Planning

Blind Spots and Seeing the Whole Picture

Posted on Jul 27, 2018 in Community, Family, Investments, Planning, Relationship

I’m a huge movie buff. In a different life, I would have been behind a camera, capturing people’s stories on film. One of the best stories I’ve seen on film is a movie making the festival circuit this year, Blindspotting. Daveed Diggs of Hamilton fame, along with longtime friend, poet and fellow actor Rafael Casal, have made a buddy movie like no other. It is smart, funny, painful, intense, and powerful. The writing is tight, the acting top-notch. The pair had been working on finding a way to produce the film for ten years, and its tone and subject matter could not be more pertinent today.

And why am I telling you about this in a personal finance blog? The power of the movie is in its exercise in asking the audience whether they can see more than one thing at the same time: Can you see the two people in profile AND the vase? Can you see a black ex-con and a thoughtful man reinventing himself? Can you see that the friend you’ve known your whole life has a different experience of the world because his skin color is different than yours? Can you see a rich person and someone struggling? Can you actively look to see past your blind spots? This is important because without the ability to do so, you can miss important information about your friends, your family, the people you work with, and the broader world around you, as well as about your finances.

What is “Blindspotting”? You’ll find that out when you go to see the movie. (And seriously, go see it.) We’ve all heard of blind spots: something in your range of vision that you should be able to see, but which is obstructed. The obstructions come from a variety of sources, but they can come straight from you: a blind spot is a predisposition, a prejudice. The most dangerous are the ones that you don’t know you have. Dangerous because you may think you are lighting candlesticks when you are lighting dynamite.

We all have them. We are all products of our own stories and experience: our upbringing, our families, and the shortcuts that help us make sense of the world. Sometimes those shortcuts don’t show us the whole picture and result in blind spots. Here are three common ones that might impact your personal financial life, and one additional that can cause you to negatively affect someone else’s:

Confirmation bias – You embrace information that supports your perspective and cultivate a blind spot to that which contradicts it. You buy a stock and when there is good news about the stock, you acknowledge that and feel you have made a wise investment. When there is negative information about the stock, you discount the news.

Recognizing that you’re likely to have a bias for the choices you make and being able to look past that blind spot and take in all relevant information about an investment will make you a better investor.

Over-confidence – What you’ve done in the past has been successful, so you are confident that you know what you’re doing. You have a blind spot to the role luck can play and to evidence itself, and in investment management, that’s one place where numbers don’t lie.

You invest in real estate and home prices soar. You feel like a brilliant investor. Real estate prices plunge, and you blame the market, not your strategy. The blind spot is your confidence in your ability versus the capriciousness of markets.  Why you were investing in real estate in the first place should be your benchmark: you needed a home and were buying for the long-term, or you wanted a long-term investment in rental property and could carry the on-going costs of the property during the periods you couldn’t rent it. That’s the measure you need to be using as a benchmark for success, not your ability to time a market. It’s hard not to get caught up in a frenzy, which also makes it the best time to go back to your desk and work through the numbers to see if an investment will meet your goals over your time horizon.

Note that the corollary of over-confidence exists as well: under-confidence. You invest in the S&P 500 and the market goes up. You consider yourself lucky. The market falls and you blame yourself for a bad investment. Your blind spot is self-confidence: without question, luck factors into timing of investing. But if you invested in the S&P 500 as a long-term strategy for growth, knowing that there will be market fluctuations, there is no luck or blame, that is a solid strategy.

Rationalizing: You overspend but explain how much you’re saving by buying things on sale. You desperately want to get out of debt but as soon as you’ve freed up some extra income, you’ve committed it to another loan or run up a balance on another credit card. You’ll start saving tomorrow.

We are creatures of habit. We are attached to our rituals, our patterns, our ways of doing things, and accepting that they may not be serving us – to say nothing of actually changing them – is hard to do. The blind spot is what you believe is really important and whether your actions support it. What is your goal? Looking at actions instead of hopes or dreams is where planning comes in. All of the above actions are rational in some way to the person making them. Seeing how the action (buying something you don’t expressly need because it’s on sale) impacts your stated goal (saving for a vacation to Italy) can help you release an old rationale and better align actions with what you really want.

And one more for the other people in your life:

Making an Assumption: This is the quickest shortcut we all use. You don’t give the plum project to the new parent because it involves travel and you assume they wouldn’t be interested in that now. You order a $90 bottle of wine at dinner with a friend, not realizing that her half of the price of the wine was what she was budgeting for the whole meal. You see your neighbor’s new Tesla, their designer shoes, the gardener at their house and you assume they are greedy and material people.

But are you making an assumption that interferes with seeing the whole picture? Your predisposition creates a blind spot. You won’t see the whole picture in each case until you ask questions and learn more. You’ll retain a prejudiced view of what a new parent wants at work, what your friend can afford, and what your neighbor is really like. The effort to see a blind spot takes time and attention and energy, all of which feel for most of us like increasingly scarce resources.

