Tag Archives: kids

Bonds Are Dead…Again?

Not trying to be a wet blanket here, but c’mon. Again? 

Maybe the line I’m walkin’ needs to be crossed. Too early to say. The pros in this business who believe the 10-year Treasury yield must breach 4% are piling on to one side of the boat.

The contrarian in me along with several data points compel me to maintain a preference to remain on the lonely side of the ship.

Most likely what you’re witnessing is a peak in intermediate and long-term interest rates, not the start of something big.

I share several reasons for my logic.

Most important, do not, I mean do not, get swayed by talking financial heads who warn that stocks will be the big winner when rates rise and bonds the loser. Simply, if rates rise too rapidly anywhere along the yield curve, stock prices will fall off a cliff while bond prices will slowly roll down a hill.

Why have rates possibly hit their zenith?

Consider the over-indebtedness of governments, corporations (corporate debt now stands at 45% of GDP), households, inflation as measured by the Dallas Fed’s Trimmed Mean PCE right at 2% – in union with the Fed’s nebulous target, and the ominous danger signs coming from housing – a leader of economic activity & forefront in a consumer’s “feel good” sensors of the psyche. Quite frankly, the economy just cannot handle rates much higher from here.

Recently, growth in the Economic Cycle Research Institute’s U.S. Leading Home Price Index turned in its worst reading since 2009. ECRI’s Index was spot on nailing the early stirs of the housing crisis in 2006.

According to ECRI’s head honcho Lakshman Achuthan, home price growth is set to fall in a sustained cyclical downturn.

Let’s not forget demographics. The U.S. population is aging which puts a lid on how high inflation-adjusted interest rates can go. If anything, there’s a point where older investors will seek to trim their stocks to capture juicer income yields from bonds.

Per research by the Federal Reserve Bank Of San Francisco:

  •  Changing demographics can affect the natural real rate of interest, r-star; the inflation-adjusted interest rate that is consistent with steady inflation at the Fed’s target and the economy growing at its potential. Demographic trends affect the equilibrium rate by changing incentives to save and consume. Lengthier retirement periods may raise some households’ desire to save rather than consume, lowering r-star. At the same time, declining population growth increases the share of older households in the economy, who generally have higher marginal propensities to consume, raising consumption and r-star.
  • As population growth declines, it could also reduce real GDP growth and productivity, thereby putting downward pressure on r-star.

Investors lament – “My bonds are losing money!” Wait: Are they? Not so simple.

First, bonds may have lost their mojo as far as price appreciation. I’ll concede that point. However, they’re far from dead. Generally, the income and diversification from high-quality and Treasury bonds act as buffers to portfolio volatility, especially through periods of significant corrections or bear markets in stocks.

Second, dig deeper into what appear to be capital losses on bonds. If you own almost any type of fixed income investment whether a mutual fund or individual bond, you’re witnessing negative numbers (losses in brackets), or online – a sea of red. Don’t panic. Don’t assume you’re losing money. Dig deeper.

If you own a bond and seeking to hold to maturity, ignore the paper losses. Unless planning to sell before maturity, a return of principal is in your future. Consider the return on the bond the yield or income being paid on the investment.

Last, if you own a bond mutual fund like most of us do in our company retirement plans, you’re going to need to play Columbo, or detective when it comes to isolating investing reality from observed losses. Recently, a friend of mine reached out. He was stressed that he “lost” $3,000 on his bond fund so far this year according to the information retrieved from his company’s retirement plan portal.

I helped him break it down.

Yes, he indeed was down $3,000. His investment of roughly $53,000 in the bond fund began the year at approximately $56,000.

When digging in and isolating his original investments vs. monthly income generated (and reinvested back into the fund), we discovered $41,000 was the sum of hard-earned money he placed in the fund, $13,000 was income and appreciation. So, on the surface, was $3,000 a reduction in the overall balance in the fund? Yes. Was he losing principal at this juncture? No.

Also, keep in mind, as bond mutual fund prices fall, yields should increase. As bonds mature, a portfolio manager should be investing new dollars in higher-yielding bonds or swapping into bonds with more attractive yields.

As my buddy is convinced rates “must go higher because the news tells him so,” I had him exchange into a fund with less interest rate sensitivity.

For investors like him who remain concerned about an increase in rates, a chance to control interest risk by shortening duration (think ultra-short or short-term bond funds), is at hand. If yields retrace and bond prices commensurately increase, it should provide a window of opportunity to swap longer duration positions with shorter duration alternatives.

Or, ask your broker for the latest rates on certificates of deposit. It’s like a candy store for conservative investors or savers out there. Yes, your broker should have access to CDs from major financial institutions, so no need to spend lots of time shopping around. For example, I discovered one-year CDs paying 2.3%, 2.8% for two years. At the end of the terms, principal is returned. These vehicles are FDIC-insured and pay interest monthly, semi-annually, or at maturity.

Bonds aren’t dead. Bonds are an important part of your portfolio. At 34X earnings for stocks, the last action a rational investor should take here is to dramatically reduce bond exposure to purchase stocks.

If you’re an investor with a primal brain who gets frustrated by investment account balances from month to month, doesn’t see progress, believes you’re missing out on the stock party and makes changes without regard to risk attitude, the current breakdown in housing and other cyclical stocks and current valuations, then frankly, you deserve what’s coming to you.

And it’s not going to be pretty.

3-Steps To A Successful Open Enrollment – Part 2

In Part 1,  I sought to help RIA readers understand the importance of selecting and rethinking a healthcare employer benefits option that should serve more as a “healthcare-in-retirement” account.

