12 Money Traps to Avoid This Holiday Season

By Kelly Doyle

The holiday season is here, and with it, the temptation to overspend. From decorations and food to gifts and travel, it’s easy to get caught up in the frenzy of holiday spending. Instead of succumbing to the urge to splurge on expensive or unnecessary purchases, you can approach this season smarter with “The 12 Days of Avoiding Holiday Money Traps!”

Money Trap #1: Impulse buys

Impulse buys are just that – things that you buy that you haven’t put thought into it. If there is no intention behind a purchase, then it certainly won’t bring you joy by the time you get home. Instead, ask yourself: What truly brings you joy? Write down your answer and revisit it over the next month. If an event, activity, or item isn’t on your list, don’t invest your time, energy, or money in it.

Money Trap #2: Buying gifts for everyone

Is your gift list long enough to make even Santa think twice? From your brother and sister-in-law to nieces, nephews, and the cute kid down the street, it can quickly add up! Save time and money by organizing a “Secret Santa” gift exchange through a website such as Elfster. Instead of shopping for 25 people, you’ll only need to buy for one. Plus, you can encourage loved ones to create wish lists, so you can buy them exactly what they want!

Money Trap #3: Roaming Target aimlessly for gift ideas

For me, it starts in the dollar section at the front entrance of Target. I pick up a few unplanned items, and suddenly, I’m primed to shop more. Next, I add a few craft items and some beauty products to my cart. Before I know it, I’ve spent $200 without buying a single holiday gift. To avoid this trap, make a holiday shopping list and stick to it. This will help you stay laser-focused and avoid impulse buys.

Money Trap #4: Mailing last-minute holiday cards

There have been many years when I scrambled to hire a photographer, buy matching outfits for my family, and pay hefty fees to mail my cards before the holidays were over. Instead, try hiring a local photographer from a website such as Snappr, where you can find affordable freelance photographers in your area. Schedule your session in mid-November to take advantage of Black Friday deals on photo prints from Costco®, Shutterfly®, and other suppliers.

Money Trap #5: Buying expensive wrapping supplies

Instead of shopping at the nearest store down the street, buy gift wrap, tissue paper, ribbon, and other wrapping materials at your local discount shop, such as Dollar Tree®. You’ll spend just $1.25 on wrapping supplies there instead of paying a premium at other merchants.

Money Trap #6: Getting holiday groceries at the nearest store

While your local store may be convenient, it can also be expensive. Try using grocery store apps like Instacart to compare prices across stores. This allows you to find the best prices for the items on your list, so you can shop smarter.

Money Trap #7: Buying gift cards with fees

Need a gift for your kid’s teachers or maybe your yoga instructor? Avoid running to your local store at the last minute to buy that impulse card by the checkout. Instead, choose cards with no fees — or low fees — to save money.

Money Trap #8: Paying shipping charges

When shopping online, place all the gifts you plan to ship into your cart and purchase them together. Doing so allows you to minimize or avoid shipping fees. Save even more by seeking out vendors who offer free or discounted shipping on orders over a certain amount.

Money Trap #9: Opting for expedited shipping

If you do have to mail gifts yourself, prepare and ship them well ahead of the delivery date to avoid costly last-minute shipping fees.

Money Trap #10: Overpaying for peak-season flights

Since airlines often hike prices during the holidays, consider flying strategically on off-peak days and using reward miles to save. Planning around peak travel dates can help you avoid inflated holiday fares and make your budget go further.

Money Trap #11: Paying high fees to send gifts home

Traveling to see family for the holidays? Plan ahead for gift-giving without racking up pricey shipping fees to haul everything back home. Opt for small, packable presents or digital gifts to keep expenses down.

Money Trap #12: Spending money on lavish gifts

It's easy to think happiness comes from expensive gifts, but often the simplest ones are the most meaningful. Instead of overspending this holiday season, try simplifying your lifestyle. For instance, setting a $25 gift limit for your spouse can reduce pressure and spark more creative, thoughtful giving. The best investments in happiness often come from sharing experiences and making connections rather than giving or receiving costly presents.

We sincerely wish everyone a joyful holiday season and look forward to reconnecting in the New Year!

 Information is being offered for education purposes only. Consult with your financial planner for specific financial advice.

Is Social Security in Jeopardy?

By Shelley Murasko

Social Security has long been a cornerstone of American retirement security, providing financial assistance to retirees and the disabled. However, concerns about the long-term viability of the Social Security system have been growing over recent decades. With shifting demographics, political debates, and evolving economic landscapes, understanding the future of Social Security requires a look at its current challenges, potential changes, and the broader implications for future generations.

A Brief Overview of Social Security

The Social Security Program was established in 1935 under President Franklin D. Roosevelt as part of the New Deal, a series of programs created to restore economic prosperity and lift the country out of the Great Depression. It was designed to provide economic security to Americans, particularly older individuals and the disabled. At that time, the average life expectancy was age 631, and Social Security didn’t commence until age 65.

The current system primarily operates on a pay-as-you-go basis, meaning that today's workers fund the benefits of current retirees through payroll taxes. These taxes, which equate to 12.4% of every paycheck, are collected through the Federal Insurance Contributions Act (FICA). In return, workers earn credits toward their future Social Security benefits.

Whenever there is a shortfall between FICA taxes collected and Social Security Benefits paid, the Social Security “trust fund” covers the deficit.

Current Challenges Facing Social Security

While Social Security has proven to be a reliable safety net for millions of Americans, questions about its long-term sustainability have surfaced due to several factors. Key issues include:

Demographic Shifts: The aging population is perhaps the most significant challenge to Social Security’s future. The baby boomers (those born between 1946 and 1964) are rapidly entering retirement. With people living longer, the ratio of workers to retirees is shrinking. In 1960, there were about 5.1 workers for every Social Security beneficiary. Today that ratio has dropped to around 2.8 workers per beneficiary2. As more people retire and fewer young workers enter the workforce, this ratio is projected to decrease even further.

Longer Life Expectancy: Advances in healthcare and technology have increased life expectancy to age 79 in 20243, which means retirees are collecting Social Security benefits for a longer period. This, combined with the sheer number of people retiring, places additional strain on the system.

Funding Shortfalls: The Social Security Trust Fund has helped support the program during periods of deficit. According to the 2024 Social Security Trustees report, it’s expected to be depleted by 2035. After that, payroll taxes would cover about 83% of scheduled benefits unless changes are made to address the shortfall, and they would further decline to 73% of scheduled benefits by 2098. This might come as a surprise to those who assume that the exhaustion of trust fund reserves would mean that no (or very little) benefits would be paid.4

Economic and Workforce Changes: The structure of the U.S. labor market is evolving. A rise in gig work and freelance positions have led to shifts in how and when people work. This has affected the traditional model of payroll contributions. Furthermore, economic downturns like the 2008 financial crisis and the COVID-19 pandemic can reduce payroll tax revenues due to widespread job losses and wage stagnation.

Potential Solutions

To ensure the long-term viability of Social Security, economists, policymakers, and advocacy groups have proposed several solutions. Some of the most popular reforms include:

Raising the Retirement Age: One potential solution is to gradually increase the full retirement age (FRA) since people are living longer. Currently, the FRA is 67 for those born after 1960. Raising the age to 68 or 70 could help reduce the strain on the system.

Increasing Payroll Taxes: Another solution is to raise the payroll tax rate. Currently, workers and employers each contribute 6.2% of wages, up to an annual limit of $168,600 in 2024. Increasing this rate by even a small percentage could help shore up the system's finances. In fact, a total 3.3% increase would shore up the shortfall entirely.5 Alternatively, lifting the payroll tax cap, so that higher earners pay taxes on all their income (not just up to the current limit), could significantly increase revenues.

Changing the Benefit Formula: Reforming the way Social Security benefits are calculated could also extend the program's life. For instance, the government could reduce benefits for higher earners while preserving or increasing benefits for low- and middle-income retirees. This approach would make the system more progressive while addressing funding gaps.

Privatization or Personal Accounts: Some proponents advocate for partially privatizing Social Security by allowing individuals to invest a portion of their payroll taxes in personal retirement accounts. This approach is highly controversial as it introduces market risk and could exacerbate inequality, but supporters argue that it could offer higher returns than the current system since currently the Social Security trust fund is largely invested in Treasury bonds.

Reducing Benefits: A more drastic option would be to cut Social Security benefits outright. This could involve means-testing, where only those below a certain income threshold would receive full benefits or an across-the-board reduction. Such proposals are politically unpopular and could leave many retirees, particularly those without other sources of income, in financial distress.

The Role of Politics

The future of Social Security is deeply tied to political decisions. The program remains a contentious issue in Congress with Democrats and Republicans proposing different paths forward. Democrats typically favor measures that preserve benefits while increasing the payroll contribution percentage or lifting the payroll tax cap. Republicans, on the other hand, often advocate for reforms aimed at reducing long-term costs, such as raising the retirement age or slowing benefit growth for wealthier Americans.

The political gridlock on this issue means that any significant reform may be delayed until the funding crisis becomes more urgent. This could lead to the implementation of more drastic and less popular measures at the last minute.

Implications for Future Generations

Younger generations, including Millennials and Gen Z, are particularly concerned about the future of Social Security. Many express skepticism about whether the program will exist when they retire. However, despite the challenges, it’s unlikely that Social Security will disappear entirely. It remains an essential part of the U.S. social safety net, and political leaders understand that failure to act would have severe consequences for millions of Americans.

However, the program as it exists today may not provide the same level of benefits for future retirees unless reforms are enacted. Younger workers may need to save more for retirement through private means, such as 401(k) plans or IRAs, and they may have to work longer before claiming benefits.

Conclusion

The viability of Social Security in the coming decades is a pressing issue that requires careful attention and timely action. While the program faces significant financial challenges, there are a range of solutions available that can help ensure its long-term survival. The choices made by policymakers today will determine whether Social Security remains a stable and reliable source of support for future generations of retirees. Despite the uncertainty, one thing is clear: the stakes are high, and the future of millions of Americans depends on finding a path forward.

Sources:

1.      University of California Berkeley. (2024). Life expectancy in the USA, 1900-98. Retrieved October 9, 2024.

2.      Why Is Social Security Running Out of Money? (2023, November 3). Free the Facts. Retrieved October 9, 2024.

3.      Macrotrends. (2024). U.S. Life Expectancy 1950-2024. Retrieved October 9, 2024.

4.      Social Security Administration. (2024). The 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Retrieved October 9, 2024.

5.      Van Deusen, Adam. (2024, October 2). Helping Nervous Clients Understand the (True) State of the Social Security System and What It Means for Their Retirement. Kitces Blog. Retrieved October 9, 2024.

Improving Your Grandchild’s Financial Literacy

By Kelly Doyle

Welcome to the latest edition of our newsletter! This month, we focus on a topic close to the hearts of many of us: ways we can share with a younger generation. Spoiling grandkids has been a tradition embraced in our culture for a long time, whether it be overindulging with ice cream, extending movie time, or allowing them to stay up extra late. However, if you’re looking for a way to give your grandkids money in a sensible, tax-efficient way while imparting some financial education, consider the following clever gift ideas.

Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA)

Instead of just giving cash, consider opening an UTMA or UGMA account. Simply use your grandchild’s social security number to open one of these custodial accounts through platforms such as Charles Schwab or Fidelity. All you have to do is provide some basic information, such as the minor’s social security number. You control the account until he or she reaches the age of majority (which is different in every state). Within this account, you can buy stocks, bonds, and even real estate.

Use this as an option to teach your grandchildren how businesses and the stock market operate by buying a stock for a specific amount, say $50. This gives them an opportunity to own a portion of a share and track the original investment over time. The stock price will go up and down, so they can get an understanding of volatility. You can use it as an opportunity to provide some financial education about what a business is and how it grows, then expand their learning from there.

Another clever idea is to match that $50 used to purchase a portion of a share, then match and invest it in a low-fee, index-based mutual fund. Tracked over time, this should be an eye-opening opportunity to compare the results when you invest in a single company. It also demonstrates how volatile stocks can be compared to a diversified investment.

There are a few things to be aware of with UTMAs and UGMAs:

• The first $1,300 (in 2024) of unearned income is tax-free. Above that, the income is taxed. See “kiddie tax” rules for more specific information.

• The assets in the custodial account are the property of the minor, and this could affect college loan eligibility and amounts down the road.

• The transfer into an UTMA or UGMA is an irrevocable gift, meaning that once the gift is made it can’t be transferred back to you.

• The minor child must receive the funds upon reaching the age of majority, which varies in every state. In California, this means your grandchild can use the money as he or she sees fit as early as 18. Regardless of what your goals are for this money, your grandchild can use it for a car, college, or a Taylor Swift concert ticket – the choice is theirs. If you’re looking for more control over when your grandchild can access the funds, you may want to consider setting up a trust instead. An estate planning attorney can help with this.

529 Plans

The best way to contribute to your grandchild’s college education is by participating in a 529 plan. You can choose from a variety of different platforms, such as my529plan.org. Opening an account is quick and easy, requiring only your grandchild’s social security number.

You have three options for tax-free gifting via a 529 plan:

1. Gift up to $18,000 (in 2024) tax free per child per year

2. Double the amount when you and your spouse each contribute up to $18,000 for a total of $36,000 (in 2024) per child per year

3. Superfund the account by contributing five years’ worth of contributions in a single year ($90,000 for an individual, which would entail filing IRS Form 709 (Gift Tax Form))

While completely allowable, amounts contributed over these limits would require completing IRS Form 709, which would count against your lifetime gift tax exemption of $13.61 million (in 2024). These amounts may be well above what you expect to contribute, so be aware that you can contribute much smaller amounts, such as the example of $50 used above.

The money you contribute to a 529 Plan is a non-deductible contribution for the purpose of federal taxes. Withdrawn earnings are excluded from income if they are qualified education expenses for college or even secondary education up to $10,000 in 2024. Examples of qualified education expenses include college tuition, fees, books, computers and related equipment, supplies, special needs, and room and board for half-time to full-time students. The 529 Plan is counted as an asset of the parent if the owner is a parent or grandparent. This is good news for your grandchild with respect to any student loans needed down the road. Some states offer tax deductions or credits for contributions.

Write a Check

You can also gift money to a grandchild by writing him or her a check. As long as it’s under $18,000 (in 2024), it’s considered a gift that falls within the annual gift tax exclusion.

To further educate your grandchild about finances, accompany him or her to the bank to deposit the check into an account (or cash it). A tour of a brick-and-motor bank can help your grandchild better understanding the value of saving money.

Yet another strategy is to write two checks: one in your grandchild’s name and another that is left blank for a charitable donation. Then help him or her look up local organizations in your area and go over the list, allowing your grandchild to choose a charity to donate the money to. This can be a great way to expose him or her to philanthropy.

Give Cash

Instead of the traditional form of giving cash, you could present your grandchild with $1 bills to spend at the dollar store. As a fun way to celebrate a birthday, give him or her an amount equal to their age. For example, if your grandchild is turning 10, give him or her $10 in $1 bills. This creative approach exposes young kids to the value of a dollar and teaches them some basic financial-related math skills.

Other Financial Literacy Opportunities

To further your grandchild’s financial education, here are two additional ideas:

1. Explore the internet. The U.S. Mint offers free financial education on their website as well as tours at some of their facilities throughout the country. Spend time browsing the internet and reading articles with your grandchild or schedule a facility tour as a field trip.

2. Start a coin collection. Buy a booklet and work together to find coins. This can be a great way to expose kids to physical money like coins, which is becoming a rare opportunity in today’s digital world.

Conclusion

Choosing the right method to gift money to grandchildren involves considering factors such as tax implications, control over assets, and the intended use of funds. As financial planners, we recommend discussing these options with us to tailor a strategy that aligns with your goals and supports your grandchildren’s financial future. Finding creative opportunities to educate them and develop their financial literacy can be time well spent together that lasts far beyond the gift itself.

Meeting Recap: Inside the 2024 Berkshire Hathaway Meeting

By Kelly Doyle

The Nebraska air buzzed with electricity. All around me, thousands of investors from around the world anxiously waited for the doors of the CHI Health Center Omaha to open. Finally, at 7 a.m. sharp, we were allowed into the arena, and our massive throng made a beeline for seats and settled in. It was May 4 after all, and the 2024 Berkshire Hathaway Annual Shareholders Meeting was about to begin.

Held annually for the past 60 years, the event known as the “Woodstock for Capitalists” drew 18,000 investors from around the world in 2024. People from all walks of life attended, including the likes of Bill Gates, former CEO of Microsoft®, and Tim Cook, CEO of Apple®.

Despite the different languages spoken, a strong spirit of camaraderie was evident. Everyone I met was proud to share how many years they’d been a Berkshire Hathaway shareholder or how many times they’d attended the annual meeting.

In my experience, it’s rather uncommon for the average investor to fly across numerous time zones on a yearly pilgrimage to attend a company’s annual shareholder meeting — especially one held in a small Midwestern town. More often, engaged investors might read a company’s annual report. A few may even attend the meeting remotely.

