Mission Wealth - Financial Planning, Estate Planning and Investment Advice
Mission Wealth’s team consults with your professional advisors to coordinate financial decisions. This integration of your professional team frees your time to pursue your life’s passions. Today, our vision is a reality across the diverse, nationwide set of families that benefit from our care and expertise.
This is the fifth time Mission Wealth has made the FT 300 list, produced independently by the Financial Times in collaboration with Ignites Research, a subsidiary of the FT that provides business intelligence on the asset management industry.
Mission Wealth manages over $2.2 billion in assets, is headquartered in Santa Barbara, CA and has fifteen other offices located in the states of California, Arizona, Texas, Illinois, Indiana, Oregon, Washington, Arizona and Colorado.
“We are proud to be included in the FT300 for the fifth time,” said Brad Stark, Mission Wealth’s founder and Chief Compliance Officer. “Our success is all due to our clients and our dedicated associates. These long-standing, trusted relationships are the true awards we cherish every day.”
RIA firms applied for consideration, having met a minimum set of criteria. Applicants were then graded on six factors: assets under management (AUM); AUM growth rate; years in existence; advanced industry credentials of the firm’s advisers; online accessibility; and compliance records. There are no fees or other considerations required of RIAs that apply for the FT 300.
The final FT 300 represents an impressive cohort of elite RIA firms, as the “average” practice in this year’s list has been in existence for over 22 years and manages $4.6 billion in assets. The FT 300 Top RIAs hail from 37 states. The FT 300 is one in series of rankings of top advisers by the Financial Times, including the FT 401 (DC retirement plan advisers) and the FT 400 (broker-dealer advisers).
The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times (June 2019). The FT 300 is based on data gathered from RIA firms, regulatory disclosures, and the FT’s research. The listing reflected each practice’s performance in six primary areas: assets under management, asset growth, compliance record, years in existence, credentials and online accessibility. This award does not evaluate the quality of services provided to clients and is not indicative of the practice’s future performance. Neither the RIA firms nor their employees pay a fee to The Financial Times in exchange for inclusion in the FT 300.
As a business owner, you should carefully consider the advantages of establishing an employer-sponsored retirement plan. Generally, you’re allowed a deduction for contributions you make to an employer-sponsored retirement plan. In return, however, you’re required to include certain employees in the plan, and to give a portion of the contributions you make to those participating employees. Nevertheless, a retirement plan can provide you with a tax-advantaged method to save funds for your own retirement, while providing your employees with a powerful and appreciated benefit.
Types of plans
There are several types of retirement plans to choose from, and each type of plan has advantages and disadvantages. This discussion covers the most popular plans. You should also know that the law may permit you to have more than one retirement plan, and with sophisticated planning, a combination of plans might best suit your business’s needs.
Profit-sharing plans are among the most popular employer-sponsored retirement plans. These straightforward plans allow you, as an employer, to make a contribution that is spread among the plan participants. You are not required to make an annual contribution in any given year. However, contributions must be made on a regular basis.
With a profit-sharing plan, a separate account is established for each plan participant, and contributions are allocated to each participant based on the plan’s formula (this formula can be amended from time to time). As with all retirement plans, the contributions must be prudently invested. Each participant’s account must also be credited with his or her share of investment income (or loss).
For 2018, no individual is allowed to receive contributions for his or her account that exceed the lesser of 100% of his or her earnings for that year or $55,000 ($54,000 in 2017). Your total deductible contributions to a profit-sharing plan may not exceed 25% of the total compensation of all the plan participants in that year. So, if there were four plan participants each earning $50,000, your total deductible contribution to the plan could not exceed $50,000 ($50,000 x 4 = $200,000; $200,000 x 25% = $50,000). When calculating your deductible contribution, you can only count compensation up to $275,000 in 2018 ($270,000 in 2017) for any individual employee.
A type of deferred compensation plan, and now the most popular type of plan by far, the 401(k) plan allows contributions to be funded by the participants themselves, rather than by the employer. Employees elect to forgo a portion of their salary and have it put in the plan instead. These plans can be expensive to administer, but the employer’s contribution cost is generally very small (employers often offer to match employee deferrals as an incentive for employees to participate). Thus, in the long run, 401(k) plans tend to be relatively inexpensive for the employer.
The requirements for 401(k) plans are complicated, and several tests must be met for the plan to remain in force. For example, the higher-paid employees’ deferral percentage cannot be disproportionate to the rank-and-file’s percentage of compensation deferred.
However, you don’t have to perform discrimination testing if you adopt a “safe harbor” 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees’ contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3% and 5% of compensation), or make a fixed contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested immediately.
