Benchmarking in Investing: Tools to track relative performance

 Ever wonder how to know whether your portfolio is performing well?  Some people will simply look at the overall return, and if it’s higher than their neighbor’s, they figure they are doing well!  However, simply looking at the bottom line rate of return doesn’t tell the whole story because returns are directly related to how much underlying risk you have taken in the portfolio. To an amateur investor an annual rate of return of 7-8% might feel good, but a professional looks at how much risk you had to take to achieve such a result.  One method everyone should use to better understand the relative performance of an individual portfolio is referred to as “benchmarking”. 

Performance tracking methods

A few commonly used benchmarks for large U.S. stocks are the Dow Jones Industrial Average and the Standard & Poor’s 500 index (more commonly known as the S&P 500).  You will hear these two indexes referred to constantly in the news. If you hear the Dow was up 100 points, you may find yourself checking how your portfolio’s performance compares.  The problem with this is that you might not own anything in your portfolio that looks anything like the Dow Jones Index. This is why you need to understand what makes up your portfolio and what indexes to track to understand relative performance. 

Benchmarking Best Practices

Hypothetically, let’s say you have a portfolio that looks like this:

30% Large International Stocks

30% Large U.S. Stocks

40% highly rated U.S. corporate bonds   

You look at the annual return for the Dow Jones, see that this particular index was up 9% at the end of the year, and then check your portfolio’s overall return to see that it was only up 4%.  Before you rush to the phone to fire your financial advisor, first get the full picture!  Your portfolio only has 30% of the money invested in Large U.S. companies and 70% of the money invested elsewhere. To expect 100% of the money to perform the same as the Dow Jones is highly unrealistic.  Instead, you should look at a few other “benchmarks” that are commonly used in financial circles to track different types of stocks and bonds.

Here is a list of benchmarks to track different asset classes to help you make a fair comparison about your portfolio’s performance compared to the types of risk you took:

S&P 500-  Large U.S. Stocks

Russell 2000- Small U.S. Stocks

MSCI EAFE- International Stocks

Barclays Aggregate U.S. Bond Index- U.S. Bonds

Back to the example, our hypothetical investor decides to look up the returns for the Barclays Aggregate Index and MSCI EAFE since he has money invested in those types of asset classes as well as Large U.S. Stocks.  Our investor sees that bonds actually had a negative 2% rate of return for the same time frame, and that the MSCI EAFE was essentially flat.  So 30% of his money he expects to be up somewhere near 9%, 30% of his money he expects to be right around 0%, and 40% of his money he expects to be down 2%. 

Putting Performance Benchmarking to Work

If our investor had $100,000 at the beginning of the year invested in our hypothetical portfolio here’s how it breaks down:

Add it up and the ending portfolio balance is $101,900 or a rate of return of 1.9%.  When you understand the whole picture, you might be more satisfied with a 4% return knowing that a portfolio with very similar holdings should only be up about 1.9% according to the benchmarks.

Talk to your financial advisor to find out what makes up your portfolio and what benchmarks to use for your particular situation.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. It is not possible to invest directly in an index. C14-038979

Capital Gains: Minimizing Your Tax Drag

The difference between the tax man and the taxidermist is the taxidermist leaves the skin."  Mark Twain

As the bull market marches on, many investors find the capital losses they have carried over since 2008 are gone.  Likewise, many investment companies that have earned 5 years of steadily positive returns are finding themselves in the same situation. While these positive returns have had meaningful impact on achieving our financial goals, we are going to start feeling them in the checks we have to write to the government. 

According to a Morningstar and Lipper study, the average annual tax drag on returns for investors is .92% for owners of U.S. equities.  This means that if you average 10% a year returns in your equities, the amount you put in your pocket is 9.08% after you pay the government its share.  From 1996 to 2000, during the extreme run up of the tech bubble, the average tax drag per year was 2.53%1.  This can happen when there has been no bear market or correction for many years.  We would argue it is happening again now.

4 Tips for Managing Taxes

Perhaps the key at this stage of the game is not to avoid taxes but to take many small steps to manage them.  There are several key steps that we utilize in managing portfolios to also minimize taxes.