However, the yearly Berkshire Hathaway Meeting is an opportunity for thousands of investors to hear firsthand from the famed Warren Buffet aka the “Oracle of Omaha.” As the co-founder, chairman and CEO of Berkshire Hathaway, Buffet uses this opportunity to provide updates on his company’s performance and share his thoughts about the American and global economies. He also offers insights into business and investment decisions and dispenses general life advice in a live question-and-answer format.

Understanding the Uniqueness of Berkshire Hathaway

What is it that makes Berkshire Hathaway such a special company? To answer this question, you need to understand a bit more about the company and how it works. Berkshire Hathaway is an American multinational conglomerate holding company whose net earnings totaled $96 billion in 2023. The company’s model is to own either all or a portion of select businesses producing good economics that are fundamental and enduring. Here are a few examples of some of the company’s holdings as either subsidiaries or investments:

·         Apple

·         Coca-Cola®

·         American Express®

·         Kraft Heinz Company

·         BNSF® Railway

·         Duracell®

·         Fruit of the Loom® Companies

·         Jazwares® (maker of Squishmallows™)

·         HomeServices of America®

·         Gateway Underwriters Agency

·         GEICO® Automotive Insurance

·         Dairy Queen®

·         NetJets®

·         Oriental Trading® Company

·         Pampered Chef®

·         See’s Candies®

·         W&W | AFCO Steel®

·         And many, many more

With Buffet at the helm, Berkshire Hathaway has become one of the greatest businesses in America. From 1965 to 2022, the company’s stock averaged a 20% compound annual growth rate, which compares to 9.9% annualized return for the S&P 500 in that period, according to U.S. News.

Buffett’s success stems from his role as a “value investor”: a bargain hunter who finds undervalued companies with strong potential for growth and invests in them for the long term. As he explained in his 2023 annual report: “The lesson from Coke and AMEX? When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”

This year’s meeting was the first held since the passing of Buffet’s renowned right-hand man, Charlie Munger, known to be the Bert to his Ernie, the Captain Kirk to his Doctor Spock, and the Batman to his Robin (as explained in a loving tribute at the beginning of the meeting). Buffet instead hosted the meeting along with two members of his senior management team: Ajit Jain, Vice Chairman of Insurance Operations, and Greg Abel, Vice Chairman of Non-Insurance Operations. The three kept the audience engaged and even enthralled over the course of the nine-hour day, though the absence of the charismatic Munger was certainly felt.

A video tribute was shown in Munger’s honor, followed by Buffet’s recap of the 2023 annual report, a special acknowledgement of a donation by a shareholder of $1 billion to the Albert Einstein College of Medicine to cover the tuition of every student in perpetuity, and lastly the hugely popular Q&A session. With CNBC’s Becky Quick moderating the latter, questions alternated between those from the audience and those from online submitters. As the real meat of the meeting, the Q&A session lasted five hours, though the time felt like it flew by. Below is an overview of 10 key topics discussed at this year’s shareholder meeting.

#1: Selling Apple

Berkshire Hathaway recently sold roughly 13% of its stake in Apple. As of February 2024, the holding company owned 5.9% of Apple, valued at about $176 billion. As Berkshire Hathaway’s largest holding, Apple accounts for about 50% of the company’s stock portfolio, which is worth over $300 billion. Berkshire Hathaway has been buying stock in Apple since 2016. With this recent sell, however, the technology company now comprises about 41% of the company’s stock portfolio.

Buffet didn’t have any particular reason for the stock sell. It simply came down to his years of wisdom and experience. The “light bulb will go on” at certain times, he said, and he’ll make a decision. In this case, it was selling some of Berkshire Hathaway’s stake in Apple.

Buffet said that people pay more attention than they should to the tax consequences of this type of appreciated stock sell. Yes, taxes were paid: 21% in federal corporate tax, to be exact. But it doesn’t bother Buffet because he feels it goes toward investing in America, which is a country he loves and is happy to help support.

#2: Buying American

Berkshire Hathaway has historically held stock in American companies only. Thus, a common question posed by several attendees from foreign countries, including China, Hong Kong, and Canada, was whether the company ever planned to invest in companies outside the U.S. For the foreseeable future, Buffett said Berkshire Hathaway would continue to invest strictly in domestic companies. However, some of those companies, such as Coca-Cola and American Express, are highly involved in foreign sales.

#3: Steady Performance in Insurance

As a financial planner, I’ve spent a lot of time discussing how recent insurance rate hikes have affected Southern California homeowners. While these higher rates have made a large impact on all homeowners, they’ve been an especially tough burden for retirees, who often must survive on fixed budgets.

With that in mind, I wasn’t surprised to hear multiple questions directed toward Jain asking for an update on Berkshire Hathaway’s insurance businesses. Due to climate change, he said, there’s a risk for more extreme and frequent natural disasters, such as wildfires, hurricanes, and flooding. As a result, Jain and Buffet confirmed that insurance rates will need to go up.

Despite this, Berkshire Hathaway’s leadership feels the company is safely positioned since they write policies with one-year terms. This creates opportunities to recalculate rates on a frequent basis. Buffet emphasized that he still likes the insurance industry because it’s something everyone needs. Plus, Berkshire Hathaway is able to offer less expensive policies than their competitors due to their underwriting expertise. While the Berkshire Hathaway’s insurance businesses continue to do well, strict regulations in some states have made it tough to operate. This has forced the company to withdraw from certain regions.

#4: Pros and Cons of Artificial Intelligence (AI)

When asked what impact AI may have on Berkshire Hathaway’s businesses in the future, Buffet responded with a historical comparison. He explained that, when the atomic bomb was invented, the “genie was let out of the bottle.” The rapid growth of AI has him wondering if it’s happening again. While there’s an enormous potential for good, he said, there may conversely be an enormous potential for bad.

Specifically, he feels there’s a huge risk for people being scammed out of money. Buffet shared a recent experience where he watched an AI-generated video of himself featuring his own voice that showed him asking his family for money. It was so realistic that he believed, without a doubt, his family would think it was authentic. While there are always going to be scams, the use of AI carries a potential for a new type of risk, he said.

On the plus side, incorporating AI into Berkshire Hathaway companies could help their businesses become more effective, efficient, and safe while providing more leisure time for employees.

#5: Advice from the Oracle

When asked for life advice, Buffet suggested writing your own obituary that includes the accomplishments you’d like to achieve. From there, go out and make it a reality. For instance, take a class that will help you reach your goals or marry the person you want to end up with. Choose the right heroes who are living the life you want (not measured by what they’ve accomplished but by who they are) and emulate them to create your own success.

As it pertains to what people are capable of, he said you’ve got to feel better about the future for your kids than you would have felt 100 years ago, no matter what the situation is. Buffet explained that those of us in the audience were incredibly lucky to live in this country, in this time, as compared to past generations. Two hundred years ago, a shepherd’s son and grandsons were destined to be shepherds. This is no longer the case since opportunities in the U.S. are endless.

#6: Making a 50% Return

Buffet offered this advice to young investors: Learn everything about everything about a small, focused topic or business. It’s also crucial to have a love for the subject. Most importantly, the subject can’t be money! Find out what your mind is best suited for and pound away at it.

#7: The Limitations of Clean Energy

Berkshire Hathaway owns 92% of Berkshire Energy, a holding company with its roots in renewable energy that controls power distribution companies in the U.S., Great Britain and Canada. When questioned about Berkshire Hathaway’s position on renewable energy, Abel said the industry’s transition from coal to renewable sources has been a “moving target” and, over time, the company’s goals had changed.

While Berkshire Hathaway’s leadership previously favored a strategy of a non-interrupted energy supply (e.g., to always keep the lights on at a hospital), they now understand that sometimes a loss of service is necessary (e.g., during events like wildfires). They also stated that a transition to renewable energy wouldn’t happen overnight and that the technology must advance further before it can be seen as a reliable, long-term solution.

Using solar battery storage as an example, Abel explained that the only economical solution today is a battery with four hours of capacity. This forces homeowners with solar to rely on traditional electricity sources for their nighttime needs once that capacity is depleted.

Another example of the current limitations of renewable energy involved this year’s Earth Day. Using renewable wind energy, Berkshire Hathaway was able to supply the electrical needs for the entire state of Iowa for the whole day. However, the next day the winds died down, and they were unable to provide the same level of support. Thus, the technology still has quite a way to go before it can be considered a viable, full-time alternative to traditional electricity.

#8: Sitting on $182 Billion in Cash

At the time of the annual meeting, Berkshire Hathaway had $182 billion of available cash with which to make investments. So why isn’t it being invested?

No one at the company, including Buffet, knows how to use if effectively. Buffet said he hasn’t seen any compelling proposals that can beat the U.S. Treasury’s 5.4% rate of return. To explain this further, Buffet resorted to baseball terms, stating that they wouldn’t swing at every pitch. They also wouldn’t swing on the third pitch just for the sake of swinging.

In other words, the company won’t make any investments until the right ones come along. He iterated that they aren’t on some sort of anti-investment strike; they just haven’t found anything deemed worthy.

The leadership team also discussed the federal deficit, which Buffet refuses to “work himself into a stew” over. The deficit has been there for decades, but it wasn’t a huge problem until inflation took off in 2020. While it continues to be an issue, the treasury market will be acceptable for a very long time.

Buffet added that Jerome Powell, the Chair of the Federal Reserve Board, is not only a great human being, but he’s also a very, very wise man. However, he doesn’t control fiscal policy. While the media is focused on what the Fed under Powell is doing and saying, Buffet reminded the audience that this is really a fiscal issue (which is in the Court of Congress, not the Federal Reserve).

#9: The Auto Industry and Self-Driving Cars

At one point, a reference was made to Tesla’s recent earnings call and a comment made by former Tesla Chairman Elon Musk that self-driving cars were safer with fewer accidents. This spurred an attendee to ask: “Shouldn’t insurance rates decrease as a result of this and, if so, would it hurt Berkshire Hathaway’s insurance company?”

In reply, the Berkshire Hathaway leadership team said that, while the number of accidents had gone down, the cost of individual accidents had gone up. Automation simply shifts the expense from the operator to the equipment provider. On the topic of clean energy vehicles, the leadership team doesn’t feel they have any specific talent to bring to this area, so don’t look for them to pick investment winners anytime soon.

#10: Buffet and Munger

Since this was the first shareholders meeting without Munger, the event organizers showed a touching video detailing the decades-long friendship between Buffet and Munger. One of the most moving moments for me (and I suspect most of the audience, judging by the response) occurred when a young teenager asked: “If you could have one more day with Charlie, what would you do?”

Buffet said that he had fun doing everything together with Munger and that, when a thing failed, it was often more fun because he had a partner to help dig him out of a hole. He had no doubts about Munger and trusted him implicitly. They never once had a fight.

He then suggested we all determine who our special people are, figure out how to meet them tomorrow, and see them as often as possible because why wait for tomorrow?

After returning home, I was extremely glad I made the trip to Omaha. The experience was life-changing, and it was easy to see firsthand why Berkshire Hathaway remains strong despite recent changes in their leadership. And it looks as if this will continue for the foreseeable future.

If you’re ready to talk about your finances, attending the Berkshire annual shareholder meeting next year, or you just want to say hello, don’t wait for tomorrow. Give us a call today!

Gratitude: The Parent of All Virtues

By Shelley Murasko

It’s easy to feel some days that our generation is worse off than those before. I find this to be especially true when spending time scanning the news of the day. Recent articles on page one of the Wall Street Journal have consistently featured topics of a negative nature. Check out these headlines:

·         U.S. Concerns Over Rafah Invasion

·         U.S. Probes Role of Ford’s Assisted-Driving Technology in Fatal Crash

·         Ailing EV Maker Fisker to Pause Production for Six Weeks

The irony of all this negativity is that we are living in pretty good times. Look at this chart detailing household wealth in the 1950s compared to 2022.1

In addition to data like this, we can also gain perspective from our elders. Look no further than 90-year-old Warren Buffett. In a 2022 interview, Buffett stated:

"A greater percentage of the American population are wealthy now or have more income now than they've ever had." He pointed to indicators such as Bank of America's average deposit figures to underline this trend, suggesting that while not everyone is wealthy, "people here have more money now."

"The bottom 2% in terms of income in the United States, the bottom 5%, and for sure the top 1% all live better than John D. Rockefeller was living when I was six years old. John D. Rockefeller was the richest man in the world." Buffet also emphasized the improvements in medicine, education, entertainment, and transportation, arguing that these aspects of life are now better than ever before.

In addition, global statistics in three key areas are on the rise:

·         GDP Growth. Today’s Global GDP is now five times the size of the Global GDP in 1990, growing from $22.2 trillion to $101 trillion.2

·         Poverty Levels. In 1820, 90% of the world population lived in extreme poverty compared with 10% in 2021.3

·         Literacy Rates. From 1950 to 2020, the literate population of the world has increased from 56% to 87%.4

By many measures, the human condition and the financial state of the world’s population are on the rise. With so many signs of progress, there are many people who accept the notion of abundance and focus on all they have. Yet, for many Americans, the amount in their bank accounts is never enough.

So, how can you move from a place of want to a place of gratitude? There are many answers to this puzzle. Here are a few thoughts to ponder:

·         Overcoming Advertising’s Mental Toll. In today’s world, we face a constant barrage of ads that point out our inadequacies. During the pre-internet decades, the average person might have seen, at most, 100 ads a day. In 2007, market research firm Yankelovich ran a survey of 4,110 people and found that an average person saw 5,000 ads every day. It has since skyrocketed to 10,000 ads.6 With so many reminders of what we don’t have or what we’re not, it’s easy to feel like we’re lacking. However, you can overcome this feeling by making gratitude a daily habit.

·         Avoiding Negativity Bias. This is a tendency to focus on negative information far more than positive information. All humans have this psychological trait, which often gets in the way of gratitude.

The reason for negativity bias comes down to consequences. For example, positive feedback on your annual review is nice, but nothing will happen if you ignore it. On the other hand, ignoring criticism might lead to you being fired. About 2,000 years ago, ignoring feedback could have gotten you cast out of your tribe, which was your lifeline in a dangerous world.

Therefore, having a negativity bias might be a good way to stay alive, but it’s generally a distortion of the world around you. For instance, you could be sitting in first class on a flight to Paris and yet be annoyed that your coffee is cold. When you learn to appreciate the good things in your life, you’ll begin to see the bounty that surrounds you.

·         Practicing the Gratitude Technique. According to Arthur C. Brooks, Harvard University’s “Happiness” class instructor and co-author of Build the Life You Want with Oprah Winfrey, “The single best way to grasp the reality of good things in life and turn down the noise that makes real threats hard to distinguish from petty ones is to occupy some of the negative emotion receptors with a different, positive feeling. The most effective of these positive feelings is gratitude.”

Brooks goes on to explain that it’s possible to bring more gratitude to your life. According to his research, the best way is to become more aware of all the good in your life by taking time to reflect.

In his book, Brooks teaches a Gratitude Technique that includes the following aspects:

1.      Daily sentence. Before getting out of bed in the morning, recite a sentence to frame the day. His example is Psalm 118:24: “This is the day the Lord has made; let us rejoice and be glad in it.” If you prefer a less religious tone, try this simple affirmation: “Thank you for this day!”

2.      Gratitude list. Maintain a gratitude list that you update once a week. You could tape it to the bottom of your computer screen and glance at it each morning before you start work, pausing briefly on each item.

3.      Two communications. Make a routine of your outward gratitude by sending two daily emails or texts to someone before you get to work. You don’t need anything long-winded or dramatic, just a few words showing someone that you noticed something nice they did and appreciated it. On the days you aren’t feeling like sending your two thank-you messages? Make it three instead.

4.      Gratitude mantra. Write or adopt a gratitude prayer or mantra that you can say throughout the day, especially at trying moments. Maybe it could be “Thank you for my life,” which can work wonders when sad or afraid.

As Brooks affirmed, “If you commit to a ‘Gratitude’ regimen, your life will change. You won’t feel grateful at every second (you are still human), but gratitude will become a fixed point around which you live your life. And that will make you a stronger, happier person.”

When taking a moment to reflect upon the benefits of today’s technology, medicine, consumer goods, and entertainment accessibility, it seems obvious that we live in better times. One major key to bringing gratitude into your life is taking the time to notice.

“Gratitude is not only the greatest of virtues, but the parent of all others.”

– Marcus Tullius Cicero

Sources:

1.      Moore, Steven and Julian L. Simon. (Dec. 31, 2022). “It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years.” Federal Reserve Bank of Boston, Statistical Abstract of the United States, International Labor Organization, United Nations, Bureau of Labor Statistics. Latest data available. For illustrative purposes only.

2.      Retrieved from Invesco’s “Compelling Wealth Management Conversations Guidebook” -found here, Compelling wealth management conversations | Invesco US  World Bank. (Dec. 31, 2023). Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.

