Charting
the Course

We all know about the stages in life, but it’s sometimes easy to overlook the fact that we live through stages in our financial lives as well.

That starts with our first job, probably in high school, and it continues as we begin our careers, then get married, purchase a home, start a family, put children through college, plan for retirement and so on. Our lives and our financial lives tend to blend, so we frequently overlook the difference between the two.

But there is a difference. And just as we envision the long-term paths that we would like our lives to take, we also should consider our financial futures as well. We should consider things like savings strategies, investment strategies, college savings plans, tax strategies, retirement planning, estate planning, and legacy planning.

And it’s never too early to start, because there are plenty of people who have started later in life, and they’ve ended up saying, “I wish I knew then what I know now.”

Technology has driven industry changes that have made financial information and resources more widespread and accessible, opening the door for more people to invest, often encouraging saving and investing at younger ages – which is great. And you can read about the differences between a traditional IRA and Roth IRA, nuances of pre-tax 401ks or Roth 401ks, which investments create income tax, and which are taxed at capital gains rates, etc. all day long, but how will you know which is right for you and your situation?

Planning is different than investing, and regardless of the point in a person’s financial life, it’s a good idea to talk to a financial advisor about savings strategies, investment vehicles, tax liabilities, and ways to mitigate future taxes. Financial education is important, and people should seek out financial professionals who are genuinely interested in learning about their needs, goals, objectives, and what keeps them up at night. Ideally, people can walk away from these conversations with more peace of mind and a better understanding of the value that a trusted advisor can often bring.

It’s easy to get complacent with how we are saving and investing now. But before investors and savors get too far down the road, they should reach out to a professional who can help guide their path with transparency and integrity, so they won’t end up like so many others proclaiming the age-old mantra.

“I wish I knew then what I know now.”

For investors who like roller-coaster rides, the beginning of 2023 must have felt like a trip to Six Flags. The markets were full of so many twists, turns, ups and downs that people were jumping out of their cars right and left.

Jumping out of a moving roller coaster is never advisable, but considering all the fear people were feeling about a faltering economy, craziness in Washington, and a world at war, you can see why so many investors wanted out.

But long-term investing is a lot like reading a book or watching a movie. You have to stay with them to know how they turn out, and investors who held on in 2023 were rewarded with a happy ending, seeing the S&P 500 up 20% for the year.

Riding a roller coaster is an emotional experience, and that’s what makes them fun. A few minutes of fear and excitement and you’re grateful to be back on solid ground. While long-term investing might seem like riding a roller coaster, there really is no similarity.

Successful, long-term investors follow their plans, not their emotions. They know financial markets will be volatile from time to time, but that’s just part of the journey, which can last a lifetime. And they know that the amount of time they spend in the market is important because the longer they stay in, the probability of a negative return decreases.

So, looking back on the year, 2023 started with plenty of negative news along with large helpings of scary commentary predicting recessions, joblessness, and continuing inflation. Some people yielded to the fear, cashed in, and put their money in safe havens with little risk and little reward.

They believed they could climb back into the market when conditions got better, but seasoned investors know that timing the market can be as futile as catching one of those roller coasters. By the time they see better conditions have arrived, the bull market has already passed them by and is screaming down the track. The saddest part is that those who opted out for a 5% money market investment could have finished the year with five times more than what they earned, and that is wealth they will never recover.

So, as we continue our investment journey into 2024, we should avoid the prognosticators, the doomsayers and the pundits who try to predict what’s over the horizon. Because the evidence tells us that no one knows what markets will do from month to month. And when the world is rocked by wars, politics, and economic turbulence, it might help to look outside.

You’ll see trucks hauling goods, trains carrying freight, and hungry consumers crowding into drive-through lines across America. That’s what it looks like when money is in motion, and when money is moving, our economy is working.

And remember that roller coasters can be full of surprises and so can markets, but motion and turbulence are part of life, and the only way to climb higher is to keep moving.

