Tag Archives: Millennials

The One Chart Every Millennial Should Ignore

The media is full of articles about the financial situation of Millennials in today’s economy. According to numerous surveys, they are saddled with too much debt, can’t secure higher wage-paying jobs, and are financially distressed on many fronts. Moreover, this is occurring during the longest financial and economic boom in the history of the United States.

Of course, the media is always there to help by chastising boot-strapped Millennials to dump their savings into the financial markets to chase overvalued, extended, and financially questionable stocks.

To wit:

“Only about half of American families are participating in some way in the stock market, according to research from the St. Louis Fed. When it comes to millennials (ages 23 to 38), about 60% have no direct or indirect exposure to the stock market.

Of course, you don’t definitely don’t have to invest, Erin Lowry, author of ‘Broke Millennial Takes on Investing,’ tells CNBC Make It. It’s not a life requirement. But you should understand what you’re losing out on if you avoid the markets. It’s a shocking amount, Lowry says. ‘You’re going to have to save so much more money to achieve the same goals because the market is helping do some of the work.’”

Great, you have a person with NO financial experience advising Millennials to put their “savings” into the single most difficult game on the planet.

Of course, this is all dependent on the same “myth” we just addressed last week:

“That’s because when you use a high-yield savings account or an investment account with higher returns, you put the magic of compound interest to work for you. When your money earns returns, those returns also generate their own earnings. It’s that simple.”

Here’s the math they use to prove their point.

“Let’s say you have $1,000 and add $100 a month to your savings over the course of 35 years. At the end, you’d have $43,000. Not bad. But if you had invested that money and earned a 10% rate of return, which is in line with average historic levels, you’d have over $370,000.”

Of course, you have to have a cool chart to go along with it.

Here’s a little secret.

It’s a complete fallacy.

From CNBC:

“Of course, investing is not risk-free. Typically, investors see some years where they earn double-digit returns and other years where they experience a loss. Losses happens, on average, about one out of every four years, and can be bad. During a bear market — which is when stocks fall by at least 20% — research shows that the market drops by an average of 30%. That condition typically lasts for about 13 months.

That means if you invested $1,000 and the market lost 30%, your investment would be worth $700. And it may take you more than 13 months to recover the $300 you lost.”

The importance of that statement is that “losses” destroy the “power of compounding.”

Let’s assume an investor wants to compound their investments by 10% a year over a 5-year period.

The ‘power of compounding’ ONLY WORKS when you do not lose money. As shown, after three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required. In reality, chasing returns is much less important to your long-term investment success than most believe.”

When imputing volatility into returns, the differential between what investors were promised (and this is a huge flaw in financial planning) and what actually happened to their money is substantial over long-term time frames.

Here is another way to look at it.

If you could simply just stick money in the market and it grew by 6% every year, then how is it possible to have 10 and 20-year periods of near ZERO to negative returns?

Morgan Stanley just recently published research on this exact issue:

On our estimates, the expected return of a US 60/40 portfolio of stocks and government bonds will return just 4.1% per year over the next decade, close to the lowest expected return over the last 20 years, and one that has only been worse in 4% of observations since 1950.”

4.1% isn’t 6, 8 or 10%.

There went your savings plan.

The level of valuations when you start your investing journey is all you need to know about where you are going to wind up. Based on current valuations, if you are betting on the last decade of returns to continue 30-years into the future, you are likely going to be very disappointed.

Don’t Forget The Impact Of Inflation

Here’s the second problem.

A recent article from MarketWatch pointed out how much it would cost to retire in each state. Using data from the BLS, Howmuch.net created the following visual.

“The average yearly expenses across the country for someone over the age of 65 is $51,624, but that figure comes in at $44,758 in the low-cost-of-living Mississippi and a whopping $99,170 on the other end of the spectrum in the Aloha State. ‘

This is misleading as the amounts shown above are based on TODAY’s data and what is required if your want to RETIRE TODAY.

What happens if you are a Millennial wanting to retire in 30-years? While $1 million sounds like a lot of money today, and might net you a comfortable retirement in Colorado ($1 million at a 3% annual withdrawal rate nets you $30,000 plus social security), will it be enough in 30-years?

Probably not. Let’s run it backwards.

In 1980, $1 million would generate between $100,000 and $120,000 per year while the cost of living for a family of four in the U.S. was approximately $20,000/year. Today, there is about a $40,000 shortfall between the income $1 million will generate and the cost of living.

This is just a rough calculation based on historical averages. However, the amount of money you need in retirement is based on what you think your income needs will be in the future, not today, and how long you have to reach that goal.

For most, there is a desire to live a similar, or better, lifestyle in retirement. However, over time, our standard of living will increase to reflect our life-cycle stages. Children, bigger houses to accommodate those children, education, travel, etc. all require higher incomes. (Which is the reason the U.S. has the largest retirement savings gap in the world.)

If you are like me with four kids, “a million dollars ain’t gonna cut it.”

The problem with Erin Lowry’s advice to her “millennial cohorts,” is not just the lack of accounting for variable rates of returns, but impact of inflation on future living standards.

Let’s run an easy example.

  • John is 23 years old and earns $40,000 a year.
  • He saves $14 a day 
  • At 67 he will have $1 million saved up (assuming he gets the promised 10% annual rate of return)
  • He then withdraws 4% of the balance to live on matching his $40,000 annual income.

That’s pretty straightforward math.

The problem is that it’s entirely wrong.

The living requirement in 44 years is based on today’s income level, not the future income level required to maintain the SAME living standard. 

Look at the chart below and select your current level of income. The number on the left is your income level today and the number on the right is the amount of income you will need in 30-years to live the same lifestyle you are living today.

This is based on the average inflation rate over the last two decades of 2.1%. However, if inflation runs hotter in the future, these numbers become materially larger.

The chart above exposes two problems with the entire premise:

  1. The required income is not adjusted for inflation over the savings time-frame, and;
  2. The shortfall between the levels of current income and what is actually required at 4% to generate the income level needed.

The chart below takes the inflation-adjusted level of income for each brackets and calculates the asset level necessary to generate that income assuming a 4% withdrawal rate. (For comparison purposes, the red bar is the “F.I.R.E. Movement” recommendation of 25x your income.)

If you need to fund a lifestyle of $100,000, or more, in today’s dollars, as Sheriff Brody quipped in “Jaws,”

“You are going to need a bigger boat.”

Not accounting for the future cost of living is going to leave a lot of people short, even including social security. 