3.      Retrieved from Invesco’s “Compelling Wealth Management Conversations Guidebook” -found here, Compelling wealth management conversations | Invesco US World Bank. (2021). Extreme poverty is defined as living at consumption (or income) level below 1.90 “international $” per day. International dollars are adjusted for price differences between countries and inflation. Latest data available. For illustrative purposes only. Retrieved from ourworldindata.org.

4.      Retrieved from Invesco’s “Compelling Wealth Management Conversations Guidebook” -found here, Compelling wealth management conversations | Invesco US  Middle class data - OECD and UNESCO. (Dec. 31, 2020). Middle-class refers to households with income between 75% and 200% of the median national income. Population data - World Bank: Health Nutrition and Population Statistics. Forecasts may not be achieved. There is no guarantee the outlook mentioned will come to pass. Latest data available. For illustrative purposes only.

5.      Jowarth, Josh. (Dec. 4, 2023). Time Spent Using Smartphones (2024 Statistics). Retrieved from explodingtopics.com on 3/18/2024.

6.      Nadia. (Feb. 10, 2024). “How Many Ads Do We See a Day?” Retrieved from siteefy.com on 3/18/2024.

7.      U.S. Bureau of Labor Statistics. (2022). Table 1. Time spent in primary activities and percent of the civilian population engaging in each activity, averages per day by sex, 2022 annual averages - 2022 A01 Results. Retrieved from bls.gov on 3/18/2024.

Navigating Market Changes During Election Years

By Kelly Doyle
 
As the United States approaches another presidential election, it's natural for concerns to arise about how political changes might affect your investment portfolio. The anticipation and uncertainty surrounding such events can lead to anxiety and even irrational decision-making.
 
Media coverage and social media discourse tend to amplify during election years, creating heightened negativity and fear. This leads some investors to make emotional decisions instead of sticking to their long-term plans. It’s essential to remember that history often serves as a valuable guide in times of uncertainty, as does recognizing our own behavioral biases when making investment decisions.
 
Past Elections
 
Americans have been voting in elections every four years since 1788. While drama surrounding recent elections has sparked volatility in financial markets, this is not a new occurrence. In fact, tension between political rivals has led to turbulent outcomes for centuries.
 
Take the election of 1800, for instance. This event was so contentious that, three years later, it led to former treasury secretary Alexander Hamilton and then Vice President Aaron Burr facing off in a duel. Tragically, this heated dispute ended with Hamilton taking a bullet to the abdomen and dying the next day. It makes me feel grateful to live in the 2020s, and not the dueling 1800s, where we mostly use words rather than weapons to resolve disputes.
 
The chart below, prepared by Dimensional Fund Advisors, helps put things into historical context. Note that, despite the ever-present, short-term volatility, the markets tend to tick up regardless of the party in office.

 
Understanding Behavioral Biases
 
When considering possible outcomes of the upcoming November election, it’s important to acknowledge that we all carry different behavioral biases. Behavioral finance, the study of why investors make decisions the way they do, has been a growing field in recent years.
 
The list below outlines some of the common biases that many of us carry. Understanding these different biases can help us acknowledge when we exhibit a bias, allowing us to stop and reflect before acting on it.

• Confirmation Bias

This occurs when individuals seek out information that confirms their existing beliefs or fears. During an election cycle, people may gravitate toward news sources or opinions that align with their political views, potentially leading to a distorted perception of the situation. Selectively choosing which information to use can lead to a lack of diversification and investments that are too risky. Try shifting your focus away from short-term market moves and instead lean toward your long-term investment goals to help mitigate your confirmation bias.

• Loss Aversion

Investors tend to feel the pain of losses more acutely than the pleasure of making gains. Fear of potential market downturns driven by election outcomes can lead to a desire to sell investments prematurely, causing investors to miss out on potential future gains. An example of this would be to sell all investments and stay in cash during a period of volatility due to a fear of a loss in the market. The risk of this type of behavioral bias is that time spent out of the market could be a loss in potential gains.

• Recency Bias

This bias causes individuals to place undue emphasis on recent events when making decisions. In the context of elections, investors may overreact to short-term market movements without considering the long-term fundamentals of their investments. People entering the work force during the decade-long bull market from March 2009 to February 2020 may suffer from Recency Bias as they have only known a really strong economy during their working years. As a result, they may not understand the importance of a diversified portfolio for downside protection.
 
In truth, diversification is the key to combatting recency bias and avoiding the lure to either go all in or all out on specific sectors or asset classes. Awareness of this bias promotes a more balanced investment approach, weighing both short-term fluctuations and long-term objectives.

Staying the Course
 
Despite the uncertainty surrounding elections, it's essential to maintain a long-term perspective and adhere to a well-thought-out investment strategy. Following the strategies below can help you navigate the upcoming election cycle.

• Focus on Long-Term Goals

An election year is 365 days long while a presidential term is four years. Your investment horizon is far, far longer than that.

• Revisit Your Investment Policy Statement

An Investment Policy Statement can be robust and formal or as simple as a back-of-the-napkin plan. Either way, it serves as a strategic guide to the planning and implementation of your investment plan. While reviewed frequently, this statement typically is only changed due to a major life change or event. It serves as a “true north” in times of rough seas, where the investor can open it up and remind themselves of why they invest the way they do.

• Diversify Your Portfolio

A diversified portfolio can help mitigate the impact of political uncertainty on your investments. Many different types of risks on a macro scale are involved when investing, such as purchasing power risk, reinvestment risk, and interest rate risk. A proven strategy is to spread your assets across various geographic areas, asset classes, and sectors to help reduce risks associated with election-related volatility.

• Stay Informed, but Beware of Overload

Stay informed about political developments and their potential impact on the economy and markets. Keep in touch with friends on social media but take some healthy time away as well. Be wary of information overload and avoid making quick reactions based on sensationalized headlines.

• Consult with Your Financial Planner

Your financial planner is here to provide guidance and support during periods of uncertainty. Reach out to discuss any concerns you have and ensure that your investment strategy remains aligned with your long-term goals.
 
In conclusion, while the upcoming presidential election may introduce short-term volatility into the markets, it's essential to maintain perspective and avoid succumbing to behavioral biases. By focusing on fundamentals, diversifying your portfolio, and staying informed, you can navigate through the uncertainty with confidence.
 
As always, if you have any questions or concerns, please don't hesitate to reach out to us. We're here to support you on your financial journey.


Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks.  Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

8 Tax-Advantaged Strategies for Building Wealth

By Shelley Murasko

In the labyrinth of personal finance, there are often elements beyond our control. Fortunately, smart financial decision-making can help you navigate the complexities of taxation.

Although tax rules might seem complicated and boring, they’re one of the best ways you can save money.

Did you know that the average U.S. citizen directs 15% of his or her income to federal taxes alone? Thus, mastering the art of tax savings requires a calculated approach. This article explores eight effective strategies to maximize your benefits and secure a better financial future.

All tax information below is based on current tax law and should not be considered as direct tax advice.

#1: Leverage Tax-Sheltered Accounts

Taking advantage of tax-sheltered investments is a smart way to legally reduce your income tax liability. Examples include health savings accounts (HSAs), 529 educational plans, IRAs, 401(k)s, and Roth IRAs. When you understand how each works and follow the tips below, you’ll be able to pocket more of your hard-earned money over time.

• Make the most of tax-deferred retirement accounts during high-income years

• ·In lower-income years, focus on Roth IRAs for tax-free growth

• Learn the benefits of health savings accounts (HSAs) which offer a triple tax advantage and are thus the best of all tax-sheltered accounts if you have a high deductible insurance plan

• For college savings, 529s can prove helpful

#2: Use Multiple Roth IRA Strategies

You may already be familiar with the advantages of Roth IRAs, including tax-free withdrawals and no required minimum distributions (RMDs). For the 2023 tax year, low-to-middle income earners can make their annual contribution of $6,500 (over age 50 is $7,500) up until April 15th.

If you’re a high earner, however, you may be subject to certain income limits. Here are a few ways to overcome this.

• To get around the Roth IRA income caps, high earners can explore the "Backdoor Roth" strategy through nondeductible contributions to a traditional IRA, followed by a Roth conversion (though be careful about the “Pro-rata rule” that considers other IRA money)

• More and more 401(k) plans are offering a “Roth” or “After-tax” contribution option; use this to create some tax diversification for your future retirement

#3: Maximize Health Savings Accounts (HSAs)

When used properly, an HSA allows for a tax break in the year you contribute, tax free growth over time, and a tax free distribution upon withdrawal. It must be paired with a high-deductible health plan (HDHP) and ideally used only for qualified medical expenses which can include paying Medicare premiums. 

• High-deductible health plans (HDHPs) make you eligible for HSAs

• Enjoy tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for medical expenses

• With age flexibility built into HSAs, you may use these monies at any age for medical-related expenses

#4: Early Withdrawal from Tax-sheltered Accounts Can Be an Option, But Use Caution

While tapping into retirement savings may not be ideal, you may want to explore the potential flexibility for early withdrawals. Before doing so, make sure you understand the rules and restrictions for taking your money out of your account prior to retirement.

• Roth IRA funds can be withdrawn without tax consequences up to the contribution amount if open for five years.

• Be aware of exceptions for penalty-free withdrawals from IRAs, such as home buying, qualified education expenses, or age 55 withdrawal options if payments are substantial and sequential for five years — known as Rule 72(t)

#5: Let Cashflow Needs Inform Where You Put Your Savings 

While there’s no single order of priority for using tax-sheltered accounts that works for everyone, your unique circumstances should guide you.

During accumulation, tax deferral is equally effective across account types, however, not everyone qualifies for all account types.

So, you are wise to know the rules around availability, qualification, tax-treatment, and timing.

Consider short- and long-term liquidity needs when choosing where to put your money:

• Long term: Employer sponsored plans, other tax-deferred accounts (Traditional and Roth IRAs, HSAs, etc.)

• Short term: Taxable accounts and Roth IRAs

• Make sure to prioritize account types with employer matches

#6: Make Asset-Location Decisions with Taxation in Mind

Before deciding where to invest your money, assess how certain account types will affect your future tax liability.

• Prioritize traditional IRAs and 401(k)s for bonds and investments generating interest or ordinary income

• ·Place actively managed stock funds in tax-deferred accounts like traditional IRAs to avoid taxes on annual distributions; these funds can also be a good fit in Roth IRA accounts

• Allocate remaining shelf space to stock index funds or low dividend stocks if you are saving beyond your tax-deferred accounts

• Municipal bonds might be considered for a portion of a taxable account if money is needed from this account within five years

#7: Create an Orderly Framework for Account Drawdowns in Retirement

Once you reach retirement and start to draw down your investment accounts, be sure you understand how this will affect you from an annual tax standpoint. Consider the guidelines below before you begin taking money out of your investment accounts.

• If you've reached Required Minimum Distribution (RMD) age, begin with Required Minimum Distributions (RMDs) from tax-deferred accounts

• Next, rely on dividends and distributions from taxable accounts

• Withdraw from taxable accounts by selling investment positions as your third source of income

• For large one-time expenses, use your Roth IRA to avoid a spike in income

#8: Keep a Lid on Required Minimum Distributions (RMDs) in your 70s

Traditional IRA and employer-sponsored accounts allow you to defer taxes until age 73 (or age 70½ if you reached this age before 2020). At that time, you’ll be required to withdraw and pay taxes on a minimum amount each year. Following the tips below may help reduce your tax burden.

• If RMDs are a concern, consider using Roth conversions in low-income years between ages 60 to 73 to pull income forward and lessen the future RMD burden down the road

• After age 70½, make sure all charitable giving is done from your IRA account through checks written out to the charity straight from the IRA; this is called Qualified Charitable Distributions, and it is one of the few ways to get money out of a traditional IRA without generating income tax

In the intricate world of taxation, mistakes can be costly. By incorporating these eight tax-saving strategies into your financial plan, you can more easily navigate the complexities of tax advantages, compound your capital effectively, and secure a prosperous financial future. With a thoughtful approach to tax planning, you can minimize liabilities, optimize growth, and embark on a journey toward financial independence.

THIS INFORMATION IS FOR EDUCATIONAL PURPOSES ONLY. FOR TAX ADVICE, PLEASE CONSULT YOUR TAX PROFESSIONAL.

Don’t Let Romance Ruin Your Retirement

By Kelly Doyle, Sr. Financial Planner, Wealthrise Financial Planning

Venturing into the online dating pool can be an incredibly vulnerable experience. Ten years ago, I gave it a try and was fortunate enough to meet my husband who I’ve been happily married to for the past eight years.

Whether you’re dealing with a recent loss, recovering from a painful breakup, or suffering from loneliness, it takes a lot of courage to make that step to open your heart in the hopes of making a connection with someone else. Unfortunately, putting yourself in an exposed position may affect your judgment. Reality may become blurred, and you might even shrug off some red flags, no matter how obvious they may seem in hindsight.

As a financial planner, I’ve often heard about people falling victim to financial schemes on online dating websites. Because of my experience in the online dating realm, I felt compelled to bring light to these widespread cons. Don’t let the thought of romance ruin your retirement!

For Love or Money

Take, for example, a story I heard recently from a friend of a friend. After a recent divorce, this person got onto a dating website. She connected with someone and started exchanging messages. After getting to know each other over a period of time, he told her about an opportunity he’d heard about through his work in the financial industry. If she invested her money, he said, she could receive an incredibly high payout. After making a small investment, she indeed made a large profit. This led her to invest again with a larger amount, which ultimately led to tens of thousands of dollars. Once that larger sum of money was transferred to this individual, he, along with her money, disappeared.

When it comes to online dating, look out for yourself and others who may be vulnerable. This can include friends or family members who have recently been through a loss or trauma. Or perhaps it’s someone who’s just feeling lonely. People who fall into one of these categories commonly fall victim to money schemes.

Ways to Avoid Scams

To keep from falling prey to a financial ruse, here are a few tips that may help.

·  If presented with an investment opportunity, search online for the contact information (name, email, phone number, and address) of the person or organization offering it. Other people may have posted information online about this individual or the business trying to run a scam.

·  Check your financial statements regularly to search for any suspicious activity. Consider lowering your credit limit in the event your account is breached.

·  Never give out your credit card, banking, Social Security, or Medicare information.

·  Never send money to anyone you have only communicated with online or by phone. Cut off contact if someone starts asking you for financial information like your credit card or government ID number.

·  Be careful what you post online. Scammers can use details shared on social media and dating websites to better understand and target you.

·  When dating, go slowly and ask lots of questions. The more specific, the better. A scammer may stumble over remembering details or making a story fit.

·         Check in on your friend or loved one and ask them about what’s going on in their life. Their judgment may be blurred, and they could be ignoring the red flags. Hearing from a friend or family member might help them see things from an objective point of view. As a financial planner, I meet with clients quarterly to provide financial updates but also to hear about any changes in their lives. In this way, I can help identify issues that may affect their financial well-being.

·  Discuss an article about a romance scam with your friend or loved one to bring awareness to them.

· Cut off contact immediately if you begin to suspect that your love interest may be a scammer.

Red Flags to Look For

If you or someone you know is in a relationship with a person who exhibits suspicious behavior, proceed with caution and look for these red flags.

·        They ask for money in a specific way. It may be in the form of gift cards, prepaid debit cards, cryptocurrency, or a bank or wire transfer. They make a sudden request for money to deal with an emergency or make a sure-fire investment. No financial adviser with a fiduciary responsibility should be guaranteeing any returns on investments, especially ones that are too good to be true.

·         They ask for money with a sense of urgency. Resist the pressure to act quickly. Scammers create a sense of urgency to produce fear and lure victims into immediate action. They don't want you to have time to check out what they're saying.

·  They are overly flirtatious and complimentary. Your new romantic interest sends you a picture that looks more like a model than an ordinary snapshot. Many scammers steal photos from the internet to use in their dating profiles. You can do a reverse image lookup using a website like Google Images.

·  They know just what to say. They lavish you with attention. Scammers will often inundate you with texts, emails, and phone calls to draw you in.

·  They won’t meet you in person. They repeatedly promise to meet in person but always come up with an excuse to cancel.

What to Do If You’ve Been Scammed

If you discover that you’ve fallen victim to a romance scam, there are steps you can take. First, don’t be too hard on yourself. Many scammers are experts at fooling their targets, and you’re likely not the first person they’ve tricked. Second, follow the steps below as soon as you realize you’ve been scammed:

·  Protect your accounts. Immediately contact your financial institutions to place protections on your accounts. Be sure to monitor your accounts and personal information for suspicious activity.

·  Report the fraud. It’s common to feel a sense of shame in admitting to being scammed, even more so if it occurred while using an internet dating site. Some victims may feel that family and friends will lose confidence in their ability to manage their money.

·  Report the scammer. Notify the dating site or the maker of the dating app on which you met the scammer to prevent further damage and keep others from falling prey.

