Spring Cleaning (Ep 96)
While you're tidying up the garage and carrying on your traditional spring cleaning tasks, tune into this episode of Make The Dough Rise where we focus on "spring cleaning" your finances, covering essential topics such as tax preparation, the importance of beneficiary reviews, and strategic updates to your investment portfolio. Could Small Cap Value be the most undervalued segment in the market right now? We'll also provide insights into effective planning tools and the implications of upcoming tax law changes.
Transcript - The following transcript was generated by a robot, so please excuse any typos or inaccuracies.
Announcer 1 00:02
It's time to make the dough rise the financial podcast with Brian dough Hey, it's another episode of Make the dough rise and it's gonna be a good one. It's spring cleaning time. Oh, I actually hate this time of year Brian spring cleaning. That doesn't sound fun at all. I don't want to do that. And now not only do I have to go clean out the garage, we're going to be talking about cleaning out our finances, I'd rather do the financial spring cleaning at least though than having to clean the house and get the garage all set up for the year. That sounds more fun. Actually,
Brian Doe 00:33
there's at least some financial benefits to the spring cleaning the other types of spring cleaning you just you get dirty and everything. I guess it feels good when you get it done. But yeah, it's just a mess. This is this is more academic and paperwork kind of stuff with a good financial payoff. So once hopefully it'd be worthwhile,
Announcer 1 00:52
we need to pay off that's for sure, in some way, shape or form. So yeah, if it's in the garage, at least he got more room to spread out and activities and make better use of that good space. And here are the financial world we want to maybe increase our opportunity to save money whether it be literally saving more or saving on taxes and what we owe or expenses and all of that can be improved through some proper spring cleaning. So this will be fun to dig into before we jump into all of that though, Brian anything exciting going on in the in the dough household these
Brian Doe 01:21
demand there's nothing but excitement at the dough house. Right? That's good got. I mean, Hannah is trying to decide where she's headed off to college. It's a fun time and all the moves. There were we're looking at some other options for our middle child and lowly. And then our the Natalie has gotten very involved in the theater. So we've got big musical coming up. Graduation has got a piano recital. I mean, it's going to be nonstop from here till
Announcer 1 01:51
next fall. Wow. Yeah, it's a lot going on. So lots of fun for you to just add things to the calendar and quite the quite the variety. It sounds like too. So it's fun seeing them grow up a little bit too. Yeah, yeah. Yeah, seeing that little bit more independent streak, probably. And just moving moving that ball forward each and every day a little bit more, and need for you to be able to experience that. Well, thanks for bringing this topic up. today. Let's dive in spring cleaning. Let's get to the specifics and what comes to mind for you and what should be coming to mind for clients and listeners to the podcast when we think about financial spring cleaning. Yeah,
Brian Doe 02:24
real quick. Obviously, taxes and tax time is happening. So we're gonna do a deeper dive into that. We've really dramatically upgraded our planning tools. We've had an enhanced tax planning tool for some time that we've we've been dabbling with. So a lot of people listening, maybe we have already experienced our holistic plan snapshots, but great tool, and there's some changes coming to the tax code. So we'll want to make sure everybody's taking advantage of that. And then we'll talk about the markets and quick portfolio update. And probably the biggest house cleaning or spring cleaning topic that we're encouraging people to look at is updating beneficiary designations. Account titling, there could be some changes to the estate tax amounts coming along. And so the things that we've been cruising along on and the rules that we've been operating under for some time now, are all back in play, and there could be some big changes coming up. And obviously, you know, as time passes, if you've lost parents or a spouse or something like that, it never hurts to go back and check all these documents and who you've named and make sure they're still around, make sure that you've got proper proper beneficiary designations for IRAs 401, K's life insurance policies. A lot of people have transfer on death accounts or transfer on titling, whether it's bank accounts, brokerage accounts. Those are non IRA accounts, where you can very simply name a beneficiary. This is a titling that has been adopted in all 50 states now. So we're seeing more and more people even doing that with larger accounts. And that way you can avoid some probate, set up most of your assets to just automatically transfer if you don't need some complex trust structure to leave assets. But still, you have to make sure the beneficiaries are the right people, the right percentages. Maybe you've named a brother or a parent or something like that. And for tax purposes, those those can be some disasters if you don't get them updated correctly.
