October 5, 2015
There’s a joke circulating online that, if you commit a crime and you need to hide the evidence, you can stash it on page two of a Google search. At least 90 percent of the time, nobody looks there. In fact, about half of our clicks are bestowed on the first two hits we see.
The serious implication behind the satire is that it remains at least as easy as ever to be overly influenced by what others have decided should be the most important information we receive. Behavioral finance has identified any number of ways we tend to give too much weight to just these sorts of hits that popular curators feed us. The results can tempt us into believing that leading financial news – the Chinese economy, global oil prices, interest rates, and so on – should be the driving force behind our next market moves.
We’re here to remind you: If it’s headline news, it’s already been incorporated into market pricing. Even if we could predict the outcomes (we can’t) it’s too late to act on them – so you shouldn’t. Instead, consider the following observations related to the recent market correction. While perhaps less splashy, they are far more important to your enduring financial interests.
- An Associated Press writer shared this comment: “A wild move in the market one week ‘is not like seeing a unicorn,’ [Vanguard principal Fran] Kinniry said. ‘Stocks are volatile. But you’re not investing for one day or one week, you’re investing for 10 or 20 years.’”
- Seeing how often investors abandon their plans during financial crises, David Andrew of Australian-based Capital Partners commented, “Short of tearing up twenty dollar bills and throwing them away, I can’t think of a more destructive wealth management strategy.”
- Forbes’ “Tax Girl” Kelly Phillips Erb reminds us that a market drop need not represent a personal loss: “Even if you were to sell your stock today, just because it was worth less this morning than when you went to bed last night doesn’t necessarily mean you’ll have a realized loss.”
- In a June 2015 column, Morningstar’s Christine Benz comments, “When it comes to checking up on your portfolio, a policy of benign neglect invariably beats too much monitoring. Investors who pay attention to their portfolios’ daily values may find themselves berating themselves during the market’s periodic downdrafts or congratulating themselves too much when their balances are fat. … Taking a long view is usually more helpful.”
These pieces of advice and many others we could share made good sense earlier in the year. They make good sense today. The evidence is strong that they will continue to make good sense tomorrow, regardless of what is breaking on the Internet. As always, if we can answer any additional questions about your own portfolio or the latest financial news, please be in touch.
We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.
September 30, 2015
Whether it’s gathering for an annual reunion, recounting an anecdote about quirky Uncle Jim, or simply being there for one another during difficult times, family traditions are the comfort food that nourishes our most satisfying relationships. We’d like to invite you to begin a NEW and important family tradition: family wealth planning conversations.
What Are Family Wealth Planning Conversations (And Why Have Them)?
At their best, family wealth planning conversations engage every family member, each of you contributing your talents and interests to achieving your collective and personal lifetime goals.
That’s not to say everyone must participate equally. As we work with families, one individual often emerges as the spokesperson or steward for the group. That’s fine … if the role is based on a mutual and deliberately planned arrangement. If it is instead based on unspoken assumptions or force of habit, your family wealth planning may benefit from a fresh conversation.
Even if your family is in full agreement on who is best suited to champion its interests, there’s always life’s many “what ifs.” Are others in your family adequately prepared to assume the stewardship role when and if it is required of them? Might they have unexpressed questions or concerns that are best addressed well before that day may arrive? Carving out time to hold candid conversations is where it all begins.
Let Us Guide Your New Tradition
To kick off your family wealth planning conversation, we invite you and your family to meet with us at your convenience. (A face-to-face meeting is optimal, or we can harness technology to hold the meeting online.) We can guide you in exploring key considerations such as:
- How would each of you define your roles in your family wealth planning?
- Are each of you satisfied with your current roles?
- Do all family members have the essential information, should they be required to increase their participation? (For example, do they know how to be in touch with us directly?)
- Are there other questions, suggestions or family wealth dynamics you’d like to explore, either immediately or over time?
- How can Hiley Hunt Wealth Management best assist each of you in these and other areas?
We encourage you to think outside the box on this! For example, even though a family member may have never joined in prior meetings, we encourage you to include them at this time. You may well discover insights about one another that could strengthen both your financial conversations as well as your overall family dynamics.
