How to Save and Invest for Kids

How to Save and Invest for Kids

As new babies are born, summer job paychecks roll in, and high school graduates gear up for college in the fall, many parents ask themselves what they should be doing today to set their children up for future financial success. 

The options available today go far beyond a simple savings account at your local bank or credit union, and the savings and tax benefits can be immense. 

The first step is to determine what your financial goals are for your child – whether it’s saving for college, building a nest egg for a future purchase like a car or a home, or even their eventual retirement. Depending on the answer, there’s an account that will work for you, and it’s never too early to get started. 

 

Saving for College:

With costs skyrocketing over the last two decades – average tuition and fees at 4-year public colleges rose 69% between 2000 and 2020 – saving early has become necessary. A family with a baby born this year would need to save $250 per month to fund in-state tuition at a public college or university, and the amounts for an out-of-state or private college are even more staggering. 

529 College Savings Plans and Coverdell Education Savings Accounts (ESAs) are two options designed explicitly for educational savings.  

 

529 College Savings Plans

The popularity of 529 plans has taken off dramatically since their introduction in the late 1990s, and they remain a powerful way to save for college.

529 programs are managed on a state-by-state basis, where each plan has its own options and rules. Generally speaking, one can invest in any state’s 529 plan, but it makes sense to research your home state’s program first to see if special tax advantages are available to residents. For example, Oregon’s College Savings Plan offers an income tax credit of up to $170 for single filers and $340 for joint filers. 

Contribution limits are high for 529 plans, with deposits of $17,000 or less falling under annual gift exclusion rules. Deposits over $17,000 can be made if the IRS Form 709 gift tax return is filed. Oregon restricts additional 529 plan contributions once an account balance reaches $400,000, but the account can continue to grow via its investments.

In any state’s 529 plan program, the main benefit is powerful tax savings. As long as funds are used for qualified college expenses, there is no state or federal income tax on investment growth or withdrawals. Starting a 529 plan for a newborn or young child allows for years of potential compounding, one of the best ways to build a nest egg for future college costs. 

 

Private College 529 Plans

The Private College 529 plan is different from traditional 529 plans. The plan launched in 2003 to make private schools more affordable by locking in tuition at current prices. Parents can put money into an account over a plan year, from July 1 to June 30th, and receive prepaid tuition certificates at current prices. When your kids are ready to enroll at any of the nearly 300 member colleges, no matter how much tuition increases, the member colleges guarantee the rate you lock in. What you save on tuition is tax-free. 

There are a few catches, however. The tuition certificates are not redeemable for 36 months after the first deposit, your child may or may not attend or get into a member school, and you forgo the potential bigger upside of a traditional 529 plan, which gains value when the market rises. 

Some families may hedge their bets by enrolling in a traditional 529 and private 529 plan, as traditional programs offer more flexibility and greater coverage, including room and board. Private prepaid plans only cover tuition and fees.  

 

Coverdell Education Savings Accounts (ESAs)

Once known as Educational IRAs, Coverdell Education Savings Accounts (ESAs) have positives and negatives. On the plus side, ESAs offer great flexibility in the educational expenses they can be used for. Funds can be withdrawn to pay for qualified expenses from kindergarten (public, private, or religious schools) through college. Investment options are flexible (mutual funds, exchange-traded funds, individual stocks), and growth and withdrawals are tax-free if expenses are considered qualified. ESAs are not considered an asset of the child regarding financial aid calculations.

Now for the negatives… Contributions to ESAs are limited to $2,000 per child annually and subject to income restrictions. Joint filers with modified adjusted gross income (MAGI) up to $190,000 can contribute the maximum yearly amount. Those with MAGI between $190,000 and $220,000 can make a reduced contribution, and incomes above $220,000 are ineligible. Unlike a 529 savings plan, an ESA must be distributed when the designated beneficiary reaches age 30 unless they have a disability. 

If you’re ready to turbocharge your college savings or want to save for both elementary and secondary education expenses, contributing to both a 529 plan and ESA is allowed. 

 

Saving for General Use:

As any parent or grandparent can attest, there are still plenty of kid-related expenses to save for – cars, summer camps, or expensive club sports – aside from education. Custodial accounts (established under the Uniform Gift or Transfers to Minors Acts) are a flexible way to save while benefiting from an investment portfolio’s growth. 

While the child is a minor, a parent or other adult will act as the account’s custodian, with the child as the beneficiary. Contributions are an irrevocable gift to the child, and withdrawals must be used for the child’s benefit. There is no maximum contribution amount or account balance, but gifts over $17,000 in a single year are subject to IRS gifting rules and reporting. 

Unlike the flexibility of a 529 plan or ESA, the beneficiary of a custodial account cannot be changed. Depending on the rules of the state in which you reside, the account will terminate when the beneficiary turns 18 or 21, and funds will be at their discretion. If the thought of a teenager or early twenty-something gaining control of a pool of money makes you nervous, you’re not alone! For significant dollar amounts, establishing a trust for the child’s benefit, with the ability to set tighter restrictions, may be the better way to go. 

While offering much greater flexibility in using funds, custodial accounts have some financial considerations. According to “kiddie tax” rules, the first $1,250 of investment earnings per year are exempt from tax altogether, the next $1,250 is taxed at the child’s rate, and anything over $2,500 is taxed at the parent’s tax rate.

Regarding financial aid calculations, custodial accounts are considered assets of the child and weighed more heavily, with federal financial aid formulas counting up to 20% of the balance as available for college expenses. 

 

Saving for Retirement:

Though retirement is many decades away for a young child or teen, if your child has earned income from a job, with a W-2 or 1099 as proof, contributing to a custodial Roth IRA is an incredible way to save.  

Like a regular custodial account, a custodial Roth IRA is established with a parent or other adult as custodian and the working child as beneficiary. Annual contributions are limited to the lesser of the child’s calendar year work income or $6,500 and can be made until their tax-filing deadline in April. 

