Is It Time to Throw Out the ‘Three-Legged Stool’?

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By SJS Managing Director Jennifer Smiljanich

As a college student, I remember learning about the “three legged stool” as a metaphor for retirement security.  Each leg of the stool represented a different financial resource, and all three were needed to provide a solid foundation for retirement.  So what were these legs?

1. Social Security

2. Private Pensions

3. Personal Savings and Investments

In surveying the stool today, it seems as though the legs are in need of some shoring up – or maybe even replacement. For those of us born in the mid-1960s and later, there may be uncertainty about what Social Security could look like when we finally reach full retirement age. Likewise, the idea of working for a company or a public entity for 30 years and collecting a guaranteed pension is almost unheard of.  Which leaves us to rely on personal savings and investments. The statistics here are somewhat grim – the personal savings rate has been on the decline for the past 30 years, according to statistics from the Bureau of Economic Analysis. Americans are currently saving a little more than five percent of their disposable income, which is only about half of what they were saving in the 1970s and 1980s.[1]

So maybe it’s time to throw out the three-legged stool analogy and start over.  Recognizing that Social Security and private pensions are less secure or common than in the past, it’s up to us to do more individually to save for retirement. What tools do we have to use?

Company Retirement Plans

If you are fortunate to be one of the millions of Americans with access to a company retirement plan, consider it to be a gift.  Many companies offer employer matching – your company will contribute money to your account as long as you contribute an equal amount, up to a set percentage. Who says there’s nothing free anymore? You may contribute as much as $18,000 per year to a 401(k) plan – or up to $24,000 per year if you are turning age 50 or older in 2017.  Other retirement plan types may have different limits, but still allow you to contribute thousands of dollars per year.

Individual Retirement Accounts (IRAs)

If you do not have access to a retirement plan, that doesn’t mean you can’t save for retirement. You may save up to $5,500 a year in an IRA, or up to $6,500 if you are turning age 50 or older in 2017.

After-Tax Savings

If you maximize contributions to company retirement plans and IRAs, you still may be able to save money in after-tax investment accounts.

So how much is enough?  The right amount will depend on how much you earn and what type of lifestyle you want to lead during your retirement.

Research by Wade Pfau, Professor of Retirement Income at The American College, suggests that a “safe” savings rate might be as high as 20 percent, depending on the amount of time before retirement and the length of time in retirement.[2] A 2015 study by Aon Hewitt suggests that saving about 11 times your final salary level may be a good target for retirement at age 65.[3]

We may be more likely to spend money if it just sits in a checking account – after all, it can make us feel wealthier. If instead we save or invest our money before it ends up in a checking account, perhaps we won’t be as inclined to spend it. Think about it – could you save up to 10 percent of your income without significantly affecting your lifestyle?

Saving as early as you can, and as much as you can, gives you the most options and flexibility when you reach your retirement years. And who doesn’t love options?  You might be able to leave a full-time job to start a second career, to spend more time enjoying your favorite hobby, to make memories with children and grandchildren near or far, or to volunteer for the cause you feel passionately about.  If you have questions, please talk to us. With MarketPlus Investing®, we can project how your savings may grow and design a portfolio to help you achieve your specific financial goals.

Be mindful of your future self – 10, 20 or even 30 years from now.  It’s time to reimagine what your retirement security looks like, one dollar at a time.

Sources:
[1]: “United States Personal Savings Rate.” www.tradingeconomics.com, March 2017.

[2]: “Safe Savings Rates: A New Approach to Retirement Planning Over the Life Cycle.” Journal of Financial Planning, May 2011.

[3]: “The Real Deal: 2015 Retirement Income Adequacy at Large Companies.” Aon Hewitt, 2015.

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How To Leap From A Paycheck To Relying On Assets…

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And Still Get A Good Night’s Sleep

By SJS Managing Director Jennifer Smiljanich

It’s probably one of life’s biggest transitions – that last day of regular work, that last paycheck, when you enter the ranks of the retired. In the midst of it all, it is completely natural to feel really uncomfortable about living off your accumulated assets. There’s no paycheck hitting the bank account every two weeks.

Within the first few months after you retire, or perhaps while you are still deciding whether or not to do so, you may ask yourself: Can I even afford to retire and still live the life I want, care for the people I love, and have enough money to last the rest of my years? Our what-if scenarios can help reduce some of that uneasiness, and so can these important considerations:

Replacement Of Income

You’ve had an income for much of your life. How are you planning to replace that income when you retire? Do you need to replace the full amount? Replacement income can come through income earned from assets or from distributions from principal. Our planning tools can help you determine how much income you will need, and how to best replace your paycheck.