As tradition suggests, we also hope you’ll consider this the first in a recurring conversation — with or without our participation, as you prefer. Regardless of who may be “in charge” of your family wealth, you are equally as dependent on the outcome of the efforts. Enabling a forum for everyone’s voice to be heard is another way Hiley Hunt helps you achieve your greatest life goals, keeping your family’s wealth fresh and meaningful over time.
We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.
September 3, 2015
In the first two installments of our three-part “hidden in plain sight” investment strategy series, we’ve covered the importance of staying invested to earn market returns, while managing the risks involved. We’ll conclude with what may be the most obvious and powerful advice of all, even if it does not seem to receive the attention it deserves.
- Being there
- Managing for market risks
- Controlling costs
Plain-Sight Strategy #3: Controlling Costs
Don’t spend more than you need to.
Why do investors spend more than they need to on their investments?
Revealing the Numbers
While spending less to earn more seems obvious, the costs themselves aren’t nearly as apparent. Disclosure requirements exist in most developed countries, but too often, the focus seems to remain on adhering to the letter rather than the spirit of the laws.
The issue does not just affect individual investors either. The California Public Employees’ Retirement System (CalPERS) is currently the largest U.S. public pension fund, with nearly $300 billion in assets as of September 1, 2015. In 2015, it embarked on an aggressive campaign to cut costs by seeking to eliminate its most fee-intensive money managers. According to a Pensions & Investments report, CalPERS officials “concede[d] they have been unable to determine just how much they do pay.” If the country’s largest public pension fund officials have difficulty assessing their all-in fees, what chance does an everyday investor have?
Demanding the Numbers
Financial professionals and investors alike should insist on clarity wherever it seems lacking. As Vanguard founder Jack Bogle describes in this CNBC article, “If you had a crowd of investors who said, ‘Look, this is just wrong,’ [fund company] directors would have to listen, whether they want to know or not.”
Instead, there is considerable evidence that, even when investors should be credulous consumers, they seem unwilling to question the costs. As expressed in a 2015 North American Securities Administrators Association (NASAA) report, “While broker-dealers may be complying with the technical requirements governing fee disclosures, our research shows that improvements are needed to raise awareness among investors of the costs associated with their brokerage accounts.”
The NASAA report was based on a survey that found widespread confusion among investors. The report concluded: “Brokerage firms routinely charge fees to serve and maintain brokerage accounts, yet nearly one-third (30 percent) of investors said their firm had no such charges and one-quarter (25 percent) indicated they did not know whether they were being charged.” Of those who did know there were fees involved, more than half did not know the amounts.
In short, the first step in managing investment expenses is to know what they are. A detailed analysis of all-in investment costs is beyond the scope of this series, but we would be delighted to provide you with additional information at any time. Here, we offer an overview.
Trading costs – When you buy or sell funds, stocks, bonds or other securities, you pay a broker a commission to place your trade. These commissions are typically disclosed in your custodian’s trade confirmation statements.
Fund management costs – If you are investing in funds versus individual stocks and bonds, you’ll pay anywhere from a lot to a little to the fund company that manages them. These costs typically appear in expense ratio disclosures in a fund’s prospectus or listed as an expense percentage by looking up the fund’s ticker symbol on any number of online services such as Morningstar, Yahoo Finance and many others.
Advisor support – If you are working with a fee-only advisor like Hiley Hunt Wealth Management, we’re here to help you build and maintain your investment portfolio in the context of your greater wealth management interests. Our fees are disclosed in the quarterly reports we distribute, as well as in the independent statements from our account custodian.
Administrative oversight – If you are invested beyond the pale of an individual brokerage account containing funds or securities, expect added costs to compensate for the extra administrative oversight and infrastructure involved. Think retirement plans, separately managed accounts, annuities, hedge funds, Real Estate Investment Trusts (REITs), private equity ventures, and so on. This is a key area where hidden costs can fester. As a result, investors often fail to realize there are added costs involved at all, let alone the extent to which they may exist.
