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Forum Co-Managing Partner, Jonathan Rogers shared his perspective. Rogers commented, "Forum's success over the past year is a direct reflection of the strength of our partnership model. Advisors who own their business and put clients first will find a way to succeed."

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FA’s RIA Rankings: FA's RIA survey is a ranking based on assets under management at year end of independent RIA firms that file their own ADV with the SEC. FA's RIA ranking orders firms from largest to smallest, based on AUM reported to us by firms that voluntarily complete and submit FA's survey by our deadline. We do our best to verify AUM by reviewing ADV forms. To be eligible for the ranking, firms must be independent registered investment advisors and file their own ADV statement with the SEC and provide financial planning and related services to individual clients. Firms must have at least $1 billion in assets under management as of December 31, 2025, to be included in the print edition of Financial Advisor magazine's 2026 RIA survey. Firms with under $1 billion will be included in FA's expanded 2026 online RIA survey. 

What Are Trump Accounts?

Here are the core rules at a glance:

• Annual contribution limit: Up to $5,000 per year (indexed for inflation after 2027), combined across all contributors: parents, grandparents, other family members, and even employers.
• No earned income required: Unlike a Roth IRA for minors, contributions to a Trump Account do not require the child to have earned income.
• Non-deductible contributions: Contributions are made with after-tax dollars and do not provide an upfront tax deduction.
• Government seed money: Children born between January 1, 2025 and December 31, 2028 are eligible for a one-time $1,000 contribution from the US Treasury. This does not count against the $5,000 annual limit.
• Employer contributions: Employers may contribute up to $2,500 per year to an employee’s dependent’s Trump Account, which counts toward the $5,000 cap. Be sure to confirm whether your employer will be setting up a plan.
• Growth period: The account operates under special rules until January 1 of the year the child turns 18, after which it transitions to a standard traditional IRA.

During the growth period, the account grows tax-deferred. When funds are eventually withdrawn — or converted to a Roth IRA — any amount that exceeds the after-tax basis (total contribution amount) will be taxable as ordinary income. This is probably a better option for savings for kids than any account except for a 529 (given that the growth in 529s is tax-free without any conversion).

The Real Power: Roth Conversion (And the Kiddie Tax Catch)

The headline opportunity with Trump Accounts is not simply tax-deferred growth — it is the ability to convert the account to a Roth IRA, ideally at a moment when the young adult is in their lowest lifetime tax bracket. Once converted, the account grows entirely tax-free, qualified withdrawals in retirement are tax-free, and there are no required minimum distributions (RMDs) during the owner’s lifetime. For a 22-year-old with 40+ years of compounding ahead of them, the mathematical advantage of a Roth conversion can be significant.

However, families must be aware of one critical pitfall: the “Kiddie Tax.”

The Kiddie Tax is a federal rule that taxes unearned income (dividends, interest, capital gains — and yes, Roth conversions) for dependent children at their parents’ marginal tax rate, not the child’s own rate. In 2026, the Kiddie Tax applies to unearned income above $2,700 per year for dependents under age 18 and for full-time students under age 24. Since a Roth conversion is taxed as ordinary income — not at the lower capital gains rate — this can result in a significant and unexpected tax bill for families in higher brackets.

The strategic implication: timing matters enormously. The most tax-efficient moment to execute a Roth conversion is typically after the child is no longer a full-time student and is no longer claimed as a dependent — generally age 24 or later, assuming they remain a student, or sooner once they have a full-time job.

A Roth Conversion Strategy: An Illustrative Example

Let’s consider a child who is 9 years old as of July 2026. Starting July 4, 2026, when contributions first became permitted, the parents open a Trump Account and contribute $5,000 per year through 2034, when the child turns 17 at the year-end, for a total of nine contributions totaling $45,000. No further contributions are permitted starting in 2035 while the child attends college. In 2039, after graduating college and beginning a full-time job, the child is no longer subject to the Kiddie Tax and can execute a full Roth conversion.

Assuming average annual growth of 8%, by 2039, the account will have grown to $91,742 with a basis of $45,000. Here is where the strategy comes into focus. The child earns a reasonable starting salary and is in the 22% federal tax bracket. The child then completes the conversion and realizes $46,742 ($91,742–$45,000) of ordinary income. At 22%, the child would owe $10,283 in additional taxes, which the parents can choose to gift, as it is well below the annual gift exemption of $19,000 per person. And from that point forward, every dollar in that Roth IRA grows tax-free for the rest of their life.

For a total investment of $45,000 in contributions plus a $10,283 tax payment for a total of $55,283, the parents have helped the child create a tax-free Roth IRA, which would on its own grow to $2.5 million fully tax-free when the child is 65, assuming an 8% growth rate annually — powerful indeed.

This $2.5 million figure is a hypothetical illustration based on an assumed constant 8% annual return over roughly 40 years; it is not a projection, promise, or guarantee of actual performance. Actual returns will vary, may be significantly lower than assumed, and could be negative in any given year, and no assurance can be given that any account will achieve the results shown.

How to Open a Trump Account

Opening a Trump Account requires filing IRS Form 4547. This form serves as the formal election to establish the account. Here is the process:

• File Form 4547 either with your 2025 federal tax return or separately. If filing separately, you will need to create an account with ID.me in order to submit the form via the IRS online portal https://www.irs.gov/payments/online-account-for-individuals.
• A legal guardian, parent, adult sibling, or grandparent (listed in priority order by law) may open the account on the child’s behalf.
• Contributions are made by funding via bank account or debit card through the Plaid account aggregation service. For family and friends who want to give, there is a gift link that can be sent to them as well.

What Should the Account Be Invested In?

The only current investment available is State Street’s S&P 500 ETF (SPYM) with its low 0.02% expense ratio. Assuming at some later date other investment options become available, we would recommend Trump Account investors consider one of these two investment options:

• Dimensional US Equity ETF (DFUS) — A broadly diversified US equity exposure without the inefficiencies that can arise from index reconstitution and other small inefficiencies of indexing.
• Vanguard Total Stock Market ETF (VTI) — A broadly diversified, low-cost alternative covering the entire US equity market in a single fund.

Given the decades-long time horizon, the goal is simple: maximize broad US equity exposure, keep costs minimal, and let compound growth do the work. Once the account converts to a standard IRA at age 18 — and ultimately to a Roth IRA — the investment universe opens up considerably, and the allocation can be tailored to the young adult’s own financial picture.

The Bottom Line

Trump (Section 530A) Accounts represent a compelling new tool for families with children, particularly when paired with a disciplined Roth conversion strategy. The combination of early, consistent contributions, broad US equity exposure, and a well-timed Roth conversion may help build a lifetime of tax-free wealth for your child or grandchild.

It’s also worth noting that a Trump Account is just one of several tools available to help a child build a strong financial foundation — alongside 529 plans, custodial (UTMA/UGMA) accounts, and Roth IRAs for children with earned income. The best option (or combination of options) will depend on your family’s specific goals, tax situation, and time horizon. We encourage you to reach out to your Forum advisor to discuss whether and how a Trump Account fits into your family’s financial plan.

We are here to help you take advantage of every opportunity to build and protect your family’s financial future.

This article is intended for educational purposes only and does not constitute personalized tax, legal, or investment advice. Topics such as gift tax implications (including the treatment of contributions as future interest gifts), employer nondiscrimination requirements, and other technical rules are complex and subject to final IRS guidance and potential legislative corrections. Tax laws are subject to change, and the regulations governing Section 530A accounts are still being finalized. Please consult with your Forum advisor and qualified tax professional before implementing any strategy discussed herein.

All investing involves risk, including possible loss of principal; there is no guarantee that any investment strategy will be successful. The hypothetical example in this article is provided solely to illustrate the mechanics of a Roth conversion and assumes a constant 8% annual rate of return; it does not reflect any specific investment, is not indicative of actual or future performance, and does not account for fees, expenses, taxes on interim growth, or market volatility, all of which would reduce returns. Actual results will vary and could include a loss of principal.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

SpaceX Takes Off

Financial headlines about the IPO of SpaceX can be summarized as: It took off like a rocket on its first couple days (making Elon Musk the world’s first trillionaire) and then gravity began pulling the stock back toward Earth.

Nobody really knows how this will ultimately play out, but the hype around how an IPO could be an extraordinary investment creates FOMO (fear of missing out). The data, however, suggests the wiser choice is to avoid hot IPOs.

What Does the Data Say?

A recent Wall Street Journal article noted the average IPO in the US realizes a first-day gain of about 19%: “The average historical return for buying an IPO at the end of its first day of trading and holding it for three years is about 21% lower than what a value-weighted market index would have returned.”¹ This analysis from Jay Ritter, University of Florida, covered more than 9,000 US-listed IPOs from 1980 to 2024.

Research by Dimensional Fund Advisors corroborates this analysis, showing the underperformance is systematic. IPOs tend to be smaller, growth-oriented companies with low profitability and high rates of investment. Decades of research into asset-pricing theory have shown that this combination of characteristics in a company means lower expected returns. At Forum, we talk a lot about “factor investing,” which is fundamental to our investment approach, emphasizing those factors that have historically shown to have higher expected returns. With IPOs, we see the other side of the factors — the side with lower expected returns!

What About That First-Day Spike?

These long-term views are complicated by the market contortions in those first few days after a stock goes public. Employees and early investors in IPOs are typically restricted from selling most of their shares immediately following the IPO — they are forced to hold most of their shares for months, creating restricted supply when demand for shares is often exuberant. The limited access to shares can cause a spike that is hard to arbitrage due to the extreme volatility and limited trading volumes in its early days of trading.

That is not to say that IPOs never win. A handful do go on to deliver extraordinary longer-term returns. The problem is that it is only a handful — and how to know in advance which ones those are.

HOW DIMENSIONAL APPROACHES IPOs

Dimensional expects to consistently apply their portfolio management rules to upcoming IPOs. They will add these new stocks only after enough of the stock is publicly traded (generally about a year post-IPO) and only if the stock meets the factor-based inclusion rules of the fund. If an IPO stock does not meet the criteria, that stock will not be added.

What Are Forum’s Thoughts on Artificial Intelligence?

Another hot topic this year has been the AI revolution, which is being compared to the industrial revolution or the advent of the internet. At the highest level, we do think AI will result in a foundational change in how work gets done. Forum has been exploring AI tools internally on a limited, controlled basis, with an emphasis on data security and thoughtful oversight of what these tools can access. Our current use is focused on internal efficiency, supporting internal software development, drafting presentations, and streamlining internal processes. We are approaching adoption deliberately, and this caution is especially warranted when it comes to financial planning.

Specifically speaking of AI’s use in financial planning, we have found it to be dangerously convincing when used by someone without deep contextual expertise. Asking AI a seemingly simple question, like “Should I convert my IRA to a Roth IRA?” often gives a clear and concise answer, but it may be the wrong answer for the person asking. Properly answering that question for any individual or couple requires a host of considerations, including joint life expectancy, future tax rates, IRMAA (Medicare’s “Income-Related Monthly Adjustment Amount”) surcharges, estate taxes, inheritors’ tax rates, and charitable intent. Asking complex questions in a simple way seems easy but can lead to less-than-correct answers.

There are also many big, unanswerable questions around AI. How do workforces adapt? What do entry-level jobs and career paths look like? Who in society benefits, and is that okay? Which is faster: new job creation or unemployment? Which stocks will benefit: the big owners of the tech or the effective users of it? How do I use it personally, and where are the lines? We can’t answer many of these questions. We will answer the narrow one about investing in AI.

How Much AI Are We Invested In?

In other words, AI is practically everywhere. It is woven through the largest companies you already own, and it’s being used by the smallest. The largest names in the stock market themselves have an outsized exposure:

• Nvidia is a central player building chips used to both train AI models and in data centers bringing AI to consumers.
• Microsoft is heavily invested in OpenAI and is incorporating AI into its broad software ecosystem across Microsoft Office, Azure, GitHub, and more.
• Alphabet, Google’s parent company, is investing heavily in Gemini, AI search, custom chips, and advertising tools.
• Amazon is invested in Anthropic and is building AI into its AWS offerings, shopping algorithms, and its own AI chips.
• Meta is investing aggressively in AI throughout its social media and advertising platforms.
• Apple is improving Siri and putting AI onto its devices and in its operating system.

Simply by holding a broad market portfolio, you are swimming in AI and innovation. The harder question is whether we should intentionally tilt even more toward AI or “transformational technology” companies. That is where we would counsel for prudence and discipline.

How Much AI Is Too Much?

One of the tricky things about investing in innovation is that even when the story is real, the prices often reflect what we already know. As such, the investment outcome can disappoint even if the prognostications come to pass.

The internet changed the world, but many internet stocks did terribly as investments when bought at too high a price. Electric vehicles are real. Streaming is real. Clean energy is real. Biotech is real. It’s important to acknowledge that not every exciting company or idea rewards investors.

AI might transform the economy over the next decade. But we do not know in advance which companies will capture the profits. For those largest US technology companies we mentioned, the prices per unit of earnings are much higher than historical averages, reflecting that there are already extraordinary expectations priced in.

So, we do not think of your portfolio as underexposed to innovation. We think of it as broadly exposed, without making a concentrated bet on any one specific company, technology, or IPO. That is portfolio intelligence!

Concluding Thoughts

We all want to benefit from AI and other innovations that reshape our world. But we do not want the portfolio to become overly dependent on today’s most exciting story and whether it plays out exactly as expected. We continue to invest in a diversified manner across the global market, tilting toward the factors of higher expected returns, and across the tens of thousands of companies that are all trying to profit from new technology and human innovation!

SOURCE

In another prediction exercise, in a 2000 study, Cornell students were asked to wear a T-shirt with an image of Barry Manilow around other students, the idea being such a T-shirt would be embarrassing (while not a particular fan of his work, I feel compelled to stick up for Mr. Manilow, but what’s done is done).¹ The Manilow-donning students were asked to predict what percentage of other students would notice the T-shirt. The average prediction was around 50%. By contrast, upon interviewing the observing students, roughly 20% of them had recalled the T-shirt.

My point in bringing up the Great Manilow T-shirt Experiment (my naming) is to highlight just one very quirky example of how bad we humans can be at predicting outcomes in the absence of data. Turning back to lifetime spending expectations, it turns out that assuming your spending will increase with inflation indefinitely is akin to assuming 50% of people are going to notice your Barry Manilow T-shirt; the observed data suggest numbers much smaller than you expect. And that has very serious and meaningful implications, namely that you may be risking OVER-saving and not enjoying your money both during your working life and during retirement.

In this article, we’re going to review typical spending patterns throughout life, and we’ll see that lifetime spending, rather than climbing steadily forever, tends to follow an arc-like pattern, peaking in middle age and generally declining thereafter. We’ll discuss the implications of this, not only on your retirement but also on how you live your life until then.

The Arc of Lifetime Spending

The Bureau of Labor Statistics publishes consumer expenditure data based on annual household surveys. Annual data is available from 1984-2024, and the chart below shows average household spending by age group at five snapshots in time: 1984, 1994, 2004, 2014, and 2024.²

While spending levels across the board have increased with inflation, the shape of the curve is remarkably similar at each point in time, even while lifestyles have changed. People in their 40s and 50s spend the most, and the number declines from there into older age. The underlying composition of spending is somewhat predictable. By middle age, households are spending a lot on housing — perhaps they’re out of a starter home or apartment and in a larger home with a bigger mortgage and bigger bills. They’re spending a lot on transportation, traveling more and perhaps owning an extra car for teenage drivers. And they’re paying a lot toward insurance and pension/retirement, making hay during those high-earning years to pad retirement. Those spending buckets all generally decrease with age after that point. The only consumption buckets that increase materially in absolute terms are healthcare and cash contributions (gifts and charitable donations), but the increase in those categories is more than offset by decreases elsewhere.³ Regardless of the underlying composition, the arc-like trend is very robust, and it appears to continue into the retirement years.

What About After 75?

According to the actuarial longevity calculator (sidebar: I used to be an actuary, which might explain my winning personality), an average-health, non-smoking 75-year-old male has a 36% chance of living to age 90+, and a similar female has a 47% chance of living to 90+.⁴ Given such high probabilities of living beyond age 90, one might wonder whether the average within the “75+” bucket is masking a trend at more advanced ages.

Not really, it turns out. Spending typically continues to decline through the end of one’s life, and several studies have shown this. One such study by Frederick Vettese examined this pattern for pension planning for Canadian retirees.⁵ Through a combination of his own research and aggregating several other studies, Vettese examined retirees' spending patterns in four developed countries: Canada, US, UK, and Germany. The results were all remarkably similar. Consumption decreased throughout life. He summarized the approximate spending changes as follows:

And here, I’ve translated those annual changes relative to a starting age of 65. Under these approximations, by age 90, retirees spend ~60% of what they did at age 65.

There’s Really No Spending Increase?

What about healthcare? Aren’t those costs drastically outpacing overall inflation, and don’t we all get sick and bankrupt ourselves? I refer back to my Great Manilow T-shirt Experiment analogy (the data just don’t support this concern). Yes, there’s an uptick in healthcare spending, but for many, those medical bills aren’t enough to raise spending overall. David Blanchett explored this potential uptick in a 2014 paper. ⁶ In it, he observes the “retirement spending smile,” which seems to indicate that retirees’ spending decreases at first and subsequently increases later in life with increased healthcare costs. This is contrary to the consistent spending decreases shown in Vettese’s findings. However, there are two things to clarify about Blanchett’s observed smile.

1. The smile is largely on the rate of change rather than on the absolute spending, meaning spending might decrease at 2% for the first ten years and then only decrease by 1% for a few years (using arbitrary numbers to make my point). A chart of percentage changes, indeed, looks like a smile that dips and slopes back upward, but a chart of absolute spending would still be largely decreasing.
2. The uptick is more pronounced for lower-spending households. I can’t say for certain why this happens, but intuitively, healthcare costs, particularly if they become extreme, would make up a much larger percentage of a smaller starting number.

Below, I’ve adapted and supplemented Blanchett’s tables from that paper. The first chart shows the percentage change in real spending by age for several starting spending levels. This is where the smile is most pronounced, but remember those are annual percentage changes. Absolute spending is only increasing when those lines are above zero. To make that clear, in the second chart, Blanchett used those percentage changes to model how absolute spending progresses through life after age 65 for several initial spending levels (and I’ve added the $150k spending line). Here, you see with higher initial spending levels, the uptick is not nearly as pronounced. It looks more like a soft landing than an abandoned landing.

Spend It While You’re Here (if You Want)

In the same way that being overly self-conscious about your Barry Manilow T-shirt may prevent you from showing it off, assuming spending will increase with inflation likely cheats you out of enjoying your money. In yet another study, Chris Browning et al. found that median wealth retirees under-consumed by about 8% relative to their spending ability, and the 20% of wealthiest retirees under-consumed their means by approximately 50%.⁷

As a financial advisor, my goal is not to get people to save every dime they possibly can for retirement. My goal is a comfortable retirement and otherwise help people maximize the utility from their money throughout their lives. If saving every dime is what gives you the most utility, great. If not, we need to have reasonable expectations about what we’ll spend, and therefore need, in the future, and that’s what I’m aiming to do with this article. I’m really just wanting people to wear their Barry Manilow T-shirts more often.

SOURCES

Our answer, as has been the case in every geopolitical crisis we’ve navigated alongside our clients, is to stay the course.

War Is Scary, But Eventually Markets Endure

It is natural to feel anxiety when conflict dominates the news. Markets can react to war with sharp, short-term declines as the news breaks. But the data tells a consistent story: In most cases, initial downturns tend to be followed by reasonable market returns.

The chart below, which we shared previously when Russia invaded Ukraine, shows how global markets have responded to conflicts. In most cases, the 6-month return was positive. In 10 out of the 11 events, with World War II being the exception, the 3-year returns were positive and often strongly so.

The lesson here is not that war is good for markets. It is that markets price in war-related events rapidly, may get bumpy, and eventually look ahead to recovery. By the time you are reading about a conflict in the news and worrying about its economic effects, that information is already being rapidly priced into today’s stock prices. Selling at lower prices means locking in the decline and risking missing the recovery.

Why Global Diversification Matters So Much

One of the themes we have emphasized repeatedly with clients in the past several years has been the importance of global diversification. The current conflict is a powerful real-world illustration of why.

Investors with portfolios concentrated in US large-cap growth stocks have been feeling a bit more pain in 2025 and into 2026. While a diversified portfolio certainly has not been immune to the volatility, the diversification across international stocks, value stocks, small-cap stocks, and bonds has helped cushion the blow.

This is not a new theme. In our February 2025 piece, we explored how US large-cap growth stocks had become historically expensive and how the recent outperformance had been driven primarily by valuation expansion (i.e., paying more per dollar of earnings) rather than earnings growth alone. Due to high US Large Growth valuations, we suggested US stocks are likely to have lower returns than international stocks in the next 10+ years. The future continues to look bright for globally minded investors.

Volatility a Toll, Not a Stop Sign

One of the most difficult truths in investing is that the very thing that makes stocks rewarding over the long run only exists because of periods like this one. If stocks always went up in a straight line, everyone would own them, and the premium would disappear. The discomfort of a downturn is not a flaw in the system. It is the system working as intended. The investors who earn the premium are the ones willing to stay seated through the bumps.

Consider an analogy: Imagine you are offered a job that pays significantly more than your current one, but the commute is longer and occasionally hits traffic. You would not quit every time you sat in a traffic jam; you took the job knowing the commute was part of the deal. Volatility is the commute. The destination is the long-term compounding of wealth that has rewarded patient investors for over a century.

Research supports this intuition. Studies have consistently shown that the majority of the stock market’s long-term returns come from a surprisingly small number of trading days. Missing just a handful of the market’s best days over a 20-year period can cut your total return nearly in half.¹ The best days also tend to cluster near the worst ones, with 6 of the market’s 10 best days happening within two weeks of one of the 10 worst days, when looking back at the past two decades.²

The cost of trying to avoid the pain is almost always greater than the pain itself.

Staying the Course Grows Wealth Over a Lifetime

The conflict in Iran may continue to dominate headlines for weeks or months. Oil prices remain elevated, supply chains are being disrupted, and there are legitimate concerns about a broader economic impact.

But if history is any guide, and we believe it is, the best course of action for long-term investors is to remain disciplined, diversified, and invested. The discomfort you feel today is the cost of earning the premium that markets have rewarded over time.

SOURCES

Many significant liability claims arise from ordinary activities, such as driving a car, hosting guests, maintaining property, or other everyday activities. Common scenarios include:

• Serious auto accidents
• Slip-and-fall injuries
• Dog bites

For many families, additional exposure can come from factors such as teenage drivers, swimming pools, domestic employees, or rental properties. In some cases, even personal activities such as social media use can create liability exposure.

As wealth and complexity increase, so can exposure to liability risk, making appropriate protection an important consideration for many households. How much umbrella coverage is enough?

Umbrella insurance is just one component of a broader risk management strategy and can work alongside other planning considerations, such as:

• Asset titling
• LLC entities for rental property
• Trust planning
• Maintaining adequate underlying insurance limits

Umbrella insurance does not create wealth, but it can help preserve it. As part of a financial plan, it helps ensure that an unexpected liability event doesn’t undo years of progress.

Few planning decisions offer millions of dollars of protection for such a modest cost. Speak with your Forum advisor about how to insure your property and your balance sheet with proper umbrella coverage.

SOURCES

At Forum, clients are at the center of every plan. As we commemorate this milestone, we want to thank our clients for their trust and confidence in us. Forum works with more than 5,000 clients across the country, and we are honored to be part of each person’s journey.

We want to recognize the incredible commitment of our Forum advisors and associates as they support clients in the pursuit of their most important financial goals. One of the reasons Forum has steadfastly remained a 100% advisor-owned partnership is that every employee knows who we serve: the clients of our advisors. Not private equity. Not a public company’s earnings report. Just our clients.

Forum's evidence-based investment philosophy is built on decades of academic research and real-world results. This approach fortifies us during difficult markets and reinforces the advice we give our clients: stick to your plan through market cycles. We have also evolved to offer more than just investing, expanding to serve as financial planners across our clients’ financial lives.

Looking forward, there is an opportunity to help new investors discover the peace of mind that comes with financial confidence. While markets may be unpredictable, one thing is certain: Forum will continue to support clients and their families, guided by our mission to empower people to reimagine and achieve what is possible.

SOURCES

Considering how his role will evolve at Forum, Joey said: “I’m excited to help shape the firm’s future while continuing to serve clients with fiduciary care. Becoming a partner felt like the natural next step to give back to the advisor community that supported my transition into advisory.”

When Joey became a Forum financial advisor, he was invigorated by the intentional focus on mentorship. From mentee in his first year at Forum to adopting the role of mentor for newer advisors, Joey can personally attest to how mentorship has a ripple effect.

“Being supported by partners and advisors who shadowed, coached, and provided honest feedback accelerated my development and gave me real-world confidence far faster than trial and error alone,” he said. “It’s also a force multiplier for the firm. Every time we welcome a next-gen advisor to the firm and mentor them well, we expand the firm’s knowledge base and capacity to serve more clients at a higher level.”

The mentorship mindset follows when helping clients take steps to set financial and personal goals. As Joey describes it, there is a sense of relief when clients who are just starting their financial journey are able to cut through all the financial media noise and online “finfluencer” advice. Instead, financial confidence can be found in having a financial plan with a solid framework and a well-drawn roadmap.

“Goals give context to every financial decision,” he said. “Aligning financial goals with personal priorities ensures that the plan supports what matters — family, career transitions, education, retirement, charitable intention, legacy leaving, and so much more — so trade-offs are evaluated against things clients truly value.”

After contemplating how things have changed and what remains constant, Joey remarked on building relationships and how AI fits into the big picture: “Sure, some of the tools and technology have changed how we serve our clients. AI is a powerful enabler when used to automate repetitive work and surface useful insights, freeing advisors to spend more time on high‑value human interactions.”

He continued: “The goal is not to replace judgment and personal connection, but to scale our capacity for considerate, timely, and enhanced client service. We can deliver more efficient, personalized service today than a decade ago, yet the core of the work is the same: building trust, listening deeply, and helping people make thoughtful long-term choices.”

“Joey embodies what we value most at Forum — a genuine commitment to clients, a passion for mentoring the next generation of advisors, and the vision to help our firm grow without losing sight of the personal relationships that define us,” Forum Co-Managing Partner Jonathan Rogers commented. “His path from mentee to mentor to partner is exactly the kind of story we love to see at Forum, and I have no doubt he will make a lasting impact in this next chapter.”

On the subject of achieving goals, Joey shares this advice with clients, colleagues, family, and friends: No matter how small, one step leads to the next, and you have the strength to keep moving forward.

Reflecting on the road he followed to step into a new role at Forum, Joey said, “Ultimately, I’m energized by the chance to pay forward the guidance I have benefited from over the course of my career and to help more people reimagine and achieve what’s possible.”

Selecting Your New Benefits with Confidence

• Should you opt for a life insurance benefit? If so, how much? What sort of debts would your beneficiaries need to take care of?
• Does it make sense to pick a health insurance plan with a higher deductible and a health savings account option? Or should you consider a higher premium with lower deductible payments?
• What sort of disability insurance makes the most sense? Do you need it to be short-term or long-term?

• Should you contribute to the traditional or Roth portion of your plan?
• How much does your company match and to which account?
• Does the new plan offer a mega-backdoor Roth option?
• Should I roll over my old retirement plan to this new plan or to my own IRA?
• What sort of investment options does my plan offer? Where do these investments fit into my overall goals and risk tolerance, and what are the fees of these investments?

Questions like these are something you should be thinking about when you head into benefits selections. Sometimes, your new employer may offer a retirement benefit that opens new planning opportunities, while other times, it may close planning doors that you have used in the past. Also, if you change jobs during the year, your deferral limit ($24,500 in 2026; limits may change year to year) and any applicable catch-up still apply. Your new job won’t be aware of how much you’ve already deferred, so it’s important to make sure you don’t overcontribute to your new plan.

Congrats on the New Job! Now, Keep in Mind the Following

After the dust settles, there are some other things to think about regarding your old employer or any money that may be ‘out there’ still.

• Old retirement plans – Consider the benefits of rolling these into either your new employer’s plan or into an IRA. It can be easy to forget about old retirement plans, and it may be helpful to review these soon after starting a new job. Of note, the Department of Labor has a lost and found website that can help you locate old retirement benefits you may have forgotten about. By inputting some basic information, the database will conduct a search for you to help find missing benefits. Keep in mind that this tool will only be able to find sponsored plans, such as a defined-benefit pension plan or defined-contribution plan. You can go to public resources such as lostandfound.dol.gov to learn more about how they can help find forgotten benefits.
• Old health savings account – If you have a health savings account, you may be able to roll this over into your new employer’s HSA, or you may want to roll it into another one that you maintain outside of your employer.
• Old stock plans – You may have an old employer stock plan or stock options that remain after you leave employment. Remember that, while you no longer work at your old employer, various options still have timeframes for exercising or maintaining their tax-advantaged status. Both stock options and equity compensation have various vesting and exercise schedules, so while you won’t necessarily make your career change decision based on this alone, it can help to understand your overall picture.

Bottom line

Career changes are exciting, but they also come with their own challenges. Try not to let your financial plan become an oversight during this process so you can keep your hard-earned benefits working for you.

If you’re about to make a career change or have recently started a new position, schedule a conversation with your Forum advisor. Working with a financial advisor during career changes can help you feel more confident about your long-term financial outcomes.

This article was written by Sage D’Aprile, a Financial Advisor with Forum Financial Management, LP (“Forum”). This material is provided for informational and educational purposes only and should not be construed as individualized advice or a complete analysis of the topics discussed. Please contact your advisor for guidance specific to your situation. Forum is not a law or accounting firm and does not provide legal or accounting advice or services.

Before making any investment decisions, please contact our office at (630) 873-8520 to request a copy of Forum’s Investment Advisory Agreement and Form ADV Part 2A, which includes a description of our services and fees.

1. Revisit Your Emergency Fund

Think of your emergency fund as a financial shock absorber: It’s the cash that keeps unexpected events from rattling the rest of your life. Does your emergency reserve still fit your current job situation, housing, and healthcare costs? Do you have family changes or special expenses coming in the next 2–3 years, like a home repair or a down payment?

That money should be set aside in something slow and steady, like FDIC-insured accounts, money market funds, or short-term bond funds. Emergency funds have a way of shrinking when you’re not looking, so if your savings have drifted below your target level, reach out to your Forum advisor to discuss how to rebuild over the next year.

2. Lock the Doors on Your Financial Data

At this point, you may as well figure that your Social Security number, mother’s maiden name, hometown, and where you went to elementary school are for sale somewhere on the internet. Your pet’s name and first car? Probably out there, too.

While you can’t prevent identity theft altogether, you can make it hard for the bad guys (“threat actors” in cyberspeak) to impersonate you online. If you make it hard enough, they’re more likely to move on to someone else.

• Use two-factor authentication wherever possible, but particularly on your email, social media, and financial accounts. Email is the most important to lock down. It’s like the front door to your financial life. If the website or app gives you the option, use an authentication app such as Google Authenticator or Authy. Using an authentication app is more secure than getting a numerical code via text message.
• Set up an IRS Identity Protection PIN. If you already have one, you can log in to the IRS website to access a new IP PIN created for the current year.
• Freeze your credit at all three major credit bureaus. You will need to temporarily unfreeze (or “thaw”) your credit file when you plan to borrow or open credit lines, but the minor inconvenience is worth the security.
• Put down roadblocks for anybody but you to open financial accounts in your name. Put freezes on your ChexSystems and LexisNexis files.

After you get your own freezes in place, do the same for minor children, and encourage the rest of your family, too. Be a nudge if you have to. Maybe they’ll even thank you someday.

3. Review Retirement Account Contributions (Especially Catch-Up Contributions if You’re 50+)

Starting in 2026, many higher-earning employees (defined as those with FICA wages of $150,000 or more in 2025) who make catch-up contributions to 401(k) and 403(b) accounts will be required to make those contributions as Roth, not pre-tax. That means these extra contributions will no longer lower your taxable income for the year, and you may see your take-home pay drop a bit compared with prior years.

If you haven’t heard how your employer will handle this, check with payroll or benefits so there are no surprises.

Retirement plan contribution rules are complex and full of exceptions. For example, this new rule does not apply to IRAs. Lean on your Forum advisor to make sense of it.

4. Save Your Charity Receipts in 2026

Among the many new tax laws this year: Beginning in 2026, people who take the standard deduction can deduct up to $1,000 in charitable gifts of cash ($2,000 for married couples). If you donate during the year, hang on to your receipts and gift acknowledgment letters. You’ll be able to report those gifts at tax time.

5. Review Your Homeowners or Renters Insurance

Rebuilding costs have shot up in recent years, and many people don’t realize their coverage hasn’t kept up. Make sure your dwelling coverage is sufficient for what it would cost to rebuild today. A simple way to check: Divide your dwelling coverage amount by your square footage to see how many dollars per square foot you’re insured for. Have a quick conversation with your insurance agent or a local contractor to help you gauge whether you’re on track.

Also, ask your agent if your policy pays replacement cost rather than Actual Cash Value. Replacement cost provides far better protection, but it’s not always included automatically. Actual Cash Value is insurance-speak for “we’ll give you enough to replace it with something from the thrift shop.”

6. Update Beneficiary Designations and Estate Documents

Have you done your estate planning? Bravo! But when was the last time you reviewed your will or trust? Major life changes can make older documents out of date. Review beneficiaries on retirement accounts, insurance policies, and transfer‑on‑death accounts. If it’s been a few years, consider a check‑in with your attorney. Even if you don’t need a redo, consider a partial refresh. Financial institutions (especially banks and insurance companies) can get crabby about accepting Power of Attorney documents more than a few years old.

More Fun Than a New Year’s Resolution

Start with one or two of these action items and go from there. Consider it the financial version of a closet overhaul, minus the trek to The Container Store. Who’s to say it won’t spark joy?

Forum Financial Management, LP is registered as an investment adviser with the Securities and Exchange Commission. This material is for informational purposes only and is not investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Services and strategies described may not be suitable for all investors and do not assure any specific outcome. Before making an investment decision, please contact our office at 630.873.8520 to receive a copy of Forum’s Advisory Agreement and Form ADV Part 2A, which includes Forum’s fee schedule.  For more information, visit our website at www.forumfinancial.com.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

The outlook didn’t look good, and stock markets reflected that:

Let’s skip ahead to the spoiler. By the end of the year, stock markets were up globally:

The lesson is simple: If you sell in the gloom, you might miss the bloom.

What does that mean exactly? When most of the current news is negative, that bad news is already baked into current stock prices. Bad news does not project, nor predict, future market lows. By the time things start looking sunny again, most of the recovery likely already happened, and investors trying to time the bottom will have missed out on most of the upswing.

This simple but elusive idea is why market timing is nearly impossible in practice. At the bottom, things will look like they’re going to get even worse. We believe the best strategy is not to avoid further losses, but to rebalance back into stocks and maintain a disciplined portfolio approach.

Set a long-term portfolio allocation before the downturn happens. The stock percentage should only be set as high as your risk tolerance (the combination of your ability to take risk and your willingness to take that risk) will allow.

In 2025, we re-learned the importance of that simple framework. Staying the course worked yet again, and those who followed a disciplined rebalancing process benefited.

The gloom will happen again. If there’s anything in markets that is a sure thing, it is that things do not go up in a straight line. Markets, like life, are messy, and there are ups and downs along the way. As investors, we are compensated in the long term for taking that risk. Without risk, there would be no return. There will be downturns in the future, and we need to be ready for them, positioned in a way that we can stay in our seats for the duration of the roller coaster ride.

Will you be able to stick with your portfolio through the next drop and recovery? If you don’t think so, you should have a conversation today with your financial advisor. Ensuring your portfolio is aligned with your risk tolerance is much easier and better to do before the next storm rather than during it.

Forum Financial Management, LP is registered as an investment adviser with the Securities and Exchange Commission. This material is for informational purposes only and is not investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Services and strategies described may not be suitable for all investors and do not assure any specific outcome. Before making an investment decision, please contact our office at 630.873.8520 to receive a copy of Forum’s Advisory Agreement and Form ADV Part 2A, which includes Forum’s fee schedule.  For more information, visit our website at www.forumfinancial.com.

Here are the highlights most likely to affect you and your planning.

Estate Tax Relief

For years, one of the biggest questions was whether the large estate tax exemption created by the 2017 Tax Cuts and Jobs Act (TCJA) would expire at the end of 2025. Under OBBBA, that uncertainty is gone:

• Beginning in 2026, the estate tax exemption will rise to $15 million per person (or $30 million per married couple), with annual inflation adjustments.
• Families with estates in the $15 million–$30 million range now have more certainty and less risk of facing estate taxes.

What This Means for You

Income Taxes and Deductions

Most of the law’s changes focus on income taxes, including adjustments to deductions:

• Standard Deduction: Permanently increased to $15,750 for singles and $31,500 for couples (2025 figures), adjusted annually for inflation.
• Additional Deduction for Seniors: Taxpayers age 65+ receive an extra temporary deduction of $6,000 single/$12,000 joint from 2025–2028. (This phases out at higher income levels.) Note that Social Security benefits remain as taxable as they have been.
• State and Local Tax (SALT) Deduction: The cap increases temporarily to $40,000 beginning 2025, goes to $40,400 in 2026 with further 1% increases for 2027 through 2029, then reverts to $10,000 in 2030. Higher-income households may see this phased down to the minimum $10,000 deduction. See this article if you’re looking for more specifics.
• Limits for Itemizers: High earners in the 37% bracket will see a modest reduction in the tax value of their itemized deductions, including charitable gifts.

What This Means for You

Charitable Giving Rules

OBBBA contains several provisions directly affecting charitable gifts:

• New Deduction for Non-Itemizers: Starting in 2026, taxpayers who take the standard deduction can claim up to $1,000 (single) or $2,000 (joint) for cash gifts to qualified charities.
• New Floor for Charitable Deductions: Charitable deductions beginning in 2026 apply only to the extent they exceed 0.5% of adjusted gross income (AGI).
• New Scholarship Credit: Beginning in 2027, donations to approved scholarship-granting organizations can qualify for a credit of up to $1,700.
• Deductibility: Up to 60% of AGI for cash gifts is made permanent.

Practical Impact

Business Owner Provisions

• Qualified Business Income Deduction (QBI): The 20% deduction is now permanent, with expanded phase-in ranges and a new $400 minimum deduction for taxpayers with at least $1,000 of QBI from an active business.
• Pass-Through Entity Tax (PTET) Deduction: Remains intact without new limitations.
• 100% Bonus Depreciation: Available again for qualified business property acquired after January 19, 2025, allowing full deductions up front.

Other Notable Changes

• No Tax on Tips and Overtime: Temporary deductions through 2028 of up to $25,000 for tips and $12,500 ($25,000 joint) for overtime, phased out at higher incomes. Payroll taxes still apply.
• Alternative Minimum Tax (AMT): More middle- to upper-income households ($300,000–$500,000 range) may once again be subject to AMT in the 2026 tax year.
• “Trump Accounts” (New Form of IRA for Children Under 18): Contributions are capped at $5,000/year. Employers can contribute as well, and families may qualify for a $1,000 credit for children born 2025–2027.
• Car Loan Interest: Temporary deduction (2025–2028) for interest on first-lien loans on new US-assembled passenger vehicles, capped at $10,000/year. Phased out at higher incomes.
• Section 1202 Qualified Small Business Stock Exclusion (QSBS): Exclusion amounts are now tiered by holding period: 50% after three years, 75% after four years, and 100% after five years. The eligible company asset limit increases from $50 million to $75 million, and the exclusion amount increases from $10 million to $15 million.

The Bottom Line

At Forum, we’ll help you evaluate:

• Whether to take the standard deduction or itemize.
• How to structure charitable gifts for maximum impact.
• How estate tax changes affect your long-term plans.
• New provisions that may create opportunities — or pitfalls — for your situation.

If you’re considering making significant gifts, updating your estate plan, or simply want to understand how these changes apply to you, now is a great time to schedule a conversation with your Forum advisor.

The information provided reflects our understanding of current legislation as of October 2025 and may change if new IRS guidance is issued. It is intended for general educational purposes and should not be considered tax, legal, or investment advice. Laws and interpretations may evolve over time, so we encourage you to consult your tax or legal professional regarding your specific situation.

Forum Financial Management, LP (“Forum”) is registered as an investment adviser with the U.S. Securities and Exchange Commission. The firm’s home office is located at 1900 South Highland Avenue, Suite 100, Lombard, IL 60148. Before making any investment decision, please contact our office at (630) 873-8520 to request a copy of Forum’s Investment Advisory Agreement and Form ADV Part 2A, which includes the firm’s fee schedule. For additional information, visit our website at www.forumfinancial.com

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

For long-term investors, this is an important moment to pause, reflect, and recognize both the opportunity and the discipline required to capture it.

Why It’s Rare for Everything to Be Positive

Markets rarely move in lockstep. Over the last two decades, it has been far more common for one or more asset classes to finish below expectations in a given year. 2025 stands out because all the “engines” are firing at once. The result: investors who stayed diversified have been rewarded not just by one or two markets, but by nearly all of them.

Leadership Rotated Throughout the Year

It is tempting to look at the positive YTD numbers and assume it was a smooth, uniform climb. But the path to today’s outcome was anything but straight.

Q1 | During the first quarter, US equities tumbled down 4.82% for the quarter, while International stocks were up 5.23% with everything else in between. As we noted in the previous quarterly commentary, the prevailing consensus entering 2025 suggested another period of US market dominance. That’s not what happened out of the gates, which highlights the risks of trying to predict markets rather than staying diversified.

Q2 | In the second quarter, equity markets across the globe started the quarter with a very large drop following “Liberation Day” in April when new tariffs were announced. Most asset classes recovered quickly. US stocks, International stocks, and Emerging Market stocks all surged 11%–12% during the quarter. The exception was Treasury bonds, which declined in value as interest rates rose.

Q3 | The third quarter continued the upward trajectory from all equity asset classes with REITs and Bonds contributing with positive returns as well.

Overall, the year has been strongly positive across asset classes. However, the sequence of returns was uneven. Different asset classes took turns leading, and that rotation is what made rebalancing so powerful.

This quilt makes clear that leadership changes hands. No single asset class dominated the entire year. Instead, investors needed to be both diversified and disciplined to benefit across the shifting landscape.

The Value of Rebalancing

When everything ends the year positive, it’s easy to forget how uncomfortable parts of that journey felt. Rebalancing during the year required discipline: trimming back the strong performers (International Equities early on) and adding to laggards (US stocks in the first quarter and around Liberation Day, bonds and REITs mid-year) often felt counterintuitive.

