VESTED Winter 2015

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The Decision to Go Our Story of Retiring Abroad

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Colon Terrell A Walking Start to Retirement PLUS 6 Ways to Maximize Your Social Security The One-Two Punch: Explaining Performance Shortfalls Focusing on Advance Directives Is a Private Family Foundation Right for You?

WINTER 2015

“We make a living by what we get.

We make a life by what we give.”

Winston S. Churchill

At CAPTRUST, we believe we have a profound responsibility to share our success with those less fortunate than us. One way we do that is through the activities of the CAPCommunity Foundation, our in-house, employee-run charitable foundation. Its mission is to enrich the lives of children in communities we serve. The foundation, a registered 501(c)(3) charity, was formally organized in 2007 to provide our employees with opportunities to participate as a group in community outreach efforts and to offer their time, passion, and financial support as a way to give back.

www.captrustadvisors.com 919.870.6822 | toll free: 800.216.0645 4208 Six Forks Road, Suite 1700 | Raleigh, NC 27609

We invite you to “Like” the CAPCommunity Foundation on Facebook.

L E T TE R F R O M THE C E O

DEAR READER, It is with great pleasure that we introduce VESTED, CAPTRUST’s own magazine, to be produced exclusively for our clients and friends three times a year.

This effort began six months ago when we challenged ourselves to create something new: a publication with enduring shelf life that

focuses on the issues, interests, and concerns of our clients who are largely either in their retirement planning homestretch or in the early years of what we hope will be a long and rewarding “second act.”

In this inaugural issue of VESTED, you will find features on topics ranging from the challenges and opportunities of retiring abroad to tips for maximizing Social Security benefits. There is also a fascinating profile on Colon Terrell, a heart attack survivor who literally walked across America as his rite of passage into a new life.

We also introduce a series of regular columns that focus on how best to use, protect, preserve, and pass along the wealth our clients have worked so hard to accumulate—and that we are proud to help manage. This issue includes pieces on setting up your children for good credit, building an art collection, the need for advance directives, and considerations for starting a family foundation.

CAPTRUST CEO Fielding Miller addresses employees at one of the firm’s quarterly meetings. Each quarter, all financial advisors and support staff gather for an update on the global capital markets and the latest corporate developments.

could bridge the void between highly technical financial journals and the frenetically paced and sound-bite-driven financial news media.

Our aim was to distill arcane financial data and to deliver timely, relevant, and actionable ideas and recommendations.

The result is a publication on topics much broader than we have covered in the past. It

Please help us stay timely and relevant.

We welcome any and all thoughts, reactions, and story ideas. Just email them to us at VESTEDmagazine@ captrustadvisors.com.

We hope you enjoy reading our new publication as much as we’ve enjoyed making it.

All the best,

Volume 1, Issue 1 | Winter 2015 PUBLISHER & EDITOR IN CHIEF J. Fielding Miller Chief Executive Officer EDITORS John Curry Senior Director, Marketing

Eric Freedman Chief Investment Officer

EDITORIAL ADVISORY BOARD Jeremy Altfeder Senior Client Management Consultant

Nick DeCenso Manager, Wealth Strategy

Lauren Bartholomew Client Management Consultant

Karen Denise Senior Manager, Wealth Operations

Rush Benton Senior Director, Strategic Wealth

Mike Gray Senior Vice President, Financial Advisor

Hugh (Trae) Cole Financial Advisor

Land Hite Senior Vice President, Financial Advisor

Ellen Crowley Vice President, Financial Advisor

Mark Paccione Director, Investment Research

Teri Parker Vice President, Financial Advisor ART DIRECTION & MARKETING Jennifer Liebel Manager, Marketing Jennifer Mastrapasqua Manager, Marketing

Jessica Rose Associate, Marketing Colby Warren Manager, Marketing WITH THE ASSISTANCE OF Generate Design Raleigh, North Carolina Classic Graphics Morrisville, North Carolina Azul Photography Raleigh, North Carolina

J. FIELDING MILLER CAPTRUST Cofounder and Chief Executive Officer

800.216.0645 | www.captrustadvisors.com 4208 Six Forks Road, Suite 1700 Raleigh, NC 27609

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IN T H I S I SS U E

The Decision to Go: Our Story of Retiring Abroad by gabi & skip yetter

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A WALKING START TO RETIREMENT

COLUMNS

by constantine von hoffman

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PASSION PURSUITS

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EXPERT ANGLE

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MONEY TALKS

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LASTING LEGACY

21 32 39 40

Gleanings

6 WAYS TO MAXIMIZE YOUR SOCIAL SECURITY by neil downing

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THE ONE-TWO PUNCH Explaining Diversification and Active Management Performance Shortfalls by eric freedman & david hood

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The Art of Collection

Focusing on Advance Directives

Raising Creditworthy Children

Is a Private Family Foundation Right for You?

Client Conversations Market Rewind CAPTRUST Happenings

CO N T R I B U TO R S g. rhodes craver

maureen lyons

G. Rhodes Craver is a Certified Public Accountant, founder, and managing partner of Kennon Craver, PLLC, in Durham, North Carolina. He practices in the areas of estate planning, estate and trust administration, tax planning, and closely held business planning.

Craver is a member of the North Carolina Bar Association and serves on the boards of the Asheville School and Galloway Ridge Retirement Community.

Maureen A. Lyons is an estate planning and elder law attorney with the California firm of Moynihan Lyons PC in Riverside, California. Lyons practices in the areas of personalized estate planning, elder law, and special needs planning services to individuals and families.

She is the president of the Estate Planning Council of Riverside County.

neil downing

constantine von hoffman

Neil Downing is a Certified Financial Planner™ and enrolled agent, licensed by the U.S. Treasury to represent taxpayers before the Internal Revenue Service. A newspaper reporter, editor, and columnist for 35 years, Downing has authored several publications focused on maximizing the value of employee benefits and retirement savings vehicles.

Constantine von Hoffman is a business and financial writer. For the past 25 years, he has worked for CBS News, INC. Magazine, and The Boston Herald, among other news outlets. His writing has appeared in many publications, including the Harvard Business Review, Sierra Magazine, and The Boston Globe.

eric freedman

susan weiner

Eric Freedman is CAPTRUST’s chief investment officer and serves as a member of the firm’s executive and operating committees. He has an undergraduate economics degree from Colgate University and received a Master of Business Administration degree from the Wharton School of the University of Pennsylvania. Freedman is chairman of the Diocese of Raleigh Investment Committee and serves on the boards of the Ronald McDonald House of Chapel Hill and Monday Life.

Susan Weiner is a Chartered Financial Analyst®, journalist, and a writer and editor for leading investment and wealth management firms. Her work has been featured in Advisor Perspectives, Boston Globe, Bottom Line/Personal, CFA Magazine, Financial Planning, Louis Rukeyser’s Mutual Funds, Wealth Manager, and other national publications.

david hood

frank (skip) yetter

David Hood is director of investment research in CAPTRUST’s Consulting Research Group and is responsible for investment manager research and oversight of the due diligence team that evaluates and monitors investment vehicles across CAPTRUST’s primary business lines. He received a Bachelor of Arts in journalism and mass communication from the University of North Carolina at Chapel Hill and a Master of Business Administration from Wake Forest University.

Frank (Skip) Yetter is a Massachusetts native, career media professional, emerging chef, and avid traveler.

He was senior vice president of global sales for Business Wire, a Berkshire Hathaway Company, until he and his wife, Gabrielle, sold their home on Boston’s North Shore in 2010 and gave away most of their possessions, relocating to Phnom Penh, Cambodia, to volunteer, travel, and write.

kathleen burns kingsbury Kathleen Burns Kingsbury is a faculty member of the Certified Private Wealth Advisor® program offered by the Investment Management Consultants Association, an adjunct lecturer at Bentley University, a Certified Professional Co-Active Coach®, and founder of the KBK Wealth Connection. Kingsbury is a wealth psychology expert and author of How to Give Financial Advice to Women and How to Give Financial Advice to Couples.

gabrielle (gabi) yetter Gabrielle (Gabi) Yetter is former journalist who worked on the South African Star before moving to the U.S. to work in public relations and business development. After relocating to Cambodia with her husband Skip, she wrote two books — The Definitive Guide to Moving to Southeast Asia: Cambodia and The Sweet Taste of Cambodia (about traditional Cambodian desserts) — and co-founded www.themeanderthals.com with Skip.

All publication rights reserved. None of the material in this publication may be reproduced in any form without the express written permission of CAPTRUST: 919.870.6822. ©2015 CAPTRUST Financial Advisors. The opinions expressed in this report are subject to change without notice. This material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. This document is intended to be informational only. CAPTRUST does not render legal, accounting, or tax advice. Plan sponsors requiring such advice should consult the appropriate legal, accounting, or tax advisor. The information and statistics in this report are from sources believed to be reliable but are not warranted by CAPTRUST Financial Advisors to be accurate or complete. Performance data depicts historical performance and is not meant to predict future results.

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THE DECISION TO GO OUR STORY OF RETIRING ABROAD

by gabi & skip yetter

GABI’S SIDE OF THE STORY

Our sneakers have gathered the dust of Angkor Wat’s temples and climbed the ancient steps of Machu Picchu. Our Tevas have waded through knee-deep floodwaters in Varanasi, India, and hiked along rivers in Hoi An, Vietnam. Our flip-flops have splashed in kayaks in the Galapagos Islands and waited on shore for us as we splashed in the warm waters of the Perhentian Islands in Malaysia.

We’ve learned how to live in the extreme heat of Cambodia, handle altitude sickness in the Himalayas and Peruvian Andes, and deal with bugs, vermin, and dodgy bus drivers in developing countries around the world. u

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SKIP’S SIDE OF THE STORY The lifestyle we chose almost five years ago is unpredictable, often exotic, sometimes uncomfortable, and always filled with adventure—a far cry from our comfy, oceanside existence in Marblehead, Massachusetts, which used to be our home. Both in our 50s, we traded in our house, stuff, and lifestyle for a world of travel, experience, and learning. And we’ve never felt so alive, so fulfilled, so stimulated… so happy.

The seed for this radical change was planted during our honeymoon in Thailand in 2007. We spent the early part of our stay in the Northern Triangle— along the Thai-Myanmar-Laos border—and were struck by how calm and relaxed we felt. The spiritual energy of the country and its people resonated with us. One Friday night in Chiang Mai, Skip asked a question that changed our lives: “Do you think we could live here?”

The answer, for both of us, was an immediate and resounding “Yes.” Returning home, we became focused. Before going into work every day, Skip spent hours on the internet, searching for places, ideas, and opportunities for us to move to Southeast Asia. Our new life began to take shape. There were dozens of steps and countless decisions over the next two years involved in making such a change.

The first was to complete a full financial review (on the right) to help us create a personal financial plan. Next, we sold our house, got rid of most of our possessions, and downsized to a two-bedroom rental condominium. Hours searching for the perfect volunteer opportunity brought us to Volunteers in Asia (VIA), a small organization based in San Francisco that places people in positions throughout Southeast Asia.