Joining the Cost-Management Movement
As financial professionals, we deserve to be fairly compensated for our efforts. But as an investor, you deserve full disclosures and clear explanations, so you can determine for yourself whether the costs are justified. We look forward to helping you join us and a growing community around the globe as we advocate for the importance of clarifying and controlling investment costs. If we could offer only one piece of advice on the matter, we would conclude by urging you to forever heed this familiar adage: If it sounds too good to be true, it probably is.
We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.
August 3, 2015
When it comes to buying or selling your home, most of us already know that the price depends on three things: location, location, location. Asset location is a similar, if less familiar rule that applies to your investments. By managing asset location within your portfolio, we help you keep as much of your wealth as possible – even after the tax man takes his cut. Given how deep that cut can be, it’s another way we add value to your total experience as an investor.
Asset Location: A Working Definition
Let’s begin by noting that asset location should not be confused with asset allocation. The two are related, but separate beings, like cousins or siblings.
- Asset allocation is dividing your money among different asset classes, based on the amount of market risk and expected reward inherent to each. For example, a simple asset allocation is equally dividing your holdings 50/50 into stocks and bonds. You may then subdivide your stocks among international versus U.S., small-companies versus large, and so on.
- Asset location is deciding where to locate your stocks, bonds and other holdings within your taxable and tax-sheltered accounts, to maximize overall tax efficiency.
Why Do It?
There’s empirical evidence that asset location is worth the extra effort it takes. Financial commentator Michael Kitces points to a Morningstar analysis indicating that a well-executed asset location strategy can add as much as a half-percent to your bottom line each year . That’s $500/year for every $100,000 invested (which, we might add, can represent a good chunk of your advisor’s fee returned to you). Why leave that money sitting on the table?
Why You (Probably) Need an Advisor to Assist
It makes intuitive sense that, by locating your most heavily taxed investments within your tax-sheltered accounts, you can minimize or even eliminate their tax inefficiencies. But it’s not as easily implemented as you might think.
First, there is only so much room within your tax-sheltered accounts. After all, if there were unlimited opportunity to tax-shelter your money, we’d simply move everything there and be done with it. In reality, challenging trade-offs must be made to ensure you’re making best use of your tax-sheltered “space.”
Second, it’s not just about tax-sheltering your assets; it’s about doing so within the larger context of how and when you need those assets available for achieving your personal goals. Arriving at – and maintaining – the best formula for you and your unique circumstances involves many moving parts.
- Managing within the context of your bigger picture – Before we locate your assets, we determine your proper asset allocation based on your unique goals and risk tolerances. Only then is it appropriate to determine where those holdings should reside for tax efficiency.
- Planning for your goals and timeframe – Is retirement near or far? Do you want to leave a legacy? Are your circumstances likely to change in the next few years? There may be withdrawal, estate planning or other needs that override optimal asset location.
- Managing tax-sheltered accounts – What are your various tax-sheltered account opportunities: Roth versus traditional IRAs versus company retirement plans? How much room do you have in each for holding assets, and which types of holdings in which kinds of accounts are going to give you the most tax-efficient bang for your buck? How does evolving tax code impact your plans?
- Considering other tax-planning needs – We also consider the benefits of holding stocks within taxable accounts, such as the ability to harvest capital losses against capital gains, donate appreciated shares to charity, implement a step-up in basis, and take foreign tax credits. While these opportunities have more or less importance depending on your goals and circumstances, they become unavailable for stocks held in tax-sheltered accounts.
Never Heard of Asset Location? Here’s Why
We don’t see asset location frequently covered in the popular financial press. Why is that? We believe it’s in part because a large swath of the financial industry ignores the need. You’ll typically only see asset location planning offered by an advisor (like Hiley Hunt Wealth Management), who is well-positioned to provide objective counsel and oversight for your larger holdings. In the absence of this oversight, you’ll find:
- Missing Pieces – Asset location is best implemented when you and your advisor consider your total wealth and its multiple, often competing components. As you accumulate regular accounts, retirement plan accounts and financial service providers, your assets can wander far and wide over the years. It’s a challenge to organize them into a cohesive whole, especially when there is no “quarter back” advisor in place to oversee the results.
- Missing Expertise – Even if you have a handle on your varied accounts and holdings, asset location does not lend itself to a turnkey formula. There are essential guidelines, as touched on above, but it’s both an art and a science to best apply asset location within your unique, often complex wealth management needs.
