Blog

Markets Finish Strong in 2023. Now What?

duda@levitateapp.com — Mon, 29 Jan 2024 12:00:00 GMT

I grew up watching John Elway of the Denver Broncos pull off several thrilling 4th quarter comebacks to come out ahead by the end of the game. Last year, financial markets looked shaky in the 4th quarter. By late October, international stocks were flat, most US stocks were down, and bonds were also down. Just when it looked like we might have a losing year, a powerful rally began driving markets higher in the last two months of 2023 to end the year with gains across the board.

A Review of 2023

The average gain for stocks within the S&P 500 Index was just shy of 14% (as measured by the S&P 500 equal weighted index) while smaller US companies and companies internationally were up in the 15-20% range. Two of the big stories from last year were technology companies performing better than the markets due to positive developments around artificial intelligence (AI) and the Federal Reserve keeping interest rates high, which led to continued stress in the bond market. However, inflation numbers came down considerably towards the end of the year and a rally in bonds led to a gain of 5.5% for the broader US bond market (as measured by the Bloomberg US Aggregate Bond Index). Volatility was high, but it was a good year overall for those who remained disciplined.

What’s Ahead?

Looking ahead to 2024, many factors went into our thinking for how to best position portfolios. Below are just some of the questions we considered:

Will inflation continue to moderate?
When will the Federal Reserve begin to lower rates and by how much?
Will corporate earnings justify the market gains we’ve seen in recent months?
Will AI continue to fuel excitement and provide real growth?
How will elections impact market psychology?
What surprises might there be?

With history as our guide, we weigh these questions along with current market expectations to ensure we make thoughtful and prudent investment decisions. By most measures, the market overall looks fairly valued to perhaps slightly overvalued. There are some areas that are cheaper than others and could be a source of above average gains. Smaller companies and those abroad are cheaper than large US companies. Bond yields are still attractive and can provide nice mid-single digit yields, which we’ve not seen in over a decade. Then there’s AI, where technological advances could provide a nice tailwind for growth in the years to come.

When it comes to the final quarter of a game, it’s tough to beat the thrill of seeing a team come from behind to win. With investing, there will also be ups and downs with excitement when things go well and disappointment when things don’t go our way in the short-term. Like sports, you can monitor investments quarter-by-quarter or even year-by-year. However, it’s the long-game that counts and applying a thoughtful and disciplined strategy is what yields results in the long-run.

5 Simple Tips for a Stress-Free Thanksgiving

Wed, 15 Nov 2023 12:00:00 GMT

So you plan to host Thanksgiving this year? For a lot of folks, the thought of hosting can be quite overwhelming! I've found that the key to keeping it low-stress (regardless of the size of the gathering or how many dishes you're preparing) is having a plan! Tackling the things that can be done ahead of time prior to Thanksgiving day will go a long way towards lightening the load!

1. Decide what kind of gathering you'll host.

Asking yourself these questions in advance will help you adequately plan for the day. It will determine if you need to design a tablescape, need more plates, or more seating. It will also determine how many dishes you need to prepare.

Size : Small and intimate or large and feisty?
How Formal : Will you being eating on paper plates or special China?
Who's Cooking : Is it a pot-luck or are you preparing the whole meal?

2. Decide on your menu 1 to 2 weeks out.

Specifically, what you plan to make. Print off your recipes and start your grocery list. Make sure you have all the kitchen tools you'll need: enough casserole dishes, roasting pan, a meat thermometer, and plenty of measuring spoons and cups! Not sure what should go on your menu? My typical lineup includes (but not limited to ��): Turkey, Gravy, Mashed Potatoes, Cornbread Dressing, 4 or 5 casseroles (Sweet Potato, Squash, Broccoli, Green Bean and Macaroni and Cheese), Rolls, and 2 or 3 desserts (Pumpkin Pie, Pecan Pie and Apple Crisp are some favs).

3. Buy your turkey a week in advance.

Most turkeys are sold FROZEN so make sure you give yourself 5 - 7 days to let your turkey defrost in your refrigerator.