In the month of February, love is in the air. Don’t turn on the blinders and ignore red flags. Keep your heart, and your head, open to romance while protecting your wealth. Happy Valentine’s Day!

Helpful resources

FBI article on “Elder Fraud”

AARP Fraud Watch Network Helpline

What Taylor Swift Can Teach Us About Personal Finance

By Shelley Murasko

The U.S. economy may have just been saved by a 33-year-old pop star from small-town Pennsylvania. Don’t believe it? Check out some of these recent headlines about music icon Taylor Swift:

·         “The Federal Reserve Says Taylor Swift’s Eras Tour Boosted the Economy” (CBS News)

·         “Taylor Swift Is the Economic Stimulus Package” (Wall Street Journal)

·         “Taylor Swift, Beyoncé Juice Third Quarter GDP” (Fox Business)

The 11-time Grammy winner has taken the world by storm, proven by the fact that her net worth has eclipsed the billion-dollar mark. Her recent global tour has raked in $780 million, which provided a much needed boost to the U.S. economy over this past summer. In fact, Bloomberg estimates her tour has added $4.6 billion to the U.S. GDP once you consider other Eras Tour-related revenue like hotels, cars, flights, restaurants, and other beneficiaries of the tour travel.

Recently named “Time Person of the Year,” Swift has crossed over genres and countless style choices while shaping her place as a music icon. Whether or not you’re a fan of the popular entertainer, there’s much to learn from her success.

Start Your Personal Finance Education at a Young Age

Given her ability to sing, play multiple instruments, and compose music, you might assume that Swift grew up in a musical household. Interestingly, both of her parents have ties to the financial industry. Her father is a financial advisor for Merrill Lynch and her mother was formerly a mutual fund marketing executive.

Perhaps this is why they carefully chose a name for her with a business career in mind. Besides having a natural preference for the name Taylor, Swift’s mom specifically chose that name so her daughter might be less disadvantaged by gender.

In a 2011 YouTube® interview found at this link: YouTube Presents Taylor Swift, Swift explained that her business sense developed at a young age. At age 8, her career goals differed vastly from her friends who wanted to be astronauts and ballerinas. Her dream? She wanted to be a financial advisor like her dad.5

Fast forward to today, and Swift says that she continues to follow her father’s financial advice: “Save your money.”5

Be Creative with Your Business Dealings

Swift made her fortune from several business-savvy decisions. One of these was re-recording and releasing old albums after the master rights were sold by her original record label, Big Machine Records. This allowed her to regain control of her work while reducing the value of the original albums.

It’s common for artists to sell their music rights to a big music label. Those who go down this path, however, are forever limited by the music label’s decisions. Fortunately for Swift, she found a creative way around her past legal agreements.

As soon as her career-limiting 2005 deal with Big Machine Records expired, she switched labels to Universal’s Republic Records. Big Machine owns the original recordings, or masters, of her first six albums, as is typical with many recording deals. However, nothing was stopping Swift from re-recording her first songs, except for the risk that her fans might not be interested in downloading the old music.

Fortunately for Swift, she received an overwhelming show of support from fans. Fearless (Taylor's Version), Swift's first re-released album, receives an estimated $758,430 in royalties each month, according to recent Spotify data. Since the 2008 remake was re-released in April 2021, it's received 2,559,699,855 streams, adding up to an estimated $20,477,599 in royalties.6

Cut out the Middlemen

Swift wisely found a way to re-package her record-breaking Eras concert tour by making a movie out of it through a direct partnership with AMC Entertainment. For those kids who couldn’t make it to the actual concerts, they could catch the excitement through a local theater.

Rather than going with the traditional model of paying a major studio to distribute the film, Swift partnered directly with AMC Entertainment. This enabled her to take home 57% of sales.2 While production of the film cost her $15 million, it grossed well over $100 million thanks to a release during the barren fall movie season.

Power of a Tribe

Swift was one of the first musicians to dig deep into the use of social media to build a brand and fanbase. Her strategic use of Instagram, Twitter, and Tumblr in the 2000s allowed her to communicate one-on-one with her fans.

During her 1989 Era Tour, Swift started hosting groups of “Swifties” at her many houses around the globe. There, they got to interact with her as if they were close friends.

What really seals the deal with her fans is how genuinely Swift approaches these relationships. She knows that her success lives and dies by the Swifties, and she seems truly grateful for their support.

She has even helped some of her fans financially by donating money to cover their academic loans, medical bills, rent, and other expenses.

The rest is history. Over half of U.S. adults identify as Taylor Swift fans, and about half of the fans identify as Swifties.

Be Diversified

It’s no secret that Swift makes a very comfortable living through her music. But that’s not her only source of income. She also has a stake in her own merchandise, concerts, movies, real estate (valued at $150 million), and other businesses.

For example, Swift’s first major purchase of a three-bedroom penthouse near Nashville, Tennessee’s historic Music Row district followed the success of her first country album Fearless at age 19. At the time, her Nashville condo was worth $1.99 million. Today, local real estate agents place her Nashville holding between $4 and $6 million. Her current real estate portfolio also includes property in New York City, Beverly Hills, and Watch Hill, Rhode Island.

According to an article in Women’s Health3, Swift has branched out to several business ventures ­— from holiday ornaments to cruise liners. Ticket prices for her future cruise expedition, which runs through Marvelous Mouse Travels, averages between $1,500 to $2,000 per attendee. In fact, the middle tier ticket priced at $1,851 is already sold out.

A Giving Spirit

Swift’s purchase habits prove that she knows how to spend money, but she also knows how to give back.

When hundreds of Swifties camped out overnight in August 2019 to catch the "You Need to Calm Down" singer's Good Morning America performance, Swift made sure none of them went hungry. She ordered 30 pizzas to be delivered to the line of fans outside New York City's Central Park, handed out by members of her team — including her dad!4

Recently, Swift made sure her staff members were greatly rewarded for their work on the 2023 Eras Tour. The superstar distributed more than $50 million of her own money in bonuses to hundreds of support staff for her record-breaking tour along with handwritten notes. The trucking tour staff was most shocked when each trucker went home from an employee meeting with a $100,000 bonus check.

Swift has also pledged funds to local food banks, relief organizations, cancer patients, and survivors of sexual assault.

Not only does her generosity extend across charities and employees, but she also receives a hefty tax deduction for her efforts.  

Avoid “Too Good to Be True” Investments

Reportedly, Taylor Swift was asked to participate in the FTX cryptocurrency exchange swindle that took millions from several celebrities, including Tom Brady and Shaquille O’Neill.

She avoided involvement in this sham by asking one simple question: “Can you assure me that these assets are registered securities?”

Swift’s question about unregistered securities was remarkably prescient, given that we’re now seeing aggressive regulatory crackdowns on the various crypto exchanges. 

You don’t have to be completely up-to-speed on the risk of every single type of investment. In Swift’s case, however, asking challenging and critical questions probably led her and her team in the right direction to avoid this catastrophe.

Don’t Be Afraid to Be the Breadwinner

Of course, none of us know exactly where Swift’s relationship with Kansas City Chiefs running back Travis Kelce is headed. If they continue along their current path, it would not be surprising to find the two in a relationship where Swift is the breadwinner with her current net worth set at $1.1 billion while the football star has accrued $30 million.

Swift writes many song lyrics about love and relationships, but making sure she doesn’t outearn her significant other is clearly not one of them.

While not everyone loves Swift’s music, there’s a lot we can learn from her financial practices. In addition, her Eras Tour is a demonstration of the huge consumer spending power that still exists in this high interest rate economy. If you’re a fan of Swift’s music, you might also be thrilled at the idea of such a large fanbase coming together to financially support a cause they strongly believe in.

1. Taylor, Candace. (March 16, 2023). “Taylor Swift’s Real Estate Empire Is Worth More Than $150 Million.” Wall Street Journal. Accessed 12/9/2023.

2. Louis, Serah. (Nov. 26, 2023). "Taylor Swift is being called a 'great economist' as she embraces billionaire status with her smash Eras tour — here are 3 big lessons you can learn from her ‘masterful’ money moves.” Yahoo Finance. Accessed 12/9/2023.

3. Evans, Olivia. (Nov. 17, 2023). “What Is Taylor Swift’s Net Worth In 2023? Eras Tour, Film, Merch.” Women’s Health. Accessed 12/9/2023.

4. Dodd, Sophie. (Nov. 15, 2023). “All About Taylor Swift's Parents, Scott and Andrea Swift.” People. Accessed on 12/9/2023.

5. Skinner, Liz. (Sep. 11, 2011). “Swift's dad a broker." Investment News. Accessed 12/9/2023.

6. Arger, Alex. (Aug. 17, 2023). “This is how much money Taylor Swift makes from her re-recorded albums.” KSBY Channel 6. Accessed 12/11/2023.

Wealth- and Health-building Habits Go Hand in Hand

In life, personal finance and health stand out as critical aspects that are important to get right. At the same time, these core areas often seem perplexing due to the abundance of available information and advice that frequently contradict each other. That’s why it's refreshing to come across a resource that offers unique insights and actionable guidance, shedding new light on these critical topics.

One such enlightening read I recently encountered was Outlive: The Science and Art of Longevity by Dr. Peter Attia, a renowned expert in longevity. In his book, Dr. Attia challenges the conventional notion of simply prolonging life and instead advocates for a focus on living healthier in a system that he calls Medicine 3.0. His personal journey, from being a marathon swimmer crossing challenging oceans to a patient dealing with a diagnosis of impending heart disease, underscores the importance of this perspective shift.

Shared Principles of Health and Wealth

Remarkably, Dr. Attia's health principles share striking parallels with key principles in wealth management.

1.       Personalization Is Key: Dr. Attia emphasizes that a one-size-fits-all approach doesn't work when it comes to health. Everyone’s unique attributes, including genetics and family history, should inform their health action plan.

In his book, Dr. Attia discusses the chronic diseases of aging that he calls the Four Horsemen: heart disease, cancer, neurodegenerative disease, and type 2 diabetes. He emphasizes that to live longer as well as live better for longer we must understand and confront these causes of slow death. Most importantly, we must consider the patient as a unique individual.

Similarly, in financial planning a personalized approach is essential. While investment advisors provide strategies based on research, a client's specific preferences and beliefs must be considered when developing a successful monetary blueprint. The best investing strategy for a client is one that he or she can believe in that fits in with his or her own personal financial plan.

2.       No Quick Fixes: Dr. Attia criticizes the prevailing desire for quick fixes in medicine, such as seeking a pill to solve problems. Similarly, in the financial realm, clients often seek instant solutions, hoping to pick winning investments or time the market perfectly. However, both health and wealth improvements typically require sustained effort over time.

Dr. Attia talks at length about Medicine 2.0 where everyone is looking for a quick fix, such as taking a pill to solve a problem. But what happens if there’s no quick fix? Often the patient leaves the doctor’s office empty-handed with an “accept the likelihood of disease” prognosis and moves on. 

Conversely, Dr. Attia counsels that most of the Four Horsemen could be minimized in one’s life with serious attention to life habits that need correcting over the long haul. These include daily exercise and good sleep habits like consistent bedtimes. It also means focusing on proper nutrition, including avoiding processed sugar, reducing or eliminating alcohol consumption, quitting smoking, and so on. Dr. Attia emphasizes that since these habits are hard to change and can’t be packaged up with a price tag, they are too often neglected in the conversations that doctors have with patients.

When I first meet with some prospective clients, I often sense that they are looking for a “magic pill” that they can take to fix their finances. They may hope their money issues can be solved by picking a winning stock or timing the market.

While there are some solutions that can be implemented quickly, most improvements take years before a client can really see the impact.

Although the U.S. market has returned about 10% a year on average, it rarely does so in any given year. (Usually, it’s much higher or much lower.) In addition, taking advantage of the miracle of compounding requires time. Good investing, like good health, demands long-term discipline and commitment.

3.       Prevention Over Cure: Dr. Attia highlights the importance of preventive measures in health, particularly in diseases like Alzheimer's. To combat this ailment, which is greatly affected by vascular and metabolic health, Dr. Attia’s prevention toolkit includes a Mediterranean-style diet, no smoking or alcohol, healthy sleep habits, and brushing and flossing. Most importantly, it requires daily exercise beyond walking, including endurance activities and weight training.

Similarly, in finance, preventive measures play a crucial role in securing a strong financial future. Actions like responsible spending, consistent saving, growth-oriented investing (even if it involves some volatility), and bad debt minimization are akin to the prevention toolkit in health.

As a physician, Dr. Attia serves as a "translator" to help patients understand medical advances that can improve their health. Financial advisors use a similar approach when counseling clients on the smartest strategies to build their wealth. Both professions require a blend of science and art to cater to an individual's unique needs and goals.

Ultimately, the objective in both health and wealth should be to make well-informed decisions, acknowledging that outcomes are uncertain. Dr. Attia seeks to extend not only lifespan but also "health span," allowing individuals to enjoy life to the fullest. Similarly, in financial planning the aim is to maximize "wealth span" by making informed choices that empower individuals to lead secure and fulfilling lives.

In essence, both physicians and financial planners share a common objective: empowering individuals to make informed choices, promoting healthier and wealthier lives. By emphasizing prevention and tailored strategies, we do more than simply help individuals survive. We lay the foundation for a future where they thrive in all aspects of life.

A Champagne Itinerary on a Miller Lite® Budget

By Shelley Murasko

Traveling the world is a privilege that many of us dream of. Whether it's exploring the stunning landscapes of New Zealand, indulging in the rich culture of France, or embarking on an adventure in Africa, the allure of cross-border travel is undeniable. However, the question remains: How can you make it a cost-effective experience?

In my recent trip to Africa with my family and a group of friends, we were fortunate to discover a way to travel on a budget without compromising the experience. Our friend Charles, who had traveled in Africa previously, invited us to join him on a safari-like tour of the continent. He described it as a "Champagne Itinerary on a Miller Lite Budget®." Intrigued by the idea of exploring Botswana, Namibia, South Africa, and Zimbabwe with knowledgeable friends, we decided to embark on this unexpected adventure.

To put things into perspective, the average cost of an official safari is around $4,000 per person, excluding airfare. When you factor in airfare, the total cost of a trip can easily reach $6,000 per person for a trip to a far-off destination in a developed country. However, with our travel group, we managed to bring the cost down to $3,000 per person. While this may still sound expensive, it's a significant savings compared to the average cost of international travel.

So, how did we achieve this? We employed five main tactics that helped us keep our costs in check. These tactics included leveraging geographic arbitrage, booking flights early and searching broadly, opting for RV accommodations at top resorts, and embracing a do-it-yourself safari approach instead of booking expensive activities. Additionally, we sought out free or low-cost opportunities to enhance our experience.

In the following sections, I'll dive into each of these tactics in detail, sharing the specific strategies we used to make our African adventure both affordable and unforgettable. So, if you're eager to explore the world without breaking the bank, keep reading to discover how you can tame international travel costs.

Saving Money Via Geographic Arbitrage

When it comes to international travel, one of the best ways to save money is by taking advantage of geographic arbitrage, aka geo-arbitrage. This financial strategy entails spending most of your time in countries where the exchange rate is most favorable to your currency. In Africa, for example, the strong U.S. dollar can go a long way.

To give you an idea of the savings, let's compare the average cost per person for a sit-down restaurant meal in San Diego, California, with some popular African destinations.

In San Diego, you can expect to pay around $32 per person per meal. However, in Botswana, Namibia, South Africa, and Zimbabwe, costs are significantly lower at about $8 per person.

During our trip, we spent most of our time in Namibia, which allowed us to keep our food costs low. Despite eating out for most breakfasts and dinners, we were able to save money thanks to the favorable exchange rate.

Geo-arbitrage doesn't just apply to food costs, though. We also benefited when booking accommodations. For instance, after 10 nights of sleeping in the RV, we reserved a poolside cottage at a four-star hotel in Sossusvlei, Namibia, a destination known for its towering sand dunes. The cost? Just $300 per night. In the U.S., a similar luxury cabana would easily cost double that amount.

Booking Flights Early and Searching Broadly

Another key strategy for controlling international travel costs is to book flights early and search for the best deals. We learned this lesson when planning our trip for early June. By booking in January, we were able to secure a fantastic deal of $1,200 per person for our flights from Los Angeles, California, to Johannesburg, South Africa.

Searching broadly also played a crucial role in finding affordable flights. We used websites like Skiplagged to explore different options and compare prices. While we ultimately chose not to book through Skiplagged, it proved to be a valuable tool for uncovering great deals.

In addition to our major flights from the U.S. to Africa, we searched for intracontinental flights in January. Our plan was to fly between the South African cities of Johannesburg and Cape Town as well as Windhoek, Namibia, to optimize our travel time. These additional flights added $400 per person to our trip. By booking early and searching broadly, however, we were able to find reasonable prices.