- Missing Oversight – Asset location is not a set-and-forget activity. As your own goals, the market and government regulations evolve, your portfolio requires ongoing coordination to retain the desired efficiencies.
While most investors may not be aware when they are missing out on effective asset location, the resulting money they may unnecessarily lose to taxes can be very real. We look forward to continuing to incorporate asset location in its proper place within your overall wealth management. Can we answer additional questions? Let us know!
Learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management
 Michael Kitces, “Asset Location: The New Wealth Management Value-Add For Optimal Portfolio Design,” March 6, 2013; and Morningstar Tries to Quantify The Value of Financial Planning,” November 12, 2012.
July 7, 2015
As a single parent, you need to understand the financial strategies that can stretch your income and help you lay the groundwork for a secure future. Consider the following lessons to help improve your family’s bottom line:
Identify Your Goals
You can’t have a financial plan without first defining your financial goals. Start by recording all of your short-, medium-, and long-term financial goals.
For example, a child’s education could be one of the biggest expenses in your future. Setting aside money for emergencies and planning for retirement are other important goals you’ll need to keep in mind while raising a family. Don’t let day-to-day concerns distract you from such important goals. Plan for today and tomorrow.
Be a Better Budgeter
To pursue your family’s goals, it’s necessary to manage your household’s cash flow. That involves tracking income and spending, eliminating unnecessary costs, and living within the confines of a realistic budget.
For example, if you spend $2 each work day on a take-out coffee, that amounts to about $40 each month. By eliminating that minor expense from your budget, you could easily save almost $500 per year.
Say No to Debt
High-interest credit card debt can make it extremely difficult to get your budget in order. If you have an outstanding balance, consider paying it off as aggressively as possible. The savings in interest alone could allow you to address other important financial goals.
It’s also a good idea to review your credit history, commonly referred to as your credit report, to make sure that the information it contains about your past use of credit is accurate.
Capitalize on Tax-Advantaged Accounts
Once you free up some cash, apply it toward your goals. But first, learn about the savings and investment opportunities available to you. Keep in mind that tax-deferred investment accounts may enable you to grow the value of your assets more significantly than taxable accounts. Examples of such accounts include 401(k) plans and IRAs for retirement planning.
For college goals, Section 529 college savings plans. These plans are state-sponsored investment programs that allow tax-free withdrawals for college expenses. College savers who contribute to their home state’s 529 plan may be eligible for state tax breaks.
Learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE – Financial Planning and Investment Management
May 20, 2015
Jane smiled as she read the note from a recent graduate -a recipient of the scholarship fund she and her husband Bill had begun shortly after retirement. Passionate about education, the couple began giving annually years ago to their alma mater, the place where they first met as young teachers’ assistants.
Education is their lifelong passion. At the core of their belief system is a desire for all children to have access to higher education, regardless of financial circumstances. Thanks to some careful estate planning, Bill and Jane knew that the scholarship fund would continue beyond their lifetimes leaving a legacy of which they could be proud.
Bill and Jane are not unique; many of us hold philanthropic causes close to our hearts that we wish to further. However, many of us are reactive rather than proactive in our philanthropic pursuits; we dedicate our charitable resources to support charities of others rather than those about which we care most deeply.
In order to become a more proactive philanthropist, you will need to do some reflection and spend some time planning your course of action.
Identify Your Passion and Select a Charity
If you haven’t already, begin by identifying the cause(s) that matter most to you. The following questions may be helpful in this process:
- What issues are you most passionate and excited about?
- What people or events have most shaped your values and beliefs?
- What is the most enjoyable charitable experience you have ever had?
- What problems in the world do you find most troubling?
- What injustices do you see on the news that make you angry?
After identifying a cause, the next step is to determine the charity/charities to which you will contribute. If you don’t already have an organization in mind, there are a number of resources available to assist you in selecting a charity. The websitewww.charitynavigator.org is an excellent online resource for finding charities with a national focus. The site allows you to browse charities by category, view top ten lists based on various criteria, or review thousands of charitable ratings. In addition to the information about specific charities, the site also offers a host of other tips and resources to help you make the most out of your charitable giving.