Yet those actions positioned portfolios to capture the later-year rotation. By the time bonds and REITs rallied, disciplined investors had incrementally increased their exposure at attractive entry points.

Without rebalancing, a portfolio could easily have been overweight with the early winners and underexposed to the later ones — reducing the benefit of this year’s broad rally.

Lessons for Investors

Diversification still pays. This year has been a live case study in why diversified portfolios improve your chance of success. No one could have predicted the exact sequencing of returns, but broad exposure ensured investors captured the upside as asset class leadership rotated. While rebalancing is often described as a way to manage risk, in years like this it also adds return. By selling recent leaders (“Selling High”) and buying back into recent underperformers (“Buying Low”), portfolios were better positioned for the future. Although we ought to celebrate when we experience an “all positive” year, we must also recognize it won’t last forever. Valuations are higher, risks remain, and volatility will return at some point. Staying disciplined is as important now as it was when markets were more turbulent.

Looking Ahead

This year has given us a gift: broad gains across nearly all asset classes. But the real lesson isn’t just in the results — it’s in the process. Diversification, discipline, and rebalancing worked, not by predicting the future, but by being prepared for a range of possible outcomes.

That is how we preserve and grow wealth over our lifetime.

Past performance is not a guarantee of future results. Investing involves risk, including the potential loss of principal. Diversification and rebalancing strategies do not ensure a profit or protect against loss. The information provided reflects general market data and does not represent the performance of any Forum Financial Management, LP strategy or client account.

Forum Financial Management, LP (“Forum”) is registered as an investment adviser with the U.S. Securities and Exchange Commission. The firm’s home office is located at 1900 South Highland Avenue, Suite 100, Lombard, IL 60148. Before making any investment decision, please contact our office at (630) 873-8520 to request a copy of Forum’s Investment Advisory Agreement and Form ADV Part 2A, which includes the firm’s fee schedule. For additional information, visit our website at www.forumfinancial.com

This year, Forum ranked among the top 100 firms appearing at #70 in 2025.

Forum Partner, David McClellan, commented on Forum’s growth, “Forum is a 100% advisor-owned firm, and we’ve achieved strong organic growth by enabling our financial advisors through industry-leading technology and implementation of a consistent investment philosophy. This approach drives advisor efficiency, allowing them to serve more clients with fiduciary financial advice and planning. Our business model aligns the interests of clients, their advisors, and the firm. We look forward to continued organic growth and empowering the next generation of successful advisors.”

Forum Co-Managing Partner, Jonathan Rogers, shared his perspective. Rogers commented, “We offer, what I believe to be, the best operational platform out there for financial planners who use Dimensional Fund Advisors to own and grow their practices. The operational team and community of advisors is second to none, and I’m proud to be a part of it.”

In July, Forum appeared on the 2025 Financial Advisor RIA Ranking. Forum ranked #63 of 252 firms to appear on the Financial Advisor list in the asset category of $1 billion and over.

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients. Barron’s collected and tabulated the 2025 Top 100 RIA Firms Rankings for September 2025 using data from June 30, 2025.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Individual investors have a strong preference for investing in companies based in the country where they live. Behavioral research suggests that familiarity makes stocks from our home country seem less risky. Financial professionals refer to this preference as home bias. Whatever the reason for home bias, we want to move beyond it in our investments.

For those of us who live in the US, investing only in the US would mean giving up a significant amount of the available diversification. Investing in a global neutral way is the opposite of investing with home bias. It’s an investor acknowledging that neither they nor anyone else can predict whether international stocks or US stocks are going to perform better in the future, so it’s better to hold it all. To size the exposure, the investor defers to the market and uses the weighting that exists in the market to each country and region.

This doesn’t imply a bet on international stocks. Rather, it’s about matching the investment opportunity set. If roughly 60% of the global equity market is based in the US, and 40% outside of it, a Global Neutral portfolio will reflect that. It’s not a forecast — it’s discipline.

Why It Matters for Long-Term Investors

A globally neutral portfolio offers broader diversification, which can be a stabilizing force during periods of regional volatility. For example, when US markets experience downturns, other regions may perform better, softening the overall impact on your portfolio. This approach avoids the trap of chasing past performance — a behavior that often leads investors to buy high and sell low.

Moreover, while the US has dominated returns in the past decade, that hasn’t always been the case. In the first 10 years of the 2000s, international stocks significantly outperformed US markets.¹ By maintaining global neutrality, we don’t need to guess when these cycles will turn. Instead, we stay consistently invested in the entire opportunity set.

Over the long term, adding to a portfolio any investment that is not highly correlated with its other investments provides an opportunity to reduce risk while maintaining return, and the different regions and countries of the world may not be highly correlated to US investments. By diversifying globally, investors can improve the risk/reward profile of a US-based portfolio.

How Forum Implements Global Neutral

At Forum, our Global Neutral portfolios are constructed based on market capitalization data, which allows us to represent countries and regions proportionately. We don’t tilt heavily toward or away from any one market based on short-term economic data or headlines. As we see in the graph below, the weightings change a lot over time. For example, US weightings have been as high as 70% in the 1970s and as low as 28% in 1989.

To avoid extreme moves, Forum smooths the weighting over the most recent 5 years, creating a more stable path to remaining global neutral. Below is a graph of what the hypothetical weighting of the US would have been over time using Forum’s 5-Year smoothed weighting.

As we can see, the smoothed approach remains close to the weightings of the markets, while creating a slightly more stable allocation globally.

We also believe this discipline helps reduce emotional decision-making. When the news cycle focuses on geopolitical tensions, recessions abroad, or currency moves, our clients can take comfort in knowing that no single region dominates their portfolio. It's a structured way to stay invested and focused on what really matters — long-term progress toward your financial goals.

We focus on tax efficiency, rebalancing discipline, and aligning the investment mix with your financial goals. When it comes to geography, we stay neutral because we believe that’s the most rational starting point.

The Bottom Line

Global Neutral is more than just a label — it’s a philosophy rooted in humility, evidence, and discipline. At Forum, we believe it’s the most reliable way to ensure that your portfolio reflects the world as it is, not as we guess it might be. By embracing a global perspective, you’re positioning yourself for long-term success in an unpredictable world.

If you’d like to better understand how this approach fits your financial plan, reach out to your Forum advisor. We’re always here to help guide you with clarity and confidence.

SOURCE

The Financial Advisor survey considers several factors including growth in firm assets, number of clients and total assets in 2024 when determining RIA ranking.

As one of the newest Forum partners, Jeff Doblin shared his view on Forum’s growth. Jeff commented, “Since joining Forum in 2017, I have been proud to be part of a growth-oriented firm that prioritizes innovation, client service, and collaboration among advisors, partners, and leadership.”

Forum Co-Managing Partner, Nirav Batavia shared his perspective. Batavia said, “This recognition reflects something deeper than just growth — it's a testament to the trust our clients place in us and the enduring strength of the service our advisors provide to our clients and their families across generations. We're honored to be included, but even more grateful for the relationships that made it possible.”

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see FA’s RIA Rankings information below). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients.

FA’s RIA Rankings: FA's RIA survey is a ranking based on assets under management at year end of independent RIA firms that file their own ADV with the SEC. FA's RIA ranking orders firms from largest to smallest, based on AUM reported to us by firms that voluntarily complete and submit FA's survey by our deadline. We do our best to verify AUM by reviewing ADV forms. To be eligible for the ranking, firms must be independent registered investment advisors and file their own ADV statement with the SEC and provide financial planning and related services to individual clients. Firms must have at least $500 million in assets under management as of December 31, 2024, to be included in the print edition of Financial Advisor magazine's 2025 RIA survey. Firms with under $500 million will be included in FA's expanded 2025 online RIA survey. To be included in the published survey, firms must complete and submit a survey on their firm's behalf.  For more information on the methodology please click here.

Diversification is a pillar of sound investing. Yet, after the extraordinary short-term returns of a handful of megacap tech stocks — the Magnificent 7 — many investors now hold too much of one or more individual stocks. From a diversification standpoint, these are considered highly concentrated positions.

And the higher the concentration, the greater the risk.

Many of our clients who have these positions would love to diversify out of them but avoid doing so due to capital gains taxes incurred upon sale. In this article, we’ll explore strategies your advisor can use to diversify concentrated stock positions — before they go from high-flying to crash-landing.

What if I’m Hesitant to Sell Winners Now?

Letting go of recent winners can be emotionally and financially challenging, particularly when they’ve been instrumental in creating wealth for you and your family. While the purpose of this article is not to convince you to sell, we did want to point out a few sound reasons to diversify.

In our recent blog How Far Can It Go? An Examination of US Large Cap Stocks from February, we point out that US stock returns (compared to global stocks) had an abnormally good period the past six years. But looking ahead, that outperformance likely will not persist due to the historically high price of US stocks today.

Another article we wrote a few years ago, Diversification Drives Higher Expected Returns, Not Just Less Risk, pointed out that about two-thirds of stocks underperform the Russell 3000 Index. Historically, the median compound return of individual stocks is surprisingly low — close to zero. In other words, if you ranked the performance of 3,000 stocks over time, the one in the middle (the 1,500th best performer) barely broke even! That’s a sobering reality: even among large pools of companies, many fail to deliver long-term growth.

Tools That Let You Diversify

1. Sell Down Over Years

One of the most effective strategies is also the simplest. Rather than sell all at once, you can plan to sell over a period of years, such as three to five years, so that if the stock keeps doing well, you won’t experience severe “FOMO” (fear of missing out). The plan might involve selling a third of the position in the first year followed by the same dollar amount each of the next two years. If the stock has done well, you’ll still have a bit left in the third year, and that’s OK. If the stock has done poorly, you will have worked out of the position fully and, thankfully, would have sold a good portion of the stock before the poor performance occurred.

This strategy does generate substantial capital gains each year, but over the next 15 years, your now-diversified portfolio, tilted toward the factors that drive higher expected returns, should deliver a more reliable investment experience to support your retirement and/or future goals.¹ For readers who feel that 15 years is a long time, keep in mind that an 80-year-old couple has a greater than 25% chance of at least one of them living to age 95.² That’s a real possibility and something we should not ignore.

2. Tax-Loss Harvesting

During market volatility, sometimes we can strategically generate a capital loss that can be used to harvest an equal amount of gains in your concentrated holdings. And because losses offset gains, doing so lets you strategically rebalance over time, smoothing out the overall tax impact.

If you happen to have a significant number of individual stock positions, holding these in a separately managed account (SMA) can be a vehicle to harvest losses even more tax-efficiently and diversify into a more balanced portfolio.

3. Exchange Funds

A newer opportunity for diversifying out of a concentrated, highly appreciated position is something called an exchange fund (EF). (Note that this is not to be confused with an exchange-traded fund (ETF), which is different.)

The basics of how an exchange fund works are:

1. You contribute individual stock shares to a pooled partnership.
2. There is no immediate sale — so no capital gains tax upon contribution.
3. The funds stay locked up for about seven years.
4. Some regulatory rules need to be met, such as at least 20% of assets in the exchange fund must be in non-liquid holdings.
5. At exit, you receive a diversified basket of positions, not just cash.
6. No tax is paid unless you sell.

Historically, exchange funds have only been offered by a few of the big wirehouse firms at very high costs and with only a few dozen securities coming out in the “diversified” portfolio at the end. Dimensional Fund Advisors, our preferred fund provider, is launching a more cost-effective solution later this year that should distribute a more diversified portfolio back to you. More information is to come, so please reach out to your advisor if you have interest in exploring this solution when it becomes available.

4. Donor-Advised Funds (DAFs) and Other Charitable Strategies

A classic solution to highly appreciated securities is to give them away to charity. An outright gift of highly appreciated shares can divest a concentrated position without any capital gains tax. Some charitable strategies can even be structured to pay you income, such as a charitable remainder trust.

A donor-advised fund (DAF) is one of the more popular charitable solutions for appreciated stock. When you transfer highly appreciated stock into a DAF, you can sell the stock and diversify without any tax liability. The donation to your DAF allows tax-free diversification of the investment, provides a charitable tax deduction, and gives you discretion to direct grants to individual charities over time. It’s a win for wealth, taxes, and your charitable intent.

Putting It All Together

Talk to your advisor about:

• Establishing a sell-down strategy over time
• Harvesting losses, possibly within a separately managed account
• Diversifying through an exchange fund
• Using a charitable strategy such as a donor-advised fund

These strategies, used alone or in combination, offer powerful ways for savvy investors to turn big winners into sustainable, diversified portfolios — without letting taxes hold you hostage.

SOURCES

The prevailing consensus entering 2025 suggested another period of US market dominance, driven by the theme of deregulation driving animal spirits and a continuation of American exceptionalism expected to favor US stocks. That’s not what happened, as the chart above shows. Instead, in a surprise to many, international stocks (International Developed + Emerging Markets) outperformed US Stocks by almost 13%!¹

Markets Will Always Surprise Us

History is full of examples where consensus expectations have been overturned. In 2000, during the height of the dot-com boom, few would have predicted that emerging markets would lead the following decade. Similarly, in 2008, during the depths of the financial crisis, many believed US stocks would take years to recover — yet they went on to deliver a remarkable bull run beginning in March 2009.

This is why even valuation metrics like price-to-earnings (P/E) ratios, while useful for long-term assessment, offer little predictive power in the short run. Consider the quote usually attributed to John Maynard Keynes, “The market can stay irrational longer than you can stay solvent.”

Global Asset Class Returns Since 1999

The Importance of Diversification and Discipline

The outperformance of international developed markets to start this year is a textbook example of why global diversification is crucial. The well-known description of diversification as “the only free lunch in investing” is usually attributed to Harry Markowitz, the father of Modern Portfolio Theory. By diversifying investments across various markets and asset classes, investors can reduce risk without necessarily sacrificing returns — a rare advantage in the world of investing.

However, diversification alone isn’t enough. Investors also need the discipline to stay invested through market turbulence. Timing the market — based on short-term movements — is a notoriously difficult, if not impossible, game. As Peter Lynch once said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Turning Volatility Into Opportunity

Market fluctuations cause asset weights to shift. When stocks rally, they end up comprising a larger portion of a portfolio. When stocks decline, their weighting shrinks. Rebalancing ensures that investors take profits from outperforming assets and reinvest in underperforming areas — essentially, buying low and selling high.

For instance, investors who rebalanced in a disciplined way over the last few years have likely reduced US equity exposure created by its strong performance and reallocated those funds toward international markets when they were relatively undervalued. This year, that discipline has paid off.

The Best Path Forward

Investors who stayed the course and maintained globally diversified portfolios were rewarded. Those who tried to outguess the market or chase upward trends likely missed out on this opportunity.

While no one can predict what the next month, quarter, or year will bring, one thing remains certain: investors who focus on process over prediction, discipline over speculation, and diversification over concentration will always be in the best position for long-term success.

SOURCE

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This communication is for informational and educational purposes only and does not constitute investment advice or a recommendation. Past performance is not indicative of future results. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.

Divorce is not just a legal ending — it’s a financial inflection point. For many households, the divorce process involves untangling years of shared financial decisions, often under emotional strain and with significant disparity in financial knowledge between spouses.

One partner may have handled the family’s investments, coordinated with tax advisors, and made long-term planning decisions. The other may be seeing their own financial snapshot in detail for the first time. When that imbalance exists, financial clarity becomes critical. Because dividing assets without understanding them is not just risky — it can affect financial stability after divorce for years to come.

1. Financial Imbalance in Divorce Isn’t Always About the Law: Asset Division in Divorce

While property division laws vary by state — with some applying equitable distribution and others following community property rules — the legal framework doesn’t account for differences in financial knowledge between spouses.

In many divorces, one spouse has managed the household’s investments, worked closely with financial advisors and accountants, and made long-term financial decisions. The other may be reviewing statements, tax returns or retirement accounts in detail for the first time.

This kind of financial imbalance in divorce isn’t reflected in the settlement structure — but it has real consequences. Even a division that’s legally fair can lead to very different outcomes if one party doesn’t fully understand the short- and long-term implications of what they’re receiving. Financial decisions made during divorce aren’t just transactional — they’re directional. They set the course for the next chapter of life.

2. Financial Literacy in the Divorce Process Is Power

Clients may express emotional attachments to particular assets: wanting to keep the house, avoid conflict over retirement accounts, or maintain a familiar lifestyle. But the real challenge is translating those wishes into sound financial decisions.

Without expertise in tax, cash flow, and risk exposure, it’s easy to mistake emotional comfort for financial security. And in divorce, that mistake can be costly. What looks like stability today might lead to a shortfall tomorrow.

A financial lens allows for deeper analysis into understanding the financial implications of divorce:

How will support payments affect future budgets?

Is it better to take the liquid asset or the appreciating one?

What are the implications of keeping the house if income is variable?

What happens when alimony ends?

These aren’t just technical questions — they shape the viability of life after divorce.

3. Why Financial Planning During Divorce Should Be Present from the Start

Legal guidance is crucial, but a financial divorce strategy is what ensures the negotiated terms align with a livable future. When a financial advisor — particularly one with divorce-specific training such as a Certified Divorce Financial Analyst® (CDFA®) — is involved early, clients gain access to forecasting, tax modeling, and long-term planning insights that go beyond the settlement.

Rather than reacting to proposals from attorneys, clients can proactively assess trade-offs and negotiate with clarity. And for those who were never the financial lead in their relationship, this may be the first time they fully understand their assets — and how to protect them.

4. A Future That Works Requires Planning Now

Divorce is the close of one financial partnership, but also the beginning of a new financial life. It’s a time to make decisions with far-reaching impact: where to live, how to invest, when to return to work, or how to support children through transition.

When divorce financial planning is integrated, individuals are better positioned to move forward with agency. They’re not just settling; they’re building.

Conclusion

Dividing assets may mark the legal end of a marriage, but it shouldn’t be the starting point for financial clarity. By bringing financial strategy into the process early — especially when one spouse holds more financial knowledge — individuals can avoid costly mistakes and create a future that reflects both equity and intention.

For clients navigating divorce, working with a financial professional who understands the legal, tax, and planning implications can be a defining factor in their long-term financial health.

This article was written by Tatiana Sunik, CFP®, CDFA®, a Financial Advisor at Forum Financial. She works closely with individuals navigating life transitions such as divorce, offering planning-first insight and guidance tailored to each client’s long-term goals.

The story of how finance became a science and caused a revolution in the way we invest is told in a compelling new documentary, Tune Out the Noise, directed by Academy Award-winning filmmaker Errol Morris.

Through personal interviews, the film presents a definitive account of the events that led to “the financial revolution that changed the way the world invests.”¹ The documentary explores topics such as markets, diversification, and Dimensional Fund Advisors, the firm at the cutting edge of this movement.

Forum Partner Norbert Mindel, JD, CFP® is featured in the film among the academic leaders and visionaries of this novel approach to investing, including David Booth, Eugene Fama, Kenneth French, Gerard O’Reilly, and Dave Butler.

“Tune Out the Noise is a story of how data drives financial solutions,” Mindel said. “Though it may seem obvious in hindsight, it was groundbreaking at the time. I knew intuitively that they were onto something because of the compelling evidence that Dimensional had, based on decades of data.”

The Wall Street Journal described Tune Out the Noise as “a nerdy and genuinely engrossing documentary about investment strategy.”² You can read the rest of the Journal article here.

Reflecting on how Dimensional carved a new path for investors, Mindel said, “It gave me the ability to embrace an investment philosophy that would provide clients with a long-term strategy to achieve their financial goals.”

We invite you to watch Tune Out the Noise streaming free on YouTube. Click to watch on YouTube and let your Forum advisor know what you think of the film.

SOURCES

We will look at:

1. What is going on in the world around us
2. Why staying invested remains our best advice
3. How your portfolio reacts to events

What’s Going On

The greatest near-term risk of the initial salvo of President Trump’s tariffs was that the global economic system might seize up. The 90-day pause on tariffs for most countries announced April 9 relieved a lot of that pressure, as evidenced by markets being up 9.5% for the US S&P 500 and 8.8% for the MSCI All Country World Index (ACWI) in a single day.¹

Since that 90-day pause, the focus has been on China and the US escalation of tariffs and counter-tariffs. In addition, this escalation has led both countries to try to persuade trading partners to choose a side. China aims to maintain its manufacturing dominance and expand use of the yuan in worldwide trade. The US wants to stymie any further use of the yuan, reduce China’s dominance of global trade, and shift some manufacturing to either the US or more friendly trading partners.

The best illustration of why China is the primary target of the current administration’s trade war is captured in this visualization from www.econovis.net:

While US trade has grown 2.6 times over 25 years, China’s combined trade has gone up 13 times. China is now the largest bi-directional trading partner for the majority of the world — leveraging trade dominance into influence.

Our goal with this article is not to provide a political viewpoint, but rather to help you understand what’s happening so you can make informed investment and life decisions. (Hint: it usually makes sense to stay invested.)

Should I Stay Invested?

We all have opinions about what the future holds. But since none of us have a time-traveling DeLorean with which we could accurately predict what will happen in the future, you’re better off staying invested.

To understand why, we will start by exploring the concept that markets do an excellent job of rapidly adjusting to new information and incorporating the expectations of millions of buyers and sellers into stock prices — in real time.

This phenomenon is illustrated by something called the bid-ask spread. After each trade, there's a brief moment of balance — no one is willing to sell for less than the current bid or buy for more than the current ask. That balance helps stabilize prices until the next trade.

That doesn’t mean the market price is right — just that no one's willing to trade outside that bid-ask range at that moment. And it doesn’t matter if you are a retail investor or a sophisticated institutional investor, the bid-ask spread is the same.

The market price is a balance of everyone’s best guess about fair price happening in real time, every second. This price movement can happen fast, like after the initial tariff announcement and again when the 90-day tariff delay was announced.

When news is first announced, prices adjust quickly and then stay a bit bumpy as further details filter out. This repricing happens so fast that if you’re reading about it in an article or watching talking heads on the news, then it is probably too late! The best assumption from that point forward is that new information is already baked into the price you’re going to pay.

In the context of the current tariffs: if trade deals are struck between countries, stock prices may rise further. If the US-China trade war expands or other countries are not quick to strike deals, stock prices may go back down.

The current market price is basically a blended guess — an average of what millions of investors think might happen. Beating that collective brainpower isn’t impossible — but it’s extremely rare.

What Does This Mean for My Investments?

The chart below shows that historical returns after a 10%-or-worse decline have been higher than average for the year ahead. This may seem counterintuitive. It is also the origin of the rule of thumb that “the best time to invest is when things look their worst.” While not always accurate — as things could always get worse — the more likely thing is that at some point they will get better, markets will recover, and that recovery is often rapid.

Looking back, the right thing to do has always been to stay invested although it may not feel like the right thing at the time. All too often, those that get out of the market often end up sitting out too long because markets usually recover faster than the economy or other visible indicators. So, our advice remains to keep your focus on the long-term goal rather than short-term events.

Many people have heightened concern right now about US companies or the US dollar depreciating, or both. This was a concept we wrote about in our recent post, How Far Can It Go? An Examination of US Large Cap Stocks, the emphasis there being to stay diversified globally and to keep holding international stocks even though US stocks — in particular large and growth stocks — had done so much better in recent years.

As pointed out in our April 7 blog post, Forum’s Market Commentary on Tariffs, owning international stocks is crucial to reducing these risks. We control these risks by diversifying, instead of making concentrated bets on what will do better next. At Forum, a little less than half of most clients’ stock allocations are invested in international companies with foreign currency exposure using exchange-traded funds and mutual funds not hedged to the US dollar. Owning both US and international stocks helps cushion returns when the US dollar loses value, compared to owning only US stocks.

Putting It All Together

As the tariff situation continues to unfold, and as political and economic variables shift in real time, our approach remains consistent: acknowledge what we don’t know, build around what we do, and stay grounded in strategies that work over the long term. The market may remain bouncy, and headlines may keep coming. But in the meantime, life goes on, plans evolve, and thoughtful investing continues to reward those who stay focused on what truly matters.

SOURCE

Let’s Start With an Explanation of Tariffs

Tariffs have not been in the news for a long time, so let’s start with what a tariff is: it is a tax placed on foreign goods. The importer pays the tax. However, the importer will often increase their prices as a result. This higher price generally gets paid by the consumer. Tariffs decrease aggregate demand because some consumers will choose not to buy the goods at higher prices.

The government receives the tax from the tariff. The consumer either consumes less and/or pays a higher price for their consumption. It may or may not result in domestic production increasing, depending on circumstances.

The way tariffs were structured in this case was also highly unusual, using a formula that more approximates the trade deficit with the exporting country than reciprocity of foreign tariffs. This indicates the main goal of these announcements is to negotiate to reduce trade deficits rather than a narrower focus on tariffs specifically.

So, where do things go from here? A lot depends on future events. If negotiations are announced, the downturn could recover quickly, like it did in March 2020 at the height of COVID pandemic lockdowns, or reciprocal tariffs could proliferate, leading to prolonged down markets, like during the oil embargoes of the 1970s. The good news is that many countries are coming to the table to negotiate, and if enough countries do so, then the more confrontational ones may reconsider their stance.

Regardless of the outcome, the most important thing to do during events like this is to remain disciplined. To paraphrase Warren Buffett, we should stick with the plan and rebalance, even — or especially — when others are fearful.

Uncertainty Is Always Uncomfortable

Looking back, investors have had to experience periods like this many times over the years. The following chart provides a bit of context, showing the size of market downturns during any given year (“largest intra-year decline”) and how often markets overcome from these declines to end the year at a gain.

The stock market pulls back at some point every year. Yet, investors are rewarded far more often than not for sticking it out and staying invested. In 17 of the last 20 years, US stocks ended with gains for the year despite 12 of those years experiencing double-digit intra-year declines.

What Do We Do About All of This?

Of note, two of the factors we have advocated for in the past decade have helped our portfolios:

• International Stocks

Some of the worst returns have been among US Large company stocks, which had high prices coming into this downturn. Staying globally diversified with our international stock exposure has helped our portfolios.

• Long-Term Bonds

While long-term bonds didn't work in 2022 for various reasons (covered here), these past few days are exactly the kind of time when long-term Treasury Bonds have the greatest impact, much as they did in March 2020. Having bonds go up while stocks decline is exactly what makes our rebalancing strategy so effective and impactful in a down market.

Conclusion

We understand the temptation to “sit it out” and wait on the sidelines. But doing so not only can be highly damaging to your long-term plans, you will more than likely miss the recovery that often happens quickly and well before things look better.

A disciplined rebalancing strategy and looking for meaningful loss-harvesting opportunities are the two best strategies we have for taking advantage of market volatility. Your Forum advisor is here to offer comfort and calm during turbulent times like these.

Here’s an additional perspective if you’re looking for more:

https://awealthofcommonsense.com/2025/04/how-bad-could-this-get/

Another way to visualize this is the following chart ranking asset classes of stocks. US Large has been the top-performing asset class in five of the last six years. An incredible run.

Quite a few explanations have been offered to rationalize the recent outperformance of US Large. The US dollar is strong. The big tech companies are all-in on AI, a trend that many expect to continue for years to come. And the US business environment — with its innovative and entrepreneurial spirit — seems set up for success.

Alternatively, the AI reverie may pop like the tech bubble. Geopolitical risks may reignite either in Ukraine or the Arctic. The US dollar could depreciate as debt levels become unsustainable.

Our approach to investing is not based on which of these things will happen. Instead, we hold a diversified set of investments that hopefully maximizes the number of possible futures in which our portfolio can still be successful despite what happens.

The coin can flip. The same chart looked exactly the opposite from 2002 to 2007, when US Large occupied the bottom two rows of the chart for five out of six years. International and Emerging Markets stocks dominated the top of the chart for years. Similar to now, there were plausible stories to rationalize the returns. International companies were dominating world trade, taking advantage of cheaper labor markets and expanding rapidly as they sold their goods to the increasingly affluent billions of people in their local markets.

The parable-like wisdom being that a person who bought and held the S&P 500 through both these periods is neither a genius nor a dullard. They have just gotten lucky lately. It is a helpful tale that cautions against reading too much into any extraordinary market run.

A Closer Look at US Large

US Large could certainly continue rocking out for a while longer. However, one fundamental concept we believe to be true is that what price you pay for a stock matters.

If one company is 2X better than another similar company (we will leave the definition of better up to the reader), but its price is 4X higher than that other company, is it a good investment? Presuming your definition of better captures things like future growth expectations and comparative advantages, then probably not.

The recent outperformance of US Large, and in particular US Large Growth, has not been driven primarily by higher earnings of US Large Growth companies, regardless of whether comparing to Value or International stocks.

One way to illustrate this point is to directly compare the rise in earnings to the rise in price. From October 2014 to September 2024, the price of US Large Growth companies rose +300% while earnings only rose +137%.¹ This implies that most of US Large Growth’s return has been from valuation expansion rather than earnings growth.

Now, Let’s Include International Stocks

For International, we will use a ratio of what it costs to buy a stock to its earnings, which is called the PE ratio. The PE ratio measures how expensive it is to buy a dollar of earnings of different companies.

This is similar to comparing the price per pound of tilapia versus salmon at the grocery store. You may prefer one fish over the other, so you would be willing to pay more for it. But, recalling our earlier example, if the price for salmon goes from twice as expensive as a pound of tilapia to four times as expensive, some consumers will switch to making fish tacos for dinner instead of salmon.

In the chart below, you can see that the price to buy a dollar of US Growth companies’ earnings is very expensive, historically speaking.² You have to pay over $40 for each dollar of earnings. Meanwhile, US Value stocks and International stocks are well within their normal range. Now, Growth companies tend to be stronger companies and should expect to garner a premium. The question of the day is whether they are that much better than their counterparts than they used to be.

Recall the earlier example of a hypothetical company that is 2X “better” but has a 4X higher price. That is essentially what we are seeing in this chart. US Growth companies used to be about 2X the price of US Value companies, but the recent expansion has resulted in US Growth companies garnering about 4x the price today. International has varied a bit more in the past but currently are priced very similarly to US Value companies.

Another interesting data point is that US Small companies’ earnings went up almost as much as US Large Growth companies’ earnings for the period we looked at earlier (October 2014 to September 2024). While US Small companies’ earnings went up +135% (compared to US Growth up +137%), their price only went up +90% (compared to US Growth up +300%). This again implies US Growth’s exceptional price appreciation is not just driven by the exceptional profit growth of these companies, as smaller companies realized similar results but their price per dollar of earnings went up by much less.

Given the high valuations and how extraordinary this US Large Growth run has been, our best guess is that the next 10 years will look a lot different than the past several years. There is little evidence in the short term that high PE ratios (or derivations thereof) can predict the coming year’s return. At best, the research suggests US Large Growth should have lower-than-average returns over the next 10–20 years, but the short term is very much unknown.³

Conclusion: US Large Growth Is Perhaps a Friend and a Foe Right Now

There are great things about US Large Growth doing well.

First and foremost, if you are a US investor, you probably own a lot of it. The factor-tilted stock allocation that Forum created called Global Neutral Portfolio holds 37% in S&P 500 stocks.⁴ When you consider that portfolio holds stocks of 13,457 companies, that much of an allocation to about 500 of them is a pretty substantial weighting.

If US Large Growth keeps doing well, you will be glad you own it. When we consider all the evidence, we think the best plan is to own many asset classes and stay diversified.

SOURCES

For Jeff, it is vital that people understand complex financial concepts from a quantitative and qualitative perspective to help them make informed decisions. Subjects that may at first be difficult to comprehend become energizing topics of conversation for Jeff and his clients. Jeff said: “I provide a second set of eyes and ears for all things financial. When clients have any questions related to their finances, that is where I come in. I help clients stay in their seats, and I make sure they are accountable to their plan.”

Since Jeff joined Forum in 2017, he has worked closely with Forum Financial Advisor Alan Hambourger and Forum Financial Advisor Megan Martin in the Forum Skokie office. With a camaraderie that has endured nearly a decade, Jeff, Alan and Megan bring different skill sets to take a team approach when helping clients.

“I am excited to see that Jeff has been accepted as a partner for 2025,” Alan commented. “I have worked with Jeff for the past eight years and have mentored him. As a trader for 20 years in his past life, he is a great networker and will be a great asset to the Forum team.”

Within each relationship, Jeff finds the optimal balance of education and encouragement to support clients as they pursue their goals and aspirations. Megan reflected on how Jeff goes out of his way to connect with clients and colleagues: “Jeff has the rare ability of taking very complicated concepts and explaining them in a way that anyone can understand. He consistently demonstrates a remarkable amount of compassion when talking with clients. He never backs away from being a source of support for both his clients and his co-workers. Jeff is the epitome of a team player.”

“Jeff always takes the time to be deeply involved, both with his clients and his Forum team members,” Forum Co-Managing Partner Jonathan Rogers noted. “I appreciate his genuine interest in people and how much that comes through in every conversation and every action. I am proud to welcome him as a partner at Forum!”

When considering what he is most excited about as he steps into his new role as a Forum partner, Jeff said: “Since I joined Forum in 2017, I knew that I wanted to help shape the future of the firm. I am excited to dig a little deeper and see if I can add value to an already successful experience for our clients. When I look at the individuals associated with this firm, and especially the partnership, I am extremely motivated to learn and grow with such great professionals and more importantly, great people.”

But is that all there is to these assets? Not exactly. Retirement assets and lifetime tax planning are intertwined. The rules are complex, and the planning opportunities are many. This article will delve into those planning opportunities and how you can take advantage of them while also providing a fresh outlook on paying taxes.

A Different Way of Looking at Taxes

Here are a couple of planning principles related to this fresh approach to tax planning.

• Required minimum distributions are just the minimum. When the IRS mandates that a certain amount must be taken from an IRA, that mandate is just the minimum — hence the term “required minimum distribution.” But there are reasons to consider taking out more than the required amount. It would mean paying more in tax but would also be reducing the size of a pre-tax IRA. Also, there may be room in the current tax bracket to absorb that extra income before bumping into a higher tax bracket.

Note that whether to take more than the required amount — and how much more — is an analysis that ideally should take place each year in the fall with the help of a tax preparer and your Forum advisor.

• Accepting higher taxes today for future benefits. This goes back to the earlier point about smoothing out tax liability over a lifetime, such as taking more than the required amount from an IRA or doing a strategic Roth conversion (see the next section). Both of these are voluntary actions that will increase current-year tax liabilities. While no one likes paying taxes, if it means a better outcome over the long run to pay a little more today, then it should be considered.

Understanding Strategic Roth Conversions

Why would someone do a Roth conversion? There are several reasons:

• Prepay the income tax for children
• Reduce the balance of a pre-tax IRA prior to being required to take distributions from it
• Pay taxes now while in a lower tax bracket when likely to be in a higher tax bracket in the future
• Tax diversification — different types of accounts are treated differently for tax purposes — to have flexibility in retirement for drawing income

Roth IRAs can be powerful tools for cash flow, tax and estate planning. What makes a Roth conversion strategic is the use of low tax brackets in low-income years to maximize the value of the conversion.

In other words, there are benefits associated with paying a little more tax now — thanks to a Roth conversion — rather than paying less now and much more later without doing Roth conversions. The goal with strategic Roth conversions is to smooth taxes over a retiree’s lifetime, as opposed to allowing required minimum distributions to push retirees into higher tax brackets as they age.

Inherited IRAs: The Good, the Bad, the Ugly

One area of retirement accounts that has received a lot of attention lately is that of inherited IRAs — accounts created for the benefit of beneficiaries after the death of the original account owner. Between recent legislation passed by Congress and new regulations published by the IRS, the rules for inherited IRAs have become quite confusing. That is the ugly of inherited IRAs — the rules are rather complicated, having changed significantly since 2019, and it can be difficult to understand all the nuances without guidance.

For most non-spouse beneficiaries, with few exceptions, inherited IRAs will have required minimum distributions annually and must be completely distributed by the end of the 10th year following the death of the original account owner. For those with sizable pre-tax inherited IRAs, that could mean large taxable distributions. That is the bad — pre-tax inherited IRAs are not great for tax-paying beneficiaries. (However, pre-tax IRAs are excellent assets to leave to charity.)

The good is that inherited Roth IRAs are great for beneficiaries. While most non-spouse beneficiaries will still have to deplete the inherited Roth by the 10th year following the death of the account owner, none of the required distributions during those 10 years is taxable. To the extent funds remain in the inherited Roth, that money can continue growing on a tax-free basis until required to be distributed.

That is why doing strategic Roth conversions can be so beneficial to the next generation — inheriting Roth IRA assets may provide advantages compared to pre-tax IRA assets.

Conclusion

The complex nature of retirement assets and the various rules that govern them provide some attractive planning opportunities. With the right professionals on your team, you can navigate this part of your financial life with ease, confident that you are managing your retirement assets effectively for yourself and your heirs.

SOURCE

1. The value of the portfolio
2. Any future contributions or withdrawals
3. Expected future portfolio returns

The portfolio value and your contributions to the portfolio are straightforward data points. We know today’s value of the portfolio. With a little bit of budgeting, we can estimate your future income and expenses, so we should be able to estimate future contributions or withdrawals from the portfolio.

When it comes to the third factor — expected returns — higher long-term government bond yields are a rising tide that lifts all boats. Let’s break down what that means.

(When referencing stock returns and bond interest rates, we will be referring to the MSCI World Index for stocks and the US 10-Year Treasury, respectively. Any reference to a 60% stock and 40% bond investment is 60% MSCI World Index and 40% Bloomberg US Treasury Bellwether 10-Year Bond Index. For illustrative and educational purposes only. Not intended to represent any Forum strategy.)

Future Spending Ability Was Basically Flat in 2020

Even though the stock market dropped 32% from peak to trough in March 2020, the market fully rebounded and then some by the end of the year.¹ From a portfolio perspective, 2020 was a good year. However, bond yields dropped from 1.92% at the beginning of 2020 to 0.93% at the end, forecasting lower bond and stock returns going forward.

In other words, stock markets did well, but bond yields went down (i.e., expected returns of both stocks and bonds went down), so the net effect was a slightly positive year for most investors from a future cash flow standpoint.

Future Spending Ability Was Up in 2022, Really!

It is not easy to forget the panic that gripped investors in 2022. Many investors were fearful of the market, understandably so.

A portfolio of 60% stocks and 40% bonds was down about –17% in 2022 with both stocks and bonds dropping similarly in value. However, the silver lining was that bond yields increased from 1.52% at the beginning of 2022 to 3.88% at the end ... meaning that expected returns for stocks and bonds went up … by a lot.

Even though portfolio values were down in 2022, this jump in expected returns meant that spending ability surprisingly went up in 2022 for most investors. Yes, this is a very counterintuitive result! Even with portfolios down in value, expected returns jumped by enough to more than offset the decline, creating more secure outlooks and retirements for investors in the long run.

Future Spending Ability Increased Quite a Bit These Past Five Years

Below is a visual look at the last five years in terms of portfolio return and change in bond yields. What is really striking is that all of the last five years were neutral or positive in terms of increasing future spending ability — especially the last four. We have to go back to 2018 to find a year when expectations of future wealth and spending ability declined.

This chart uses the return of a portfolio of 60% stocks and 40% bonds to show a hypothetical investor’s portfolio return and the yield of 10-year U.S. Treasury Bonds for interest rates. Anything up and right of the neutral line represents a straight-line increase in spending for an investor who plans to invest at least another 10 years. Notice that all five blue dots, which represent years 2020–2024, are up and to the right of the neutral line — representing higher spending ability each year.

Looking at 2024 Through a Financial Planning Lens

The 10-year U.S. Treasury bond yield ended 2023 at 3.88% and rose to 4.58% by the end of 2024, thus increasing bond and stock expected returns going forward as mentioned earlier (remember that rising long-term government bond yields increase the expected returns of stocks and bonds). The combination of higher portfolio values and higher future expected returns means that long-term wealth and spending ability look stronger than ever.

2024 ended up being a strong continuation of the last five years, providing investors with the best outlook for retirement spending and long-term portfolio values yet.

Conclusion

As the Eagles sang in “The Long Run”: “Well, we’re scared, but we ain’t shakin’. Kind of bent, but we ain’t breakin’ in the long run.”²

Viewing the world through portfolio values alone, the last few years felt scary with the drop in the market in early 2020 and the drop across stocks and bonds in 2022. However, when we view the world in terms of long-term spending and wealth, the last five years have added a significant amount of long-term security and financial flexibility for disciplined investors.

SOURCES

Finding the sweet spot of risk versus reward in an investment portfolio may be less intuitive than my reckless driving example, but we can look to history and see what we can learn. In this article, I’m going to demonstrate that including a small slice of bonds in an otherwise 100% global stock portfolio has reduced volatility with no meaningful impact on long-term returns. Further, I’m going to present a couple historical scenarios to demonstrate how much of a lifeboat bonds have been during intense market downturns, which I argue helps investors stick to their plans during tough times.

Section I: Avoiding Uncompensated Risk

Most people are familiar with the risk/reward tradeoff of stocks and bonds. If you need or want less volatility in your portfolio, bonds get an increasing weight, and you implicitly pay for the lower volatility in the form of lower returns. On the flipside, if you’re willing and able to take risk (two components of having a high risk-tolerance), then you should favor stocks and go for the higher returns. To that end, for those with the highest risk tolerance, is 100% stocks the right allocation? In the same way that overly aggressive driving likely doesn’t pay off even for those who can stomach the risks, a 100% stock portfolio might be taking some uncompensated risk.

More Stocks → More Risk

The chart below shows the rolling 12-month trailing returns for the global stock market and our 80/20 portfolio. When the series were above zero, the respective portfolios had a positive return over the previous 12 months, and vice versa when the lines were below zero. For reference, I’ve shaded the areas where the global stock market had a negative 12-month trailing return, which will be helpful for the next few charts in this section.

If you look closely, there’s often a gap, which means that when the market was up, the 80/20 portfolio lagged slightly, and when the market was down, the 80/20 portfolio reduced the damage.

Let’s examine that gap and isolate the impact of including bonds in the stock portfolio. In the chart below, when the blue area is above zero, the 80/20 portfolio outperformed the 100% stock portfolio over the previous 12 months, and vice versa. In other words, when it is positive, bonds helped, and when negative, bonds hurt. The gray area still indicates when the trailing 12-month stock market return was negative.

Note what was happening when the stock market was down (gray shaded areas). Bonds tended to help the portfolio when the stock market was down, sometimes significantly and for long periods of time. To make it abundantly clear, the chart below is the same except for leaving only periods when the global stock market had a negative 12-month return.

I’m hoping this makes it painfully obvious. During stock market downturns, bonds have historically been a huge source of stability in stock portfolios, on average, thus reducing risk in the portfolio during times when you most need risk-reduction.