A Health Savings Account provides triple tax-free benefits; a unique feature that makes maximum annual funding to subsidize rising health-care costs in retirement, a no-brainer. Non-catastrophic current healthcare expenditures should be accounted for in a household budget, thus allowing the HSA to accumulate over time.

I reviewed the importance of taking advantage of employer-based long-term disability coverage; there’s a greater chance of becoming disabled than dying. To ignore this option is clearly reckless financial behavior.

Flexible Spending Accounts may be available for dependents and are ‘use it or lose it’ in nature.

Part 2 covers additional benefits. The following choices are not perfect. For most households, additional coverage will be required.

Life insurance:

It’s customary for employers to offer one-time annual salary life insurance as a freebie. AD&D or accidental death & dismemberment coverage as an add-on to traditional life insurance coverage may also be paid 100% by an employer. AD&D may cover death or the loss of a limb, eyesight, speech or hearing due to an accident.

I’m shocked by how many workers, especially those with dependents, who take the bare minimum when it comes to life insurance. Employers generally offer supplemental life insurance up to four times annual salary inexpensively with evidence of insurability. To determine how much life insurance is required for your personal circumstances utilize the life insurance calculator available at www.lifehappens.org. Better yet, establish a meeting with your financial partner to determine what your family requires.

Life insurance decisions must not be made in a vacuum. For example, I find that employees who do a commendable job purchasing life insurance for themselves, fail to consider the financial impact to a household at the loss of dependent spouses. Some policies offer dependent life insurance however, it’s generally inadequate to cover dependent spouses who remain home with children; it may be considered partial coverage at best.

According to Salary.com in their 19th annual Mom Salary Survey, a stay-at-home mother commands annual compensation of $162,581, up nearly $5,000 from 2017. For couples with young children who do not have the financial resources to hire a live-in caregiver, additional life insurance coverage will be mandatory to mitigate the risk of losing a dependent spouse for as long as children require assistance.

The greatest disadvantage of employer-provided life insurance and long-term disability options is lack of portability. In other words, lose your job, lose your coverage. Do not be lulled into complacency because life insurance is offered by your employer unless you’re in a rare career situation where job security exists. At Clarity, we assist workers to assess their insurance needs through holistic financial planning and suggest additional life insurance to compliment benefits offered by employers.

Retirement plan review time:

It’s possible your company retirement plan falls short – no match, limited choices, but it is what it is.

Open enrollment doesn’t necessarily include deadline decisions about an employer-provided retirement plan. However, take 30-40 additional minutes to review your investment mix, fund selections and current contribution rate.

Side note: According to MetLife’s 2018 Employee Benefit Trends Study, 70% of employees would be interested in converting sum or all of their retirement savings into lifetime income. Most employers offer defined contribution plans such as 401k plans.

In the good old days, in the ancient times of pensions (first time I heard the word ‘pension’ was during a rerun of an episode of The Little Rascals from the mid-1930s), the employer solely bore the risk of saving and investing for a worker’s retirement. In other words, you were provided an income for life in retirement as an employee of the organization for a specific period of time.

Bluntly, as shareholder greed and technology made workers less of an asset and more of a liability, the responsibility of saving for retirement was placed one-hundred percent on the shoulders of the employee.

In a 401(k) you, the employee, takes on high fees, limited investment selections and the risk of possible devastating stock losses, especially if over-allocated to company stock. A common pitfall is to ignore asset allocation and allow the stock portion of a portfolio to deviate dramatically from the emotional capacity to stomach volatility.

Tread carefully with target date mutual funds.  

In 2007, the Department of Labor placed a stamp of approval on target-date fund choices in 401(k) plans so plan providers have been quick to embrace them.

A target date fund is a mix of asset classes – large, small, international company stocks and fixed income that is adjusted over time or allocated conservatively the closer an employee is to the ‘target date’ identified.

For example, the Vanguard Target Retirement 2020 Fund is designed to increase its exposure to bonds the closer it gets to 2020. Let’s be clear – this is NOT a maturity date, which is part of the confusion of a target-date fund. The target never gets reached. The fund doesn’t go away. It’s always out there.

Also, as a rational human, in 2020, the so-called retirement or target year, wouldn’t you intuitively think this fund should be a conservative allocation? Perhaps 30% equities and 70% fixed income? Well, it all depends on a target date fund’s ‘glide path,’ or method of how the allocation is reshuffled the closer the time to the target date. Every fund group differs in philosophy, so you must read the fine print.

For example, the Vanguard Fund takes seven years AFTER 2020 to shift from a 60/40 stock & bond allocation to a 30/70 bond & stock mix. In reality, this is a 2027 fund.

Target date funds are not the best, but suitable choices as most 401(k) participants treat their plans like pensions. In other words, they deposit money into them, ignore allocations and wish for the best. Once money is placed into 401(k) plans it seems to fall into a psychological dark hole and rarely monitored or rebalanced. At least target date funds allocate and rebalance on autopilot (employees don’t need to do anything).

A growing, positive trend – Workplace wellness plans:

According to the Kaiser Family Foundation’s Employer Health Benefits Survey for 2017, 58% of small businesses and 85% of large companies offer health and wellness promotion plans which include smoking cessation, weight management, behavioral and lifestyle coaching. It would be shortsighted to ignore enrollment in these programs. Why?

Per Kaiser:

“Fifty-two percent of large firms with a health risk assessment program offer an incentive to encourage workers to complete the assessment. Among large firms with an incentive, the incentives include: gift cards, merchandise or similar incentives (50% of firms); requiring a completed health risk assessment to be eligible for other wellness incentives (46% of firms); lower premium contributions or cost sharing (46% of firms); and financial rewards such as cash, contributions to health-related savings accounts, or avoiding a payroll fee (40% of firms).”