While authors like Ms. Lowry are creating a nice income for themselves by selling books to “broke Millennials,” the content is only as good as the current market cycle you are in. Ms. Lowry, and her cohorts, have never been through a bear market.

Mean reverting events expose the fallacies of “buy-and-hold” investment strategies. The “stock market” is NOT the same as a “high yield savings account,” and losses devastate retirement plans. (Ask any “boomer” who went through the dot.com crash or the financial crisis.”)

Unfortunately, for individuals, the results between what is promised and what occurs continues to be two entirely different things, and generally not for the better. 

The Voice of the Market- The Millennial Perspective

Those who cannot remember the past are condemned to repeat it.” – George Santayana

Current investors must be at least 60 years old to have been of working age during a sustained bond bear market. The vast majority of investment professionals have only worked in an environment where yields generally decline and bond prices increase. For those with this perspective, the bond market has been very rewarding and seemingly risk-free and easy to trade.

Investors in Europe are buying bonds with negative yields, guaranteeing some loss of principal unless bond yields become even more negative. The U.S. Treasury 30-year bond carries a current yield to maturity of 2.00%, which implies negative real returns when adjusted for expected inflation unless yields continue to fall. From the perspective of most bond investors, yields only fall, so there’s not much of a reason for concern with the current dynamics.

We wonder how much of this complacent behavior is due to the positive experience of those investors and traders driving the bond markets. It is worth exploring how the viewpoint of a leading investor archetype(s) can influence the mindset of financial markets at large.


The millennial generation was born between the years 1981 and 1996, putting them currently between the ages of 23 and 38. Like all generations, millennials have unique outlooks and opinions based on their life experiences.

Millennials represent less than 25% of the total U.S. population, but they are over 40% of the working-age population defined as ages 25 to 65. Millennials are quickly becoming the generation that drives consumer, economic, market, and political decision making. Older millennials are in their prime spending years and quickly moving up corporate ladders, and they are taking leading roles in government. In many cases, millennials are the dominant leaders in emerging technologies such as artificial intelligence, social media, and alternative energy.

Their rise is exaggerated due to the disproportionately large baby boomer generation that is reaching retirement age and witnessing their consumer, economic, and political impact diminishing. An additional boost to millennials’ influence is their comfort with social media and technology. They are digital natives. They created Facebook, Twitter, Snapchat, Instagram, and are the most active voices on these platforms. Their opinions are amplified like no other generation and will only get louder in the years to come.

Given millennial’s rising influence over national opinion, we examine their experiences so we can better appreciate their economic and market perspectives.

Millennial Economics

In this section, we focus on the millennial experience with recessions. It is usually these trying economic experiences that stand foremost in our memories and play an important role in forming our economic behaviors. As an extreme example, anyone alive during the Great Depression is generally fiscally conservative and not willing to take outsized risks in the markets, despite the fact that they were likely children when the Depression struck.

The table below shows the number of recessions experienced by population groupings and the number of recessions experienced by those groupings when they were working adults, defined as 25 or older.

Data Courtesy US Census Bureau – Millennial Generation 1981-1996

About two-thirds of the Millennials, highlighted in beige, have only experienced one recession as an adult, the financial crisis of 2008. The recession of 1990/91 occurred when the oldest millennial was nine years old. More Millennials are likely to remember the recession of 2001, but they were only between the ages of 5 and 20.

Unlike most prior recessions, the recession of 2008 was borne out of a banking and real-estate crisis. Typically, recessions occur due to an excessive buildup in inventories that cause a slowing of new orders and layoffs. While the market volatility of the Financial Crisis was disturbing, the economic decline was not as severe when viewed through the lens of peak to trough GDP decline. As shown in the table below, the difference between the cycle peak GDP growth and the cycle trough GDP growth during the most recent recession was only the eighth largest difference of the last ten recessions.

Data Courtesy St. Louis Federal Reserve

One of the reasons the 2008 experience was not more economically challenging was the massive fiscal and monetary stimulus provided by the federal government and Federal Reserve, respectively. In many ways, these actions were unprecedented. When the troubles in the banking sector were arrested, consumer and business confidence rose quickly, helping the economy and the financial markets. Although it took time for the fear to subside, it set the path for a smooth decade of uninterrupted economic growth. A decade later, with the expansion now the longest since at least the Civil War, the financial crisis is a fleeting memory for many.

The market crisis of 2008 was harsh, but it did not last long. It is largely blamed on poor banking practices and real-estate speculation issues that have been supposedly fixed. Most Millennials likely believe the experience was a black swan event not likely to be repeated. One could argue there’s a large contingent of non-millennials who feel likewise.  Given the effectiveness of fiscal and monetary policy to reverse the effects of the crisis,  Millennials might also believe that recessions can be avoided, or greatly curtailed. 

Half of the millennial generation were teenagers during the financial crisis and have few if any, memories of the economic hardships of the era. The oldest of the Millennials were only in their early to mid-20s at the time and are not likely to be as financially scarred as older generations. In the words of Nassim Taleb, they had little skin in the game.

No one in the millennial generation has experienced a classical recession, which the Federal Reserve is not as effective at stopping. With only one recession under their belt, and minimal harm occurring as a result of their relatively young age, recession naivete is to be expected from the millennial generation.

Millennial Financial Markets

As stated earlier, the dot com bust, steep equity market decline, and the ensuing recession of 2001 occurred when the millennial generation was very young.

The financial crisis of 2008-2009 occurred when millennials were between the ages of 12 and 27. More than half of them were teenagers with little to no investing experience during the crisis. Some older Millennials may have been trading and investing, but at the time they were not very experienced, and the large majority had little money to lose. 

What is likely more memorable for the vast majority of the generation is the sharp rebound in markets following the crisis and the ease in executing a passive buy and hold strategy that has worked ever since.  

Millennial investors are not unlike bond traders under the age of 60 – they only know one direction, and that is up. They have been rewarded for following the herd, ignoring the warnings raised by excessive valuations, and dismissing the concerns of those that have experienced recessions and lasting market downturns.

Are they ready for 2001?

The next recession and market decline are more likely to be traditional in character, i.e. based on economic factors and not a crisis in the financial sector. Current equity valuations argue that a recession could result in a 50% or greater decline, similar to what occurred in  2008 and 2001. The difference, however, may be that the amount of time required to recover losses will be vastly different from 2008-2009. The two most comparable instances were 1929 and 2001 when valuations were as stretched as they are today. It took the S&P 500 over 20 years to recover from 1929. Likewise, the tech-laden NASDAQ needed 15 years to set new record highs after the early 2000’s dot com bust.

