We all have loved ones who we want to succeed after we have passed on. How do we prepare them to use our hard-earned savings in a healthy way?
Heritage planning encompasses passing on your “wealth” to your heirs without controlling or enabling them. The process begins by redefining “wealth.”
Your wealth is human, intellectual, and financial capital. It is who you are and what you value. You can improve the life of your loved ones by passing these principles to them along with financial assets.
Many people are curious about how to start heritage planning with their families. These are six steps to focus on:
Redefine wealth as financial capital, human capital, and intellectual capital.
Use a 7th generation mentality.
Pass on your values through stories.
(Above is the word cloud of values from our participants.)
Teach your children to give.
Teach your children how to manage financial risks.
Focus on the qualitative and not on the quantitative.
Please call us if you would like to schedule an appointment to discuss how we can help you get started with heritage planning in your family.
“The stock market is a device for transferring money from the impatient to the patient.”
This statement by Warren Buffett is educational and relevant today. When markets move downward, investors become uncomfortable. But during recessionary times, investors may panic. Companies pull back, people lose jobs, and stock declines can become sharp.
The U.S. is now late in that cycle, meaning we are coming closer to the end of a growth period. But if we look at the big picture, how damaging are recessions? How often do they occur? And how should investors handle them?
Since 1950, the average expansion lasted 67 months (5.6 years) and had an average GDP growth of 24 percent. The current expansionary period is one of the longest in history, currently 10 years in length. But it has also had one of the slowest average growth rates and is still far from the largest in total growth. Capital Group believes this has prevented the major imbalances that cause recessions from materializing. However, they do admit that the risk of recession will continue to grow until its inevitable arrival.
The average recession has lasted only 11 months and had a GDP decline of 1.8 percent. The contrast, as you can see in the graph provided, is immense. Yet the fear that those relatively small declines bring is often greater than their positive counterpart. The truth is, opportunities are developing in declining markets, and the strongest rallies are generally found right after a recession.
The general rule is this: Stay invested. Those who deviate from their financial plans are those who Warren Buffett calls “impatient investors.” If you stick with your plan, the odds of success will greatly be in your favor and the money transferring from the impatient will be to you, the patient investor.
Presented by Max McQuiston (American Funds) at the Just for Women conference. Recap by Jordan R. Hadfield.
Financial advertisements make inflammatory statements such as “You cannot afford losses like those of the last recession” or “Making the wrong Social Security decision can cost you thousands.” These advertisers want to make us feel that we need to make changes without considering the reality of our situation.
Everything we hear or see causes an emotional reaction; good or bad. Information we hear or see hits the amygdala, the center of emotion in our brain within 12 milliseconds.
It takes 40 milliseconds for the same information to hit the logical part of our brain, the cortex.
By that time our emotions have hijacked our brain, and we cannot think straight. There literally is no time for rational thinking. Our minds were made up before we even realized what was happening.
Finding a Solution
Next time you find your logic being hijacked by emotion, take a step back. Think to yourself: “What if the situation I am fearing does not happen?” “What if the opposite happens and things are better than I think?”
Your financial plan is the tool we use to prepare you for market volatility and prevent emotional decisions from sidetracking you from your important financial goals. If you do not have a plan or have not recently reviewed your plan, I invite you to meet with one of our financial advisors.
Planning for retirement is daunting, especially if you don’t know where to start. In this article, we’ll walk through the basics of two common retirement accounts and two different ways you can contribute to them so you can make a more informed decision.
An IRA (individual retirement accounts) and a 401(k) serve similar purposes. They are both accounts that are used for retirement. They both have penalties for withdrawing money before age 59½ and the option to make traditional or Roth contributions.
So, which should you choose? If you don’t have the option to contribute to a 401(k) then, of course, an IRA is the better choice. However, if you have the 401(k) as an option, that is usually a good option, especially if the company is matching part of your contributions, it is always a good idea to take advantage of an employer match. It’s basically free money!