If you would like to concentrate your efforts locally, Nonprofit Association of the Midlands (www.nonprofitam.org ) will be launching an online database called Community Compass in the next few weeks. This comprehensive database will have publicly available data on every non-profit organization and program in Nebraska and in 19 counties in Southwest Iowa.
Plan Your Giving
There are numerous complex tax rules regarding charitable contributions, so it is advisable to seek professional guidance to help you evaluate your own personal situation. Generally speaking, if you itemize your deductions on your tax return, gifts to qualified charities are deductible in the year they are made.
Most people simply write a check or donate cash for their charitable contributions; however you may be missing out on an additional tax savings that could help stretch your charitable dollars farther.
Rather than donating cash, a gift of long-term (held more than 12 months) appreciated stock or mutual funds will result in two tax benefits. You will be able to deduct the fair value of the stock as an itemized deduction, and you will also avoid the realized gains that would be associated with the sale of the appreciated shares.
For example, let’s say you plan to donate $20,000 to your favorite charity. To do this you plan to sell stock worth $20,000 you purchased several years ago for $10,000. After the sale of the stock, you would owe federal capital gains tax of 15% on the gain (state tax may also apply), resulting in a tax bill of $1,500.
If however you donate the $20,000 in stock to the charity, the charity will avoid paying taxes on the sale of the stock. You enjoy the additional benefit of never having to pay taxes on the stocks appreciated value resulting in a tax savings of $1,500!
Accelerate Charitable Contributions for Larger Impact
Consider giving more in years where you are subject to higher income tax rates for maximum benefit. If your income fluctuates from year to year, or you have a significant event that spikes your income for a single year, accelerating your giving may produce bigger tax savings. If you like the idea of accelerating your contributions from a tax perspective, but dislike the idea of uneven contributions from year to year, consider opening a Charitable Checkbook® at the Omaha Community Foundation (www.omahafoundation.org).
When you donate cash or appreciated securities to a Charitable Checkbook®, you are eligible for a tax deduction in the year the donation is made. You are then able to decide on the timing of your grants to charity – there is no requirement to direct a grant from your account in a given year. You can take the deduction in one year, and spread the gift to the actual charities out over several years.
With a little reflection and financial planning, you can become a more proactive philanthropist. Like Bill and Jane, you may find this approach more rewarding in a personal and financial sense.
With interest rates at historic lows and growing concern about a rise later this year, we have been fielding many questions about home buying and affordability. Most people have an idea of what they “think” they can afford but they come to us asking what they should do in comparison to where we see how our other clients allocate their cash flow.
Rules of Thumb:
Your total housing expense (principal, interest, taxes and insurance) should never exceed 28% of your pre-tax income. For example, if your household income is $100,000 before taxes, you should not spend more than $28,000 a year or $2,333 per month on housing.
Your total debt payments (housing, cars, credit cards, student loans, etc.) should never exceed 36% of your pre-tax income. For example, if your household income is $75,000 before taxes, you should not spend more than $27,000 per year or $2250 per month on all debt payments.
*Disclaimer, these are “rules of thumb” obviously you must individualize for your personal situation and their may be some circumstances where these rules do not apply or may be adjusted. For example, if you have no debt except your mortgage you may be able to spend 29% to 30% pre-tax payment, instead of the prescribed 28%.
Rock Star Status
What’s the right amount to spend on housing if you want to be a “financial rock star”? In my experience, when our clients spend between 20% and 23% which leaves cushion for meeting a 15%-16% income allocation for annual savings toward wealth building.
Let’s run an example
John and Sally have the following financial information:
John’s Earned Income: $45,000
Sally’s Earned Income: $75,000
Total Household Income: $120,000
Rules of thumb:
John and Sally’s top end housing expense: $2800 per month
John and Sally’s top end total debt expense: $3600 per month
John and Sally have no debt outside of their mortgage except for car payments. They really like to have nice, new cars so they are currently spending $1050 per month on car payments. If they want to keep these cars they should spend less than $2550 on housing to keep their total debt payments below the recommended 36% of pre-tax income ($3600-$1050= $2550).