These decisions we make based on our biases, our assumptions, our blind spots, can have a very real impact on the lives – financial and otherwise – of other people. You limit the professional growth of an employee, you burden a friend with an unexpected expense, you fail to offer friendship to a neighbor because you are operating in a blind spot.

Are you seeing what you think you are seeing? Or could there be another way of looking at something? Can you step back and take in the whole picture objectively? Could there be more to the story? People and situations can be more than one thing. In developing an awareness of what we know for a fact, setting aside the shortcuts, expanding our view into blind spots, we get better information for action. Blind spots are not blindness – we can improve the completeness of what we see. It requires observation, attention, and sometimes confronting a limitation under which we’ve been operating.

Financial self-awareness is the first step. Learning to be aware of our blind spots can lead us to greater understanding, compassion, and better decision-making all around.

As for Blindspotting the movie, my experience at the SIFF screening was intense and very personal. There is an art to allowing us to laugh while we cry, something Shakespearean about giving us that release so that we can continue to watch, to engage, to care about these characters, flawed as they may be, in the short time we have with them. This is a powerful film, coming at a time when we are churning up some deeply held beliefs among us, which I continue to believe is the first part of healing. Right now it may not feel like we’re making progress, yet like any problem – or blind spot – you can’t do anything to change it until you recognize it’s there.

It is only a movie. But if it promotes a continued conversation about racial tension, police violence, gentrification, growing income inequality, and how we can promote empathy and compassion while tackling these issues, then it is so much more.  Blindspotting opens nationwide July 27th.

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Awakening From Slumber: Ten Years After The Financial Crisis

Posted on Jun 27, 2018 in Community, Investments, Philanthropy, Planning, Retirement

Ten years ago I was in Rome and passed a shop on Via del Corso that sold crystal balls.  If I Image result for crystal ball shop italycould have figured out how to bring one home without setting off airport security, I would have picked one up for the office. Then when you ask me what I think will happen in the market, I can point you to my little Roman souvenir and you will be able to see the future as well as I can.

One of the closest things I have to a crystal ball is my relationship with PIMCO. In addition to being the largest bond manager in the world, PIMCO has the biggest and most geographically widespread research team I know. Most of you who work with me hold at least one PIMCO fund in your portfolio. Even if you don’t, you have heard of their research: they were the folks who came up with The New Normal to describe economic and financial life after the Great Recession. (And which you are likely using to describe any number of new trends in your own life.)

Each year, PIMCO holds its Secular Forum, a gathering of its internal investment professionals along with guest speakers to discuss and debate the state of the global economy and markets over the next three to five years. Like much of PIMCO’s team, my background is in bonds as well, in markets for which critical to understand not only an individual issuer’s ability to repay a debt, but also the longer-term trends that will affect its ability to do so. As part of PIMCO’s investment process, its Secular Forum is designed to promote new ideas and differing points of view, to look into the future for the trends they believe will have important investment implications. They meet, then they publish their results for their advisory firm clients.

The title of this year’s look at 2018 and beyond is called “Rude Awakenings.” That gives you an idea of where we are headed.

The Great Recession: Ten Years Later
After The New Normal, PIMCO dubbed the last five years (2014-2018) the “New Neutral.” This moniker described the low growth, low interest rate environment we found ourselves in world-wide, chugging along without much economic change, with your savings accounts earning next to nothing, but overall slow and steady growth in the economy.

PIMCO predicts our economy will be more volatile over the next several years than this past New Neutral period, and the global political environment will be rockier as well. Nations which worked together to combat the aftermath of the Financial Crisis are showing nationalistic tendencies, meaning it may be every-nation-for-itself when the downturn comes. Neutral no longer, we will need to be prepared for Rude Awakenings. We will need to be flexible, to be able to respond to changing conditions, and to take advantage of opportunities in the investment landscape as they present themselves.

Here are four of the Rudest Awakenings we can expect:

Rude Awakening #1: You expect the same stock market growth in the next 10 years that we’ve had since the Financial Crisis. The big question many of us are struggling with is the state of the business cycle, and when we will shift from expansion and growth to contraction and recession. PIMCO’s research points to a good chance of recession in the next three to five years, most likely sooner rather than later. It’s surprised many of us that the stock market continues to be supported at its current level.

PIMCO forecasts a downturn in 2020, though they note it could be a little later due to government spending (fiscal stimulus) on infrastructure, which means more jobs and economic growth. But because this type of deficit-spending is coming at a time late in the economic cycle when we have very low unemployment, PIMCO calls this stimulus a “fiscal sugar rush.” The “sugar rush” is the artificial high that comes from spending money we don’t have (deficit spending, thanks to tax law changes) on roads, bridges, and the like and risking overheating the economy when unemployment is already so low. This type of stimulus tends to be an expansion-killer as debt levels become unsustainable, and spending that creates deficits increases uncertainty that PIMCO believes is not yet reflected in the stock market. Any of you with kids know how bad the crash can be after a sugar binge.

