Target-date funds – also known as lifecycle funds -- adjust their allocation (stocks, bonds, cash equivalents) as time passes. The embedded strategy allows individual investors to select their target retirement year, and then sit back, relax, and enjoy the ride. While the nature of a target date fund is designed as such, it is still important for investors to periodically review their strategy with a financial advisor.

To help illustrate the different stages, Rachelle Locey has illustrated different life stages for a fictious person, Sophia.  For purposes of this example, assume the year is 2020, Sophia is 20 years-old, and she expects to retire at age 65.

**Note: this is an example and not a guarantee of what the Fidelity Fund 2065 (FFSFX) will look like in the future**

Meet Sophia

Age 20: Sophia has a part-time job and some extra dollars to invest. She opens a Roth IRA account and invests in the Fidelity Freedom Fund 2065 (FFSFX). With nearly 45 years before retirement, she can benefit from the potential growth of equities and other long-term assets. In 2020, her asset allocation looks like this:

*all percentages are rounded*

Age 25-45: Sophia switches employers three times and works full-time at each job. Her same target-date fund (FFSFX) maintains a consistent asset-allocation during the first twenty years of her career. Even though she is getting older, Sophia is still categorized as a young investor.

Age 50: It is not until Sophia is age 50 that her Fidelity Freedom Fund will experience a noticeable shift in asset allocation. She is now considered a middle-aged investor since her expected retirement age of 65 is only 15 years away. The fund starts to move some dollars out of stocks into more conservative investments.

Age 55: Sophia is still considered a middle-aged investor. Since these dollars are geared towards retirement, the fund will continue to shift away from equities and towards less risky assets.

Age 60: Sophia’s retirement is only 5 years away! Once again, her asset allocation will shift away from equities and towards less risky assets that are designed to protect her hard-earned dollars.

Age 65: It is time to retire! Sophia has worked full-time for nearly 45 years. Since she no longer expects to earn income from an employer, she will begin to make withdrawals from her retirement account to support her daily life. As such, her asset allocation is expected to look something like this: 

Age 70+: Even though Sophia has reached her target year of retirement, her target-date fund will continue to exist. Human Investing wrote about what happens to target date funds after they reach the target year here.

Takeaways

There will be many life changes and developments between now and retirement. However, one thing will remain consistent: target-date funds continue to evolve over time. These funds remove the guessing game and can help an investment build a portfolio based on their time horizon.

Because the changes happen behind-the-scenes, investing in a target-date fund is one of the simplest ways to grow a retirement savings during earning years and protect savings during retirement years.

---

Related Articles

Until recently, the availability of Nike Restricted Stock was limited to a select group of Nike Executives.  In 2018, Nike shifted its Stock Award program to include Restricted Stock Units (RSUs) to pair with the traditional Stock Options benefit.  This brought the concept of restricted stock to a wider base of Nike Executives, including more VPs and Directors.  With this broader availability, more questions have arisen about what Restricted Stock Units (RSUs) are, how to maximize this benefit, and what strategies should be considered.

RSU (Restricted stock units)

What exactly are RSUs?  An RSU is a form of stock-based compensation where the company grants the employee a specific number of shares of Nike stock that are restricted and will not be issued until they vest.  The shares are released and issued each year according to the vesting schedule, which is typically in equal installments over 3-4 years.  Each Nike executive has an individual account at Fidelity that is tied to the stock plan and receives and holds RSU shares as they vest.    

RSA (Restricted stock awards)

RSAs appear almost identical to RSUs and many executives may not notice the difference between them.  The main difference between the two is that with RSAs, shares are issued at the time of grant and you own them even before they vest.  With RSUs, the shares are not issued and owned until the shares vest and subsequently become available.  In either case, you cannot sell the shares until they vest.  RSAs at Nike are marginally better for one reason: they pay out dividends to the Executive even before the shares vest.  With RSUs, you only receive dividends after the shares vest.  

Taxes

As RSUs and RSAs vest, they are taxed as compensation and are subject to the same federal and state tax rates as your salary/bonus.  A portion of shares that vest is immediately sold to withhold taxes and are paid directly to the IRS and Oregon.  A common challenge that we see with tax planning is that the amount withheld for taxes is often much lower than what is needed for the high-income tax brackets that Nike Executives fall in to.  We typically see a tax withholding shortfall of up to 17%.  This can contribute to a frustrating experience during tax filing in April, where painful checks need to be written to the IRS and Oregon.  With proper tax planning and coordination with a CPA, this can be mitigated by calculating the tax shortfall and setting aside the cash necessary to cover that shortfall.