4. Create a food prep schedule.

No matter how many dishes you're preparing, it can be helpful to make a schedule for what you're cooking and when. Here's my tried and true formula for the week of Thanksgiving:

Monday : Grocery shop (for everything but the turkey - since you already got that! ��) and make the cornbread for the dressing

Tuesday : Make the desserts, chop the onions or other vegetables

Wednesday : Assemble the casseroles (don't bake them though), and peel and cut the potatoes (keep them in a pot of water in the refrigerator until you're ready to cook them)

Thursday : Roast the turkey, make the gravy, bake your casseroles, cook and mash your potatoes, and heat your rolls

Friday : Kick your feet up and eat leftovers all day!

5. Plan out your oven usage.

If you only have one oven, it is super important to plan out when you will bake each of your dishes. Making your desserts ahead of time is one way to free up space, but those sides and turkey can take quite a while to cook! I always cook my turkey first, starting it early in the morning since most turkeys take at least 4 hours to roast. Next up I bake my casseroles! Regardless of time and temperature suggestions, I've found that baking all of my casseroles together at 350 for around an hour will do the trick! Keep the oven light on and stay close by making sure they are baking evenly. You can also use a meat thermometer to check that the internal temperature has reached 165 to be sure they are done. When my casseroles are fully baked, I PLACE THEM IN A COOLER. That's right - the same cooler that keeps your drinks cold will keep your casseroles warm! Using casserole dishes with lids will help you stack them up. Keep the cooler closed until you're ready to serve! Lastly (and right before it's time to eat), I heat my rolls.

Here's a sample baking schedule:

8:00 am - Start roasting your turkey

12:00 pm - Turkey done (make sure the internal temp is 165) - cover with aluminum foil to keep warm

12:15 pm - Start baking your casseroles

1:15 pm - Casseroles done - place in cooler to keep warm

1:45 pm - Heat up rolls

2:00 pm - Time to eat!

Looking for a few new recipes for your Thanksgiving table? Here are a few from our team!

From Jessica:

From Amanda:

From Seattle:

No matter how big or small your Thanksgiving meal, adding a measure of intentionality and planning can help you host with ease!

We wish you all a stress-free Thanksgiving!

The Age of AI: Ready or not, here we go!

Mon, 17 Jul 2023 12:00:00 GMT

A golden age of innovation is upon us. Beginning in the late 1700s, we saw the Industrial Revolution transition manufacturing from creating goods by hand to using machines. More recently in the 1990s, the Internet started to transform the way we learn, transact business, interact with friends and loved ones, and so much more. We’re about to experience another seismic transformation of our economy and world as we know it with the advancement of artificial intelligence (AI). Microsoft co-founder, Bill Gates, had this to say about AI in a recent blog post titled, “The Age of AI Has Begun”1:

“It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it.”

BILL GATES

To provide a sense for the expected growth in AI, Grand View Research projects the global artificial intelligence market size to grow to $1.8 trillion by 2030—growing at 37% a year from 2023 to 2030!2 When you consider the potential impact on the broader economy, it’s even more staggering. Economists from Goldman Sachs estimate that US economic growth as measured by GDP could be about twice what the Congressional Budget Office is forecasting for the coming decades. Rather than an economy struggling to grow more than 1.5% (net of inflation), we could see a robust economy growing at 3% a year.3 There are vast implications for economies around the world and life as we know it.

What AI is and how it might it impact you

The technology behind AI has been around since the 1950s when Christopher Strachey of the University of Oxford developed a program that could play checkers.4 Advancements were made from there, but they have been limited by computing power and available data. Fast forward to today, computers are much more powerful, and companies have been collecting massive amounts of data. AI has been found in simple applications such as rudimentary chatbots within help sections on websites, navigation applications such as Google or Waze, and digital assistants such as Google, Siri, and Alexa. Then just last year on November 30th, OpenAI (a company with a substantial investment from Microsoft) released a free prototype of ChatGPT that demonstrated to the world a sophisticated chatbot capable of responding with more natural language than we’ve ever seen before. In addition to text, it’s also able to generate new content in the form of images, audio, and more. This new form of AI is called generative AI, which means new ideas and thoughts can now be generated from existing data.

