Personally Invested In Your Future™

  1. Creating Your Retirement Paycheck (Part II) – It’s Not What You Earn; It’s What You Keep

    This is the second in a three-part series of articles designed to help you better understand how to create a paycheck in retirement.

    (CLICK HERE to read the first one.) To answer that question, we’re addressing the following three topics:

    1. It’s not about returns; it’s about your account balance
    2. It’s not how much you earn; it’s how much you keep
    3. It’s not about cash; it’s about cash flow

    Tax Minimization

    Tax minimization is a key factor in creating a sustainable plan for income in retirement. It may sound counter-intuitive, but people typically overestimate their tax liabilities in retirement. Income taxes may actually be quite a bit less than you experienced during your working years, even if your standard of living remains essentially the same in retirement.

    Prior to retirement, there are a few things you can do to reduce your tax burden – like retirement contributions and charitable giving. But, for the most part, you don’t have much control over your tax burden during your working years.

    But if you plan ahead, in retirement you can have much more control. The reason for this is that there are a number of different buckets of money to pull from; each with different types of tax treatment. And, for many of these, you can turn them on and off depending on the tax implications of your personal situation.

    How It Works

    The Retirement Tax Filter® is an interactive tool that we developed to help you manage your portfolio and make the most of your money by optimizing your income and minimizing taxes. One of the goals of the Retirement Tax Filter® is to help ensure you maximize your lower tax bracket income without creeping into higher tax brackets. Watch our video below to see how that works:

    We consider your various sources of income: retirement accounts, return of basis, interest and dividends, capital gain and loss, pension and Social Security, and earned income. These are different pools of money each with their own type of tax treatment.

    The Retirement Tax Filter® helps you see how to strategically pull from each of the various pools to create the most tax-efficient income.  These concepts might sound complicated, but the tool is extremely intuitive. You can turn on and off the different buckets of money and also increase or decrease the amounts of income being generated.

    For instance, withdrawals from retirement accounts funded with pre-tax dollars are also subject to ordinary income tax, but they can be delayed until 70-1/2 if you have other available income sources.

    You may choose to incorporate tax-free sources of income including withdrawals from Roth IRAs, municipal bond interest, or return of basis from investments that have already been taxed. Interest, dividends, or capital gains create their own forms of tax treatment, which are generally lower than ordinary income tax rates.

    Social Security benefits can be taken early, at age 62, delayed until age 70, or taken anytime in between, and some pension plans let you determine when to take your benefits.

    Our tool allows you to clearly see and understand the estimated tax impact of each decision. We work closely with our clients’ CPAs to implement the best tax planning strategies over many years.

    Jargon-Free Approach

    We have always been amazed by the ridiculous complexity of the investment industry. Financial jargon, confusing acronyms and “back-stage” jargon are commonplace across the wealth management space. Our approach at Brown & Co. is truly the opposite. We bring clarity and simplicity to complicated subjects. The Retirement Tax Filter® is one of the ways in which we do that.

     

    Securities offered through LPL Financial, Member FINRA/SIPC. Financial planning offered through Brown and Co., Inc, a Registered Investment Advisor and separate entity. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

  2. Creating Your Retirement Paycheck (Part 1) – It’s Not About Returns; It’s About Your Account Balance

    One of the main questions people want to know as they approach retirement is “how am I going to get paid once I stop working?” Saving and accumulating wealth is much different than trying to figure out how to create a stream of income that’s going to last for several decades and keep up with inflation.

    This is the first in a three-part series of articles designed to help you better understand how to create a Retirement Paycheck. These are the topics we’ll cover:

    1. It’s not about returns; it’s about your account balance
    2. It’s not how much you earn; it’s how much you keep
    3. It’s not about cash; it’s about cash flow

    It’s Not (Just) About Returns

    When we say it’s not about returns, what we mean is that for someone nearing retirement, the average investment rate of return is only part of the story. The sequence of returns is tremendously important when you are drawing down from a portfolio.

    Below is an example of two $1 million portfolios with the same average return of 6% over a 25-year period. Assume the first one (in blue) is named Mr. Bull and the second one (in orange) is named Mr. Bear.

    This is a hypothetical example and is not representative of any specific investment. Your results may vary.

