Being an attorney I spend most of my time working for my clients.
I am oftentimes so busy that I cannot afford to give the necessary attention to my own personal financial situation. I need to speak with a financial professional who can help me put together a thoughtful investment strategy and comprehensive financial plan. How do I create a well-diversified investment portfolio? What are the major risks out there? Where can I find an advisor who’s going to act as my fiduciary?
 

Is my family protected?

The goal of estate planning is to direct the transfer and management of your property in a way that makes the most sense for you and your family. While this may sound simple enough, it is only through careful planning that you can achieve this result. Without careful planning, your property may pass on your death to unintended beneficiaries or may be reduced unnecessarily by transfer taxes.

While planning for your death is a significant part of the planning process, estate planning addresses more than just the transfer of your assets upon your death. Your estate plan may also provide for the transfer of assets during your lifetime through gifts. In addition, prudent planning involves evaluating the management of your assets in the event you become incapacitated or desire independent management of your assets as a matter of convenience.

There are a number of considerations that drive the estate planning process. Family considerations are important. For example, you must consider not only whom you want to receive your assets but when and how. Should your children receive their inheritance outright, or should it be managed for their benefit in trust? When should the trust terminate? Should your spouse be a beneficiary? Who should serve as trustee? Does a program of lifetime gifts make sense?

Perhaps just as important as the family considerations are the tax considerations. There are federal and state transfer taxes that apply to lifetime gifts and transfers at death. It is very important to understand the important tools available to minimize total transfer taxes.

Ferris Capital has the knowledge, to help guide you in the creation of your plan, as well as in many cases, the evaluation of a current plan you may have already put in place.

Do I have enough money to retire?

One of the most common questions the team at Ferris Capital encounters is; “Will I be able to retire, and not outlive my money?”. Although it is the most common question, it is absolutely one of the most complex issues facing individuals and families. That is why Ferris Capital offers comprehensive goals-based planning to all of our clients, inclusive of their fee.

Ferris Capital will help you consider the factors that go into estimating your retirement savings goal and decide how much you’ll need to live on in your retirement. Our team uses detailed Monte Carlo simulations to help you plan for a variety of potential scenarios. Here are some of the key factors we will help you navigate;

Factors in the Planning Process
The amount of variable factors in the retirement planning process make it impossible to predict a precise retirement income for everyone. However, by taking a closer look at these factors, some within your control, such as your retirement lifestyle, and some subject to outside influences, such as inflation, you can determine their effect on your retirement savings and more accurately predict what is “enough” for you to comfortably retire.

Current savings
The amount you currently have earmarked for retirement will affect the amount and the pace at which you need to continue to save. This may include money you put into funds directly for retirement, such as a 401(k) or an IRA, as well as personal savings accounts.

Life expectancy
Predicting your own death may seem morbid, but having an idea of your life expectancy can help you determine how many years you need to plan for in retirement. According to the Social Security Administration (SSA), an American man at age 55 can expect to live, on average, an additional 28 years, and an American woman at age 55 can expect to live, on average, an additional 31 years. Since most people estimate their retirement savings based on how much they will use each year, it’s important to know how long you will need to depend on these savings.

Retirement age
Just as knowing your life expectancy is vital to your retirement timeline, so is choosing an age at which you hope to retire. If you want to retire by age 50, you will have a vastly different savings plan than someone who plans to retire at age 70, as that person will have 20 years of additional income to add to their savings. If you do want to retire at an early age, starting to save early is even more crucial; the more years you have between you and retirement, the less you’ll have to save each month to reach your goal.

Income

Not only how much you can afford to save but also the amount you should ultimately put away is highly dependent on your income. Most estimates for retirement savings are either a percentage or a multiple of your income, and generally, the lower your income, the higher a portion of it you will need to save. In addition to your regular income, you should consider any other forms of income you will have in retirement, such as Social Security or a pension. Your Social Security Statement, available through the SSA, provides an estimate of your retirement, survivor and disability benefits under current law and updates your latest reported earnings. You will receive a statement by mail once at age 25 as well as regularly once you reach age 60, provided you aren’t already receiving Social Security benefits.

Investment returns
When calculating any savings you will incur from investment profits, you’ll have to calculate the annual rate of return you expect to earn. This includes savings you’ve already accumulated as well as savings you intend to make in the future, including during your retirement. These calculations will largely depend on whether the money is inside a tax-deferred account. When estimating these rates, you’ll will want to err on the side of being conservative.