The Ultimate Glamping Experience: RVs at Top Resorts

Imagine staying in RVs at the most luxurious campgrounds, right next to top resorts in the region. That's exactly what we did throughout our trip in Africa. We rented RVs from Bobo Campers, a reputable outfit in Namibia. Thanks to the favorable currency conversion rate, the average rental charge per night for an RV was affordable at $125 per night.

In addition to RV fees, we paid for campsites, which averaged around $20 per night. We also required plenty of gas, which totaled around $200 per week.

When we added up our total lodging and gas costs, we were amazed at the savings compared to a comparable trip with hotel stays. In fact, we saved a grand total of $2,250 by opting for RVs and putting in the extra work of operating them. But the cost efficiency wasn't the only benefit.

The RVs proved to be incredibly useful for viewing the watering holes where animals gathered. We simply backed our RV convoy into these spots, turned on our radio communications, opened a cold beverage and relaxed in style.

Do-It-Yourself Safari vs. Booked Activities

When it comes to travel, I've found there's nothing quite like the freedom of exploring at your own pace. During our trip to Africa, we decided to forgo most of the typical "game drives" and take matters into our own hands. Not only did this give us the flexibility to create our own schedule, but it also turned out to be a cost-effective choice.

You see, a standard safari can set you back roughly $180 to $500 per person per day.1 While we did opt for a Chobe River cruise ($20 per person) and a Brandenburg White Lady Lodge elephant tour ($75 per person), I can confidently say that choosing our own watering holes in Etosha National Park was just as rewarding. By simply driving our RV to the designated spots and patiently waiting, we witnessed a plethora of wildlife, including giraffes, elephants, zebras, wildebeests, impala, and over 100 other species.

The best part about going off the beaten path was the ability to customize each day according to our energy levels and interests. If we felt like adding a game drive or a river tour, we could easily do so. It was all about embracing the freedom to explore Africa on our own terms.

Seeking Out Free Opportunities

While traveling always comes with a price tag, some of the most memorable experiences are the ones that don't cost a fortune. During our trip, we discovered a treasure trove of free or almost free activities that brought us immense joy. Here are just a few examples:

·         Watching breathtaking sunrises and sunsets while the animals put on a show

·         Taking a refreshing dip in the swimming pools available at most resorts

·         Immersing ourselves in "living" museums, where we had the chance to meet indigenous people living in the bush

·         Gathering around campfires under the starry African sky each night

·         Engaging in impromptu soccer matches whenever we stumbled upon a greenspace

·         Embarking on invigorating hikes through sand dunes, especially at sunrise

From the moment we arrived, I was captivated by the incredible wildlife views and the peaceful coexistence of various animal species. Each had its own unique strengths and weaknesses.

Giraffes, known for their timidity, displayed remarkable diplomacy, grace, and speed. As herbivores, they posed no competition to the other animals. Zebras, reminiscent of Africa's wild horses, were feisty and emitted an interesting barking noise when irritated.

And then there were the elephants, with their imposing size and unwieldy tusks, marching through the landscape. We even witnessed elephant tusk marks on the side of a vehicle, a testament to their power and potential danger when feeling threatened.

While there were minor disputes among the animals, such as impalas headbutting near a watering hole, the various species seemed to coexist mostly in harmony.

However, the ultimate animal sighting was a pride of lions—two males and a female—stealthily stalking a group of wildebeests grazing on the range. It was awe-inspiring to witness their strategic approach through the tall grass. Surprisingly, the male lions decided to prioritize a nap while the female lion remained focused on the potential dinner opportunity presented by the wildebeests. It seems that across continents and species, it’s often the females who take charge of securing a meal.

One of my most cherished moments in nature occurred at the Hakusembe River Lodge near Rundu, Namibia. I woke up before sunrise to witness the day awakening over the Kavango River valley. The colors of the morning light painted a breathtaking scene. Sneaking into the breakfast area, I indulged in soft and sweet lemon poppyseed muffins while mingling with other early risers. It was a fleeting moment in time, but one that allowed me to create a beautiful memory of a once-in-a-lifetime experience with people I care about.

Throughout the trip, we embraced a different way of living. Inspired by author John Steinbeck in the book Travels with Charley, we learned a clever trick for doing laundry while in transit. First, we threw our dirty clothes into a lidded bucket with soap in the back of our RV. Then, as we drove to our next stop, we let the notoriously bumpy African roads agitate and clean them. Upon reaching our destination, we then hung the laundry on a line or tree branch overnight, knowing that the arid African climate would dry our clothes perfectly overnight.

Additionally, we took turns driving on the left side of the road. This would typically be challenging but proved to be a fun experience in a region with minimal traffic. Our trip leader, Charles, kept us connected through walkie-talkie radios, allowing for informative narratives and shared music, including the iconic theme from Indiana Jones and the beloved song "Africa" by Toto. Along the way, we occasionally passed children and offered small gifts, such as toy airplanes and soccer balls, which never failed to elicit screams of delight.

What truly made the trip unforgettable were the warm smiles of the African people. Despite having so little, they seemed genuinely happy in their simple way of life. Whether it was witnessing friends gathering to share music and a campfire on a Friday evening or observing children marching to school with pride in their uniforms and book bags, the people of Africa embraced their opportunities with joy.

Even employees in restaurants, hotels, and grocery stores seemed to genuinely enjoy their work and consider themselves fortunate. At one point during our trip, I asked a chef at Chobe Lodge why her omelets were so much better than the ones at home in the U.S., and she simply replied, "I make them with happiness."

At the end of the day, the true value of a trip lies in the lasting memories we create and the beautiful moments we get to experience. Africa certainly lived up to its reputation, exceeding my expectations and leaving me with a profound understanding of what this incredible continent is all about.

Miller Lite is a trademark of Molson Coors Beverage Company USA LLC.

Source:

10 Day African Safari. (n.d.) MisterSafari.com. Retrieved August 10, 2023, from https://mistersafari.com/blog/10-day-african-safari.

Cracking Open Your Nest Egg: Tips for Spending Your Money After Years of Saving

By Shelley Murasko

“What got you here won’t get you where you’re going.”

While this classic saying applies to many areas of your personal and professional life, its innate wisdom can also relate to your financial life.

Whether your allocation strategy is moving slowly over time from an all-stock portfolio to a bond portfolio or you are transitioning from high-income years to Roth conversion years, there are many aspects of your financial life that require tuning over time.

Yet there is a bigger challenge that I run into with clients: getting them to switch off their frugal spending muscles and start spending on their priorities in retirement.

Learning to Balance Saving and Spending

This is more common than you might think. After all, the smart practice of careful spending and saving over decades is a habit that can be hard to break. In fact, it’s what allows many to retire at a reasonable age, put children through college, and save up for an array of worthwhile financial goals.

As with any fine-tuned discipline that results in the achievement of a goal, the buildup to a certain value in your IRA can give you a huge sense of purpose and, eventually, accomplishment.

When it’s time to shift from saving to spending, however, you’ll have to learn to flex a different muscle group: your spending muscles!

I’m not suggesting that once you retire it’s time to go crazy and start blowing through your savings. If you have credit card or car loan debt, and you can’t seem to live within the 4% withdrawal rule, this article is probably not for you.

I’m merely suggesting that, when retirement nears, you learn to accept the fact that it’s okay to put your pile of money to use. In fact, the safe withdrawal rate of 4% of assets is a great place to start as it has been the most pressure-tested of all the withdrawal strategies.1

Thus, if you’re not drawing out at least 3% of your investment assets per year, it might be a really good time to probe into why.

Even if you’re not yet retired, but you find yourself in a very strong position for retirement, it might be time to let go of some of your frugal living habits.

Take grocery shopping, for example. Let’s say you’re standing in the cereal aisle at your local supermarket hoping to restock a box of Cheerios® for tomorrow’s breakfast. But since this isn’t Costco® or Sam’s Club® where you usually shop, the darn stuff is priced at $6.99 a box.

As you consider your options, perhaps one of these thoughts runs through your head:

“@#$% you, grocery store! I’m driving to Costco.”

“I’m going to boycott these prices!”

“Hmm…I wonder if any of the competing brands are any good?”

“What else is a good substitute for Cheerios for breakfast?”

And then thankfully, after exhausting all other mental options, you settle on the correct one:

“JUST BUY THE CHEERIOS, YOU CHEAPSKATE!”

Flexing Your Spending Muscles

Why is this the correct option? Because it’s highly unlikely that you’ll wake up one day, look at your bank account, and say, “If only I had an extra $2 in there, I would be a happier person.”

This is just one scenario where your frugal spending muscles attempt to kick in. Here are a few others:

·         Filling your gas tank only a quarter full because you’re at a gas station that costs you $0.50 more per gallon than the one across town

·         Skipping time with your friends on Saturday because you must do laundry during the lowest cost “off peak” utility company hours

·         Buying your friend an adequate book at a thrift store as a gift instead of splurging the extra $10 on a book she might really like

·         Shying away from the $14 bottle of wine for the $7 version

·         Experiencing deep anger at having to clean your house each week and grumble that “no one else can do it quite like you”

·         Feeling regret after spending $100 on a nice dinner date with your beloved spouse

Ahhh…the list goes on and on. Just ask the daughter or son of a retired person with millions in the bank who still refuses to subscribe to Netflix® because it costs $15 a month.

Overcoming Your Fear of Spending

After years of saving carefully, it’s perfectly normal for the fear side of your brain to kick in when spending an extra $2 on a carton of eggs.

Yet, I strongly urge you to try harder to overcome your fear. It takes practice to tame the voice inside of you that says, “Hold on! You’re going to run out of money and be poor forever.”

Fortunately, there’s a happy medium here.

You should, of course, focus on being a responsible steward of your life savings. But along with that, consider how to put your money to work in ways that add joy to your life.

Many of my clients have found enjoyment in hiring a gardener, giving generously to their preferred charity, upgrading to business class on an airplane, or simply ending the “find the cheapest at all costs” spending approach when buying clothes, shoes, tools, and other items.

If you struggle with this adjustment, you may even want to set aside an account for spending frivolously. Park a certain amount in that account each month. Then, use whatever is left at the end of the year to give generously to your favorite charities, friends, teachers, and other important people in your life.

Here are some other useful tips for improved splurging:

Try to find the unpleasant aspects of your life, and focus additional spending on those areas. This is not always a slam dunk the first time around. It might take some fine-tuning to figure out the right level of help you need in your life to enhance your joy.

In addition, look beyond simply upgrading the things that are already good in your life. While your neighbor might thoroughly enjoy daily runs to the gourmet coffee shop, that doesn’t mean you need to upgrade your morning coffee routine if you’re happy with your current one.

But if there’s something that causes you regular angst and stress, it could be a good target for improvement — whether it’s a leaky roof that makes you fear rain, a long commute that makes you dread going out on weekends, or an ailing body that needs a tune-up.

If giving to others is your jam, consider mindful ways of doing so, such as treating your grandson to a shopping trip and lunch rather than just sending a gift card.

If you’re worried about how your recipients might spend money you gift to them, you could consider contributing it to a retirement account on their behalf, making a payment against their debt, or adding to their 529 college fund. Also, giving stock instead of cash might save you on taxes while also encouraging your recipient to learn a little about investing.

As far as charitable giving, Guidestar® can be an excellent website to consult if you want to check on the validity of your preferred causes.

Whatever your path to moderate and mindful spending might be, it’s worth your time and energy to determine the best way to exercise your spending muscles.

Like Grandpa Vanderhoff said in the 1936 classic play “You Can’t Take It with You”: “Maybe writing will stop you from trying to be so desperate about making more money than you can ever use. You can’t take it with you, Mr. Kirby. So what good is it? As near as I can see, the only thing you can take with you is the love of your friends.”

Source:

1.       Hayes, Adam. (Nov. 27, 2021.) “Safe Withdrawal Rate (SWR) Method: Calculations and Limitations.” Investopedia. Retrieved from https://www.investopedia.com/terms/s/safe-withdrawal-rate-swr-method.asp.

The 2023 Berkshire Hathaway Meeting: Buffett and Munger Talk China, Banks, and Elon Musk

By Shelley Murasko

In early May, I traveled with my husband, Mike, to Omaha, Nebraska, for the 2023 Berkshire Hathaway Annual Shareholders Meeting. We arrived on Friday, May 5, along with thousands of other attendees. As fellow shareholders buzzed about the meeting, complained about the exorbitant hotel room pricing, and packed the local steak houses, it was apparent that the hype of multinational conglomerate Berkshire Hathaway and financial legend Warren Buffett continues to live on.

After waking at 4:15 a.m. on Saturday, May 6, we drove to the CHI Health Center Omaha in preparation for the 8:30 a.m. start. By the time we arrived, hundreds of people were already lined up at the arena entrance — all hoping to get seats that would give them a clear view of financial maven Charles Munger and Buffet, the “Oracle of Omaha.” Though CHI Health Center Omaha holds more than 18,000 people, latecomers were left with standing room only. Our tactic of entering through the Hilton Skybridge worked superbly for the fourth time, allowing us to claim good seats.

Unfortunately, my hunt for a good cup of coffee before the 7 a.m. entry had proved tougher. Lines of suited meeting attendees had wrapped around the block for both nearby Starbucks locations, despite their predawn openings.

As Mike and I had waited to order or morning caffeine, we met people from all over the world: New York, England, Kazakhstan, and Hong Kong. We also had an enjoyable discussion about our favorite companies with fellow investors from Portland, Oregon; and even met a guy who was getting paid $100 to stand in the queue for another Berkshire Hathaway shareholder. Yes, there is such a thing as a side gig for being a line placeholder!

At 7 a.m. sharp, the arena staff opened the various entry points and, after a quick security screening, we walked briskly, while others ran, to the first balcony seats adjacent to the stage. With all the running and excitement, you’d have thought that Buffett was giving out free cars to the first 100 visitors!

Once we settled in our seats, we guarded them like sentinels. While people who attend this event are generally respectful about saving seats for others, this code of honor cannot be completely trusted. In fact, a brawl nearly broke out mid-meeting between two men over seating matters!

Opening Movie

At 8:30 a.m., the meeting began with the traditional Berkshire Hathaway opening movie. Updated annually, it typically showcases key Berkshire Hathaway brands like Apple®, Coke®, and Geico® along with special guest appearances. In this year’s movie, the story line featured Buffett trying to get Jamie Lee Curtis’s attention while she had another “interest” in mind: Munger. She even tried to convince Buffet that he should change the company name to Munger Industries.

The movie also featured a montage of shareholders from past meetings asking about Berkshire Hathaway’s succession plans and what will happen after CEO Buffett, age 92, and Vice Chair Munger, age 99, are no longer in charge. What I found humorous was that these succession questions dated back decades.

“Incidentally, I think I’m in pretty good health,” Buffett said in response in 1994 when he was a young 63-year-old.

For the record, Greg Abel, Berkshire Hathaway’s vice chairman for non-insurance operations, is the firm’s appointed successor for the CEO position.

Taking the Stage

At 9:15 a.m., Buffett and Munger took the stage along with Abel and Ajit Jain, vice chair of insurance operations.

As usual, Buffet walked to his seat and was his typical down-to-earth, folksy self. Munger came on stage via wheelchair and sat next to his stash of See’s Candies® peanut brittle and Diet Coke. Despite their advanced ages, they seemed to hear, process, and respond to questions just as they have in previous years.

During the Question-and-Answer session, CNBC journalist Becky Quick shared the microphone with attendees in a back-and-forth format. She would ask a question, then someone from the audience would ask a question. This rotation went on for about 3 hours in the morning and another 2 hours in the afternoon.

While watching the sessions, I captured eight key takeaways that I’d like to share with you.

#1: Berkshire Hathaway’s Access to Unique Opportunities

During the meeting, attendees asked Munger and Buffett about the future of value investing, which is the pair’s preferred style of seeking out companies that appear “undervalued” on paper. Munger replied that “we should get used to making less.” Yet in the same breath, he indicated that, if people are “ridiculous”, there will always be good investing opportunities. Munger has famously criticized investors for treating investing like gambling, trying to market time and pick investments without any intrinsic value.

Early in the discussion, the two partners shared a recent situation where they took advantage of today’s higher interest rates, making a special deal to invest in one-year U.S. Treasury bills at a 5.9% return, which is a full percentage point more than what regular investors can get right now.

#2: Emphasis on Key Tenets of Their Business

From owing stocks to owning operating companies, Buffett and Munger discussed the many facets of their business that make it unique.

For example, Buffett emphasized the $165 billion in “float” that they have. Float is basically the money they’ve taken in from their insurance customer premiums that won’t be paid out until sometime in the future. Buffett likened this to owning a bank, except they don’t have any employees, outgoing interest payments, or unexpected large withdrawals.

They can use this float money to buy businesses they want to own and operate. Or they can direct the money toward buying up large amounts of stock in companies they admire but don’t want to own.

