Trinity Financial Quarterly · Trinity Financial Advisors, LLC John Wimbiscus, CFP® Principal 541...

Trinity Financial Advisors, LLCJohn Wimbiscus, CFP®Principal541 North Fairbanks Ct.Suite 1060Chicago, IL 60611312-245-1300Fax: [email protected]

August 2016Be Prepared to Retire in a Volatile Market

Four Reasons Why People Spend Too Much

Can I make charitable contributions from myIRA in 2016?

Can I name a charity as beneficiary of myIRA?

Trinity Financial Quarterly

Investors Are Human, Too

See disclaimer on final page

We hope you are enjoying yoursummer! Here at Trinity, we arecontinuing to monitor the volatilefinancial markets in light of therecent historical BREXIT referendumand other global issues. Thisquarter, we are highlighting a coupleof key ideas to consider duringmarket volatility including thepsychological drivers behind yourpersonal investment behavior andthe impact volatility can have on yourportfolio in retirement. Please read,enjoy, and feel free to call us todiscuss further!

In 1981, the NobelPrize-winningeconomist RobertShiller published agroundbreakingstudy thatcontradicted aprevailing theory thatmarkets are alwaysefficient. If theywere, stock prices

would generally mirror the growth in earningsand dividends. Shiller's research showed thatstock prices fluctuate more often than changesin companies' intrinsic valuations (such asdividend yield) would suggest.1

Shiller concluded that asset prices sometimesmove erratically in the short term simplybecause investor behavior can be influenced byemotions such as greed and fear. Manyinvestors would agree that it's sometimesdifficult to stay calm and act rationally,especially when unexpected events upset thefinancial markets.

Researchers in the field of behavioral financehave studied how cognitive biases in humanthinking can affect investor behavior.Understanding the influence of human naturemight help you overcome these commonpsychological traps.

Herd mentalityIndividuals may be convinced by their peers tofollow trends, even if it's not in their own bestinterests. Shiller proposed that humanpsychology is the reason that "bubbles" form inasset markets. Investor enthusiasm ("irrationalexuberance") and a herd mentality can createexcessive demand for "hot" investments.Investors often chase returns and drive upprices until they become very expensiverelative to long-term values.

Past performance, however, does notguarantee future results, and bubbleseventually burst. Investors who follow the crowdcan harm long-term portfolio returns by fleeingthe stock market after it falls and/or waiting toolong (until prices have already risen) toreinvest.

Availability biasThis mental shortcut leads people to basejudgments on examples that immediately cometo mind, rather than examining alternatives. Itmay cause you to misperceive the likelihood orfrequency of events, in the same way thatwatching a movie about sharks can make itseem more dangerous to swim in the ocean.

Confirmation biasPeople also have a tendency to search out andremember information that confirms, rather thanchallenges, their current beliefs. If you have agood feeling about a certain investment, youmay be likely to ignore critical facts and focuson data that supports your opinion.

OverconfidenceIndividuals often overestimate their skills,knowledge, and ability to predict probableoutcomes. When it comes to investing,overconfidence may cause you to tradeexcessively and/or downplay potential risks.

Loss aversionResearch shows that investors tend to dislikelosses much more than they enjoy gains, so itcan actually be painful to deal with financiallosses.2 Consequently, you might avoid sellingan investment that would realize a loss eventhough the sale may be an appropriate courseof action. The intense fear of losing money mayeven be paralyzing.

It's important to slow down the process and tryto consider all relevant factors and possibleoutcomes when making financial decisions.Having a long-term perspective and stickingwith a thoughtfully crafted investing strategymay also help you avoid expensive,emotion-driven mistakes.

Note: All investments are subject to marketfluctuation, risk, and loss of principal. Whensold, investments may be worth more or lessthan their original cost.1 The Economist, "What's Wrong withFinance?" May 1, 20152 The Wall Street Journal, "Why an EconomistPlays Powerball," January 12, 2016

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Be Prepared to Retire in a Volatile MarketIn an ideal world, your retirement would betimed perfectly. You would be ready to leavethe workforce, your debt would be paid off, andyour nest egg would be large enough to providea comfortable retirement--with some left over toleave a legacy for your heirs.