Those that were prepared, and had experienced numerous recessions were able to protect their wealth during the last two downturns. Some investors even prospered. Those that believed the popular narrative that prices would move onward and upward forever paid dearly.

Today, the narrative is increasingly driven by those that have never really experienced a recession or sharp market decline. Is this the perspective you should follow?


 “Those who cannot remember the past are condemned to repeat it.

We would add, “those who remember the past are more likely to avoid it.”

The millennial generation has a lot going for it, but in the case of markets and economics, it has lived in an environment coddled by monetary policy. Massive amounts of monetary stimulus have warped markets and created a dangerous mindset for those with a short time perspective.

If you fall into this camp, you may want to befriend a 60-year old bond trader, and let them explain what a bear market is.

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.


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.

Technically Speaking: 7-Deadly Investing Sins


As I noted in this past weekend’s newsletter, I am on a much-needed family vacation this week. However, I would be remiss if I did not relay some of my thoughts in reference to the Monday’s market action as it relates to our current portfolio positioning.

As I stated on Saturday:

“As we discussed previously, what happens in the middle of the week is of little consequence to us. We are only truly interested in where the week ends. In that regard, the bulls remained stuck at the ‘Maginot Line’ which continues to keep the majority of our models on hold for now.”

The one thing that keeps us a bit more bullishly biased at the moment is the flood of earnings coming in as we progress into the Q2 reporting season. Google reported better than expected numbers (of course, that’s not saying much since estimates are always lowered so companies can beat them) which will give a lift to market today at least at the outset of the session.

However, as shown below, the bulls have cleared resistance momentarily. It is important the bulls are able to maintain control above 2800 through the end of the week. A failure of that level will likely result in a correction back to 2700.

If these current levels hold through the end of the week, the intermediate-term “buy signal” will also be triggered. (While it may seem to already have been triggered, this is a weekly signal so it requires a full week’s of data to confirm.) This signal will be supportive of current equity allocation levels and will suggest that a move higher in the short-term is likely.

The risk, in the short-term, remains the White House and geopolitical policy which could disrupt the markets. Longer-term it remains a story about valuations, economic cycles, and interest rates.

This is why I noted this past weekend that “with our portfolios are already mostly exposed to equity risk, there isn’t much for us to do currently. Our main job now is to focus on the risk of what could wrong and negatively impact portfolio capital.”

This morning I was sitting on the beach with my lovely wife having a cup of coffee when a prayer group formed on the beach. They sat in a circle as the sun crested the horizon. As streams of sunlight glinted off of the crystal blue waters, they read scripture and prayed. As my wife and I watched, and listened, a very peaceful feeling fell across us both.

As they finished, I looked down at my laptop with a blank page staring back at me. At that moment, I begin thinking about the risks which currently face us as investors and the sins we repeatedly commit as individuals which keep us from being successful over time.

If you were raised in a religious household, or were sent to a Catholic school, you have heard of the seven deadly sins. These transgressions — wrath, greed, sloth, pride, lust, envy, and gluttony — are human tendencies that, if not overcome, can lead to other sins and a path straight to the netherworld.

In the investing world, these same seven deadly sins apply. These “behaviors,” just like in life, lead to poor investing outcomes. Therefore, to be a better investor, we must recognize these “moral transgressions” and learn how to overcome them.

The 7-Deadly Investing Sins

Wrath – never get angry; just fix the problem and move on.

Individuals tend to believe that investments they make, or their advisor, should “always” work out. They don’t. And they won’t. Getting angry about a losing “bet” only delays taking the appropriate actions to correct it.

“Loss aversion” is the type of thinking that can be very dangerous for investors. The best course of action is to quickly identify problems, accept that investing contains a “risk of loss,” correct the issue and move on. As the age-old axiom goes: “Cut losers short and let winners run.”

Greed – greed causes investors to lose more money investing than at the point of a gun. 

The human emotion of “greed” leads to “confirmation bias” where individuals become blinded to contrary evidence leading them to “overstay their welcome.”

Individuals regularly fall prey to the notion that if they “sell” a position to realize a “profit” that they may be “missing out” on further gains. This mentality has a long and depressing history of turning unrealized gains into realized losses as the investment eventually plummets back to earth.

It is important to remember that the primary tenant of investing is to “buy low” and “sell high.” While this seems completely logical, it is emotionally impossible to achieve. It is “greed” that keeps us from selling high, and “fear” that keeps us from buying low. In the end, we are only left with poor results.

Sloth – don’t be lazy; if you don’t pay attention to your money – why should anyone else?

It is quite amazing that for something that is as important to our lives as our “money” is, how little attention we actually pay to it. Not paying attention to your investments, even if you have an advisor, will lead to poor long-term results.

Portfolios, like a garden, must be tended to on a regular basis, “prune” by rebalancing the allocation, “weed” by selling losing positions, and “harvest” by taking profits from winners.

If you do not regularly tend to a portfolio, the bounty produced will “rot on the vine” and eventually the weeds will eventually reclaim the garden as if it never existed.

Pride – when things are going good don’t be prideful – pride leads to the fall. You are NOT smarter than the market, and it will “eat you alive” as soon as you think you are.

When it comes to investing, it is important to remember that a “rising tide lifts all boats.” The other half of that story is that the opposite in also true.

When markets are rising, it seems as if any investment we make works; therefore, we start to think that we are “smart investors.” However, there is a huge difference between being “smart” and just being “along for the ride.” 

Ray Dalio, head of Bridgewater which manages more than $140 billion, summed it up best:

“Betting on any market is like poker, it’s a zero-sum game and the deck is stacked against the individual investor in favor of big players like Bridgewater, which has about 1,500 employees. We spend hundreds of millions of dollars on research each year and even then we don’t know that we’re going to win. However, it’s very important for most people to know when not to make a bet because if you’re going to come to the poker table you are going to have to beat me.”

Lust – lusting after some investment will lead you to overpay for it.  

“Chasing performance” is a guaranteed recipe for disaster as an investor. For most, by the time that “performance” is highly visible the bulk of that particular investments cyclical gains are already likely achieved.  This can been seen in the periodic table of returns below from Callan:

I have highlighted both the S&P 500 and U.S. Bond Market indexes as an example. Importantly, you can see that investment returns can vary widely from one year to the next. “Lusting” after last year’s performance leads to “buying high” which ultimately leads to the second half of the cycle of “selling low.”

It is very hard to “buy stuff when no one else wants it” but that is how investing is supposed to work. Importantly, if you are going to “lust,” lust after your spouse – it is guaranteed to pay much bigger dividends.

