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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.

The World’s Most Misunderstood Investment – Part 1

Annuity.

Say the word and watch facial expressions.

They range from fear, disgust, confusion.

Billionaire money manager and financial pitchman Ken Fisher appears as the senior version of Eddie Munster in television ads for his firm.

He stares. Deep eyes ablaze with intensity. The tight camera shot. A dramatic pause, then solemnly he delivers the line:

“I hate annuities. I’d rather go to hell then sell annuities.”

Which obviously means you should too. The financial professional with a net worth of 500,000 Americans put together doesn’t need to worry much about lifetime income or portfolio principal loss. Obviously, he doesn’t believe you need to, either.

No offense but…

Let’s face it.

Ken Fisher is a master marketer. There’s no doubt of his prowess to pitch his wares. He’s raised megabucks for his firm. However, what he knows academically about annuities and how they mitigate life expectancy risk can fit in to a dollhouse thimble. And that’s fair because he doesn’t need to worry about running out of wealth. You most likely do.

Based on past comments he made in print about the financial planning industry, deeming it ‘unnecessary,’ I understand why he isn’t a fan of anything or anyone but himself. If you’re close to retirement or in retirement income distribution mode, you will pay for his overconfidence.

Unfortunately, what Ken Munster (I kid), is correct about is you as a consumer and investor must be skeptical of annuities as they are customarily offered. As they ‘sold first and planned for later.’

An annuity solution shouldn’t be on the radar until holistic financial planning is completed to determine whether there’s longevity risk – a strong probability of an investor outliving a nest egg. Annuities, especially deferred and immediate income structures, take the stress off a portfolio to generate lifetime income and places that risk with insurance companies. Fixed annuities that allow owners to participate in the upside of broad stock market indexes can be used as bond replacements.

Respected Professor Emeritus of Finance at the Yale School of Management and Chairman, Chief Investment Officer for Zebra Capital Management, LLC Roger G. Ibbotson, PhD, in a comprehensive white paper released last week, outlined how fixed indexed annuities which provide upside market participation and zero downside impact may be attractive alternatives to traditional fixed income like bonds.

In an environment where forecasted stock market returns may be muted due to rich valuations and bond yields still at historic lows, FIAs eliminate downside stock market risk and offer the prospect of higher returns than traditional asset classes. Ironically, at our Clarity investment committee two weeks ago, one of our partners, Connie Mack showcased a similar strategy based on our organization’s lowered return projections for traditional stock and bond portfolios.

Per Roger Ibbotson:

“Generic FIA using a large cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, allowing for equity upside participation. For these reasons, an FIA may be an attractive alternative to (long-term government bonds) to consider.”

In financial services, Ibbotson is a god. Brokers and advisors have been misrepresenting to consumers his seminal chart of 100-year stock market returns for as long as I’ve been in the business. The chart outlines how domestic large and small company stocks compound at 10-12% and beat the heck out of bonds, bills and inflation; financial professionals showcase the lofty past returns and convince customers that without buying and holding stocks for the long term (whatever that is), they’ll succumb to the vagaries of inflation. Adhere to the chart and your portfolio will have it made in the shade! (if invested in stocks for 100 years plus).

In all fairness to Roger Ibbotson, it’s not his fault that his data and graphics have been used to seduce investors to bet their hard-earned wealth on investment fantasy. He’s been in favor of annuities in retirement portfolios and in accumulation portfolios leading up to retirement for a long time.

Investment fantasy:

Investor reality:

SP500

It took nearly 14-years just to break even and 18-years to generate a 2.93% compounded annual rate of return since 2000. (If you back out dividends, it was virtually zero.) This is a far cry from the 6-8% annualized return assumptions promised to “buy and hold” investors and the 10-12% promised by financial pros who misrepresent Ibbotson’s work.

Investors if lucky, have 20 years to save interrupted. As labor economist and nationally-recognized expert in retirement security professor Teresa Ghilarducci shared with us recently on the Real Investment Hour – “Life has a way of getting in the way.”

I have yet in my 28 years in the business to meet a Main Street investor who’s achieved or achieving the long-term returns displayed in Ibbotson’s chart. The information is correct; how it’s used to sucker investors into “buy & forget” portfolios regardless of valuations and market cycles is unfortunate.

It’s time to provide the real story about annuities – the most popular types available, financial guardrails or rules to consider before annuities are purchased, what consumers should look for in a product and most important, what should be avoided.

Not every annuity product is ‘the devil.’

Unfortunately, all annuity types get lumped together and blanketed by the same sordid reputation.  Those who push annuities to collect attractive commissions ostensibly leave buyers confused (annuities by nature are complex), and regretful; these products are not explained well upfront and once the sale is complete, the consumer is usually left to figure out alone the intricacies of the contract.

Sales people tend to attach expensive riders (add-ons), to annuities that consumers may or may not need. Overall, the process is not a positive experience. Bad press and poor sales practices make annuities one of the most misunderstood products out there.  It’s a shame because annuities can help mitigate longevity risk and increase the survival rate of traditional stock and bond retirement portfolios.