Keep in mind, most wellness programs are offered throughout the year. However, many employees seem to focus on them on a limited basis or during open enrollment in November.

As I mention often, an employer’s benefits program is the first line of defense against financial vulnerability.

If you require an objective assessment of your employer’s benefits package and how to maximize options, do not hesitate to reach out to us here.

3-Steps To A Successful Open Enrollment – Part 1

It’s almost that time again.

Another year, another window of opportunity to select employer benefits options for the upcoming new year.

How do American workers feel about open enrollment season?

According to the latest Aflac Workforces Report, 67% of the 5,000 employees who participated in the study described benefit enrollment as complicated, long or stressful.

Amazingly, 83% of respondents spend less than hour researching available options; 20% do no research at all. An overwhelming 92% are on enrollment auto-pilot, simply choosing the same benefits year after year.

Employees tend to minimize the importance of employer-provided benefits; they rush through the process to ‘get it over with,’ instead of taking time to seek professional advice, whether from a financial planning partner or in-house human resource staff. Thankfully, over the years I’ve been able to assist workers with making the most of their benefits options.

The goal is to perceive open enrollment period as an annual window of opportunity to save money (Aflac found that 55% of workers waste up to $750 by making mistakes during open enrollment), minimize the financial impact of potential catastrophic risk and explore new options especially as employers increasingly shift the burden of rising healthcare insurance costs to employees.

Remember: Your first line of defense against financial fragility is the benefits offered to you by your employer.

November is customarily enrollment month. Before you submit your selections for 2019, take into consideration the following three money-savvy steps:

Embrace a high-deductible health insurance option.

Most likely, your employer has or will offer a high-deductible plan coupled with a Health Savings Account. A high-deductible healthcare plan is defined by the IRS as one with a deductible of at least $1,350 for an individual, $2,700 for a family. A HDHP limits total annual out-of-pocket expenses to $6,650 for an individual and $13,300 for families.

Based on data from the National Health Interview Survey which is conducted by the National Center for Health Statistics, enrollment in high-deductible health plans along with Health Savings Accounts increases with education and income level. Highly educated and affluent adults are more likely to enroll in high-deductible plans with an HSA and less likely to enroll in traditional healthcare plans. Per the long-term financial benefits of HSAs, this statistic makes perfect sense to me.

Unfortunately, future costs of healthcare including that of employer-provided coverage will continue to increase as a result of health insurer losses due to the Affordable Care Act. A growing number of companies are adding high-deductible plans along with health savings account options that need to be considered this enrollment season. This isn’t a trend that’s going away; it’s inevitable, you’ll have a high-deductible plan option if not now, then in the future.

A Health Savings Accounts is a powerful savings vehicle that allows triple tax benefits. Contributions are tax deductible, and if an employee, they’re funded pre-tax from payroll contributions. Growth or income is tax-free (yes, you should have mutual fund investment selections like in a company retirement plan.) Finally – distributions for qualified medical expenses are tax free.

HSA contribution limits (employer and employee total), for 2019 are $3,500 for a single filer, $7,000 for a family. Those over 55 may contribute an additional $1,000 as a ‘catch-up’ contribution.

If you only see a doctor once or twice a year, it may be beneficial to switch to your employer’s high-deductible plan offer with employer match (hopefully available) and save as much as possible in a Health Savings Account.

If you don’t have a high-deductible with HSA option yet, it’s coming. Over time, your employer is going to shift the burden of healthcare premium costs to you, the employee.

Think of a HSA as healthcare retirement plan. It’s not a ‘use or lose it’ account, either like a Flexible Spending Account. In other words, in a HSA, you can stockpile money, allocate across investments, usually mutual funds, allow the money to grow tax-deferred, then withdraw at retirement to subsidize rising healthcare costs or even pay Medicare premiums.

For a couple retiring in 2019, lifetime healthcare costs are estimated to be $280,000 based on Fidelity’s latest report. A third of the expenditures will be Medicare Part B premiums. In my opinion, healthcare costs are difficult to assess but one thing is certain – the healthcare cost burden is rising.

A study published in the Journal of The American Heart Association outlines that making time for exercise pays off. Literally. Researchers discovered how walking 30 minutes five days a week can save people $2,500 a year. A positive, monetary outcome of reduced medical expenditures.

There are documented benefits of fully funding a HSA as a priority. Even over a company retirement account as HSA benefits may be pre-tax, grow tax-deferred, and withdrawn tax free. A strong combination that does not exist in other savings and investment vehicles.

At Clarity, we advise workers to prioritize HSA contributions over retirement plan contributions, especially when employer 401k matches aren’t provided. According to healthcare account investment expert Devenir, an increasing number of employers are contributing to their workers’ HSAs. Per the Devenir Midyear HSA Research Report, nearly 32% of all HSA dollars contributed to an account came from an employer with the average contribution at $658.

This is going to sound counterintuitive, however, consider paying out-of-pocket health insurance deductibles and as many medical expenses as possible with after-tax dollars thus leaving savings in an HSA to accumulate long-term for medical, dental (Medicare doesn’t cover dental FYI), and vision treatments in retirement. Health Savings Account dollars may be allocated across mutual funds; accounts can’t be lost in the case of job loss and transportable to another HSA custodian or rolled over to a new HSA provider every 12 months.

Thoroughly understand your Flexible Spending Account options.

For comparison purposes, consider FSAs the ‘smaller sibling’ to the HSA. A Flexible Spending Account or FSA permits the accumulation of pre-tax dollars (although not to the extent allowed in HSAs) and allows tax-free distributions for healthcare, dental or vision expenses.