Envy – this goes along with Lust and Greed

Being envious of someone else’s investment portfolio, or their returns, will only lead to poor decision-making over time. It is also important to remember that when individuals talk about their investments, they rarely tell you about their losers. “I made a killing with XYZ. You should have bought some” is how the line goes. However, what is often left out is that they lost more than what they gained elsewhere.

Advice is often worth exactly what you pay for it, and sometimes not even that. Do what works for you and be happy with where you are. Everything else is secondary and only leads to making emotional decisions built around greed and lust which have disastrous long-term implications. 

Gluttony – never, ever over-indulge. Putting too much into one investment is a recipe for disaster.  

There are a few great investors in this world who can make large concentrated bets and live to tell about it. It is also important to know that they can “afford” to be wrong – you can’t. 

Just like the glutton gorging on a delicious meal – it feels good until it doesn’t, and the damage is often irreversible. History is replete with tales of individuals who had all their money invested in company stock, companies like Enron, Worldcom, Global Crossing; etc. all had huge, fabulous runs and disastrous endings.

Concentrated bets are a great way to make a lot of money in the markets as long as you are “right.” The problem with making concentrated bets is the ability to repeat success. More often than not individuals who try simply wind up broke.

Heed Thy Warnings – the path to redemption is rife with temptation

Regardless of how many times I discuss these issues, quote successful investors, or warn of the dangers – the response from both individuals and investment professionals is always the same.

“I am a long-term, fundamental value, investor.  So these rules don’t apply to me.”

No, you’re not. Yes, they do.

Individuals are long-term investors only as long as the markets are rising. Despite endless warnings, repeated suggestions, and outright recommendations – getting investors to sell, take profits and manage portfolio risks go unheeded.

With the markets currently rising, it is easy to ignore the warning signs. The “devil on your shoulder” is very convincing and keeps whispering in your ear to take on more risk with comments like: “This market has nowhere to go but up,” “the yield curve doesn’t matter this time,” “Fed rate hikes don’t cause recessions,” and “it’s still not to late to jump on this bull train.”

The hardest thing for individuals to overcome in investing is their own emotional biases. This is why laying out a strict written discipline, having a sound investment strategy and keeping a journal of your trading are key elements in winning the long-game. Investing, like religion, requires a belief system that you follow even when it doesn’t seem to work.

But that is incredibly difficult to do.

Money Lessons From George Washington

As a small child, Washington yearned to be a British officer.

While other children were playing games, doing what children do, Washington gravitated to rigorous study of famous battles as recreation.

He lived the victories and defeats; with extraordinary precision, a young George envisioned and documented battle strategies, actions he would have taken to turn around and win losing engagements.

Washington possessed an indomitable fire fed by love for the home country. In his view, Britain was an honorable, unstoppable world force. Washington’s plan, early on in childhood, was to be an English patriot, ready, perhaps even anxious, to fight and die for king and country.

So, what series of events occurred that turned a searing heat of unstoppable love, dedication and passion for a home country into the ice of disappointment? How did a boy and young man eager to die for king and country turn and become the father of a new nation?

How does a passionate believer in and contributor to a country to take over the world morph into a searing combatant against his first and greatest love? What does that do to a person inside? How did that twist him? How did he mourn? How did Washington reinvent himself? Turn love into hate, ostensibly dispassion, to calculate and fight against a home country he now perceived as an oppressor of people he loved?

Virginians first. Then a scraggy mess of countrymen, Americans, he took on to fight a beast 100x the size? Awaiting the French, attempting to keep the cause alive until they arrived.

Listen, I couldn’t build out a fictional drama character or develop a protagonist for a full-length feature film as perfect as the circumstances which turned Mr. Washington.

A change of heart so dramatic, men with less resolve would have folded or disappeared into private life never to be heard from again. Washington did indeed do just that for a period. At 27, he retired from military service to Mount Vernon only to become an innovator at agricultural techniques founded by farming expert Jethro Tull.

Why did Washington retire? Ah, you’ll find out soon enough.

A man lives and breathes false truth, encounters a series of adverse circumstances, (some emotionally devastating), which continually confront and mar that truth.

Concurrently, an alternate truth begins to emerge. A truth this man doesn’t want to admit and fights against until one, last devastating personal setback, turns him completely, causes him to retrench, only to emerge different, beholden by a new truth.

Listen, this is the formula for every great fictional protagonist we embrace (and sometimes hate). Rick Grimes & Father Gabriel (tertiary protagonist) from The Walking Dead, John Wick, Maximus from Gladiator, Lucas McCain in a revamped The Rifleman, Benjamin Martin in The Patriot.

And there’s Washington.

Is one man’s fiction another man’s reality? I l believe it to be so. Every fictional character is in some part, another’s reality. I’m sure we all know people who have overcome obstacles that would have broken others.

The stock market is fiction. Prices of stocks are based on stories those who get sucked in to the stories. Supply and demand of stories, possibilities, hopes. All regulated. Mostly, fiction.

So, how and why did Washington change so radically? What can we learn?


Washington embraced strategic retreat, avoiding major engagements until he felt the opportunity was right. On occasion, it was never right, and he needed to re-group and find an alternative plan to victory.

Self-preservation and those of his men was paramount. Live to fight another day. Small victories, flanking attacks forged morale for a ragtag army that at times didn’t even possess shoes.

Britain scorned Washington numerous times, turning him down for major battles. A tremendous disappointment.

In 1754, British leaders galvanized against Washington when at the Forks of Ohio not far from Fort Duquesne (occupied by the French), Washington, an officer in the British Army along with men he marched through mountainous and dangerous terrain of Maryland and Pennsylvania, met up with a band of Iroquois to confront a French party of 35 men, fifty-five miles from the Forks.

What Washington perceived as his contribution to a first battle between two of Europe’s greatest empires, turned out to be an eventual well-publicized massacre of diplomatic messengers. One of the messengers named Jumonville was carrying a letter which was to be delivered to English authorities declaring Ohio Country as French territory. He was the first to be slaughtered by the Iroquois.

The attack was particularly gruesome and later didn’t write well in periodicals back in the home country, especially due to the brutality of the Indians who split open French scalps with tomahawks and rinsed their hands in victims’ brains.

As Russell Shorto wrote in his impressive tome – “Revolution Song,” – “The event, the series of fateful missteps by an inexperienced provincial officer, whose signatures carried the official weight of the British Empire, meant that, for the first time an event in North America would trigger a war in Europe.”