Announcer 1 04:43
All interesting little avenues that we get to investigate today. So where do you want to start? You want to look at portfolios first for our investigation here? Yeah,
Brian Doe 04:50
yeah, the markets been very cooperative. Obviously. I think everybody's seeing that in their portfolio values. I I'm, I have fewer incoming calls these days. It's
Announcer 1 05:00
interesting how that works, isn't it?
Brian Doe 05:03
Not Not that I, you know, I don't get a lot of jumpers when the market goes down. But obviously, you know, people get concerned. But yeah, we really rallied nicely out of the 2022 downturn that we had last year was a good year, we've continued up this year, and a lot of things are looking very positive for the markets right now. But so much of the action has been in the large cap technology space. In particular, we've talked about maybe the seven to 10 stocks that really drove the indexes and the returns. And so one of the big portfolio changes that I've been making for clients is the addition of a small cap value fund. And I have been aware of a company called dimensional funds, they've, they've had a mutual fund offering for for a long time. And they're very quantitative analysis, very geeky filters and criteria that they constantly monitor for the stocks that go in there in their funds. But the problem was, they were always just available as a mutual fund. And that has a structure to it that is not as favorable in a brokerage account, a non qualified account, non IRA account in the over the past couple of years, they've come out with exchange traded funds, and so they they have a small cap value fund, that has all the advantages for cost basis and tax harvesting of gains, that leaves you in control of those variables. But it gives you a very good filtering mechanism for picking the right stocks. If you look at small companies, there's a lot of potential risks but also potential growth there. And so you want to be more mindful of which companies you're you're putting into the index, well, if you buy an index, that index is set by Russell or standard pours, or you know, whoever's MSCI, whoever setting the index, and they only reconstitute and rebalance that index, maybe once a year. So a lot of the companies may have changing financial circumstances may have price momentum changes, any any variable that you would want to use as a buy or sell indicator for the individual stocks, while in the small cap space, that extra mindfulness and monitoring can really pay off, when so in the past, I've tended to avoid or have very small exposures to the small cap space, because with those indexes, you're gonna get a lot of the very volatile growth stocks very low profitability companies. And their small cap value fund really focuses on profitability, they're watching for one time, cash infusions that may indicate either distress or potential takeover, price momentum, if they've had too much of a run up. If they're getting added to an index, that causes a spike in buying activity as all the other index funds have to add it to the to the index, they're able to avoid a lot of those downsides to traditional indexing in a space that can use the extra attention. So dimensional funds, small cap value, a lot of people seeing that going into their portfolios, it's been holding up and advancing very nicely. But it is also the most affordable or most appropriately priced segment of the market. Right now. We're seeing a lot of price to earnings ratios go up for the large company and tech stocks. And the boost, fair or even discounted value relative to historical values is in that small cap space. So kind of excited to see where that that goes and very happy with this font
Announcer 1 08:58
selection. Yeah, I feel like you don't hear the words undervalued a whole lot in the stock market these days. So you hear overweighted or things like that, I think a little bit more frequently. So neat to see maybe some areas of opportunity there for folks who pay attention to such things.
Brian Doe 09:13
So what's historically a more volatile area, the market actually looks like the safer place to be right now.
Announcer 1 09:19
Well, that's interesting right there. Yeah. All right. So that's what's going on in the portfolio side of things. What about on the planning side? Well,
Brian Doe 09:25
so also new tool in the planning space, it's taken me some time to get up and running on it, but really does a good job of capturing your entire asset stack. Human capital being the big one. And so if you're in your final earnings years, or maybe peak earnings years, and you're overly focused on like, what's my balance going to be in my IRA or what's my brokerage balance going to be? A lot of people fail to look at what their cash flows. In future cash flows from Social Security, maybe potential liquidity events from selling real estate or businesses or inflow from life insurance policies or from an inheritance, all of those variables can have a major impact on your financial plan. But a lot of the traditional financial planning mechanisms just look at growing your portfolio balance, how much can you withdraw from that? And is that going to satisfy your need, and it's often done on a linear basis. So a lot of expenses that you have, and I'm, I'm experiencing this myself, with three children about to go off to college, there may be weddings, or cars or things that you need to buy, you may have a time period of higher expenses. But the linear models of financial planning don't really capture that as well as it needs to happen. Because you may be at a much higher burn rate on cash for a number of years, and then it could drop dramatically. Or you could have the scenario where you want to have, we've talked in the past about the font font, that you're going to transition to retirement and you want to have a number of years where you do spend a little bit more than maybe things slow down, and then you have more long term care or health care expenses later. So being able to better monitor all of the different asset categories that you have, factor