You can also avoid discrimination testing by adopting a qualified automatic contribution arrangement, or QACA. Under a QACA, an employee who fails to make an affirmative deferral election is automatically enrolled in the plan. An employee’s automatic contribution must be at least 3% for the first two calendar years of participation and then increase 1% each year until it reaches 6%. You can require an automatic contribution of as much as 10%. Employees can change their contribution rate, or stop contributing, at any time (and get a refund of their automatic contributions if they elect out within 90 days). As with safe harbor plans, you’re required to make an employer contribution: either 3% of pay to each eligible employee, or a matching contribution, but the match is a little different — dollar for dollar up to 1% of pay, and 50% on additional contributions up to 6% of pay. You can also require two years of service before your contributions vest (compared to immediate vesting in a safe harbor plan).
Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs (see below), but can also allow loans and Roth contributions. Because they’re still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven’t become a popular option.
If you don’t have any employees (or your spouse is your only employee) an “individual” or “solo” 401(k) plan may be especially attractive. Because you have no employees, you won’t need to perform discrimination testing, and your plan will be exempt from the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). You can make pre-tax contributions of up to $18,500 in 2018, plus an additional $6,000 of pre-tax catch-up contributions if you’re age 50 or older (unchanged from 2017). You can also make profit-sharing contributions; however, total annual additions to your account in 2018 can’t exceed $55,000 (plus any age-50 catch-up contributions).
A 401(k) plan can let employees designate all or part of their elective deferrals as Roth 401(k) contributions. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. Unlike pre-tax contributions to a 401(k) plan, there’s no up-front tax benefit — contributions are deducted from pay and transferred to the plan after taxes are calculated. Because taxes have already been paid on these amounts, a distribution of Roth 401(k) contributions is always free from federal income tax. And all earnings on Roth 401(k) contributions are free from federal income tax if received in a “qualified distribution.”
401(k) plans are generally established as part of a profit-sharing plan.
Money purchase pension plans
Money purchase pension plans are similar to profit-sharing plans, but employers are required to make an annual contribution. Participants receive their respective share according to the plan document’s formula.
As with profit-sharing plans, money purchase pension plans cap individual contributions at 100% of earnings or $55,000 annually in 2018 (up from $54,000 in 2017), while employers are allowed to make deductible contributions up to 25% of the total compensation of all plan participants.
Like profit-sharing plans, money purchase pension plans are relatively straightforward and inexpensive to maintain. However, they are less popular than profit-sharing or 401(k) plans because of the annual contribution requirement.
Defined benefit plans
By far the most sophisticated type of retirement plan, a defined benefit program sets out a formula that defines how much each participant will receive annually after retirement if he or she works until retirement age. This is generally stated as a percentage of pay, and can be as much as 100% of final average pay at retirement.
An actuary certifies how much will be required each year to fund the projected retirement payments for all employees. The employer then must make the contribution based on the actuarial determination. In 2018, the maximum annual retirement benefit an individual may receive is $220,000 ($215,000 in 2017) or 100% of final average pay at retirement.
Unlike defined contribution plans, there is no limit on the contribution. The employer’s total contribution is based on the projected benefits. Therefore, defined benefit plans potentially offer the largest contribution deduction and the highest retirement benefits to business owners.
SIMPLE IRA retirement plans
Actually a sophisticated type of individual retirement account (IRA), the SIMPLE (Savings Incentive Match Plan for Employees) IRA plan allows employees to defer up to $12,500 for 2018 (same limit as 2017) of annual compensation by contributing it to an IRA. In addition, employees age 50 and over may make an extra “catch-up” contribution of $3,000 for 2018 (same limit as 2017). Employers are required to match deferrals, up to 3% of the contributing employee’s wages (or make a fixed contribution of 2% to the accounts of all participating employees whether or not they defer to the SIMPLE plan).
SIMPLE plans work much like 401(k) plans, but do not have all the testing requirements. So, they’re cheaper to maintain. There are several drawbacks, however. First, all contributions are immediately vested, meaning any money contributed by the employer immediately belongs to the employee (employer contributions are usually “earned” over a period of years in other retirement plans). Second, the amount of contributions the highly paid employees (usually the owners) can receive is severely limited compared to other plans. Finally, the employer cannot maintain any other retirement plans. SIMPLE plans cannot be utilized by employers with more than 100 employees.
The above sections are not exhaustive, but represent the most popular plans in use today. Current tax laws give retirement plan professionals new and creative ways to write plan formulas and combine different types of plans, in order to maximize contributions and benefits for higher paid employees.
How Mission Wealth Can Help You
If you are considering a retirement plan for your business, we can help you determine what works best for you and your business needs. The rules regarding employer-sponsored retirement plans are very complex and easy to misinterpret. In addition, even after you’ve decided on a specific type of plan, you will often have a number of options in terms of how the plan is designed and operated. These options can have a significant and direct impact on the number of employees that have to be covered, the amount of contributions that have to be made, and the way those contributions are allocated (for example, the amount that is allocated to you, as an owner).
Now that summer is upon us, it is prime time for travel. Soon you’ll be on your way, taking that trip you’ve looked forward to for ages–but suppose something happens. If you get sick, lose your suitcase, or have to cut your trip short, will any of your existing insurance policies cover your expenses or reimburse you for your losses? If not, you might want to purchase travel insurance, which is available from insurance companies, travel agents, tour operators, and cruise lines. Many choose to bypass travel insurance options, but there are certain cases where you may want to spend the extra fees to protect yourself.
