Successful families agree that higher education is essential to the success of future generations, and they also realize that costs are only going to continue to rise. If paying for your children or grandchildren’s tuition is a must (similar to a liability), and you know the exact number of years until they start undergraduate or graduate school (their investment horizon), why not approach saving for their education like you would saving for retirement?
One such way to tackle this goal is through the use of 529 college savings plans. 529s are unique in that there are no income restrictions on contributions, and the contributions can grow and be withdrawn tax-free as long as the distributions go toward qualified expenses (tuition and fees, room and board, books, supplies, and equipment). However, the benefits to your family go much further.
In addition to providing Roth-like advantaged growth and withdrawals, 529 plan assets are also removed from the owner’s estate. This means if a parent or grandparent, who owns a 529 plan with a family member as a beneficiary, were to pass away, the value of the 529 plans would not be included in their gross estate1. And, the total contributions as of 2016 to individual 529 plans can be as high as $235,000 to $452,210 (Pennsylvania) per beneficiary, depending on which state you choose to open the plan. read more…
As consumers, we love low oil prices for the savings we receive at the pump. As investors in energy companies, we love high oil prices for the earnings and dividends.
Over the past 18 months, we’ve seen oil prices fall precipitously from around $100 per barrel to below $40 per barrel as of year-end. Similarly, big oil players such as ExxonMobil, Chevron and BP have seen declines in their stock prices of 23%, 31%, and 41%, respectively. Is this a value investment opportunity? Could be. Can oil prices fall further? Possibly. However, why worry or attempt to time or choose specific sectors of the stock market to invest in like energy, technology or healthcare? Just like other market events, it would be difficult, if not impossible, to consistently predict drops like we’ve seen in oil, and to determine how long prices will stay this low.
Instead, let’s consider how the prolonged drop in oil prices and the corresponding decline in energy stocks play into the overall stock market indices. For the MSCI All Country World Index (ACWI), the energy component makes up just 6.1% of the overall index. Over that same 18-month period, the global energy sector fell in price by 43%, while the overall MSCI ACWI declined by just 7%. If you owned only a market index, which would remove company- and industry-specific risk from your portfolio, the decline would have been dampened. In fact, when oil prices drop, consumers use those savings from the gas pump to buy products and services that boost other parts of the economy. In addition, industries whose costs are heavily impacted by oil prices, such as airlines and transports, greatly benefit from this shift. This leveling effect provided by investing in various indices can more importantly help keep you from falling off course from reaching your financial goals.
As a result, we continue to believe in the long-term benefits of broad-based diversification provided by investing in indices across the globe.
An investment portfolio is typically described as a basket of stocks and bonds invested across the global markets. These securities usually have sufficient liquidity where they could be sold in a relatively short period of time to receive your money. While not all investments fit this description perfectly, most investors’ portfolios reflect these characteristics, whether that portfolio is invested through an assortment of mutual funds, exchange traded funds or individual securities. In return for capital, the investor hopes to earn capital gains, dividends and interest on a regular basis. By that definition, should real estate holdings be considered as part of your investment portfolio?
Your personal residence has different characteristics. First off, it provides shelter, so it can be considered a necessity. Homes can take anywhere from a few weeks, months or even years to sell, so it wouldn’t be considered a liquid asset that can be sold readily. Also, a home is located in a particular neighborhood, city, state, region and country, so it’s exposed to location-specific risks. You don’t receive dividends and interest annually from owning your home. In fact, you spend money on maintenance, mortgage payments, property taxes and insurance. You can, however, generate capital gains, but that occurs only if your home is sold for a gain. Often, sellers turn around and use the proceeds to purchase a new residence.
From the description above, an investor’s personal residence lacks marketability and diversification, and it requires additional inputs of capital to maintain. Equity real estate investment trusts (REITs), on the other hand, are investable assets and provide exposure to commercial, agricultural, industrial and residential real estate across the country and most parts of the world. Families who own their homes may also own a few rental homes, but most don’t have expertise and resources to own commercial, industrial and agricultural real estate. Exchange traded funds and mutual funds can track equity REIT indices (i.e., FTSE NAREIT) and provide a low-cost, inflation fighting, diversified option with daily liquidity and low investment minimums.
Similar to the reasons for including other asset classes in an investment portfolio, such as emerging markets equity or reinsurance, exposure to real estate through equity REITs adds incremental value to the portfolio. This is because equity REITs are fundamentally different from other asset classes due to differences in taxation, correlation and inflation-fighting characteristics. As a result, we believe equity REITs are better suited than a residence for a well-balanced, diversified portfolio.