We applied online, made our way through the interview process, and, a couple of weeks later, were accepted and offered posts working with nongovernmental organizations (NGOs) in Phnom Penh, Cambodia, a country neither of us knew much about.

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I’m the practical side of Team Yetter, the planner (Gabi’s the dreamer) and worrier (she’s the trust-the-universe-and-so-it-shall-be part of the equation). Hard as I’ve worked to shed my Type A skin, there are some practical details I attend to as we pursue a postwork life of travel, choice, adventure, and learning. capital appreciation — Our journey began five years ago with a thorough review with our financial planner, including long-range investment forecasting, income projection, and estimating our annual expenses and cash needs. Thanks in part to a bull market with long legs, after four years, our holdings are pretty much the same as when we left the U.S. u

Tip: Complete best-, worst-, and likely case scenarios for both expenses and investment returns to give yourself the highest sense of confidence in a sustainable life outside of work. u health insurance — Our volunteer gigs through VIA (www.via programs.org) included great health insurance for our first three years off the grid. Since then, we’ve purchased short-term catastrophic insurance from World Nomads (www.worldnomads.com) and paid for incidental healthcare costs out of pocket. World Nomads offers flexible, costeffective programs that will suit any budget and need.

Tip: Be sure to fill in the “no coverage in the U.S.” gap by buying short-term U.S. health insurance. We do so every time we’re back in the states so we’re not exposed to the absurdly expensive U.S. healthcare system. banking — I got a rude shock when our financial advisor’s compliance department got wind that we were living overseas and abruptly canceled our sole credit card, claiming that rules of the Foreign Account Tax Compliance Act (FATCA) prohibited credit card use by non-U.S. residents. We had to scramble to find another bank for credit card use and switched our other cards to debit cards to provide access to our cash.

u

Tip: If you don’t have a U.S. home of your own (we sold ours), keep a toe in U.S. waters by maintaining a U.S. bank account that sends statements to your post office box or to a relative’s home. That will help retain access to your money while satisfying the compliance folks. u keeping in touch — Buy an unlocked phone (I bought a Samsung in Phnom Penh that’s served me well for over three years) and prepaid calling service from local providers in the countries you visit. I collect SIM cards like I collected bottle caps as a kid, and I’ve found that prepaid plans in other countries are cheaper, more flexible, and offer more reliable service than anywhere in the U.S.

Tip: Keep your old SIM cards in case you crisscross unfamiliar lands more than once. In many cases, you can just reload them with a few pounds, euros, soles, or lira without having to sign up anew. That way you can call friends and family direct and easily gain internet access while you travel.

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The final stage of simplification came next.

We sold our cars, found a home for our cat, and sold or gave away most of our possessions. What remained went into a nearby storage unit. Skip quit his job as senior vice president at Business Wire, a Berkshire Hathaway company, I closed down my home business, and in June 2010, we found ourselves at the Boston airport with two oneway tickets to Phnom Penh.

It was a new adventure for both of us. And as we said farewell to friends and family, neither of us had any idea when—or if—we’d be back.

For Skip, it meant extricating himself from a life in Massachusetts. He’d raised two daughters (the youngest of whom finished college the year we left), had run newspapers throughout the state, and worked in a high-profile job for many years, surrounded by family and lifelong friends. His roots ran deep.

As for me, I had spent most of my life moving around the world. I was raised in Bahrain (the daughter of a British mother and Maltese father), worked as a journalist in South Africa, and traveled extensively since I was a child.

We met at Business Wire, fell in love, and were married in 2006.

Although we both loved to travel, nothing prepared us for life in Cambodia. Phnom Penh was dirty, smelly, and chaotic. Our home for the first few weeks of orientation was a no-frills $10-a-night guesthouse. We spent our days struggling to learn Khmer, the native language, a task that made our heads spin, and our nights trying to make sense of it all. Everything felt unfamiliar, strange, and uncomfortable.

Within months, we found a three-bedroom apartment with a sweeping balcony on a quiet tree-lined street near the Royal Palace and started to fall in love with our adopted

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Tuk-tuks, or auto rickshaws, are a very popular form of transportation for Skip and Gabi, as well as most of Phnom Penh. The city’s unique style of tuk-tuk looks like the front end of a motorcycle with a covered tray mounted at the back. The open cabin in the back has seats on each side, allowing seating for up to six people.

home. We got to know SomOn, our tuk-tuk driver, who became our first Cambodian pal.

(A tuk-tuk is an auto rickshaw, most commonly a motorcycle with a cabin attached in the rear.) Through him and our colleagues at work, we made personal connections with local people who taught us more than we’d learn in any program on cultural awareness.

We observed how people who had nothing were always willing to give. And we marveled at how a population that had been persecuted and abused for decades always seemed predisposed to laughter.

Meeting friends in our new country was easy, since we were all in the same proverbial boat, adrift in a new land. Our circle included people from Australia, England, the U.S., the Netherlands, France, Italy, and New Zealand. Many of them were half our age. Taking advantage of Cambodia’s low cost of living, we dined out often, usually choosing hole-in-the-wall, local cafes over Western-style establishments. We spent time with Tony, our other tuk-tuk driver friend, in his one-room, un-air-conditioned home rather than frequenting upscale expat spots.

This late twelfth century statue at Angkor Thom, the last capital city of the Khmer empire, is one of approximately 200 stone faces of the ancient city.

Our lives became immersed in the unfamiliar. We ate snake and roasted crickets, rode rickety buses on potholed roads, hiked up a mountain at dawn to watch the sun rise over Angkor Wat, and learned how to speak a language little of the world knows.

Skip and Gabi pose for a photo in front of a large crab statue in the Kep Province of Cambodia. Fishing and crabbing is popular in Kep, and is a large part of the province’s economy, along with agriculture and tourism.

Our lives became immersed in the unfamiliar. We ate snake and roasted crickets, rode rickety buses on potholed roads, hiked up a mountain at dawn to watch the sun rise over Angkor Wat, and learned how to speak a language little of the world knows.

But our lives weren’t completely dust and grit.We also ate freshly shucked oysters, listened to world-class jazz in a plush cocktail lounge, and savored cupcakes better than any we’ve ever found.

Nothing was missing, other than our family and dear friends from home. In fact, our lives were fuller and more complete than ever, at a fraction of the cost.

While we were now halfway across the world from our loved ones, Skype, Facebook, and email kept us connected, and we’d often call family members directly from our knockoff Nokia phones using Cambodia’s reliable and inexpensive mobile phone network.

We spent our days working for NGOs on a volunteer basis (with a small stipend). Additional work opportunities arrived unexpectedly, mostly in the form of writing projects for me and business consulting projects for Skip, which supplemented our income while opening doors to new circles of friends and opportunities.

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Outside work, our lifestyle included dinners out most nights, exploring Phnom Penh’s fascinating neighborhoods, and constant trips to other parts of the country and throughout Southeast Asia. At home, we enjoyed air conditioning, reliable and fast internet, Wi-Fi, and cable TV. We entertained frequently, featuring tasty meals that Skip whipped up in our tiny and hot, yet perfectly functional, kitchen.

We grew to love the Cambodian people and their simple way of life. Gone were the stresses of monthly bills and traffic. We were surrounded by gentler, kinder attitudes, open-minded tolerance, and acceptance.

Women haul full crab traps from the ocean to sell at the market in Kep. In addition to crabs, the market also boasts sales of Kampot peppercorns, native fish, squid, and shrimp.

We grew to love the Cambodian people and their simple way of life. Gone were the stresses of monthly bills (Cambodia is a U.S.dollar-based, cash economy) and traffic (we traveled by tuk-tuk, and it took no more than 20 minutes and $3 to reach any destination in the city). We were surrounded by gentler, kinder attitudes, open-minded tolerance, and acceptance.

After living in Cambodia for three years, we decided to pull up anchor once again, and spent four months traveling in Asia—a month in India, a month in China, three weeks in Vietnam, and three weeks in Thailand. We then started house sitting in Europe (through www.TrustedHouseSitters.com and www.

MindMyHouse.com).

Since December 2013, we’ve “lived” in England (twice), France (twice), Cyprus, Italy, and Greece. We’ve taken care of prize-winning

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DPA (Development and Partnership in Action) Executive Director Sambath holds pomelos grown in Ratanakiri. Located on the border of Vietnam, Ratanakiri is about a 10-hour drive from Phnom Penh.

A group Gabi and Skip met in the Kep Province, a four-hour bus ride from Phnom Penh. Gabi later wrote in her blog about the slightly confusing encounter, “It was without question one of the happiest moments I’ve experienced since being here, surrounded by complete strangers, laughing, trying to communicate, and sharing a few minutes of simple human contact.”

Angkor Wat means “city of temples” in Khmer. The temple complex was built in the early 12th century and is one of a series of palaces and temples that were built over a 400-year period by the Khmer Kingdom. The outer wall encloses a total of 203 acres, which makes it the largest religious monument in the world.

Most of the population of Cambodia, around 95 percent, follow Theravada Buddhism.

Persian cats in Oroklini, Cyprus, had a houseful of rescue animals in Comigne, France, become best friends with a woolly golden retriever in Lewes, England, and hung out with a feral cat in Gialova, Greece.

Culture shock hits hard when we visit the U.S., and we now have little use for the fast pace, enormity of choice, and widespread edginess. We crave simplicity and the unpredictability of exploration.

Since we’re both writers, we chronicle our experiences on our blog (www.themeanderthals.com) and we’re completing a book about our experiences and those of others like us who have chosen a different way of life.

We’ve learned a lot in the past four years. We often prefer being with people who don’t speak English. We’d rather ride in a tuk-tuk or a bus than drive a car. We need very little stuff (our possessions fit into two suitcases and two backpacks), and we’d rather spend time with local people in local restaurants than in upscale establishments.

We’ve discovered you can communicate with everyone—no matter what language they speak—with a smile and a camera. And we’ve learned that there’s magic everywhere. No matter what may appear on the surface, all you have to do is dig a bit to unveil the wonders of the world.

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A WALKING START TO RETIREMENT colon terrell

Heart Attack Survivor, Former Banker, Coast-to-Coast Walker, and Pickleball Ambassador

by constantine von hoffman

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SECOND ACT

When it comes to retirement, Colon Terrell believes you have to listen to your heart, especially if it’s telling you you’re having a heart attack.

In 2009, Terrell was facing one of the toughest challenges of his 41 years as a banker: how to successfully lead his North Carolina bank as president during the worst economic crisis in 80 years. And he was feeling the stress of it.

On Valentine’s Day of that year, he and his wife went out to a Mexican restaurant near their home in Florida. “After dinner, I thought I had the world’s worst case of indigestion,” says Terrell, 66. “I started getting cold sweats, violently throwing up, and then it felt like someone hit me in my left elbow with a ball-peen hammer.” He told Brenda, his wife of 47 years, he was having a heart attack. Not wanting to wait for an ambulance, she raced him to the hospital. As soon as they pulled up to the emergency room entrance, he jumped from the car, literally ran to the desk, and told them what was happening. Later he found out he had suffered a heart attack and had come within minutes of dying.

“I had five major blockages in the front of my heart,” he says. Being a longtime runner and former marathoner had kept him alive. His body had built a number of capillaries, small vessels that created an alternate route for blood to flow from the back of the heart to the front.

