas in the form of questions and let them adapt your ideas as your own if needed. Don’t force your ideas down their throats, or you’ll just get pushback.


Well-educated second-generation owners may want to use advisors and consultants with prestigious academic degrees and career credentials—people that founders would never consider bringing in. On the surface, it may seem like second generation owners are injecting unnecessary complexity into the business, but it’s best to let NextGen figure that out on their own. As a founder, you can suggest some ways in which simpler is usually better, but don’t try to override the process.

Being blunt with second and third generation owners generally won’t work. You must remember where they came from. It’s not necessarily coddling, but you have to be open to the possibility that there could be a better way of doing things.

Conclusion

One final caveat—generalizations are often wrong. I’ve encountered more than a few (first-generation) founders who are open to new ideas, outside expertise and a more collaborative work environment. Likewise, I’ve worked with many founders’ children who are gruff, relentless and think only one ways of doing things—their way—is right. Be aware of generational predispositions and try to leverage the strengths of each generation’s work habits and management style. Your customers and clients will thank you, and family gatherings around the dinner table will be a lot less stressful.

Feel free to contact me any time if your family or a close friend or relative’s family is considering a leadership change in the family business.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Identifying Your Property/Casualty Insurance Gaps

Standard insurance policies cannot adequately address complex needs. Here are 5 key questions that can reveal critical coverage gaps.

Key Takeaways:

  • Standard insurance policies may not adequately address your complex needs.

  • Disconnected polices from multiple companies are potentially dangerous.

  • If you have a custom home, an active lifestyle, luxurious possessions, domestic help, a public profile and young drivers in your family, get your comprehensive personal insurance reviewed on a regular basis.

From a consumer's vantage point, insurance is typically viewed as a necessary evil. Because standard insurance carriers commoditize their offerings through their advertising campaigns, it’s tempting to think that the simple act of buying insurance equates to being adequately protected—a belief that can prove perilous.

Much like seeking out a specialist for a particular medical issue, you should consult an independent insurance agent who focuses exclusively on successful professionals, business owners and other affluent people. If you’re not sure where to find a great agent, or not sure if your longtime agent has all the expertise that you need, ask your wealth advisor for assistance.

A good insurance pro should be asking you "trigger" questions that point to potential vulnerabilities in your insurance coverage. Here are five of the most useful:

1. Do you have enough personal excess liability insurance?
If a lawsuit puts your personal assets at risk, the last thing anyone wants to worry about is running out of insurance. Most standard excess liability (umbrella) policies cap out at $5 million, a figure that might not be sufficient considering your net worth. Don’t worry. It can be surprisingly affordable to obtain higher coverage limits, but this sort of solution can be accessed only through the independent specialist channel. Limits of up to $100 million are available on a single policy to address allegations of property damage or bodily injury.

2. Are your insurance programs complicated and disorganized?
You acquire assets over many years, so it's not uncommon to insure them in different ways. A summer residence, for example, may be insured with a different agent and carrier than a home in the suburbs. Fine art may be insured independently from cars. Whatever the combination, the end result is fragmented. This can create dangerous insurance gaps and makes coverage more difficult and expensive to manage. Don't wait until claim time to find out what is—and is not—protected!

3. Is your home properly insured and protected?
If you had to rebuild your home(s) in today's market, would you have enough homeowners' insurance to cover the expense sufficiently? Many properties are insured based on values that are vastly underestimated, especially those that have undergone extensive home improvements and renovations. For those living in wildfire- or hurricane-prone areas, value-added services also are available to maximize safety and preparedness.

4. Do you employ private staff?
It's not uncommon for nannies, housekeepers, private assistants, gardeners and others to take their employers to court. Employment Practices Liability Insurance (EPLI) responds to allegations of sexual harassment, wrongful termination and discrimination. However, this coverage is not included in a standard excess liability policy. In addition to more precise coverage, carriers that specialize in safeguarding HNW people may offer services to proactively manage risk, such as complimentary background checks on prospective or existing private staff.

5. Are you involved with charities or foundations?
Not-for-profit organizations typically operate on tight budgets and carry a minimal amount of liability insurance for their board members. If you or your spouse sits on the boards of not-for-profit organizations, you should look for additional individual protection on top of existing board coverage. Again, this sort of coverage will not be included in a standard excess (umbrella) policy.


A good independent insurance advisor will conduct annual lifestyle reviews to identify circumstances that usually are excluded from standard policies. If you haven't had such a review within the last three years, now would be a very good time to do so.

Conclusion

Property/casualty insurance and personal risk exposure are complex areas for successful people who have more assets than the average American has--and therefore much more to lose. Because so many wealthy people are not receiving counsel about their insurance-buying choices, you can raise questions with your advisor to help them spot potential gaps in your coverage and give you significantly greater peace of mind.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I do a Qualified Charitable Distribution from my IRA?

Charitable contributions are a common financial goal.  One of the easiest and most tax efficient ways to do this is to do a Qualified Charitable Distribution (QCD) from your IRA.  In order to do this, you must meet specific requirements which include age, dollar amount, and the type of charities you can contribute to.  Read below to see if you qualify for making a Qualified Charitable Distribution from your IRA.

Do you have a traditional IRA, inherited IRA, inherited Roth IRA, SEP IRA, or SIMPLE IRA that is subject to an RMD?

If you do not have a required RMD, you will not be eligible for a QCD.  If you do have to take an RMD from any of the IRA types listed above, move on.

Are you at least 70.5 at the time you plan to make the Qualified Charitable Distribution?

Those under 70.5 will not be eligible to make a QCD.  This means even if you have an inherited IRA subject to RMDs, the QCD may not be available to you.  If you are over age 70.5, move on.

Is the IRA actively receiving any employer contributions (SEP IRA or SIMPLE IRA)?

If you answered “yes”, you unfortunately will not be eligible for the QCD.  If you are not still receiving employer contributions, move on.

Is the recipient a private foundation or donor-advised fund?

Qualified Charitable Distributions can not be done through a private foundation or donor-advised fund.  If your intended charity is not private or donor-advised, then you will be able to make a QCD.  The amount of the QCD cannot be greater than $100,000 per year ($200,000 for married couples).

Qualified Charitable Distributions have to be done correctly, else they can have large tax consequences.  Check out this flowchart to learn more.