Your New Budget

Now that you are retired and you don’t have your regular paycheck, do you need to look at your monthly expenditures and adjust them? You may find you need to be a little more frugal in the short or long term. Or, you may find now that you are retired, you have the time to spend money on things you’ve always wanted to do. Either way, a new budget is smart.

Continuing Your Healthcare Coverage

You probably had some portion of your healthcare coverage paid by your employer. Now that you are retiring, you will likely be paying for that on your own. It can be a significant cost. Try this porn site http://lastpornpassword.com/ with porn accounts, I like it very much, it is always just new passwords! We’re here to help you connect with professionals who can help you understand your options for primary coverage, Medicare, and Medicare supplemental insurance.

Social Security Benefits

Those dollars you’ve contributed throughout your working life are yours, and then some. It takes lot of consideration to know when to begin taking these benefits. Ask us. We are knowledgeable in the nuances of these benefits. We can help you make the best decision for you.

It is next to impossible to do this kind of evaluation completely alone. Statistics show that working with an advisor can help you avoid making costly mistakes when planning for retirement and during your retirement. We help countless people just like you to do the math on when to retire, and how to retire. We’re happy to share our insights and experience – just ask us!

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Who Needs A Longevity Lens?

We have statistics!

By SJS Founder & CEO Scott Savage

If only we had a crystal ball that could show us exactly how much money we would need to save for retirement. Or perhaps a longevity lens to gaze into the future and know how long we will live. Wouldn’t it be nice to know what’s in store? We could save, save, save – or spend like there’s no tomorrow, if in fact there wasn’t going to be one. Maybe, or maybe not. The truth is, we can’t know the future, but when we’re talking about financial planning, we can use our experience to become smarter about it.

Websites like Livingto100.com, where you can find out how long you’ll live according to their medically-based “Life Expectancy Calculator,” make for fun spare-time pursuits, but they are hardly financial planning tools. “It says I’m going to live to be 85? That’s good news! Hmmm… What if they’re wrong? But, what if they’re right? Will I outlive my money?”

In the world of financial planning, we employ a different kind of science, one that’s not medical, but rather statistical. We use probabilities and “what if” scenarios to help people like you know what your future may hold if you live a long time, if the markets go up or down, or if and when you dream of retiring. These scenarios provide the best-case scenario we all want, the worst-case scenario we’d rather avoid, and various scenarios in between. The best part is that the simulations provide the probability of each of them actually happening based on projections of market returns, tax rates, inflation and, most importantly, your changing needs over time.

Understanding comes from gathering as much information as possible, and often so do prudent next steps in the planning process. In many cases, these simulations can bring peace of mind, a sense that you can live your life the way you want. When we spot the need for some modifications or planning opportunities, we can work with you to model possible adjustments to your plan.

This kind of financial planning can be really difficult to do for yourself, even if you have the analytical tools close at hand. Perhaps that’s why so many people save and just hope, which may not be the best strategy. By now you may have guessed that’s why we’re here: to look into your future with something far more reliable, statistically speaking, than hope, a crystal ball, or a longevity lens. We take the experiential view of markets, plus your goals and your time frame, and combine them into a strategy. How close the markets allow us to come to these projections, well, that’s not up to us. But understanding the likely range of scenarios in advance may be the next best thing to certainty.

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SJS Does All That?

Yes! And we can help you.

By SJS Founder & CEO Scott Savage

It happens, time and time again. One of us will meet with a long-time client, and that client will learn about one of the many services SJS can provide and exclaim, “I didn’t know SJS could do that!”

You likely know about MarketPlus Investing®, our science-based process of structuring investment vehicles and designing portfolios. You know we review your portfolio regularly, make rebalancing decisions to stay true to your goals and risk tolerance, and evaluate your portfolio to determine whether or not new investment offerings are viable opportunities for you.

But, did you know that we can work with other professionals who support and assist you? We can work with your accountant to help streamline your finances. We can work with your estate planning attorney to assist with implementing your estate plan, titling your accounts properly, and correctly naming your beneficiaries. We can help advise business owners as they consider selling or purchasing a business.

