Tag Archives: Richard Rosso

Anatomy of The Bear. Lessons from Russell Napier.

One of my annual re-reads is Russell Napier’s classic tome “Anatomy of the Bear.”

A mandatory study for every financial professional and investor who seeks to understand not only how damaging bear markets can be but also the traits which mark their bottoms. Every bear is shaken from hibernation for different reasons. However, when studying the four great bottoms of bears in 1921, 1932, 1949 and 1982, there are several common traits to these horrendous cycles.  I thought it would be interesting to share them with you.

First, keep in mind, bear markets characteristically purge weakness – weak companies, weak advisors, weak investors. I want you to consider them less a bloodletting and more a cleansing of a system. There will be unsuitable investors who will never return to the market and justifiably so. Businesses that were patronized pre-Covid, will either be gone or completely reinvent. Bear markets slash equity valuations. Unfortunately, this doesn’t mean that stocks return to healthy valuations quickly after a bear departure. Some believe the global economy can turn on and off like a light switch without major repercussions. In other words,  the belief is once the worst of this horrid virus ceases,  business activity invariably will return to normal. I believe it’ll be quite the contrary.

I mentioned on the radio show in December that I expected wage growth to top out in 2019. Keep in mind, through this yet another outlier economic upheaval, there will be employers who will realize they don’t require as many employees and will let them go or cap their wages for years to rebuild profit margins. Without the tailwind of stock buybacks to equity prices, corporate employees will bear the brunt of the pain. In addition, organizations will realize many of their remaining employees are equipped to work from home and perhaps gather in-person perhaps once a month or every couple of weeks. Thus, large commercial space will no longer be required which is going to require massive reinvention by the commercial real estate industry.
The cry of nationalism will rise. Products manufactured overseas especially China, will take a hit which means Americans will face greater inflationary challenges while also dealing with muted or non-existent wage growth. We will experience ‘ more money chasing too-few goods.’ Many, especially younger generations will continue to strip themselves down to basics (I especially envision this in Generation Z;  those born in the mid-late 1990s such as my daughter Haley).  This sea-change will require most of the U.S. population to finally live below their means, dramatically downsize, reinvent, expand, the definition of wealth to include more holistic, ethereal methods that go way beyond household balance sheets and dollars.
I hope I’m wrong. So very wrong about most of what I envision for the future.
Here are several traits that every major market bottom share – courtesy of Russell Napier:

  1. Bears tend to die on low volume, at least the big bears do. 

Low volume represents a complete disinterest in stocks. Keep in mind this clearly contradicts the tenet which states that bears end with one act of massive capitulation – a  downward cascade on great volume. Those actions tend to mark the beginning of a bear cycle, not the end. A rise in volume on rebounds, falling volumes on weakness would better mark a bottoming process in a bear market.

2. Bears are tricky.

There will appear to be a recovery; an ‘all-clear’ for stock prices. It’ll suck in investors who believe the market recovery is upon us just to be financially ravaged again. Anecdotally, I know this cycle isn’t over as I still receive calls from people who are anxious to get into the market and perceive the current market a buying opportunity. At the bottom of a bear, I should be hearing great despair and clear disdain for stock investing.

3. Bears can be tenacious.

They refuse to die or at the least, quickly return to hibernation. The 1921 move from overvaluation to undervaluation took over ten years. Bear markets, where three-year price declines make overvalued equities cheap, are the exception, not the rule. As of this writing,  the Shiller P/E is at 24x – hardly a bargain.  At the bottom market cycle of the Great Recession, the Shiller CAPE was at 15x. There is still valuation adjustment ahead.

4. Bears can depart before earnings actually recover.

Investors who wait for a complete recovery in corporate earnings will arrive late to the stock-investment party.  Most likely it’s going to take a while (especially with their debt burden), for the majority of U.S. companies to reflect healthy earnings growth. CEOs who employ stock buybacks to boost EPS will be considered pariahs and gain unwanted attention from Congress and even the Executive Branch. My thought is a savvy investor should look to minimize indexing and select individual stocks with strong balance sheets which include low debt and plenty of free cash flow within sectors and industries that are nimble to adjust to the global economy post-crisis.

5. Bear market damage can be inconceivable, especially to a generation of investors who never experienced one.

The bear market of 1929-32 was characterized by an 89% decline. The average is 38% for bears;  however, averages are misleading. I have no idea how much damage this bear ultimately unleashes. The closest comparison I have is the 1929-1932 cycle. However, with the massive fiscal and monetary stimulus (and I don’t believe we’ve seen the full extent of it yet),  my best guess is a bear market contraction somewhere between the Great Depression and Great Recession. At the least, I believe we re-test lows and this bear is a 40-45% retracement from the highs.

6. Bear markets end on the return of general price stability and strong demand for durables such as autos.

In 1949, as in 1921 and 1932, a return of general price stability coincided with the end of the equity bear market. Demand and price stability of selected commodities augured well for general price stabilization.  Watch how industrial metals recover such as copper, now at the lowest levels since the fall of 2017. The Baltic Dry Index is off close to 20% so far this year. Low valuations (not there yet), when combined with a return to normalcy in the general price level, may provide the best opportunity for future above-average equity returns. We are not there.

7. Bear markets that no longer decline on bad news are a positive.

The combination of large short positions in conjunction with a market that fails to decline on bad news was overall a positive indicator of a rebound in 1921, 1932 and 1949. Also, limited stock purchases by retail investors may be considered an important building block for a bottom.  Since the worst of economic numbers haven’t been witnessed yet, there remains too much hope of a vicious recovery in stock prices as well as the overall global economies.

8. Not all bear markets lead the economy by six-to-nine months.

Generally, markets lead the economy. However, this tenet failed to hold true for the four great bears. At extreme times, the bottoms for the economy and the equity market were aligned and in several cases, the economy LED stocks higher!  It’s unclear whether this bear behaves in a similar fashion only because of massive fiscal and monetary stimulus. We’re not done with stimulus methods either. If anything, they’ve just begun! I know. Tough to fathom.

For me and the RIA Team, every bear provides an important lesson. The beast comes in all sizes; their claws differ in sharpness. However, they are all dangerous to financial wealth.

I believe the market will eventually witness a “V” shaped recovery due to unprecedented stimulus. Unfortunately, I believe the economy will remain sub-par for a long period. Here’s a vision I shared on Facebook recently:

Let me give you one example how an economy cannot turn off, then on, like a light switch.

Joe’s Donuts is closed. Joe lets his 2 employees go, at least temporarily. Joe employs his wife Emily to assist as she’s just been laid off from her job. Joe is a quick thinker. He creates pre-packaged dough-to-go bags and sells them outside the store. His sales are off 75% as most businesses around him are shuttered. Joe was able to negotiate postponement of his rent for one month but will have to pay two months in May.

Joe has a profitable business but he’s already eaten through a quarter of his cash reserves to pay for supplies, maintain expenses to keep going. He can’t afford another month of quarantine.

The quarantine is lifted May 1 (best case scenario). Joe’s establishment is open! He’s hesitant to have employees return because he wants to gauge business for a month. He discovers that business is still off 40% from last year at the same time. Why? Because his patrons have either been let go or in repair of ravaged household balance sheets. In addition, he notices that purchasing boxes of donuts for office meetings is way off.

Joe contacts his former 2 employees. He tells them he still doesn’t require them. He’s handling the traffic sufficiently alone at this time. Joe now owes 2 months of rent. He takes one month from the business’ reserve account; distributes another from his retirement account.

Joe’s wife Ellen has been called back to work by her former employer, a local car dealership. She’s been asked to work the same job, same responsibilities. However, the pay is 10% less. Out of desperation, she takes the job. Meanwhile, Joe tells Ellen that they need to find a way to continue to cut household expenses…. Well, you get the picture.

I think this is reality for at least a year after the ‘all clear.’

There’s never been a better time to catch up on reading. Russell’s book is available through Amazon. For those interested in market history,  the pages hold invaluable insights.

For me, markets are always battlefields, but I’ve survived several conflicts.

Consider “Anatomy of The Bear,” part of your financial literary war chest.


Much of what passes for orthodoxy in economics and finance proves, on closer examination, to be shaky business.” The Misbehavior of Markets – by Benoit Mandelbrot & Richard L. Hudson.

If as households we do crumble financially yet another time, will this ‘outlier’ event finally teach us a valuable lesson? One we’ll never forget (again)? I mean, how many Black Swans or events that create wholesale economic and financial devastation must we endure to work diligently, effortlessly, to shore up our family’s finances?

Unfortunately, as humans, we focus on risk and financial stability too late. Always. Too. Late. We are creatures of complacency and mainstream financial advice does nothing but fuel our overconfidence bias. Only when a storm is upon us, wreaking havoc, do we seek to board the windows and secure what’s important to us. 

We’re cajoled by ‘experts’ during good times. We’re taught how outlier events occur every 1,000 years. Strange how rare occurrences aren’t so rare. They seem to happen every decade. So, let me ask you – How many times do these so-called ‘rare’ events need to occur before fiscal discipline becomes a priority for all of us?

Over the last three years, at RIA we have created several financial tenets to guard against financial vulnerability. I don’t mean to preach; I mean to teach.

I hope over the next few years, once this pandemic is past and we rummage through the economic rubble, we’ll take it upon ourselves to remain vigilant through the complacency and take the following rules to heart.

1. A painful reminder about the ‘buy and hold’ investment philosophy or whatever horrid expletive you’re probably calling it right now.

Never forget that convincing words, piles of academic studies and mined data from big-box financial retailers in pretty packages make it easy to share convincing stories to push stocks. Hopefully, investors who spent most of their time and money getting back to even remain comforted by the narratives. They’ll now do it again.

I’ll admit – I’m nonplussed by the appeal of buy-and-hold to the purists. I truly envy them.

It seems to be a “What Me Worry?” kind of existence. There seems to be an eerie comfort to throwing money into a black hole of overvalued investments and hoping that it transforms into a white light of wealth 20 years down the road (even if it’s a very dim bulb). I truly wish I could be convinced that a blind buy-and-hold fable is truth.

I so passionately want investors to achieve returns and exceed their financial life benchmarks or goals; it’s good for me too. I also would like to minimize the damage from bears. Is that too much to ask?

At Real Investment Advice we think it’s one of a money manager’s primary responsibilities.

Buy-and-hold at the core wrapped in rules of risk management is a healthy, long-term strategy to build and protect wealth. That’s what we’re doing at this juncture.

If you’re completely out of the market for an extended period, I mean zilch, zero, then stock investing may not be appropriate for you. Hey, it isn’t for everyone, especially today when the flood of central bank liquidity (I’ve never witnessed anything like it), algos (the robots), probably $4 trillion in fiscal stimulus coming, tries to stem the devastation. The bull market is dead, a bear is tricky to navigate. I am grateful to be a partner at a firm where all members understand the devastation of bear markets and are not ‘deer in headlights’ as this crisis is upon us. Take heart – the bear will die; the bull will run again. As investors we will bleed. The key is not to hemorrhage. There is a difference.

It’s not too late to undertake a quick gut check – Realize that an allocation of 10-20% to domestic and international stocks can drop 40% on average in bear markets. Investors fail to realize that diversifying between foreign and U.S. stocks doesn’t manage the risk they care about most – risk of principal loss. We are witnessing this now – one more time on the disaster hit parade. The world has become increasingly an Irwin Allen (The Poseidon Adventure; The Towering Inferno), film and we are the actors.

Let’s say your retirement plan balance is $90,000. In a conservative allocation, $18,000 (20%), may be allocated to stocks. If a bear cycle takes the stock balance down to $10,800 and makes you a bit queasy, then certainly the market doesn’t fit into your overall investment philosophy.

If you do have the intestinal fortitude to maintain an allocation to stocks, your financial partner is a buy-and-hold zealot (highly likely), and you haven’t taken profits (a tenet of risk management) or rebalanced this year, then there’s still an opportunity to do so on rallies. It’s acceptable to maintain additional cash as much as buy-and-hold purists abhor cash.   

You’re not the ‘idiot’ who sells at the bottom just because you adhere to rules of risk management.

Granted, investors can be their worst emotional enemies. If risk management rules are employed as an integration to an overall investment process, then selling at the very bottom may be avoided. From my experience, the dumbest actions of those who did sell at the bottom in March 2009, rest almost solely on their brokers.

You see, if financial professionals would have empathized with their clients and took enough (any) action to preserve capital as clients were calling with concern in late 2007, maybe, just maybe, those distressed investors wouldn’t have sold out of everything pretty much at the bottom.

The advice “not to worry, markets always come back,” regurgitated repeatedly did nothing to allay concerns; frankly hollow words made brokers appear as if they employed market blinders or were in a state of denial. They appeared ignorant, not aware of the severity of the crisis.

I listened enough to begin surgically trimming positions (I explained to clients we sought to take a scalpel, not a machete to reducing stock exposure in portfolios), and was proactive to sell clients out of a Charles Schwab bond fund described as “stable in price,” an “alternative to cash,” in November 2007 when the mutual fund share price was doing nothing but faltering.

Although Schwab portfolio management assured us in the field repeatedly that there was “nothing wrong with the fund,” and it wasn’t suffering mass redemptions, it did eventually go bust and Schwab was held accountable for lack of oversight.

Unfortunately, the company got off easy as the settlement with the SEC was nothing but a financial slap on the wrist when the fund held $13.5 billion at its peak.

You tell me this stuff isn’t rigged against retail investors? I believe differently. I always will.

Proactive behavior allowed me to maintain a semblance of stock ownership and then begin to increase exposure through the summer of 2009.  I deemed it buy-and-hold with a “protective twist.”

If your broker isn’t actively listening and is discounting concerns, it’s time to replace him or her. Answers received should be thorough and backed by analysis.

If you must invest today, consider dollar-cost averaging.

Usually, dollar-cost averaging where you add a fixed dollar amount to variable investments on a regular schedule, underperforms value or lump-sum investing. Unless the cyclically adjusted price-to-earnings ratio or CAPE exceeds 18.6 (today, it exceeds 25).

An impressive analysis and paper by Jon M. Luskin, CFP® for the Journal of Financial Planning titled “Dollar-Cost Averaging Using the CAPE Ratio: An Identifiable Trend Influencing Outperformance,” outlines how investment periods with a CAPE greater than 18.6 is beneficial to dollar-cost averaging with investment returns .45% greater than lump-sum investing.

The other side of the coin of buy-and-hold isn’t active trading.

Cop out. Lame excuse. I can’t be clearer. Not only are you branded a ‘bear’ if you employ a sell discipline, it appears that the buy-and-hold purists can’t think outside of extremes. They tend to associate selling with active trading. It’s a clever ploy designed to avoid the conversation or even the thought of a sell process. It’s just impossible.

Not it isn’t. And it isn’t active trading either. Active trading isn’t going to generate returns, just activity. Plus, if you consider that trades cost ZERO at most big-box financial retailers, transaction costs aren’t a concern anymore.

For years, the investment industry has tried to scare clients into staying fully invested in the stock market, no matter how high stocks go or what’s going on in the economy. Investors are repeatedly warned that doing anything otherwise is simply foolish because “you can’t time the market.” 

Here’s why per Lance Roberts:

“Wall Street firms, despite what the media advertising tells you, are businesses. As a business, their job is to develop and deliver products to investors in whatever form investor appetites demand…Wall Street is always happy to provide ‘products’ to the consumers they serve.

As Wall Street quickly figured out that it was far more lucrative to collect ongoing fees rather than a one-time trading commission…The mutual fund business was booming, and business was ‘brisk’ on Wall Street as profits surged.”

I’ll add:

Frankly, it’s too much work. Financial experts are primarily peddlers of managed products. They’re hired to regurgitate sell-side biased data mined from their employer’s research department. What they’re implying is they’re too busy meeting sales goals to consider risk management (the way you define it as an investor), important.

With that being said, consider other rules to protect your household for when the next ‘outlier’ event occurs (I mean, after this one).

 2. The FVC – The Financial Vulnerability Cushion.

The main purpose of the Financial Vulnerability Cushion is to fortify the foundation of a financial house. You’ve heard about maintaining three to six months of living expenses in cash for emergencies. Well, define an emergency. The car breaks down, sure. The A/C goes out? Right. Expenses such as these fit well into a three to six-month cash cushion. However, Black Swan events remind us this cushion isn’t enough.  We must finally learn to separate emergency from crisis.

Over the last six months we’ve been discussing on the radio how important it is to build a cash war chest of one to two years’ worth of living expenses and maintain it above everything else. These reserves are for crisis. A sudden job loss; major illness. Unfortunately, millions will be out of work here. Some, long term. I’m increasingly concerned about those who work in the energy sector. Never forget. Don’t listen to mainstream financial media again. Remember this time and work diligently to build a FVC.

3. Create financial rules around debt control and savings. Then stick to them. No matter what. Good times or bad.

Consider strict debt management and savings habits as the blend of robust soil which allows opportunities to be realized. Excessive debt and limited ability to buffer against financial emergencies and crisis can limit a person’s ability to take on riskier but rewarding ventures like career change, entrepreneurial endeavors and risks that may lead to significant, long-term wealth.

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

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

Personal, unsecured debt (credit card, auto): No more than 25% of gross monthly household income.

4. Be smarter with credit.

Today, credit cards are used for various reasons – convenience, cash back, travel reward points and the most unfortunate, to meet ongoing living expenses in the face of structural wage stagnation. So, consider the following.

Credit Card Debt = No greater than 4% of monthly gross income.

If your household gross income is $50,000 then credit card debt shouldn’t exceed $2,000. Per WalletHub, Texas ranks 46 with $2,848 in average credit card debt.

Survival tip: Take control of your money. Contact your credit card provider today and request a lower interest rate, perhaps the favorable balance transfer rate along with delayed payments. We are in this catastrophe together and it’s the least they can do for at least the rest of the year.

Car Loan Debt-to-Income Ratio:

Cars are required like breathing here in Houston and Texas, overall. However, they are not investments. Their values do not appreciate. If anything, auto values decrease as soon as you drive away from the dealership.

Car Loan Obligation = No greater than 25% of monthly gross income.

For example, a household bringing in $60,000 a year shouldn’t have more than $15,000 in outstanding auto loan debt. In my household, the ratio is less than 10%. I drive a Toyota RAV4. Put your ego aside; consider reliability first.

As I complete interviews with media and news outlets in Houston and across the country, my heart is overwhelmed with sorrow for those who are suffering through this, yet another ‘rare’ historical episode.

Please reach out to our team with questions and for guidance.

Every question is a good question.

Never be afraid to ask.


#FPC: Tips For A Volatile Market

These last couple of weeks have been crazy in the markets, last week we saw steady declines and this week we’re yo-yoing from one of the best days in the market to date to one of the worst. It seems like the sky is falling, it always does when we get into one of these environments, but fret not we’ve been here before. The question is what will you do different this time around? Since you’re here you’re probably already doing something different in reading the Real Investment Advice Newsletter, maybe you’re a client or a RIA Pro subscriber. Those resources will help you navigate these choppy waters.

Here are a few additional tips.

  • Understand that it’s ok to take profits and pay taxes.
  • Have a discipline to your investing approach.

Wall Street promotes an “it’s always a good time to buy” philosophy, but rarely does it give advice on when to reduce risk or increase it. For Wall Street it’s always about you… well, you staying invested. Have an exit strategy or a strategy to take profits, reduce risk and eliminate areas you no longer need to invest in. Markets change and so should your investments. Set it and forget it is not good enough.

  • Buy and hold is dead.

Portfolios should be monitored and changes should be made when needed. Not only when you visit or call your advisor. Buy, hold, monitor and sell. Buy and hold is for vampires who live forever, your life is finite. Getting back to even shouldn’t be a long term strategy.

  • Diversification is all but dead.

Wall Street will claim diversification is all you need, but we all know the type of diversification Wall Street refers to is all but dead. Markets are to intertwined in 2020, global supply chains, money flows, coordinated central bank interventions and the speed of information.

  • Speed of information is a loud, but silent killer to portfolios.

Years ago someone may be shot across the globe and we’d never hear about it or if we did by the time we received the information it was old news, outdated or like the game of telephone you may have played as a child: widely inaccurate. Now we get information in minutes if not seconds.

  • Everyone is an expert.

Have a Twitter account and an opinion or following and you are automatically an expert. There are many platforms out there for people to express their views, be careful what you consume. Facebook, Twitter or any other site may be a vacuum for your thoughts or may be a sales pitch in hiding. When I hear or see information I always want to know someone’s motive.

It’s ok to have a motive or promote your business. We promote ours daily by telling people what we do inside our business, how we invest and things you should be doing inside of your own financial plan.

Just remember, most of those so-called expert were in grade school during our last market down turn.

Nothing against being young, we were all there. But more and more advisors or experts have never been through a bear market. Many of these new investing platforms haven’t been around long enough to experience one either.  A bear market or a recession does more than impact your investments it can take a part of your soul. It changes people, I’ve heard many older advisors who’ve been around the block that they may not make it through another bad market. The emotional toll and stress is real. If you’ve never experienced a bad market it’s difficult to guide people through it. All the more reason you must guard against elation and have a process surrounding your investments, your actions and your emotions.

  • Watch for the wolf in sheep’s clothing.

Fear sells. Period. We get lots of calls from readers, our daily radio show or podcast and our television interviews. A big question I get from prospects or in the form of a general question is do you guys sell annuities? Typically the reason why is they were told something bad about one, preyed on by an insurance salesman or have had a bad experience with one. I’m telling you this because just this last week I’ve had more calls asking about annuities with guarantees. Fixed annuities, fixed indexed annuities or any other that will guarantee 7%.

The reasoning for these calls is that fear sells. When markets are as volatile as they currently are we make some of our worst mistakes and the annuity sales force knows this. I’m not saying annuities are bad, just don’t get sold one and live to regret it. We believe that annuities should be planned for not sold.

  • Understand your financial plan.

Many have financial plans that use only the rosiest of data. Don’t be afraid to stress your plan, use low performance numbers, bad market returns, give yourself a raise annually-stress your plan! I’m not saying that any of those events above will happen, but what if they did? We want you to be prepared. Our job is to educate you on how all of your financial world combines to help you meet your goals and provide you with the best results and the retirement you hoped for your family.

  • Keep your cool.

This is difficult to do when you see your life’s savings eroding quickly. Markets are very reflexive when they are at extreme deviations and markets moving as quick as they have over these last couple of weeks can be a scary event. You will come out on the other side. The markets don’t just go up and no one has taken a recession out of the business cycle. It will be ok, if you work with a good advisor they have a plan, an exit strategy, maybe they’ve already reduced your equity exposure, they’ve accounted for this in your financial plan. It doesn’t feel good. Investing is difficult because we let our emotions get in the way. 

  • Just because we CAN do something doesn’t mean we should. We’re often our own worst enemy.

Our brains and gimmicky marketing often get in our way. Have you ever seen the E Trade commercial where they tell you all about your high school buddy that trades on E Trade from his yacht or the Vanguard ad with the guy next to his personal plane? When the markets go up investing can be fairly easy, but what about when markets begin to drop? Dalbar did a study in 2019 that shows since 1988 the stock market’s average return has been 10% per year, but stock fund investors have earned only 4.1% annually. Why the big difference? Fear. Human nature is for us to get into something when it’s high and get out when it’s bad. We buy high and sell low even when we know the number one rule of investing is buy low and sell high.  I need a degree in Psychology just as much as I do in Finance. We study Behavioral Finance to limit the biases, help with self control and help make rational decisions.

  • Communicate

Reach out to your advisor, we have sent numerous emails, videos, hold investor summits and one on one phone calls or meetings to discuss the overall impact and to reinforce the plan and strategy. This is when good advisors earn their keep.

If you have questions, concerns or want to know more about how to implement these strategies for your family please don’t hesitate to reach out. We’d love to help.

Three Ways to Avoid the ‘Lost Highway’ of Financial ‘Advice.’

Now boys don’t start to ramblin’ round
On this road of sin are you sorrow bound
Take my advice or you’ll curse the day
You started rollin’ down that lost highway

Hank Williams.

On the road to personal financial milestones, investors aspire to reach multiple destinations that are important to them – whether it’s saving for a college education or retirement, we all seek to assess travel risks, regularly track progress and hope to avoid hazardous conditions.

We all long to  -cheer – “I have arrived!”

However, there is imminent danger on the path to our destinations; like a low fog that hangs heavy, there are forces out there which blind and misdirect investors from the major road onto a lost highway. Unfortunately, obstacles to wealth are created by Wall Street, mainstream financial pundits and the social media they employ as a conduit of misinformation. And investors? You’re not off the hook. Your emotions are going to facilitate a major portfolio accident.

As I prepare framework for a screenplay “Lost Highway,” titled after a song written by Hank Williams, Sr., I gravitate to the Johnny Horton version which is slower, more haunting.  Consider the ‘Lost Highway’ one of regret and foreboding, a weigh station between life and death, certainty and the unknown.  Singer Johnny Horton, a spiritualist, knew for certain his demise was imminent and and it would be tragic. On November 5, 1960; at 2 am on a bridge in Milano Texas, Mr. Horton’s premonition became an unfortunate reality. More on that story later.

For now, it’s important for readers to navigate their own financial life highway and avoid the diversions which grow larger, deeper, as this bull market rages on.

As investors, let’s attempt to navigate away from these 3 financial potholes, shall we?

1 – As a retail investor, I’d avoid Twitter.

It’s called ‘FinTwit.’ A lost highway where financial experts who appear to know everything pat each other on the backs with joyous volleys of endless-scrolling bon mot. Most of these Twitter folk were running around the house in their Underoos during the last bear market or blew up portfolios during the financial crisis and conveniently chose to forget it because market recovery cures all ills – except for yours of course, because time is more valuable than money.

I mean, why not? The market recovery gave many advisors and big-box financial retailers a free pass. Of course, markets recover, don’t they? Sure they do. If you’re willing to wait a decade or so to break even. In the span of a human life, lots of events occur, lots of hair is lost, lots of wrinkles, lots of wealth stagnates over the years. The stock market is the Dorian Gray of money and the Twitter Twits believe you, as a human, have the lifespan of a vampire.

Let me show you.

Nothing wrong with Meb; he’s a very academic, smart guy.  I like his work. I understand why he shared this tweet. But as my grandfather would say – OOFA! We’re being shamed as advisors for limited exposure to international stocks. I get it. It’s a big world out there. Most investors – professionals and novices – will never seek to invest outside their borders.  And that’s a bad idea.

It’s a formidable, worldwide issue deemed Home Country Bias. However, over the last decade it’s been a fruitful endeavor for U.S. advisors  and investors to diversify mostly among U.S. stocks. International money managers should have, in hindsight, been overweight in overseas or U.S. stocks. Home-based bias has cost them. The EliteTwits would scoff at me for writing this (not that I care),  – I do not see a reason to invest in an asset class that underperforms for extended periods. I don’t find it of value to be diversified at all or at the least, greatly exposed to dormant asset classes just to ‘spread the risk.’

Diversification can indeed minimize specific company risk. If the majority of retail investors owned individual stock portfolios and sought to own ‘oil’ and ‘bleach’ in their portfolios from various countries,  diversification from an unsystemic perspective would be effective. After all, if oil stocks falter, it’s most likely food & beverage stocks are thriving or at the least, not faltering as hard as non-cyclical stocks.  Anybody you know still own individual stocks? Bueller? Heck, they don’t even split anymore.

Most investors today are encouraged to buy  baskets of stocks through index funds or their exchange-traded brethren. So, if I own an investment that represents the S&P 500  and the MSCI EAFE Index i.e; international stocks,  and one underperforms for an extended period of time, well then, why do I need to own it? Because mainstream financial media tells me so?

You must understand what diversification is and most crucial, what it isn’t. Certainly, it’s not the panacea it’s communicated to be. There’s no ‘free lunch,’ here, although I continue to hear and read this dangerous adage in the media and on Twitter. The word gets thrown around like a remedy for everything which ails a portfolio. It’s the industry’s ‘catch all’ that can lull investors into complacency, inaction.

So, who buys into this free lunch theory, again? After all, what is free on Wall Street? Investors who let their guard down, buy in to the myth of free lunches on Wall Street,  find their money on the menu.

Due to unprecedented central bank intervention, there exists extreme distortion in stock and bond prices. Global risk-averse investors have purchased bonds with a voracious appetite. The odds of negative rates even at least briefly, can manifest here in the states. As I’ve lamented on the radio show in December and January – domestic interest rates will be lower in 2020.