Below are just some examples of how AI might be used today or in the near future:

Write speeches or memos with a certain tone you specify along with a target audience in mind
Create images (or art) after you describe what you want to see
Help authors or song writers push through writing blocks by generating storyline ideas or lyrics
Give chefs ideas for dishes based on available ingredients
Enable drug manufacturers to accelerate and improve the research and development phase for new life-saving drugs
Help doctors to more quickly and accurately diagnose conditions and prescribe treatments based on all available medical research data
Accelerate the advancement of autonomous driving of cars
Plan out possible itineraries for your next family vacation based on ages within your family, where you want to go, and what you want to do

Essentially, AI is like an assistant with vast knowledge and the ability to save time and improve products, services, and life experiences. There are countless applications for the use of AI, but hopefully you’re starting to get a sense of what’s possible.

How AI might affect financial markets and your investments

It is difficult, if not foolish, to prognosticate how something like AI will impact financial markets. There are too many variables at play and so many unknowns to make reliable predictions. However, there are some trends and likely outcomes we can suggest based on history that I’ll attempt to summarize below.

Valuations of stock markets are likely to be higher in the future than we’ve seen historically. The stock market’s valuation should be viewed considering the historical weightings of various sectors and industries. Technology has become a larger percentage of the stock market over time. In fact, it has grown from 5% of the S&P 500 Index in 1992 to over 28% at the end of the first quarter of this year.5,6 Technology companies command higher valuations than others that produce (for example) household products such as cleaning supplies or toilet paper. We all love toilet paper as we were reminded during the pandemic, but there’s only so much growth potential and excitement that can come from toilet paper compared to AI, electric vehicles, or other segments within technology.
The worries about inflation today are likely to subside as AI continues to progress. Inflation during periods of technological revolution tends to be subdued when we realize meaningful productivity gains and become more efficient with time and resources. Simply put, technology helps to contain or even reduce inflation over time.7 We saw labor disruptions because of the pandemic, which contributed to a spike in wages and overall inflation. However, advancements from AI are expected to lead to less demand (not more) for human labor, which is expected to alleviate pressure on wages to increase in the years to come. This is a double-edged sword and it’s difficult to predict the full ramifications. This will probably play out gradually at first and while there will be disruption within labor markets, we’ll ultimately adapt as human capital gets reallocated to where it’s needed most.
There’s a good chance we’ll end up seeing a bubble down the road. Those old enough to remember the days of the late 1990s and how crazed everyone was for the latest internet IPO can certainly appreciate where we’re going with this. Unfortunately, emotions within financial markets swing to both extremes—greed in up markets and fear in down markets. Alternatively, you might even say that it’s always fear—fear of missing out in up markets and fear of losing in down markets. We’re very early in the advancement of AI, so a potential bubble isn’t likely to happen for some time yet. Nonetheless, investors need to proceed with caution and be sure to not get carried away with reaching for risk beyond what their emotions or financial situations can handle.

A thoughtful approach to portfolio positioning today

One of our beliefs is that you should view the holdings in your portfolio as if you’re making a conscious decision to purchase your investments anew each day. Forget yesterday or last year. All that matters is what happens from here, although you can allow history to guide your thinking about tomorrow. Investors often like to quote the great Wayne Gretzky when emphasizing this point.

“I skate to where the puck is going to be, not where it has been.”

WAYNE GRETZKY

We are convinced that AI is going to be transformational and have wide-ranging and long-lasting implications for all of us with both benefits and risks. AI is likely to disrupt labor and many industries. These disruptions will force global citizens to grow and adapt like we have done in the past with new technologies. As with many tools, AI will likely be a powerful tool in the hands of those wishing to inflict harm on others. Government officials around the world are working on ways to regulate AI. As for feelings about AI, they are all over the map. Some feel anxious, others excited, and some in between. Regardless of how you feel, the process of AI adoption has begun.

