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May 25, 2016

Dear Clients and Friends,


Cash Management - Knowing Your Annual Spending

We have devoted much of the content of our recent newsletters to investment management and the reasons behind current portfolio positioning.   The overall objective of investment management is to put your portfolio in a position to facilitate a desired spending level throughout life. This requires a portfolio that 1) attains the required return to keep pace with inflation and 2) doesn’t expose the investor to significant downside risk, which can be catastrophic to cash flow sustainability.

Given that the goal is generally to maintain a sustainable future cash flow stream, measuring your current cash flow needs is a hugely critical factor in the equation. To that end, we have proposed a simple method that can track spending and enhance planning success. Unfortunately, we have only been able to successfully convince about 20% of our working client base that it is worth the effort to implement.   This leaves many of our non-retired clients somewhat in the dark about their current spending level. To shed light on spending levels, we propose the following:
Ø Redirect all income sources to an existing or new Fidelity account via direct deposit.
Ø Establish a set amount of monthly cash to be transferred from this Fidelity account to your primary checking account for routine monthly expenses.
Ø Transfer one-time distributions for large expenses from Fidelity to your primary checking.

Running all income through a separate account from your spending account will help to better measure the total outflow, which ultimately leads to the critical information of spending and savings rates. Conversely, when income is going directly into the spending account, the variability in net pay, which can occur from changes in withholdings, 401(k) contributions, reaching the Social Security wage base limit, etc., makes it somewhat harder to calculate spending. 

The above method is a fairly painless way to measure total cash outflows. Simply running a withdrawal report from your Fidelity account and adjusting this total amount by the net decrease or increase in your primary checking account will allow us to arrive at a fairly accurate measure of current spending. Knowing what you are spending now helps us in evaluating the reasonableness of your projected retirement spending needs. Please call your primary service advisor to assist with the set up process.

For retirees, we monitor the annual rate of withdrawal (as a percentage of their total portfolio) to gauge whether they could be spending above their means. Monitoring withdrawal rates allows us to isolate clients in need of a more detailed retirement plan analysis. 

The Zero Returns On Cash

Given the low yield environment, most money market funds are yielding next to nothing. For those who are keeping a significant amount of monies in cash, online savings accounts represent a good alternative, with some yielding around 1%. Clients wishing to maximize the yield on their core, emergency savings, can open an online savings account and establish an electronic link between their local bank and the online savings account. Note that it takes a considerable amount of savings to generate any significant after-tax return in the online accounts. If you keep $50,000 in an account that earned 1%, it would generate $500 a year, or about $335 after-taxes - worth it to some clients, not to others.   Please contact your primary service advisor at Schiavi + Dattani if you wish to explore.

Social Security - The Disappearing Options

Two strategies for claiming future Social Security benefits were impacted by recent changes. The ability to “file and suspend” one’s own benefit ended in April.  The ability to file a restricted application has been curtailed. A “restricted” application allows a higher earning spouse to file and receive benefits restricted to a spousal benefit, which is a fraction of the benefit being paid to the spouse already collecting benefits. This allows the higher-wage-earning spouse to collect some benefits now while allowing his or her own benefit to build to a higher level when started at a later age. One spouse must be collecting benefits to allow the other to file a restricted benefit application. Restricted applications are still permitted for all earners who reached age 62 by January 1, 2016.

Although the above changes are significant, they do not take away from the need to fully explore and benefit from the remaining benefit claiming strategies. Individuals approaching benefit eligibility are strongly encouraged to carefully review the available options with us.

Expanding the Role of Financial Planning

The main idea behind basic financial planning is to spread the economic resources accumulated during our working years over our entire lifetimes, while also preparing for the contingencies that life has in store for us. One contingency often overlooked is the need to support adult children and parents. Some of you have accumulated resources in excess of what could conservatively be needed to provide for your own secure financial future. As a result, financial planning tools can be utilized to efficiently and effectively benefit loved ones and charities.  

The more we know about you, the better we are able to assist with this financial planning process. Understanding your loved one’s stage of life, profession, income, spending/savings habits, and health- related information is extremely helpful. Also, it is useful for us to know about additional assets that are not on our radar resulting from a future inheritance or family gifting.   The more complete a picture we have, the greater the potential for us to uncover opportunities to maximize family resources, protect assets from creditors, minimize income and transfer taxes, and advance charitable intent.

This area of planning is completely customized. No two families will have the exact same set of circumstances. We encourage you to make us aware of your concerns and objectives that exist beyond your own financial security and look forward to helping you make impactful decisions.

We continue to work daily to earn your trust and confidence.


Best Regards,
Vincent A. Schiavi, CFP®, CPA/ PFS                            Ravi P. Dattani, CFP®, CPA
President                                                                     Vice President  


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