If you have questions regarding Qualified Charitable Distributions or other general retirement planning advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Don’t Let Your Brain Play These Tricks on You

5 common behavioral finance traps

Key Takeaways:

  • Understanding both the “how” and the “why” of irrational behavior can be invaluable to investors.

  • Research shows that many individuals are overconfident, under-diversified, short-sighted and often swayed by the media.

  • Learn how to protect yourself from your basic instincts.



Imagine world full of “rational” people who could maximize their wealth while minimizing risk. The ratings would be terrible for every cable-TV money show and there would be a lot fewer financial advisors in business. Rational individuals would assess their risk tolerance honestly and then determine an investment portfolio that met their income needs within their risk comfort zone. However, we know that most individuals are NOT capable of being rational—research has proven this time and time again.

Behavioral finance encompasses a body of theoretical and empirical academic research that seeks to explain how and why people, especially investors, do not act in a rational manner.

First let’s look at how investors behave irrationally:

  • Their portfolios are not sufficiently diversified.

  • They trade actively with high turnover and high transaction costs.

  • Too much of their wealth is tied up in their employer’s stock or in their own company’s stock if they’re a business owner.

  • They’re over-concentrated in or stocks of companies within their own industry or their immediate geographic area.

  • They tend to buy, rather than sell, companies that are mentioned positively in the news.

  • They tend to sell their winning investments while holding onto their losing investments far too long in a futile chase back to “break-even.”

Now let’s look at five common reasons why individuals behave so irrationally:

1) Recency bias.  We tend to make our decisions—especially financial ones—based on what happened to us most recently. Suppose a stock we just unloaded zoomed up by 50 percent a week after we sold it. Ouch! Then suppose there’s an earnings miss on another stock we’re holding, even though our disciplines might tell us to sell it. We’re scared to death that the same timing mistake we just made will happen again – i.e. the stock will zoom back up right after we sell it.

2) Anchoring.  In one sense it’s about having a mental stake in the ground to give you a framework for making decisions. For example, news about new market highs is blaring every day (Dow 26,000!  S&P 2,800!). And people are saying to themselves: “New highs! New highs! It must be time to sell.” But think about it. New highs are usually a positive sign for the market. We get anchored into these numbers and they distort our thought process. As a general rule, introverted people tend to be more skeptical. And that mindset can really hurt us in our investing because you miss out on opportunities or give up on an investment too quickly. On the flip side, extroverted people tend to be optimistic most of the time, but that can also hurt you as an investor, because you tend to expose yourself to too much risk—again and again.

3) Mental accounting/fallacy of breakeven.  Picking winners is not the big problem for most investors (do-it-yourselfers and many pros). The problem is that they can’t let go of their losers. When you’re holding on to your losers, your ego gets in the way. You tell yourself: “I’m know I’m right about this stock, the market just hasn’t recognized its value yet.” Or, you tell yourself, “I did so much work analyzing this stock, I can’t bail on it now.” So, you start doing all kinds of mental accounting and then at the end you tell yourself that you’ll sell the stock just as soon as it gets back to breakeven. And that’s an ABSOLUTE KILLER in investing.

When you hold on to a losing investment for too long trying to get back to break even there’s an opportunity cost. All those months and years that your money is tied up waiting to get back to breakeven means it can’t be deployed elsewhere in a more profitable investment.

4) Confirmation bias. Let’s say you have a great investment thesis, but you want it confirmed before you pull the trigger on it. So, you run around trying to get confirmation bias from all your smart friends, your broker and the Wall Street pundits whose picks you typically like.  Unfortunately, you’ve got a self-selected group of people who generally share your world view. If you’re honest with yourself, you’ll see they’re wrong more often than right.

Confirmation bias illustrates the danger of following the news media all day long and the danger of blindly following managers who have had the “halo effect” (i.e. hot hand) for the past several years. So you dive in and start following them and it often doesn’t work out. Remember those elite gurus who predicted that the housing crisis 10 years ago would trigger the global financial crisis. They made a fortune! So many investors piled into their funds waiting for them to work their magic again—and a decade later they’re still waiting.

5) Gambler’s fallacy. This occurs when you believe a purely random event is really NOT really random and that it’s going to continue to happen into the future. You start loading up now on FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) because you think they’re going to stay hot forever. You predict the next coin flip is going to land heads because the last 20 flips also landed heads. In reality, you have no way of knowing which side is going to land facing up. It’s completely random, just like so much of investing is. Most of the time, we have no control over what’s going to happen in the market. This fallacy that you actually have control due to some event that is random that you think is NOT random.

Conclusion

Behavioral finance literature serves as a reminder why it so important to protect yourself from you basic instincts—especially when markets are volatile. Safeguarding your wealth is a responsibility, not just to yourself, but to your family and the causes you support. Don’t hesitate to contact me if you suspect that you, or someone close to you, might be drifting from your long-term financial plan.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Charitable Gift Annuities

It’s worth the time and effort to get up to speed on CGAs

Key Takeaways:

  • A CGA enables individuals or married couples to make a gift to a charity in exchange for an income stream that will last for the lifetime of the last survivor.

  • A CGA is a tax-advantaged way to give to worthy causes and retain predictable income. Most CGAs are in the form of cash or marketable securities, but there are many other variations.

  • The deduction is available in the year of the gift and can be carried forward for five additional years if you can’t utilize it currently.

A Charitable Gift Annuity (CGA) is a split-interest gift in which the donor makes a gift, but retains a right to an income stream. Most CGAs are very straightforward; individuals or married couples make a gift to a charity in exchange for an income stream that will last for the lifetime of the last survivor. Most gifts are made in cash or marketable securities and provide immediate income to the donor.

CGA basics

First, every state has regulations regarding CGAs issued by in-state nonprofits and often in the state of nonresident donors. The CGA is a contract between the charity and the donor, and that contract, much like a commercial annuity issued by an insurance company, becomes a general obligation of the charity. This means that all the assets of the charity are available to pay the annuity income to the donor. This alone has kept many smaller charities from offering gift annuities to their donors. However, there are now organizations such as the Charitable Giving Resource Center (CGRC) that provide turnkey gift annuity programs for small organizations. Assistance includes calculation, administration, financial stability and money management resources for organizations that are too small to handle all those responsibilities themselves.