A company that falls into the latter category is Apple, in which Berkshire Hathaway has invested 40% of its overall stock holdings. Recently, Berkshire Hathaway sold a small portion of their Apple shares, which Buffet called a mistake. According to him, Apple is a better business than any they own. He based his opinion on polls that asked Americans which item they would choose if asked to give up either their iPhone® or a second car. Most said they would give up the second car.

This type of brand and product loyalty is a key factor that Buffett and Munger look for in businesses. They call it having a “competitive moat” that makes it really tough for another company to come in and steal business.

Unlike private equity investors, Berkshire Hathaway likes to buy excellent management in the companies they acquire. They don’t want to be micromanagers of the businesses they own, such as Geico, BNSF®, Midwestern Energy, See’s Candies, and Dairy Queen®. Instead, they use a hands-off approach, allowing the managers of the individual companies to run the business.

#3: New Technology and Today’s Tech Leaders

Early in the session, Buffett and Munger were asked about their thoughts on artificial intelligence (AI).

Munger responded that he thinks AI will change many parts of the world and that “we won’t be able to uninvent it.” He even compared it to the invention of the atom bomb and how it changed the world. Yet he also added that he thinks “old-fashioned intelligence works pretty well” and that AI can change a lot “except how men think and behave.”

While discussing technology, an attendee asked Buffett and Munger what they thought of billionaire business tycoon Elon Musk. Munger replied that the SpaceX® founder and Twitter® owner has a high opinion of himself, but he is very talented and a “brilliant, brilliant guy.” He said Musk likes taking on impossible tasks, but joked that he and Buffett are different in that they look for easy jobs.

#4: China Tensions

When it came to China relations, the duo commented that there is tension on both sides and that we should work hard to get along with China. Munger stated that “any tension with China is stupid, stupid, stupid” and emphasized that we should exhibit kindness.

Both shared their concerns about countries having more tools of destruction today than in the past, including cyber and biological weapons. Thus, there are more reasons than ever before to choose diplomacy.

Buffett said the situation was “like playing chicken and driving toward a cliff.” He said that China and the U.S. should understand that both countries can prosper from their relationship.

China’s Taiwan Semiconductor (TSM) stock sale also came up during the discussion. Munger noted that TSM is one of the best managed and most important companies in the world, but that he and Buffett did not like the political risks of the location.

#5: Optimism

Despite Munger’s occasional negativity, both he and Buffett seemed generally upbeat about the prospects of investing in the U.S. They said it would take an idiot to screw up Berkshire after they’re gone.

Buffett stated that he would still rather be born in the U.S. today than in any other country or any other point in history. Going on to speak about politics, he said that while political partisanship has long been present in America, he’s concerned about the recent rise of the us versus them mentality of “tribalism.”

Buffett expanded on this thought by explaining that, when his dad was in Congress in the 1940s, the country was a mess as it struggled to recover from the Great Depression. During the Civil War in the 1860s, President Abraham Lincoln likely had moments when he felt disheartened as well. Although the future can look discouraging, an unwillingness to work together can worsen the situation.

With tribalism, Buffet said, “you don’t even hear the other side, and tribalism can lead to mobs.”

#6: Bank Runs

When asked about the state of the banking industry, Buffett said the situation is very similar to what it’s always been in banking: that “fear is contagious, always.” He continued to say that, historically, sometimes the fear was justified and sometimes it wasn’t.

Munger reminded us that after World War II, there were 2,000 bank runs in one year. He added that the FDIC is necessary, and there probably won’t be major bank runs today. Yet both agreed that the recent communication about bank failures has been poor.

#7: Lifelong Lessons

It wouldn’t be a typical Berkshire Hathaway meeting without some life lessons passed along as well.

At one point, Buffett brought up his favorite college professor, Benjamin Graham. Known as the “father of value investing,” Graham’s teachings had a huge impact on Buffett during his years studying at Columbia University’s Business School. Buffett alluded to the fact that more people should be like Graham: “Planting trees for others to sit under them with nothing expected in return.”

As a manager, Buffett mentioned that he has always tried to praise by name and criticize by category. In a setting where a team has exceeded expectations, he will recognize each person by name. Whereas, in the event of a problem or failure, the department would face the heat instead of individuals.

He also reminded us that kindness is the key when it comes to making friends. Buffett said the way to avoid making mistakes is to "write your own obituary" and live up to it.

There were also several indications that people should find their passion and work at it for decades, not just until their 60s. Though Munger pointed out that young people should apply their brains more to science and engineering and less to wealth management.

Munger also shared his philosophy for achieving success: “It’s so simple to spend less than you earn and invest shrewdly and avoid toxic people and toxic activities. Try and keep learning all your life, and do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. And if you don’t, you’re going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck.”

#8: Succession Planning

Abel and Jain, the succeeding team to the Buffett-Munger duo, participated in the Question-and-Answer session for the first half of the meeting.

While both individuals are intelligent and have proven experience running a successful business, their presentation skills could use a little pep. I don’t expect either one of the succeeding leaders to have the wit or charisma of Buffett or Munger. Perhaps some of that comes with age. But in my opinion, they could use some work on their presentation skills.

Abel and Ajit were boring and dull in most of their responses. I don’t see how they’ll ever fill arenas to even half of capacity based on their current presentation skills. Granted, they’re both smart as whips; but considering that Buffett was a huge fan of public speaking pioneer Dale Carnegie, I would expect that he’d encourage them to take up some training in that area.

Also, when Buffett and Munger were asked to share stories about their successors’ character, neither had any anecdotes at the ready. In my view, this should be an area that the current leaders focus on as they prepare their replacements to take the helm. Although I don’t expect either successor to live on McDonald’s breakfast sandwiches the way that Buffett does, a shared anecdote of how they treat people or demonstrate brilliant business or life habits would go a long way toward building confidence in these two.

Abel does have skin in the game, however. He recently loaded up on Berkshire Hathaway shares with his personal assets. The 60-year-old vice chairman added to his stake in the company in March, bringing the total value of his holdings in the company to about $105 million.

In summary, the trip to Omaha was well worth it. When I first attended in 2014, I was told that I should do so since, actuarially speaking, these two might not be around much longer. Yet here we are nearly 10 years later, and the duo continues to pull in record audiences from around the world. The Berkshire Hathaway Dynasty clearly lives on. 

Are You Hitting the Wall with Your Investments?

By Shelley Murasko

In my 20s, I ran over 25 marathons. While participating in races from Boston to Catalina Island, I experienced all the highs and lows of enduring miles and miles of running over hills and through the flats.

Among marathon runners, there’s a notorious challenge with distance running called “hitting the wall.” This phenomenon usually occurs around mile 18.

It's all about your glycogen, the carbohydrate that's stored in your liver and muscles for energy. Runners hit the wall when glycogen runs low, making them feel so excessively fatigued that their brain wants to quit.

The worst wall I ever experienced was during the Las Vegas marathon. After running steadily uphill for the first 13 miles, I couldn’t wait to hit the back half, so I could press the cruise button and enjoy a gentle decline into Las Vegas. What happened was an entirely different story! Psychologically, this race crushed me.

First, my mindset was all wrong from the get-go. As a marathoner who has done a fair amount of downhill running, I’ve learned that this type of running can be hard to train for. During my Las Vegas outing, what started as a nice feeling of momentum slowly morphed into persistent agony as my overworked quad muscles screamed for mercy.  

Second, it’s rare to feel like you’re “cruising” in the second half of a marathon. As my body’s glycogen stores dwindled, I began to feel drained and depleted. Even with the best refueling at the aid stations, I was running on empty.

In addition to an inadequate mental attitude and a declining physical state, the desert heat became an unbearable obstacle. In Las Vegas, it’s common for the temperature to rise quickly starting around 10 a.m., which happened as I was hitting mile 20. As the heat began to take a toll on me, the remaining miles, though flat, felt like a long uphill battle to the end.

Those final miles brought me to tears, forcing me to slow my pace. I began switching between running a few minutes, then walking a few minutes. Alternating my muscle use helped me withstand the heat and manage my overused joints that ached from head to toe. In addition, chugging water at aid stations and downing sugar gel packs allowed me to keep my focus. Despite an increasing temptation to call a taxi, I managed to cross the finish line battered and blistered, but with a smile on my face.

The Past Decade and Bear Markets

Investing during a bear market—a cycle where stocks at one point dip at least 20%—reminds me of hitting a wall with finances. From 2009 through 2022, investors had a good run. The only official bear market was the four-month dip during the COVID-19 shutdown in 2020. In addition, throughout most of the past decade, investors experienced double digit returns with the exceptions of 2011, 2015, and 2017 when returns were milder.

Fast forward to 2023, and we’re currently in a bear market that has continued for over 14 months. With added stress in the banking sector, investors are becoming less patient with each monthly statement that lands in their mailboxes.

For some investors, this “wall” is becoming intolerable. What makes it even harder is the inability to know how many more miles are left before the market reaches a destination where returns are more favorable. At least in a marathon, you have clear mile markers at various stages of your suffering. Not so with the unknowable investment track.

On average, bear markets last about 1.5 years. If we were currently going through an average bear market, we would have hit the bottom toward the end of 2022, with an expected return to the previous high by July 2023. In reality, there’s no way to know. It could be shorter, or it could be longer.

It's important to note that since 1935 only three bear markets took significantly longer to recover: 1973, 2000, and 2008. Out of 15 bear markets, these three were outliers. In these instances, it took more than four years to get back to even.

While the Federal Reserve Board has continued to take a strong stance toward tightening the supply of money in the economy, investors have become jittery. It doesn’t help that the war in Ukraine continues to persist, putting additional pressure on economies around the world.

While these factors are worrisome, there are positive aspects in the economy. These include a strong job market, wage increases, increased corporate purchasing activity and productivity, and a subtle but clear decreasing trend in inflation.

Fortunately, stocks have made up a lot of ground since January 2022 when the chips first started to fall. Most investors who stayed the course with a diversified bond/stock allocation are down less than 10% today.

Keys for Staying the Course

What should you keep in mind as you go forward from here? First, let’s start with mindset. Remember that the world has faced obstacles before. Whether it be wars, poverty, assassinations, or debt; capital markets have eventually carried on. By surviving bear markets in the past, your mind is better trained to be resilient and patient this time around. After all, fortune favors the patient.

Also, remember that investors who stayed the course were ultimately rewarded with expected market returns. Sometimes it took years to get back on track, but those who stuck it out and endured the pain achieved the gains they were pursuing.

There’s no perfect investment portfolio, and some volatility is a normal part of investing. This is true whether you hold a conservative or aggressive portfolio. As you assess your holdings, ensure that your investing strategy still works for your own personal timeline, risk tolerance, and income objectives.

It also pays to stick to a well-diversified investment approach so you can avoid speculative moves, such as significant individual stock picking or sector concentration. As tempting as it is to be the investor who tries to pick the next Microsoft, this approach to hitting it big rarely works. You’ll have more success being a prudent investor who plans for more reliable returns through broad diversification and steady investing over time. As they say, slow and steady wins the race.

Markets will always be unpredictable, and sometimes volatile, for long periods. We’re in such a time now. Rather than running for cover by selling your holdings when things aren’t looking so good, re-examine your portfolio to ensure you’re still holding high-quality positions for the long haul.

Taking charge of the controllable aspects might help. Try exploring ways to take advantage of this down cycle by considering the following actions:

·         Adding money to your investments if you have excess cash on the sidelines. Many high-quality businesses are selling at a discount.

·         Consider investing some of your cash reserves in a money market account, high-yield savings account, or Certificates of Deposit, which are now offering rates over 4%.  

·         Expedite your annual Roth conversion, where you can now convert on depressed values.

·         Harvest tax losses from your taxable portfolios if tax reduction is a major goal.

·         Sell off low-quality funds or stocks that you held for tax gain avoidance purposes. 

By acting on the things you can control, your worries may lessen.

Lastly, find ways to mitigate the pain. Looking at statements or listening to money talk shows less often may give you more stamina during these volatile periods. Enjoying other aspects of your life may also defuse investment stress. In times like these, it’s important to pace yourself and keep an eye on the big picture.

Bear markets may feel like a risk as you go through them, but they often appear as an opportunity in retrospect.

As Charlie Munger, Warren Buffett’s right-hand investment partner, once said, “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

Eventually, it’s the patient and disciplined investors who are rewarded at the finish line. 

Need assistance staying the course? Give us a call! We’re here to help.

CDs vs. Bonds: Which Is the Best Option?

By Shelley Murasko

Many of my clients have favored CDs over bonds in recent years. As I write this article, CDs and bonds offer the following rates:

CDs

·         6 months                     5.2%

·         1 year                           5.1%

·         2 years                         5.1%

Bonds

·         1 year                           4.6%

·         5 years                         3.8%

·         10 years                       3.6%

When comparing these two financial investment options, the higher CD rates seem to indicate CDs as the clear winner.

Take a moment, though, to consider the long view. Specifically, think about reinvestment risk: the risk tied to how well you can reinvest your money in the future. While it might be nice to lend money to a bank for 6 months and capture the top interest rate of 5.2%, we can’t be sure of what the available interest rate will be 6 months from now. If the U.S. were to enter a recession, for example, we could see rates drop well below 3%.

Therefore, as you go about choosing how you’d like to “lend” your money in the form of CDs or bonds, it’s wise to give reinvestment risk some consideration.

To do that, let’s step back for a refresher on what makes up a CD or bond.

What Is a Bond?

According to Investopedia, a bond is defined as a “debt instrument and represents a loan made to the issuer. Governments (at all levels) and corporations commonly use bonds to borrow money.”1

In other words, a bond is simply a “loan” to another party. As with any loan, the most important features to consider are the credit quality of who you lend to and the period of the loan (also known as the term of the loan).

Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall, and vice-versa.

In addition, bonds have maturity dates at which point the principal amount must be paid back in full or risk default.

What Is a CD?

A certificate of deposit, or CD, is a savings product that earns interest on a lump sum for a fixed period. CDs differ from savings accounts because the money must remain untouched for the entire term or the investor risks penalty fees or lost interest.

CDs usually have higher interest rates than savings accounts as an incentive for lost liquidity. As a result, it pays to shop around for the best CD rates. When searching, you can often find better rates at lesser-known banking institutions. Also, it’s important to make sure your CD is FDIC insured. This protects you from losing your investment. Thus, if the bank defaults, you’ll get your money back in its entirety despite the bank’s problems.

Both bonds and CDs are “fixed income” instruments since they traditionally pay a fixed interest rate to debt holders.

Don’t Forget About Inflation

Although CD rates might seem attractive, remember that they tend to have negative return relative to inflation. Since 1973, CDs have resulted in a negative inflation-adjusted return 49% of the time. During this same timeframe, bonds have been negative inflation-adjusted only 21% of the time. Since one of your key goals as an investor should be earning return to at least maintain purchasing power, it’s crucial to consider inflation-adjusted return.

If you’re retired, it still makes sense to keep at least one year of your cashflow needs in a cash equivalent investment like a CD. However, the frenzy to find the best CDs each year and drive all over town for seminars about CD return does seem a little silly — especially when you realize that you’re likely seeking a negative-returning instrument.

The Importance of Your Timeline

To decide whether to go with CDs vs. bonds, you may want to consider your timing. In other words, when will you need the money? If you’re socking away cash to pay taxes in 6 months, then a 6-month CD might be the perfect fit.

On the other hand, if you’re planning to use your money on a car that you plan to buy in 5 years, then the 5-year bond paying 3.8% might serve that purpose better.

How Long Will Today’s Higher Yields on Fixed Income Last?

Yields are higher on bonds today and, for now, seem to be moving upward. Therefore, bonds have higher expected returns and, thus, a better cushion if bond valuations decline.

It’s important, however, not to get caught up in the expectation that rates will remain where they are currently. We really have no idea what rates will look like 6 months or a year from now. The past shows a very bumpy trend for rates, which is something no one can predict.

According to most economists, an economic downturn is expected by markets in late 2023. With that in mind, it may be a good time to reassess your fixed income portfolio and make sure you’re invested across various terms.

Consider the trade-offs of maximizing interest today by over-weighting in CDs compared with moving out on the yield curve. This may allow you to take advantage of rates that are higher on bonds than they have been in years.

Best Practices for Investment Timing

Of course, the best practice is to align the timing of the fixed income with your approximate timeline, especially if you’ll need the money relatively soon.

For needs within a year or so, CDs remain an appropriate option. On the other hand, short-term bonds (those which mature between 1-5 years) can work for needs within the next few years. If your withdrawal needs go beyond 5 years, intermediate term bonds might make sense.

In addition, you can align your timing by choosing an appropriate bond fund. For example, a short-term bond fund will hold bonds that mature within 5 years. This gives you the advantage of holding a variety of bonds across different types of lenders with various durations.

The bond fund managers will do the hard work of determining which bonds to purchase and when to sell out of a lower interest rate bond to move to a bond paying higher interest. As a sensible investor with a moderate or growth-oriented risk tolerance, you can start to look beyond bonds to stocks once the need for money from your portfolio exceeds 10 years.