Retirement lifestyle
Especially if you are far away from retirement, it can be difficult to imagine what your life will look like during this unique time in your life. It’s important to ask yourself things like the kinds of hobbies you expect to pursue, how much you want to travel, if you will pursue part-time work during this time and how frugal you realistically expect to be during this time. Although some costs, such as commuting costs, payroll taxes, retirement savings, mortgage payments, etc. will likely go down during retirement, you will also have more free time to spend your money during retirement. Even if you estimate everything else correctly, if you budget for a retirement lifestyle that’s more conservative than the one you actually live, your savings may not be enough.

Deciding How Much to Save
After considering the above factors, you will ultimately have to decide how much of your preretirement income you will need to save to enjoy the standard of living you are used to. Popular estimates usually range from 70 to 90 percent or eight to 12 times your annual income. Once you have an overall goal and considered your planning factors, it should be much more feasible to calculate an amount to save each month and each year. Your financial advisor at Ferris Capital can also help you to decide on an appropriate number.

It’s important to reassess these factors every two to three years, as your retirement savings will have to change along with your lifestyle. It can help to set up checkpoints throughout your life to make sure you’re still on track; for example, if you plan to save eight times your annual preretirement salary by the time you retire, you could save one time your salary by age 35, three times your salary by age 45, five times your salary by age 55, etc. Estimating income needs for 30 to 40 years in the future can be difficult, but starting with a rough estimate and starting small is better than not starting at all.

Ferris Capital will aid in evaluating these factors, and ultimately in implementing a plan to help you and your family meet these goals. More importantly, the firm will keep track of your progress, and help you adjust any changes to the plan as your situation changes.

What are some “Value-Add” tax strategies Ferris Capital can provide?

Another component of Ferris Capital’s family office approach, is our firm’s ability to consider the tax implications our clients face as a result of their entire financial picture. Our team works hand in hand with our clients and their CPA’s to ensure we are being as thoughtful and thorough as possible when it comes to minimizing tax liabilities for clients.

Every family’s situation is unique, and is taken into consideration. However, our firm has found there to be some core strategies in adding value for clients in this area. The most direct way in which Ferris Capital adds value for clients is tax loss harvesting.

Tax loss harvesting is a strategy that takes your current investment losses and uses those to reduce your tax bill for the year. The strategy attempts to do this without disrupting your asset allocation. In short, you can take some of your investing lemons and make lemonade.

The Tax Benefit

Tax loss harvesting allows you to use current, taxable investment losses to pay less in taxes now and defer taxes on capital gains and income. When you realize a capital loss (by selling the position), you can offset capital gains you’ve realized for the year on your tax return. If you have a net loss, you are allowed to offset up to $3,000 of income. If you still have excess losses, those are carried forward onto future tax returns.

When you sell a security but repurchase shortly after, you are effectively trading paying taxes now for paying them later. The reason has to do with your cost basis in the security. For instance, if you purchase a single stock for $100, your initial cost basis in the security is $100—the amount you paid for it. Then, when you sell and repurchase it for $80, your cost basis becomes $80 rather than $100. Let’s say the stock then increases to $150. Without tax loss harvesting, you would be paying capital gains on $50 dollars of gains ($150 minus $100). With tax loss harvesting, you get an initial tax benefit, but then pay taxes later on $70 ($150 minus $80) worth of gains.

For many, there is great value in deferring taxes on their investments. Generally, money now is worth more than money later because you have the power to invest it. Furthermore, many people anticipate being in a lower tax bracket in the future because they will be earning less or will be in a more advantageous tax situation for other reasons. In these cases, it makes sense to defer taxes so that you can pay them at potentially lower rates.

The Strategy

Tax loss harvesting goes beyond a simple sell strategy and attempts to take losses in your portfolio while not significantly disrupting your overall investment strategy. To do this, you would sell a security to capture the loss, then buy the same amount back shortly after in order to return to your original position. For example, if you originally purchased one share of stock for $100 and it is currently worth $80, you would sell the stock, taking a $20 loss, and then buy one share of stock shortly after, likely at a similar price. This gives you the capital loss for tax purposes, but then returns you to your original position in your portfolio.

In the meantime, however, you will have been out of the position you sold, so you may have missed out on potential gains made during that time. To alleviate this issue, an additional step would be to invest in a different, but correlated investment during the 30 days you are not invested in the sold position.

Avoiding Wash Sales

You must wait 31 days to repurchase a security after selling it due to the IRS wash sale rule, which disallows a loss on a “substantially identical” security purchased 30 days after or before the sale. This means that purchasing the same security you just sold within 30 days would violate the rule. As a result, the safest way to avoid a wash sale is to simply repurchase the stock 31 days later without replacing it in the meantime.