If you can’t make it after all or have to cut it short–trip cancellation/interruption insurance
You’re ready to go, but the cruise line has gone under financially. Or perhaps you’ve arrived at your hotel only to be handed a telegram informing you that Uncle George is seriously ill and you must return home immediately. If your trip is canceled or cut short, will you be able to get any of your money back?
Trip cancellation/interruption insurance protects you if you must cancel your travel plans before you leave or cut your trip short due to an unforeseen event. Covered contingencies can include bad weather, the financial failure of a service provider such as a cruise line or a travel agency, your illness or that of a family member while on the trip, or an illness or death at home. But coverage varies widely from policy to policy, so check the exclusion section carefully. Your definition of an unforeseen event may differ from that of the insurance provider. For example, some companies don’t recognize a recurrence of your pre-existing medical condition as unforeseeable.
Under the policy, you’ll be reimbursed for your nonrefundable prepaid expenses, such as tour deposits, airline tickets, or hotel rooms. To determine what the insurance covers, you may need to check the terms of your travel agreements and find out what guarantees are offered by the carrier, travel agent, or tour operator. Cruise lines, for instance, may refund most of your money if you cancel several weeks before your scheduled departure, but they’ll give you less or none back if you cancel a few days before you’re supposed to leave. In that case, you’d get nothing back unless you purchased trip cancellation/interruption insurance.
Trip cancellation/interruption insurance is different from cancellation waivers offered by cruise lines and tour operators. These waivers are not insurance; they’re simply company guarantees that your money will be refunded under certain circumstances. They usually won’t cover your last-minute cancellation and they won’t protect you if the company goes out of business.
If that fever isn’t just excitement–short-term supplemental health insurance
Your individual or group health insurance policy typically covers you if you’re traveling within the United States. Still, it’s a good idea to check with your insurance provider before you travel so that you fully understand the coverage conditions. If you’re traveling overseas, beware–your health insurance policy may not cover you at all. Even if it does, it may not provide the same benefits overseas that it does in the United States. Check the limitations of your policy carefully, and call your insurer’s customer service department if you have questions.
If your health insurance doesn’t provide you with adequate coverage while you’re traveling, consider purchasing a short-term supplemental health insurance policy from an insurance company, travel agent, tour operator, or cruise line. These policies often combine accident and/or sickness coverage with medical evacuation coverage, which pays all or part of the cost of getting you back to the United States if you’re traveling overseas (something most basic health insurance polices won’t cover).
The terms of supplemental health policies vary widely, so before purchasing this insurance, ask to see a copy of the policy and get the answers to the following questions:
Does the plan pay the cost of medical care needed for sickness, accidents, or both?
What procedures must you follow to see a doctor or go to the hospital?
Will you have to get approval before you receive care?
Does the policy pay for care upfront, or will you have to pay and wait to be reimbursed?
What are the deductible, co-payments, and/or coinsurance costs?
What exclusions and restrictions apply?
What is the maximum amount of coverage under the policy?
Are translator services available?
If you lose your shirt–baggage insurance
Baggage insurance reimburses you if your personal belongings are lost, stolen, or damaged while you’re traveling. Before you purchase it, however, find out if you already have adequate protection. For instance, airlines may be liable for damage caused by their negligence, and they’re liable for lost or stolen baggage after check-in, up to their stated limit per passenger. Some credit card companies and travel agents also provide supplemental baggage insurance at no charge to you. Your homeowners or renters policy may protect your personal belongings against theft when you travel, as well.
Purchasing baggage insurance may be appropriate when you want 24-hour protection, not just protection after your bags are checked in with an airline. Baggage insurance may also offer higher liability limits than those offered by an airline. However, check the policy’s fine print. If you carry expensive items, you may not be fully reimbursed if they’re lost or stolen, and benefit limits may apply to certain items like electronics (e.g., laptop computers) or jewelry. You also may not be reimbursed for anything covered under another policy; if your bags are lost or damaged by an airline, you may need to seek reimbursement from the airline first.
If you lose more than that–accidental death and dismemberment insurance
Accidental death and dismemberment insurance (AD & D) is inexpensive coverage that compensates you if you lose a limb or an eye, or that compensates your beneficiary if you die in an accident. You can purchase this coverage as a separate policy, as a rider to an existing policy, or as part of a travel insurance policy. You may also receive this coverage as a “free” benefit when you purchase airline, train, or bus tickets using your credit card. AD & D policies usually cover, up to certain limits, medical expenses associated with an accident.
Before you purchase this coverage, make sure you don’t have duplicate coverage elsewhere. You may already have AD & D coverage if you have adequate life insurance, or through a group insurance plan sponsored by your employer or credit card company.
Original article prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.
This generation of retirees is going to live longer than any in history. Today’s seniors are healthier, more active, and receiving better preventative care than ever before. On top of that, a growing group of scientists are trying to harness technology and modern medicine to slow down the aging process.