Unlike an HSA, FSA balances must be used by December 31 every year. Now, an employer may allow a grace period or carry over of $500 for 2 ½ months into a new year, however the general mandate is use it or lose it by the end of the calendar year. October is a good month to assess healthcare spending for the new year as to not overcontribute. Currently, an employee may sock away $2,650 annually that may be used for an individual or family.

Generally, employees are not offered both a HSA and FSA. Employers may compliment a HSA with a limited-purpose FSA, a type of Flexible Spending Account which allows tax-free withdrawals based on specific types of healthcare expenses like dental and vision.

A dependent care FSA is a pre-tax account that may be used to pay or reimburse for services such as child day or dependent adult care services. Employees eligible to claim disabled family members, elderly parents and children for tax purposes, can take advantage of this employer-offered benefit.

The current maximum contribution is $5,000 a year per household. With average national in-center child care costs running $9,589 annually according to Care.com, the ability to cover more than half these expenses tax free is a tremendous advantage.

What about employer long-term disability coverage?

Statistics outline that one out of four workers will become disabled before they retire.

Long-term disability insurance provides a level of income protection during extended periods if sidelined from working, especially at an employee’s own occupation. It’s one of the most inexpensive, comprehensive benefits employers provide yet I find many forgo signing up as they believe a long-term disability will never occur or healthcare insurance takes higher priority in the family budget. I observe this behavior especially with Millennial employees who ironically, haven’t yet built the financial stability necessary to withstand a long-term disability.

Without long-term disability coverage, a household is going to need to prepare to shoulder the financial burden of making up a gap in household cash flow for as long as a long-term disability exists. Or until the wage earner can return to his or her own occupation or at the least, any occupation, depending on how severe the disability may be. In some cases, LTD insurance payouts will last until the insured reaches age 65. On average, a long-term disability lasts two years.

Employer long-term disability generally offers varying levels of coverage, from a minimum of 20% of monthly salary, to the maximum which is closer to 65%. Keep in mind, these benefits if paid with after-tax dollars, would be paid received tax free, so receiving 60% of income isn’t as austere as believed.

At Clarity, we advise every employee to take advantage of maximum coverage. No excuses. Unless you have a decade’s worth of emergency cash for living expenses or invested enough for large expenses like a child’s college education, it isn’t worth passing on coverage.

In Part 2, I’ll review several of the lesser-known employer benefits workers should consider for 2019.

8-Steps To Fiscal Fitness

Autumn is the period of transition from summer to winter; a time of harvest.

Use the season to breathe fresh perspective into your finances and prepare for a prosperous 2019.

Here are the 8-steps to fiscal fitness.

#1: A thorough portfolio review with an objective financial partner is timely.

Most likely your long-term asset allocation or the mix of stocks, bonds and cash you maintain or add to on a regular basis, has been ignored. With most of the major stock indices almost at new highs, it’s possible your personal allocation to stocks has grown disconnected from your tolerance for risk.

Consider complacency the emotional foible du jour. After all, it appears easy to ride out an aggressive allocation at present since every market dip appears to be an opportunity to buy. With volatility in September as measured by the VIX, so far subdued, investors are growing increasingly overconfident in future market gains.

A financial professional, preferably a fiduciary, can help make sense of how the risk profile of your portfolio has changed, provide input on how to rebalance or sell back to targets, and ground your allocation for what could be a different 2019.

#2: Sell your weak links (losers), trim winners.

Tax harvesting where stock losses are realized (you may always purchase the position back in 31 days,) and taking profits taken from winners is the ultimate cool fall-harvest portfolio moves. Going against the grain when the herd is chasing performance takes intestinal fortitude and an investment acumen with a more appetizing scent than pumpkin spice!

Candidly, tax-harvesting isn’t such a benefit if you examine its effects on overall portfolio performance. However, the action of disposing of dead weight is emotionally empowering and if gains from trimming winners can offset them, then even better.

Per financial planning thought-leader Michael Kitces in a thorough analysis, the economic benefit of tax-loss harvesting is best through tax-bracket arbitrage with the most favorable scenario being harvesting a short-term loss and offsetting with a short-term gain (which would usually be taxed at ordinary income rates).

#3: Fire your stodgy brick & mortar bank.

Let’s face it: Brick & mortar banks are financial dinosaurs. Consider how many occasions you’ve seen the interior of a bank branch. Unfortunately, banks are not in a hurry to increase rates on conservative vehicles like certificates of deposit, savings accounts and money market funds even though the Federal Reserve appears anxious to step up their rate-hike agenda.

Virtual banks like www.synchronybank.com, provide FDIC insurance, don’t charge service fees and offer savings rates well above the national average.

Accounts are easy to establish online and electronically link to your existing saving or checking accounts.

#4: Get an insurance checkup.

It’s possible that weakness exists in your insurance coverage and gaps can mean unwelcomed surprises and consequences for you and the financial health of loved ones.

Risk mitigation and transferring risk through insurance is a crucial element to reduce what I call “financial fragility,” where a life-changing event not properly prepared for creates an overall failure of households to survive financially.

As I regularly review comprehensive financial plans, I discover common insurance pitfalls which include not enough life insurance, especially for stay-at-home parents who provide invaluable service raising children, underinsurance of income in the event of long-term disability, overpaying for home and auto coverage and for high-net worth individuals, a lack of or deficient umbrella liability coverage to help protect against major claims and lawsuits. Renter’s insurance appears to be a second thought if it all however, it must be considered to protect possessions.

You can download an insurance checkup document from www.consumer-action.org. It’s a valuable overview and comprehensive education of types of insurance coverage.