The things that most affect the timing of the recession are what the Federal Reserve does to manage inflation, whether we get a rise in worker productivity, and whether the current trade spat turns into a full-fledged war.

Rude Awakening #2: Growth in worker productivity is always good for the economy  Worker productivity has been below average since the Great Recession, and while gains in productivity are typically desired as a means of expanding the economy, productivity growth can have a dark side.

Technology-driven productivity growth could extend the current period of expansion, pushing out the recession to a later year. But technology can also be disruptive to markets and the economy. In the case of new technologies, these have an additional impact on legacy companies: think Amazon and every bookstore chain you’ve ever known. New technologies often disrupt industries and displace/replace workers. This higher “technological unemployment” can lead to a populist reaction, and we’ve seen a snippet of what populist sentiment can reap in a number of countries, the US included.

Rude Awakening #3: Populism doesn’t seem to have much impact on the economy Whatever you might think about the current US administration, the American version of populism has been well-liked by financial markets. But expect a different flavor of populism if we hit a recession: Expect a more radical populism that demands redistribution of wealth or income tax increases, nationalization of key industries, and/or a protectionist trade policy.  Italy is serving up an early 21st century version today, where we’re seeing a widespread populist reaction to world events.

Rude Awakening #4: Protectionist trade policy will level the playing field for US goods PIMCO considers China to be less of a risk to the global economy now than previously, as they have re-centralized power and are exerting more control over their economy; they are less of a loose cannon now. That said, tensions over the trade imbalance with the US and over intellectual property rights are growing. PIMCO sees the US-China smackdown as the Rising Power vs. Ruling Power WWF fight of our time: In ancient times, Athens challenged Sparta, in the last century, Germany challenged Britain. Neither of these bouts ended well for the challenger, but there was a whole lot of disruption to global economic systems. China’s challenge to the US as the world’s pre-eminent power is not expected to lead to armed conflict but could lead to rude awakenings on the geopolitical front. Not even a month after PIMCO’s Secular Forum, it appears this expectation of disruption is becoming reality with escalating trade tariffs.

What Will this Next Recession Look Like?
If the future plays out in these ways, what kind of recession will we be waking up to find? The expectation is that this time, the downturn will be shallower and longer than it was in the Great Recession (December 2007-June 2009). Two things that are different now are that (1) it’s hard to rely on central banks to ride to the rescue this time, and (2) we have much greater economic inequality worldwide. The first issue means we won’t have the same solutions we had during the last downturn to help avoid a global economic meltdown, and the second issue means that more people could be affected in this next time, with seriously frayed social safety nets and little protection against great economic harm.

What To Do?
So now that I’ve given you lots over which you can lose sleep, what are you supposed to do about it? How you can prepare? Consider the following:

Get serious about paying off debt. Whether it’s credit card balances, a home equity line of credit or other non-mortgage borrowing. The next year or two is the time to get serious about paying it down. It’s going to cost you more in interest as the months go by, and you might need that debt capacity if things hit the skids.

Build up your cash reserve. If you’re working with me, I’ve already bored you with the fat cash balance I think you should have in reserve. For the rest of you: plan on setting aside a minimum of six months’ worth of expenses (12 months if you are self-employed) in a savings account, or a couple of CDs.

Start setting aside funds for planned major purchases.  You could end up getting them for cheap. One of the things about a recession is that overcapacity as the economy winds down means many goods such as cars and other big ticket items go on sale, and start to come on the market at better prices. If you can, maybe wait to 2019 or 2020 to pick up a new car or major household appliances for less.

Work on pink slip-proofing your job. You know you are doing a great job at work, but you will need to make sure others know, too. No one is immune to job loss, and if you think you’re high enough up on the food chain to avoid being sent packing, remember from the company’s perspective, getting rid of you means getting rid of your big comp package too.

Retirees need to re-assess their asset allocation. -With the next recession expected to be shallower but longer than previous ones, that means arranging your resources so that you’re not having to liquidate anything at an inopportune time. If you’re working with me, we’re building “buckets” of assets to protect your retirement draws three to five years from now. Going forward, structuring this protection becomes even more important.

Consider stockpiling your resources for charitable giving.  Our social safety net is more frayed now than it has been before, and when the recession comes, more people will need help. Demand on charity will be greater, just at a time when donors are more strapped, too. If you are charitably inclined, using a donor-advised fund to accelerate the tax benefit of your contributions is one way to stockpile funds to donate when needed over the coming years.

Take this time to reflect on what’s really important to you. This is my standard refrain. When times are good, it’s often easy to drift towards all things bright and shiny and to forget about the warm and wonderful: the people you love, the things you like to do, the experiences you want to have. It’s also a hard time to put off gratification when it seems like the whole world is on a shopping spree (they are, but it will more than likely come to no good end.)