Just like a regular IRA, a custodial IRA can be invested in stocks, mutual funds, ETFs, and more, and it is a great way for a kid to learn more about investing.

Though intended for retirement, withdrawals of contributions can be made anytime. Withdrawals of earnings may be subject to taxes and penalties if the account hasn’t been open for at least five years. Withdrawals for certain exceptions may not be subject to tax or penalties, such as a first-time home purchase, qualified educational expenses, or disability.

The main advantage of a Roth IRA is that it grows completely tax-free, and withdrawals are tax-free as long as they’re made after age 59 ½. For a young child, decades of tax-free growth could be worth a significant amount by the time retirement rolls around.

 

It’s Never too Early to Start

We’re probably all familiar with Einstein’s wise statement about interest being the 8th wonder of the world and the power of compounding over time. This is never more true than with the opportunity to save for your children’s future, and thankfully there are ways to do it that align with various needs.

If you’re unsure what type of account is best for your child’s situation or want some guidance on getting started, reach out. We’re here to help.

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

What Do I Need to Know About the Debt Ceiling?

Debt Ceiling

After months in and out of the headlines, the debt ceiling issues have become a sharp focus. As we write this, lawmakers are racing to advance legislation before the new June 5th deadline, when the U.S. may be unable to pay all of its bills. Many are understandably nervous, and it’s still unclear how this will ultimately play out. 

How can we maintain perspective around political and fiscal uncertainty? We can start with understanding what the debt ceiling is. 

The federal government often operates with a budget deficit, as spending on things like defense, Social Security payments, and emergency pandemic stimulus checks exceed government revenues, primarily from taxes. 

As the economy grows, tax revenues increase. Over time, these tax revenues are outpaced by spending. The federal government borrows money to pay its bills by issuing Treasury securities, which adds to the national debt and hit the $31.4 trillion debt ceiling in January. Since then, the Treasury Department has employed “extraordinary measures” to ensure the country doesn’t default on its obligations. 

Why is this an issue?

The debt ceiling is a mechanism that requires Congress to approve additional borrowing above these levels. Democrats and Republicans have been in a standoff but made good progress over the Memorial Day weekend. As of Tuesday, May 31st, the House and the Senate still need to pass the deal. Ultimately, getting the bill passed and signed into law by the June 5th deadline remains tight.

What information do we have?

The latest deal may calm nerves among markets and investors alike, as it suspends the $31.4 trillion borrowing limit until January 2025. This sets the debt limit at whatever level it reaches by the 2025 suspension and passes the hot potato to the next presidential administration.

Goldman Sachs summed the deal up this way: “Major reduction in uncertainty, minor reduction in spending.”

Why does this sound familiar? 

A debt ceiling “crisis” is nothing new. According to the Congressional Research Service, the debt ceiling has been raised 102 times since World War II. Similar debt ceiling standoffs have occurred over the past decade, with the limit suspended and expanded in 2013, 2014, 2015, 2017, 2018, 2019, and 2021. 

Fortunately, despite the headlines and investor concerns, these episodes had little long-term impact on markets. The one exception occurred in 2011 when a similar standoff led Standard & Poor’s, a credit rating agency, to downgrade the U.S. Debt and the S&P 500 to tumble19%. Ironically, the prices of Treasury securities increased. Why? Despite the downgrade, investors still believed Treasuries remained the safest in the world, even during heightened uncertainty. Ultimately, the debt ceiling was raised and a new budget was approved, allowing markets to bounce back. 

What happens if a deal isn’t reached and the U.S. defaults? 

Although this remains unlikely, a default would significantly impact the U.S. and across the globe. A few potential ramifications:

  • Delayed payments of federal benefits – things like Social Security payments and veterans benefits
  • Higher borrowing costs
  • A potential downgrade of U.S. debt
  • Increased market volatility
  • Global recession

While we are not in the business of making predictions, it isn’t far-fetched to see that the ramifications would be hard-hitting. 

What can we do? 

Though we’ve been here before, there is still no clear understanding of how investors may be impacted. If an agreement isn’t promptly reached, investors may have to accept higher stock market volatility in the short term. While it may be tempting to sit on the sidelines until the negotiations are resolved, it’s important to remember that volatility goes in both directions–up and down–and very often, the market’s worst-performing days are followed by some of its best. 

Investing in a well-diversified portfolio, owning safe bonds, and keeping a prudent cash buffer for shorter-term goals are the best antidotes to market volatility.  In times of heightened uncertainty, staying focused on what we can control, maintaining a long-term perspective, and remaining disciplined are the keys to weathering whatever lies ahead.

Clear as Mud?

Have additional questions about the economy, markets, or your financial plan? Please reach out—we’d love to help.  

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

Ongoing Banking Turmoil: Cause for Concern?

Ongoing Banking Turmoil

The recent failure of three U.S. banks has dominated news headlines for the past few weeks and has spread to Europe. Credit Suisse, Switzerland’s second largest “global systemically important bank” and latest institution teetering on collapse, was purchased by UBS in a $3.2 billion deal brokered by regulators, making it Europe’s most significant banking merger since the 2008 financial crisis. 

Smaller U.S. banks have also turned to the Federal Reserve for assistance, borrowing $165 billion, which surpassed the previous record of $111 billion set in 2008. Eleven larger banks, such as Bank of America and Wells Fargo, came together to aid First Republic Bank to the tune of $30 billion. This collaborative rescue effort aimed to shore up customer withdrawals and restore confidence in the banking system. 

 

Testing Our Resolve

While the situation is still evolving, these banking system concerns add to the numerous challenges investors have faced in recent years. Over the past 12 months alone, stubborn inflation, aggressive Fed rate hikes, Russia’s invasion of Ukraine, and a bear market have all made hope for the future sometimes difficult to see.