While saving, investing, and planning are at the foundation of secure, long-term retirement portfolios, the close relationships and personal connections financial advisors share with their clients are at the center of what’s important.

Sometimes advisors can get caught up in market returns, advising, or planning, and look up only to realize they’ve forgotten a special birthday, new grandchild, or anniversary. As an advisor, beyond the fiduciary standard to place clients’ interest before your own, having a genuine interest in the personal lives of clients and their families is important for strong long-lasting relationships.

Money is personal, and many people avoid talking about it. Advisors can be tasked with hosting difficult meetings and communicating information to family members that the client is reluctant to discuss themselves. Client-advisor relationships that are formed through and based on trust are crucial to planning for future generations.

Trust grows when an advisor can anticipate a client’s needs and resolve problems before they ever materialize. That kind of personal attention and focus is the hallmark of a good advisor. When clients know that their advisors are paying closer attention to their portfolios than they are, it allows them to sleep better at night knowing they are in good hands.

Some financial decisions aren’t made based on numbers in a spreadsheet. A lot of them are made with and driven by feelings and emotions such as fear and anxiety. Making difficult decisions and being faced with challenging circumstances are inevitable, and having an advisor whom you trust to help navigate those situations is valuable when the time comes.

Financial advisors are sometimes the first to hear news about an unexpected surgery or a lost job. They can be called on to help sort out Medicare and Social Security applications or to help with an estate plan. Questions can come up about selling a home, buying a home, or even repairing a home. While advisors may not have the expertise or the credentials to help with home repairs, the good ones know people who can.

When the advisor role extends beyond financial guidance and provides comprehensive support and understanding through the complications and celebrations in everyday life, true value is created.

I had the good fortune to work with an award-winning veteran in the Oklahoma City financial community, and he would always remind me, “this business is about the people”.

The holidays are the season when charitable giving goes into overdrive with nearly half of all annual giving reported during the month of December.

And while a lot of people think tax benefits are the primary motivator behind giving this time of year, research suggests there’s more to it than that. People who give tend to feel satisfaction, and they experience joy from helping others.

While it’s good to know that people are going to give, whether there’s a tax benefit or not, we can still take a moment with a financial advisor and look for ways to give even more to charity by considering our tax options. Because the fact is, donations don’t always lead to tax savings at the end of the year.

That’s especially true for people who file standardized tax returns. By taking a standard deduction, we can lower our income by a fixed amount. A married couple who files jointly, for example, is allowed to take a standardized tax deduction of $27,700 in 2023.

While that’s the best option for millions of people, it doesn’t necessarily lead to end-of-year tax benefits from charitable giving. Consider someone who takes a standardized deduction that decides to contribute $10,000 to charity. While that might seem like a big gift, it still may not be enough to exceed the standard deduction on the individual’s tax return, so there would be no potential tax benefit.

Fortunately, there are measures within the tax law that can result in tax benefits from giving, even when people tend to take a standard deduction.

For example, people currently 73 or older must take Require Minimum Distributions (RMD) from their individual retirement accounts (IRA). While some choose to donate that money to charity, the RMD is considered taxable income.

But they can avoid reportable taxable income by transferring the money directly to a 501(c)(3) organization through a Qualified Charitable Donation (QCD), which is a financial strategy to help people donate their required distributions. The QCD permits people who are older than 70 ½ to avoid the income taxes from their distributions by allowing the money to bypass the account holder and flow straight from the IRA to the designated charity. A financial advisor can help execute the process.

For those who don’t face required distributions, bundling is another way standardized tax filers can realize a tax benefit from charitable contributions. A $10,000 charitable donation may not be enough to exceed an individual’s standard deduction in any given year. However, by bundling two or three years of annual donations into one year a taxpayer can utilize the itemized deductions over a standard deduction for that year, which could produce additional tax benefits over that two- or three-year period. A good way to do that is to open a Donor Advised Fund (DAF) and contribute a couple years of charitable donations in one year, which allows the taxpayer to recognize the charitable deduction immediately. The DAF funds can be distributed to qualifying charities whenever the account holder chooses, and a much larger gift can result from investment earnings or interest on those funds.

