What is financial planning?

Dollar Puzzle Piece.jpg

Imagine the scenario: a new prospective client visits our office for an initial consultation, and we ask them what their main objective is for our potential work together. Oftentimes they’ll start by talking about their current advisor or past experience with one. They’ll tell us about the balance of their portfolio and a few even know their asset allocation! But they become really enthusiastic when they move on to what they want to accomplish in their life. They tell us about their family and careers and hobbies and dreams. We love to hear about their biggest accomplishments and what they’re still hoping to achieve. Why does this scenario play out so often? Because planning is so much more than just investing!

 

We believe investment management is a core tool to achieve long term financial goals, and know that the work doesn’t stop there.

 

Can you imagine the amount of stress that would be reduced when you have a workable plan for your money that addresses your current cash flow, your future, and is adapting to your life? We can. We’ve seen the difference it can make!

If your financial advice consists solely of the return on your investments, then you have missed out on the professional guidance and financial peace of mind that a comprehensive financial plan can offer.

A solid comprehensive financial analysis should include at least the following:

Cash Flow Planning:

Do you know how much of a surplus or deficit your household has each month? Do you know the changes you could or should take to meet your and your family’s short and long-term goals? Is inflation factored into these plans?  Good cash flow planning involves not only an emergency fund, but analysis of current and future needs with a solid plan to manage your money in a way that reflects what is important to you.

Cash Flow is the true foundation of any plan. For business owners, income is often inconsistent, so they generally have a good understanding of their expenses but not always on income. For corporate employees, the opposite is often true: they know what they make but can rarely give a detailed record of spending. Either way, without a good understanding of cash flow, it’s impossible to identify how much is available for additional savings, debt reduction, or any other goal you may have.

Retirement Planning:

Everyone’s idea of retirement is unique to them and their family. What do you want retirement to look like and what are you willing to do now in order to make that a reality? A plan is necessary to have a reliable stream of income through retirement assets, maximizing Social Security benefits, and pensions, in addition to knowing what the alternative plan is if one spouses dies or becomes disabled. 

Insurance Planning:

As fee-only financial advisors we do not sell insurance. We evaluate your potential risks and factor them into your financial future. Without considering these risks, your entire plan may collapse with one unexpected event. If you have an agent you work with now, that’s great. If not, we’re happy to recommend one.

Investment Planning:

We believe in keeping emotions in check, good diversification, and low expense ratio investments. Your time horizon and risk tolerance are always considered. We offer a full range of investment solutions and portfolio management services.

Tax Planning:

No comprehensive financial plan is complete without considering the impact taxes will have on various financial scenarios. Which retirement vehicles will place you in the best tax situation now and in the future? Certain investments, cash flow choices, and timing should all be examined for their effect on your overall financial picture. As always, we recommend you consult your CPA.

Employee Benefits/Health Care:

This is often an overlooked aspect of financial planning, but can significantly alter your plans if healthcare costs, employer health coverage, and long-term medical needs are not incorporated in your financial discussions and planning.

Estate Planning

We are firm believers that a good estate plan is a necessity. It’s more than just a will, too! A good plan will include wills, health and financial Powers of Attorney, a health care directive, and potentially trusts.  If your estate plan is in place, we evaluate account titling, beneficiary designations, and other items to make sure your intentions are being taken into consideration with your current situation. If you don’t have an estate plan in place, we’re happy to recommend an estate planning attorney.

And the list goes on! College planning for your kids, student loans, legacy planning –

 

Significant life choices should all be incorporated into

a comprehensive plan that is both practical and actionable.

 

By prioritizing your goals and breaking the plan into manageable pieces, a detailed plan from a Certified Financial Planner professional can assist in mapping out your financial future. Financial planning is an ongoing process that is built around your core values as well as the ever-changing needs and desires for you and your family. This is why we encourage our clients to continue to update us on their changing circumstances.

For the clients that we serve, we are grateful to be part of identifying and implementing planning and asset management strategies that are aligned with your priorities and values. For those of you who have not scheduled a free initial consultation, what are you waiting for? It would be a privilege to help you achieve your desired future. Book an initial consultation here.

 

Is there a leak in your budget?

Leaky Bucket.jpg

January is a perfect time to evaluate your existing subscription services. As we work with our clients, it’s pretty consistent that the small expenses add up, and their overall impact is usually a big surprise.

Review your bank and/or credit card statements for at least the last 3 months. Identify all the subscription services you have: websites, music services, TV subscriptions, phone plans, automatic delivery services, annual credit card fees, gym memberships, etc. If you love them AND you’re using them consistently, congratulations - you can stop here for now!