In 2021, it wasn’t uncommon to feel concerned about the sustainability of the economic recovery and excessive stock market valuations. In 2020, the pandemic and nationwide shutdowns threatened the economic and financial system, in addition to the well-being of everyday folks. Many of these events occurred seemingly out of left field and easily caught us off guard.

While there are unique circumstances behind the failures of Credit Suisse and Silicon Valley Bank, banking crises are not as unexpected as global pandemics and military invasions. With the benefit of hindsight, these bank failures echo other collapses across history. 

 

Common Causes

The common thread across these episodes is the availability of money, the expansion of credit, and the eventual tightening of financial conditions. Like a sugar rush, the supply of credit and the flow of funds through the global financial system can drive asset bubbles, appreciating currencies, and risk-taking in a particular market or across a whole country. Sooner or later, however, there is a sugar crash as returns peter out, sentiment shifts, and conditions tighten.

While failed banks are not innocent bystanders – they often involve poor risk management and excessive risk-taking – they are also subject to macroeconomic trends just like any other corporation. When both the supply and demand for money by individuals and businesses are expanding, banks have strong incentives to extend more and more credit. As this compounds, it can lead to asset bubbles in real estate, the stock market, and more, which in turn further increase the appetite for credit. While this can continue for longer than expected, eventually it grinds to a halt.

It’s no coincidence that this is occurring just as the Fed, the European Central Bank, the Bank of England, and other monetary authorities are removing liquidity from the system by shrinking their balance sheets and raising interest rates. Coupled with lower asset prices across the broad stock market, the tech sector, and areas like cryptocurrencies, it’s natural for financial stresses to build. 

 

What does this mean for you? 

Within the S&P 500, regional bank stocks have struggled, falling 34% year-to-date and the broader financial sector declining 9.4%. Despite those losses, the S&P 500 has still gained 3.4%. This is because sectors such as Information Technology and Communication Services have risen 17.5% and 18.4%, respectively, over this same period. Hopefully, this drives home the importance of staying diversified both across and within markets.

While some folks may always wait for the “opportune time” to invest in the market, these same investors may be hesitant to take advantage of temporary downturns due to the nature of each market crisis. What inevitably happens is missed opportunities when markets eventually recover and too much time out of the market. 

The bottom line: Despite the big market and financial events this year, the best course of action is still to stick to well-constructed portfolios and financial plans. While this can be easier said than done, we’re here to help you. Please reach out. 

 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

Does a Roth Conversion Make Sense for Me?

Roth Conversion planning

As fall ends and winter begins, many people wonder what end of the year financial tasks and tax planning strategies they should be thinking about. 

One planning opportunity we review for clients is a Roth IRA conversion. 

A Roth IRA conversion takes all or part of your existing balance in a traditional IRA and moves it into a Roth IRA. The money in a traditional IRA hasn’t been taxed yet, so in converting you pay taxes on the money your investments earned and on any contributions you originally deducted on your taxes.

Why would anyone pay taxes early? There are a few good reasons:

  • Providing you meet certain requirements, Roth IRA withdrawals are tax-free in retirement.
  • Unlike Traditional IRAs, Roth IRAs do not have required minimum distributions (RMDs) once you reach age 72 or during your lifetime. So, your money continues to grow tax-free. 
  • Roth IRAs are some of the best types of accounts to pass on to beneficiaries. While your heirs will have to take RMDs, they won’t have to pay any federal income tax on the withdrawals. Given recent legislation changes, inheriting Roth assets is even more favorable.  

A Roth conversion can be a great option for some and a costly mistake for others. Here are 4 important considerations to make before converting your traditional IRA into a Roth IRA. 

 

  1. Do you expect your income to increase in the future? 

A big appeal of Roth accounts is tax-free withdrawals in retirement. If you believe you will be in a higher tax bracket in the future, it may make sense to pay taxes now at a lower rate. It may also make sense if your income is temporarily lower (i.e. between jobs for an extended period, missed a bonus, etc.) 

If offered by your employer’s plan, also consider making Roth 401(k) and after-tax 401(k) contributions, which you may be able to convert to a Roth IRA through a mega-backdoor conversion. Note: this can be tricky, so be sure to talk to a qualified professional for help. 

On the other hand, if you expect your income to decrease in the future, a Roth conversion may not make sense for you. Instead, consider strategies to minimize your tax liability now, such as deductible traditional IRA and 401(k) contributions. 

 

    2.  Do you have cash outside your retirement accounts to pay the taxes due upon conversion? 

While it’s possible to use some of your IRA to pay the tax bill, it’s typically not advised. Money withdrawn from your IRA to pay conversion taxes is considered a distribution, which could push you  into a higher tax bracket. It could also result in a 10 percent penalty.  

Additionally, using retirement funds to pay tax erodes the value of a Roth conversion. There’s less money compounding and growing tax-free. 

 

    3.  Will you need distributions from the Roth IRA within 5 years? 

The money you convert into a Roth IRA must stay there for a 5-year holding period. If withdrawals are made before the 5 years are up, you could be looking at a 10 percent penalty and/or additional income taxes. 

If you’re retiring soon and will need to take distributions from your Roth, a conversion may not make sense for you. 

 

    4.  Will a conversion bump you into a higher tax bracket? 

If you’re on the cusp of the next tax bracket, it’s possible to still do a Roth conversion by only converting a portion of your traditional IRA. Spreading the conversion across several years, as opposed to one, can lower your yearly tax obligation. 

 

Other Considerations

As we write this, the stock market is down 15% for the year. When account values are temporarily lower, the tax cost to convert is also lower – you pay tax on a smaller portfolio balance. When the market rebounds, you then have a larger portion of your total portfolio in a tax-free account.

You may also have expiring tax carryforwards or credits to use that could provide additional incentives to do a Roth conversion. 

Heads up: if you currently or will soon participate in income-based benefits like Medicare or Affordable Care Act subsidies, a Roth conversion could impact the amount you pay or receive. 