Good-intentioned and knowledgeable financial professionals are not inured against falling for pervasive horror stories when in fact they could be doing their clients a disservice by ignoring benefits annuities can bring to the table for those who have high probabilities of outliving assets that generate income in retirement.

So, let’s get basic. Ground floor.

What is an annuity, anyway?

An annuity is a sum of money, generally paid in installments over a contract owner’s lifetime or that of the owner and a spouse or a beneficiary. Annuities are insurance products that guarantee a lifetime income stream. Pensions are considered annuities. Yes, Social Security is an annuity (guaranteed by the Federal Government).

For years, several well-known money managers and syndicated financial superstars have overwhelmed social, television and weekend radio media with negative information about annuities.

Several types of annuities can be incorporated into a holistic financial plan.

It’s time Real Investment Advice readers understand the truth.

Here’s real investment advice lessons for three of the most popular annuity structures:

Variable Annuities: “The Black Sheep.”

Variable annuities are a hybrid. A blend of mutual funds and insurance. Guarantees come in the form of death benefits to beneficiaries or payouts for life if annuitized which means the investment is converted by the respective insurance company into a series of periodic payments over the life of annuitant or owner of the contract. Variable annuities are ground zero for negative press as they can be expensive and generate big commissions for brokers.

Earnings are tax deferred and taxed as ordinary income upon withdrawal. Investments in variable annuities are best outside of tax-sheltered accounts like IRAs which are already tax deferred. Investment choices are plentiful. There are various riders that may be attached. The most common is the GLWB or Guaranteed Lifetime Withdrawal Benefit rider which guarantees a lifetime income withdrawal percentage on the principal invested or the account value, whichever is greater. Owners barely understand how variable annuities operate; many don’t realize their contracts contain riders, how much they cost, or what they do. I frequently deal with the frustration people feel.

Candidly, I cannot consider a valid reason for consumers to purchase variable annuities. In its purest form, an annuity should provide lifetime income, increase retirement portfolio longevity and possess zero downside risk to principal. Most investors possess exposure to variable assets such as stocks and bonds through company retirement plans already. I see little rationale to mix financial oil and water through variable annuities that combine insurance and mutual funds. The marriage of these two appears to be nothing more than a mission to generate revenue for the respective industries.

If you own a variable annuity within an IRA, consider liquidating it and transferring to a traditional IRA, preferably at a discount brokerage firm. Be wary of surrender charges that may occur upon liquidation. Non-qualified or variable annuities purchased with after-tax dollars can be liquidated however, taxes and withdrawal penalties may apply. It’s best to sit with a fiduciary who is proficient with annuities to assist with a strategy to unwind from this product.

Fixed Annuities. “The Quiet Ones.”

Fixed annuities or “multi-year guaranteed” annuities or MYGAs are essentially CD-like investments issued by insurance companies. They pay fixed rates of interest in many cases higher than bank certificates of deposit over similar periods.

An important difference is while CDs are FDIC-insured, fixed annuities are only as secure as the insurance companies that issue them; financial strength of the organizations considered, is paramount.  A.M. Best is the rating service most cited. Search the rating service website for the insurance company under consideration here. There are six secure ratings issued by Best. Consider exclusively companies rated A (Excellent) to A++ (superior). For ratings of B, B- (Fair), understand thoroughly your state’s coverage limits. Avoid C++ and poorer rated companies altogether.

Fixed annuities in the case of insurance company insolvency, are backed by the National Organization of Life & Health Insurance Guarantee Associations and each state has a level of protection. For example, in Texas, the annuity benefit protection is $250,000 per life.

The predictability of a set payout and limited risk to principal make MYGAs a popular option for retirees who seek competitive fixed rates of interest.

Fixed Indexed Annuities – “A Cake & Eat Some Too.”

Fixed indexed annuities get under the skin of one financial superstar asset allocator who dismisses stock market losses as no big deal (I mean markets rebound eventually, correct?). Losses don’t appear to be a big concern for him or his clients.

As the granddaddy of financial radio personalities, the gentleman relishes the calls in to his radio show that express concerns about annuities, especially fixed indexed annuities as he gets another opportunity to proudly remind his national audience – “so, with these products, you don’t get all the market upside!” Believe me, he’s all about the upside because markets only move in one direction from where he sits. From where you sit and what Roger Ibbotson believes, there’s a strong probability ahead for lower returns on traditional asset classes which include long-term bonds.

So, what are fixed indexed annuities?

First, they are not products that invest directly in stock markets. They are insurance vehicles that provide the potential for interest to be credited based on performance of specific market indexes. Selections within these fixed annuities allow owners to participate in a fixed percentage of the upside of a market index or earn a maximum rate of interest that’s based on the percentage change in an index from one anniversary date (effective date of ownership), to the next. A strategy identified as “point-to-point.”

Second, fixed indexed annuities are characterized by a ‘zero floor,’ which simply means there’s no risk of market downside. Owners may get a goose-egg of a return for a year, that’s true. However, there’s no need to make up for market losses, either.

As stated in the academic research published by Mr. Ibbotson:

“This downside protection is very powerful and attractive to many individuals planning for retirement. In exchange for giving up some upside performance (the 60% participation rate), the insurance company bears the risk of the price index falling below 0%. The floor is one way to mitigate financial market risk, but also gain exposure to potentially higher equity performance than traditional fixed income investments.”