those in what are their present values, and then build a better budget that captures or encompasses this fluctuating need for cash based on a different time periods or lump sums, you know, both inflows and outflows, libretto is the name of the company, but really, really pleased with the outputs that I'm getting from that. And it helps people realize that a lot of their future cash flows are not insignificant. And Social Security is the big one. I had one prospective client basically said, Oh, well, you know, Social Security is just going to be a rounding error for me. I said, Well, you know, I said, you've got a high net worth, you're selling a company that good income, I said, but the net present value of your and your spouse's combined Social Security is about 1,000,003. Is that a rounding error? Oh, well, no, actually was was not at all a rounding error. It was actually hitting several percentage points. So it's been fun to be able to quantify and illustrate these things. It's a little bit different approach than than the traditional linear build up your portfolio, which are withdrawal rate, creating an income statement and balance sheet just gives you a much better way to capture the earnings potential that you have, or liquidity events, like I said, from illiquid, or semi liquid assets. So if you have some questions about that, or curious about that, I will be rolling that out for more clients going forward as I get, become more proficient with it. But if you're in your 50s, early 60s, you got a number of income years left, man, don't wait until you retire to reach out and start making a plan and getting a strategy that you can really do a good job of quantifying what is your earnings capability, there may be some part time work, or some consulting gigs that you could get, and determining whether you need to do that, or don't need to do that. Or if you have extra resources, maybe you can take on some additional risk by doing some more speculative investments or private equity or take private equity positions. So there's a lot of opportunities that become available. But it's good to know, do you have the budget for that? Do you need to do that? Do you even need to work if you do how much you know how many years would get the job done. And so it's been able to just give people a better sense of what they really need to do in retirement and what their options are. Sounds
Announcer 1 14:22
to me like a great illustration of that danger of assuming because it doesn't always mean that you're going to make some major mistake that's going to cost you money from like losing money, but it could be costing you from the standpoint of opportunity. And so if you if you are making assumptions anywhere in your financial plan, that should be a little bit of a red flag because just like that Social Security example you could be leaving way more on the table than you than you realize and nobody wants to do that. All right, let's get to it. The taxes any part of spring cleaning this time of year as a recording this just ahead of the tax filing deadline and all that good stuff. So this is Top of Mind For a lot of people, and there's gonna be a lot on the horizon changing in the coming years in the tax world, we've been kind of warning about it for a little while. So there's some immediate things here. And then there's some stuff kind of immediately coming down the pike.
Brian Doe 15:10
Sure. So item number one would be is if you've just done your taxes, while it's still at the top of your inbox, or you know, where that PDF file or the hard copy of your return is, use this opportunity to get me a copy of that return. If you're one of the people who has run the holistic plan snapshot, you'll know what a nice output that is, and what a great tool that is. But as we're coming up on the potential change in future rates, which we'll get to here in just a minute, it's going to be nice to be able to just toggle back and forth to say, you know, what are what's my optimal bracket? What's my average rate? You know, all those, those numbers. But if rates change in 2026, what impact is that going to have? Is it going to be a dramatically higher tax rate is it going to be a loss of deductions, or maybe you're going back to itemized deductions, all of these these things are coming, but hold us the plan allows us to give you a good deep scan of your total tax return. And we can capture all of all the variables and calculate safe harbors and make sure you're not getting penalties and interest and things like that for either underpayments or we're missing a quarterly estimate or something like that. But the big thing that's happening is the 2017 tax cuts and job act is set to expire. And the way they are able to get tax cuts passed these days is they come up with a new law or new tax code that is set to expire at some future date. So it's a sunset provision. And that's what they did with in with the 2017. Act, they put it in place, let it run for eight years. And everybody can sort of buy into it or sign off on it. Because they know that in the future as it expires, they don't have to end that legislation, it's automatically set to end. And so they don't have to go and raise taxes on you. They're just letting the old legislation expire. Because that was the that was the rule. That was how it was set up. And so if that happens, and there's some debate about whether this will actually happen or not, obviously there there are people that recognize the value of the current tax code. And they're campaigning or lobbying to extend these rates. There are some segments of it that impact more people, which means more votes. And so maybe they keep certain segments of the tax code. But let's just proceed and say everything expires and goes back to the 2016 rates. Well, standard deductions was the big one. We they doubled the standard deduction. So most people who were itemizing, or maybe we're kind of right on the cusp of itemizing. It really helped because you got a larger standard deduction, but then you were you were losing all your itemized deductions. So depending