A way to effectively manage risk has morphed into two disparate perceptions. The investor’s definition of diversification and that of the industry has parted, leaving an asset allocation plan increasingly vulnerable.

Today, the practice of diversification is Pablum. Watered down. Reduced to a dangerous buzzword. 

What is the staid mainstream definition of diversification?

According to Investopedia – An internet reference guide on money and investments:

  • Diversification strives to smooth out unsystematic risk events in a portfolio so the positive performance of some investments neutralizes the negative performance of others. Therefore, the benefits of diversification hold only if the securities in the portfolio are not perfectly correlated.
  • Diversification benefits can be gained by investing in foreign securities because they tend to be less closely correlated with domestic investments. For example, an economic downturn in the U.S. economy may not affect Japan’s economy in the same way; therefore, having Japanese investments gives an investor a small cushion of protection against losses due to an American economic downturn.

Now let’s break down the lunch and examine how free it is. 

Unsystematic risk – This is the risk the industry seeks to help you manage. It’s the risks related to failure of a specific business or underperformance of an industry.

To wit:

  • This is a company- or industry-specific hazard that is inherent in each investment. Unsystematic risk, also known as “nonsystematic risk,” “specific risk,” “diversifiable risk” or “residual risk,” can be reduced through diversification.
  • So, by owning stocks in different companies and in different industries, as well as by owning other types of securities such as Treasuries and municipal securities, investors will be less affected by an event or decision that has a strong impact on one company, industry or investment type.

So, think of it this way: A ‘diversified’ portfolio represents a blend of investments – stocks, bonds for example, that are designed to generate returns with less overall business risk. While this information is absolutely valid, the financial industry encourages you to think of diversification as risk management, which it isn’t.

Here’s what you need to remember:

Bleach  (consumer staples) and oil (consumer cyclicals) eventually all run down-hill, in the same direction in corrections or bear markets. 

Sure, ketchup or bleach may run behind, roll slower, but the direction is the one direction that destroys wealth – SOUTH.  Large, small, international stocks. Regardless of the risk within different industries, stocks move together (they connect in down markets).


What are the odds of one or two companies in a balanced portfolio to go bust or face an industry-specific hazard at the same time?

What’s the greater risk to you? One company going out of business or underperforming or your entire stock portfolio suffers losses great enough to change your life, alter your financial plan.

You already know the answer.

Diversification is not risk management, it’s risk reduction.

  • When your broker preaches diversification as a risk management technique, what does he or she mean?
  • It’s not risk management the pros believe in, but risk dilution.
  • There’s a difference. The misunderstanding can be painful.

To you, as an investor, diversification is believed to be risk management where portfolio losses are controlled or minimized. Think of risk management as a technique to reduce portfolio losses through down or bear cycles and the establishment of price-sell or rebalancing targets to maintain portfolio allocations. Consider risk dilution as method to spread or combine different investments of various risk to minimize volatility.

Even the best financial professionals only consider half the equation. Beware the lamb (risk management) in wolf’s clothing (risk dilution). The goal of risk dilution is to “cover all bases.” It employs vehicles, usually mutual funds, to cover every asset class so business risk can be managed. The root of the process is to spread your dollars and risk widely across and within asset classes like stocks and bonds to reduce company-specific risk.

There’s a false sense of comfort in covering your bases. Diversification in its present form is not effective reduce the risk you care about as an individual investor – risk of loss.

Today, risk dilution has become a substitute for risk management, but it should be a compliment to it. Risk dilution is a reduction of volatility or how a portfolio moves up or down in relation to the overall market. 

Risk dilution works best during rising, or up markets as since most investments move together, especially stocksThink about betting on every horse in a race.

  • In other words, a rising tide, raises all boats.

So, why is risk reduction not risk management, the prevailing sentiment?

Sales Goals: Most financial pros are saddled with aggressive sales goals. Risk dilution is a set and forget strategy. Ongoing risk management is time consuming and takes time away from the selling process. Unfortunately, the financial industry as a whole, has watered it down and broadened it to such a degree it’s become absolutely ineffective as a safeguard against losses. One reason are the sales targets that force financial representatives to spend less time with client portfolios.

Compliance Departments: A targeted diversification strategy places accountability on the advisor and poses risk to the firm. A wider approach makes it easier to vector responsibility to broad market ‘random walks’ so if a global crisis occurs and most assets move down together, an advisor and the compliance department, can “blame” everything outside their control. Here’s a perfect compliance department question: “so why isn’t this investor allocated appropriately to international stocks?” Appropriate for whom?

At RIA, we monitor global trends. We don’t believe investors need to participate in an asset class that’s been out of favor for over ten years. That doesn’t mean we won’t; it means our exposure has been minimal.  That stance can change at any time. I mean, isn’t that what your advisor is supposed to do? The average investor holding period is less than two years. So imagine attempting to convince most investors to sit on poor performance for longer than decade. In the trenches, it’s never gonna happen.

I have hundreds of examples of Twitter commentary. that will send you down a Lost Highway. To repeat, my advice to retail investors: Please avoid the medium. It’s generally unhealthy for your psyche. Yes, we’re on Twitter too because we need to be. Avoid our feed too. Follow and read the blog instead.

2 – Avoid an ‘accumulation’ mindset if you’re five years or sooner from retirement, or you may never exit the Lost Highway.

Here’s another unusual tweet. I have yet to meet an investor, average, above-average, HUMAN, over the last 30 years who’s gained 300% after losing 30%. Those who are close to retirement must avoid information like this which fosters overconfidence and complacency.

Investors five years or less until retirement must avoid FOMO or Fear Of Missing Out, when it comes to blowing up their overall asset allocations; tempted to take on more risk than they’re prepared to handle. In January when the S&P 500 was three-standard deviations above its 200-week moving average, retirees or those close to retirement were questioning their tolerance for risk even though their portfolio returns were greater than four times the personalized benchmark rate required to achieve long-term financial goals.  

Lance Roberts recently wrote: “There have only been a few points over the last 25-years where such deviations from the long-term mean were prevalent. In every case, the extensions were met by a decline, sometimes mild, sometimes much more extreme.” 

And while we were trimming gains, rebalancing and facing challenges to add money to equities for new clients, tenured ones were wondering why we were being so cautious. Now that markets have fallen precipitously, the same retirees now question why they sought greater risk in the first place.  Some of the same investors wonder why we’re buying at lower prices or dipping our pinky toe into stock waters. It’s an emotional roller-coaster that ostensibly will destroy portfolio returns.  

As we teach around town at our popular Retirement Right Lane Classes, the financial services industry preaches a wholesale accumulation mindset where every downturn is a buying opportunity. However, retirees who are need to re-create a paycheck, withdraw a fixed amount or percentage from variable assets like stocks and bonds, must realize they need to protect capital over time and severe losses must be avoided. Limited losses are inevitable. That’s the price you pay for investing in stocks. If you cannot handle an ebb and flow of risk assets, you shouldn’t be invested in the market. It’s a harsh reality; the recent downturn my serve as a valuable lesson.

James B. Sandidge, JD in his paper “Adaptive Distribution Theory,” for The Journal of Investment Consulting, describes The Butterfly Effect for retirees. The effect refers to the ability of small changes early on in a process that lead to significant impact later.

Depending on the length of this correction and damage incurred, systematic withdrawal rates may need to stay the same (do not increase cash flow requirements in any year during the first 5 that has a negative return) or reduced altogether.  James’ chart from his paper below, outlines how the sacred ‘4 percent withdrawal rule,’ can place a retiree in jeopardy if withdrawals aren’t monitored, revisited through bear market cycles.

3 – Emotions are going to be the demise of your portfolio performance.

I get it. Many investors – novice or seasoned – have forgotten markets correct; newer investors are hard-pressed to believe that bear markets are possible. I personally embrace rough markets. They provide valuable lessons, great wisdom; a dose of humility, a chance to purchase stocks at attractive prices.  Each downturn is different and I take notes. It’s through times like this I’m thankful that I’m no longer with my former employer and part of a team who employs a surgical, rules-based sell discipline.

Tenured investors need to be reminded again that portfolios fluctuate! Being all in or all out of stocks is the worst move I’ve ever witnessed. In other words, selling all stocks low, purchasing again higher or ‘when the crisis blows over’ (already too late), tells me that you my friend, should avoid stocks at all costs, through every cycle. It’s a caveman reaction that will lead to very poor returns over time. Stocks are risk assets and over the last decade, we’ve forgotten what the word ‘risk’ means.

Oh, you will bleed through bear markets; it’s crucial not to hemorrhage. Can you surgically sell through down cycles like we do at RIA? If you have solid rules to do so, yes. Should you take a chainsaw to your wealth and sell everything in a panic? No. Personally, I’m using this downturn to place cash I’ve sat on for two years, selectively, slowly, to work in stocks.  Our investment team is doing the same at RIA. We maintain a rules-based, three-prong approach to take profits, sell weak players and add to positions we believe are good opportunities. 

I pray a prolonged downturn doesn’t turn off  yet another generation of young adults from investing in equities.  These generations have embraced Twitter, so I fear the  messages they’ve taken in as gospel from the FinTwit stars over the years.  I believe the FinTwit club members with insensitive tweets which outline how Jeff Bezos lost more wealth (to help followers keep the ‘downturn in perspective,’) are nothing short of idiocy. There’s no way in hell these people deal with clients on a consistent basis. 

To keep it in perspective – Bezos, the founder of Amazon, bled close to $12 billion during the market downturn. Don’t feel bad:  He’s still worth $116 billion.  If you’re not seated at the Bezos table of wealth, big losses can derail future plans. However, an acceptable rate of loss must be accepted and built into a financial plan. Holistic investors are guided by rules; their guidebooks are their personalized financial plans. Investors who fly by the seat of their pants and get absorbed in fear and greed at bottoms and tops are going to find investing a disappointing experience.

Johnny Horton was a singer of folk/country story songs such as The Battle of New Orleans and Johnny Reb. However, my two favorites are North to Alaska and his rendition of  Hank Williams’ Lost Highway.  Mr. Horton was haunted by a premonition that he’d be killed by a drunk driver.  So much so, he cancelled his attendance for the opening of the theatrical film, North to Alaska. He was hesitant to play the famous Skyline Club in Austin.

From Arden Lambert who wrote of the fatal night:

“Soon after the gig was over, he kissed his wife Billie Jean good-bye. Jean was Hank Williams’ widow whom Horton married a year after Williams’ death in 1952. Horton gave his goodbye kiss to Jean in the same place on the same cheek where Hank had kissed her after his last gig at the Skyline.

Horton, together with his bass player Tillman Franks and manager Tommy Tomlinson, headed to Shreveport, Louisiana. From the beginning, Franks noted that Horton was driving too fast (though that wasn’t new about him as he always drove fast). Suddenly, a pick-up truck smashed head-on into Horton’s car. Horton’s companions were severely injured, and he was still alive when the ambulance came. He died, however, on their way to the hospital.”

I imagine Johnny and his bass player still driving that fatal stretch of road in Milano, Texas. Forever trapped on the Lost Highway. Two men who died way too soon.

I implore that you don’t place your portfolio and emotions on a similar road. 

Today, it’s easier than ever to do so.

Here’s Johnny’s version of the song. Let me know what you think…



#FPC: Dave Ramsey Is Right & Very Wrong About Permanent Life Insurance (Pt. 2)

Last week’s piece was on why Dave Ramsey is right and wrong about permanent life insurance and some of the reasons you may consider using a permanent life insurance policy. 

To reiterate last week’s sentiment-permanent life insurance is not for most, but if you:

  • Max out your retirement savings
  • Make too much to contribute to a Roth
  • Have accumulated a large savings account
  • Want to gain flexibility from taxes
  • Want growth, but would like some protection from high valuations
  • Have a large estate that needs estate tax protection

Keep reading…

Let’s discuss some of the benefits of these policy’s:

  • No 1099’s– your cash value isn’t taxed year to year like most non-qualified investments, in fact if used properly the funds will never be taxed
  • Distributions aren’t considered income (when done properly) so unlike your pre-tax 401K, you’ll be using these funds tax free, which will be a big deal in retirement
  • No Income limitations-that’s right say goodbye to those income limitations most are familiar with on IRA’s
  • No Contribution Limits– it’s difficult to super charge your savings in tax free or tax deferred accounts due to the contribution limits.  In 2020, you can contribute $19,500 to an employer sponsored plan with a catch-up provision of $6,500 for those over 50. In an IRA you’re much more limited. You may contribute up to $6,000 with an additional $1,000 catch up provision for workers 50 or older. Another great tool that’s finally gaining the recognition it deserves is the HAS or Health Savings Account. If you have access to an HSA an individual may contribute $3,550 and a family can contribute $7,100. If you’re maxing out all of these and hopefully utilizing a Roth you’re likely in pretty good shape, but where do those additional funds go?
  • No age requirement for distributions– cash value can be used at any time. Need funds for kid’s college, or retired early prior to 59 1/2-no problem.
  • Likelihood of tax reform impacting your policy is low– this is a little loop-hole that many think may change in the future because of the ability to grow and distribute funds on a tax free basis. With the path the government is on I’m concerned not to have this tool. The 80’s were the last time changes were made to these types of plans and current policy holders were grandfathered to have no changes made to their policies, but only impacting future policy holders. The belief is that the precedent has been set and it would be unfair to materially impact the plans already underway.
  • Creditor Protection-most all states offer some sort of creditor protection some full and some partial. Check with your state to determine how protected you are from potential creditors or judgments.

All these advantageous aspects why don’t we hear more about these types of tools or why do they get a bad wrap?

Dave Ramsey is right. They’re not for everyone. BUT for the few who already know how to save, high income earners or those just looking to be a little more strategic this could be a viable option.

I think many also have an aversion to these products because they are misunderstood or they felt the pressure of someone trying to make a hard sell. Let’s be very clear, a recommendation for such a policy should only come after a thorough financial plan is done. We often say planned, not sold, they are a complex piece to an already complicated puzzle.

Buyer Beware:

Many agents, or “financial advisors,” who sell insurance are held captive to 1 firm and 1 product or are limited in some way. Here I use the term “financial advisors” very loosely, because many are just salesman trying to make a quick buck, not advisors. Have hammer, see nail. Unfortunately, it’s not that easy or at least it shouldn’t be.

I believe any and all financial decisions should be made holistically by looking at the big picture through a telescope and then bringing it back down to each star in your universe with a microscope. Not sparing any detail. After all, each piece of the puzzle must fit and work together. Ideally, you want to work with someone who is independent from working only with one firm so they may scorch the earth to find the best policy for you and your family.

Life insurance, or an annuity, is also not a tool you put all of your funds in and if anyone advises so, RUN!

In the coming weeks we’ll discuss how to use permanent life insurance for cash accumulation or estate planning, what to look for in a policy and the different types of permanent life insurance available.

6 Considerations for Long-Term Care Coverage.

Retirement is a a continuous road; mile markers that represent age may be visualized along the path.

However, if one looks to retire at 67 and in relatively good health, it’s a challenge to comprehend what quality of life may be like at 80. It’s easy to understand how 40 may not look too different from 60 from a quality of health perspective. The stretch from 60 to 90 may be so dramatically different, it’s a challenge to envision.

How does one contemplate their own increasing frailty?

People tend to avoid the topic of long-term care which is defined as financial and caregiver resources required to perform daily activities such as bathing and dressing. Services range from temporary home health services to full-time care through assisted living or memory care. At RIA, we find that investors are hesitant to confront the topic of long-term care. It’s understandable. After all,  the mitigation of long-term care risk is expensive. People barely save enough for retirement, overall. Imagine planning for the possible additional six-figure burden of long-term care services.

Also, consumers don’t understand how coverage works, premiums have the ability to skyrocket every few years which can break constrained budgets, and insurance underwriting can be a challenge. It’s reported that over 30% of those who apply for traditional long-term care coverage are rejected for health reasons. Realistically, after age 62, premiums become cost prohibitive for consumers. It’s in their mid-sixties we find people scramble to put together some patchwork plan. We call long-term care the ‘financial elephant in the room.’ You can try to lift it, move it to another area of your financial house however, wherever you go, there it is! 

As we lament at workshops, on the radio, to clients at face-to-face meetings – heck, to anybody who’ll listen! – Long-term care expenses are the greatest threat to a secure retirement. Confounding about this specific study is that over 53% of Boomers are confident about managing long-term care costs yet the majority have nothing set aside. The results lead me to conclude there’s a strong and dangerous case of DENIAL going on here. Is there more to the story? Since 50% of middle-income Boomers maintain less than $5,000 in emergency reserves, saving for retirement AND retirement care is most likely too burdensome.

Don’t ignore the elephant. Prepare for it. If traditional long-term care insurance isn’t in your future, hope isn’t lost. Consider these alternatives.

Bankers Life Center for Secure Retirement in a study conducted by Blackstone Group in October 2018, discovered that middle-income Baby Boomers (those with an annual household income between $30 and $100,000 and have less than $1 million in investable assets), are increasingly concerned about staying healthy enough to enjoy retirement (56%). Yet, an astounding 4 in 5 (79%) of Boomers sampled have no money set aside specifically for retirement care needs.

First Step: Don’t Ignore the Elephant!

Your rightful concern, if I got you thinking, is to take a deep breath and find a Certified Financial Planner® who is also a fiduciary. In other words, your interests above all else. Financial plans laud strengths; plans also expose financial vulnerabilities that require remedy.

Per the Center For A Secure Retirement® study, six out of ten Baby Boomers have a plan for how they will fund retirement. Only one-third have a retirement long-term care strategy which leads me to believe this group is not undertaking holistic financial planning which considers every facet of a fiscal life including the possible need for long-term care from custodial to skilled nursing. I’m not surprised that 88% of Boomers who have included a retirement care strategy reported a positive impact to their overall plan.

Second Step: Cover the Spouse Who’ll Most Likely Live Longest.

I’m not going to lie; the mitigation of long-term care risk using insurance isn’t cheap.  According to the American Association for Long-Term Care Insurance, the best age to apply is in your mid-fifties. To obtain coverage, the current condition of your health matters or you may not qualify. Only 38% of those age 60-69 make the cut. Even if healthy, at a point in life, especially around the mid-sixties, premiums are known to be household budget nightmare. For example, a couple both age 60 in a preferred health class can wind up paying close to $5,000 a year in premiums and will likely experience premium increases over time.

The number of insurance carriers is shrinking – down to less than 12 from more than 100. Recently, Genworth, one of the heavy hitter providers of long-term care insurance temporarily suspended sales of traditional individual policies and an annuity product designed to provide income to cover long-term costs such as nursing home stays.

If you’re astute enough to plan for retirement care and concerned about the impact of dual premiums on the household budget including saving for other goals, work with a Certified Financial Planner to create a scenario to consider at least partial coverage for the spouse with a greater probability of longevity. For example, on average, women outlive men by 7 years.

If single and do not have a reason to leave a legacy to children or grandchildren, it’s likely that asset liquidation can adequately cover a long-term care event. Again, it’s best to work with a CFP Fiduciary who can help create a liquidation strategy.

Third Step: Take the Kids Out of It. 

I’m shocked by parents who assume their adult children will take care of them or ‘take them in’ in the case of a long-term care event. Personally, I find it too painful to interrupt my daughter’s life and impact her physical, emotional and financial health by providing long-term assistance to her dad.

According to www.caregiver.org, 44 million Americans provide $37 billion hours of unpaid informal care for adult family members and friends with chronic illnesses and conditions. Women provide over 75% of caregiving support. Caregiving roles are going to do nothing but blossom in importance as the 65+ age cohort is expected to double by 2030. There will be a tremendous negative impact, financial as well as emotional, on family caregivers who will possibly need to suspend employment, dramatically interrupt their own lives to assist loved ones who require assistance with activities of daily living.

Parents must begin a dialogue with adult children to determine if or how they may become caregivers. Armed with information learned from discussion, I have helped children prepare for some form of caregiving for parents.

A 47-year-old client has added financial support for parents as a specific needs-based goal in her plan; another recently purchased a larger one-story home with an additional and easily accessible bedroom and bath. Yet another has commenced building a granny pod on his property for his elderly (and still independent), mother. All these actions have taken place due to open, continuous dialogue with parents and siblings.

In addition, elder parents have been receptive to allocating financial resources to aid caregiver children. Siblings who reside too far away to provide day-to-day support have been willing to offer financial support as well. However, these initiatives weren’t pushed on children. Children weren’t forced into a situation based on an assumption. If you’re a parent, ask children if they’d be willing to provide care. As an adult child, don’t be afraid to ask parents how they plan to cover long-term care expenses.

Fourth Step: Get Creative. 

Three out of every five financial plans I create reflect deficiencies to meet long-term care expenses. Medical insurance like Medicare does not cover long-term care expenses – a common misperception. Close to 56% of people surveyed in the Bankers Life Center study are under the false impression that Medicare covers long-term care expenses.

The Genworth Cost of Care Survey has been tracking long-term care costs across 440 regions across the United States since 2004.

Genworth’s results assume an annual 3% inflation rate. In today’s dollars a home-health aide who assists with cleaning, cooking, and other responsibilities for those who seek to age in place or require temporary assistance with activities of daily living, can cost over $45,000 a year in the Houston area. On average, these services may be required for 3 years – a hefty sum of $137,000. We use a 4.25-4.5% inflation rate for financial planning purposes to reflect recent median annual costs for assisted living and nursing home care.

As I examine long-term care policies issued recently vs. those 10 years or later, it’s glaringly obvious that coverage isn’t as comprehensive and costs more prohibitive. It will require unorthodox thinking to get the job done.

One option is to consider a reverse mortgage, specifically a home equity conversion mortgage. The horror stories about these products are way overblown. The most astute of planners and academics study and understand how for those who seek to age in place, incorporating the equity from a primary residence in a retirement income strategy or as a method to meet long-term care costs can no longer be ignored. Those who talk down these products are speaking out of lack of knowledge and falling easily for overblown, pervasive false narratives.

Reverse mortgages have several layers of costs (nothing like they were in the past), and it pays for consumers to shop around for the best deals. Understand to qualify for a reverse mortgage, the homeowner must be 62, the home must be a primary residence and the debt limited to mortgage debt. There are several ways to receive payouts.

One of the smartest strategies is to establish a reverse mortgage line of credit at age 62, leave it untapped and allowed to grow along with the value of the home. The line may be tapped for long-term care expenses if needed or to mitigate sequence of poor return risk in portfolios. Simply, in years where portfolios are down, the reverse mortgage line can be used for income thus buying time for the portfolio to recover. Once assets do recover, rebalancing proceeds or gains may be used to pay back the reverse mortgage loan consequently restoring the line of credit.

Our planning software allows our team to consider a reverse mortgage in the analysis. Those plans have a high probability of success. We explain that income is as necessary as water when it comes to retirement. For many retirees, converting the glacier of a home into the water of income using a reverse mortgage is going to be required for retirement survival and especially long-term care expenses.

American College Professor Wade Pfau along with Bob French, CFA are thought leaders on reverse mortgage education and have created the best reverse mortgage calculator I’ve studied. To access the calculator and invaluable analysis of reverse mortgages click here.

Insurance companies are currently creating products that have similar benefits of current long-term care policies along with features that allow beneficiaries to receive a policy’s full death benefit equal to or greater than the premiums paid. The long-term care coverage which is linked to a fixed-premium universal life policy, allows for payments to informal caregivers such as family or friends, does not require you to submit monthly bills and receipts, have less stringent underwriting criteria and allow an option to recover premiums paid if services are not rendered (after a specified period).

Unfortunately, to purchase these policies you’ll need to come up with a policy premium of $50,000 either in a lump sum or paid over five to ten years. However, for example, paying monthly for 10 years can be more cost effective than traditional long-term care policies, payments remain fixed throughout the period (a big plus), and there’s an opportunity to have premiums returned to you if long-term care isn’t necessary (usually five years from the time your $50,000 premium is paid in full). Benefit periods can range from 3-7 years and provide two to five times worth of premium paid for qualified long-term care expenses. As a benchmark, keep in mind the average nursing home stay is three years.

I personally went with this hybrid strategy. For a total of $60,000 in premium, I purchased six years of coverage, indexed for inflation, for a total benefit of close to $190,000.

Also,  pay closer attention to your employers’ benefits open enrollment. It’s amazing to discover how many people have bypassed or didn’t realize their employers offer long-term care insurance coverage. Those with health issues and possibly ineligible for coverage in the open marketplace will find employer-offered long-term care insurance their best deal.

Fifth Step: Formalize a Liquidation/Downsize Plan. 

Consider a liquidation/downsizing hierarchy to subsidize long-term care costs. According to a Deutsche Bank report from January 2018 titled US Wealth and Income Inequality,  a record high 30% of Americans hold no wealth outside their primary residences which makes me wonder how that group is going to fund retirement, let alone long-term care expenses.

We partner with clients who can’t afford premiums or not able to pass long-term care insurance underwriting with liquidation strategies which look to begin 3-5 years before retirement.  Liquidation of a primary residence can be a workable option especially if an individual is widowed or living alone.  Empty-nesters can aspire to sell and move into one-story smaller digs early into or before retirement to lower overall fixed costs. They include in their plan home improvements such as ramps, easy access baths, kitchen cabinets and the cost of caregiver services which complement a spouse or life partner’s long-term care responsibilities. 

Per the Center for Retirement Research from their analysis dated February 11, 2020, most older Americans prefer to age in their homes. However, it’s important to decide whether a current residence is appropriate for the task. In other words, many older Baby Boomers look to remain in large homes with empty rooms and two stories which is absolutely not practical – Especially in the face of property taxes that increase annually, sometimes dramatically! 

The Center’s paper discovered that:

  • Seventy percent of households have very stable homeownership patterns, even over several decades. They either stay in the home they own in their 50s (53 percent) or purchase a new home around retirement and stay for the rest of their life (17 percent).
  • The 30 percent of households that do move consist of two distinct subgroups. Frequent movers (14 percent) appear to face labor market challenges.  Late movers (16 percent) look like a slightly more affluent version of the households that never move, but then face a health shock that forces them out of the home that they owned into a rental unit or a long-term services and supports facility.
  • Overall, the findings largely support the narrative from prior research that most people want to age in place and move only in response to a shock.

Sixth Step: Consider Long-Term Care Riders for Permanent Life Insurance.

Permanent life insurance unlike term, builds cash value. Policies can be ‘over funded’ above the cost of insurance to allocate to a fixed interest sleeve and other investment choices attached through various calculations, to stock indexes such as the S&P 500. There is no chance of loss in cash-value accumulation therefore balances have the true opportunity to compound. 

A living benefits rider allows the insured to accelerate access to death benefits due to certain conditions such as long-term care needs and terminal illness.  There are benefits to utilizing permanent life insurance to subsidize long-term care needs. Premiums remain level (unlike long-term care insurance premiums that tend to increase on a regular basis, sometimes dramatically), second, of course unlike long-term care insurance, at least there’s life insurance or dollars at the end of the road for heirs.

In addition, underwriting for morbidity risk (long-term care) can be draconian compared to mortality risk (life insurance). In other words, medical issues that have potential to affect activities of daily living may not have the same effect on life expectancy; consumers who don’t qualify for long-term care insurance may still qualify for life insurance.  There are a couple of drawbacks to these life insurance riders:  Funds accessed during a lifetime will inevitably reduce the face value or death benefit of a life insurance policy. Second, riders cost money. So, before adding a living benefits rider, through holistic financial planning be certain you require insurance to mitigate long-term care risk. Through proper planning, we discover that four out of every ten clients have assets to liquidate or are able to self-insure.

Retirement care analysis is a deep dive into the overall retirement planning process. Unlike income planning, retirement care planning requires us to face our inevitable physical limitations and the toll it can have on personal finances along with the negative ripple effects on wealth and health of loved ones.

It’s best to expose vulnerability and plan accordingly while there’s precious time to do so.

#FPC: Dave Ramsey Is Right & Very Wrong About Permanent Life Insurance (Pt. 1)

Let’s start with the basics, Dave Ramsey is great at a couple of things, budgeting, helping people get out of debt, prioritizing material things and/or putting things in perspective. 


There are some things where good ole Dave isn’t so great. I know this is going to surprise many of you, but you need to hear this.


Allow me to give you some additional context. Dave is good at helping people get out of debt and make better financial decisions, in fact he’s really good. His Financial Peace University has helped so many people get on track to a better life. I’m a really big fan of Dave for the work he does, but my clients and most of our readers have graduated beyond Dave’s philosophy’s to needing more sophisticated planning and advice.