1. Asset Location:  Place your least-tax-efficient, highest returning investments in your IRA or 401(k).

2. Loss Harvesting: Continually monitor your taxable accounts for losses to harvest rather than only looking in the last quarter of the year. 

3. Maximize contributions to tax-deferred retirement accounts:  This directly lowers your taxable income when maximizing your contributions to 401(k) plans at work.

4. Harvest gains:  In the long run, taking gains during years your income is lower than normal can potentially reduce the amount of taxes paid to the government over a lifetime.

While paying attention to expenses always seems to top the headlines, taxes are just as big of a drag to long-term investor returns. Consult a tax advisor about your particular tax situation.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

1:Source: http://www.lipperweb.com/docs/aboutus/pressrelease/2002/DOC1118788693610.doc

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax advice. C14-036848

Unrealized Capital Gains? Consider Gifting Stock Instead of Cash

One of the most tax-efficient ways to give a financial gift to your favorite charity is with long-term appreciated securities.  While gifts of cash are easy to make by simply writing a check, don’t overlook the potential benefits of gifting stock that has gone up in value.  By considering both options, you may be able to increase the tax benefit and make the most of your year-end tax planning and gifting goals. 

Here are four tips to consider:

1. If you own stock investments (held longer than 12 months) with unrealized capital gains, the best way to give may be with a portion of stock rather than an all cash donation.  By gifting stock, you receive a deduction for the market value and reduce future capital gains tax liability.  

2. If you own stock with short-term gains (owned for less than 12 months) the strategy is not optimal because your tax deduction will be limited to the amount you paid for the shares. 

3. If you think the gifted stock still has upside potential, you can use the cash you would have otherwise donated to replace the shares of stock you donated.  This will reset the stock cost basis to the current market value, reducing future capital gains tax liability.

4. If you are holding taxable investments that have lost ground, it may be preferable to sell the investment, claim a capital loss, take the charitable deduction and gift the cash.  In this scenario, the combined tax deductions may make this strategy a winner.

Making the Call between Gifting Cash or Appreciated Stock 

If you are looking to support organizations important to you and maximize your tax benefits, it is important to consult with your tax advisor and include your financial planner to make the most of your tax planning and lifetime gifting goals.  

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-036845

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Many asset management firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Moreover, early indication is that some firms will be paying out capital gains higher than recent years. As you may be aware, when a manager sells some of their holdings internally and realizes a gain they are required to pass this gain on to its shareholders. More specifically, by law and design, asset management firms are required to pay out 95% of their realized dividends and capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. Remember this is only relevant for taxable accounts; capital gain distributions are irrelevant in IRA’s or 401k’s.

Capital gain distributions are a double edged sword.  The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. The bad news – the taxman wants to be paid.

What can we do to minimize the effect of capital gain distributions:

1. We exercise care when buying funds at the end of the year to avoid paying tax on gains you didn’t earn, and in some cases hold off on making purchases.

2. We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date.

3. Throughout the year we harvest tax losses, when available, to offset these end of the year gains. 

As always, there is a balance to be struck between income tax and prudent investment management.  Please feel free to contact us if you would like to discuss your personal situation.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of [insert FA name] and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional. C14-040561

Do You Have Warren Buffett’s Stomach for Volatility?

It is rare that I don’t agree with advice from Warren Buffett, but earlier this year we took different sides of a debate. His recommendation for a simple, flawless investment strategy was putting 90% of your assets in an equity fund designed to mirror the performance of the S&P 500 and 10% in cash.

This sounds great if you have nerves of steel and can make it work. But most people can’t stomach it.  Buffett is an amazing investor who understands his emotions and has a great ability to see the value of companies and what he owns.  But we’re not all Warren Buffett.  That is one of the reasons there are financial advisors in the world who help people understand appropriate volatility in their portfolio and what to do when that volatility spikes. 

Your Own Risk Tolerance

One common question I got during the downturn five years ago was when do we stop the bleeding?  One client said to me, “I had $1,200,000. Now I have about $1,000,000 due to the financial crisis and the market falling.  When do I do something?” To determine a time to sell really takes two correct decisions.  When to sell and when to buy back in. It is almost impossible to be right twice consistently.   