on where you fell in that, that scale, well, we may be looking at a situation where standard deductions drop, and you may want to go back to itemizing. The other big thing is the brackets are going to get compressed. We've we've seen this nice adjustment up of the 1012 and 22% brackets to accommodate a little more income, which has been nice, because you get you've been getting inflation adjustments to Social Security payments, maybe your portfolio dividends are up money markets paying more, you've had a pay increase with work. As your income has gone up, those brackets have expanded so that you have not necessarily gone into dramatically higher tax brackets. Well, those those get all compressed back down and this income that we were realizing and the 12% bracket may bump up into the 22% bracket. Oh in the 22% brackets actually going to 25% and the 12% bracket is going to 15%. So we're talking we're talking about some significant amounts between the higher rates and the compression of the brackets. Okay, before it all sounds totally doom and gloom, and we're all going to be paying dramatically more in taxes. The good news is we could be getting we would be getting the salt deductions back in that state and local taxes. If you're paying state income tax, property tax ad valorem tax, you're capped at 10,000 dollars of deductions on those now. So if you're paying more than than 10,000, for those types of things, well, the good news is, is you'll actually get a better deduction for those. That's probably the top benefit that I've that have seen coming from the potential expiration of these of these rates,
Announcer 1 20:20
helpful to see that we've got some positives to go along with some of those negative lapses. And that's, that's assuming that someone doesn't step in and do something about those in the next year and a half to right, because that could also be another outcome from all this. Yeah, I
Brian Doe 20:33
think I don't know what's actually going to happen, I don't really have a good feel or sense legislatively, you know, there's been so much political turmoil, that I don't know that we have a clear sense of where anybody is gonna stand obviously going to depend very heavily on the election these these were Trump's tax cuts. So if he were to win the election, then that certainly would give some more support to these getting extended. If he loses, I think Biden would like to see the rates for higher income earners, go up and maybe keep some of the rates for the more moderate income earners, my big caution is going to be for Gen X, high income earners. This is where I see the real problem. This isn't necessarily an income tax rate. But we've got Social Security strained, Medicare strained, and you've got all the boomers retired, the the last of the boomers are entering retirement, and you've got all the millennials have fun, they're finally building homes and having families and getting things going. And Gen X in the middle is going to be the generation that is going to be completely out voted by the boomers and the millennials, because the Millennials don't want their their parents moving into their basements now that they've finally gotten out of their parents basements, and you could see a lot of push a lot of voting power, for the idea of raising the cap completely on FICA taxes, that that could be one of the things that they could implement to try to, quote unquote, save Social Security. So if you're earning above the FICA cap, and have phased out of Social Security tax on your wages, well, they, they could lift that, and all of a sudden, you're paying an additional 6.2% on all of your income. Plus, if you're your own employer, that's another 6.2%. So really 12.4%. And I see a lot of talk about that without people really understanding that the more you the way the formula works, the more you pay in Social Security taxes, the higher the benefit, future benefit that you're gonna get, that benefit tapers off, the higher the income goes. So I don't know how they would reconcile that. But I would just be be very cautious. If you have your peak earnings years, and all of a sudden they lift the FICA cap, you can see a 6.2 to 12.4% increase in all of your income above the current FICA limits,
Announcer 1 23:17
a lot of things to consider there anything else in the tax realm we should keep top of mind here? Yeah,
Brian Doe 23:22
so for people who are in the r&d phase in which they've increased required minimum distribution age to 73. But if you're over 70 and a half, we've been doing a lot of charitable gifting from IRAs, that's going to continue to be a good way to go. That's, that's not tied in so much to the income tax code. And whether you get your itemized deductions or whether you have you know, rates go up and then the withdrawals from IRAs get more expensive, I think continuing to do gifting for my IRAs will will continue to be an advantageous thing to do. Don't forget that you can also do gifting to children, grandchildren, that that amount is up to 18,000 per year. So if you're concerned about estate taxes, that number is going to go from I think it's 13 point 6 million per person. So 27 point 2 million per couple that you can leave a state tax free. Well, that's made it Yeah, most people have not had to worry about estate taxes. Well, those get cut in half, you're looking at, you know, 7 million for a single 14 million for married. You may may have some situations where you did not set up the bypass trust and title assets in different names. Because those limits were so high you weren't going to run into estate tax issues. But if things have gone well, a lot of real estate value has increased dramatically. You could be looking at situations where the estate tax comes back into Play. So doing some gifting now during the charitable gifting from IRAs, you can reduce those balances, reduced future required minimum distributions and reduce estate tax consequences. I know these are all specific to individual circumstances. But I'm just I'm just throwing out all the variables that I think people should be considering.