Dave Ramsey believes you should buy term life insurance and invest the rest. In theory it sounds great. For example, if you were to spend $1,000 a month on a permanent life insurance policy- according to Dave you should buy a term policy and invest the rest.

And from a RISK MANAGEMENT mindset I love the idea.

In fact, this is where you should start. Buy a term policy to protect your family. There are many factors to consider when purchasing a term policy and how much you need here are a few:

  • Loss of Income
  • Debt
  • Expenses
  • Children
  • Lifestyle
  • Age
  • Do you have insurance through work? Is it portable if you leave?

The rule of thumb is 7 to 10 times your annual salary-BUT we believe each individual should go through a thorough analysis to help determine what’s right for their family.

Now that you have your bases covered to protecting your family what’s next?

I’m making an assumption that you already have an emergency fund, established a “financial vulnerability cushion” and are wondering where to put additional funds.

Here’s what I hear often-

  • I make too much to put into a Roth IRA
  • I make too much to put into a Roth 401(k)- (no you don’t there are no income limitations)
  • I can’t make tax deductible contributions to a Traditional IRA
  • Where do I put funds?
  • Savings aren’t earning much interest,
  • I’m missing out on returns in the markets (High Yield Savings) No FOMO.
  • Or alternatively, Markets are too high to put funds to work

The list goes on and on.

What has the Financial Industry beat into our brains year after year?

 Tax Deferred Savings, Tax Deferred Savings, Tax Deferred Savings!

Times are changing. With the new Secure Act we just saw the death of the Stretch IRA and are in one of the lowest tax brackets we’ve seen in years. Not to mention the TCJA (current tax code) sunsets in 2026 and there is also a political party dead set on raising taxes if elected.  In regard to debt and taxes neither Democrat or Republican party understands a budget or how to truly curtail deficit spending. U.S. Government let me introduce you to Dave. It’s a match made in Heaven-until it causes a massive recession, but that’s beside the point. I’d expect higher taxes, not austerity.

So how will you prepare for higher taxes?

When helping clients prepare for retirement we look for not only the low hanging fruit or the obvious feel good propositions, but also some of the harder ones. Like paying taxes now.  

Right now we’re the bearers of bad news.

You don’t always retire in a lower tax bracket.

AND, most aren’t prepared for the additional stealth taxes Uncle Sam surprises you with.

Stay with me, I know I’m walking you through a dark tunnel. The light is near.

Envision yourself on a 3-legged stool. Each leg represents a different tax ramification.

  • Leg 1-Fully Taxable
  • Leg 2-Partially Taxable
  • Leg 3-Tax Free

If you could put all of your eggs in one leg where would they be?

Exactly, Leg 3-but why are so many stools so wobbly? I’ll go one step further.

  • Leg 1- 401(k)’s, 403(b)’s, Traditional IRA’s (the feel good’s)
  • Leg 2- Saving’s, Brokerage Accounts, After tax investment Vehicles

We focus on so many other things first.  The typical sequence of savings is:

  • 401(k)
  • Savings
  • Investments

What do these all have in common? Taxes

What do we want to get away from? Taxes

Here’s how I want you to look at Leg 1- it’s not all yours. Treat these funds like a business, but you don’t own all of it Uncle Sam has some ownership in your business. However, this partnership is unlike any other-they can increase their ownership at any time therefore decreasing your probability of success in retirement.

Leg 2- the principal is yours (you’ve already paid the taxes,) but any realized growth, interest and dividends are taxable at either ordinary income levels or capital gains tax rates.

Leg 3- like leg 2 you’ve already paid the taxes, but the earning’s when all the rules are followed are tax free. For obvious reasons this is the more difficult leg to stabilize. It’s not easy, it takes some proper planning and it takes some work.

I believe everyone needs to strengthen leg 3. Most people will do it by utilizing a Roth 401k or a Roth IRA, but a few will use a permanent life insurance policy.

This is where Dave is right- for most people.

Buying term and investing the difference if you are diligent enough to do so is a great strategy for the majority of Americans living paycheck to paycheck or the saver who is doing all they can to make the sacrifices for their family, but they just can’t do much more. 

This is where Dave is wrong?

What about our typical client? These are the people who are doing all the right things, maxing out retirement contributions, maxing out their HSA’s, putting funds into their savings accounts regularly with little to no debt. Do they just keep plugging away putting additional funds into accounts that are taxable?

What about our clients who have a true estate tax problem? These are people who’ve built businesses, acquired land, built wealth with hard work, blood, sweat and tears. Do their heirs liquidate assets just to pay the tax bill?

No, no they don’t they use insurance properly.

Is permanent life insurance wrong for them, Dave?

No, they use insurance as one leg of their 3-legged stool. These are people who take a big picture holistic view, have a financial plan and have planned for these events.

Insurance is something that must be planned, not sold.

I know and hear of too many insurance agents who say everyone needs a Variable Universal Life Policy aka (VUL.) Unfortunately, many of these guys primarily sell property and casualty and are looking for a big-ticket item, the VUL. Which typically carry higher fee’s little or no guarantee’s and premiums that can change. The majority of the time a realistic plan wasn’t done, illustrations are done to show only the best case scenarios and many times the agents themselves are captive to one or two carriers and/or don’t quite know what to look for in an insurance policy or how to choose one that really fits your needs. This is the have hammer, everything is a nail syndrome.

Permanent Life Insurance when done right can play a vital role in a retiree’s financial plan, it can help provide tax free income, some provide guarantee’s to principal and offer low fee’s which help with accumulation of cash value when overfunding the contract.

Which is why we believe insurance should be planned, it’s a solution to a sophisticated problem. Insurance is also a sophisticated product, that deserves a better reputation than many give it.

  • Who doesn’t want some guarantee’s?
  • Who doesn’t want to pay 0% in taxes on distributions?
  • Who doesn’t want protection from the governments stealth taxes?
  • Who doesn’t want creditor protection?
  • Who doesn’t want to protect their family and their hard-earned funds?

I hope this post has opened your eyes to another potential avenue to explore in your plan.

Next week in Part 2, we’ll get into the nitty-gritty of different types of permanent life insurance, how to use them, what to look for in a policy and also what to stay away from.

#FPC: 5-Things You Aren’t Being Told About HSA’s.

With the passage of the SECURE ACT and the death of the STRETCH IRA there has been a lot of noise about Health Savings Accounts or HSA’s for short. The role, or lack of, that people use a Health Savings Account as investment vehicles in their financial plans has been highly debatable, but not anymore. In 2020, we are finally seeing a shift in financial advice to find ways to put funds aside and avoid taxes altogether down the road.

Health Savings Accounts are becoming common place now that employers are shifting more of the burden of Health Insurance to the employees with the use of high deductible health plans. If you don’t have access to one now, those days may be numbered.

With all of the attention HSA’s have been given; there has been an enormous amount of “advice” on how you should use these accounts. Let’s take a look at what your advisor probably isn’t telling you:

Your broker confuses an HSA and FSA.

Not everyone is eligible for a Health Savings Account, to have access to an HSA you must be in a High-Deductible Health Plan. This means your out of pocket deductibles must be at minimum $1,400 and your max out of pocket can be no greater than $6,900 for a single insured and for a family the minimum deductible can be no less than $2,800 and maximum out of pocket expenses can be no greater than $13,800 for a family in 2020.

If your health insurance plan meets those parameters you can contribute to a Health Savings Account.

The annual 2020 contribution limit, (employer+employee) is $3,550 for a single insured and $7,100 for a family. If you’re over 55 you’re allowed an additional $1,000 catch up contribution annually.

Most employers who have high deductible health plans are beginning to start HSA’s for their employees. However, if you’re not satisfied with your company’s plan or they don’t offer one you can certainly shop around for your own HSA. Keep in mind if your company offers a plan and makes contributions to your account it would be wise to use your employer’s plan. A study from the Employee Benefit Research Group found that in 2015 employers who contributed averaged an annual contribution of $948. Other more recent studies show the employer contributions typically varies by the size of the company, but varying between $750 and $1250.

When doing your own shopping, remember to check costs, ease of use and investment options available.

Flexible Spending Accounts are much different from HAS’s. They are offered through an employer-established benefit plan.  Unlike the HSA if you are self-employed, you aren’t eligible for an FSA.  A Flexible Spending Account will allow participants to put up to $2,750 annually in their account. FSA’s also provide you the ability to access funds throughout the year for qualified medical expenses even if you haven’t contributed them to the account yet.

Some Key differences: 

  • HSA’s will allow you to retain all of your funds in the account each year-even if you don’t use them.
  • An FSA may allow for a rollover of unused funds of up to $500, but only if your company agrees to it and anything remaining over the $500 will go back to the company’s coffers.
  • The HSA’s ability to make tax free contributions, allow the funds to grow tax free year after year and then make tax free withdrawals when used for medical expenses make this a great tool to utilize as part of diversifying the type of accounts in your financial plan.
  • The HSA also allows employees to retain their funds long after their employment.
  • Contributions to an HSA should stop permanently 6 months prior to starting Medicare. Medicare enrollment can be delayed past 65 if you’re still covered under an employer plan, but one should be familiar with the system and potential penalties if not enrolled properly and on time.
  • Once on Medicare you can use your HSA to pay premiums, meet deductibles and cover other qualified medical expenses.

Your broker doesn’t care about the trend in health care costs

As discussed in our RIA Financial Guardrails, the cost of health care is growing twice as fast as the typical Cost of Living Adjustment in Social Security benefits.

Healthview Services put’s out an annual report on the trends and costs of health care. In their 2018 Retirement Healthcare Costs Data Report they found that health care expenses are projected to rise at an annual rate of 4.22%. The report also found that the average healthy 65 year old couple who is retiring this year should expect to spend $363,946 in today’s dollars in health care premiums, deductibles and out-of-pocket expenses.

These are scary numbers if you ask me. Is your advisor using standard income replacement ratios of the past or are they updating their numbers annually or is this even a consideration in your overall financial plan?

In your financial plan what is your health care expense and at what % is it inflated each year?

Time and time again financial plans use unrealistic return numbers, little or no inflation and health care considerations have been either missed or an altogether after-thought. 

If you don’t know-ask your advisor what type of assumption’s they are using. This should be an easy conversation to have and if it’s a conversation you don’t feel comfortable having with your advisor it may be time to start kicking tires.

Your advisor’s job is to be your advocate and more importantly in financial planning to play devil’s advocate.

Fund your HSA over your 401(k)

Now this one tends to scare the bejesus out of people, but hear me out.  According to a 2018 Economic News Release by the Bureau of Labor Statistics the median number of years an employee stays at one job is 4.2 years. Now that number is even smaller (2.8 years) if you’re between the ages of 25-34. The trend that people are spending less time at one employer is probably why we have seen an increase in vesting schedules for employer matching contributions or an all-out stop in employer matches.

The U.S. Bureau of Labor Statistics 2019 National Compensation study shows that of the only 64% of employers who offer a 401k plan and on average 74% take advantage of those plans. Out of the 64% who do offer a plan around half of them don’t even offer a match.  As labor markets continue to tighten hopefully we’ll see employers begin to sweeten the pot on 401(k) plans as they try to retain and entice talented workers.

Now if you’re lucky enough to get that illusive bonus of a match you must think about your company’s vesting schedule.

Companies matching contributions are vested a couple of different ways: Immediately, a cliff vesting schedule or graded vesting schedule.

  • An immediate schedule works just like it sounds once your funds are matched in your 401k the employer contribution is 100% vested. I think of that as a unicorn in this day and age, those good companies are few and far between.
  • A cliff schedule means that once you have worked at an employer for a specified period of time (think years) you will be 100% vested in their contributions. When using a cliff schedule by Federal law the company must transfer their match to you by the end of year 3.
  • A graded schedule will vest employer contributions gradually.  In many cases we see the magic number of 20% per year, but employers can’t take that any longer the six years before you are fully vested.

Why is this important? With so many people on the move looking for employment opportunities you must be mindful of your expected time with a company to make the most of any match. As people spend less time at one employer one must consider the length of how long you may continue your employment in regard to your vesting schedule. This will certainly play a factor in determining if funding an HSA prior to your 401k makes sense for you.

When funding an HSA you get to utilize a TRIPLE TAX ADVANTAGE: 

  1. Employee contributions are tax deductible,
  2. Interest is allowed to grow tax free; and,
  3. You can pull the funds out for qualified medical expenses at no tax!

This is extremely powerful and is one reason why there is so much buzz around these accounts.


In a traditional 401k plan your contributions are put in pretax, funds grow tax deferred and THEN your distributions are taxed when you begin to use them.

As health care expenses become a larger part of our spending in retirement it only makes sense to use an HSA to your family’s advantage.

Medicare and Cobra Payments

Unlike most other accounts utilized for retirement or health care you can use your HSA funds for not only your day to day qualified medical expenses, but also your Medicare and Cobra premiums without incurring taxes or a penalty. The ability to use the funds to pay premiums is a great benefit that is often overlooked.

As referenced earlier in our RIA Financial Guardrails. Per Medicare Trustees as reported by Savvy Medicare, a training program for financial planners, Part B and Part D insurance costs have averaged an annual increase of 5.6% and 7.7% respectively, over the last 5 years and are expected to grow by 6.9% and 10.6% over the next five years.

As inflationary pressure has been weighing on Medicare premiums and expectations for increasing costs to continue now may be a great time to start saving in your HSA.

How to invest your HSA properly

This is one of those things that when I open my computer and see article after article on how to invest aggressively in your Health Savings Accounts it makes me want to bang my head against a wall.

Let’s get this straight, an HSA has the ability to be a powerful investment vehicle with the triple tax-free benefits when used the right way. However, just like with any good financial plan you need to start by having a cushion of emergency funds. This cushion will look different for everyone, but we would recommend having at minimum 2 years of deductibles and premiums saved in a very low risk allocation before you started dipping your toes in the markets with these funds. Life has a way of slapping you upside the head from time to time, just as markets do. When life takes you for a ride we want you to be ready to access your hard earned funds should you need to use them in a medical emergency without regard for asset prices.

Do you pay top dollar for your houses, real estate or a business venture? Or are you looking for a deal? No one wants to buy anything only to have to turn around and sell it later for a loss.

Valuations are high- Not just a little bit high, but near all time. If we look at Shiller’s CAPE-10 Valuation Measures & Forward Returns we can see that current valuation levels are above what we have seen at every previous bull market.

I’m not saying we’re headed into our next recession; the momentum of this market could continue to carry on for some time. Like any other investment thoughtful allocations need to be made in late stage market cycles-especially in an account such as an HSA where you may need the funds sooner rather than later.

There is no one size fits all in the use of a Health Savings Account, but if you use these tips as a template and factor your HSA into your financial plan you’ll be well on your way to success in retirement.

Where’s the Adult Merit Badge for Super Savers?

Super Savers are a special breed.

They are not concerned about keeping up impressions; they exist outside the mainstream of seductive consumerism.

Call it a mindset, call it walking a different path; perhaps it’s an offbeat childhood money script. Whatever it is, those who fall into this category or save 20% or more of their income on a consistent basis are members of an elite group who strive for early financial independence.

Speaking of independence: At RIA we believe households should maintain 3-6 months of living expenses in a savings account for emergencies like car and house repairs.  They should also maintain an additional 6 months of living expenses as a “Financial Vulnerability Cushion,”  whereby cash is set aside for the big, life-changing stuff like extended job loss especially as we believe the economy is in a late-stage expansionary cycle. Job security isn’t what it used to be; best to think ahead.

In 2018, TD Ameritrade in conjunction with Harris Poll, completed a survey among 1,503 U.S. adults 45 and older to understand the habits that set Super Savers apart from the pack. The results are not surprising. However, they do validate habits all of us should adopt regardless of age.

Like a physical exercise regimen, shifting into Super Saver mode takes small, consistent efforts that build on each other.

So, what lessons can be learned from this elite breed?

First, on average, Super Savers sock away 29% of their income compared to non-super savers. 

Super Savers place saving and investing over housing and household expenses.

Keep in mind, the Personal Saving Rate as of December 2019 according to the Federal Reserve Bank of St. Louis was a paltry 7.6%.  How does this group manage to accomplish such an arduous task? They abhor the thought of being house poor. They focus attention on the reduction of spending on the big stuff, or the fixed costs that make a huge impact to cash flow. Candidly, they’re not concerned about cutting out lattes as a viable strategy to save money. Super Savers spend 14% on housing, 16% on essential household expenses compared to non-supers who spend 23% and 21%, respectively. Any way you cut it, that’s impressive!

Perhaps it’s because Super Savers think backwards, always with a financially beneficial endgame in mind. There is great importance placed on financial security, peace of mind and freedom to do what they want at a younger age. They consider the cumulative impact of monthly payments on their bottom line, which is not common nature for the masses.  They internalize the opportunity cost of every large or recurring expenditure.

Super Savers weigh the outcome of every significant purchase, especially discretionary items, which invariably increases their hesitancy to spend. This manner of thought provides breathing room to deliberate less expensive alternatives and thoroughly investigate the pros and cons of their decisions.

Tip for the Super Saver in training: Sever the mental connection between monthly payments and affordability. How? First, calculate the interest cost of a purchase. For example, let’s say you’re looking to purchase an automobile. First, never go further than 36 months if you must make payments. Why? Because longer loan terms like 48 to 72 months is a payment mentality that will undoubtedly increase interest costs.

For example, let’s say an auto purchase is financed for $23,000. At 3.49% for 36 months, the payment is roughly $674 with total loan interest of $1,258. For 72 months, naturally there’s a lower monthly obligation – $354. However, total loan interest amounts to $2,525.

A Super Saver’s consideration would be on the interest incurred over the life of a loan, not the affordability of monthly payments. An important difference between this manner of thinking and most, is to meet a lifestyle, it’s common for households to go for the lowest monthly payment with little regard to overall interest paid. Super savers will either consider a less expensive option or adjust household budgets to meet higher payments just to pay less interest in the long run.

Second, Super Savers live enriching lives; they don’t deprive themselves.

Members of the super crowd don’t live small lives -a big misnomer. I think people are quick to spread this narrative to ease personal guilt or envy. Certainly, a fiscal discomfort mindset is part of who they are when they believe personal financial boundaries are breached. However, the TD Ameritrade survey shows that both super and non-super savers spend the same 7% of their income on vacations!

Third, starting early is key for Super Savers.

Per the study, more than half of Super Savers started investing by age 30 (54%).  I’m not a fan of personal finance dogma. Many of the stale tenets preached by the brokerage industry are part of a self-serving agenda to direct retail investor cash into cookie-cutter asset allocation portfolios; all to appease shareholders.

However, one rule I’m happily a complete sucker for is Pay Yourself First. It’s not just a good one. It’s the core, the very foundation, of every strong financial discipline. Why? Paying yourself first, whereby dollars are directed to savings or investments before anything else, reflects a commitment to delayed gratification. An honorable trait that allows the mental breathing room to avoid impulse buys, raise the bar on savings rates and minimize the addition of debt.

Per Ilene Strauss Cohen, Ph.D. for Psychology Today, people who learn how to manage their need to be satisfied in the moment thrive more in their careers, relationships, health and finances when compared to those who immediately give in to gratification. Again, the root of Pay Yourself First is delayed gratification; the concept goes back further than some of the concepts the financial industry has distorted just to part you from your money.

Fourth, Super Savers embrace the simple stuff.

When it comes to financial decisions, basics work. For example, Super Savers avoid high-interest debt (65% vs. 56% for non-super savers),  stick to a budget (60% vs. 49%), invest in the market (58% vs. 34%) and max out retirement savings (55% vs. 30%).

Listen, these steps aren’t rocket science; they’re basic financial literacy.

For example, I’ve been ‘pencil & paper’ budgeting since I began my Daily News Brooklyn paper route at age 11. Budgeting over time fosters an awareness of household cash flow.  Try micro-budgeting for a few months. It will help you intimately engage with  personal spending trends.

Micro-budgets are designed to increase awareness through simplicity.

Yes, they’re a bit time-consuming, occasionally monotonous; however the goal is worth it – to uncover weaknesses and strengths in your strategy and build a sensitivity to household cash-flow activities. My favorite old-school book for budgeting comes from the Dome companies. For a modest investment of $6.50, a Dome Budget Book is one of the best deals on the market.

Last, Super Savers believe in diversified streams of income and accounts!

44% of Super Savers prefer to bolster already impressive savings rates by funding diversified sources of income, compared to only 36% of their non-super brethren. In addition, Super Savers are especially inclined to lean into Roth IRAs compared to non-super savers. It is rewarding to discover how the best of savers seek various income streams to build their top-line.  They are also tremendous believers in Roth IRAs. The reason I’m glad is this information further validates why our advisors and financial planning team members have passionately communicated the importance of the diversification of accounts for several years.

Super Savers build the following income streams outside of employment income – Dividends, investment real estate, annuities (yes, annuities – 21% vs. 14% for non-super savers), and business ownership (14% compared to 8%).

Their retirement accounts are diversified; over 53% of Super Savers embrace Roth options (53% compared to 29%). A great number of Super Savers fund Health Savings Accounts and strive to defer distributions until retirement when healthcare costs are expected to increase.

Why diversification of accounts?

Imagine never being able to switch lanes as you head closer to the destination called retirement. Consider how suffocating it would be to never be able to navigate away from a single-lane road where all distributions are taxed as ordinary income. There lies the dysfunctional concept that Super Savers are onto – They do not believe every investment dollar should be directed to pre-tax retirement accounts.

Congratulations -With the full support of the financial services industry you’ve created a personal tax time bomb!

As you assess the terrain for future distributions, tax diversification should be a priority.  Envision a retirement paycheck that’s a blend of ordinary, tax-free and capital gain income (generally taxed at lower rates than ordinary income). The goal is to gain the ability to customize your withdrawal strategy to minimize tax drag on distributions throughout retirement. Super Savers have figured this out. Regardless of your savings habits, you should too.

Many studies show that super savers are independent thinkers. Working to create and maintain a lifestyle that rivals their neighbors is anathema to them.

Now, as a majority of Americans are utilizing debt to maintain living standards, Super Savers set themselves apart as a badge of courage. No doubt this group is unique and are way ahead at crafting a secure, enjoyable retirement. and financial flexibility. Whatever steps taken to join their ranks will serve and empower you with choices that those with overwhelming debt cannot consider.

And speaking of badges: Did you know Amazon sells Merit badges for adulting? It’s true. I believe they need to add a “I’M A SUPER SAVER” badge to the collection.

If you’d like to read the complete T.D. Ameritrade survey, click here.

#FPC: What You Have In Common With Kobe Bryant & Chandler Parsons

As an advisor we are taken to task daily on the best way to keep clients informed and give them a holistic view of their financial situation. We must also do so in a way to ensure our clients not only listen but understand and when the situation is right implement action items discussed.

Many times, these items aren’t exciting and they’re what we would call “fortifying your financial house”. Fortunately, for many we can fortify our financial house fairly easily, but it does require dealing with your own mortality.

As you can probably see this article isn’t really about Chandler Parsons or Kobe Bryant, but sometimes seeing someone else’s misfortune and mortality can help us put our own into perspective.

Chandler Parsons, an NBA player and ex Houston Rocket was driving along on a Thursday afternoon at 2 pm after his basketball practice with the Atlanta Hawks and was hit by a drunk driver.

“According to his attorneys, Parsons suffered life-altering and potentially career-ending injuries in the crash. Traumatic brain injury, disc herniation and a torn labrum are among the injuries. The degree of injuries is graver than was assumed last week when the Hawks announced the placement of Parsons in the NBA’s concussion protocol due to whiplash caused by a car wreck.” –From Sports Illustrated Article by Michael McCann

Hit by a drunk driver at 2 pm on a Thursday. That could be any one of us at any time.

Luckily for the 31-year-old Parsons, he has made millions over his career. Hopefully he will make a full recovery and return to the NBA. I have a feeling if he used sound financial behaviors he should be financially secure for the remainder of his life.

What if this was you?

What if you were injured in an accident and no longer had the ability to work? Would you be able to support yourself and your family? Fortunately, for many this risk can be mitigated easily with disability insurance.

We help our clients look at employer benefits to ensure they are fortifying their financial house, not leaving any benefits on the table and alternatively ensure they’re not paying for something they don’t need. Disability insurance is one benefit we find under-utilized.

Kobe Bryant and his daughter Gigi’s death is still fresh on many minds. I’ll spare you the details with the exception of telling you they were 41 and 13.

Many celebrities come and go, many times we hear horror stories over the lack of estate planning. Take a look at Prince’s death. I’m not sure if his estate has finally been cleaned up, but I do know as of 2019 it appeared to still be in limbo.

Who’s made money off this fiasco? Attorneys and Uncle Sam, that’s who.  The list of famous people without basic estate plans goes on and on.  I visit with people daily who have failed to update or do a plan.

Everyone, I repeat everyone-needs a basic estate plan. At minimum a will, power of attorney and medical directives. We also work with many clients who need much more sophisticated estate planning.

In Kobe Bryant’s case, it appears he was a thoughtful man with good business advisors. I pray he had his estate plan all buttoned up.  I can imagine with a reported net worth of $2 Billion his plan had many layers. I would hope there was a 2nd to die policy or some plan in place to help mitigate estate taxes for his wife Vanessa.

So what do you really have in common with Kobe Bryant and Chandler Parsons?

It could happen to you.

Do you think Kobe or Chandler thought this would happen to them? At 41 and 31, I bet not. You’re never too young or old to take the measures to protect yourself.

Some of the things that are most important are often put off for someone else to deal with.

Let me leave you with this- I work with many of you who are so diligent with spending and saving, so good at making money in your craft, so good at taking care of your family-Why? Why leave something as important as protecting your loved ones up to chance, an attorney, a judge, the state, the federal government (In the chance you may have to pay estate tax.)

Why pay the additional costs of not being protected and having a plan?

Why put the burden on your loved ones to know your dying wishes? Why put the burden on your loved ones to fight for your estate? Why put the burden on your loved ones to go back to work?

Purchasing some form of disability insurance either through work or on the open market isn’t some huge undertaking.

Many gamble with the lack of insurance. If you’re going to gamble do so with insurance on your TV or your upcoming trip, don’t gamble with your livelihood and your family’s well-being.

Doing an estate plan and financial plan isn’t the most fun thing to do, but it’s necessary. For some it’s the costs of building a plan or buying the insurance that deters them from doing so, but I’d like for you to talk to someone who didn’t attain disability insurance and needed it. Talk to the family of someone who died without an estate plan.  Then determine the overall cost.

For others it’s not the costs that causes their failure to execute, but the thought of facing the what if’s. The thought of staring down our own mortality and then taking the time to get it done.

It’s funny how time is the one thing we all want more of, yet we can’t control. Take control of what you can, while you can and take the time to fortify your financial house.

As an advisor we see the good, bad and ugly. We’re not estate attorneys but deal with them frequently. More importantly we see the negative financial consequences when events occur, and proper plans aren’t in place.

As always, please don’t hesitate to reach out with any questions. We’re always happy to help or point you in the right direction.

#FPC: New Advisors: Stop Doing These Two Things.

The higher stocks ride a glide path of zero volatility, the greater the risks for investors and their financial partners to fall victim to overconfidence. After all, we are human;  when it comes to money and emotions our brains are no smarter than a lizard’s. 

As markets continue to be  hyper-fueled by unconventional monetary and fiscal policy in the form of tax cuts, it’s normal to suffer from chronic FOMO or Fear Of Missing Out. It feels like this charging bull is invincible.  You don’t hear much in mainstream financial media about corrections, bear markets, or recession, either. It’s at these times when things are going smoothly that I’m most suspicious. It doesn’t mean I’m going to take it out on a portfolio. Nor does it mean I’m bearish.  It does mean I’m going to aggressively seek out information that conflicts with the latest group think. In other words, at a time where there is apparently ‘no risk,’ and it’s deemed a Goldilocks period, I’m prepared to be eaten by a bear – emotionally, that is.

In addition, I’m greatly concerned that employers at big-box financial organizations  will fail to provide objective, historical information about market cycles especially as the decade-long bull market continues to validate the narrative that stocks ‘always go higher in the long run.’

I’m  worried that new professionals who never experienced a rough market or are too young to recall, cannot comprehend the fiscal damage a bear may inflict on retail households, especially those beginning their investment journey or close to retirement.  I’m convinced newly-minted brokers are not receiving the real story from the firms which employ them. Financial social media, especially Twitter (or FinTwit as the cool kids deem it),  for the most part is a dangerous information conduit as pros idolize financial celebrities who dissect time frames and use statistics that ignite confirmation bias.

