Why Rebalance?

To restore to the correct balance.

By Tim Flick, CFP®

In short: The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation. A portfolio’s asset allocation is the major determinant of a portfolio’s risk-and-return characteristics. Yet, over time, asset classes produce different returns, so the portfolio’s asset allocation changes. Therefore, to recapture the portfolio’s original risk-and-return characteristics, the portfolio should be rebalanced.

What is Rebalancing? Rebalancing is the process of realigning the weightings of your portfolio assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.

For example: say our original target asset allocation for your account was 50% stocks and 50% bonds. If the stocks performed well during a period, it could have increased the stock weighting of the portfolio to 70%. The investor could then decide to sell some stock and buy bonds in order to get the portfolio back to the original target allocation of 50/50.

While the term “rebalancing” has connotations regarding an even distribution of assets, a 50/50 split is not required. Instead, rebalancing a portfolio involves the reallocation of assets to a defined makeup by the investor. This can be a target allocation of 50/50, 70/30 or 40/60…

Often these rebalancing steps are taken to ensure the amount of risk involved is at the investor’s desired level. As stock performance can vary more dramatically than bonds, the percentage of assets associated with stocks will change with market conditions. Along with the performance variable, investors may adjust the overall risk within their portfolios to meet changing financial needs.

Rebalancing for Diversity? Depending on market performance, investors may find a large number of current assets held within one area. For example, should the value of asset class X increase by 25% while asset class Y only gained 5%, a large amount of the portfolio is tied to asset class X. Should asset class X experience a sudden downturn, the portfolio will suffer a higher loss by association. Rebalancing lets the investor redirect some of the funds currently held in asset class X to another investment, be that more of asset class Y or purchasing a new asset class entirely. By having funds spread out across multiple asset classes, downturn in one will be partially offset by activities of the others, which can provide a level of portfolio stability.
In conclusion: With the choice of inadvertently taking on more risk over time or rebalancing back to our intended risk model, we choose to rebalance.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.
www.cornerfi.com

Talking to Your Kids About Your Wealth

How can you convey its importance and its meaning?

Provided by Tim Flick, CFP® 

What accounts for the difference? It may boil down to values. When the right values are handed down, a young adult is poised to hold wealth in high regard and receive it with maturity.

Some parents never tell their children how wealthy they really are. This is not uncommon: in a recent U.S. Trust survey of households with investable assets greater than $3 million, 64% of those polled indicated that they had said nothing or nearly nothing about their net worth to their kids.1

This is also a risk. In hiding the details and avoiding the talk, parents may see a child grow into a young adult who is ill-prepared to understand and manage wealth.

One good step is to set some expectations. After your kids learn how wealthy you are, they may expect your money to play a financial part in their personal lives, especially in adolescence. Tell them, frankly, what you are willing or not willing to do and why. Where will the family wealth come into their lives? Will you want to fund their college educations, or help them with car payments? You may or may not want to do that. 

You can help them see that wealth has meaning. Some financial professionals like to ask their clients the question, “what does having money mean to you?” In other words, what should that money accomplish? What dreams should it help you pursue, and what fears or worries could it be used to address? How does having money fit into your vision of success – is it integral to it or inessential to it?

It has been said that money never transforms character; it simply reveals it. The responsibility of handling wealth amounts to a test of character. Thoughtful conversations with your children about the meaning of wealth may help them pass that important test when the time comes.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – reuters.com/article/us-money-generations-strategies-idUSKBN0OX1RH20150617 [6/17/15]

One Couple, Two Different Retirements?

After many years together, some retired spouses may find their daily routines far apart. 

Provided by Tim Flick, CFP®

 

When you see online ads or TV commercials about retirement planning, do they ever show baby boomer couples arguing? No. After all, retirement planning is about the pursuit of a happy outcome – a fun and emotionally rewarding “second act” that spouses and partners can share.  

Realizing that goal takes communication. As you approach retirement, you may not be who you were at 30 or 50. You and your significant other may want different daily lives once you retire. This is a frequently ignored reality in retirement planning. In preparing to retire, you might want to consider your individual preferences and differences when it comes to these factors:

How you spend your days. What does a good day in retirement look like to you? What does it look like for your spouse or partner?

Social engagement. How much time do each of you want to spend working, volunteering, or socializing? Your preferences may differ.

Your health. If you contend with serious health issues, you may define a “good day” in retirement much differently than your spouse or partner does.

Your spending. Where will your retirement income go? What will it be spent on besides basic living expenses? Your discretionary spending priorities and those of your spouse could vary. If they vary widely, this could be the source of some drama.

Your time alone. Some couples build businesses together or work in the same office or practice for years; others spend just a few hours per day around each other for decades. In retirement, you will likely be around each other for more hours of the day than when you worked. You will need to decide how much “me time” you need.