Announcer 1 25:20
Oh, yeah, a ton of variables. And all of this can get uncovered through proper planning, right? I know this is 100 different variables. But it's not like you've got to go individually investigate each and every single one of these. You go through the planning process, and you're going to be able to start uncovering all of these areas of opportunity and seeing where the gaps in the plan are, and all that sort of stuff, right?
Brian Doe 25:40
Yeah, obviously, this is the thing about running iterative plans, you want to do some long term projections and say, what what are rates today? How would things play out today? How could they change in the next couple of years or your longer term, you need to do some things, calculating what your your future estate value might be? The estate tax number has changed. Just about every year I've been in this business for 24 years they've had they've had a different estate tax limit or dollar amount that you could pass a state tax free. I think that's changed 90% of the years that I've been here. So it could swing wildly from from year to year. And I've seen it go from as low as 675,000 per person to is unlimited. There was one year where they failed to pass anything and you could if you happen to die that year, it was unlimited. So yeah, just just being mindful of it and keeping an eye on it over time. Make sure you do those, those housekeeping things, update your beneficiaries. Keep an eyeball on taxes, Ira balances. And I think another big one, too, is we've seen much higher yields on money markets over the past several years. Well, those are taxable dividends, taxable interest. And so a lot of brokerage accounts, bank accounts, where clients were not earning a lot of income or interest from their savings. Well, now they are well, that's taxes, ordinary income, that's not a qualified dividend. So it may be an asset location, question going forward. So yeah, whether it's the portfolio, whether it's tax, whether it's you know, gifting an estate, Ira, distribution, and charitable, all of these things intersect on your tax return. And so use this opportunity, like I said, to get a copy of the return, let's take a look at it. Are there things that you could optimize? Are there things that you could make little changes here and there, and if you can save a few 100 Or a few 1000, or, you know, over time, 10s of 1000s of dollars to exercise definitely worth doing? Okay,
Announcer 1 27:45
very good. Well, if you are looking to take control of things like we've discussed on the podcast today, your future tax implications if you want to make sure that you're staying up to date with the latest planning changes and updates and making sure your portfolio is optimized in all the proper ways. This is a great opportunity to begin that conversation with Brian doe and take control of that financial future. If you don't know exactly where to start, and Brian doe as a tenured Certified Financial Planner with more than 20 years of expertise can be your trusted partner throughout the process. As a Certified Financial Planner, in case you're kind of new to this planning world, you should know that someone with that designation meets the highest standards of training, ethics and always puts your best interests first during the planning process. So take advantage of a complimentary 15 minute call with Brian. gain clarity about your financial goals and prepare for that more secure tomorrow. All you have to do is go to living worth.com and click book a call that's again living werth.com and click book a call or you can call 706451 9800 706451 9800 Brian great recap on all the things you're keeping your eye on here in the spring. And I think that was a successful spring cleaning episode my friend and lots for us to be kind of thinking about and taking action even on several of these things as well as we go forward.
Brian Doe 29:04
Very good. And by dust off your hands go get ready for prosperity and summer is right around the corner and
Announcer 1 29:11
I have to go literally clean that garage now. At least we got the fun math talk out of the way first. So all right for Brian doe. I'm Walter Storholt. Thanks for taking the time to join us this week. I hope you have a fantastic rest of your day. Come back and join us for the next episode of Make the dough rise.
29:37
Make the dough rise is brought to you by living worth Wealth Advisors with a central office in Greensboro, Georgia, but serving the lake country and yet the podcast is available on Apple podcast, Spotify and all your favorite podcasting apps. Subscribe today and never miss an episode. Just search for make the dough rise with Brian doe You can also visit make the dough rise.com To listen to this And episodes. If you'd like to contact the show or schedule a complimentary financial review is Brian and the team. Just go to make the dough rise.com and get in touch through the website or call 706-451-9800 Thanks for listening to make the dough rise. Investment
Ben George 30:17
Advisory services offered through Main Street financial solutions LLC. information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable but their accurateness and completeness cannot be guaranteed