Experts call the cumulative effect of these changes to life expectancy “the longevity effect.” They project that extending our years of healthy living can have tremendous benefits both to individuals and to society as a whole.
Let’s look at some of the cutting-edge advances in slowing biological aging, as well as what experts recommend folks can do right now to stay more than just young at heart.
You’ve probably seen products like AncestryDNA that can give you a robust genealogical profile from your saliva. Scientists are continuing to progress on more sophisticated versions of this technology that will be able to use your genes to test for serious diseases. There’s even hope of being able to test for genes that are associated with longevity, and others that could eventually shorten your lifespan.
We all know that the best medicine is preventative. But if scientists can perfect this “road map” for life expectancy, the implications for your financial planning could be enormous. An accurate longevity expectancy could make it much easier to plan ahead for significant medical expenses that might not be covered by Medicare. If you had a better idea of when you were likely to start “slowing down” later in your retirement, you might enjoy your early retirement years more and worry less about running out of money.
Fighting “Zombie Cells”
The cells in our bodies are constantly dividing. After a certain number of divisions, cells usually die. Those that don’t – so-called “zombie cells” – can build up in our bodies over time and interfere with how our healthy cells operate.
Scientists are looking for ways to clear out zombie cells via “interventions” such as pills. Clear out the zombies, and you’re eliminating cellular environments ripe for things like cancer, cardiovascular disease, Alzheimer’s, and osteoporosis. The more resistant we are to these kinds of diseases, the greater our longevity will be and the longer you live without having to cope with a debilitating disease, the longer you’ll be able to work part-time, vacation, volunteer, play your favorite sports, and spend quality time with your friends and loved ones.
In the Meantime
There’s no guarantee that these specific medicines and technologies will be ready for the general public during your retirement. But it is safe to assume that advances both gradual and rapid will continue to improve the quality of your health care.
The most important thing you can do to keep aging in check during retirement is to maintain a healthy, active lifestyle and to take full advantage of the services Medicare provides right now. That starts with your free “Welcome to Medicare” visit, which will help you and your doctors get a baseline reading of your health upon retirement. Medicare also covers many vaccinations, a wide variety of preventative screenings and tests, an annual wellness checkup, and a depression screening if you’re struggling with the emotional transition into retirement.
These services might not sound as exciting as fighting zombie cells, but they’re the most effective ways to detect significant health problems while it’s still early enough to do something about them.
So while we’re all waiting for the next big medical breakthroughs, old fashioned common sense will go a long way towards a long and healthy retirement. Go to the doctor. Eat well. Exercise. Wear sunscreen. Pursue your passions with a vigor that will keep your body and mind energized.
How We Can Help
Retirement planning is our area of expertise. Since 2000, we have helped hundreds of families retire with confidence. Careful coordination is required to ensure your retirement income strategy is tax-efficient and sustainable. You will face many decisions when retiring. Let us guide you through your options and come up with a plan. If you are interested in reviewing how your financial plan will take care of you at every phase of your retirement, don’t hesitate to come fill out the form below and an advisor will be in touch.
We’ve prepared an economic update and outlook for the second quarter of 2019 that focuses on a few key themes – an update on the market rebound experienced year-to-date, an overview on the health of the U.S. and global economy, and an update on Fed policy and the current interest rate environment and implications moving forward.
After experiencing a challenging 2018 and Q4 in particular, stocks rebounded strongly in Q1 2019, with the S&P 500 experiencing its best start to a year since 1998. While many retail investors missed out on this equity upswing, Mission Wealth participated fully. The Fed’s more dovish tone and positive signs regarding a trade agreement with China helped investor sentiment. Despite the bounce, stocks are currently trading in-line with historic valuation multiples, with the most attractive levels found in International and Emerging Markets.
We anticipate the current economic expansion will enter its 11th year and become the longest ever this summer, and we do not currently see a near-term catalyst that could disrupt it. We anticipate growth rates to moderate for the balance of the expansion but may get an additional stimulus from pent-up capital expenditure, should we reach some form of trade agreement with China. Despite recent cooling, the global economy and trade appears to be picking up, with Chinese data particularly improving.
The Fed appears to have adopted a “wait and see” approach to monetary policy and may find it difficult to adjust rates near-term. Part of the yield curve inverted in March, though we do not think it forebodes an imminent recession. Moving forward, we believe we will be in a “lower for longer” interest rate environment and are actively managing our fixed income allocations accordingly.
For more details on these key themes and outlook, watch my Market Perspectives video presentation above.
How are you going to get the best, most fulfilling life possible with the money you have once you retire?
Many studies have shown that retirees who spend their time and money on experiences are much happier than those who just buy stuff. Charitable giving can be a particularly meaningful way to keep yourself active and put your assets to good use. Just as long as you don’t overdo it.
If you’re feeling an increased desire to give back now that you’ve retired, here are some tips on balancing your good intentions with what’s best for you and your family.
Do your homework.