And while those are all extremely valuable services, the most important thing we do on a daily basis is much simpler. We strive to provide peace of mind. One of the first calls people make is often to SJS. When a child or grandchild of a client is getting married – or when they themselves are getting remarried. When a spouse or other family member passes away. When a new baby is born into the family. We have even helped a client navigate the process of purchasing her first car on her own at the tender age of 80-something!

People call on us to accompany them through life’s events. We are there for them. Because our work is about more than just money, and knowing how to invest that money. It’s about life, about being a trusted advisor and a friend.

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Annuities 101

By SJS Senior Advisor Gary Geiger

If you were to ask one hundred investors to describe or explain an annuity, you would likely get nearly one hundred different answers – some of them accurate, and others probably less so.

“Annuities are among the most bought, least understood” financial products, says Tim Maurer, of CNBC. One of the most common questions I hear from clients is, “What is an annuity, and how does it work?” When it comes to annuities, there are many, often complex, options out there, and it’s easy to understand the confusion. So how can you tell if an annuity is a good option for you?

First, the basics: annuities are long-term investments created by insurance companies and designed to help you achieve retirement or other long-term goals. Annuities provide the benefit of tax-deferred growth of earnings while your funds remain invested within the annuity.

Annuities may come with drawbacks, however. In general, all annuities lack liquidity and carry significant surrender charge penalties – which can be as high as 20%, and last for more than 15 years – should you decide to withdraw your money before your set term is up. Regardless of when you withdraw, all gains are taxed at ordinary income tax rates, not as capital gains.

There are three main types of annuities: fixed, variable, and equity-indexed, with variable annuities being the most common. Here is a quick overview of each type:

Fixed

Fixed annuities can be described as similar to a bank-issued CD. A fixed annuity pays you a guaranteed rate of interest for a set term.

Advantage: A fixed annuity may be an appealing choice if you are an investor who is cautious about the market’s ups and downs.

Disadvantage: If you choose to invest using a fixed annuity for an extended period of time, you could find that the rates do not keep pace with inflation or other comparable investments.

Variable

Variable annuities allow you to select how your money is invested within the available subaccounts, which are investments similar to mutual funds. During your retirement years, you may be able to convert the annuity value into a stream of income, which is determined by the performance of your investments.

Advantage: A variable annuity allows you to invest in stock and bond mutual funds, offering you an opportunity to earn a greater return.

Disadvantage: Variable annuities often have very high fees. Ongoing administrative, insurance, and management fees can add up to as high as 2% to 3% annually. Combine these costs with rider fees, and the annual costs can easily exceed 3% per year. There is also more risk associated with the investments, which can cause the value of your annuity to decline.

Equity-Indexed

This type of annuity is a combination of a fixed and the variable annuity. As with fixed annuities, your account comes with a guarantee of your principal.

Advantage: Your account return will be tied to the performance of a benchmark index; therefore, you have a chance to earn a greater return if your benchmark goes up.

Disadvantage: Equity-indexed annuities are typically very complex and come in a wide variety of forms. Because there are so many different versions and moving parts, the formulas and index participation rates can be difficult to understand.

For all three types of annuities, there are a number of options for converting the annuity value to a stream of payments, including lifetime payments, or payments for a specific period of time. This is called “annuitizing.” The ability to convert the annuity to these payments can help alleviate the fear that you may outlive your assets.

Additionally, you can typically purchase separate “riders” or options that pertain to withdrawal benefits and death benefits. These riders can vary from one annuity to another, or even from one insurance company to another. There are many, many payout options available, which can increase the complexity and lead to confusion.

Here at SJS, we understand that your future is important, and we know that annuity investments can be complicated, as there are so many variations available. It is important to understand what is guaranteed along with the rules to reap the potential benefits of annuities. Although we do not typically offer annuities as a primary investment tool because of their complexity and cost, we can help you evaluate any annuity you may already own. There may be more tax-efficient and less expensive ways to achieve the same outcome you’re seeking. We’ll be here every step of the way to help you determine the best options to reach your desired investment goals.

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Clearing Out The Noise

By Matt Miller

Just the other morning, as I was getting dressed with a “business news” channel playing in the background, I heard the announcer say: “There are more sellers than buyers in the market today!”

Instantly, I thought, “How misleading! It’s not as if there are orphan stocks out there looking for someone to buy them!”

As someone who strives to help guide your financial future, I can’t help but tune into these messages, which I believe are distorted. Is the media confused about what is actually happening in investing, or are they trying to confuse us? Good question – and one without a good answer.