Set a meeting this quarter with your insurance professional or a Certified Financial Planner who has extensive knowledge of how insurance fits into your holistic financial situation.

#5: Don’t overlook the value of your employer’s open enrollment period.

Usually in November, you have an opportunity to adjust or add to benefits and insurance coverage provided or subsidized by your employer. The biggest change (shock, surprise), may pertain to future healthcare insurance benefits.

The number of employers moving to high-deductible health care plans for their employees increases every year. In addition, overall, individuals and families are shouldering a greater portion of health care costs, including premiums every year.

According to a survey of 600 U.S. companies by Willis Towers Watsons, a major benefits consultant, nearly half of employers will implement high-deductible health plans coupled with Health Savings Accounts.

Health Savings Accounts allow individuals and families to make (and employers to match) tax-deductible contributions up to $3,500 and $7,000, respectively for 2019. Those 55 and older are allowed an additional $1,000 in “catch-up” contributions.

Money invested in a HSA appreciates tax free and is free of taxation if withdrawn and used for qualified medical expenses. Like a company retirement account, a HSA should have several investment options in the form of mutual funds from stock to bond.

Although Health Savings Accounts provide tax advantages, as an employee you’re now responsible for a larger portion of out-of-pocket costs including meeting much higher insurance deductibles. If you think about it, your comprehensive healthcare benefit has morphed into catastrophic coverage.

No longer can employees afford to visit the doctor for any ailment or it’s going to take a bite out of a household’s cash flow at least until the mountain of a deductible is met.

Want to make smarter choices during open enrollment season? Check out my post next week – “5 Smart Steps to Successful Open Enrollment,” for guidance.

#6: Check beneficiary designations on all retirement accounts and insurance policies.

It’s a common mishap to forget to add or change primary and contingent beneficiaries. It’s an easily avoidable mistake. Several states like Texas have formal Family Codes which prevent former spouses from receiving proceeds of life insurance policies post-divorce (just in case beneficiaries were not changed), with few exceptions.

Proper beneficiary designations allow non-probate assets to easily transfer to intended parties. Not naming a beneficiary or lack of updating may derail an estate plan as wishes outlined in wills and trusts may be superseded by designations.

#7: Shop for a credit card that better suits your needs.

Listen, it’s perfectly acceptable to utilize credit cards to gain travel points or cash back as long as balances are paid in full every month; so why not find the card that best suits your spending habits and lifestyle?

For example, at www.nerdwallet.com, you can check out the best cash-back credit cards.

For those who carry credit card balances and unfortunately, it’s all too common, consider contacting your credit card issue to negotiate a lower, perhaps a balance transfer rate or threaten to take your business (and your balance), elsewhere. Keep in mind, on average an American family maintains more than $8,300 in credit card debt and the national average annual percentage rate is a whopping 19.05%!

8#: Prepare for an increase to your contribution rate to retirement accounts and emergency cash reserves.

Start 2019 on the right financial foot by increasing payroll deferrals to your company retirement accounts and bolstering emergency cash reserves. Consider a formidable step, an overall 5% boost and prepare your 2019 household budget now to handle the increase.

You can’t do it? Think again. As the seasons change so can your habits.

The fall is a time to shed the old and prepare for the new.

When it comes to money, we can all learn from the power, beauty and resiliency of Mother Nature.

Use the season to gain a fresh perspective and improve your financial health.

What Your Financial Wikipedia Says About You

The longer one lives, the mustier the memories. I often ponder the past; it makes me sad how as years go on, personal events regardless of pain or pleasure, dissolve into fine mist and disappear into a black hole of time. I long to remember all the great things I’ve forgotten!

A couple of childhood memories stand out. Before I share, keep in mind, I was a boy. I was also a nerd, an inveterate reader. Books were and remain, a personal passion. Every year the Scholastic book fair made the rounds to my elementary school. Every year, I tested my parents’ patience, especially my father’s as I requested on occasion to purchase two of the same paperback books.

A permanent crease to a cover or the bookmark of a page disturbed was unnerving; it was easier to purchase one book for reading, another as backup to remain untouched. I realize it must have been some light form of OCD or other obsessive behavior. Still in my possession is a pristine copy of a book titled Horse Stories, filled with short stories of equine heroics. Thick and glossy baby-blue pages stand out as different from most 70’s paperbacks.

As an adult, my connection with books has dramatically changed. It’s a lot messier. Today, I highlight, underline, bookmark. Even aged books about Wall Street, original editions from the early 1900s aren’t spared my wrath. The more I annotate, the more I absorb. A well-creased book is the aftermath of worthy toil. Lance forbids me to borrow from his collection because he knows what I’ll do. Perhaps he has a touch of OCD, too?

I couldn’t wait for the latest edition of The World Almanac® and Book of Facts to hit the racks of the local convenience store. Yes, in the 70s, most “mom & pop” retail establishments including pharmacies and candy/soda shops, maintained deep inventories of latest paperbacks and magazines.

The anticipation as I walked from the front door to the middle of the store where books and magazines were displayed on long, multi-shelved metal shelves, grew palpable, especially if it were early in the year and the latest Almanac was available. The tome was so thick, two hands were required to grasp it.

I was fascinated by movie and television personalities, especially those from the 30s and 40s; if they were still alive and if gone, where they were interred. The World Almanac was a great source of information about them along with offbeat news stories I missed throughout the prior year. Amazingly, The World Almanac is celebrating its 150th anniversary edition and available for purchase at www.worldalmanac.com.

I was a news and world-facts junkie from age 10 to forever. So much so, an orange Radio Shack AM radio was secured to my lime-green Schwinn’s handlebars, so I’d never miss New York talk radio.