These difficult questions were most prevalent during the final weeks of the financial crisis in January to March of 2009.  And there was a lot more bad news to come. GM’s pending bankruptcy was front stage in the spring of 2009.  If someone was to try and time the exit and reentry during this period, it could have been devastating. Actually, the S&P soared over 30% from March to June in 2009 in the face of such horrible news and if someone sold out, it would be almost impossible to buy back in without paying more.  And those are the people on the sidelines that missed one of the greatest markets in history.

Nerves of Steel or Appropriate Allocation?

No one knows when a market downturn will occur or for how long it will go. More importantly to reap the benefits of long-term equity returns we need to be in to win.  Even more important, we need to have the right amount allocated so that we can withstand any type of downdraft and wait it out.  

So, while Buffett and his steely nerves might be able to stay invested through thick and thin with 90% of his wealth in the stock market, most people need less volatility to stay the course.  Buffet realized the value of companies when they were extremely cheap in 2009, while most investors could only see the losses from the past. Through those challenging times when people kept asking if it was time to do something, many investors benefited from staying the course through the last market cycle and went on to reap the benefits of this bull market.  I believe some nerves were enforced with regular meetings, appropriate plan design and investment portfolio allocation.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Holding stocks for the long-term does not ensure a profitable outcome. Investing always involves risk and investors may incur a profit or loss regardless of strategy selected. Inclusion of any index is for illustrative purposes only. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. C14-036847

3 Reasons Municipal Bonds are Darlings of the Year

While bond returns have astounded investors so far this year, many are left scratching their heads wondering if interest rates are ever going to rise creating the “Bond Armageddon” that has been so highly anticipated.  On November 17th the Barclays US Aggregate Bond index total return has returned 5.13% year-to-date1.  While that is certainly an attractive return on something that was destined to be down this year, municipal bonds have astounded even more.  As of November 17th the Barclays Municipal total return index1 has experienced a cool 8.06% return.  Is it time then to give up on municipal bonds after this return that seems like it should be unreal?  The short answer is no.

Why not to give up on municipal bonds

The municipal bond market offers three unique traits that continue to make it attractive. 

1. Taxes:  Paying taxes are always a concern for investors, so the tax advantaged nature of municipal bonds continue to make them attractive, especially as tax rates increase for the wealthy.

2. Supply is limited:  The chart below demonstrates how the number of municipal bonds available to purchase is getting smaller.  The light teal bar below zero shows the amount of bonds each month that have been redeemed (called away or matured giving the investor their principal back).  The purple bar above shows the number of new bonds being issued each month.  The blue line shows the net number of issues or redemptions (number of new issues subtracting the number of redemptions).  In most months over 2012 and 2013, the number is negative meaning the number of bonds out there for investors to purchase is getting smaller.  A limited supply with demand that stays steady or increases can create positive returns for bondholders.

Source: Columbia Management

3. Yields: When comparing two bonds of similar quality (bond rating) and the municipal bond is yielding about the same or more and the interest is tax free2, which bond would you choose?  Many investors have made that very same decision.

Three main things to consider before investing in municipal bonds:

• May provide a lower yield than comparable investments

• Are likely not suitable for investors who do not stand to benefit from the tax advantages

• Are subject to certain risks, including interest rate, credit, legislative, reinvestment and valuation risks

As with any investment, the decision to own municipal bonds is not one to be taken lightly.  As always don’t hesitate to ask us to see if they make sense for your portfolio. 

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

1: Source: Morningstar Direct. Barclays US Aggregate Bond Index represents investment grade bonds being traded in United States. Barclays Municipal total return index represents the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

2: Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

The market value of municipal bonds may fluctuate and, if sold prior to maturity, the price you receive may be more or less than the original purchase price or maturity value. There is an inverse relationship between interest rate movements and fixed income prices. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-036843

Our Gold Medal Standard: The Center’s Investment Scorecard Review

I’m always amazed by the almost superhuman springs, twists, turns, and flips gymnasts are able to perform with grace and precision.  Who could forget Kerri Strug’s seemingly impossible vault of handsprings, twisting dismount, and a perfect landing just seconds after tearing two ligaments on her ankle?  Watching from home, I remember anxiously waiting as the judges reviewed her vault with a fine-tooth comb; evaluating the form, height, length, and landing of her performance.  To my excitement, Kerri received winning scores and managed to catapult the 1996 US Olympic women’s gymnastics team to gold medal victory.