I’d be remiss not to acknowledge the glaring exception of 2022, and I address that in the appendix. I also include additional statistics for my fellow nerds who are asking about the realized standard deviation of the two portfolios (spoiler alert: the 80/20 portfolio had lower realized volatility).

More Stocks → More Return?

The chart below shows the cumulative returns over 54 years of the global stock market, long-term bonds, and our 80/20 portfolio.

First, the easy comparison of stocks vs bonds: Over this 54-year sample, you’d have had 2.1x as much money investing 100% in the stock market than if you’d chosen long-term bonds. Sure, the bond line is much smoother, but as long as you hung in there, stocks easily won out in the long run. In other words, it appears that the white knuckling of the 100% stock portfolio paid off relative to bonds. Maybe it did when comparing the two ends of the spectrum, but what if we reduce risk just a little bit, as in the 80/20 portfolio?

At this scale, the differences between the 80/20 portfolio and the 100% global stock portfolio are almost indiscernible without the labels. The 80/20 portfolio realized a slightly lower return of ~0.02% per year — essentially no difference.

To ensure this long-term result isn’t driven by one or two extreme time periods, we can look at shorter time horizons within the sample. The charts below depict differences of rolling 10-, 20- and 30-year returns within the 54-year sample. When the blue is above zero, the 80/20 portfolio had higher returns than the 100% stock portfolio and vice versa.

What Do I Notice?

• Measuring by 10-year-trailing returns, the two portfolios traded the leading position many times. If the long-term relative performance was driven by 1–2 outliers, we would expect to see a couple big spikes in either direction and the rest of the chart on the other side of the line.
• While the 12-month return differences can be significant (up to 10%–15% in extreme years, per the earlier charts), as we look at longer and longer time horizons, the differences are much smaller. On a 20-year basis, the annualized differences rarely broke outside of +/- 1%. On a 30-year horizon, the annualized differences were rarely outside of +/- 0.5%.

Summarizing Risk and Reward

• Risk: While adding bonds to a stock portfolio means the portfolio might lag when the market is doing well, it has also provided material protection during almost every market downturn in our sample. On average, it’s fair to say that the inclusion of bonds has historically reduced volatility (see appendix for the statistics).
• Reward (returns): Over the long run, allocating 20% of an otherwise 100% stock portfolio to long-term bonds has had an all but immeasurable impact on returns.

In other words, by including a small amount of bonds in your stock portfolio, you’re likely getting a material reduction in risk for no discernible difference in long-run returns, and this is why Harry Markowitz reportedly said, “Diversification is the only free lunch in investing.”⁴

Section II: Sticking to Your Plan

Thus far, I’ve shown you that, historically, you could have significantly reduced volatility in your stock portfolio without sacrificing any returns. If you can take less risk for the same outcome, you might as well do so. But we’re still talking about the same outcome, meaning you don’t have MORE money, you just had a less wild ride to get there. I would argue there’s considerable value in the smoother ride, as the smoother ride helps us stay in our seats and stick to our plan.

Despite its overuse, the quote often attributed to Mike Tyson is too perfect: “Everyone has a plan until they get punched in the face.” Going back to my highway driving example, what if I opt for the pedal-to-the-metal strategy only to find I’m not as comfortable with risk as I thought. Say I’m humming along at 30 mph over the limit and come over a ridge to find a cop waiting to give me a massive ticket for reckless driving, not to mention vaporize my time savings and some of my wallet. After accepting my ticket and getting back on the road (and emotionally processing my future of higher insurance premiums), if I don’t have the stomach to keep up the excessive speed, then I have no chance to recover the lost time, and I end up worse off than if I’d simply maintained reasonable speed from the start.

Getting a reckless driving ticket is not unlike a sudden market downturn in a 100% stock portfolio. The stock market has delivered fantastic returns over the long run, as depicted in the cumulative return charts above, and the plan is so simple! All you need to do is hang on through those blips in the chart along the way, and long-term returns of ~9% seem all but guaranteed. But a “blip” on a long-term chart is more akin to a punch in the face while it’s happening, and for better or worse, some of the best returns occur on the backs of some of the worst returns. If you lose your nerve and bail out when things are down, you risk not capturing the long-term returns that seem so easy and all but guaranteed. Let’s take a closer look at a couple of the more extreme historical “blips.”

Market Extreme Example 1: Deflation of the Tech Bubble

While it looks like a hiccup in the 54-year chart, the global stock market dropped 46.2% from April 2000 through September 2002 with the deflation of the tech bubble. It was a long, drawn-out slog of repricing those rosy valuations and reckoning with the fact that companies still need to make a profit. You couldn’t blame someone for feeling more than a bit jittery and wanting to pull the proverbial portfolio ripcord during those times. But while the stock market was melting, what happened to our trusty bonds? Over that same period, long-term government bonds returned 35.4%!

Yes, on all objective metrics, your total 80/20 portfolio still got creamed, but at least you had something in your portfolio that increased in value and provided reassurance that all was, in fact, not lost. Further, if you were able to stay in your seat, the stock market returned 27.3% over the subsequent 12 months, a spectacular return that you wouldn’t want to miss, and it then continued its long-term march upward.

Market Extreme Example 2: Global Financial Crisis

From November 2007 to February 2009, the global stock market dropped 55.1% — an even faster and deeper drop than the Tech Bubble. Even if I were sitting next to you showing you all the beautiful, long-term, upward-sloping historical charts and reassuring you that markets have always recovered (like they did after the Tech Bubble), a 55% drop would be difficult to endure for most people, even those who claim they can handle volatility. Lo and behold, during that same period, long-term government bonds returned a positive 16.0%!

Further, in the three months after this drop, the stock market staged a 33.9% rebound, the highest 3-month return in this 54-year sample. No, it wasn’t a full recovery (that took until 2013), but the recovery would take a lot longer if you’d bailed out and not participated in the breakneck recovery from the bottom.

I am cherry picking extreme examples, and that’s exactly my intention because that’s when bonds really shine. These and other downturns were extremely painful and stressful while they were happening, and the path to recovery wasn’t clear at the time. It never is while we’re in it. CNBC and the Wall Street Journal were (probably) talking about market freefalls with no end in sight. People were losing jobs and losing their homes. And every Tom, Dick and Harry who hides their money in the mattress instead of investing in the stock market were smugly telling everyone “I told you so.” It is not easy to ride these out, but you’d have missed sharp recoveries if you’d bailed when things were most bleak. Including bonds in your portfolio protected wealth and provided reassurance during these times, likely increasing the chances of staying in your chair and achieving your long-term wealth goals.

Conclusion

It’s pretty simple. Based on historical data going back to 1970, including a small portion of long-term bonds in an otherwise 100% stock portfolio has done the following:

1. Reduced portfolio risk
2. Cost very little, if anything, in the form of returns
3. Helped you stick to your plan when a “blip” in the long-term path sends your stock portfolio down 30%–50%

As always, there are no guarantees about the future, but for my money and risk budget, I’ll be keeping my station wagon to a reasonable speed on the highway and holding onto my slice of bonds in my portfolio.

Appendix: For Those Who Haven’t Had Enough

The Statistics

With the 80/20 portfolio, we were able to substantially reduce risk relative to 100% stocks. By including 20% long-term bonds in the stock portfolio, observed standard deviation during this sample dropped from 15.16% to 12.50% with very little impact on returns. This is possible because of the low correlations between stocks and bonds. From January 1970–December 2023, the correlation of monthly returns between the global stock market and long-term bonds was 0.083.

Why Long-Term Bonds?

I had to use a later start date of January 1976, as that’s when data for the US Agg was first published, but including data back to 1970 does not change the conclusions for the other bond series.

Of the 576 months in this historical sample, the global stock market was up 361 of those months, and it was down 215 of those months. Looking at the average performance of each type of bond, long-term bonds had better average performance in up-market AND down-market months. In other words, as a complement to stocks, they’ve provided better downside protection and upside participation that’s at least as strong as the other bonds.

Further, below is the correlation matrix of the global stock market with the three bond indexes. Looking across the global stock market row, we see long-term bonds have the lowest correlation. It’s roughly equivalent to that of the 5-year Treasuries, but the US Agg has materially higher correlation with the stock market, making it a less attractive candidate for diversification, all else equal.

In short, the returns to long-term bonds have historically exhibited low correlations with the returns of the global stock market — lower than other broad bond categories — and they’ve provided just as much protection during down times while being less of a drag in the up times. This is what makes them great candidates for diversifiers in a high-stock portfolio. All that said, long-term bonds are A LOT more volatile than short-term bonds when considering each independently, and as such, long-term bonds can only reduce portfolio volatility to a point. For those needing or wanting an even lower-risk portfolio, one should likely incorporate shorter duration bonds, though that discussion is beyond the scope of this article.

Why 80/20?

What Happened in 2022?

SOURCES

Here are several proactive measures you can take to protect yourself and your children from identity theft.

Freeze and Unfreeze Your Credit

• Equifax: Security Freeze or 888-Equifax (888.378.4329)
• Experian: Freeze Your Credit File for Free or 888.397.3742
• TransUnion: Credit Freeze or 800.916.8800

While freezing one bureau may suffice in some cases, it is safer to freeze all three, as not all financial institutions check with all bureaus before issuing credit.

For children, freezing their credit is equally important. Although the process can be more time-consuming, it is crucial to do so before they become teenagers and gain access to devices. Identity thieves often target minors because their credit histories are clean and unchecked for extended periods.

• Equifax: Freezing Your Child's Credit
• Experian: Child Identity Theft Protection
• TransUnion: Child Identity Theft

Steps To Take if You Suspect Identity Theft or Fraud Attempts

If you believe your personal information has been compromised, taking immediate action can help mitigate the damage. Here are some steps to follow:

Personal Email Accounts

• Make sure you have two-factor authentication enabled.
• Change your password immediately on the affected email account.
• Consider closing the compromised account and opening a new one with a different provider (such as Gmail).

• Perform a full system scan on all devices (computers, phones, tablets, etc.) that may have been accessed through the compromised email.

• Change your passwords for any online banking or investment accounts.
• If you have switched email addresses, consider updating your login credentials with your new email.
• Notify your financial institution or investment provider of the potential identity theft and request restricted access to your accounts.
• If necessary, close and reopen your accounts under new account numbers to prevent further fraudulent access.

• Contact your Forum advisor immediately if you suspect identity theft or fraud.
• Your advisor will inform the account custodian and take steps to update your accounts, including determining whether it is necessary to change your account numbers.
• A Forum team member will assist you with updating your Client Portal access and securing your investment accounts.

Credit Freezing and Fraud Alerts

As another option to freezing your credit, consider placing fraud alerts on your credit reports. Fraud alerts notify creditors to take additional steps to verify your identity before opening accounts in your name. Unlike credit freezes, fraud alerts allow creditors to access your credit report while offering additional protection. They generally remain active for one year and can be renewed.

Additional Recommendations

Here are some additional precautions to consider:

• Change your email address and password for all accounts tied to a compromised email address.
• File a police report if you are a victim of identity theft.
• Consider subscribing to identity protection services that offer credit monitoring and identity theft protection, such as LifeLock, Identity Guard or Privacy Guard.
• Use resources like the Federal Trade Commission’s Identity Theft Hotline at 877-ID-THEFT (877.438.4338) or the website (https://identitytheft.gov) to report and recover from identity theft.
• Contact the Social Security Administration's Fraud Hotline at 800.269.0271 for further assistance.

Be Aware of Phishing Scams

Fraudsters often try to trick victims into divulging personal information through phishing scams. Be cautious of any emails, texts or phone calls from unfamiliar sources, especially those asking for sensitive information. Any request for immediate action or pressure to share details should be considered suspicious.

Final Thoughts

In today’s digital world, protecting your personal information is more important than ever. Freezing your credit, monitoring your accounts and staying alert to scams can significantly reduce the risk of identity theft. Taking these preventative measures now will help you avoid the headaches and financial risks associated with fraud in the future.

If you have any concerns or need assistance with your investment accounts, don’t hesitate to reach out to your Forum advisor. We're here to help you stay protected and informed.

SOURCE

As a result, market expectations suggest that the federal funds rate and other short-term interest rates will likely end 2025 near 3%, while long-term rates, such as 20-year Treasury bonds, are expected to remain around 4%.

That leads us to ask two big questions. What does the Fed’s cut mean for me and my assets? And what, if anything, should we expect to change in the future?

Question 1: What does the cut mean for individuals and various financial assets?

1. Cost of Short-Term Borrowing: Good news for individuals who are borrowing in the short term, using instruments like credit cards, stock-based margin, car loans, or homeowners in the variable period of an adjustable-rate mortgage, as these rates will move down with Fed cuts. This means that short-term borrowing is expected to get cheaper over the next year.

2. Money Market/CD/Savings Account Rates: Not-so-good news for savers. A lot of these rates have been near or above 5% over the past year but will come down in conjunction with the reduction in Fed rates. The market expects these short-term rates to be around 3% or lower within the next 12 months.

Borrowing gets more attractive, but investing in cash/cash equivalents, less so. To continue earning higher returns, many individuals with excess cash will likely need to invest at least a portion of it in higher-return assets, such as stocks and bonds.

3. Mortgages: The news is not great for those hoping to see lower mortgage rates in the near future.

Mortgages, which are long-term debt, are tied to longer-term interest rates like 10-year Treasuries. At the end of 2023, the yield on 10-year Treasuries was 3.88%, compared to 3.81% as of September 30, 2024 — not much change.

Basically, long-term mortgage rates are not expected to move, nor should they be affected much, by the Fed continuing to cut short-term rates since fixed-rate mortgages move with long-term rates.

4. Future Portfolio Expected Returns (Expected Returns on Stocks and Bonds): Expected returns for both bonds and stocks — typically around 5% over 10-year Treasury bonds — are largely influenced by long-term interest rates. As we saw with mortgages, long-term rates have remained relatively flat year to date. As a result, expected portfolio returns have stayed nearly unchanged this year and are unlikely to be significantly impacted by further declines in the federal funds rate.

Question 2: What does this mean for the future in terms of further rate cuts?

To get some guidance on future interest rates, we can look at what Fed officials expect moving forward and what the market is telling us.

In his remarks, Fed Chair Jerome Powell indicated that inflation is progressing toward the target of 2%, with the Consumer Price Index showing a 12-month rate of 2.4% through September 2024, down from 3.7% in the prior year.¹ This significant cooling of inflation underscores the progress made.

Compare this to market inflation expectations over the next five years, currently 2.07%.² So, the market aligns with the Fed's view that inflation is likely to remain near the target moving forward.

This cooling of inflation allows the Fed to focus on the other part of its dual mandate, which is to try to keep the country near full employment. Full employment is usually thought of as around a 4% unemployment rate. The unemployment rate after the COVID-19 pandemic reached a high of 14.8% in April 2020 when much of the country was shut down. In the aftermath, it ended up dropping to a low of 3.4% in April 2023, which was the lowest level we had seen in over 50 years (since 1969).³

As the Fed kept rates high to cool inflation beginning in 2022, the constrictive nature of high rates on the economy has caused the unemployment rate to creep up to 4.1% (as of September 2024), compared to a low of 3.4% in April 2023. This is still historically low as the long-term average is about 5.7%. However, the risk of unemployment continuing to rise forced the Fed into action to move to less restrictive rates.

Here’s the bottom line: the market provides our best “crystal ball” into the future. Although not flawless, market expectations reflect the most likely outcomes based on the information available today. Since markets are efficient, most of the market expectations on the effects of these cuts are already priced into bonds and into stocks. It is hard to outguess those expectations!

As stated at the beginning of this piece, market expectations are that the Fed will continue to cut the federal funds rate from 5% currently to about 3% by the end of 2025. Regardless of where rates end up this time next year — which is unpredictable — we can incorporate current market expectations into our decisions, whether using debt to finance short-term purchases or investing excess cash to earn higher returns over the long term.

SOURCES

This year, Forum ranked among the top 100 firms appearing at #60 in 2024.

Forum Partner Jennifer Cray commented, “At Forum, our clients get the personalized service typically found in boutique firms, delivered by Forum's local, independent-minded financial advisors. This allows us to tailor the experience to each client’s unique needs, all while benefiting from the support and resources of a larger organization.”

Forum Partner Rob Methven shared his thoughts on Forum’s ranking: “We are very pleased to see Forum named again this year. This recognition is the result of all Forum advisors and associates working with clients to help them achieve their goals. In the past year, we have continued to make improvements in technology, training and processes to simplify the day to day for our advisors and bring more value to clients. I am especially excited about the number of younger advisors, 35 and under, joining Forum either out of school or as early career changers, something that speaks to a strong platform for future growth in our firm.”

Jennifer said, “Whether addressing immediate practical financial issues today, or engaging in big-picture discussions about goals, wants and dreams, we roll up our sleeves and work side by side with our clients. The result is long-lasting relationships built on trust, which our clients depend on to get their financial lives in order today and to build a plan for the future.”

In July, Forum appeared on the 2024 Financial Advisor RIA Ranking. Forum ranked #54 of 278 firms to appear on the Financial Advisor list in the asset category of $1 billion and over.

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients. Barron’s collected and tabulated the 2024 Top 100 RIA Firms Rankings for September 2024 using data from June 30, 2024.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Part 1: Is Your Retirement Portfolio a Tax Bomb?

In this article, David shares the various tax implications that could affect your current portfolio.

Part 2: When It Comes to Your RMDs, Be Very, Very Afraid!

In this article, David discusses what you should know about the cost associated with required minimum distributions.

Part 3: Watch Out! RMDs Can Trigger Massive Medicare Means Testing Surcharges

In this article, David explains how saving too much can eventually cost you more on Medicare premiums.

Part 4: Will Your Kids Inherit a Tax Bomb from You?

In this article, David discusses the unwanted tax bill that could be left for your loved ones.

Part 5: How to Defuse a Retirement Tax Bomb, Starting With 1 Simple Move

In this article, David shares the one simple action that can minimize a retirement tax bomb.

Part 6: Using Asset Location to Defuse a Retirement Tax Bomb

In this article, David explains how asset location can lower your tax bill.

Part 7: Roth Conversions Play Key Role in Defusing a Retirement Tax Bomb

In this article, David explores the best timing for Roth conversions.

Bonus Article 1: 2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)

In this bonus article, David describes two methods to reduce taxes.

Bonus Article 2: Can My Pension Trigger a Retirement Tax Bomb?

In this bonus article, David suggests additional strategies including asset location and Roth conversions that can help reduce tax costs.

The articles appeared in Kiplinger in August 2022, September 2022, October 2022 and November 2022 as well as March 2023.

About David McClellan

David McClellan joined Forum Financial Management in 2015. He is a Partner and Financial Advisor at Forum. David focuses on retirement planning and financial life coaching. He loves helping people achieve financial independence and a secure retirement. David is also an executive at AiVante, a machine learning technology firm that is helping the wealth management industry improve planning for client healthcare costs in retirement. David has 30 years of professional experience, primarily in wealth management. He held executive sales, product and strategy roles at Morningstar and Pershing and previously worked as a strategy consultant. He has a Chicago Booth MBA with concentrations in strategy, finance and marketing. He earned a bachelor’s degree with honors in economics and history from the University of Texas at Austin while lettering on the swim team, which won several national championships. He brings the work ethic of a champion swimmer to how he works with clients.

David is passionate about creating a safe and limitless future for everyone, a theme running through his volunteer activities. He was a founding parent and trustee of Urban Prairie Waldorf School in Chicago; he mentored entrepreneurs at the 1871 incubator in Chicago; he served as the volunteer event director for Swim Across America Chicago, which raised more than $1 million for cancer research at Rush University Cancer Center; and he served on the board of the Alliance for the Great Lakes.

David serves clients nationwide.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

The Financial Advisor survey considers several factors including growth in firm assets, number of clients and total assets in 2023 when determining RIA ranking. Previously ranked 64, Forum has had consecutive appearances on the list in this asset category.

Juan Ros, who recently joined the Forum partner group, shared his thoughts on Forum’s growth since joining Forum as a financial advisor in 2018. He said, “I attribute Forum’s success to the exceptional people across the firm — our partners, advisors, management team and staff — and to our ability to convey the trust and confidence that clients seek in an advisory firm. When a potential client meets with a Forum advisor, our firm shines in that we demonstrate empathy, understanding and competence in how we advise clients to make smart decisions about their money.”

Forum Co-Managing Partner Jonathan Rogers said, “Forum is a partnership of advisors who serve clients as trusted, fiduciary advisors. We are proud to have grown and honored to have helped many clients reimagine what is possible!”

Having worked alongside Juan for several years, Forum Partner Chris Lamia commented, “While it’s nice to be recognized, I think our true success lies in the deep relationships we build with our clients on an individual level.”

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients. FA’s RIA Rankings: For 2024, July/August 2024 Issue is using 2023 data.

Amid this political turmoil, investors may feel either nervous about the impact of elections on their money or thinking they can take advantage of some anticipated outcome. Will stocks soar if their candidate wins? Or plummet if the other side is in control? The truth, as history shows us, is more reassuring than you might expect.

Let's take a look at what the numbers tell us. While the ups and downs may be driven by the uncertainty of the political landscape, the long-term outcome is often positive, regardless of who came out the victor. According to BlackRock, “Stocks historically outperform their long-term average in election years, with the second half of the year typically the strongest.”¹

Does this mean you should count on a strong stock market for the second half of 2024? Not necessarily. The 2000 and 2008 election years are two examples in which the S&P 500 Index was negative from July through December.

Dimensional’s insights add the nuance that returns during election months are pretty evenly dispersed across a range of outcomes, whether the victor is Republican or Democrat. In other words, there simply is no clear pattern, even if the outcome were known, that can be reliably used to predict market movements.

Looking beyond the election, the historical returns have been stronger under Democratic presidents as compared to Republicans. However, attributing market performance to the party in power is a tricky, if not impossible, endeavor. For instance, a Republican administration cannot be solely responsible for the financial crisis of 2008, just as a Democratic administration cannot be solely credited for significant returns within the technology sector throughout the tech bubble but none of its aftermath.² Even when parties are relatively consistent over time on policies they aim to implement, market outcomes do not align predictably with these policies.

While elections undoubtedly influence market sentiment and can lead to short-term fluctuations, the broader trends in market performance are shaped by a myriad of factors beyond the immediate political environment. Rather than attempting to time the market based on election outcomes, investors benefit from maintaining a diversified portfolio and focusing on long-term investment goals.

By understanding the historical context and maintaining a disciplined investment approach aligned with their personal and financial goals, investors can navigate through the uncertainties of election years regardless of what happens or who wins. This election season, which has already proven chaotic, you would be wise to watch the events unfold without letting them drive your investment decisions.

SOURCES

What steps should a business owner take to begin the exit planning process?

1. Recognize the Need to Begin Planning for an Exit

Just the acknowledgment that this kind of planning is necessary for an ideal outcome is a huge first step for many owners.

Questions to ask include:

• Who am I outside the business?
• What are my goals in life?
• Do I have the team in place to run the business or other plans for when I am gone?
• Am I personally ready to exit the business? If not, what do I need to be true to be ready when the time comes?

2. Assemble Your Exit Planning Team

As noted earlier, the financial advisor is often the “quarterback” of the team, guiding the process while bringing in other specialists as needed. Other core members of the team include the owner’s CPA, estate attorney, insurance professional and business attorney. Other professionals who may be brought in are the valuation specialist, business broker, growth consultant, investment banker and business banker, among others.

It is important to be aware that the owner’s current advisory team may not be experienced or equipped to advise on the complexities of a business exit. In that case, additional professionals with exit planning expertise may be needed to complement the existing advisors.

3. Obtain a Business Valuation

Whether an owner is planning to transition the business internally (to key employees or to the next generation in the family) or is open to an external sale, a crucial step is to have the business appraised by a business valuation specialist who will analyze financial statements, make adjustments, compare to peers in the industry and arrive at a value that is generally expressed as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization).

4. Calculate the Owner’s Wealth Gap

Once the initial valuation is established, the owner’s financial advisor in collaboration with the owner’s CPA can calculate the expected net proceeds from the sale and answer the question: Is this going to be enough to live on for the rest of my life? If the answer is no, that means there is a wealth gap: the difference between how much an owner needs to have as an income-producing nest egg and how much an owner will have from the sale of the business.

The wealth gap can be closed if the owner has income-producing or growth assets other than the business such as an existing portfolio. It can also be closed by finding ways to increase the value of the business. A business growth consultant can serve as a key member of the exit planning team in this instance, working with the owner to implement changes to the business — some minor, others more fundamental — that will increase the multiple and therefore increase the value of the business.

SOURCES

Guide to Military Benefits for Retirement, Pay and Savings

In the first article of his three-part series, Zach discusses various plans available through the U.S. military retirement system.

Guide to Military Education Benefits and Resources

In the second article of his three-part series, Zach outlines military education benefits from college programs to the GI Bill.

Major Financial Benefits for Military Veterans and Their Families

In the third article of his three-part series, Zach reviews financial assistance for veterans including VA loans, the Survivor Benefit Plan and disability benefits.

The articles originally appeared in Kiplinger in May 2024.

About Zach Mindel

Zachary Mindel joined Forum Financial Management in 2023 as a Financial Advisor. Before joining Forum, Zach served as a pilot in the U.S. Navy in the rank of Lieutenant Commander and continues to serve in the Naval Reserves as a pilot and instructor.

Throughout his professional life, he has had a passion for teaching others and helping them progress in a way that is meaningful to them. His objective is to develop trusted relationships with clients by learning about their goals and how they envision their financial future at each stage of their life. Zach prioritizes financial goal setting to help clients stay on track, so they can focus on doing what they love (and takes this same approach in his own life).

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Throughout his professional life, Juan can point to a common theme. At every turn, he has built lasting relationships.

Juan said, “Throughout my various careers, building relationships has been at the center of all of them, an approach that has afforded me some success in each new endeavor. Indeed, I have internalized this to be my ‘why’ — building relationships with others to help them feel empowered to improve our world and feel fulfilled.”

Before joining Forum, Juan worked with Forum Partner Chris Lamia as a partner and vice president for Lamia Financial Group in Thousand Oaks, California. Their chance meeting at a Financial Planning Association of Ventura County chapter event ultimately led to an opportunity for Juan to transition from philanthropy to financial planning through a new role on the Thousand Oaks team. Lamia Financial Group joined Forum in January 2019.

Chris commented, “I can't think of a better person to have as a partner than Juan. He sincerely wants to make things better for everyone he comes into contact with. In addition to his obvious skills, particularly in the charitable sphere, he has tremendous empathy when working with advisors and clients alike."

In 2024, Juan began splitting his time between Thousand Oaks and Scottsdale after making the decision to move to Arizona. Juan has found a way to stay connected with his clients, team members and the community organizations he supports, including ProVisors, the Exit Planning Institute Conejo Valley Chapter and the Conejo Valley Estate Planning Council while building new relationships with clients and professionals in the greater Phoenix metro area through his involvement with the Exit Planning Institute Greater Phoenix Chapter, the Central Arizona Estate Planning Council and Arizona Charitable Gift Planners. Juan also serves on the board of the National Association of Estate Planners and Councils.

Through the millions of dollars in charitable gifts Juan personally raised, he has seen the impact that philanthropy can have on both donor and charitable organization. While some advisors take a strictly technical approach to charitable gifting strategies, Juan encourages people to think creatively about their giving. He shares the same message when speaking to financial professionals and national estate planning organizations on estate planning, charitable giving and financial planning.

Juan said, “There is nothing like seeing the satisfaction in a client’s eyes when they realize the impact their philanthropy is having on the causes they care about most. My role as the advisor is to have those conversations around values and goals and then formulate and execute the plan that brings together financial and charitable objectives in a tax-efficient way. The creativity involved in that process is my favorite thing about being an advisor, and I’m grateful to be at a firm that encourages and motivates philanthropy.”

Forum Co-Managing Partner Jonathan Rogers said, “We are excited to welcome Juan as our newest partner. Always approaching his colleagues and clients with a remarkably positive attitude and a willingness to go above and beyond, Juan gives of his talents generously, whether that be his talent for communication or his knowledge of charitable giving. When it comes to collaboration, which is one of our core tenets, he epitomizes what we all strive to be as partners for each other. We look forward to continuing to build our businesses alongside him as partners for years to come!”

Whether in Arizona, California or elsewhere in the country, Juan is committed to being there for his clients, colleagues, family, friends and charitable endeavors. Regarding his new role as a Forum partner, he said, “It is an honor to join the leadership of a firm for which I have great respect, and I look forward to sharing whatever skills I have with Forum’s partners, advisors, staff and allied advisory firms.”

When investing for the long term, we all know returns matter. But if you only look at returns, that’s analogous to only comparing the speed of the hare to that of the tortoise. The often-overlooked side of the equation is the volatility required to generate those returns. In the same way that stopping and napping cost the hare the race, even though he was the faster runner, volatility can slow the growth of wealth over the long term. This concept is known as “volatility drag.”

As an example, let's imagine an investment with a 50% loss one year, followed by a 50% gain the next. Intuitively, it might seem that the investment broke even over the two years, but let’s do the math. If you start with $100, a 50% loss reduces it to $50. A subsequent 50% gain then increases it to only $75. Overall, the investment has lost 25% over the two years.

Now we look at the same example but with reduced volatility (a lower volatility drag). Say the investment loses 10% one year and gains 10% the next. Starting with $100, a 10% loss brings it to $90. The subsequent 10% gain ($9 in dollar terms) increases the value to $99. It’s still an overall loss of 1% or $1, but it’s not nearly as bad as the first example, despite each example having equal and opposite returns from year to year.

To put it simply, volatility drag means that if a portfolio's value fluctuates significantly, the portfolio needs to work harder to return to its original value. In contrast, if we can limit the size of the downturns, the portfolio doesn’t have to work as hard to recover, and all else equal, less volatility likely leads to more growth over the long term. In the context of our fable, if we knew the hare could maintain his breakneck pace 100% of the time, he would be the obvious choice, but given the hare’s propensity for stops and starts, the slow and steady tortoise is the better bet for the long term.

A Real-World Example

Let’s look at the market drop of 2022 and the subsequent market rise of 2023 through the returns of three U.S. benchmarks: Dimensional US Core Equity 2 ETF (DFAC), the S&P 500 Index and the Nasdaq Composite Index.

For 2023, DFAC was up nicely at 22.0%. The S&P 500 was up even more at 26.3%. The Nasdaq was up a breathtaking 44.6% (the Nasdaq was the place to be in 2023).

Let’s now go back one more year to 2022 when all three benchmarks dropped in value. DFAC dropped the least, down 14.9%. The S&P 500 was down 18.1%. The Nasdaq dropped by nearly a third of its value, down 32.5% — not the place to be in 2022!

Putting 2022 and 2023 together, DFAC was up 3.8% over both years. The S&P 500 was up 3.4%. The Nasdaq was down 2.4%.

Even with the breathtaking 2023 return of the Nasdaq, volatility contributed to its third-place finish as the weakest performer across the three benchmarks. It performed much like the hare, and the one that lost the least (DFAC) — in other words, had the lowest volatility drag — was the tortoise that won the race.

Takeaways for Investors

This fable reminds investors of the importance of patience and the risks of overconfidence. Just as someone who only saw the tortoise and hare at the beginning of the race would be surprised by the outcome, so too can we be surprised and disappointed by the outcome of chasing high returns without considering the impact of volatility.

The hare's approach in the story mirrors the allure of high-volatility investments, which promise substantial returns in a short period. While these can be tempting, they come with the risk of significant losses that require extraordinary gains to recover, as exemplified by the hare's decision to rest and ultimate failure to recover.

The tortoise’s approach underscores the value of consistency. For investors, this means diversifying one's portfolio to include a mix of assets to maximize after-tax wealth for the right amount of risk. At any given time in a diversified portfolio of stocks and bonds, there will be an asset class that appears to be a drag on the portfolio. Over time, though, the leaders and laggards will rotate positions, and this diversification tends to reduce volatility of the overall portfolio. By balancing return and volatility, investors can mitigate the effects of significant downturns and subsequent volatility drag, ensuring their portfolio moves forward steadily, even if it doesn't always lead the race.

In classic parable fashion, “The Tortoise and the Hare” offers timeless wisdom that transcends its original moral. In the world of investing, just as in Aesop’s fable, sometimes slow and steady does indeed win the race.

Charitable giving is something in which any age group can participate. Below are some tips and strategies for incorporating charitable giving into your plans at various stages of your life.

20s-30s: DISCOVER AND EXPERIMENT

Recent college grads and others entering the workforce in their 20s are just getting established financially. Similarly, those in their 30s are starting families and raising children, which can be an all-consuming endeavor, financially and timewise. Donating to charity may not be at the top of the priority list but there are a few ways to get started.

Volunteer Your Skills and Discover Your Passions

Set Up a Charitable Budget Starting with Small, Consistent Donations

GIVING STRATEGIES IN YOUR 20s-30s

40s-50s: FOCUS AND FORMALIZE

INCREASE YOUR IMPACT

Involve Your Family and Include Charitable Giving in Estate Planning 

As children get older, parents will want to revisit estate plans to make the appropriate changes. Adding charitable recipients into an estate plan is a simple way to put something in place that does not cost you anything now because the gift is deferred. In addition to remembering family and friends, a bequest to charity in a revocable living trust is a simple act of philanthropy that can be changed down the road. Similarly, including favorite causes among the beneficiaries of a retirement plan or life insurance policy defers the actual gift until much later, can be amended and demonstrates the value of philanthropy today.

GIVING STRATEGIES IN YOUR 40s-50s

Direct gifts to charities of appreciated stock from a non-retirement account remain viable, tax-efficient ways to give now as well.

Whether donating to donor-advised funds or doing direct gifting to charity, you should be aware that gifts may not be income tax deductible if you plan to claim the standard deduction when filing your taxes. This often leads to people “lumping” their gifting into the same tax year, or in other words making several years’ worth of donations into a single tax year when you will itemize taxes to benefit from the large gift, and then availing yourself of the standard deduction in the other years.

60s AND OLDER: LEGACY AND LEADERSHIP

Consider Time over Money

Of course, volunteering at this stage of life becomes important as another way of giving back. Serving on a board or committee of causes held dear, participating in fundraising capital campaigns or simply offering time to help with an organization’s ongoing programs are all important ways to give back.

Mentor the Next Generation

GIVING STRATEGIES IN YOUR 60s AND BEYOND

1. Giving through your estate plan as mentioned earlier: a bequest in a will or trust or a beneficiary designation of a retirement plan or insurance policy
2. Using donor-advised funds as a vehicle for giving with the added benefits of being able to plan the timing of gifts for maximum tax efficiency and continue your family’s philanthropic legacy by naming successor owners such as children who can manage the fund after the original donors pass on
3. Establishing an advanced charitable trust to solve a specific financial or tax challenge, such as avoiding capital gains on the sale of investment real estate, diversifying out of a concentrated stock position or as part of a business succession or exit plan
4. For those 70 1/2 and older, using qualified charitable distributions (QCDs) to make charitable gifts from a taxable IRA account (a QCD takes place when an IRA account holder directs a distribution from the IRA to one or more charities — such charitable distributions are not taxable and count toward any required minimum distribution from the IRA)

Final Thoughts

Charitable giving is a deeply personal journey that evolves alongside us throughout our lives. Individuals at any age can engage in philanthropy, and the earlier you start, the more habitual and natural giving to charity becomes, whether it is giving of time or dollars. By adapting your strategies to your changing capabilities and insights, you ensure that your contributions make a meaningful impact.

Remember, the most important aspect of philanthropy is not the amount you give, but the thoughtfulness and intention behind your actions. Each decade offers unique opportunities to contribute to the world in a way that is both rewarding and reflective of our journey through life.

Speak with your Forum financial advisor today about your charitable giving values and goals.

Source

The majority of last year was stress-inducing for investors, but a significant market shift occurred in November, and investors were largely rewarded. In fact, November 2023 was the sixth best-performing month (as proxied by the S&P 500 Index) in the last two decades!

These kinds of outsized rewards make it nearly impossible to know when to invest in or get out of markets. We frequently emphasize the importance of staying disciplined for this reason.

The chart below highlights the impact of missing just a few of the best market returns. Missing either the best days or the best months can materially reduce your long-term wealth.

Historically, many great return years were actually very hard to live through because the headlines were filled with pessimism. The chart below shows disheartening news headlines happen every year, yet 15 out of the past 20 years stocks ended up positive for the year.

Often as investors, we find it tempting to think we know whether markets are doing well or not. If our recent experience has been bad, we expect tomorrow to be bad and vice versa. Markets simply do not work like that, and we must guard against the temptation to think that they do.

For example, clients who employed a global “factor investing” strategy — the academically based foundation for how Forum’s portfolios are designed — have felt like things have been going poorly for a while. Certainly, from 2018 to 2020, growth stocks did abnormally well relative to value stocks. It can seem like that has been the case for a long time, but in reality, the last few years have actually been better for factor investing globally, almost making up for the prior 3-year period.

Investing is about thinking ahead about the long term and investing accordingly. In a way, it is like a car trip. Recent events only tell us where we turned to get here. They do not tell us how to navigate the next mile because the road ahead is different. Our best bet is to have a good map (long-term returns) and an idea about where we are headed (a financial plan). And, of course, it helps to have good company along the way. We are honored that you will continue to bring us along on your journey into 2024!

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio, nor does diversification protect against market risk. All investment strategies have the potential for profit or loss, including loss of principal. The future performance of any investment or financial planning strategy, including those recommended by Forum, may not be profitable or suitable or prove successful. Individual client results may vary. Past performance is not indicative of future results.

The S&P 500 is an unmanaged weighted index of common stocks. Performance results do not reflect fees, expenses, or sales charges, which would diminish results. Index performance is not indicative of the performance of any investment. Any index or benchmark performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data.

In 2022, rising interest rates and the twin fears of inflation and recession roiled markets, with both stocks and bonds dropping sharply.

Then 2023 delivered the recovery we were hoping for, but it did not always feel that way. Markets spent most of the year seesawing and treading water. It was not until the end of October when stocks and bonds went vertical, finally erasing almost all the downturn of 2022.

You might reflect on the last two years and think, after all that volatility and stress, that you are pretty much back to where you were at the end of 2021. Looking only at portfolio values and cumulative returns, that is generally true. Underneath the surface, however, this is far from the truth.

For a retiree, the most critical and basic function of a financial plan is to provide confidence that one will not run out of money. From that perspective, today’s market inspires much more confidence than at the end of 2021! For our clients, sustainable spending projections over a retiree’s lifetime have increased significantly over the last two years, improving financial plans and providing greater confidence in the ability to achieve one’s goals.

We are not the only ones pointing out this incredible increase in financial security for retirees. Looking at recent articles from Morningstar (The Good News on Safe Withdrawal Rates) and the Wall Street Journal (The 4% Rule for Retirement Is Back), we find similar commentary. These articles point to the same factors that give us optimism — increased spending outlooks for retirees and higher long-term net worth projections for younger investors.

Why has this happened?

The simple answer is that interest rates have increased significantly since early 2022, thereby increasing future expected returns in stocks and bonds.

It is easy to see this on the bond side. Long-term government bonds yielded 1.90% at the end of 2021 and currently yield 4.03% — a dramatic increase in yield over a short period of time, especially after the extended low-yield environment we have experienced since the financial crisis of 2008-09.¹

The good news is this yield increase is not driven by higher inflation expectations. For those keeping score at home, from the end of 2021 to today, long-term annual inflation expectations actually dropped slightly from 2.34% to 2.13%.² Rather, the increase in bond yields is driven by the increase in after-inflation or “real” expectations. Said another way, it is an increase in expected purchasing power for investors long term.

Using a retired couple at age 65 as an example, the Internal Revenue Service predicts they would have a joint investing lifetime of about 28 years. Compounding the former low yield of 1.90% per year for 28 years would yield a cumulative return of 69%. By contrast, compounding today’s 4.03% yield for 28 years returns 202%, an astoundingly higher number.

Turning to stocks, we see a similar dynamic. The expected annual return on stocks was 6.90% per year at the end of 2021. Over 28 years, that would compound 548% cumulatively, or in dollar terms, $100 invested would grow to $648. Today, the expected annual return on stocks (thanks to something called the equity risk premium) would be 9.03% per year.³ At that rate, an investment would compound 1,025% over the same 28-year period! The same $100 would grow to $1,125, increasing projected wealth by almost 75% relative to 2021 projections.

Thus, as interest rates have increased, expected returns across the board have likewise increased significantly.

The net effect of this dramatic increase in yields is that long-term financial projections have dramatically improved for investors over the past two years.

How do we look at this from a historical perspective?

For 65-year-olds, this is arguably the best financial planning environment since their 40s. For younger investors, especially those below the age of 45, this is arguably the best environment in their investment lifetimes to date.

As we stated above, looking only at portfolio values might leave you with the impression that the last two years were a lot of ups and downs with no real forward progress. However, those ups and downs were the market’s way of adjusting to the fundamentally different environment of higher interest rates, and that has serious (and positive!) implications for investors going forward. By acknowledging that and focusing on the more important long-term perspective, there are great reasons for optimism.

Our takeaway for you? Take that long-term view, as always. Recognize that the last two years have been a surprising gift for long-term investors, delivering a very bright outlook going forward. It’s a Happy New Year indeed!

SOURCES

How We Approach Financial Planning for Women

We listen first to understand the overall situation (financial, personal and professional) when someone is sharing their concerns, values and dreams and then follow up by asking powerful questions such as:

• Where would you want to start to better understand your financial situation?
• What does the term “financially independent” mean to you?
• What is most important to you in your life, and why?

The questions above are meant to get to the heart of your views on money, values and financial goals. We advocate the idea of exploring your “why” as described by Simon Sinek in his 2009 book on the question. You may discover that it is easier to visualize your financial future when you have the opportunity to consider big-rocks questions with plenty of space to expand upon your answers.

The Ever-Changing Landscape of Women and Wealth

The recent statistics highlighted here tell a story about the ever-changing roles of women in the United States.