Those are two examples of how tax strategies can open the potential for hundreds or even thousands of dollars in tax savings that might otherwise slip away. As we head into Christmas, it might be a good idea to take the extra step with a financial professional. It might just lead to bigger gifts during the holidays, and an even happier season for everyone.

Sometimes Uncle Sam gets a bad rap. As a metaphor for the federal government, he’s frequently the target of wry jokes, complaints, and criticism.

Maybe the worst of it comes when the Internal Revenue Service (IRS) is involved, what with the rules, regulations and all those taxes. It’s a tough gig for a tough guy, but buried under all that red, white, and bureaucratic garb is a big heart with some soft spots.

Take capital gains taxes, for example. As investors, we take risks and buy stocks, and if we’re fortunate, the value grows far beyond our stock’s original price. We can either hold the stocks and possibly watch their value grow even more, or we can sell them, and reap the rewards. But those who sell will soon face Uncle Sam with his hand out, asking for his share – the capital gains tax payment.

Selling stocks can be necessary, especially when investment portfolios lose balance over time and need to be adjusted to protect against market volatility, forcing investors to sell, even if it results in extra tax liability.

But here’s where Uncle Sam’s soft heart shows through. Investors can solve their portfolio problems by gifting some or all of their problem stocks. They can give the stocks to children, grandchildren, close friends, or anyone they choose. By doing so, they can benefit their loved ones with a gift of great value, and under IRS rules, the capital gains tax liability goes to the gift recipient.

That can solve the investors’ tax problems, but what about the loved ones? If they decide to sell their gift, they may need to hold onto a percentage of the proceeds to pay the government what’s due.

But there may be a silver lining for the loved ones as well. Depending on their annual income, loved ones may not be required to pay capital gains taxes. Under the law, individual filers in 2023 do not have to pay capital gains taxes if their total taxable income is $44,626 or less. For married couples who are filing jointly, the taxable income threshold is $89,250 or less. And when qualifying charities receive stock gifts, they never have to pay capital gains taxes.

So, when it comes to capital gains taxes, Uncle Sam has a soft spot, after all.

Who knows what he’s thinking, but maybe he likes it when investors give shares to charities and when parents and grandparents pass equities down to children. Perhaps he supports investors who share some of their gains to support the common good, and maybe he thinks it’s a good idea to teach young people about the power of investing and the long-term benefits of compounding interest.

In light of all that, it looks like capital gains taxes really aren’t for everyone. That’s something to keep in mind next time we want to crack a joke, complain, or criticize. If we look deep enough, even Uncle Sam has a softer side.

Who knows why tax law is so complicated? Most of us blame the IRS, but those who understand the history behind the whole thing point to Congress. Regardless of who’s responsible, most everyone who’s ever filed a return will agree that the U.S. tax code is an annoying web of confusion.

It’s hard enough dealing with the meat and potatoes, but the tax filing process often comes with side dishes that require even more scrutiny and expertise.

While the menu of complications is too long to cover outside of a CPA’s office, there is one fascinating example that’s worth looking at, especially for those facing required minimum distributions from their IRAs or other retirement plan accounts.

Once we reach a certain age, the law requires us to take minimum distributions from specified retirement savings accounts, such as IRAs, simplified employee pensions and others.

The government has tables that tell us how much money we must pull from those accounts each year, and there are penalties for those who don’t. While required minimum distributions (RMD) do not present a problem for some, they can be disruptive for others by pushing income levels into higher tax brackets or by eliminating certain tax deductions.

Fortunately, there’s a way to avoid potentially negative tax ramifications without facing IRS penalties. A provision of the Pension Protection Act of 2006 established the qualified charitable distribution (QCD) allowance. Under the provision, individuals who are 70½ years old or older can satisfy the minimum distribution requirement through direct transfers from their retirement plan accounts to qualified 501(c)(3) nonprofits.