If you look through the list and realize a few of them could be stopped and you’d never miss them, congratulations - you’re about to give yourself a raise!

Our suggestion would be to identify the savings from cancelling the unwanted/unused subscriptions and start a monthly automatic deposit to your savings account for that amount. That’s a win-win.

One other note - please check your statements even after you cancel a subscription. A client recently told us a story of a subscription they cancelled (they have the email!), but didn’t realize for a few months that they were still being charged. They’re now having a difficult time getting a refund.

Cheers!

 

This is the hard part.

Bear.jpg

It would be nearly impossible to ignore the volatility and recent downturns in the markets. It’s no fun for anyone. Trust me, it’s no fun for us either. Our retirement accounts and business revenues are impacted when the markets are down as well. This is the hard part we all knew would come eventually. Investors have experienced a great run since spring of 2009. It was easy to forget about the normal market cycles when things were, for the most part, going up, up, up. Now that we’re experiencing another market downturn, it’s especially important to remember a few basics about why we invest and what the research tells us about investing over time.

First, no one knows what’s in store for investors tomorrow, next month, or next year. That doesn’t mean there won’t be a countless number of articles written by anyone with an opinion. A few of them may get lucky and be right in hindsight, but that doesn’t mean that they’d get the next prediction correct, or the next. If there was someone that consistently got all the market predictions correct, they would have All. The. Money!

Not even Warren Buffet bats 1000. He’s been very forthright about some of his swing-and-misses. Do you recall Greenspan’s “irrational exuberance” talk? It was made in 1996. It was 4 more years before the market saw a down year. And 2002 when Bill Gross said the Dow would drop to 5000? Even in the middle of the worst market since the Great Depression the Dow never dropped to that level. Then there was Abby Joseph Cohen who was bullish in 2008, even as the crash was happening around her. They are all intelligent and successful people that have worked for decades in the details of economic and market movements and still couldn’t predict well.

So, we won’t try to predict. It may get worse before it gets better, or we may be able to think back on 2018 as just a bad market memory soon. No one knows for certain.

Second, it’s important to take a step back and realize that we can only control what can be controlled. What’s controllable? Our asset allocation, our continued contributions, keeping our fees to a reasonable level, and the information we consume.

We’re often our own worst enemies when it comes to investing. Our own human nature can easily get in the way of a perfectly rational portfolio strategy. It’s easy and normal to feel confident and willing to take risk when the markets are up. It’s also easy and normal to feel a bit of panic and hesitation when markets dip. It’s perfectly normal to feel that way– but acting on impulses rather than sticking with your strategy can hurt long-term results.

I half-joked with a client recently that my job during good times was to remind them it will get worse, and in bad times to remind them that it will get better. That’s obviously too simplified, but there is an element of truth to it. 

Third, remember why we invest. We invest because we want to at least earn a rate of return that exceeds the impact of inflation over time. If we’re willing and able, we can invest to target an even higher rate of return over a longer period of time. We know that risk and return are correlated in a diversified portfolio. If the long-term returns didn’t compensate investors for the risk taken, no one would ever invest.

We’ve all seen the risk tolerance questionnaires and charts. What many of those charts don’t show is the volatility that can occur at any given level of risk. One of our favorite reports does show that! We share it during nearly every client review. It shows a back-test of how the portfolio (or similar) would have performed in several of the last few market downturns. That creates a meaningful conversation, realizing that the future will never exactly replicate the past.

Risk can be measured by a number of metrics, but to keep it simple, we’ll just focus on the top driver: asset allocation. Generally speaking, the higher percentage of equities (stocks) we have in a portfolio, the higher the portfolio’s risk metrics will be, and the higher the long-term expected rate of return will be. By long-term, we mean 10+ years.

Very few investors are comfortable with 100% stocks – for good reason. The volatility that can be experienced is quite extreme and can shake the nerves of even the most risk tolerant among us. It’s true too that very few investors are wealthy enough to put all their money in a CD account and live on the interest, especially at recent rates. So, therein lies the rub. We must find the balance between the risk we’re comfortable taking, and the rate of return we need to realize our goals.

 Here are some statistics that were recently shared via Vanguard:

Chance of a positive return for different time periods:

One Day: 54%

One Week: 58%

One Month: 64%

One Year: 82%

Ten Years: 91%

From January 4th, 1988 through December 31st, 2017 based on Vanguard calculations from Bloomberg.

 

Also, timing the market can prove to be a challenge since volatility means big moves both up and down in short periods of time:

-          Twelve of the twenty best trading days occurred in years with negative annual returns

-          Nine of the twenty worst trading days occurred in years with positive annual returns.