Before making any moves, know that a conversion is permanent–you can’t revert the money back to a traditional IRA. 

 

We’re Here to Help

Wondering if a Roth IRA conversion is right for you? The decision hinges on many personal and unique circumstances, so it’s best to speak with a financial professional first. Reach out, we’re here to help.

 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

3 Reasons for Optimism Among Market & Economic Uncertainty

Optimism Among Uncertainty

It’s no secret that this year has been full of market and economic uncertainty. Inflation, the Fed, geopolitics and more continue to be on most of our radars. 

Perhaps the most important way to stay grounded amongst the uncertainty is by being familiar with the facts and figures that drive markets in the long run, rather than the speculation and opinions that occupy headlines for a day or two. 

As a result, we see three reasons to remain optimistic. 

 

Corporate Earnings 

Corporate Earnings are the link between the economy and markets. Although markets can fluctuate in the short run, rising earnings are what allow stocks to create wealth for investors over full business cycles.

While it is still early in the current earnings season, with about a quarter of S&P 500 companies having reported, overall earnings are exceeding beaten-down expectations. Despite inflation and slower growth, which have directly impacted corporate earnings reports, the numbers remain positive. A commonly used metric is Earnings Per Share (EPS), which is how much money a company makes for each share of its stock. Consensus estimates are that S&P 500 EPS will grow 6.9% over the next twelve months, which is still healthy despite being below the average of 7.9% since the mid 1980s. 

Not only do growing earnings continue to support market valuations, which are the most attractive in years, they are a reason to stick to appropriate asset class allocations in portfolios. Since not all sectors can be expected to perform well at all times, staying diversified remains important.

 

Markets Have Done Well Across Political Parties 

With upcoming midterm elections on November 8th, it seems natural to assume that politics could impact stock market returns. After all, elections do affect economic policies which directly impact specific industries and companies. However, how this impacts broader financial markets is often not as straightforward.

History shows that markets have done well in a variety of political configurations under both Democrats and Republicans and, conversely, that poor market conditions often have little to do with politics. 

The chart below shows that although there are variations between party configurations, they are all quite positive. It is not the case that one party’s leadership always results in poor economic growth or market returns, and vice versa.



The full economic cycle is what matters for investment returns, and this often has less to do with who’s in office than other factors that drive growth. For instance, in the 1990s, it’s unlikely that the Clinton administration and the Republican controlled Congress at the time were the main drivers of the tech boom of that era. Similarly, it’s hard to argue that the George W. Bush White House or the split Congress at that time were the reasons for the subsequent bear market of the early 2000’s or the later housing crisis. These were driven by technological and economic trends that were larger than politics.

Perhaps most importantly, economic policies are difficult to evaluate and often work with a lag. There are always pundits – on both sides of the aisle – predicting doom and gloom based on the other party’s proposals. While there are policies that can promote long-run investment spending and labor force growth, the record shows that it’s incredibly difficult to predict the economic impact of any particular proposal. 

For instance, while historical corporate tax cuts may have resulted in short-term jumps in the stock market, the true economic benefits occurred over years and decades across political cycles – and far beyond the attention span of short-term traders and media coverage.

 

IRS Updates for 2023 May Help Many Households

While marginal tax rates still remain at historic lows, the recently announced IRS adjustments to income tax brackets and the standard deduction could also help many of us. Each year, the IRS makes adjustments to match the average year-over-year increase in what is known as the “Chained Consumer Price Index,” so that taxpayers don’t “creep” into higher tax brackets due to inflation. The IRS has announced 7% increases to these ranges and deductions for the 2023 tax year. As a result, many workers could see higher take-home pay starting January as payroll deductions decrease. These excess savings will be a welcome change even if they don’t fully offset higher prices.

In addition to income tax brackets and the standard deduction, the IRS also made inflation adjustments to many employee benefits, including 401(k) contribution limits. 

For employees who participate in 401(k), 403(b) and most 457 plans the limit for 2023 is increasing to $22,500. Employees 50 and older are eligible for a $7,500 catch up contribution, bringing the total contribution amount to $30,000. IRA contribution limits didn’t see as much of a lift, with a $500 bump from 2022 to a total of $6,500. IRA catch-up contributions for those 50 and older remains unchanged at an additional $1,000. 

For those who can swing it, maxing out these contributions can help you save more in taxes. 

 

We’re Here to Help

If you have questions about how the IRS updates may impact you, or are ready to put a plan for your future in place, reach out… we’re here to help. 

 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

Are We In a Recession? If Not, Is a Recession Coming?

Recession Fears

With high inflation, the Federal Reserve raising interest rates, and the economy contracting for two consecutive quarters, the possibility of a recession doesn’t seem far-fetched. 

Contrast that with a strong dollar, job market, and resilient corporate and personal spending, and there is room for debate. 

What do we know? Economists are notoriously bad at predicting recessions, and typically a recession isn’t technically declared until many months or even years after it actually started. There’s a possibility we are already in one now.

While it’s difficult to say for certain “are we or aren’t we,” here are 4 things you should know. 

 

1. What is a recession? 

For something with as many tentacles and implications, you’d think we’d have a pretty solid definition of “recession” by now. Spoiler alert: we don’t. In fact, there is no precise definition. Instead, it’s up to the National Bureau of Economic Research, a nonprofit academic group, to determine. On its website, NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” 

It sounds straightforward in theory but is much more nuanced in practice. 

Take COVID. NBER declared the start of COVID as a recession even though it lasted only a few months. The NBER academic committee considers a range of economic data and typically makes the determination months or even years after a recession ends. It’s entirely possible that a short recession could be over before it’s officially declared.

While few people are excited about the prospect of entering a recession, they are a normal part of our economic cycle. From a historical perspective, there have been 15 recessions in the last 100 years, and they’ve lasted an average of 17 months. In about 70% of those instances, stock returns were positive two years after the recession began. 