Giving Investments the Fine-Tooth Comb Treatment

Similarly, we aim to build model portfolios with “gold medal” worthy investments that are equipped to meet your goals even through adverse circumstances.  We too, like Olympic judges, evaluate each investment with a fine-tooth comb making sure it meets its purpose in your portfolios.  In fact, we routinely complete a seventeen-point criteria review of our model investments.  Our investment department team fondly refers to this process as the Morningstar Direct Fiduciary Scorecard Review.  For the review, we assess the following:

Performance and Volatility

We look at performance, risk-adjusted performance (alpha), and the volatility of the investment compared to the market (beta) for 1, 3, 5, and 10-year periods.  In order for investments to receive points for these metrics, they must place above 50% of comparable peers.  For these categories, score points are more heavily weighted towards the longer periods of time with the intent of crediting investments that consistently produce over long stretches of time.

Tenure and Inception

We want your investments to be managed with the wisdom of experience and we want investments that have shown they’re able to adapt through different parts of a market cycle, therefore, we review manager tenure and product inception.

Size and Style

We evaluate the investment’s size and style to identify whether the investment has grown too large to maintain its investment strategy and integrity or whether an investment is too small to keep resources robust (i.e. research, analysts, etc.).

Expenses

We evaluate investment expenses so performance is not watered down by excessive fees.

Once scores have been tallied by the investment department team, our investment committee talks through each investment to determine whether it meets the gold medal standard.

We want to ensure your portfolio investments can perform through the springs, twist, turns, and flips of any market cycle with grace and precision.  The Morningstar Direct Fiduciary Scorecard Review is just one of the many ways we stress test your portfolios.  After all, due diligence is one of the key ingredients to maintaining our investment process and ensuring that we are investing your portfolios in the best products. So, the next time you review your portfolio, imagine each investment being able to do this gold winning move through even the toughest circumstances.

Investing involves risk and investors may incur a profit or loss regardless of strategy selected. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-035970

The Strategy Behind Investment Allocation for 529 Savings Plans

529 plans can be a great way for families to create college tuition savings for their students.  Not only do the plans benefit students, they also carry advantages for donors. Benefactors can enjoy tax-deferred growth with federally tax-free distributions (when distributions are paid directly to the beneficiary’s college).  Donors have complete control of the account, they are allowed to make substantial deposits, and there aren’t age restrictions or income limitations to inhibit investing.  It’s no surprise 529 savings plans have become popular over the years.

Age-Based 529 plans

Ever wonder how 529 college savings plans are invested to meet timely tuition needs?  Age-based 529 savings plans are a helpful place to gain insight.  The graph below shows an example of the glide path of equity allocation for age-based 529 savings plans from 2010 to 2013.

According to this chart, we see the following:

• Generally, 80% of the portfolio is invested in equities at age 0 and reduces to 10% by the time the beneficiary is enrolled in college. 

• Since 2010, plan investment managers have become more conservative in the beginning (age 0) and end (age 19) stages of plans.

• Investment managers have become 6-7% more equity aggressive during ages 5-15 to meet tuition goals. 

529 Managers Make More Aggressive Move

To meet the tuition needs of students in adequate time frames, the graph trend reveals that investment managers are becoming more aggressive during the middle of a student’s investment time horizon, but they are also growing more cautious about preserving money closer to the end of the student’s investment time frame.  Interestingly, the graph also reveals that investment managers still rely on bonds as one of the safest places to preserve money (90% of the portfolio by age 19) despite the negative reputation bonds have received in our current rising rate environment.

As always, we are more than willing to support your investment needs.  If you have questions about 529 plans or are considering adding one to your investment strategy, don’t hesitate to reach out; we’d love to help.

Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of an investment in a 529 plan before investing. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation to buy or sell any investment. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-035968

Investment Pulse: What we’ve heard in the Third Quarter

While the quarter started quietly, as summer was in full swing, it ended with a bang as Bill Gross announced his departure from PIMCO.  As summer travel and vacations died down, we ramped up our travel to collect insights from some of the world’s largest money managers.