The upside potential for AI is incredibly high, and we are hard at work positioning portfolios for the years ahead. We have been revisiting our investment strategy with regard to the underlying exposure to secular growth sectors such as technology and healthcare, how to diversify beyond the concentration of the largest companies to benefit from the emergence of new leaders, and how to take advantage of yields in today’s fixed income markets given the expected disinflationary impact of technology. As always, those who exercise a thoughtful approach to investing should do well. By thoughtful, we mean intentional positioning of geography, asset class, sector, and security type with an appreciation of risk and opportunity for return. There is so much to consider during this exciting time. Ready or not…here we go!

Sources:

https://www.gatesnotes.com/The-Age-of-AI-Has-Begun

https://www.grandviewresearch.com/industry-analysis/artificial-intelligence-ai-market

https://www.aei.org/articles/why-goldman-sachs-thinks-generative-ai-could-have-a-huge-impact-on-economic-growth-and-productivity/

https://www.britannica.com/technology/artificial-intelligence/The-Turing-test

https://blogs.cfainstitute.org/investor/239-472-4538/is-technology-a-new-asset-class/

https://www.thebalancemoney.com/what-is-the-sector-weighting-of-the-s-and-p-239-472-4538

https://www.richmondfed.org/press_room/speeches/thomas_i_barkin/2022/barkin_speech_239-472-4538

SECURE Act 2.0

Tue, 24 Jan 2023 12:00:00 GMT

On December 29, 2022, SECURE Act 2.0 was passed into law. The SECURE Act 2.0 has many more provisions than the original SECURE Act, portions of which do not take effect until next year or later. Some of the provisions still need clarification from the IRS and some will need to be implemented by company retirement plans and/or custodians before they can be utilized.

The Original Secure Act

Let’s first review the two major provisions that came from the original SECURE Act, which was passed into law in December of 2019.

Age for Required IRA Distribution - The age for required distributions from retirement accounts was increased from 70.5 to 72.
Inherited IRA Distributions - The ability for beneficiaries of inherited retirement accounts (from those who passed away in 2020 or later) to stretch distributions over their expected lifetime was eliminated. The law now requires the account to be distributed within 10 years. We are hopeful that clarity will be provided as to whether distributions from those inherited retirement accounts are required annually. There were no penalties for not taking distributions in 2021 and 2022

Major Provisions of SECURE Act 2.0

Retirement Account Distribution Age

The starting age requirement to take distributions from retirement accounts increased to 73 (from age 72). For those born in 1960 or later, the age to begin required distributions is 75.

The age to begin making QCDs (qualified charitable distributions) remains at 70 ½. The $100,000 per year limit will be indexed for inflation beginning in 2024.

Roth Contributions

There are more options for making Roth contributions in employer-sponsored retirement accounts.

Employer Contributions – Whether it is a matching contribution or a non-elective contribution (i.e., the company contributes 3%/year automatically), those contributions can now go into the Roth side of your retirement account. Note that the company gets a deduction for any contribution to the employee’s account. If the employee elects to have it go into the Roth side, the contribution will be taxable income to the employee.
Catch-up Contributions (for those age 50 and older) – Beginning in 2024, if an employee’s prior year’s wages were over $145,000 (adjusted for inflation), the company will be required to put all employer contributions into the Roth side. This does not affect profit sharing plan contributions.

Roth Accounts

SEP-IRAs and SIMPLE IRAs can now be a Roth version of those accounts. As mentioned in the introduction, the custodians have to create the necessary forms to allow the accounts to be opened and funded, but they are now allowed.

Roth IRAs from 529 Plans

For those individuals that have excess funds in a 529 Plan, starting in 2024, there will be the opportunity to use funds from the 529 Plan to fund a Roth IRA for the named beneficiary.

The account has to have existed for at least 15 years and you cannot use contributions made within the past 5 years (or earnings on those last 5 years of contributions), but otherwise, those funds can be used to fund a Roth IRA.

The ability to contribute to a Roth IRA is the same regardless of where the funds come from and you can use up to $35,000 (lifetime limit; indexed for inflation) from a 529 Plan to fund a Roth IRA.

Additional Catch Up Contributions (age 239-472-4538

Beginning in 2025, in the year you turn ages 60, 61, 62, or 63, you may make a larger catch-up contribution.