Back to the battle: It was only a matter of time before more than 1,000 French soldiers back at the Fork would know of the combat and seek to attack. Washington retreated with 400 men to a wide meadow and built a makeshift fort in the middle of it to await the next encounter.

French military head up ironically by the brother of Jumonville, passed through the gruesome massacre, now even more motivated to confront Washington and his men. With swift and diligent attack, the French took positions behind trees and rocks and precisely began to pick off Washington’s group.

They picked off men on horses, they killed more than 100, forcing Washington’s hand to surrender. The Indians had run off before the French arrived.

Military protocol at the time required George Washington surrender in writing. The French drafted a document. Washington signed it.

What the father of our country didn’t understand was that he was placing his name to a document that referenced the “assassination” of Jumonville. Washington believed the document referenced the death of the French leader, not an assassination. Unfortunately, it was probably due to the lack of skills by a novice interpreter. No matter. Washington signed a document of admission to the assassination which made the battle even more repulsive to the British.

To make matters worse (can you imagine?), a letter Washington wrote to his brother bragging about the encounter, referencing how the whistle of bullets to be a “charming sound,” was exposed and published in London Magazine.

A prominent writer portrayed Washington as foolish and the consequences dire – “The volley fired by a young Virginian in the backwoods of America set the world on fire.”

I’m not sure about you, but this series of events would have convinced me to leave the military and never be seen or heard from again. And Washington did indeed do so. For a bit. He went straight to the earth. He pondered a new life as gentleman farmer. He learned to grow tobacco on a commercial scale, he became a voracious reader and student of several heady topics including the law.

So, how do we take in what Washington experienced, how he reacted, and reinvented? Obviously, he was a Stoic in the making. He was a student of the German philosopher Nietzsche without knowing, either.

It was just who he was.

Nietzsche described human greatness as:

“Amor Fati or love of fate. Don’t bear what is necessary but love it.”

Marcus Aurelius said:

“A blazing fire makes flame and brightness out of everything that’s thrown at it.”

Epictetus lamented:

“Do not seek for things to happen the way you want them to; rather, wish that what happens happen the way it happens. Then you will be happy.”

Washington was an empath. He took in the pain of others. The Stamp Act and taxation by Britain forced oppression upon him and his brethren; denied him and his fellow man the freedom to prosper.

Thus, the rest is history. The man who loved and wanted so much to be loved by the British, found a new and greater love, a bigger mission, a higher truth. Mostly from great setback. Just like those incredible characters in films and series we are hooked on.

A non-fictional American story that resonates today.

A life we all can learn from.

At the time of his death in 1799, Washington’s estate was worth roughly $780,000 and that doesn’t include the valuation of his 7,000 acres at Mount Vernon. He was ranked as one of the richest colonialists. However, that wasn’t always the case. His finances dramatically ebbed and flowed. There were times in his life Washington was “land rich, cash poor.”

So, what lesson can we take from Washington’s life, good and bad? Here are 3 to consider.

Washington yearned for social status and went broke several times in an effort to keep up with the “Joneses.”

It was all about appearances. The finest clothing, expensive, outlandish accessories brought in from London designers. He borrowed (at 6%), to maintain his lifestyle for many years. Appears many Americans take after our first president when it comes to the use of credit to maintain standards of living.


Consumer credit per capita accelerated post-financial crisis as wage growth continued to suffer and job losses mounted. Unfortunately, unlike Washington who yearned for riding carriages with purple velvet-tufted seats and ivory handles, Americans are increasingly using credit to pay for the basics as wage growth although increasing, is not enough to keep up with rising costs, especially healthcare premiums.

According to the Pew Research’s Survey of American Family Finances, 46% of respondents reported making more than they spend; only 47% said they predictable household bills and income from month-to-month. More than third of those surveyed have suffered income volatility (a year-over-year change in annual income of 25% or more), in 2015.

Washington was a strong believer in education and the benefits of mathematics. He was also a gifted student throughout his life in agricultural sciences and the law.

A young Washington was fascinated with military strategy along with an aptitude for mathematics and geography. He was on the payroll of land baron Lord Fairfax at age 16 as a land surveyor of 5 million Virginia acres that was to be prepared for tenants arriving from across the Atlantic.

We are faltering as a country when it comes to math, science and reading proficiencies.

In a 2015 Pew Research Center report, only 29% of Americans rated their country’s K-12 education in science, technology, engineering and mathematics as above average or the best in the world.

As parents, we must help our children embrace these subjects. A Cleveland Fed study discovered that advancing past Algebra II strongly correlates with college graduation and thriving financially in the workforce.

Washington was a master networker.

America’s first president and one of its bravest leaders believed in the power of connections. He was not born of a rich family. He made connections, was a savvy social climber and married Martha Curtiss, one of the wealthiest widows in Virginia. Not that we all can marry wealthy, mind you!

Empirical studies outline how children who are better at socializing have above-average reading scores and better literacy skills. According to the Brookings Institute, social and emotional competence is critically important in the workplace. Traits that employers value in employees include self-esteem, goal setting, pride in work and interpersonal skills and teamwork.

Regardless of political affiliations, Americans can easily agree upon the respect for or relate to a trait or skill they admire when it comes to George Washington, the resilient leader of a new nation.

How Millennials Can Retire At 56 – Part 2

In Part 1, I shared several ideas for ambitious Millennials who seek to make retirement in their mid-fifties a reality. Those who take the initiative to retire early, especially close to a decade before Social Security and Medicare benefits eligibility, are going to need to think and behave differently than the masses when it comes to saving and debt management.

Live at home longer or find a roommate.

The share of young adults living at home has been on the rise since the Great Recession. According to the FactTank at Pew Research Center which deep dives into U.S. census data, as of 2016 15% of 25-35-year-old Millennials were living at home with their parents. Nearly double the share of the Silent Generation who lived at home in 1964. The median stay is three years and likely due to limited professional prospects coupled with burdensome student-debt obligations.

By the way, I support younger generations temporarily returning to the nest to play financial catch-up (not a popular opinion shared by partner Lance Roberts!) as long as they can contribute to their parents’ households whether it’s financial or in sharing of household responsibilities. Specific financial targets and timeframes should be established during this period; ambitious savings and debt reduction targets should be outlined in a budget and periodically reviewed by young-adult children and parents to showcase progress.

Young adults who are back in their old bedrooms or take in a roommate to reduce overhead or fixed expenses, shouldn’t feel ashamed or a failure to take a step back to move forward as long as the intention is to catch-up financially and parents witness the efforts.

