From November 16th, 2021
To watch the Zoom video recording, please click on the below button:
To listen to the audio only version, please click play below:
Skip to a section of the call:
A quick reference for tax rates, savings and retirement contributions, college savings strategies, as well as Social Security and Medicare information.
Everyone’s financial situation is unique – the information found in the 2021 Planning Guide should only be used as a foundation for discussing your individual circumstances with a CERTIFIED FINANCIAL PLANNER™ practitioner, legal or tax professional.
The wealth advising team at Albion Financial Group understands the complexities of the current wealth management environment and would be honored to discuss your financial situation and strategies that may help you reach your personal financial goals.
Please give us a call at (801) 487-3700 or email dpope@albionfinancial.com.
We wish you a prosperous 2021.
Devin Pope, CFP®, MBA
Senior Wealth Advisor
Albion Financial Group
Should I refinance?
Mortgage rates are at historic lows. According to Bankrate, the national benchmark rate for a 30-year fixed refinance mortgage is 3.16% and a 15-year fixed refinance mortgage is 2.62% (8/27/2020). It is worth noting that rates for refinancing tend be a bit higher than for purchases. Many clients are wondering if they should refinance and it seems like the answer would be, “yes,” however, not unlike many financial planning questions we address, the real answer is, “it depends.”
Yes, refinancing at a lower rate will reduce your monthly payment. But, it may not reduce the total payment you make over the life of your loan. One of the most determinate variables in the refinancing equation is how long you’ve had your current mortgage.
For example, we have a client who was looking to refinance a few months ago. They were 10 years into a 30-year fixed mortgage at 4.375% and were looking to refinance into a new 30-year fixed loan at 3.5%. Sounds like a good move, right? Their monthly payment would drop by $400 which is a savings they would feel right away. But, over the life of the loan, they would actually end up paying an additional $15,000 of interest. Why? Because more of the monthly payment goes towards interest in the early years of a mortgage. When you refinance, you restart the interest clock. In our client’s example, they already paid 10 years of interest. If they continued paying on their current loan at 4.375%, they would pay a total of $128,000 in interest over the life of the loan. If they refinanced at 3.5%, they would end up paying a total of $143,000 in interest.
If the client chose to invest their monthly savings ($400) they could potentially earn more than the additional interest of $15,000 thus making the refinance a more attractive option.
For simplicity sake we are not accounting for closing costs, but they do have an impact on the refinancing decision. Additionally, a new refinance fee – called the “adverse market” fee – is set to go into effect on December 1st of this year. It will add a 0.50% charge to the vast majority of refinances. The fee is applied to the total loan amount. For example, if you take out a $300,000 mortgage, you will pay an additional $1,500 in closing costs.
So, should you refinance? Again, the answer is, “it depends.” How long have you been paying on your current mortgage? If you haven’t had your current mortgage for very long, a refinance is likely more compelling, especially if you can do it before the new fee goes into effect later this year.
Other important questions. How much lower will the rate be with a refinance? What will you do with the monthly savings? Are you trying to shorten the term of your loan?
We have helped many clients work through refinancing decisions. Please reach out if you have questions about your current mortgage or other loans. We are happy to help you determine the best decision for your individual circumstance.
by Liz Bernhard & Danielle Gregory, August 2020
Senior Wealth Advisors at Albion Financial Group
www.albionfinancial.com | 801-487-3700
Often, the Planners’ Corner is used to provide straight forward, actionable guidance from our planners and advisors. In these extraordinary times, it’s a piece of behavioral psychology that will beset the following text. We are working hard to provide insights into the changing world around us using a plethora of mediums – conference calls, blog posts, emails, phone calls, video chats, TV appearances, social media posts, etc. Yet we can’t discount that the world has seemingly tempered to a halt. As a community, we do our best to make do, but sometimes fear and anxiety permeate our best efforts at normalcy.