Source: Dimensional Fund Advisors 

 

2. What should people be doing right now to prepare for a recession? Is there a specific list of financial goals to follow?

The saying “cash is queen” bodes true for many during a recession. We customize the amount of liquidity recommended to clients based on their personal circumstances.  

Are you contemplating entrepreneurship? Run some projections on what it could take to make the leap and be proactive. Extra cash and liquidity makes a lot of sense here. 

If you’re in a highly paid specialized position and replacing your income could take longer if you lose your job, consider a backup to your emergency fund. A home equity line of credit could make sense for you, and it’s best to obtain it while still employed.

Also, think about your job and how your role or company might be impacted by a recession. If you feel there is risk you might be laid off, you may need more money set aside than standard rules of thumb like 3-6 months. 

Lastly, don’t panic. The job market has continued to be strong and there are some signs that inflation may be cooling off. What you shouldn’t do is make moves based on recessionary fears, as recessions don’t last forever. 

 

3. Are there smart investments people can be making right now?

It’s important to remember that markets are forward looking, and oftentimes they react before investors even know we are in a recession. This could explain what we saw in roughly the first half of the year when markets were down 20%. They made a nice recovery in July, which could be a signal that the risk of a recession isn’t as great as markets once thought. 

Another way to think about this question is what not to do:

  • Don’t try and time the market; the data just doesn’t back it up and it’s exceptionally difficult to do, even for professionals. 
  • Don’t fall for ‘get rich quick’ fads – while it might be tempting to try to get rich off the next GameStop or Tesla, the best approach to building wealth is to invest in low cost index funds that invest broadly in companies here in the U.S. and around the globe. 

Good investing doesn’t have to be sexy or overly complicated. Downturns and volatility are part of investing–it’s normal for your portfolio to be down every 4 or so years. As a long term investor, it’s a bit easier to shift your view and see this period of time as an opportunity. 

Regardless of what the market is doing, it’s a good idea to pay yourself first via a retirement plan or brokerage account. Investing in yourself by enhancing your health, relationships, personal and professional fulfillment and growth will always be in style and pay some of the highest returns. 

 

4. If someone does get laid off, what are key financial tasks they should take care of right away?

Layoffs are not easy. Some friends and clients in the tech space have experienced this lately, and we certainly feel for them. 

One of the first things to consider is medical coverage. Prior employer coverage can extend via COBRA, switching to a partner or spouse’s plan, or enrolling in the state’s insurance marketplace. Being laid off counts as a “qualifying event,” which means you can enroll in a private health plan outside the normal open enrollment window. Additionally, if you will have lower expected household income for the year you need coverage, it’s worth looking into the premium tax credit.

Evaluate your options with your workplace retirement account. You can usually just keep your money in the same plan, roll it over to a new employer’s plan, or roll it into an IRA or Roth IRA for after-tax contributions. Take a look at your old plan’s investment options to see if low-cost index funds are available. You’ll also want to look at the fees you’d pay to keep your money in the 401k plan — there is no need to pay high fees to get access to quality funds. Also, where is the rest of your money? Is it necessary to have it spread across multiple accounts? How can you simplify? Are you being as tax efficient as you can? 

Assess the benefits you may no longer have and evaluate what your options are now. Do you have a life insurance policy independent of an employer? Do you have unused Flexible Spending Accounts or Health Savings Account funds?  Make sure you find out what happens once you are no longer an employee. Also, double check your last payroll statement with your account balances. Get paid out for vacation, sick time, and file for unemployment. 

 

Keep Calm and Carry On

While the uncertainty surrounding recession, continued inflation, and potential job layoffs can be stressful, the most important thing to do is not panic. Building a solid emergency fund, investing wisely, and creating a plan unique to your personal situation is the best approach to weathering whatever future storms we may face. 

If you’re not sure where to start, or whether the plan you have in place is solid, reach out to us – we’re here to help.

 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

3 Strategies for Sustainable Investing

strategies for sustainable investing

As climate change disasters such as wildfires, floods, and intensifying storms seem to be increasingly common, many people are looking for a way to encourage companies to enact positive change, while casting a “vote” against the worst offenders. Enter the world of sustainable investing options, which have steadily grown in popularity over the last decade.

According to Barron’s, U.S. ESG mutual fund and ETF assets have soared to a record $400 billion in 2021, up 33% from the year before. Despite this strong growth, the overall market share is still small, at just 1.4% of total U.S. mutual fund and ETF assets. 

With the huge market potential, it’s hard to know where to start. Here are three things we have incorporated in building a sustainable investment option for Uplevel clients. 

 

Prioritize and Focus  

There is no one true, universal definition of ethical investing. This is why it can be so confusing to understand and interpret. There are still many gray areas. 

Environmental, Social and Governance (ESG) investing is a framework you can use within ethical investing to evaluate investments and put your money to work with companies that strive to make the world a better place. In addition to financial factors, ESG investing also considers non-financial factors to measure an investment or company’s sustainability.

Here are some of the things each category may incorporate:

 

Environmental

Social

Governance
  • Carbon emissions
  • Air and water pollution
  • Deforestation
  • Green energy initiatives
  • Waste management
  • Water usage
  • Company gender parity
  • Diversity and inclusion efforts
  • Company sexual harassment policies
  • Human rights and fair labor practices
  • Diversity of board members
  • Executive pay
  • Internal corruption
  • Lobbying
  • Transparent accounting practices

ESG investing relies on independent ratings that assess a company’s behavior and policies in these various categories. Currently, there is no standardized approach to these measurements. ESG metrics are also not part of a company’s mandatory financial reporting, although many companies are voluntarily making disclosures or creating standalone sustainability reports. 

Designing a sustainable portfolio for Uplevel clients starts with values. We let our clients, prospective clients and combined 35+ years of experience guide us in defining the sustainable problem we are trying to solve: Climate change. Without this focus, it’s hard to have transparent reporting and results. 