From 1950-2022, a diversified S&P 500 stock fund outperformed bond funds 99% of the time over rolling 10-year periods. They also outperformed bonds by 5%. Stocks clocked in at an average 11.1% return while bonds returned 5.5% during that period.2

While FDIC-insured CDs with a guaranteed rate of return might seem like a promising investment option for the long run, the history proves otherwise. Like other fixed instruments, CDs should be selected with timing of cashflow needs in mind. Once your time horizon moves beyond 10 years and your temperament for risk is reasonable, stock investments might be the better option for the long haul.

Wondering whether your investments line up with your time horizon? Give us a call to discuss your options. We’re here to help and look forward to meeting with you!

Sources

1.       Fernando, Jason. (Mar. 09, 2023.) Investopedia. “Bond: Financial Meaning with Examples and How They Are Priced.”

2.       J.P. Morgan Asset Management. (Dec. 31, 2022.) J.P. Morgan. “Guide to the Markets,” page 64. Bloomberg, Strategas/Ibbotson.

Key Lessons from Silicon Valley Bank

Key Learnings – Silicon Valley Bank

“Yikes!!  The Silicon Valley Bank just went under and who knows what lies ahead for the financial sector/economy now!  I'm praying this isn't a replay of 2007-08!!!!!  Should I make changes to my portfolio?”

This was a recent comment that I received from a client; and I figured it might be a good time to address some of the worry. In addition, we can learn from the Silicon Valley Bank (SVB) failure. Therefore, in this article, you will learn about why SVB failed and key considerations for you as an individual investor.

Granted, I recognize that there have been other bank failures beyond SVB. Though the causes may be different, many of the same principles apply.

Who Is SVB?

SVB bank, ranked 16th in the nation in terms of market-cap at the start of March, has been very good at getting business from technology firms in, you guessed it, Silicon Valley. Over the past decade, SVB benefited from the long boom in the technology industry, financing deals and holding the money for start-up businesses. These start-up businesses often received funding from venture capitalists; and thus, in the recent past, SVB banking clients were often in the position of adding money to their accounts or at least not having large withdrawal needs.

Banks traditionally earn money by making a “spread” on the difference between the interest they pay to depositors and the interest they earn on loans like mortgages. Since banking is a highly regulated industry, there are rules about how much banks can lend so that there should always be enough cash available to customers who need to make a withdrawal. Normally, banks do not have every dollar on hand if every customer decides to withdraw their money on the same day. 

Over recent years, SVB had much larger deposits than loans in which they could make a spread; so, they had to look for other ways to keep their deposits working.  What they could not lend out, they invested in “safe” long term U.S. Treasury bonds. The problem is the rapid increase in interest rates in 2022, from 0% to 4.4%, caused the value of these seemingly safe securities to plunge.

A characteristic of bonds is that when yields or interest rates go up, bond valuations go down, and vice versa. If you hold a long-term treasury bond over the entire hold period of 10-30 years, an investor should expect to receive the level of return equal to the interest paid. It’s when you must sell long bonds in less than the hold period, that the bond valuations themselves can become a problem.

What Went Wrong

In recent months, interest rates increased rapidly, technology stock values dropped, and venture capital dried up. This created a cash flow crisis for SVB, and it escalated quickly:

·     Tech firms (SVB’s core customers) had not been getting much new investment and had instead been spending down their cash in the bank.

·     The long-term U.S Treasury bonds lost 20-30% in value (meaning current saleable value) due to higher interest rates.

·     To provide cash to their customers, SVB had to start selling their bond portfolio at a loss. 

·     Realizing this wasn’t sustainable, they announced they were looking to raise capital.

·     Coming from a bank holding many billions of dollars this sounds Very Bad, so customers started withdrawing funds via wire transfer as fast as they could. Panic spread via text, Twitter, and Slack! About ¼ of the money held at SVB was pulled in five business days!

·     Their stock price dropped so fast that trading was shut down mid-morning on Friday, March 10th.

These are not the same mistakes made as those of the banks in 2008ish with the Global Financial Crisis. While the banks in 2008 primarily did not properly manage risk related to mortgages, SVB’s cashflow problems of today seems to be a combination of different factors.

In hindsight, it seems obvious that SVB could have prevented their failure if they would have diversified their types of banking clients further (beyond the tech sector and beyond business accounts) and if they would have invested less of their bank deposits in long-term Treasury bonds that are super sensitive to interest rate risk.

The whole story reminds me of one of my favorite quotes by Warren Buffett: “Only when the tide goes out do you discover who's been swimming naked.”

What Happened to SVB Account Holders

The FDIC (Federal Deposit Insurance Corporation) announced that the bank was shut down and depositors would have access to funds on Monday, March 13th. The FDIC is set up to handle this situation (banks close almost every year), and had already created a new bank, Deposit Insurance National Bank of Santa Clara (DINB) to allow depositors access to their insured deposits and time to open accounts at other insured institutions. Thus, all depositors with $250,000 or less were guaranteed to have their account values restored.

One potential problem was that SVB account holders are … very rich? The FDIC limits their insurance coverage on bank deposits to $250,000 per account title. Apparently 86% of SVB accounts (mostly business accounts) were over the FDIC insurance limit.

On Sunday, March 12th, in the afternoon, the federal regulators announced that even account holders beyond $250,000 in an account would be made whole starting Monday.

Did this mean business as usual on Monday? Well, not exactly. SVB account holders were still having challenges with account access and cashflow in the early part of the week which was exacerbated by having to make payroll on Wednesday the 15th. It will probably still be weeks before these companies feel like they are back on solid ground with their banking needs.

Up until now, it does appear that regulators are doing all they can to restore confidence at SVB. No one wants Americans to lose faith in the banking system, and up until very recently, SVB had a good business which could be attractive as an acquisition.

The overall effect on the banking system and the stock market remains to be seen. As of this article writing, it seems as if bank stocks have declined about 25% while the broad S&P 500 stocks have declined about 2%. In addition, there are ripple effects of other large banks having severe problems including First Republic (in the process of being rescued by the big U.S. banks) and Credit Suisse (in process of acquisition by UBS). A positive outcome of the cracks in the banking sector could be that it might force the US Federal Reserve to end or at least slow its rate hike cycle.

What you as an individual investor should know:

There is a reason why we generally avoid long-term bonds in investment portfolios at Wealthrise. They are known to be VERY interest rate sensitive. During Covid, the Federal Reserve dropped rates to 0% increasing the likelihood of a future rate hike cycle. With the onslaught of inflation coming out of Covid lockdown, the need for rate hikes became pretty clear. The sensible investor avoided long-term bonds in the first place; and definitely, gave them a wary eye when inflation started to heat up.

In addition, most clients hold stocks and bonds which typically are non-correlating in their performance. Obviously, this past year was an exception as rapid interest rate hikes proved to punish bonds, down 13%, and stocks, down 18%. Yet, over time, we should still aim to keep some exposure to stocks and bonds in portfolios where clients have near term withdrawal needs. The discipline of holding both core asset classes as well as various investment categories should lend to an ability to draw money out of investments without compromising the long-term return to a great extent.

It pays to stay diversified. During certain periods, it is tempting to focus investments on certain sectors like tech. This approach eventually comes back to bite. We saw that in the late 90’s, and we are getting a taste of that again. The prudent investor will stay broadly diversified across all the sectors and across other countries. 

Investors should pay attention to account balances. If you are ensured up to $250,000 at a bank or in a CD and have more money to add; you may want to start a new account. Each account is insured up to $250,000; and you may hold more than one account at a bank.

In brokerage accounts like the one’s at Schwab, SIPC insurance applies which insures each account to a balance of at least $500,000. SIPC coverage is used to make investors whole if there is a shortage after all customer assets held at the brokerage firm have been recovered. These limits do not mean that the account will only receive up to $500,000 of their invested securities. Rather, in a SIPC customer proceeding, the account will receive a pro-rata share of all client assets recovered in liquidation then will receive up to $500,000 from SIPC to make up any difference that exists.

No one knows for sure where this banking crisis will land. There are simply too many factors in play. Therefore, a reasonable investor drawing money from accounts should consider holding up to two years of their withdrawal needs in cash equivalent accounts (CDS, money markets, high yield savings) and then set up a balanced portfolio that incorporates stocks, bonds, and broad diversification that is in line with the investor’s risk tolerance.

So, after all this, where are nervous investors putting their money? One of the interesting fall outs of these past couple of weeks is the rush to invest even more money into U.S. Treasury bonds. Demand has spiked for the “riskless” asset.

Have questions or concerns? We are here to help. Schedule a time to meet with us.

This article is for educational purposes only and should not be considered investment advice. Speak to a financial advisor for advice on your personal situation.

Shelley Murasko, MBA, CFP®, is founder of Wealthrise Financial Planning, a Registered Investment Adviser in California.

Nine Tax Breaks That Could Save You Thousands

By Shelley Murasko

Good news for taxpayers in San Diego County! You now have until October 16th to finish your state and federal returns. This extension is being offered throughout most of California due to the recent state flooding.

In addition to the deadline postponement for many filers, some of the key changes for 2022 tax filings include:

·         Reduced benefits for the child tax credit, the dependent care credit, and the earned income credit.

·         No federal stimulus checks were sent in 2022, however, certain states sent out inflation reduction payments that need to be claimed.

·         Due to high inflation, higher than normal adjustments have been made on income tax brackets, capital gain income brackets, and standard deduction ( $25,900 for Married(up $800) and $12,950 for Single filers(up $400)).

·         1099-K forms from third party payers like Venmo and Paypal are now sent for anyone earning more than $600 annually, which is reduced from $20,000.

·         Above the line charitable deduction of $300 eliminated.

·         The Clean Energy Credit was increased back to 30% from 26%.

With the extra time that you have for filing, make sure that you are not missing out on valuable tax breaks that can save you thousands of dollars.

In fact, a tax break could save you up to 50% of the deduction if you live in a high-income household. This is a result of the high tax brackets that top incomes can hit — 47% or higher in California — as well as the valuable credits and deductions that can be phased out.

Therefore, it’s well worth your time each year to maximize all possible tax breaks. Check out the list below of nine proven tax break opportunities that are often overlooked. Then consider which ones might be right for you. Just be sure to consult with your tax professional before implementing the following concepts as unique circumstances often apply.

1 – Accumulate Money in a Health Savings Account (HSA)

For working professionals, the HSA is the most misunderstood tax shelter. Interestingly, it ranks as one of the best ones out there. Why? It’s the only tax-friendly account that gives a tax deduction going into the account AND when the money comes out for use with health expenses.

When enrolled in an eligible high-deductible, health savings plan in 2022, you can contribute $3,650 as a single filer or $7,300 as a family. If you’re 55 and over, you can also make a $1,000 catch-up contribution.

Ideally, you’ll accumulate money in an HSA and let it build for retirement where it can then be used for Medicare premiums. Along the way, you can access it at any age for medical expenses, from sunscreen purchases to out-of-pocket doctor fees. In the event of a large expense, such as braces or a visit to the emergency room, you can tap your HSA to offset the financial challenge of these one-time expenses.

Most people mistakenly believe they must use up their account balance before the end of each year. While this is true of a Healthcare Federal Spending Account (FSA), it’s not the case with an HSA. Your money remains in your account until you’re ready to use it.

Another misnomer is that you can’t invest the funds that are in your HSA. In most cases, HSAs allow for an investing option once you have at least $2,000 in your account.

2 ‑ Maximize Your 401(k) or 403(b) at Work

Many of my clients truly believe they are maximizing their 401(k). After reviewing their accounts, however, I often find this is not actually true. Here are a few tips for rectifying this.  

If you’re under 50, you can contribute up to $20,500 into your 401(k) in 2022. This is in addition to the allowed employer match. If your employer gives you a $5,000 employer match, for instance, you can contribute an additional $20,500 for a total of $25,500. On top of that, you can bump this up in the year you turn 50 with a “catch-up” contribution of $6,500.

3 ‑ Choose a Roth 401(k) Over a Traditional 401(k)

The share of 401(k) plans offering a Roth savings option grew to 86% in 2020. This is up from 75% in 2019 and 49% a decade ago, according to the Plan Sponsor Council of America.1

The Roth 401(k) popularity does not mean it’s right for everyone, though. It’s best to work with a tax professional to determine if your tax bracket is lower now than it will be in retirement. If it clearly is lower now, then a Roth 401(k) contribution makes sense. If not, stick to the traditional 401(k) option.

Not sure which way the tax bracket will go for you in retirement, even after working with a CPA? Consider tax diversification where you divert half your contribution to the Roth 401(k) and half to the traditional 401(k).

4 – Make a Backdoor Roth Conversion

Ever heard of a backdoor Roth Conversion? This is a Roth IRA contribution that was originally added to a traditional IRA without deduction and then moved into the Roth. A backdoor Roth IRA is a legal way to get around the income limits that normally prevent high earners from owning Roth accounts.

When a regular IRA contribution is not deducted from income due to income limits, a smart move is to convert it to a Roth IRA before the contribution is invested. Since the money went into the traditional IRA after-tax, it’s allowed to be converted tax-free.

This tax opportunity has been getting some headlines lately as Congress debates on whether to remove this option. I hope they don’t as it’s one of the few ways that higher income individuals can smartly get savings into a Roth IRA.

The Backdoor Roth IRA conversion works best when there are no other assets in IRA accounts. If there are, then you will be subject to the “pro-rata rule.” It specifies how the IRS will treat pre-tax and after-tax contributions when you carry out a Roth conversion. Before proceeding, speak with your tax professional to understand your best option.

5 – Set Up a 529 College Savings Plan

Before you know it, your kids, or perhaps your grandkids, will be closing in on the college years. Hopefully you’ll be ready with ample college savings to get them off to a great start! Along the way, you can save some serious tax dollars by growing those college savings in a tax deferred 529 account. One extra bonus: starting in 2024, you will be allowed to roll up to $35,000 from a 529  into a Roth IRA account in the event that you saved too much for college.

According to Morningstar, the top 529 plans over the past decade include:

·         Utah: Utah Educational Savings Plan (UESP) at my529.org

·         Michigan: Michigan Education Savings Program (MESP) at misaves.com

·         Illinois: Bright Start 529 Plan at brightstart.com

The 529 plan you choose has nothing to do with the state where your child will attend college. However, in certain states you might earn an even higher deduction by using their state plan. Check with your state to understand their incentives. Also, while 529 savings must be used for college costs to avoid the 10% penalty, the savings can be transferred to alternate beneficiaries who are related to the current one. This built-in flexibility makes these plans a great way to pass on a legacy.

6 ‑ Use Tax-efficient Index Funds in Your Taxable Accounts

A capital gains distribution is a payment made by a mutual fund. This includes a portion of the proceeds from sales of the fund's stocks and other assets from within its portfolio. It’s the investor's pro-rata share of the proceeds from the fund's transactions.

You can find the capital gains distribution on your 1099 tax form from your taxable investment account under the dividend section.

Some capital gains are necessary, especially in a year like 2021 that recorded strong stock market performance. Yet you might find the distributions from actively managed funds to be excessive relative to a low-cost, passively-managed, better-performing index fund.

This is just one more reason why low-cost index funds can make good sense in your investment portfolio.

7 ‑ Take Advantage of Qualified Charitable Distributions

Once you are age 70½, the IRS allows you to distribute up to $100,000 from your IRA tax-free that would normally be a taxable distribution. In addition, this distribution can count toward your Required Minimum Distribution (RMD).

Since there are not many ways to get money tax-free out of your traditional IRA, you might find this to be an appealing way to do so.

8 ‑ Give Money Through Donor-Advised Funds

The U.S. government wants you to give to charity. Thus, they offer many ways to donate your wealth while saving on taxes.

One of the most convenient ways to give to charity as tax-efficiently as possible is to open a donor-advised fund. You can give a lump sum to a dedicated charity account in one year to claim the tax deduction. Then you can distribute the charitable gifts out over several years.  

In a year where you have a lump sum of income from a sale of property or inheritance, you might find the donor-advised fund most useful for bringing your income down to a more reasonable level.

Clients also find it interesting that they can give an appreciated stock to a donor-advised fund. Check with your tax professional as income limits do apply.

9 ‑ Make the Most of Roth IRA Conversions

In a low-income year — perhaps you lose your job or retire early — it’s worthwhile to study whether converting your traditional IRA to a Roth IRA could make sense for your taxable future.

Although you still pay taxes on the amount converted, you avoid paying taxes on that same income in a future year when you are in a much higher bracket.  

Albert Einstein once said, “The hardest thing in the world to understand is the income tax." When he said that, our tax code was likely much simpler than it is today. While paying taxes is a necessary part of being an adult, taking advantage of tax breaks may ease the burden.

Have questions or concerns? Give us a call or send us an email. We’re here to help!

Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. Please consult your tax professional on all tax-related matters.