Third, Roger Ibbotson and his team analyzed fixed index annuities performance compared to periods of outperformance and underperformance for long-term government bonds. They isolated 15 three-year periods where bonds performed below the median like above, where the average 3-year annualized return was 1.87% compared to the FIA average of 4.42%. Through fifteen 3-year timeframes where bonds performed above median, returns for bonds and fixed index annuities averaged 9% and 7.55%, respectively.

Last, the research is limited to a simulation of the net performance of a fixed index annuity tied to a large cap equity index with uncapped participation rates. A participation index rate strategy is mostly effective under strong stock market conditions as interest credited is a predetermined percentage multiplied by the annual increase in a market index’s return. For example, a fixed indexed annuity offers an uncapped point-to-point option with a 40% participation rate. If the chosen market index the participation rate is connected to increases by 10%, your return for the year will be 4%. The participation percentage may be changed annually.

A “point-to-point” cap index strategy incorporates a ceiling on the upside and will not perform as well during periods when stocks are characterized by strong performance. The point-to-point cap index choice is best when markets are expected to provide limited growth potential and provides 100% participation up to the annual cap set by the insurance company. Let’s say a fixed indexed annuity has a 3% index cap rate and is tied to the performance of the S&P 500. For the year, the S&P 500 returns 2%. The interest credited to your account would be 2%, which is under the 3% cap. Under the participation index rate strategy outlined above, interest credited would be less at 40% of the S&P return, or .8%.

Since credited interest increases the original investment and downside protection is provided, your money compounds in the true sense of the definition. As we’ve written previously at Real Investment Advice – compounding works only when there is NO CHANCE of principal loss.

Fixed indexed annuities offer a fixed interest rate sleeve in addition to stock market participation options. There’s the choice to select multiple strategies (to equal 100%) and change allocations every year on your anniversary or annuity effective date.

Generally, annuities are immediate or deferred as well as fixed and variable as described above. Deferred annuities are designed for saving and interest accumulation over long periods, usually 5-10 years. They most popular are outlined here in Part 1. Immediate and guaranteed income annuities which I’ll cover in Part 2, are designed to provide lifetime income and longevity insurance for consumers who are concerned about outliving their retirement investments.

Below are Real Investment Advice and Clarity’s financial guardrails or rules to consider before the purchase of accumulation and income annuities:

  1. Annuities tend to get sold, not planned. Annuities are primarily product-sales driven. Comprehensive financial planning which includes your current asset allocation, ongoing savings and investing habits, anticipated income needs in retirement and survivability of investment assets based on estimated life expectancies either for you or you and a spouse, should be a mandatory first step. Most annuity salespeople are not going to undertake a holistic planning approach before an annuity solution is offered; it’s important to partner with a Certified Financial Planner who is also a fiduciary to complete a financial plan before you commit resources to annuities. A plan can determine whether an annuity improves retirement income sustainability and specifically, how much investment to commit. If your plan reflects the probability of meeting your retirement goals at 85% or greater, forgo the annuity and create an action plan to bolster savings, reduce debt or work a year or two longer.
  2. Consider fixed indexed annuities as intermediate to long-term bond replacements. Or to improve risk-adjusted portfolio returns during market cycles of extended stock valuations and/or less potential for appreciation in bond prices (like we’re in now). Roger Ibbotson estimated that a 60% stock, 20% traditional bond, 20% fixed indexed annuity allocation returned 8.12% from 1927-2016 in periods where bond returns were below median, compared to a traditional 60/40 portfolio which returned 7.6%. If future returns for traditional risk assets will be muted due to rich stock valuations and lower capital appreciation for bonds (which we believe is the case), a fixed indexed annuity may be employed to replace up to 20% of a total fixed income allocation. A FIA may provide attractive returns compared to stocks and bonds combined with zero downside risk.
  3. Avoid or minimize exposure to variable annuities. Variable annuities do not appear worthy of investment in our opinion. Meet with a financial professional, preferably a fiduciary, to create and implement a liquidation or transfer plan.
  4. Understand surrender charges, costs, tax and withdrawal penalty implications. Annuities must be considered long-term products designed solely to meet retirement goals. Deferred annuities will include a hefty 5-10 year decreasing annual percentage charge to discourage liquidations. There will be ordinary income taxes incurred and possibly penalties (if younger than 59 ½), upon withdrawals. Charges are incurred for commissions and cost of insurance, too. Most annuities will permit up to 10% annual withdrawals free of surrender charges. It’s important to understand how to withdraw as a last resort if a financial emergency arises.
  5. Slow your riders. Riders are supplementary features and benefits that can add anywhere from .35 to 1.50% in additional costs per year. Available riders range from enhanced liquidity benefits (ELBs) which allow surrender-charge free return of premiums in the second year, ADL (activities of daily living such as bathing & dressing), or custodial care withdrawals that provide access to up to 100% of accumulation value without surrender charges, to the most popular – GLWBs or Guaranteed Living Withdrawal Benefits for one life or for you and a spouse. Lifetime income is guaranteed even if the accumulation value of the annuity falls to zero. I have yet to encounter an annuity owner who can explain to me why they purchase riders or how they’re supposed to work. Unless a comprehensive financial plan indicates a 25% or greater probability of outliving your retirement savings (75% success rate), and expected single or joint life expectancies are age 95 or older, paying 1-1.5% a year for a living withdrawal benefits rider seems excessive. If outliving your investment source of retirement income is a concern, there are deferred and immediate income annuities on the market that can fill the gap along with other solutions like reverse mortgages.
  6. Seek a second opinion. An annuity is a long-term financial commitment. Before purchase, due diligence is mandatory. A fiduciary professional can outline the pros and cons of your prospective purchase. A deliberate, well-researched decision will minimize regret, later. Contact us for objective guidance.