In our always-changing world, it should come as no surprise that the next ten years will look very different from the last ten. Best we can tell, you can expect more volatility, and be prepared for a recession in the near term. The timing of a downturn is always a confluence of events that are not hard to see but whose coming together is difficult to predict. In the meantime, be cautious about getting overextended — whether stretching financially to buy a new house or taking on other debt to finance spending — and be mindful about maintaining or stockpiling a cash reserve.

Remember that there are limits to the things you can control, and the trajectory of our global economy is not one of them. Consider what you can do on the list above, and then go out and enjoy the rest of life: take a walk, see friends, hug your dog, hang out with family. These things you can do something about, and ultimately they are what really matter as well.

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Let the Debate Begin: Waiting for Tax Reform Details

Posted on Apr 25, 2017 in Community, Philanthropy, Planning, Simplicity, Tax

Now that your 2016 tax return is behind you, you might be thinking about how tax reform changes expected under the Trump Administration might affect you. We are expecting a big announcement tomorrow, but despite some advance hype of “massive” changes, we’re likely to get only minimal details. The tax code is 4,029 pages and covers a multitude of taxes and entities. Tax reform, like Repeal and Replace, is going to take longer than originally planned.

The Big Three Goals of current tax reform proposals are:

1-Reduction of the corporate tax rate
2-Lower tax rates on individuals (reducing tax brackets from 7 to 3)
3-Simplification

In general, Republican proposals strive to broaden the tax base and lower tax rates. Under the banner of freedom and personal responsibility, these proposals support the idea that government should be as small as possible, providing minimal benefits to individuals, but counter that with lower tax rates, meaning more after-tax dollars in pocket, with which people are free to do what they want.

What are the things to watch for tomorrow? Here’s what I’ll be watching for:

1. Corporate tax rate: Republicans originally wanted a 20-25% top rate, which even they felt was unrealistic. Expect Trump to hold out for the 15% corporate rate he campaigned on.

The argument for a lower corporate tax rate is one of global competitiveness. The Tax Foundation reported that the US ranks 32 of 43 countries in the OECD in terms of international competitiveness. Note that the Tax Foundation is the oldest non-profit think tank in the country, described as an “independent tax policy research center” but it is also noted for a conservative, business-friendly bias.

The top US corporate tax rate is 35%. But who really pays this? The US Government Accountability Office (GAO) issued a report in March 2016 that reviewed US corporate taxes over a five-year period. “From 2008-2012, profitable large US corporations paid, on average, US federal income taxes amounting to about 14% of the pretax net income that they reported in their financial statements. When foreign and state and local income taxes are included, the average effective tax rate across all of those years increases to just over 22%.”

One of my sources for tax policy research is the Tax Policy Center (TPC), a nonpartisan joint venture between the Urban Institute and the Brookings Institution. From TPC’s perspective, a 15% corporate tax rate would make the US one of the lowest corporate tax regimes – until other countries cut their own rates, as they did after the Tax Reform Act of 1986. It would also create a ginormous loophole for high-income individuals. Under the Trump proposal, the 15% rate would apply to partnerships and sole proprietorships, which would create a huge path for tax avoidance by sheltering wages through such an entity. If the new rules let pass-through entities, such as sole proprietors and LLCs (like this firm) be taxed at the lower corporate tax rate, then that benefits me (and dentists).

Let’s be clear about how this works: it’s not like there is one bucket for corporate tax receipts, and a separate one for individual tax payments, and yet another for payroll taxes. All tax receipts go into the same bucket, and go right out again to pay our collective expenses. Those countries with lower corporate tax rates also have much higher personal tax rates. (The plan in the US is to cut those too – at least at the very top levels. You can guess where this is headed.)

The one bright idea in corporate tax reform proposals is to tie corporate tax rate reform to reform of individual tax rates, potentially aligning rates and eliminating this type of income-shifting loophole.

2. Fewer tax brackets for individuals: The idea is to simplify the tax system. The following chart shows how your tax bracket might change under the proposed simplification.

By the way, this doesn’t come without a cost. The deficit is expected to increase by $6 trillion in 10 years. That’s more than a 25% increase. Your kids and grandkids get to figure out how to pay for that.

Ultimately what you care about is what you have in your pocket, as well as what things you have to pay for (health care, city services, college, retirement, etc). While marginal tax brackets are expected to change, if some deductions and exemptions are eliminated as expected, you could end up paying more in taxes. Fortune magazine took a look at the impact of expected changes on take-home pay, and this is the result:

If you’re in the Top 1% of earners, this works for you.

Hand-in-hand with the compressed brackets are higher standard deductions ($15,000 for a single filer, $30,000 for marrieds).  The higher standard deduction could make your tax calculations simpler by eliminating the need to itemize.  It may also make your tax liability higher, and remove incentives for certain spending and investment.