If you are going to replace the sold security with another during those 30 days, it’s best to be cautious when choosing a replacement security. For instance, if you sell an S&P 500 index fund and replace it with another S&P 500 index fund from a different company, it is possible you may have violated the wash sale rule. The IRS does not clearly define a “substantially identical” security and hasn’t issued any guidance on this specific example, but it would be a risky move nonetheless. Work closely with your financial advisor and accountant to determine the best course of action.

Risks

Because tax loss harvesting is not an exact science, there are risks to be aware of. One is that if you use the strategy to effectively defer paying taxes, there is a chance that your tax situation in the future may not be as favorable as it is now. Whether it’s because you are earning more than expected or because future tax law changes will increase tax rates, a less favorable tax situation can mean paying more in capital gains taxes rather than less. While no one can tell the future, it’s best to discuss this issue with your financial planner and accountant.

Another issue that can arise is due to switching to a temporary investment during the 30 days after you harvest your losses. If the temporary investment gets significant gains and is then sold, you’ll be subject to short-term capital gains, which are taxed at higher rates than long term gains. Granted, you’ll receive a net benefit from selling at a gain, but it would mean a higher tax bill for the year. Of course the opposite result is possible as well; that the temporary investment drops, creating greater losses.

Tax Gain Harvesting

While tax loss harvesting is helpful when you want to reduce the impact of a large tax bill, tax gain harvesting can be helpful when your tax situation is unusually good. The same general principles apply but in reverse. You would sell the security to realize gains for the year and then repurchase the security to be in the same position but with a higher cost-basis. You will pay less in taxes later because of the higher cost basis but will pay them this year when your tax situation is potentially more favorable. One major difference is that there are no “wash sale” rules for realizing gains. You may repurchase the security immediately after selling.

Ultimately, tax loss and gain harvesting can be powerful strategies when used well. However, there are risks involved, and because the future is unpredictable, the strategies may not end up being as effective as you intended. That is where Ferris Capital’s family office approach can look at each client or family as a unique case, and evaluate the merits of such strategies accordingly.

Please reach out to Ferris Capital in order to cover the entire list of other tax advantage strategies, and see which may apply to your specific situation.

Get in touch with our experts


 Dave Ferris

Dave Ferris


 
 

The Ferris Capital Process


We firmly believe that the best results come from a consistent process with a thoughtful design.

We use low cost ETFs, mutual funds, individual bonds, and stocks to build custom portfolios for our clients that are in line with their larger financial plan. We always seek to use the lowest fee, most efficient investment vehicles possible and to utilize best of class managers when they offer more value than an index or ETF.

Understand Your Goals and Financial Situation 

Ferris Capital meets with you to fully understand your goals, time horizon, anticipated cash flows, and feelings towards investments in general . We also conduct an in-depth evaluation of your total financial picture including insurance, wills, trusts, 
and employee benefit options.

Create a Financial Plan Tailored to Your Goals

Ferris Capital works with you to develop a comprehensive financial plan that positions you with the highest probability of success in meeting your goals. The plan includes goal-driven asset allocations, tax sensitivity, long-term estate planning, and overall 
risk management.

Establish the Proper Accounts and Legal Structures

If applicable, Ferris Capital can direct you to top notch accountants and attorneys or work with your existing relationships to formulate and execute the structures and strategies to best protect your assets from taxes and liability. 

Current Investment Evaluation and Tax Analysis 

We analyze your current holdings to see if there are any embedded taxable gains or additional issues that should be considered in building your portfolio. If there are any issues, we will construct the investment portfolio to address those issues specifically and potentially use the existing investment as proxies to our investment model choices. 

Portfolio Construction

Using the risk profile from the financial plan and the considerations from the analysis of your existing assets, we manage your capital in one of our strategies that corresponds with your risk level which are designed using our proprietary market outlook, historical asset class performance, manager interviews and internal expenses. 

Ongoing Maintenance, Monitoring, and Reporting 

Ferris Capital monitors market and portfolio changes and keeps you informed on performance, risk and goals-based progress through quarterly calls or meetings. We also look to address any liquidity needs or life changes that may impact the long-term financial plan. 

Why Ferris Capital?

All investment firms offer “financial planning”. However, not all investment firms are bound by the fiduciary standard and not all firms are conflict free. Ultimately the most important difference between firms comes down to the people, their experience, and the service they provide.

At Ferris Capital, our independence ensures that your interests always come first. We believe that transparency and integrity are critical to building long-term relationships. We’re devoted to a client experience that revolves around the needs of you and your family, not around commissions.

Our work doesn’t end with a financial plan; that’s where it begins.

 

Next Steps