There is a nonprofit association of organizations called the American Council on Gift Annuities (ACGA) that provides guidance on gift annuities and gift annuity rates. While charities may establish their own gift annuity rates, those that don’t utilize the ACGA rates will be required by their state to hire an independent actuary to perform the necessary calculations. The ACGA rates are meant to provide a remainder balance of 50 percent of the original gift to the charity at the death of the last survivor. This means that the charities have immediate access to some amount of the donated property that they can use for their charitable purposes.

For the donor, perhaps the greatest benefit of a CGA is the ability to make a gift to a favored organization. This should always be the first part of any conversation you have with your advisors.

Tax benefits

There are a number of economic and financial benefits as well. First, there is an income tax charitable deduction for the calculated benefit to charity. The deduction is based on the net present value of the future gift. The deduction is available in the year of the gift and can be carried forward for five additional years if the donor is not able to utilize it currently. In addition to the income tax deduction, there is a possible deferral of capital gains tax. Donors who choose to give appreciated property in exchange for their annuity will not realize the immediate gain on disposition that would normally be due upon sale. The capital gains tax will be stretched out over the lives of the income beneficiaries and paid as they receive income. In fact, one of the attractive benefits of the CGA is the nature of the income. Effectively, there is the possibility of three different tiers of income with each annuity payment:

  1. Ordinary income, which is the presumed interest rate applied to the gift.

  2. Capital gains tax based on the appreciation of the property over its cost at the time of the gift.

  3. Return of capital that is free of tax.

These factors can create a very attractive “after tax” income for some donors.

Further benefits come in the area of estate planning. Assets given to charity are normally out of the estate for estate tax purposes. And though there is a retained income, since that income ceases at death it essentially removes the gifted asset from the taxable estate. While most estates won’t face federal estate tax because of the current exemption being so high, it is important to remember that many states impose their own estate tax and impose it on far smaller estates.

Other applications and considerations

While we’ve covered the very basics of CGAs, there are many other things to know from the perspective of income flexibility and asset transfer. Most CGAs provide income that begins immediately upon the completion of the transfer of the asset to charity. However, it is possible to establish an annuity or series of annuities that will be deferred for a period of time. It is also possible to structure annuities that increase the payment amount over time. There are many reasons why you might consider these options. Planning for retirement is the first thing that comes to mind, but providing income to pay for a grandchild’s college tuition is also a common reason. The possibilities seem endless.

Although we have discussed gifts only of cash and marketable securities because they are the most common assets used, almost any other asset can be utilized. With only 10 percent of American wealth held in liquid assets, freeing up illiquid resources might make the best approach. CGAs can be created with gifts of artwork, real estate, cash-value insurance policies, distributions from qualified plans such as IRAs, closely held stock and almost any other asset you can think of. The rules that govern each of these assets vary, and advisors must become familiar with them in order to provide the most appropriate recommendations to their clients.

Conclusion

While CGAs can be remarkably simple on the surface, they encompass many disciplines and have many variations. Contact me any time to see how this powerful planning tool-and its many nuances--can help you better serve your charitable desires, as well as your estate and income planning needs.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Do a Net Unrealized Appreciation (NUA) Distribution?

Many companies offer company stock as a type of profit-sharing bonus in order to encourage company stock ownership for employees.  This is typically rewarded to employees within their 401(k) or other retirement account.  Unfortunately, as with all 401(k) distributions, withdrawals are taxed at ordinary income rates.  To combat this, the IRS allows for the capital appreciation of the stock to be taxed at long-term capital gains rates, as long as certain requirements are met.  Read on to see if you could qualify for a NUA.

Do you have employer issued stock in an employer retirement plan?

If you have no company stock, you won’t be eligible for an NUA distribution.  If you do have appreciated company stock in a retirement plan, read on.

Is it phantom stock or stock options?

Unfortunately phantom stock and stock options are not eligible for NUA treatment.  If you have other company stock, read on.

Do you have investments in the retirement account, other than employer issued stock (such as mutual funds)?

NUA distributions require the entirety of the account to be distributed, but non-qualified distributions from retirement funds could trigger taxes and penalties.  To avoid this, roll all non-employer stock to a Traditional IRA. 
Was part or all of the employer stock distributed in-kind to a taxable brokerage account?

To be eligible for the NUA distribution, the employer stock must be distributed directly to taxable account.  Additionally, the distribution must occur after one of the following events to be eligible: death, disability, separation from service, or reaching age 59.5.

If you meet all of the above requirements, you will be eligible for a NUA distribution.  Check out this flowchart to learn more.

NUA distributions can be complicated and difficult to coordinate with the retirement plan sponsor.  Numerous mistakes can be made in the long process that will disqualify you from receiving NUA treatment.  If you have questions regarding NUA distributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Pursuing a Better Investment Experience

Key Principles to Improve Your Odds of Success

  1. Embrace Market Pricing

  2. Don’t Try to Outguess the Market

  3. Resist Chasing Past Performance

  4. Let Markets Work for You

  5. Consider the Drivers of Returns

  6. Practice Smart Diversification

  7. Avoid Market Timing

  8. Manage Your Emotions

  9. Look Beyond the Headlines

  10. Focus on What You Can Control

Click here to read more:

Pursuing a Better Investment Experience

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Quarterly Market Review

Second Quarter 2019

This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

The report also illustrates the impact of globally diversified portfolios and features a quarterly topic.

Click here to read more:

Quarterly Market Review

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Eradicating Entitlement

Even families that don’t consider themselves highly affluent can be raising “trustafarians” without realizing it

Key Takeaways:

  • Entitled people, especially children, don’t develop the capacity for self-reliance or independence.

  • Even in families of modest affluence, it’s essential for kids to learn about spending wisely, saving diligently and sharing generously.

  • Warren Buffet said, the perfect amount to leave your kids, is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.'' 

The wordentitlement” has many negative connotations, but it wasn’t always that way. In the past, it was often about having a right, as in “I’m entitled to certain rights.” In reality, it’s a little bit of both. Many times successful parents become concerned about their childrens’ feelings of entitlement stemming from their family’s ritzy neighborhood, their high-end cars, their affluent school district or the expensive sleep away camp they attend.

Your children or grandchildren don’t have to be trust fund recipients (i.e. trustafarians) to exhibit signs of entitlement that can be difficult to shed in adulthood. We all want to do what’s best for our children. But, giving kids too many things at an early age can prevent them from developing self-reliance and independence as they get older.