The Millennials I counsel who have returned to parents’ residences are instructed to provide evidence of their ongoing commitment to improvement. For example, a young lady who moved back home in 2015 due to $52,000 in credit card and student loan debt she couldn’t get ahead of, provided a simple, monthly financial excel sheet to her parents, relevant proof of her commitment to be debt free. Today, she is down to her last $2,000 in student loan debt, has $4,000 in emergency savings and has been able to contribute 6% annually to her company retirement plan over the last couple of years. This young professional is now engaged and will live at home until her wedding in 2019. And speaking of weddings…

Get married.

Wait. What? Yes, marriage can be a financially beneficial step. Cohabitation or living together? Not so much. In a study from the Journal of Financial Planning – The Financial Implications of Cohabitation Among Young Adults,  authors Sonya Britt-Lutter, Ph.D., CFP®, Cassandra Dorius, Ph.D., and Derick Lawson, CFP® discover that co-habiters have lower net worth and financial asset accumulation than married respondents. Intuitively, this makes sense although the researchers do a formidable job obtaining data to prove their thesis.

Marital and co-habitation relationships up to the age of 30 were used to study net worth, financial assets and non-financial asset accumulation. Those with the highest net worth were married. People who never co-habitated possessed $16,340 more wealth than married couples who had co-habitated in the past and $18,265 greater wealth than married people who lived together with others two times or more. So, get married. Most important, marry someone who believes in fiscal responsibility and shares a similar money script.

Couples with similar money scripts grow or destroy their net worth at an exponential rate.

I don’t require academic or empirical backup to make the statement. I possess close to 3 decades of face-to-face meetings with couples to review their money habits and provide financial planning guidance. Couples that share similar philosophies about debt, savings and investing are a synergy to wealth creation or they’re the death of it.

It doesn’t matter if both are strong wage earners or if one remains home to care for children. In other words, household income isn’t as relevant a factor; the highest and best use of the net income or the utilization of household dollars, whatever level they are, is critical. Those who can allocate (or in some cases, misallocate) funds and mutually agree on the flow of their funds are likely to stick together through thick and thin, rich or poor.

Not to be morose, but it’s to the point where I can predict with respectable accuracy who is going to meet their forever marital obligations. I’m not a relationship expert by any stretch of the imagination. However, I do know that financial stress in a marriage can be toxic to its health.

The question is – how do you define stress? I understand couples who experience financial distress are more likely to part ways. However, two people together aligned as profligate spenders or passionate savers, in my experience, tend to stick it out.

According to Brad T. Klontz, Psy.D., CFP® & Sonya L. Britt, Ph.D., CFP®, money scripts as coined by Brad and Ted Klontz, are the core beliefs about money that drive ongoing behavior. Money scripts are unconscious beliefs about money formed in childhood, passed down from generations.

Marriage can be a catalyst to early retirement even if one party decides to work a couple of years longer to accelerate savings or maintain company healthcare insurance benefits.

Adhere to stringent debt guardrails.

Millennials should follow strict guidelines when It comes to debt control. At Clarity and Real Investment Advice, we have created debt control guardrails to help those looking to aspire to an early retirement.

Excessive debt and limited ability to buffer against financial emergencies will limit the ability to take on riskier but rewarding long-term ventures like career change and entrepreneurial endeavors.

A couple of our guardrails are as follows:

Mortgage debt: Primary residence mortgage = 2X gross salary.

Recently, an article for a national financial newspaper quoted an expert who said that purchasing a house is a good idea for Millennials looking to retire at 56. I was a bit dismayed by this guidance as a primary residence isn’t as much an investment as it is an expense. A house may be an anchor to mobility (go where the jobs are), and when taxes, insurance and upkeep are considered, it can turn an American Dream into a cash flow nightmare.

I’m not anti-house, I’m anti-house poor. Ostensibly, I created the above guardrail so potential homebuyers can focus unemotionally on how much mortgage debt to consider as not to place a future milestone like retirement in jeopardy.

Student loan debt:  Limit to one year’s worth of total expense – tuition, room & board, expenses.

Student loan debt has been a formidable obstacle for Millennials. The Center for Retirement Research in June 2018 report – “Do Young Adults with Student Loan Debt Save Less for Retirement?” outlines how student loan debt has nearly tripled in real terms between 2005 and 2017.

Using the NLS97 a dataset with information on borrowing by young workers for education, the regression analysis by the authors shows that 401(k) participation does not vary much among young workers with or without student loans or the size of the loans. However, the study does conclude that college graduates with outstanding student loan debts accumulate 50 percent less overall retirement wealth by the age of 30. The presence of a student loan materially impacts retirement saving which is why I created the student loan debt guardrail 6 years ago.

The objective is to limit student loan debt to one year’s worth of total tuition, room, board and other expenses. No matter what. I don’t care how you take it, either. All in one year or spread over four (or five). Sticking with the rule will force you to consider cost-effective solutions such as two years at a community college first for the basics (which is what my daughter decided and now has been accepted at University of Texas’ Cockrell School of Engineering), working a year to save while living at home, or to aggressively apply for scholarships.

Millennials should remain flexible when it comes to thoughts of retiring early. Regardless of good intentions and efforts, life has a way of altering plans as I recently shared my personal challenges with RIA readers in an imperfect retirement plan.  My strong fiscal habits proved beneficial in the face of divorce, career change, lawsuit and illness which made me grateful I’ve walked most of the steps I’ve shared with you here and in Part 1.

I wish an early retirement for the Millennials who strive for it. Frankly, I’m not confident yet remain positive. I hope these tenets serve you as well as they’ve served me.

How Millennials Can Retire At 56 – Part 1

A TD Ameritrade poll of 1,500 Millennials (those born 1981-1996 according to Pew Research Center), outlines how Millennials’ expectations about retirement age may be too ambitious. They expect to retire at 56 which is seven years younger than the current average retirement age.

Admittedly, it’s a lofty aspiration. Millennials are not going to hit their retirement goals at 70, let alone 56. Wholesale financial media advice such as invest aggressively in stocks and buy a house is offered up as solutions that ostensibly bankrolls Wall Street and the banking industry. This generation must embrace heterodox financial lessons to make retirement a reality. They must march to different drummers, be selective with the financial advice followed and take to heart the mistakes of Baby Boomers.

After all, secure retirement today is a privilege. At a time when Americans should be seeking to wind down and enjoy the golden years, 15 million households are in worse financial shape than the prior generation to do so.


Many Americans are victims to irresponsible financial industry guidance, aggressive actions of greedy corporate boards and organizations that have dismantled pensions and haven’t raised median incomes for the middle class going on close to two decades.