Once the shares vest and become available, they are identical to Nike stock shares that anyone could purchase on their own in an individual, joint, or trust account funded with money you have already paid taxes on, like a checking account.  The growth or decline of the stock from the day it vests is now subject to capital gain/loss tax rules, which is triggered when it is sold.  If the stock grows and you sell it in 12 months or less, it is subject to short-term capital gains rates, which is the same as your regular income.  If you hold the stock for more than 12 months, it would be subject to long-term capital gains, a rate that can be up to 20% lower than short-term capital gains.

Risk/Return

When compared to Nike stock options, Nike restricted stock is a more conservative form of stock compensation.  RSUs/RSAs will follow the exact movement, up or down, of Nike stock while stock option values move significantly higher or lower than the actual stock price.  Put simply, stock options have a much higher upside and downside than RSU/RSAs.  This difference is a significant factor in the decision that many Nike executives must make each year between RSUs, stock options, or a combination of the two. 

Planning Strategies

What planning strategies and opportunities exist for RSUs and RSAs?

1. Cash Needs – If you have needs for cash, whether for college expenses or a vacation and need to sell some of your Nike stock, RSUs/RSAs are typically your best option.  The tax impact is typically lower than Stock Options and ESPP shares.  Additionally, you are not sacrificing the significant growth opportunity that exists with stock options.

2. Tax Loss Diversification - Most Nike executives own a significant amount of Nike stock that makes up most of their overall net worth.  This may represent such a large portion within your overall investment portfolio that it poses a significant amount of risk.  Many want to diversify out of Nike stock into other investments, but the tax bill that would be generated by doing so is so painful that no action is taken.  Tax-Loss Diversifying is a way to diversify out of Nike by identifying and selling very specific stock shares that are at a loss during a market downturn. 

   We do not believe that you should sell an investment at the bottom of a market drop and leave it in cash, so it is important to execute the next step, which is reinvesting the proceeds. Proceeds should be reinvested by diversifying into many different stocks that have also dropped in value during the downturn.  This can come in the form of low-cost, diversified funds, that hold thousands of stocks in large, mid, small, and international stock companies.  In addition to diversifying, the tax loss that is created can lower your current or future taxes by offsetting capital gains or deducting up to $3,000/year from your ordinary income, like your salary.

3. Charitable Giving - Instead of using cash, make your charitable contributions from your RSUs/RSAs.  If you transfer this stock directly to the charity organization, you can still get the tax deduction for the value of the stock, and the charity can sell the stock to completely avoid any capital gains tax that would normally be due if you sold the stock on your own.  Please note that only stock that has been held for over 12 months is eligible for this preferential tax treatment.  For more details on utilizing Nike stock for charitable purposes see this article.

Nike RSUs and RSAs are an effective tool for Executives to both participate in the success of the company and to meet their personal financial goals.  They are a great compliment to Nike Stock Options and provide many planning opportunities to minimize the tax burden due to their flexibility.

If you want to know more about how to maximize your RSUs and RSAs, please get in touch.

You can schedule time with me on Calendly (click here to schedule an appointment), e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

---

---

Related Articles



Buckle up. Welcome to the rollercoaster ride of the year.

Find me one person who predicted the magnitude and velocity of the recent stock market selloff and rebound, and I will buy us tickets to Vegas. In 74 trading days, the stock market lost a third of its value and subsequently rallied by more than 40%. (Another friendly reminder that short-term market prognosis is speculative.)

Through discussions of this market phenomenon with clients, friends, and family, I have discovered a disconnect in how investors interpret investment returns. Take the S&P 500 for an example:

From its high on February 19th, the S&P 500 slid by more than -33% over the next 24 market days 📉

Following its low on March 23rd, the market quickly gained in value by more than 40% 🤯

It would appear that as of June 3rd, the market would be up 6.35% for the year (-33.79% + 40.14% = 6.35%). However, this is not the case for our investment account statements.

The reality is that the S&P 500 was still down -7.21%.

Why? Market pullbacks will have a greater magnitude than the market rebound.

This is because the percentage loss experienced in the pullback is based on a larger value than the rebound percentage. Thus, not all percentages can be evaluated in the same way.

An easier way to understand this is through the following example:

Take an account valued at $100,000. Now cut the account value in half (-50%), and its value is at $50,000. What return is needed to bring it back up to $100,000? You would need to double your account (+100%).

So what percentage of growth is needed to make up for a portfolio or market loss?

• A market loss of 1% requires a 1.01% return to get back to its beginning value.

• A market loss of 5% requires a 5.26% return to get back to its beginning value.

• A market loss of 10% requires an 11.11% return to get back to its beginning value.