3. Deductibility of state income tax:  One of the items on the chopping block is the deductibility of state income taxes. Let’s not kid ourselves about this being payback to states that went blue and voted for Clinton. The states most effected: California, New York and New Jersey.

That said, Trump is not the only President to use tax reform to rectify political slights. We have the current rule on the non-deductibility of donations to not-for-profit organizations with a political agenda because President Lyndon Johnson was miffed over a preacher literally using his pulpit to bully Johnson. Trump has suggested repealing the Johnson Amendment, which essentially shut down lobbying activity by 501c3 organizations.

But if you don’t have itemized deductions of at least $30,000 for a married couple (or $15,000 for a single filer), it might not make that much difference to you, and might simplify your tax return.

4. Deductibility of mortgage interest: This is a classic middle- to upper-income deduction on the block. Each household can deduct mortgage interest on mortgage indebtedness up to $1,100,000 on up to two homes (that means loans totaling up to $1.1 million, not a deduction of $1.1 million). So mortgage interest on your house (and vacation home) is deductible up to these limits. What if you hold a multi-million loan on your home? Or own more than two homes? You’re not able to deduct that interest anyway. No skin off your nose.

5. Cap on total itemized deductions & 6. Deductibility of charitable donations: One proposal last summer from House Republicans suggested eliminating all itemized deductions except those for home mortgage interest and charitable contributions. The latest scuttlebutt puts charitable donations on the chopping block too. Or at least capping them.

Trump campaigned on capping all itemized deductions at $100,000 for single people and $200,000 for couples. You might not care about this one either, if you’re not making seven figures. But a lot of support to not-for-profits comes from higher earners. A taxpayer making over $1 million paid an average of $260,000 on state and local taxes according to the TPC. At this point, this taxpayer’s itemized deductions would be capped, eliminating the tax incentive for charitable giving by high earners.

One of the arguments made by those favoring smaller government is that people should have the choice of how their money is spent, and if they want to give to social services and other philanthropic causes, they can give to charity directly. Congress created the charitable deduction 100 years ago this year, to incent Americans to support their communities. With smaller government and a capped or eliminated charitable deduction, the landscape of American society will fundamentally change.  If you are in the camp that believes an American spirit of generosity is in part responsible for the success of capitalism (as I am), things won’t be changing for the better. The “compassionate conservatives” in the Republican Party won’t be happy with the reduction in tax incentives for charitable giving either, as it would affect donations to religious organizations.

7. Limits on donor-advised fund deductions: It’s unlikely we’ll hear anything tomorrow on this detail of the tax code. There are already some limits based on income for large charitable contributions, either directly to an organization or to a donor-advised fund (DAF). A DAF allows a taxpayer to “bunch” deductions for future charitable contributions into a single tax year. I recommend DAF contributions to charitably-inclined clients when they have a windfall, to off-set some of the tax they would otherwise pay in that year. Proposals here have included a time limit on the pay-out of DAF money through grants. Under current law, there is no limit on how quickly you need to make donations from a DAF; some proposals are suggesting funds be distributed to charities in 5 years.

Simpler is not always better. In my view we have the wacky tax code we have due to the same strong special interests we have always had, and because our economic world has grown more complicated. If you think about the tax code as a tool to incent certain behavior, as an example, you get to deduct your mortgage interest and property taxes because as a society we think it’s better for wealth building and maintaining capital stock for individuals to own their own homes. We have other tax rules to rectify imbalances, such as the Alternative Minimum Tax (AMT), which was created because in 1962 it was discovered that a bunch of millionaires were paying no tax, and that seemed unfair. That it was not inflation-adjusted and had unintended consequences years later doesn’t mean it was a bad idea, it means it needed to evolve as the economic landscape did.

For a quick overview of the three main proposals and detail on some of the main changes up for consideration that you may hear about tomorrow, check out http://www.taxpolicycenter.org/feature/preparing-2017-tax-debate

Remember that Trump views himself as a disrupter and a master negotiator, and as such, he’s not likely to start with a centrist proposal meant to bring everyone into the fold. Once we do have a detailed bill to consider, the legislative process begins. That means lots of hearings, followed by changes, more review and comments before the House then Senate vote. But Democrats in Congress are not aligned, and Republicans  may attempt to push through a tax bill with only Republican votes, though they may not have enough.

Alternatively, Republicans can use the Budget Reconciliation process to overcome this legislative hurdle. There are many rules that need to be followed, but it’s possible we’ll get tax reform this way. We got the Affordable Care Act this way under Obama and the 2001 tax cuts under Bush.

To date, there has generally been strong support for tax incentives for retirement savings, home ownership, and some charitable giving. Under the proposals being floated thus far, these tax-preferenced items are expected to have less value in the future.

We’ll find out more tomorrow.

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Planning in the New Year

Posted on Jan 9, 2017 in Community, Family, Planning, Tax

You all know I love to plan. The power of planning comes from setting your intention, and taking action to make it happen. It’s about dreaming, but it’s more about doing.