Those contributions can go to a single nonprofit or the money can be distributed to multiple organizations, but the amount of the total distribution cannot exceed $100,000 annually. There are several considerations related to the QCD allowance, so it would be a good idea to discuss them first with a tax professional, but there are a few basic rules to keep in mind. While churches and 501(c)(3) nonprofits would be eligible to receive qualified charitable distributions, there are other types of charitable organizations that do not.

For example, private foundations, support organizations and donor-advised funds do not qualify for QCDs. Also, individuals are not allowed to benefit directly from their QCDs. In other words, QCD money can’t be used to purchase items at charity auctions or to buy tickets for charity golf tournaments.

Furthermore, individuals are prohibited from double dipping and claiming their QCDs as tax deductible contributions. Remember, the law allows the fulfillment of minimum distribution requirements without having to pay more taxes under an elevated income tax rate. That’s the tax benefit.

Aside from the tax value, giving to others is enormously important to many people. So, we could say the QCD allows people to have their cake and eat it too. They can give to their charities, and they can avoid paying higher taxes while they’re at it.

Now that’s a rule we all can understand.

As parents, we spend a lot of time thinking about grades and manners. We spend Saturday mornings at the soccer fields or the ball park. We worry about friend groups; we plan birthday parties, and we attend parent-teacher conferences.

There’s a lot that goes into teaching our kids the fundamentals of life through the plethora of educational and extracurricular activities that crowd into our daily schedules. But there is one fundamental life lesson most parents overlook, and that’s financial literacy.

Children can’t win a trophy for financial literacy, and they’re not going to be graded on it in school. In fact, we don’t meet many parents who brag about how financially literate their children are. But, a child’s knowledge of earning, saving, investing, and spending will be more important to them later in life than anything they’ll learn on the soccer field, in band practice or in history class.

There are many ways we can teach our kids about money, and it’s important that we are proactive, deliberate, and consistent with our plans because it will pay dividends for our children in the end.

Millions of children across the country receive allowances from their parents, and that’s a good start, but how many are actually earning the money? Children benefit more when there’s a job, or a responsibility that goes with it. Learning about the sacrifices required to earn money is important, but there are other lessons to teach them as well.

Most kids will spend money as fast as they earn it, so it’s the parent’s job to teach them how to save, and we can use incentives to help with that. Employers frequently offer 401(k) plans that match employee contributions by a certain percentage. Parents can make similar arrangements with their children. When a child saves a dollar, the parent can match it with a dollar, 50 cents or some other amount, and once the money is in the bank account, it shouldn’t be easy to take out, just like a 401(k).

When children reach high school and college and are earning money from jobs like baby sitting or mowing lawns, consider setting up a Roth IRA account. That will allow them to continue saving, investing, and watching their nest eggs grow into substantial sums that could be available for future expenses, such as education or a first home.

Through these lessons, children are likely to grow into young adults who understand the importance of saving and investing because they will have observed the power of compounding interest and potential gains that can come through investing. You will have taught them critical habits that could create enormous value for the rest of their lives.

While we will always be grateful for soccer practices, baseball games and English classes, let’s not overlook the allowances, the jobs, the saving and investing. Because most kids never make it to the major leagues and only a few end up writing the great American novel.

But if they apply what you teach them about earning, saving, and investing, they might end up being millionaires, just the same.

Passing assets on to those we love can be a wonderful thing and a great accomplishment, knowing the financial resources we leave behind could have a positive or even a transformative impact on those we care about most.

But the process of wealth transfer should begin long before we pass away because planning and communication can help increase the likelihood of successful transitions.

While that may seem like common sense, recent studies show that 64% of wealthy individuals say they have not talked to their families about passing on their assets. And 97% of failed wealth transfers are attributed to either a breakdown in family communication and trust, inadequately prepared heirs or those who have no established family mission.

Without communication, it is easy to imagine the confusion, misunderstanding and emotional hurdles individuals could experience after receiving large inheritances, and little information to go with them.