“$30 trillion in investable assets will be possessed by baby boomers by 2030, much of it controlled by women.”¹

“American colleges and universities now enroll roughly six women for every four men. This is the largest female-male gender gap in the history of higher education, and it’s getting wider.”²

“In 2022, women ages 25 to 34 earned an average of 92 cents for every dollar earned by a man in the same age group – an 8-cent gap. By comparison, the gender pay gap among workers of all ages that year was 18 cents.”³

“On average, women pay 7% more than men for similar products.”⁴

“While almost four in 10 respondents say they have been excluded from meetings, decisions, and informal interactions when working in a hybrid way, this proportion is considerably lower than it was in 2022 (nearly 60%).”⁵

When Actions Speak Louder Than Words

Seven Action Steps for Taking Control of Your Finances

1. Review what you already know and fill in gaps with a reliable knowledge source
2. Acknowledge your feelings about money and that others may have a different perspective
3. Understand your personal risk tolerance (being risk aware does not mean being risk averse)
4. Think about your community and note if anything is missing that you could add to enhance your life
5. Formalize your charitable intentions through charitable gifting strategies within an overall financial plan (one inspiring example would be MacKenzie Scott and her philanthropic approach to charitable giving)
6. Draw up an estate plan (for which you may need assistance from an attorney) and plan to modify it every few years to make sure it is up to date
7. Establish financial goals (as many have said, hope is not a strategy)

Every action you take is a step toward greater financial independence. Contact us at hello@forumfinancial.com.

SOURCES

If you have an impending need for cash within the next one or two years, for example, to buy a car, purchase a home or cover expenses while you start a new business, then moving some cash to T-bills could make sense to reduce market risk on money that you need in the short term. However, for the long term, moving cash out of a well-constructed and diversified stock and bond portfolio could cost millions.

For the sake of round numbers, if we assume a $1,000,000 investment, moving your portfolio from a 70% equities/30% bond portfolio to 100% Treasuries will likely cost you $450,000 over 10 years and more than $4,000,000 over 30 years; that is 4x your current principal. This is because the after-tax and after-fee expected return for a 70/30 portfolio using low-cost ETFs and index funds is about 7.00%.

In contrast, earning 5.50% for T-bills or money markets seems attractive, for effectively minimal risk, but that is a pre-tax number. Interest income is taxed at ordinary income rates, so if an investor has an effective federal tax rate of 24%, the after-tax return drops to 4.18%. If we just compound annually at those after-tax rates, assuming no contributions or withdrawals, the math shows a tremendous discrepancy in outcomes in the long term.

The above example also assumes that Treasuries will continue to yield 5.50% through the longer-term investment period, when in reality they fluctuate, and current market signals indicate a fall in short-term Treasury rates in the next few years. While some may shrug and plan to re-enter the equity markets when rates fall, market timing rarely ever works in part because you have to be right on the way out and the way back in. We can look through history and see that a T-bill-only investment approach will at best maintain your purchasing power over inflation but will not increase it and hence will not afford most of us to meet our retirement cash flow needs. It does not matter whether T-bill rates are 0%, 5%, or 10% like they were around 1980.1 The Treasury rate sets the risk-free rate, and over the long term, stocks and bonds earn more because investors get compensated above the risk-free rate for taking risk.

The chart above further highlights the importance of keeping equities and even long-term bonds in the mix. Long-term investing in the equity and bond markets can offer investors a return that outpaces the effects of both inflation and taxes; T-bills do not. This is because risk and return are directly related. Investing on emotions and market timing rarely ends well. If you are thinking of moving to T-bills, we suggest you consider your long-term investment horizon, stay disciplined and only move some cash to T-bills if you have a clear need for the cash in the short term.

SOURCE

Surprisingly, more than 70% of the U.S. stock market performance in 2023 has been driven by just seven stocks! Without these seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), the collective performance of the other several thousand U.S. stocks increased by just under 4%, rather than the 12% return with those seven stocks included.

While this may lead do-it-yourself investors to rush into those seven stocks, it makes us hear sirens warning about how concentrated these index returns have become.

Rather than buy more S&P 500, which looks a bit more like a technology sector fund than a diversified market, we think the prudent course is to take those gains and rebalance into the parts of the market that have not kept up. This is what allows investors to retain those winnings rather than “riding the escalator up and elevator down.”

To see the downside of concentrated index returns, we only have to look back a year to 2022. Last year, we wrote about how some of the highest-flying technology stocks in 2020 — commonly referred to as FAANG stocks (Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet) — subsequently realized a 41% drop in value while the Russell 3000 Value Index (a total U.S. stock market index in line with our emphasis on value stocks) was only down 13%.

The tech bubble in the late 1990s experienced even greater swings. Early in their meteoric rise, tech stocks like Dell, EMC, Microsoft and others created millionaires out of people who had just invested a few thousand dollars. Then came the bust, when we heard anecdotal stories of retirees who had piled into the tech-heavy NASDAQ Index only to lose more than 75% in the drop.

Going beyond the United States, in the 1980s, Japan had a remarkable run where Japanese stocks increased in value more than 450% in a decade. They dropped in the early 1990s, and the Nikkei 225 Index has yet to recover its 1989 high, until it came close in the summer of this year.

History often repeats itself, and too often, investors do not listen. At Forum, we recognize that nobody knows when these trends will reverse themselves. All we can do is control our own actions. We can stay as diversified as possible and make sure we plan according to what data and science suggest is most likely to be successful in the long term.

Now that we have had almost a full year since the passage of the SECURE 2.0 Act, we thought it would be a good time to look at how the changes have affected the financial planning needs of clients.

Let’s start with a couple of rules that were clearly not ready for prime time, where we have seen the can kicked down the road.

Rules Not Ready for Prime Time

1. The elimination of “stretch” IRAs, and inherited IRA and Roth IRA required minimum distributions (RMDs)

The original SECURE Act eliminates “stretch” IRAs for the majority of non-spouse beneficiaries for any account owner who passed away after December 31, 2019. It is still possible to stretch IRA distributions if the beneficiary falls into one of the following categories, known as eligible designated beneficiaries:

• Surviving spouses
• Minor children (until the age of majority)
• Beneficiaries who are no more than 10 years younger than the deceased account owner
• Individuals with disabilities and chronically ill individuals

But the focus of this piece will be on the effect on non-eligible designated beneficiaries (such as children who have reached the age of majority). These beneficiaries are required to take all distributions from inherited IRAs or Roth IRAs by the end of the 10th year following the year of death of the IRA owner. For example, if an owner of an IRA passed away on December 15, 2021, and the beneficiaries of the IRA were children who had reached the age of majority (18 in most states), the resultant inherited IRA would need to be fully distributed by December 31, 2031, and the distributions would be taxable at the beneficiaries’ tax rates (Roth IRA distributions are not taxable).

Professionals were upset that the ability to stretch the IRA distributions over the beneficiary’s lifetime was removed, requiring concentrated distributions over 10 years that could have tax bracket impacts on beneficiaries. What people did not realize initially is that the rule was even more complex.

Realizing that many investors, financial professionals and accountants were not ready to comply with the rule, the IRS waived the interpretation for 2021 and 2022 with 2023 as the year when it would go into effect. On July 14, 2023, the IRS released another suspension of the rule until 2024. Note that the IRS has not released the final guidelines around this rule, so there is some hope that the requirement for RMDs may be eased. Our guidance would be that individuals should prepare as if 2024 RMDs from inherited IRAs will be required.

2. Catch-up contributions for individuals 50 and older with high income ($145,000 or more) would be required to be Roth 401(k) contributions, not pre-tax starting in 2024

The problem this rule encountered is that many plans do not currently have a Roth 401(k) option as part of the plan, and the way the law is written, it requires the plan administrators to suspend all catch-up contributions for high-income earners if there is no Roth 401(k) option available. This is an administrative nightmare, and on August 25, 2023, the IRS announced that the change is suspended until 2026.

In both the inherited IRA RMD and the catch-up rule, it is clear that the law as written did not anticipate all the practicalities of trying to comply with the rule.

Two Changes That Seem To Be Going According to Plan

1. The ability to distribute up to $35,000 lifetime to a Roth IRA from long-standing (15+ year) 529s

An issue for 529s has been what to do if money is left over after a child finishes schooling. There were two less than ideal answers. The first was to let the 529 grow and eventually change the beneficiary to a sibling or grandchildren. The other option was to withdraw the assets as a non-qualified withdrawal and pay ordinary income tax plus a 10% penalty on any growth — not a palatable choice but sometimes the only real option.

The new ability to distribute $35,000 provides added comfort to clients that the money they put into a 529 won’t be trapped if it is not fully used. Note that it is constrained by the yearly maximum contribution to the Roth IRA ($6,500 for 2023), so to use the full lifetime exemption would take about 5–6 years.

Given the relatively low limit, this rule change still does not resolve the “what if” scenarios when a child does not attend college or gets a major scholarship, but it solves for when there is some money left over. It seems to have led to further interest in using 529s to fund higher education given the tax-free growth of 529s.

2. RMD age extended to 73 now and 75 for people turning 74 after 2032

Considering the greater longevity overall for our population over the last few decades, having the ability to delay RMDs acknowledges that people are continuing to work until later and provides additional flexibility around financial planning. Moving from 70.5 to 72 in the original SECURE Act and then moving to 73 in the SECURE 2.0 Act was helpful to individuals because it provided more time for strategic Roth conversions and other methods of increasing after-tax wealth long term. These changes have also clearly increased the importance of planning for retirement early (at retirement or even earlier) to make appropriate choices around Roth versus pre-tax 401(k) contributions and strategic Roth conversions.

If you want to dive deeper into these planning topics, read this multi-part series on Kiplinger by Forum Partner David McClellan.

Changes That Have Not Kicked in Yet That Have Our Attention

With the SECURE 2.0 Act, there is a rule that allows employers to match student loan payments just like they currently provide matches for 401(k) contributions. This law is set to go into effect in 2024, right after student loan repayments restart for the majority of borrowers.

What appears simple in concept is administratively difficult with several rules to be followed, including what constitutes a student loan, how much can be matched and how it will be documented. It is a noble idea, especially given the number of recent graduates that cannot make 401(k) contributions due to the burden of student loan repayments, but this is a challenging rule for employers to properly implement.

We have highlighted the impact of some of the rules and rule changes to emerge from the SECURE Act and the SECURE 2.0 Act. Based on the rule adjustments that happened this year, we may see additional changes in 2024. If you have any questions, we encourage you to reach out to your financial advisor.

This year, Forum ranked among the top 100 firms appearing at #65 in 2023.

Forum Partner Daniel Drallmeier commented, “We’re pleased to have been named again this year. I see this as a testament to all the hard work being done at Forum, which continues to increase the value we provide to our clients. By growing with intention through technology implementations, new locations and hiring highly talented people throughout the organization, we have expanded our ability to make a positive impact on more lives for those seeking sound financial guidance.”

In July, Forum appeared on the 2023 Financial Advisor RIA Ranking. Forum ranked #64 of 308 firms to appear on the Financial Advisor list in the asset category of $1 billion and over.

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients. Barron’s collected and tabulated the 2023 Top 100 RIA Firms Rankings for September 2023 using data from June 30, 2023.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

1. Non-qualified stock options, aka NSOs
2. Incentive stock options, aka ISOs
3. Stock appreciation rights, aka SARs (these technically aren’t options, but they have a similar payoff pattern)
4. Section 83(b) of the tax code (early exercise of options)

I’ll use a real-world example to break down the value of an option. Let’s consider a two-month call option on Alphabet stock (GOOGL) with the following details as of the time of this writing:

• Strike Price: $125.00
• Current Market Price of GOOGL: $130.21
• Option Price in the Market: $10.30

For $10.30, you can buy the option to acquire GOOGL shares for $125. If you exercised the option, you would buy a share for $125, and you could sell it immediately for $130.21, netting yourself $5.21. This is known as the intrinsic value of an option — the amount you could net if you exercised and immediately sold, or market price minus strike price.

Intrinsic value accounts for $5.21 of the $10.30 option price. What about the other $5.09? This is the extrinsic value of the option, also known as the time value of the option. It’s the expected value of all the other potential outcomes — the share price skyrocketing, tanking and everything in between. And remember, the option also gives you the ability to sit out and observe the price before doing anything, which is worth something! Once we exercise the option, we capture the intrinsic value, but we throw away the extrinsic value of the option. We don’t want to throw anything away if we can help it; we want to minimize extrinsic value before exercising.

Summary of when to exercise:

• Total Option Value = Intrinsic Value + Extrinsic Value
• When you exercise, you capture intrinsic value and throw away extrinsic value. Thus, we want to exercise when the extrinsic value is minimal relative to the option’s total value, i.e., when the option is sufficiently in the money, such that intrinsic value dwarfs extrinsic value.
• Roughly, this implies you should exercise when the market price is 2x–3x the strike price, but this will vary depending on the underlying stock and attributes of your option.

Assumptions:

• Strike Price: $4 — This is the purchase price guaranteed to you.
• Market Price at Exercise: $15, i.e., the share price has appreciated significantly, and you decide to exercise and buy shares.
• Bargain Element: $11 — When you exercise, you pay $4 for a share worth $15. This $11 difference is the bargain element.
• Ultimate Sale Price: You eventually sell your share for $16, which makes your total gain $12, i.e., $16 – $4.

The tax treatment of that $12 gain depends on when you execute each step of the process. Let’s use this chart to guide the discussion:

The tax treatment depends on the type of option and when your transaction occurs:

1. If you exercise and sell the shares within one year of exercising (left bar), the bargain element of $11 is taxed as ordinary income. The investment gain of $1 is a short-term capital gain, which will also be taxed at ordinary income rates. In other words, the full $12 gain is taxed as ordinary income.
2. If you exercise, hold the shares for more than a year, and sell within two years of the grant date, now your investment gain of $1 turns to long-term capital gains, but the bargain element of $11 is still taxed as ordinary income. In other words, $1 of your $12 total gain is now long-term capital gains, and $11 is still ordinary income.
3. The final bucket (right bar) is applicable only for ISOs. If you exercise and hold the shares for at least a year from exercise and at least two years from the grant date, the entire gain of $12 is now long-term capital gains, i.e., in the column to the right. This is what’s so advantageous about ISOs — the bargain element becomes a long-term capital gain.

Tax timing: With NSOs, the ordinary income tax on the bargain element is due at exercise. This is an important cash-flow consideration if you plan to exercise NSOs and keep the shares. Not only will you need the cash to exercise, but you will also need cash to pay the tax bill. Once you’ve exercised (and paid the tax), a share from the NSO is like any other share purchased in the market — any taxes on gains are due upon sale.

With ISOs, whether you hit the window for ordinary income treatment or hold out for long-term cap gains treatment, the tax on the bargain element is not due until sale — another advantage of ISOs. However, the bargain element is included in your Alternative Minimum Tax (AMT) calculation in the year of exercise, assuming you don’t sell the shares within the same calendar year. If you’re unfamiliar with AMT, it’s another method of calculating your tax bill that includes and excludes items from the traditional calculation method. The AMT could result in a larger tax bill if the bargain element on your exercised ISOs is very large relative to your other income.

A few things to keep in mind for private company options:

1. Cash required for purchase: Don’t forget, with options, you have to pay the strike price. Even if the shares are worth far more than your strike (options are deep in the money), you may not be able to sell the shares after exercise. You have to wait for liquidity.
2. Cash required for taxes: If you exercise NSOs, in addition to the cash required for exercise, you owe ordinary income tax on the bargain element. If you can’t sell shares to raise cash to cover that bill, you’ll have to come up with cash elsewhere. Analogously, with ISOs, if AMT is triggered and you can’t sell any shares, you’ll have to get the cash elsewhere.
3. Company valuation volatility during illiquidity: Cash considerations aside, if you’re sitting on illiquid shares, the value of those shares could always change, sometimes significantly, before you’re able to sell. The nice thing about options is that you can wait for more clarity before having to pony up any cash.

To sum up navigating ISOs, NSOs, and SARs:

• When to exercise: Wait until the market price is ~2x–3x your strike price before considering exercising.
• When to sell after exercising: With NSOs and SARs where you’ve been granted shares, sell shares immediately. With ISOs, if the bargain element is sufficiently large, it’s likely worth holding for a year from exercise and two years from grant for full capital gains treatment.
• When to elect 83(b) early exercise: This is not applicable with SARs. With ISOs, early exercise is probably not worth it. With NSOs, you might want to do a small portion of early exercise to save taxes in the event of a good outcome, but there’s a lot of risk in doing so. No shame in waiting for the stock price to appreciate.
• Constraints and nuances to keep in mind: The biggest constraint to keep in mind is liquidity. Even if it’s “optimal” to exercise based on your option and market prices, liquidity constraints may mean you need to wait or exercise only a portion of your options. The other constraint to bear in mind is cash flow. With options (not SARs), exercising involves a cash outlay for the purchase and for any resulting tax bill. The bargain element is taxed immediately for NSOs. The bargain element is not taxed for ISOs until you sell the shares, but if you hold them, this is included in AMT. Either one of these tax liabilities could be particularly challenging if the purchased shares are illiquid.

Suffice it to say, if you’ve been granted employee stock options, you have a lot of … options. Hopefully, mediocre humor aside, this piece has shed some light on how to navigate the many decision points when considering how to handle NSOs, ISOs and SARs.

Their philosophy of making sure that all aspects of clients’ financial lives are working in sync has an overarching sense of fun. They had much to share about their approach to financial planning and their relationships with clients.

What brought you to financial planning?

Julie related her story first and began by noting, “This is not the first career for either of us. When I was 18, I chose a career in engineering because math was always my favorite class. But I was self-aware enough to know that one career was not going to cut it. Mechanical engineering was a great start, and I figured that in time I’d find my next career. I was introduced to financial planning shortly after my husband and I got married. The way his family managed money really scared me — there seemed to be no managing and no planning. I knew that the two of us needed to be in sync, working together toward our goals, so I reached out to a financial planner. It wasn’t long before I realized I might like the other side of the table.”

In her late 30s, a career change looked feasible for Julie. “I took my financial planner out for lunch to ask him a bunch of questions. I said naively, ‘I bet you really like clients like me. You know, someone who is interested in personal financial matters.’ His answer was no. He really liked the widows who relied on him for everything, when they needed something, he was the first person they called. I knew that probably wasn’t going to be my clientele. And that’s truly how it turned out. Jennifer would agree that, overall, our clients are accomplished and capable: They choose to work with us because they don’t love working with financial matters as much as we do or they just do not have the time to focus on it. Some of our clients are widowed, some of our clients are overwhelmed, but none are helpless.”

Jennifer added, "My story is similar to Julie’s in that this is not my first career. When I was a kid, I always knew exactly what I wanted to do. I wanted to be a newspaper reporter. I worked as an editor at daily newspapers in Los Angeles, and I loved it until I didn't. I just got the itch to do something different. I went back to school to get my MBA in 1994. That was right when the internet was starting to grow. I started working for internet startups in Silicon Valley, ending up at E-Trade. I was there from 2000 to 2004, and I had a front-row seat to the dot.com bubble, the implosion, watching all these online traders blow up, and I thought, there has to be a better way to do this. I started having coffee with local financial planners, including, as it turned out, Rich Chambers, who founded the firm that Julie and I eventually joined. In 2004, the day I learned I passed the CFP® exam, I gave notice at E-Trade and immediately joined Julie and Rich.

What is special about your team?

We have to be able to laugh with our clients. Financial independence planning, stock options and employee benefits planning, portfolio allocation, insurance reviews, tax planning and all other planning topics are not most people’s idea of a fun time. But we love it. And through the years we spend a lot of time with our clients, so it’s much more enjoyable when we all bring a sense of humor. Financial planning doesn’t have to be dull. While the nuts and bolts can be dull, we don’t drown our clients in the dull stuff. We want our clients to enjoy the process.

The people who choose us each walk in the door with unique situations, so the experience has to be unique to each client. We’re a small team, working in a more relaxed, informal setting that our clients prefer.

Before moving into our offices, the #1 rule was no mahogany. We told our designer to make the space fun and energetic. It couldn't look anything like financial services.

When you meet with a prospective client, how do you explain the benefits of working with a financial professional?

First and foremost, this relationship has to work for everyone. Our clients must be people who can trust us and ultimately want to delegate because they're busy or because investments and managing their finances are not their thing.

We work with clients who care about more than just investment performance and understand that we bring a comprehensive perspective to their financial lives. We look at the big picture and help fit all the pieces together: We listen to their wishes, wants and dreams and help plot the course to achieve them.

How do you build the optimal financial plan for your clients?

We talk with our clients about what's going on at home because it's not just about the money. Money is a means to an end, it’s in the service of their lives, and part of our job is to teach our clients to be good stewards of their money. It's really about what's important to the client. Those are the real conversations.

Associates who are now a part of Forum include Niki Theil and Katie Shinnick. Learn more about the professional journeys of Julie Schatz and Jennifer Cray, as told from their personal perspective.

The Financial Advisor survey considers several factors including growth in firm assets, number of clients and total assets in 2022 when determining RIA ranking. Previously ranked 69, Forum has had consecutive appearances on the list in this asset category.

With Forum’s continued growth, Forum has welcomed new talent to our team. Forum Chief People Officer Laura Norek remarked on Forum’s growth and the addition of new advisors and associates across the country. Laura commented, “The credit for our growth is owed to the amazing talent that exists throughout our firm. Over the last few years, we have increased our focus on people development and talent acquisition, and I am excited to see how the team continues to evolve.”

Regarding Forum’s growth in the past year, Forum Co-Managing Partner Jonathan Rogers shared his perspective. He said, “The exceptional growth of our firm really comes from two sources. First, it comes from our existing clients who continue to have confidence in our advice and entrust us to grow their financial wealth. And secondly, it comes from our ongoing effort to find like-minded financial advisors who deliver personal financial planning backed by our evidence-based investment philosophy. We are honored by the trust placed in us by our clients, and we of course could not do it without our key strategic relationships with Dimensional Fund Advisors and the two primary custodians we utilize, Charles Schwab and Fidelity.”

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients. Financial Advisor collected and tabulated the 2023 RIA Rankings for the July/August Issue using data for December 31, 2022.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

So far, the volume of discourse around an inevitable recession over the past two years has been wrong. What can we learn from this? There are two key takeaways:

1. Like Predicting the Stock Market, Predicting the Economy Is a Fool’s Errand

The economy is an incredibly complex beast, intertwined with numerous factors, including consumer behavior, governmental policies, global events and technological advances. Predicting its future movement with precision is like accurately forecasting the weather for every day of the next year.

Some economic signs, such as inverted yield curves, increasing unemployment rates or reduced industrial production have historically been associated with recessions. But they are far from perfect predictors. There have been many instances where these indicators have signaled a downturn, but no recession occurred.

The difficulty with predicting recessions lies in the complex, dynamic nature of the economy, which is affected by both quantifiable factors and human behaviors that are challenging to measure and accurately forecast. Predicting a recession is not only about the analysis of data and trends but also about understanding a multitude of human decisions and global events. This inherent unpredictability makes the precise timing of recessions an elusive prospect.

2. Pessimism Sounds Smart, but Optimism and Discipline Lead to Better Long-Term Outcomes When Investing

Pessimism often seems intelligent, especially when it comes to investing. After all, the pessimist is seen as the vigilant, cautious individual who saves us from our worst impulses. They caution against taking excessive risks and remind us of the brutal economic downturns we have faced in the past.

However, while pessimism might sound smart and sophisticated, it does not necessarily lead to the best outcomes in long-term investing. History has shown us that the stock market, despite its ups and downs, has trended upward over the long term. The patient investor, who stays the course during economic downturns, usually reaps the rewards. Investing is an act of optimism and a belief in human ingenuity’s ability to create value over the long term.

The following checklist can be useful for individuals reflecting on their personal decisions and for families preparing for life-changing events based on the diminishing health of a loved one. The checklist is divided into three sections to highlight important items that may need to be addressed at different stages of declining health.

Addressing Significant Health Events and End-of-Life Planning

Section 1: Personal Instructions Designated Through an Estate Plan (Wills, Trusts and Other Documents)

▢ It is important to review account beneficiaries to make sure that no changes need to be made. Are primary and contingent beneficiary designations up to date and accurate for accounts such as IRAs, 401(k) plan accounts and insurance policies?

▢ Have HIPAA authorizations (for medical information release) and a medical power of attorney and a durable power of attorney been assigned and documented? This especially extends to living wills, which may include specific instructions on what measures should be used to extend life.

▢ Has another person been named on the checking account other than the loved one (usually defined in the durable power of attorney for finances) so that someone can write checks to make payments for monthly expenses?

▢ Many times, trusts and wills do not detail how personal property such as jewelry and family heirlooms should be divided among the beneficiaries. If a loved one expresses their wishes (either in writing or in person), this action can avoid potential difficulties among family members.

▢ Is there a plan in place for digital assets, such as digital photos or social media accounts? A digital estate plan should include a list of digital assets and a designated trusted contact.

Section 2: Where to Live (Considering Assisted Living)

▢ If a loved one does not want to move, challenges can arise when selecting and retaining resources for regular in-home care or 24/7 care. Agencies are available that can help families find suitable assistance. Additionally, home improvements such as the installation of ramps and chair lifts and modifications for bathrooms, kitchens and entryways may be needed. Medicare may pay for some of these alterations.

▢ It is important to follow up on any insurance policies for long-term care by contacting the agent/insurance company to determine how to process a claim (policies should be available for reference).

Section 3: Decisions Related to End-of-Life Planning

▢ The family should know if arrangements are already in place for funeral services, burial or cremation. A conversation might be necessary to understand specific instructions and to make sure expenses can be covered with median funeral costs estimated to be more than $7,000, depending on the various arrangements.

▢ Additional decisions might need to be made regarding medication, feeding and care. The individual named in the medical power of attorney ultimately has the responsibility, but it is crucial to make sure that family members are aware of such decisions.

When helping a family member or friend facing declining health, it can be overwhelming to delve into financial matters. We understand that the idea of making end-of-life preparations for someone close to you can be difficult and highly emotional. We encourage you to contact your financial advisor if you need assistance or additional information.

• You may receive a pop-up message appearing to be from either Microsoft or Apple, alerting you that your computer has been compromised.
• The pop-up instructs you to call a provided "tech support" number, which connects you to a fraudster.
• After speaking with the fraudsters, you will be contacted by someone impersonating a Schwab “security officer.” They will inform you that your Schwab account has been compromised and, to safeguard your funds, instruct you to transfer them into an account under “federal custody.” They assure you that your money will be returned in three business days, once your account has been “encrypted” for added safety.
• Unfortunately, if you were to follow these instructions, your funds would be gone.

To add credibility to their scheme, the scammers are sending personalized paper letters via mail, purporting to be from the Federal Reserve. These letters reference the real names and titles of actual Schwab personnel, tech company employees and FDIC analysts who supposedly contact you by phone. The letter encourages you to verify each person's identity through their LinkedIn profiles, making the scam even more convincing.

If you are a target of this scam, here are steps to take:

• Do not click on links or call any phone numbers listed in the computer pop-up.
• Always verify the phone numbers for tech providers or Schwab independently.
• Never grant remote access to your personal devices or to any websites with sensitive information, including your Schwab accounts.
• Check with your Investment Advisor or Client Service Associate. They can assist in determining if the requests from Schwab are legitimate and can help if your accounts have been compromised.

Our clients’ trust and safety are important to us. If you have any questions or concerns, please do not hesitate to contact our dedicated Client Services team. They can assist with further guidance on how to protect your accounts in the event of identity theft or a fraud attempt.

Together, we can navigate this challenging landscape and protect your financial well-being.

The debt ceiling has been raised 78 times since 1960. The three most recent major negotiations occurred in 1995, 2011 and 2013, all of which were eventually resolved.

Concerns expressed by investors are related to what happens if negotiations do not result in a resolution, as it could lead to temporary suspension of government services, delay of payments to vendors, government debt or a potential interruption of payment for Social Security or Medicare. The last two are unlikely as the U.S. Department of the Treasury can make payments by other means to avoid a default on debt obligations or key programs like Social Security. A recent editorial in Brookings goes a bit deeper on the contingency plan the Department of the Treasury put in place in 2011 when the country last faced a debt ceiling debate.

It is also worth noting that the flip side of the coin can also occur. If there is an eventual resolution after tense initial negotiations, the reduced uncertainty has the potential to result in a positive effect on investment markets, as it has in the past. The important thing to remember is that the market prices in probabilities of both sides of the coin, and historically, the market has been better at assigning those probabilities than the smartest investors. The proof being that you see a lot fewer successful active investors than you would expect if such anticipation of markets was possible.

At Forum, we take a long-term view. We do not recommend allocation changes around events like debt ceilings because we expect to live through many such events over our lifetime. Reducing stock market exposure across all these events would very likely reduce long-term wealth.

Instead, investors should work with their financial advisor to set up the right mix of stocks and bonds appropriate for their risk tolerance in advance of market volatility. This allows the portfolio to take advantage of market movements through rebalancing and reinvestment of dividends. Forum clients complete Investment Policy Statements for the purpose of having a consistent process and focusing on long-term investing, not short-term market volatility.

An additional discussion worth having with your financial advisor when events like this occur is whether or not to increase your permanent emergency reserves and extended cash reserves. These reserves should be enough to allow you to weather periods of heightened market volatility, as drawdowns happen almost every calendar year, and yet most years are positive in whole.

Permanent insurance should generally be considered when the time horizon for the insurance need is undefined or extends beyond the available time periods for term insurance. Additionally, policy owners must have the financial wherewithal to pay significantly higher premiums and not need access to that cash element in the next 10–15 years. Situations when permanent policies may be appropriate include:

• Individuals or couples who may be subject to the federal estate tax or state estate taxes. In 2023, your estate would need to be greater than $12.92 million for individuals and double that amount (almost $26 million!) for married couples to trigger federal estate taxes. For those who fall into that cohort, life insurance premiums can be a much more effective way to fund those taxes. This need typically grows, not diminishes over time for this cohort.
• Individuals or couples who have a dependent with special needs. This need typically extends beyond the period of time available through a term policy.
• There are some particular circumstances in business where the need will extend beyond the available time periods of a term policy.

There are other situations when permanent policies may be appropriate, but they are one-offs and not mainstream.

A recent Wall Street Journal article noted the significant increase in CD investing: “Balances in CDs rocketed from $36.5 billion in April 2022 to $418.4 billion in January.”¹

Those are big numbers. A lot of that money likely came from bank accounts, where the money was earning no interest before, but some of it comes from investors who are opting to take the CD rates rather than invest in more risky assets like stocks and bonds.

It has been a decade since investors have had the opportunity to earn a reasonable interest rate on CDs and other short-term, low-risk investments. We want to address when to take advantage of doing so and when it is not the best solution.

To answer this, investors must first understand why it is important to invest.

Most People Invest to Increase Their Purchasing Power, CDs Do Not Typically Do So

While rates on one-year CDs have risen to over 4%, recent inflation has been higher than that, clocking in at 4.68% in 2021 and 7.99% in 2022.² This means that even though CD investors are receiving a sizable return on paper, they would be losing purchasing power if inflation stays the same. On the other hand, stocks and bonds have both exceeded inflation, even during past periods of higher-than-average inflation.

The chart below illustrates this using U.S. Treasury bills, which have comparable return to CDs of similar term because both are guaranteed by the U.S. government either directly or through the Federal Deposit Insurance Corporation. Such short-term, risk-free investments have delivered less than 0.3% over inflation annualized since 1926 with multiple 20+ year periods when these risk-free investments have lost purchasing power after inflation.

Few investors have saved enough for their retirement or other goals such that they can pay for their long-term needs dollar for dollar if their investments do not grow faster than inflation. Investing in CDs makes achieving goals that require growth of purchasing power nearly impossible, or at least very improbable.

Investing to Hedge a Future Liability

If you have a short-term liability, such as money you owe for taxes or spending needs coming up in the next few years, it makes sense to invest this cash in something like money markets or CDs. This ensures those funds will be available when you need them. However, it is important to be careful when doing so. We will discuss best practices for this later in this section.

Long-term liabilities, like retirement spending 20 years from now, require a more complicated answer. Likely, very little of it should be invested in risk-free assets like a CD because retirees need their wealth to grow to avoid outliving their assets. A retiree should invest in the blend of stocks and bonds that minimizes the chance of running out of money in later years.

Most investors need a return above inflation to meet their goals, and stocks have proven to do so reliably over long time periods and across periods of both low inflation and high inflation.

Sometimes, when interest rates go up, stocks experience short-term losses because their expected future returns need to increase to be competitive with other available investments like CDs and bonds.

This phenomenon also may explain why many of the largest returns in stocks happen shortly after some of the worst returns. Referencing a chart we have used many times in the past on this topic, you can see that the return after a 20% market decline is on average 22%, which is double the 10% long-term average return of stocks across the entire period.

In conclusion, we should consider foundational investment principles when choosing where to invest our cash. Looking at an interest rate in isolation is likely to lead to the wrong decision. Any investor considering investing in CDs to hedge short-term cash needs should absolutely consider doing so. But for the bulk of our funds, we should likely maintain a portfolio of stocks and bonds because of the ability to increase purchasing power long term, properly align our assets with our long-term liabilities and “stay in our seat” for when stocks may experience their strongest returns.

SOURCES

The decision to move can be driven by reasons as varied as climate, family, health, taxes, or estate planning. We want to highlight some of the top considerations when preparing for such a move. The considerations vary depending on whether you are in retirement or are still working.

Top Five Factors for Retirees to Consider When Moving

Factor 1: Health Care

Factor 2: Taxes

Factor 3: Estate Planning Laws

Factor 4: Cost of Living

• Real estate taxes can vary dramatically and affect cost of living, especially for retirees. Some states have no state income tax, but real estate taxes can be significantly higher.
• You might want to move to the beach but the cost of homeowners insurance can be prohibitive.
• If you are moving to a condo, make sure to check for special assessments and that the HOA reserves are adequate.
• The cost of air travel to visit family (or for family to visit you) should be considered before moving. Is the new location near an airline hub or regional airport with good connections?
• Some states with sales tax rates close to 10% or high gasoline taxes may not generate the abundant tax savings you expected, depending on your tax bracket and lifestyle.

Factor 5: Community Support

Top Five Factors for Working Professionals to Consider When Moving

Factor 1: The Local Job Market

Factor 2: Cost of Living

Factor 3: State Taxes

Factor 4: Retirement Savings

Factor 5: Estate Planning

Conclusion

SOURCE

Emergency Funds and Tenure Consideration

Confusing Retirement Plan Options

Diverse and Unique Income Streams

• Summer salary from grants
• Consulting
• Summer teaching
• Book deals
• Honorarium for speaking engagements
• Royalties
• External businesses

Tenured professors holding administrative roles likely receive additional compensation for their leadership and service. With diverse income streams that can be irregular and unpredictable, professors can treat these opportunities as bonuses. The key areas your financial advisor needs to understand include cash flow planning, tax impacts and identifying savings and investment strategies for these unique income streams to grow.

Health, Dental and Vision Insurance

Group Life Insurance

Insurance for Long-Term Care

College Tuition Perks and College Savings Strategies

Tax Planning

Pre-Retirement Planning Consideration

International Retirement

A Financial Plan for College Professors Should Be Designed for Their Unique Career Path

SOURCES

1. Restricted Stock Units aka RSUs
2. Employee Stock Purchase Plans aka ESPPs

Restricted Stock Units aka RSUs

What are they? RSUs are company shares given as compensation. Employers often grant them in blocks that vest over a predetermined schedule. Sorry, fashionistas — vesting, in this case, has nothing to do with the sleeveless garment. Vesting is when you own the shares, and usually at that point, you can choose what you want to do with them, i.e., sell or hold.

RSU Vesting Explained

In a publicly traded company, vesting is based on one requirement — time. Vesting schedules can be cliffs, where the shares vest all at once on a certain date. They can also be pro rata, where shares vest gradually over time. They can also be some combination of the two. A common vesting schedule is four years with a 25% cliff after one year and pro rata monthly thereafter. For example, for 100,000 RSUs, after one year, 25,000 shares would vest. After that point, the remaining 75,000 shares would vest proportionately over the remaining 36 months, or approximately 2,083 shares per month.

Once the RSUs vest and you receive the shares, they function very similarly to shares you buy on the open market. The one exception is that many employees have trading restrictions around earnings announcements and other insider-information events; thus, you might not be able to sell these at the drop of a hat. One way around the restricted trading period is an automated selling plan under which you set a schedule to sell shares ahead of time, and that schedule cannot be adjusted once put in place. Not all employers or plan administrators will offer this, but it’s worth investigating.

In a privately held company, in addition to the time requirement described above, vesting may also depend upon a liquidity event such as an IPO or acquisition. This time and liquidity vesting logic for private RSUs is sometimes called “double-trigger” vesting.

Once vested and delivered, these also operate as normal shares subject to the usual capital gains taxation. If there is only a time requirement for vesting, the company may still be private when the shares are delivered to you, and the shares will be a lot less liquid than those of a public company. You don’t have control over this, but it’s something to bear in mind, particularly for paying your tax bill on vested shares – more on this later.

With either public or private company RSUs, if you leave the company before the RSUs vest, they disappear.

How are they taxed? Everyone’s favorite topic. The market value of the RSUs on the delivery date is taxed as ordinary income. Sidebar — The delivery date is almost always the same as the vesting date, but in rare cases, shares are delivered at some point after the vest date, in which case, tax is assessed on the value at the delivery date. Because that’s rare and to keep things simple, I’m going to use “vested” and “delivered” interchangeably, just be aware there are instances where this isn’t the case.

You are taxed on the vest price whether you sell the shares or not. Assuming the share price is $5 on the vesting date, the company is handing you something worth $5; it makes sense that it’s taxed the same as cash would be. Effectively, RSUs are like salary from a taxation standpoint; it just happens that instead of cash, you receive stock. Often, a company will withhold taxes from the vesting stock by holding back a portion of the stock, akin to withholding from cash salary.

I recommend paying attention to how much is withheld and discussing with a tax professional to ensure it’s the right amount. There’s nothing worse than getting an unexpected (and potentially large) tax bill.

Once vested (and delivered), the taxation of your shares functions similarly to any other shares, as I stated above. If you sell within a year, the gain from the vest price is treated as a short-term capital gain and taxed equivalently to ordinary income rates. If you hold for a year or more before selling, the gain qualifies as a long-term capital gain, which is generally a more favorable tax rate.

What about the grant price? I haven’t even mentioned grant price yet, and there’s a reason for that. It’s because it doesn’t matter. The grant price is the stock price on the day the company grants the RSUs. It’s used to approximate the level of compensation they want to … grant. However, once the RSUs are granted, the grant price does not matter. The only things that matter after that point are:1) the vest price and 2) how the stock performs thereafter, assuming you choose to hold the shares or are forced to hold them. If the company issued you 10,000 RSUs at a grant price of $5, do not anchor yourself on earning $50,000! If the stock price at the vesting date has halved to $2.50, you only get $25,000 worth of stock. For the sake of your mental and financial health, forget about the grant price!

What would I do with the shares once the RSUs vest? I’d probably sell them immediately. Given the shares’ market value on the vest date is taxed as ordinary income, keeping the shares is equivalent to receiving the same amount of cash compensation and immediately using all of it to buy company stock. By and large, this is not a good idea! Research shows us that individual stocks are volatile and, on average, lead to worse long-run returns than a diversified portfolio — more detail in the next paragraph.

Think of a case where you receive $50,000 in equity compensation, paying full ordinary income tax on that amount, and three months later, the shares are worth $40,000. You paid tax on $50,000 and now only have $40,000 to show for it. Thus, I would sell the shares immediately after vesting, and either treat the proceeds as cash compensation (for budgetary needs, etc.) or reinvest in a diversified portfolio.

This will be more complicated if you have shares in a private company. There may be opportunities to sell on secondary markets, or you might be stuck holding the shares until a liquidity event.

If you’re reading my advice and thinking, “Well, that’s kind of boring, Steve. I want to hold the stock when it goes to the moon!” I got news for you: 1) I’m a boring guy and 2) I’d caution you on that “to-the-moon” theory. Building wealth is about being the tortoise, not the hare.

Is there a chance your company stock goes to the moon? Yes. There’s also a chance you buy a winning lottery ticket or that I literally go to the moon for my next vacation, but those are not the expected outcomes! In a study on concentrated stock positions, JP Morgan found that more than 40% of stocks in the Russell 3000 Index (a proxy for all U.S. stocks) have experienced a “catastrophic stock price loss” since 1980, defined as falling 70% from their peak and never recovering.¹ Since 1980, 42% of stocks in the Russell 3000 have had negative absolute returns. Further, a full 66% of stocks underperformed the index, highlighting how hard it is to outperform a diversified portfolio. We want to be the casino, not the gamblers — we take the odds that are in our favor and accumulate wealth over time via a diversified portfolio.

After all that, if you’re still wanting to hold onto the shares, limit it to a level that’s not going to ruin you if it crashes. Usually, we say that limit is about 5% of investable assets, but that limit varies based on individual circumstances.

RSU Summary

What they are: Shares in the company given as compensation.

How they’re taxed: The market value of shares on the vest date (or the delivery date, if it’s later than vest) is taxed as ordinary income. Thereafter, the tax treatment is similar to that of any other shares - short-term capital gains if held less than one year and long-term capital gains if held for one year or more - with the cost-basis being the vest price (or price at delivery). Remember that the grant price is all but irrelevant. It has no impact on taxation or your ultimate compensation.

What to do with them: Given the volatility and lower expected returns of single stocks relative to a diversified portfolio, for most people, the most sensible thing to do is sell immediately upon vesting/delivery and re-invest in a diversified portfolio.

Employee Stock Purchase Program aka ESPP

What is it? I’m sorry to disappoint fans and supporters of the paranormal, but this has nothing to do with ESP, that magical sixth sense of clairvoyancy and mind reading. That would certainly be a “nice to have” in this realm, but alas, here we are, sans crystal ball. Nonsense aside, an ESPP isn’t quite as generous an RSU program. Instead of simply giving you shares, your employer allows you to buy them at a discount, oftentimes 15%. Yes, you have to pay for the shares, but nonetheless, the discount is still free money.

A typical ESPP operates as follows: An employee opts in during an enrollment period before the offering period. There are usually two offering periods per year, six months each per period. The start of the offering period is called the grant date or enrollment date; the end of the offering period is referred to as the exercise date or purchase date. Contributions to purchase the shares are made via paycheck deductions during the offering period. At the end of the offering period, the shares are purchased. The discount (and hence, the purchase price) may apply to the market price at the grant date, or if there is a lookback provision, the discount would apply to the price at the grant date if it’s lower than the exercise date price.

• Your gain as calculated by selling priceminus actual price paid, i.e., $15 – $8.50 = $6.50, or
• The employer’s discount, i.e., $10 – $8.50 = $1.50

Thus, ordinary income per share sold in this case is $1.50, the lesser of these two numbers.

The gain portion is calculated as [selling price minus actual price paid minus the ordinary income portion we just calculated], i.e., $15 – $8.50 – $1.50 = $5, and this is treated as long-term capital gains.

In short, the longer you hold the shares, the more of your profit gets treated as long-term capital gains as opposed to ordinary income.