It was once thought that ostriches buried their heads in the sand to avoid danger. Although a reasonable assumption, it’s wrong. This hasn’t stopped the term “ostrich effect” from bleeding into the study of behavioral finance. The misconception about why ostriches bury their heads in the sand, led to a broad definition describing this effect as “avoiding exposing oneself to [financial] information that one fears may cause psychological discomfort.” As with every story, there are two sides – some tend to find themselves falling victim to the over monitoring of finances in periods of high uncertainty and volatility. Coined the “meerkat effect” due to a change in behavior that resembles more of a hyper-vigilant meerkat than a head in the sand ostrich. Regardless of whether we act more like ostriches, meerkats, or just humans – our built-in psychology can reinforce negative emotions in times of uncertainty.
Whether we like it or not, some aspect of the ostrich effect influences us within or outside of our financial lives – avoiding listening to a voicemail because we know its contents are undesirable, not checking financial statements for fear of unpleasant details, putting off an uncomfortable phone call, or unnecessarily rescheduling a filling at the dentist. We, as humans, experience this effect even with the most minor unpleasantries. Financial health is no minor detail. It’s easy for financial advisors and investment gurus to repeat the same truisms over and over in times like this to aid clients who are wading in murky waters. However, we should never discount the unprecedented nature of this pandemic as it relates to all of our ever-changing situations.
So why do ostriches bury their head in the sand? They dig holes to keep their eggs, and occasionally insert their heads into the ground to turn the eggs. They are nurturing, not hiding. This is time we can spend nurturing our financial eggs, controlling what we can control. Below are 5 steps we can take, together, to manage our financial and mental health during and after the novel coronavirus:
Talk to us, talk to others – We do our best to reach out to all clients personally, both prior to and during this time. Discussing finance, family, friends, canceled trips, or plans for the future are all suitable topics. We are here to listen to you, regardless of the topic. Communicating with our clients does as much for us as it does for you – we all need the personal connection right now. Remember to connect with those you love via phone or video chat or catch up with someone you haven’t spoken to in years.
Automate – Finances can fall by the wayside when our health is at risk. Manually making transfers, withdrawals, paying bills, and contributing to retirement accounts can feel tedious and stressful right now. Let us help you automate your financial life so that you can focus on what’s important.
Plan with real data – Financial planning is probably not near the top of many lists right now. However, I would be hard-pressed to find a better time to properly plan. Working together to understand and finetune your entire financial picture can be a great way to confront both sides of this psychological coin. Planning with estimates is good, planning with data is better. When we understand what is coming in versus what goes out while factoring in all assets you have, we can act faster with real data in times of need (good or bad). Please reach out to discuss formal planning and we will work together to realize its benefits.
Get informed – We work with some of the most intelligent clients out there, but no one knows everything about everything. Albion employees are working as a cohesive unit from home to deliver the most relevant insights and information for our clients. Following us on social media, attending our conference calls, keeping up with the blog, and dissecting our emails are great ways to understand where we stand on the most important topics facing the world today. We can’t cover everything, but we are willing and able to research or answer any tough questions that you have – don’t hesitate to make us your first call.
Take it slow, make a list – Whether we are busy or finding ourselves with too much free time, trying to tackle everything at once can be draining. We are here every day working to ensure your success but might not wholly understand what concerns you have for one reason or another – everyone has different worries and wants. Making a list of things we have been actively avoiding or overanalyzing is a logical first step. Acting on and completing this list over time yields the desired outcome. Small steps turn into big leaps with time.
A quick reference for tax rates, savings and retirement contributions, college savings strategies, as well as Social Security and Medicare information.
Everyone’s financial situation is unique – the information found in the 2020 Planning Guide should only be used as a foundation for discussing your individual circumstances with a CERTIFIED FINANCIAL PLANNER™ practitioner, legal or tax professional.
The wealth advising team at Albion Financial Group understands the complexities of the current wealth management environment and would be honored to discuss your financial situation and strategies that may help you reach your personal financial goals.
Please give us a call at (801) 487-3700 or email dpope@albionfinancial.com.
We wish you a prosperous 2020.
Devin Pope, CFP®, MBA
Senior Wealth Advisor
Albion Financial Group
You’ve worked hard for your employer for several years and been rewarded with options on the company stock. Now stock options make up a large share of your wealth and you’re thinking it’s time to pay more attention. But what are these options worth and how should they be handled? As employers have grown more creative with compensation, questions like these no longer apply only to the executive suite. In many companies options are now available to employees of all levels and for some represent a substantial portion of their total compensation package. Understanding how stock options work, and determining how to maximize their value can be complicated. While employee stock options can be great wealth creation vehicles, understanding what they are and how they work will greatly increase the odds of a positive outcome.