Unfortunately, this is not a perfect world, andevents can take you by surprise. In a surveyconducted by the Employee Benefit ResearchInstitute, only 44% of current retirees said theyretired when they had planned; 46% retiredearlier, many for reasons beyond their control.1But even if you retire on schedule and haveother pieces of the retirement puzzle in place,you cannot predict the stock market. What ifyou retire during a market downturn?

Sequencing riskThe risk of experiencing poor investmentperformance at the wrong time is calledsequencing risk or sequence of returns risk. Allinvestments are subject to market fluctuation,risk, and loss of principal--and you can expectthe market to rise and fall throughout yourretirement. However, market losses on the frontend of your retirement could have an outsizedeffect on the income you might receive fromyour portfolio.

If the market drops sharply before your plannedretirement date, you may have to decidebetween retiring with a smaller portfolio orworking longer to rebuild your assets. If a bigdrop comes early in retirement, you may haveto sell investments during the downswing,depleting assets more quickly than if you hadwaited and reducing your portfolio's potential tobenefit when the market turns upward.

Dividing your portfolioOne strategy that may help addresssequencing risk is to allocate your portfolio intothree different buckets that reflect the needs,risk level, and growth potential of threeretirement phases.

Short-term (first 2 to 3 years): Assets such ascash and cash alternatives that you could drawon regardless of market conditions.

Mid-term (3 to 10 years in the future): Mostlyfixed-income securities that may havemoderate growth potential with low or moderatevolatility. You might also have some equities inthis bucket.

Long-term (more than 10 years in thefuture): Primarily growth-oriented investmentssuch as stocks that might be more volatile buthave higher growth potential over the long term.

Throughout your retirement, you canperiodically move assets from the long-term

bucket to the other two buckets so you continueto have short-term and mid-term fundsavailable. This enables you to take a morestrategic approach in choosing appropriatetimes to buy or sell assets. Although you willalways need assets in the short-term bucket,you can monitor performance in your mid-termand long-term buckets and shift assets basedon changing circumstances and longer-termmarket cycles.

If this strategy appeals to you, considerrestructuring your portfolio before you retire soyou can choose appropriate times to adjustyour investments.

Determining withdrawalsThe three-part allocation strategy may helpmitigate the effects of a down market byspreading risk over a longer period of time, butit does not help determine how much towithdraw from your savings each year. Theamount you withdraw will directly affect howlong your savings might last under any marketconditions, but it is especially critical in volatilemarkets.

One common rule of thumb is the so-called 4%rule. According to this strategy, you initiallywithdraw 4% of your portfolio, increasing theamount annually to account for inflation. Someexperts consider this approach to be tooaggressive--you might withdraw less dependingon your personal situation and marketperformance, or more if you receive largemarket gains.

Another strategy, sometimes called theendowment method, automatically adjusts formarket performance. Like the 4% rule, theendowment method begins with an initialwithdrawal of a fixed percentage, typically 3%to 5%. In subsequent years, the same fixedpercentage is applied to the remaining assets,so the actual withdrawal amount may go up ordown depending on previous withdrawals andmarket performance.

A modified endowment method applies a ceilingand/or a floor to the change in your withdrawalamount. You still base your withdrawals on afixed percentage of the remaining assets, butyou limit any increase or decrease from theprior year's withdrawal amount. This could helpprevent you from withdrawing too much after agood market year, while maintaining a relativelysteady income after a down market year.

Note: Asset allocation is a method used to helpmanage investment risk; it does not guaranteea profit or protect against investment loss.1 Employee Benefit Research Institute, "2016Retirement Confidence Survey"

Market losses on the frontend of your retirement couldhave an outsized effect onthe income you mightreceive from your portfolio.

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Four Reasons Why People Spend Too MuchYou understand the basic financial concepts ofbudgeting, saving, and monitoring your money.But this doesn't necessarily mean that you're incontrol of your spending. The following reasonsmight help explain why you sometimes breakyour budget.

1. Failing to think about the futureIt can be difficult to adequately predict futureexpenses, but thinking about the future is a keycomponent of financial responsibility. If youhave a tendency to focus on the "here and now"without taking the future into account, then youmight find that this leads you to overspend.