Another danger of entitlement is that children become so self-absorbed (both personally and materially) that they have no what other people want or need, particularly those who are less fortunate.

As Warren Buffet famously said, the perfect amount to leave to your kids,  is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.''

Real world example

One family I know, in which both parents are first generation Americans, created significant wealth for themselves. Their children enjoyed the fruits of that hard work. Naturally, the parents wanted provide their kids with more than their parents gave them --more experiences, more opportunities.

The parents were well intentioned, but even those good intentions can give the kids unrealistic expectations. For instance, both kids expected to receive a Mercedes upon graduating from high school—which they did--because that’s what many of their affluent peers received in their circles.

Despite their advantages, both kids started to act out, which teens of all backgrounds inevitably do. The boy even got in trouble with the law, but thanks to his family’s wealth, they were able to hire top attorneys to get the boy off the hook. Unfortunately, he was kept entirely out of the legal process so he never learned his lesson. Before long, he got in trouble again. The parents realized too late that their good intentions—to protect their child—preventing the boy from learning valuable life lessons about being accountable for his actions and suffering the consequences. It took him many, many years to get on the right track to responsible adulthood and caused his family significant pain.


Add inherited wealth to the list of addictions

The Latin root of the word addiction mean “is a slave to a master.” When people are addicted to something, say a drug or alcohol, they’re slaves to that master. In the same way, when heirs inherit wealth, they get used to the regular “hits” from their trust distribution “dealer.” They organize their lives around their family’s money flow, rather than forging their own path to adulthood and self-reliance.

So, how do parents prevent this from happening? Start with the process of “naming.” When we name something, we’re calling it out. To name something, we don’t want to clobber it in the head with a baseball bat and call it “entitlement.” Instead, families that succeed and create family harmony, unity and cohesiveness over the generations are ones that have meaningful conversations about what they have. They discuss the potential risks of their wealth also the potential benefits it can provide to themselves and to others. In many ways, wealth and money can be viewed as members of the family—and we always have to respect our relationship with those special family members.


The Thee S’s

In a family of affluence, it’s important for the kids to learn about Spending, Saving and Sharing. This can begin as early as age five or six. I know of a family in which the father gave a dime to his daughter when she was 7 or 8 years old and he said, “We have a lot of these dimes. And so what I want to do is give you this dime, and we’re going to decide how we’ll spend it, how we’ll save it and how we’ll share it.” That was the beginning of the daughter’s wealth and money education.

I often facilitate family meetings around the qualitative or emotional issues that accompany wealthy families. A three-generation family business had multiple liquidity events over a short amount of time. That was very new to them, and subsequently what they decided to do in addition to getting technical advisors to help them, they brought in a family counselor to help them have meaningful and respectful conversations about what they have and what they want do with it.

Conclusion

For children of privilege, wealth can be a tremendous tool for helping others and for achieving a life of fulfillment. It can also be a dangerous and highly addictive drug. It’s never too early to teach your children and grandchildren about the 3 S’s and the responsibility of money. Contact me any time if you have concerns about your gifting or estate planning.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Retirement Choices - Eight Key Dilemmas That You and Your Advisor Should be Addressing

8 key dilemmas that you and your advisor should be addressing

By Robert Pyle

Key Takeaways

  • Even the affluent worry about running out of money in retirement and no one really knows how long they will live.

  • Some retirees have to increase spending in their golden years while others need to go on a budget.

  • Don’t wait too long to enjoy “bucket list” trips and other life changing experiences--or you may never get the chance.

 

If you worry about running out of money in retirement, you’re not alone. According to recent surveys conducted by the AICPA and Transamerica, about half of retirees cite “outliving their money” as their No.1 concern. That dovetails with the 2019 CPA/Wealth Adviser Confidence Survey™ which found that two-thirds of financial advisors believed their clients were “in danger of outliving their money” when they first came to see them. The survey of nearly 300 CPAs and wealth managers was conducted by CPA Trendlines, The Financial Awareness Foundation and HB Publishing & Marketing Company) this spring.

While these numbers are consistent with what I see in my practice, it’s important to understand that there’s no secret formula or magic algorithm to use when planning your retirement. It’s a complicated balancing act that is constantly changing as your life circumstances change.

As my practice has evolved over the years, I’ve seen eight common dilemmas surface time and time again for our clients. There are no quick and easy answers, but getting the issues out in the open, is a key step in devising solutions. How many of these sound like you?


Dilemma #1: Pay for all of your children’s’ education (or just part of it)
This dilemma really has two parts: First, is an out-of-state private college (say $60,000 per year) worth twice the financial hit as an in-state public school costing say, $30,000 per year? There are pros and cons to attending each type of college and no two students have the same needs and career expectations. Just keep in mind that if you go the out-of-state private college route, that’s an extra $120,000 over four years—and that’s before you factor in airfare, cabs and other travel-related expenses that aren’t deductible. Trust me, it adds up quickly. If your current spending is $10,000 per month, then that extra tuition hit is equivalent to 12 months of your normal spending. That means you’ll have to wait an extra year to retire for each child you send to an out of state private school.

The second part of this dilemma—regardless of which type of college your children attend—is paying the tuition 100 percent up-front or asking your children to shoulder some of the student loan burden after they graduate. Doing so will certainly make the young adults in your life financially responsible and may allow you to retire earlier—if you don’t have to help your recent grads with the student loan payments.

See. I told you it wasn’t easy.
That’s why we use MoneyGuide Pro, powerful financial planning software that helps us model a vast array of calculations and what-if scenarios for our clients.

 

Dilemma #2: Take trips now and work an extra year or so later 
When most people hear the word “retirement,” visions of leisurely travel to exotic locations fill their head. No more counting precious PTO days. No more checking in with the office every hour on a painfully slow Wi-Fi connection. No more red eye flights to get back to the grind on time. Sounds great right? But, if you wait until you and your spouse are 100-percent retired, you may not be healthy enough (mentally or physically) to travel extensively and fully enjoy the trip. That’s why many near-retirees start taking bucket-list trips about five years prior to their planned retirement date—and plan to remain employed an extra year or two--so they don’t spend their golden years muttering: “Shoulda Woulda Coulda!”


We recently modeled a retirement scenario for a couple who was about five years out from retirement.