Stock options grant the holder the right to purchase shares in a company at a specified price (exercise price) for a specified period of time (expiration). The aim of granting options is to incentivize employees; aligning their interest with that of the company. By doing so the company hopes to increase operational performance and thus profitability. There are two types of options awarded; incentive stock options (ISOs) and nonqualified stock options (NQSOs). The key difference between the two is how they are treated for tax purposes.
Incentive Stock Options (ISOs)
ISOs offer more favorable tax treatment than NQSO’s, taxing the gain on the sale of the underlying shares at long-term capital gains rates if the holding rules are correctly followed. There are two important holding periods to meet the holding rule requirement. The first holding period begins with the grant date of the option. The option holder must wait at least two years from the grant date prior to selling the underlying shares in order to have the gain taxed at long-term capital gains rates. The second period begins when the stock is transferred to the employee. In order to receive long-term capital gains treatment the shares must be held for at least one year following the date the stock was transferred. If the two holding periods are met then the gain will be considered long-term. Be aware that ISO’s are an alternative minimum tax (AMT) preference item and in certain circumstances can trigger AMT.
Nonqualified Stock Options (NQSOs)
NQSOs are less tax favorable, but are more commonly used as they are not subject to the same restrictions on issuance as ISO’s. When a NQSO is exercised tax is due at ordinary income rates on the difference between the exercise price and the value of the stock at the time of exercise. The exercise price becomes the cost basis for the position going forward. When the shares are eventually sold they will be subject to short-term or long-term capital gains based on the length of the holding period from the time of exercise.
Option Risks
Stock options are a great way to build wealth and over time may come to represent a large share of one’s net worth. However there are risks. First and foremost is concentration. Not only does the employee rely on the company for income but he also depends on the ongoing success of the company if his net worth is to be maintained. A failure of the company is a double whammy; the income is gone and the stock option assets on his personal balance sheet have greatly diminished in value. It is important to sensibly diversify the balance sheet from time to time to avoid having all eggs in one basket.
Exercising Options
The method used to exercise options can also have unintended consequences. In the late 1990’s many technology and internet based companies experienced substantial stock price appreciation. Employees of these companies were suddenly wealthy and exercised their stock options. Given the strength of the companies in the market many employees chose to hold the shares for further appreciation. When the bottom fell out and the share prices dropped these same employees discovered that their tax bill, based on market price at exercise, was greater than the now depressed value of the shares. There were many variations on this theme but the net result was the same; when the share prices plummeted the option value disappeared and the option owner found himself with liabilities but no assets left to cover them.
An idea often considered is to hedge the exercised shares by purchasing a corresponding put option while waiting for twelve months to pass in order to receive long-term gains treatment. Unfortunately this does not work. Such a strategy suspends the holding period in the eyes of the IRS and the holding period for capital gains purposes remains suspended as long as the put is in place. Fortunately all is not lost. With proper planning and a clear vision of what employee stock options can and cannot do an investor can design a strategy to protect against catastrophic downside loss while allowing participation in the ongoing success of the company. With a clear-eyed hard headed analysis the option owner can greatly increase the probability of meeting their long-term financial objectives.
Devin Pope, MBA, CFP / Senior Wealth Advisor
Albion Financial Group
dpope@albionfinancial.com
(801) 487-3700
Disaster Waiting to Happen or Disaster Averted; You Choose
Headline: “Earthquake Strikes Salt Lake City. Buildings Destroyed: Utilities Down for a Month”
What comes to mind when we think about disasters are cataclysmic events; floods, earthquakes, fires and the like. And while it is essential to plan for these dramatic possibilities there are far less newsworthy yet much more likely “disasters” that can impact us in adverse ways. So prior to confronting the daunting task of planning for an unlikely large scale disaster spend some time planning for the more likely, and far more mundane, inconveniences that could rock your world. A side benefit to this planning is that your efforts can be used as building blocks when creating a large‐scale disaster recovery plan. Disaster mitigation strategies cover a broad range of topics from planning places for your family to meet in case of an emergency to maintaining adequate supplies of food and water. While the full range of disaster mitigation topics is essential to review, this piece will be limited in scope to essential preparations you should make to avoid crippling problems with your financial affairs.