You might hear of qualifying dispositions or disqualifying dispositions. These are official names for holding periods. As labeled above, if you sell within two years of the grant date (time periods 1 and 2), it’s a disqualifying disposition. If you wait two years from the grant date AND one year from the purchase date to sell, it’s a qualifying disposition.

Most ESPPs are qualified plans, which is what I’ve presented here. These are eligible for qualifying dispositions, which may offer better tax treatment on a part of the bargain element. Some employers offer plans that are non-qualified, and as one might expect, those are not eligible for qualifying dispositions. The bargain is taxed as ordinary income at purchase/exercise, and the shares thereafter are like any other shares. In the visual aid, the last bar is irrelevant for non-qualified plans.

What would I do with an ESPP? The first question is whether to participate, and the answer is yes, assuming I can afford the paycheck deductions for six months. It’s free money. The second question is what to do with the shares once you have them. My default path would be to keep it simple — sell the shares immediately after purchase. Yes, my gain will be taxed as ordinary income, but this is guaranteed money. Assuming your discount is applied to the grant price, you’re effectively paying 85 cents for a share and selling it immediately for a dollar. That’s an immediate and risk-free gain of 17.6%!

Holding longer than that is a trade-off, and maybe even a gamble. Yes, if you hold the shares long enough, you can get more favorable tax treatment. But the risk is that you’re holding a single stock, and single stocks can be volatile. Refer back to my comments in the RSU section — historically, the average stock underperforms the market, and a large portion have had negative returns.

ESPP Summary

• What it is: An ESPP allows you to purchase shares at a discount.
• How it’s taxed: Taxation of shares purchased through an ESPP changes through three phases: 1) less than one year from purchase, 2) greater than one year from purchase but less than two years from the grant date and 3) greater than one year from purchase and two years from grant date. The further you go into these breakpoints, the more of the gain you can push to long-term capital gains, which is likely more favorable than ordinary income tax rates.
• What to do with it: Keep things simple and lock in the “free money” (courtesy of the discount) by participating in the ESPP and immediately selling the shares. This is the least favorable tax treatment, but holding out for better tax treatment risks the volatility of a single stock and exposes you to the possibility of having shares worth less than you paid for them.

Conclusion

A big thank you to all who have read this — and a big congratulations to those who did it without falling asleep! To revisit my gourmet meal ingredients analogy from the start of this article, maybe you’ve attended Le Cordon Bleu of Equity Compensation and can whip up the proverbial batch of financial cake batter with your eyes closed. But if not, it might make sense to consult with a professional chef — a financial advisor, to make the analogy very clear — to help you put all the ingredients together in a way that suits you.

SOURCE

In addition to noting provisions of SECURE 2.0, there are also statutory limit increases in contribution limits among retirement plans and accounts such as health savings accounts (HSAs) for 2023 that we want to highlight as you revisit your savings plan for the upcoming year.

Summary Points

• Required Minimum Distribution (RMD) Updates — Pushing back the age for RMDs for some clients.
• Higher Catch-Up Contributions — In a few years, some participants in their early 60s will have catch-up contribution increases indexed to inflation or have a higher baseline limit.
• Retirement plan and IRA contribution limits have increased, notable for 2023 given higher inflation.

SECURE 2.0 Notable Provisions

RMDs From Qualified Retirement Accounts

If you turn age 74 after December 31, 2032, RMDs will begin at age 75 (again, previously was age 72).

The original SECURE Act altered RMD ages for certain clients, and those RMD ages for clients whose birth year was 1950 or earlier have not changed (RMDs begin at age 72, or age 70½ for those who turned 70½ prior to 2020). The RMD age is 73 for those born between 1951 and 1959, and the RMD age is 75 for those born in 1960 or later.

What This Means

• This may provide for a few more years to consider a strategic Roth conversion before your RMDs begin.
• This may further delay increases in premiums for Medicare Part B/D by inherently delaying retirement income.

Increased Catch-Up Contribution Limits to IRAs and Retirement Plan Participants

What This Means

Beginning in 2025, participants in employer retirement plans (401(k) plans, 403(b) plans and SIMPLE IRAs) who are age 60, 61, 62, and 63 at that time will have their catch-up contribution limit in the plan increase to a greater baseline amount based on inflation or the catch-up contribution limit at that time.

What This Means

SIMPLE plan participants in the year 2025 and within the same age range will have contribution catch-up limit increased to the greater of $5,000 (indexed for inflation going forward) or 50% more than the SIMPLE catch-up contribution limit amount for 2025. This essentially allows for the ability to contribute more to your retirement plan in your early 60s.

However, the SECURE 2.0 Act also changed how catch-up contributions will be treated for high-earning employees beginning in 2024. For employees who earn more than $145,000, SECURE 2.0 forces those catch-up contributions to be made as Roth deferrals, thereby precluding the ability to defer taxes on any catch-up contributions. This will apply only to employer-sponsored plans such as 401(k), 403(b), or 457, not to IRAs (SIMPLE or SEP). If an employer plan does not offer Roth deferrals, then no employee will be able to make catch-up contributions regardless of wages.

Look for plan sponsors to be adding the ability to make Roth deferrals in 2023 if not already offered. If you are a business owner who sponsors a company retirement plan, talk with your financial advisor about changes you might need to make in your plan this year.

Other Provisions in the SECURE 2.0 Act to Quickly Note

• In 2024, certain beneficiaries of 529 plan accounts could do a tax-free and penalty-free rollover up to a lifetime max of $35,000 to a Roth IRA in their name (subject to Roth IRA annual contributions limits and other provisions around the 529 plan). This may help those who possibly overfund a 529 or if the beneficiary does not need the full accumulated amount anymore.
• In 2024, there will be an elimination of RMDs for Roth 401(k) accounts and Roth 403(b) accounts (original plan participant prior to death) as long as the account owner or plan participant is still alive.
• In 2023, SIMPLE IRA and SEP IRA plans will allow Roth contributions (plan specific, not automatic).
• Starting in 2024, the maximum amount that can be donated to charity from an IRA as a “qualified charitable contribution” — currently $100,000 per year — will be indexed annually for inflation.

2023 Higher Contribution Limits for Retirement Accounts

Given the previous reads of higher inflation over the past year, the IRS has published statutory contribution limits for retirement accounts and other savings vehicles that are notably higher. This is a benefit to those who are continuing to save, are still working, or still eligible to contribute and able to pack dollars into these types of accounts for retirement and/or tax planning purposes.

You should discuss with your financial advisor whether or not your income prohibits you from any of the following:

• Receiving a deduction for your traditional IRA contribution
• Being able to contribute to a Roth IRA
• Contributing to a Roth IRA via a backdoor Roth conversion if your income is above the max threshold

For Retirees: Expected returns have gone up to rates not seen in a decade, so short-term losses are greatly offset by higher future income and expected returns when looking at an overall retirement plan.

For Savers: Recent market drawdowns present opportunities to purchase stocks and bonds at a discount today, along with higher expected returns on both looking ahead.

The key to remaining steadfast is your long-term financial plan, which can show you that you are still on track.

What to Remind Ourselves Coming Out of a Tough Year

In January 2022, we featured an article by David Booth, founder of Dimensional Fund Advisors, in which he shared why he remains optimistic about the markets.

He commented: “Markets will go up and down, but you should expect them to be positive, and that is what history has also shown.” Although the past year’s performance was not positive, we believe this statement continues to apply, which is why we remain optimistic about markets as well.

Moreover, headlines like “Wall Street ends 2022 with biggest annual drop since 2008” should be put into context when considering whether to make changes to a long-term financial plan. Markets bear uncertainty, and investors who remain disciplined are rewarded for that uncertainty without trying to predict or time the market. Long-term returns are compensation for enduring the risk that comes with investing. That is why there are silver linings for all investors to highlight from the past year.

Diversified Portfolios Provide the Best Opportunity for Consistent Returns

The data shows that following Forum’s academic approach should maximize the probability of a good long-term outcome for clients.

For instance, being an investor in concentrated technology portfolios felt significantly more painful in 2022, especially those concentrated in what had done so well over the previous decade such as so-called FAANG stocks. In 2022, the growth and technology-heavy NASDAQ Index lost a cumulative 32.5% compared to the more diversified Russell 3000 Index loss of only 19.2%. Further, looking back over the past 3 years, the Russell 3000 Index has come out ahead with returns of 22.7%, compared with 19.5% for the NASDAQ, cumulatively.

It is tempting to pursue investing in what some would call yesterday’s winners, which have done well recently, but the data tells us that is the wrong approach long term and that’s why we are so focused on having a diversified approach that is disciplined through market ups and downs.

Silver Lining in Your Plan if You Are a Retiree

A tangible takeaway from 2022 when looking ahead is that many retirees are better off long term due to expected returns increasing.

The impact of rising yields in the market now offers investors higher future expected returns. Portfolio values, particularly on the bond or fixed income side, have experienced a drop in exchange for improved yields not seen since before the ultra-low interest rate environment of the past decade. Similarly for stocks, when prices decline, prices going forward have a greater chance of a future positive outcome. Effectively, this trade-off consisted of a drop in current account values in 2022 coupled with an increase in portfolio expected return of 2.00%–2.25% annually long term.

Action to Take: As a retiree, discuss with your advisor what the impact of future expected return means for your plan and how this could change your sustainable spending going forward.

Silver Lining in Your Plan if You Are a Saver

For savers, as counterintuitive as it may seem, years like 2022 should be cause for celebration. Market declines make it a more attractive time to invest. Your contributions to long-term savings are purchasing a greater number of shares of assets at cheaper prices, your dividends are also being reinvested at cheaper prices, and you can capture the power of compounding with higher future expected returns going forward. That’s a triple win! It may not look like you are making strides right now, but if you have been saving continuously (at lower and lower prices), you are setting yourself up to be far wealthier in the future than had you otherwise paused on saving or investing.

We know that sticking to a long-term plan and holding steady has paid off for investors in the past, and we expect that to continue in the future.

Action to Take: As a saver, discuss with your financial advisor your current savings path and what this means for your long-term plan. Re-evaluate as necessary how much and where to continue saving.

We hold January in high regard because it presents everyone with an opportunity to appreciate all they have accomplished thus far and consider what they will do next. As we move forward into 2023, we appreciate your confidence in us to help you achieve your financial objectives and goals.

Planning Item 1: Strategic Roth Conversions

Given movements in the market this year and depending on your current financial picture, it may be prudent to convert your traditional IRA (or a portion) to a Roth IRA. Strategic Roth conversions are the transfer (or conversion) of pre-tax dollars in a tax-deferred plan such as an IRA or 401(k), to a tax-free Roth IRA account to maximize after-tax wealth. What makes it strategic is to make these conversions in low tax years or when values of pre-tax assets have declined to maximize the value of the conversion. The goal is to maximize lifetime wealth by reducing taxes over your lifetime. This may be very attractive for people who have retired but are not yet taking minimum distributions from retirement accounts and/or Social Security.

A reason why this is an attractive time is that the value of the IRA assets may be lower than they used to be at the beginning of this year, thus, the cost of converting them to Roth IRA assets from a tax standpoint has declined. You are getting a bigger bang for your buck for your converted pre-tax dollars because of the market decline. By converting, the assets move from an account that will be taxed at ordinary income rates in retirement to a tax-free account. In addition, if you are finding yourself in a lower tax bracket this year than previous years, the effect of making Roth conversions also becomes less costly. If you are in retirement, you want to ensure you are planning around income tax brackets as well as income-related monthly adjustment amount (IRMAA) brackets (premiums associated with Medicare Part B and Part D).

David McClellan, a Forum partner, recently completed a 7-part series of articles with Kiplinger around retirement planning specifically around tax pitfall avoidance and Medicare.

Planning Item 2: Required Minimum Distributions (RMDs) for Inherited Traditional IRAs

We are waiting for clarification from the IRS on a proposed ruling on distributions from inherited IRAs for certain non-spousal beneficiaries where the owner passed away on or after 1/1/2020. The SECURE Act of 2019 required beneficiaries to withdraw the full balance of an inherited traditional IRA within 10 years after death. Initial interpretation of that rule was that you could take those distributions at any time during the 10-year period. Nothing is finalized as of this writing, but there is some indication the IRS may require annual minimum distributions during the 10-year period. The IRS recently indicated there would be no penalty for not taking a distribution in 2022. We are hoping to receive final guidance before year-end on distribution requirements going forward.

You may need to consult your accountant as we approach year-end, and it would be prudent to talk with your financial advisor as we get more clarity from the IRS as to what, if any, distribution from your inherited IRA may need to be made this year if you are affected by this change. We will definitely reach out to those affected when a decision is announced.

Planning Item 3: Tax-Loss Harvesting

Given current market trends, your portfolio may have losses that, if realized, could potentially be used to reduce taxes. Tax-loss harvesting is putting this strategy to work — deliberately selling positions in the portfolio that are at a loss to save on current taxes.

Loss harvesting may make sense if you expect to be in an unusually high tax bracket this year or took large gains earlier in the year. It may also make sense if you expect either of these things in future years — $3,000 in losses can be used to offset ordinary income every year and the balance can be carried forward indefinitely to offset future gains. Keep in mind that loss harvesting only makes sense in taxable accounts, not in retirement accounts.

There are also many times when it does not make sense. If you are currently at a lower tax bracket than you may be in the future, there may actually be negative value for the loss harvest. Also, if you are only recognizing losses on a small part of an asset class holding (e.g., international stocks), those same tax lots eventually are likely the ones you would have sold for withdrawals or rebalancing, which means the tax-loss harvest did not gain you anything long term and potentially created transaction costs today.

Please talk to your financial advisor and accountant to discuss whether this could make sense for you.

Planning Item 4: Timing on Charitable Giving

Despite the market downturn, worthy nonprofit organizations nationwide still need support from donors to fulfill their missions. For clients who wish to support their favorite causes, you may wish to keep the following in mind to maximize the impact of your philanthropic dollars for yourself and for the charities you support:

• If you are over age 70.5, consider making your charitable gifts from your IRA, a strategy known as a qualified charitable distribution (QCD). Individuals can distribute up to $100,000 per year from an IRA to charity, and any QCDs are excluded from taxable income. If you are also subject to RMDs from an IRA, any QCDs count toward that minimum. Note that charities must receive and process the QCD before December 31 to count for 2022.
• Long-term investors likely have highly appreciated securities in their portfolio. Those securities can be donated to charity more tax-efficiently than gifts of cash. You are eligible for a charitable donation at the full fair market value of the securities on the date of the gift, and you avoid any capital gains that would otherwise have been taxed.

Note: Be mindful not to donate securities that have lost value. Instead, sell those shares to harvest the loss and donate the cash proceeds.

• With many taxpayers taking the standard deduction on their tax returns, they receive no tax benefit from charitable contributions. It might make sense to "bunch" several years' worth of contributions into one year to be able to itemize your charitable contributions on your taxes. Consult with your accountant to determine how much you would need to donate to exceed your standard deduction for this year.
• If you are not sure which organizations to support but you would like to receive a charitable deduction in 2022, consider opening a donor-advised fund before the end of the year. These can be funded with cash or securities and offer tremendous flexibility to your charitable giving. You are eligible for the charitable deduction when you donate to your donor-advised fund, and you can later decide which organizations to support out of that fund. The balance of your donor-advised fund is invested for future growth, which can greatly enhance your giving capacity down the road.
• With interest rates on the rise, certain charitable trusts are offering higher charitable deductions than before. These complex but powerful vehicles can be used to diversify a concentrated stock holding or defer capital gains on the sale of investment real estate, while making a significant charitable contribution at the same time. Contact your financial advisor for more information on whether a charitable trust is right for you.

As you consider your year-end giving, be sure to complete any gifts before December 31 and obtain a donation receipt letter from each charity to substantiate your generosity.

Planning Item 5: IRMAA Appeal Process

If you recently turned 65 and applied for Medicare, you may have been surprised to receive a letter in the mail regarding your IRMAA premium increase. Several years ago, a premium surcharge for Medicare Part B and Part D was implemented based on the modified adjusted gross income on your tax return two years prior to the current year. The surcharge starts at income levels of $91,000 for those filing single and $182,000 for those filing jointly (2020 income levels for 2022 premiums) and there are breakpoints at 5 different income levels.

You may not know that if your income or marital status has changed, you can file an appeal and receive a reduction or elimination of the surcharge. Common reasons for a change in income are retirement or a reduction in employment income, a large capital gain in a prior year or reduced rental or other investment income. You will need to attach documentation — it is a fairly straightforward process with a quick resolution. The appeal form is found on the SSA website and is Form SSA-44.

In addition to appealing the surcharge, it may make sense to implement some tax planning moves to offset the impact or at least plan around it. Your financial advisor can help you navigate your options.

We will try to address some of these concerns head-on in this article. While unsettling, we do not think these bond returns are something to fear, and we want to share our best answer to the question of “Will bonds stay down?” and “How will it affect my retirement?”

These Truly Are Very Unusual Returns for Bonds

In the post What Is Unusual About These Markets?, we pointed out how unusual the start to the year was in historical terms. We spoke a great deal about inflation expectations and what that implies (and does not imply) for future interest rates in Perspective Midway Through the Year.

As an update to those pieces, we put together these two charts to show just how unusual the start of this year has been in historical terms.

Year to date, this has been the worst return for intermediate and long-term bonds in history. This also suggests that looking forward to next year, it would be extraordinarily unlikely to repeat such an event. These losses are not driven by default or other such realized losses in value. These price losses are driven almost entirely because interest rates have gone up very rapidly.

Meanwhile, stocks and bonds are down at the same time. Since the start of the S&P 500 Index, there have been 25 calendar years in which the S&P 500 Index had negative returns. In all of those years, an investor would have been better off in a 60/40 portfolio (holding 60% stocks and 40% bonds), whether that portfolio was constructed of long-term diversified bonds or short-term, high-quality bonds. This year is the first year, if it remains the same, that a 60/40 portfolio may do worse in a year when stocks had negative returns. We do not think that the 60/40 portfolio is dead. Holding bonds will continue to be important for dampening risk in the future. Looking forward, we expect a 60/40 portfolio to reduce stock market losses by an average of 50% in those loss years, just like it has in the past.

These Are Short-Term Losses of Value That Directly Benefit Investors Long Term

There are two reasons we hold bonds. The first is to diversify stocks. The second is to earn the interest payments from those bonds.

The good news around these bond losses is that the higher interest payments are a very good thing for investors, especially retirees. While diversification has not worked as it has in the past, the loss in value is largely offset by the fact that we expect to earn higher interest in the future. Either bonds will pay out more interest in the future, or bond rates will fall back down and we should make back most of the principal lost as bond prices rise. Either way, long-term investors should be better off because real interest rates have gone up.

That sounds too good to be true, so let’s put that in numbers. The Bloomberg U.S. Aggregate Bond Index, for example, is down 14.61% year to date, but investors expect to earn dividends that will add about 29% more value cumulatively over the next decade. The compound effect on your long-term wealth is positive. Beyond 10 years, individuals are projected to be substantially wealthier than they would have been had interest rates stayed low.

Furthermore, when bonds have had negative returns in the past, the time to recovery of those losses has historically been very short.

The table above does not imply that interest rates will necessarily drop back down next year, but we also do not think the common statement that “bond rates are going to remain high as long as inflation is high” is true either.

Is This Driven by Inflation?

The common story is that this year’s higher yields are driven by inflation, but looking at the data, this does not seem to tell the story of the bond market. Yields in the bond market are made up of two elements:

1. Market Inflation Expectations
2. Real Yields: The Yield Above Inflation Expectations

Bond Yields = 1. Market Inflation Expectations + 2. Real Yields

Looking at inflation expectations (the gray line is expectations in January and the blue line is now), we can see long-term inflation expectations have dropped as the Federal Reserve has become more aggressive about reining in inflation. Markets believe that the Fed will aggressively reduce inflation in future years. In fact, inflation expectations for the next 5 years are around 2.25%, which is pretty close to what the expectation was pre-pandemic.

This means the entire increase in interest rates can be attributed to an increase in real yields. The expected returns for bond investors (net of inflation) are significantly higher now than they were at the beginning of the year.

Should We Take Less Risk with Bonds?

One question some clients have asked is whether we would have been better off invested in short-term bonds or even cash this year, since they have lost less. While true this year, the vast majority of years would have been worse off for holding those short-term bonds, especially after inflation. Over a lifetime of investing, short-term, high-quality bonds do not increase wealth net of inflation, as they tend to yield interest approximately equal to inflation. A diversified bond approach invested in bonds with exposure to term risk and credit risk tends to provide 1–2% per year greater return on average. For clients with sizable bond exposures, this means a lot greater wealth and ability to spend long term.

Some of the worst losses have been in long-term government bonds this year, even though such bonds have historically provided the greatest diversification to stocks. In the 10 worst stock market downturns since 1926, long-term bonds cushioned the blow with positive returns in 8 out of the 10 years. This means a portfolio holding these bonds reduced the downside better than shorter-term bonds or cash the vast majority of time, but not every time.

In the past 22 years, such a diversified bond approach, as compared to a short-term, high-quality approach, has added material wealth over time. A diversified bond approach was at least 1% better in 14 years, while the short-term, high-quality approach was at least 1% better in only 2 years (2013 and this year)! The outcomes were similar in the remaining 6 years.

If an individual started out with a 60% stock/40% bond portfolio worth $1 million in 2000, they would currently have about $3.34 million with short-term, high-quality bonds, and $4.3 million with diversified bonds, $1 million more.

It does not work every time, but the preponderance of the evidence suggests investing in a diversified bond approach is the most prudent course of action over the long term.

What About Today? Is There Anything We Should Change?

The degree of interest rate changes does change what kinds of bonds we want to hold. As mentioned, at the beginning of the year, short-term interest rates were 1% or less, while long-term bonds were 2%. Today, rates on short-term bonds are a bit over 4% while long-term bonds are a bit below that — this is called an inverted yield curve (when shorter-term bonds have higher yields than long-term bonds). We have highlighted two inversions in the curve today in the chart below. The yield curve today looks M-shaped rather than the normal steep curve:

Our Investment Committee has a long-standing process of re-evaluating our bond holdings when interest rates change by a certain magnitude, and they recently met to do so again. The result will be that we want to continue following the same approach of owning diversified bonds as we have in the past, but we want to shorten the maturity slightly. This makes sense, given that short-term bonds currently pay more interest than long-term bonds. We still want to maintain a holding of long-term bonds, but shift our allocation slightly from 30-year bonds into 20-year bonds (the inversion on the right side of the chart).

Similarly, we plan to shift about half our allocation of core bonds from a market-like 7-year duration into bonds with closer to a 3-year duration (the inversion on the left side of the chart). These changes are consistent with our disciplined approach and have everything to do with where today’s interest rates best compensate investors for taking risk looking forward. It should increase expected returns slightly while also dampening the ups and downs of our bonds in this unusually volatile bond market.

Forum does at times shift to shorter-term bonds during periods like today when short-term bonds have higher expected returns than longer-term bonds. When we do such a shift, however, our Investment Committee directly acknowledges that we are slightly reducing diversification by buying shorter-term bonds. These situations are rare over time but present opportunities for higher overall portfolio returns with similar overall risk.

Conclusion

When we look at our portfolios, we see significant drops in value in the bond positions because of one of the largest moves in interest rates in history. This can be unsettling for investors unless we take a step back and understand the long-term implications.

Long-term investors are now earning much more on their bond portfolio. Coming into the year, bond investors expected to earn 2% or less in perpetuity. Now long-term expectations are closer to 4%. That difference in income makes investors more secure in their retirement spending and wealthier long term. Higher interest rates (especially without higher inflation expectations) are a valuable outcome for the well-being of long-term investors, and we are focused on being properly positioned through a disciplined approach to take advantage of the situation to provide a more secure long-term future for our clients.

We suggest having a written plan to provide long-term perspective and balance the excitement of campus visits and acceptance letters. The place to start is to compare all associated costs (not just tuition) as well as how much financial assistance is being offered and how much has been saved for college expenses. We help families address:

1. How to evaluate the costs of higher education relative to a student’s goals and aspirations
2. How to intelligently manage and eventually pay off student loan debt

Don’t Underestimate How College Savings Can Change the Borrowing Equation

The longstanding college planning resource Saving for College designed what they refer to as the “World’s Simplest College Cost Calculator.” This calculator gives students and their families a clear view of the potential college savings gap or surplus based on different scenarios, including current college savings, future monthly savings contributions, household income and type of university. We compared two saving scenarios for a student who will attend an in-state public university.

How Much Student Loan Debt Is Too Much?

Student loan debt has been growing at a breakneck pace since the late 1990s. In August 2011, The Atlantic described the rate of growth as “startling” and “staggering” and referenced data from the New York Federal Reserve: “In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.”³ Two decades later, outstanding student loan debt stood at $1.58 trillion (as of the fourth quarter 2021).⁴

It is important for students to understand the amount of debt for which they will be responsible in relation to their earning power. That said, pursuing higher education is a wise decision even when viewed from a purely economic perspective.

Graduates with a bachelor’s degree are both more likely to gain employment and earn an average salary of $20,700 more than their peers who only graduate from high school, according to annual earnings data for 2019 from the National Center for Education Statistics.⁵

This is the first level of analysis to consider — that earning a college degree does improve the chances of attaining a higher quality lifestyle. The second level of analysis, however, dives deeper into the economic tradeoffs that offset the cost of living during those years and the foregone wages during the years not spent in the workforce.

Understanding Student Loan Debt and Other Household Debt

The first step in debt management is to understand how much is outstanding, the type of debt and the interest rate. With that information, it is easier to develop a plan.

For example, if you have other debt like a mortgage or credit card debt that have higher interest rates, the best decision may be to pay the minimum amount due on your student loans, so that you can pay down the higher interest rate debt first. Some people can also refinance their student loans over a longer term and take the money saved directly to pay off the higher-interest debts faster.

As a general rule, if the highest interest rate is below 5%, then there may be reason to consider not prepaying the higher education debt and instead contributing to an investment account or paying down other debt.

Another way to pay down debt is to participate in a federal or state student debt forgiveness program such as the Teacher Loan Forgiveness Program. This federal program forgives up to $17,500 for borrowers with qualifying federal student loans who teach full-time for five consecutive years at a qualifying elementary or secondary school.⁶

Ron Lieber on student loans: “Gallup research from 2015 showed that almost half of recent graduates who had any debt at all had postponed additional training or graduate school. About a third had delayed purchasing a car or house due to the debt. … We want our kids to be on the right side of those numbers if at all possible so their next big life choices won’t have anything to do with how much money they owe.”⁷

Graduation Day

Even with all the financial considerations, the personal fulfillment that comes with obtaining a higher education should not be discounted. The greatest reward for many students will be realizing the path they want to follow and gaining the confidence to pursue those dreams.

That is why having a plan in place that outlines associated expenses can benefit a student over the long run. If you have questions about how to build a plan for managing college expenses, connect with a Forum advisor who can help you evaluate your options.

SOURCES

The Financial Advisor survey considers several factors including growth in firm assets, number of clients and total assets in 2021 when determining RIA ranking. Previously ranked 77, Forum has had consecutive appearances on the list in this asset category.

In early 2022, Forum launched its new website, forumfinancial.com. A departure from where Forum started, the new website and logo represent Forum’s legacy while acknowledging the organization’s growth and evolution.

Since 2021, Forum has added new talent from the partner group to the Backoffice team. Laura Norek, director of talent and organizational development, views having a strong associate development plan that includes goal setting and career pathing as essential to the health and success of an organization.

She commented, “Our goal is to strengthen our associates’ connection to Forum’s mission, vision and values through training, coaching and custom development plans. We believe that helping each person reach their full potential is what drives a successful organization.”

Recently named to the Forum partner group, David McClellan shared his perspective on Forum’s evolution since he joined as a financial advisor in 2015. McClellan said, “I initially joined Forum because of our people, our approach to investing and retirement planning, and our vision for serving clients. Those same factors remain true today. Forum continues to innovate and invest in people and in technology so our advisors can better meet the needs of our clients. I’m excited for the future of our firm and how we can help our clients."

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Having a financial plan in place can help us focus our optimism on the long term. It helps ask the question, do I think prices will be higher in 20 years than they are today? (Or you can insert your own mental timeframe, as long as it is measured in decades.) It can also focus our activity on what we can control — investment strategy, career milestones, lifestyle spending and the personal well-being of yourself and your loved ones. What we do know is that capital markets deliver in the long run but in the short term many things can and do happen in the markets.

Short-Term Stock Returns Are Very Unpredictable

Without risk in the financial markets, there would not be a financial return. We discussed this in our June post: What Is Unusual About These Markets? In that post, we included a chart from Dimensional Fund Advisors that makes the point that it is difficult to predict market returns and how much missing out can sting. Further, if you invested $1,000 in the S&P 500 Index continuously from the beginning of 1990 through the end of 2020, you would have $20,451. If you missed the single best day, you would only have $18,329 — and only $12,917 if you missed the best five days.

The Silver Lining Is That Value Investing Has Lost Less

Through the first six months of 2022, value stocks have outperformed growth stocks by 15%. That outperformance is the difference in return for the Russell 3000 Value Index of -13.15% and the return for the Russell 3000 Growth Index of -28.15%. There have been far more extreme losses by the high-flying technology stocks like those commonly referred to as FAANG stocks, which lost on average (41.3%) year to date as of June 30, 2022.

In a recent article from David Booth, executive chairman and founder of Dimensional Fund Advisors, titled So What’s Your Plan for the Bear Market?, he wrote, “If you find yourself tempted to make a change, think carefully about whether you’re moving from one long-term plan to the next long-term plan. Trying to time short-term moves has more in common with gambling than with long-term investing plans.” We think he did a nice job of summing up how investment changes should be made — they should be made because we want to change our allocation for the long term, not because recent events make us more worried (or more bullish) than we felt last year.

Where Is Inflation, Where Is It Going, And Why I Should or Should Not Care?

The below chart shows a solid line representing where we have gone from about 2% annual headline inflation up to 8.6% annual headline inflation in the latest CPI release. The dotted line in the chart tracks what the market expects for inflation going forward based on long-term Treasury and TIPs bond yields (5-year expectations are currently about 2.4%). Recent realized inflation has been greater than the interest rates on bonds. If this persisted long term, it would cause investors to lose purchasing power over time. Holding cash or commodities would not be a better choice and would lead to the same problems.

The good news in the chart below is that the dotted line shows roughly where markets expect us to be in a year or two from now. Markets expect inflation to come back down over the next 24 months to a little below historical averages and interest rates to rise to and then remain a little below historically average levels. This means bonds are expected to provide above-inflation returns from a long-term perspective. The message here is that you should stay invested in bonds and keep longer-duration bonds in your portfolio. The best bet for exceeding inflation is to invest in stocks, but bonds are expected to have positive returns net of inflation as well long term.

In terms of where current inflation expectations are in the market, forward-looking 5-year expectations have actually come down from its previous high a few months ago. This is counter to most headlines about year-over-year inflation being very high because those headlines are based on backward-looking data points and lagging economic indicators.

"5-Year Breakeven Inflation Rate (T5YIE).” Retrieved from FRED, Federal Reserve Bank of St. Louis.

A Comment About the Risk of Stagflation

Stagflation was coined as a term by a British politician in the late 1960s to describe a period of simultaneously high inflation with stagnation of the economy. The United States has only experienced stagflation materially one time, in the early 1970s. That period is most remembered for its high oil prices, abnormally high interest rates and price controls. Today’s high oil prices have people drawing comparisons. In reality, the level of interest rates anticipated by markets are not expected to get anywhere close to the levels reached in the 1970s and 1980s. With the anticipated increases to the federal funds rate over the next year, rates are expected to level out around 3%–4%, which most people would view as very reasonable.

There are still lessons we can learn from the 1970s — in particular, the stock market investors who remained invested when the S&P 500 Index had –15% and –26% returns in 1973 and 1974 were rewarded with a cumulative +99% return over the following 5 years. Once again, investors who stayed invested during those tough economic times were rewarded. And often those rewards come well before the economic storm clouds have cleared.

History tells us that our approach toward financial planning and investing must remain disciplined and diversified, certainly in times like these and those similar to market corrections experienced in early 2020. No matter what the future looks like, investors will benefit by maintaining a long-term plan and process. Your financial plan and portfolio bake in the chances of experiencing market dips. We recognize that the start to this year has been unsettling, and we appreciate your confidence in us to help you achieve your financial objectives and goals.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Most states have adopted a law called the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) in the last few years. This law allows executors and trustees to access data and digital assets at your death. But a key point in the law is that the terms of service agreements of custodians (think Google, Apple, Facebook, etc.) may overrule whatever is in your digital estate plan.

These terms of service agreements are the lengthy documents you are required to read and then check the box when signing up for the service. Does anyone remember the last time they actually read those terms? Most people have no idea what they agreed to, and it is very possible that you agreed that your accounts would terminate at your death. Even if you have provided passwords to your loved ones so they can access your accounts, they may technically be hacking into your accounts by accessing them.

Our best advice is threefold:

Use the online tools offered by your data custodians.

1. Go to Settings, then tap your name.

2. Tap Password & Security, then tap Legacy Contact.

3. Tap Add Legacy Contact. You might be asked to authenticate with Face ID, Touch ID, or your device passcode.

After you designate the person, they will receive a notification. Your phone has a QR security key that you can provide to them. They will need that security key and your death certificate to gain access to your account. You can also opt to print the security key yourself to store within your estate plan.

Incorporate a comprehensive digital estate plan into your estate planning documents.

Not only should you have this incorporated into your estate plan, but you should also talk to your trusted contact or executor on exactly where your important information such as your estate plan, will, and trusts are located (whether stored digitally or printed) and how to access them.

Talk to your trusted contact or executor about your digital files and where you keep important documents.

These are a few relatively useful ways to make sure your digital assets transfer at your passing, and that your designated trusted contact or executor will have the means and ability to access. If you have any questions regarding your digital assets or how best to incorporate into your estate plan, contact your advisor who can help assist you in planning for your digital assets and connect you to trusted estate planning attorneys.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

“Almost every brokerage firm in the country was a client of mine in my prior career, so I have a very unusual perspective on the industry and how best to provide good fiduciary advice to clients,” David said. “I choose to work with clients more broadly, deeply and proactively than most financial advisors. I’m passionate about helping my clients achieve financial freedom.”

David’s practice focuses on retirement planning and financial life coaching. He has developed subject matter expertise in understanding and mitigating the risks associated with saving in tax-deferred accounts.

“I’m thrilled to join the partnership,” David said. “There are many things that differentiate Forum’s approach and services, but at the end of the day, it’s about people, and the team at Forum has so many amazing, caring people.”

Forum Co-Managing Partner Jonathan Rogers commented on the extraordinary perspective David will bring to the Forum partnership: “The depth of knowledge David brings to his client relationships and his unwavering commitment to their betterment make him a great advisor and a wonderful business partner. I love working with the dedicated group of partners and advisors we have at Forum. Financial advisors like David are why Forum exists — to help advisors and their clients achieve all of the professional, personal and financial goals in their lives.”

David is excited to help Forum continue to evolve and deliver expert advice to its clients. He lives in Austin and works with clients nationwide.

According to U.S. News and World Report, the average cost to raise a child is now roughly $267,000 before reaching college.¹ Add in the rising cost of college tuition and raising a child can seem overwhelming. But have no fear. With proper financial planning, the costs of raising a child can be extremely manageable, allowing you to focus on what matters most — the love and care you give to your newborn.

In this article, we’ll discuss the typical expenses you should budget for, as well as the financial preparations you will want to make prior to and immediately after the arrival of your baby.

Budgeting for your New Arrival

Housing

Working with thousands of clients, Forum has developed a rule of thumb for home purchases: “Generally, purchases of 3x pre-tax income or below allow households to save effectively and not have many budgetary constraints. While 4x pre-tax income is doable, it does require some sacrifice to savings and budget in many situations. We’ve had a few clients go up to 5x pre-tax income. This is not advisable as in many of these situations there is very little financial flexibility left over. Many of these individuals have to stay at their job (or at least their income level) and their savings ability becomes marginal at best with very little flexibility for 10–15 years.” For more information about purchasing a home, you can read this great article from Forum on “Making Smart Decisions Around Purchasing a House.”

Child Care

If both parents continue to work, you can expect child care costs in the following range:

Care.com Editorial Staff, “This Is How Much Child Care Costs in 2022” Care.com, June 15, 2022.

However, this is an area where you can get creative. Perhaps you can share a nanny with a close friend or neighbor who has children of a similar age or you can rely on family for child care to help ease some of the burden.

Food Costs

Transportation

Other Costs

Preparing for the Arrival of Your Newborn

Setting Aside an Emergency Fund

Understand the Costs of Childbirth

Planning for Parental Leave

Organizing Your Baby’s Paperwork

Adding Your Child to Your Health Insurance Plan

Changing Your Beneficiaries

Life Insurance

Our perspective is that insurance should be an income replacement to provide for the family should something happen to you. A $1MM policy can be bought to provide about $40,000–$50,000 per year in cash flow if it’s needed. We use 4–5% of the policy value when thinking about how this translates into cash flow for your family. Term life makes sense for 95%+ of individuals because it is simple, portable and low cost. Remember, insurance today is always cheaper than insurance tomorrow.

Working with an insurance broker can be a great step in acquiring life insurance. This is because an insurance broker can poll several dozen insurance companies at once, finding the most competitive rate and comprehensive coverage for you. Your financial advisor is a great resource for connecting you with an experienced and trustworthy insurance broker.

Create an Estate Plan

If your estate is more complex, an estate lawyer can be helpful in drafting a full estate plan, which may include setting up a trust. If you already have a will, now is the time to update it to account for your new child. It’s especially important to designate guardians for your new child should something happen to you and your significant other. Your financial advisor can guide you toward the right estate plan for you and will have a network of estate attorneys should you need one.

Saving for College

One of the best and most ubiquitous vehicles for college savings is a 529 plan. 529s are incredibly tax-efficient savings vehicles for those who have the means and desire to set aside money for a child’s education. The money invested in the plan grows tax-free if used for qualified education expenses (including tuition, housing, etc.). They are also incredibly flexible in that they can be used for post-graduate education and you can even change the beneficiary on the account once a year.

Additionally, many states offer tax incentives for investing in 529 plans. For instance, in New York, you can deduct up to $5,000 per individual or $10,000 per couple from your state tax return each year for contributions to a 529 plan. Our perspective is that if you have means, you are better off funding the account sooner rather than later as the compounding effects are so great.

Your financial planner can help you think through the best savings strategy for you, help you to set up your 529 plan and provide investment recommendations based on your child’s time horizon to college.

Don’t Stop Your Retirement Planning

Conclusion

SOURCES

The most unusual thing about the start of 2022 has been that stocks and long-term bonds both experienced negative returns at the same time. It is very unusual for Long-term Treasury Bonds to lose greater than 5% of their value while stocks lose greater than 5% as well. In fact, it has only happened in two calendar years since 1926 looking at Ibbotson’s Long-term Treasury and the S&P 500 Indexes. Since the year is not over yet, we do not know if this year will be the third.

Rebalancing May Be Less Frequent, But We Still Look for Opportunities to Do It

What has been challenging is that we have not been able to rebalance our stock portfolio with bonds that are up. Typically, we go shopping when stocks fall, as we normally have Treasury bonds providing the capital to do so. Recently, we saw very tangible benefits of this during the first half of 2020. This diversification, however, works over longer timeframes, and not always in the short-term, like the first half of this year.

At Forum, we focus on what we know: capital markets deliver in the long run. One helpful example of this is to reflect on stock market performances after recent declines, as the chart below indicates.

The Unusual Part Is Really Bonds

Most clients have not been unusually concerned by the stock market losses this year – after all, 20% losses from previous market highs happen with a very high degree of regularity, so much so that we build our trading protocols to rebalance roughly around 20% asset class bands. Since 1980, the S&P 500 index was down 20% or more from its prior high approximately 1 out of every 5 years. Stock investors should be somewhat acclimated to this kind of volatility.

As the chart below indicates, the start to this year has been very unusual for bonds. The point that we made in our prior article, however, remains valid, which is that while we can confidently say short-term interest rates will be going up, we do not expect long-term rates to necessarily rise from here, and they could even fall if the Federal Reserve does a good job addressing inflation expectations.

What the chart above does not say is that we are entering into a period like the 1980s. In fact, if you look at inflation protected bonds, the inflation in the second half of this decade is expected to be around 2% to 3%. The chart above simply shows that rates across bonds have risen more rapidly than at any time in the past. They may have already risen to where they need to be to reach equilibrium. Do they have further to go? Might they fall back down? It all depends on future investor expectations: do they perceive global risks being higher or lower from here? Right now, whether it is the risk of war, or supply chain issues or everything else, that perceived risk is high. If some of these global risks resolve themselves, intermediate bond rates could come back down even if the Fed continues to hike short-term rates.

Higher Bond Yields Drive Lower Current Prices, But Higher Future Wealth

Rising interest rates, which are the primary cause of recent bond price drops, are actually a good thing for most long-term investors, especially for retirees.

Let us use an example with 10-Year Treasury Bonds to understand why higher yields are usually a good thing for long-term investors from a wealth perspective. From the beginning of the year, a 10-Year Treasury Bond lost 15.2% as of June 15, but each future interest payment received gets reinvested at the new higher rates, producing an expected 18.1% over the next 10 years. An investor expects to be 2.9% wealthier by the maturity date than if rates had not increased. We have detailed the bond math below for those in the audience who enjoy digging into that.

Retirees especially benefit because higher yields allow retirees to sustainably draw more from their portfolio. Many individuals have heard of the 4% rule of thumb (that a retiree can sustainably withdraw up to 4% of their portfolio without risking running out of money). For most of the 2010s, the concern for retirees was that withdrawing 4% of the portfolio was too high of an expectation because of how low bond yields were. This year’s moves make 4% a much more reasonable expectation going forward.

The Ultimate Question Is What Should We Do About It?

In short, we should continue to position the portfolio to have the greatest odds of success looking ahead. Long-term, stocks and bonds are the two asset classes that have positive real returns, returns above and beyond the cost of inflation. 3 out of 10 years in diversified portfolios we have seen, and we expect to see, negative returns. And in 3 out of 100 years we may see large (greater than 5%) negative returns in both stocks and bonds. Without that risk, there would be no return. Our perspective is that we need to stay disciplined, not assume these outliers have become a new normal, and take advantage of the lower prices. Your future self will thank you for staying invested in a diversified way.