Notes:

·        All investing is subject to risk.

·        Past performance is no guarantee of future results.

·        The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

From Vanguard based on S&P Index daily returns, Dec. 31, 1979 through Dec. 31, 2017.

With just these small insights, we know that the length of time being invested increases the likelihood of a positive return, and that short-term volatility doesn’t tell the whole story and it’s not always predictive. Even more, the best and worst days are often close together (for an example, see last week!).

What can we do with this information?

Evaluate your current circumstances. If you have a solid plan in place now, realize that this too shall pass - eventually. That can feel really tough sometimes! We’re not suggesting completely ignoring the portfolio. Over the last couple of weeks we’ve rebalanced many portfolios and taken some strategic losses (if you have a loss, you may as well take it and save a little on taxes if you can!). It simply means don’t try to out-think the market.

Or, if you’re willing and able to take a little more risk, downturns can offer an opportunity to purchase investments at a lower price.

Either way, stay consistent with the financial basics: keep an emergency fund, reduce or eliminate the interest expense of debt, contribute to savings goals, make the most of employee benefits, be tax efficient, keep a positive cash flow, and monitor needed changes for estate planning and insurance needs.

If you fundamentally feel that your current plan isn’t where it needs to be, and it’s more than just the normal volatility and downturn jitters, then it’s time to create a better plan for your future. We can help with that, and it would be an honor! We love what we do, even in challenging times.

 

 

 

None of the information provided here is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Please work with professional advisors to determine the best course of action for your circumstances.

 

We're Celebrating 4 years!

Celebrating 4 Years!.png

Today marks 4 years since Bridge Financial Planning began, and this year will mark 19 years since starting my career in this industry.

I strongly believe in the value of a comprehensive financial plan and investment strategy. As I thought through building this business and what we would offer to our clients, it was clear that it needed to be a bit different than the standard model. What would I expect for my family if we were in the client seat? That question guides many of my decisions for the Bridge Financial Planning business model. There is a need and a demand for truly comprehensive financial planning and investing that is held to a fiduciary standard with clear pricing. I am extremely proud of what we’re building and thankful for the trust of our clients.

2018 was a busy year for us at Bridge Financial Planning. We moved into our new offices, worked through our first full regulatory audit, and I continued my professional development by completing the exams for a tax designation. Allyson is just a few short months away from completing the CFP experience requirements to use the designation and completed the 2018 FPA Financial Planning Residency at the University of Utah. We’ve also become a Greenlight Certified business dedicated to sustainable business practices. We are dedicated and excited to serve our clients with even more resources in 2019.

What we’re most proud of is what our clients have accomplished! We’ve cheered as a few clients transitioned into retirement. We’ve helped plan for education expenses, growing families, building dream homes, travel, to reduce and/or eliminate debt, to grow their businesses, and develop plans for their future goals.

We’ve also had the honor to work with clients through some of their most difficult times. During times of loss, whether from the death of a loved one, divorce, illness or other big life challenges; having a strategy can help avoid hasty decisions that can make a bad situation worse. It’s a difficult process, but necessary.

We love seeing our clients make progress, whether through celebration or healing. It’s why we do what we do.

Thank you!

Jennifer Harper

 

Don't let the markets derail your plan. Stay focused on what you can control.

iStock-465784826.jpg
 

There is much more to financial planning than standing by watching the market go up and down every day. In fact, if we are keeping our financial house in order, then the market does not seem so scary.

Research tells us that over time, if we properly allocate our investments to align with our goals and timelines, keep our fees low and stick with our strategy, the market is still a good place to put our money. It may be a not-so-thrilling roller coaster ride for the faint of heart these days. But even the faint will not fare well over time by resorting to cash or hiding it under the mattress if they want to keep pace with inflation.

Financial planning is a process – an ever-changing one. We can’t “set it and forget it”. It is a balancing act. There are competing financial demands, needs, and wants that must be addressed, strategically worked into a plan, and then monitored and reevaluated periodically.

This is why financial planning is necessary and never boring. It is essential for every household to take care of the family, protect against the unexpected, and prepare for the future.

Think of a financial plan like a house. A lot of preparation and hard work go into building a house. The foundation is critical; the framework and roof make the house sturdy and prevent leaks; and the details make it enjoyable. However, even after those last details are complete, you don’t move in and never concern yourself with your house again. Life happens – the family grows, needs change, repairs must be made. Life is organic – rarely does anything stay the same and not require an update or revision.