See? Annuity is not such a scary word. In some cases, it’s the difference between a secure retirement or not. Along with a strategy backed by a comprehensive plan, fixed indexed annuities can be employed to minimize losses or enhance portfolio returns.

Indeed, annuities are complicated. There’s no getting around that obstacle. However, I hope our guardrails will help you gain perspective.

Annuity means ‘check for life,’ and who is against that?

The billionaire Ken Fisher. That’s who.

You may need to think differently.

6 Things “Super Savers” Do That You Don’t

Super savers march to a different drummer. Impetuous financial decisions are not in their DNA. They exist outside the mainstream of consumerism.

These hyper-savers have a unique ability to delay gratification. Frankly, they prefer to consider the future first. Uncommon for many Americans whose attitude is live for today, super savers consistently save for tomorrow.

Principal Financial defines super savers as Americans who are socking away at least 90 percent of the annual employee contribution limit to their 401(k) plans. In 2016, Principal surveyed 2,424 retirement plan participants whose ages range from 23-51.

Interestingly, the study debunks a myth that Millennials are profligate spenders; a majority of this group (91%), identified saving for retirement as a priority. Perhaps living through the Great Recession and observing the impact on friends and family has something to do with their conservative attitudes.

Super savers are driven by a mission. A passion to master security one financial decision at a time. The more they save, the greater they yearn to raise the bar. Undeniably, saving money acts as an endorphin. Cash inflow over outflow is a key contributor to their sense of well-being.

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? How can we be part of the super-saver generation?

First, they find reasons to control what they spend and associate positive feelings with saving.

Super-savers think backwards, always with a financially beneficial endgame in mind.

They have evolved to consider the cumulative impact of monthly payments on their bottom line, which is not common nature for the masses (Read: People Buy Payments, Why Rates Can’t Rise). 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 spend. This manner of thought provides breathing room to deliberate less expensive alternatives and thoroughly investigate the pros and cons of their decisions.

A focus is on the opportunity costs of using credit and paying interest (resources that could have been otherwise directed into investments earmarked for long-term goals like retirement).

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.

Super-savers experience enriching lives, but always with an eye on the future.

Members of the super crowd don’t live small lives -a big misnomer. I think people are quick to spread this type of 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, super savers thrive below their means. Extending themselves with new cars and big mortgages is uncomfortable and inhibits quality of life. Super-savers are not compelled to spend to gain social status and not motivated by keeping up appearances.

Tip for the super-saver to be: Give thought to the future before the present.  Make it an obsession. In other words, delay some of today’s gratification for tomorrow’s security. There is a painless way to accomplish the task.

Super-savers are programmed to pay themselves before everything else. They proactively adjust their household expenditures so that company retirement and or emergency savings accounts are funded first. Payroll deductions or some form of automatic deposit feature make it easy to create and stick with an aggressive saving and investment program.

Make an initial bold move. A financial leap of faith: This week take a step to super-saver status and immediately increase your retirement payroll deduction to 15%. Don’t even think about it, just do it. Before consideration to your household spending.

Micro-track expenses for the month after the new deduction is in effect. Adjust spending to meet the new, increased deduction. Then work on the necessary cuts to expenses to continue the 15% or possibly adjust even higher, to 20%.

My thought is you’ll be amazed to see how quickly the change is accepted and the impact minimal to the quality of life. Only as I’ve witnessed how this action alters thinking to attach good feelings and reward to savings vs. spending. You’re now working super-saver muscles you didn’t even know you had.

Super-savers are a year late but rarely a dollar short.

No, super-savers don’t own the latest smart-phones, nor do they consider automobiles as luxuries. They’re merely for transport. Nearly half of “super savers” are driving older vehicles (47 percent) in order to direct dollars to their retirement savings per the study by Principal Financial.

The super-savers I interviewed are at least one or two smart-phone iterations behind (it works fine), and will investigate pre-owned autos over new. They’ll maintain and keep these automobiles for as long as they’re operational, well into hundreds of thousands of miles.

They’re not house poor.

Cars aren’t the only carefully considered big ticket purchases. “Super savers” often choose to live in modest homes (45 percent) and, among millennials, 18 percent are renting vs. buying. Read RIA’s rule for taking on mortgage debt.

According to the Core Logic Case-Shiller Home Price Index, house prices in Texas are growing faster than the national average. For example, San Antonio has gained 7.8% year-over-year compared to a national gain of 3.7%. Home prices are up across the country at the minimum, 5% above fair value.