“If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution.” Likely said by a Yale professor but often attributed to Einstein. 

Given our location in Portland, Oregon, it’s common to have clients who are interested in a sustainable way to invest. What we like about focusing within the “E” bucket and climate change specifically, is that we can rely on science to identify and pinpoint the primary contributor to climate change–greenhouse gas emissions. Also, the data on greenhouse gas emissions are widely available for public companies. 

 

Look Under the Hood  

It’s imperative to look beyond ESG branding when evaluating the viability and quality of various funds. Worth mentioning again is the absence of a universally accepted definition of sustainable investing, which gives way to broad interpretations and approaches to ESG investing. The components of ESG considered in an investment strategy, variables by which they are measured, and the method of incorporation can lead to a range of investment outcomes. 

Put another way, a company’s ESG rating is very subjective and there is often a lack of focus on what’s actually being measured. Even the ratings providers themselves can’t seem to agree with one another. The OECD assessed different rating providers and found ESG scores to vary widely.

From the graph below, we can see the variability of ratings. Take Johnson & Johnson, which is given a score in the low 40s by one provider and 90 by another. Not only is this significant difference hard to decipher, but it  raises important questions about reliance on any one rating and can lead investors to wonder if they are having the impact they think they are.  


 

 

 

 

 

 

 

 

 

Source: The OECD

 

Rather than rely on generic, and heavily opinion-based ESG ratings for building our clients’ sustainable portfolios, we turn instead to assessing the availability, quality and objectivity of data and transparent reporting. 

In our analysis, we found Dimensional Fund Advisors’ (DFA) approach to be the most robust. Their sustainability strategies are designed to have a clear focus on climate change. 

The process begins by screening out the worst emitters of greenhouse gasses–including “in the air” and “in the ground” emissions–from the portfolio. DFA utilizes carbon emissions data and scales it by a company’s sales to determine how much carbon is emitted to produce a dollar of sales. This carbon emissions intensity represents 85% of the score. 

DFA is mindful to not exclude certain sectors, as they all need to decarbonize. Instead, they go sector by sector and overweight the companies that are the most sustainable, and underweight the companies that are the least. This is important, as removing sectors entirely is shortsided. It takes the entire economy to run the world, and removing components would decrease the diversity of the fund.

Eventually, kicking out sectors could also leave you with an overweight of large cap technology companies. Their practices are to exclude or reweight, but not concentrate. The remaining 15% of the score screens out companies for other considerations, including palm oil, child labor, factory farming, etc. 

 

Set and Manage Expectations 

While it’s important to note there currently isn’t a known or evidenced based return premium for investing in a sustainable fashion, it also doesn’t need to cause underperformance. The evidence shows we can still own high-quality investments with returns similar to a non-ESG fund, provided we do it right and stick to sound investment principles like diversification, lost cost, low turnover, etc. 

Over 13 years, this type of sustainable approach has had very similar performance to a more traditional DFA portfolio. As the data provided by DFA below demonstrates, returns of their US Sustainability Core 1 Portfolio have been remarkably similar to their “traditional” US Core Equity 1 Portfolio going back to 2008, illustrating that investing sustainably doesn’t have to mean sacrificing long-term performance. 

Source: Dimensional Fund Advisors

We also make sure clients understand that it’s imperfect to compare “traditional” portfolio performance to “sustainable” investment performance by using the same indices as benchmarks. By intentionally screening out the worst offenders from our sustainable portfolio, there will be periods of time when the portfolio deviates from the market by design.  

For example, in the first quarter of 2022, the energy sector did remarkably well. Oil prices spiked to record highs due to supply chain issues and geopolitical events. Exxon Mobil Corp stock, the biggest public energy company in the world, was up over 30% year to date. At the same time, big tech companies were approaching a market correction. Given the underweight of energy companies relative to technology companies in an Uplevel sustainable portfolio, it has faced some headwinds so far this year. 

Regardless, we believe long-term sustainable investors have many reasons to be optimistic about the future. Seven out of the ten largest pension funds in the world invest in sustainable funds, which will continue to pressure big corporations to make positive changes.

Additionally, the Securities and Exchange Commission just proposed new rule changes requiring companies to report their greenhouse gas emissions and details of how climate change is affecting their businesses. We’re confident markets will work better with more standardized information, and the new SEC disclosure should help drive better outcomes. 

While it’s not always easy, our message remains consistent—much of investing requires taking the good with the bad. Remaining focused and disciplined, regardless of ESG strategy, is what leads towards future rewards in the long run. 

Do you need help understanding sustainable investment options? Reach out to us at Upevel. We’re here to help. 

 

Is Your Concentrated Stock Holding Worth the Risk?

concentrated stock holding

 

Earlier this month, stock of Facebook’s parent company Meta dropped a whopping 26%, its biggest one-day decline ever. Mark Zuckerberg, Meta’s chief executive, saw his personal “paper wealth” decline by a staggering $31 billion, more than the entire market capitalization of companies like Twitter ($30 billion) and Delta Airlines ($26 billion). 

Even after this precipitous drop in wealth, he’s still the tenth richest person in the world and it’s unlikely he’s had to make any concessions to his lifestyle. Still, he provides a valuable lesson for us all. 

At Uplevel Wealth, we’ve encountered our fair share of clients whose wealth is heavily concentrated in a single company’s stock. If you find yourself in the same position, here are three things you should consider.

 

1. What’s the Risk?

Investing in a one company’s stock is tremendously risky, as you are concentrating your wealth in the future success of a single company or industry. It can be challenging to see this risk, especially when a company’s stock has performed well recently.

The stock market’s past is littered with former “heros” turned “zeros” – Enron and WorldCom being two of the most famous. While these calamitous crashes garner lots of attention, a more common risk of a concentrated holding is poor performance for a prolonged period of time. 