I know that feeling. I fell hard for the hype on the brokerage side of the fence until 2006 when I took a deep dive into the catalysts of the Great Depression as purely by luck,  I began to notice how retail investors were progressively pulling money from their brokerage accounts and investing in real estate based on promises of big returns.  I knew that real estate busts, especially values of primary residences (thanks to the work of Robert Shiller),  had potential to create panic and wholesale societal and structural economic distress.

I read everything I could get my hands on including vintage volumes of Magazines Of Wall Street I purchased from the years 1925-1940; I studied Ben Bernanke’s, Christina D. Romer’s work.  The game changer for me was the book titled, “Only Yesterday – An Informal History of the 1920s,” by Frederick Lewis Allen.  A used copy may be purchased for less than 13 bucks on Amazon; the lessons within the pages remain invaluable.

Frederick Allen served on the editorial staff of Atlantic Monthly and editor-in-chief of Harper’s Magazine from 1941 until his death in 1954. What’s fascinating about this book besides the compelling, raw writing style, is Mr. Allen’s ability to showcase how the boom-to-bust affected everyday lives from the kitchen table, to music, to culture. The reader gains a feel of breaking bread with a family on any morning in 1929 and how the Great Depression overwhelmed people’s lives and the world around them. There is also a sordid accounting of what happened to real estate prices along with stock prices. If you seek to remain rational through periods of market euphoria, this book can assist.

As a professional responsible for growing and protecting a family’s wealth, it’s your job; no, it’s your highest aspiration, to avoid doing the following things:

1. Do not underestimate the effects of bear markets on the households you serve. 

Almost 80% of rolling decades since 1900 have
delivered returns 20% above or below the
historical average. For the U.S. stock market, this
means that there is an 80% chance that total
nominal return for the next decade will be either
above 12% or below 8%. Ed Easterling, Crestmont Research, April 2019.

Bear markets in most charts appear as a minor speed bump on an otherwise smooth destination to larger portfolios. 

Understand, to most investors it’s carnage. Average bear market losses can be devastating. Novices who do not comprehend the risks of stock investing, only rewards, have the potential to be blindsided, become distrustful and avoid stocks for a lifetime; pre-retirees or those who seek to begin a distribution plan within 3-5 years depend on their financial professionals to help them minimize losses significant enough to dramatically derail their plans. 

Industry pundits and strategists tout that bear markets are rare. Those who fall for such a dangerous fallacy will eventually lose client trust and ostensibly, accounts. If you dare to believe market cycles are ‘no big deal,’ or every cycle is a bull – Prepare to suffer the consequences.

Courtesy of www.dshort.com:

Based on history,  secular bears appear roughly 40% of the time, not 20%  which seems to be the popular, erroneous statistic touted by financial media. Most of the FinTwit universe tends to ignore the 120+ characters it takes to admit that bear markets actually do happen! (No, really, they do!). 

On a percentage basis, bears indeed appear to be no big deal.

However, take a look on a point basis. This is the chart that will mean the most to clients.

On a point basis, bears almost (and in some cases, completely), wipe out the gains of the previous bull. 

For me, the possible conversation with a client who experiences years of gains wiped out,  is the stuff that wakes me up at 1:30am with night sweats. Consider how much time in the span of a finite human life it takes to create wealth,  how quickly it can be lost, how long it will take to get back to even.  Now, you can repeatedly tout the line how ‘stocks always come back,’ but by then, the client will be done with you and either take over management of the account or find an advisor who appropriately answers the question – “what did you do to protect client wealth during the last bear market?”

I don’t provide this information to dissuade stock investing or suitable stock allocations. I provide it to keep advisors grounded at a time when most financial firms are going to hyper-spike the Kool-Aid to push corporate agendas without giving a d**** about personal growth or tenure of your career. As long as you communicate realistic information to help clients understand the potential bloodletting of bears, you’ll keep everybody’s emotions firmly in check and not mired in the clouds of euphoria.  You will forge trust that binds through any market cycle.

2. Avoid the crowded side of the boat or jump ship, altogether.

Never underestimate the seduction of emotional biases. Never discount the attraction to those who agree with your current point of view.

The objective isn’t to be a curmudgeonly contrarian or known as a wall flower at the bull market party, especially when global central banks keep turbo-spiking the punch bowl. Your overall responsibility is to be a an objective, holistic, eagle-eyed observer of the current period and study history to continue to safeguard the hard-earned savings of investors you serve.

In a paper for Investments & Wealth Institute – “The Psychology of Financial Professionals and Their Clients,” by H. Kent Baker PhD, CFA, CMA, Greg Filbeck, DBA, CFA, FRM, CAIA, CIPM, PRM and business professor/author Victor Riccardi, a behavioral specialist in his own right, outline the behavioral, cognitive and emotional biases financial professionals suffer; even more so than clients.

Overconfident professionals may underestimate the risks and overestimate the upside potential of their investment selections and the stock market, overall.  Even more so, I fear employers, along with mainstream financial media and the popular Fin kids, do nothing but inject steroids into the already bloated confirmation bias many of us are inflicted with, especially advisors who were running around the house in Underoos during the last bear cycle.

It’s worth it to deflate your emotional state, humble yourself a bit. During times of distress or euphoria, it’s crucial to aggressively seek out research that directly contradicts the popular  (or your), opinion. It’s a worthwhile exercise to equally document information that supports and throws a bit of headwind into your sails – Always keep an eye on the lifeboats. Clients will appreciate your objective, perhaps Stoic manner.

In the 70s, I recall a waste disposal space in Brooklyn. How in the spring, beautiful flowers would sprout among the mountains of garbage. Beautiful colors – yellow, purple, green. I never forgot what was underneath. Perspective…

Go ahead and fool yourself how it’s different this time. 

You may believe that bear markets are a part of the past. Or the financial crisis was merely a blip in the heartbeat of time. I mean, it can’t happen again, correct? Many investors and households would disagree.

Overall, American household wealth has not fully recovered from the Great Recession. In 2016, the median wealth of all U.S. households was $97,300, up 16% from 2013 but well below median wealth before the recession began in late 2007 ($139,700 in 2016 dollars). And even though overall racial and ethnic inequality in wealth narrowed from 2013 to 2016, the gap remains large. Pew Research Center.

Become a humble provider of objective information, never waiver from a fiduciary intent, and be assured you’ll retain clients for decades. 

I know that it’s worked for me. 

It will for you, too. 

Rosso’s 2020 Reading List – Part II

“A reader lives a thousand lives before he dies… The man who never reads lives only one.” – George R.R. Martin.

I’m not sure what I would do without books. On weekends, I can be found in antique stores searching out volumes written in many instances, over 100 years ago from authors most of us never knew existed. These treasures don’t cost much. The words are priceless.

I find that absorbing fiction and self-improvement as well as financial or economic titles, fosters an ability to think creatively.  As much as you’ll hear that money is about numbers, it’s equally about emotions and intuition.

After all, what are investments but stories?

The next 5 tomes for 2020 are mostly tied to emotional and physical health. The health + wealth connection is one of the most important equations of our lifetimes.  Although, one of my favored authors on economics, Robert Shiller also appears.

Narrative Economics: How Stories Go Viral and Drive Major Economic Events – Robert J. Shiller.

Professor Shiller’s latest is off the beaten path when compared to  previous writings. In this book, he explores how stories go viral and have the force to fuel major economic events. It’s a very human analysis for a man usually immersed in math, which many Shiller zealots find disconcerting.  I find it refreshing. As I lament often – Economics is a social science and as humans, we live and breathe the subject every day  The world is one big Petri dish; investors cannot discount emotions or ‘animal spirits’ to shift economic winds. The professor shares plenty of historical references to make his case; he studies how  words spread throughout society. Think about how specific narratives have sparked economic tinderboxes on Main Street – Houses always go up in value,  we’re in a stock market bubble (or not),  robots are stealing jobs. What are stocks but stories spread by biased sell-side analysts and investors, overall? What Shiller doesn’t adequately cover is why certain phrases infiltrate the lingo of the masses while others die in transit.  Regardless, this book is a fascinating read into the economic wildfire of emotions.

Love Yourself Like Your Life Depends On It – Kamal Ravikant.

My friend Kamal revisits, refreshes his work on torturous personal growth. Kamal is a modern-day Stoic; he objectively examines his life as a successful CEO who fell apart emotionally after his company failed. Kamal documents his trials of ‘getting in his own way.’ How many of us do the same? The urge to self-sabotage must be exposed, brought to the light, and cleansed. Kamal examines how living in the past can destroy the present. His methods to emerge from a dark place will provide profound sense of encouragement for those who feel lost. We all play, re-play patterns in our heads. They in turn, trigger feelings.  The loops that roll in our minds, our thoughts, can free or imprison. Once caught in a negative-feedback loop, how do you break it? Kamal shares what he’s done to free and love himself because his life depended on it.  This book never leaves my nightstand.

Super Human: The Bulletproof Plan to Age Backward and Maybe Even Live Forever –  Dave Asprey.

Ok, so Dave’s goal to live to 180 is indeed, lofty. However, as the ultimate human bio-hacker, in book 5 of his “Bulletproof” series, he does provide worthwhile tips on how to gain and maintain health. As a child, he was classified as “premature aging.” His body was its own worst enemy. Dave improved his health dramatically based on aggressive diet, lifestyle, supplementation and specific biohacking methods outlined in the book. There are several unconventional tactics that require further homework. However, Dave is also solid about reminding us about the basics of better sleep and intermittent fasting. Last, readers are provided with specific ideas on the proper supplements and strategies to not only live a longer life, but a robust healthier one. I see his methods as a pathway to lowering healthcare costs. Keep in mind, a couple may incur anywhere from $280,000 to $387,000 in total healthcare expenses throughout retirement. Good habits employed to become aggressively preventative will ostensibly lead to lower expenses and an increasingly active lifestyle.

The Simple Life Guide to Financial Freedom – Gary Collins, MS.

Gary has been a guest on our  700AM KSEV radio show on numerous occasions. He’s a minimalist, ‘ruralist’ and many other ‘ists’ that pertain to financial independence through small yet enriched living. He employs simple math – addition, subtraction, division (unlike the mainstream financial industry which wields obfuscation like a Japanese sword), to make clear the reasons as to why the vast majority of Americans live one paycheck away from disaster, why the health=wealth connection is most important, how primary residence can be your greatest American nightmare, and presents a primer on basic consumer debt. Gary is my brother from another mother; he walks the talk of  financial independence. His philosophy is almost in perfect alignment with RIA’s Financial and Debt Guardrails. Want the financial truth such as what you read in our RIA blog? Here’s the book. My copy is highlighted, dog-eared and resides on a bookshelf in my office.

Blood – Allison Moorer.

In 1986, Allison Moorer awoke to a gunshot. Her father shot and killed her mother then turned the gun on himself.  Blues, folk, country singer/songwriter Allison Moorer and recording artist sister Shelby Lynne,  live in this shadow every day.  This work is Allison’s story of recovery written in a form only a songwriter can pen. The words, her perceptions, are poetic, biting and flow like a  dark song which transforms into a melody of warmth and sunlight. For those who have suffered a family trauma and carry it daily, Allison’s writing style is overwhelmingly healing and loving. I’ve already recommended her tome to friends who bear similar burdens. Candidly,  a topic such as this is a departure from my usual reading material. However,  I’m personally fond of Allison and her award-winning older sister Shelby Lynne, a songwriter and actress in her own right.  The sentiments shared in this book will stick with me. I bet they will with you, too.

I consider the written word a tap dance for the synapses. With each step, new visions are born and new thoughts forged.

Through a tumultuous childhood, books were one of my greatest escapes; a salvation of sanity and calm. During summer break as a boy I’d grab a stack of paperback books, depart our apartment early and head to the interior of a local funeral parlor (a friend’s dad was the director), where I’d sit in the corner nearest the largest plate-glass window I’ve ever seen. The morning sun at maximum light was all I needed. I loved the feel of the luxurious wall-to-wall deep red carpet of that place. Quiet floated on the faint aroma of flowers. The time made my reading that much more rewarding and memorable. Today, that large window is replaced with concrete. However, the memories of my reading time can never be sealed away.

This spring, I’ll provide my next five for your summer reading pleasure.  I read, study, highlight, 40-50 books a year and happily share my top selections.  Currently, I’m re-reading several classics including – Jack London’s White Fang, Shelley’s Frankenstein and Stoker’s Dracula.

If you read any of these selections, please let me know what you learned!

The SECURE Act: It’s Reality & What You Need To Know

Like a thief in the night, in a rare bipartisan agreement, Congress passed the Setting  Every Community Up for Retirement Enhancement Act or the SECURE Act. The most creative element of the act admittedly, is the name. All is needed now is the President’s signature which is a foregone conclusion. I’m torn by this Act.

There are several good elements to it; however, those who plan to leave significant wealth through non-spousal inherited IRAs are going to face formidable issues with this bill which I will expand upon.

The possible passage of the Act is one of the reasons we’ve been expanding RIA’s initiative to help clients with surgical, occasionally aggressive, Roth conversions.

SECURE will take effect on January 1, 2020. Here are the highlights:

70 ½ and still working? We’ve got a solution for that.

As we discuss in our Right Lane Retirement Classes, working past 70 is not a rarity for today’s ‘retiree.’

The Labor Force Participation Rate growth rate for those age 75 is up 76% since 2000. There are many reasons for this with the most prominent being this cohort needs the money.

The SECURE Act gets traditional IRAs in line with traditional 401(k) and Roth IRAs and will allow working older Americans, 70.5+, to continue to contribute to their pre-tax retirement accounts. Let me say this is no big deal. In fact, I’m very concerned this provision may lead retirees along with advice from mainstream financial professionals, to continue to overfund pre-tax accounts for absolutely no reason.

In other words, most older Americans past 70 shouldn’t be concerned about saving taxes today as they are about increased relief against taxes that cut into their consumption income, including Social Security. Why would I care to contribute to a pre-tax retirement account when I’m living it or close to living retirement or some phase of it, and income is my imminent lifeblood at this stage of life?

The only good thing I see about this change is the ability for continuation of backdoor Roth IRAs. However, by 70.5 most people have already rolled over their retirement accounts into IRAs which would diminish the positive effects of backdoor Roths anyway due to something called the pro-rata rule. Again, I consider this provision a way to clean up what should have been done previously and not a clear win for anybody except Wall Street and brokers.

If you haven’t turned 70.5 by December 31, there’s something for you!

Simply, if you haven’t turned 70.5 by the end 2019, you’ll be provided the privilege to wait until 72 to begin required minimum contributions. On a positive note, at least it’ll be easier for people to figure out when to begin their RMDs.

On a disappointing note, why older Americans who remain or return to the workforce are required to take distributions when they should be given the choice to wait is the most egregious ignorance of the tax elephant in the room and the issues seniors face today when it comes to making ends meet.

The Act should have allowed older employed Americans to postpone distributions until they, well, RETIRE.  However, we will need to make the best of it. Along with reform around life expectancy tables expected in 2021, many taxpayers should experience a bit of relief on taxes as life expectancies have increased.

The bill permits penalty-free withdrawals from retirement plans for expenses related to the birth of a child or adoption.

I’m torn over this one as it adds another element of ‘leakage’ to accounts that shouldn’t be touched until retirement. However, if it assists a family to adopt a child, I’m compelled to support it. Now, Congress could have removed the penalty-free withdrawal provision for a first-time homebuyer as we believe at RIA, if you need to tap retirement accounts to make a down payment on a house you clearly can’t afford to own one. In addition, and I know we can argue about this all day, a primary residence is NOT an investment. It’s a consumption asset.

The bill creates a new three-year tax credit for small employers for startup costs for new pension plans that include automatic enrollment.

Occasionally, probably by accident, there’s a jewel among the government rubble.  The new bill allows for a $500 tax credit for small employers to start retirement plans that must utilize automatic enrollment. Empirical studies outline how auto-enrollment has increased retirement plan participation.

Come together all small employers!

(Sec. 101) The bill amends the Internal Revenue Code to revise requirements for multiple employer pension plans and pooled employer plans. It provides that failure of one employer in a multiple employer retirement plan to meet plan requirements will not cause all plans to fail and that assets in the failed plan will be transferred to another plan. It also establishes pooled employer plans that do not require a common characteristic.

This Section will allow small employers to pool their resources to create 401(k) plans. A great dilemma we face as a country is lack of retirement plans available to employees of small companies. We hear about this issue all the time from radio listeners and blog readers. Hopefully, small employers should find it easier to establish plans and face lower costs; further details are pending.

Guaranteed Retirement Contracts are coming.

Rarely, are guaranteed lifetime income options in the form of annuities provided in company retirement plans. Now, that can change. I fully support this initiative, but the endorsement comes with a caveat. I’ll explain.

First, overall this is a positive. The loss of pensions has clearly created a retirement saving crisis in America. To offer a lifetime retirement income option among the sea of variable assets of stocks and bonds is indeed a positive ballast.

However, if you believe your employer does a challenging job with the selection of mutual funds, just wait to see what happens with annuities. It’s going to be absolutely crucial (and I cannot stress this enough), that you work with a fiduciary partner with extensive insurance experience that can help you assess the annuity your employer selects and whether or not you should consider it.

I leave the worst for last: The Death of the Stretch.

RIA was most concerned about this section; this is a significant change. The SECURE Act will require owners of larger pre-tax retirement accounts who plan to leave a legacy to family through IRAs, to review and possibly restructure their estate plans, ideas, in the coming years.

Currently, non-spouse beneficiaries such as children, can stretch inherited IRA distributions over their life expectancies. The SECURE Act beginning next year would require non-spouse beneficiaries deplete IRAs over a ten-year period. Non-spouse beneficiaries who are currently taking distributions should be grandfathered and not affected.  Along with taxes, this change can be detrimental to your legacy planning.

Again, this is one reason why we focus so much on surgical Roth IRA conversions and favor Roth over traditional, pre-tax accounts in almost every circumstance. Sure, the accelerated distributions are the same. However, the acceleration of depletion due to taxes is a tremendous negative to the wealth you plan to leave to others.

Overall, I rate the SECURE Act a C+.

Sadly, it does very little to address the chronic retirement insecurity which faces most Americans. Bold actions are required to foster national financial literacy (not from Wall Street and companies like Acorns) and allow for ambitious creation of widescale guaranteed retirement income vehicles such as those proposed by Dr. Teresa Ghilarducci. Read more of her work here: https://realinvestmentadvice.com/is-capitalism-responsible-for-socialist-sentiment/

Our four Certified Financial Planners are well equipped to discuss concerns you may have over the SECURE Act.

Watch for a webinar coming soon on the topic as information is provided.

It’s a Wonderful Time of Year to Face Financial Ghosts.

What are your ghosts?

Ghosts of the past are notorious for creeping into the present, especially when holidays roll around.

If you’ve unpacked an ornament from 30 years ago or got lost in a memory while watching A Charlie Brown Christmas, then you understand.

The ghosts of Financial Mistakes Past are sometimes not so kind. In other words, they’re not mindful of seasons; they aren’t warm and fuzzy either. Rattling chains of the ghosts of financial mistakes can be uninvited guests for years to come.

December is the month to objectively review your financial history – expose the good and bad – then, outline tactics to sever ominous chains and sprout wings to the beneficial for 2020. Oh, watch for financial disciplines or lack of them that may conjure the ghosts of financial future.

Just because I partner with others on personal finance challenges doesn’t mean I don’t own my share of mistakes. Thankfully, my Ghosts of Financial Mistakes Past lose their power to frighten me, especially as I too assess my consistent progress to slay them. As a financial professional, let’s just say I remain ‘fiscally aware’ throughout the year. Hey, it’s my job.

This month, as you prepare your favorite meals from recipes that have been in the family for decades, watch a timeless film, (White Christmas is my favorite), and go through old photographs, take some time to unwrap financial gifts and pack away the mistakes.

Here are three ideas to get your started.

  1. Calculate your household debt-to-income ratios.

I know. Math. I promise this isn’t a difficult task. As a society, we tend to base our lifestyle on the ability to meet monthly payments but rarely consider the damage to net worth by spending too much or taking on excessive debt.

I complete a couple of calculations for my household. I’ll also share with you, RIA’s financial guardrails. I won’t lie: Our tenets are tough; I promise your net worth will thank me 10 Decembers from now.

First, I isolate my mortgage, HOA, and homeowner’s insurance payments and divide the sum by my NET or ‘take-home’ monthly income.  Currently, my ratio is 7.6%. The standard rule in finance is a house payment shouldn’t exceed 28% of pre-tax income. It’s a horrible rule. It’s designed to push the boundaries on cash flow and sell you more house than is necessary. Throw it out if you desire financial flexibility, cash to cover emergencies and save for a prosperous financial future. Dave Ramsey suggests 25% of after-tax income. Not bad. However, you need to do better.

Our rule at RIA is a total mortgage payment should not exceed 15% of after-tax income. I didn’t extract this percentage out of thin air. I’ve watched how households over the last two decades who utilized this rule continue to increase their wealth by thinking of a primary residence as a place to live, not an investment. In other words, an intimidating mortgage obligation was just too painful for couples who employed  long-term consideration of other important goals they sought to fund.

I then consider my household’s variable and specific fixed expenses – entertainment, groceries, clothing. I also examine costs for utilities, car insurance (not cheap with a college-bound daughter driving). The general rule is 30% of after-tax income for ‘wants.’ Obviously, auto insurance is a need, not a want. However, with the ability to shop around for better rates or utilize insurance company ‘drive-pay’ programs which reward responsible drivers, I place auto insurance into the variable category.

Currently, my variable expenses are 10% of monthly after-tax household income. I understand I no longer have a household with young children where variable expenses are greater. However, that doesn’t mean as a growing family, you shouldn’t create your own rules which still allow for a robust savings rate.  At RIA, we believe variable monthly expenses shouldn’t exceed 20% of after-tax income.

If you’re disappointed by your ratio results, be grateful for new awareness and schedule a meeting with your financial professional in January to create an action plan for improvement so when ratios are calculated next year, they’re much healthier.

 2. Openly communicate about money, especially mistakes, with loved ones. It’s a good time to have conversations!

Holidays, when there is downtime from work and family gathers, seem to allow for communication flow about money within families.

Children: You children are monitoring your relationship with money. What is your outward expression towards debt, savings and general household financial management, especially when communicating with immediate family?

If your relationship with money is positive or one of control and discipline, your children will learn from the example. If your relationship with money is negative, stressful, extravagant or reckless, the kids will pick up on that, too. Smart money beliefs and actions can lead to smart money imprints by the younger generations around you.

Generally, if you’re a saver your children will be too. According to a www.moneyconfidentkids.com survey from 2017, parents who have three or more types of savings are more likely to have kids who discuss money with them and less likely to have kids who spend money as soon as they get it or lie about their spending.

I have found that parents who openly communicate their financial failures along with how they worked through them, raise fiscally intuitive children. Kids want to know you’re human. You mess up! Most important is how you acknowledged and changed erroneous behavior. Give the gift of wisdom this season!

Parents: Older parents are challenged to communicate final intentions with their children; or they decide to let estate planning documents speak for them. Big mistake. If you seek to create a Ghost of Future Turmoil for heirs, go ahead and remain tight-lipped about how you wish assets dispersed including family heirlooms and whom you selected as the executor of your will and why. Perhaps John doesn’t want great-grandmother’s fine China, but Erica does.

 Or Alan is bitter and wondering why your younger son, his brother, Edward is executor of the estate instead of him. These are not small things. I’ve witnessed them generate irreparable family rifts. Make December the month where you communicate with the children and ask questions about the items they’d wish to inherit upon your passing. Take a moment to explain to siblings why one is selected executor and the logic that drove the decision.

3. Trim the expense tree.

The evergreen fir has been a part of winter festivals for roughly 1,000 years. Per www.whychristmas.com:

The first documented use of a tree at Christmas and New Year celebrations is argued between the cities of Tallinn in Estonia and Riga in Latvia. Both claim that they had the first trees; Tallinn in 1441 and Riga in 1510. Both trees were put up by the ‘Brotherhood of Blackheads’ which was an association of local unmarried merchants, ship owners, and foreigners in Livonia (what is now Estonia and Latvia).

Year-end credit card and checking account statements should be available from your financial institutions the first week of January. Today’s statements do an excellent job categorizing expenses. Access, print and review all statements. Scrutinize your spending for 2019. Many statements will also outline prior years’ spending by category and how it compares to the current. From there, begin to outline a spending budget for 2020 with a focus on expense reduction and debt-to-income ratio improvement.

Let’s all try to make our financial ghosts the ones we don’t mind inviting into our homes at any time of year.

Never Forget These 10 Investment Rules.

“Psychology is probably the most important factor in the markets, and one that is least understood.”

– David Dreman

A motive of the financial industry  is to blur the lines between investor and trader. I’m convinced it’s to make investors feel guilty for taking control of their portfolios. After all, Wall Street firms ares the experts with YOUR money.

How dare you question them?

Sell to take profits, sell to minimize losses, purchase an investment that fits into your risk parameters and asset allocations; it’s all enough to brand one as ‘trader’ in the buy & forget circles  that are paid to push the narrative that markets are on a permanent trek higher and bears are mere speed bumps. Wall Street has forgotten the financial crisis. You can’t afford such a luxury.

And, if you’re a reader of RIA, you’re astute enough to know better.

“You’re a trader now?”

Broker at a  big box financial shop.

A planning client called his financial partner to complete two trades. Mind you, the only trades he’s made this year. His request was to sell an investment that hit his loss rule and purchase a stock (after homework completed on riapro.net). His broker was dismayed and asked the question outlined above. 

Investors are advised – Be like Warren Buffett and his crew: You know, he’s buy and hold, he never sells! Oh, please. 

From The Motley Fool:

Here’s what Berkshire sold in the third quarter:

During the third quarter, Berkshire sold some or all of five stock positions in its portfolio:

  • 750,650 shares of Apple. 
  • 31,434,755 shares of Wells Fargo. 
  • 1,640,000 shares of Sirius XM. 
  • 370,078 shares of Phillips 66. 
  • 5,171,890 shares of Red Hat.

What Do Paul Tudor Jones, Ray Dalio, Ben Graham, and even Warren Buffett have in common?

  • A strict investment discipline.
  • Despite mainstream media to the contrary, all great investors have a process to “buy” and “sell” investments.

Investment rules keep “emotions” from ruling investment decisions:

Rule #1:

Cut Losers Short & Let Winners Run.

While this seems logical,  it is one of the toughest tenets to follow.

“I’ll wait until it comes back, then I’ll sell.”

“If you liked it at price X, you have to love it at Y.”

It takes tremendous humility to successfully navigate markets. There can be no such thing as hubris when investments go the way you want them; there’s absolutely no room in your brain or portfolio for denial when they don’t. Investors who are plagued with big egos cannot admit mistakes; or they believe they’re the greatest stock pickers who ever lived. To survive markets, one must avoid overconfidence.

 Many investors tend to sell their winners too soon and let losers hemorrhage. Selling is a dilemma. First, because as humans we despise losses twice as much as we relish gains. Second, years of financial dogma have taken a toll on consumer psyche where those who sell are made to feel guilty for doing so. 

It’s acceptable to limit losses. Just because you sell an investment that isn’t working doesn’t mean you can’t purchase it again. That’s the danger and beauty of markets. In other words, a stock sold today may be a jewel years from now.  I find that once an investor sells an investment, it’s rarely considered again.  Remember, it’s not an item sold on eBay. The beauty of market cycles is the multiple chances investors receive to examine prior holdings with fresh perspective.

Rule #2:

Investing Without Specific End Goals Is A Big Mistake.

I understand the Wall Street mantra is “never sell,” and as an individual investor  you’re a pariah if you do. However, investments are supposed to  be harvested to fund specific goals. Perhaps it’s a college goal, or retirement. To purchase a stock because a friend shares a tip on a ‘sure winner,’ (right), or on a belief that an investment is going to make you wealthy  in a short period of time, will only set you up for disappointment. 

Also,  before investing, you should already know the answer to the following two questions:

 At what price will I sell or take profits if I’m correct?

Where will I sell it if I am wrong?

 Hope and greed are not  investment processes.

Rule #3:

Emotional & Cognitive Biases Are Not Part Of The Process.