Maybe you feel that you're acting responsiblysimply because you've started an emergencysavings account. You might feel that it will helpyou cover future expenses, but in reality it maycreate a false sense of security that leads youto spend more than you can afford at a givenmoment in time.

Remember that the purpose of your emergencysavings account is to be a safety net in times offinancial crisis. If you're constantly tapping it forunnecessary purchases, you aren't using itcorrectly.

Change this behavior by keeping the big picturein perspective. Create room in your budget thatallows you to spend discretionary money anduse your emergency savings only for trueemergencies. By having a carefully thought-outplan in place, you'll be less likely to overspendwithout realizing it.

2. Rewarding yourselfAre you a savvy shopper who rarely splurges,or do you spend too frequently because youwant to reward yourself? If you fall in the lattercategory, your sense of willpower may be toblame. People who see willpower as a limitedresource often trick themselves into thinkingthat they deserve a reward when they are ableto demonstrate a degree of willpower. As aresult, they may develop the unhealthy habit ofoverspending on random, unnecessarypurchases in order to fulfill the desire for areward.

This doesn't mean that you're never allowed toreward yourself--you just might need to think ofother ways that won't lead to spending toomuch money. Develop healthier habits byrewarding yourself in ways that don't costmoney, such as spending time outdoors,reading, or meditating. Both your body and yourwallet will thank you.

If you do decide to splurge on a reward fromtime to time, do yourself a favor and plan yourpurchase. Figure out how much it will costahead of time so you can save accordinglyinstead of tapping your savings. Make sure thatyour reward, whether it's small or big, has apurpose and is meaningful to you. Try scalingback. For example, instead of dining out everyweekend, limit this expense to once or twice amonth. Chances are that you'll enjoy going outmore than you did before, and you'll feel goodabout the money you save from dining out lessfrequently.

3. Mixing mood with moneyYour emotional state can be an integral part ofyour ability to make sensible financialdecisions. When you're unhappy, you might notbe thinking clearly, and saving is probably notyour first priority. Boredom or stress also makesit easy to overspend because shopping servesas a fast and easy distraction from yourfeelings. This narrow focus on short-termhappiness might be a reason why you'respending more than normal.

Waiting to spend when you're happy andthinking more positively could help shift yourfocus back to your long-term financial goals.Avoid temptations and stay clear of stores ifyou feel that you'll spend needlessly afterhaving an emotionally challenging day. Stayingon track financially (and emotionally) will benefityou in the long run.

4. Getting caught up in home equityhabitsDo you tend to spend more money when thevalue of your assets--particularly yourproperty--increases? You might think thatappreciating assets add to your spendingpower, thus making you feel both wealthier andmore financially secure. You may be tempted totap into your home equity, but make sure you'reusing it wisely.

Instead of thinking of your home as a piggybank, remember it's where you live. Be smartwith your home equity loan or line ofcredit--don't borrow more than what isabsolutely necessary. For example, you mayneed to borrow to pay for emergency homerepairs or health expenses, but you want toavoid borrowing to pay for gratuitous luxuriesthat could put you and your family's financialsecurity at risk. After all, the lender couldforeclose if you fail to repay the debt, and theremay be closing costs and other chargesassociated with the loan.

You may be more likely tooverspend on a particularpurchase compared to otherpossible expenditures.According to researchconducted by the ConsumerReports National ResearchCenter, adults in the UnitedStates reported that theywould spend money on thefollowing throughout theyear:

• 54%--electronics

• 33%--appliances

• 27%--a car

• 23%--home remodeling

Source: Consumer Reports,November 2014

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Trinity FinancialAdvisors, LLCJohn Wimbiscus, CFP®Principal541 North Fairbanks Ct.Suite 1060Chicago, IL 60611312-245-1300Fax: [email protected]

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

IMPORTANT DISCLOSURES

Broadridge Investor CommunicationSolutions, Inc. does not provideinvestment, tax, legal, or retirementadvice or recommendations. Theinformation presented here is notspecific to any individual's personalcircumstances.

To the extent that this materialconcerns tax matters, it is notintended or written to be used, andcannot be used, by a taxpayer for thepurpose of avoiding penalties thatmay be imposed by law. Eachtaxpayer should seek independentadvice from a tax professional basedon his or her individualcircumstances.

