Tax Efficient Investing – Potential Alpha?

David E. Hultstrom, MBA, CFP

Outline

1. Portfolio Turnover2. Asset Location3. Products

Portfolio Turnover• Good vs. Bad Turnover• Example:

– 10% return, 20 year horizon, 15% capital gain bracket, ALL gains long term

– 100% turnover = 8.50% net return– 50% turnover = 8.60% net return– 10% turnover = 8.95% net return

• Step-up on death

Asset Location• Example:

– 60/40 allocation, 50/50 deferred/taxable– Stocks – 10% return, 10% turnover– Bonds – 4% return– Taxes – 15% CG vs. 35% OI– 20 year horizon, annual rebalancing– Bad allocation = 6.44% net return– Naïve allocation = 6.89% net return– Optimal allocation = 7.36% net return

Products – Permanent Life Insurance

• Permanent Life Insurance ONLY:– After maximizing tax advantaged

options AND

– If long-term (>20-year) need OR– If GUARANTEED to NEVER need the

$AND

– If good pricing

Products – Variable Annuities

• Almost NEVER – Example:– 65 bps marginal cost (Vanguard)– 10% return, 100% turnover! (but LT)– Taxes – 15% CG vs. 25% OI– Breakeven – 36 years– @ 10% turnover – >100 years– @ 35% OI – 63 years– Annuities INCREASE standard deviation– Death is TERRIBLE

Products – Miscellaneous

• Deductible IRA v. Roth IRA• Index funds & ETFs• Core & Satellite approaches• Fee & Commission efficiency

David Hultstrom, MBA, CFP Financial Architects, LLC

804-795-5500 DEH@FinancialArchitectsLLC.c

om

www.FinancialArchitectsLLC.com

Contact Information