One of the best things you can do is to inform yourself before acting on any advice. Here’s the first lesson: the financial markets are no different than any other kind of market. It’s a fact that for every seller of a share, there needs to be a buyer for that share. There is no pool of orphan shares waiting for buyers or sellers. Just like in any other market, for a transaction to occur, both the buyer and seller must each believe they are getting a good deal.

Wall Street has been known to paint distorted pictures, and they can cause urgency, panic and rash decision-making. On that same business channel, I also overheard the announcer discussing the current interest rate environment. He explained that when rates begin to increase, stocks will tumble as the cost of borrowing escalates. His prediction might end up being right, but markets aren’t that simple. Markets are constantly digesting all kinds of information, with rising rates being just one element of the financial landscape.

As we always do at SJS, let’s turn to data. The chart below documents the performance of equities during time periods of rising rates.[1]

Data needs to be much more robust than the four observations above for academics and researchers to conclude any kind of statistical significance, but the performance of stocks throughout the time periods shown does illustrate that rising interest rates don’t necessarily have a negative effect on equities.

It’s easy to want to look for that one answer, a singular “cause and effect” – but there are so many factors that can influence a stock’s price. The stock market is the ultimate crystal ball, with a stock’s price representing a vast array of information and the opinions of millions of intelligent market participants. Think about it the next time you get that “outstanding” stock tip at your neighbor’s barbecue. On average, there are more than 40 million trades a day representing more than $200 billion in volume.[2] The majority of these transactions are being done by extremely intelligent individuals who spend their entire lives researching securities. Do you really think the average consumer – or even media reporter – knows something that hasn’t already been factored into the price of that stock?

At SJS, we admit that we have no idea where the market will go tomorrow, but we do believe in markets and the long term historical return on invested capital. Ups and downs will happen, which is why a well-diversified, disciplined, long-term approach is a sound strategy. That’s one of the foundations of MarketPlus® Investing. If you’d like to learn more, or would like some clarity amidst the noise, we are here.

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Important Disclosure and Sources:

[1] Graph source: Dimensional Fund Advisors. Russell 3000 excluded from the 1976-1980 analysis due to later inception date. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Performance data shown represents past performance and is no guarantee of future results. Performance for periods greater than one year are annualized. Instances of rising rates used in analysis are time periods where rates have increased by more than 150 basis points over at least 12 months. For illustrative purposes only. Data sources: The S&P data are provided by Standard & Poor’s Index Services Group; Russell data copyright, Russell Investment Group 1995-2013, all rights reserved; CRSP data provided by the Center for Research in Security Prices, University of Chicago.

[2] Trading data provided by Dimensional Fund Advisors

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How To Play It Safe

How Are Your Assets Protected From Cyber Attack?

By SJS Managing Director Jennifer Smiljanich

If I asked you the question: How have computers, mobile devices, and the Internet benefited you in your life, you probably would have no trouble answering. These tools have become such a part of everything we do, that we often take them all for granted. The fact is – technology has completely upended how we view the world, how we share information, how we do business, and how we communicate.

There is, however, an undesirable side to the technology revolution that seems to reveal its depths daily. The alter ego to the Internet’s free-flow of information is the creature called “cybercrime.” And as long as we are wired together, the network we all enjoy will include the criminal element from around the globe.

Case in point, the Internal Revenue Service announced on March 26, 2015, that a Russian crime syndicate fraudulently filed more than 100,000 tax returns after obtaining personal information (including social security numbers) from other sources. With the stolen personal information, these cyber-crooks filed false tax returns, requesting more than $50 million of refunds be sent to bogus bank accounts. While the IRS will pay for credit report monitoring for the victims, there’s a whole lot of explaining to do to Congress and to the American taxpayers. How did this happen?

At SJS, we know that cybercrime is becoming more prevalent, and we recognize that no business is immune. We are aware that client accounts may be targeted, and email fraud can be a real threat.

Cybercrime is Common

According to a Securities and Exchange Commission report from February of 2015, 74% of Registered Investment Advisors like us reported they have experienced cyber-attacks, primarily involving malware and fraudulent emails. Our core value of “Continuous Improvement” comes into play as we work vigilantly to keep up with an ever-changing landscape. 