If your investment  (and financial) decisions start with:

–I feel that…

–I was told…

–I heard…

–My buddy says…

You are setting yourself up for a bad experience.

In his latest tome, Narrative Economics,  Yale Professor Robert J. Shiller makes a formidable case for how specific points of view which go viral have the power to affect or create economic conditions as well as generate tailwinds or headwinds to the values of risk assets like stocks and speculative ventures such as Bitcoin.  Simply put: We are suckers for narratives.  They possess the power to fuel fear, greed and our overall emotional state.  Unfortunately, stories or the seductive elements of them that spread throughout society can lead to disastrous conclusions. 

Rule #4:

Follow The Trend.

80% of portfolio performance is determined by the underlying trend

Astute investors peruse the 52-week high list for ideas. Novices tend to consider stocks that make 52-week highs the ones that need to be avoided or sold. Per a white paper by Justin Birru at The Ohio State University titled “Psychological Barriers, Expectational Errors and Underreaction to News,” he posits how investors are overly pessimistic for stocks near 52-week highs although stocks which hit 52-week highs tend to go higher.

Thomas J. George and Chuan-Yang Hwang penned “The 52-Week High and Momentum Investing,” for  The Journal of Finance. The authors discovered  purchasing stocks near 52-week highs coupled with a short position in stocks far from a 52-week high, generated abnormal future returns. Now, I don’t expect anyone to invest solely based on studies such as these. However, investors should understand how important an underlying trend is to the generation of returns.

Rule #5:

Don’t Turn A Profit Into A Loss.

I don’t want to pay taxes is the worst excuse ever to not fully liquidate or trim an investment.

If you don’t sell at a gain – you don’t make any money. Simpler said than done. Investors usually suffer from an ailment hardcore traders usually don’t – “Can’t-sell-taxes-due” itis

An investor which allows a gain to deteriorate to loss has now begun a long-term financial rinse cycle.  In other words, the emotional whipsaw that comes from watching a profit turn to loss and then hoping for profit again, isn’t for the weak of mind.  I’ve witnessed investors who suffer with this affliction for years, sometimes decades. 

Rule #6:

Odds Of Success Improve Greatly When Fundamental Analysis is Supported By Technical Analysis. 

Fundamentals can be ignored by the market for a long-time.  

After all,  the markets can remain irrational longer than you can remain solvent. 

The RIA Investment Team monitors investments for future portfolio inclusion. The ones that meet our fundamental criteria – cash flows, growth of organic earnings (excluding buybacks), and other metrics, are sometimes not ready to be free of “incubation,” which I call it; where from a technical perspective, these  prospective holdings are not in a favorable trend for purchase. 

It’s a challenge for investors to wait. It’s a discipline that comes with experience and a commitment to be patient or allocate capital over time. 

Rule #7:

Try To Avoid Adding To Losing Positions.

Paul Tudor Jones once said “only losers add to losers.”

The dilemma with ‘averaging down’ is that it reduces the return on invested capital trying to recover a loss than redeploying capital to more profitable investments.

Cutting losers short, like pruning a tree, allows for greater growth and production over time. 

Years ago, close to 30, when I was starting out at a brokerage firm, we were instructed to use ‘averaging down’ as a sales tactic. First it was an emotional salve for investors who felt regret over a loss. It inspired false confidence backed up by additional dollars as it manipulated or lowered the cost basis; adding to a loser made the financial injury appear healthier than it actually was. Second, it was an easy way for novice investors to generate more commissions for the broker and feel better at the same time.

My rule was to have clients average in to investments that were going up, reaching new highs. Needless to say, I wasn’t very popular with the bosses. It’s a trait, good or bad, I carry today. Not being popular with the cool admin kids by doing what’s right for clients has always been my path.

Rule #8:

In Bull Markets You Should be “Long.” In Bear Markets – “Neutral” or “Short.”

Whew. A lot there to ponder.

To invest against the major “trend” of the market is generally a fruitless and frustrating effort. 

I know ‘going the grain’ sounds like a great contrarian move. However, retail investors do not have unlimited capital to invest in counter-trends. For example, there are institutional short investors who will  continue to commit jaw-dropping capital to fund their beliefs and not blink an eye. We unfortunately, cannot afford such a luxury.

So, during secular bull markets – remain invested in risk assets like stocks, or initiate an ongoing process of trimming winners.

During strong-trending bears – investors can look to reduce risk asset holdings overall back to their target asset allocations and build cash. An attempt to buy dips believing you’ve discovered the bottom or “stocks can’t go any lower,” is overconfidence bias and potentially dangerous to long-term financial goals.

I’ve learned that when it comes to markets, fighting the overall tide is a fruitless endeavor. It smacks of overconfidence. And overconfidence and finances are a lethal mix.

We can agree on extended valuations; or how future returns on risk assets may be lower because of them. However, valuation metrics alone are not catalysts for turning points in markets. With global central banks including the Federal Reserve  hesitant to increase rates and clear about their intentions not to do so anytime in the near future, expect further ‘head scratching’ and  astonishment by how long the current bullish trend may continue. 

Rule #9:

Invest First with Risk in Mind, Not Returns.

Investors who focus on risk first are less likely to fall prey to greed. We tend to focus on the potential return of an investment and treat the risk taken to achieve it as an afterthought.

Years ago, an investor friend was excited to share with me how he made over 100% return on his portfolio and asked me to examine his investments. I indeed validated his assessment. When I went on to explain how he should be disappointed, my friend was clearly puzzled.

I went on to explain how based on the risk, his returns should have been closer to 200%! In other words,  my friend was so taken with the achievement of big returns that he went on to take dangerous speculation with his money and frankly, just got lucky. It was a good lesson about the danger of hubris. He now has an established rule which specifies how much speculation he’s willing to accept within the context of his overall portfolio. 

The objective of  responsible portfolio management is to grow money over the long-term to reach specific financial milestones and to consider the risk taken to achieve those goals. Managing to prevent major draw downs in portfolios means giving up SOME upside to prevent capture of MOST of the downside. As many readers of RIA know  from their own experiences, while portfolios may return to even after a catastrophic loss, the precious TIME lost while “getting back to even” can never be regained.

To understand how much risk to consider to achieve returns, it’s best to begin your investor journey with a holistic financial plan.  A plan should help formulate a specific risk-adjusted rate of return or hurdle rate required to reach the needs, wants and wishes that are important to you. and your family. 

Rule #10:

The Goal Of Portfolio Management Is A 70% Success Rate.

Think about it – Major League batters go to the “Hall Of Fame” with a 40% success rate at the plate.

Portfolio management is not about ALWAYS being right. It is about consistently getting “on base” that wins the long game. There isn’t a strategy, discipline or style that will work 100% of the time. 

As an example, the value style of investing has been out of favor for a decade. Value investors have found themselves frustrated. That doesn’t mean they should  have decided to alter their philosophy, methods of analysis or throw in the towel about what they believe. It does showcase however, that even the most thorough of research isn’t always going to be successful.

Those investors who strayed from the momentum stocks such as Facebook, Amazon, Netflix and Google have  paid the price. Although there’s been a resurgence in value investing since October, it’s too early to determine whether the trend is sustainable. Early signs are encouraging. 

Chart: BofA Merrill Lynch US Equity & Quant Strategy, FactSet.

A trusted financial professional doesn’t push a “one-size-fits-all,” product, but offers a process and philosophy. An ongoing method to manage risk, monitor trends and discover opportunities.

Even then, even with the best of intentions, a financial expert isn’t going to get it right every time as I outlined previously. The key is the consistency  to meet or exceed your personalized rate of return.

And that return is only discovered through holistic financial planning.


10 Financial Planning Rules You Shouldn’t Ignore.

Financial planning is misunderstood.

Ask consumers or brokers what financial planning means to them and the conversation steers toward the portfolio or a pitch for investment and insurance products.

“I asked for a financial plan –  he gave me a brochure about long-term care insurance.” Anonymous.

So, you’re considering holistic financial planning? I commend you. 

Here Are The 10-Rules

Rule #1 – Take a holistic approach to every financial decision.

Money doesn’t exist in a vacuum; money is fungible.

  • Consider money concerns as a circle, or a wave. There’s a ripple effect to every decision you make on every facet of your financial picture.
  • Proper planning integrates every asset, liability and source of income along with your ability to save, invest, manage risk and debts.

How did you make your decision about when to take Social Security? I spoke to my – neighbor, relative, friend, the guy at Kroger’s.

Rule #2 – Be smart when it comes to household Social Security planning.

Take the emotion and politics out of your decision-making process.

  • Most recipients will take Social Security early thus cutting at least 20% of lifetime benefits from them and their spouses. A majority work with financial advisors who are not trained in social security strategies.
  • The goal is to maximize benefits for you and your spouse, or surviving children.
  • Since Social Security may be taxable, work with you financial professional to create a coordinated portfolio withdrawal strategy.

Rule #3 – Take an objective view of your health; include healthcare costs and proper rates of inflation in your process.

According to the Kaiser Foundation, Medicare Beneficiaries spent an average of $5,460 out-of-pocket for healthcare in 2016 with some groups spending substantially more.

  • Health care cost inflation can be twice the stated rate of inflation. Ignoring in your planning can be a mistake.
  • Pre-Retirees can contact their insurance company to keep track of health care expenses for planning purposes.
  • Retirees also must do the same and re-examine their coverage during Medicare open enrollments (which ends December 7th.)
  • Average health care expenses in retirement are $220-320,000 based on annual studies.

Rule #4 – Ground your mindset in financial awareness.

If I ask you to explain your greatest financial weakness, I bet you know it off the top of your head.

  • Those who maintain a money awareness and gain a “sixth sense” about spending, debt and investing are the ones with the best “plan” outcomes.
  • Overspending, “Keeping Up With The Jones,’” and not saving assures poor plan outcomes.
  • Outline your money philosophy in two sentences.
  • Work backwards to understand how it was formed. Most likely parents and grandparents forged your money frame of reference.
  • Meet with a Certified Financial Planner to  help you reprogram a negative mindset and identify financial strengths.

Rule #5 – Prioritize needs, wants and wishes BEFORE beginning a comprehensive planning process.

A holistic plan needs to be based on the financial life benchmarks you seek to achieve.

  • Begin with needs. They are the priorities. How much do you require for rent, mortgage, insurance, for example?
  • Then, wants: The fun stuff and other expenses are secondary benchmarks to strive for. Day trips? A second home?
  • Last are your wishes: GO for the gusto! List the big bucket list items. Can your plan handle them?
  • The responsibility of you and your planner is to come up with a workable,  personal plan that works. It’s a give and take. You must remain flexible to be successful.
  • Perhaps it’ll take saving 10% more a year, downsizing, working two more years. Regardless, an action plan needs to be created, worked and monitored.

Rule #6 – Conversations, conversations, conversations!

A successful, workable financial plan must be aligned with open dialogue with people who are important to the implementation of facets of your plan.

  • Utilize your financial planner to facilitate family discussions if you’re reluctant.
  • Intentions must be clear when it comes to gifting and estate plans.
  • Don’t allow misunderstandings to generate family tensions after you’re gone.
  • Lifetime gifting strategies, especially of family heirlooms, should be based on open communication with proposed recipients to make sure the right gifts are destined for the ‘right’ people.

Rule #7 – Don’t be fooled by market averages.

A plan must include realistic rates of return for asset classes based on risk-asset valuations.

  • Financial markets don’t consistently return 8% a year.
  • Understand the cycle you’re retiring into.
  • A realistic plan includes variability of returns, including losses, over time.
  • Retirement income withdrawal plans should be ‘stress-tested’ through real-world market cycles to manage sequence of return risk.
  • Income withdrawal plans should be reviewed every three years.

Rule #8 – Accountability matters.

A financial plan is the beginning, not an end. A plan is an ongoing process that requires monitoring and ‘check ins’ to make sure life benchmarks are being reached.

  • A plan is NOT a loss leader. Financial services firms use ‘free plans’ to get to the good part. The part where you’re placed in expensive managed money products.
  • A plan is the structure where your portfolio and investment philosophy lives and thrives.
  • Long-term financial goals should be broken down to monthly objectives.
  • You and your financial partner together, are responsible for meeting those objectives.

Rule #9 – Understand your Medicare options.

Studies show that most retirees will overpay for  supplemental coverage or fail to understand when to begin Medicare Part A and especially Part B.

  • A Kaiser Foundation study found that relatively few people have used the annual enrollment period to switch Part D prescription drug plans.
  • The relatively small share of PDP enrollees who switched plans at some point between 2006 and 2010 were more likely than those who did not switch to end up in a plan that lowered their premiums. 
  • Nearly half (46%) of enrollees who switched plans saw their premiums fall by at least 5% the following year, compared to 8% of those who did not switch plans. 
  • Plans should be assessed annually during Medicare open enrollment to determine whether the current insurance fits your needs at the lowest possible premium costs.
  • Tracking healthcare costs can help retirees determine how fast their costs are rising. From there, financial plans can be customized for personal healthcare inflation.

Rule #10 – A plan is never perfect. 

A plan represents a human life and life rarely goes the way we expect.

  • If you seek perfection, you’ll never retire or hit the benchmarks sought.
  • If you embrace realistic expectations, a plan is always successful. It can be worked and fine-tuned over years.
  • A financial plan is a snapshot along the road of a long and winding financial path.
  • Over time, those photos no longer represent the final destination for the goals outlined.
  • Twists and turns must be expected and plans revised.

If done properly, comprehensive planning can provide invaluable insight to your financial health; applaud strengths and expose weaknesses which require attention. 

I hope you find these rules helpful.

For objective hourly-based planning, RIA’s deep bench of tenured Certified Financial Planners are here to partner with you.

Medicare Advantage? A Couple of Things To Consider

It’s that time of year again.

Medicare Open Enrollment season began October 15 and runs through December 7th.

If you’re Medicare-eligible or in Original Medicare or Medicare Advantage, I’m confident you’re getting bombarded with advertisements and collateral materials. Remember, this is the annual opportunity to review your Medicare Advantage and Prescription Drug D plans to make certain costs and benefits still meet your personal needs.

By now, recipients should have received Evidence of Coverage or an Annual Notice of Change to determine if their plans will change for 2020. I find that many retirees either inadvertently ignore these notices or regardless, do not spend 30 minutes to an hour every year comparing their current plans to others that are available.

According to The Senior Citizens League’s Policy Analyst Mary Johnson:

“Free one-on-one counseling is available in every area of the country to check coverage options and to switch to other health or drug plans when a better choice is available,” Johnson says. “Checking coverage is especially important since the Social Security cost-of-living adjustment for 2020 is just 1.6 percent and will only raise an average benefit of $1,460 by about $23 per month.”

Keep in mind, Medicare does not negotiate drug prices on behalf of beneficiaries. The plan with the lowest-priced drug can be hundreds or even thousands of dollars less than the highest cost plan for the very same drug. Yet most Medicare beneficiaries rarely shop for their best drug plan during Medicare’s annual Open Enrollment Period. Consequently, Medicare beneficiaries in Part D and Medicare Advantage plans overpay for their prescription medications even though less expensive, high quality plan choices are available.

For those who haven’t spent the time to review their D Plan or have no idea where to begin, The Senior Citizen’s League has a checklist available here.

Per the finest healthcare think tank out there, the Kaiser Family Foundation, list prices have increased up to 9 times faster than inflation for 20 of the top 25 Part D drugs. There are several proposals on the table to lower prescription drug costs which would require drug manufacturers to cough up a rebate to the federal government if their drug prices covered under Medicare Part B and D increase by more than the rate of inflation. These initiatives would be welcomed relief for older Americans. 

Next year at RIA, we plan to initiate a “Health = Wealth” series of podcasts, live events, to help those saving for retirement understand how important proactive preventative health initiatives are crucial to financial, mental, and physical health in retirement. It’s crucial to review your Plan D coverage every year.

Medicare Advantage is growing in popularity despite reductions in payments enacted by the Affordable Care Act. Per KFF.org, since 2010, Medicare Advantage enrollment has grown 71%. As of 2017, one in three people with Medicare (19 million beneficiaries), is enrolled in a Medicare Advantage Plan.

There is no denying the growing popularity of these plans.  

Medicare Advantage Plans are inclusive which means they cover all services of Original Medicare, including prescription drugs. Most offer extra coverage like vision, hearing, dental and/or wellness plans. Two-thirds of the plans offered are through closed-physician network HMOs.

Advantage Plans usually have lower premiums than Medigap (also known as Medicare Supplemental Insurance) and are offered without evidence of insurability. However, out-of-pocket costs can be costly and in the future, hold unwelcomed surprises (which I’ll outline later).  Per KFF.org: While average Medicare Advantage premiums paid by MA-PD enrollees have been relatively stable for the past several years ($36 per month in 2017), enrollees may be liable for more of Medicare’s costs, with average out-of-pocket limits increasing 21 percent and average Part D drug deductibles increasing more than 9-fold since 2011; however, there was little change in out-of-pocket limits and Part D drug deductibles from 2016 to 2017.

Ostensibly, Medicare Advantage is most suitable for participants who are healthy, don’t visit the doctor often, find preventative care important, oversee a frugal retirement budget and find the lower premiums not only favorable, but necessary based on household retirement cash flow.

If you’re thinking Medicare Advantage is a good choice, ponder these important considerations:

Are you willing to accept future change, possibly dramatic, in your Medicare Advantage Plan?

Medicare Advantage is a lucrative endeavor for private insurance companies. Annual gross margins in the market average $1,608 per covered person which is about double the margins in the individual and group markets per research provided by www.kff.org.

You may see greater involvement by insurers and higher future costs for consumers as President Trump’s recent executive order allows insurers to determine rates rather than have Medicare set prices. Currently, Medicare Advantage plans receive their payments from Medicare and assume full responsibility for providing care under Medicare Parts A, B & D. Keep in mind, Medicare’s reputation is one of a tough price negotiator.

With insurers provided the freedom to establish prices, there’s a greater chance that recipients become responsible for additional costs that Medicare Advantage won’t cover or perhaps experience a reduction in current benefits. The risk here in my opinion, is an interruption to or dramatic price increase for life-saving treatments that a retiree may require. At that time, it would be too late to obtain coverage through Medigap due to a pre-existing condition exclusion.

At RIA, we strongly recommend older Americans select a Medigap policy over Medicare Advantage. Monthly premiums for Medigap policies will absolutely be higher. However, the Medigap insured can benefit from more choice among providers and ultimately lower total out-of-pocket costs. Medicare-eligible individuals must be aware of Medigap enrollment periods otherwise, they may not be able to obtain coverage in the future.

Medigap policies are available to eligible recipients during open enrollment periods regardless of pre-existing health conditions. Medicare Advantage plans are not subject to similar exclusions. Medigap’s supplemental coverage open enrollment is a six-month open enrollment period that starts the month you are 65 or older and enrolled in Part B.

What other services are important to you?

I admit – Medicare Advantage plans can include attractive ‘bells & whistles.’ Gym memberships, rebates on Apple watches, online brain games, cooking classes, meal delivery and more. I expect to see an increase in tempting sign-up incentives as insurance companies continue to compete for enrollees.

Recently,  a client spent an hour or so on the phone with a United Healthcare representative during annual Open Enrollment because his current Medicare Advantage Plan dropped the gym membership benefit. He was able to switch to another plan with lower premiums and a greater allowance for a gym of his choice (within certain monetary limits).

I don’t suggest Medicare Advantage plans based on incentives or special offers. There are important financial and physical health variables to consider – most which are identified during the holistic financial planning process.

Remember – A Medicare Advantage plan comes with ongoing due diligence. As outlined previously: Every year during Open Enrollment which begins October 15th and lasts through December 7th, it’s best to make sure your current plan still meets your needs and compare it to other available plans whether you’re satisfied with your current option or not.

Medicare Advantage is not RIA’s favorite choice for retirees; however, it is indeed a popular option. The Kaiser Family Foundation in a recent analysis, outlines that a record 3,148 Medicare Advantage Plans are now available across the country with an average of 28 plans available locally per beneficiary! It’s best to understand the pros & cons before they’re considered.

At RIA, we can guide you accordingly.

For further information, check out the following government online hub:

NOT government sites but informative just the same:

3 Tips To Avoid A “Save Taxes NOW!” Mentality

We scramble to do whatever we can to save on taxes.

Unfortunately, there’s little firepower in the form of itemized deductions since the Tax Cuts and Jobs Act (TCJA) was initiated. The www.taxfoundation.org estimates that nearly 90% of taxpayers will continue to take the expanded standard deduction which has increased from $6,500 to $12,000 for single filers; $13,000 to $24,000 for those married filing jointly. If you recall, the income tax changes under TCJA expire at the end of 2025.

CPAs, professionals in the financial industry and the media constantly tout the advantages of pre-tax accounts like traditional 401ks and deductible IRAs to help consumers reduce their current tax liabilities.

The sole focus on tax reduction today could be a shortsighted mistake paid for dearly down the road.

I’ll explain:

Most financial professionals advise with an accumulation mindset. The emphasis is to help clients accumulate and invest primarily in tax-deferred accounts with little consideration to tax implications of this guidance when the day arrives to withdraw funds – most likely at retirement.

Rationale for this tax-deferred myopia is based on a compelling three-part story: First, the ‘snowballing’ of compounded investment returns which occurs as would-be annual tax dollars work 100% for the investor sheltered from taxation for years, perhaps decades. Second, a company retirement account contribution is generally a dollar-for-dollar reduction of gross income which ostensibly reduces taxable income.  Finally, the blanket statement about how households are going to drop to the lowest tax bracket in retirement is stubbornly alive and well. Only one component of this story remains valid.

The tax-deferred snowball story touted throughout the 80s and early 1990s made sense as ten-year annualized returns on the S&P 500 ranged consistently between 10 to 15%. What a snowball, right? From the mid-90s to today, returns on the large company index have been half or less than half what investors previously realized. If we’re correct at RIA about forward-looking stock returns closer to 3%, the attractiveness of socking every dollar away in tax-deferred accounts based on the compounding story is as small as a snowball in Texas.

But Rich, what if marginal tax rates do indeed move higher? Wouldn’t it be worth maximizing my savings in tax-deferred accounts while I’m still working? Well, that is clearly the conventional wisdom – worry about taxes today, never tomorrow (and tomorrow arrives sooner than you think!)

However, unless there’s a proactive strategy to the invest tax dollars that are saved by maxing out pre-tax accounts, (in an after-tax account or Roth IRA), why not bite the bullet, pay taxes now while you’re a career-driven, human capital earnings machine, as opposed to the time when you are no longer in the workplace and need every tax-friendly dollar to live comfortably?

If we consider taxation on Social Security benefits and couple that with future disappointing investment returns, it makes sense that investors should place greater focus on tax-free account vehicles such as Roth vs. traditional pre-tax choices which just postpone future tax pain.

If you’re a rare breed of taxpayer who believes marginal tax rates will fall in the future, taxation on Social Security benefits is not eventually headed higher and Medicare IRMAA surcharges will only increase down the road for higher-income households, then there’s no reason to consider a change to your current focus on pre-tax retirement accumulation.

If you believe taxes have one direction to go (and that’s up), then read on.

With the proliferation of exchange-traded funds, investors now have a great opportunity to invest tax-efficiently in after-tax brokerage accounts. The inherent tax-efficiency of ETFs allows investors to still buy in to the snowball compounding tale (if they must), of stocks, but in a tax-friendly manner.

The advantage would be the reduction of ordinary income tax liability and increase in long-term capital gains, which are currently taxed at lower rates. For example, a married retiree with income at the 22% marginal tax rate (married filing jointly with taxable income of $19,401-$78,950), would pay a more palatable 0 – 15% on long-term capital gains on the sale of investments held for a year or longer.

Keep in mind, short-term capital gains (gains from a sale on assets held for a year or less), are currently taxed as ordinary income. Noted, there’s always a risk that favorable long-term capital gain rates are not as tax-friendly in the future. Personally, I’m willing to take the risk as I believe long-term capital gain rates will always be taxed favorably vs. current income as the wealthiest Americans (including members of Congress), don’t survive paycheck-to-paycheck. They thrive off capital gains.

At the least, maintaining pre-tax, after-tax and tax-free accounts allows for greater lifetime tax control. It’s especially important throughout the retirement income distribution phase.

At RIA, we teach the importance of ‘diversification of accounts’ whereby a retiree is able to maintain greater distribution flexibility and control over tax liabilities when unexpected expenses arise or ordinary-income distributions risk placing a retiree in the next highest marginal tax bracket.

Recently, a client required $50,000 to pay off the mortgage on his primary residence. Because he believes in account diversification, we were able to withdraw $20,000 from his pre-tax rollover IRA, $10,000 from his Roth conversion IRA and the remainder from his after-tax brokerage account which helped minimize the overall taxes he would have incurred if the entire $50,000 needed to be distributed solely from his pre-tax rollover IRA.   

Unless you’ve undertaken holistic financial planning that includes tax-friendly retirement income distribution planning modeled for the sunset of current tax laws in 2025, and then know for a fact you’re going to be in the lowest tax bracket in retirement, here are several other tax-friendly ideas to consider:

Maximize annual contributions to ROTH IRAs.

A Roth comes in two flavors: Contributory and conversion. People tend to mix them up. So, let’s start with the smarter, more handsome sibling of the traditional IRA: The contributory Roth IRA. Roth accounts overall offer tax-free growth and most important: Tax free withdrawals.

The annual contribution limit per individual is $6,000 for 2019; $7,000 if you’re 50 or older.  Roth IRA contribution levels phase out based on household adjusted gross income. For example, if your filing status is married filing jointly and modified adjusted gross income is less than $193,000, you may contribute up to the limit. Once MAGI is greater than $193,000 but less than $203,000, contribution levels are reduced. Based on the generous AGI phaseout levels, most wage earners will have no excuse and should be able to fund Roth IRAs every year.

Since Roth IRAs are funded with after-tax dollars obviously, a current tax deduction is not available (remember my commentary about focusing on taxes tomorrow vs. taxes today?). After a five-year period, which begins January 1st of the year a contribution is made, earnings may be distributed 100% tax free. If younger than 59 1/2, unfortunately, a 10% premature distribution penalty applies to withdrawn earnings.

Contributions, which are after-tax, may be withdrawn at any time without taxes or penalties. For many investors, the five-year waiting period for earnings is a quick walk in the park as funds should be considered long-term for retirement.

Keep in mind, a Roth IRA is not subject to required minimum distribution rules where at 70 1/2, distributions from traditional retirement accounts must begin or a retiree may face a draconian 50% penalty on the amount that should have been withdrawn.

Another benefit to Roth IRAs and Roth 401(k) options: Withdrawals are not included in the provisional income formula used to tax Social Security; distributions will not add to income that may generate Medicare IRMAA surcharges.

Keep this in mind if you follow a Pay Yourself First strategy: In almost every case a Roth is a better choice. I’m not concerned about your current tax bracket; nor am I worried about your possible tax bracket in retirement. I do care about how you’re going to gain more consumption dollars in retirement and the impact of taxation on Social Security benefits.

John Beshears a behavioral economist and assistant professor of business administration at Harvard Business School in a study – “Does Front-Loading Taxation Increase Savings?: Evidence from Roth 401k Introductions,” along with co-authors, outlines that plan participants who place their retirement savings on auto-pilot and direct a percentage of gross income, say 10%, into a Roth vs. a traditional pre-tax 401k, will wind up with more dollars to spend in retirement.

 It’s rare when a financial rule-of-thumb is a true benefit. And you don’t need to do much to receive it! The reason the strategy works is front loading of taxes. In other words, sacrificing tax savings today (when working and paying the taxes isn’t as much of a burden as it would be in retirement when earning power drops dramatically), and failing to adjust the percentage of auto-pilot savings to compensate for the current tax impact of switching from pre-tax to Roth, allows for additional future consumption dollars. 

From Lauren Lyons Cole Business Insider article on the study:

“If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.” John Beshears

 Switch to a ROTH 401(k) at work.

I know. Sounds weird. We’ve been so brainwashed to invest in traditional pre-tax 401k plans; it just feels odd to consider a Roth alternative. Most likely, your place of employment offers a Roth 401k; you just never bothered to check – they never bothered to make a big deal about offering it.

A Roth 401k operates the same as the traditional brethren with several important differences – contributions are after-tax; there is no current tax benefit for paycheck contributions. In other words, if you decide to max your employee contributions (and I hope you do), then $19,000 ($25,000 if 50 or older), will not reduce your household income. Employer-matched contributions remain pre-tax and deposited in your traditional, pre-tax 401k.  