Starting a new year is a perfect time to set your intention on how you want to affect the world outside your personal sphere. I know I’m not alone in that while I am glad to put 2016 behind me, I’m not altogether too sure about 2017. All the more reason to have a plan about how you want things to go down. It can be overwhelming to figure out where to start. So start at the beginning:

1. FOCUS – Ask yourself what the top issue is for you – it’s overwhelming to try and solve all the world’s problems at once. Believe me, my mom and I tried over numerous cups of coffee. What is the area that you feel most concerned about protecting? Civil rights? Climate change? Women’s health? Choose one (or two, tops) and put your energies here.

When we’re talking about your portfolio, diversification is beneficial. For philanthropic investments, concentrating your giving – of time and money – focuses your precious resources on the specific goal you want to support, and can enhance your involvement in something you care about.

2. Next, DECIDE how you’d like to help. There are three main ways to support the causes that matter to you:

• Gifts to traditional charities
• Gifts to not-for-profits with a political agenda
• Gifts of action

Gifts to Traditional Charities
Our tax code currently provides some incentive for charitable giving, allowing a tax deduction for giving to not-for-profit – and generally non-political – groups. We’re entering a whole new world this year, both with potential changes to the tax code and changes in the political climate.

We don’t yet know how the changes to the tax code will affect charitable giving from a tax perspective. One thing we can know with some certainty is that there will be less spending of our collective tax dollars for social services or human rights protection. Organizations that work in these areas – food banks, civil rights groups, women’s health – are going to need your help more than ever. If they are 501(c)3 organizations, you can take a tax deduction to the full extent of the law as it stands now.

From what we have heard thus far, the new administration is proposing tax reform that stresses simplification, part of which would reduce the number of tax brackets and substantially increase the standard deduction (from $6,300 to $15,000 for single filers, $11,500 to $30,000 for jointly-filed tax returns). Meaning many people who may have itemized and received a tax benefit for charitable giving will now receive no additional tax benefit from this unless their total itemized deductions exceed the standard deduction.

Gifts for Political Action
There are many reasons to give beyond a tax deduction, and giving to groups that lobby or otherwise take political action may now be on an equal footing tax-wise with giving to tax-exempt organizations. Some not-for-profit groups which lobby or otherwise participate in political campaigns don’t have 501(c)(3) status, so your donation may not be tax-deductible.

It’s easy to get overwhelmed by the many areas of need, and you’re going to need to pick your battles. On one of his first post-election shows, comedian John Oliver of Last Week Tonight offered a solid list of organizations you may want to help. Oliver made a very serious call to action on his program, noting that until now we’ve generally felt that the rights of all Americans would be protected by those in Washington. But many may feel that will no longer be the case, and some groups will need help under the new administration. He organized his list by cause:

Women’s health: Planned ParenthoodCenter for Reproductive Rights           

Climate change: Natural Resources Defense Council

Refugees:  International Refugee Assistance Project

Civil rights: American Civil Liberties UnionNAACP Legal Defense FundThe Trevor Project,

Mexican-American Legal Defense and Education Fund

All of these groups, with the exception of the ACLU, are 501(c)3 organizations and donations to them are tax deductible to the full extent of the law. Note you can donate to the ACLU Foundation to make a tax-deductible gift to support their work on civil rights issues.  Here’s a description of the difference: Giving to ACLU or ACLU Foundation: What is the Difference?

If you want to make your own list — and not rely on one from a fake news show — check out Charity Navigator or Guidestar to search for organizations doing work you want to support. You can search by area of interest.  On Charity Navigator you can start with its Perfect 100, charities that execute their missions such that they’ve received top marks for good governance.

Gifts of Action
You may want to take action beyond writing checks. While you can blog and tweet and email and post about how the world should change, coming together with others is what creates a message that cannot be denied.

You can do this without leaving your house. Just last week, plans to alter the House of Representatives independent Office of Congressional Ethics (OCE) were scrapped after thousands of phone calls opposing the move tied up Representatives’ telephone lines. The fight to curb the power of the OCE was not new, nor was the tool used to voice disapproval. You have your First Amendment Rights for a reason. Likewise, over dinner recently with a long-time friend, she surprised me by saying if the new administration rolls out a Muslim registry, she’s planning to register. She is not Muslim nor of a targeted ethnicity. It was her way to disrupt a rounding up of people according to religion or ethnicity, and she was betting it was unlikely that the authorities would come round to arrest a white, middle-aged mom in the suburbs.

I felt obliged to remind her that that was a reasonable bet now, but perhaps not in the future. (See point #3, below).

3. If you plan to act, PLAN to act

You know this is all really leading up to some planning. Whether you give money – for a tax deduction or not – or decide to take action yourself, make sure you plan for it. It will take time out of your already busy lives, to research a charity, to call your Congressperson, or better still, to show up en masse at his or her office. To work on a committee, to meet up with others to plan, to work, to act. It will use nights, weekends, vacation, PTO. And you’re going to need to protect yourself when you do.