As illustrated above, the greater the market loss, the greater are the market gains needed to recover.

In terms of the COVID-19 crash, a market drop of -33.79% requires +51.03% of market growth to make up for the loss incurred. 

*Note the exponential increase in the percentage gain needed to recover.

In application, it is important to consider the downside risk of investments with regards to your financial planning needs. Investment downside risk can have a greater detriment depending on an investor’s timeline and cash needs. (See our article on sequence risk here.)

Both patience and an intelligently designed investment strategy are the remedies to market loss. In the history of the US stock market, no matter how great the loss, subsequent market returns have always lead to new market highs. This is a trend we expect will continue.

---

---

Related Articles

Target-date funds do not stop when they reach the target year. For example, Vanguard Target Date 2015 (VTXVX) still exists today even though it is 2020. Your dollars will not disappear!

Instead, target-date funds are designed to continue to serve the assumed age demographic of a specific retirement year. To provide a deeper understanding, we have outlined what will happen to 2020 target-date funds.

Target-date funds are designed one of two ways:

1. “Through” target-date funds: Continue to shift their asset mix (less stocks, more bonds) over a predetermined number of years. The dollars invested in a target-date fund will remain inside the fund.

2. “To” target-date funds: Reach the designated target year and merge with a retirement fund that maintains a specified asset allocation over time.

Either way – “through” or “to” target-date funds continue to be invested, and there is no required action-item for investors once the target year is reached.

2020 Target-Date Fund ExampleS

Since 2020 is a target year; let us look at what will happen to popular target-date funds.

Vanguard Target Retirement 2020 (VTWNX)

Vanguard’s glide path continues through for seven years (in this case 2027) until the asset allocation is 30% stocks and 70% bonds. After the seventh year, dollars merge into Vanguard Target Retirement Income (VTINX).

Fidelity Freedom 2020 Fund (FFFDX)

Fidelity Freedom’s glide path continues through for nearly twenty years (in this case 2040) until the asset allocation is 24% stocks and 76% bonds. After that, dollars merge into Fidelity Freedom Income (FFFAX).

T.Rowe Retirement 2020 Fund )TRRBX)

T.Rowe’s glide path continues through for thirty years (in this case 2050) until the asset allocation is 20% stocks and 80% bonds. These dollars do not merge with another fund, but instead maintain this asset allocation until the investor withdraws all dollars from the account.

AGAIN, YOUR DOLLARS WILL CONTINUE TO BE INVESTED OVER TIME.

The use and protection of retirement dollars (beyond a target year) is embedded in a fund’s lifecycle. Regardless of whether a target-date fund operates ‘through’ or ‘to’ the target year, your dollars will continue to be invested over time.

---

Related Articles

Investors, savers, or even advisors rarely view a primary residence (the home you live in) as an asset in the same way a person would see a stock or bond.  Generally, I agree with this perspective—that a home is for raising children and creating lasting memories, and not viewed in the same light as Tesla, Microsoft, General Electric, or Apple.  However, there are three factors present in the market today that are cause for a new point of view.  That is, your home as an investment asset used to generate income or cash flow savings.

Factor 1: Money Market and Savings Account Rates

Money market rates have remained near zero for over a decade. This means for those holding money in checking, savings, and short-term bond investments, there is virtually no return on investment.  Include net of inflation, and investors are going backward.  Today, these shorter-term accounts serve the dual purpose of offering investors safety and liquidity, but little by way of yield.

Factor 2: Bond Rates

Bond rates have followed a similar "race to zero" that we saw in the money market and savings account rates.  As of today, an investor must go out ten years to receive .63% on a treasury bond.  In other words, a $1,000 investment yields just over $6 per year.  Bond investments are GREAT, and will forever be a cornerstone of a diversified portfolio.  However, too many investors and their advisors stockpile money into bonds as though it is the only safe way to make a return.  Importantly, like money markets, the "real" rate of return (after adjusting for inflation) is negative, going out 30 years!  You can find more exciting rate related info at the U.S. Treasury link here.     

Factor 3: Mortgage Rates

Mortgage rates have been at similar levels as today in both 2016 and 2012.  So, if you were lucky to buy your home or refinance at that time, there may not be much upside to a refinance.  For the rest of us, with the 30-year rate at 3% and the 15-year rate at 2.5%, now is the time to take a second look.  More rates from Rivermark Credit Union can be found here.