401(k) or similar plans - at least $10,000
Simple IRAs - at least $5,000
If your prior year’s wages are over $145,000 (as described earlier), those additional catch-up contributions have to go into the Roth side.

Spouses Inheriting Retirement Accounts

A surviving spouse can treat the inherited retirement account as if the decedent is still the owner. This could help delay distributions from the account.

Ability to Take Distributions from Retirement Accounts with More Favorable Tax Treatment

Generally, you cannot take a distribution from a retirement account before age 59.5 without incurring a 10% penalty. Below are some new/updated provisions to allow early distributions without penalty under certain circumstances:

Qualified Disaster Recovery Distributions – Similar to the recent Covid-related distributions (and other natural disaster distributions), up to $22,000 can be distributed from a retirement account during a lifetime. The distribution can be paid back within 3 years and if not, the income can be spread over 3 years. This is relevant if someone lives in a natural disaster area. The amount one can borrow from a retirement plan (such as a 401(k)) increased and loan payments can be delayed up to one year.
Domestic Abuse Victim Distributions – Beginning in 2024, victims (self-certified) can take out the lesser of $10,000 or 50% of the vested retirement account balance.
Terminal Illness Distributions - If a doctor states you have a condition or illness which can reasonably be expected to result in death within 7 years, you can take retirement plan distributions without penalty. Distributions are repayable for up to 3 years.
Long-term Care Distributions - Beginning on December 29, 2025, you can take money out for long-term care expenses at the lesser of $2,500/year (indexed for inflation) or 10% of your retirement account balance.
Public Safety Workers - Currently they can make penalty-free distributions upon turning age 50. This has been expanded to those that have 25 or more years of service.
Private-sector Safety Workers - Similar to public safety workers, private-sector firefighters and state and local corrections officers will be able to take distributions without penalty once they reach age 50.

Other Provisions of SECURE Act 2.0

Below is a high-level summary of additional provisions, however it is not an exhaustive list.

Missed Required Minimum Distribution Penalty

Historically, the penalty for failing to take a required distribution from a retirement account was 50% of the required distribution. That has been lowered to 25% and further lowered to 10% if fixed in a timely manner.

Student Loan Payments

Beginning in 2024, employers can make matching contributions based on employee’s making student loan payments.

Military Spouses

In looking at their retirement account, companies with under 100 employees will be incentivized to treat military spouses as if they had been with a company for a longer period of time. This means:

They must be eligible for retirement account participation within 2 months of joining the company
They are treated as having 2 years of service once they start
They are immediately vested in all employer contributions

Disabled First Responders

Beginning in 2027, instead of their tax-free disability income becoming taxable income when their pension begins, the amount of the disability income will continue to be tax-free in retirement.

In Summary

While there are many more provisions in the SECURE Act 2.0, we provide this summary based on what we believe to be the most relevant information for the families we serve. The application of these rules depends on each family or person’s unique situation and it is important to discuss how the changes impact you with a trusted advisor.

Click below for a printer-friendly version

SECURE Act 2.0 - High Level Summary

Journey Beyond Wealth (“JBW”) is an Investment Advisor registered with the State(s) of GA, TN, LA. All views, expressions, and opinions included in this communication are subject to change. Registration of an investment advisor does not imply a certain level of skill or training. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions.

Charting New Waters: 2023's Investment Landscape

Fri, 20 Jan 2023 12:00:00 GMT

Predicting what the stock market will do is easy. It’s getting the prediction right that’s difficult. If you could tell me what corporate earnings (or net profits) will be for this year and what investors would be willing to pay for those earnings, I could tell you with great precision where the market would land by the year’s end. Unfortunately, there are so many unpredictable variables that impact corporate earnings. Even if you could get reasonably close, it’s practically impossible to know what investors’ appetite for risk will be at any given time. People’s emotions play a large role in determining the price of stocks and what valuation gets attributed to corporate earnings. So as a professional, what am I doing writing this paper and what’s the use in attempting to draw any conclusions about current market conditions and what the future may hold? Being informed hopefully gives you a little more confidence having your hard-earned money invested for the long-term. We can also put current conditions into context given historical norms and make reasonable judgments about near-term risks and long-term opportunities. After all, Mark Twain once said that “History never repeats itself, but it does often rhyme.”