Sources:

1. Iacurci, Greg. (Dec. 27, 2021). CNBC. "Employers adding Roth 401(k) option at fast clip.” Retrieved from https://www.cnbc.com/2021/12/27/roth-401k-availability-grows-rapidly.html

Insurance: A Tax on People Who Don’t Take Time to Do the Math?

By Shelley Murasko

My daughter dropped her cell phone while hiking recently and cracked the screen. While searching for a replacement, I found a model for $150 at Gabb Wireless, a company that offers phones for kids and teens with only texting and calling services. I noticed that the company also offered insurance to cover phone repairs for $5 per month. Since my daughter’s previous phone had lasted only nine months, I thought this insurance protection might make sense.

Around the same time, my son smashed his phone when he accidentally kicked a soccer ball into it. While his cell had survived twice as long, a whopping 18 months, he was also in need of a replacement.

It was then I remembered that my son’s replacement phone would be free due to a special Christmas deal we’d gotten at the time of purchase. I also recalled that my daughter’s phone was originally free in May because it had been part of a special Mother’s Day sale.

As I compared these options against buying the Gabb phone, I discovered in the fine print that Gabb would still charge me $40 to replace the phone if damaged. So while the replacement phone would cost less, it would not be totally free.  

After calculating the lower phone cost offered by Gabb and the required $40 replacement fee, I realized it would have been MORE expensive to buy the Gabb phone with the insurance option. In fact, without insurance I would have saved $65 between the two phones for my kids.

During my investigation of these expenses, I also discovered that neither of my children was using a screen protector. This additional low-cost risk reduction step could have minimized the damage, if not prevented it altogether. Instead, my kids are spending the money they earn to pay me back for their phone replacements.

The reason I’m sharing this story is to help you understand that insurance – whether it’s for your phone, car, house, life, health, or pets – is a profitable field that uses fear-based marketing to convince you that it’s necessary. In addition, many consumers purchase insurance without doing any actual cost calculations of their own. Instead, they rely on the insurance company to provide the tally, which may or may not include hidden fees like phone replacement costs.

Do You Really Need Insurance?

If you’re like most consumers, you likely spend thousands of dollars per year on insurance. But do you really need to spend large sums of your hard-earned money on it? Once you dig a little deeper into the math, you may be surprised to discover that you don’t. Or that there are ways to reduce your insurance costs if you decide you do need it.

The first thing to know about insurance companies is that they ARE making money off you — lots of it! They do this by hiring intelligent mathematicians called actuaries who analyze loads of statistics about the typical behavior of people just like you. Then they carefully determine how much money they expect to pay out on your claims. After that, they set your premiums to a level where, on average, they can pay your claims, compensate their employees, and still make a large profit for their shareholders. They have, of course, rigged the odds against you. When buying insurance, you’ll most likely pay more into it than you get out of it.

There are only two ways in which this scenario would be wrong:

1.      If the brilliant actuaries had incorrectly assessed risk. Even if this were true, it would not be the case for long. You can bet those actuaries would be fired and the insurance company would adjust their fancy formulas.

2.      If somehow you had inside knowledge of how to defy the odds of their calculations. In other words, your crystal ball is better than theirs!  

The fact that the insurance company will most likely come out ahead seems obvious. Yet the average consumer still feels like they are missing out if they do not own at least twenty different insurance policies on every facet of their life; and the sale of insurance exists on just about anything that you can imagine including wedding events, to kidnappings, patio furniture, fantasy football and even alien abduction. I’m not kidding. Look it up!

The Importance of Doing the Math

Recently, I learned about a financial advisor who encouraged a woman in her mid-20s to buy life insurance for $2,500 per year, even though she had no dependents and her odds of dying within the next five years was 1 in 100,000.

During another recent insurance-related conversation, an acquaintance told me, “I need pet insurance, so I don’t have to pay the $200 every time I take my dog to the vet!” Of course, the vet policy cited cost the individual $75 per month, had a $500 deductible, and included several other limitations on coverage.

It’s important to note that most pet insurance policies won’t cover pre-existing conditions or end-of-life matters. In addition, they often have phase-outs at a certain age and leave out coverage for many elective procedures or preventable diseases.

These two examples demonstrate why it’s important to run the numbers when considering an insurance purchase. Despite the belief that you need insurance to SAVE money, most often the opposite is true! Once you understand this, you’ll realize there are only four possible reasons to get any type of insurance.

1.       You’re required to have insurance (i.e., house insurance to obtain a mortgage, auto insurance to drive a car).

2.       You can’t afford the consequences of a major life event (i.e., a burned-down house, a year in the intensive care unit at $20,000 per day, or the cost of losing an income if one spouse dies prematurely).

3.       You’re riskier than the insurance company thinks you are. For example, perhaps you take your dog skydiving with you every weekend, or you never floss your teeth and eat three bags of candy each day. Or, on a more serious note, maybe you’re expecting a baby, suffer from a chronic health condition, or possess genetics that make you more likely to acquire a particular disease in the future. In these cases, it may be wise to set yourself up with an insurance plan featuring a lower deductible.

4.       You insist on the peace of mind that comes with paying a lower monthly insurance premium versus the possibility of having to pay a higher expense all at once. Mathematically, that peace of mind is not a solid reason for buying insurance. Yet many individuals prefer to keep various types of insurance for emotional reasons.

Ways to Win the Insurance Game

The list above covers many of the possible insurance categories. But what about coverage for events that may be unlikely to happen, yet you couldn’t afford if they did? For instance, should you get kidnapping insurance on yourself to cover up to a $3 million ransom? Extended warranties from Best Buy® on your laptop? Hair color insurance because you’re fed up with your stylist’s rising prices? Grocery insurance because the cost of eggs has hit an all-time high? 

Stop! It’s all a trick.

Luckily, there’s a solution: Simplify your insurance holdings now by reassessing which ones are worth the money. For this discussion, let’s set aside the insurance types mentioned above that are legally required, would keep you from going over the financial edge, or cover a known higher risk factor. When you narrow your focus to essential needs, you really can simplify your risk management to insurance types like auto, health, home, and term life insurance (if you have dependents). 

If you own a business, it may also make sense to take a hard look at umbrella insurance, errors and omissions insurance, and other appropriate insurance types that apply to your specific business area. 

Do you have a healthy emergency fund and a savings built up that allow you to afford most unexpected outcomes? If so, then carefully consider whether you truly need the less essential insurance types, such as dental, pet, whole life, and long-term care. You may also want to consider annuities insurance if you have a solid income stream in retirement relative to your expenses. Just keep in mind that insurance companies today can raise their premiums anytime they wish.

I’m not saying you shouldn’t have these types of insurance; I’m merely saying that it could serve you well to look at the math and the insurance policy exclusions carefully before purchasing.

Once you’ve shortened your list to the insurance types you feel are important, consider how you might tailor them to fit your actual needs. If you have life savings above and beyond your financial goals, you can probably go with the highest deductibles on policies for cars or your home.

If your car is over 14 years old, it might be time to drop collision coverage. If your pet is 13 and your pet insurance doesn’t cover pets over age 14, it might be time to drop the policy. On the other hand, if your home insurance policy still has your home’s reconstruction costs set at 1985 values, you may want to consider updating it.

For the insurance products you decide to keep, plan a nice afternoon to do some shopping around. I did this last January and sliced about $300 per year off my remaining home and car insurance.

When you’ve completed this task, put all the savings from these premiums into growing your nest egg. Then sit back and enjoy the fact that you’re now getting paid to be your own insurance company.

Although streamlining your insurance might sound risky at first glance, it will feel quite satisfying once you’ve done it. By not buying into a product where the odds are stacked against you, you’re statistically likely to win. While you can’t predict the future, you do have one tool that lets you turn the unknown to your advantage: statistics. Understanding the role that statistics plays is a huge advantage when it comes to becoming wealthy.

As your savings of thousands of dollars adds up to a sizeable nest egg over time, you’ll find greater confidence in knowing that you can handle the larger ticket items without the need for unnecessary insurance.

Forget the Lotto: Win Your Own Lottery in 2023!

By Shelley Murasko

On August 17, 2022, the winning lottery ticket for the $2 million Powerball® was sold in Loving, New Mexico. Don’t feel bad if you didn’t win – 90 million other people didn’t either. Besides, the winner will only take home about $1.2 million after taxes.

Ever thought about what you might do if you won the lottery? It can be fun to dream about. Thinking about it myself recently, I decided to ask some of my friends and clients how they would spend a $10 million lottery payout. Here are a few of the answers I received:

·         Buy a house on a lake where I can store my kayak and head right out the door each morning at sunrise to spend some quiet time on the water

·         Splurge on new electric cars and solar panels for my home

·         Give more to favorite nonprofit organizations, including battered women’s shelters, public television, colleges, and medical institutions as well as those that focus on cancer and Alzheimer’s research, nature conservation, and homelessness

·         Take my extended family on an exotic trip to Fiji or the Bahamas

·         Build a network of bike paths throughout my community to make cycling safe for all

·         Start a business, maybe a spaceship company like Elon Musk has

·         Work less so I can spend more quality time with my friends and family

·         Take a trip around the world, visiting every continent

·         Send my kids and all the other kids in my family to college

·         Build a beautiful library in a low-income area

After reading through the list I compiled, I found it interesting that several clients revealed their lives wouldn’t change much. Essentially, they already have all they need.

Others mentioned that what they wanted most was not easily solved by the lotto, such as more love, more time, and better health.    

As I pondered these insights, a light bulb went on in my head. Many of these lottery dreams could become reality with a little bit of planning, saving and creativity.

Here are some examples of what I mean:

Amanda’s Dream: I would relocate to Florida with my family to a beachside mansion.

How to make it a reality: Today, there are more ways than ever to rent private homes through AIRBNB or VRBO. You may even discover that other wealthy family members will go in on the project too.

Kathy’s Dream: I would like to take a flight on a private jet.

How to make it a reality: Consider splitting a private jet rental, which typically starts at $5,000 per hour for a light jet. Or contact your local municipal airport to see if there is a way to fly with instructors at a nominal cost.

Bob’s Dream: I would give a large donation to charities that I care for deeply.

How to make it a reality: Every dollar donated makes an impact! Give like a billionaire by setting up a Donor-Advised Fund, which is similar in many ways to a private foundation. Or consider giving up to $100,000 annually from an IRA to get a tax-free distribution on your retirement savings.

Linda’s Dream: I would love to buy a Porsche. It has always been my dream car. Though I realize it’s an extravagance, it would still be fun to do something on the wild side.

How to make it a reality: Seek out a rental car company or an owner-rental company like Turo and see what it would cost to rent a Porsche for a few months. If the fee fits your budget, you could enjoy the luxury of driving your dream car for a few months, then turn it back in without having to handle repair costs.

While it’s true that money can stand in the way of some of your life’s dreams, it’s worth challenging your mindset occasionally to see if you can convert your desires into reality.

While winning the lottery would be nice, the odds of that happening aren’t in your favor. Luckily, you can maximize your return on life without it. As Paula Pant, the author of the “Afford Anything” blog, often says: “You can have anything you want, just not everything."

So take some time in the New Year to dream big, then create a plan to make it happen. You never know what you can achieve with a little creativity!

Tips for Minimizing Capital Gains Distributions from Funds

By Shelley Murasko

Each December, mutual fund companies are required to account for all the gains resulting from the buying and selling of holdings within the funds throughout the year. This calculation is called the “capital gains distribution,” and it’s the investor's pro-rata share of the proceeds from the fund's transactions.

The distribution is then issued to each investor holding part of that fund on the ex-dividend date. This typically occurs a few days before the capital gains distribution is paid.

These distributions are taxed as long-term capital gains and can have significant tax ramifications for investors with large, taxable brokerage accounts. This impact will appear on the investor’s 1099 Composite Form from their brokerage firm, showing Capital Gains Distributions on line 2a. The form is usually sent out in February.

To be clear, this is an additional taxable event for holding a mutual fund. It has nothing to do with the capital gains that an investor can incur by selling a fund in the future. These capital gains distributions will occur annually, even if the investor holds the fund for decades.

What You Need to Know About Capital Gains Distributions

Who needs to worry about mutual fund capital gains distributions? It’s easier to answer who does NOT need to worry about them, so let’s address that first.

Fortunately, if you hold an IRA, 401(k), Roth IRA, or 403(b) account, you don’t need to be concerned about capital gains distributions. These “qualified” accounts are only taxed when money is withdrawn.

Investors with trust, individual, or joint brokerage accounts, on the other hand, need to pay close attention to capital gains distributions.

In addition, if your taxable income after all deductions is estimated to fall under $42,000 filing as single or $83,000 filing as married, then your federal capital gains rate is 0%. In this case, you don’t have to worry much about federal capital gains taxes, but you should still check the impact from state capital gains taxes.

Are you an index fund investor? Then you can worry less about the tax impacts of capital gains distributions too. Index funds are passively managed and follow a broad benchmark like the S&P 500. Many index funds by companies like Vanguard, Fidelity, and Schwab often have very low or no capital gains distributions since the level of trading activity is minimal. 

By the way, the capital gains distributions can be much more painful during bull market years because most of the trading activity will stack up to big capital gains by year-end.

Use Turnover to Assess Tax Impact

What’s the best way to gauge the potential capital gains tax impact? Look at the turnover metric on a fund report for insights about trading activity. According to Investopedia, mutual fund turnover “is calculated as the value of all transactions (buying, selling) divided by two, then divided by a fund's total holdings. Essentially, mutual fund turnover typically measures the replacement of holdings in a mutual fund and is commonly presented to investors as a percentage over a one-year period.”

A fund with turnover of under 10% is only exchanging or swapping 10% of its holdings in any given year.  A turnover of over 50% occurs when the fund manager is trading over half of the fund holdings in a year. Index funds typically have a turnover of less than 10%. Most investors with incomes above $50,000 a year should aim to keep turnover on their funds in taxable accounts well under 50%.

Greater turnover is expected with certain types of funds, such as bonds and small cap stocks. Bonds don’t usually appreciate much, however, so they’re unlikely to be a concern from a capital gains distribution standpoint.

Keep an Eye on Actively Managed Stock Mutual Funds 

So which funds do investors need to keep a pulse on when it comes to turnover rates? Actively managed mutual funds top the list. These are funds that have a manager who is purposely buying and selling winners throughout the year at a rate of over 50% turnover.

Here’s an example: A prospective client (we’ll call her Kelly) shared with me recently that her tax professional was urging her to have a mutual fund holding looked at by an investment manager.

Sure, enough, when I dug into the actual fund, there had been significant capital gains distributions over the past 3 years.

After reviewing her 2021 1099 Composite Form for her trust account, I was able to see that her mutual fund with a current value of $104,000 had paid out $35,000 in capital gains distributions. Since Kelly’s total taxable income added up to about $80,000 for the year, this $35,000 put her over the capital gains taxable threshold of $42,000 for a single filer. This added an estimated $4,600 in federal taxes to her return and likely another $1,000 in state capital gains taxes. That’s a sizeable amount of money for an individual with a total estimated income of roughly $60,000.  

To top it all off, the fund with the large capital gains distributions has underperformed a standard low-cost index fund by 15% over the past 5 years. Thus, this fund not only put a drag on Kelly’s investment results, but it cost her approximately $18,000 in capital gains taxes over the past 3 years. It also probably cost additional untold amounts over the many years that the fund has been held.

How to Anticipate Capital Gains Distributions

The best way to anticipate a high capital gains distribution for a particular fund is to review your 1099s from previous years. If a given fund caused distributions last year, it’s likely to have a higher-than-average capital gains distribution in the current year.

Another way to anticipate this is to look for your fund’s turnover ratio. Any mutual fund with a ratio of more than 25% is likely to cause higher-than-average capital gains distributions.

Strategies for Minimizing Capital Gains Distributions

What can you do to minimize capital gains distributions? One of the easiest ways is to consider holding only index funds or tax-managed stock funds in your taxable accounts.

Another strategy is to hold individual stocks in your taxable accounts. In addition, you might review the capital gains distribution in the context of the overall performance. If the actively managed fund is truly outperforming the comparable benchmark by a large margin, it might be worth holding. Better yet, you’ll prevent the tax impact from the internal fund trading if you can hold this type of fund in a tax-sheltered account like an IRA or 401(k).

As you evaluate your tax situation, be aware of large outflows on a particular fund you’re holding. This information is often reported in the financial media.

You should also review your 1099 Composite Form annually with your financial advisor. Doing so will help you understand the tax implications of your current holdings. It will also allow you to strategize ways to minimize capital gains distributions in the future.

Before you begin selling high turnover funds, assess what your capital gains will be from the resulting sale. Despite the high tax due to capital gains distributions, you must use caution to prevent the other type of capital gains tax that comes from selling a fund. Conduct a careful mathematical review to learn if selling the tax-inefficient fund still makes sense.

Overall, you don’t want the tax system to prevent you from making smart investment decisions. As a Certified Public Accountant once told me, “Don’t let the tax tail wag the dog.” On the other hand, a strong understanding of investment tax impact is a prudent step for all investors.