Your Home as an Investment

The opportunity for homeowners comes when they can look at these three factors (money market rates, bond rates, and mortgage rates) within an overall planning framework.  Below are a few examples of how this can work:

1. Mary and John are staring down retirement.  They have a 15-year loan at 4.5% that is five years from being paid off.  Their payment is around $1,900 per month, with a pay-off of around $100,000.  They have the choice of investing a final bonus of $100k from work at .63% and generating $52 per month income, or they can take that same bonus and pay off their home.  It seems like this should be a no-brainer—generate $52/month or save $1,900/month by not having a house payment.  But for whatever reason, the repetition of saving money (which is good) into safe investments (which is also good) is not considered within an overall planning context.  If acted upon, this scenario puts an extra $1,900 per month into this investor's pocket for paying off the home versus investing it into a bond.

2. Julie is 45 and has a goal of not having a house payment by the age of 60.  She has a $300,000, 30-year loan at 4%, and a payment of $1,432/month.  Julie has also accumulated $60,000 from real estate commissions she is looking to invest.  Investing in a 10-year Treasury would yield her $31.50/month.  A better alternative is to use the money to pay down her loan.  In doing so, she goes from a loan size of $300k to $240k.  Also, moving from a 30-year to a 15-year loan allows her to have no home loan by age 60.  Importantly, her rate is reduced from 4% to 2.5%.  Although her monthly payment is more by about $170/month, she saves $167,000 over 15 years in interest expenses—or $927/month! 

Conclusion

Recent events have presented opportunities for investors, savers, and homeowners.  Leveraging a comprehensive financial plan that considers your home, mortgage rates, and reinvestment rates could be the chance of a lifetime to save and earn. 

Join our forum on May 14

To learn more about how to leverage your home within a comprehensive financial plan, join Peter Fisher and Jill Novak for their forum, “How to Empower Homeowners during a Downturn” Thursday, May 14th at 9am PST. Sign up here.

---

---

Related Articles

We are now crossing a zone of turbulence. The Captain has turned on the fasten seat belt sign. Please remain seated. Thank you.

Human Investing serves as a fiduciary on a variety of employer-sponsored retirement plans. We get the opportunity to meet with individuals with different vocations, interests, and life goals.  This is because we advise retirement plans ranging across different industries, different ownership structures, and different geographic locations. We have also established on-site client visits at different points in the year.

Over the years, we have provided advice throughout different market highs and lows.

That’s a lot of differences.

Despite these differences, we have a similar conversation with each retirement plan participant. We remind participants that it’s the decades and not the days that are important for building one’s retirement savings. Given the current market volatility, it’s not surprising that we have been receiving more phone calls than usual. And these calls are welcomed! It is our job to ensure that participants feel equipped and empowered to survive this turbulence.

Both financially and emotionally, one of the best ways to thrive in market volatility is to ensure that you have created a sound strategy for your 401k account.

What do we think is a sound strategy?

When we meet with 401k participants, we discuss their expected retirement age and then check these three boxes:

1. Savings Rate

2. Tax Advantages

3. Investment Strategy

Your retirement horizon is a key driver for the synchronization of tax advantages, a contribution amount, and an investment strategy geared for your retirement age. If we have spoken before, then we would have checked these boxes. Note that market volatility in and of itself does not uncheck boxes, but it often prompts us to review our account setup. 

If you are not expecting to access your dollars soon, then my gentle reminder to you is as follows: by doing nothing, you are doing something. If you sustain your contribution rate and remain invested in the stock market, your account will grow over time. To illustrate this concept, see the chart our team created to show the importance of being invested today.

Total values (assuming a 7% annual rate of return and an inflation rate of 3.22%). Actual results will vary.

Lastly, and most importantly, we recognize that today is stressful. We feel it, too. Quite frankly, there is something for everyone to worry about. Please take precautions and be mindful that your mental and physical health is of utmost importance during this time.

---

Related Articles

Home is where the low-interest rate is. Putting that up on Etsy.

Real estate is a part of just about every financial plan I see.  Whether real estate is synonymous with a home or an investment, it typically starts with a loan.  The focus of this blog is on how individual homeowners should be thinking about their debt, given the historically low rates.  To be clear, how you go about financing your home is not a one size fits all approach.

This is about caring for the financial decision of a lifetime

Whether you are financing the purchase of a home or looking to refinance, how you go about it can have a lasting financial impact (good or bad).  There are many considerations, including the rate, term, how much to borrow, and where to acquire the loan.  But one thing is for sure, that there is not a one size fits all approach for a new loan or refinances.  As such, working within a successful decision-making framework will increase your odds of a positive loan outcome.