They wanted to take a two-week overseas trip every year for the last five years of their working lives. They liked to take fairly high-end tours, so we budgeted $10,000 to $20,000 per trip per year. That’s $50,000 to $100,000 in after-tax dollars over five years. Since the couple’s normal living expenses were about $10,000 per month, we helped them see how staying in the workforce for a year longer than expected would provide the extra income they’d need to enjoy their yearly overseas trips without causing financial hardship.

Dilemma #3: Delay taking trips until after you retire
Here’s the opposite of Dilemma #2. If you save and save during the last years of your working life—and don’t go on any exotic trips--you’ll be able to retire a year or two earlier than the couple above, but one of you (or both) may not be healthy enough (mentally or physically) to start enjoying extended overseas travel.


Dilemma #4: What can go wrong?

Your health can deteriorate, a spouse can pass away unexpectedly, or one of you could suffer from dementia or Alzheimer’s disease. All of a sudden, your travel plans are out the door. All that money you diligently saved for travel during the final decade of your working years could easily go toward healthcare expenses instead of seeing the world.


Dilemma #5: Children may not be able to spend time with you later
When your kids are younger and still living at home, you may be swamped at work, but it may be the last chance you’ll have to go away together as a family for an extended period of time. Once your children are in college or in the workforce, they may have too many academic or career obligations (possibly young children of their own) to be able to go away with you on that trip to Europe, Africa or Australia that you always dreamed of.

Dilemma #6: When pinching pennies doesn’t make sense
I know this sounds counterintuitive, but sometimes we have to encourage clients to spend more in retirement, not less. For example, we work with one couple in their early 70s. They have no children or grandchildren; they’re in good health and they have about $1 million in investible assets which provides an annual income of about $120,000. They always talk to me about going to Europe, but they don’t want to spend the money. I bring up their Dream Trip every three months at their quarterly meeting, but they were brought up shortly after the Great Depression, and it’s psychologically very hard for them to splurge on non-essentials. Like many seniors, I also suspect they have lingering fears about running out of money if they may someday need say, $70,000 per year, for eldercare—for themselves or an elderly parent.

Sometimes we use our financial planning software to show clients how much they can spend every month for the next 20 years and still be okay. That can be just as much of an eye-opener as it is for clients who are spending too much. If they don’t use some of their hard-earned savings to enjoy life and I they have no one to pass it on to, then it’s all going to have to go to charity or back to the state when they pass on.

Dilemma #7: Cut back your spending
In financial planning there’s something called a “safe withdrawal rate,” typically 4 percent of their nest egg per year. If clients are spending 8 percent per year then they’re in danger or running out of money.

Over the years, we’ve had to sit down with clients occasionally and tell them to rein in their spending. This is not an easy conversation for an advisor. Clients could be spending on houses, new cars, trips or tuition for their children or grandchildren. For example, if a couple is in their mid-60s and spending $80,000 per year on a $1 million portfolio, this could easily outlive their retirement nest egg. It’s a big wakeup call for folks who’ve been affluent and successful their entire adult lives. By using MoneyGuide Pro, we can show them that if they keep spending money at their current rate, their money will only last them 10 to 15 years. Sometimes they have to see the illustration two or three times before it hits home that they could be out of money before they turn 80.

 

Dilemma #8: We don’t know how long we will live
It’s very important to be honest with your advisor and make sure they’re aware of all of your life goals and aspirations. You may want leave millions of dollars to your heirs and favorite causes when you pass on or you may want to enjoy your money while you still can and ideally pass away with an “empty financial tank.” No advisor, no matter how talented, can predict when clients are going to pass away. Most doctors can’t either.

Everyone knows a couple that retired and planned to take lots lot of trips before something came out of left field to derail their plans. One spouse could have dementia, or another could be diagnosed with cancer. As an advisor, I always feel terrible when this happens because in hindsight, I could have urged them to retire earlier and take more trips when they had the opportunity.


Conclusion

We live in a world of life hacks, rules of thumb and 24-hour door-to-door delivery. It’s temping to take the same quick-fix approach to our retirement dilemmas, but you’ll be sorry if you do. It’s on ongoing iterative process and it’s best to have an objective confidant by your side who can guide you through all the twists and turns along the way. Contact me any time if you or someone close to you is wrestling with life and money dilemmas like the ones discussed above.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Can I Avoid Taking my RMD after Turning Age 70.5?

Most retirement plans have RMDs, or Required Minimum Distributions that you must begin to take by age 70.5.  The reason for this is that your investments have been growing tax-deferred, and the government is now ready to collect their share. If you do not need the money, it is generally beneficial to allow the money to continue growing tax-deferred.  Read below to see if you can delay your RMDs past 70.5. 

Did you turn age 70.5 last year?

If you passed age 70.5 in the last year, you must take an RMD by April 1st of the current year.  If you do not, you will have to pay a 50% penalty of the RMD amount in addition to the tax.

Are you still working past age 70.5?

If you plan to continue to work past age 70.5 and are not a greater than 5% owner in the business at which you work, you will be able to delay any RMDs from that 401(k) until retirement.  You will have to take RMDs from any other 401(k)s or Traditional IRAs that you have, unless you choose to roll those over into your current 401(k).  This can be a useful strategy if you have multiple retirement accounts but do not need any of the money currently. 

RMDs are calculated to make your retirement accounts be distributed over the rest of your life expectancy, but they can cause issues if you live longer than expected.  Check out this flowchart to learn more.

RMDs are important to keep track of, as the penalty for not taking them is 50% of the RMD amount.  It is easy to lose track of these if there are multiple accounts.  If you have questions regarding delaying RMDs or other general retirement planning advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

How Smart Business Owners Plan for their Golden Years

Know the power of retirement plans

Key Takeaways:

  • Most business owners are not going to retire solely on the proceeds from the sale of their business.

  • You need to get up to speed on different types of retirement plans.

  • Business owns are interested in how much money they can save--not what’s a fair plan.



Most business owners have a dream. It’s to build a successful business, sell it for a zillion dollars and ride off into the sunset. The sad fact is that for the vast majority of business owners, this is just a pipe dream. In most cases, business owners will get less than 50 percent of their retirement income from the proceeds of the sale of their business—if they’re fortunate enough to sell it.

Many business owners have spoken with various advisors about diversification. Too often I see advisors warn owners how unsafe it is for the owner to have all of his or her assets tied up in the business. This conversation has merit, of course.