The lesson? Super-savers are either going to wait (until prices moderate, as they’re disciplined, not emotional), or save for a larger down payment. Anything to avoid being saddled with a big mortgage that jeopardizes savings goals.

Super savers sacrifice current vacations for the permanent vacation fund.

Principal Financial discovered super savers are prioritizing retirement savings over vacation funding. Many say they are traveling less than they’d prefer (42 percent).

The key is to re-define travel and become financially savvy while doing so. Super savers explore vacation adventures close to home, take frequent day trips and travel to popular destinations in the off-season when expenses can be 15-25% less.

Studies show that super savers are independent thinkers. Working to maintain a current 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 creating a secure, enjoyable retirement.

Whatever steps taken to join their ranks will serve and empower you with choices that those with overwhelming debt cannot consider.

5 Things You Aren’t Being Told About Your Health Savings Account

With the current health care bill yo-yoing between picking up momentum and flaming out there has been a lot of noise about Health Savings Accounts (HSA’s). The role or lack of that people use a Health Savings Account as investment vehicles in their financial plans has been highly debatable.

Health Savings Accounts are becoming common place now that employers are shifting toward 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.

Everyone is not eligible for a Health Savings Account. To have access to an HSA you must be in a High-Deductible Health Plan. Meaning your out of pocket deductibles must be between $1,300- $6,550 for a single insured and $2,600-$13,100 for a family in 2017.

If your health insurance plan meets those parameters you can contribute to a Health Savings Account. The annual 2017 contribution limit, (employer+employee) is $3,400 for a single insured and $6,750 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. Do keep in mind if your company offers a plan and makes contributions to your account it would be wise to use your it. A study from the Employee Benefit Research Group found that in 2015 employers who contributed averaged an annual contribution of $948.

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

Flexible Spending Accounts are offered through an employer-established benefit plan.  Unlike the HSA if you are self-employed, you aren’t eligible for a FSA.  A Flexible Spending Account will allow participants to put up to $2,600 annually in their account. In a FSA, you also have 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 each year-even if you don’t use them. An FSA may allow for a rollover of up to $500, but only if your company agrees to it and anything over the $500 will go back to the company’s coffers.

The HSA’s ability to contribute and not use each year make this a great new tool workers have to utilize in their financial plans.

The HSA allows employees to retain their funds long after their employment.

When a worker starts Medicare they can no longer contribute to an HSA-the key word here is start Medicare not reach 65. Medicare can be delayed if you’re still covered under an employer plan, but one should be familiar with the system and potential penalties if not done properly.

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 last week’s RIA Financial Guardrails, the cost of health care is growing twice as fast as the typical Cost of Living Adjustment in Social Security benefits.

The out of pocket expenses as reported from Healthview services estimates the average 65 year old couple will exceed $400,000 in health care costs and also projects a 5.5% annual increase in health care costs over the next decade.

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?

Time and time again financial plans use unrealistic return numbers, little or no inflation and health care considerations have been either missed or altogether an after thought.  Ask your advisor what type of assumptions 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 on advisors. 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 an economic release by the Bureau of Labor Statistics the median number of years an employee stays at one job is 4.6 years. Now that number is even smaller (3.2 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 2015 National Compensation study shows that of the only 56% of employers who offer a 401k plan, 49% of them don’t even offer a match.  As labor markets tighten hopefully we’ll see employers begin to sweeten the pot on 401(k) plans as they try to retain 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 regards 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: Employee contributions are tax deductible, interest is allowed to grow tax free and 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.

NO TAX GOING IN, NO TAX ON YOUR EARNINGS AND IF YOU USE IT PROPERLY YOU WON’T BE TAXED ON THE WAY OUT!

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 health savings account properly

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.

An HSA has the ability to be a powerful investment vehicle with the triple tax free benefits when used the right way. However, 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 3-5 years of deductibles saved in a very low risk allocation to your account 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 Shillers 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.

#FP: The RIA Financial Guardrails

The following guide was authored by both Richard Rosso, CFP, CIMA and Danny Ratfliff, CFP, ChFC.


Guardrails are forged to prevent navigators from veering off course.

Financially, it’s easy to drift off target or accidentally travel a path that places your wealth in jeopardy.

Not to fear:

Real Investment Advice’s guardrails were created to help readers and clients keep their finances on track.

These nine tenets focus on helping investors and individuals avoid common mistakes, not-so-obvious monetary pitfalls and the financial industry dogma that’s so entrenched throughout media channels.

Guardrail #1:

Annuities should be planned, not sold. Not all annuities are bad; unfortunately, how they’re often sold is not always in the best interest of the consumer. Beware financial ‘experts’ who perpetuate annuity false stereotypes as a self-serving agenda to generate business. The ultimate purpose of an annuity is to mitigate longevity risk (you can be on Earth a long time!), and provide a lifetime income for an individual, couple and survivors.

The smartest way to understand if an annuity is appropriate is to first determine whether the projected total wealth accumulated, current periodic investing, along with Social Security, pensions and other liquid assets can adequately sustain your household spending throughout your entire retirement.  If it’s determined there’s a shortfall, an annuity structure may be effective as a supplement to Social Security benefits as an income you cannot outlive.