First, what happened last year?

Last year, stocks and bonds both saw double digit losses as inflation surged higher, the Russian/Ukraine conflict raged on, and China struggled to open its economy due to the pandemic. Below is a quick snapshot of how various parts of the market performed.

The Federal Reserve caused a lot of uncertainty with seemingly being out of touch with the reality of inflation and having to play catch-up with interest rate increases and an ongoing balance sheet runoff — letting bonds mature and not providing support for new purchases. It was a year to invest more in defensive companies, maintain bonds with shorter maturities (they tend to hold up better when interest rates rise), and have an allocation to gold. Doing all three helped to mitigate the downside.

We must adapt to a new investment landscape.

For the last several decades, we’ve had powerful tailwinds propelling stock and bond markets to new heights. The federal funds rate, which impacts lending and money market rates, was a whopping 20% in 1980 and got down to zero during the ’08 Great Financial Crisis. Rates remained at or near zero until recently when the Federal Reserve started a campaign to fight inflation during the spring of last year. The S&P 500 Index rose from 102 in August 1982 to 4,796 at the beginning of 2022 (a compounded average return of over 10% per year). A declining interest rate environment has probably been the single biggest tailwind for stock and bond markets over the past 40 years. Globalization and technological advancements also played a role. The Federal Reserve could certainly reduce rates once they feel they’ve conquered inflation, but rates can’t come down by 20% again over the next 40 years. We must get used to a new environment where interest rates aren’t persistently dropping.

Globalization has been a boon to global commerce over the years and a benefit to keeping inflation low by enabling companies to procure lower cost materials from other countries and manufacture abroad where costs of property and labor might be lower. With Brexit, the pandemic, and increased global conflict pushing countries to feel the need to become more self-reliant, we have likely seen the peak of globalization. We are now moving in the direction of shifting back to domestic procurement and manufacturing, and tax breaks even incentivize deglobalization. This initially could lead to higher inflation until domestic manufacturing capabilities advance and economies of scale are realized.

Technology is the one major bright spot that continues to be a driving force for growth and helps to bring costs down, thus keeping a lid on inflation. The U.S. has been and continues to be a leader in technology and the possibilities are endless for advancements in mobile computing, internet of things, and health sciences among other things. Technology, for better or for worse, is dramatically changing the way we work and experience leisure. Change only seems to be accelerating.

So, what's the outlook from here?

The mainstream view on Wall Street is for the Federal Reserve to cut interest rates by year-end and that the U.S. economy will likely enter a brief recession during the first half of the year. This seems reasonable given recent data. The Consumer Price Index (CPI) showed inflation under 2% on an annualized basis for the last six months of 2022, and wholesale prices as measured by the Producer Price Index (PPI) just showed a decline of 0.5% for the month of December alone compared to estimates of a 0.1% decrease.

Inflation seems to be cooling off quickly, although keep in mind that it’s not uncommon for such a deceleration after a quick spike like what we’ve seen. The real question is where inflation settles as we move into the next year and beyond. At this point, market expectations for 5-year, forward-looking inflation are hovering between 239-472-4538%.

If we enter a recession this year, the usual imbalances are largely nonexistent at this point. There does not appear to be speculative asset bubbles since we’ve already seen assets such as crypto currencies and high-flying growth stocks come down significantly last year. Banks are well-capitalized, businesses have healthy balance sheets, and many consumers still have plenty of excess savings to spend.

Home prices remain elevated despite recent weakness, but a shortage of homes resulting from years of limited construction should help to support home values and soften the blow of a downturn.

Still, the economy has risks as it always does. The Russian/Ukraine conflict could worsen. The Federal Reserve could have a misstep in setting interest rates or managing the runoff of bonds from its balance sheet. China might continue to struggle with Covid-19, or tensions with Taiwan or the U.S. might boil over. Then there’s high government debt levels that the U.S. and other nations have, which become harder to service with higher interest rates.