“It looked like a little spider web of capillaries that was carrying some blood to the front of the heart so it didn’t die,” he says. “I attribute a lifetime of cardio exercise to saving me.” That and open-heart quintuple bypass surgery.

After recovering and helping to complete the first successful voluntary liquidation of a bank in U.S. history, Terrell decided it was the time to move on to the next phase of his life. That day was Dec. 31, 2011.

Like a lot of high achievers, for Terrell retirement meant refocusing his energy, not just relaxing at the beach. The first thing he wanted to do was raise awareness about heart health. He felt fortunate to have overcome a genetic predisposition to heart disease compounded by stress. So he said to Brenda, “What would you think about me walking across America?” Her response was classic: “I’m all for it, as long as I don’t have to walk with you.” On March 1, 2012, he began what he named Heart Trek USA at the Cape Hatteras lighthouse. It ended six months and 3,275 miles later on the Santa Monica Pier in California.

Terrell kept track of the mileage on his cross-country walk with chalk, writing on the sidewalk or road at the end of each day or on special milestones.

With support from his wife, the American Heart Association, and groups like the North Carolina Bankers Association, Terrell’s walk took him down the back roads and byways of 11 different states and into the company of a number of very interesting people. In Mississippi for example, Terrell, an avid fan of the blues, sought out After recovering and helping the gravesite of master guitarist Robert to complete the first successful Johnson. “It’s way out in voluntary liquidation of a bank the middle of nowhere in rural Mississippi, in U.S. history, Terrell decided with cotton fields it was the time to move on all around, at a little to the next phase of his life. clapboard church,” he says. “When we got That day was Dec. 31, 2011. there, a group of about 30 people in two Mercedes buses was having a birthday celebration, partying around the grave.

Everybody had put a guitar pick on the tombstone. They were having champagne and caviar and a grand old time.”

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During the walk, Terrell raised $26,300 for the American Heart Association and made people aware of what he was doing and why he was doing it via his blog (http://terrellwalk.wordpress.com/), Facebook, Twitter, and just by making friends along the way, something that comes as naturally to Terrell as not walking thousands of miles comes to most people.

CAPE HATTERAS, NC 2 RALEIGH, NC 3 CHARLOTTE, NC 4 ATLANTA, GA 5 BIRMINGHAM. AL 6 TUSCALOOSA, AL

HEART TREK USA

7 GREENVILLE, MS 8 SPRINGHILL, LA 9 DALLAS, TX 10 FORT WORTH, TX 11 LUBBOCK, TX

The walk wasn’t the only unexpected thing that happened to Terrell as he embarked on the next phase of his life. He had assumed his retirement would involve banking consulting because, in addition to having been the president of four banks during his career, he had helped start a number of others. But with the financial crisis, the new bank business disappeared. “I saw the handwriting on the wall that there really would not be any growth,” he says. “My home state of North Carolina hasn’t had a new bank charter application in the last five years, and we used to have 10 or more each year.”

Not quite knowing what to do with himself after his cross-country journey, Terrell experimented with a lot of ideas before finding something he loved. “I tried to play golf but I just wasn’t good enough and didn’t enjoy it,” he says. “I’d played on a seniors softball team, but that wasn’t for me. I’d even worked on some driftwood sculptures, only to find out I had no artistic ability.

You’ve got to try several things until you find something that gives you a passion.”

12 ROSWELL, NM 13 PHOENIX, AZ 14 TWENTYNINE PALMS, CA 15 PASADENA, CA 16 SANTA MONICA, CA

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He found that passion in the fastpaced, oddly named sport of pickleball, which combines elements of badminton, tennis, and ping-pong. In pickleball, two or four players use graphite paddles to hit a wiffle ball across a net on a badminton-sized court. Invented in 1965, the sport boasts more than 165,000 players across the nation today and is billed as “one of the fastest growing sports in America,” according to the USA Pickleball Association (USAPA).

“It’s a fantastic sport for all ages, but it’s particularly good for seniors because it’s low impact,” he says. “Even very experienced tennis players who play with us say they get much more exercise from pickleball than tennis.

That’s because we typically hit the ball six to nine times before someone scores. In tennis, you hit the ball three times and somebody’s scored.”

Terrell says one of the great things about the sport is how you can learn it in 15 minutes and start playing immediately at a beginner level. “It’s a sport that everybody can play.

I love it because women are just as good as men and us old guys can often outplay youngsters.” The sport rewards smarts over pure athletic ability, which means all ages can play against each other, have fun, and get a great workout.

“My regular partner in doubles is 75 years old,” he says. “We get guys in their late 20s or 30s who come out to play and try to win with pure athletic ability. They don’t learn the strategy of the game, so we often beat them because they’re all over the court making these great plays while we’re just hitting the ball where they’re not.”

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What You Need to Know Pickleball is a sport that combines various aspects of tennis, badminton, and ping-pong.

Played both indoors and outdoors, pickleball is played on a double badminton court with a paddle larger than that for ping-pong, but smaller than a tennis racquet, and with a plastic ball similar to a wiffle ball.

Who Plays Pickleball?

When Did It Start?

Pickleball has been around since 1965, when three dads, Joel Pritchard, Bill Bell, and Barney McCallum, created the game when their kids were bored with their usual summertime activities.

Where Can I Play?

There are pickleball courts in all 50 states, and the game is growing internationally as well.

Many Asian and European countries are adding courts; you can already find pickleball communities internationally such as United Kingdom, Aruba, and China.

Why Play Pickleball?

Today it is still played for leisure as Joel, Bill, and Barney intended, but pickleball players also use the game for exercise and even competition.

Source: www.usapa.org

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W H AT I S P I C K L E B A L L?

From kids in grade school physical education classes to seniors looking for another way to stay active, there are over 165,000 active pickleball players today.

It should be no surprise that this gregarious man also loves the social aspects of pickleball. He says he’s made more friends in a few years playing pickleball than any other period of his life. Talk to Terrell for any length of time and you will get the feeling that both numbers are pretty big. He is a natural ambassador for the sport, so much so that the USAPA named him the official district ambassador for the Florida Panhandle area where he lives today.

What’s made it possible for Terrell to enjoy retirement is the fact that he had been planning for it for many years. During his working years, he had consistently contributed the maximum possible into his 401(k) account and had been fortunate to receive stock option grants along the way. “Every time I had the opportunity to exercise a stock option, I took it. I sacrificed income in my earning years to buy stock,” he says. “That’s how I had managed to prepare to retire— building an asset base to provide income after my working years. My only problem right now is I better not live to be a hundred. Not sure I’ve got myself covered that far.”

Good sportmanship counts. Instead of the typical handshake, players in pickleball bump paddles following a match, in recognition of a game well played. From left to right, the players are Joe Borrelli, Colon Terrell, Richard Meister, and Luis Vasquez.

Colon and Brenda Terrell

For this father of two and grandfather of four, retirement is really about being able to focus on what he truly loves: Building community, helping others, and keeping active.

For this father of two and grand-

“Until you’ve had some- father of four, retirement is really thing like a heart attack, about being able to focus on what cancer, or something else life threatening, you don’t he truly loves: building community, feel mortal. I knew other helping others, and keeping active. people died, but I wasn’t sure I was going to,” he says. His brush with death got him thinking about what is really important to him and how he would be remembered. “I don’t want to just be remembered as a banker. I was successful, but that’s not all there is for me. I’d like people to remember that I had some impact here before I left this Earth. Life is short. Live it fully and try to have a positive impact on others.”

6 WAYS TO MAXIMIZE YOUR SOCIAL SECURITY hat’s the best time to start collecting Social Security retirement benefits? What strategies are available? Can you continue working while collecting benefits? Such questions can bedevil busy working people who are planning ahead for retirement.

So here are six helpful ways to make the most of your Social Security benefits. by neil downing

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WAIT UNTIL FULL RETIREMENT AGE One of the best ways to maximize Social Security retirement benefits is to postpone the point at which benefits begin. About 73 percent of all retired workers start collecting Social Security benefits before full retirement age (generally age 66), according to Social Security Administration figures. However, collecting “early” — before full retirement age — results in an automatic reduction in the amount of benefits.

For example, if someone who is due a $2,000 monthly Social Security benefit at age 66 elected to begin collecting at age 62, the benefit would be reduced by 25 percent to $1,500 a month. In general, the reduction works out to approximately one-half of 1 percent for each month before full retirement age. Waiting until full retirement age to start collecting results in no reduction in benefits, said CAPTRUST Senior Director Scott Matheson. “The math is on your side,” if you wait until full retirement age to begin collecting Social Security, he continued.

The person who starts collecting at age 62 has the advantage, from the standpoint of total dollars collected, but only for only the first 12 years.

After that, the person who waited to full retirement age to start collecting has the advantage, said Social Security expert Kurt Czarnowski.

EARLY RETIREMENT “PENALTY” Collecting Social Security benefits before full retirement age results in a reduction in benefits. The following example assumes that a $2,000 monthly benefit is due at full retirement age (66).

AGE

PORTION OF BENEFIT

BENEFIT AMOUNT

62

75.0%

$1,500

63

80.0%

$1,600

64

86.7%

$1,734

65

93.3%

$1,866

66

100.0%

$2,000 Source: Social Security Administration

Reductions in column two, and corresponding reduced monthly benefit amounts in column three, are for someone whose full retirement age is 66. Reduction amounts vary depending on one’s full retirement age. For someone whose year of birth is between 1943 and 1954, full retirement age is 66. For someone born later, full retirement age is later. (For someone born in 1955, for example, full retirement age is 66 and 2 months.)

“If you start collecting at full retirement age, you get 100 percent of what your work and earnings have entitled you to” without reduction, said Czarnowski, a retired Social Security Administration official who now runs a Social Security consulting firm, Czarnowski Consulting, in Norfolk, Massachusetts. “Good things come to those who wait,” he said.

Keep in mind that there are other factors to consider in deciding when to start collecting Social Security benefits, including health and lifestyle issues, Matheson said. “You need to make the decision that’s best for you” based on your own facts and circumstances, he said.

TAKE ADVANTAGE OF DELAYED RETIREMENT CREDIT To squeeze even more money out of Social Security — and put more money in your pocket — consider postponing collecting Social Security benefits beyond full retirement age. That will result in an automatic and permanent increase in benefits, through what’s known as the delayed retirement credit. In general, “The longer you wait, the higher your payment is,” Czarnowski said.

For someone born in 1943 or later, delaying the collection of benefits beyond full retirement age results in a benefit increase of 8 percent per year. That works out to about 0.667 percent a month. There is no additional benefit under the delayed retirement credit beyond age 70.

For example, if you were due a $2,000 monthly benefit at full retirement age (assume at age 66), but waited until age 70 to start collecting, the monthly benefit would be 32 percent higher, or $2,640 per month.

Through the delayed retirement credit, “You’re getting a guaranteed 8 percent per year by waiting,” Czarnowski said. A guaranteed 8 percent annual increase “sounds pretty doggone good,” especially in today’s low-rate environment, Matheson said. “One would be hard-pressed to find a bond portfolio that pays 2 percent,” he said.

