You-Pain?

“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” – Socrates

 

The war in Europe feels like footsteps not quite reaching the pavement. The March 1st Financial Times headlined “Nike Suspends Online Purchases in Russia” and “Carmaker Ford Suspends Operations in Russia”. The same day’s Wall Street Journal joined in with “The West’s Sanctions Barrage Severs Russia’s Economy from Much of the West”. Interestingly though, the sanctions – at least those imposed to date – appear to be focused primarily upon the financial rather than economic part of Russia’s relationship with those seeking to punish it. The United States now imports more oil from Russia than any other country and that country, with its adversary Ukraine, accounts for 29% of global wheat exports. The loss of life and destruction in Ukraine is both real and tragic but with Russia’s relatively unimpeded access to the global marketplace and the United States and its European allies disclaiming the possibility of intervening directly, the conflict seems likely to remain localized and so its impact upon the US economy may be significantly less than markets are currently discounting, creating the possibility of a positive surprise.

Yahoo Finance was left to wonder in a story on March 2nd that “All in all, the stock market is hanging tough in what has been a turbulent two weeks for humanity.” There certainly is volatility aplenty in virtually all financial markets with gold’s 6% rise for the month acting as a sort of thermometer for the emotional state of global markets. CNN’s Fear & Greed Index has fallen to 17, a measure representing Extreme Fear and a level not seen since March and April of 2020, the onset of the global pandemic. The 10 Year US Treasury rate, which started out the year at 1.52% and reached a peak yield of 2.05% on February 15th, ended the month at 1.83%. Confounding most investors focusing upon news headlines, US mid cap and small cap stocks actually rose in February and the S&P 500 ended the month higher than its closing level on January 27th.

While much of the world has been focused upon war in Europe and the likelihood of the Fed’s raising interest rates, there is something much larger at work impacting our economy and that may be what will most influence financial markets this year. Since the Global Financial Crisis of 2008 central banks have targeted an inflation rate of 2% which would have allowed them to seek to manage the inflation adjusted rate of interest to below zero, but stubbornly persistent low levels of inflation confounded their attempt to achieve that objective. Now, with inflation levels likely to remain at 4% to 5% levels through the remainder of the year and with 10 Year Treasury Rates at less than 2%, money has rarely been less expensive. With economic demand outstripping supply creating the ability to achieve attractive rates of return through investments in the real economy, it may be time to toss out the old play book because this sure looks like a new world!

Equity markets in February contributed negatively to returns on investor’s portfolios of approximately -2.25% with technology’s -5% return a source of negativity offset by the aforementioned positive returns of small cap and mid cap stocks and Energy’s +6% and +26 ½ % returns year to date. Foreign stocks, which had avoided most of the negative returns of those US markets in January, matched the S&P’s -3% return for the month. Interest rates rose modestly in February resulting in -1% returns for the fixed income portion of portfolios leaving 60/40 portfolios -1.7% for the month and – 5% year to date.

 

Mark H. Tekamp; March 6, 2022

DYK: The Revocable Living Trust

The Revocable Living Trust

A Living Trust is one of the most flexible estate planning tools in existence. It can be customized to help ensure that actions will be carried out according to one’s intentions while providing for several contingencies. One of the most common types is the ‘Revocable’ Living Trust, which is what we’ll review today.

Definition:

A Revocable Living Trust is a legal document that an individual owner creates during their lifetime, whereby a ‘Successor Trustee’ is chosen to manage that person’s assets for the benefit of designated beneficiaries, contingent upon certain triggering events (i.e. the owner’s incapacity or death).  Successor Trustees can be other individuals, although attorneys often recommend selecting professional institutions, such as a bank or a trusted company. Typically, these are structured so that the owner retains full control over the assets during their lifetime, as well as the right to ‘revoke’ (terminate) the Trust at any time.

Taken at face value, a Revocable Trust only seems to accomplish the same objectives as that of a ‘Last Will and Testament’. For example, they both allow for some influence on how assets are dispositioned at one’s demise. And it’s true, that a Will can help prevent transfers from occurring according to State Law – which takes little account of what the decedent would have wanted. However, certain questions will arise in the conversation, which reveals key differences in the Trust. For Example:

What would happen if someone were to become disabled or otherwise incapacitated, instead?

A Revocable Living Trust can provide certainty in terms of who would be managing that individual’s assets, how they would go about making decisions, and whether it would be on a temporary or a permanent basis.

Living Trust- Estate Planning - Wealth Management - Financial Planning - Norfolk Wealth Management

What if someone wants their assets to be distributed to beneficiaries over a certain timeframe?

A Revocable Living Trust can allow that person to be very explicit in addressing what will happen, often specifying the time period, as well.

What about the cost?