Your roles. Have you done most of the cleaning around the house? Or tackled most of the home improvement projects? Should it remain that way in retirement?

To some extent, your spouse or partner’s vision of retirement will vary from yours. It could vary 1%, or it could vary 99%, but some variance is almost certain. It need not breed discord so long as you recognize the following three truths.  

Some of your shared retirement savings will be used to fulfill individual dreams. The money you have saved and invested will provide financial support for you as a couple, but you also must concede that some of those dollars will be spent relative to each other’s individual goals, passions, and pursuits. The same applies for your retirement income. 

You will not automatically see money the same way. Those online ads and TV commercials would have you believe that some kind of magic happens once retirement starts, leaving every retired couple to walk along the beach smiling, laughing, and in total agreement about their future. Yes, retired couples do disagree about money; they also learn to overcome those disagreements through understanding and compromise.

Many things are more valuable than money in retirement. Time is probably your most valuable asset, and your health and relationships are close behind. So, whether your retirement savings falls short of or far exceeds the median baby boomer amount of $147,000 (as identified last year by the Transamerica Center for Retirement Studies), keep what matters most in mind.1   

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

  

Citations.

1 – forbes.com/sites/forbesfinancecouncil/2017/05/15/retirement-its-not-as-simple-as-it-used-to-be/ [5/15/17]

 

Annual Financial To Do List

todo-cornerstone_0000_todoblogimage    Things you can do before & for 2017

Provided by Tim Flick, CFP®                

What financial, business or life priorities do you need to address for 2017? Now is a good time to think about the investing, saving or budgeting methods you could employ toward specific objectives. Some year-end financial moves may help you pursue those goals as well.

What can you do to lower your 2016 taxes? Before the year fades away, you have plenty of options. Here are a few that may prove convenient:

*Make a charitable gift before New Year’s Day. You can claim the deduction on your tax return, provided you itemize your 2016 tax year deductions with Schedule A. The paper trail is important here.1

If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2015 ends, you can only deduct $500.1

Are you gifting appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the investment and then donating the proceeds. (Of course, if your investment is a loser, it might be better to sell it and donate the money so you can claim a loss on the sale and deduct a charitable contribution equal to the proceeds.)2

Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you will need a receipt or a detailed verification form from the charity. You also have to file Form 8283 when your total deduction for non-cash contributions or property in a year exceeds $500.1

If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

*Contribute more to your retirement plan. If you haven’t turned 70½ this year and you participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, you can cut your 2016 taxable income through a contribution. Should you be in the 35% federal tax bracket, you can save $1,925 in taxes as a byproduct of a $5,500 regular IRA contribution.3,4

If you are self-employed and don’t have a solo 401(k) or something similar, look into whether you can still establish and fund such a plan before the end of the year. For TY 2016, you can contribute up to $18,000 to any kind of 401(k), 403(b), or 457 plan, with a $6,000 catch-up contribution allowed if you are age 50 or older. Your TY 2016 contribution to a Roth or traditional IRA may be made as late as April 15, 2016. There is no merit in waiting, however, since delaying your contribution only delays tax-advantaged compounding of those dollars.4,5

*See if you can take a home office deduction. If your income is high and you find yourself in one of the upper tax brackets, look into this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. (The percentage of costs you may deduct depends on the percentage of the square footage of your residence you devote to your business activities.) If you qualify for this tax break, part of your rent, insurance, utilities and repairs may be deductible.6

*Open an HSA. If you are enrolled in a high-deductible health plan, you may set up and fund a Health Savings Account in 2016. You can make fully tax-deductible HSA contributions of up to $3,350 (singles) or $6,750 (families); catch-up contributions of up to $1,000 are permitted for those 55 or older who aren’t yet enrolled in Medicare. Moreover, HSA assets grow untaxed and withdrawals from these accounts are tax-free if used to pay for qualified health care expenses. HSAs are sometimes referred to as “backdoor IRAs,” because once you reach age 65, you may use withdrawals out of them for any purpose, although withdrawals will be taxed if they aren’t used to pay for qualified medical expenses.7

*Practice tax loss harvesting. You could sell underperforming stocks in your portfolio – enough to rack up at least $3,000 in capital losses. In fact, you can use this tactic to offset all of your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2017 (and future tax years) to offset ordinary income or capital gains again.8

Are there other moves that you should consider? Here are some additional ideas with merit. 

*Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pre-tax accounts and your most tax-efficient securities should be held in taxable accounts.