I loved my encyclopedia editions, too. Who remembers them? My personal 20+ volumes of 1974’s World Book Encyclopedia cost my parents a small fortune. Today, we have Wikipedia although I’m reasonably certain inaccuracies abound. Regardless, I find myself checking the world’s online encyclopedia. My investigations are disparate and at times, unusual. From less publicized Civil War battles to the backgrounds of 70s television detectives, I find that Wikipedia is a go-to source.

Recently, I checked out the career of actor & producer William Conrad. I was surprisingly amazed by his accomplishments. For those too young to remember, William Conrad, a rather rotund fellow with a deep baritone voice and face that resembled a pug, was a diversified talent. From voiceover work to production of iconic television series, Mr. Conrad was an inveterate Hollywood power player. Who knew? All I remember as a private detective in the 70’s detective television series “Cannon,” Bill Conrad possessed the uncanny ability to nab a fleeing criminal half his size and age and catch up with him on foot even though the perpetrator had at least a two city-block head start.

Wikipedia has a penchant to shine light on interesting, and occasionally unpopular information about a subject. So, when it comes to personal finances, what would Wikipedia contributors mention about you?  What are the habits or accomplishments you’d be proud for the world to read? What financial episodes would make you cringe to have divulged to the masses?

Here are a few initiatives that would deem you a financial Wikipedia superstar:

He maximized lifetime income options and ignored the temptation to take Social Security at 62.

Do not underestimate the lifetime income that Social Security can provide. After generating hundreds of Social Security benefits payout scenarios it’s rare I recommend future recipients claim benefits before age 70 especially if I must consider survivor benefits for a younger, lower-earning spouse

According to a The Nationwide Retirement Institute® Consumer Social Security PR Study conducted by Harris Poll, it’s not surprising to discover than ½ of a retiree’s fixed expenses are covered by Social Security benefits.

Per the study, surprisingly few retirees have a financial advisor who provides advice on Social Security strategies. The total incidence of having a financial advisor who provided Social Security advice was a dismal 11%.

A 2015 study by the Consumer Financial Protection Bureau indicates that more than 2 million consumers choose when to begin collecting Social Security retirement benefits. Many make the decision based on limited or incorrect information.

Of those given Social Security advice by their advisors, roughly half or more had to initiate the discussion themselves.

Now with pensions all but gone, Social Security is the only guaranteed monthly income for roughly 69% of older Americans.

Unfortunately, in 2013, 75% of retirees chose to start collecting before full retirement age which results in a permanent reduction in lifetime benefits. This may be a very shortsighted decision.

As Wade Pfau, Ph.D., CFA and professor at the American College outlines in the 2nd edition of his Retirement Researcher’s Guide to Reverse Mortgages:

“Delaying Social Security is a form of insurance that helps to support the increasing costs associated with living a long life. It provides inflation-adjusted lifetime benefits for a retiree and surviving spouse, and those lifetime benefits will be 76 percent larger in inflation-adjusted terms for those who claim at seventy instead of sixty-two.”

According to Social Security expert Elaine Floyd, ignorance is the primary reason. The CFPB report outlines studies that represent how much people don’t know about claiming. One study for example outlined that only 12% of pre-retirees knew how benefits differed if benefits were claimed before, at, or after full retirement age.

He worked longer which exponentially increased the probability of wealth lasting through retirement.

In a recent National Bureau of Economic Research working paper, “The Power of Working Longer,” the research corroborates what tenured financial planners understood all along – remaining in the workforce longer greatly increases the probability of retirement plan success. However, the results of the study are surprising, even for professionals who have created countless financial plans and validated the financial benefits of working longer.

The authors discovered that working longer is more powerful than increasing saving for most people, especially if the primary wage earner defers the start of Social Security and takes advantage of delayed retirement credits which result in an annual 8% increase in income benefits up until age 70.

The research outlines that for many retirees, Social Security comprises 81% of sustainable retirement income. Therefore, increasing contributions to 401ks for example, (which makes up the remaining portion of sustainable income), is helpful, but pales in comparison to remaining in the workforce. What’s shocking about the findings is that only 3 months of additional work generates the same increase in retirement income as 30 years of saving an additional one percentage points of earnings.

He didn’t give a second thought to financial headline candy that espoused new highs for stocks or celebrate the length of bull markets.

After all, a blended portfolio of stocks, bonds and cash, is never going to participate fully in the reverence. However, the same portfolio shouldn’t bear the brunt of the downside, either. I know it seems improbable, but bear markets do arise.

Markets move in long-term secular trends, or cycles. Per analysis by Doug Short at www.dshort.com, secular bull market years total 80 vs. 52 for the bears, which is a 60/40 ratio. Most investors believe the ratio is closer to 80/20. A falsehood, a story perpetuated overwhelmingly by financial media outlets.

An astute investor should seek to partner with a Certified Financial Planner® fiduciary to create a personal rate of return. This rate is derived from asset class future return estimates, an allocation based on the results of a behavioral risk diagnostic, current household savings rate and inflation expectations that is compiled as a benchmark to assess progress towards financial goals.

In other words, beating a stock index is not an aspiration one can afford for long since the math of loss and time it requires to break even must be considered when bear markets hit. For example, if you require a 3% rate of return to meet your objectives, why take on more risk than necessary? Especially when stock valuations as measured by the Shiller PE ratio now stand at a rich 33.48X.

Keep in mind, markets are infinite. To Wall Street, it doesn’t matter how many years it takes to recover from corrections or bear markets. It’s a celebration! You however, are human and finite; there’s limited time available to rebuild lost wealth.