The initial cost in setting up a Living Trust is typically greater than the amount needed to establish a Will. That said, in most cases, the initial expense is more than offset by the future benefit to the Estate. More specifically: The benefit in using the Living Trust to bypass the costs and delay associated with the otherwise mandatory legal process, known as ‘Probate’.

Are there any other benefits?

A Living Trust allows for privacy by default, whereas Probate involves an estate settlement process that is transparent and fully accessible via public record.

Trustee Fees tend to be lower than Executor Fees (Probate), and they often cover professional asset management services.

While a Revocable Trust won’t directly reduce estate tax liability, it can certainly enhance tax efficiency when provisions are included to establish a Credit Shelter Trust, or when used in conjunction with other estate planning techniques, as part of an overall strategy.

In most cases, the Trust will also allow for additional FDIC Insurance Coverage per Beneficiary.

What are some downsides?

A Revocable Living Trust won’t always negate the need for a Will. For example, attorneys often recommend having a ‘Pour-Over Will’ as a backstop for certain assets that won’t be used to fund the Trust, or separate provisions to name Guardians, etc.

As was mentioned before, there are no inherent tax benefits to the Revocable Trust, itself.

Not unlike a Will, the Trust Document may need to be updated over time.

It’s also important to be careful about how the Trust will be funded. Some types of assets, such as qualified retirement accounts, should not be owned by the Trust.

In short, these downsides underscore the importance of working with an attorney.

Bottom Line:

The Revocable Trust can be like the cornerstone of an Estate Plan.

If you’ve been meaning to speak with an Estate Attorney about securing a strategy for the ultimate disposition of your assets, there may be no better place to start, than by asking whether a Revocable Living Trust is right for you. As always, feel free to reach out to us at the Heritage Wealth Management Group with any questions. We’ll be glad to help in any way we can.

 

Rhett Garner, CLU®, ChFC®, CFP®
Vice President – Financial Advisor
Heritage Wealth Management Group

 

This content is being provided for informational purposes only and should not be construed as financial, investment, tax, or legal advice. The views and opinions expressed do not necessarily reflect those of the company. Always consult a licensed investment professional before making investment decisions. All investments and financial strategies involve various risks, including the possibility of loss of principal. Investment values and returns will fluctuate. There are no implied guarantees or assurances that any target objectives will be met. Future performance may differ significantly from past performance due to many different factors. The Heritage Wealth Management Group, its employees, affiliates, and associated persons shall not be held liable for losses resulting from financial decisions based on information or viewpoints presented herein.

 

DYK: Solo 401K

Are you or someone you know self-employed? If so, at some point you’ve had to think about setting up a retirement plan for your business. Someone may have approached you with the idea of a SEP IRA or a similar arrangement, but did you know that you also have the option to set up your own 401k? Depending upon your situation, this might be a significant opportunity!

To understand why let’s dive a little deeper and compare.  We’ll start with the most common alternative: the SEP IRA. With a SEP IRA, the self-employed individual can make ‘employer’ contributions of up to 25% of their eligible compensation.  There’s a limit to this, though, and it’s capped out at $56,000 (as of 2019). This tends to work well for the business owner who has no employees and earns a high income with little variation from year to year. But what if someone doesn’t make as much money from the business, yet still wants to contribute a high percentage of their income?

A Solo 401k could allow that person to make contributions on two fronts:  as both the ‘employer’ and the ‘employee’. If you’re a savvy reader or particularly well-versed in this from having done this research for your own business, you might be thinking, “But, there’s still the same overall cap of $56,000, so what’s the difference?”

Let’s take a closer look with a couple of hypothetical scenarios:

Scenario 1: Jack, a 50-year old sole proprietor, is making $200,000 per year (net profit). In determining what he could contribute to his SEP IRA, he first has to reduce that figure by a certain percentage (based on IRS guidelines & formulas). For this situation, the end result is an allowable SEP IRA contribution of somewhere around $37,000 for the given year.

Scenario 2: Diane, a sole proprietor who also happens to be making $200,000 in 2019, sets up a Solo 401k. She wants to ensure that the account is funded before December 31st, so she contributes the maximum amount that she can as an employee right away – $19,000. But remember, she gets to contribute as the employer, too.  Once she has a better idea of her tax situation, she funds the account with as much as she can on the employer side.  Now, this puts the total amount just shy of the standard $56,000 limit – already a big difference! However, like Jack, she happens to be 50 years old. As is the case with other/larger 401k plans, a Solo 401(k) has an additional “catch-up” provision that allows people over 50 to contribute more.  This catch-up amount is $6,000, which effectively raises her overall funding limits, as well.

The End Result: A net Solo 401k contribution of nearly $62,000 – roughly 67% more than Jack!