Step 1: Create your financial framework

Start by looking at your overall financial plan.  Think about your checking, short-term savings, emergency fund, and the amount you have invested in cash and bonds.  These are essential considerations when looking at a loan.  As an example, if you don’t have a savings account or an emergency fund, maybe you should put off that home purchase until you have a safety net of cash.  Also, if you are looking to refinance and your savings account is flush, you may want to consider putting extra money into your home.  Doing so may rid you of unnecessary private mortgage insurance or enable you to get a better rate because you have more equity in your home.  By starting the process within the context of your overall financial strategy and plan, your outcomes can improve, and bigger goals than just one to reduce your payment can be achieved. 

After considering the bigger picture, start looking at your goal or objective for getting the loan or refinancing in the first place. A target could be, “through financing my home, I hope to get a loan that enables me to pay off my loan as soon as possible.”  If that is the case, a loan with no pre-payment penalty and a 15-year term could make much sense.  At the same time, if your objective for the loan is to “use some of the equity I’ve built-up to increase the home’s value through a kitchen remodel,” then a simple line of credit could be the best approach.  Once you’ve looked at your loan within your broader financial picture and established goals and objectives for the loan, it is time to look at the rates and fees for the new loan.

Step 2: Shop for the right loan

In my 24 years of advising, I have learned a lot about loans and incentives for the people that sell them.  My view is that the majority of individuals should go to their local credit union and find a loan from them.  Credit unions are non-profit and member-owned, so their incentives are to keep rates low when borrowing, and rates higher when you deposit money.   As a side note, the majority of my employees who have purchased or refinanced their homes have used a local credit union.  We have had particularly good luck working with Rivermark Community Credit Union.  You can find their rates here.  Regardless of where you go to get your loan, it is essential to look at a few different options. 

Step 3: Prioritize getting Good Faith Estimates

Getting a good faith estimate (GFE)  is a critical part of the loan process as it helps you compare one loan versus another.  Closing costs can be as much as 10% of the loan amount, and with different lenders charging a variety of fees, it is wise to get a GFE from at least two lenders on the same day. Because rates can bounce around, getting the GFE on the same day provides the most accurate picture of pricing, rates, and terms.  Getting a GFE is so important and an area where many decide to get lazy.  I like the saying, “trust but verify”, and the GFE is a great way to both trust the people you are talking to but verify their results. 

A real-life example: Saving $170K over 15 years

Recently, I was speaking with a client who is in the real estate business.  She was aware that mortgage rates had been dropping, so she wanted to look at refinancing.  Having a solid understanding of her financial plan, I then asked her what her overall goal was for the refi.  Was it to lower her rate, or reduce her payment?  In the end, those were important considerations. Still, even more critical was the goal of having no house-payment by the time she was 60.

Consequently, we decided to invest some of the cash from her investment account to pay down her loan from $300k to $240k.  We shifted from a 30-year term with a rate of 4% to a 15-year loan at 2.5%.  Her total payment was approximately $170 more per month. The shift allowed her to save around $170k in interest over 15 years—a significant return on her investment.  Importantly, the new loan is in line with her bigger picture goals outlined in her financial plan and consistent with her desire to be debt-free at 60!

Establishing an easy to follow process for making financial decisions can pay dividends for years.  Looking at your broader financial goals (financial plan) is a great first step.  From there, identify specific financial goals you’d like to accomplish (be debt-free by 60) and the objectives for each (restructure home loan).  Then, establish a process for comparing rates (good faith estimate) and engaging a trustworthy financial partner.  Following these steps for financing (or refinancing) your home can have a substantial impact on your net worth, cash-flow, and ability to retire.

---

---

Related Articles

@makenna_entrikin

Over the last 100+ days since the first US Covid-19 case, Americans have had to alter their normal way of life. For some, there has been little change, for others the change has been drastic.

The combined health and financial crisis can be confusing and difficult. Navigating personal finances during this time for many has been paralyzing. As an effort to help, here are some general considerations for you during this time:

Complete a proper assessment:

How is your job security? - Soberly assess your employment during this season where more than 30 million Americans have filed for unemployment since march. No one knows how long this economic disruption will last, so plan accordingly. Has your employment been displaced? See our guide to unemployment during Covid-19 here.

How is your emergency reserve? – For such a time as this we recommend that clients build and maintain an emergency reserve. A stockpile of liquid assets can be the best form of self-insurance. Most should plan to keep a minimum of 3-6 months of living expenses on hand.

How are your investment accounts? Should you make updates? Many states are recommending residence to "stay home." Stay home is not just wise counsel to help flatten the curve, but for many “stay put” should be their investment philosophy as well. A study conducted by DALBAR, Inc. found that investors change investment strategies too often to realize the inherent market rates of return. It is in volatile seasons like this where investors’ emotions run high and they make short term changes that will hurt their long-term returns.