Note on 10 YR Bond Math: 10-year Treasury Bonds entered the year with a yield of 1.52%, meaning if an investor bought $100 of a bond, it would pay you $1.52 for 10 years, and then the investor would receive their $100 back at the end of 2031. As of 6/15/2022, 10-year Treasury Bonds yield 3.33%, causing the price of the bond in our example to drop from $100 to $84.80 or by 15.2%. Why? Because the coupon is only paying $1.52/year whereas newly issued bonds are paying $3.33, so to get a 3.33% yield on the old bond, the purchase price (or market price) must decline. As a long-term investor though, I am better off. How? Because now as I get paid $1.52/year, I can reinvest the coupons at 3.33%, when at the beginning of the year I might have only been able to reinvest at 1.52%. This additional yield of 1.81% over 10 years is an additional 18.1% in wealth, but I only lost 15.2% on the current price of my bond. So, over the next 10 years I end up overall 18.1%-15.2% = 2.9% wealthier. This is true whether I hold a single bond or an aggregate of bonds (in a bond fund as long as the bond fund is consistent in its approach and holdings).

Forum Financial Management, LP is registered as an investment advisor. The home office is located at 1900 S. Highland Ave., Suite 100, Lombard, IL 60148. Before making an investment decision, please contact our office at 630.873.8520 to receive a copy of Forum’s Advisory Agreement and Form ADV Part 2A, which includes Forum’s fee schedule. This information is intended to serve as a basis for further discussion with your professional advisors. Although great effort has been taken to provide accurate numbers and explanations, this information should not be relied upon for making investment decisions. web: www.forumfinancial.com

Many clients I work with wish they’d started saving at a much younger age, and they worry their children may make the same mistakes. So many of them hope to teach their children how to manage their own money.

One of the most important lessons to teach is how important it is to save. Most people don’t realize how much they need to save for retirement. For instance, using a common 4% sustainable withdrawal rate in retirement, you’d need to save $1 million by retirement in order to have $40,000 of sustainable annual income in retirement. That savings goal can feel pretty daunting, especially for younger people. But the biggest advantage young people have when it comes to retirement is that they have a lot of time for their savings to grow. The earlier they start saving and investing, the more wealth they’ll build.

But let’s get real… I’m yet to meet the teen who is thinking about their retirement. A simple strategy that parents can implement to jumpstart their children’s retirement savings is to help them fund a Roth IRA. If your kids have earned income, they can contribute up to $6,000 of their earned income to a Roth IRA. They probably won’t have the cash to make contributions themselves (even if they wanted to), but this is where parents can step in by giving them a cash gift (up to $16,000 per person) that can be used to fund the Roth IRA. In most states, if the child is a minor, you’d have to start with a Minor Roth IRA, where the parent is the custodian of the account, and then you can convert the account to a regular Roth IRA owned by the child once they are legally an adult.

How big an impact can this have on your kids’ lives? If they contribute $3,000 a year as a high school junior and senior, and $6,000 a year during all four years of college (so $30,000 in total contributions), and they earned a 7% annual return, they’d have $682,000 of tax-free retirement savings by age 65.

In addition, this creates an opportunity to teach your kids some basic investing concepts such as what retirement accounts are and the time value of money. Hopefully, they become accustomed to the annual contributions and carry those good habits forward into their adult lives.

That’s a legacy you can be proud of.

There are several things striking about Scott’s giving pattern. One, unlike most of her philanthropic peers, she does not use a private foundation as the vehicle for her giving: She simply makes gifts as a private individual. By doing so, she does not have any public reporting requirements like she would through a foundation. She is able to stay somewhat anonymous, and many of the organizations that received donations from Scott respected her privacy by not disclosing the size of the donation to Bloomberg.

Two, she supports a wide range of organizations — from social assistance organizations to education, the environment, religion, arts and culture, and health. Scott identified 286 of the recipient organizations in a blog post on Medium.com, in which she also wrote about her specific desire to support organizations that provide support and infrastructure to the nonprofit community.

Three, Scott’s giving is intentional, meaning she wants to have an immediate impact through her giving and implements her giving strategy with that intention. To wit, many of the recipient organizations reported that Scott’s gift was the largest ever received — by far. Many are from sectors of the nonprofit world that are historically underfunded or neglected. And her support of organizations involved in philanthropic and grantmaking infrastructure demonstrates her keen awareness that by strengthening the core of the nonprofit sector, all organizations can be lifted up, magnifying the impact of her giving.

No matter our net worth, here are three lessons learned from Scott’s giving that we non-billionaires can apply with our own giving.

Lesson 1: Identify the right vehicle for your giving

I often get approached by clients about wanting to set up a private foundation through which to donate. In most cases, however, a private foundation is not the ideal way to donate. Foundations come with a number of strings and restrictions, not to mention ongoing expense. Foundations are also public, required to disclose specific financial information that can be accessed by anyone. This characteristic of foundations alone is enough to turn off donors who wish to maintain their privacy.

Foundations can work well in certain situations. For most donors, other options are generally better suited. A donor-advised fund, for example, offers the grant-making and tax privileges of a foundation but at a much lower cost and with the added benefit of privacy and anonymity, if desired. I frequently set up donor-advised funds for clients and have found them to be both powerful and effective.

For some donors who are looking for an added benefit to go with their giving, a vehicle like a charitable remainder trust (CRT) can work well. A CRT provides an income stream to the donor and potentially others such as the donor’s children. After the income period ends, whatever remains in the CRT is paid to charitable organizations identified in advance. CRTs have been around since 1969 and can be applicable in a myriad of situations. Ask a Forum financial advisor about whether a CRT may be right for you.

For others, giving through an estate plan — such as a bequest in a will or trust, or a beneficiary designation through a retirement plan or life insurance policy — can be a simple way to make a gift now but “pay it” later. Billionaires like Warren Buffett and Bill Gates, who have pledged to give away most of their assets to charity, have surely set up giving instructions within their respective estate plans.

Or, like Scott, simply give assets away now, whether cash, stocks or even real estate. For nonprofits, cash is king, and while charities are grateful for planned gifts to be received in the future, a current gift is always welcome.

Lesson 2: Identify the cause(s) that matter most to you

With Scott’s net worth, she has the luxury of supporting many different areas of philanthropy. But most donors have one or two social issues that are of utmost importance to them, whether health care, poverty, the homeless, animals, education, the arts, civil liberties, religion, disaster relief or something else.

I coach my most charitable clients to draft a “giving mission statement” — a sentence or two that describes: 1) what’s important to them, 2) the values they hold most dear and 3) how they intend to make a difference through their giving. By doing so, donors can be more focused and effective with their giving. Fidelity Charitable, one of the largest donor-advised funds in the country, provides a worksheet to help donors craft their charitable mission statement here.

Lesson 3: Define what “making an impact” means to you

Scott has a clear vision for the impact she wants to make with her giving. But one person’s definition of impact is not the same as another’s.

For some organizations, demonstrating impact can take longer than others, something donors need to keep in mind. For instance, remember the Ice Bucket Challenge in 2014, which raised some $115 million for amyotrophic lateral sclerosis (ALS)? It wasn’t until 2019, five years later, than an independent report was issued detailing the impact of that amount of money flowing into ALS research. The impact was no doubt transformational for a disease like ALS — and yet, the hunt for a cure for ALS continues to this day.

Do you want your dollars to go to a specific area of an organization’s mission? Or are you comfortable giving to “where it’s needed most,” the unrestricted dollars organizations crave? Do you want to hear from the organizations you support with regular updates? Or, do you trust that the charities you support will make the best use of your dollars?

To learn more about impact philanthropy, check out the University of Pennsylvania’s Center for High Impact Philanthropy, which provides resources and education for donors on best practices related to making an impact through your giving.

With charitable intent and some smart giving strategies, you can be as effective and impactful a philanthropist as any billionaire.

We believe that this story is best told with charts and some commentary below.

What has happened with inflation?

U.S. Bureau of Labor Statistics, “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Percent Change from Year Ago, Monthly, Seasonally Adjusted.” Retrieved from FRED, Federal Reserve Bank of St. Louis.

The year-over-year change in the Consumer Price Index (CPI), an economic measure of inflation, has significantly accelerated with the most recent data point being 8.5% in March. The market is expecting this to reach its peak in the next few months (June/July timeframe) with 9% data points expected.

For calendar year 2022, the expectation for CPI is somewhere between 6%–8% after being 5.9% in 2021.

What do future expectations for inflation look like?

“United States Rates & Bonds.” Bloomberg.com. Accessed April 8, 2022. 

The market’s inflation expectations are relatively benign. Expectations for inflation in 2023 drop to about 4%. Over the next 5 years, the market expects inflation to average 3.40%, 10-year expectations are an average of 2.89% and 30-year expectations are an average of 2.53%.

Laid out by years the expectations are:

2022–2026: 3.40%

2027–2031: 2.89%

2032–2051: 2.53%

Effectively, markets believe that the inflation we are seeing now will be relatively short-lived and longer term, we will be in a more normal inflation environment. Market expectations are based on the trillions of dollars that are invested by intelligent investors every day, and so are arguably the best expectation available.

But at least for 2022 and potentially in 2023, individuals receiving Social Security should see sizable increases in their annual cost-of-living adjustments.

What are market expectations for Fed rate hikes?

“CME FedWatch.” cmegroup.com. Accessed April 8, 2022. 

Currently, the expectation is for about 11 rate hikes of 25 basis point (0.25%) over the next 12 months (the Fed may do some 50 basis point hikes and, as an example, the market expects this in May). This would leave Fed rates between 3.00%–3.25%. The market expects the Fed to stop after that point.

The Fed is not likely to stop increasing rates until inflation shows signs of moderating and/or unemployment starts increasing. The rapidity of these hikes indicates that the market expects the inflation moderation and/or unemployment increases to occur within about 12 months from now.

What is the impact of higher rates on my portfolio?

As yields move higher, bond prices move down, which means bonds in most portfolios should have negative returns year-to-date. However, there is a big silver lining. For example, 7-year yields (average maturity of core bonds in our portfolios) are up about 1.24% since the end of 2021. This equates to a drop of value of about 7.8% for a 7-year Treasury bond. However, the expected return on the bonds has increased by 1.24% for each year because of the higher yield for the next 7 years for a total of 8.68% in additional expected return. Overall, the investor is better off long term by about 0.88%.

So as a bondholder, short term the price of the bond has gone down, however in the long term, the bondholder is wealthier because yields increased (since the coupons are getting reinvested at a higher rate than they originally would have been). For long-term investors, higher yields are unequivocally good for growth of wealth and for reducing the risk of running out of money, not only for bonds but also for stocks. This is because higher bond rates imply similarly higher equity expected returns (since equity risk premiums are generally accepted to be computed as a premium over a risk-free bond rate).

How are client portfolios taking advantage of the change in yields?

This Reuters article about the Dimensional bond funds is very timely. The summary is that, based on the changes in the curve, there are very high expected returns in the 2–3 year part of the curve and credit spreads (what you get paid for taking credit risk) are higher as well. So, within the funds that clients own, the allocation is moving slightly shorter on the curve and more toward lower-rated credits (higher expected returns). These changes affect the DFA Global Core Plus Fixed Income Portfolio (DGCFX) and DFA Global Core Plus Real Return Portfolio (DFAAX) primarily.

In addition, there has been a unique situation we have seen where long-term municipal bond yields have been the same or higher than Treasury yields for 30 years to maturity, even though municipal bonds are tax-exempt federally and Treasuries are not. This happens rarely in the market and makes municipal bonds very attractive on a relative basis (VWALX in our portfolios).

I am looking for a house. Should I be worried about mortgage rates increasing with Fed rate hikes? Do I need to lock in something now?

No, because markets are efficient and anticipate Fed rate hikes. As we said above, the market is already anticipating about 11 rate hikes of 25 basis points over the next year. That is already baked into long-term bond prices. This is the reason that over the last 6 rate hike cycles, bonds have made money in 5.

Stocks as proxied by MSCI World Index (gross div.). Bonds proxied by Bloomberg U.S. Government Bond Index Intermediate.

If rate hikes are greater or faster than the market anticipates, long-term yields should move higher and then mortgage rates will be higher. If they are slower or less, long-term yields should move lower and mortgage rates will be lower. But if Fed hikes are as anticipated by the market, then long-term yields need not change from their current level.

If you have any questions about how inflation and interest rates play a role in your financial plan, you can reach out to your advisor to re-evaluate and discuss.

1. Deciding between buying and renting given your situation and lifestyle needs.

There is no better answer. This is very much a personal question based on your situation, albeit there are a few financial considerations.

Situations When Renting May Be Preferred

• Flexibility of lease length — If you know you may be moving due to your job or circumstances, you know how long you could sign a lease for and be able to move when you want to. If you can’t commit to a location for 3+ years, renting may be preferable.
• No major cash outlays that are associated with owning — You may not need to pay for major repairs to appliances or utilities nor will you be subject to property taxes. Also, you don’t owe large real estate commissions for buying and selling, which generally take a few years to recoup.
• More predictable monthly housing expenses — Your lease terms dictate how much your rent payments will be, which utilities you may or may not need to cover. Bills and maintenance needs can fluctuate significantly as an owner.

Situations When Buying May Be Preferred

• Can commit to a location for at least 3 years — You may have a growing family and want a more permanent residence for a particular neighborhood and school district. Three years provides enough time to amortize some of the buying/selling costs and makes the buy versus rent equation usually move in the direction of the buyer.
• Ability to renovate or modify the home to exactly what you want — While you may be limited to current inventory in the market you are searching in, you have more freedom to make improvements or renovations to a residence.

2. Understanding how much home you can afford to purchase (and continue to pay for).

Down Payment

Consider saving for a down payment that is at least 20% of the home purchase price. Putting down anything less than 20% will require you to pay for private mortgage insurance (PMI), which increases the cost of your mortgage. PMI protects the lender of your mortgage on the chance you default on your loan. The cost of PMI will be added to your monthly mortgage amount, to the closing costs when you finalize your purchase, or in the form of a higher interest rate on your loan. PMI expenses will remain in place until you have paid down your loan to 75%–80% of the loan’s value to your purchase price or reappraised home price.

Note that there are first-time homebuyer loans, physician loans, and veteran loans, which avoid PMI for below 20% down payments.

Mortgage Qualification

To figure out how much mortgage you are probably going to qualify for, you should understand the 28/36 rule. The reality is that you will probably qualify for more mortgage than you actually want to carry long term, so we discuss affordability in the next section.

28% — Mortgage payment/pre-tax income

Your monthly mortgage payment (principal, interest, property taxes, and insurance) should equate to no more than 28% of your monthly pre-tax or gross income. Your gross income should be your reliable monthly income before taxes and payroll deductions. For example, if your household’s income/base salary is $150,000 ($12,500/month), then approximately $3,500 of monthly mortgage payments is the top end of your affordability.

36% — Total debt payments/pre-tax income

Your monthly mortgage payment used above plus all other debt payments you have outstanding on a routine basis (auto loans, student loans, credit card balances if not paid in full each month) should equate to no more than 36% of your monthly pre-tax or gross income.

House and Mortgage Affordability

Working with hundreds of clients, we’ve developed a rule of thumb for house purchases. Generally, purchases of 3x pre-tax income or below allow households to save effectively and not have many budgetary constraints. While 4x pre-tax income is doable, it does require some sacrifice to savings and budget in many situations. We’ve had a few clients go up to 5x pre-tax income. This is not advisable as in many of these situations there is very little financial flexibility left over. Many of these individuals have to stay at their job (or at least their income level) and their savings ability becomes marginal at best with very little flexibility for 10–15 years.

Let’s look at a quick example: If a family has $150,000 of pre-tax income, we would advise targeting $450,000–$600,000 as the house purchase price (3x–4x pre-tax income). At or below $450,000 would be very affordable, and above $600,000 the family would start sacrificing financial flexibility and longer-term savings and wealth growth.

Mortgage Types

We often advise clients to compare 2 types of mortgages: 30-year fixed and ARMs (generally 7/1 or 10/1 ARMS), or adjustable-rate mortgages. Generally, 30-year fixed mortgages are easy to understand — you effectively pay the same interest + principal payment for 30 years to pay off the mortgage. A 10/1 ARM starts out the same as a 30-year fixed, with 10 years of set interest and principal payments. At the end of that 10 years, the principal payment schedule doesn’t change but the interest resets to a floating rate, usually the SOFR (Secured Overnight Financing Rate) + a spread. As a general rule, you do not want the mortgage to ever reach the floating-rate stage as those rates can be substantially higher, so getting a 10/1 ARM usually involves an unstated commitment to refinance or sell within 10 years.

How do you make a decision between the two? In situations where there is a chance you will sell your home in the next decade or two, we typically recommend an ARM over the 30-year fixed. For example, if you are offered 4.50% for a 30-year fixed and 4.00% for a 10/1 ARM on a $1MM mortgage, you save $5,000/year or $50,000 over 10 years on interest payments over the next 10 years by taking the ARM. However, you then have to deal with having to refinance within the next 10 years to avoid hitting floating rates at whatever future interest rates might be at the time, so you need to ensure you are getting paid enough for taking that risk.

For people confident their purchase is a “forever home” or at least their home for the next 20+ years, then a 30-year fixed mortgage may be better, as it locks in the low interest rates we have today over that entire period. However, one element to note is that "locking-in" the last decade or so of a 30-year mortgage has a reduced impact since the outstanding loan balance during those years becomes much lower, unless you cash-out refinance to take equity out.

The obvious question is why we didn’t recommend a 15-year mortgage. A 15-year mortgage means that the principal is fully paid over 15 years versus over 30 years on a 30-year fixed mortgage. This seems reasonable, but the problem is that when you make principal payments, you are earning the mortgage rate on a pre-tax basis (and something less after the interest deduction is accounted for). So, $1 paid toward a 4% 15-year mortgage is earning 4% pre-tax and less on an after-tax basis. This $1 could probably earn a higher return in a moderate or aggressive portfolio long term (6%–7% expected return yearly) so from wealth maximization perspective, lowering the principal payments by going to a 30-year amortization schedule drives a higher wealth expectation (as long as you take the $1 you would have used for principal and invest it). Obviously, portfolio returns are not guaranteed, but the chances an investor comes out ahead over 10 years is over 80%.

Interest Only Mortgages

3. You should not dip into your emergency fund savings during or following a home purchase.

• Closing costs for the purchase — anywhere from 2%–7% of the purchase price
• Moving expenses
• Repairs and maintenance costs that you do not expect to fix yourself
• Monthly utility expenses
• Potential increases in property taxes annually
• Furnishings

Our recommendation is to set aside 5% of the purchase price in addition to setting aside the estimated closing costs and major repairs/renovations. Note that this could amount to making 50% of the down payment available for these costs, which might suggest a client would need to set aside 30% of the purchase price, so that 10% can go toward these additional expenses. On a $1MM house purchase, this would mean $200,000 for down payment and $100,000 for these additional expenses.

4. Having a contingency plan when life events happen.

Dan joined Forum in 2012 as an associate in the role of portfolio trader and has worn many different hats in the organization as he grew professionally throughout the last decade. In 2017, Dan earned the CERTIFIED FINANCIAL PLANNER™ certification. Since that time, his passion as a financial advisor within the firm has only grown.

He said: “For me, the role of an advisor is not just about the investment management, but about helping people have a holistic plan in place in advance of many different events that life presents us so that they have peace of mind about their financial situation no matter what life throws their way.”

Dan is honored to accept a role as partner. As he joins the group to help shape the strategic future of the firm, Dan reflected on the relationships he has established with his clients, including the disciplined financial planning process that he provides to help them achieve their financial goals.

He said: “While I don’t view my role as partner changing my day-to-day engagement with my clients, I am excited about this opportunity to direct the future of Forum, so the firm continues to provide its clients with the financial and investment planning experience they deserve.”

Giving Back

In 2021, after running the Chicago marathon twice, Dan ran the New York City Marathon, his third marathon in honor of his father. Dan continues his fundraising efforts to raise awareness about Alzheimer’s disease. Over the past few years, Dan has been fortunate to personally raise tens of thousands for the cause, thanks to the support of family members, friends and co-workers.

Dan said this about his commitment to the cause: “It has been uplifting to see some of the progress made by researchers in starting to understand what might cause the disease. However, until there is a full understanding and cure, we cannot stop the fight. I can only hope that my efforts will help contribute to progressing the research for prevention and, a cure.”

Dan is respected by his colleagues throughout the financial industry and continues to act as a mentor and resource for financial advisors at Forum.

Forum Co-Managing Partner Nirav Batavia said: “Dan has been an invaluable resource to the Forum team in trading, investment management, technology, as an advisor and as a mentor since the early days of Forum Financial. His experience, empathy and leadership strengthen the Forum partnership, and I look forward to collaborating with him for decades to come.”

• You have received restricted stock units or stock options
• You inherited or have been gifted a single stock
• You are a company founder

We want to focus on why holding a concentrated stock position brings risk to your portfolio and some of the ways in which you can reduce your overall concentration in a single stock.

There are several strategies commonly used to reduce a concentrated stock position, including:

• Selling shares
• Incremental selling of shares
• Using options to hedge a position
• Give stock to charity
• Give stock to family

To provide context throughout, we will consider some of the concepts and examples presented in an enlightening piece from Forum on how diversification drives higher expected returns, not just less risk. First, we explain the inherent risk of owning a single stock, which leads to the importance of diversification in one’s portfolio.

Inherent Risk of Owning a Single Stock

An individual stock is subject to two forms of risk: company-specific risk and overall market risk. Company-specific risk refers to the risk that applies to only a specific company, its industry and sector.

Market risk can be defined as “the riskiness of a stock compared with that of its benchmark. Stocks with less market risk have tended to outperform over time.”¹ While we can diversify away company-specific risk, all stocks are subject to market risk.

As “Diversification Drives Higher Returns” notes, “Since we cannot predict the market’s future, investing in a single company creates a lot of risk. The company could be one that goes bankrupt (for example, from 2005 to 2015, there were 303 bankruptcies of public companies or about 1% of all companies per year¹), or they could be an Amazon or Facebook, which would have delivered holders incredible returns over the past 10–15 years.”²

We diversify because it is impossible to know ahead of time whether a stock will outperform, go bankrupt or end up in the middle.

The Importance of Diversification

Diversification is important in an individual portfolio for two reasons:

• First, we know that, on average, individual stocks have underperformed the broader indices
• Second, individual stocks have more volatility than owning a wide basket of stocks

Let’s take a deeper look at real world returns of individual stocks versus the broader market. A quick definition. The median stock return is the middle stock if we rank all stocks from best performing to worst performing. If we picked a stock at random, half the time we would expect a worse return and half the time we’d expect a better return.

We again consider the findings outlined in “Diversification Drives Higher Returns” through “data for U.S. stocks from 1927–2017 using the CRSP U.S. stock database. The average yearly U.S. market return over that time period (91 years) was 12.01%. The median stock return was 8.30% on average. This means that investing in the overall index versus randomly picking a single stock would have earned on average 3.71% more per year. In any given year, there are a few big winners … Going back to 1980–2014, we know that roughly 2/3 of the universe of single stocks underperformed the Russell 3000. The median stock underperformed the index by –54%.”³

Let’s return to “Diversification Drives Higher Returns” for an example comparing $100 invested in two portfolios.

• Single-Stock Portfolio: 7% expected arithmetic return, 35% standard deviation
• S. Market Portfolio: 7% expected arithmetic return, 20% standard deviation

The paper concludes: “Reduction of volatility has a dramatic impact on the growth of wealth, and this is the tangible benefit of diversification.”⁶ As you can see, there are many benefits to reducing single stock or company specific risk and switching to a diversified portfolio.

Now that we know why diversification is so important, let’s look at some ways we can reduce our concentration in an individual stock.

Selling Shares

Many investors will consider the following option: “Sell the stock or a portion of the stock outright.”⁷ While the obvious benefit of this strategy is that you immediately reduce your concentrated stock position.

However, a key consideration is the potential tax liability in the form of long-term capital gains taxes and state taxes that can come with selling stock you have held for at least one year. If options have just vested, or you are receiving compensation in the form of RSUs, short-term capital gains on the sale of shares held for less than one year would be taxed as ordinary income. This could be as high as 37% at the federal level depending on your income tax bracket.

Incremental Selling of Shares

One way to address potentially significant tax liability is to sell the concentrated stock position over a scheduled period, which could be over several years.

There are situations where you could accelerate the schedule to sell the concentrated position. It is important to speak with your financial advisor to discuss whether this approach makes sense for you.

Using Options to Hedge a Position

A put option is another way to hedge a concentrated stock position. We recommend speaking with your financial advisors to learn more about hedging strategies using option contracts.

Give Stock to Charity

Donating stock to charity can be a straightforward way to give to the organizations you are passionate about. Fidelity describes it this way: “When you donate stock to charity, you’ll generally take a tax deduction for the full fair market value. And because you are donating stock, your contribution and tax deduction may instantly increase over 20%.”⁸

For investors who would like their stock to provide charitable giving over the long term, they can consider donating stock into a donor-advised fund (DAF). Fidelity outlines some of the benefits: “The tax deduction for giving their stock to the private foundation would be limited to 20 percent of their adjusted gross income, while for a public charity with a donor-advised program, the deduction limit was 30 percent — a significant difference.”⁹

Lastly, charitable trusts can also be set up and funded with concentrated stock positions. Charitable trusts have many complexities, and we would recommend speaking to an advisor if this strategy is of interest to you.

Give Stock to Family

One of several strategies for handling highly concentrated stock positions is to gift shares to children via trust or gift. For 2021, “the annual gift exclusion limit remains at $15,000 per individual, which is the amount you can gift without reducing your estate exemption.”¹⁰

Conclusion

The potential tax implications of reducing a highly concentrated stock position can seem daunting but there are strategies out there to reduce the risks of single stock ownership. To explore the strategy that makes the most sense for you, please contact your financial advisor.

SOURCES

We cannot predict how the global stock market will perform in the immediate future, and we know this type of volatility can be distressing. We are not far removed from early 2020 when the onset of the coronavirus pandemic caused uncertainty and volatility. Markets compensate stockholders and bondholders for taking risk, and if investors in aggregate think that risk is elevated, then they should rationally demand more compensation. Lower prices mean higher expected returns long term, and so if investors are demanding higher compensation for investing, then prices should go lower. That could best describe the start of this year — investors demanding more future expected return for taking the risk of investing, and that happens through price adjustments. What the data shows and what we do know is that a long-term investor’s most effective mitigation of geopolitical risk is staying disciplined during times of uncertainty and investing in a globally diversified portfolio.

When considering the impact of conflicts similar in nature to what is happening on the ground in Ukraine, we see that geopolitical conflicts typically experience short-lived selloffs and that market recoveries can happen fairly quickly. We have looked at the returns of the S&P 500 Index following incidents of conflict or declarations of war — the chart below shows the 6-month, 1-year, and 3-year return periods following the date of those events. You can see that in most all time periods, the 6-month or 1-year return period made a recovery, and nearly all 3-year return periods exhibited a positive return. The average return between the date of incident and the 6-month, 1-year, and 3-year periods following are 5%, 13% and 40%, respectively.

All returns shown are cumulative, not annualized. The starting date is the first day of the month during which the incident began or the month after, whichever produced the lower 6-month return. Returns are proxied by the S&P 500 Index. Indices are not available for direct investment and not indicative of any particular underlying investment. They serve as a useful proxy for overall market performance.

Focusing on the country of Russia in particular, we want to provide context for how much Russian stocks and bonds make up in a diversified portfolio. As a simple proxy for this within the Dimensional funds we use predominantly, we looked at the DFA World Core Equity Portfolio (DREIX) and DFA Global Core Plus Fixed Income Portfolio (DGCFX) funds, though these results are also consistent for our clients who own more than one Dimensional fund:

We put these in chart form to emphasize a point. Our philosophy of global diversification seeks to capture returns from thousands of companies around the world — offsetting weak performance in one country with stronger returns in another.

Certainly, unforeseen events and geopolitical conflicts of this nature are devastating when thinking about the human impact. We would be remiss in not acknowledging the humanitarian concerns, too. We recognize that such periods are never easy to live through. Our view of the world is shattered just a bit, with the forced recognition that global peace and prosperity have never been assured. In these situations, the thing you can control is your own behavior and realize that making a decision that does not conform to your long-term plan will often lead to poor outcomes.

Investors who do not remain disciplined too often miss out on the eventual portfolio recovery. Long-term investors position their portfolios for success by rebalancing to capture recoveries and adhering to their written financial plan.

The type of account in question is a Health Savings Account (HSA). In this article, we look at how HSAs work, including who is eligible and how to maximize such accounts for your future by turning one into your “medical piggy bank.”

What Is an HSA?

The HSA is a tax-deductible health care savings account that is available to anyone who has a high deductible health plan (which means that your deductible is at least $1,400 for individuals or $2,800 for families).¹ The maximum annual contribution in 2022 between you and your employer is $3,650 for individuals and $7,300 for families.² Individuals age 55 and older can also contribute an extra $1,000 known as a catch-up contribution.

The account is in your name, so there is no “use it or lose it” issue like there is with some other accounts like FSAs. In most cases, you can invest the account to allow for future growth, which makes it a very powerful tool for retirement planning and allows you to build up funds for health care expenses before and during retirement.

What Can the Funds Be Used For?

• Some health insurance, coinsurance and deductibles
• Most medical, dental and vision expenses
• Prescription drugs
• Medicare premiums
• Some long-term care policy premiums

Why Should I Be Maxing Out My HSA?

The HSA is the only triple tax-advantaged account, which makes it the most tax-advantaged account in which you can save and invest. First, you get a current year tax deduction for your contribution plus your account can be invested and grow tax free. Finally, if the funds are used for approved medical expenses, then the withdrawals are tax free. So, this account acts like a traditional 401(k) (tax-deductible contributions) when you make contributions but acts like a Roth (tax-free withdrawals) when you take out money for medical purposes.

How Can Individuals Maximize the Benefit of Their HSA?

If individuals have the cash flow to allow it, they should make the maximum contribution to their HSA, invest as much of the account as their provider allows and pay for their medical bills out of pocket (keeping detailed records/receipts of medical expenses). This leaves the HSA funds invested and growing tax free, which then becomes a “medical piggy bank.”

It is critical to have enough savings to cover medical expenses in retirement. According to an estimate from Fidelity, “an average retired couple age 65 in 2021 may need $300,000 saved (after tax) to cover health care expenses in retirement.”³ This cost estimate for a 65-year-old couple retiring in 2021 increased from Fidelity’s 2018 estimate of $280,000 for medical expenses in retirement not including long-term care.⁴ Neither estimate factors in rising health care costs.

But with an HSA (assuming an 8% annualized return), one year’s contribution of $3,600 would grow to about $36,000 in 30 years, which is a great start for retirement medical savings. As an added bonus for those inclined, at any point, you can reimburse yourself for medical expenses that you paid out of pocket as long as you keep those records. This means that a doctor’s bill for $100 from when you were 30 years old can be reimbursed to you from the HSA 30 years later after you have allowed the account to compound significantly. You are paying past expenses with cheaper future dollars.

What if I Have a High Deductible Health Plan but I Do Not Have Access to an HSA Through My Employer?

Employers are not required to give access to an HSA even if they have a high deductible health plan available. Check with your employer to find out if the plan has an HSA that you can set up. If not, you can set up one individually with many different providers. First, talk to your financial advisor who can help you with this process.

Two providers that we suggest due to relatively low fees, diverse investment options and decent user interface are https://livelyme.com/ and https://www.fidelity.com/go/hsa/why-hsa.

A Few Additional Points

• High deductible health plans usually have lower premiums than their counterparts.
• Some employers will make contributions to HSAs on an employee’s behalf.
• Individuals can use HSA funds penalty free for non-medical expenses after age 65 but they will be required to pay income tax on the distributions just like for pretax traditional IRAs.
• HSA funds can still be used if an individual does not have a high deductible health plan, but he or she can no longer make contributions.
• If the owner of the HSA account dies, his or her spouse can inherit and continue to use the funds for medical purposes. For non-spousal beneficiaries, the entire inherited balance is taxable as income (less any medical bills received for the deceased within one year of death).

Note that this article quotes 2022 announced limits that are subject to change as well as are generally increased over time. HSA rules are defined by the IRS.

You can find additional information here: https://www.irs.gov/publications/p969. Talk to your financial advisor to see if saving into an HSA combined with a high deductible health plan is right for you.

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The truth is that the value of prudent financial planning can and should begin well before reaching retirement. Diversification, thoughtful portfolio allocation and tax efficiency are important no matter your life stage, but perhaps the most significant period for retirees (i.e., your future self) are those middle-of-career years between the ages of 30 and 55. Decisions that investors make during this period will have the greatest influence on the long-term financial health and lifestyle they experience in retirement.

Though every client situation is unique, the following is a non-exhaustive list of financial and non-financial planning topics we often see as having the greatest impact for our middle-of-career clients.

Big-Picture Questions

Annual Goals and Savings Prioritization

Understanding the Relationship Between Risk and Expected Return

Tying Up Loose Ends: Additional 401(k) Considerations

Other Wealth-Related Topics

Big-Picture Questions

Switching Careers or Starting Your Own Business 

1. How will switching jobs or taking the leap into entrepreneurship change my income, benefits and even lifestyle/daily routines?
2. Do I need to make changes to my budget/savings plan?
3. How do I evaluate the capital needs for my startup?
4. Should I increase my emergency fund?
5. What impact will my new benefits plan have on my wealth?

Considering Whether to Rent or Buy

1. When does it make good financial sense not to own?
2. How much house can I afford to buy?

Preparing for the Birth or Adoption of a Child 

1. How should I budget and adjust savings priorities when growing a family?
2. Does it make sense to open a 529 college savings plan right away?

Saving for College With a 529 Plan

1. What should I consider when saving for college?
2. What 529 plan should I open?
3. How should my investment allocation in this account differ from my retirement accounts?
4. What is the proper amount of funding?

Mortgage Financing

1. When does it make sense to refinance?
2. Should I pay points in exchange for a lower interest rate?
3. Should I take equity out of my home?
4. Which one should I choose: 15-year or 30-year amortization?

Changes in your long-term plan do not have to be scary. In fact, most of these topics signal a cause for celebration. When you understand how common life changes may impact your long-term financial projections, you can find new clarity and confidence.

Annual Goals and Savings Prioritization

• 401(k) — Typically, saving to workplace retirement accounts is the top priority for most middle-career savers. Despite an increase in access and ease of setup over the past decade, there are still a lot of critical decisions to consider when putting money into a 401(k).

1. Should I make pretax contributions?
2. Should I make Roth 401(k) contributions?
3. Or a combination thereof?
4. Do I select the prescribed target date fund or build my own portfolio of individual investment options?

One thing is certain: At the very least you should make sure you are maximizing any 401(k) match (i.e., free money) offered by your employer.

• Roth IRA or Backdoor Roth IRA* — In certain situations, clients that otherwise earn too much income to qualify for direct Roth IRA contributions can still make backdoor Roth IRA contributions. To avoid messy pro-rata taxation rules that ultimately diminish the tax advantages of the backdoor Roth, a requisite for pulling off this properly is ensuring the absence of any pretax IRAs for the account owner. This is another reason why speaking with an advisor about what to do with your old 401(k)s can be beneficial.
• Health Savings Account (HSA)— Individuals and families enrolled in a high deductible health plan are eligible to make HSA contributions (and possibly get free employer contributions), and thus have access to an incredibly powerful savings and investment tool to boost their financial security.
• Employee Stock Purchase Plan (ESPP)— If your employer offers an ESPP, you may be eligible to purchase company shares at a discount, often 5% to 15%, off the fair market value. When managed correctly, participation in an ESPP plan can boost your income and net worth.
• Mega Backdoor Roth— For those whose company-sponsored 401(k) plan or 403(b) plan meet two key conditions, a mega backdoor Roth could allow additional savings each year (up to $40,500) in highly tax-advantaged Roth assets beyond the normal employee contribution limit of $20,500. Because direct and backdoor Roth IRA contributions are limited each year ($6,000 for 2021, or $7,000 if over age 50), the mega backdoor Roth may potentially be more lucrative.
• Brokerage Account— Taxable brokerage accounts are typically the last pool to be filled; however, this pool plays an important role in optimizing client portfolios as its unique tax characteristics allow for more efficient asset location.

Understanding the Relationship Between Risk and Expected Return

As an investor, you should start with an understanding of your personal risk tolerance as a foundational input to productive long-term investing. We often define a client’s risk tolerance along three dimensions as follows:

• Willingness: A client’s willingness to take risk can be difficult to assess, as it is a more subjective measurement of an investor’s behavioral and emotional response toward investing and the inherent unpredictability of markets. This is the dimension that explores the question, “Can I sleep soundly at night with this portfolio?”
• Ability: A client’s ability to take risk can more easily be gauged via quantitative assessment. A greater ability to tolerate risk is often associated with longer investment horizons, greater job stability, higher income and higher existing asset balances. This dimension evaluates an investor’s level of insulation from market uncertainty.
• Need: In some instances, need is layered into the assessment and is based on the rate of return a client would need to achieve to reach their financial goals. This dimension is rarely relevant for investors in the middle of their careers because, typically, the amount of time between now and when the assets will be drawn upon to sustain spending in retirement is lengthier than a retiree’s. Changes in earning potential, spending habits and life circumstances tend to be more relevant drivers of risk tolerance than “need” for investors in the accumulation phase of their career.

As your willingness, ability and need to take risk evolves, so too will your risk tolerance. Knowing when and why it may make sense to adjust your portfolio allocation accordingly can lead to a better investment experience.

From there, it is well known that one of the core tenets of any proper long-term investment strategy is diversification. As a matter of fact, diversification drives higher expected returns, not just less risk. Once your objective is defined as achieving some long-term outcome as opposed to beating the market in the short-term, that understanding of risk takes on a whole new perspective.

Here are a few examples of the right things to focus on:

• Is my portfolio appropriately diversified?
• Are the investments in my portfolio low cost, or are they detracting from my investment returns? (typically a blended/average fund expense ratio under 0.30% is considered low cost)
• Am I leveraging the best of academic and empirical evidence to guide my investment decisions (not what my gut is telling me)?
• Am I remaining disciplined to my plan?
• Are the assets outside my main portfolio, such as 401(k)s, aligned with my risk tolerance and asset allocation objectives?

Tying Up Loose Ends: Additional 401(k) Considerations

You can improve your long-term, after-tax returns by making sure your entire investment portfolio is being managed holistically from brokerage accounts to 401(k)s to IRAs. In addition to aligning your 401(k) assets with your broader portfolio, there a host of additional considerations you should give to your 401(k)s as you progress from early through middle to late in your career.

Have You Consolidated All Your Old 401(k)s? 

• Are You Rebalancing Your 401(k)s?

  The two primary benefits of portfolio rebalancing are: 1) to maintain the long-term risk profile of the portfolio and 2) to add expected return by buying low and selling high. In short, rebalancing helps reduce portfolio volatility aiming to increase long-term wealth by systematically taking advantage of the inherent randomness and unpredictability of markets. If your 401(k) does not offer automatic rebalancing, you should be resetting the allocation of your current investments once or twice a year. Remember, there is no tax impact to moving around your 401(k) or IRA investments.

• What If You Are Self-Employed or Your Company Does Not Offer a 401(k)?

  Self-employed individuals, small business owners, sole proprietors and W-2 employees who find themselves in this situation have more tax-advantaged savings options than they might think. The universe of options is both vast and nuanced with traditional IRAs, SEP IRAs, SIMPLE IRAs and solo 401(k)s. Make sure you talk with a financial advisor to determine which vehicle will get you the best bang for your investment buck based on your situation.

Other Wealth-Related Topics

Last but not least, two of the most critical planning items we examine with clients at all stages of life are life insurance and estate planning. While not easy to contemplate, if you have not yet, now is a good time to incorporate them into your planning discussions.

• Life Insurance — We help families and individuals determine whether their loved ones are adequately taken care of and the implications on wealth and legacy if the unthinkable were to happen.
• Estate Planning— At a minimum, anyone who owns real and/or financial assets should have a basic will and medical power of attorney in place (and up to date). You should speak with your financial advisor and/or attorney for guidance and assistance in considering and preparing these important documents. The need for certain estate planning elements is as much a factor of where you live and your personal situation as it is about the size of your estate, so it is advisable to speak with a professional before starting an estate plan. Once you have completed these documents, make sure to send copies to the people in your life who need to know, including your financial advisor.

Conclusion

Hopefully, this article serves as a helpful guide to some of the planning-related topics that can impact families and individuals long before you reach retirement. Having a long-term financial plan is an important first step that can reduce stress and help facilitate a stable transition from middle career on to retirement. Many of these topics boil down to optimization and implementing mechanisms that nudge you toward regularly reassessing that plan and all of its moving parts. Speaking with a financial advisor can help you adjust and adapt, helping you achieve long-term financial well-being.

Questions on when the Federal Reserve will begin starting to raise interest rates have investors questioning performance of stocks and bonds, often fueled by headlines suggesting that rising rates are bad for stocks and bonds. In contrast, the historical data shows that five of the last six rate-hike cycles, long-term bonds have had positive returns. We know that markets are reasonably efficient and have already priced in the expected rate hikes into the current prices of stocks and bonds. To provide further perspective, we have compiled a short list of market and economic topics top of mind that helped define the year as we make our way into 2022.

Topic 1: Equities reached record highs and we saw small capitalization and value positioned companies perform strong to end the year.

Investors saw indices climb to record highs throughout the economic recovery in 2021. The S&P 500 set 70 closing record highs throughout the year or ended trading at an all-time high for about 30% of trading days, the second highest number besides 1995.¹ This is due to a handful of stocks that performed exceptionally well, appearing immune and/or benefiting from pandemic turmoil and setting new highs. Fortunately, our diversified portfolios systematically capture the performance of these “mega winner” stocks, rebalancing to lock in gains and mitigate risk as the stocks appreciate.

Since our portfolios are statistically tilted toward small capitalization and value positioned companies, we took a deeper look at the performance of one of our holdings on the year. Over the course of 2021, our DFA US Core Equity 2 Portfolio (DFQTX) holding outperformed the benchmark Russell 3000 Index by nearly ~3%. Notably, in the fourth quarter, the fund saw a return of 9.7% despite the headwinds from the global pandemic and supply chain disruption.

As humans, we are conditioned to think that a rise must be followed by a fall. In one sense this is true, part of investing is weathering the short-term market drops that occur with unsettling, yet still surprising, regularity. On the other hand, we do expect markets to increase theoretically forever in a compound fashion, so decades from now, today’s prices will be a thing of the distant past, never to be revisited. Between now and then, we do not know. Given that market prices today incorporate market participants’ current knowledge and expectations, we know stocks have a positive expected return. We do not know, just like we will never know, what the actual return will be before it happens.