Recently, there have been high-profile cases of fraud and misappropriated funds at some very famous charitable organizations. But even if you’re giving to a charity that is run well, you should understand where your money is really going. If you’re happy with your dollars helping a larger organization to pay its bills and employees, great. If you want your money to have a more immediate impact on those in need, consider giving to smaller organizations in your community.
Do some googling and check online watchdog databases to make sure your favored charity is on the up-and-up. And unless you know the organizers personally, avoid online crowd-funding campaigns that aren’t legally accountable for how they use donations.
Consider a volunteer position.
Your favorite non-profit or charitable organizations need money. But they also need manpower.
If you’re thinking about working part time in retirement and a paycheck isn’t really important to you, schedule regular volunteer hours instead. You’ll get all the same benefits of having a job: structure, responsibility, camaraderie. Plus, seniors who volunteer report lower levels of stress, an increased sense of purpose, and better physical and emotional health.
Teach, tutor, or consult.
When looking for a charitable outlet, don’t overlook the professional skills that you honed over your career.
You might not have the qualifications to teach at a school or university, but you could talk to your local community center about holding a seminar that could benefit your neighborhood. You might be done balancing your company’s books, but there are high school kids who could benefit from your mastery of math. Open your door to local small business owners or recent college graduates who need an entrepreneurial mentor.
Make a plan.
It’s a scientific fact that giving makes us feel good. But some seniors may get too caught up in their generosity. They forget that gifts and donations are coming from that same pool of assets that are supposed to keep them safe and secure for the rest of their lives. They may have trouble setting limits and saying no.
There is indeed such a thing as too much giving. You might not think much about writing an extra check or two early in retirement. But seniors have to maintain a long-term perspective on their nest eggs. This generation of retirees is going to live longer, more active lives than any in history. You need to make sure that helping someone today isn’t going to make it harder to cover your health care and cost of living needs tomorrow.
So, if you and your spouse want to make regular charitable donations, it’s important that you come in and talk to us. We can incorporate giving into your monthly budget and retirement income plan. If you want to make your generosity more permanent, we can also help you establish a charitable trust and add sustained giving to your estate plan.
We’re always happy when our clients want to help others. But it’s our responsibility to make sure your financial plan covers your best interests first. Let’s work together on a plan that will make your retirement secure and the world around you a little brighter. Visit our retirement planning page to learn more about how we can help!
By Brad Stark, MS, CFP
Founder and Chief Compliance Officer
An Initial Public Offering (IPO) often times gets mixed perceptions between retail and institutional counterparts. For starters, investment bankers are trying to extract the highest premium values while the public also wants to hit a homerun. Some institutional firms such as DFA (Dimensional) won’t touch an IPO for around six months as the academic data tells them that it takes this long for “normal” trading volume to take place and for an efficient market price to be established.
This past week, Uber had their long anticipated IPO to the disappointment of both the public and private investors. Since 2016, Uber has privately raised $15.35 billion at $48.77 per share and then on the IPO, they sold another $8.6 billion at the slightly lower price of $45 per share. As of the time of this writing, the price was $37.70.
Doing the math, approximately 81% of all the shareholders of Uber (pre and post IPO) are underwater.
Other recent high profile IPO’s did not favor well to help validate the work of DFA;
Spotify opened at $150, soared to $200 and seven months later, it has not traded above the opening price.
Dropbox opened at $30 and trading above that mark shortly before dropping to $20 and settling around the $25 range.
iQiyi (Netflix of China) opened at $15, soared to $40 before dropping to the IPO price eight months later.
Going back in time, Facebook did not trade above the IPO price until about 8 months afterwards.
However, not every IPO goes this way but these are good examples of the highest profiled IPO’s of this past year. Several that have bucked the trend recently have been Roku, Carvana and The Trade Desk (3 out of the 10).
Mission Wealth’s philosophy is that of a long term investor, and short term trading of IPO’s is a risky proposition. Overall, if we are going to invest in private equity, we generally prefer the debt or real estate asset class because we can invest at a fraction of the value of the equity holders (debt) or have real third party appraisals to establish fair value.
It might sound a little crazy but there are many benefits to working even though you no longer need the money for your living or retirement needs.
These “retirement workers” have discovered that part-time jobs or volunteer positions allow them to keep a nice pace in life and find a balance among using their talents, enjoying recreation, traveling, and spending time with family. Some of our most ambitious clients even start brand new companies in retirement.
Here are three important benefits of working in retirement that might persuade you to clock back in a couple days every week.
Working can be good for you.
Retiring early is a very popular goal right now. But while it makes sense to want to enjoy your assets when you’re younger, a recent study links retirement with decreased mental and physical activity and higher instances of illness.
Working helps keep your mind sharp and your body active and encourages you to engage in problem solving and creative thinking on a regular basis. It challenges you to keep achieving and rewards you when you do.
Work can give you a sense of purpose.
Many retirees struggle with the transition to retirement because their sense of purpose and identity is so tied to their work. Without that familiar job and its schedule and responsibilities, some retirees struggle to find a reason to get out of bed in the morning. A part-time job can restore some of that sense of structure and drive.