Henrik Bessembinder, a professor at Arizona State University, looked at stock market performance going back to 1926. His research found that only 86 stocks, or 4% of companies were responsible for half the stock market’s wealth creation over 90 years. 

The other 96%? Their performance was no better than 1-month Treasury Bills, a government-backed investment whose return is only slightly higher than cash. 

As seen in the recent Meta example, individual stocks can also be incredibly volatile, losing significant value over a single earnings report, change in government regulation, or company scandal. 

This volatility is especially dangerous for investors who rely on their portfolios for income, expenses like college tuition or a home purchase, or are making future life decisions based on their current net worth. 

High volatility greatly increases the risk that stock will need to be sold at some point in the future when its price is depressed, and that the value is not there when it’s needed most. 

 

2. How Much is Too Much?

Common rules of thumb suggest limiting a single stock position to no more than 10 or 20% of your investable assets, but the “right” amount is very specific to your unique circumstances.

Like many clients we encounter, a concentrated stock position has often been amassed while working as an employee for the company in question. Stock options, RSU grants, and discounted employee stock purchase plans are common compensation vehicles and can quickly grow to a sizable portion of your net worth. 

Employees also have to be mindful of their own “human capital” investment and the degree to which it, too, is tied to your current employer. This may further reduce the stock exposure you should prudently have.

Rather than relying on one-size-fits-all percentages, we instead evaluate the amount of a single stock position, if any, that makes sense for our clients’ unique circumstances. If the future performance of the stock holding in question is sizable enough to sway the success or failure of a client’s future plans and goals, we often advise a significant reduction. 

For someone like Mark Zuckerberg, his astronomical wealth affords him the ability to assume greater stock risk without threatening financial ruin – a position most of us aren’t lucky enough to find ourselves in.

 

3. What’s the Best Way to Start?

Reducing a concentrated stock position can present its challenges, both on a financial and emotional level. 

One of the main hesitations of selling stock, presuming it has appreciated considerably, is the potential tax bill for doing so. Though long term capital gains rates are at historic lows, with the top Federal rate at 23.8% and state rates varying, many investors see taxes as the primary obstacle to diversification. 

In reality, however, reducing the inherent risks of holding a concentrated position should far outweigh the tax implications of selling. Afterall, isn’t it better to pay taxes because of investment gains rather than no taxes because of losses? 

It’s also common for investors to have emotional ties to their stock holding. Perhaps you have been an employee of the company for many years and have great confidence in its future direction. Or, you were gifted the stock by a beloved family member and feel a sense of duty to keep it. 

While both are understandable from an emotional perspective, mixing emotions and investing rarely turns out well. Recognizing this, or working with a competent advisor who can help you work through your hesitation, provides the best probability of financial success.

From a mechanics perspective, the fastest way to reduce the risk and volatility associated with a large stock holding is to sell it all at once. As discussed above, this can often be impractical. 

At Uplevel, we work with our clients to create a plan for diversification. Whether that means spreading gains over several tax years, picking monthly or quarterly dates to sell a specified amount, or setting price targets at which trades will execute, creating a disciplined plan is key.   

 

Protect Your Wealth

While concentrated stock holdings can be a great way to build wealth, diversification is the best way to maintain it. 

Do you need help creating a plan for your concentrated stock position? Reach out to us at Upevel. We’re here to help. 

 

Three Tips for Surviving Stock Market Volatility

As we close out the year, you’ve probably noticed that the stock market’s been on a bit of a wild ride. Markets dropped sharply on Black Friday as news of the omicron variant emerged and have continued to seesaw as markets try to decipher how this new development will impact travel, consumer spending, interest rates, and more. 

These swings have caught many investors off guard after 18 months of strong market returns. If you’re one of them, read on for three tips to survive stock market volatility:

 

1. Worrying is normal. Most of us have complex emotions surrounding money and investing, and it’s especially common to feel concern when the money we’ve worked so hard to earn and save may be at risk. Our brain’s “fight or flight” reaction, which served us well in the days of animal predators, often leads to panic when the news appears bad or our investment portfolio takes a downturn. 

Instead of the sabre-toothed tiger, many investors fall prey to common behavioral biases like loss aversion and anchoring, two phenomena popularized by economist and Nobel Prize winner Richard Thaler. His study of loss aversion showed that people feel the pain of losses twice as acutely as the pleasure of wins, meaning a day in which your portfolio falls two percent, for example, likely feels much more traumatic than the happiness experienced on a day in which your portfolio rises by the same amount. 

Another common cognitive bias is the concept of anchoring, which occurs when we have a particular value or number in mind. Perhaps you reached a milestone in the balance of your investment portfolio, only to see it slip backwards during this most recent volatility. That decline may feel like a “loss,” even though your portfolio is still likely higher than it was a year ago. 

The temptation to react in stressful times and “do something” is a very human behavior. The best thing we can do as investors is remind ourselves that choosing to “do nothing” and sticking with the long-term plan is also taking action.

 

2. Have a little perspective. While we all enjoy seeing positive returns and growing portfolios, the less pleasant reality of investing is that markets are volatile in the short term. 

It’s not uncommon to experience a market correction, which is a decline from a previous peak of 10%, or a bear market, which is a decline of 20%, in any given year. In fact, even years with positive stock market returns experience intra-year declines. Looking back at the past 20 years, the US stock market had positive returns in 16 of those years, despite intra-year declines ranging from 3% to 49%. 

US Market Intra-Year Declines vs. Calendar Year Returns, January 2001 – December 2020

 

US Market Intra-Year Declines vs. Calendar Year Returns

Chart courtesy Dimensional Fund Advisors. January 2001–December 2020, in US dollars. Data is calculated off rounded daily returns. US Market is represented by the Russell 3000 Index. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year.

 

While we don’t know how 2021 will end, investors have enjoyed another year of strong returns, despite recent volatility. US stocks, represented by the Russell 3000 Index, have returned over 24% year to date, well above historical averages. International stocks, represented by the MSCI All Country World Index Ex-US haven’t fared quite as well, but have still enjoyed returns north of 7% year to date. 