Source: Dalbar. Past performance is no guarantee of future results.

“Have we already seen the bottom of the market?”

“Do you think the market will go down further?”

Consider the time horizon for your investment accounts. Make long-term investment strategies, not short-term speculations.

Know what resources are available to you:

Negotiate your bills – To reduce your expenses call your creditors and try to negotiate your bills. Lenders realize the financial stress many are under and are willing to work with you to create approved payment modifications. Learn how to negotiate your bills here.

Stimulus checks - 80 million Americans already received stimulus checks from the US Treasury Department via direct deposit earlier this month. If you are eligible but haven't received your stimulus dollars check on its status here.

Accessing retirement dollars - The recent CARES act has made it easier to access retirement account dollars through loans and distributions. Eve Bell shares how your 401(k) may be impacted here. 

Extended tax filing deadline - The due date to file your 2019 Federal and Oregon taxes has been extended. Luke Schultz, CPA answers questions on the stimulus bill and 2019 tax filing here.

What to do with excess:

If you are questioning what to do with extra cash, consider yourself lucky. Are you saving money without a commute, eating out, or childcare? Here are some considerations for what to do with extra cash:

Give - There are many people in need. Want ideas on how to give and to learn about the current tax benefits of doing so? See our post by Nicole Wilson, CPA here.

Build up your aforementioned emergency reserve.

Consider refinancing your mortgage - See our how to guide here.

Invest - As a part of your long-term investment strategy buy when the market is down. Global stocks are priced down to 2019 values. Will the market go down further? Maybe, or maybe not. Again, make long-term investment strategies, not short-term speculations.

Both in a physical and in a financial crisis it is important to have a plan.

Be wise, panicked decisions can have long-term negative implications.

It is never too late to get your finances in order.

SOURCES:
https://www.dalbar.com/
https://www.irs.gov/

---

---

Related Articles

CARES Act Impact on Retirement Plans: Q&A with Human Investing and Retirement Law Group

Please join us on Thursday, April 16, 2020 at 1:30 pm Pacific for a webinar hosted by Human Investing, Pension Resource Institute and Retirement Law Group. We will be discussing the impact of the CARES Act on key retirement plan issues. There will be a brief overview of the following:

• Coronavirus Related Distributions, Plan Loans, and Required Minimum Distributions;

• Available Defined Benefit Plan funding relief; and

• DOL and IRS guidance following the CARES Act.

Following the overview, Dean Scoular of Retirement Law Group will be available to answer questions you have about the law impacting retirement plans and IRAs.

After registering, you will receive a confirmation email containing information about joining the webinar.

This photo was taken before flour and yeast disappeared from grocery shelves.

Love. Care. Serve.

Those were three words Pete Fisher repeated during my interview at Human Investing. So simple, yet so energizing. I left the interview hoping for an opportunity to join Human Investing, a Certified B Corp, but most importantly committed to finding a profession that would combine my analytical background with an opportunity to empower others. 

That is why I am here writing a blog about the ways we, as individuals, can give to others in 2020. If you are thinking of giving financial aid, there is good news for you. Specifically, in the last month, there have been updates to the tax code which expand charitable deductions for all taxpayers, including those who are taking the standard deduction and those who are itemizing deductions this year. In addition to humanitarian motivations for charitable giving, the changes to the tax code also provide financial incentives.

Give and lower your taxable income even more

This section is useful if you are interested in lowering your 2020 taxable income and donating some cash to help others. 

The CARES Act, which passed a few weeks ago, includes a $300 above-the-line tax deduction for cash donations to qualified charities in 2020. This above-the-line deduction is available for taxpayers who use the standard deduction, which is true for most taxpayers. See below for a visual on how this changes a single filer’s tax return:  

My advice for lowering your taxable income and donating cash to help others is the following: 

1. Keep your receipts.

2. Don’t forget to include the donation on your 2020 tax return!

Giving $300 might feel enormous to you, and de minimis for the community. Or it might feel de minimis to you, and impactful for the community. Just remember micro-actions lead to macro changes.  Your $300 will go a long way to help your community.

Good news for taxpayers using itemized deductions

The CARES Act also includes an incentive for those who itemize their deductions. In the year 2020, taxpayers can take 100% of adjusted gross income as a charitable deduction. Before this bill passed, itemized taxpayers could take up to 60%. Note: this rule only applies to cash gifts that go to a public charity. Cash gifts to private foundations are still subject to the 60% rule. 