In fact, you might find that working in retirement gives you an even greater sense of purpose than your former career did. You might have worked a job you didn’t 100% love in order to support your family. Now that you no longer need to worry about that, you can take that community college teaching position. You can work a couple days every week at that non-profit that’s making a difference in your community. You can set up regular volunteer hours at a charitable organization that’s close to your heart. You can feel like you’re making a contribution to society without worrying about the size of your paycheck.
Work can improve your connections to other people.
Early retirement can be a period of isolation for some folks. Your friends and family might still be busy working and raising children. The familiar social interactions you enjoyed at work are gone. You and your spouse probably share some common interests, but you can’t spend every single second together.
It’s important for retirees to be open to making new personal connections in retirement. A new workplace is a great place to start that process. You’ll meet new people from different walks of life. You’ll work with and help people who can benefit from your personal wisdom and your professional skill set. You might meet other retired seniors who, like you, are trying to stay active and put their talents to good use. And the more involved you are in your community, the more curious and adventurous you’re going to be about trying new restaurants, shopping in new stores, and interacting with more people.
Of course, working in retirement can affect other aspects of your financial planning even if you don’t need the money, such as taxes, withdrawal rates, and your relationship with your spouse. If you’re considering a new part-time job, call us or let’s schedule a conversation to discuss any adjustments we should be thinking about so that you get the best life possible with the extra bit of money you’ll soon have.
Over the last several years, index funds have received increased attention from investors and the financial media. Some have even made claims that the increased usage of index funds may be distorting market prices. For many, this argument hinges on the premise that indexing reduces the efficacy of price discovery. If index funds are becoming increasingly popular and investors are “blindly” buying an index’s underlying holdings, sufficient price discovery may not be happening in the market.
But should the rise of index funds be a cause of concern for investors? Using data and reasoning, we can examine this assertion and help investors understand that markets continue to work, and investors can still rely on market prices despite the increased prevalence of indexing.
MANY BUYERS AND SELLERS
While the popularity of indexing has been increasing over time, index fund investors still make up a relatively small percentage of overall investors. For example, data from the Investment Company Institute1 shows that as of December 2017, 35% of total net assets in US mutual funds and ETFs were held by index funds, compared to 15% in December of 2007. Nevertheless, the majority of total fund assets (65%) were still managed by active mutual funds in 2017. As a percentage of total market value, index-based mutual funds and ETFs also remain relatively small. As shown in Exhibit 1, domestic index mutual funds and ETFs comprised only 13% of total US stock market capitalization in 2017.
In this context, it should also be noted that many investors use nominally passive vehicles, such as ETFs, to engage in traditionally active trading. For example, while both a value index ETF and growth index ETF may be classified as index investments, investors may actively trade between these funds based on short-term expectations, needs, circumstances, or for other reasons. In fact, several index ETFs regularly rank among the most actively traded securities in the market.
The argument that increased usage of index funds may be distorting market prices hinges on the premise that indexing reduces the efficacy of price discovery. But should the rise of index funds be a cause of concern for investors?
Beyond mutual funds, there are many other participants in financial markets, including individual security buyers and sellers, such as actively managed pension funds, hedge funds, and insurance companies, just to name a few. Security prices reflect the viewpoints of all these investors, not just the population of mutual funds.
As Professors Eugene Fama and Kenneth French point out in their blog post titled “Q&A: What if Everybody Indexed?”, the impact of an increase in indexed assets also depends to some extent on which market participants switch to indexing:
“If misinformed and uninformed active investors (who make prices less efficient) turn passive, the efficiency of prices improves. If some informed active investors turn passive, prices tend to become less efficient. But the effect can be small if there is sufficient competition among remaining informed active investors. The answer also depends to some extent on the costs of uncovering and evaluating relevant knowable information. If the costs are low, then not much active investing is needed to get efficient prices.”2
WHAT’S THE VOLUME?
Trade volume data are another place to look for evidence of well-functioning markets. Exhibit 2 shows that despite the increased prevalence of index funds, annual equity market trading volumes have remained at similar levels over the past 10 years. This indicates that markets continue to facilitate price discovery at a large scale.
Besides secondary market trading, there are also other paths to price discovery through which new information can get incorporated into market prices. For example, companies themselves can impact prices by issuing stock and repurchasing shares. In 2018 alone, there were 1,633 initial public offerings, 3,492 seasoned equity offerings, and 4,148 buybacks around the world.3 The derivatives markets also help incorporate new information into market prices as the prices of those financial instruments are linked to the prices of underlying equities and bonds. On an average day in 2018, market participants traded over 1.5 million options contracts and $225 billion worth of equity futures.3
HYPOTHESIS IN PRACTICE
Even though the historical empirical evidence suggests that the rise of indexing is unlikely to distort market prices, let’s consider the counterargument that the rise of indexing does distort markets and in turn causes prices to become less reliable. In this scenario, wouldn’t one expect stock- picking managers attempting to capture mispricing to have an increased rate of success over time?