Let’s compare the foundation to cash flow, an emergency fund, and staying or getting out of debt. These are fundamentals that everyone needs to get in place. It is impossible to plan if you do not know how much money is coming in and going out. Whether you are single or a family of eight, it is good to begin with an accurate picture of income and expenses, as well as a balance sheet illustrating what you own and what you owe. An emergency fund would then consist of at least 3-6 months of your expenses, including fixed costs as well as variable ones that happen monthly. Establishing this emergency cushion while digging out of debt helps build the habit of saving and therefore preventing future continued debt. We may not be able change the direction of the market, but we can change the direction we are headed by fine tuning the fundamentals: wisely managing debt, investing prudently, and freeing up cash flow to accomplish our savings objectives.

Secondly, the framework and roof include insurance planning, estate planning, savings for goals, and retirement and education funding. You’ll need insurance to protect everything that has the potential for financial harm: your car, home, health and life. Having estate planning documents in place is equally important due to their huge impact on how health and financial decisions are made, guardianship, wealth preservation, beneficiaries, and end of life directives.

As fee-only financial planners, we do not sell insurance or draft estate documents, but we do look for holes in risk management and your estate plan to give advice that fits a comprehensive plan for your and/or your family’s needs.

Another part of the framework, savings, can be seen as different buckets assigned to short, medium and long-term goals. How you invest these buckets of money depends on the time horizon for your unique goals. How to allocate between them and how much risk to assume helps determine the appropriate investment strategy. If you have decades before your newborn goes to college or before you retire, you can take on more risk. Part of the financial planning process is balancing your goals so that one goal, such as college for children, does not highjack another goal, like your retirement. Then reviewing your accounts each year to see if they still match your goals – remembering that life is organic, and we must adapt. 

Lastly, there are dreams and legacy planning for the finishing touches. The relationship between financial planner and client must be one of trust, transparency, and clarity. Only then can there be a cooperative effort to move past covering the necessities to what truly matters to you. Do you want to start a new business that you’ve been putting off? How about your desire to give to needs or purposes dear to your heart? Is there a place where you want to visit or invest a part of your life? How about the legacy you want to leave for family? Those finishing touches make your house a home; and enjoying your life is the fruit of your labor.

Imagine how it would feel to have the peace of mind of a plan in place, and options and choices available when life takes a detour.

Yes, the market may be turbulent, but there is plenty of financial planning to do while we ride the peaks and valleys. And with progress in other areas, it just may make the ride a little less frenzied.

 

How to Turn Your RMDs into Charitable Gifts and Save Taxes

Charitable Giving iStock-1002362042.jpg

Over 70 ½? Have a traditional IRA? Give to charities? We have 3 words for you:

Qualified Charitable Distributions.

 

Most people give because they are passionate about a cause or they want to make an impact for good, not for a financial incentive. Nonetheless, if you desire to give, why not do so with money that you must take out anyway.  If you are fortunate enough to not need all your required minimum distributions for living expenses, or if you are planning to give out of your normal expenses, you can avoid income tax on your required withdrawal by donating your money directly to a qualifying charity.

 

Let’s review the rules for qualified charitable distributions:

·       You must be 70 ½ or older to make a tax-free charitable contribution.

·       You must give from your IRA subject to RMDs, not a 401k or similar type of retirement account. Inherited IRAs are eligible, but SIMPLE IRA and SEP plans are excluded.

·       If you are age 70 ½ or older, you can transfer up to $100,000 per year directly to an eligible charity; if you file a joint tax return, your spouse can also contribute up to $100,000 for a total of $200,000 from retirement savings excluded from income tax treatment.

·       The charity must be a 501(c)(3) organization.

·       The gift must be transferred directly from the IRA by the IRA trustee to qualify. If you withdraw it and later donate it, it will not qualify for a tax-free qualified charitable distribution.

·       You must make the contribution by December 31.

 

So, for a retired individual or couple that is 70 ½ or older, own an IRA subject to required minimum distributions, and want to donate to charity, a qualified charitable distribution can be an avenue to preserve an income-tax-reducing charitable deduction under our new tax law.

 

Why make a qualified charitable distribution (QCD) instead of a normal charitable gift?

 

The new tax law will see fewer people taking advantage of itemized deductions such as mortgage interest and charitable gifts due to the doubling of the standard deduction possibly being a greater amount. If you do claim the standard deduction, you unfortunately lose any tax benefit from your charitable gift. With that said, a QCD will first count towards satisfying your required minimum distribution for that year.