Tax planning strategies

Our team of CFP’s and CPA’s is also thinking about more complex tax planning strategies these updates could have on your current tax returns. Individuals are limited to a $100,000 qualified charitable distribution (QCD) from their IRA account in 2020. However, the CARES Act includes financial incentives for taxpayers who itemize deductions that allows them to donate and deduct more than $100,000 from an IRA this year. For example, since Required Minimum Distributions are waived for 2020, individuals could still make a taxable withdrawal and give the cash to a qualified charity. This series of events completely offsets taxable income since there is a 100% charitable deduction this year. This scenario is specific for itemized taxpayers, but it exemplifies the cohesive planning strategies we can discuss to maximize benefits and minimize taxes.

Time is money

If you do not have extra dollars to make charitable contributions, please know there are other ways to give to others this year. For example, you can give your time. To quote my beloved mother, “children spell love T-I-M-E”. Whether it’s organized volunteer work or calling a distant relative, giving of your time is a generous way to donate to others this year. 

If you are feeling inspired, visit this article from the Washington Post listing numerous ways to help vulnerable populations throughout the nation. Let us know if you have questions about how to strategize 2020 gifts. We are here to love, care, and serve.

---

---

Related Articles

This will probably take place in Animal Crossing this year

This goes out to all those who hold part of the $1.6 trillion in student loan debt in the United States. This debt has the power to ignite in us fear, uncertainty, anxiety, and hopelessness. If you’re like me, at any given moment you are subconsciously trying to scheme out some way to make it better – whether it be refinancing, making extra payments when possible, seeing if you’re eligible for forgiveness, or just praying for a miracle. Given the increased levels of anxiety world-wide during this pandemic, I’m hoping that this information will provide a little bit of relief to your worries, even for a short window of time, as it has done for me.

If you’re eligible for relief, consider waiting to refinance

If you have been thinking about taking advantage of the low interest rates and refinancing or consolidating your student loans, you may want to hold off according to Justin Kribs, MS, CFP; Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc.

Last month, the US Department of Education announced student loan relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Refinancing your federal loans now with a private loan lender will waive all the new benefits from this relief, including the temporary 0% interest rate on federally held loans and suspension of payments. These federal benefits are most likely something you don’t want to miss out on.

Here’s the student loan relief per the CARES Act

Loans Eligible for Relief Benefits

• Perkins Loans, Federal Family Education Loans, and Parent Plus Loans

Loans NOT Eligible for Relief Benefits

• Private loans (e.g. bank & credit union loans)

• Any loan not owned by the U.S. Department of Education

CARES Act - Benefits Offered to Borrowers
(In Effect 3/13/20 through 9/30/20)

1. Forebearance/suspension of payments
   Loan payments are suspended for federal loans and no interest will accrue during the six-month suspension
   Note: According to the CARES Act, the six-month window of suspended payments begins automatically, but it is recommended to confirm with your loan servicer to ensure they are suspending payments.

2. Interest rate elimination
   Interest rates are reduced to 0% on all FD and FFELP loans
   Note: It is important to note that FFELP loans that are owned by a bank, credit union or other lender are not eligible for the 0% interest rate.

3. Public service loan forgiveness
   Suspended payment months continue count towards the loan forgiveness programs. As long as you are working, you do not need to make payments to continue to qualify.

Next steps

1. Defer student loan payments
   If you’re eligible: Contact your lender and request or confirm a suspension of payments (this may have started automatically).

   If you’re non-eligible: Call your private lender ASAP to see what options they offer to suspend, reduce, or pause payments and/or waive late fees – These will not be offered if you do not reach out.  Keep in mind that each institution has its own guidelines for payments and late fees. Look here for a list of banks providing information and resources on Coronavirus relief

2. Make extra payments if you can
   If you have extra cashflow, now is a really good time to take advantage of the 6-month, 0% interest benefit period. During this 6-month period, all your payments will pay down principal (and any interest that accrued prior to March 13th), putting you further ahead in the long run. You can make extra payments on your lender’s site at any time.  
   Note: Be sure to select “Do Not Advance the Due Date,” otherwise your lender will apply your payment to future payments rather than counting them as additional payments. There is usually an option to make this selection on the “pay now” page.

What if I want to refinance after the relief ENDS?

Since the CARES Act 0% interest is a short-term benefit, you may still want to consider re-financing to leverage a lower, long-term rate.

Are you a good candidate to refinance?
A person with stable income and a higher income to debt ratio may be a good candidate for refinancing.  “A person with unpredictable income should probably steer away from refinancing,” says Justin Kribs, since private loans do not generally offer the same loan payment flexibility that is offered with federal loans.