Exhibit 3 shows little evidence that this has been the case. This chart shows the percentage of active managers that survive and beat their benchmarks over rolling three-year periods. These data show that there is no strong evidence of a link between the percentage of equity mutual fund assets in index funds and the percentage of active funds outperforming benchmark indices.
Lastly, in a world where index funds bias prices, we should expect to see evidence of such an impact across an index fund’s holdings. In other words, there should be more uniformity in the returns for securities within the same index as inflows drive prices up uniformly (and outflows drive prices down). Taking the S&P 500 Index as an example, however, we see that this has not been the case. The S&P 500 is a widely tracked index with over $9.9 trillion USD indexed or benchmarked to the index and with indexed assets comprising approximately $3.4 trillion USD of this total.4
Exhibit 4 shows that in 2008, a year of large net outflows and an index return of –37%, the constituent returns ranged from 39% to –97%. This exhibit also shows that in 2017, a year of large net inflows and a positive index return of 21.8%, the constituent returns ranged from 133.7% to –50.3%. We would also expect that constituents with similar weighting in traditional market cap-weighted indices would have similar returns. In 2017, Amazon and General Electric returned 56.0% and –42.9%, respectively, despite each accounting for approximately 1.5% of the S&P 500 Index.
Despite the increased popularity of index-based approaches, the data continue to support the idea that markets are working. Annual trading volume continues to be in line with prior years, indicating that market participant transactions are still driving price discovery. The majority of active mutual fund managers continue to underperform, suggesting that the rise of indexing has not made it easier to outguess market prices. Prices and returns of individual holdings within indices are not moving in lockstep with asset flows into index funds.
Lastly, while naysayers will likely continue to point to indexing as a hidden danger in the market, it is important that investors keep in mind that index funds are still a small percentage of the diverse array of investor types. Investors can take comfort in knowing that markets are still functioning; willing buyers and sellers continue to meet and agree upon prices at which they desire to transact. It is also important to remember that while indexing has been a great financial innovation for many, it is only one solution in a large universe of different investment options.
Derivative: A financial instrument whose value is based on an underlying asset or security.
Options Contract: An options contract is an agreement between two parties to facilitate a potential transaction on an underlying security at a preset price.
Futures: A financial contract obligating the buyer to purchase an asset or a seller to sell an asset at a predetermined future time and price.
3. Options, futures, and corporate action data are from Bloomberg LP. Options contact volume is the sum of the 2018 daily average put and call volume of options on the S&P 500 Index, Russell 2000 Index, MSCI EAFE Index, and MSCI Emerging Markets Index. Equity futures volume is equal to total 2018 futures volume traded divided by 252, where annual volume traded is estimated as the sum of monthly volume times month- end contract value for S&P 500 Mini futures, Russell 2000 Mini futures, MSCI EAFE Mini futures, and MSCI Emerging Markets Mini futures. IPO, seasoned equity offering, and share repurchase data are based on Bloomberg corporate actions data and include countries that are eligible for Dimensional investment.
4. Source: S&P Dow Jones.
This article was originally created by Dimensional Fund Advisors. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered. Investment advice or a solicitation to buy or sell securities. There is no guarantee an investing strategy will be successful. Investing involves risks including possible loss of principal. Diversification does not eliminate the risk of market loss. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
MISSION WEALTH CONCENTRATED STOCK SOLUTIONS
Having a concentrated position in a single stock carries unique challenges. Even if the stock has historically performed well, you may want more diversification, and history would suggest that it is wise to diversify. You may have come into a large stock concentration via an inheritance, a position that has performed exceptionally over time, or stock compensation at work (options, RSUs, 10b5-1 plan).
At Mission Wealth, we have the capability to work with clients who are seeking more specialized investment solutions. As a part of our Private Client Solution, we offer concentrated stock solutions. The Exchange Fund allows investors who have at least a $5MM net worth transfer their highly appreciated concentrated stock position into a diversified S&P 500-like fund without triggering capital gains taxes. This allows our clients to diversify their portfolio in a very tax efficient manner.
Every Exchange Fund is different, please reference the prospectus for details prior to investing. Information provided here is to be viewed as general in nature. Investors need to financially qualify for certain transactions or products. Please seek professional advice, including tax and legal.
Converting your IRA to a Roth IRA is a tax planning strategy that may provide significant tax savings down the road. Hopefully by the end of this article, we have explained the components that go into the conversion process well enough to help you determine whether this strategy could be right for you.
Certain parts of this process can at times prove to be difficult and should be left to a financial advisor and/or tax professional.
Below, we discuss the components and rules that govern Roth IRA conversions.
Traditional IRAs are savings vehicles that may have originated from an employer-sponsored plan, such as a 401(k), that was used to defer taxes on the amount you contributed. The money left in these accounts will continue to grow on a tax-deferred basis, which means you are only taxed on the dollars coming out. Sounds pretty good, right? Well, not so fast …
Withdrawals from these accounts are subject to ordinary income tax rates, which means all of the growth will be taxed as ordinary income.