Have you ever had your purse or wallet lost or stolen?
If so you know well those moments of concern as you attempt to recall exactly what was in it and what damage the thief might do before you are able to take mitigating steps. Having your mail stolen brings the same response with the additional uncertainty of not knowing what exactly was in the mailbox that day. What about that sinking feeling when due to business volatility bank balances are too low at the end of the month to meet your living expenses? Do you have adequate liquidity outside your company if the problem persists? What about your health? Do you have a mechanism in place in the event you are unable to conduct your own affairs due to a temporary disability? Who can you turn to for help in the event of an emergency? Let’s categorize and address these issues.
Checking and Organizing your Financial Information
Begin by organizing your financial data, recording the relevant account information, and storing it in a safe place. Know where your deeds, titles, and insurance policies are located and have them stored securely in a place where you can quickly grab them on your way out the door. Document the possessions in your house; walk through your home with a video camera recording images and describing the contents of each room. If possible have copies of the relevant documents, the video of your home, and account information secured off site and accessible by a trusted friend or advisor who you can reach on short notice. This will prove invaluable should your home be damaged or destroyed and also very useful if putting a hold on your assets or cancelling credit cards or debit cards becomes necessary, particularly if you are out of town and unable to access the information on your own.
Make sure your planning documents are current. This allows for someone you trust to make decisions on your behalf should you be unable to do so. Many of the tools to do this are relatively simple to execute but may have complex repercussions. Be careful to whom you grant these powers. Make sure your health care powers accurately reflect your wishes and are properly executed. Review your estate planning documents whenever you experience a significant life change. Keep copies of critical documents (Social Security, Passport and Driver’s License).
These documents are not very useful if they are not available when needed. Be sure someone you trust knows how to access the documents in case of an emergency. This trusted individual might need to get an executed copy of your health care directive to the hospital should you be unable to do so yourself.
At least annually obtain a credit report from each of the three reporting bureaus. There are also services available that, for a fee, can keep you apprised of any credit activity under your Social Security number on a daily basis.
Maintaining Accessible Rainy Day Funds
The other day when driving to work I pulled into a gas station to fill up. As we all now do, I got out, slid my credit card through the reader, and placed the nozzle in the filler tube. When the pump then told me my card could not be accepted I went inside and was informed that their link was down, they could not accept credit cards, and if I wanted to buy gas I’d have to use cash. Fortunately I had cash that day so was able to fill my tank but while I was doing so a half dozen cashless potential customers were turned away.
We are dependent on our financial system to function each day and the example above indicates how ingrained it has become in the fabric of our lives. While we don’t advocate basing disaster mitigation exclusively around the notion that our financial system will cease functioning it is likely that there could be temporary interruptions to your ability to access funds. This could be a result of a temporary system failure as mentioned above or the result of a failure of the tools in which your funds are invested. To protect against a temporary inability to access funds or credit lines keep several days of cash on hand. These are funds that would tide you over until the financial network in your area is up and running again. It is important to separate this cash from “walking around” cash you may normally carry in your wallet. While it is not the focus of this piece you should also have adequate food and water stored at home to tide you through a temporary period of time in the event you are unable to purchase basic supplies.
Far more likely than a systemic financial failure is an event specific to you or your region of the country that interrupts your usual cash flows from employment. Have a cash reserve set up to carry you and your family through three to six months of lean times. Keep these cash reserves as safe and liquid as possible. FDIC insured bank deposits and high quality money market funds are the best options. Yes, the yields on these tools are nonexistent right now but the purpose of this piece of your financial puzzle is safety and liquidity, not return.
Be careful of investment tools that are “similar” to money market funds but may offer a slightly higher current yield. While many of these tools may function as advertised for years, failure is most likely to occur in a time of crisis; just when you need it most. Auction rate securities, for example, were very popular as a cash management tool several years ago. By trading daily liquidity for weekly liquidity investors received a higher interest rate on their money. Unfortunately many investors in these tools did not understand that these were not money market funds. In 2008 when buyers for auction rate securities dried up holders were unable to sell their positions for much needed cash.