Another thing to consider is whether to contribute to a traditional account or a Roth account.
The primary difference between traditional contributions and Roth contributions is when they are taxed. Traditional contributions go into the account pre-tax, and everything is taxed as ordinary income when distributions are taken. In Roth accounts, the money is taxed before it is contributed, and the distributions are taken tax-free. Another bonus to Roth accounts, you can pass them to your heirs tax-free as well.
Depending on your personal situation, one account or the other may be more advantageous to you. In simple terms, if you are in a low tax bracket now, contributing to the Roth is a good idea. Tax rates are relatively low right now, and it’s likely that they will be higher in the future. If you pay tax now, while in a low tax bracket, you will benefit from it because you won’t have to pay taxes at the possibly higher rate in the future.
On the other hand, if you are in a high tax bracket now and expect to be in a lower tax bracket in the future, it would be prudent to make traditional contributions. The money will avoid taxes now and will be taxed later when your tax rate is lower.
Now that you’re armed with information, you can make a better decision as to when, where, and how to contribute! Please call us with any questions.
If you have an Employee Stock Purchase Plan (ESPP), you might wonder if it is a good value. An ESPP can be very beneficial, depending on how the plan is written. Check the plan rules to see if it lines up in your favor. If so, then you should (1) participate as much as you comfortably can and (2) cash out each year as soon as you can. Here’s why an ESPP is usually a good deal.
An ESPP allows you to contribute a percentage of your income each paycheck towards the purchase of company stock. The payroll deductions go into an account and are held until the end of the purchase period, typically yearly. At that point, you “purchase” company stock usually at a 15% discount, which is a nice benefit by itself.
If your plan has a “look back” provision, it is a bonus. A “look back” provision gives you the price on either the offering date or the purchase date, whichever is lower. So, even if the company stock is down from the offering price, you still get it at a 15% discount from its lowest price. If the stock is up, you purchase at the lower price and may have significant gains.
These potential gains may make the transaction attractive, but you shouldn’t sink all your money into the ESPP. Participate at a rate that is comfortable and that doesn’t rob your other buckets.
You should always have short-term, intermediate-term, and long-term buckets. Your short-term bucket should be your emergency fund, preferably in a Money Market or short-term CD (i.e. 1 year or less). We like to see an emergency fund of 3-6 months of living expenses.
Your 401(k) and other retirement savings are your long-term bucket. We prefer that clients save 10-15% per year for retirement. If you already have 1-2 months of living expenses in the bank and you are saving for retirement, you could use the ESPP to build the emergency fund and then to build the intermediate bucket for expenses like new cars, buying a home, etc. Once your short-term bucket is full, then participate more fully in the ESPP.
Cashing out immediately when the stock is available is the safest choice because you lock in guaranteed gains. Just be aware that the distribution will be taxable as ordinary income, unless your plan is qualified, which may have a more favorable tax treatment.
You can choose to hold the stock to lower your taxes. However, you must keep it for one year from the purchase date, and two years after the beginning of the offering period. At that point, the gain above the purchase price will be taxed at a long-term capital gain rate, which is always lower than your ordinary income rate. However, it may not be wise to wait a year. Saving taxes doesn’t help if the stock value goes down by more than your tax savings. That is why the safest bet is to sell the stock as soon as it is available. Only hold on to the stock if your other buckets are filled and you are just investing for the future.
ESPP’s can be a great way to save for the future. If you have any questions about your specific situation, please contact one of our wealth managers.
This article is not a solicitation, offer, or recommendation to buy or sell any security. Financial advisory services are only provided to investors who become Smedley Financial clients. Projected returns are not a guarantee of actual performance. There is a potential for loss as well as gain that is not reflected in the information presented. Past performance is no guarantee of future results. This article is not intended as tax advice, and Smedley Financial does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Smedley Financial assumes no responsibility for the tax consequences to any investor of any transaction.