Topic 2: Consumers are feeling the biggest sticker shock in the last few decades as inflation has risen.

Another high seen recently is the annual change in the Consumer Price Index, or the most widely used barometer for consumer inflation, reaching 6.8% in November 2021, which is a level not seen since the 1980s. The recent rise is the fastest on an annual basis since the 1980s and the first time many consumers and investors have experienced these levels. Investors may be worried that this recent rise may impact portfolio performance or returns in the future.

There are two parts wrapped into this notion we would like to point out when thinking about how inflation may impact your financial picture:

1. History tells us it is difficult to time markets around inflation expectations.

Those who want to hedge against persisting higher inflation would require a correct prediction on when to trade the portfolio to hedge against and then when to trade the portfolio back. This essentially comes down to a market timing strategy. Most often, the response from investors looking to address this issue would trade in response to market headlines or economic data, which we know to be priced into the markets already, given they are relatively efficient

2. In the long term, stocks are the best hedge for inflation.

The below graph illustrates 23 U.S. asset classes and their real returns (returns net of inflation) in high inflationary periods (above-median inflation) from 1927 to 2020. Average inflation in this analysis is 5.5% per year and covers periods with double-digit U.S. inflation and deflation. The result is that all asset classes except for one-month Treasury bills had a positive average real return in high-inflationary periods. The data suggests that staying invested for the long term will help outpace inflation curbing thoughts on today’s rising prices making it harder to reach financial goals.

Topic 3: Investors are worried about the outlook for bonds given the implications of rising inflation and increasing interest rates.

The subsequent rise in inflation and the Federal Reserve’s intention to end its monthly bond-buying program by March 2022 have raised questions about when interest rates will begin to rise and the impact on the performance of bonds. The conventional wisdom is that since increasing yields mean lower bond prices, the Fed hiking rates will cause bonds to lose money. But this is not true, in fact it is not even a coin flip. Bonds have actually made money 5 out of the last 6 rate hike periods (versus what used to be 4 out of the last 5 periods). The table below illustrates this point:

There are two major factors driving this result:

1. Bond markets, like stock markets, are mostly efficient, so therefore rate hikes should be priced in. Bonds only lose value if rate hikes are faster, larger or last longer than the market expects. If hikes are slower, smaller or fewer than the market expects then bonds should actually increase in value
2. Fed hikes have a strong correlation with changes in yield on the short end. The long end has almost no correlation with the short end and therefore with rate hikes. The biggest factor for long-term yields and therefore returns is inflation expectations. Higher inflation expectations will drive higher long-term yields and therefore lower bond prices. However, higher yields mean higher income, and this is the reason that even in high-inflation environments, long-term bonds have positive returns net of inflation. Lower inflation expectations will drive lower yields and higher prices for bonds.

Topic 4: The labor market bounced back (demand is up), however, there are too few workers rather than too few jobs with changes in those willing to work or quitting (supply is down).

There are certainly two different sides to the coin when looking at the U.S. labor markets.² 2021 started what we have been calling the Great Resignation — people quitting jobs at historically high rates. The number of people leaving their jobs as a percentage of total employment hit a record high of 3.0% in September 2021 with 2.8% for October and a preliminary 3.0% for November. There continues to be labor shortages particularly in hard-hit pandemic sectors of the market such as restaurants and health care. The 2020 recession and onset of the global pandemic set off the quickest period to reaching an unemployment rate high of 14.8% with nearly 22.1 million jobs lost between January 2020 and April 2020.

However, on the flip side, the economy has recovered 18.5 million jobs lost since March 2020 and the unemployment rate has recovered to 4.2% as of November 2021, an unemployment rate at which the Congressional Budget Office did not expect until 2024. Total job openings remain high and have all but recovered since pre-pandemic levels and unemployment claims recently notched a 52-year low. This dynamic between supply and demand has empowered many to quit their jobs ahead of another lined up or demand higher wages.

We remind ourselves of the need to stay the course and remain disciplined throughout this continued uncertainty and that the market remains efficient and forward-looking. In recent remarks by David Booth (“Why I’ll Always Be Optimistic About the Market”), he shares this perspective: “Rather than having to guess what will happen to whom and when, I choose a different path. I invest in the market. … Markets will go up and down, but you should expect them to be positive, and that is what history has also shown.”³

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Savings Considerations

1—Are you maxing out your retirement contributions to your employer plan?

Actions to Consider: Deferral limits increase in 2022 to $20,500 for most plans. Simple plan limits increased to $14,000, while traditional IRA and Roth limits remain at $6,000. There are catch-up contributions for those over age 50.

2—If you are in a high-deductible health plan or one is available to you, are you contributing to your Health Savings Account?

Actions to Consider: Health Savings Accounts (HSAs) are one of the best tax savings strategies around as you never pay tax on withdrawals as long as they are used for healthcare expenses. Single contributions max out at $3,650, while family plans have a $7,300 maximum annual contribution. However, HSAs are not for everyone — you need to review your healthcare expenditures and make sure you can cover the higher out-of-pocket expenses associated with the plan.

Estate Planning

3—When was the last time you reviewed your estate plan?

Actions to Consider: You might want to review your estate plan with your advisor and attorney to make sure you have all the legal documents in place to minimize taxes and lessen the burden on your family should anything happen to you, including properly titling assets such as a home or non-retirement accounts.

4—Have you checked the beneficiaries on your retirement accounts recently?

Actions to Consider: You should review your beneficiary designations on an annual basis. Your situation may have changed, and it is possible that banks and other custodians may not have the correct information on file, so it is a good idea to check.

Charitable and Family Gifting

5—Are you required to take distributions from your retirement accounts?

Actions to Consider: Required minimum distributions start at age 72. Starting at age 70 1/2, you are allowed to give directly to charity from your IRA through a qualified charitable distribution, so the income bypasses your tax return. This can also help you avoid the Medicare surcharge, depending on your income level.

6—Do you have appreciated stock?

Actions to Consider: You may want to transfer appreciated stock directly to charity or a donor-advised fund to avoid capital gains taxes and time your charitable deduction for a higher-rate year. You would then have plenty of time to disburse the funds to the charities of your choice if you use a donor-advised fund.

7—Do you make annual gifts to your family?

Actions to Consider: Annual gifting limits per person increased from $15,000 to $16,000. This is the first time we have seen an increase in several years.

Insurance

8—Do you know if your current life insurance fits your needs?

Actions to Consider: Many people are surprised to discover that their policies are much lower in value than they thought, or that their term insurance expires soon. Ask for an in-force illustration to review your coverage if you have any policy that is not a term policy. Your advisor can assist with a needs assessment to make sure you have enough coverage. You may even find out that you no longer need the level of coverage you currently have, depending on your situation.

9—Would you or someone in your family benefit from having insurance for long-term care? 

Actions to Consider: Lack of healthcare planning can significantly affect your finances. Healthcare costs continue to rise, including the cost of long-term care. The U.S. Department of Health and Human Services estimated that 52% of the population will need long-term services and supports after age 65.¹ Your advisor can help you review your options and determine the types of coverage that might be appropriate based on your personal situation.

ROTH IRA Accounts

10—Do you know your marginal tax rate?

Actions to Consider: You might want to consider strategic Roth conversions in lower-bracket years. If you are retired and have not started taking Social Security, you could be in an ideal situation to convert portions of your IRA to a Roth to reduce future taxes. If your children have earned income, consider opening Roth accounts for them — up to the level of their earned income or $6,000, whichever is lower. This is a great way to get a head start on their retirement savings.

As of the date of this article, Congress has not passed any new tax and/or estate legislation. However, we anticipate there will be some legislative action at the federal level in 2022. We will continue to monitor the estate and tax landscape for any significant changes that may require revisions to your financial plan.

SOURCE

Defining Your Ideal Risk Profile

Your true risk tolerance is defined by a combination of the willingness and capacity to take risk. You may be willing to take a higher level of risk but your capacity to do so — dictated by time horizon, ability to save, and the margin between what your portfolio can provide in retirement and what you actually need — will play a role in shaping your overall risk profile.

Turning to your willingness to take risk, the five scenarios in the chart below illustrate what risk looks like but not what it feels like if a portfolio were to experience a sharp market decline in a single year. Any investor who has completed a risk tolerance questionnaire will find this chart somewhat familiar.

Each portfolio shows three different possible returns (best, average and worst) for one year and an ending balance 20 years later after an initial investment of $100,000. The real goal of this exhibit is to uncover whether you could sleep at night if you were to incur a $45,000 loss as shown in Portfolio A in one year, or if one of the other portfolios would be more likely to keep you from counting sheep.

Even after you have determined how much of a market decline you can comfortably tolerate in theory, actual experiences and your reactions to them tend to be more telling. Market downturns challenge us to avoid taking hasty action when it seems that everything is telling us to do something. As an example, for many individuals it was difficult to stay disciplined during the market downturn in March 2020. With the benefit of some distance from the event, now is a good time to re-examine your feelings during that period. Were you looking to put your portfolio in the safety of cash, committed to staying the course or itching to take advantage of lower prices by investing more?

U.S. stocks (as proxied by the S&P 500 Index) dropped to a market low on March 23, 2020, with concerns about the effect of the pandemic on the global economy. Small cap and small cap value stocks (as proxied by Russell 2000 Index and Russell 2000 Value Index) also hit lows in March 2020 down 41.2% and 44.9% respectively.

Around this time, many investors found themselves unsettled in the face of uncertainty and market turmoil. Clients who had the resolve to remain invested at that time were amply rewarded for their patience.

The Power of Rebalancing and How Quickly the Market Can Move

A significant benefit of staying the course through difficult markets is how rebalancing enhances a portfolio even in down periods. Disciplined investors embrace the opportunity to buy stocks at lower prices even when it feels uncomfortable.

Forum portfolios have allocation guardrails in place that stipulate when rebalancing will occur. When the guardrails are crossed, this prompts trades that rebalance a portfolio back to its stated allocation with a careful focus on taxes and capital gains. In the graph below, we illustrate the round trip from the beginning of 2020 to the end of the third quarter 2021 for two portfolios (as proxied by the Forum GNP Core 60): a portfolio that was rebalanced when guardrails were crossed to return to the stated risk tolerance of a 60/40 allocation and a portfolio that demonstrates an attempt to time the market.

The purple line represents the portfolio of an investor who sold all stocks from the portfolio due to fear in late March 2020 when U.S. stock prices plummeted at the start of the pandemic. The investor sat on the sidelines through the summer and bought back stocks in late August 2020 when U.S. stock prices returned to their beginning-of-the-year levels. By doing this, this investor got back into the market at higher equity levels and with less capital than was originally allocated, basically locking in a $184,000 loss. In a failed attempt to time the market, this investor had a portfolio value 19.4% lower than the rebalanced portfolio.

The rebalanced portfolio, represented by the green line, systematically took advantage of the stock market selloff and bought more stocks in March 2020 on two occasions by reducing bonds when the allocation exceeded 44% (versus the 40% target of the 60/40 allocation) and buying more stocks to bring the allocation back up to 60%. Conversely, on three occasions during this period, the allocation to stocks exceeded 64% and the portfolio was rebalanced back to its original 60/40 target allocation. The rebalanced portfolio exceeded the value of the market-timed portfolio by almost 20%.

Forum clients continue to reap the substantial rewards of this approach, which is why we advocate rebalancing to stay disciplined to your risk tolerance. While the chart above provides a snapshot of the power of rebalancing, it also offers a glimpse of how quickly things can change and the folly of trying to change during volatile periods.For those who considered drastically altering their asset allocation or exiting the market completely in the early months of 2020, we suggest two action steps to take today: speak with your advisor and conduct a financial lifeboat drill.

The Investor, the Stock Market and the Lifeboat Drill

If you have the choice of completing a lifeboat drill while docked in the harbor on a sunny day or while on the water in the middle of a thunderstorm, the obvious choice would be to run your tests with your feet firmly planted by the water’s edge.

Logic tells us to take advantage of the calm before the storm — defined in this scenario as a time with relatively low market volatility. During this exercise, it is useful to keep an open mind about what you may discover.

There are dozens of cognitive biases that can hamper an investor’s decision-making process. Recency bias can lead someone to believe that what happened yesterday with stock prices will persist indefinitely. They say hindsight is 20/20, which is the foundation of hindsight bias where people recall that they guessed the correct result of an unpredictable event when they did not.

For our financial lifeboat drill, we suggest that you review your risk tolerance to give you new perspective on your ideal risk profile. Your advisor can assist with this exercise. This process focuses on current needs along with your acceptance of market movements that would generally be deemed worst-probability outcomes.

Part 1: Evaluate What You Need – Your Capacity to Take Risk

• Assess your capacity to take risk. You may realize that you have a large margin of safety and can achieve your financial goals with lower risk. On the other hand, an allocation that is too conservative could cause your planned distributions to exceed what is sustainable for the overall portfolio.

Part 2: Examine How You Feel When the Stock Market Slumps – Your Willingness to Take Risk

• Revisit your current risk tolerance. You had a sense of how much market decline you thought was tolerable when your portfolio was originally built, which defined your risk tolerance.
• Explore the downside. Your willingness to take risk should not be based on your feelings when the market does well. If you experienced a steep or prolonged market decline, if you felt the need to change to a more conservative allocation, we regard this as a signal that you may have taken on more than you can handle when it comes to market volatility.

Part 3: Determine Next Steps

• Consider potential allocation changes. The best time to make a change to your asset allocation to a more conservative allocation is following a market recovery. We suggest looking at your cash flow needs to evaluate if the allocation to stocks can be reduced toward a lower-volatility portfolio while still meeting your cash flow goals.
• Make any necessary adjustments. Your advisor will help you to balance competing needs in a way that does not negatively impact your long-term financial goals and any current cash flow needs.

We recognize that risk and expected return are related. We want to help you maximize your after-tax wealth for the right amount of risk for you. If you want to discuss your willingness and capacity to take risk and how that relates to your current portfolio, please contact your financial advisor.

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First, a refresher. Under current federal law, an individual may transfer $11.7 million (2021) during lifetime or at death, free of gift or estate tax. Married couples may transfer $23.4 million. This estate tax exemption amount will sunset after 2025 and revert to $5 million per person, adjusted for inflation, beginning in 2026.

Estate planning professionals can and do propose complex tools and vehicles for avoiding or minimizing the estate tax. For those who are charitably inclined, there is one estate planning strategy that is not only relatively simple to establish but can also meet both philanthropic and estate-transfer goals — and is particularly powerful now due to the low-interest-rate environment. I am referring to the charitable lead trust.

How It Works

A donor (the “grantor”) contributes assets to the charitable lead trust. The trust makes distributions to charity for a set number of years. The charitable distributions are predetermined at the outset. After the term of years, the trust terminates. Whatever remains passes to the next generation.

Because the assets are eventually ending up in the hands of the donor’s heirs, there is a reportable taxable gift to the heirs when the trust is funded.

This is where the leverage provided by today’s low interest rates comes in.

Before the assets transfer to the next generation, there are charitable distributions that need to be made in between. At the time the trust is funded, the donor receives a charitable gift tax deduction for the present value of those charitable distributions. That gift tax deduction offsets the taxable gift to the heirs.

There is a specific interest rate known as the applicable federal rates (or AFR for short) that is used in calculating the size of the charitable gift tax deduction. The lower the AFR, the higher the gift tax deduction. And right now, the AFR is very low — a mere 1.0% for October 2021.

Keep in mind that for the month in which you establish and fund a charitable lead trust, you can use either the current month's AFR, or elect to use the AFR of either of the prior two months if the prior rate provides a higher tax deduction. Thus, the October AFR of 1.0% is available to donors who create and fund a charitable lead trust in December 2021, even if November and December rates inches higher.

In other words, a donor can pass on more assets to heirs now than at any other time in recent memory, thanks to a low AFR (and a corresponding high gift tax deduction).

An Example of the Power of the Charitable Lead Trust

Assume a donor and spouse have an estate worth $100 million. Absent any other planning, if they both pass away this year, they can transfer $23.4 million to heirs free of tax. The remaining estate will be subject to federal estate tax of approximately $30.6 million.

Now assume that same donor and spouse are charitably inclined. Their estate includes a diversified portfolio of stocks worth $80 million. They establish a charitable lead trust and decide to fund it with the $80 million portfolio. The trust will make annual payments to charity equal to 5% of the funding amount, $4 million, for a period of 16 years. The charities are selected by the couple, who reserve the right to change the charities each year. After 16 years, the balance of the trust will be divided among the couple’s children.

At the outset, the couple has made an $80 million taxable gift. However, thanks to the charitable distributions, the couple will receive a charitable gift tax deduction of $58,871,600 (using the October 2021 AFR of 1.0%), which reduces the taxable gift from $80 million down to $21,128,400.

Put a different way, they have just transferred $80 million of their estate to their children and used up only $21.1 million of their $23.4 million exemption amount – leverage of almost 4x the exemption! The balance of the estate (after the remaining exemption amount is used) will be subject to federal estate tax of approximately $8 million at today’s estate tax rates — saving over $22 million in federal estate tax from the first example.

What is more, if the portfolio earns an average of 6% per year while in trust, the heirs will divide a trust that has grown to $100.5 million after 16 years. The additional $20.5 million of growth is free of gift or estate tax.

And in the meantime, the couple has given away $60 million to charities.

Charitable lead trusts do have their drawbacks. In the example given, the children inherit the stock portfolio with the same basis as the parents and will eventually have to pay capital gains when they sell. This needs to be weighed against the significant estate tax savings. A charitable lead trust is also a taxable trust and needs to be carefully managed to avoid taxation inside the trust from the sale of assets. Finally, a careful analysis comparing a charitable lead trust to simply retaining the asset and paying the estate tax should be undertaken.

The time is now for estate planning with a charitable lead trust, particularly for clients who are philanthropic. This is a golden opportunity for both estate transfer and improving our world.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Forum ranked among the top 50 firms appearing at #44 in 2021, moving up the list of Barron’s 2021 Top 100 RIA Firms from last year’s position at #65.

Co-Managing Partner Jonathan Rogers said, “We are committed to empowering our clients and advisors to reimagine what is possible in their financial and professional lives. We work hard every day at Forum to enable our clients and advisors to be successful, and I view recognition like this as a byproduct of that hard work.”

In July, Forum appeared on the 2021 Financial Advisor RIA Ranking. Forum ranked #77 of 321 firms to appear on the Financial Advisor list in the asset category of $1 billion and over.

Forum advisors serve clients from 37 offices around the country including offices in California, Colorado, Florida, Illinois, New York, Texas, Utah and Virginia. Forum Financial Management has more than $6.6 billion of assets managed or serviced (as of June 2021).

SOURCES

The Financial Advisor survey looked at several factors to assemble the list including growth in firm assets, number of clients and total assets in 2020. Last year, Forum ranked 80 with consecutive appearances on the list in this asset category.

At the end of 2020, Forum reached a milestone by surpassing $5 billion in assets managed or serviced. Jonathan Rogers, Forum co-managing partner, commented that Forum’s growth throughout the pandemic is the result of Forum’s model to empower each client.

He said, “We have built an exceptionally talented group of advisors who serve families and individuals across all stages of their lives. Our role is to care for clients and come up with innovative solutions. We are proud to have grown and honored to have helped so many clients reimagine what is possible.”

Marie Stark, who joined the Forum partner group in January, agrees that Forum’s sincere commitment to one of its core principles –– improving the lives of our diverse clients, advisors and associates ––fosters an environment where all members of our firm have an opportunity to thrive. She said, “Our inclusive and collaborative culture values diversity and encourages innovation, all with our central purpose to build and maintain deep and meaningful client relationships.”

Considering Forum’s milestone growth over the past year, Norbert Mindel, Forum partner and co-founder, said, “This is a validation of our strategy of creating a national RIA firm owned solely by advisors, while achieving rapid growth and scalability without the need for third-party capital. We are committed to staying independent, and we believe this is in the best interest of our clients and employees.”

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Forum is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see participation criteria/methodology). Unless expressly indicated to the contrary, Forum did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Forum by any of its clients.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Fast forward to 2021 and a very different picture has been drawn, a picture that was difficult to even imagine for anyone in 2020. Those large technology stocks have struggled in 2021 with a return of only 0.7% as of March 31 compared to a return of 20.7% for small and value stocks.

Note: US Small Value as proxied by Russell 2000 Value Index. US Large Growth as proxied by Russell 1000 Growth Index.

Meanwhile, Treasury bonds that held up so well during the drop in the stock market during the first quarter of 2020 are lagging with a return of –13.9% through the first quarter of 2021. This is a reminder that diversification works over the long term, but well-diversified portfolios usually have some portion of the portfolio that is not doing well.

Going a bit deeper on Treasury bonds, they have lost value in 2021 as long-term interest rates have gone up. Short-term rates have stayed near zero and are expected to go up, but that does not imply that long-term rates will go up above current expectations. Based on today’s Treasury rates and what is implied within long-term interest rates, markets have already priced in interest rate hikes of up to 2.75% which is 11 interest rate hikes of 0.25% from current levels. If rate hikes are as expected, or slower or fewer, then long-term bonds would make money over the next few years. If rate hikes are faster or greater than the market currently expects, then long-term bonds could lose money. That is why in five out of the last six rate hike cycles, long-term bonds have had positive returns.

We also want to illustrate how tough it is to market time these recoveries. The start of the recovery happened fast. Very fast. And it happened well before anything looked better. The chart below shows the difference between returns starting on March 23, 2020 and March 30, 2020 through March 31, 2021. For anyone trying to time the market, getting back in before the recovery started was nearly impossible. That one week represented about a –19% difference in return!

Note: US Small Value as proxied by Russell 2000 Value Index. US Large Growth as proxied by Russell 1000 Growth Index.

The goal of most investors is to maximize returns on an after-tax basis for a targeted level of risk. There are a few things that are within our control when framing a financial and investment plan, as well as things we cannot predict or control that may influence adjustments to the plan. As part of our strategy, we like to use the levers we can control to make sure we are managing portfolio risk and minimizing taxes.

What we can control when building a plan:

• Staying invested for the long term
• Diversification
• Asset allocation

What we cannot control but will influence adjustments to the plan:

• Long-term returns
• Inflation
• Interest rates
• Tax law and tax rates

Through the market turmoil witnessed during much of last year, we stressed the importance of staying invested long term when there is volatility in the short term and having proper diversification from a risk and return perspective when comparing single stock returns to a diversified portfolio. Asset allocation is another approach we employ across our clients’ financial plans.

Every individual’s risk tolerance and investment time horizon will vary. Even more, the personal and financial goals of each individual are vastly different. Therefore, there is no one-size-fits-all allocation. We aim to balance the risk and reward by allocating the portfolio into different asset classes according to a client’s current financial picture and tolerance for risk.

Managing Portfolio Risk Through Rebalancing

As we have seen in the first quarter of 2021 and in the first quarter of 2020, asset classes experience different performance. Since bonds have underperformed thus far this year, the original allocation in the portfolio may have drifted to overweight stocks and underweight bonds. To correct for these drifts in allocation, we employ rebalancing typically in terms of the following three factors:

• Stocks versus bonds
• Domestic versus international
• Asset class allocation

Back in the first quarter of 2020, a majority of clients sold out of bonds that were up as much as 22.1% from January 1 to March 31 and bought stocks (as proxied by Russell 3000 Index) that had dropped 21.3% during the same period (and at one point were down up to 32%). In the second half of 2020 and in the first quarter of 2021, portfolios did the opposite, clients saw their portfolios rebalance or sold out of stocks that have rallied 60% since the first quarter of 2020 and bought bonds that have since been down 16.7% from where they were sold in March 2020.

Rebalancing has the ability to reduce portfolio volatility and keeps a portfolio aligned with an individual’s risk and return preferences. In addition, it allows the portfolio to consistently buy low and sell high. We continually monitor portfolio allocations and will trade whenever allocations drift from a predetermined range, while avoiding whenever possible realizing capital gains in the process.

Reducing Portfolio Taxation Through Asset Location

By diversifying your exposure to many asset classes and allocating your portfolio based on your risk tolerance, we need to be cognizant of the different tax treatments depending on which asset we are looking at. How an asset is taxed will determine where it should be located. The purpose of asset location is to help maximize your after-tax return by determining which assets should be held in tax-deferred accounts and which assets should be held in taxable accounts.

By properly locating assets, individuals can increase their after-tax returns by holding broad market funds and other low-turnover equity funds in taxable accounts while holding REITs and less tax-efficient assets in tax-deferred accounts.² We help manage your overall allocation strategy by employing this technique.

Through asset allocation and holding a globally diversified portfolio, it is our belief these strategies will help you meet and achieve your long-term financial goals. If you have questions about your plan and how asset allocation is being employed, please contact your financial advisor.

SOURCES

Understanding Roth IRAs and Roth Opportunities

A Roth IRA is funded with after-tax dollars that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. The contributory Roth can consist of both regular and spousal contributions and is the most straightforward way to participate. An individual may fund a Roth IRA on behalf of their married partner who earns little or no income. Spousal IRA contributions are subject to the same rules and limits as regular Roth IRA contributions and must be held separately from the Roth IRA of the individual making the contribution.

The maximum Roth IRA contribution for 2020 and 2021 is $6,000 plus a $1,000 catch-up contribution for individuals 50 and older. The ability to contribute to a Roth IRA is phased out for those whose income is above certain limits and extremely limited for those filing married filing separately.

Many employer plans (401(k), 403(b) and 457(b)) now include options for employees to elect Roth as an alternative to traditional contributions. Employees can contribute via payroll deduction thereby avoiding the income and filing status limitations. Aggregate employee elective contributions are limited to $19,500 in 2020 and 2021, plus an additional $6,500 for employees age 50 and over. Withdrawals of contributions and earnings are not taxed provided it is a qualified distribution. Unlike contributory Roths, distributions from a Roth 401(k) must begin no later than age 72 (or age 70½ if reached before January 1, 2020), unless the individual is still working and not a 5% owner of the sponsoring company.

The backdoor Roth provides an opportunity for those over the income limitations to take advantage of the Roth IRA. The individual first makes a nondeductible traditional IRA contribution and then immediately converts to a Roth. Since there was no deduction for the original contribution, there is no tax due upon conversion. Taxpayers must beware of the pro rata and aggregation rules when contemplating a backdoor Roth. If you have other traditional pretax IRAs (SEP, SIMPLE, rollover and contributory traditional IRAs), your basis is calculated as a percentage of total IRA assets. In addition, the aggregation rule forces you to include all IRA accounts. It is not enough to just keep the after-tax (nondeductible) funds in a separate account. For example, if you have $693,000 in a rollover IRA consisting of all pretax funds and perform a backdoor Roth transaction for $7,000, your basis in the transaction will only be $70 ($7,000/$700,000=1.00% after tax) and you will be taxed on the remaining $6,930.

If you find yourself in this situation, you do have some options.

• Qualified Charitable Distributions: At age 70½, you can transfer up to $100,000 from your IRA directly to a qualified charity. The $100,000 maximum must be reduced by any contributions to IRAs made between age 70½ and age 72.
• Qualified Health Savings Account (HSA) Funding Distribution:You can transfer from your IRA directly to your HSA tax free, but the transfer cannot exceed the maximum annual HSA contribution. In addition, you are only allowed to do this once in your lifetime.
• Rollover to a Qualified Plan: Accounts that are part of a qualified plan fall outside of the pro rata and aggregation rules. Many employers allow rollovers into their qualified plans, although you should be mindful of current plan rules and if they will apply to your rollover (such as, in service withdrawals, investment choices, etc.). Individual 401(k) or Solo(k) is also a qualified plan in the eyes of the IRS and can be a great option for individuals with self-employment income.

Decision Points on Whether to Convert to a Roth

You have likely heard the saying, “Just because you can, does not mean you should.” This is particularly true with Roth IRAs. There are many things to consider when opting for a Roth.

You can convert all or a portion of your traditional IRA accounts and there is no annual limit as to how much you can convert. There is no early withdrawal penalty on the converted funds, but you must pay income taxes on the amount converted.

A popular strategy is to employ “bracket topping” where you convert enough to go to the edge of your tax bracket. Taxpayers with flexible income can time their income to maximize the amount they are able to convert without spilling into the next tax bracket.

For years, tax and financial advisors have been encouraging clients to take advantage of Roth IRAs by converting their traditional IRAs but this does not make sense for everyone. The broad assumption that you will be in a higher tax bracket in future years may not be true, and you cannot forget to consider the impact of state taxes. Even if you are not planning to retire in a no-income-tax state, many states have attractive retiree income exclusions. For example, Georgia has a retiree income exclusion starting at age 62 that becomes even more attractive each year and hits a maximum of $65,000 per year at age 65 and older.

You should not plan on converting any traditional IRA contributions unless you have sufficient cash reserves to pay the tax. If you pay the tax from the IRA funds being converted, you not only handicap the Roth from the beginning, but can also incur a 10% penalty if you are under age 59½. Tax considerations and the time value of money are key to the Roth IRA conversion. Timing conversions in years when your income is lower will minimize the amount of taxes paid, and the earlier in your career you start the better.

For those retirees who find themselves with large tax-deferred accounts, the early years of retirement, prior to the start of required minimum distributions, can be a great time to take advantage of conversions. Now that required minimum distributions do not begin until age 72, this gap period provides key planning opportunities. Retirees can capitalize on the reduction in their earned income to convert tax-deferred assets while minimizing the tax effect.

In 2021 for example, a married couple with taxable income up to $172,750 will be in the 22% tax bracket for federal income tax purposes. Keep in mind that this is their marginal tax rate. Their actual effective tax rate at this income level would be approximately 17%. Depending on income needs and available resources during this period, it is possible to use annual conversions to develop one prong of a three-prong withdrawal strategy. Building a withdrawal strategy that includes tax-deferred, Roth and non-qualified assets can provide both flexibility and tax efficiency.

When Roth IRAs Make Sense

In the case of a contributory Roth, if you do not have, or are ineligible to participate in, a retirement plan at work and are in a low tax bracket, a Roth IRA is a great choice. You may even be eligible for the saver's credit if certain criteria are met. On the other hand, if you are in a high tax bracket with no employer-sponsored retirement plan, it may be difficult to justify giving up the tax deduction now, especially if you are nearing retirement.

Contributing to a Roth IRA also makes sense if you have already contributed the maximum to employer-sponsored retirement plans, you are not subject to the income limitations, and you have sufficient nonqualified reserves. If you are subject to income limitations, but otherwise satisfy these criteria, a backdoor Roth is an excellent opportunity to accumulate some assets in Roth IRAs, provided of course that you can navigate the pro rata and aggregation rules.

When deciding whether to opt into the Roth option at your employer-sponsored retirement plan, you need to consider your current tax bracket versus your anticipated future one. Do not forget to include state income taxes in this calculation. For example, a single, high-earner New York City resident (current combined top tax rates of 49.696%) with plans to retire in Florida will likely have a lower combined tax rate in retirement. It is important to also consider the number of years until retirement. If you have enough time, the power of the tax-free growth can overcome the additional tax incurred up front. Consider a 50/50 approach where you defer 50% to Roth and 50% to traditional.

SECURE Act Considerations and Roth Conversions

With the passage of the SECURE Act at the end of 2019, Roth IRAs and, in particular, Roth conversions have seen a new surge in popularity. The combination of three key provisions — delaying required minimum distributions, removing age restrictions on IRA contributions and the repealed “stretch” provisions for IRA inheritors — has both retirement planning and estate planning implications.

The 10-year distribution rule requiring most non-spousal beneficiaries to distribute the entire inherited account within 10 years of the account owner’s passing can leave beneficiaries with a sizable tax burden. For those with large balances in traditional IRA accounts, converting can reduce future tax bills for both themselves and their heirs.

With many experiencing decreased incomes in 2020 and into 2021, the opportunity for conversions has presented itself to a broader range of taxpayers. You will still need to be aware of tax implications, including the potential for more of your Social Security benefits to be taxed and possible increases in Medicare premiums, but you may now have reason to look closer at whether a Roth conversion is right for you.

Conclusion

The Roth IRA can indeed be a valuable component in the retirement fund lineup. The tax-free growth and distributions can add significant value when designing withdrawal strategies and implementing estate plans. It is important to stay mindful of tax implications and to take advantage of both traditional and Roth IRAs based on your personal circumstances. Do not consider the decision to be all or nothing. It is not traditional versus Roth but rather a blended approach as your situation dictates.

If you have any questions about whether a Roth IRA makes sense for you, please contact your financial advisor.

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Forum has surpassed $5 billion of assets managed or serviced as of December 31, 2020. Reaching this milestone reflects the commitment of our team and strength of our client relationships that continue to motivate us with their goals, vision and sense of purpose.

Looking forward, Forum will continue its long-term strategy of growth and sustainability building upon the current foundation to ensure that the firm is positioned well to support the next generation of clients for decades to come. This includes significant and continuous investments into our advisors, associates and technology. Forum would not be where it is today without the foundation of its current clients, advisors and associates.

Forum remains fully advisor-owned. We believe this aligns our advisors solely with their clients without conflicts from outside shareholder priorities. Our firm has grown to 16 partners and 63 advisors serving clients from 34 offices around the country including offices in California, Colorado, Florida, Illinois, New York, Texas, Utah, Virginia and Wisconsin.

Yet, in the midst of all the uncertainty and tragedy, there was cause to be optimistic about the future. According to the Wall Street Journal, by September, people were “starting new businesses at the fastest rate in more than a decade.”¹ From a financial perspective, the stock market recovered from the March lows. There is reason to be hopeful that we can soon resume the plans we put on pause as more people are vaccinated.

A New Year Full of Possibility

Many people come up with New Year’s resolutions such as “I’m going to eat better” or “I’m going to save more money.” But resolutions rarely work. According to one source, 80% of resolutions fail.²

Resolutions are like goals, but they are not goals. A resolution is more like a statement of an intent to change something in your life, but there is no true commitment or accountability.

If you really want to achieve something, you need to set a goal. An example would be: “Increase my emergency savings to cover six months of expenses by December 31, 2021.”

A true goal has the qualities embodied by the acronym “SMART”:

• Specific
• Measurable
• Achievable
• Realistic
• Time-bound

It is not enough to just come up with a goal. We can look to respected productivity experts for some direction.

David Allen, bestselling author on productivity for work and life, said: “The more you know why you are doing what you are doing, the more freedom you have to explore all kinds of ways to get there.”³

If Achieving a Goal Is Your Goal, You Need a Framework

Author and productivity guru Michael Hyatt has outlined a five-step process for making goal setting more effective, giving you a higher probability of success in accomplishing your goals.⁴

Step 1: Summarize Your Goal

The first step is to write your “SMART” goals. You might wish to use a journal for notes (paper or app) formally designated to document the process.

Hyatt recommends no more than 10 goals each year. Depending on the level of difficulty, you may wish to pursue less than five goals to increase your focus. Goals can be either achievement goals (you want to accomplish something) or habit goals (you want to stop a certain behavior or start a new behavior). Make sure each goal follows the “SMART” acronym.

Step 2: Categorize Your Goal

Your life consists of several areas in which you spend your time. Allen calls the categories of things for which you are responsible “areas of focus” and Hyatt refers to them as “domains.”

For each goal, identify to which of your domains the goal is related. It can be one or more of the following:

• Spiritual
• Intellectual
• Emotional
• Physical
• Marital
• Parental
• Social
• Vocational
• Avocational
• Financial

By knowing the domain(s) for each goal, you can assess whether your entire goal list covers a balanced cross-section of domains or is narrowly focused on one or two areas.

Step 3: Rank Your Key Motivations

Why is it that you want to achieve each goal? Knowing the reasons will help keep you motivated toward the accomplishment of each goal. Here again, you will benefit from writing everything down.

Three steps that will help you explore why this goal is important to you:

• Identify at least three motivations for each goal
• Rank the motivations by importance to that goal
• Review all goals based on the rankings you have assigned

In the example about increasing emergency savings, a motivation could be “to have enough set aside to avoid using credit cards in the event of a major emergency.” Another might be “to sleep better at night knowing we have enough savings for almost any unexpected event.”

Step 4: Determine Your Next Steps

What are the first few actions you need to take to reach your goal? A goal can seem daunting until you break it down into smaller steps. Writing your next steps also gives you a sense of direction for each goal and a reference point.

Going back to our example of increasing emergency savings, the next steps might be:

• Calculate how much needs to be set aside monthly to save that amount by the end of the year
• Set up automatic transfers from checking to savings

Step 5: Decide on Your Reward

Another motivational technique in goal setting is to consider how you will celebrate once you accomplish your goal! This could be anything from taking the family out to a nice dinner (post-pandemic, of course) or upgrading your current phone to the latest iPhone you have been wanting. Once more, writing down your reward in advance is part of your goal-setting process and gives you something else to work toward, in addition to the goal itself. You will be working hard to see your goal go from notes to reality — treat yourself!

Conclusion

Coming up with goals and breaking them down using this framework takes time. That is what makes it effective but also why it requires time and effort! You need to spend time with your goals, think about them, break them down and add a dash of motivation.

Whether you focus on a specific domain for a new goal or commit to something that has been on your to-do list for a while, it is possible for you to achieve your goals in 2021.

SOURCES

1. The stock market began the year in a bull market, saw its fastest-ever bear market and ended the year in what could be viewed as the next bull market.

The S&P 500 Index climbed to its then record high on February 19 as the year began. This was followed by a 33.9% decline over 23 trading days into late March in large part due to the ensuing pandemic and economic fallout that followed.

Since the low on March 23, the S&P 500 finished the remainder of the year up 67.9% and has recently hit its all-time high on December 31. Previously, we have written about the importance of remaining invested for the long run, as recoveries can tend to happen quite quickly. As investors, we need to recognize that large company indexes like the S&P 500 are less diversified today than they have been in the recent past, and as a result, make sure we are maintaining diversification across other assets classes.

2. The Russell 2000 Index had its best month in November 2020 since the index launched.

With the outcome of the election slowly being determined and with updates on vaccines by major biopharmaceutical companies, the Russell 2000 Index (an index comprised of small company stocks) had its biggest monthly gain since the index’s inception more than 40 years ago. The Russell 2000 returned 18.3% in November, versus returns for the Russell 1000 Index (an index of large company stocks) and the S&P 500 of 11.6% and 11.0%, respectively. The chart below shows the 10 months with the largest percentage gain for the Russell 2000 since inception.¹ 

Over the prior four recessions that occurred before 2020, the Russell 2000 has outperformed the Russell 1000 by 7.1% in the subsequent 1-year period and by 3.3% in the subsequent 3-year period, on average. Since the market lows in March 2020, the Russell 2000 has outperformed the Russell 1000 by 21.5% (using Vanguard’s Russell Index ETFs as a proxy). The Russell 2000 comeback is important to note for your portfolio since our portfolios are statistically tilted toward small companies. The table below shows the 1-year and 3-year performance of the Russell 1000 and 2000 indexes following the prior four recessions.² 

3. Q4 inflows to emerging market bonds, stocks and currencies were at an 8-year high.

Data from the Institute of International Finance (IIF) show that foreign-investor appetite for emerging market assets was nearly the strongest since the first quarter of 2013. According to the IIF, November alone saw inflows of $145 billion.³ With low interest rates and historically high stock valuations in developed countries, it appears investors are turning to emerging market assets to capture higher yields and higher stock expected returns. This is important to note for your portfolio as we look to diversify — not only globally diversifying around stocks but also among different asset classes.

4. U.S. dollar index reached its lowest point since April 2018 and neared its worst Q4 performance since 2003.

The U.S. dollar has weakened this year and finished at its lowest level in two years. The low domestic interest rates and a subsequent appetite for risk in foreign assets have contributed to the weak performance in the U.S. currency for the year. During Q4, the dollar lost 4.5%, which represents the worst Q4 performance since a 6.4% loss in Q4 2003. There are economic positives to a weaker U.S. dollar since goods and services provided by U.S. companies become more affordable globally. For investors, international holdings are relatively helped by a weaker U.S. dollar, so a globally diversified portfolio such as ours takes advantage of this movement.

5. Through the remainder of 2020, roughly 42% of the U.S. workforce remained fully remote versus an estimated 8% in February.

The Federal Reserve Bank of Dallas estimated that 8% of the U.S. workforce worked fully remote in February 2020, which then spiked to 35% in May.⁴ A survey conducted in Q4 by Upwork, reaching 1,000 small business owners, HR managers and CEOs, concluded that 41.8% of the U.S. workforce continues to be fully remote nine months into the pandemic.⁵ We continue to stay connected to our clients through the use of technology — whether by video conferencing, email or phone — through this period and beyond.

As much as we wanted to fast forward at times throughout the year, 2020 will not be forgotten. Our conclusive thoughts on the market performance this year are not dissimilar from the perspective we shared at this point one year ago, which is still relevant (“The Market Has No Memory” by David Booth).

We reminded ourselves of the need to stay the course and remained disciplined following market corrections similar to those experienced last year. Here is to hoping for a much more "boring" 2021.

SOURCES

Item #1: Review How Much You Keep in Your Cash Reserves

What to Consider: In 2020, many people used their cash reserves to weather the storm. If your cash reserves were depleted, you should work on rebuilding those reserves to a level equal to 6–9 months of spending. On the flip side, it is not a good idea to have too much cash as extremely low interest rates mean you are losing to inflation every year. Consult with your advisor to determine a level appropriate for your situation.

Item #2: The Window Is Still Open to Refinance a Mortgage

What Stayed the Same: With interest rates still at historic lows, 2021 could be a great time to refinance your mortgage. You may be able to obtain a no-cost refinance at a rate under 3%.

What to Consider: Think about cutting the term of your loan or planning to pay it off over a shorter period for the biggest impact. Mortgage providers are extremely busy, so it could take some time to get this done.

Item #3: No Increase for Retirement Plan Contribution Limits

What Stayed the Same: With continuing low inflation, there has been no increase in contribution limits for employer retirement plans or IRAs for 2021.

Contribution limits remain as follows:

• Employees under 50 can contribute $19,500 to their employer retirement plans, and those over 50 can add an extra $6,500 for a total of $26,000.
• IRA contributions remain at $6,000 for those under 50 and $7,000 for those 50 and over.

What to Consider: Contributions may be limited if you are in a top-heavy plan, so check with your employer. There are income phaseouts associated with IRA contributions for those covered by a workplace plan (including spouses) so check those limits before you contribute.

Item #4: Required Minimum Distributions Are Back

What Has Changed: In the span of one year, a lot has changed for required minimum distributions (RMDs). Although the Internal Revenue Service waived all RMDs in 2020, they must be taken in 2021.

