More Support for Why We Use DFA Funds
Recently Dimensional Fund Advisors (DFA), was profiled in an article by the Wall Street Journal. The article discussed their unique investment philosophy which has helped make DFA the fastest-growing major mutual fund company in the U.S. In fact, over the last year only DFA and Vanguard have net positive inflows.
The article gives a deeper insight into DFA’s approach which is to offer low-cost, broadly diversified mutual funds that are designed to take advantage of risk premiums in the market. DFA funds are an important part or our portfolios and you can click here to view a reprint of the article.
More Research Supports AHC Investment Philosophy
Research by Dimensional Fund Advisors on mutual fund performance supports our investment philosophy – that most active managers cannot beat the market consistently. Individual investors are much better off in funds that build portfolios based upon the science of the market that are broadly diversified, don’t try to predict where the market is headed and have lower fees.
Index Reconstitution: The Price of Tracking
In this article, read how index funds can rack up higher trading costs in their pursuit of tracking an index. If you are currently invested in index funds, these higher trading costs may be taking a bite out of your investment returns. The approach we apply helps shield investors from the cost of tracking benchmark indices.
Nobel Prize winner Eugene Fama on market volatility
In this video Professor Eugene Fama and David Booth discuss the performance of the value premium and the Federal Reserve’s perceived impact on interest rates.
Craig Larsen quoted in a Bloomberg story about financial planning ideas for recent college grads
Earlier this week, Craig was quoted in a Bloomberg article advising parents of recent college graduates to give their children the gift of building a financial plan with a professional. Doing this, Craig says, can help recent grads “avoid falling into some traps that can lead to bad habits, like overspending and running up credit-card debt”. You can read Craig’s additional advice and the rest of the story here.
Year End Tax Strategies
Strategy #1 – Donate shares of highly appreciated securities instead of cash
If you are considering making a year-end gift to a charity you have the opportunity to use the tax code to your advantage. This is an effective way to both help your favorite charities and reduce the tax bite that you will feel when you file your tax return next year. The mechanics of this tax planning strategy are fairly simple.
First a bit of background. When you donate cash to a qualified charity you get to deduct the gift on your tax return. For example, if you give $5,000 and you are in the 33% tax bracket your federal income tax that you pay will be reduced by $1,650 ($5000 x 33%). So, in effect your $5,000 gift will only cost a net $3,350. If you live in a state with an income tax you would save even more on your taxes.
Now let’s assume that instead of gifting cash you instead gift an investment security that also has a value of $5,000. But let’s further assume that you paid $2,000 for the security. This means that you currently have a $3,000 capital gain since you purchased it.
If you give the security this security that is worth $5,000 you will get a charitable deduction of the $5,000, just as you would if you gifted cash. However, you will also avoid paying the capital gains tax, and this will save you additional money. The math on this is fairly simple and is as follows:
If you were to donate the $5,000 security you would avoid paying $450 in federal capital gains taxes (gain of $3000 x 15% capital gains tax). This means that your charitable gift will cost you only $2,900 (after tax cost of a gift of $3,350 reduced by the capital gains tax savings of $450). By avoiding the capital gains tax, you are keeping an additional $450 in your pocket.
Importantly, this strategy may not be applicable if you are in one of the two lowest tax brackets. This is because in these tax brackets the federal capital gains tax is 0%. However it still may be beneficial if you live in a state with an income tax.
Conversely, this strategy will be even more effective if you are in a high income tax bracket, where you may pay an additional 3.8% tax on net investment income, and, if you are in the very highest tax bracket, a capital gains tax of 20%.
The tax code is complex, and seems to take an ever increasing bite out of our incomes. However, with knowledge of the tax code you can reduce the amount of tax that you pay. We work closely with our customers on tax planning strategies. If you would like to talk to us about tax planning opportunities please give us a call.
Craig Larsen named 2014 President of The Financial Planning Association of Illinois
The Financial Planning Association™ of Illinois announces that member Craig Larsen, CFP® of St. Charles, IL has been named as its President and assumed responsibilities for 2014.
In this role, Larsen will help guide the policy and direction of the nearly 1000-member association that seeks to foster the value of financial planning and advance the profession within Illinois. Prior to being named President of FPA of IL, Larsen served on the Board of Directors as President-Elect and Treasurer.
Larsen, President of AHC Advisors in St. Charles, IL, began his financial services career in 1987 and has built a fee-only investment advisory firm that that focuses on comprehensive financial planning and delivering wealth management services. AHC’s clients include both individuals and institutions such as pension funds and 401k plans.