These materials are provided forgeneral information and educationalpurposes based upon publiclyavailable information from sourcesbelieved to be reliable — we cannotassure the accuracy or completenessof these materials. The information inthese materials may change at anytime and without notice.

Can I name a charity as beneficiary of my IRA?Yes, you can name a charityas beneficiary of your IRA, butbe sure to understand theadvantages anddisadvantages.

Generally, a spouse, child, or other individualyou designate as beneficiary of a traditional IRAmust pay federal income tax on any distributionreceived from the IRA after your death. Bycontrast, if you name a charity as beneficiary,the charity will not have to pay any income taxon distributions from the IRA after your death(provided that the charity qualifies as atax-exempt charitable organization underfederal law), a significant tax advantage.

After your death, distributions of your assets toa charity generally qualify for an estate taxcharitable deduction. In other words, if a charityis your sole IRA beneficiary, the full value ofyour IRA will be deducted from your taxableestate for purposes of determining the federalestate tax (if any) that may be due. This canalso be a significant advantage if you expectthe value of your taxable estate to be at orabove the federal estate tax exclusion amount($5,450,000 for 2016).

Of course, there are also nontax implications. Ifyou name a charity as sole beneficiary of yourIRA, your family members and other loved oneswill obviously not receive any benefit from thoseIRA assets when you die . If you would like toleave some of your assets to your loved onesand some assets to charity, consider leavingyour taxable retirement funds to charity andother assets to your loved ones. This may offerthe most tax-efficient solution, because thecharity will not have to pay any tax on theretirement funds.

If retirement funds are a major portion of yourassets, another option to consider is acharitable remainder trust (CRT). A CRT can bestructured to receive the funds free of incometax at your death, and then pay a (taxable)lifetime income to individuals of your choice.When those individuals die, the remaining trustassets pass to the charity. Finally, anotheroption is to name the charity and one or moreindividuals as co-beneficiaries. (Note: There arefees and expenses associated with the creationof trusts.)

The legal and tax issues discussed here can bequite complex. Be sure to consult an estateplanning attorney for further guidance.

Can I make charitable contributions from my IRA in2016?Yes, if you qualify. The lawauthorizing qualified charitabledistributions, or QCDs, hasrecently been made

permanent by the Protecting Americans fromTax Hikes (PATH) Act of 2015.

You simply instruct your IRA trustee to make adistribution directly from your IRA (other than aSEP or SIMPLE) to a qualified charity. Youmust be 70½ or older, and the distribution mustbe one that would otherwise be taxable to you.You can exclude up to $100,000 of QCDs fromyour gross income in 2016. And if you file ajoint return, your spouse (if 70½ or older) canexclude an additional $100,000 of QCDs. Butyou can't also deduct these QCDs as acharitable contribution on your federal incometax return--that would be double dipping.

QCDs count toward satisfying any requiredminimum distributions (RMDs) that you wouldotherwise have to take from your IRA in 2016,just as if you had received an actual distributionfrom the plan. However, distributions (includingRMDs) that you actually receive from your IRAand subsequently transfer to a charity cannotqualify as QCDs.

For example, assume that your RMD for 2016is $25,000. In June 2016, you make a $15,000QCD to Qualified Charity A. You exclude the$15,000 QCD from your 2016 gross income.Your $15,000 QCD satisfies $15,000 of your$25,000 RMD. You'll need to withdraw another$10,000 (or make an additional QCD) byDecember 31, 2016, to avoid a penalty.

You could instead take a distribution from yourIRA and then donate the proceeds to a charityyourself, but this would be a bit morecumbersome and possibly more expensive.You'd include the distribution in gross incomeand then take a corresponding income taxdeduction for the charitable contribution. Butthe additional tax from the distribution may bemore than the charitable deduction due to IRSlimits. QCDs avoid all this by providing anexclusion from income for the amount paiddirectly from your IRA to the charity--you don'treport the IRA distribution in your gross income,and you don't take a deduction for the QCD.The exclusion from gross income for QCDsalso provides a tax-effective way for taxpayerswho don't itemize deductions to makecharitable contributions.

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Trinity Financial Quarterly · Trinity Financial Advisors, LLC John Wimbiscus, CFP® Principal 541...

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