Taking advantage of the delayed retirement credit can be especially helpful to those who have resources other than Social Security to cover expenses in retirement and can afford to wait to begin collecting, according to Matheson.

Continued on page 18

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Continued from page 17

An individual may also continue to work while delaying the start of Social Security retirement benefits beyond full retirement age. The obvious advantage is an increase in income. But there is another potential benefit, involving the underlying Social Security formula.

Taking advantage of the delayed retirement credit can be especially helpful to those who have resources other than Social Security to cover expenses in retirement and can

The file-and-suspend strategy can also work for someone who is single, serving as a kind of insurance policy, Czarnowski said. For example, suppose that Gary is single, has reached full retirement age of 66, and files a claim for benefits, but suspends payment.

afford to wait to begin collecting.

Two years later, he learns that he has To determine the amount of one’s retirement terminal cancer. He can direct the Social benefits, the Social Security Administration Security Administration to pay him, in a lump sum, the two years looks back over the individual’s entire history of work and earnings and of benefits that he did not collect. He can use the funds to help pay chooses the 35 highest-earning years. So if someone stepped out of the for healthcare expenses or for other purposes. If he did not use the workforce for one or more years—to raise a family, for example—those file-and-suspend strategy in this example, he would be limited to “zero earnings” years count against an individual for purposes of the forsix months of retroactive benefits. mula. By continuing to work, an individual can replace one or more “zero earnings” years, thereby increasing benefits.

Overall, Social Security is an entitlement program that provides for the masses, Matheson said. However, “it’s customizable enough” so that people can employ strategies, based on their circumstances, that allow them to optimize benefits, he added.

FILE AND SUSPEND

The “file and suspend” strategy can benefit a married couple or someone who is single, Czarnowski said. For example, suppose that Jim is at full retirement age, 66, and is entitled to a $2,000 monthly benefit, but wants to wait to start collecting to take advantage of the delayed retirement credit.

His wife, Caroline, has a limited work history and would receive a comparatively small monthly benefit if she claimed Social Security benefits based on her own record. She can obtain a benefit based on Jim’s record, but only if he files a claim.

So Jim formally files a claim with the Social Security Administration, but tells the agency to suspend payments to him until later (age 70 in this example). As a result, Caroline can immediately begin receiving a monthly benefit that is equal to half of Jim’s benefit. The exact amount would depend on when she started collecting. And Jim, by waiting until age 70 to start collecting, receives a monthly benefit of $2,640, instead of $2,000.

WORK WHILE COLLECTING A Social Security beneficiary can continue to work while collecting benefits. For some, working during retirement is preferred; for others, it may be a necessity “because they’re not ready for retirement” from a financial standpoint, said Phyllis Klein, CAPTRUST senior director.

RETIREMENT EARNINGS TEST A portion of your Social Security benefits may have to be forfeited if one works and collects benefits at the same time—and the amount earned from work exceeds a certain threshold.

Following is a brief list of various income types and how they are treated.

WHAT INCOME COUNTS

WHAT INCOME DOES NOT COUNT

• Wages

• Interest/dividends

• Salaries

• Capital gains

• Bonuses

• Pensions

• Net self-employment

• Annuities Source: Social Security Administration

Contributions to pensions or retirement plans do count as income if the contributions are included in the employee’s gross wages. Wages, salaries, bonuses, accumulated sick leave, and accumulated vacation pay count as income for the year earned, not the year paid.

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LIMITING TAX IMPACT

Bear in mind, though, that if you keep working, you may have to forfeit a portion of your benefits, depending on your age and how much you earn through work: EARLY RETIREMENT. Someone between 62 and full retirement age may earn only a certain amount before having to forfeit benefits. A new limit is set each year. The limit is $15,720 ($1,310 per month) for 2015, up from $15,480 for 2014 ($1,290 per month).

Under this rule, $1 in benefits will be withheld for every $2 in earnings above the limit. Thus, if one were to earn $17,720 in 2015 under this rule, $1,000 in benefits would be withheld.

FULL RETIREMENT AGE. For the year in which an individual reaches full retirement age, a less punitive rule applies. For every $3 in earnings above the limit, $1 in benefits is forfeited. The limit is $41,880 for 2015, or $3,490 per month. This limit applies only from January to the month before someone reaches full retirement age, Czarnowski said. Beginning with the month someone reaches full retirement age, no limit applies.

AFTER FULL RETIREMENT. After reaching full retirement age, the sky is the limit. No earnings limit applies; a beneficiary may earn as much as possible from work and forfeit no benefits.

A Social Security beneficiary may have to pay federal income tax on the benefits if his income exceeds a certain threshold. And because the threshold stays the same, with no adjustment for inflation, more and more beneficiaries trigger the tax each year, said Scott Weiner, editor and author with the Tax & Accounting business of Thomson Reuters, a global provider of information for businesses and professionals.

Because the formula is linked to one’s income, the only way to avoid the tax, or at least reduce its impact, is to reduce income—not a pleasant thought. However, some techniques can limit the pain. For example: • Social Security benefits count as income for purposes of the tax, so consider postponing the point at which you start collecting benefits.

• Withdrawals from traditional individual retirement accounts (IRAs), 401(k) or 403(b) accounts, and other pre-tax retirement savings vehicles generally count as income for purposes of the tax. “So consider limiting the amount withdrawn from these vehicles,” Weiner said.

“If you must make a withdrawal to meet the plan’s rules, try to withdraw no more than that minimum amount.”

• Consider converting at least a portion of a traditional IRA to a Roth IRA. For purposes of the tax on benefits, the amount converted to a Roth IRA typically counts as income for the year of conversion, but future Roth IRA withdrawals are tax-free, assuming that certain qualifications are met.

Working while collecting has advantages.

Continued on page 20 Just remember “that there’s a trade-off involving the potential forfeiting of FULL RETIREMENT AGE benefits, depending on one’s age and other factors,” Klein said.

Collecting Social Security benefits before full retirement age results in a reduction in benefits. Collecting at full retirement age, however, results in no reduction in benefits. Full retirement age depends on one’s year of birth.

YEAR OF BIRTH

FULL RETIREMENT AGE

1943 through 1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 and later

67 Source: Social Security Administration

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Continued from page 19

Such techniques have potential benefits and drawbacks, so be sure to talk to your financial advisor first before making a move. “Don’t take unnecessary risks with your money” just to avoid tax on Social Security benefits, Weiner said. “Certainly, taxes are a piece of the puzzle,” Klein said. But the tax on Social Security benefits represents “just one piece,” she adds.

DIVORCED SPOUSE BENEFITS In planning ahead for retirement, remember that you may be eligible for Social Security benefits based on an ex-spouse’s work record. “That’s something people just aren’t aware of,” Klein said. “Those benefits are available, and people may qualify and not even realize it,” she said.

If you qualify, you will receive the full amount to which you are entitled (under Social Security rules) based on your own work record, or a benefit based on your ex-spouse’s work record, whichever amount benefits you most. To qualify: • You must be age 62 or older, • You cannot be currently married,

What if your ex-spouse is 62 or older and can qualify for benefits, but has not applied? You can receive benefits based on the ex-spouse’s work record if you have been divorced for at least two years. Drawing a benefit based on an ex-spouse’s record will not affect the benefits that the ex-spouse receives—or the benefits received by that ex-spouse and his or her family, Czarnowski said.

Social Security benefits, while helpful, are only one piece of an individual’s broader financial plan, so taking advantage of any strategy should be done with care after consulting your financial and tax advisors and after thoroughly considering the bigger picture.

The Social Security Administration’s website WWW.SOCIALSECURITY.GOV is an excellent source for more information.

• The marriage had to have lasted at least 10 years, and • Your ex-spouse must be entitled to receive Social Security benefits.

• The retirement earnings test online calculator

TAXATION OF SOCIAL SECURITY BENEFITS IF YOUR INCOME EXCEEDS

THIS PORTION OF YOUR BENEFITS WILL BE TAXED

$25,000 (and you’re single)

up to 50%

$32,000 (and you’re married)

up to 50%

$34,000 (and you’re single)

up to 85%

$44,000 (and you’re married)

up to 85% Source: Social Security Administration

“Married” means married and filing a joint federal income tax return.

“Income” is sometimes called “provisional income” and means your adjusted gross income plus tax-exempt income plus one-half of your (and your spouse’s) Social Security benefits.

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A few specific resources to explore include:

• The retirement age online calculator • How Work Affects Your Benefits, a booklet • When To Start Receiving Retirement Benefits, a fact sheet • Your Retirement Benefit: How It Is Figured, a fact sheet • Incentivizing Delayed Claiming of Social Security Retirement Benefits Before Reaching the Full Retirement Age, a Social Security Bulletin article • What Every Woman Should Know, a Social Security booklet (which includes information for men and women)

GL EAN I N G S

SOCIAL SECURITY PAST AND PRESENT

1889

1935

GERMANY The first nation to adopt an old-age social insurance program, precursor to U.S. Social Security system

Year the 37-page Social Security Act was signed

by President Franklin D. Roosevelt

1937

Year first Social Security cards issued by post offices

OTTO VON BISMARCK Germany’s chancellor in 1889, when program was adopted

IDA MAY FULLER First recipient of monthly Social Security benefits

Ida May worked for three years and paid $24.75 into the system She lived to age 100 and collected $22,888.92 in benefits

$118,500 Maximum earnings subject to tax

6.2% Social Security tax rate in 2015

2015

Maximum Social Security tax

$7,347 Average monthly benefit for worker retiring at full retirement age

168

MILLION Workers who pay Social Security tax

58

$1,328

MILLION

Maximum monthly benefit for worker retiring at full retirement age

39%

$2,663

Number of beneficiaries

Percentage of income the average American age 65 and older receives from Social Security

Sources: Social Security Administration, Huffington Post, and Employee Benefit Research Institute.

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PASS I O N PU RSUITS

THE ART OF COLLECTION

Photos courtesy of Anna Dunbar, Galerie d’Orsay

Once people retire, they can devote time to passions they may have neglected during their working lives. Art collecting fills that role for some. by susan weiner

A smart approach can make the difference between amassing a haphazard group of objects and creating a coherent collection that brings you joy and holds its value. Doing research, using galleries, and setting goals are a few of the steps you can take to launch your art collecting project to the next level.

“As baby boomers retire and move beyond the demands of raising kids and pursuing careers, they’re treating themselves to art,” says Sallie Hirshberg, owner of Galerie d’Orsay in Boston.

For example, one couple she knows bought a sculpture by Israeli artist Tolla Inbar to celebrate their downsizing to a townhouse. “Retirement frees people to enjoy their passions,” she adds.

For most people, collecting art isn’t about finding items that stun the experts on Antiques Roadshow or set records at auctions, like Andy Warhol’s Triple Elvis (Ferus Type), which went for more than $81 million in November 2014. Collectors find joy in art that speaks to them. “Art enriches your life,” says Bill Gorelick, a Charlotte, North Carolina, collector of glass. It’s not just a matter of savoring the art in their homes. Collectors also find that art enriches their lives as they share it with others and research potential purchases. “When we go to a new city, we check out the galleries,” says Gorelick. He also enjoys bringing art to others because “the more people who see art, the better off we are.”