Said differently, Jack funded a SEP IRA with around 19% of his income, while Diane could contribute close to 31% through her Solo 401(k).

Choosing the right retirement plan for your business can be difficult and can involve unforeseen or unintended effects. If working out these scenarios seems tricky, or if you just don’t have the time to work through all of that, it often makes sense to consult with an advisor who has experience navigating this complex landscape.  Doing so will make it easier for you to evaluate options, coordinate with your tax professional, and feel confident that you’re making the right choice for you and your business.

 

Rhett Garner, CLU®, ChFC®, CFP®
Vice President – Financial Advisor
Heritage Wealth Management Group

 

This content is being provided for informational purposes only and should not be construed as financial, investment, tax, or legal advice. The views and opinions expressed do not necessarily reflect those of the company. Always consult a licensed investment professional before making investment decisions. All investments and financial strategies involve various risks, including the possibility of loss of principal. Investment values and returns will fluctuate. There are no implied guarantees or assurances that any target objectives will be met. Future performance may differ significantly from past performance due to many different factors. The Heritage Wealth Management Group, its employees, affiliates, and associated persons shall not be held liable for losses resulting from financial decisions based on information or viewpoints presented herein.

 

DYK: Dollar Cost Averaging

Heritage Wealth - Dollar Cost Averaging - Investment Strategies - Wealth Management Provider

Dollar Cost Averaging – is an investment strategy in which an investor makes purchases of an investment or group of investments with a fixed dollar amount at regular pre-determined intervals. This may sound familiar. A lot of us have used this strategy without being aware of it. Many of us have, for example, made a set dollar contribution to a 401k, IRA, or Educational Account. So, we know from experience that Dollar Cost Averaging (‘DCA’ for short) can be used to build wealth over time. But are there other reasons that someone might want to consider this strategy?

Dollar Cost Averaging can also be used to offset some of the risk associated with volatility in a particular investment, or in an overall portfolio. If this approach is implemented during a period where the investment experiences volatility, it can result in a higher average price per share than the average cost per share. Of course, that description doesn’t help us all that much, so let’s translate this into ‘human’ language through a hypothetical scenario:

To illustrate, let’s say that you bought $60,000 worth of stock in Company X on January 1st at $20 per share. When you check back in at the end of six months, the price of the stock is $14 per share. If you were to sell at that point, you would realize a loss of around 30% – or in other words, around $18,000.

Now, let’s say that instead, you made an initial investment of $10,000 and followed that up with additional purchases in $10,000 increments until you reached your full investment amount of $60,000. When we first glance at the end-of-month stock prices, the situation actually looks even worse. Those prices were: $20 (starting price), $16, $5, $12, $9, $13, and finally our end price of $14. That’s a lot of volatility! But… If we take a look at the number of shares we bought with each $10,000 investment, the situation starts to come into focus. The number of shares purchased each month were: 500, 625, 2000, 833, 1,111, and 769, respectively. That gives us a total of 5,838 shares. When we multiply that by our final stock price of $14, we are left with a market value of $81,732. That represents a roughly 36% increase over the total amount invested! You knew you were a genius for buying into Company X, and for the record, I believed in you the whole time….

Bottom Line:

Clients generally experience the most success Dollar Cost Averaging in the following two circumstances:

1.) When they don’t have a lump-sum dollar amount to invest – In this case, DCA is a great way to build in the discipline of regular contributions. It also helps some clients feel they can take on slightly more risk in their choice of investments early on.

2.) When they know their money should be invested according to their personal risk tolerance, but they also have significant concerns around the potential of a sharp, near-term decline in the market.  Put another way, when they know they need to get from point ‘A’ (not invested) to point ‘B’ (invested), but they are struggling with how to get started, given their feelings about the market. In this situation, Dollar Cost Averaging into a diversified portfolio can be a particularly effective strategy.

If you would like to have a conversation around this or any other investing-related concepts, please feel free to reach out to us at the Heritage Wealth Management Group. As always, we’ll do whatever we can to advocate and to be of service.

 

Rhett Garner, CLU®, ChFC®, CFP®
Vice President – Financial Advisor
Heritage Wealth Management Group

 

This content is being provided for informational purposes only and should not be construed as financial, investment, tax, or legal advice. The views and opinions expressed do not necessarily reflect those of the company. Always consult a licensed investment professional before making investment decisions. All investments and financial strategies involve various risks, including the possibility of loss of principal. Investment values and returns will fluctuate. There are no implied guarantees or assurances that any target objectives will be met. Future performance may differ significantly from past performance due to many different factors. The Heritage Wealth Management Group, its employees, affiliates, and associated persons shall not be held liable for losses resulting from financial decisions based on information or viewpoints presented herein.