Check your insurance coverage. A good disability policy can make a big difference for you and your family should you be rendered unable to work for a period of time. Good health insurance (and yes, we recognize this is a hot button issue) can make the difference between a health issue being a minor setback or a road to bankruptcy. As CEO you are likely the primary breadwinner in your household. What happens to your family if you pass away? Life insurance, properly used, can really help your family meet their objectives should you be unable to provide for them.
The last point about liquidity is to review whether your financial assets are adequately diversified. It is very common for CEO’s, business owners, and senior executives to have the majority of their net worth tied up in their company. While wealth is often best created through concentration it is best retained through diversification. When your paycheck, your career path, much of your net worth, and in many cases your reputation is tied to a single company it is prudent to diversify a portion of your balance sheet away from that company. There are many tangible benefits to building a substantial portion of your net worth outside your company. These include the flexibility to raise funds without impacting your firm and the ability to maintain your family should the company fall on rough times and be unable to meet your cash flow needs. It also provides a lifeboat should the unthinkable happen and the company fail.
The Benefits of a Good Team
You likely already work with an accountant, an attorney and a financial advisor. When creating your disaster mitigation plan do not hesitate to take advantage of their expertise. A solid team watching your back can not only ease the process of creating your plan but can certainly prove invaluable help should the plan ever be called into use.
Your attorney can help you correctly create legal documents, specific to you, that provide essential guidance and a framework for action in the event of a variety of disasters. He can work through asset titling issues to ensure that your assets are held in such a way that they provide the most benefit to you and your family in a variety of prospective circumstances. Your attorney can review your full slate of documents from trusts and wills to medical and financial powers to make sure they meet your current requirements and do not have conflicting passages that could cause problems in the future.
Additionally, your attorney will usually keep a copy of all documents they create giving you the benefit of off‐site storage for these critical items should your originals become lost, stolen or destroyed. In addition to advice on how best to navigate the tax and regulatory environment in which your business operates your accountant is an excellent backup location for your specific financial information. Should your financial information be lost, stolen, or destroyed your CPA will have records that can provide essential guidance as the data is reconstructed. Often your CPA firm will know your corporate information as well as your personal information and can be an excellent source of aid in the event a disaster befalls your firm.
Most CEO’s of closely held businesses keep close tabs on most if not all of the financial relationships of their company and some choose to forego an accounting relationship altogether, preferring to handle these functions on their own. While this can be effective for the individual CEO it quickly becomes a problem if the CEO is no longer able to function. It can be extremely disruptive to the business, to say nothing of the family members charged with picking up the pieces, to recreate this knowledge base in the absence of a quality, previously involved, CPA.
Often communications with your financial advisor occur with far more frequency than with the other professionals on the team. It is in your best interest to use that relationship to its fullest. Your financial advisor can serve as a trusted backstop if they know you, the pieces of your financial puzzle, and how you’d like the pieces to fall together in the coming years. They can be an excellent place to keep backup copies of your data, and if they adhere to a fiduciary standard, can give you the security of knowing there is a team out there that has a duty to look out for your best interests first. Your financial advisor can provide guidance regarding tools and techniques that are best suited to your individual circumstances whether it be a place to park an emergency reserve fund or the appropriate investment policy for financial assets with a longer time horizon. In the event of an emergency they are in a position to quickly help you implement steps to mitigate the damage to your financial situation.
Disaster recovery planning can be a daunting project but like so many endeavors it can be accomplished if divided into smaller more manageable tasks. The items outlined here are some of the steps that serve as building blocks to a comprehensive disaster mitigation plan. There are scores of resources available to help you design and build your own disaster recovery strategy. One of the most comprehensive sources is the Federal Emergency Management Agency. They have extensive guidance available online at http://www.fema.gov/plan/index.shtm. May you create an excellent plan and never have to use it.
Devin Pope, MBA, CFP
Senior Wealth Advisor
dpope@albionfinancial.com
Albion Financial Group
(801) 487-3700