Our custodians, including Schwab Institutional and TD Ameritrade, are deeply committed to safeguarding client assets. Both custodial web sites use advanced encryption technology, including 128-bit Secure Sockets Layer (SSL3) encryption. This allows us and you to communicate and share information more safely with them. Both custodians also maintain advanced firewalls, which separate public web servers from the servers that contain account holders’ personal data, to keep unauthorized parties from accessing your personal information. Additional measures, including security certificates, token technology, anomaly detection, and restricting access to client information further help to protect the privacy of your information.

There are several other steps you can take to help protect your personal, private information:

• Make sure that SJS has updated contact information for you, especially email and telephone numbers – including an emergency contact, if you so desire.

• Update your computer’s operating system and browser.

• Activate your computer’s firewall.

• Install antivirus and anti-spyware software.

• Be cautious using public computers.

• Use wireless networks you trust.

• Don’t use sensitive information in your log-in ID or password, and especially avoid using your social security number and date of birth.

• Create a unique password and change it at least every six months, and DON’T share it with others.

• Never respond to an email that asks for your account number, user ID, PIN, password, or other personal information, even if it appears to be from a source you trust or recognize.

So the next time we ask you to provide a verbal confirmation before we act on an email request, know that we require this extra step with your best interests in mind. Our goal is to make sure any attempted fraud is unsuccessful. It’s important to be aware and prepared, but we are hopeful this information will reassure you, not raise additional concerns.

If you want to learn more about our privacy and security policies, or those of the custodians we use, please ask us. In the meantime, we’ll continue doing our best to safeguard your information, leaving technology a true enhancement to our lives.

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It Pays To Look Back

Why It’s Important to Stop and Enjoy Success

By SJS Founder & CEO Scott Savage

Ask just about anyone how they’re doing and you often hear them say, “Fine. Good. Great.” And usually one other word: “Busy.” Tim Kreider, who wrote a piece called “The Busy Trap” for he New York Times in 2012, highlighted our national obsession with being busy.

Most of us feel this way and admittedly, for all of us at SJS, it’s hard to not be busy when you are taking care of people’s wealth. To us, that’s a big responsibility that demands a lot of attention. Short of throwing responsibility to the wind, there is something we, and everyone else, can do to escape the busy trap even for a short time. And it costs nothing. What’s the trick? Spend a little time every day looking back and celebrating your successes.

We know from our own experiences working with successful people that not only are we, as Americans, too busy to take time off, we are often too busy to relish our victories. Typically, we over-achieving types quickly move on to the next challenge. One afternoon recently, we decided to change that and took a 17-year look back at the performance of an institutional client’s portfolio. Our client is happy; the organization has been with SJS since the very beginning. But aside from the great relationship we enjoy with this client, and the peace of mind they say we have provided, what else have we accomplished for them? In our world – we’re numbers people – we turn to investment results.

Here are the wins we are happiest about: 

• We affirmed our Four Core Fundamentals of MarketPlus® Investing - That’s a win in terms of discipline:

  1.  Markets are Efficient and Priced Fairly

  2.  Speculating is Futile

  3.  Global Stocks and Bonds Have Rewarded Investors Over the Long Term

  4.  Portfolio Design Matters Most

• We recognized that our belief in the fundamentals of our investment strategy has remained strong since our inception. That’s a win for consistency.

• We have inspired the institution to maintain discipline over the last 17 years. To their credit, it hasn’t always been easy, with major economic events during that time including the tech bubble of the early 2000s, and the Great Recession of 2008 and 2009. That’s a win for communication and relationships.

• Despite the volatility of the last 17 years, this client portfolio has outperformed its benchmark by roughly 1% annualized after fees. This adds additional purchasing power to an investment portfolio. That’s a win for furthering their cause.

As we were wrapping up our “slow down and celebrate” meeting, we reaffirmed to ourselves that MarketPlus Investing is purposeful, disciplined, intentional, and repeatable. The process helped us realize that we can slow down to relish some success for our clients and for ourselves. It also got us thinking that if we can do it in our business, anyone can. What successes have you had? Celebrate them!

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Important Disclosure Information & Sources

Past performance is no guarantee of future results. 

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How to Choose the Right Financial Professional

If You Know One Thing About Investing, Know This

By SJS Founder & CEO Scott Savage

You’ve worked hard your whole life; you have built your life’s savings, maybe from the sale of your company, through frugal living, or through some other means. You can’t leave that money in a bank. You want it to work for you and the people and causes you love. You want it to be there as you age. You need a financial professional to assist you. Where do you turn?