Socially Responsive Investing with Neuberger Berman

In early August The Center’s Investment Committee had the opportunity to speak one-on-one with the management of Neuberger Berman’s long-time successful Socially Responsive Investing (SRI) strategy.  Since this is an area that seems to be gaining in interest from our clients, we talked with some of the most successful investors to get their take on how they do it.

•  Process: They look for areas of business that have tailwinds and find the best positioned companies.  They analyze the companies for 13-15 months.  Once a company meets their expectations, it is added to their prospect list (173 names currently).  When looking to buy they ask, “Why is the price attractive?”; “Is something broken (based what they know about the company)?”; “Does the stock have value criteria?"

• SRI has five avoidance points:  alcohol, tobacco, weapons, nuclear power, and gambling.  The investment team wants a management team that makes thoughtful, long-term, fundamental decisions.

Steve Vannelli, CFA, managing director of GaveKal Capital

On a trip to Denver, CO to visit clients, Matt Chope, CFP®, Partner, spent an afternoon in September with Steve Vannelli, CFA, Managing Director of GaveKal Capital. Matt and Steven discussed many aspects of investment markets, interest rates, and the state of the economy.  Steven shared GaveKal’s proprietary approach to finding what he calls "knowledge leaders" or firms with an R&D intensity greater than that of the industry they are a part of.  He finds a correlation to these innovative companies of higher future sales growth, higher future Return on Assets, and higher market share as well as lower variability to earnings and stock returns.

Steven described how to better understand the intangible investment that many of these companies make, which he says is the key missing element in understanding the true company value. In that, he says, lies the misunderstood inefficiency in the marketplace.

Matt also learned about their proprietary quality models that scrubs the balance sheet, reviews financial leverage, calculates net debt as a percent of capital, and, most notably, intellectual property as a percent of assets of 1600 companies around the world.

Goldman Sachs, Blackrock and JP Morgan on-site visits

Matt continued his busy schedule with due diligence meetings in New York City.  Global macro themes were the main takeaways from his discussions.  Topics ranged from deflation in Europe to the energy revolution in the U.S.

While many of these companies do not currently have representation in our portfolios, the discussions with management are key to us in the overall management of our clients’ investments.  One of the worst risks you can have is the risk you don’t know about. Discussions like those we had in the 3rd quarter help us to understand where potential risks could be coming from.  While we at The Center can’t be on the ground in 20 different countries every year, we have the opportunity to leverage many experts and listen to their sometimes conflicting viewpoints.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios, CFP®, Portfolio Manager and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Are Donor Advised Funds Right for You?

Many people are charitably inclined and like to give money to churches or synagogues (among others) throughout the year.  At The Center, we fully support these efforts, but are always conscious of the most tax efficient ways in which our clients can give to their favorite charities.   One option that we often consider is a Donor Advised Fund. 

Charitable Giving

In order to take advantage of this charitable vehicle, an individual must open an account with the fund, and deposit cash, securities or other similar financial instruments.   By taking this approach, you can set funds aside--even if you aren’t sure exactly where you want them to go-- and still take the tax deduction in the year that the donation was made. 

Who Should Consider this Strategy?

An example of where a strategy like this might make sense is if you are in your peak earning years, but approaching retirement in the next 3-5 years.  You might need the charitable deduction more now than you would in retirement when your income would probably be less and your tax liability lower.

For illustrative purposes, let’s assume that Joe and Jane Smith are 58 years old and are employed with a taxable income of $300,000.  This places them squarely in the 33% marginal tax bracket. However, in retirement, they anticipate they will only need $140,000 of taxable income to sustain their desired standard of living. This would place them in a 25% bracket.  Every year Joe and Jane like to give about $10,000 to their church.  A donor advised fund may make a lot of sense for Joe and Jane because, if they know they are going to make the gifts anyway, they can set the money aside now and take advantage of the tax deduction at a 33% marginal rate as opposed to a 25% rate.

As always, be sure to consult with a qualified financial professional before incorporating any of these ideas into your own personal financial plan.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

This material is being provided for information purposes only and is not a complete description of all information necessary for making a decision, nor is it a recommendation to buy or sell any investment. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Consult a tax or legal professional for any specific tax or legal matters. C14-034226