As unpleasant as volatility can be, it’s a normal part of investing. Having a long-term focus and a little perspective can help us all get through the inevitable tumbles along the way.

 

3. Take a look at how your portfolio is allocated. If stock market volatility is causing you to lose sleep, perhaps that’s a sign it’s time to revisit your asset allocation, or mix between stocks and bonds.

A healthy allocation towards stocks is needed for most long-term investors, especially to keep pace with inflation like we’re seeing today. Stocks also experience greater volatility than safe government bonds like US Treasurys. If fluctuations in your portfolio are a cause of great concern, that may be a sign that a permanent shift to a more conservative portfolio is due. 

The right asset allocation is unique to each investor and depends on a number of factors. At Uplevel Wealth, we like to say that choosing the mix between stocks and bonds is as much art as science. While ensuring our clients have enough growth via stocks to achieve their future goals, equally important is creating a portfolio mix they can stick with in good times and bad. 

Having a comfortable cushion of cash for emergencies or access to low interest rate funds like a home equity line of credit (HELOC) is also a vital part of a healthy investment plan. As mentioned earlier, market volatility is nothing unusual. What investors should avoid is being forced to sell investments for cash needs at the same time markets are struggling. 

Lastly, do your best to tune out the noise. Whether it’s the news, social media, or your brother-in-law at the holiday get together, remember that nothing grabs our attention like scary headlines. If you find yourself worrying about recent volatility, a good first step is to take a much-needed break from the “noise.” Read a book, take a walk, or turn on some cheerful holiday music. 

Or, give us a call at Uplevel. We’re here to help.

 

 

 

Five Ways to Uplevel Your End-of-Year Finances

End of Year To-Do's

Visit any Costco or Target (two of our favorites!) and you’ll see that fall is officially over and the holiday season is upon us. Not to despair, however. With a solid nine weeks left in 2021, now’s a great time to run through some important “to-do’s” and finish the year with your finances in good order.

To keep things easy, we broke it into our top five categories:

 

Be Mindful of Deadlines Ahead

With only a few pay periods remaining in 2021, make sure you’re on track to maximize your retirement plan contributions, especially if your employer offers a match. You can contribute up to $19,500 this calendar year to a 401(k) or 403(b), plus an additional $6,500 if you’re over age 50. 

If you want to increase contributions before the December 31st deadline, reach out to your HR department or payroll provider ASAP. It’s also a great opportunity to get next year’s contributions set up, as the maximum contribution amount jumps to $20,500 in 2022, for a total of $27,000 if you’re over 50. 

 

Use It or Lose It

A Flexible Spending Account (FSA) or Dependent Care FSA allows you to save pre-tax dollars throughout the year and use those funds to reimburse yourself for out-of-pocket expenses like copays, prescriptions, or child care expenses. While these accounts are a great way to save on taxes, typical FSA accounts have a “use it or lose it” provision whereby the balance in the account needs to be depleted by the end of the year. 

Employers do have the discretion to offer wiggle room and allow for some money to be carried over, usually $550. Due to the pandemic, the government is giving employers even more leeway, allowing for deadline extensions and larger balance carryforwards, including up to the total balance in an FSA. 

Be sure to find out what deadlines and limits apply to your plan, as you may want to contribute less money next year if you can carry-over an existing balance. If not, now’s the time to use up remaining funds and schedule doctor visits or stock up on FSA-eligible items, a handy list of which can be found here. 

 

Tax Planning Isn’t Just for April

While impending tax changes have been rumored since President Biden took office (check out our past blog posts on proposed tax changes) nothing has officially passed as of this post. Despite the uncertainty, it’s still a good idea to take a look at your income and deductions in 2021 and how they might compare to 2022 and beyond. 

If you were part of 2021’s Great Resignation and left your job, a Roth conversion in a lower-income year could be of great benefit. Conversely, if you were fortunate enough to receive a significant windfall, such as Restricted Stock Units (RSUs) vesting, other stock options, or a large bonus, make sure you are paying enough in estimated tax payments to avoid penalties come tax time. 

 

Double Check Your Portfolio

Though stocks have been on a winning streak for the last year or more, it’s worth taking a peek at your portfolio to see if any holdings are currently at a loss. Those investments can be sold and their losses used to offset capital gains realized this tax year or carried forward to a future tax year until depleted. 

If you don’t already have capital gains, you can offset up to $3,000 in ordinary income with realized capital losses. A word of caution however – be sure to familiarize yourself with wash sale rules before repurchasing a security sold at a loss, or you may find yourself in a bit of hot water with the IRS.

 

Make a Difference

Helping friends and family or supporting beloved charitable organizations can happen any time during the year, but there are some timing considerations if you’re looking to maximize your giving. 

This year, you can give up to $15,000 to another individual without making a dent in your lifetime estate and gift exclusion. If you are married and file jointly, that amount doubles to $30,000. Limits for 2022 have yet to be announced, but there is speculation that this amount will increase to $16,000 for single tax filers and $32,000 for married couples. 

Giving to charities has its own set of financial benefits and strategies vary depending on your circumstances. If you find a bit of excess cash in your bank account, here are a few options to consider:

  • Cash donations – Congress extended a provision of the CARES Act that gives single taxpayers a deduction of up to $300 for cash donations to some charities and $600 for married filing jointly. This applies even if you claim the standard deduction.
  • Strategic Donations – In addition to outright cash contributions, there are other options available such as donating appreciated stock, funding a donor advised fund, or a qualified charitable distribution (for those ages 70.5 or older). We can help determine which option is best for you. 

 

Reach Out

In the coming weeks, as you trade Pumpkin Spice Lattes for Peppermint Mochas, don’t forget to take a few moments to check-in on your financial position to make sure you’re taking full advantage of all the options available to you. We’re here to help.