When I was in graduate school, a visiting professor taught a course on ethics. I was skeptical about what ethics you could teach to MBA students, but her approach was pragmatic. Specifically, she talked about how to be prepared in case you found yourself working somewhere in which you found corporate behavior to be illegal or unethical. There is often an enormous toll for speaking out, not only in legal costs but in damage to your career in the short- and sometimes long-term, to your social and professional networks, personal financial security, and to personal health. At a minimum, you need to be able to walk away. We all want to be the kind of person who acts when needed, but not everyone feels they can for some of these reasons.

One of the things she taught us was to have a cash reserve. Yes, I’ll always recommend you have an emergency fund. Beyond cash for a short-term shortfall, consider building another kind of reserve. Have “pin money,” bail money, a Go F*ck You Fund, a reserve in case you need to make a change, or end up at Santa Rita after your weekend activities.

A Brave New World
Progress often feels like two steps forward and one step back. We are at the beginning of a new cycle for social justice, and things are going to get bad before they get better. It’s going to take work and sacrifice to make progress. Civil rights, women’s rights, human rights all seem under threat as we move into this New Year.

You can leave it to others. 56% of Californians and 39% of Washingtonians did not vote, they left the decision to others. Don’t leave the work to others. Plan for your part in it, whatever that is.

I’m encouraged by the numerous people in the media, experts in disparate professions, and yes, even some politicians, who understand what is at stake and who are ready to put their time and effort towards moving us forward. Find your cause, find others working towards the same goals, find your tribe. At a minimum, it’s an opportunity to get to know your neighbors, co-workers, kids, parents in new ways. It’s our connection to others that gives us a rich life, and believe it or not, this year and beyond could prove to be some of the most moving and meaningful times we might have. It takes courage, and time and effort. Set your intention: what do you want to look back on with pride at the end of this year? It is a New World in this New Year, and we need to be brave in it.

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A Post-Election Note

Posted on Nov 9, 2016 in Community, Investments, Planning, Tax, Women

Like me, you may have felt that the world would look different this morning (if we even woke up at all) after the results of the presidential election. And yet, the sun rose, the day began, and here we are.

What we know after the election is that our country is seriously divided. As we saw when we elected Barack Obama, we want real change. The trouble as I see it is that the direction in which President Trump will lead us will be more of the same. Right now, markets — and the people who make them up — are orderly. There may come a time when the emotions that drove this election will react negatively to a lack of any real change.

Here are a few thoughts on what comes next:

Economics – We have limited specifics on Trump’s plans for “national growth and renewal” in the economy, but there are echoes of Reaganomics: lower taxes, relaxed regulation, big government spending. If the fiscal stimulus he plans repairs and expands our infrastructure, that’s a plus. Reduced regulation (such as repeal of the new DOL Rule (which requires advisors to your 401k to act in your best interest), repeal of Dodd-Frank (Wall Street reform), repeal of the Affordable Care Act) means you’ll be more on your own to protect your interests.

Taxes – We can expect lower taxes, at least on higher earners. I am doubtful Trump’s plan to bring overseas corporate earnings home; if he is able to do this, that’s again a plus for higher earners. Given the structure of our Federal budget, we can’t grow our way out of a deficit spending situation, so lower taxes means increasing deficits.

The World – We are more connected globally than ever, and building walls and reducing trade is likely to hurt us economically, as well as in our leadership role in the world. Bombastic rhetoric in discussions with other leaders and nations could have dire consequences.

The Rhetoric – The most difficult part of the campaign for me has been the vitriolic, threatening language that stirred up some of the ugliest facets of the American character. As a woman, I feel unheard, less safe and decidedly second-class. But I believe we can’t change what we don’t acknowledge, and we must admit this election cycle has revealed a dark side we have wanted to ignore. How we continue the conversation around these issues and change them is the real challenge.

Markets are mixed this morning, after some strong negative indications overnight. We can expect to see more volatility in the months and years ahead, and increasing economic inequality. What we can do is focus on what we can control: diversifying the risk in portfolios, organizing your accounts for tax diversification and to keep expenses as low as possible, saving more, and when we spend, spending with intent.

The table next to mine at the Election Watch Party I attended last night joked that at least here in California we also passed a recreational marijuana law, which we’ll need all the more after this election. (To be clear: I don’t recommend that as a personal financial strategy.)

In the meantime, we need to continue the conversation, and fighting for what we believe: “Let us not lose heart in doing good, for in due time we will reap if we do not grow weary.”

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March (Money) Madness

Posted on Mar 19, 2016 in Planning

It’s that time of year again when offices across the country experience an uptick in employees who call in sick, and a widespread reduction in productivity. No, it’s not flu season, it’s March Madness.