Always partner with a Certified Financial Planner who also acts as fiduciary (a professional obligated to take the highest and best care), to create a comprehensive financial or retirement plan to determine whether an annuity can complement your holistic investment strategy.

Avoid variable annuities (a combination of mutual funds and insurance), if you’re contributing to company retirement plans, Individual Retirement Accounts, or Roth IRAs. If you’re ten years or longer from retirement, fixed or deferred income annuities for a portion of your savings may be considered.

Guardrail #2:

Consider a primary residence as a place to reside, not an investment. We observe too often that primary residences are considered investments when in reality, depending on the mortgage outstanding, is more liability than asset.

To calculate return from a primary residence, an owner must track every improvement and add it to the purchase price to calculate a cost basis. Taxes, maintenance and what you would have paid in rent vs. the mortgage payment must also be considered.

According to Yale Professor Robert J. Shiller, noted expert on housing, co-creator of the widely-used S&P/Case-Shiller U.S. National Home Price Index, and author of several editions of the seminal book “Irrational Exuberance,” a house is a consumption choice, not an investment. Based on his historical research, real home prices (adjusted for inflation), have appreciated an average of 0.6% a year from 1915-2015.

Of course, there are exceptions. Depending on the location, overall supply and demand, and uniqueness of the property, appreciation may deviate from national averages. However, these instances are not a typical homeowner experience.

The definition of ‘investment’ tends to be misused when capital is allocated to large expenditures like cars and homes. When financial resources are applied to long-term assets, the word ‘investment’ is embraced to help us overcome buyer’s remorse and make us feel good about our decisions.

Thinking of a house as a place to reside and not an investment will help a buyer maintain perspective and not become “house poor.”

Guardrail #3:

Never allow others to cross your personal financial boundaries.

It’s a tough lesson for some, but once learned, never forgotten. There’s nothing inappropriate about maintaining boundaries and saying “no” to obligations that may place your personal financial security in jeopardy.

For example, we witness parents who extend themselves to co-sign for children. We know of those who lend to friends and family members only to be disappointed when loan obligations are not met. It’s acceptable to establish in a household budget, charitable intentions and gifts; it’s honorable to help people you love who are in need.

However, it’s best to understand upfront what the financial impact to your personal situation is going to be. Know your boundaries and adhere to them. If you say ‘no’ enough, others will respect them, too.

Guardrail #4:

Create your own financial rules around debt control and savings. Then stick to them. No matter what.

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 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.

Real Investment Advice’s guardrails are as follows:

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.

Guardrail #5:

Invest in yourself.

Human capital is a measure of the economic value of an individual’s skill set. A passion to learn can increase capacity to earn.  Consider lifetime earnings as the financial fuel that drives wealth and savings. Seek to boost or learn new skills that will increase your value in the work place or facilitate an entrepreneurial venture. These are methods to maximize the “return on you.”  To put it in perspective, assuming 30 earnings years at the current median household income of $59,345, an individual or family would earn $1,780,350 over a lifetime. A goal could be to double that median income every decade, however that comes from focus, determination, and a little bit of luck.

Guardrail #6:

Good health is a significant contributor to financial and physical wellness in retirement. 

In a report from Healthview Services, a provider of cost-projections software, healthcare costs in retirement are rising twice as fast as the typical annual increase in Social Security benefits.

Latest estimates outline total out-of-pocket spending for an average 65-year old couple retiring today could exceed $400,000 when Medicare premiums, supplemental insurance and deductibles are included. Keep in mind that cost-of-living adjustments for Social Security are overwhelmed by the rising costs of Medicare Part B premiums.

Healthview Services projects a 5.5% annual increase in healthcare costs over the next decade.

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.

Preventative actions such as regular workout regimens, eating properly and healthy sleep habits can work to reduce the financial stress of the most significant costs retirees face.

Guardrail #7:

Realistic return projections, time horizons and inflation factors are crucial to successful planning.

Financial planning is far from perfect. After all, working with projected returns on risk assets like stocks, estimating how long a person may live and where inflation may be at the time of retirement, is an intelligent guessing game at best.

Consider the plan a snapshot of your progress toward financial life benchmarks. Where you are, outlined direction of where you need to go. Are you on track to meet your needs, wants and wishes? A plan is a diagnostic; the exercise is one of financial awareness.

Studies show that people who follow a retirement plan are more successful than those who don’t. But know the common pitfalls you’ll face, depending on the professional who creates the plan and where his or her loyalties lie.

Unfortunately, most planning systems as well as planners tend to provide overly-optimistic outcomes with asset return projections and life expectancies that may be far from what you’ll experience living in real world.

Why?

Most financial plans are created to push product. They’re a means to a lucrative end for brokers. An afterthought.

When in fact, a comprehensive financial plan should stand alone as a roadmap to financial success, and that includes recognition of how stock markets flow through cycles – bull, bear, flat and realistic assessments of inflation and life expectancies.

Consider a second opinion of a completed plan if your first was generated by an employee of a big box financial retailer. Always seek a Certified Financial Planner who acts as fiduciary.

Guardrail #8:

Be vigilant of confirmation, recency bias and other emotions when it comes to financial decisions.