They’re victims of the lingering effects of the financial crisis including devastating job loss that forced them to tap retirement savings early, adherence to traditional financial industry dogma to load up on stocks for the long run, and the devastating loss of guaranteed income options like pensions.

The fortunate ones who can afford retirement have exhibited steeled fiscal resolve, ignored traditional Wall Street dogma, embraced vehicles to guarantee income for life and lived smaller than their fiscally-strained brethren.

Millennials – Listen up! I genuinely believe you can retire at 56 however, you’ll need to embrace the following Real Investment Advice steps to get there. I’ll warn you up front. An early retirement goal isn’t going to be easy. Open your mind. Think mental clean slate and maybe there will be hope for you.

Take to heart the previous generation’s mistakes.

Unfortunately, Baby Boomers are suffering from serious shortfalls, several out of their control, that you should do your best to understand and avoid. Boomers kept the faith in their employers to provide guaranteed retirement benefits, the banking, financial system not to implode and the buy and hold advice from the financial services industry which for many, proved to be detrimental to building wealth.

We are all now witnessing the damage that has been done. The aftermath. Toss in soaring prices for children’s education and healthcare, divorce rates rising for those 50 and older and cloying debt levels near to retirement, and 40% of Boomer households are now forced to remain in the workforce and or dramatically adjust their retirement lifestyle expectations.

Become an objective observer. Take notes. Don’t be afraid to respectfully ask Boomer family members and friends how they’re preparing (or not) for retirement.

The “pay and continually improve yourself” mantra must drive every action you take starting now.

To become a pay-and-improve yourself powerhouse is tantamount to turning an early retirement flame of desire into a raging fire.

Above all else and all that drives your behavior with money, this credo is the genesis you seek.

Frankly, if you stop reading here, decide to pay yourself first and continually improve your skills to earn more or increase your human capital, then my work is done!

So, what is human capital investment exactly?

The human capital investment is simply, YOU. Yes. YOU are an investment. The greatest investment. A lifetime money-making powerhouse. Earnings if directed wisely, result in long-term financial security and perhaps more important, a career passion that continues up to and far into retirement.

As adults, we have been counseled to invest financially through real estate, stocks, retirement, etc. but not always in ourselves…at least not to the same extent.  At Real Investment Advice, we believe that human capital investment is one of the biggest ROIs and should be treated with the same importance as traditional financial investment.  We call it “Return on You.”

The Census Bureau data shows the average American with a bachelor’s degree earned $2.4 million over their lifetime in 2013.  It is hard to argue with these figures when AARP published the average seasoned American (e.g. at least 55-years-old) had $255,000 in their retirement account during the same year.

Formal education is important to earnings potential, but it’s merely the beginning of a lifelong learning process. The economy and career paths appear to be in constant flux; it’s easier than ever to lose the competitive edge.

Fortunately, unlike financial investments where many variables are out of our control, we do possess the ability to strategize and take ownership of human-capital gains whether personal or professional.

Unfortunately, Millennials cannot depend on employers to provide consistent wage increases. They’ll need to take matters into their own hands by raising the bar on their skillsets and using them to switch employers or begin a part-time business to turn up the cash flow.

Plenty of dangerous financial rules of thumb exist. We passionately bust the myths and showcase the truth about your money. A tenet that indeed holds up however, is to pay yourself first.

You may want to sit down for what I’m about to share. Take a deep breath.

A Millennial born in 1981 is 37 this year. If I assume $1,000 currently saved for retirement, if I assume a realistic inflation-adjusted rate of return (3%), if the assumption is made Ms. Millennial earns a gross income of $50,000 and can pay herself first 30% of pre-tax income annually for 18 years (with the huge assumption that a financially disruptive life event doesn’t occur), Ms. M. would wind up with a nest egg of $363,455.

Taxes were not considered as I hope a Roth 401(k) and IRA would be utilized over the often-suggested tax-deferred alternatives. Wait. What? A Roth? Yes, a Roth. A 2017 Harvard Business School Study for the Journal of Public Economics suggests that most investors will have more money or retirement consumption dollars if they use a Roth 401(k) instead of a traditional choice. Roth accounts do not require mandatory retirement distributions at 70 ½ and qualified distributions including earnings are tax free.

Although $363,000 isn’t a fortune, it’s a respectable effort. However, to retire at the ripe old age of 56, Ms. M is going to require a multi-step plan of attack. Consider an interminable pay yourself first discipline coupled with the ability to increase annual earnings [thus bolstering your 30% PYF (pay-yourself-first dollars)] as a solid financial two-step strategy.

Respect stock market cycles and don’t take excess risk because your age dictates you do so.

I believe the stock market should be a part of a Millennial’s wealth-building plan. It’s just not a panacea as relentlessly touted by financial media. Stocks appear to be the solution to every financial problem. If the pros didn’t make stock investing sound so definitively positive and objectively, equally exposed the risks, perhaps we’d see a healthier stock market participation rate from this group.

My first year in the financial services industry was 1988, in the midst of a great bull market. However, I expected the industry, those who preached stale theories and ostensibly set investor portfolios up for the kill, to change their tunes about allocations and risk after the tech bubble burst in 2000. I had encouraged investors to shift portfolios to more balanced, less aggressive allocations, as early as 1998. Markets cycle data has been out there for what feels like an eternity, yet now more than ever, it’s rarely discussed.

However, the facts are the facts. Markets shift; they’re more than just bull as the public is led to erroneously understand. Although bull markets occur historically with greater frequency, people are surprised to discover that since 1877, bear markets have accounted for 40 percent of market cycles.

Yet, the narrative doesn’t budge. In the media and in client meetings at brokerage firms, the stock market fantasy bull is the financial Energizer Bunny. The bullish flipcharts keep flipping; visuals are designed to foster regret if one “misses out,” on the endless bliss of stock returns. Those that outline risk of loss are nowhere to be found.

I believe it to be blatantly irresponsible. Retail big-box investment factories are steadfast “set it and forget it,” peddlers. I’m amazed at their tenacity.

The spiel is rarely altered. Minds never changed.

Respected academics do change their minds.

Objective students of market history do.

What has changed is how millennials and generations which follow, are on to the biased rhetoric. Sadly, chronic skepticism and trepidation is hurting younger generations as they should participate in stock investing. They just don’t know who to trust.