    Now, let’s look again at those portfolios but assume that Mr. Bull and Mr. Bear are each withdrawing money from them. Let’s assume they each withdraw 5% (or $50,000 per year) over that period. In that case, the results are dramatically different. Due only to the different sequence of returns, Mr. Bull has a portfolio that continues to grow in retirement, while Mr. Bear depletes his portfolio by his early 80’s.1

    This is a hypothetical example and is not representative of any specific investment. Your results may vary.

    A Different Kind of Math

    To understand why this happens, we need to understand a different kind of math.

    -25 + 33 = 0

    When does negative 25 plus 33 equal zero? If you invest money and you lose 25% you need to earn more than 33% to get back to even. (see the illustration of this below)

    The math gets worse as you factor in withdrawals. Assuming the same 25% downturn, but then factoring in three years’ of withdrawals (of 5% or $50,000 per year), you would have to make up a 40% deficit (-25-5-5-5=-40). It would then require a 67% positive return to get back to even (as shown below).

    Be Prepared

    So what do you do about all of this? If you are twenty years away from retirement, you don’t need to worry about it much at all. But if you are only a few years or months away from retirement, that’s a much different story. Realize that we are in the midst of one of the longest bull markets in history. That means that you should be proactively preparing for a recession in order to stress test your wealth plan.

    At Brown and Company, we have created what we call our Recession Prep Scorecard™ to assess our clients’ preparedness for a potential downturn in the markets. If you are nearing retirement and have not done an assessment like this to ensure that you are prepared, just provide your information below and we will follow up with you to prepare a complementary scorecard for you.

    1 Source: Baird Financial: http://www.bairdfinancialadvisor.com/chris.trumble/mediahandler/media/118612/Sequence%20of%20Returns%20Risk.pdf

  3. Socially Responsible Investing: Allianz Conference 2019

    Martin Walsh attended the Allianz Global Investors “ESG University” conference in New York on June 20th.  ESG stands for “Environmental, Social and Governance,” an acronym that is a filter for evaluating socially responsible companies.  The conference was a detailed update for the investment advisor community on socially responsible investing, including the latest research and trends in the field.

    At Brown and Company, we maintain a robust research and investment due diligence process.  As socially responsible investing and corporate governance issues continue to emerge as mainstream ideas in the investment world, it remains critical that our research stays current.  The Allianz ESG event was an excellent opportunity to expand our thinking and receive research updates on an increasingly common topic.  Several key takeaways emerged from the day in New York.

    Divestment vs. Active Engagement

    In the early stages of socially responsible investing, the major idea was to divest from “bad” companies.  In a typical socially responsible fund, the portfolio manager would screen out companies that made profits from certain industries: fossil fuel production, tobacco and gambling were some of the most common companies to be screened out.

    One notable evolution in the world of socially responsible investing is the idea of active engagement instead of divestment.  The idea is that instead of withdrawing capital from a company that is deemed to be non-socially responsible, it is better to engage actively with corporate boards as a major shareholder in order to actually influence change from within.  An example given is the energy industry.  Over the past decade, certain boards of fossil fuel companies have moved towards renewable energy and an awareness of carbon emissions.  This type of messaging from the energy industry was nearly unheard of ten years ago.  Shareholder feedback and engagement, not divestment, has been the driving force.  The overarching idea is that engagement from within is much more effective for creating change than external criticism.

    Good Corporate Governance

    An important theme from the conference is that well-run companies actually outperform over the long run.  Good corporate governance leads to more profitable companies.  By way of example: executive compensation strategy can have a meaningful impact on corporate health.  Public companies with independent boards that hold executives accountable through meaningful performance incentives typically outperform.  In contrast, companies with non-independent boards that set low standards for executives will often underperform.  Further, good corporate governance can lead to lower borrowing costs.  According to research from Oxford University, companies that are rated highly for corporate governance have a significantly lower cost of capital.[1]

    Conclusion

    A notable insight is that investing according to ESG principles does not mean that investors have to sacrifice investment returns.  In the past, socially responsible funds have had the perception of underperforming their investment peers.  The majority of this underperformance was driven by higher fees.  Today, fees have come down in the ESG fund world, while the quantity and quality of fund offerings has increased.  The result is that investors can invest according to their principles, while not giving up on performance.  We continue to monitor the changing landscape of ESG investing and welcome the discussion of improved corporate governance within global public companies.

     

    Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

    No strategy assures success or protects against loss.

    [1] “From the Stockholder to the Stakeholder.”  Oxford University.  Online at https://www.smithschool.ox.ac.uk/publications/reports/SSEE_Arabesque_Paper_16Sept14.pdf