Flight #53, Bonds are Sexy Again, and So is Giving!

Pilot News

https://www.reuters.com/business/aerospace-defense/european-regulator-rules-out-single-pilot-flying-by-2030-2023-02-06/

Question From The Flight Deck:

Q: Are all annuities Crap?

A:  Annuities are NOT investments; they are Insurance income products, and most of them are sold as something they are not - again, not investments! People that hate annuities compare them to investments - life insurance is used when people die. Annuities can help people that live too long or need mortality credits to decrease anxiety or smooth out the journey.

LEFP is not licensed, nor makes commissions on annuities, but we do sometimes recommend them through third parties. Find someone who does NOT make commissions on annuities but believes that they are sometimes necessary and EVEN helpful as a part of a financial plan. 2022 was the number one year of annuities sales in history. 

• Contingent Deferred Annuities: CDAs, Retire One - "Constance"
  • No changes in taxation – Roth IRA, Taxable brokerage account
  • Remain invested in Mutual Funds, ETFs
  • Turn off anytime...

A CDA acts as a sort of "risk wrapper" for your IRAs, Roth IRAs and taxable brokerage accounts, but the insurance portion is unbundled from the underlying accounts so that investments in ETFs and mutual funds may be covered. The amount of income you receive from the CDA (your coverage base) is calculated from the total of your initial investment, and will not drop below that amount, no matterwhat the markets do. In fact, your coverage base may go up, and those annual income payments can range from 3% to 6%. Keep in mind that excess withdrawals CAN impact your coverage base, however.

The CDA's income payments trigger when you need them and are paid by the insurance company for the rest of your life, even after your assets are depleted.

https://www.financial-planning.com/news/2022-was-the-best-annuity-sales-year-in-history 

https://awealthofcommonsense.com/2023/03/talk-your-book-lifetime-income/ 

Q: Should I own bonds?

A: There are two reasons to own bonds.

1. Decrease recovery time in your portfolio: TYPICALLY, (not 2022) bonds act as ballast. During a recession, Treasury bonds act as a flight to safety, plus Fed may lower interest rates which may cause bond prices to increase. See JPMorgan Chase Charts.
   • It's all about the math...50% decline in your investment dollars requires a 100% increase to get back to even.
     • $100,000, 50% loss = $50,000. 100% gain = $100,000.
   • A 25% decline in stock prices requires
     • $100,000, 25% loss = $75,000. 33.3% gain required to get $100,000.
   • https://www.hughcalc.org/getback.php
   • Then why would anyone be 100% equity???  
2. There is actually yield, interest now. T-Bills
   1. Annuities, higher
   2. CD, Money Market higher
   3. Long-term investors are better off after bond price declines and interest rate increases from 2022

Main Topic – Tax-Efficient Giving Strategies

• When to use a Donor Advised Fund - https://www.morningstar.com/articles/1039795/pros-andcons-of-donor-advised-funds
  • Pros:
    • The major benefit of donor-advised funds is the ability to take an immediate tax deduction on the amount contributed. Donors contributing cash can take a deduction of up to 60% of adjusted gross income...
    • Donors can also contribute a wide range of appreciated assets, including stocks, bonds, mutual funds, privately held business interests, restricted stock, and even bitcoin and other cryptocurrencies. Donors contributing securities or other assets can take a deduction of up to 30% of adjusted gross income.
  • Cons: 
    • Donor-advised funds also come with an additional layer of annual administrative costs. Fidelity, Vanguard, and Schwab all charge a 0.6% administrative fee for accounts with balances up to $500,000. All three have tiered expense structures, so accounts with balances greater than $500,000 are subject to lower fees in percentage terms.
    • These charges are in addition to the fees on the underlying investments (operating expenses for mutual funds and exchange-traded funds, or trading commissions for individual stocks and bonds). All these fees come out of the amount donated, making donor-advised funds less cost-efficient than donating directly to a charity.

• Gifting highly appreciated stock

https://www.blackrock.com/us/financial-professionals/insights/donate-stock-to-charity-for-tax-savings

Gift your star performers. Maximize your savings on capital gains taxes by donating your strongest-performing stocks. They may be your favorite holdings, but this is not goodbye – replenish your portfolio by purchasing the same security (or a similar exposure). Because the stock has appreciated since your original purchase, your new cost basis will be higher, which creates the potential to harvest tax losses to offset gains in future years.

• When do you get to deduct your giving on your tax return?

https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/tax-deduction-wisdom-should-youitemize/L8Ln7K0Gp

"Add up all of these taxes, but remember the IRS limits your state and local tax deduction to $10,000.

Tip: Add your total state and local taxes (capped at $10,000) to the mortgage interest number you calculated above. If the total is larger than your standard deduction, you'll likely benefit from itemizing."

• Lump your giving? 
• Other reasons to give? 

The immediate effect on our physiology…Psychologytoday.com - Dr. Eva Ritvo - https://www.psychologytoday.com/us/blog/vitality/201404/the-neuroscience-giving

 "Neuroscience has demonstrated that giving is a powerful pathway for creating more personal joy and improving overall health...Dopamine, serotonin, and oxytocin make up the Happiness Trifecta…benefits are better moods, sleep, digestion, memory, learning, and appetite, blood pressure decreases…Oxytocin is known as the "cuddle hormone." trust and empathy are enhanced. Oxytocin is also anti-inflammatory and reduces pain, and enhances wound healing. "So, if giving allows us to secrete all the chemicals at once, we owe it to ourselves to give as often as possible!