What are your goals?
Shorter Loan-Term Length: For someone with excess cashflow to increase monthly payments and who is looking to pay off their loans as soon as possible, refinancing may offer a shorter term-length for your loan.

Lower Payments: For someone looking to free up some current cashflow by paying less on their loans each month, the reduced interest rate of a refinanced loan may offer a lower monthly payment.

This student loan calculator is a great resource to understand the impact of a refinance on your loan amortization (showing the payments split between principal & interest during your entire loan term length) and help determine if a lower interest rate will help you accomplish your goals.

How will you choose a private loan lender?
Client Experience: How are you being treated on the other end of the phone? Or on the other end of that email? Justin Kribs argues that this is one of the first things to look for when comparing lending companies.

Flexibility is Key: What types of assistance do they offer in times of hardship? Keep in mind that Private Loan Lenders do not offer the same assistance as Federal Loan Servicers (e.g. Income Based Plans, Forbearance, etc.). If this sort of flexibility is important to you, make sure to be clear when asking what benefits they will offer you.

Questions to ask: 

• How many different repayment options do they give you?

• Who does the servicing of the loan?

• What is the Co-signer release agreement?

Recommended Lenders who come with positive client reviews:

• First Republic Bank

• So-Fi

• Laurel Road

Sources

Justin Kribs, MS, CFP®, Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc. https://insmedloanservices.com/

 https://www.forbes.com/sites/advisor/2020/03/26/student-loan-forbearance-in-the-coronavirus-covid-19-stimulus-what-you-need-to-know/#3e9e92cc2039

https://studentaid.gov/announcements-events/coronavirus

https://www.forbes.com/sites/advisor/2020/03/12/list-of-banks-offering-relief-to-customers-affected-by-coronavirus/#7411c1d73ee3

https://www.marketwatch.com/story/2-trillion-coronavirus-stimulus-bill-gives-student-loan-borrowers-six-months-of-relief-2020-03-26

https://www.bankrate.com/calculators/college-planning/loan-calculator.aspx

---

---

Related Articles

Nothing like having your morning coffee and talking to your cat about time and threshold rebalancing strategies

Last weekend, I was perusing the Wall Street Journal and stumbled across section B4 and B5 titled, “What Happens Next?”.  In it, the Journal interviewed five financial magnates about the market.  As many of those interviewed often do, they made bold statements and predictions for the future.  Knowing their collective predictive power is ZERO, many of us read along, believing these financial giants have a crystal ball.  This, my friends, is a terrible mistake.  It is a mistake for them to prognosticate, particularly now.  It is equally miscalculated for us to believe they know where the markets are headed, whether it be up or down.

A meaningful statement from the CEO of Charles Schwab

From my point of view, one meaningful statement came from the CEO of Charles Schwab, Walt Bettinger, who posits that “panic is not an investment strategy".  Mr. Bettinger, I so agree.  Think about times in your life where panic is useful in a crisis.  In reality, it rarely helps the situation get better and often makes matters worse.  So, what is the opposite of panic?  Words that come to mind are courage, calmness, peace, and composure.  When it comes to your financial situation, model the opposite of panic and chaos.  Be calm.  Get off your screen and evaluate your portfolio in the quiet of the early morning. Yes, with a cup of coffee or tea in hand.  Or, if you are a night owl (which I am certainly not), find some space once the kids are down to evaluate your plan and portfolio.  Be at peace and take a deep breath.  Be courageous, which may mean rebalancing your portfolio by selling quality bonds to buy quality stocks.  Yep, buy low, sell high.  Try being composed when thinking about money and ways in which a negative can be turned into a positive.  Call your local credit union or bank to see if they can refinance your car or house loan, as recently rates are at record lows.  Most importantly, collect yourself and find comfort knowing this too shall pass.

Over time, history has shown that global economies expand, and markets rebound.

However, nobody knows how long our current circumstances will last, nor do they see the direction the markets will head.  Take the extra time you now have to develop a game plan for getting your family through this crisis.  Getting through our current dilemma will require a measured approach to decision making. This includes the choices you make with your financial plan and money. In its aftermath, there will be plenty of opportunities to get back on track, as long as you keep yourself and your finances in one piece and do not panic.

Peter Fisher is the CEO of Human Investing, one of the largest and fastest-growing wealth management firms (Forbes) in the U.S.  He is the author of Becoming a 401(k) Millionaire and blogger at 450 publishing.  He received his B.A. in Economics from Linfield College, an M.B.A. from George Fox University, and is currently a 3rd-year Doctoral student researching financial literacy, and the concept of collaborative consumption.   

---

---

Related Articles