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On the opposite page, an exclusive collection of contemporary Bruno Zupan paintings adorns an entire wall of the gallery. Above on the left, Richard Erdman’s Ariette bronze sculpture stands next to a painting by Luc Leestemaker. On the right, works from Marc Chargall hang near the gallery window on a snowy Boston day.

Research is essential for the budding collector. Before you start buying, view art in as many places as possible to get a sense of what you like. “It’s like refining your tastes for cheese,” says Duane Bousfield, senior art consultant with Franklin Bowles Gallery in New York City. “You sample a wide variety of cheeses to get an idea of the entire spectrum of tastes.”

There’s a wide variety of places to look, including museums, art shows, galleries, open studios, and gatherings of art collectors.

Gorelick found SOFA CHICAGO, an annual exposition of sculpture objects and functional art, particularly helpful in identifying galleries with tastes that appealed to him. The three-day 2014 SOFA expo featured 70 galleries from around the world.

Galleries can help. Gorelick prefers to buy through galleries, rather than directly from artists, because he values how galleries screen for artists who are established or up and coming. “You pay for that” through the gallery’s markup, but he says it’s worth it. Bousfield says that galleries screening for quality means you’re less likely to find works that make you wonder “why’d they waste the frame.” A gallery that represents an artist you like can also help by notifying you when new works become available so you get first pick. This is important, because new releases are likely to include works of varying quality. They may also introduce you to artists with a similar aesthetic.

Budget is an important consideration. Before you make your initial purchases, think about your long-term goals and how much you’re willing to spend on a single piece. Gorelick sets an annual art collecting budget that has risen over time. “It’s like candy,” he says, which used to sell for a penny a How do you decide on piece and now may cost more than a a purchase? The work dollar. Hirshberg sughas to speak to you. gests that collectors “Buy the best that you can afford. It’s better to buy one important piece than to fill your house with decorative art you may later regret owning.”

How do you decide on a purchase? The work has to speak to you.

“Trust your gut,” says Bousfield. However, he warns, “Don’t go art shopping on a partied-up weekend in Cabo. Everything looks good then.” Gorelick tests items’ appeal by waiting at least 24 hours between initial viewing and purchase.

Bousfield suggests looking for galleries that offer short-term loans of works or will buy them back within 30 days of purchase. Something that looks great on a spacious, well-lit gallery wall may not look as good in your living room.

Continued on page 24

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Continued from page 23

Hirshberg warns that collectors shouldn’t let other people drive their art-buying decisions, especially if their tastes aren’t aligned with the collector’s. The most common mistake of collectors is to second guess themselves, she says. “They live in beautiful homes, drive great cars, but have inexpensive art, like posters, on their walls because they don’t trust themselves.”

Consider whether a purchase is likely to maintain or rise in value. Artists with a long history of exhibits in galleries and museums tend to hold their value better. The same goes for artists who have been the subjects of monographs or books. However, don’t count on making money off your art. Gorelick doesn’t view his art as in investment. “Art is for buying, not selling. When you go to sell art, if you get your money back, you’re lucky,” because a gallery needs to make 30 to 40 percent on a sale, says Gorelick. Still, Hirshberg says, if you buy high-quality art and hold it a

long time, it can appreciate significantly. She has seen that, for example, with pieces like a Chagall purchased prior to the artist’s death in 1985.

Once you’ve bought a piece, protect it and display it at its best. Bousfield suggests putting the artist’s biography and certificate of authenticity in a clear sleeve and attaching it to the back of the work. “If your painting is published, even in a gallery catalog, keep a copy with your records as it can enhance its importance in future sales,” he adds.

Consider installing lighting. Talk to your insurance agent to see if you need an amendment to your homeowner’s insurance to cover more expensive pieces. Hire professionals to work with your pieces, whether it’s simply moving a piece from one home to another or making some kind of repair.

Lastly, think about how your art can bring joy to others. You can’t count on your children loving your art the way that you do. Even if they do, their spouses may not like it or their homes may not accommodate it. Museums are short on space and funds to accommodate new acquisitions, even if you donate them. If you can interest a museum in your entire collection, rather than just one outstanding piece, you’ll probably need to provide some sort of funding.

Gorelick is sharing his collection with his community through an agreement with Central Piedmont Community College, which is creating galleries on multiple campuses that will display his family’s glass collection. Gorelick provides funds to support the project. “Younger people don’t go to museums, so you have to bring the art to them,” he says.

Think about how your art can bring joy to others. You can’t count on your children loving your art the way that you do.

Pictured below, the gallery has a few Picassos hanging on the wall behind Richard Erdman’s Vela sculpture.

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E X PE R T A N GLE

FOCUSING ON

ADVANCE DIRECTIVES by maureen a. lyons Moynihan Lyons PC

Estate planning involves much more than deciding who will receive our property after we are gone. A high-quality estate plan considers all the twists and turns life might take that may impact health, wealth, and independence, and provides a guide for those we will rely on to carry out our plan.

Potential health issues are often treated as an afterthought rather than key components of a plan. But all of us should take the time to provide the appropriate legal authority and guidance to those who may need to make healthcare decisions for us in the event of a serious accident or illness that renders us incapacitated and unable to speak for ourselves.

Such provisions are found in what are commonly referred to as advance directives, which address healthcare decision making and end-of-life wishes.

Advance directives may involve multiple documents including a healthcare power of attorney, living will, and Health Insurance Portability and Accountability Act (HIPAA) authorization—or one document incorporating some or all of these provisions.

How often do we hear of someone else’s health crisis and say emphatically, “I’d never want to live like that.”

What have you done to make those wishes part of your planning? Consider Joe and Mary’s story …

Joe and his wife Mary were retired and enjoying the good life. Their children were doing well and their grandkids even better. One Friday afternoon, they decided to take a

quick road trip to visit their eldest, Linda. All was well until the traffic began to back up on the highway. In an instant, tires screeched and the unmistakable sound of metal on metal filled the air as cars collided.

Ambulances delivered the couple to a local emergency room.

Joe suffered extensive trauma, including several broken bones and a neck injury.

He was given strong painkillers. Mary’s skull was crushed and she was on life support. Things were not looking good.

After a few hours, the hospital contacted Linda, who immediately shared the news with her three siblings. They waited anxiously to speak with the doctors.

One of the first questions Linda and her siblings were asked was whether Joe and Mary had healthcare powers of attorney or advance directives. They were not certain. Joe Jr. remembered his dad talking about their estate plan the previous Christmas. He volunteered to go to the house immediately and look for their documents.

He found documents titled Advance Healthcare Directives and Living Wills in his parents’ estate planning files. In their directives, both Joe and Mary appointed each other Continued on page 26

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Continued from page 25

to serve as their agent or healthcare decision maker. They also named all four children as coagents in the event either parent was unable to serve. The directives also authorized the doctors to share Joe and Mary’s confidential health information with their agents to comply with HIPAA healthcare privacy laws.

Armed with this information, the doctors updated the children regarding Joe’s prognosis. They recommended emergency surgery to stop internal bleeding. Everyone agreed with the doctors’ recommendation, and the operating room was booked.

Mary’s prognosis was much more dire. She suffered severe head injuries, along with multiple other injuries to her chest and spine.

Immediate surgery could repair some injuries, but the doctors indicated that rehabilitation would be long and painful. Moreover, the possibility of brain injury meant that her ability to participate in rehabilitation was uncertain.

Linda and Joe Jr. favored authorizing immediate surgery. Their siblings wanted to wait. Harsh words were spoken and tears were shed. Meanwhile, the doctors waited in limbo. Mary’s condition worsened before the situation was resolved; surgical intervention was no longer indicated. In Mary’s living will, she expressed her desire to have a peaceful transition if her doctors believed that she would not recover sufficiently to live without machines breathing for her. No further treatments were undertaken. Because she had created a living will, her children did not have to make this decision for her. Mary was prescribed pain medications and peacefully passed away three days later with her family at her side.

PART ONE: IDENTIFY YOUR HEALTHCARE DECISION MAKERS As an attorney, one of the most common responses I hear when I start to talk to people about medical decision making is along the lines of “My husband/wife/family knows what I want.”

While that is a great place to start the process, it certainly should not be the end. The first priority should be to determine who to entrust to speak for you and carry out your wishes. As Joe and Mary’s situation demonstrates, it is not enough to provide your spouse with that authority.

It is best to also have a backup plan. The bench may be shallow or deep, but it makes great sense to build in some options in case your first choice is not available.

Making critical life and death decisions for another person is a daunting responsibility. Your advance guidance can reduce the burden on those you have entrusted and provide them with the comfort of knowing that they are carrying out your sincere wishes.

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I also typically recommend to my clients that they avoid appointing coagents. Parents may think that the fairest thing to do is to name all of the children as coagents; however, giving joint authority to two or more people can create unnecessary delays, especially if disagreements arise.

If you are determined to name more than one healthcare agent, consider providing each agent with independent authority to make decisions rather than requiring unanimous agreement among all agents.

PART TWO: GET SPECIFIC ON CARE ISSUES After clarifying who can speak for you, the next priority is to address what sort of decisions your agent can make. Doing this requires asking yourself some very specific care questions: • Do you have strong feelings regarding quality-of-life issues?

• If you are conscious but permanently unable to recognize and communicate with people, do you want aggressive treatment designed solely to prolong your life?

• What if you are living with advanced Alzheimer’s disease?

• If you cannot eat on your own, what are your feelings about tube feeding? For a week? For the rest of your life?

• Would these choices be the same if you become permanently unconscious? Are they dependent on your age?

Two topics that deserve specific discussion include how you feel about hospice care and the end-of-life wishes you would like to see carried out: Hospice care. Many seriously ill individuals whose illness has progressed to the point where curative treatments are thought to be futile choose hospice care. Those receiving hospice care have chosen to stop treatments designed to cure the condition. Instead, they opt for care that address their comfort as they approach the end of life. It is important to consider that many treatments designed to stop or slow down disease also carry unpleasant side effects that may significantly interfere with the quality of a person’s remaining days. If you would want your agent to have the power to arrange for hospice care, that preference, too, should be included in your advance directive.

End-of-life wishes. A living will is the document or the provisions in a healthcare directive that addresses more immediate endof-life wishes. In a living will, a person can direct care providers to

withhold or withdraw life-prolonging procedures if that person’s medical condition becomes irreversible and terminal and death is believed to be imminent but for those life-prolonging procedures.

Living wills are unique in that they do not require the agent to make a personal end-of-life decision. Rather, a living will is designed to express the individual’s legal right to refuse medical or surgical treatment and an understanding of the consequences of such refusal. The living will, then, is the most critical part of advance planning for those who have strong preferences regarding end-of-life care.

PART THREE: COMMUNICATE YOUR WISHES There are no right or wrong answers to these questions. It is also acceptable to be unsure and rely on your agent’s best judgment at the time a decision must be made. Regardless, it is critical to communicate your wishes. Joe and Mary almost lost out on the benefits of creating advance directives because they hadn’t discussed their planning with their children. They were lucky that their son was able to locate the appropriate documents. Making critical life and death decisions for another person is a daunting responsibility. Your advance guidance can reduce the burden on those you have entrusted and provide them with the comfort of knowing that they are carrying out your sincere wishes. In most or all states, photocopies are legally valid. Thus, after creating your advance directives, provide your agents and healthcare providers with copies for their files.