Even though there are unknowns, and we don’t quite have the investment landscape we had in the early 1980s, there are opportunities for solid returns going forward. We have much more attractive stock and bond markets today than we’ve had in quite some time, which is a great benefit to long-term investors. Despite the potential for continued choppiness in the markets, those who remain committed to a properly diversified portfolio should ultimately be rewarded.

Click below for a printer-friendly version

Charting New Waters: 2023 Investment Landscape

3 Considerations for a Meaningful Giving Strategy

Tue, 13 Dec 2022 12:00:00 GMT

In our Insights piece last month titled, “Do You Feel Called to Philanthropy,” we talked about how someone who is philanthropic sacrifices out of love for mankind. Giving of our time, talent, and treasure can bring about tremendous happiness in life and it can be even more impactful on our children than any professional success we may enjoy. If you’ve determined that giving is important to you but you’re not sure where to begin, we’ve outlined three considerations when establishing a charitable giving strategy.

1. How much can I afford to give?

There are different ways to approach this question. Some decide to give a certain percentage of income to a church and/or charities each year. This certainly is an effective way to give, but what if you could afford to give more or what if you’re no longer working and still want to give from assets you have? It’s helpful to first determine how much you need to live your life as you want to live it. Consider thinking through your cost of living such as housing, travel, medical, education, insurance, food/entertainment, and any other recurring expenses you have. Next identify your existing assets, consider future income such as Social Security, pensions, or any other expected income, and project the effect your core living expenses would have on your assets and future income. There are many important assumptions that go into an analysis like this, so unless you have experience making such projections, it’s best to get help from a good financial planner. The result of this exercise is it will start to become clear if you have enough to support your ongoing financial needs. Provided that you do and you appear to have more than you need, you can adjust your projections by reducing the initial assets you have to see what you actually need to meet your goals. The level of assets you have beyond what you really need could be considered excess capital and used today (rather than at death) to have an impact now while you can see it and appreciate it. We’ve seen families become clear on how much of their wealth is truly excess and then decide to:

Help family members in need
Fund education for grandchildren
Take family on trips to create memories
Give to charitable causes important to them
Start scholarships at a school
Start a business
Consider new aspirational goals they might not have pursued otherwise

There is much to consider in a core-excess capital analysis, but the important thing to note is many don’t go through this exercise and will go their whole life without truly having the impact they want (and can afford) to have now, and they might even hold back on experiences they could be enjoying. We don’t want this to happen to you. It’s all about having the clarity you need to make intentional decisions along your journey to fulfillment.

2. I know I want to give, but to where?

Once you know you have more than you need, it’s natural to want to be prudent with how you spend the “excess” dollars to do good. Some families know right away where they want to have an impact while others take time to determine what’s important or what feels right. Here are some practical ways to identify where you might give charitably.

Consider setting up a giving fund at a local community or faith-based foundation. Community and faith-based foundations are a wealth of information regarding local charities or causes that align with your values. These charities may not get the publicity other larger, more well-known organizations do, thereby allowing your dollars to have an even greater impact.
Meet with the director of a charity of interest. Request a tour of their operations or ask to see examples of their work if it’s something like a neighborhood built by Habitat for Humanity. Ask them questions to help you gain comfort and feel inspired to support their cause.
Visit the school if you’re interested in helping them or promoting education. Determine how you want to have an impact whether it’s helping fund someone’s education through a scholarship, a project the school would like to embark on, or a project you think the school would benefit from.
Volunteer with an organization. Volunteering will give you an inside look at how the organization operates and how it benefits those it serves.
Play the card game. If you’re just getting started or still unsure about where to give, there are card decks available online ( 21/64 motivational values and picture your legacy ) with virtual/electronic formats as well that can help you explore what’s important or meaningful to you.