 

Secondly, the distribution is excluded from your income, thereby reducing your taxes, which is a real benefit under the new tax law. And an additional bonus of using this strategy is it helps reduce your Adjusted Gross Income. This is important for several reasons. Your AGI determines the amount of your Medicare premiums in the following year, how much of your Social Security is subject to income taxes, and if you will be subject to the Net Investment Income Tax. Reducing your Adjusted Gross Income will help with each of these areas to lower overall income and/or taxes.

 

A few examples might help to clarify:

 

·       Kathy, a single taxpayer, has reached 70.5 and is subject to a $25,000 RMD from her IRA for 2018. Her itemized deductions will not exceed $13,600 so she will use the standard deduction. She does not need all her RMD for living expenses and usually gives around $6,000 to charities each year. Kathy will make $6,000 in qualifying charitable gifts directly from her IRA and then take the rest of her RMD as a taxable distribution for herself. Kathy meets her full RMD requirement but will only owe tax on $19,000. She therefore receives the tax benefit of a $6,000 charitable deduction.

 

·       John, a 71-year-old, has an IRA worth $750,000 as of December 31, 2017. His RMD for 2018 would be $28,302 based on the RMD table which requires the $750,000 to be divided by a factor of 26.5. John decides to use all his required minimum distribution to fund his charitable gifting. If John is in the 25% marginal tax bracket, he could avoid approximately $7,075 in income tax liability through giving.

 

As you can see, for an individual or couple who are in the 25% tax bracket, even a $1,000 donation can save $250 in taxes. You can also break up the donation and send it to multiple 501(c)(3) organizations. There are no IRS limitations on how many or how small the distributions may be to your favorite organizations if you provide the name, address, and other specific information for the charities.

 

There are other planning strategies for charitable gifts. It may be possible to bunch itemized expenses into one tax year to enable you to itemize in some tax years while claiming the standard deduction in other years. You may also be holding securities with large unrealized gains. By donating the securities to charity, you can benefit by avoiding capital gains, especially if you are able to itemize in that year.

 

A good plan can take your good intentions and create a winning strategy for you and your non-profit of choice!

 

A brief introduction to Impact Investing.

Globe in Hand.jpg

Impact Investing – you may think it’s a new buzzword, but it’s nothing new. It has been around here in the U.S. since the 1700’s and there are many examples of specific investment mandates by many religions for millennia.

Many investors want to be sure their investments are aligned with their values. In recent years, these strategies have become more prevalent. It’s always important to keep the core principles of investing (like diversification, risk management, and fee management) at the center of portfolio construction, and thanks to more options in the last several years, that’s more possible than ever before.

Here are some common impact investing strategies:

Most people would choose to use mutual funds and/or ETFs to achieve broader diversification than what most investors could achieve by using individual stock or bond holdings, so we’ll focus on mutual funds and/or ETFs for now.

Impact Investing is a broad term that is a bit of a catch-all for the category. Within it, you can have any number of screens to determine the right investment strategy to have the impact you’re looking for.

Impact investing may be as simple as choosing to shop locally, or purchase items from businesses that support or advocate for causes that are near and dear to you. It can also mean choosing to invest in companies that share these values and put them to work in their own business practices.

Socially Responsible Investing

The most common form of this kind of investment uses a negative screen to pull out industries associated with alcohol, tobacco, and gambling. Some may also screen out firearms or companies involved with the production of weapons.  There are others that may use a positive screen to invest in companies that have certain worker policies, or show dedication to human rights.

For example, if you’re interested in learning whether a certain fund invests in firearms, there’s a site that will tell you: https://goodbyegunstocks.com/

Sustainable Investing

Many investors are interested in choosing businesses that promote environmentally friendly business practices, promote preservation, or have governance practices that are aligned with sustainability. These goals may be accomplished through a variety of means, depending on the industry or business involved. It could be a company that offers carbon offset credits, or purchases them for their own activities. It could be a paper company with strong practices tied to the sustainable harvesting practices of timber. There are companies that are focused on developing new advances in solar, wind, or water energy. There are a number of ways to invest in sustainable businesses.

 

Today there are more choices than ever before, which can be both good and bad. Good, because more specific screens can be applied to reveal investments that are aligned with specific values. Bad, because it can be difficult to decode all the language different investment companies use to develop those screens. 

Each fund manager can choose how they develop the appropriate screens for their fund, so it’s important as an investor to understand the differences of philosophy on how companies are included or excluded. For example, one fund has decided to base their screens on percentage of revenue derived from the exclusion list parameters. So, if a company still sells the offending item, but derives less than 10% of revenue from it, the company may still pass the test and be included in the fund.

 

We work with our clients to determine the best portfolio for them. It may not always include any of these options, but when it does, we’ll help guide the process to be sure there’s a good match!