PART FOUR: REVIEW AND ADJUST AS NECESSARY You should review your planning and related documents every few years to confirm that they still reflect your desires; even more frequently in the event of any change in health status. This is an important and sometimes overlooked need. Medical technologies and treatment options advance over time. Meanwhile, many emergency procedures can have vastly different results depending on the age and physical condition of the patient. For example, cardiopulmonary resuscitation (CPR) performed on a frail elderly person may be more traumatic than beneficial. Make changes on an ongoing basis, as necessary.

The requirements for creating legally valid advance planning documents are state specific. Please consult with an experienced estate-planning attorney to insure that your planning addresses your specific concerns and complies with the laws of your state of residence.

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M ON EY TA L KS

RAISING

CREDITWORTHY

CHILDREN by kathleen burns kingsbury

You’ve done everything right as parents. You read all the books on raising financially fit children and started talking to your kids about money and wealth from an early age. You helped them open their first saving accounts, then checking accounts, and even made them authorized users on your American Express account when they went off to college.

Now you are shaking your head in disbelief as your financially literate and responsible daughter has just been turned down for her first mortgage. How could this happen in your family?

The truth is that building up your creditworthiness is not as easy as it may seem. According to mortgage broker Dave M. Damaré, founder of the David M. Damaré Team in Raleigh, North Carolina, it takes more than a good credit score. “The majority of young adults I speak with have no credit history and many of the rest have thin credit.” Thin credit is a term used in the lending industry to describe a borrower who has a thin file as a result of having very little credit history. The result is that Damaré and other lenders often have to look these young borrowers (and their parents) in the eye and tell them their loan is denied—or that they’ll need to do some work to establish their credit.

How can you help your son or daughter avoid this fate? There are a number of ways you can help ensure your children’s credit will be ready when they need it.

Dave M. Damaré, mortgage broker and founder of the David M. Damaré Team in Raleigh, North Carolina.

START EARLY When it comes to establishing a track record with the credit bureaus, it’s important to start early. Begin the process when your child is a sophomore or junior in college, if not sooner. Why? Because the credit bureaus look for a history of a minimum of 12 to 24 months of using established credit responsibly when evaluating your child’s

I would have worked on building my credit sooner. I admit I did not know how important a good credit history could be in life.

— Erin, 24-year-old college graduate

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ability to repay. If your daughter wants to attain a mortgage to buy her first home upon graduation, being proactive while she is still in college will help her credit look more attractive to a lender and increase her chances of success.

LOOK BEHIND THE CURTAIN There are certain rules in the lending industry that many consumers and well-intended parents aren’t aware of. The most important one is the idea that all credit is not created equally. In other words, a retail charge card is not viewed the same by a credit bureau as a bank-issued Visa. Meanwhile, retail cards can be a great way to get your children started, but they are seen less favorably than others when it comes to beefing up credit scores. Also, cosigning a credit card account with a child may help her learn how to be financially responsible, but does not count toward establishing credit in her name.

Damaré speaks with CAPTRUST’s Matt Raines about the pros and cons of homeownership.

Damaré has recently noticed greater interest in homeownership from younger adults.

KNOW YOUR CHILD’S MONEY PERSONALITY Joline Godfrey, author of Raising Financially Fit Children, believes that every young person is born with a money temperament. These personalities include the hoarder, spendthrift, scrimper, giver, beggar, hustler, and oblivious. As these names imply, children—just like their parents—differ when it comes to how they naturally handle money. Therefore, when coaching a young person to use credit responsibly, you need to factor in personality differences. For example, your son may be a hoarder, unwilling to part with his allowance, whereas your daughter is more of a spendthrift, with money burning a hole in her pocket. Most likely, your son will be ready to responsibly use credit sooner than your daughter. Your daughter may need more practice before she can reliably be left to her own devices.

PRACTICE MAKES PERFECT The best way to help your children establish good credit is to allow them to practice healthy financial habits. Start by making them authorized users on your card and let them experience using a credit card to make purchases under your supervision. Next, help them apply for secured credit cards at the local bank. The credit

limit is usually a few hundred dollars and secured by linked savings accounts in their names. Encourage them to make small purchases and pay off their balances in full each month. In time, their good behavior will be rewarded as the bank increases their limits and allows them to have unsecured debt. Eventually, it will be time for your young adult children to obtain additional credit cards. They don’t need to use these cards, but having two or three cards results in a more robust credit rating when it comes time for them to apply for a car loan or mortgage.

Rearing financially fit, creditworthy young adults is a slow process.

In a world where you can immediately communicate with someone halfway around the globe and buy anything you desire by clicking a few buttons on your smartphone, waiting is not something many of us do well. However, if you are patient and teach your children the value of persistently working toward a financial goal, it will pay off. It may take a few years, but it will be a great feeling when you’re sitting in the living room of your daughter’s first home knowing only she is footing the bill.

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L AST I N G L E GACY

A STRONG

FOUNDATION

by g. rhodes craver, esq.

Kennon Craver, PLLC

Is a Private Family Foundation Right for You? Many of us make annual gifts to charities, our church, an alma mater, or some other worthy charitable organization. But beyond this annual giving, some individuals or families may have a desire to set aside a more meaningful amount of their net worth to achieve larger philanthropic objectives. One way this goal can be achieved is through the creation of a private family foundation that you fund and operate.

Like public charities, private foundations are established under section 501(c)(3) of the Internal Revenue Code. Unlike a public charity, a private foundation typically makes donations—or grants—to other charities.

Private foundations make grants either to fund an organization’s general operating expenses or to fund specific programs of interest. They can also make grants to individuals if they follow Internal Revenue Service (IRS) The threshold issue for seriously considering rules. To maintain tax-exempt a family foundation is determining if you have status, the activities of a private sufficient financial resources to commit to the foundation, like those of a public foundation to make it economically viable. charity, must benefit the public.

Creating a private foundation may appeal to those families with strong philanthropic values and a willingness to commit the resources—both time and money—necessary to make the foundation a reality. And because a foundation can exist in perpetuity, attaching the family name to a legacy of giving in this manner can help ensure that it continues through the generations.

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The threshold issue for seriously considering a family foundation is determining if you have sufficient financial resources to commit to the foundation to make it economically viable as an operating entity.

While there is no bright line test for determining the amount necessary to fund a viable family foundation, I recently consulted with a family foundation manager on this issue, and his response was that it would take a minimum of $2 million—and more likely $5 million—to really make a family foundation an economic reality.

In today’s environment, running a foundation requires a good deal of time and effort simply to meet the burden of complying with the tax regulations governing these entities. To justify that time, effort, and expense takes a significant financial commitment from a family wanting to create a foundation. This funding threshold is pretty high and would likely dissuade many from considering a family foundation. For those unable or unwilling to commit resources at such a high level, a donor-advised fund may

Under the right circumstances, a family foundation can create a powerful and lasting legacy. However, to determine whether it is the best vehicle to achieve your family’s charitable objectives, it’s important to consider the amount of resources you are willing to commit to the endeavor.

be an attractive alternative that can mimic much of what a foundation does without the time and expense of the foundation.

A donor-advised fund is a philanthropic vehicle established at a public charity. This vehicle allows donors to make a charitable contribution, receive an immediate tax benefit, and recommend grants from the fund over time. In the simplest of terms, a donor-advised fund is like a charitable savings account. Donors contribute to the fund as frequently as they like and then recommend grants to their favorite charities when they are ready. The focus of this article is not on donor-advised funds, but more information is readily available at your local community foundation.

foundation is required to file an annual tax return with the IRS. These tax returns reveal a great deal of information about the foundation and, unlike individual income tax returns, are public information. If a family values its privacy and wishes to remain anonymous about its charitable giving, then the family foundation is likely not the right vehicle. Once again, a donor-advised fund may be a better alternative.

Under the right circumstances, a family foundation can create a powerful and lasting legacy for a family with a meaningful philanthropic orientation. However, to determine whether it is the best vehicle to achieve your family’s charitable objectives, it’s important to consider the amount of resources—both time and money—you are willing to commit to the endeavor, the amount of control you would like to have over investing foundation assets and giving, and how you feel about your family’s charitable giving being made public.

While family foundations can be relatively time consuming and expensive to set up and operate, the thousands of individuals and families who have established them clearly suggests that these sacrifices are worthwhile.

If you’ve crossed the financial threshold and are willing to fund a family foundation at a level that makes it economically viable, what other considerations should be top of mind when deciding to create a foundation?

Without a doubt, the single most important consideration is the degree of control the family would like to have over the foundation.

ISSUES TO CONSIDER

There are two important aspects of this control issue:

• Are you willing to commit a minimum of $2 million to upward of $5 million to start a family foundation?

• Do you want to control how the money is invested after it has been contributed to the foundation?

• Do you want to have control over the grants the foundation makes to charities?

Having control over grants involves the review of grant proposals and, often, monitoring of the use of the grant after the money has been given to the charity. Some families want that sort of involvement with the charities they support. Others do not. While such involvement can be meaningful, it is also time intensive. If the family has the time and interest to be that involved, a family foundation can be a great vehicle to further family philanthropic objectives. If that level of control is not essential to the family, then a donor-advised fund may be a more effective alternative.

While the issue of control is generally the most important consideration, there is a second key issue to be considered: privacy. A family

A donor family should carefully weigh these factors when assessing whether a family foundation vs. a donor-advised fund is the right vehicle for the family’s philanthropy:

• How important is it to you to control the investment of foundation assets and grant making?

• How important is it to keep your family’s charitable giving anonymous?

ADDITIONAL RESOURCES • Council on Foundations — www.cof.org • Starting a Private Foundation: Carrying Out the Donor’s Intent by Paul K. Rhoads and Stephanie H. Denby — available at www.philanthropyroundtable.org

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CL IE NT CON VE R SATIO N S

READER Q & A In this issue, we explore options for financing a second home, take a look at long-term care costs and the tradeoffs of long-term care insurance, and offer our thoughts on prudent retirement portfolio withdrawal rates. Please let us know if you’re interested in learning more about these topics or have questions of your own. another way, it’s the opportunity cost of not having the money invested.

Take, for example, a couple with a conservatively invested portfolio who expect to earn 3 percent. If we assume a borrowing rate of 5 percent, they will be paying 2 percent more on the loan than they are expecting to earn on their portfolio. In this scenario, it doesn’t make sense for them to borrow; they are financially better off to liquidate a portion of their portfolio. (Of course, it’s also important to consider the cost of taxes, if any are due.)

What’s the best way to pay for a second home?

Should I pull money out of my portfolio or take out a loan?

You will likely want to consider a combination of both. It may make sense to pull some money out of your portfolio to “buy down” your loan to get to a monthly payment you can manage. The bigger the down payment, the smaller the monthly check you’ll have to write and vice versa.

That said, interest rates are low right now, making it relatively attractive to borrow rather than to fund the purchase from your portfolio.