But Rich, this is painful! I get it. As you recall, tax savings realized in the current can be a tax enemy in waiting when retirement arrives and you require every tax-free dollar to maintain a lifestyle. Let’s consider a compromise (and I do need to make this deal. Sometimes the tax-deferred story is too deeply ingrained to discount completely).  

You decide to ignore my advice. I have no idea what I’m talking about. Fine. So, you make the maximum contribution to a pre-tax 401(k). Hey, I’m just happy you’re saving money! Now, please go ahead and ask your tax advisor how much was saved in current taxes due to the contribution. Whatever that sum turns out to be, I want you to please contribute 100% of it if possible, in a Roth contributory IRA. See? I’m all about compromise. At the least, you’ll be working on diversification of accounts. For that, I commend you.

I’m proud of how we’ve helped attendees at our Right Lane Retirement Classes and clients to realize the long-term benefits of Roth. So much so, we have many clients who max their Roth 401k AND Roth contributory accounts on a consistent basis.

If your company doesn’t have a Roth retirement plan option, I’d suggest you speak to your benefits department to inquire as to why one isn’t offered. In the meantime, my recommendation is to invest up to the match in your tax-deferred plan and continue the remainder of your savings in an after-tax brokerage account.

Consider annual surgical ROTH conversions.

People ask me about the viability of Roth in light of massive federal government deficits. I’m not concerned about the government changing the tax-free status of Roth. Why? They’re like J.G. Wentworth! They need cash now! However, I’m extremely concerned how political parties envision tax-deferred accounts as fatted calves – all too tempting not to bring to eventual tax slaughter.

The $100,000 AGI ceiling on Roth conversions was removed years ago to allow traditional IRA owners to convert to Roth without limitation (J.G Wentworth!).

A Roth conversion allows withdrawals from a pre-tax retirement account, most likely a rollover IRA, and subsequent conversion to Roth. Withdrawals are taxed as ordinary income. Therefore, careful analysis and discussion with a financial and tax advisor is crucial.

I partner with a ‘young’ retiree, a client for over a decade now – 57 years old, on a surgical Roth conversion plan. If you recall from previous blog posts, I’ve written how the fortunate few who still have pensions, employer-based retirement healthcare pre-Medicare, and are disciplined savers to boot, earn the luxury of retirement in their 50s.

I outlined a five-year surgical Roth conversion strategy to fully maximize the 22% tax bracket. Considering a 37-year life expectancy, we were able to estimate an increase in his lifetime withdrawal and/or legacy plan by $871,466 compared to conventional wisdom whereby we remain passive and just distribute money every year from his tax-deferred accounts beginning at age 60, to meet specific spending goals. With the surgical Roth strategy, we were also able to reduce overall tax liability and loss of tax control that comes with required minimum distribution requirements.

In addition, years ago we initiated a process where our client proactively made an effort to NOT sock every investment dollar away into tax-deferred accounts. Ostensibly, we now have cash to pay all taxes on Roth conversions from his after-tax source. This allows 100% of his IRA dollars to be directed into the Roth. Having the money available from an outside source to pay taxes on the conversion instead of withheld from the traditional IRA, avoids the 10% premature distribution penalty he would have incurred before 59 1/2.

A trusted tax advisor with a bit of fine tuning was able to validate the plan before we moved forward.

There are times when pervasive financial dogma is harmful to your wealth. For some reason, Roth is not discussed often enough.

I’m no conspiracy theorist. However, I do believe there’s a profit incentive behind it all for Wall Street and the financial industry which prevents Roth from becoming the popular choice.

As a reader of RIA, now you know better.

Portfolio Returns Are The Least Of Your Worries

At RIA – through the blog and in meetings with clients and readers who require objective investment and planning guidance, our team has been clear about our view along with the analysis to back it up: Investors are going to experience future real portfolio returns which will rival the lowest experienced since 1966-1982. 

It’s not that the market as represented by the S&P performed badly through through that cycle; inflation was the household wealth nemesis which dramatically eroded real or inflation-adjusted returns. Back then, households in general were in healthy fiscal shape I believe, due to several reasons – Personal savings rates – think a consistent 10-14% of household incomes saved every year, strong wage growth which I surmise was due primarily to the proliferation of unions, including public sector unions. Heck, I lived through the experience in the 1970s as I watched my grandparents – both janitors for Brooklyn, New York public schools, own a home, new car every few years, and save for retirement – all at the same time!

In addition, the wide-scale shift to globalization didn’t accelerate until the 1980s which meant private-sector workers were able to command attractive wages. Last, personal fiscal responsibility was prevalent as the depression-era mindset impacted permanently a generation to save, abhor big debt and live below or  well within their means.

It was indeed a frustrating time to be invested in variable assets – crippling inflation, bonds performing poorly and real returns on stocks at or close to zero. The cycle went on for so long that in August 1979, BusinessWeek Magazine declared the ‘death of equities.’  At the beginning of 1982, the price/earnings of the S&P 500 was 7.73. The lowest since 1918.

Over the last decade, it’s been a fun ride for stock and bond investors. Complacency has ruled. Markets have moved higher with infrequent periods of correction.

Change is coming.

I believe we’re due for another cycle of stock market stagnation due to a Great Financial Suppression which began after the financial crisis and continues today. Since the Great Recession, global GDP has remained below 3% a year for most of the period. 

The Great Financial Suppression comes in the form of: 1. lower household incomes due to returning wage stagnation and eventually, higher taxes, 2. suppression of risk asset returns due to overwhelming government debt coupled with irresponsible central bank monetary policy manipulation, 3. stretched market valuations, 4. younger generations such as Gen X and Z who favor smaller households (less or no children), small homes and less material wealth. In other words, it’ll be a global economy – just not so grand.

Wait, Rich – Hasn’t wage growth improved? In the short term, yes. However, unless global economies structurally reform, don’t expect the party to last. Negative and sustained low interest rates are a sign of structural problems that cannot be rectified through monetary policy; global central banks for some reason, have been given the responsibility to employ blunt instruments as the sole method to fix broken economic engines. 

Per a recent analysis by Daniel Aaronson, vice president and director of microeconomic research, Luojia Hu, senior economist and research advisor, and Aastha Rajan, research assistant at the Federal Reserve Bank of Chicago:

“Real wage growth has come in low during this expansion, relative to historic relationships between labor market conditions and real wage growth. That pattern holds for women in nearly every age-education group, with particularly large gaps among college-educated women. For men, there is a striking dichotomy by education. Like college-educated women, college-educated men have experienced wage growth well below what we would have expected given pre-2008 relationships; this is especially true for college-educated men aged 45–69. “

If  you’re retired or looking to be within 3-5 years, there are going to be equally bigger concerns to face in addition to anemic portfolio returns.

Continued erosion of cost-of-living adjustments for America’s pension – Social Security.

Based on CPI-W so far, (September’s inflation numbers obviously still pending), the Social Security cost-of-living adjustment for next year will likely be half or less than it is today. We may be talking a paltry 1.6% in 2020. To put it in perspective, Social Security retirement benefits average roughly $1,400 a month; the estimated COLA would add $22.40 a month. The monthly Medicare Part B base premium is estimated to increase by $8.80 to $144.30 next year. Social Security recipients who have Medicare Part B premiums subtracted from their payments would net a whopping $13.60 a month.

Medigap and health-care cost inflation twice the national average or greater.

HealthView Services is a company that provides healthcare projection analysis and tools to the financial services industry. The organization draws upon a database of 530 million medical cases, longevity and government statistics to create their projections. They estimate that the total lifetime healthcare costs (which include premiums for Medicare, supplemental insurance, prescription drug coverage,) for a healthy 65-year-old couple retiring this year are projected to be $387,644 in today’s dollars assuming the Mr. lives 22 years and Mrs. – 24. Health-care inflation is averaging roughly 4.4% a year; we use a 4.5% inflation rate in our planning at RIA. Medigap or supplemental insurance coverage which is offered by private insurance companies has increased consistently by more than 6% a year, according to The Senior Citizens League.

Where do you believe tax rates are headed in the future? 

Income taxes will place growing pressure on portfolio depletion – unless you believe income tax rates are headed lower. Please let me know if you believe tax rates are going to be lower in the future. I’d love to hear the rationale. The financial services industry has done an outstanding job brainwashing a nation of investors to direct every long-term investment dollar into pre-tax accounts. Tax-deferred compounding and the search for methods to cut taxes today may have serious repercussions on the quality of life tomorrow when you’re retired and no longer at career earnings machine.

Oh, I know. You’ve been told that your tax rate will drop in retirement. Another blanket myth the industry irresponsibly spouts; who is going to pay the price for it?

You are.

Granted, for some retirees, taxes will fall. However, our planners witness firsthand, the long-term financial damage of sheltering every retirement dollar in pre-tax accounts and the negative impact of ordinary income taxes on distributions.

Nobody knows for certain where tax rates are going; although I’ll make a solid guess (again), that future rates must move higher due to fixes required to entitlements such as Medicare along with other rising costs of an aging population. When the taxation of Social Security retirement benefits is considered, there’s a high probability that the ordinary income tax distributions from pre-tax accounts are going to generate an additional tax burden that rarely gets considered.

A married couple filing jointly with provisional income (a convoluted mix of ordinary income, tax-exempt income & ½ Social Security benefits), within the threshold amounts $32,000-$44,000, must add to gross income the lesser of 50% of Social Security benefits or the amount by which provisional income exceeds the threshold amount. Provisional income over $44,000 raises the percentage to 85%. Retirees must pay attention to the marginal tax rate danger zone where Social Security benefits are not fully taxed at 85% yet provisional income is high enough to trigger additional tax.

A marginal tax rate danger zone is the point where each additional income dollar has the potential to be taxed at $1.50 or $1.85. For example, if married filing jointly, the 12% marginal tax bracket threshold is $78,950. However, depending on Social Security income received, (the average benefit is $33,456), a retiree can experience a tax rate as high as 22% on each additional dollar above Social Security provisional thresholds.

Per CFP Elaine Floyd’s tremendous work examining this insidious bracket creep, $30,000 in annual social security income along with $17,000-$59,000 in modified adjusted gross income (not counting Social Security), can cause your marginal income tax rate to increase to as much as 22%. Roth accounts being 100% tax free on withdrawals, do not get added to the provisional income equation (even though tax-exempt or municipal bond income does!).

A retiree may delay the receipt of Social Security benefits until age 70. This decision will lead to greater lifetime income due to the delayed 8% annual retirement credits which accrue every month from FRA or full retirement age until age 70. Concurrently, a recipient can reduce a future tax burden on benefits by drawing down an IRA or 401(k) account to fund retirement living expenses.

Currently, we plan for most clients to initiate annual surgical Roth conversions along with coordination of distributions for living expenses to accelerate the reduction of IRA or 401(k) balances prior to mandatory distributions at age 70 ½. It’s important that your financial partner and tax advisor work together to ensure that the upper limits of your personal tax rate aren’t exceeded. 

For example, if you and your spouse require $4,000 a month to meet living expenses, even with taxes withheld there’s still ‘bandwidth’ in the 12% bracket to complete a surgical Roth conversion. You want to make sure you have enough cash outside your IRA to pay taxes on conversion dollars. 

If you follow a ‘Pay Yourself First,’ strategy, in almost every case a Roth is a better choice. I’m not concerned about your current tax bracket; I’m worried about your possible tax implications in retirement.

I care about how you’re going to gain more consumption dollars in retirement and the impact of taxation on Social Security benefits. John Beshears a behavioral economist and assistant professor of business administration at Harvard Business School in a study – “Does Front-Loading Taxation Increase Savings?: Evidence from Roth 401k Introductions,” along with co-authors, outlines that plan participants who place their retirement savings on auto-pilot and direct a percentage of gross income, say 10%, into a Roth vs. a traditional pre-tax 401k, will wind up with more dollars to spend in retirement.

 It’s rare when a financial rule-of-thumb like ‘pay yourself first,’ is a truly a benefit. And you don’t need to do much to receive it! The reason the strategy works is front loading of taxes. In other words, sacrificing tax savings today (when working and paying the taxes isn’t as much of a burden as it would be in retirement when earning power drops dramatically), and failing to adjust the percentage of auto-pilot savings to compensate for the current tax impact of switching from pre-tax to Roth, allows for greater future consumption dollars. 

From Lauren Lyons Cole Business Insider article on the study:

“If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.” John Beshears.

Taxes are an important component of net investment return – Taxes, fees, along with disappointing future portfolio returns are going to force retirees to closely re-examine their lifestyles and initiate big changes whether they want to or not.

Pre-retirees must prepare to work longer, save more and consider a dramatic reinvention of their retirement lifestyles.

Start now to prepare for reality.

If you need a roadmap, we’re here to assist.

5-Things Your Broker Wont Tell You – Part 4

Social Security is America’s pension.

Without Social Security included as part of a retirement income plan, even disciplined savers may experience financial vulnerability in retirement.

With the inclusion of Social Security or an inflation-adjusted income annuity that lasts a lifetime, a retiree may depend less on variable assets like stocks to create a predictable retirement income, especially during market cycles characterized by poor sequence of returns risk. Investors in distribution mode must now pay attention to the imminent headwind in stock market returns.

When investment assets perform poorly over a series of years perhaps decades, guaranteed income sources like Social Security can decrease the burden on a portfolio alone to shoulder the distribution burden. In other words, there’s less pressure to withdraw from variable assets that may require time to appreciate or recover if there are guaranteed income options considered.

We witness the fortunate few who have pensions AND  are smart with Social Security decisions, retire earlier than 65 and comfortably compared to their non-pension brethren. According to Willis Towers Watson, only 16% of Fortune 500 companies offer defined benefits plans (pensions) to new hires (2017), compared to 59% in 1998.

According to surveys conducted by the Social Security Administration, roughly half the aged population live in households that receive at least 50% of total family income from Social Security. About a quarter of senior households receive at least 90% of household income from Social Security; a bad benefits enrollment  decision can result in thousands of lost lifetime income for recipients, spouses and possibly survivors.

Many brokers are replete with incorrect information about Social Security. Their organon is based on political affiliation, anecdotal headline fodder and perhaps something perused on the internet. After all, Social Security analysis takes time and there are big sales quotas to meet! You as a future retiree, cannot afford to be so casual about the decision – A wrong move can lead to a diminished quality of life throughout retirement.

At our Retirement Right Lane Classes and Wednesday Lunch & Learn events, Social Security is a hot topic.

Here are several Social Security concepts your broker will ignore. Oh, we know they ignore them.

We listen to the stories from attendees.

Social Security ‘blanket information’ can be dangerous.

Blanket information about Social Security is pervasive which makes the topic treacherous to navigate. Take benefits early at 62 because it’s going away; wait until full retirement age or postpone benefits until age 70 to capture delayed retirement credits.

What to do?

The proper advice depends on several personal factors including overall health of the recipient and a spouse,  additional household retirement income resources including pensions and investments, and the intent to preserve investment assets for heirs or spend them down. At RIA, we also incorporate our firm’s expected future returns on variable investments like stocks and the probability of sequence of returns risk to determine whether a future Social Security recipient should enroll for benefits at full retirement age (full retirement age is older than age 66 if born after 1954) or postpone until age 70.

Social Security is a family decision.

The ripple effect of a poor Social Security claiming decision can affect a family for decades. Non-working spouses, women in particular, can suffer from poor decisions made by husbands who claim Social Security early at age 62, thus permanently cutting spousal and survivor benefits by  roughly 25%.

Given the fact that women live longer and second marriages may result in additional children, claiming Social Security before full retirement age can be a narrow-minded decision when spouses and families are involved. Often, the decision is driven by emotion and false narratives such as – “I need to live long enough to breakeven,” or the ever-popular “I want to take it early when I can spend it, not when I’m 80 and don’t need it.” I can’t even wrap my head around rationale for the latter.

Unfortunately, we hear of brokers who support or communicate similar bonehead (thank you for the word, President Trump!) commentary. I understand why people aspire to breakeven or get out of the system what they put in however, this is flawed logic.

There is much more to a claiming decision, as I mentioned previously. For the most part, Social security is ‘actuarial agnostic,’ which means most recipients receive their entitled benefits in full. Retirees who maintain healthy lifestyle habits and have loved ones to consider have better reasons to wait until age 70.

There are people who express how upset they are with Social Security. They believe in their own investment acumen over the U.S. government guarantee to provide lifetime income. It doesn’t appear that individual investors are as good as they believe they are. It’s called overconfidence bias and it’s an emotional plague.

Based on Dalbar’s annual Quantitative Analysis of Investor Behavior study, investors consistently do poorly relative to market benchmarks.

The key findings of the 2017 Dalbar study include:

  • In 2016, the average equity mutual fund investor underperformed the S&P 500 by a margin of -4.70%. While the broader market made gains of 11.96%, the average equity investor earned only 7.26%.
  • In 2016, the average fixed income mutual fund investor underperformed the Bloomberg Barclays Aggregate Bond Index by a margin of -1.42%. The broader bond market realized a return of 2.65% while the average fixed income fund investor earned 1.23%.
  • Equity fund retention rates decreased materially in 2016 from 4.10 years to 3.80 years. (This is directly related to psychology and behavior.)
  • In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for the Average Equity Fund Investor was only 4.79%, a gap of -2.89% annualized.

In 2018, Dalbar discovered that most investors lost 9.42%; the S&P 500 was down 4.38%.

To compare Social Security benefits to returns from stocks is like looking for similarities between apples and squirrels. A suitable evaluation would have one researching returns for guaranteed investments such as long-term U.S. Treasury bonds.

Also, if retail investors were so disciplined, the median 401(k) balance for those 65 and older would be a heck of a lot greater than $58,035. Yes, you read that correctly.  Yet, roughly one-third of Americans claim Social Security at 62 and cut by 25% quite possibly, the only  guaranteed lifetime income they’re going to receive.

Claiming a Social Security widow’s benefit early is almost always a mistake.

A Retirement Right Lane Class attendee explained how a financial professional advised her to take her Social Security widow’s benefit at age 60 even though she didn’t need the money, is gainfully employed full time and not planning to retire until age 65.  

Her husband enrolled in Social Security early at age 62 which ultimately reduced the survivor benefit to 82.5% of the amount his widow would have received had he waited to claim benefits at full retirement age.

If our attendee had listened to the professional advice and claimed her survivor benefit at age 60, she would have received 71.5% of an already reduced benefit. Based on our Social Security maximization analysis using a life expectancy of 88 years old (from www.livingto100.com), we counseled this widow to wait until full retirement age to claim her survivor benefit, postpone her benefit and claim on her own record at age 70. This strategy will result in an increase of $288,284 in lifetime benefits if she lives to age 88.

Social Security planning should be included in your holistic financial planning process. To ignore or minimize its positive financial impact to a retiree or survivor’s bottom line is shortsighted.

Part 5 – Your pending tax bombshell in retirement – Courtesy of your broker and the financial services industry.

5-Things Your Broker Will Ignore – Part 3

At our extensive Retirement Right Lane Classes which fill seats all over Houston, our planning group spend hours with a wide demographic of attendees who give up their Saturdays to tackle head on, the challenging topics that are crucial to financial survival in retirement.

An important goal of the class is to rewire the years of bad advice consumers have been given from an industry which thrives on outdated theories. From “pre-tax investment vehicles are the greatest invention since electricity,” to “you need to take Social Security at 62 because it’s going away,” our planners are proud to address myths and help hundreds of people avoid permanent mistakes, maximize retirement, Medicare benefits and reduce taxes in the creation of lifetime retirement income. I only touch on a few of the topics we address; the class is extensive and lasts over two hours. If attendees gain enough insight to avoid just one mistake, our RIA team has accomplished their mission.

During and after classes, most of the feedback and questions involve Social Security and Medicare. Inaccurate information is pervasive; the sources are varied – Financial professionals, insurance brokers, HR departments, friends and family. Thankfully, we are able to help before actions are taken.

Many brokers would rather avoid a discussion about Medicare. We find that when advice is provided, it’s generally incorrect or based on anecdotal information, not facts.

Here is some of the bad Medicare advice we hear from class participants who spend their Saturday mornings with us:

Don’t worry about signing up for Medicare, you’re covered by an employer’s plan. 

The multiple (initial, general, special) Medicare enrollment periods are confusing enough. Understanding when to sign up for Part B (medically necessary services, preventive services) when covered by an employer plan, adds another element of confusion. So, when a 67 year-old woman explained to me that her insurance agent was adamant that she did not need to enroll for Part B even though she was employed by an organization with less than 20 workers, I knew she was not going to like what I was about to tell her. 

The BENES Act which is designed to simplify the  enrollment process has stalled in Congress. Unfortunately, the responsibility of Medicare enrollment awareness will continue to fall on senior Americans and the professionals they turn to for guidance.  The Medicare Payment Advisory Committee (MedPAC), estimates that 800,000 Medicare recipients were paying Part B permanent late-enrollment penalties as of 2016. I’m certain as of this writing, the number has increased.

Retirement at 65 is an outdated concept. It’s not unusual for older Americans to work longer or return to the workforce at 70 or older. Frankly, I find it delightfully odd when someone looks to retire sooner unless there is a pension available (rare). Perhaps you have a working spouse with employer-covered health insurance who is eligible to cover you as well – or fortunate enough to have healthcare benefits as part of a corporate retirement package. Otherwise, the purchase of healthcare insurance in the open marketplace or ‘bridge coverage’ before Medicare is cost prohibitive. To enroll or not enroll in Medicare at 65 when more older Americans are working means the decision isn’t as easy as it used to be back in the 1960s and 70s.

Per the Bureau of Labor Statistics:

Since 1996, participation rates have steadily increased among the 65-years-and-older age groups. The participation rate for workers age 65 to 74 is projected to be 30.2 percent in 2026, compared with 17.5 percent in 1996. For workers age 75 and older, the participation rate in 2026 is projected to be 10.8 percent, compared with 4.7 percent in 1996.”

Unless you have access to qualified (under Medicare) healthcare and prescription drug plans, you will need to enroll in Medicare Parts A, B and a Part D prescription drug plan. Envision Medicare as Swiss cheese. Original Medicare coverage has plenty of holes. Additional insurance is required to fill them. At RIA, we suggest Medigap supplemental policies. These plans are offered by private insurance companies and standardized by letter. All plans cover Part A coinsurance.

You also want a plan that covers at least 75% of Part B co-pay which is 20% of the Medicare-approved cost for most doctor-approved expenditures. Coverage for Part B excess charges or those above Medicare-approved charges, should also be mandatory. The most comprehensive plans available this year are F and G. Next year,  per the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), Medicare supplemental plans that cover the Part B deductible will no longer be offered in 2020.  Plans C and F will no longer be available to Medicare-eligible recipients next year.

If you’ve decided to postpone Social Security benefits to take advantage of the annual 8% delayed retirement credit that accrues after full retirement age up until age 70, you’ll need to proactively sign up for Part A and B coverage during the initial enrollment period which begins the first day of the third month before your 65th birthday and extends for seven months. Part A or hospital coverage has been paid through payroll taxes. Part B requires ongoing monthly premiums. The standard Part B premium is $135.50 per recipient this year and may be higher depending on income.  Ostensibly, if your modified adjusted gross income is above specific thresholds, you’ll pay the standard premium plus an “Income Related Monthly Adjustment Amount.”

Part B (inpatient/medical coverage) enrollment can be tricky. For example, if covered by a qualified employer plan that covers 20 or more employees during the initial enrollment period, then you may postpone signing up until you leave employment or group coverage is terminated, whichever occurs first. Now, this special enrollment period goes out eight months from the first day of the month employment ends. However, it’s best not to wait. Sign up for Medicare before group coverage ends to prevent a lapse of healthcare coverage.

At our classes, we hear from attendees who are employed by companies with less than 20 employees and advised by human resources and financial professionals to wait to sign up for Medicare Part B, which is incorrect. We speak with clients and attendees who suffer 10% permanent penalties on Part B premiums due to this bad advice. It’s important to remember; don’t be dissuaded: If your employer does not have 20 or more workers, you will need to sign up for Medicare Part B. In most cases, a non-qualified (for Medicare purposes), employer health plan will serve as secondary coverage to Medicare’s Part A & B primary coverage. If you fail to enroll into Medicare and incur health expenses, your employer healthcare plan won’t cover the bills. They’ll default to Medicare as your primary option. If you don’t sign up for Medicare, expenses won’t be paid which means the costs are ultimately going to come out of your pocket. You don’t want this situation to occur!

It’s fine to continue an employer’s healthcare insurance option if it’s not qualified under Medicare. However, it may not be worth the risk.

For example, let’s say an employee of  a company with less than 20 workers enrolls in Part B. The clock then starts for six-month enrollment into a Medigap policy which you’ll recall, is designed to ‘fill the holes in the Swiss cheese’. Importantly, during that period,  insurers cannot deny coverage due to pre-existing conditions. The employee decides to stick with his employer’s coverage instead of obtaining a Medigap policy. The six-month window passes. Medicare becomes the primary healthcare coverage; the employer’s plan, secondary.  In month eight, our employee decides to retire. The former employee is indeed covered by Medicare Parts A & B. However, he no longer has supplemental or secondary insurance for services Medicare doesn’t cover. Unfortunately, during the same month, our new retiree is diagnosed with a life-threatening illness. He attempts to sign up for Medigap during the next enrollment period;  unfortunately he’s denied due to illness, a pre-existing condition. Our retiree is now responsible for out-of-pocket additional costs that Medicare Parts A & B do not cover.

The retiree can certainly look to switch from Original Medicare into an all-inclusive Medicare Advantage Plan during Fall Open Enrollment which runs from October 7th – December 15. Medicare Advantage Plans do not come with pre-existing restrictions. However, the sad stories about these plans and what they won’t cover appear regularly through reliable sources such as medicarerights.org. The retiree will likely suffer gaps in medical coverage depending on the time between when treatment started and the selected Medicare Advantage Plan becomes officially active.  Also, since many Medicare Advantage providers operate as HMOs, it’s highly common for current doctors or treatment options to change or not be accepted by the new plan,  thus creating undue stress at the worst possible time.

Don’t worry about signing up for Medicare, you’re covered by COBRA.

The problem we hear about often is when Medicare Part B special enrollment intersects with COBRA which is a temporary continuation of former employer group health insurance coverage. Those who utilize it are under the misconception that COBRA is employer coverage thus it qualifies for the Medicare special enrollment period. COBRA may be continued as secondary coverage for expenses Medicare doesn’t cover; however missing special enrollment may result in a permanent Part B late enrollment period penalty of 10% for each year (12-month period), missed. 

It’s of utmost importance to partner with a knowledgeable professional before you navigate the coordination of employer healthcare coverage with proper Medicare enrollment. Employees of small companies and former employees who plan to utilize COBRA can suffer additional confusion.

What you don’t know or fail to anticipate can cost you, dearly.

Have Medicare-related questions? Reach out to our team at RIA.

Next up in the blog series:

4). The common Social Security mishaps we encounter at our Right Lane Retirement Classes.

5-Things Your Broker Wont Tell You – Part 2

Valuations Matter.

As I mentioned briefly in Part 1 of the series,  investors about to the enter the retirement distribution phase of their lives or seeking to extract money from a basket of variable assets like stocks and bonds to re-create a retirement paycheck, must be keenly aware of portfolio risk and prepare for a cycle of muted portfolio returns.

Newbies to the retirement experience and those who aspire to retire within the next 3-5 years must seriously consider comprehensive financial and distribution planning to ensure the retirement income paychecks they require are realistic, tax-effective and sustainable over a lifetime.

I passionately believe that people who retired last year and those looking to retire within the next 5 years will need to deal with a tremendous headwind to returns on variable assets. In other words, a traditional portfolio of bonds and stocks will fail to generate the returns and income required to maintain the annual 4% standard withdrawal rate touted by the masses of financial experts.

In addition, financial planning is going to become downright perilous for consumers. Planners and consultants employed by big-box financial retailers are not motivated to adjust downward their projected global stock and bond market returns. After all, it’s not in the best interest of their employers to downplay future returns to sell managed money products. There’s too much career risk for those who want to do the right thing; the responsibility for truth discovery is going to fall on the shoulders of clients of these firms.

Going forward, second opinions must be the standard for consumers of financial planning and asset management, especially those going through retirement preparation. Investors will need to employ a “two-plan strategy,” if their broker (most likely), has not prepared for lower future asset-class returns. Unfortunately, lives will change, but it’s not too late.