*Can you contribute the maximum to your IRA on January 1, 2017? The rationale behind this is that the sooner you make your contribution, the more interest those assets will earn. In 2016 the contribution limit for a Roth or traditional IRA remains at up to $5,500 ($6,500 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA, though: singles and heads of household with MAGI above $132,000 and joint filers with MAGI above $194,000 cannot make 2016 Roth contributions.5

What are the income limits on deducting traditional IRA contributions? If you participate in a workplace retirement plan, the 2016 MAGI phase-out ranges are $61,000-71,000 for singles and heads of households, $98,000-118,000 for joint filers when the spouse making IRA contributions is covered by a workplace retirement plan, and $184,000-194,000 for an IRA contributor not covered by a workplace retirement plan but married to someone who is.5 

*Should you go Roth before 2017 gets here? You might be considering that. If you are a high earner, you should know that MAGI phase-out limits affect Roth IRA contributions. For 2016, phase-outs kick in at $184,000 for joint filers and $117,000 for single filers. Should your MAGI prevent you from contributing to a Roth IRA at all, you still have the chance to contribute to a traditional IRA in 2016 and then go Roth.5

Incidentally, a footnote: distributions from Roth IRAs, traditional IRAs, and qualified retirement plans such as 401(k)s are not subject to the 3.8% Medicare surtax affecting single/joint filers with AGIs over $200,000/$250,000. Dividends, net investment income from taxable interest, passive rental income, annuity income, short-term and long-term capital gains, and royalties are subject to that surtax if your AGI surpasses the aforementioned MAGI thresholds.9

Consult a tax or financial professional before you make any IRA moves to see how they may affect your overall financial picture. If you have a large traditional IRA, the projected tax resulting from a Roth conversion may make you think twice.

What else should you consider as 2017 approaches? There are some other things to note…

*Review your withholding status. Should it be adjusted due to any of the following factors?

>> You tend to pay a great deal of income tax each year.
>> You tend to get a big federal tax refund each year.
>> You recently married or divorced.
>> A family member recently passed away.
>> You have a new job at a much greater salary.
>> You started a business venture or became self-employed.

*If you are retired and older than 70½, remember your RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs and 401(k), 403(b), and profit-sharing plans by December 31. The IRS penalty for failing to take an RMD equals 50% of the RMD amount.10 

If you have turned 70½ in 2016, you can postpone your initial RMD from an account until April 1, 2017. The downside of that is that you will have to take two RMDs next year, both taxable events – you will have to make your 2016 tax year withdrawal by April 1, 2017 and your 2017 tax year withdrawal by December 31, 2017.10

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your MAGI plus 50% of your Social Security benefits surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.11

*Consider the tax impact of 2016 transactions. Did you sell real property this year? Did you start a business? Have you exercised a stock option? Could any large commissions or bonuses come your way before January? Did you sell an investment held outside of a tax-deferred account? Any of this might significantly affect your 2016 taxes.

*Would it be worth making a 13th mortgage payment this year? If your house is underwater, it makes no sense – and you could argue that those dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If you have a fixed-rate loan, a lump sum payment can reduce the principal and the total interest paid on it by that much more. 

*Are you marrying in 2017? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2017, you will need a new Social Security card. Additionally, you and your spouse no doubt have individually particular retirement saving and investment strategies. Will they need to be revised or adjusted with marriage?

*Are you coming home from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure your employee health insurance is still there, and consider if it’s prudent to revoke any power of attorney you may have granted to another person. 

www.cornerfi.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. 

Citations.

1 – irs.gov/uac/Newsroom/Six-Tips-for-Charitable-Taxpayers [5/19/15]
2 – philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]
3 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [3/18/15]
4 – turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/4-Last-Minute-Ways-to-Reduce-Your-Taxes/INF22115.html [10/20/15]
5 – forbes.com/sites/ashleaebeling/2015/10/21/irs-announces-2016-retirement-plans-contribution-limits-for-401ks-and-more/ [10/21/15]
6 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction [10/16/15]
7 – bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx [10/7/15]
8 – fidelity.com/viewpoints/personal-finance/tax-loss-harvesting [9/9/15]
9 – kitces.com/blog/how-ira-withdrawals-in-the-crossover-zone-can-trigger-the-3-8-medicare-surtax-on-net-investment-income/ [12/2/14]
10 – fool.com/investing/general/2015/09/29/mrd-requirements-for-your-retirement-accounts.aspx [9/29/15]
11 – ssa.gov/planners/taxes.html [10/20/15]

Train Up a Child

Three Ideas: Guiding a Child to Wise Financial Choices.