3. What’s the best way to give?

We wrote an Insights piece last November titled, “6 Ideas for Charitable Giving in 2021,” that is still conceptually relevant today. As an update, standard deductions are higher now ($25,900 for married filing jointly, $12,950 for single, $19,400 for heads of households, and an additional deduction of $1,400 if you’re at least 65 years old or $1,750 if using the single or head of household filing status). It’s easy to simply write a check, but there are usually better ways that can minimize taxes and maximize your gifts to charity. If you’ve held an appreciated investment for more than a year and you plan to itemize deductions on your tax return in the current year, then donating the investment allows you to avoid realizing the capital gain. You can always repurchase the investment if desired and you’ve essentially reset your cost basis. Given how high the standard deduction is today, it’s harder to get a full deduction for charity if even one at all. Some will pre-fund multiple years’ worth of gifting by giving to a donor advised fund, which allows you to get the tax deduction in the current year and give from the fund over time as you deem appropriate. For those age 70.5 or older, you can give up to $100,000 per person from your IRA without it counting as a taxable distribution for income tax purposes. It’s especially beneficial at age 72 or older since this can count towards the required minimum distribution that the IRS mandates. There are also charitable trusts you could consider establishing for large one-time gifts with flexibility to have an income stream to you over time or elect for a lump-sum remainder distribution to beneficiaries. If benefiting yourself or family isn’t important, then you could always fund large charitable gifts to the donor advised fund we mentioned.

For those who have been blessed with financial resources beyond their needs, giving back is often a main driver of fulfillment. Stephen Covey is credited with identifying 7 habits of highly effective people, one of which is to begin with the end in mind. Giving comes down to ultimately leaving something behind that people will either remember us by or benefit from. When we get towards the end of our life, we want to know we made a difference. We want to know our life mattered. Those who give of their time, talent, and treasure get to experience the joy of giving and build a meaningful legacy that will last for generations to come.

Do You Feel Called to Philanthropy?

Wed, 26 Oct 2022 12:00:00 GMT

Have you ever sat down and thought about the purpose of money? What are we supposed to do with it? The world tells us our money is ours to do with it as we please. While we do have free will to make choices, our life will be judged and our legacy will be defined by those choices.

How to Manage a Large Inheritance: 7 Considerations

Tue, 16 Aug 2022 12:00:00 GMT

You might be grieving the loss of a spouse, parent, or other relative who’s recently passed away and left you an inheritance. What do you do with the money? How do you manage it well? We'll explore a host of issues such as taxes, insurance, goals, estate planning, and more.

Reflecting on 2021 as Markets Stumble in 2022

Wed, 26 Jan 2022 12:00:00 GMT

On the surface, it looks like 2021 was a great year. Digging a little deeper reveals that not all parts of the market performed quite as well as the S&P 500 index. The Russell 2000 index, a benchmark of smaller US companies, gained 15%.

Is Your Ladder on the Right Wall?

Thu, 13 Jan 2022 12:00:00 GMT

We’ve rung in a new year with new possibilities and the best of intentions. Some of us might want to eat better, exercise more, work on relationships, or something else. Whatever your resolutions may be, the start of a new year marks a point of new beginnings.

6 Ideas for Charitable Giving in 2021

Thu, 11 Nov 2021 12:00:00 GMT

Research has shown that happiness is much more sustainable after regular giving than after regularly receiving.1 We’re going to review 6 ideas for charitable giving this year and how to maximize the tax benefits of doing so.

Is your estate plan in good order? Consider these 6 things.

Tue, 05 Oct 2021 12:00:00 GMT

Death is an unpleasant topic to talk about. Only 55% of those 55 and older have a will and a mere 18% have all the recommended essentials—a will, healthcare directive, and durable power of attorney.

7 Ways to Help Protect Your Data and Financial Assets

Tue, 24 Aug 2021 12:00:00 GMT

An estimated 87 percent of U.S. adults feel that the risk of becoming a victim of a cybercrime is growing. We see this concern firsthand from families we work with when we're asked about ways they can safeguard their sensitive data.

The Second Most Important Thing You Can Teach Your Children or Grandchildren

Wed, 04 Aug 2021 12:00:00 GMT

Only 18% of students in US schools are required to take a personal finance course before earning their high school diploma. Increasing financial literacy helps students have higher credit scores, less debt, and more savings.

The Less-Traveled Road to Financial Freedom

Thu, 01 Jul 2021 12:00:00 GMT

Some might say financial freedom is not getting financially stressed out when there is an unexpected expense while others would say it's being able to pursue items on their bucket list without financial worries. Is it a number? Try Googling