Unlike the pervasive, cancerous dogma communicated by money managers like Ken Fisher who boldly states that in the long-run, stocks are safer than cash, stocks are not less risky the longer you hold them. Unfortunately, academic research that contradicts the Wall Street machine rarely filters down to retail investors. One such analysis is entitled “On The Risk Of Stocks In The Long Run,” by prolific author Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University.

In the study, he busts the conventional wisdom that riskiness of stocks diminishes with the length of one’s time horizon. The basis of Wall Street’s counter-argument is the observation that the longer the time horizon, the smaller the probability of a shortfall. Therefore, stocks are less risky the longer they’re held. In Ken Fisher’s opinion, stocks are less risky than the risk-free rate of interest (or cash) in the long run. Well, then it should be plausible for the cost of insuring against earning less than the risk-free rate of interest to decline as the length of the investment horizon increases.

Dr. Bodie contends the probability of a shortfall is a flawed measure of risk because it completely ignores how large the potential shortfall might be. Sound familiar? It should. We write of this dilemma frequently here on the blog. Using the probability of a shortfall as the measure of risk, no distinction is made between a loss of 20% or a loss of 99%.

If it were true that stocks are less risky in the long run, it should portend to a lower cost to insure against that risk the longer the holding period. The opposite is true. Dr. Bodie uses modern option pricing methodology i.e., put options to validate the truth.

Using a simplified form of the Black-Scholes formula, he outlines how the cost of insurance rises with time. For a one-year horizon, the cost is 8% of the investment. For a 10-year horizon it is 25%, for a 50-year time frame, the cost is 52%.

As the length of horizon increases without limit, the cost of insuring against loss approaches 100% of the investment. The longer you hold stocks the greater a chance of encountering tail risk. That’s the bottom line (or your bottom is eventually on the line).

Short-term, emotions can destroy portfolios; long term, it’s the ever-present possibility of tail risks or “Black Swans.” I know. Tail risks like market bubbles and financial crises don’t come along often. However, only one is required to blow financial plans out of the water.

So, what does age have to do with how much of a portfolio is allocated to riskier investments like stocks?

I’m not willing to believe those who are younger should be more exposed or increasingly vulnerable to market risk than anybody else, when the reward from stocks is less for every investor going forward. You see, risk has no age. Risk is risk.

An investment allocation should be customized for your life, needs, and ability to withstand volatility. Most important, it should be based on the valuation conditions that exist at the time you’re looking to place dollars into the market.

I witness cookie-cutter dogma blindly followed and money invested immediately regardless of where stocks are valued. Ultimately, the forward returns are anemic, or wealth is destroyed altogether.

Financial consultants and brokers have needles deep stuck in thought grooves. It’s not just this rule per se. It’s the belief that younger people must, MUST be more aggressive because they have time to weather through disaster.

Risk couldn’t care less about how old you are. When the environment is favorable to take on greater risk for higher returns, then why be so focused on age?

How would you perceive my advice if I explained that Millennials shouldn’t fasten their seatbelts before driving however, grandparents should?

I mean, after all, if there’s an accident and injuries suffered, common sense tells me that nana and papa may require a longer convalescence period, correct?

Not to be flippant, but I can make a formidable case that based on savings accumulated and driver (investment) experience, older and perhaps wiser navigators may forgo seatbelts, but the novices cannot.

Think about it.

Don’t be shamed by financial media and professionals into investing aggressively into stocks at 32X which is the price-earnings ratio based on average inflation-adjusted earnings over the previous 10 years (known as the Shiller PE). Partner with a fiduciary or financial professional who studies and understands market cycles. Create an asset allocation that fits the environment or market cycle and doesn’t follow a meaningless rule of thumb created by Wall Street that your age should affect how much risk you take.

Regardless of age, the current risk vs. reward equation is not in your favor as a stock investor. Examining the S&P 500 (including dividends) since as early as 1919, there have been periods where forward 20-year returns have been close to zero. If you’re 37 and seeking to retire by 56, the reality is you may encounter a headwind to domestic stock returns. Set your expectations accordingly for below-average investment returns and focus efforts on bringing more cash into your household.

Get a side gig or start a part-time business.

According to a recent survey by Bankrate.com, 4 out of 10 Americans work a side job (think driving for Uber). Greater than 50% of Millennials have side hustles to make extra income. On average, these side gigs bring in an extra $686 bucks a month. Unfortunately, a majority take on a business or provide a service in addition to a full-time job, just to survive. Those who seek to retire at 56 should strive to use these dollars to pay off student loans and other debts including credit cards.

Take responsibility to guarantee your own basic income.

As a student of Social Security, I’m concerned full retirement age will be pushed to 68 years-old or later for Millennials and younger generations. Social Security is a good thing and essential for retirement survival, regardless of the negative information you hear or read. Social Security was created in 1935 to provide a basic income to supplement employer-provided pensions. Today, it is the pension replacement; Social Security provides guaranteed lifetime income for you or you and a spouse. Millennials who want to retire at 56 are going to need their portfolios to shoulder the income burden for at least 11 years before Social Security kicks in.

In addition, those who want to retire at 56 are going to inhibit the ability to maximize Social Security as benefits are based on a worker’s 35 highest earnings years. Those who exit the workforce in their mid-fifties are going to forfeit several peak earnings years that can make a big difference to lifetime Social Security income. The maximum amount of wages in 2018 subject to the 6.2% Social Security payroll tax is $128,400. When Social Security is considered, it’s crucial that Millennials focus on becoming earnings machines while in the workforce and meet Social Security wage limits.

Ten years into saving and investment, Millennials should look to direct financial resources into a deferred income annuity. Income annuities are solely designed to provide a stream of income now or later that recipients cannot outlive. These annuities are simple to understand and are generally lower cost when compared to their variable and indexed brethren.

Deferred income products where owners and/or annuitants can wait at least 5 years before withdrawals, may participate in market index gains (subject to caps) and have an opportunity to receive higher non-guaranteed annual income withdrawals depending on market performance. Withdrawals can never be less than the guaranteed withdrawal benefit established by the insurance company but may be higher depending on annual market returns. As with most annuities, there is never market downside risk.

In other words, Millennials are going to be responsible for creating their own pensions. Income annuities are a vehicle to accomplish the task. The objective is to ensure that fixed expenses like rents, mortgages, insurance, are covered by a lifetime income option especially until full retirement age is reached, and Social Security can be incorporated to boost guaranteed lifetime income.

Retiring at 56 can be doable for Millennials. However, most of mainstream financial information is not going to assist in the effort.

Next week, I’ll outline additional action steps that should be taken including rules to manage debt and several lifestyle or qualitative initiatives to consider.