On a regular basis our planners at RIA must re-adjust consumer expectations especially when they come to us for second opinions on retirement plans completed by their brokers. As fiduciaries, our goal is to be objective and help people plan for reality. Market fantasy is dangerous for those looking to re-create a paycheck in retirement.

For example, one of the financial planning programs we utilize has a projected asset class return of 5.03% for a balanced portfolio of stocks, bonds and cash. Based on our analysis of valuations, we believe future returns for a similar portfolio will average closer to 2.5%. John Hussman, Ph. D one of the finest analysts of complete market cycles is less hopeful. In his market commentary from July 14, “They’re Running Toward the Fire,” he outlines:

“As of Friday July 12, our estimate of likely 12-year total returns for a conventional portfolio mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills, has dropped to just 0.5%. A passive investment strategy is now closer to “all risk and no reward” than at any moment in history outside of the three weeks surrounding the 1929 market peak.”

Will there be years when 5.03% is attainable or exceeded? Sure. However, on a consistent basis we don’t believe it’s going to happen until the current ultra-rich level of stock valuations have been worked off. Thus, a consistent ‘surprise gap’ in expected returns will require investors especially pre-retirees, to consider specific actions:

1). Work longer. Retirement at 65 is an outdated aspiration. Today, people are either working longer or returning to the workforce.

Notice the dramatic 74% increase in the Labor Force Participation Rate for 75 & older since the year 2000. For some older Americans, working longer allows them to remain social and engaged which crucial to health. However, like younger cohorts, seniors have utilized debt to maintain standards of living. They have taken on increased credit card debt and co-signed loans for children and grandchildren. In the latest U.S. Census Report, 44.4% of households led by people older than 65 are wallowing in debts.

Per NBER Working Paper No. 24226 titled “The Power of Working Longer,” by Bronshtein, Scott, Shoven & Slavov, the delay of retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional 1% of labor earnings for 30 years. Yea, you read that correctly. We witness the results daily. Those who decide to work longer, even another year (which goes by quick), witness a marked increase in the probability of financial plan success even with our lower projected portfolio returns!

2). Remain unemotional when it comes to planning for potential guaranteed streams of income. Through a period of increased sequence of returns risk whereby withdrawals can have a deleterious impact on overall portfolio returns, a future retiree should maximize Social Security benefits (waiting until age 70 to file), re-consider an employer’s pension options over lump-sum rollovers to IRAs and investigate annuity options such as single premium immediate or fixed-indexed annuities with income riders. Guaranteed income alleviates the burden of a portfolio to bear the full burden of lifetime withdrawal requirements.

3). Rethink expectations. The results of a comprehensive plan can help people gain tremendous perspective of the financial viability of future goals in a world of lower returns; with compromise and a bit of soul-searching, retirement during a period of greater sequence of returns risk can still be rewarding. A reduction of spending on wants like big vacations, a revised definition of expectations and new methods that ensure a quality retirement on a budget should be topics on the table. A fiduciary planner who studies market cycles should be hired to communicate objectively and help you prepare for probable future reality, as unpleasant as it may be, not projected hopes of lofty investment returns.

4). Live smaller starting ten years before retirement. I have helped clients accomplish this task – it works. I have witnessed dramatic downsizing efforts as couples shed large two-story homes and settle into quaint one-story 1500 square feet abodes. I have watched pre-retirees purge most possessions, clean things out, donate aggressively, gift heirlooms to kids who want them, all to live simpler. Lower overhead, adherence to a micro or strict household budget, aggressive savings rates north of 30%, along with a redefinition of retirement enrichment can reap formidable results. In other words, without the tailwind of robust investment returns, people are going to need to close the ‘surprise gap’ with their own sweat equity and ingenuity.

Whew. Now, for the valuation metrics that investors especially pre-retirees, should consider.

With the current Shiller P/E at 29x and other market valuation metrics at stretching points, those who are 5 years or less from retirement should act today to reduce portfolio risk.

RIA’s CAPE-5, a more-sensitive adjunct compared to the Shiller P/E, correlates highly with movements in the S&P 500.

There is a positive correlation between the CAPE-5 and the real (inflation-adjusted) price of the S&P 500. Before 1950, the CAPE and the index closely tracked each other. Eventually, the CAPE began to lead price. The current deviation of 68.28% above the long-term five-year CAPE ratio has occurred only three times in recent history.

What if you retired last year and began a distribution plan?

I’m surprised to find that many investors still do not realize that markets had a poor showing in 2018. You may be shocked to find out that although S&P 500 returns are higher by 15.23% YTD through August 16th, over the last 12 months the major index has done nothing but tread water.

I have been a proponent of Ed Easterling’s market valuation work since 2010. At Crestmont Research they have created their equivalent to the P/E-10 (or Shiller P/E) ratio.

The Crestmont P/E is now at 33.1 which is 130% above its average.

 To maintain perspective, the 33.1x P/E exceeds the Tech Bubble, August and September of 1929.

Irrational exuberance, anyone?

There are financial advisors and pundits who scoff at valuation metrics. They are afflicted with terminal recency bias with little hope of recovery. I peruse their comments on social media; I listen to their words. The tone smacks of defiant “this time it’s different.” I remain eternally humble when it comes to markets. They are designed to obfuscate the masses. Markets are great levelers.

In all fairness to the doubters, unorthodox monetary stimulus from global central banks along with short-term interest rates being lower for longer, indeed push money into risk assets and manipulate markets. Finally, in a period of sustained negative interest rates overseas and accelerated lower rates domestically, the effectiveness of central bank intervention to move markets I believe, is finally starting to crack which could be the catalyst required to jump-start lower future investment returns. In other words, central banks are employing every tool in the magic box and yet economic growth is faltering and global markets are not as enamored with monetary efforts. It’s ‘pushing on a string’ at its shining hour.


Ruchir Sharma, author of the book “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” recently penned an eye-opening opinion piece in The New York Times titled “What’s Wrong With the Global Economy? ” If you have the time, it’s worth a thorough read. Overall, he makes the case that demographics are the main driver of economic growth; let’s just say  we should calculate a  global “baby dearth rate.”

He writes:

“The benchmark for rapid growth should come down to 5 percent for emerging countries, to between and 3 and 4 percent for middle-income countries like China, and to between 1 and 2 percent for developed economies like the United States, Germany and Japan. And that should just be the start to how economists and investors redefine economic success.”

If the global central bank drug has lost efficacy – If younger generations begin to redefine their own economic success by living smaller and not looking to have children (I witness this in my own Gen Z daughter and friends), if earnings growth remains muted during a period of massive overvaluation as we’re in now, then the probabilities of lower investment returns are going to be a reality investors need to face.

So, what if I’m wrong?

I hope I am.

I hope consumers and clients who come to RIA for planning and investment guidance consistently beat the heck out of their personal investment return hurdle rates and easily meet financial milestones. I hope their biggest dilemma is how to spend more or leave a greater legacy to loved ones and charities.

At the least, even if you scoff at what I’ve written, it may compel you to monitor your annual portfolio distribution rates, be flexible to change them through periods of poor sustained returns, ask more questions of your brokers about how to maximize guaranteed income options including Social Security. Perhaps I’ve helped you get your financial head out of the dirt and propel you to prepare just in case. Maybe I’ve spurred motivation to create a contingency plan that places your household on solid financial footing regardless of how cycles play out.

What if I’m correct?

Time will tell. If correct, I’ve properly tempered expectations. We will not be surprised or need to scramble to have very difficult conversations with clients about uprooting their lives mid-retirement.

Either way – I win. You win, too.

And at night regardless, I can sleep like a baby.

5-Things Your Broker Will Ignore – Part 1

Investors mistakenly believe their financial partners are students of holistic financial planning. Outside of sell-side biased market information pumped out daily by an employer’s research department, there are several areas of study that many brokers would prefer to avoid.

Worse are the practitioners who confidently communicate erroneous Medicare and Social Security advice which results in consumers leaving thousands of lifetime income dollars on the table. Then, there are the brokers who utilize comprehensive financial planning as a tool to sell products with little focus on sequence of returns risk or lower future asset class returns that may drain a retiree’s investment nest egg faster than anticipated.

There are 5 areas of concern investors must consider (even though brokers will discount their importance). I decided to break the actions into 5 separate blog posts so readers are not overwhelmed.

1). Inflation must be adjusted and matched to specific goals.

Inflation is personal to and differs for every household.

My household’s inflation rate will differ from yours.

Thanks to an inflation project undertaken by the Federal Reserve Bank of Atlanta, there’s now a method to calculate a personal inflation rate. A smart idea is to compare the results of their analysis to the inflation factor your financial professional employs in retirement and financial planning. Instruct your adviser to complete an additional planning scenario which incorporates your personalized consumer price index and see how it affects your end results or outcomes.

The bank has undertaken a massive project to break down and study the elements of inflation along with the creation of a myCPI tool which captures the uniqueness of goods that individuals purchase.

Researchers estimate average expenditures using a calculation which incorporates various cross-demographic information including sex, age, income, education and housing status. The result is 144 different market baskets that may reflect a closer approximation to household’s personal cost of living vs. the average consumer. It’s easy to use and sign up for updates.

My personal CPI peaked in July 2008 at an annualized rate of 5.2%. Currently, it’s closer to 1.7%. For living expense planning purposes, I use the average over the last decade which comes in at 2.1%.

The tool can help users become less emotional and gain rational perspective about inflation. Inflation tends to be a touchy subject as prices for everything must always go higher (which isn’t the case). I’ve witnessed how as a collective, we experience brain drain when we rationalize how inflation impacts our financial well-being. It’s a challenge to think in real (adjusted for inflation) vs. nominal terms.

I hear investors lament about the “good old days,” often where rates on certificates of deposit paid handsomely. For example, in 1989, the year I started in financial services, a one-year CD yield averaged 7.95%. Inflation at the time was 5.39%. After taxes, investors barely earned anything, but boy, those good old days were really somethin’ weren’t they?

We’re all inflation experts because we live with it daily. It’s an insidious financial shadow. It follows us everywhere. We just lose perspective at times as the shadow ebbs and flows, shrinks and expands depending on our spending behavior. Interestingly, as humans, we tend to anchor to times when inflation hit us the hardest.

I’m not saying inflation isn’t important. The dilemma is that a majority of brokers will blindly adhere to default inflation rates provided in their respective financial planning software. If inaccurate inflation rates are employed, or not personalized for a household’s goals, they have the potential to under or overestimate spending needs, especially throughout retirement.

As an investor, I want you to be prepared to consider inflation in a logical manner (perhaps teach your financial partner a thing or two).

Here are 3 concepts to remember.

2). Specific financial goals may require varied rates of inflation.

A financial plan is a voluminous snapshot of wealth building in process. A plan (hopefully, along with a knowledgeable financial partner), helps forecast how specific actions can lead to success (or failure) to meet future goals. However, the effectiveness of a plan is only as good as the inputs employed to create it.

The adage of “garbage in, garbage out,” not only goes for the accuracy of personal financial information shared to prepare the plan, it also applies to the asset-class returns and inflation estimates employed. Financial planning software is user-ready with built-in assumptions about returns and inflation estimates; it’s the responsibility of your advisor or brokerage firm to review defaults and decide if or when they require change. For example, one of several programs we utilize at RIA defaults to the Consumer Price Index (CPI) for its base inflation rate. A series of default projected asset class returns are also provided.

As a group, we annually review these inputs and update if warranted. Early in 2018, we decided to reduce forecasted returns on every asset class due to stretched fundamentals, excluding international and emerging markets. Although our investment committee finds international stocks attractive from a valuation perspective, we maintain zero broad exposure to them. I’m getting ahead of myself as I expand on valuations in the second blog post of the series.

As a reminder, the Consumer Price Index is the average change over time in prices paid for a market basket of consumer goods and services. There are two target populations or groups the Bureau of Labor Statistics calculates for its main series: All Urban Consumers (the “CPI-U” population), and Urban Wage Earners and Clerical Workers (the “CPI-W” population).

From the BLS:

The CPI-U population covers about 88 percent of the U.S. population or households in all areas of the United States except people living in rural nonmetropolitan areas, in farm households, on military installations, in religious communities, and in institutions such as prisons and mental hospitals.

The CPI-W is a subset of CPI-U and covers the CPI-U population households for whom 50 percent or more of household income comes from wages and clerical workers’ earnings. The CPI-W’s share of the total U.S. population has diminished over the years; the CPI-W population is now about 28 percent of the total U.S. population. The CPI-W population excludes households of professional and salaried workers, part-time workers, the self-employed, and the unemployed, along with households with no one in the labor force, such as those of retirees.

Listen, it’s the best we have when it comes to broad measures of inflation. Thus, the historical inflation rate used in most financial planning programs are not incorrect per say, it’s just designed to capture spending of the mass population, not your household where spending may differ. It’s acceptable to be utilized in plans but when it comes to specific future spending goals especially in retirement, perhaps we can do better.

3). Gain a grip on your household’s PIR or Personal Inflation Rates.

So, how do you create PIR or Personal Inflation Rates? Initially, seek to partner with a fiduciary or Certified Financial Planner® to create and prioritize financial goals segmented into needs and wants. Needs are the financial milestones which are most important and may include college funding requirements, retirement income needs and healthcare and long-term care insurance costs. Wants and wishes as secondary, tertiary desires such as overseas trips or the convertible foreign sportscar you always wanted should also be in a plan!

For each goal, it should be determined whether current CPI (or CPI-U) over the last 12 months should be employed or a rate which differs higher or lower than CPI. I would also spend a few minutes and discover your household’s rate of inflation through the Federal Reserve Bank of Atlanta’s myCPI tool. Complete the brief questionnaire and collect data for 12 months (you’ll receive regular e-mail updates from the Reserve Bank), before consideration as replacement for the broad-based CPI in your plan. I recommend waiting a year as I’ve witnessed the rate change dramatically, so it’s best to gain an understanding of the trend in your personal rate.

Specific goals such as college funding, long-term care coverage, and additional healthcare-related expenditures above what Medicare-related insurance will cover, consistently trend at twice or greater the broad-based CPI. Planning software must be adjusted accordingly.

For example, at RIA we monitor trends in healthcare and long-term care inflation through the Kaiser Family Foundation research at www.kff.org, www.medicarerights.org, and www.genworth.com, respectively. We monitor overall trends including inflation that is “sticky,” or consistently rising, through the Federal Reserve Bank Of Atlanta’s ongoing inflation project at www.frbatlanta.org.

4). Keep an open mind: Inflation can change throughout retirement.

I love westerns, especially “The Big Valley.” Rich story lines and robust acting by Barbara Stanwyck as the matriarch of the Barkleys, along with Lee Majors and Richard Long as members of a California ranching family, have captivated me for years.

Your spending in retirement is mostly a big valley. I’ll explain:

Several of the Certified Financial Planners at RIA partner with clients who have been in retirement-income distribution mode for over a decade.  In other words, these clients are re-creating paychecks through systematic portfolio withdrawals and Social Security/pension retirement benefits. Although we formally plan for an annual cost-of-living increase in withdrawals, rarely if at all does this group contact us every year to increase their distributions!

There’s a time series in retirement where active-year activities, big adventures conclude, and retirees enter the big valley of level consumption. I call it the “been there done that,” stage where a retiree has moved on; the overseas trips have been fulfilled and enrichment thrives a bit closer to home.

Retirees move from grandiose bucket list spending to a long period or valley of even-toned, creative, mindful endeavors. It’s a sweet spot, an extended time of good health; so, healthcare is not so much an inflationary or heavy spending concern. The big valley stage is just a deeper, relaxed groove of a retirement lifetime.

A thorough analysis I refer to often because it reflects the reality I witness through clients, was conducted by David Blanchett, CFA, CFP® and Head of Retirement Research for Morningstar. The research paper, “Estimating the True Cost of Retirement,” is 25 pages and should be mandatory reading for pre-retirees and those already in retirement (along with financial professionals).

David concludes:

“While research on retirement spending commonly assumes consumption increases annually by inflation (implying a real change of 0%), we do not witness this relationship within our dataset. We note that there appears to be a “retirement spending smile” whereby the expenditures actually decrease in real terms for retirees throughout retirement and then increase toward the end. Overall, however, the real change in annual spending through retirement is clearly negative.”

David eloquently defines spending as the “retirement spending smile.” As a fan of westerns, I envision the period as a valley bracketed by the spending peaks of great adventures on one side, healthcare expenditures on the other. Hey, I live in Texas. This analogy works better for me.

In comprehensive financial planning, it’s prudent to be conservative and incorporate an inflation rate to annual spending needs.

Medical costs affect retirees differently. Unfortunately, it’s tough as we age to avoid healthcare costs and the onerous inflation attached to them. Thankfully, proper Medicare planning is a measurable financial plan expense as a majority of a retiree’s healthcare costs will be covered by Medicare along with Medigap or supplemental coverage.

Unfortunately, many retirees are ill-prepared for long-term care expenditures which are erroneously believed to be covered by Medicare. Generally, long-term care is assistance with activities of daily living like eating and bathing. At RIA, we use an annual inflation factor of 4.5% for additional medical expenses (depending on current health of the client), and the cost of long-term care.

David suggests an alternative inflation proxy for older workers. The Experimental Consumer Price Index for Americans 62 Years of Age and Older or the CPI-E, reflects contrast of category weightings when compared to CPI-U or CPI-W, the CPI for urban consumers and urban wage earners, respectively.

Unfortunately, don’t expect CPI-E to gain traction as it would result in robust COLA or cost-of-living adjustments to Social Security benefits. Intuitively, it makes sense that greater relative importance is placed on medical care for seniors. However, based on the burden of social programs on the federal budget, don’t expect CPI-E to be employed anytime in the foreseeable future.

Table 2. Comparative analysis of CPI relative importance data of selected expenditure groups, December 1995.

Expenditure Group                  CPI-U   CPI-W   CPI-E

All items                                        100.00  100.00  100.00

  Food and beverages                    17.33   19.26   15.00 

    Food at home                                9.88   11.21     9.66 

    Food away from home                5.89    6.37      4.23

    Alcoholic beverages                     1.57    1.68      1.10

  Housing                                          41.35   38.89   46.89 

    Shelter                                          28.29   25.98   33.88

  Apparel and upkeep                       5.52    5.53    3.93 

  Transportation                             16.95   19.02   13.82 

  Medical care                                     7.36    6.26   12.14

    Medical care commodities           1.28    1.06    2.57

    Medical care services                    6.08    5.21    9.57

        Health Insurance                           .36     .25    1.09

  Entertainment                                   4.37    4.03    3.35 

  Other goods and services                7.12    7.01    4.87

  College tuition                                   1.61    1.19    0.59

Inflation is indeed the omnipotent boogeyman in the room and must be addressed.

Due to globalization, technological advancement, increased competition and decreased domestic energy dependence, inflation overall has progressively trended lower for decades (thankfully).

Chart courtesy of www.inflationdata.com.

A responsibility of your advisor (among many), is to study current macro/micro trends in inflation and update your plan accordingly to determine how these trends may impair or complement future financial aspirations.

Next up in the blog series:

2). The “Valuations Matter,” pre-retirement portfolio adjustment.

The Most Important Trait To Look For In A Financial Advisor

Daniel R. Solin, a New York Times best-selling author who penned a series of popular books with the overarching theme of how to be the ‘smartest,’ with money, recently wrote an article where he shared what he believes is The One Trait That Predicts Advisor Success. Mr. Solin makes a convincing case for curiosity as the dominating trait that separates a great advisor from a marginal one.

I agree curiosity is critical to success not only to prosper in a chosen vocation, but for success overall in life (which is mentioned by Mr. Solin). Although biting curiosity bordering on obsession along with an insatiable need to learn should come natural to successful advisors, it’s not the most important quality.

Oh, curiosity and a thirst for knowledge is absolutely near the top of the list. However, there’s an overpowering internal force some professionals possess. These advisors are passionate advocates for clients and anybody who seeks help making money decisions.

Fellow professionals will disagree with my belief that those who work the frontlines for big-box brokerage firms cannot sincerely be advocates for clients; loyalty is dictated by their employers. Energy and focus are directed toward sales quotas that must consistently be exceeded to remain employed.

I’m not saying brokerage firm representatives don’t care about customers. I’m fortunate to know financial professionals who strive to do the best for consumers of their products. However, if ever in an awkward position to choose between an employer and the client, the employer will win every time.

In other words, loyalty comes with constraints and that fact will never change.

An imminent “Best Interest” SEC rule for brokers won’t alter behavior, either. The legislation is designed to obfuscate the boundaries between salesperson and fiduciary – a professional who adheres to the following tenets (per www.fiduciarystandard.org):

Five Core Principles:

  • Put the client’s best interests first;
    • Act with prudence, that is, with the skill, care, diligence and good judgment of a professional;
    • Do not mislead clients–provide conspicuous, full and fair disclosure of all important facts;
    • Avoid conflicts of interest;
    • Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

The culture of a large brokerage firm is driven to sell product and make decisions primarily in the interest of shareholders. Currently, brokerage firms are threatened by the Certified Financial Planner Board’s slated enforcement (October 1, 2019), of a revised Code of Ethics and Standards. The enhanced code is a vast improvement as it clarifies the Certified Financial Planner as fiduciary at all times, in every financial interaction. In other words, the Board is returning the profession to its roots as set forth by the Founding Father of financial planning, Richard Wagner.

In his writing “Financial Planning 3.0,” published post-humous, Richard Wagner, JD, CFP® shares the following:

“Let’s face the ugly truth. Many licensees use the CFP® marks just for sales purposes in order to augment their apparent credentials. First, we have those whose employment circumstances require that their first loyalty is to their employer. Next, we have those successors to my first manager who believe the most important function of a financial plan is to pound sales. They will look you square in the eye and tell you they are “advisors” when they put together financial plans but “buyer beware” salesmen when it comes to implementation. They take off one hat and put on another with nary a thought about conflict or confusion.”

“At the end of the day, “CFP®” must stand unambiguously as both the trademark and hallmark of fiduciary advice.”

As a client of a broker dealer, watch to see if your advisor drops the CFP® mark to remain employed. If so, he or she has chosen not to act as fiduciary.

In my opinion, empathy is a spark which ignites traits one should seek in an advisor – a curious nature about peoples’ lives, motivations, histories, a ravenous need to gain knowledge and the personality of a nurturer.

My childhood centered around the ebb and flow of an eclectic socio-economic urban caldron of families, single parents, police officers, union laborers, salespeople who maintained various levels of communication with each other in a close-knit predominately Italian and Jewish Brooklyn neighborhood.

Grandmothers’ doors were slightly ajar in the summer for neighborhood kids to visit for a snack or a full-course meal which rivaled local restaurants. I sat in on conversations, observed and was embraced by a rich mix of races and cultures.

From Leon the superintendent of our three-story post-WW2 brick apartment complex (his nephew James was one of my best friends), to widowed, elderly Sophia in a top floor enclave who kept fresh, sliced semolina Italian bread on the kitchen table – I spent countless hours with these extended families to escape and complement my own.

I reveled in fun stories, felt their heartaches. I was fascinated by how urban dwellers survived, the experiences and daily travails which forged who they were. I respected boundaries – Right down to off limits set by plastic covers on fancy gold velveteen couches (more for show, less for sit). These individuals weren’t strangers, they weren’t friends, they were more. For my own survival, I needed to care about them too.

Later in my teens, let’s just say I got by gracefully due to kindness of strangers. Negotiation with bullies to avoid getting mugged or knifed was a gift I brought to the table on subway excursions to Coney Island. I felt for these people; I’d imagine their plights. I was able to step into their shoes and feel kindness.

Ironically, several would-be juvenile muggers became friends. After all, we had much in common as lower income city residents (although I never delved into criminal behavior). However, I believed I understood what drove those rather intimidating souls to cross lines. Ostensibly, they just didn’t seem so intimidating anymore. They were outliers, granted. I believed we were all a meal or job away from becoming outliers ourselves.

Empathy became a way of life for me. It added richness and engagement to my childhood. At times, I felt like an observer of human plight. At night, I’d journal my experiences. The nuances of these lives fascinated me. Not the stuff the outside world knew. It was the stuff going on, discussed at dining room tables or in living rooms before the Jonathan Winters Show came on television, that thrilled me. I was granted silent permission to listen. I was allowed to sit among families as they shared the good, wept over the tragic. It was such an honor. I was diligent to not disrespect unspoken privileges provided to me.

Over time, empathy developed into nurture and protection; loyalties to friends, the old guys who hung out at Joe’s Grill on Avenue U all day, every day, the elderly widows who supplied me regularly with meatballs steeped in red sauce so thick it was 2 shades close to black. And deep dishes of pasta. Lots of pasta.

Oh, and how can I forget Tony, a cook at Casa Bella Italian Restaurant. Late in the day and preparing for the dinner crowd, Tony would make time to sneak through the back door and hand me two hot potato and cheese croquets. I can still taste them. He’d pass them through the holes in the chain-link fence that separated the back of the restaurant from the rear of the apartments.

Let’s say I never went hungry.

Daniel Goleman outlines three definitions of empathy – cognitive, emotional and compassionate. A successful advisor should possess a bit of all three but I’m going to focus on cognitive empathy.

Cognitive empathy is simply knowing how another person feels, what they may be thinking. This type of empathy can help with negotiation or motivate people to act. As advisors, we must care enough to help clients understand their cognitive and emotional biases, especially during periods of market turmoil. We must remain non-judgmental listeners who genuinely care about client outcomes. Good advisors understand when compromise is an appropriate choice.

For example, during the height of the financial crisis, there were long days of face-to-face, back-to-back meetings. I encouraged clients and those who sought guidance to open up about what was going on in the economy, their lives and portfolios. It was very emotional. Some of the stories were tragic – lost jobs, lost savings, lost souls. Frankly, regardless of recovery, these stories still haunt me.

I was sort of lost myself yet thankful I began to study the Great Depression in 2005 which made me less of a deer in the headlights. I purchased vintage copies of the Magazine Of Wall Street dated 1927-1940 from eBay and book dealers across the country. Today, I maintain a stack of these periodicals close to four feet high and randomly go through them every month. It’s fascinating how history and the current often intersect.

No matter how much cash our group maintained in portfolios at the time (anywhere from 30-50%), in a client’s eyes, it was never enough. Heck, we didn’t even know if cash was safe as some money markets were breaking the buck or their $1.00 per share prices. In other words, during the Great Recession, any failure or tragedy was fair game to consider.

Instead of discounting feelings and advising clients to sit there and do nothing because “markets always come back,” I went through various exercises to motivate clients to go ‘all out there’ and explore the possible fruition of their greatest (bordering on panic), fears.

What’s cool about the brain is how beliefs can take on the feel of reality. It’s also not so cool how the brain goes direct to the greatest fear first which is usually a far stretch from what occurs.

We played the Poltergeist game.

In the 1982 film written and produced by Stephen Spielberg, a young family moves into a planned community only to find out their home was built on a cemetery where the stones were moved but the bodies weren’t. Let’s just say the anguished souls are not happy about it as they’re trapped and seek to move on.

There’s a scene in the movie where a rope is tied around the waist of Steven Freeling (dad), who must go through to another dimension  (in a closet), marked by brilliant light, to recover his daughter Carol Anne from “The Beast” who restrains the young girl in an effort to use her life force to prevent spirits from “crossing over.”  The goal was for dad to snatch her from the evil presence and aggressively be pulled back through the closet by his wife, a psychic and her crew.

So, imagine you believe the end of the world is imminent. The largest corporations are going to go broke and the dollar is going to be worth a penny. Don’t hide, share your thoughts. I won’t discount them.

Now, I’m going to secure this rope around your waist (mentally of course). While I hold tight to the other end, I need you to leap willingly into another dimension of fear. I need you to explore what you think may occur and share it all with me.

Let your mind go where it’s been hesitant to roam. Or at the least, share with me the sentiments you’ve afraid to discuss with others. Once you’re out there, communicate your thoughts, I’ll pull you back into the real world and away from “The Beast.” Then we’re going to discuss and adjust. I’ll use examples from the Great Depression and how America eventually recovered. We’re also going to discuss the reality of how this is very, very bad and it could take decades to financially get back to where we were.

You see, investors willing to play my game, who freely vented frustrations and voiced the wildest, imagined outlier economic events, began to realize that they were ok to hold some percentage of stocks and not get all out. Maybe they were able to realize they were overacting. Either way, I was willing to listen and take the concerns seriously as opposed to telling people who lost so much, that I knew best and they should win some award for continuing to bleed wealth. Heck, we were all out there in the unknown back then. Any financial expert who tells you different is clearly lying.