Larsen is the Vice-Chairman of the St. Charles, IL, Chamber of Commerce, and a member of the board of directors of TriCity Family Services. Larsen is also a member of the Downtown St. Charles Partnership, and serves as the chairperson for the St. Charles Holiday Homecoming and St. Patrick’s Day parades.
“It is a privilege and an honor to be named President of the FPA of Illinois,” said Larsen. “I look forward to the opportunity to work with fellow members in our continuing efforts to be the recognized voice for the financial planning profession. I am excited to be a part of the FPA and our efforts to promote the value of financial planning, provide pro-bono services and deliver high quality education to our members.”
The Financial Planning Association of Illinois is a not for profit corporation offering a wide variety of personal finance advice from Certified Financial Planners, and other professionals. The FPA of Illinois is currently the largest of the 97 regional chapters of the national FPA with nearly 1000 members.
For more information about the Financial Planning Association of Illinois please visit our website at http://www.fpaillinois.org.
Eugene Fama Awarded the Nobel Prize in Economics
In October 2013 Eugene Fama was awarded the Nobel Prize in Economics. Fama is one of the most important names in finance, and his research has broad implications for every investor. His findings are also central to how we deliver investment advice to our customers.
At AHC, our approach is built squarely on the foundation of Fama’s important work. We construct very broadly diversified, low cost portfolios that are designed to take advantage of the science of how the markets work. Our goal is to efficiently capture return premiums that we know, through Fama’s work, certain types of stocks offer over time.
Join us in saluting a man who is truly one of the giants of modern finance and had done so much to help investors build better investment portfolios.
Social Security – The WEP and GPO
WINDFALL ELIMINATION PROVISION (WEP)
If you receive a pension from a government job in which you did not pay social security taxes, any social security benefit that you did earn from other employment could be reduced by the Windfall Elimination Provision (WEP).
The WEP will never completely eliminate your earned social security benefit but it will reduce it significantly. There are some exceptions to the WEP. The main exception is for people who are considered to have “substantial” earnings in jobs that did pay into social security. If you fit into this category than your benefit will be reduced by a smaller percentage than other people who are affected by the WEP.
GOVERNMENT PENSION OFFSET (GPO)
The Government Pension Offset (GPO) affects your benefit as a spouse or widow/widower. If your receive a pension from a government job in which you did not pay social security taxes, the social security benefit you collect as a spouse or widow may be reduced or eliminated.
The GPO reduces your spousal or survivor social security benefit by two-thirds of the amount of your government pension. For example, if you receive a government pension of $600/month, than your spousal or survivor social security benefit would be reduced by $400/month.
It is important to note that GPO only affects spouses and widows who are collecting a government pension that is based on their own earnings. If the pension you are collecting are based on someone else’s earnings than GPO does not apply.
Social Security Survivor Benefits
Most people view Social Security as a retirement program. In fact, social security also provides disability and survivor benefits. Survivor benefits can be a very important income source for families who lose their main financial provider due to death.
In order for a worker’s family to qualify for survivor benefits, the worker must have earned enough social security credits. You receive 1 credit for every $1,160 (in 2013) you earn in income up to a limit of 4 credits each year. Any worker with 40 credits is fully insured. However, younger workers, who have not had time to earn 40 credits, may qualify with less than 40 credits. There is a special rule that says a worker has qualified for survivor benefits if he or she has earned 6 credits in the past 3 years.
There are several groups of people who are eligible to receive survivor benefits.
Widows and Widowers: Widows are eligible to receive 100% of their deceased spouse’s retirement benefit beginning at their full retirement age (somewhere between age 65 and 67 depending on when you were born). They can also begin collecting a reduced benefit as early as age 60. If the widow is disabled, she has the option to begin collecting as early as age 50. Finally, widows are eligible to collect a benefit if they are caring for the deceased workers children under the age of 16.
Divorced Spouses: Divorced spouses who were married to the worker for more than 10 years are eligible for the same benefits as the widows/widowers as long as they have not remarried. However, divorced spouses who were married for less than 10 years are still eligible to collect a benefit if they are caring for the deceased workers children under the age of 16.
Children: A deceased workers children qualify for a benefit if they are age 18 or younger (19 if they are still attending secondary school). In addition, a child qualifies at any age if they were disabled before the age of 22.
Dependent Parents: If a worker provided 50% or more of the financial support for his parents, then the parents may be eligible to collect a survivor benefit if they are age 62 or older.
Visit the official Social Security website at www.ssa.gov to find more information about survivor benefits.