Per the FacTank at the Pew Research Center, ten years later, the only generation to recover wealth lost after the housing crash is Generation X. In the span of a human life, a decade is substantial. For markets, it’s an irrelevant speed bump. A blip in time. It’s important to keep this perspective.

Per the work of Gregory L. Morris, in his extensive tome “Investing with the Trend: A Rules-based Approach to Money Management,” which is a go-to reference edition in my RIA recommended reading list library, it takes six years for the S&P to recover from a 20% drawdown. Generally, a blended portfolio should take half that time or less.

You have the opportunity to conquer financial milestones that can appear fabulously in your financial Wikipedia (if a financial Wikipedia ever existed!)

Leave a legacy of good money decisions loved ones and others you care about would be proud to emulate.

Why Your Credit Score Just Improved

Are you one of the 8 million consumers who noticed a credit score improvement and wondered how it happened?

Here’s the scoop:

Beginning in March 2015, The National Consumer Assistance Plan, a consortium of the three major consumer credit reporting companies – TransUnion, Experian and Equifax, began an effort to make credit reports more accurate and make it less intimidating for consumers to correct errors. The three-year initiative outlined the following objectives:

  1. Allow consumers to access a free credit report sooner than 12 months if a dispute that causes a modification is initiated. This change provides consumers the window of opportunity to verify that modifications have been completed.
  2. Medical debts won’t be reported until a 180-day waiting period which allows insurance payments to be applied. Past medical collections that have been paid by insurance will be removed.
  3. Unpaid traffic, parking tickets and fines will no longer appear on credit reports.
  4. Consumers who are victims of fraud will receive improved communications about credit report disputes and additional options to rectify fraud situations.

As a result of these efforts, the number of individuals with collections accounts (as identified by Equifax), dropped dramatically in the fourth quarter of 2017.

The New York Federal Reserve Bank Quarterly Report on Household Debt & Credit, outlined that 8 million people had collections accounts removed from their credit reports.

Consumers with the lowest credit scores benefitted the most from the NCAP initiatives with 18 percent of affected consumers experiencing a rise of 30 points or greater. Those who experienced a 40 or more boost in their scores began with an average of 529.

So, what actions can you take to monitor, maintain or boost your credit score?

Check your credit reports once a year.

It’s not that difficult. Place an activity on your calendar in January of every new year. The only source for free credit reports is www.annualcreditreport.com. The site is authorized by Federal law to provide a free copy of your reports every 12 months from each of the three credit reporting companies. Based on improvements by the NCAP, it’s easier than ever to report discrepancies (in most cases, online), and follow up to make sure errors have been removed.

Check your credit score annually.

Your credit history, activity, open and closed accounts are listed on credit reports which feed into the scoring algorithms used to create your three-digit numerical credit score. Consider scores and reports as joined pieces of a financial puzzle which form a story about your overall relationship and use of credit. Elements of a credit score include payment history, amounts owed, credit history, types of credit used and your application for new credit. The FICO® Score is an industry standard and the most popular.

A growing number of credit card vendors including major providers like Discover, Capital One, Chase and Bank of America now provide FICO® scores to customers. In addition, www.creditkarma.com will also allow free access to scores and reports. They will make product recommendations and are paid by a bank or lender if you obtain a product through one of their recommendations.

Payment history comprises a whopping 35% of your FICO® Score. Paying credit obligations on time is paramount.

If you’re retired don’t be afraid to utilize smart credit strategies.

I find new retirees suffer drops in their credit scores and refrain from using credit, which could be a mistake. The goal is to know when it’s smart to use credit compared to tapping precious liquid resources. This can be an incredibly advantageous endeavor through the early years of retirement where spending on discretionary categories like vacations, travel and major purchases pertaining to home improvement are at their zenith.

For example, a new retiree client recently decided to take advantage of Best Buy’s zero-percent interest credit card offer for quality home electronic upgrades. He takes comfort in knowing he has the cash to pay in full immediately but why do it when he can make minimum monthly payments and have cash earn interest in an online savings vehicle for two years?

Those who budget stay disciplined and motivated to boost cash flow through similar methods and utilize credit to work for them, not against themIn addition, smart credit management that includes timely payments, helps keep his respectable FICO® credit score (over 780), intact which can come in handy for future credit-based decisions.

Smart retirees are not in a hurry to close their credit card accounts. They’ll look to aggressively utilize the ones that provide the greatest benefits to their households; whether gathering points for travel, cash back or rewards for goods and services, credit card companies want your business and new retirees are active enough to take advantage of special offers.

Flex your credit muscle but don’t overdo it.

Credit scoring models reward usage and disciplined credit management. Don’t be afraid to flex your credit muscles by rotating the use of credit cards and utilizing credit overall as long as you don’t push the limits on every card you own. It’s important for credit agencies to observe responsible ongoing utilization of credit in conjunction with timely payments.

The world of credit scoring consistently evolves.

A credit score of 800 or above is considered excellent. A good or excellent score can save a consumer thousand in interest charges on automobiles and homes. The Loan Savings Calculator at www.myfico.com, calculates how the FICO® Score impacts the interest you’ll pay for the life of a mortgage or auto loan.

Planting The Seeds For A Financial Harvest

Since the age of 16, my daughter has worked summer jobs. She’s been a waitress, a hostess. A cashier at the local HEB supermarket.

This isn’t a topic we’ve discussed formally, so it made me curious as to her motivations at the time. Sure, we’ve had countless small money moments as early as age 5. Formal conversations have been granular covering specific topics such as payroll tax withholding and where to invest her money.