Traditional IRAs are also subject to Required Minimum Distributions at age 70½.
Required Minimum Distributions (RMDs) in IRAs
You are required to take mandatory withdrawals from your IRAs in the year following the year you turn 70½. Failing to plan for RMDs might cause surpluses in your cash flow, which means you could pay more in taxes than you should. Moving your IRA dollars to a Roth IRA is a way to help reduce or possibly eliminate the need to take Required Minimum Distributions after you turn age 70½.
Something else to think about: Leaving IRAs to your children or grandchildren. When a child or grandchild inherits an IRA, they are required to immediately start taking RMDs. While they will be appreciative of the sudden inheritance, they may not be anticipating the larger tax bill they also just inherited. On the other hand, inherited Roth IRAs are still subject to RMDs; however, the money will be received tax-free and does not increase the taxable income of your beneficiaries.
Roth IRAs consist of after-tax contributions and do not allow for a deduction like a traditional IRA does. The major advantage of having a Roth IRA is that both distributions and investment earnings are not just tax-deferred – as with traditional IRAs – but are completely tax-free. There are income limits when contributing to a Roth IRA, but there are no income limits when converting a Traditional IRA to a Roth IRA. Amounts contributed to a Roth IRA can always be withdrawn at any time.
Roth IRAs are also not subject to Required Minimum Distributions.
Roth IRAs are subject to what is called the 5-year rule, meaning in order for your earnings from a Roth IRA to be withdrawn tax-free, they must be withdrawn after age 59½ or at least 5 years after the first contribution is made to your first Roth IRA.
Each conversion you do also has its own 5-year period governing it, with the first or oldest conversion having to be withdrawn first. In other words, after the first conversion satisfies the 5-year rule, any subsequent conversions will satisfy the rule.
Any premature distributions will be subject to a 10% penalty tax.
The pro-rata rule is a common problem experienced when doing conversions and prevents taxpayers from converting solely the non-deductible portion of a Traditional IRA to a Roth IRA. The rule stipulates that the portion of the conversion that is taxable is determined by dividing the non-deductible contributions by the total IRA balances of all Traditional IRAs combined.
If your income exceeds the contribution limits to a Roth IRA, you may be eligible for a strategy called a “backdoor contribution.” This involves making a non-deductible IRA contribution and then immediately converting it to your Roth IRA.
This strategy is best executed when there are no other existing IRAs. This is a difficult strategy and should be done with the assistance of your financial advisor and/or tax professional.
Timing Your Conversions
In years where your income is low, you can take advantage of potentially being in a lower tax bracket and do Roth conversions. Generally speaking, deductions are negligible in lower tax brackets, and it may make sense to make Roth contributions and/or utilize Roth conversion strategies. Another important component of timing is having the cash available to pay the taxes on a conversion.
It is important to also be aware of the adjusted gross income (AGI) thresholds for the Medicare Part B & D surcharge, which can increase monthly premiums if your income exceeds these limits.
How to Convert your IRA to a Roth IRA
Before 2010, Roth conversions had an adjusted gross income limitation of $100,000. The good news is that this rule was permanently eliminated.
Generally, conversions to a Roth IRA should be made up to the limit of your current marginal tax bracket, so you don’t get bumped into the next tax bracket. Roth conversions and non-deductible contributions to a Traditional IRA are tracked on Form 8606.
You can make a direct transfer within the financial institution where your Traditional IRA is held, or you can complete a 60-day rollover, where you can physically receive a check made payable to you and then deposit the amount in a Roth IRA. You have 60 days to complete this rollover or else the amount of the funds withdrawn, minus any non-deductible contributions, will be subject to taxation.
Changes Under New 2018 Tax Law (TCJA)
Prior to 2018, 2017 conversions could be reversed by transferring the converted funds back into a Traditional IRA before the due date of the tax return, in a process called “recharacterizing”.
Due to the new favorable lower federal tax rates and larger tax brackets, converting your Traditional IRA to a Roth IRA just got better.
Asset Location in IRAs vs. Roth IRAs
The equity/stock (growth) portion of your portfolio should be located in your Roth IRA to take advantage of tax-free growth. The fixed-income (income-generating) portion of your portfolio should be located in your IRAs to take advantage of tax-deferred growth.
How We Can Help
At Mission Wealth we will invest in you and your future so that over time – as you accumulate and grow your assets – we can help you achieve your goals and give you greater flexibility. The Emerging Wealth Solution offers the first step toward management, refinement and prioritization of your financial and investment goals. As you experience life-changing events, such as a sudden inheritance, purchase of a home, a new marriage, loss of a loved one or divorce, you may find yourself seeking a trusted advisor to provide financial security and caring advice.
Ultimately, investing for a lifetime is a long road. By avoiding mistakes and missteps early, investing regularly, and with a bit of prudent financial management, the emerging wealthy individual can be well on their way towards a productive future and retirement. Mission Wealth can chart a reasonable course of action to help an individual start down this road with the best foot forward.