Grace Groner was born in Lake County, Illinois, in 1909. She was orphaned at the age of twelve. Although she lived to be 100 years old, Grace never married or had children. Most of her life was lived in a small one-bedroom cottage. She shopped at rummage sales and never owned a car. She worked her entire career as a secretary, earning a modest income.
When Grace Groner passed away in 2010, she left over $7 million dollars to a foundation established for the benefit of students at Lake Forest College. How did she become so wealthy? She invested in stocks at a young age, reinvested her dividends, and stayed invested so compounding interest could work its magic.
Richard Fuscone was an ambitious man. He received an education at Harvard and the University of Chicago. He then went on to become a vice chairman for Merrill Lynch. He was so successful in the investment industry that he retired at the age of 40 to pursue other interests.
Richard owned two homes, one of which carried a mortgage of $66,000 a month. Richard Fuscone declared bankruptcy in the same year Grace Groner donated millions to charity.
Richard had a top-shelf education and an impressive background in finance. Grace had neither. How is that possible?
The answer is behavioral finance. Financial knowledge does not prevent bad financial decisions. Richard had an expert understanding of how markets and investments work, but behavioral finance is an entirely different animal, one he did not understand.
We, as wealth managers, are often judged by our investment management. However, that is only part of our service. The financial and behavioral advice we offer can make a more significant economic impact than people realize.
We work hard to ensure sound financial decisions are made and protect against bad ones, which are not always obvious and are usually made unknowingly.
We wouldn’t suggest one live like Grace, but we certainly wouldn’t recommend one live like Richard, who might have saved millions with a behavioral financial advisor and some quality advice.
Women generally have huge hearts and can sometimes let their
hearts lead their financial decisions. Even the most educated and most
successful women can let their hearts influence their financial decisions. Here
are some examples of how women may be dealing with financial situations:
– Children ask for
money for the latest thing(s), and mothers usually say yes. When mothers spend
too much money on their children, they may not be saving enough for retirement.
– Women who allow
their husbands to handle every aspect of financial decisions may find
themselves in crisis when a spouse is injured, they are divorced or widowed and
discover they are unprepared to manage all facets of their financial life.
– Single women –
those who never marry or who are divorced – are often uncomfortable with
finances and may even be bored with financial matters. Still, they are anxious
about being financially secure now and in the future.
As women, we need to take control of our financial life and
be honest with ourselves and others in our relationships. We are generous with our love, time and money
and we shouldn’t stop being kind, generous people, but we must be sure that our
acts of generosity are not depleting our financial future and retirement
plans. We must learn to say “NO” out of
love, not out of fear. If you pay for a child’s college education, will it
jeopardize your future retirement? This act of generosity could potentially
create financial stress for years into the future. Your act of charity should
never put you at financial risk.
Women need to set financial limits. Our goal should be to
raise financially independent, successful children. While it may seem
reasonable to help a family member, continuing to pay expenses for grown
children will not help them become financially successful adults. It might feel
like tough love, but in the big picture, it truly helps everyone.
Make financial decisions that support your financial goals
and secure your financial future by taking time to think through the situation
and process the outcome. Lead with your head, not your heart. Being financially
smart will help you secure your goals and achieve financial success.
If you are faced with a decision and need additional
information or maybe just a sounding board, reach out to us and let us help you
think through your options. Together we can find the right solution for you.
The first significant tax reform in over three decades was put into action for 2018. Now we get to see the real impact of the Tax Cuts and Jobs Act as people start to file their 2018 tax return.
Whether you are filing your tax return or you want to make sure you give your accountant the best information possible, here are the major changes to which you should pay attention.
Form 1040 significantly shortened and simplified One of the major goals for this tax reform was to “simplify” taxes. The immediate impact is that the old Form 1040 will be shrunken down to a half page on front and back. Now there will only be 23 lines compared to the daunting 79 lines on the old 1040. There will no longer be a form 1040A or 1040EZ as those were just an attempt to simplify an overly complex 1040. The new 1040 will be accompanied by 6 schedules.