The key idea here is cost of capital. When you borrow money, your cost of capital is the interest rate you pay on the loan. When you take money out of your portfolio, it’s the rate of return you would otherwise expect to earn on the investments that you liquidate to fund the purchase. Put 32

Winter | 2015

Now suppose the reverse is true—our couple can borrow at 3 percent and earn 5 percent on their portfolio. In this case, our couple can borrow at a lower cost of capital than they plan to make, meaning they are capturing the 2 percent spread between the two rates and pocketing the difference. That’s a good thing.

Another issue to consider is the nature of the loan. You may want to explore borrowing options beyond a traditional mortgage. For example, home equity loans or brokerage lines of credit are sources of borrowing available at attractive interest rates that provide the flexibility to change or skip payments— or pay down the loan to reduce monthly payments. These options may be more appealing to individuals with assets but limited regular monthly income.

I am concerned about the cost of health care and long-term care during my retirement years. Should I buy long-term care insurance?

This is an important question since long-term care expenses are generally not covered by Medicare. According to Medicare & You, the official U.S. government Medicare handbook, at least 70 percent of people over age 65 will at some point need long-term care services such as personal assistance at home, assisted living, and nursing home care. These services are covered by Medicare only for a limited time, unless they are deemed medically necessary.1 Long-term care is expected to be a large out-of-pocket expenditure for many older Americans. While 70 percent of people over age 65 may experience some need for long-term care services, most long-term care episodes last one year or less. However, 12 percent of men and 22 percent of women experience nursing home stays of more than three years. Given that nursing home costs can range upward of $75,000 or more per year— depending on geography—this can become a substantial expense.2 Without Medicare to pay these expenses, At least 70 percent of you are left with the people over age 65 will options of paying longat some point need longterm care expenses out term care services such of pocket (self-isurance), relying on care as personal assistance from family members, at home, assisted living, or buying a long-term and nursing home care. care insurance policy.

Like all forms of insurance, a long-term care insurance policy is easier and cheaper to buy when you don’t need it; in like, when you’re middle-aged and in good health. Even then, these policies are not cheap and may seem like a significant expenditure for something that may or may not pay off.

However, for those who can afford it, long-term care insurance can provide a much-needed hedge against healthcare costs (and healthcare inflation) that could otherwise create financial and family distress.

Sources: 1 Medicare & You 2014, “Centers for Medicare and Medicaid Services,” accessed May 20, 2014, p. 127 2 Jeffrey R. Brown, Gopi Shah Goda, and Kathleen McGarry, “Why Don’t Retirees Insure Against Long-Term Care Expenses?

Evidence from Survey Responses,” July 2011, p. 2

I think I am doing the right things to save for retirement. When I get there, how much should I plan to withdraw from my portfolio, and not touch principal?

Unfortunately, the answer to this question is more complex than in years past. Due to the historically low interest rates we are experiencing, it is impossible for most investors to live in retirement strictly off of interest from a high-quality bond portfolio. Instead, it is necessary to take what are known as sustainable withdrawals from a globally diversified portfolio of stocks, bonds, and other asset classes.

The level of withdrawal that is sustainable depends upon a number of factors, including how your portfolio is invested and your expectations for longevity and inflation. Applying the 4 Percent Rule can help you estimate the level of sustainable withdrawals you might expect from your portfolio. This helpful rule of thumb suggests that an investor should be able to safely withdraw 4 percent of the value of her diversified portfolio annually (adjusted for inflation). In other words, each $1 million of retirement savings should generate $40,000 a year of cash flow. That $40,000 can be increased over time to offset the impact of inflation.

Like most rules of thumb, the 4 Percent Rule risks oversimplifying the issue. Our research indicates that 4 percent is a reasonable level of withdrawals for a 20-year period of retirement (again, given a well-diversified portfolio). If you are anticipating retiring early, or if people in your family regularly live into their 90s or 100s, a 3 percent withdrawal rate is more prudent. That approach would produce $30,000 a year, adjusted for inflation, per $1 million of savings. Meanwhile, if you anticipate a shorter period—like 10 or 15 years—4.5 or 5 percent may be reasonable.

While these quick metrics provide some guidance—and put you into the ballpark of the level of sustainable withdrawal you might reasonably expect—be careful not to rely upon them too much. Prior to making any decisions, you should perform a detailed retirement income analysis that includes all of your savings, assets, and retirement income sources, including Social Security and any pension benefits you are entitled to.

If you have a question for the VESTED team, we’d love to hear from you and see if we can help. Please send your questions to us at VESTEDmagazine@captrustadvisors.com.

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INVE ST M E NT STR ATE GY

THE ONE-TWO PUNCH: EXPLAINING DIVERSIFICATION AND ACTIVE MANAGEMENT PERFORMANCE SHORTFALLS by eric freedman & david hood To explore this “one-two punch” of underwhelming returns for diversified portfolios and active managers, we interviewed CAPTRUST Chief Investment Officer Eric Freedman and CAPTRUST Head of Manager Due Diligence David Hood to get their insights. Eric manages asset allocation research across CAPTRUST’s business lines, and David oversees active and passive manager research. Eric and David are co-authoring a position paper on these combined issues, which we will publish later this quarter.

Eric, can you explain the basics of diversification and how those principles translate to clients?

Diversified investors, which we will define as investors whose portfolios include several different asset categories, such as global stocks, bonds, hedge fund strategies, commodities, and real estate, have not enjoyed diversification’s benefits over the past three to four years, compared to more narrowly allocated portfolios focused on U.S. stock and bond markets. To add insult to injury, active management, defined as a portfolio management style in which the manager makes individual security choices designed to beat a market benchmark, delivered poor performance across most asset classes relative to indexes and passive managers who try to replicate index returns.

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Doing my best impersonation of my mother, who was an English teacher, the term “invest” comes from the Latin word “investire,” which translates into the English “clothe in, cover, or surround.” I like those last two words when thinking about asset allocation; our goal is to try to surround and cover our clients’ investment objectives with tools that can help them increase their odds of reaching their objectives.

Most investors have a goal of achieving more than just retaining purchasing power, so they should invest in assets that will grow their capital beyond inflation’s historical 2–3 percent growth rate.

FIGURE ONE: Differences in Return Between a Diversified Portfolio and a 60/40 Portfolio January 2001–December 2014 10% Iraq War Begins

DIVERSIFIED PORTFOLIO OUTPERFORMED

Great Recession Begins

8% U.S. Debt Downgrade 6%

U.S. Quantitative Easing Ends

4% European Debt Crisis Peak

2% 0% -2% 9/11 Terrorist Attack -4% -6% Lehman Brothers Fails

-8% -10%

U.S. Equity Market Trough

60/40 PORTFOLIO OUTPERFORMED 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Zephyr, CAPTRUST Research

Because no one, including professional investors, knows what the future holds, we believe in maintaining a portfolio with a variety of asset classes that respond differently to various potential economic conditions and market-driving outcomes. Examples include inflation-protected securities, which are bonds whose principal amounts rise when inflation increases. These securities should act differently than high-quality corporate bonds, which tend to fall in value when expected inflation increases. Recognizing that inflation is not the only factor driving bond returns helps us to think about how they may react in isolation, as well as in tandem with other assets for a given market scenario.

Our goal is to make sure that clients are not overly diversified, such that each portfolio component cancels out another, but instead that we have created portfolios that will increase the likelihood that clients can achieve what they want with their capital. Over longer periods of time, diversification into many dissimilar asset classes has led to good outcomes.

So what has happened more recently?

In Figure One, we show how a hypothetical diversified portfolio, which is composed of global stocks, a variety of bond types,

commodities, real estate, and hedge fund strategies, has performed against a less diversified hypothetical portfolio consisting of U.S. large-capitalization stocks and U.S. investment grade corporate, mortgage, and government bonds over the past 15 years. The chart shows that the diversified portfolio outperformed the 60/40 portfolio early in the 2000s but has traded leadership in more recent years.

Notable market events are highlighted.

As you can see, the performance differences between the diversified and 60/40 portfolios shows some persistent “clustering” but appears to be cyclical. However, over the full time period, the diversified portfolio delivered higher total returns, almost 20 percentage points more. You can see certain time periods in which the diversified portfolio performed better (from 2001 through August 2008, just before the financial crisis) but then the 60/40 portfolio performed better for a few years. The diversified portfolio regains the relative lead from 2010 through mid-2011, and then the 60/40 portfolio demonstrates some consistent outperformance for the next two and a half years. Again, relative performance ebbs and flows over time.

Continued on page 36

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Continued from page 35

Is it fair to say that a push toward dollardenominated assets, which the 60/40 portfolio owns more of, is the reason why the diversified portfolio typically underperforms the 60/40 portfolio?

Not entirely. U.S. stocks fell within 3 percentage points of international stocks during the financial crisis, so currency alone does not explain the performance differential. The “40” in the 60/40 seems to be what investors demand most emphatically during stressful time periods: government and quasi-government bonds. The bias toward U.S. stocks over international stocks has been especially persistent over the past four years, largely due to the U.S. Federal Reserve’s easy money policies, which have hurt more diversified portfolios. Also, hedge funds and commodities

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have held back portfolio total returns. Hedge fund strategies, broadly, have made money consistently, just not a lot of it, and commodities have produced negative returns for four straight years.

With the U.S. economy on firmer footing than many international economies, do you think U.S. assets will perform better in the foreseeable future?

That is a possibility, but again, no one is absolute on the future. If U.S. assets perform better, our clients will benefit; the portfolios and allocations we build tend to tilt toward the U.S. despite the fact that the rest of the world’s stocks represent a larger market capitalization. We see U.S. public companies’ accounting standards,

governance, transparency, and corporate attitudes toward shareholders as superior to those of non-U.S. companies, so we favor the U.S. with a conscious home-country bias. However, markets and economic growth can diverge. I wish it were as easy as picking the countries or regions that will grow the fastest.

So is diversification no longer relevant?

We think diversification is highly relevant. Different regions of the world are in very different economic situations right now. Central banks are taking on divergent strategies; in some regions interest rates are low and falling, and in other places they are high and rising. Energy price declines help some regions, while hurting others. Many scenarios could play out this year, and in a highly correlated global marketplace, having differentiated return sources in a portfolio should help weather the varied outcomes.

While many clients wished they owned nothing but U.S. stocks over the past two years, we didn’t have a single client with the same wish in early 2009 after stocks were cut in half. Over 15 years, diversification has benefited our clients, but over the past four, it hasn’t. As Figure One shows, these things tend to be cyclical.

We continue to look for the right asset classes for our clients. Those asset classes can change over time, but we do not expect to materially narrow the range of assets we think clients should own in their portfolios. Again, we want to cover and surround client goals. More asset classes helps accomplish that goal.

David, what has been going on with active managers?

We think diversification is highly relevant. Different regions of the world are in very different economic situations right now. Central banks are taking on divergent strategies; in some regions interest rates are low and falling, and in other places they are high and rising.

Active management in areas most widely followed by investors, like large-cap U.S. stocks, has been poor. In other areas, active managers have done well. Fixed income managers, for example, have outperformed their indexes and passively managed funds over the past five years consistently. The difficulty for investors, though, has been that poor active equity manager performance has overwhelmed positive performance in other asset classes. Because of this, active management as a whole has come under scrutiny by clients and advisors alike.