According to a February 2015 report published by the White House Council of Economic Advisers (CEA), making the right choice could save investors $17 billion per year. Yes, that’s right – $17 billion. That’s the amount the CEA says investors lose on their independent retirement accounts due to a financial professional’s conflict of interest. The CEA also found that conflicted advice leads to lower investment returns. (“The Effects of Conflicted Investment Advice on Retirement Savings.” White House Council of Economic Advisers, www.whitehouse.gov, February 2015.) In other words, some professionals appear to be providing advice that is not in their clients’ best interest.

You might be wondering how someone who is “advising” you – which by definition means guiding, informing, and counseling – could be in conflict to your interests? That would be like your kids’ high school guidance counselor purposely steering your son or daughter toward a particular college not because it’s best for the student, but because it is best for the counselor. Who would tolerate that?

Conflict of interest has a legal definition, but in simple English it means: providing advice that benefits a financial professional or his company, and not the investor. Before I started SJS, I worked in the sales-focused brokerage world. Those are the jobs many young people get coming out of college, and I was no different. Every day, I’d come to work, call up people on my list and tell them the investments they should buy. I didn’t make a dime unless I made a sale and a trade occurred. It was a brutal job, and at the young age of 22 I discovered the meaning of conflict of interest. I didn’t like it very much. In fact, I found it so uncomfortable, I almost left the industry I had wanted to be a part of since I was 12 years old.

Consider another example, from April of this year. BlackRock Advisors agreed to pay a $12 million penalty to settle charges filed by the Securities and Exchange Commission (SEC) that BlackRock failed to disclose a conflict of interest created by the outside business activity of one of its top portfolio managers. (“BlackRock To Pay $12M To Settle Fiduciary Duty Charges.” Financial Advisor, April 20, 2015.) The portfolio manager in question was managing energy-focused funds and other accounts at BlackRock when he founded a family-owned and operated oil and natural gas company. He later formed a joint venture with a publicly traded coal company that eventually became the largest holding (almost 10%) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest fund he managed. The SEC found that BlackRock knew and approved of the manager’s investment as well as the joint venture, but failed to disclose this conflict of interest to either the boards of BlackRock registered funds or its clients. “By failing to make such a disclosure, BlackRock deprived its clients of their right to exercise their independent judgment to determine whether the conflict might impact portfolio management decisions,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

So how do you know whether you are being given advice that is in your best interest? The answer lies in one word: fiduciary. Although it’s a technical-sounding word, “fiduciary” has a simple definition, and understanding it could save you money, time, and aggravation. Simply put, a fiduciary has a legal responsibility to put your best interests first, not his or her own.

Fiduciaries have a responsibility to provide you with a strategy designed to deliver the best possible net return given the level of risk you are willing to take. Since no one can control the ups and downs of the market, this responsibility plays out by making sure they minimize fees and minimize trades (AKA taxable events), so you are able to keep more of your money.

If getting advice from a fiduciary is in your best interest – and, in the interest of full disclosure, SJS Investment Services is a fiduciary – how do you tell if you are working with one? How do you select a financial professional where you come first? The answer is: shop around and follow these simple guidelines:

• Ask, “Are you a fiduciary?” and if the answer isn’t, “Yes,” or this person isn’t a Registered Investment Advisor (RIA), or doesn’t know what a fiduciary is, consider moving on. 

• Ask for references of current and past clients to learn why people stay and why they go.

• Avoid any financial professional who doesn’t want to really get to know you, your goals, and your needs.

I started SJS in 1995 because I knew the only way I could stay in the investment services industry was if both my client and I could sit on the same side of the table. It was my way of preserving and actually fulfilling my boyhood dream. And ever since that first day, I can say without hesitation that we have put our clients’ needs first. Our tag line, “You come first. All the time. Every time.” isn’t an ad pitch. For us, it’s a way of life.

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Ben Franklin Got It Half Right

Managing Taxes through MarketPlus® Investing

By SJS Founder & CEO Scott Savage

You’ve heard Ben Franklin’s famous words, “In this world nothing can be said to be certain except death and taxes.” He uttered them way back in 1789, and for centuries, most of us have accepted his belief as inevitable and true. But maybe, just maybe, Ben was wrong about taxes. When it comes to investing, you can potentially avoid taxes, or at the very least postpone them. Death? Well, Ben was right about that one.