Assuming that John and Sally choose a 30 year mortgage with an interest rate at 4.50% APR, pay 2.2% per year in property taxes and $1450 per year in insurance then they could afford a $345,000 property at the high end of our rule of thumb. If they want to shoot for “rock star” status and have housing expense be only 21% of their pre-tax income they should spend $285,000 on a property with the same assumptions as above.
|High End||Rock Star|
|Monthly Principal & Interest||$1,748.00||$1,445.00|
|Monthly Property Taxes||$633.00||$523.00|
It comes down to values
Ultimately, the amount you choose to spend on housing comes down to a values decision. We believe that great financial planning should enable you to spend lavishly on the things you care about and cut mercilessly on the thing you don’t. Money is a finite resource, regardless of how much you have, and there are an infinite number of things you could choose to spend on. The trick is to determine what you value enough to spend your hard earned resources on. At Hiley Hunt Wealth, our role is to help you find that place where your money and your values meet.
May 11, 2015
Over the years, one of the most common mistakes we have seen related to people’s financial affairs has been the incorrect naming of beneficiaries. Sometimes this is due to a lack of understanding around how a beneficiary designation works, or other times it may simply be due to an oversight. Whatever the reason, this can be a very costly mistake that is easily avoided.
Financial assets such as IRAs, life insurance policies, variable annuities, and 401k or other company retirement accounts are all payable based on the beneficiary designation. Many people do not realize that beneficiary designations supersede bequests made in a will or living trust. We often talk to people who believe they have all of their affairs in order because they recently created wills or trusts. Upon further review of their beneficiary designations, people sometimes find that those designations do not match up with the intentions laid out in their estate planning documents.
The most common reasons for these issues are due to people not updating their beneficiary designations after life changing events. Perhaps a sibling was named the beneficiary of life insurance policy prior to the insured’s marriage, or the contingent beneficiary of an IRA is missing the youngest child because they were not born when the account was opened. Whatever the reason, the best way to avoid these mistakes is to check your beneficiary designations on all relevant accounts on a regular basis.
When discussing beneficiary designations the focus is often on “who” gets what, but equally important may be “how” they get it. For parents with younger children, this aspect can be extremely important. We often like to ask new clients who have younger children whether or not they would be comfortable with their children receiving $1 million dollars when they turn 21 years of age. Generally the answer is a resounding NO! However, these same parents often name their children as the contingent beneficiaries of their life insurance and retirement accounts. Should both parents be in a fatal accident, the contingency we just discussed would quickly become a reality. This reality can be prevented with proper planning. For many parents, going through the estate planning process can be the solution to these issues. A common strategy for this situation is the creation of a trust upon the death of both parents. The trust is then named as the beneficiary of any policies or accounts that utilize a beneficiary designation. This then allows for the parents to both provide for and protect their children as they grow and mature into adults capable of handling their own affairs.
Another important reason for naming a beneficiary of an IRA or retirement account is it gives your beneficiaries the ability to “stretch” the distributions of those accounts over their own life expectancy. If your beneficiary is your spouse, he or she has the option of treating your IRA as his or her own which would postpone required distributions until the age of 70 ½. If your beneficiary is a non-spouse, regardless of age, he or she will need to begin taking distributions from that account no later than December 31st of the year after your death. However, if you have set things up correctly, your beneficiaries will be able to take those distributions over their own life expectancies which can dramatically enhance the value of the account due to continued tax deferred growth.
To accomplish this, you must have a “Designated” beneficiary on file. This means that you specifically name that person on the institution’s beneficiary paperwork. If you fail to name a beneficiary, someone will inherit your account assets but it may not be the person you would have wanted. Furthermore, not naming a beneficiary will likely result in not being able to utilize the stretch provision. The rules around inheriting an IRA are very complex and tricky. I would suggest you talk to us when dealing with this situation. With more and more people accumulating wealth in investment vehicles such as IRAs and 401ks, proper beneficiary planning has become a critical, yet often overlooked, component of a financial plan. Take time to talk with your advisor about this issue to ensure that your hard earned wealth is protected. You owe your beneficiaries that much.