Money is emotional. It’s impossible to avoid mixing feelings and finances. Success comes from recognizing cognitive and behavioral pitfalls and avoiding them as much as possible.

Investors tend to seek opinions that agree with their perspective, which can lead to poor portfolio returns. Success comes from purposely considering those sentiments that disagree with yours. The exercise will open your mind to conditions rarely considered.

For example, bulls and bears are myopic in their perspectives. At Real Investment Advice, we consider a view from greater altitudes. Our responsibility is to provide a robust view of overall conditions. Like eagles. And as an eagle, you’ll ponder financial and portfolio decisions with a holistic mindset.

It’s very human to believe that current or recent market conditions will continue indefinitely into the future. Frankly, it’s how financial media operates. Be wary of most as it perpetuates what is going on in the present with little regard for the past.

The pundits employed by big-box brokerages, and financial media celebrities, prefer you forget the markets of 2000 and 2008. They’re succeeding. These negative periods are being pulled into the mist of long-term averages. Averages are misleading. They have little to do with the limited time most households possess to begin and continue an aggressive savings and investing program.

Rarely are the ‘pros’ held accountable or freely admit their mistakes. Unfortunately, the public, so inundated with daily information and life, incurs most of the negative stock market impact and loses time (the most precious commodity), trying to break even.

It’s easy to get sucked in to a current phase, especially as we haven’t witnessed an S&P 500 bear market (a decline of 20% or more), since 2008.

Per technical analyst and author Gregory Morris in his seminal book Investing with the Trend,” there have been 10 declines greater than 20 percent in the past 89 years. The average bear market from its beginning peak until it fully returned to that peak lasted over 5.5 years.

Most individual investors experience longer recovery periods due to inflation, expenses and poor emotional responses (buying high, selling low).

Guardrail #9

Create a household financial wellness evolution.

We define financial wellness as consistent monetary success and pathos which leads to security and generates inner peace. The flow is uneven as stages of wellness ebb and flow along channels of a human existence. It’s rarely perfect. However, there always exists a strong center or stasis that like a rubber band, an individual returns to after a deviation from self-defined financial norms.

In other words, wellness isn’t pretty, but there’s beauty in its consistency. It represents a tumultuous 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.

More than almost anything else that defines you, financial choices made over a lifetime forge not only the path you travel today, but also the ongoing integrity (or lack thereof), of that road you take into the future.

Your overall financial health may flow through to multiple generations long after you’re gone, so it’s worth understanding that money – your actions, how you treat it, is much bigger than any one individual.

The ripples of your financial decisions have potential to carry through and buoy the lives of others or act as undercurrents and pull down everyone around you.

Share openly financial successes and failures with your children, communicate legacy intentions before they require interpretation from legal documentations, learn to say no more often to requests that don’t sit well with your fiscal security, and clearly define and live your money philosophy.

Our guardrails were formed to keep navigators on the route to overall financial success. Deviations are normal and expected, such as the flow of events throughout a human life. However, those with boundaries adjust quickly and get right back on track.

They’ll remain grounded while others falter.

Such are the rules of the road.

#FP: Girl, I Heard You’re Getting Married

Johnny Maestro never gave up.

Born on New York’s Lower East Side to a lower-middle class Italian family, humble beginnings singing acapella in city subways in the early 1950s, Johnny Maestro (real name Mastrangelo), honed his craft to eventually be known as one of the finest rich-toned tenors of his time.

Johnny was the first artist to form one of the most successful integrated doo-wop groups, The Crests, and their song Sixteen Candles, became a national pop sensation. Today, The Crests can still be heard on oldies stations throughout the country.

Johnny eventually formed other bands, tried a solo gig and regrettably, fell into obscurity for close to a decade.

In 1968, he was the lead on a merger of two bands and the group Brooklyn Bridge had emerged.

They debuted on the Ed Sullivan show with a song titled “Worst That Could Happen.” Written by popular wordsmith Jimmy Webb, the tune about the looming marriage of a woman he still loved yet woefully, reluctantly, wished well, the song took off and put Brooklyn Bridge on the map.

Great for them. Not so much for my mother. It was the worst that could happen (for her!)

You see, this was one of my favorite songs. I was a radio freak. I couldn’t get enough of AM talk and music radio which were incredibly rich with content. I owned a prized Emerson hand-held battery-operated transistor beauty, chrome lined and encased in black fake-leather or a ‘pleather’ case with a wrist strap attached.

The portable radio was a gift from my paternal grandmother (also a radio zealot), who was a casual friend of famous broadcaster John A. Gambling, host of WOR-AM’s “Rambling with Gambling.” The program was the longest, continuously-run radio broadcasts in America up when it was cancelled in 2000.

A serrated dial on the side of my portable radio, moved securely by thumb, rarely was turned clockwise to OFF. As early as 5 years-old I’d sing in high-pitched broken vocals, the chorus, repeatedly to “Worst That Could Happen.”

And baby if he loves you more than me,
And baby if he loves you more than me,
Maybe it’s the best thing,
Maybe it’s the best thing for you,
But it’s the worst that could happen to me.

It drove mom crazy.