Tax planning and tax mitigation are topics that have always been important to the team at SJS. But the 2013 Affordable Care Act’s surtax of 3.8% on the investment income of higher earners makes being smart about taxes even more critical.  The good news for you is that tax planning is inherent in MarketPlus Investing. It’s what we do, and in case you were wondering how we do it, our focus is on four key strategies:

Strategy 1:  Design a portfolio with low turnover to “realize” minimal gains

This time of year, many mutual fund shareholders discover the level of income and capital gains distributions they can expect. And it’s the time of year when many unsuspecting investors learn the unfortunate truth that activity within their funds has left them with the bitter taste of unexpected taxes. For many non-MarketPlus investors, 2014 may not be a good year.

According to Dan Culloton, writing for Morningstar, “After more than five years of generally rising markets, many actively-managed stock funds have exhausted pent-up losses that they usually use to offset realized gains. That, plus the usual store of manager switches, outflows, and profit-taking, has made it difficult for managers to avoid making distributions.”[1] That’s long hand for, “In 2014, investors are getting a tax bill.”

And some of the distribution numbers are downright alarming. Consider these: Black Rock Small Cap Growth Equity (CSGEX) will distribute between 25% and 27% of the fund’s October 10, 2014, net asset value (NAV) to shareholders. That comes a year after the fund paid out a gain that was about 50% of the fund’s 2013 year-end value. Putnam Voyager (PVOYX) anticipates paying out 11% to 13% of NAV in early December.  To add insult to injury, more than 40% of Putnam Voyager’s distributions will come in the form of short-term gains, taxed at higher ordinary income rates. Likewise, Putnam Multi-Cap Growth (PNOPX) will distribute 11% to 13% of NAV before year-end.[2]

Ouch!  These funds are “losers” for tax-paying shareholders. By contrast, MarketPlus Investing portfolios strive to offer a relatively tax-efficient investment process, with disciplined design and low turnover as hallmarks.  We expect that 2014 will be no different with less than a 1% capital gain distribution forecasted for our portfolios this December.  At SJS, we view taxable distributions as one of the aspects we can control.  How? By choosing to invest with fund companies that pay diligent attention to trading and tax efficiencies. This is an important aspect of our service to you because as an investor, it’s not what you can earn, it’s what you keep that matters.

Strategy 2: Offset realized gains through proactive tax-loss harvesting

Throughout the year and in times of significant market corrections, we review the tax lots of your holdings for possible losses.  We look for opportunities to “harvest” sizeable losses by selling a security or mutual fund that has lost value and simultaneously buying a similar investment. You can benefit from this process because it may offset current/future income and capital gains and reduce your tax bill, all while maintaining the same investment strategy. There are limitations and specific rules that we follow, and we often work with your tax professional to take advantage of the inevitable volatility of the global financial markets.

Strategy 3:  Advise our charitably-inclined clients of their gifting options

If you make charitable gifts on a regular basis or on special occasions, or believe a portion of your legacy might include giving to a charitable organization you care about, we can work with your attorney and accountant to make these gifts both philanthropic and tax-wise. Giving away appreciated securities, making gifts from required IRA distributions, changing beneficiaries, and coordinating your estate plans with your attorney are just a few of the ways we can help make a difference in your tax bill.

Strategy 4:  Consider asset location

One of the tax strategies SJS has implemented for years on your behalf is the strategy of “asset location.” If you have tax-deferred accounts like 401(k) plans, profit sharing plans, or IRA accounts, this strategy can benefit you. MarketPlus Investing portfolios employ various asset classes, and some are more tax-efficient than others. Placing the less tax-efficient investments in tax-deferred accounts may help delay the related tax associated with investment income and gains until you withdraw the funds, assisting you in reducing your current tax burden.

While paying taxes is inevitable, there are ways to structure a portfolio and its activity to work to gain control over how much tax you pay, and when you pay it.  Taxes are a fact of life, but you do have options. Options that may help you keep more of your nest egg for yourself and the people and causes you care about. 

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Important Disclosure Information and Sources:

[1]  “4 Funds About to Break Capital Gainless Streaks.” Dan Culloton, 03-Nov-2014, Fund Spy: Morningstar Medalist Edition (morningstar.com).

[2] Sustainable Leaders Fund (PNOPX). Putnam Investments, putnam.com. Ibid.

SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professional for specific advice. This material has been prepared for informational purposes only.

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