Whether the estate is worth thousands of dollars or millions, we should start the conversations early and then keep them going over time. Communicating with our loved ones isn’t just about letting them know what to expect, it’s helping to prepare them for when that day comes.

Though it may not be a particularly sympathetic problem, the fact is sudden wealth can be a detriment to those who aren’t prepared. This unfortunate reality is reflected in an oft-cited study by Vic Preisser and Roy Williams, which found that that 70% of families who inherit wealth lose their fortunes by the second generation and 90% lose them by the end of the third generation.

But it doesn’t have to be that way. Estate plans do not necessarily guarantee against wealth destruction, but they can be helpful. Trusts have been employed by high-net-worth families for generations, but today, they are far more commonly used, and that’s a good thing. Through trusts, we can designate how we would like assets to be used and control when an heir receives an inheritance, which can increase the chance the assets will be properly managed.

Meanwhile, we should make it a priority to talk with our heirs about the hard work that was required to build or steward the family’s wealth and to pass along the financial knowledge necessary to keep it. If there’s a trust, explain how it’s set up and talk about its provisions and why they are there. Have a conversation about who the players are (like the trustee), their powers and the role they will play.

For some families, these conversations might be difficult. A lot of people don’t like to talk about money, much less mortality. Older generations may think the promise of inheritance will deplete motivation, and younger generations may fear bringing it up may cross the line of seeming entitled. The discussions can also take time, and in a busy world where family members are often spread across the country, the right moment can be hard to find.

But the price of procrastination can be high when heirs are left with too many questions, and not enough answers, leaving them vulnerable to poor financial decisions.

So, open the door and get the conversation started. Consider and share your visions of wealth preservation and generational enrichment. Talk about all the possibilities: education for the grandchildren, seed money for a new business, charitable giving and continued long-term investment. A simple phone call or a lunchtime chat might be all it takes to start a plan and build for the future.

When most people think about sailing on the open seas, they rarely get past the image of big sails and the ship’s captain at the helm, barking orders to crew members laboring on the deck, but the fact is, sailing has changed a lot in recent decades.

While sails are still big, captains are still loud and crews still work hard, technological advancements in radar, navigation, and other facets of operation have taken a lot of the danger and uncertainty off the table. Today, captains and crews are spending more time on the art of sailing and less time looking at paper charts and combing the horizon for dangerous weather.

A similar shift is underway in the world of finance, where the rapid development of artificial intelligence (AI) is opening the floodgates to enormous volumes of information available at a moment’s notice. If you thought the internet and smart phones were revolutionary, wait until you see what’s coming around the corner.

As we move further into 2023, we are seeing a surge in groundbreaking AI technology releases from companies such as OpenAI, Microsoft, and Google. The wave is already transforming our daily workflows, ranging from business email communications, PowerPoint presentations, and complex spreadsheet and database analysis to personal tasks, such as booking travel reservations, personal services and grocery delivery.

Soon, we can expect to see even more profound changes, as nearly every aspect of traditional office operations can be affected by this powerful technology.

And like those sailors on the open seas, financial advisors will soon have more time to do what they do best, manage client portfolios, build relationships, and create value. Following the recent failure of Silicon Valley Bank, we spent half a day combing through data to verify whether our client portfolios were impacted by the financial crisis. But, with this new technology, we may be able to answer questions like that within moments, not hours.

By now, most of us have probably read about AI. It boils down to breakthrough technology allowing more efficient communication between computer systems, which is opening more pathways, allowing information, analysis, and functionality to flow at greater and greater speeds. In the early stages of the internet, former Vice President Al Gore used to talk the information superhighway. Today, AI is giving us a latticework of superhighways, and soon, any of the information those roads are carrying could be in our offices within minutes.

For clients, that means questions could be answered more rapidly, presentations could be more informative, and advisors could be more available with more information to make faster, smarter decisions.

Like the open seas, navigating financial markets will never be without risk, but AI is becoming a resource we can use to counter uncertainty and steer away from storms, just like the electronic charts and weather radar sailors began using all those years ago.