But, the conversation that resonates more is when I help owners understand that they won’t be able to leave their business if they think the business will provide all of their retirement income. This conversation always gets traction. If your client owns a business and employs fewer than 25 people, it’s very easy to design a retirement program that is almost irresistible for the owner.

It’s all about what the owner can get

The first rule of retirement plan design is understanding that it’s all about what you, the owner, can put in your pocket. Most owners I know are also happy to include their employees when it makes economic sense to do so.

Let’s assume you are in a 38 percent marginal tax bracket, as are most successful small-business owners. If that’s true, your plan only needs to cost less than 38 percent for the employees before it’ll make economic sense for you.

For example, if you want to maximize a 401(k) and profit-sharing plan, you will be able to defer $56,000 per year (for 2019). If the employee cost is less than $40,320, then the employer comes out ahead. The reason? If your client wants to save $56,000 in a taxable account, the tax cost would be $43,320.

When I’ve asked business owners if they’d rather give the government $40,320 or give their employees $40,320 while saving $56,000, it’s an easy answer. One hundred percent of the time the business owners will say they would rather give the money to their employees than to the government.

The proper question to ask


Now that you’ve seen the power of a qualified retirement plan, you need to figure out how much you will save. The proper question here is, “Since you have no limits on how much you can save, how much do you want to put in your plan every year?”

As advisors, we too often decide for our clients how much they can or should save. This is actually a question that YOU should answer. If you are over 50 years old and have a company that employs fewer than 25 people, it’s easy to design a plan in which you can save $200,000 per year in your account—or more. I’ve rarely met a business owner who wants—or could afford—to save more than that in a qualified account.

Four power options for business owners

Here are four plans that I’ve discovered business owners find interesting:

1. Simplified Employee Pension (SEP) plan—This is the simplest of all plans. It requires an equal contribution for all employees based on their salary. For tax year 2019, the owner can defer a maximum of $56,000 in this plan. From a tax/employee deferral analysis, it’s hard to make a SEP work with more than ten employees.

A SEP requires that you put the same amount of money away for each employee as a percentage of their salary. This will often cause the amount put away for employees to be larger than the owner’s deferral amount. Once a company reaches ten employees we start to look at 401(k) plans and profit-sharing plans as being more cost-effective for owner retirement savings.

2. 401(k) plan—This plan is best for owners who want to save up to $25,000 per year in their account. You will want to provide a safe-harbor plan for this account. This allows the owner to defer the maximum contribution with no plan testing.

3. Cross-tested profit sharing/401(k) plan—This plan uses age and salary as a method for putting together contribution amounts. The owner can defer up to $56,000 per year. Using a combination of a maximum 401(k) deferral and profit-sharing plan, the cost for all employees is often less than the tax breakeven point.

4. Cash balance—profit-sharing/401(k) plan—Say your owner wants to defer more than $56,000 per year and can reliably do so for at least five years. You can now consider a hybrid plan that combines a cash balance defined benefit plan with a cross-tested profit-sharing plan. Most owners will be able to defer over $200,000 per year, with a significantly lower amount for the employees.  This plan is the secret sauce for an owner who has not saved enough for retirement and has excess cash flow while running their business with little prospects for a great sale when they’re ready to transition their business.

Don’t forget your spouse

In many cases, the spouse of the company’s owner might be on the company’s payroll, too. If your spouse is over 50 years old, he or she can defer up to $25,000 in the company’s 401(k) plan. This brings a simple deferral to $81,000 for the owner of the company and their spouse.

If the owner’s spouse is not on the payroll, it’s pretty easy to justify adding the spouse to the plan for the amount that would be needed for the 401(k) deferral.

Conclusion

A financial plan is a crucial part of the private business planning process. I often do a rough plan on a legal pad to illustrate the problem the business owner has. I call it the four boxes of financial independence. Once I’ve gotten the attention of the owner we will then move to a formal financial plan.

I want to make sure you are moving in a direction that will get you to financial independence. A simple plan will help both of us understand that we’re making a wise decision. Please don’t hesitate to contact me any time to discuss.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Why Can’t You Make Better Decisions? Ask Your Ego

Key Takeaways

  • Investing is a psychology game, not an IQ game.

  • Research shows human decisions are made with 80 percent emotion and 20 percent logic—maybe 90/10 when it comes to investing.

  • Why is it so hard to let go of your losers?

 

As some of you may remember, University of Chicago professor, Richard Thaler won the Nobel Prize in economics last year. Thaler is relatively young by Nobel laureate standards, and his primary field of study (behavioral finance), is somewhat controversial to many in the numbers-driven financial advisory world. The idea that psychological research should even be part of economics has raised eyebrows for years.

 

So what is behavioral finance?

Behavioral finance encompasses a body of theoretical and empirical academic research that seeks to explain why people, especially investors (both retail and institutional), do not act in a rational manner. Think of the moniker “behavioral” as describing how and why individuals behave the way they do.


As Warren Buffet has explained many times: “Investing is a psychology game; not an IQ game.” Research shows that human decisions are made with 80 percent emotion and 20 percent logic. Some would argue the ratio is now closer to 90 percent emotion and only 10 percent logic.

Take the “disposition effect.” That’s the all-too-common situation in which investors hold on to their losers and sell their winners. It’s one of the main reasons that investors--both pros and do-it-yourselfers underperform--they can pick winners pretty effectively, but they cannot sell their losers.

Our egos are a big part of the problem. Our egos are what drive the emotional difficulty of parting with a stock that you spent so much time analyzing.  “How can I be so wrong?” you ask yourself. “Eventually my thesis will prove correct.”

Wrong!

An advisor’s job is to help you manage your behavioral biases during different stages of the market cycle. In this long-running bull market, investors start to get short-term memory lapses. In particular, greed kicks in and investors become tempted to move all their assets into equities. You and your advisor should work together to extract emotion from investment decisions and to mitigate unnecessary risk wherever possible.


Our egos get in the way

Why do we think we are so good at financial decision making when the odds are stacked against us? The simple answer can be traced to ego-- the ultimate roadblock to sound investing. According to Ryan Holiday, media strategist and best-selling author of Ego Is the Enemy, the answer is most often NO.

