What Is A Donor-Advised Fund?

Donor-advised funds are gaining a lot of popularity because of all the benefits that they provide. A lot of people thought that these benefits were only available to ultra-wealthy people or people who could create family foundations. But with a donor-advised fund, you can get a lot of those same benefits. 

As the donor to a DAF (donor-advised fund),

  1. You can give any amount you decide
  2. There are multiple ways to give, including cash, stock, funds, or real estate
  3. You get a tax deduction, same as if you were to give directly to the institution

So, why not just give directly to the institutions, the charities?

Here are a couple of reasons: 

  • Let’s say that you were going to give a stock – a highly-appreciated asset – and that you had multiple charities that you wanted to give to. You could fill out the DTC forms and everything needed to give to those different charities directly from your brokerage account. Or you can just do it one time and get it into your DAF, and then once the money is in there, you can decide the time and the place and when you want to give.
  • If it’s a big income year and, for tax purposes, you’d like to give more than you usually do. Well, rather than flooding the charity with a bigger gift than normal – for example if you normally give 10, and this year you’re going to give 50 – you could put in 50K out of any of your assets. And then over the next five years, you can have it spread out and sent out to each charity at the timing and pace you want. So you have a little bit more control over how it gets to get to these charities. 
  • You can also “give” real estate. Let’s say that you have a building and it has appreciated in value. You can give a portion of your building to a DAF and it gets converted into monies that you can then give out, which is pretty crazy to think about and really cool that it’s actually possible. 
  • One of the other advantages, and the reason why I use it personally is, yes, to give stock. But then the other reason is just setting it up on autopilot where every month or year, I can set up an amount that goes to each charity, and then I can let it go. And at the end of the year, I don’t get three receipts or however many charities you give to. You just get one from your donor-advised fund. 

So that’s a simple example of what a donor-advised fund is, as well as some of the benefits. 

Other institutions that have options for donor-advised funds:

  • Vanguard
  • Fidelity
  • Schwab
  • American Endowment Foundation
  • National Christian Foundation
  • Charityvest, a no-fee donor-advised fund

If you’ve got questions about donor-advised funds, you can either give us a call or click here to schedule a time to talk.

Social Security Changes’ Impact on Retirement Plans

We just found out that Social Security benefits are going up 1.3% in 2021. In this post, I want to talk about three things:

1) What does this mean for people receiving Social Security in 2021? Is it really 1.3%?

2) If I’m planning for retirement, what Social Security increases should I assume every year?

3) We’re going to look at a case study, an example, of using historical averages for what Social Security will go up in our retirement simulations.

Whether you’re retired or you’re 10 years out from retirement, Social Security is one of your biggest assets. So keeping up to date with how it works is really important to your financial plan.

According to the Social Security Fact Sheet on ssa.gov, Social Security income beneficiaries will receive a 1.3% COLA – not a soft drink, but a cost-of-living adjustment – in 2021. So, it’s a pay raise. 

The average person receives about $1,500 a month in Social Security benefits. A 1.3% increase means about a $20-a-month increase. So, that’s good; now I can upgrade my Netflix subscription from Premium to Ultra. But here’s the thing: when Social Security goes up, and we’ve seen this time and time again in helping families plan for retirement, your Medicare premium goes up as well.

Now, we don’t know how much Medicare’s going to go up next year. For Medicare Part B, back in April, the Medicare trustee report said they think benefits are going to go up by $8 a month per person. So you hit that $8 and all of a sudden that’s taking away from your 1.3% COLA. I would say the net effect of Medicare and Social Security together is actually only a 0.8% increase.

Why is this important?

If you’re planning ahead and you’re running retirement scenarios, which you should do, it’s important to know what growth rate to assume for Social Security in the future. So, my first thought was to take a look at history because we can use history as a guide, though not a guarantee, as far as what Social Security will do in the future.

I looked all over the internet for a historical average of Social Security COLAs and I couldn’t find one, so I made one. And since 1975, when the cost of living adjustment law came into effect, we’ve been keeping track of those averages. That average comes out to 3.6%.

You could be a little conservative and estimate Social Security will go up 3% a year. Well, this year has historically low interest rates and we have a historically low Social Security COLA.

Should we use 3%, even though that’s a conservative number moving forward? I’m going to show you a case study that says, I’m not sure if we should.

I’ve got this family here: Stan and Joanna. They’re about 10 years out from their retirement age of 65, they have three kids, and their net worth is right around $2 million. Right now they make $350,000 of combined-growth income, and they’re projected to receive about $50,000 a year in Social Security when they retire.

Let’s look at Stan first, and assume his benefit is going to grow 3% per year until retirement. Currently, they have about $10,000 in monthly expenses plus their mortgage, which is pretty big. And then in retirement, they think they’ll have about $100,000 a year in expenses.

In looking at their long-term financial plan, all of these expenses and income and investments are being factored into the picture which you can see in the video. And the picture looks good based on a 3% cost-of-living adjustment on their Social Security.

You can even run a test and determine what is the percentage chance that you’ll need to make an adjustment during the next 30 or 40 years into retirement? And based on this scenario, the chance of needing to make an adjustment is only 3% because it’s a 97% success rate.

However, what happens if we change this to Social Security with no COLA, which is 0% (because this year it’s really close to zero). When running scenarios, should we use historical averages? Or should we go with Medicare and Social Security moving in tandem with one another – as the benefit from one goes up, the cost from the other goes up – so this might be the safer way to go. In this case, the long-term plan goes from a 97% success rate down to 74%.

In this scenario, there’s a 1 in 4 chance I’ll need to make a big adjustment between now and retirement, or maybe even in retirement, meaning:

  • I need to work longer, or
  • lower my expenses in retirement, or
  • save more now.

These are all doable things, but this shows you that the change in value of their net worth over time was 2.7 million upon assuming 0% versus 3%.

So, again, if you’re planning for retirement, knowing what Social Security’s impact is on your situation is huge for a lot of Americans.

If you have any questions on this, feel free to reach out to us. Or talk to your financial planner and ask how they are assuming Social Security is going to grow over the next 20 or 30 years and maybe assume zero, just to be safe.