In a previous Merriman Insight article, we wrote about the “free spousal” strategy for married couples. Shortly after that article was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd. The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date.
Many recent articles have been written about the new law changes, so we won’t reinvent the wheel here. Instead, we’d recommend this article for a detailed discussion of the changes. The main highlights are:
- The new rules are not retroactive; anyone currently employing a “file and suspend” or “restricted application” strategy will continue to be grandfathered under the old rules, as well as those who “file and suspend” by April 30, 2016 or who plan to use a “restricted application” and are at least 62 by the end of 2015
- Survivor benefits and claiming strategies are unaffected by the new rules
- “File and suspend” claims initiated after April 30, 2016 will now suspend all benefits based on the claimant’s earnings record (including spousal, ex-spouses, and dependent benefits)
- “File and suspend” claims initiated after April 30, 2016 will no longer allow the claimant to reinstate their benefits back to the original suspension date and receive a lump sum payment
- “Restricted applications” for spousal-only benefits will no longer be available to those who are not at least 62 by the end of 2015
If you believe the new rules will impact your situation, we recommend contacting your financial advisor to review your options.
Here is yet another example of why we prefer to use Dimensional funds in our MarketWise portfolios:
Morningstar recently issued a new Stewardship Grade for DFA. The firm’s overall grade–which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history–is an A.
Like Merriman, Dimensional believes in the efficiency of markets, places a focus on academics and solid research, and doesn’t give in to chasing investment trends. Read Morningstar’s full analysis of the firm’s corporate culture here.
Shortly after the article below was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd. The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date. Read the highlights of the new law changes here.
In helping our clients make smart decisions with their money, we often spend a lot of time on the subject of Social Security. The rules are complex, but the decision of when and how to claim Social Security can have a big impact on the quality of life for most families. Thus, it’s a very important decision with long-term ramifications. The good news is your advisor can help you evaluate your options so you’re well positioned to make the best decision for your particular situation.
Evaluating all of the available claiming strategies for Social Security is beyond the scope of this article (and would bore most people to tears), so I’d like to focus on one particular strategy that I think has tremendous value: the “free spousal.” I’ll describe it using a real life example, although I rounded the numbers for simplicity.
“Henry” and “Wilma” are both 66. Henry is still working, and although he is qualified to claim Social Security benefits now, he decides to wait because they’re able to live comfortably on his salary alone. His benefits at age 66, which is full-retirement age (FRA) in this example, would be $2,700 per month, but delaying the benefits will earn him 8% more each year until age 70. By that time, his benefits would jump to around $3,600 per month.
Wilma is retired and has her own Social Security benefits. She’d receive $1,800 per month if she claims at FRA, but $2,400 if she waits until age 70. Since they don’t need the extra money right now, she also decides to wait.
Everything seems fine, right? They’ll receive their higher benefits at 70, which will maximize their monthly income for the rest of their lives. I’d wager that most people would be thrilled in this situation!
But they’re leaving free money on the table.
Henry should “file and suspend” his benefits at FRA. Then, Wilma should file a “restricted application” to claim her 50% spousal benefit against Henry’s earnings. By restricting her claim to just the spousal benefit, Wilma’s own benefits can continue to earn the delayed credits. At 70, they can both claim their own higher benefits, just like they had always planned to do. But by jumping through a few hoops, Wilma could receive a spousal benefit of $1,350 per month between ages 66 to 70 for free—that’s an extra $64,800 in their pockets over the four years—without impacting their original plan. Hence the term free spousal!
There are some important steps in this strategy that must be adhered to strictly. First, Henry must file and suspend his benefits before Wilma submits her application because Wilma cannot claim spousal benefits unless Henry has started his claim. The “suspend” part of this strategy allows Henry to continue earning the 8% per year delayed credits, even though he has now filed for benefits. Secondly, Wilma must clearly indicate that her claim is restricted only to the spousal benefit and not her own benefits based on her earnings history. Although she is entitled to both, she can only ever receive one at a time, and while her own benefits are higher than the spousal benefit ($1,800 at FRA instead of $1,350 for the spousal, in this example), if she elects to take her own now, she would lose out on the 8% annual increase.
If the strategy and steps above are a little confusing, that’s okay. The goal of this article isn’t to fully explain the free spousal strategy; instead, it illustrates one of the many planning opportunities your financial advisor can help you with that go beyond your investments. Maximizing your Social Security benefits can be complicated, but you have a wonderful resource at your disposal to help make this very important decision. We’re always available to help!