“One might say that the ability to evaluate one’s own ability is the most important skill of all,” wrote Holiday. “Without it, improvement is impossible. And certainly ego makes it difficult every step of the way. It is certainly more pleasurable to focus on our talents and strengths, but where does that get us? Arrogance and self-absorption inhibit growth. So does fantasy and vision,” Holiday added.

From where we sit at our firm, hubris is prevalent due to the market’s all-time highs; but again human biases are coming into play.  The 2008 crisis left us with the biggest investing hangover in modern market history. As a result, portfolio managers are scared to death about missing the next correction instead of the hyper-bullish you usually see around equities when markets are at record highs.


Many of my colleagues believe greed has kicked in, but some investors still can’t shake the nightmare of 2008-09 from their memories. Looking at the question from a different angle, we should ask: “Is the index’s standard deviation higher today?” The answer to that question is yes! That’s why it’s essential to make sure your advisors know about all your changing life circumstances, financial needs and ever-changing concerns. Understanding one’s investment psyche has become harder due to recent market volatility and geopolitical events—threats to the long-running bull market that the media constantly reminds us about.

Conclusion

As valuations continue to rise above the top quartile, many fundamental analysts can’t get their arms around being long. The problem is that they are only measuring the ‘P’ in price to earnings–the ‘E’ essentially stands for emotion.

If you or someone close to you has concerns about the viability of your current investment decisions for the near-term and long-term, please don’t hesitate to reach out. We’re happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Am I Eligible for Social Security Benefits as a Spouse?

Whether you are reaching your Full Retirement Age or your spouse has passed away, Social Security has spousal benefits that you may be eligible for. To see what spousal benefits you may be entitled to, read below.

Has your spouse passed away?

If your spouse is no longer living, see the “Am I Eligible for Social Security Benefits as a Surviving Spouse?” Check out this flowchart.  If not, move on to the next question.

Have you been divorced at some point?

If you have been divorced and not remarried, see the “Am I Eligible for Social Security Benefits as a Divorced Individual?” Check out this flowchart. If you remarried or are currently married, move on to the next question.

Is your spouse entitled to Social Security on their work record?

If your spouse is not eligible for Social Security benefits based on their own work record, you will be unable to claim any benefits.  If your spouse is entitled to Social Security, move on to the next question.

Are you 62 or older and have been married for at least one year?

If so, you can collect 50% of your spouse’s benefits or your own benefits, whichever is greater.  If you are younger than 62 or have been married for less than one year, you may still be eligible for benefits, but there are several more requirements. 

Collecting spousal Social Security benefits is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Timing Isn't Everything

Over the course of a summer, it’s not unusual for the stock market to be a topic of conversation at barbeques or other social gatherings.

A neighbor or relative might ask about which investments are good at the moment. The lure of getting in at the right time or avoiding the next downturn may tempt even disciplined, long-term investors. The reality of successfully timing markets, however, isn’t as straightforward as it sounds.

OUTGUESSING THE MARKET IS DIFFICULT

Attempting to buy individual stocks or make tactical asset allocation changes at exactly the “right” time presents investors with substantial challenges. First and foremost, markets are fiercely competitive and adept at processing information. During 2018, a daily average of $462.8 billion in equity trading took place around the world.[1] The combined effect of all this buying and selling is that available information, from economic data to investor preferences and so on, is quickly incorporated into market prices. Trying to time the market based on an article from this morning’s newspaper or a segment from financial television? It’s likely that information is already reflected in prices by the time an investor can react to it.

Dimensional recently studied the performance of actively managed mutual funds and found that even professional investors have difficulty beating the market: over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs.[2]

[1]. In US dollars. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days.

[2]. Mutual Fund Landscape 2019.

Further complicating matters, for investors to have a shot at successfully timing the market, they must make the call to buy or sell stocks correctly not just once, but twice. Professor Robert Merton, a Nobel laureate, said it well in a recent interview with Dimensional:

“Timing markets is the dream of everybody. Suppose I could verify that I’m a .700 hitter in calling market turns. That’s pretty good; you’d hire me right away. But to be a good market timer, you’ve got to do it twice. What if the chances of me getting it right were independent each time? They’re not. But if they were, that’s 0.7 times 0.7. That’s less than 50-50. So, market timing is horribly difficult to do.”

TIME AND THE MARKET

The S&P 500 Index has logged an incredible decade. Should this result impact investors’ allocations to equities? Exhibit 1 suggests that new market highs have not been a harbinger of negative returns to come. The S&P 500 went on to provide positive average annualized returns over one, three, and five years following new market highs.

In US dollars. Past performance is no guarantee of future results. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,115 observation months in the sample. January 1990–present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index,  Stocks, Bonds, Bills and Inflation Yearbook ™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

In US dollars. Past performance is no guarantee of future results. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,115 observation months in the sample. January 1990–present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

CONCLUSION

Outguessing markets is more difficult than many investors might think. While favorable timing is theoretically possible, there isn’t much evidence that it can be done reliably, even by professional investors. The positive news is that investors don’t need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By focusing on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) investors can better position themselves to make the most of what capital markets have to offer.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Buy-Sell Agreements

How smart business owners take good care of their business for the long-term

 Key Takeaways

  •  The majority of business owners don’t have succession plans in place.

  • A buy-sell agreement stipulates how a partner's share of a business may be reassigned if that partner dies, becomes disabled or otherwise leaves the business.

  • Key person life insurance (aka Key Man) covers the cost of finding a replacement for the loss of a vital owner of team member.

  • When it comes to succession planning, don’t be a do-it-yourselfer.

 

By Robert Pyle

Business owners are highly driven people. But, a downside to that entrepreneurial passion is that they spend so much time IN their businesses that they have no time to spend ON their businesses. Succession planning is one critical area that often gets overlooked.

According to PWC’s 2019 family business survey, three out of four business owners don’t have documented succession plans in place. I suspect that number is even higher. Even more alarming: over half of U.S. business owners today are over age 50.

If you don’t have a succession plan in place—or if it’s been years since you updated your plan—don’t keep procrastinating. The world moves fast and doesn’t wait around for you to get all your succession planning ducks in a row. Changes in ownership happen every day in all types of businesses for all types of reasons: Death, retirement, disability, divorce, voluntary and involuntary termination of employment; lawsuits, financial and economic setbacks, bankruptcy, selling and gifting interests, just to name a few.  These disruptions often result in: Collateral damage to customer, supplier, banking and employee relationships as well as to long term company goodwill.