By Tim Flick, CFP®

Everyone seems to agree that financial education for children is important.  The lack of training can be obvious and the benefits are numerous.  Some of the significant byproducts of training children money management skills are:

  1. Wisdom
  2. Character Development
  3. Learning Contentment
  4. Generational Impact

Use it or lose it.  One of the challenges is financial literacy is similar to learning a foreign language.  You can talk the talk and pass the tests, but then it becomes “use it or lose it time”.  Children don’t have the opportunities to use this knowledge like an adult.  The necessity of practicing financial principles isn’t present.

Start with the big picture principles.  The key is to begin with foundational wisdom.

Teach general principles like:

  1. Spend less than you earn
  2. Avoid debt
  3. Saving – Build liquidity
  4. Set long-term goals
  5. Giving – Delight in generosity
  6. Understand that God owns it all – we are the managers

The rest can be taught in a “just in time” or “next step” manner.  For instance before a child goes to college, talk about the credit card offers they will receive.  Teach how credit works with the paying of interest making the items we purchase much more expensive than the price shown for the article.

Three ideas to build the foundation:

  1. Three cups – Give a child three cups to place in their room. Label the cups “Giving”, “Saving”, and “Spending”.  Then, every time the child receives money, have them put 10% each into the “Saving” and “Giving” cups.  The remaining 80% goes in the “Spending” cup.  Help the child find a church or charity for the giving portion and encourage them to be involved.  Also help them discover a long-term goal for their savings and even open a savings account.  The “Spending” cup is for them to decide how to spend and learn from, even as they make mistakes.
  2. Provide a match. To encourage savings, you can match the amount they decide to put into a savings account.  You may want to set limits for some over achievers.
  3. Have them earn an allowance. Give them age appropriate jobs and if they do the work, they get paid.  If they don’t, they don’t.  You may even want to come up with a fun tracking system.  I’ve heard one family uses Popsicle sticks.  One end says, “To Do” and the other end “Done”.

Finding a good “Second Voice”. The responsibility of training the child in finances falls squarely on the parents.  As many know, it’s always better with help from a like-minded resource. Hopefully, you can find support from family, friends, resources, and encouragement from church, school, and your financial advisor.

There are some good resources out there for teaching kids about money.  Check out:

www.crown.org

www.daveramsey.com

www.compass.org

The benefits are not only numerous for your own children, but can have an impact on generations to come.  Generations that may include your grandchildren and great-grandchildren.  Let’s start a new trend of financial wisdom.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com

Think About Your Lifestyle Before You Retire

Sometimes planning for retirement isn’t entirely about money.

Provided by Tim Flick, CFP®

How many words have been written about retirement? It’s a preoccupation for many, and we devote so much time, thought, and energy toward saving for the last day we go to work. Saving and investing in such a way that we no longer have to work may seem ideal at first, but it raises a question: what do you have planned for all of that free time?

What do you do with your first day? Maybe you finally take that big vacation you’ve been talking about. Or, perhaps, it’s time to catch up with your kids, grandkids, and other extended family. But, eventually, you come home from a vacation or a visit.

While many of us have that first day mapped out, it’s the days that follow that we haven’t really considered. In a survey conducted by Merrill Lynch and AgeWave, people who were about to retire were asked “what they would miss the most” once they left the working world. A “reliable income” was the top answer, coming in at 38%.1

When the same survey was given to people who have been retired for a while, “reliable income” was still a popular answer, but it drops down to 29%. So, what are actual retirees missing? The top answer, at 34%, was “social connections.” Other prominent answers included “having purpose and work goals” (19%) and “mental stimulation” (12%).1

Free time can be a luxury or a curse. The results of the survey indicate that many retirees don’t give much thought to what they will be doing with all of their free time. We are meant to enjoy our retirement, of course, so banishing the restlessness and loneliness that can come from leaving your job should be taken into consideration when you are planning.

In his book You Can Retire Earlier Than You Think, investment strategist and radio host Wes Moss advises seeking out what he calls “core pursuits.” These are rewarding and engaging interests that can bring satisfaction and happiness to your life; charity work, hobbies, community activities, or public service are but a few examples.1

Moss estimates that the most satisfied retirees enjoy three or four such pursuits as they go into retirement – though, there’s no reason that someone can’t find more ways to pass the time.1

“Retirement” doesn’t mean “not working.” Not everyone is geared toward making their life about core pursuits. You may find that you miss working, or that you simply need or desire a little more income. Maybe you find that a part-time job is ideal for supplementing your retirement income? Or, perhaps, you have an idea for a small business that you’ve always wanted to pursue?
Whatever path you take, it’s important to consider the options open to you once your time is finally your own. You’ve worked most of your life for it, so enjoying yourself during retirement should be a priority.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.
www.cornerfi.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

«RepresentativeDisclosure»

Citations.
1 – fool.com/retirement/general/2016/04/01/think-youre-ready-to-retire-not-until-you-read-thi.aspx [4/1/16]