I played basketball in junior high, shot hoop on the floor of Portland’s Rose Garden, and follow the sport a little, but I wouldn’t have deviated from my usual routine for the three weeks of collegiate competition. I have no idea about the merits of one team or another, I have placed no bets and have formulated no brackets.

What did get my attention was another bracket asking me to choose my Final Four – and my Number One Pick to win a Financial Four. This roster was a little different: it’s March Money Madness.

Often in financial planning, it’s hard to know where to begin. Which tasks do you put first? Review your insurance? Pay-off your credit cards? Save for check your credit score? The National Endowment for Financial Education and the Financial Planning Association put together a Financial Final Four to help us get a clear picture on how to prioritize our fiscal goals. Financial experts have entered their brackets, weighing in on what Americans should be thinking about as their top priorities in 2016.

And you can play along as well.

Thirty-two financial tasks are grouped into four “regions”: 1-Growing Your Money, 2-Spending Wisely 3-Protecting What You Have, and 4-Learning & Talking About Money. In each division, two financial actions are pitted against each other until the Sweet Sixteen become the Elite Eight, the Final Four, and at last, Your #1 Financial Priority.

My Final Four, the winners of each “region” are:

1-Start saving early
2-Have a spending plan
3-Maintain adequate insurance
4-Identify Financial Values

Even after more than 15 years as an advisor, it was still an interesting exercise to winnow down deserving financial tasks to get to my Final Four. The philosophy behind my selections involves controlling what you can, and beginning with the end in mind.

1-Start saving early
This is the same as going to practice every day, improving your skills over time. As Yale Bulldog Makai Mason, who scored a career-high 31 points in Yale’s upset over Baylor, put it: “I was just trusting in my practice, hours and hours of just shooting foul shots at the end of a workout and making a certain amount in a row just before I’m able to leave the gym,” he said. It’s a little bit of money over a long period of time that gives you a financial win.

2- Have a spending plan
You might want to be an all-around great player, but you have your unique set of skills and limits. You can shoot but not jump. You’re not tall but you’re fast. You need to understand what your limits are and spend your resources (time, practice, money) where it makes the most sense for you. To just throw yourself into a game understanding your best athletic talents is no strategy. Once you get beyond the essentials (food, shelter, clothing) you start to have choices about how you spend your money. Focusing on what really makes you happy – like what makes you shine on the court – is what you focus on. Spend where it gives you the most pleasure – but you trade off something else to stay within your limits.

3-Maintain adequate insurance
You’ve got to understand the risks you are exposed to, and decide whether to retain them, eliminate, reduce or transfer them. If I’m a basketball player with a shot at playing in the NCAA finals, maybe I’ll accept the risks of playing other sports to cross-train. Maybe I’ll skip the sky-diving. Or avoid getting into a fight that could get me suspended or injure my hands. It’s just not smart to risk your major assets when you could walk away or otherwise avoid a catastrophic loss. Similarly, the most well-constructed portfolio won’t get you very far if you have a major health crisis without adequate insurance, or are sued for a slip-and-fall injury on your property. If you have good health, income from a job, or a few nice things, you’re going to want to protect them.

4- Identify Financial Values
You don’t get to the Final Four without making sacrifices. Time with friends, partying, and other classic college activities are typically set aside when you’re in training. You need to be disciplined, you need a goal. You have to want it. Similarly, it helps to know why you’re saving to stay on track. If someone just tells you you need to get more exercise, they might be right but it’s not so motivating. If you decide you want to manage your health to be there for your family, that’s a prize that can keep you going to the gym even when you’d rather not. Knowing what’s important to you gives you the motivation to keep to your plan, even when it gets tough.

My “winner” in this game of March Money Madness is identifying your financial values. Many of you have heard me say that I don’t know what to do with a portfolio until I understand what you need it to do. Your goals drive how your resources get allocated. Your financial values will be at the center of your financial life, and will ground you when you start to drift. If you want to save for a two-month sabbatical in France, identifying that goal can help you when it’s so easy to spend money elsewhere. Like picturing holding that trophy when you’re tempted to skip practice.

My perspective on the Final Four holds true at any age: if you’re already in or nearing retirement, it doesn’t much help for someone to tell you to start saving early. But you always have to formulate your financial values as a target so you can even know whether you’re “winning.” If you want to fill out your own roster of Your Financial Four, you can do that here:
http://www.financialfour.org/

You can submit your bracket to see how your results compare to the team of financial advisors.

As for basketball, Yale (grad school) made its first NCAA appearance in my lifetime as winner of the Ivy League. UC Berkeley (undergrad) was out after the first round, so my personal interest in the rest of the tournament is minimal. But Yale moves on to play Duke, and that has at least spawned some humor in a host of tweets and memes about the match-up.  You can get out your polo shirts and boat shoes and read more on that here:
http://www.huffingtonpost.com/entry/yale-duke-march-madness_us_56eb3a0ae4b084c6721fda68

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