Stock allocations weren’t going to be 60%, but at least they weren’t zero. Most investors settled between 10-30% in equities. As markets bottomed back in the summer of 2010, I was able to employ the same game to help investors battle a deep recency bias and slowly begin to build equity positions.  Hey if you believe the stalwarts of the economy are going to crumble and your money isn’t going to be worth anything anyway, why not take a gamble when the market is at 13X earnings? I mean, what a deal if you’re wrong!

To me, empathy is the core of my personal success. It cannot be faked; however, it can be developed.

To be proficient at a job is rewarding. However, to be tested throughout life prepares an advisor to maintain an uncompromising stance if required to safeguard a client’s financial health (I’ve done it – it’s incredibly uncomfortable). A financial expert who lives his or her finest truth will find that making every decision for the greater good of the client becomes a natural and easy choice.

A broker’s disguise as confidant and protector to suit an employer’s goals would motivate me to find another line of work or at the least, a company that puts itself out there as a fiduciary.

How “FaceApp” Can Help You Save More For Retirement

FaceApp is taking over social media.

It also may help procrastinators focus on long-term goals, like retirement.

The face recognition smartphone application is available for free download; a Pro version is available for a fee. The features available in the free version are enough to motivate you to immediately (possibly dramatically), increase your retirement account contribution percentages.

So, what is FaceApp?

FaceApp is artificial intelligence facial software which allows users to change up their face – add smiles, beards, impressions, change hair colors, hair styles, add glasses, tattoos, makeup. All in a manner that appears hauntingly realistic. Users can also hit the ‘age editor,’ to see how they look young and most important, old.

Whether it’s off the mark or not, staring at an eerily-realistic, much older, future, frailer-looking iteration of self in a mirror today may be compelling enough for financial procrastinators to face a future reality (literally), motivate one to ask – Am I saving enough for retirement? Am I taking care of my health?

To see yourself in a physically vulnerable state of being, to immediately pull a future into the present day, may jumpstart a brain to also clarify long-term nebulous inevitabilities like aging (in my case you’ll see, not so gracefully), and push a user to get serious about finances, complete a comprehensive financial plan, get that estate plan updated, increase contributions to retirement accounts.

You get the picture. It sure scared me straight to consider the viability of my long-term goals and examine the pitfalls in my financial strategy and I create financial plans for a living!

Listen, this isn’t a new concept. Years ago, Merrill Lynch launched an application which ages a picture of a user and shows how one may look even after 100 years old. Along with the aging photos, Merrill also showcased messages about the impact of inflation on everyday goods like milk and bread. Smart.

The idea of linking facial recognition software to financial viability was founded through experiments conducted at Stanford University and published in a November 2011 edition of the Journal of Marketing Research. Stanford’s studies discovered that people who viewed their aged selves, considered allocating more money to their retirement vehicles.

From the study:

“Many people fail to save what they will need for retirement. Research on excessive discounting of the future suggests that removing the lure of immediate rewards by precommitting to decisions or elaborating the value of future rewards both can make decisions more future oriented. The authors explore a third and complementary route, one that deals not with present and future rewards but with present and future selves. In line with research that shows that people may fail, because of a lack of belief or imagination, to identify with their future selves, the authors propose that allowing people to interact with age-progressed renderings of themselves will cause them to allocate more resources to the future. In four studies, participants interacted with realistic computer renderings of their future selves using immersive virtual reality hardware and interactive decision aids. In all cases, those who interacted with their virtual future selves exhibited an increased tendency to accept later monetary rewards over immediate ones.”

I don’t believe FaceApp is going to magically turn financial profligates into saints. However, I do believe that a long-term financial dilemma which weighs on one’s mind coupled with a photo of one’s aged self, may push a procrastinator to take a positive, financial action.

Try it and let me know if the application helped you get out of the fiscal foxhole and make a run at a financial goal that has been weighing on your mind.

What You Need To Know About Medicare & The “BENES” Act

The Medicare Rights Center a national non-profit consumer advocacy organization, fields thousands of questions as it assists older adults to make sense of the complexity of Medicare.

The Center publishes its Medicare Trends and Recommendations report each year; the work is a highlights compilation of the roughly 15,000 helpline questions and 3 million online queries fielded by staff and volunteers. Their Medicare interactive web pages garner millions of views per year. So, if you have questions about Medicare believe me, you’re not alone!

Three main areas of concern provide crucial insight for those who are new to Medicare enrollment or face ongoing healthcare cost challenges.

  1. Complex enrollment periods are a mess to navigate.

There’s no rhyme or reason to Medicare enrollment – the structure of initial enrollment, special enrollment, general enrollment periods date back to the creation of Medicare in 1965. Perhaps it made sense in the beginning. Today, many recipients experience gaps in healthcare coverage or are subject to permanent penalties for late enrollment due to confusion and lack of a formal notification process.

When dramatic U.S. workplace and healthcare changes are considered, 1965 standards may as well be 1865. The Labor Force Participation Rate for those 65 & older has increased dramatically since 2000 which also means more workers are covered longer by employer-based healthcare plans. It’s also apparent two devastating bear markets coupled with prolonged wage stagnation have fueled the trend to retire later or return to work.

Better education about Social Security is helping a growing number of future recipients defer benefits. In addition, full retirement age for Social Security purposes is 66 for those born between 1943 and 1954. In other words, these changes mean prospective recipients must juggle multiple complex Medicare enrollment timelines to actively enroll. Those already receiving Social Security benefits before 65 are automatically enrolled in Medicare Part A and B.

The public’s understanding of how and when to enroll in the Medicare alphabet soup of benefits including Prescription Part D is amiss.

The bipartisan Beneficiary Enrollment Notification and Eligibility Simplification (BENES) Act is designed to bring the Medicare enrollment process into this century (finally).

Through the BENES Act, the Federal Government would initiate two notices to individuals who are near to eligibility for Medicare. First notice would arrive six months before an individual’s initial enrollment period; another one month before the IEP.

Most important, the Act looks to fix the fragmented Part B enrollment periods by eliminating coverage gaps between initial and general enrollment periods. For example, initial enrollment period begins the first day of the third month before your 65th birthday and extends for 7 months. Coverage begins the first day of your birthday month; if you sign up after your birthday month yet still within the initial enrollment period, then coverage begins on the first of the month following enrollment.

If you miss open enrollment, your next window of opportunity opens during general enrollment which starts January 1 through March 31st of every year, with coverage beginning July 1.

Let’s use my birth day and month for illustration purposes. Also, assume I don’t have qualified healthcare coverage with an employer. Let’s say I turned 65 last March and in August I realize I missed my initial enrollment window. Tough luck for me. I’m expeditious to get on track. During general enrollment in January 2020, I get it done. On July 1, 2020, my Medicare coverage begins. In September, I decide to retire, or most likely, Lance gets tired of my jokes and has the locks changed on my office door.

Unless I purchase coverage in the open marketplace, I am financially exposed to a catastrophic healthcare event until July 1, 2020. Thankfully, I dodged the Part B penalty bullet because fewer than 12 months had elapsed. Reminder: The penalty increases permanently the Part B premium by 10% for each twelve-month period missed. In 2017, it’s estimated that 701,000 people were paying late enrollment penalties for failing to sign up for Medicare Part B during the appropriate enrollment period. The average penalty was an onerous 30% increase to monthly premiums.

The BENES Act looks to eliminate gaps in healthcare coverage such as my example above.

In addition, BENES seeks to align general enrollment with existing enrollment periods for Medicare Advantage and Part D prescription drug plans. So, when you’re bombarded by media ads and mailers from October 15 through December 7 every year, you’ll also know that’s time to enroll in original Medicare Part A & B if you missed initial enrollment.

Currently, the government is unforgiving when it comes to waiving permanent Part B penalties. BENES creates a path for consumer-friendly relief.

According to Govtrack, this bill is in the first stage of the legislative process. It was introduced into Congress on May 2, 2019. I passionately hope during such a dysfunctional time for Congress, both sides can see the overwhelmingly positive impact this bill would have on our nation’s older adults.

  1. Yes, you can appeal Medicare Advantage denials of care. Don’t give up.

Medicare Advantage or all-inclusive HMO-type plans are growing en masse which also means more confusion over selecting a plan, changing a plan, how coverage is approved per procedure, pre-procedure; how coverage may differ or not apply depending on a doctor or hospital and the astounding confusion over why certain life-saving operations and treatments are denied even though MA-approved doctors require them. Per Medicare Rights based on a report from the Office of Inspector General, only 1% of Medicare Advantage enrollees appeal denied claims. Yet for those who do appeal, the report found that plans reverse 75% of their own decisions.

Our advisors prefer Original Medicare coupled with Medigap PPO and Part D supplemental plans as they resemble plans most of us are used to at our employers; procedures covered are comprehensive.

  1. The costs of prescription drugs remain a major concern.

The cost of drugs in some cases, is a decision between life or death.

Keep in mind, half of all Medicare recipients live on incomes below $26,200. Those with adequate Prescription D coverage contact Medicare Rights seeking assistance with drug costs Part D won’t cover or cover in full. Obviously, there must be greater transparency in pricing and the ability for Medicare to negotiate.

The Medicare Rights Center is a much-needed protection and advocacy program with many commonsense ideas on how to improve the program. They are also a frontline, in the trenches partner for Medicare enrollees and caregivers who are desperate for help to navigate a complicated system.

Check out their content at www.medicarerights.org.

Teens & Summer Jobs: 3-Ways To Maximize The Experience

The labor market is tight. However, summer jobs for teens, especially in leisure and hospitality are in demand.

While just 35% of teens aged 16-19 participated in the labor market last year, global outplacement and business and executive coaching firm Challenger, Gray & Christmas, Inc. predicts job opportunities could increase around 5% this year and the teen participation rate could rise as well, according to its 2019 annual outlook.

How can you as a parent make the most out of your teen’s first summer job? Here are 3 money tips. Don’t let an opportunity to make the most of the experience fade away before the new school year starts.

Celebrate the ‘rite of passage’ 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. Initiate the “Level 2, Triple S” protocol. 

No, it’s not the title of a 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 2019, a dependent youth doesn’t require a tax return filed if earnings do not exceed $12,200.

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 2019, the maximum that can be placed in a Roth IRA is $6,000. 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.

Start a cash-flow discovery exercise.

Emphasize budgeting in your 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. Set aside 20 minutes, initiate a “cash flow discovery” exercise to review expenditures and the overall work experience. A paycheck is exciting. Some kids get carried away and go through what I call an “independence splurge” where spending increases along with the first paychecks.

SECURE Act: Big Changes & What It Means For Your Retirement

The House overwhelmingly passed a new bipartisan bill 417-3 called the SECURE ACT or Setting Every Community Up for Retirement Enhancement Act focusing on making big changes to the U.S. Retirement System.

Here’s what you need to know about the bills proposals:

One of the major talking points is raising the age RMD’s aka Required Minimum Distributions must be taken from Retirement accounts from 70 ½ to 72. This is a move in the right direction, but why stop at age 72 when the fastest growing demographic of workers is those over the age of 65? Why punish those still working or people who would still like to contribute to IRA’s by stopping at 72. Certainly a move in the right direction, but still falls short of meaningful reform. Thank goodness the House’s bill does away with the downright confusing age of 70 ½ for those pesky RMD’s.

Ok, this one I know many of you are rolling your eyes at, but being able to have annuities inside 401k’s is a BIG deal.

You’re probably asking why?

Well quite frankly because the vast majority of Americans are underfunded in the retirement savings department. In a recent study by Fidelity Investments they found that the average retirement savings account balance for individuals between 60-69 is $195,500.

Using the old school and stodgy 4% rule individuals can expect to collect $7,820 annually or $651.67 each month. Combine that with the estimated average monthly Social Security benefit payment in January 2019 of $1,461 for a total of $2,112.67 average monthly income for retirees. This means many are going to have to continue working, find a part time job or live on much less in retirement than they anticipated.  This part of the bill will help retirees and employers. It will help retiree’s by being able to choose to utilize an annuity inside of their 401k. An annuity for these intentions is generally defined as a guaranteed stream of income that an annuitant (you the owner) can’t outlive. Key word’s- stream of income that you can’t outlive. Believe it or not having this option is a good thing for Americans.

Here’s where the small business owners or employers win on the 401k front which is flying under the radar is actually providing some safety to employers when using state licensed insurance companies in which the company is domiciled for annuity products if an insurance company went out of business. This is good because it will protect employers from liability assuming proper due diligence and requirements are followed.

The Secure Act will also allow employers with affiliations to ban together to reduce administrative and fiduciary costs. If this bill ultimately passes all hurdles I expect you will begin to hear more about MEPs or Multiple Employer Plans. This is another win for small business owners.

Another win for the consumer – albeit a small win, because I do believe most 401k plans already provide this service – is making it a requirement for 401k providers to show the estimated income you can expect based off of current or future balances in a 401k. This is a win for the consumer.  However, investors need to be cautious and understand what types of returns these simulations use. Too many times to count we see software and media financial pundits alike lull investors into a false sense of security by projecting unrealistic and much higher than average returns. Understanding how the markets work and the math of loss will give you a leg up in planning for your retirement. The market is not always bull and neither is your financial plan.

The Kiddie Tax change is a win for all parents out there who are putting funds aside in their children’s names! The Kiddie Tax most are familiar with was changed with the tax code in 2017. The Kiddie Tax after 2017 was boosting tax rates on unearned income received by children to their parents tax rates. It will now be repealed.  This is especially important for families in lower to middle income as it more often than not catches them by surprise. That really hurts when you’re trying to make ends meet and also put funds aside only to be penalized in the long run. This has two thumbs up from RIA.

Want to know the one thing about this bill I hate the most?

Have you ever heard of a stretch IRA?

A stretch IRA has been a well utilized strategy enabling families to stretch out IRA distributions to future generations after death.

Guess what, potentially gone.

Currently when a non-spouse beneficiary inherits an IRA as of right now they have several options to distribute funds.

  1. Take the funds within 5 years
  2. Stretch out over your lifetime using your IRS life expectancy numbers
  3. Take the money and run

Guess what, the government giveth and they taketh.

The new bill states that all distributions (with the exception of spouses and minor children) all funds must be taken out within a 10 year time frame. This provision in the bill is estimated to generate 16 billion over the next 10 years. This is a shame and brings to light what we all know about the government, they need our tax dollars and now more than ever.

This should have you thinking about what you can do to protect your assets and beneficiaries.

Now could be a good time to utilize surgical Roth Conversions. This could prove to be an extremely beneficial tool especially while most are enjoying lower tax brackets.

Run a distribution analysis to determine if you are taking distributions to keep you in a lower tax bracket over the life of your plan.

If you have questions, your advisor hasn’t simulated for Roth conversions or how to pinpoint how much and where to take your distributions from call or email us, we’d love to help.

Bottom Line:

With this bill lawmakers fail to address some of the bigger issues.

  • Where does this plan actually help Americans? 
  • What about the 1/3rd of Americans who can’t afford a $400 emergency?
  • The average Joe’s are being overlooked yet again.

There is a lot of good in this bill, but I think it’s a half-assed attempt for Uncle Sam and the broader government to say, “look what I did for you today! Elect me tomorrow”!

Keep in Mind:

This bill still has to go before the Senate which already has a similar bill on the docket so I would expect changes or slight modifications. If this is moved on by the Senate, the bill will then head to the President’s desk. I think it’s very unlikely that anyone regardless of party will not vote for this bill.

My bet is there will be some modifications. As they come, your financial plan will be updated accordingly.

A Generational Dose of Financial Reality

Financial wellness is difficult to achieve without steeled resolve for fiscal self-preservation and an endlessly skeptical nature about the information provided by mainstream financial media.

You as saver, investor and commander of assets and liabilities that steer the household balance sheet toward achievement of financial milestones such as retirement planning, must carefully navigate popular financial advice which has progressively morphed into statistical click-bait.

The stock market is sliced and diced to present its prettiest façade. Investing time frames that I argue best fit the lifespan of vampires not humans indeed connect to consistent double-digit returns.

Statistical foreplay makes it easy to promote risk assets like stocks as the solution to every financial ailment. I posit this sentiment is fueled hot by overconfidence, a backstop provided by a Federal Reserve that listens to and fears market downturns and recency bias as professionals have forgotten the damage created by bear market cycles.

New advisors and brokers are convinced that bear markets are occurrences of the past and trained by their big box brokerage allegiances to perceive them as great opportunities. For young investors market derails may be opportunities; especially for those who are in accumulation mode and seek to purchase stock shares at lower prices. For people near or in retirement who require investment account distributions, a bear market can be devastating to longevity of portfolio assets.

When (if) bear markets occur, every investor trades time for dollars. So, what is your time worth? How much of your overall portfolio should be allocated to stocks if you consider how long it may take to make up for losses? If you consider risk first, reward second, especially at a time when market valuations portend to lower future returns, outside of the media telling you to “eat your stocks!”, what do you believe is right?

Search for the truth. It’ll crystallize sane thoughts. Understand how long it can take to break even from market disconnects and decide accordingly.

I’ve been studying individual stocks since I was 16. When I was 12 years old, I called the Dreyfus mutual fund company to receive information on a money market named Dreyfus Liquid Assets (ironically, I worked for Dreyfus from 1990-1998).

At that time, I recall the fund had a hefty front-end load to invest. Yes, a money market fund with a front-end charge! We’ve come a long way. I realized I was way over my head as I labored through voluminous square-stapled pages comprised of paragraphs in very small type. Each word came across as important. Although I comprehended a mere 2% of what I read, the exercise along with studying stocks helped me to realize that money is deadly serious and downturns in markets and flowery fabrication of long-term market returns should be taken seriously too – which is one reason I teamed up with Lance Roberts who I believe communicates money truth for today’s market and macro-economic conditions.

Please don’t misunderstand me – Stocks are indeed part of an overall lifetime financial strategy – they’re just not the solution to every financial shortfall. Even if they are the best answer, valuations and time frames as head or tailwinds to success of the asset class, must be considered as a practical measure when helping investors meet long-term financial milestones.

I recall a period in my career when a blended portfolio of 60% stocks, 40% bonds provided solid double-digit returns. Over the last 20 years, the same asset mix, similar risk provided returns in low-to-mid single digits. I deem it a stealth financial repression.

Let’s imagine I’m 25 and save consistently for 40 years in an S&P 500 Index Fund; using past performance through December 2018 as a guide, I may achieve an annualized return greater than 11%. Not shabby. My beef with mainstream financial media is not their certainty of future rosy returns more than it is the financial reality today which prevents people from investing consistently for 40 years.

For example, many households have still not recovered financially from the Great Recession. A recent nationwide Bankrate survey discovered that 48% of Americans who were adults when the recession began in 2007, have seen no improvement in their financial situation. How does one save for the long-term to take advantage of market returns for 40 or 50 years if this is their present state?

Vanguard’s 2019 edition of their How America Saves analysis breaks down the behavior of 5 million participants in 1,900 defined contribution plans (most of them 401ks), they administer.

My beef on occasion with Bankrate is their sample size is too small – roughly 1,000. Although I do admire their initiatives to measure the pulse of the financial distress still prevalent in America that most outlets are reluctant to discuss. Vanguard casts a wide net as a lead provider of defined contribution plans.

In 2018, the average account balance for Vanguard participants was $92,148. The median balance was a paltry $22,147. For those 65 and older, Vanguard found these average balances at $192,877 with the median being a woefully deficient $58,035.

Something is broken. Now you know why I focus much in my writing about the importance of making smart, unemotional decisions about Social Security which is now America’s primary pension.

Today, I meet with individuals and couples – Millennials, Generation X’ers – I teach 20-something Gen Z young adults about financial basics; I wonder how in reality they’re going to be able to invest interrupted for 40 years, especially when more of the risk of saving for retirement and healthcare cost burdens are incurred by the employee, not employer.

Although wage growth has improved over the last 12 months, in real (inflation-adjusted) terms, median annual income is only $674 higher than it was in the beginning of 2008, according to Sentier Research.

I am encouraged by the fiscal habits of Generation Z, those born after 1995. They are aggressively price conscious with purchase decisions, seem to master the temptation of immediate gratification, save money at a higher rate than previous generations and are even willing to discuss formal financial planning.

I pray I’m dead wrong. However, based on how I assist young generations prioritize (juggle) their saving, debt and investment goals, without consistent, inflation-adjusted wage growth and strong resolve to live below their means, I am having a challenge envisioning how this group saves interrupted for two decades, let alone four.

If I’m correct, stock returns just due to lack of time invested in markets may be closer to 6.5%; if current valuations are considered then maybe returns are closer to 3%. Unless wages consistently increase which could allow for heftier savings and investing rates, Gen X and Gen Z populations are going to require information that’s based more on their reality than the ancient history of euphoric fiscal tailwinds that Baby Boomers faced in the 80s and 1990s.

I don’t believe the financial industry is up for the educational task nor the noble responsibility to align with the financial reality that younger generations are going to encounter. The focus would be less of an emphasis on stocks as a wealth-building tool or full-on retirement savior. Imagine?

Portfolios will need to include longevity insurance or annuities to replace lost pensions. These structures should only be offered if holistic, lifetime financial planning suggests they’re warranted.

I’m afraid it’ll be best for the industry to stick with lush memories of big returns derived within the expanse of semi-centennial stock investing.

Limited information which details the impact of bear markets may scare young generations away from stocks forever once 30%+ losses become part of their reality. I observe how risk-averse Generation X and Z tend to be; perhaps an imprint of their not so prosperous recollections of what their families went through during the financial crisis and the hardships they’re still experiencing. After all, breaking even is a b*tch as I meet with investors today who haven’t recovered from losses incurred during the Great Recession. Not just stock losses. There remains a drag on wages, which is worse.

It’s time for financial professionals to align with the mindset of these generations – help them focus on the basic skills required to create robust financial balance sheets. Help them to combat financial fragility by focusing on the benefits of building and maintaining emergency cash reserves as a priority over retirement accounts, debt control, small mortgages and the benefits of health savings accounts. It’ll be a refreshing change from the myopia over the so-called magical financial elixir that only seems to be manufactured on Wall Street in the form of stock investing.

As fiduciaries we can’t afford to be so narrow minded.

3 Steps To Achieve Holistic Financial Wellness

Investors tend to narrowly define wealth management as portfolios and products. Unfortunately, many financial professionals permit this shortsightedness as it aligns with their aspirations to sell investment vehicles, then move on to the next prospects.

However, this pervasive myopia is a tremendous oversight; investors and financial consumers miss out on the advantages of holistic financial processes and the robust long-term fruitful actions which follow.

We find that people who embrace holistic financial wellness make cogent decisions when it comes to savings rates, debt management, meeting or exceeding financial goals and yes, even portfolio risk management.

3 Steps to Holistic Financial Wellness

If you’re not fortunate enough to partner with a financial professional who can assist with the planning and questions that arise from holistic financial wellness, here are 3 ideas to consider.

1. Define financial wellness from the grass roots, on your own terms. Make it personal.

For example, I define financial wellness as a place of security and inner peace; the flow is uneven as stages of wellness ebb and flow along channels of a human existence. It’s never perfect. However, there always exists a strong center or stasis that like a rubber band, snaps back in place after a period of deviation from self-defined financial norms.

In other words, wellness isn’t pretty, but there’s beauty in its consistency. It represents a soup of philosophies, experiences, ego, habits, perceptions and attitudes. Finances bolster with the victories, falter with the setbacks. The challenge is to assess and maintain alignment over time.

You don’t need to be as philosophical as I am about financial wellness. Keep it simple. Do you breathe a bit easier knowing there’s enough cash in an emergency reserve to cover unforeseen expenses? Do you have an active, holistic financial plan in place to realize the impact of a major life change on your wealth? Does the plan include the analysis of current insurance especially disability income coverage and other areas of required risk mitigation like long-term care? Then you’re experiencing financial wellness without even knowing it!

Is portfolio allocation, investment selection part of the equation? Sure, it is. However, it’s one piece of the puzzle. Along with the appropriate mix of stocks, bonds and cash, a portfolio management process should include a discipline to periodically rebalance or return to an original asset allocation. In addition, a strategy to decrease stock exposure 3-5 years from retirement is an important consideration.

2. Ignore common misconceptions about savings, household debt and the stock market.

Personal finance tenets you’ve heard before – regularly save 10% of take-home pay, diversification is a ‘free lunch,’ stocks always outperform bonds and debt-to-household income ratios of 36% are ‘admirable’, need to be ignored if you want to achieve financial wellness. You must dig deeper.

For example, take an example from the FIRE (Finance Independence Retire Early), crowd who believe that saving 25% of income annually is a more suitable standard. There are many in the FIRE movement who are disciplined enough to sock away 50% a year into a diversified portfolio.

And speaking of diversified…

You must consider portfolio diversification differently to achieve wellness.

According to Investopedia – An internet reference guide on money and investments:

  • Diversification strives to smooth out unsystematic risk events in a portfolio so the positive performance of some investments neutralizes the negative performance of others. Therefore, the benefits of diversification hold only if the securities in the portfolio are not perfectly correlated.

Per Lance Roberts: Diversification is less effective as stock markets have become more correlated (connected) over time.

Now let’s break down the lunch and examine how free it is.

Unsystematic risk

This is the risk the industry seeks to help you manage. It’s the risks related to failure of a specific business or underperformance of an industry.

To wit:

  • This is a company- or industry-specific hazard that is inherent in each investment. Unsystematic risk, also known as “nonsystematic risk,” “specific risk,” “diversifiable risk” or “residual risk,” can be reduced through diversification.
  • So, by owning stocks in different companies and in different industries, investors will be less affected by an event or decision that has a strong impact on one company, industry or investment type.

While this information is valid, the financial industry encourages you to think of diversification as risk management, which it isn’t.

Here’s what you need to remember:

Ketchup (consumer staples) and oil (consumer cyclicals) all run down-hill, in the same direction in corrections or bear markets.

Sure, ketchup may roll slower, but the direction is the one direction that inhibits wealth – SOUTH.

Large, small, international stocks. Regardless of the risk within different industries, stocks are tightly correlated as Lance outlined in his chart.

So, think about it:

What are the odds of one or two companies in a balanced portfolio to go bust or face an industry-specific hazard at the same time?

What’s the greater risk to you? One company going out of business or underperforming – or your entire stock portfolio suffers losses great enough to change your life, alter your financial plan?

You already know the answer.

Investors with balanced portfolios over time achieved better risk-adjusted returns than those who bought into stocks exclusively as the solution to every financial shortfall. Bonds remain an important diversifier to a stock portfolio.

To calculate your household’s debt-to-income ratio divide total recurring monthly debt by monthly gross income.

Credit issuers prefer a debt-to-income ratio less than 36%. That’s fine for them; keep in mind a lender’s goal is to cover their asses yet place you into further debt. I’ve heard financial pundits preach this rule as ‘healthy.’ Healthy for whom? Why is this ratio considered healthy? Do not anchor to 36% as a definition for wellness.

My monthly debt-to-income ratio is 15%. It’s a target that defines peace and flexibility for me. Are you able to define then pursue what it takes to live within a ratio which provides financial breathing room? A percentage which generates internal relief and clear thinking derived from what I call ‘financial bandwidth.’ As an example, I’m secure enough to treat my daughter to a summer trip, purchase a shirt when I want it, take care of a veterinary expense – all without the distress of living paycheck to paycheck or wondering how I’m going to handle a financial emergency. That feeling of security is worth more than some ratio a lender deems adequate to pile more debt onto my household balance sheet.

3. Focus on simple efforts to achieve big results in the future.

Small improvements have potential to forge big mental victories on the path to financial wellness. Since I listen to podcasts and subscribe to Amazon music, I recently made the decision to cancel a Sirius radio subscription. The $120 bucks I’ll pocket annually from the cancellation won’t make or break me. However, the confidence which arises from being proactive bolsters my determination to remain vigilant over money decisions.

Discipline to re-direct discretionary cash into savings (in lieu of spending), ‘brown bagging’ lunch at work, maintaining a budget; even the curb of a daily coffee purchase habit (which doesn’t budge the needle to build wealth), can nonetheless generate feelings of well-being and positively impact future financial decision making.

Financial wellness is achievable; however, it takes thoughtfulness and discipline to set rules and adhere to them. It also takes a dose of healthy skepticism in mainstream financial advice as much of it is designed to serve the industry, not the end users.