There have also been some changes in timing of distributions. Note the following changes:

• If you were 70 1/2 by December 31, 2019, you need to start your distributions based on the current IRS life expectancy table in 2021.
• If you turned 70 1/2 in 2020, your start date is deferred until you reach age 72.
• There is a new life expectancy table that will allow you to take slightly smaller distributions every year. The table goes into effect in 2022.

What Stayed the Same: Roth IRAs do not have a distribution requirement during your lifetime.

What to Consider: Inherited IRA accounts have different rules and depend on when the original owner of the account passed away. You should consult your advisor for inherited IRA situations.

Item #5: Estate and Gift Tax Limits

What Stayed the Same: The annual gift exclusion limit remains at $15,000 per individual, which is the amount you can gift without reducing your estate exemption.

What Has Changed: The federal estate tax exemption has been increased to $11.7 million per person. If your assets are above this amount at your passing, estate taxes will be paid on excess.

What to Consider: There is a lot of discussion on this exemption amount being reduced by the new administration, so gifting strategies may make sense. Currently, your assets at death are stepped up in value, avoiding capital gains taxes for your heirs. Consideration is also being given to eliminating this step-up. Consult your advisor or estate attorney for planning strategies that may work for your situation. Many states have separate exemption amounts, so be sure to check those amounts as well to see how they could affect your plan.

Item #6: Tax Planning Opportunities

What to Consider: While we do not know what the tax landscape will look like this year, we are confident that those who are prepared will be in a better position to take appropriate action, if required. One step you can take is to begin making preparations for your 2020 tax return to allow you and your financial advisor more time to help you navigate potential changes.

Conclusion

With the long-awaited arrival of a new year, we are encouraged by what will be possible in 2021. To help you set new personal goals, we enthusiastically recommend the action-driven, goal-setting article by Forum Financial Advisor Juan Ros: How to Achieve Your Goals in 5 Steps.

As one of the founders of Stark & Basila Certified Public Accountants, P.C., Marie has assisted accounting clients for more than 30 years from her offices in Cohoes, New York. Her new role as a Forum partner presents an opportunity to share her financial planning experience and extensive knowledge of the field of tax and accounting.

 Marie said, “A uniting factor of the Forum partners is our shared investment philosophy, but I also feel that strength is drawn from our diverse backgrounds, areas of expertise and communication styles. I am looking forward to adding my perspective to the partner group and helping to grow the firm while supporting the ideals that have brought Forum to what it is today.”

Forum Partner Mary Pat Wesche, CPA, PFS, CDFA®, CFP® said, “Marie is a great addition to the Forum partnership. Her value system and skill set represent what a Forum partner should be. With her clients’ best interests at heart, Marie takes the time to get to know clients to determine the optimal strategies that will work for them. She is well respected within the partner group, and we have valued the different opinions she has brought to the table since she joined Forum as a financial advisor.”

 Marie regards her decision to become a financial advisor in 1999 as the turning point in her professional career. She said, “I have the opportunity to develop deep relationships with clients, to understand who they are and truly partner with them to ensure that their short- and long-term goals fit into their overall financial plan. Utilizing my experience in tax and accounting to help clients not only develop but implement a comprehensive financial plan with a focus on tax efficiency is truly rewarding.”

Just Starting Up

We begin at the early stage of companies, specifically those that have raised less than $5 million of funding, and in a lot of cases, no funding. Often, when starting out, many entrepreneurs pay themselves below market salaries, if they even take salaries at all. The companies themselves are not profitable at this stage nor have much intention to be profitable for the next 2–3 years at least.

At these points, we rarely suggest setting up a 401(k) plan. If there are no or minimal salaries, there are not really wages that are worth redirecting toward an investment plan. Additionally, often the company is trying to be extremely frugal while prototyping and searching for product/market fit, and this may not be an appropriate time to incur the administrative costs and potential matching costs of implementing a plan.

Less Than 10 Employees With Some Funding or Revenue (Series A Companies)

At this stage, companies have raised enough to fund market or near-market salaries, or they have bootstrapped to break even or slight profitability. This is usually at or after a Series A raise or a situation where revenues are approaching or above $1 million Annual Revenue Run-Rate (ARR).

Putting a 401(k) in place at this point can make a lot of sense. Two common reasons it does not happen are:

1. Benefits are very low on the priority scale for most fast-moving startups.
2. Setting up a 401(k) seems like it would be complicated or take a long time.

These might have been problems 10–20 years ago, but currently, there are options out there that allow companies to set up their 401(k) in a matter of minutes. Here are four providers that clients of ours have used recently:

1. Guideline
2. Human Interest
3. Employee Fiduciary
4. Launch 401(k) by JULY Services

All four allow for quick startup, integration with popular payroll providers, low-cost investment options and easy online enrollment for new employees and easy termination as well.

Here is a cost example for five employees using Guideline pricing. It is about $500 per year for the plan and another $100 approximately per year per employee. Five employees generate roughly $1,000 in costs to the company annually. That’s it. The underlying funds are low-cost with lots of index fund options.

There is only one decision that companies need to make at this stage: Should they make employer contributions to employees?

Here are the two considerations:

1. Not making company contributions preserves more cash for the company, however, it can create a top-heavy plan where key employees may not be able to fully take advantage of the 401(k).
2. Making employer contributions turns it into a Safe Harbor 401(k) plan where everyone can contribute up to the limit (it was $19,500 for those below the age of 50 and $26,000 above that in 2020) but this is more expensive for the company as they need to choose 1 of 2 options.

• Matching: at least 100% match on the first 3% of employee contributions plus a 50% match on employee contributions between 3% and 5% (4% total)
• Nonelective contribution: at least 3% of compensation, regardless of employee contributions

Practically, because of the number of key employees early on (5% or greater owners), it almost always makes the most sense to set up a Safe Harbor plan as soon as a 401(k) plan is initiated and factor in 3%–4% higher compensation expenses when setting up the plan. There are obviously exceptions, but in most cases, it doesn’t make sense to incur the administrative costs unless the key employees are in position to maximize their contributions.

What happens to the money if the startup fails along the way? Any money in a 401(k) is segregated from the company assets, so these assets are fully protected in a bankruptcy situation. It is possible to keep the account as is, or roll it to an IRA for those who no longer work at the company if the plan is terminated. One thing to keep in mind is that employer contributions (matching or nonelective contributions) may have vesting provisions that would cause forfeiture of that portion only if the employee did not meet vesting requirements. But anything employees contribute is theirs.

More Than 10 Employees (Post Series A)

At this point, almost every 401(k) is Safe Harbor and some of the administrative expenses can be looked at. For example, as the company grows, the per-employee cost starts becoming more important and administrators like Employee Fiduciary and July Services start becoming more attractive because the marginal per-employee cost is lower ($30 per employee at Employee Fiduciary beyond 30 employees and $60 per employee at July Services versus the higher per-employee costs at Guideline and Human Interest). Especially as companies approach 50–100 employees, players like Vanguard and Fidelity become possibilities as well.

The big decision here is whether to allow a mega backdoor Roth, though a company could institute it earlier. Effectively this allows employees to put in additional money after tax and immediately roll it over to a Roth 401(k) or Roth IRA increasing the amount that they can put away into tax-free Roth vehicles every year. The reason it makes sense at this point is that more than likely everyone is getting paid market wages and the ability to put away significantly more money could be attractive at this point to a number of employees.

How does the mega backdoor Roth work? Consider employees who make $100,000 per year who are under the age of 50. They max out their employee contribution at $19,500 for the year. They also receive $3,000 as the Safe Harbor 3% nonelective contribution to bring the annual total to $22,500. If the mega backdoor Roth is available, they will be able to make an after-tax contribution for the year that could be as high as $34,500. This is because the limit in 2020 for all types of contributions (employer and employee combined) is $57,000.

Once they make the contribution, it is important that they move this after-tax contribution to a Roth IRA or Roth 401(k) relatively soon thereafter. The reason is growth of after-tax contributions within the 401(k) are tax-deferred (taxed upon distribution). Once the principal is rolled into a Roth IRA or Roth 401(k), then all the growth is tax-free.

To institute after-tax contributions with immediate rollover ability requires amending the plan and finding an administrator that allows for it. Amending a plan usually costs between $500 and $1,000 to the company and the costs are very similar when switching administrators.

One other decision at this point is whether to increase employer contributions with a profit-sharing component, but generally for most startups this does not make a lot of sense (it does make sense for law practices/accounting practices/venture capital firms) because the size of the firm can make these types of contributions very expensive. Making even a 3%–4% contribution above the Safe Harbor contributions can be prohibitively expensive. And it takes up capacity that could be used for mega backdoor Roth contributions.

Conclusion

Hopefully, this article is a helpful guide about how to start up a plan and the key decision points for startup founders and executives. The idea of offering a 401(k) is often very positive for the company and a critical component in the benefits package that employees have come to expect, but it often feels daunting to get started when it does not have to be. In fact, in some cases, starting up your plan can take less time than you spent reading this article and can provide a powerful company benefit.

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The spectacular popularity of the musical “Hamilton” made the biography of Alexander Hamilton by Ron Chernow a New York Times best-seller. Variety reported that the filmed version of the musical was the top streaming title in July 2020 and “constituted the largest audience amassed by any one program over the course of one month this year,” according to audience viewer data tracking Amazon Prime Video, Apple TV+, Disney+, Hulu and Netflix.1

Two points from Chernow’s biography strike home related to today’s world.

OUR NATION, IN ITS EARLIEST DAYS, SURVIVED AN EVEN MORE DEADLY PANDEMIC

The first is discussed in the chapter about the yellow fever pandemic that struck the United States in 1793, just six years after the Constitution was signed. The epidemic killed about 10% of the population of Philadelphia, our nation’s capital at the time and the epicenter of the outbreak, and it led to northern states imposing a mandatory quarantine for any traveler along the Atlantic seaboard. Many stores closed for several months, and the wealthiest citizens fled to country houses or homes in other states. Yellow fever resurfaced regularly during the early years of our country, often shutting down commerce. While we rightly think of the world as very different today, there are striking similarities, and yet, our fledgling country endured.

A Political Divide Played Out in the Field and in the Press

If ever there were a time for solidarity and political union, you would think that would be it, with our founding politicians having just survived the Revolutionary War and a major pandemic. But that leads us to our second takeaway: The political differences between parties were perhaps never more extreme and the attacks at no time more personal than in the early years of our country’s formation. The political divide separating the Federalists and Anti-Federalists at the Constitutional Convention of 1787 and the years after would surprise many people. On the one side, leaders of the Federalist Party advocated for a president who would serve for life (in effect, an elected monarch). The other party wanted virtually no federal government, advocating for a loose affiliation of independent nation-states (among other things, no taxes, no standing army and the continuation of slavery). It is also worth dispelling the notion that these men were as austere as their portraits. That early era of politics involved highly personal attacks carried out both in person and in the press. Insinuations of infidelity, fraudulent schemes and abuses of power were published with incredulity in the press under pseudonyms. Fisticuff brawls and duels were not unheard of between early congressmen — Hamilton was involved in as many as a dozen duels through his life — most of which resulted in verbal reconciliation rather than shots with the last leading to his demise.

Our Country Will Endure

The point of these two conditions is that our country has endured both pandemics and political infighting since its founding. There are innumerable other examples throughout our country’s history. It puts into perspective that the turmoil of this election is not extraordinary, but rather more a recurring theme of antagonistic debate and dire predictions that regularly occur in election years. In past presidential elections going back to President Herbert Hoover’s election, the average return during an election year was, surprisingly, higher than the average return the year subsequent to an election. Despite the uncertainty introduced by the changes of power that have occurred, when the election is over, we know who has won and the country moves on.

There has also been no discernable difference between Republican and Democratic winners. Even looking at periods when the House, Senate and presidency were controlled by a single party, when broader regulatory change might be expected, there is no evidence that either party being in power has resulted in higher stock market returns.

Holding all else constant, our economy and the stock market tend to go up in the long run despite political outcomes. What we do know is this: In the long run, staying invested in the market has worked out far better than getting out to avoid the rare exception. In closing, we know that it can be difficult to be optimistic in times like these, but for all its volatility and its uncertainty, the act of investing is at its root an act of optimism. It is grounded in our belief that the world tomorrow will continue to expand — with new technologies and human ingenuity leading to improvements in our lives. The elevation and comfort of our lives, compared to the life of an average American 200 years ago, even with COVID-19 limiting our activities, is extraordinary and something we see continuing with advances in medicine, in artificial intelligence, in productivity and in the creation of new conveniences that make the daily life of billions of people better in the years ahead. “Look around, look around at how lucky we are to be alive right now.” — Lin-Manuel Miranda, “Hamilton: An American Musical”

SOURCES

A mega backdoor Roth is a supersized, employer-retirement-plan-facilitated version of the somewhat more ubiquitous backdoor Roth IRA, a method involving the conversion of a traditional IRA to a Roth IRA for taxpayers whose income exceeds contribution limits.

For those whose company-sponsored 401(k) or 403(b) plan meet two key conditions (more on that below), a mega backdoor Roth could allow additional savings each year (up to $38,500 or more) in highly tax-advantaged Roth IRA assets beyond the normal employee contribution limit of $19,500 (or $26,000 for those over age 50). Because the backdoor Roth IRA is limited to the amount of traditional IRA contributions that can be made each year ($6,000 for 2021, or $7,000 if over age 50), the mega backdoor Roth may potentially be more lucrative.

Why Is It Advantageous?

Investments held in Roth accounts offer tremendous tax benefits, including tax-free growth on your assets forever. The gains on Roth contributions and qualified distributions are tax free unlike money invested in a brokerage account subject to capital gains taxation and unlike qualified pre-tax contributions to a 401(k) or IRA, which are subject to ordinary income tax rates upon withdrawal. Assuming you contribute $30,000 each year, the savings is more than $20,000 in capital gains over a 30-year period for each year you pull off the contribution.

Additionally, Roth IRAs allow for greater flexibility with respect to access and penalty-free drawdown in early retirement. Savers at least 59½ years old (who have held their accounts for at least five years) can take distributions, including earnings, without penalty or taxation. Furthermore, the principal in a Roth IRA, meaning the contributions or non-earnings portion, can be withdrawn at any time, at any age, tax-and penalty-free. Holding assets in a Roth IRA also offers certain tax-diversification benefits, allowing for greater flexibility in managing taxation and withdrawal strategies in retirement.

Another benefit of Roth IRAs is that they are not subject to required minimum distributions (RMDs), as is required from traditional IRA or 401(k) accounts starting at age 72.

Finally, holding assets in a Roth account also creates further opportunity to increase tax efficiency by capitalizing on the benefits of asset location, which plays a crucial role in maximizing after-tax wealth.

Who Can Benefit From a Mega Backdoor Roth?

1. Individuals already maximizing their regular 401(k) contributions ($19,500 in 2021, or $26,000 for employees over age 50) and meeting other savings priorities.
2. Families and individuals whose income exceed the IRA limits for making direct Roth IRA contributions. In 2021, eligibility to make direct Roth IRA contributions begins to phase out at $125,000 in modified adjusted gross income (MAGI) for single filers and $198,000 in MAGI for taxpayers married and filing jointly.
3. Individuals with existing pre-tax traditional IRA assets who might otherwise be precluded from making backdoor Roth IRA contributions without bumping up against pro-rata taxation rules. Note that if you do not have any existing pre-tax IRA assets, you may be able to execute both backdoor Roth IRA and mega backdoor Roth IRA savings strategies.

Key Conditions

If all of this seems too good to be true, there is a catch. Not all 401(k) plans are mega backdoor Roth friendly. To take advantage of the mega backdoor Roth, your employer-sponsored 401(k) plan must allow both of the following key conditions:

1. The ability to make “after-tax contributions” to the plan above and beyond the $19,500 contribution limit for traditional pre-tax 401(k) or Roth 401(k) contributions. The combined employee contribution limit plus employer contribution limit for 401(k) and 403(b) plans in 2021 is $58,000 ($64,500 if age 50 or older). Note that some plans that allow after-tax contributions place a cap on after-tax contributions that may fall below IRS maximum contribution limits.
2. The ability to make “in-service” distributions/rollovers outside of the plan and into a Roth IRA or into the Roth 401(k) component of the plan. If executed correctly, this provision allows for the after-tax funds to be converted to Roth assets on a virtually tax-free basis. Note that even if a plan offers after-tax contributions, it is not required to permit distributions of those contributions while the employee is still working.

When Should You Consider a Saving Strategy Other Than the Mega Backdoor Roth?

1. If your plan does not allow for in-service withdrawals to a Roth IRA or a rollover to your Roth 401(k) of your after-tax contributions, then your opportunity to make a qualified distribution is delayed until you leave your job. If that is the case, you might want to reconsider this strategy as the earnings on your after-tax contributions will be taxable up to the point in time until they are converted or rolled into a Roth IRA or Roth 401(k).
2. Individuals who may not earn enough income to make appropriately sized after-tax contributions to a mega backdoor Roth in addition to other savings vehicles should consider a different saving strategy.
3.  If you are a business owner and in a high-income tax bracket, it could make more sense to set up a Safe Harbor 401(k) with New Comparability Profit Sharing (versus pursuing a mega backdoor Roth), which can allow you to save a combined $58,000 of employee- and employer-profit-sharing contributions. The primary reason for this is that you are likely to be in a high enough tax bracket that the tax benefits of these pre-tax contributions likely outweigh the tax-free growth of a Roth IRA in the future. If you are unsure about whether your tax bracket is high enough that pre-tax would outweigh tax-free growth of a Roth IRA, you should talk with your financial advisor about which option is best for your situation.

How to Make It Work

Because the growth on after-tax contributions are taxable, the goal is to get as much money into the Roth account as quickly as possible. The ideal scenario would be to make a one-time, after-tax contribution that is rolled over to the Roth IRA or Roth 401(k) the very next day. Here is why that matters: You do not want after-tax assets to grow substantially before rolling them over, so smoothing the after-tax contributions over time should be avoided if possible.

The best approach is to strategically increase after-tax contributions over the fewest number of pay periods needed to reach the contribution maximum. Once the maximum contribution has been reached for the year, immediately initiate the in-service withdrawal to the Roth IRA. If your 401(k) or 403(b) plan allows for unique portfolio allocations across contribution types, invest the after-tax contributions in a money market fund during the contribution and rollover window to minimize taxable gains during that time.

Three Examples

Example 1 The Filer: A 51-year-old single filer making $185,000 year.

The Plan: Employer-sponsored-retirement plan meets both conditions for the mega backdoor Roth and contributes a 3% company match to the employee’s 401(k).

Example 2 The Filer: A 35-year-old married filer making $300,000 year.

The Plan: Employer-sponsored-retirement plan meets both conditions for the mega backdoor Roth and contributes a 6% company match to the employee’s 401(k).

Example 3 The Filer: A 45-year-old married filer making $450,000 year.

The Plan: Employer-sponsored-retirement plan meets both conditions for the mega backdoor Roth and contributes a 6% company match to the employee’s 401(k). After-tax contributions to the plan limited to $15,000 per the Summary Plan Description (SPD).

Could You Boost Your Tax-Advantaged Savings With a Mega Backdoor Roth?

Talk with your financial advisor to discuss your savings priorities and determine whether a mega backdoor Roth would be appropriate for your portfolio. The next step would be to confirm whether it is possible to use a mega backdoor Roth by reviewing a copy of the SPD from your 401(k) or 403(b) for plan eligibility.

The only thing we know for sure is that there is no way of telling which path a single, randomly chosen stock will take beforehand. This uncertainty of whether an individual will become a multimillionaire, lose everything or something in between, is why we diversify. Diversification reduces risk.

Diversification From a Risk Perspective

The idea that diversification is the only free lunch in investing is often attributed to Nobel Laureate Harry Markowitz. Instead of the crazy, uncertain paths in the example above, an investor can invest across the market, thereby diversifying away company-specific risk, while earning the market return. Companies go bankrupt all the time, but the entire market will not. Diversification has allowed investors to have more conviction in their future outcomes and clarity for their long-term financial plans by building more efficient portfolios. More return for each unit of risk and less risk for each unit of return increases the efficiency of a portfolio. Diversification is the cornerstone of proper investment management.

For example, the average U.S. stock has a standard deviation of about 35%.² This means that if a stock has an expected return of 7%, the yearly return will be between –28% (7%-35%) and +42% (7%+35%) about two out of every three years. A range of –28% to +42% is a very wide band of possible outcomes. However, if a portfolio is diversified across all 3,000+ stocks that make up the U.S. market, now the standard deviation is below 20%. This means that assuming the same 7% expected return, the yearly outcomes about two out of three times will be between –13% and +27%, a tighter band than the previous example. In the second example, the company-specific risk has been diversified away, leaving only the market risk component. In the single-stock portfolio, the portfolio fully retained both types of risk: market and company-specific. One thing that Markowitz discovered is that since company-specific risk is diversifiable, it does not drive additional expected return. The arithmetic average returns are the same, but the risk of the index is much lower than the risk of the single stock. This means the diversified portfolio of U.S. stocks is much more efficient.

In addition, the diversified portfolio has an advantage in growth of wealth because of “volatility drag” on portfolios that cause geometric or compounded returns (average returns in dollar terms) to be lower than arithmetic returns the more volatile a portfolio. The simple logic is that if a portfolio falls by 20%, then it must increase in value by 25% to get back to even. Volatility drag is the formal name for the concept that a given percentage drop has a larger effect on dollar value than the subsequent same percentage gain.

Assume $100 is invested in the two portfolios from the earlier example:

1. Single-Stock Portfolio: 7% expected arithmetic return, 35% standard deviation
2. U.S. Market Portfolio: 7% expected arithmetic return, 20% standard deviation

They will have different geometric returns as approximated by the following formula:³

Geometric or Compounded Return = Arithmetic Return – (StDev^2)/2

After 30 years, the $100 has turned into:

Reduction of volatility has a dramatic impact on the growth of wealth, and this is the tangible benefit of diversification. There are two items worth mentioning about the analysis above. First, it ties out with known data, as over half of publicly listed stocks have negative total returns versus Treasury bills over their lifetime.⁴ Second, this analysis presupposes that the arithmetic returns are the same for an index versus an individual stock, however, in the next section, we will discover that this is not true either. The expected arithmetic return for a single-stock holding should be lower than for an index.

Diversification From a Returns Perspective

The benefit of diversification has mostly been researched as a risk story, but there is a very important return benefit as well. As in the previous section, we will examine the difference between investing in a single stock versus investing in an index. If one is picking a stock at random, then the median stock return should be used as a proxy for the average stock. We looked back at the data for U.S. stocks from 1927–2017 using the CRSP U.S. stock database.⁵

The average yearly U.S. market return over that time period (91 years) was 12.01%. The median stock return was 8.30% on average. This means that investing in the overall index versus randomly picking a single stock would have earned on average 3.71% more per year. Again, this is a natural outcome of stock returns as stock returns are skewed, not uniform. In any given year, there are a few big winners, while the majority of stocks have returns that are less than the average. That means it should not be a surprise that the index would have higher yearly returns than the median stock, but this phenomenon has not received nearly enough attention.

Further, by looking at a single-stock’s lifetime price return versus the Russell 3000 Index, going back to 1980–2014, we know that roughly 2/3 of the universe of single stocks underperformed the Russell 3000. The median stock underperformed the index by –54%, with the extreme winners being two standard deviations over the mean as represented by the chart below.⁶

Combining Risk and Return

Going back to the example of compounded annual growth over 30 years, let us evaluate the combined effects of both a higher standard deviation and a lower expected return.

1. Single-Stock Portfolio: 4.29% expected arithmetic return (7% index return – 3.71% historical spread between single stocks and index returns), 35% standard deviation
2. U.S. Market Portfolio: 7% expected arithmetic return, 20% standard deviation

After 30 years, the $100 has turned into:

We can see that in this scenario, which considers both risk and return, the diversified approach is clearly superior to an approach concentrated in a single stock. The single stock’s increased volatility when considered cumulatively with its lower expected return actually results in a negative -1.84% compounded annual growth rate. This will be shocking to many investors, who expect single stocks to deliver returns similar to the market over the long term. In reality, most single stocks deliver much higher volatility and lower compound returns.

Conclusion

Most of the financial world understands the benefits of diversification from a risk perspective, but there is a benefit from a returns perspective as well. Investing in single stocks or a concentrated portfolio is significantly riskier (from a standard deviation and long-term outcome perspective) than investing in a diversified index. Additionally, single stocks or a concentrated portfolio have lower returns than index returns, which means that single-stock and concentrated portfolios are less efficient on two dimensions: risk and return. The goal of a well-constructed portfolio is to maximize returns for the lowest amount of risk. Single-stock investing accomplishes the opposite: It lowers returns for greater risk. Single-stock or concentrated-stock investors could get lucky, but the less diversified the portfolio, the more the odds tilt against these portfolios versus a diversified portfolio in the long run.

SOURCES

Step 1: Try Not to Do Anything Rash

Buying and staying disciplined is not just for normal markets. Markets drop 30%+ about every 13 years, so these events are bound to happen in everyone’s investment experience. They always happen for different reasons, but they almost always feel like “this time is different” with no light at the end of the tunnel. Jeremy Grantham, co-founder of the investment company GMO, said, “Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”¹

In 2008, there were commentators who thought a large percentage of companies were going bankrupt as the market dropped 56.8% from peak to trough. During 2000–2002, the NASDAQ dropped by 78% from peak to trough. These selloffs have to feel endless and remove hope of a return to normalcy. If market participants believe there is a light at the end of the tunnel, the selloff would not sustain. Fear must reach levels where some investors ask the question, “Is this time different?” Another way of saying that is investors need these periods of volatility to provide the equity risk premium (return greater than the return of a risk-free asset like the three-month U.S. T-bill) and long-term positive returns. In the past, markets have eventually recovered, and investors have always been better off for remaining disciplined and taking advantage of opportunities presented during volatile markets.

For most investors, the reality is that down markets are unequivocally better for them than if these drops never happened. It allows dividends to be reinvested at cheaper levels, savers to buy at lower prices than they could have otherwise and portfolios to be rebalanced from bonds to stocks to take advantage of lower prices. When markets eventually recover, those purchases at lower prices end up driving higher long-term wealth than if the market had never dropped in the first place. This piece is one of our absolute favorites in illustrating this concept: “Why a 66% Crash Would Be Better Than a 200% Melt-Up.”²

Down markets being better from a long-term wealth perspective means the opposite is also true — up markets are generally bad for investors’ long-term financial net worth. However, the problem is human nature lends us to keep score by portfolio value. In fact, we are hard wired to do so and, therefore, we end up focusing on the short term to the detriment of our long-term well-being.

If we as investors believe that we should be compensated in the form of positive expected returns in excess of the risk-free rate for holding assets with risk, we must also accept that excess returns cannot be realized long term without periods of volatility and even sizable declines. So, the first and most important thing you can do is realize these down markets are part of the plan and avoid deviating from the plan.

Step 2: Evaluate Your Cash Situation

Most clients who engage with an advisor are told to set up an emergency fund before doing anything else. While it is relative to each client’s situation, a rule of thumb often used is somewhere between three months and six months of expenses. That tends to be a valuable rule of thumb in normal times, but during a crisis like the one today, this should definitely be re-evaluated. Job losses, furloughs and even different living arrangements could require larger emergency funds than previously anticipated.

 We suggest the following actions:

Find a New Emergency Fund Level

Assess whether life changes require additional months of savings and agree upon a new emergency fund level if needed. This should include an honest look at your household situation and what could happen to cash flow in a worst-case scenario. (What if the economy is still not normalized in 12 months? Does that change your answer toward your job and income security versus today?) We have seen situations ranging from no changes to needing to add 18 months of expenses to maintain a reasonable emergency fund because of circumstances.

Build Toward the New Emergency Fund Level

Next, create a plan to get to that increased emergency fund level in a reasonable amount of time. While most clients may need to access brokerage funds to free up enough cash to expand the emergency fund, other clients, who continue to have stable incomes, can expand their emergency fund through savings alone, which is preferred.

Access Accounts to Raise Emergency Funds

If accounts need to be accessed to raise emergency funds, an after-tax brokerage is the preferred option because there are no penalties associated with withdrawal. If a brokerage account is not available or not possible, there are a number of options to access retirement assets, especially in 2020. Accessing retirement accounts should be a last resort but it can become necessary in some cases and your advisor can talk you through those options.

Step 3: Deploy Excess Cash (for Pre-Retirees)

Some clients have enough of an emergency fund for their current situation and may have additional cash as well. These clients need a plan to invest into the market. As we mentioned in Step 1, the fact that prices are lower than they have been in the recent past drives greater long-term wealth if clients are in a position to take advantage. However, given the volatility of the markets, individuals may be apprehensive about deploying all their assets at once. There are two approaches that make sense in the deployment of capital.

1. One-Time Deposit: Theoretically, this is the correct approach. Since expected returns are always positive (otherwise, nobody would lend or undertake any financial risk if they did not think they were going to make money), the earlier you invest, the better the theoretical long-term outcome for the portfolio should be. We recommend this if we know the client will remain disciplined through the ups and downs of the portfolio, or if the intended deposit is small in relation to the overall portfolio.
2. Dollar-Cost Average: By dividing the deposit into equal monthly increments, the portfolio reduces the point-in-time risk — the chance that the market drops significantly right after the money goes in — since the point of entry is spread over time. However, this reduces the expected return since the average dollar is getting into the market later than it would in a one-time deposit. This is why we try to keep dollar-cost averaging to short periods like three months or six months.

If the introduction of dollar-cost averaging reduces the chance of an investor losing discipline to the process, it can make more sense than a one-time deposit from the perspective of a long-term plan. Dollar-cost averaging tends to be the preferred method for large deposits and clients who are very concerned about current volatility.

Step 3: Evaluate Spending (for Retirees)

If you are already retired and living off your investments, now is a good time to make sure you are spending within your means to ensure your money will last your lifetime. While we do anticipate these periods and build them into your sustainable spending projections when creating your financial plan, down markets can have a significant impact on your long-term plan, either positively if you can reduce withdrawals or negatively if you are overspending. Here are a couple factors to think about:

1. If you were spending more than your sustainable spending amount, your withdrawal rate as a percentage of the portfolio is now even higher and it will be harder for your portfolio to recover if the down market is sustained for a long period. This is a good time to speak with your advisor and evaluate your sustainable spending relative to your expenses.
2. Even if you are in a good spending position long term but spending less due to the current environment (maybe traveling or dining out less), your portfolio could benefit by reducing withdrawals for a period of time to allow more of your money to stay invested. Again, your advisor can help you think through this process.

Conclusion

Going through these three steps is an important exercise for many individuals during market downturns. Clients and their advisors get a chance to take a step back from the recent situation and focus on the long-term plan. It also allows investors to address any changes in their circumstances and evaluate if they are in a position to take advantage of the current lower prices in the market. By systematically addressing these steps, we can all have greater confidence in long-term plans and outcomes.

SOURCES

Some aspects of the SECURE Act are expected to have a major impact on retirement planning and savings, some are minor, and for some parts, we’ll just have to wait and see. What we want to do in this article is provide a primer and our thoughts on what we feel are the most significant portions of the Act.

Note that we did not include a section on changes to retirement plans for employers and employees as these changes will primarily impact small business owners. If you are a small business owner, we encourage you to speak with your financial advisor.

Major Changes

Elimination of Stretch IRAs

Stretching inherited IRA distributions over the life expectancy of a beneficiary has been an important financial planning technique used to reduce the impact of taxes on beneficiaries. The SECURE Act eliminates so-called “stretch” IRAs for the majority of non-spouse beneficiaries for any account owner who passes away after 12/31/2019.

However, it is still possible to stretch IRA distributions if the beneficiary falls into one of the following categories, known as eligible designated beneficiaries:

• Surviving spouses
• Minor children (until the age of majority)
• Beneficiaries who are no more than 10 years younger than the deceased account owner
• Individuals with disabilities and chronically ill individuals

Outside of these categories, beneficiaries will have 10 years to fully deplete an inherited IRA or Roth IRA. There will be no RMDs, so beneficiaries will have to manage the distributions themselves.

For inherited Roth IRAs, the math is simple. Since Roth IRAs compound tax-free and distribute tax-free, beneficiaries will generally be best served waiting until the 10th year to distribute the account unless they need access to the funds sooner.

For inherited traditional IRAs, there is a lot more to consider. Since the distributions will be taxed at ordinary income tax rates, the expected income of the beneficiary can play a large role. For example, if a beneficiary had planned to retire in Year 3, it may behoove the beneficiary to wait until Years 4–10 to start distributions from the IRA.

For account owners concerned about overall family taxation, it may be valuable to consider several strategic choices, especially after a spousal beneficiary is no longer in the picture. These options include:

• Roth conversions of IRA assets since retirement tax rates tend to be low for most individuals
• Naming multiple beneficiaries to spread out distribution tax effects
• Naming children and grandchildren as beneficiaries

For those who have a trust as a beneficiary of an IRA or 401(k), there could be an issue with the plan now that the SECURE Act has passed. For example, if the trust states that the beneficiary only has access to the RMD each year, under the new rules, there is no RMD until Year 10 after the year of death. This means the IRA money could be held up in the trust for 10 years and then all be distributed as a taxable event on Year 10.

Your advisor and estate planner can help you through these decisions and review whether a trust remains the right type of beneficiary and whether the language within the trust continues to work with the SECURE Act.

Minor Changes

Increasing the Required Minimum Distribution Age to 72 From 70.5

Removing the Contribution Age Cap for IRAs From 70.5

Allow the Use of Tax-Advantaged 529 Accounts for Qualified Student Loan Repayments and for Apprenticeship Programs

One Big Caveat: Both of these changes have similarities to the recent change that allowed 529s to be used for private K–12 education for up to $10,000 per year. While these changes are approved on the federal level, state law may not align with the federal law changes, so the distributions would be allowed at the federal level and could be penalized as nonqualified at the state level. We recommend that you speak with your financial advisor and accountant before proceeding.

Permit Penalty-Free Withdrawals of $5,000 From 401(k) Accounts to Defray the Costs of Having or Adopting a Child

Summary

The SECURE Act entails some of the largest changes to retirement planning in the past few years, but the bulk of the effect is due to the elimination of “stretch” IRAs going forward for most non-spouse beneficiaries. The delay in RMDs by 1.5 years should be noted but this change is minor when viewing it in the context of an expectation of 20 years of RMDs for most households during their lifetime. Small business owners should speak to their financial advisor about some of the benefits of the new Act when setting up or maintaining retirement plans.

Even if the changes in the SECURE Act alter how and where we can save for retirement, there are still many planning strategies available to help you meet your long-term financial goals. If you have questions about which strategies would work for you, please contact your financial advisor.

In 2016, Mary Pat received the DuPagePads Spirit Award for her work with the organization. We asked Mary Pat about what DuPagePads means to the local community.

“I started volunteering with DuPagePads about 20 years ago as a way to show my children that not everyone in DuPage County lived a comfortable life. We started by supplying food to be served at one of the overnight sites near Wheaton. The more I became involved with the organization, the more impressed I was with the leadership, the commitment of the staff and everything they were accomplishing.

Most people think of DuPagePads as only providing overnight housing, but DuPagePads is so much more. It is remarkable what they are doing in the areas of employment and housing. Their approach of combining housing initiatives with supportive services is truly innovative and a great model for helping people who are going through extremely challenging times. They really do change lives, and I am proud to be associated with the organization!”

Mary Pat currently serves as an advisor to the Finance committee for DuPagePads and a board advisor and member of its Program committee. Upon joining DuPagePads, Mary Pat supported expanding services beyond overnight programs to permanent housing initiatives.

About DuPagePads

Founded in 1985, DuPagePads is committed to ending homelessness in DuPage County. Bringing together civic, faith-based and social services groups, local businesses and human service agencies, DuPagePads addresses the needs of the homeless population with the support of more than 4,000 volunteers.

For more information, visit dupagepads.org.

Photo: Forum Partner Mary Pat Wesche receives the 2016 DuPagePads Spirit Award presented by Janelle Barcelona, Vice President of Development for DuPagePads, in Lisle, Illinois, Wednesday, November 2, 2016. (Robyn Sheldon)

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

The Wake-Up Call

In the wake of the recent U.S. government shutdown, Americans were reminded that having an emergency savings fund is better than the alternative. Many folks have less than six months of savings set aside for a financial emergency.

According to the January 2019 Prudential survey, “Financial Fragility: How the Shutdown Affected the Household Finances of Federal Workers,” many federal government workers were significantly affected by the shutdown. The survey found that 49% were not able to pay bills on time, 42% had to use a credit card or take out a loan and 35% decreased or used all of their emergency savings.¹ In addition, 27% of the furloughed or unpaid federal workers or contractors and spouses surveyed by Prudential did not pay their mortgage or rent payment while 26% reported they borrowed money or withdrew it from a retirement account.² A Bankrate survey found that 29% of people surveyed had enough savings to cover six months or more without monthly income.³ A short loss of income can have a big impact on our finances.

Saving Now Can Make a Big Difference Later

Financial planners typically advise people to have between six and 12 months of funds saved and accessible on short notice for an emergency. Consider monthly costs for rent or mortgage, food, gas, car, insurance, health care and credit card payments. Multiply that total by the number of months. Unfortunately, mutual funds, CDs, stocks, bonds and other investments intended for long-term goals don’t qualify as good resources. They lack liquidity, have potential for loss and will likely disrupt other financial goals.

Checking, savings and money market accounts serve as a safe and ready source of funds in the event of an emergency. They help cover costs and avoid the pain of selling dear investments or scrambling to meet obligations. Family, friends, credit cards and 401(k) loans are sources of last resort in a financial crisis.

Inspired to Plan Ahead

The government shutdown raised general awareness about the benefits of having rainy-day funds. Prudential’s survey also found that “34% of the general population said they plan to add to their existing emergency savings funds, and 11% who have no fund said they plan to start one.”⁴ It may be easy to put off planning on sunny days, but such days represent some of the best times to make emergency fund plans. It is much better to be prepared when clouds and storms arrive and financial surprises happen!

Emergency Savings Q&A

1. Some sources recommend 3–6 months of savings while some suggest 6–12 months. How much makes sense to save?

Set a goal of three months of savings. After reaching that mark, I encourage people to set a new goal of six months of emergency savings. By setting realistic goals, it is easier to achieve them. For most people, accumulating 6–9 months of emergency funds should provide a sense of comfort and satisfaction.

2. Why do I need an emergency fund if I can use a credit card for emergencies?

Individuals who tap or max their credit cards in an emergency may then only pay the monthly minimums. The interest rates (non-deductible) charged on unpaid credit card balances are among the highest rates charged anywhere. Typical rates can range anywhere from 14% to 25%. Using a credit card for living expenses during an emergency quickly shrinks the available credit on that card and could impact credit scores. A mound of compounding credit card debt is among the most difficult debt to pay off. It is better to plan ahead and save money to avoid using this resource.

3. What financial situations would warrant using some of the savings in an emergency fund?

Most couples rely on both incomes. The job loss by one partner or spouse may trigger a financial emergency. An unexpected home repair, car trouble or sudden family health crisis can trigger an emergency.

When I unexpectedly lost my job several years ago, my wife called me that same day to say her car stalled in the middle of traffic. The transmission repair was a shocking $3,000! Thankfully, we had emergency funds to cover those expenses.

4. If we are already saving in a savings/checking/money market account, should we have a separate account for an emergency fund?

As an example, accountants often recommend that individuals establish a separate account just for taxes. This tactic works very well for them. In the same way, I suggest having a separate account earmarked for or formally titled as emergency savings. Imagine this account is encased in glass. Break the glass only in case of an emergency!

SOURCES

Mary Pat became involved with NAWBO several years ago as a way to connect with other women business owners. She has watched the organization grow and become a true force for women in the Chicago area. A member of the American Institute of Certified Public Accountants, Illinois CPA Society and the Financial Planning Association, Mary Pat took on the role not only to adeptly serve in the role of treasurer but to support women entrepreneurs through NAWBO’s mission to “strengthen the wealth-creating capacity of its members and promote economic development [and] to create innovative and effective change in the business culture.”

NAWBO Chicago was formed in 1978 to provide business women with leadership, education, procurement and networking opportunities. The organization recently partnered with 1871 to serve as a voice for its members on economic, social and public policy issues that affect the local communities throughout the city of Chicago.

More About NAWBO Chicago

More About 1871 (“Where Digital Startups Get Their Start”)

By clicking on a third-party link, you will leave the Forum website. Forum is linking to this third-party site to share information in a different format and is for informational purposes only. However, Forum cannot attest to the accuracy of information provided by this site or any other linked site. Forum does not endorse the site sponsors or the information or products presented there. Privacy and security policies may differ from those practiced by Forum.

Talking about money with a trusted advisor is the first step on the journey to financial confidence. Each financial planning situation for both women and men presents its own challenges. However, planning for women is especially important because women tend to live, on average, 2.3 years longer than men.²

In addition, women are far more likely to live alone for a significant period of time (either by choice or circumstance), often take career breaks to raise children and/or become a caretaker to parents or loved ones, so they earn lower wages over their lifetimes and therefore have less opportunity to save for the future. Discovering how to use money as a tool to enhance present and future life can inspire taking a new approach that leads to clarity by tracking successes (and setbacks) rather than shying away from them. So, why do some women hesitate to have conversations about money?

Five Reasons Why Women Don’t Talk About Money

1. “It is not polite to talk about money.”

2. Personal finance was not taught in school.

3. The financial world seems too complex.

4. One spouse manages the household finances and leaves the other spouse uninvolved and uninformed.

5. Prior money decisions are viewed with regret and not considered learning opportunities.

The Positive Effect of Regularly Tracking Progress and Gaining Clarity

All investors should make time at least quarterly to check in on their financial status and progress toward the life they wish to live. This can result in feelings of empowerment due to having money, goals and values all working toward alignment. It is also important to reflect upon and gain clarity about subconscious money beliefs, as they were established in childhood and often continue to present into adulthood.

Investors can gain control over their finances and reduce their financial stress just by having a financial plan.⁴ A 2013 study of 15,000 people by the Financial Planning Standards Council (the national accrediting body of CFP® professionals in Canada) found that individuals who engage in financial planning report significantly higher levels of financial and emotional well-being than those who do not.⁵

Regular meetings with a financial advisor are also pertinent to financial success because they provide the chance to discuss concerns, track goals and announce victories. An advisor can help identify areas of vulnerability and strength, establish resources to weather financial emergencies, manage risk exposure, craft a savings and retirement plan with a sensible investment strategy and help manage emotions and stay informed during periods of market volatility.

When women talk about money, they break through the barriers and stigma to address any concerns or fears they have. Ask questions. Dare to begin.

SOURCES