On a side note, money discussions with your kids should be casual and occur in brief but impactful moments. A discussion over the price on a BRATZ doll at Target; is it worth spending the cash? How much to save, share and spend from a weekly allowance. You see, anytime is a good time to talk money with children. The casual the better. Over time, parents gain a sense of their children’s’ money scripts or how they’re wired. Are they ambitious savers or profligate spenders?

I recall my first job delivering “New York’s Picture Newspaper,” The Daily News, at 14 years-old. The route was one of the largest in my Brooklyn neighborhood. The lessons were indispensable and remain with me today.

Selling, customer service, handling complaints, the discipline to wake before 5am including weekends, to make sure papers were delivered before morning coffee, and the financial reward I earned sacrificing hours of my weekend to collect payment from subscribers. It was a challenge, yet I remember how the job fostered feelings of well-being through a challenging childhood.

I asked people through social media about their summer employment and what motivated them to take on the responsibilities while their friends were on vacation or at camp.

The positive responses were overwhelming. People couldn’t wait to share. The exhilaration was contagious. Many were vocal about how the qualities they developed working as teens, were unequivocally linked to prosperity, financial and otherwise, as adults.

Firs, you’re proud. Yet, there’s something strangely sad about the milestone. Perhaps your teen is embracing maturity with gusto, motivated to take on new responsibilities and taking a big step to adulthood, to independence, which makes you feel vulnerable, uncomfortable.

Old.

Ok, so that was MY issue.

So, you have a teen or grandchild who is wrapping up a summer job? Don’t let an opportunity to make the most of the experience fade away before the new school year starts.

What can you try?

Celebrate the ‘wrap up’ from payout to paycheck.

Most likely, there’s been a long-standing allowance agreement at home. Sure, you taught the basics of save, share and spend early on, helping your child formulate a simple yet impressionable strategy of monetary discipline. It’s time to re-visit the discussion. The addition of sweat equity adds another dimension to save, share and spend. Have a “big picture” talk and explore how take-home pay was allocated.

Celebrate the wrap-up of such an accomplishment at a special yet informal setting – Allow your child to share deeper thoughts around save, share and spend. Guide the conversation, provide reinforcement for good ideas and create positive memories around how proud you are of the transition from payout to paycheck. My daughter and I held our celebration at a pizza establishment named Mellow Mushroom.

Initiate the “Level 2, Triple S” protocol. 

No, it’s not the title of the new Mission Impossible movie. It’s how save, share and spend takes on renewed relevance in proportion to the past. It’s the “Triple S, Level 2” rite of passage. As a child, allocating an allowance or cash for chores, was important. With a summer job, parents and kids make allocation decisions with greater impact.

Oh, there’s another interested party looking to share in your child’s success: It’s the IRS. Taxes are now a consideration. As an employee, your child was to complete a W4 form to indicate the correct amount of tax to be withheld from each paycheck. For 2018, a dependent youth doesn’t require a tax return filed if earnings do not exceed $12,000, the standard deduction amount.

In my case, we felt comfortable writing “EXEMPT” on line 7 of the W4; as a dependent, my daughter will most likely not exceed $12,000 in earnings for 2018. I find most parents will recommend their children withhold taxes and receive a refund. I don’t think this is a good lesson as a refund is an overpayment of taxes, an interest-free loan to the government. Parents are unsure how to advise their kids, so they have them withhold taxes ‘just to be safe.’ Again, not an optimum financial decision and example for young adults.

Fund a Custodial Roth IRA.

Working leads to new investment vehicle opportunities. Fund a Custodial Roth IRA with a savings allocation of at least 30% of summer earnings directed into a Roth as a contribution. For 2018, the maximum that can be placed in an IRA is $5,500. Even invested conservatively, a $1,500 deposit, earning annually at 4% has the potential to be worth over $11,000 tax-free by the time your teen reaches 67 years-old.

Time is your child’s greatest ally; part-time employment provides the opportunity to jumpstart full-time retirement. At the least, they may tap into contributions in later years to fund a down payment on a primary residence. Not an optimum solution however, it’s better than tapping into a pre-tax 401(k) or traditional IRA and shelling out ordinary income taxes and possibly, early withdrawal penalties. For example, roughly 1 in 3 millennials withdraw or borrow from their retirement accounts to purchase a home.

Start a cash-flow discovery exercise.

As my girl had additional money to spend, we emphasized budgeting in our discussions. It’s crucial children maximize what’s left of a paycheck after taxes and savings. Teach kids to make saving a priority and to pay themselves first. It’s one of the best financial habits you can instill as parents. My daughter’s two biggest expenses – clothing and music downloads were monitored using a free Smartphone budgeting application she selected.

Set aside 20 minutes, initiate a “cash flow discovery” exercise to review expenditures and the overall work experience. I seek to learn the pros & cons of my daughter’s summer jobs. I want to hear how she handles customer complaints, interacts with other employees and working makes her feel.

After all, earning a pay check is exciting. Some kids get carried away and go through what I call an “independence splurge” where spending increases along with the first paychecks. Ironically, I’ve observed most of the spending is done at a teen’s place of employment as employer discounts are considered a “benefit.”

As a parent or grandparent, what have you lost and found again?

At our personal summer-job celebration, I shared my early work memories good and bad. I opened up about the time I got fired from Stern’s Department Store. Not my proudest moment. Overall, my daughter helps me re-live the best of my work habits and reminds me of why I’ve been motivated to succeed for so many years.

And teens?

Your family finds your initiative admirable; also, they’re observing how you handle multiple responsibilities outside of home and school.

Your work efforts are forging their confidence in you to handle future fiscal responsibilities.

The disciplines that begin as a working teen will sharpen and live on in you for many generations.

The financial seeds planted today have potential to grow large.