Fortunately, most of the painful issues above can be avoided by having a well drafted “buy-sell agreement” in place right from Day One. That’s when all of the owners are still in the “honeymoon” stage and when relations are most amicable. However, it is never too late to put a buy-sell agreement in place. Honesty and open communication are the key to making by-sell agreements work.

What is a buy-sell agreement?

Also known as  a buyout agreement, a business will or a business prenup, a buy-sell agreement is a legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies, becomes disabled or otherwise leaves the business. Most often, the buy-sell agreement stipulates that the remaining shares of the business should be sold to the other partners or to the partnership itself.

Buy-sell agreements are typically funded by life insurance that protect the business if an owner dies. That way the owner’s spouse or family doesn’t have to step in and take over the business—something they likely have no experience running. If you’re an owner and you don’t have other owners, a mature child or close relative capable of running your business, then a buy-sell agreement can be used to set up a formal agreement to sell the company to a competitor or to a private equity group at a predetermined price when you leave.

Buy-sell agreements can take many forms (more on that in a minute). What they have in common is that owner(s) agree well in advance to the terms of a potential business at some point in the future. This way, an owner’s family doesn’t have to sell under duress should something unfortunate happened to the owner.


Getting started: Document everything!

One of the first things we advise business owners to do after they start working with us is to document every bill that comes in, as well as how they received the bill (email or paper, etc.), how they paid it (check, bill pay or credit card) and when that service or software contract ends. As an owner, you need to document how all the money flows through your accounts and how you pay all your bills for your house and other personal expenses.

Very important: If you own a sole proprietorship, make sure your spouse knows your master password. If you’re part of a partnership or multi-owner business, make that at least one of the other principals knows your master password. All businesses, regardless of size, need a Plan B in case something happens to the one person who pays all the bills and who understands all the contracts that keep the business running. Also, it’s very important to update all your documentation every year or so--it’s not a one-and-done exercise.

Before you get started, seek out attorneys or CPAs who specialize in succession planning or a business broker who might know somebody who has expertise in succession planning. Some CPAs even have an ABV® credential (Accredited in Business Valuation).


Key person life insurance

The death of a key employee or team member can potentially sink your business if you’re not protected. Key person life insurance (aka Key Man life insurance) provides funds for a business when a key person dies. This type of policy helps address the financial losses that can occur when a key person in the business passes away and money from the policy can be used to find a replacement for the key person or to train someone to take the place of the key person who died or otherwise left the business.

Under most plans, the company purchases a life insurance policy on the key people and the company pays the premiums on the policy. If the key person passes away, then the proceeds from the policy are payable to the company. Determining the amount of life insurance to purchase can be challenging. You could use the cost of replacement, a multiple of compensation or a contribution to profits method. Again, don’t try to do this yourself. Consult with a life insurance specialist that works with business owners. If you would like a referral to professionals who can help, please let us know.

Don’t think you’re big enough for a Buy Sell Agreement? Think again

You may think your business is too young or too small to need a sophisticated transition agreement. Just understand this: If you’re business is too large for your spouse or outside family members to take over, then you need a buy-sell agreement. If the business is your family’s only source of income, then you need a buy-sell agreement. If your business is potentially “sellable”—i.e. it has recurring revenue in the form of contracts or agreements with customers/clients that pay you on a regular basis--you need a buy-sell agreement.

Most common types of buy-sell agreements

1. Cross Purchase Agreement. Each co-owner agrees to purchase the equity from the estate of the co-owner that passed away. The sales price is agreed upon in advance and life insurance is used to fund this type of plan. Each co-owner has separate polices on each of the other co-owners and they each pay the premiums.

2. Entity redemption arrangement. In this type of agreement, the business (not the individual owners) takes out life insurance policies on the co-owners and the business pays the premiums. When a co-owner passes away, the company can then purchase that owner’s equity with the life insurance proceeds.

3. Hybrid plan. Under this plan, the business has the first option to purchase the equity of the co-owner that passed away. If the business does not elect to purchase the late co-owner’s equity, then the remaining co-owners have the option of purchasing the deceased owner’s equity.

If you don’t have a child or key employee(s) to assume ownership of the business, you can sell to a business consolidator in your niche. You could also have an agreement with a competitor to buy your business at a pre-determined price.   There are many other types of buy-sell agreements which I’ll discuss in a future article. Regardless of which structure you choose, make sure you have something in the agreement ties the sales price to the business’s revenue or profit. That way the predetermined sales price can be adjusted fairly if the business grows (or declines) substantially between the time the agreement was made and when it is actually sold.


Update regularly

Like your estate plan, you also want to have a business valuation every three or four years. In addition to CPAs, check with the trade associations or professional societies in your business. They can be great resources for finding business valuation professionals that specialize in your niche.

Cautionary tale

If selling to an outside owner or a competitor, you may get a nice offer for your business in the form of an installment sale rather than the one-time purchase. A typical scenario for an installment sale of a $1 million business is 30 percent ($300,000) paid to the owner upon closing and the remaining $700,000 paid over five years ($140,000, plus interest). If you’re the owner, you could potentially pay less in taxes when you close and theoretically earn more money when the interest payments are factored in (please consult with your tax professional). However, there is also more risk involved in an installment sale than a one-time transaction. The buyer could run into hard times, the economy could go in the tank, and the new owner might be unable to make the payments to you each year, leaving you out in the cold.

You should thoroughly investigate you buyer and to make sure they are qualified. This could involve an expensive background check. As the seller, you will need a larger emergency fund on hand in case the buyer is late on the payments or worse, defaults. You want to ensure there is a good transition after the sale and that your clients are comfortable with the new owner.  If not, there is always an outside chance that you will have to take over the business and go back to work.


Conclusion

Succession planning can get overwhelming quickly for time-pressed business owners. It takes coordination with the other owners and with specialized legal, accounting and financial advisors to make sure you’re doing everything right. Then you need to check every few years to make sure the agreement is still valid and reflective of the business today. If nothing else, avoid the two most common but dangerous mistakes that business owners make: Procrastinating and being a do-it-yourselfer. You’ve worked too hard to build your business to throw your employees and family into a bad situation. If you or someone close to you has concerns about an eventual business transition, please don’t hesitate to contact me.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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