If this shortened version makes you feel like attempting to do your taxes for the first time in a while, you should probably still take them to your accountant as there are so many tax changes that you really need an expert that knows how all of the changes will impact you. If you have been filing your own taxes, they should be easier this year (should being the keyword).
Tax brackets Tax brackets have been reduced, which should benefit almost all people. Tax brackets are based on your total amount of taxable income, not adjusted gross income.
For example, if a couple’s joint taxable income was $75,000 in 2017, they were in the 15-percent bracket and in 2018 will be in the 12-percent bracket. The 25-percent bracket has been reduced to 22 percent.
Changes to the standard deduction and exemptions The most significant changes for individuals happened to the standard and itemized deductions. With the changes, it is estimated that 80-90 percent of people will now take the standard deduction. However, don’t throw out your box of medical receipts yet. You still need to make sure itemizing is no longer a benefit for you.
The standard deduction limit has been raised from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filers. They also did away with personal exemptions that were $4,050 per person, but offset that loss for families with children by increasing the child tax credit from $1,000 to $2,000 per child. There is also an extra deduction of $1,600 for single filers and $2,600 for married filers if you are over age 65. (For a more complete list, please visit:
Specific changes to itemized deductions State and local tax deduction has been limited to $10,000. You can still deduct medical expenses that exceed 7.5 percent of your adjusted gross income, and that limit will be going up to 10 percent in 2019.
Mortgage interest can be deducted up to a principal value of $750,000 if the loan originated in 2017 or later. Older loans will be grandfathered in and interest is deductible up to a principal limit of $1,000,000. Mortgage equity loans will only be deductible if the proceeds were used for home improvement. (Say goodbye to consolidating debt into a home equity loan and deducting it.)
This major overhaul to the tax system should simplify taxes and should make it so most people take the standard deduction. Most people should also end up paying a little less in taxes, which is always nice.
Let’s look at an example In 2017, Jay and Mary filed a joint tax return. They are both age 55 and they don’t have any dependents. They had $18,000 in itemized deductions. Add to this their personal exemption of $4,050 each, totaling $26,100 in deductions. In 2018, they will only get the standard deduction of $24,000 with no personal exemptions and may owe more in taxes. The saving grace for Jay and Mary is that their tax bracket was reduced and may make up for the reduction in deductions.
SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.
Let’s say you received an inheritance, or you sold your home or business, or you earned a big bonus. Where do you park your cash while you decide how to make the best use of it? The best short-term account is the one that best matches your needs. Call us to talk about what would be best in your situation. Here are a few ideas to consider:
Savings accounts, money market accounts, and certificates of deposit are FDIC or NACU insured up to $250,000 and offer a fixed rate of return. Other investments are not insured and their principal and yield may fluctuate with market conditions.
Tax reporting documents While you may be anxious to get your taxes done, you can avoid filing amended returns by assuring you have all final tax documents to provide to your tax preparer.
Most 1099 tax forms will be available between January 27th and February 16th.
If you have an account with National Financial Services, please be aware of the following timelines for receiving your tax documents.
Some securities companies may not deliver National Financial Services with final tax information by the first mailing date. In this case, you will not receive a 1099 until the final information is available. A preliminary tax statement will be available online only. This will not be reported to the IRS and cannot be used for filing purposes.
All 1099s will be available online and mailed no later than March 8th.
If you have signed up to receive electronic documents, you can access the tax documents through your Wealthscape access. If you signed up to receive tax documents electronically only, you will not receive them in the mail.
Qualified Charitable Distributions (QCD) If you made a qualified charitable distribution from your IRA during 2018, please let your tax preparer know. Your 1099R form should indicate that the taxable amount is undetermined by a checked box in 2b “Taxable amount not determined.”
You will also need to provide documentation from the charity that your donation was received. This should not count as income for tax purposes and should not be an itemized deduction.
Consult your tax advisor for further information regarding the preparation of your taxes. If you have questions regarding the delivery of your tax documents, please contact our office at 801-355-8888.