How has CAPTRUST scrutinized active managers?

As a way to cut through the rhetoric and passion and to provide empirical facts about the value of active managers, we studied manager performance over the past 30 years, dating back to the creation of many of the indexes we use today and the beginnings of the mutual funds themselves. We wanted to remove as much bias as possible from our analysis. To do this, we studied large-cap managers’ performance versus their benchmarks and peers and small-cap managers’ performance versus their benchmarks and peers. We also separated growth and value managers to measure them against their respective benchmarks to eliminate any factor biases that may exist in the data.

Continued on page 38

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Continued from page 37

Rounding out the major asset classes, we evaluated international equity managers and fixed income managers.

Finally, we analyzed manager performance in rolling three-year increments. Our belief was that reviewing manager returns over a one-year period was too short, and studying manager performance over five-year periods was too long.

U.S. EQUITY MANAGER PERFORMANCE

77

percent of large-cap growth managers underperformed their indexes

64

percent of large-cap value managers underperformed their indexes

61

percent of small-cap value managers outperformed their indexes

39

percent of small-cap growth managers outperformed their indexes

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What were your findings?

Large-cap U.S. equity manager performance was meager. In the short run, on a rolling three-year basis, 77 percent of large-cap growth managers underperformed their indexes, and 64 percent of large-cap value managers underperformed over the past five years. Small-cap manager results were mixed. During the same period, 61 percent of small-cap value managers outperformed their indexes but only 39 percent of smallcap growth managers outperform their indexes. As a result, broadly diversified U.S. equity portfolios underperformed.

International equity manager performance was similar to large-cap U.S. equity manager performance. Overseas, 60 percent of active managers underperformed their benchmarks on a rolling three-year basis over the past five years.

Switching from equities to fixed income, we observed opposite results. Over the past five years, 72 percent of “core” or broadly diversified active managers outperformed their corresponding indexes and passive managers on a rolling three-year basis.

The issue for investors continues to be that, while active fixed income managers have outperformed, it has not been enough to offset widespread active equity underperformance. As a result, diversified portfolios that retain large active components across asset classes have underperformed benchmarks.

What do you look for with passive funds?

There are a number of index funds to choose from that range from global markets to sub-industries within individual countries.

The first step in choosing an index fund is to make sure the index it tracks aligns with your investment objectives. In an ideal world, the most important consideration for selecting an index fund would be fees. Your expected return is going to be the return of the index minus fees, so minimizing the fee you pay to the manager maximizes your potential return.

However, because even the best index funds do not perfectly track their benchmarks, we must also consider tracking error, or the volatility of the fund relative to its benchmark.

An index fund that struggles to match the return of its target benchmark on a consistent basis — a characteristic of higher tracking error — creates undesired risk for a portfolio.

What about the future? Is active management doomed, and is it easier just to invest passively?

The data we analyzed suggests that the average active manager loses to passive management. However, the data is by no means smooth; there appear to be prolonged periods of time during which active managers can add value relative to indexes. Plus, investors need to keep in mind that not all asset classes or strategies can be accessed through passive funds.

Our view remains that this is not an either/ or choice, and that active and passive strategies can coexist in a portfolio. It is clear from our work that a high hurdle exists for active managers in general, especially in certain asset classes, but our research efforts centered on process and governance can help unearth managers we believe can add value for clients.

If you are interested in receiving the position paper on these issues when it is published, please let your financial advisor know.

M AR KE T R E WIN D

2014 MARKET RECAP For the year, real estate and U.S. stocks led the way with returns of 27.2% and 13.7%, respectively. Bonds notched a solid year with a 6% return this year, defying many who predicted higher interest rates and lower bond prices. Meanwhile, developed and emerging market international stocks were modestly lower on the year.

Weighed down by falling oil prices, commodities were down 17%. Crude oil was down a surprising 45.9%.

International Stocks

-4.2%

Emerging Market Stocks

-2.1%

A CLOSER LOOK

29.4%

Digging a little deeper suggests that the headline numbers don’t always tell the whole story. For example, while U.S. large-cap and mid-cap stocks performed well, small-cap stocks lagged significantly. And while bonds turned in a respectable year overall, long-maturity U.S. Treasury bonds were a clear standout, returning more than 29%, while high yield bonds failed to keep pace with the broader fixed income market.

U.S. Bonds

6.0%

2.5%

8.7% 6.0%

6.1%

U.S. Bonds

MortgageBacked Securities

Commodities High Yield Bonds

-17.0%

Municipal Bonds

30-Year U.S. Treasury Bonds

13.2%

13.7%

U.S. Mid-Cap

U.S. Large-Cap

Real Estate

LOOKING FORWARD

27.2%

The U.S. stock market remains a global bright spot for investors; however, the potential for unpredictable periods of volatility always exists. Potential catalysts for a market pullback include:

U.S. Stocks

Economic fallout from the dramatic drop in oil prices, A flare-up of concern over slow economic growth and the prospect of deflation in Europe, and Apprehension over the timing of higher interest rates in the U.S.

13.7%

4.9%

U.S. Small-Cap

Asset class returns are represented by the following indexes: U.S. large-cap stocks (S&P 500 Index), U.S. mid-cap stocks (Russell Mid-Cap Index), U.S. small-cap stocks (Russell 2000 Index), international stocks (MSCI EAFE Index), emerging market stocks (MSCI Emerging Markets Index), U.S. bonds (Barclays U.S. Aggregate Bond Index), 30-year U.S. Treasurys (Barclays Capital 30-Year U.S. Treasury Index), high yield bonds (Barclays U.S. Corporate High Yield Index), municipal bonds (Barclays Municipal Bond Index), mortgage-backed securities (Barclays U.S. Mortgage Backed Securities Index), commodities (Bloomberg Commodity Index), and real estate (Dow Jones U.S. Real Estate Index).

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CA P T R U ST H A P P E N IN GS

GIVING BACK In 2014, the CAPCommunity Foundation (CCF) made 73 financial contributions

his photography talents to give back to his community. As a frequent photographer totaling nearly $80,000 to charitable organizations, all of which were made at for charities and nonprofits, having done the request of CAPTRUST employees. Along with charitable requests, the CCF twelve photo shoots in 2014, Jones was organizes fundraising efforts throughout the year to benefit a chosen organization. recognized by Activate Good for his work In 2014, our big fundraiser benefited Ronald McDonald House Charities. A total of with the organization Dress for Success. $100,000 will be contributed to Ronald McDonald House locations in the areas Dress for Success promotes the economwhere we live and work as a CAPTRUST community. Below are some highlights of ic independence of disadvantaged women by providing professional attire, a network CAPTRUST employees giving back to their communities throughout 2014. of support, and career development tools.

Shaun Eskamani, vice president and financial advisor, and Mike Hudson, He admires the organization for its mission, and believes the images he senior director of institutional consulting, are sponsors and committee captures show “true success stories.” members of the Jimmy V Foundation’s Racquets for Research tennis On December 6, 2014, CAPTRUST sponsored The Holly Run in Akron, event. Eskamani calls it “a phenomenal cause” that combines the joy and Ohio. Through the nonprofit organization Life is Good No Matter What, competition of tennis with the fight for finding a cure for cancer through The Holly Run raises funds to provide adults with advanced cancer a research. With the recent passing of Stuart Scott, sportscaster and 2014 break and escape from their battle and diagnosis through a cherished recipient of the Jimmy V Award, Eskamani and Hudson feel even more experience. Akron native and CAPTRUST senior vice president and devoted to the Jimmy V Foundation and its efforts to cure cancer. financial advisor Steve Wilt spearheaded the firm’s participation in and Todd Jones, senior vice president and financial advisor, was recently recsupport of the run as a way to give back to his community. The Holly Run ognized by Activate Good, an organization that links willing volunteers to includes a 5K race and a 1-mile Fun Run, in which Wilt and his family organizations in need of help, as a Pro Hero for his commitment to using participated to show their continued support.

On this page, clockwise from left, 1) CAPTRUST employees pose for a photo after serving dinner at the Ronald McDonald House in Chapel Hill, North Carolina. 2) Todd Jones volunteers his time and photographic talents for local nonprofit organizations. 3) Steve Wilt poses with his family at The Holly Run in Akron, Ohio. On the opposite page, from top left, 4) In the fall of 2014, CAPTRUST’s Detroit office participated in the Easter Seals Michigan Walk with Me, which helps support those with disabilities, mental illnesses, or other special needs so they can live, learn, work, and play in their communities. 5) Fielding Miller, founder and CEO, updates employees on new additions to the firm.

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Winter | 2015

COMMUNITY RECOGNITION ELLEN CROWLEY, vice president and financial advisor, was recently elected president of the Notre Dame Alumni Club of Eastern North Carolina for a two-year term beginning January 2015.

MIKE GRAY, senior vice president and financial advisor, was recently named to the national board of directors of the University of Kentucky Alumni Association.

CAPTRUST GROWTH We wrapped up the year by adding more talent to our portfolio with the addition of two new financial advisors in our Raleigh headquarters.

Keaton Brewer Brewer joined CAPTRUST in November of 2014 as vice president and financial advisor, and is responsible for providing retirement plan advisory services to corporate fiduciaries.

Prior to joining the firm, Brewer served as associate director of sales and trading at Brownstone Investment Group, and has worked in the industry since 2012. He received a Bachelor of Business Administration degree in managerial finance with a minor in management from the University of Mississippi.

Wat Keys Keys joined CAPTRUST in December of 2014 as vice president and financial advisor, and is responsible for providing retirement plan advisory services to corporate fiduciaries. Prior to joining the firm, Keys served as a financial advisor and retirement plan specialist with LPL Financial, and has worked in the industry since 1984. He earned a Bachelor of Arts degree in studio art from the University of North Carolina at Greensboro, and holds the designations of Certified Financial Planner (CFPÂŽ) and Chartered Retirement Plans Specialist (CRPSÂŽ).

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We believe an investment advisory firm is only as strong as the people who create the advice.

CAPTRUST was built on the belief that investors are best served by financial advisors motivated to focus exclusively on their clients’ best interests. Our commitment to independence and transparency has enabled us to grow from the entrepreneurial vision of our founders to one of the largest independent investment advisory firms in the country.

WEALTH MANAGEMENT SERVICES

OFFICE LOCATIONS

• Financial and estate planning

• Akron, OH

• Detroit, MI

• Philadelphia, PA

• Retirement and education funding

• Atlanta, GA

• Greenwich, CT

• Port Washington, NY

• Birmingham, AL

• Houston, TX

• Raleigh, NC

• Charlotte, NC

• Los Angeles, CA

• Richmond, VA

• Discretionary investment management

• Columbia, MO

• Minneapolis, MN

• Riverside, CA

• Portfolio performance analysis

• Dallas, TX

• New York, NY

• Des Moines, IA

• Orlando, FL

• Investment consulting services

www.captrustadvisors.com 919.870.6822 | toll free: 800.216.0645 4208 Six Forks Road, Suite 1700 | Raleigh, NC 27609