Today when I listen to the Sixties on Six channel on Sirius Radio, I clearly see my mother shake her head back and forth in surrender; I can hear her scream to the sky, arms pointed toward that dreaded vinyl spinner in the sky – “NOT THIS SONG AGAIN!”

Sadly, for her the tune (yes, back then there were physical records played in studio), was on frequent rotation, spun often by an ensemble of wacky disc jockey personalities who made WABC 77, the most iconic, incredibly popular New-York based AM pop radio station throughout the 60s and 70s.

Based on some random system, I guess that the discretion of the radio personalities, the song ran at least once every couple of hours.

Now with a child of my own – well, a young adult headed to college, a vision of eventual nuptials gnaws at me. I started a list of financial ‘to-dos’ she should embrace early in her marriage. My goal is she takes smart actions from the get-go, immediately after the honeymoon (if Millennials can afford such a luxury).

I thought of a few song titles Brooklyn Bridge could have blossomed into top-ten pop hits and designed to help new brides jump-start healthy money habits in their households.

It’s mine, his, and ours.

Most likely, husband and wife already maintain separate checking accounts. They should be kept; I’ll explain in a few. In addition, a new joint checking and savings account should be established.  Consider these accounts as conduits – receiving and delivering dollars to various accounts.

An online FDIC-insured bank for both new joint checking and savings vehicles is the financial savviest choice. For a list of the best online banks or to receive a personalized recommendation, do your homework at Nerdwallet – a rich hub of information about credit cards, banking, mortgages, loans and insurance. Every year they investigate online accounts; check out their top choices at Best Online Checking Accounts of 2017.

The couple should link their new checking account to both their jointly-held savings vehicle and existing individual checking accounts.

Once accounts are established, a system of mine, his, and ours may begin.

Here’s how it works:

Joint checking auto-receives payroll deposits direct (which would most likely require new paperwork from employers). From there, until a household emergency cash reserve holds at least six months’ worth of living expenses, 15% of every joint deposit should be automatically transferred into the linked jointly-held savings account.

Once this basic mechanism is in place, establish a weekly money awareness date which allocates 30 minutes to an hour on an evening or weekend to outline and gain awareness of expenses and establish spending boundaries for separate discretionary or “fun stuff.”

I prefer new couples work with pencil (yes, pencil), paper and printed statements. At least for the first year of marriage. The goal is to become intimate with household cash flow, something I do not witness when electronic methods are used.

My suggestion is to order a Dome Household Budget Planner from Amazon or purchase one at any major office supplies retailer. It’s a wire-bound, inexpensive book where expenses can be tracked by categories.

I suggest the new bride take the lead on this weekly exercise so she understands completely how money flows into and out of the household. Monitoring also blossoms confidence. Her new husband of course, provides input, helps shape the direction of the money and is fully engaged in the process.

These meetings are opportune engagements that blossom communication, break down resistance around money concerns, especially how discretionary dollars should be allocated.

Recently, a couple who haven’t missed weekly money awareness dates for at least six months, shared their rules about recreational spending. They’re impressive. You may consider these tenets a good starting point for you, too.

We allocate $300 a month to joint spending on things we love to do together – restaurants, movies, wine bars and weekend road trips.

We allow ourselves $100 a month each for events we like to participate in apart including online subscriptions, work lunches on occasion and boys or girls’ nights out.

As a couple, we agree that I electronically transfer this $100 a month to each of our separate checking accounts. If spending is going to be exceeded by $20, we have an agreement to discuss the expense and jointly decide on the increase and transfer.

Perfect. Now you understand why I believe husband and wife should maintain separate individual accounts. At least until their weekly money dates are a matter of habit. Most banks allow customers to establish beneficiaries on individual accounts. It’s a process called “transfer on death.”

This feature allows, in case of death, for proceeds in a separate account to be transferred to a beneficiary easily, without a complicated legal process. A wife’s beneficiary may be her husband and vice versa. Keep in mind, there may be a one-time nominal charge for setup.

Make sure to establish an electronic link from the joint account to each separate one to facilitate transfers to separate checking accounts.

The main arteries that flow money through a joint vehicle into a jointly held savings account and two individual checking accounts are now formally established.

Honey, when is our special credit report and score anniversary?

Identity theft is a serious issue and must be monitored. A recent survey conducted by Experian, one of the three credit bureaus, found that a majority of respondents underestimated the risks of identity theft. Not a wise move.

I instruct new brides to place on their calendars a joint annual credit report analysis on a date close to the wedding anniversary so it’s never forgotten. Husband and wife can access a free credit report annually from www.annualcreditreport.com.

A checklist for what to look for in a credit report is available here. It’s easier today to report discrepancies electronically direct from the websites of Equifax, Experian and TransUnion.

The higher your credit score the more you’ll be sought out by lenders. Husband and wife should attempt to maintain individual credit scores of 770 or better to prepare for a favorable mortgage rate on a new home.

According to a Nerdwallet interview with several mortgage lenders, a credit score of 720 or higher can lead to big savings. For example, a 100-basis point drop in score from 780 to 680 can lead to thousands of dollars in additional interest paid over the life of a mortgage loan.

Along with a credit report checkup annually, husband and wife should access a FICO® Score 1B Report.  FICO® is the leading score for most lenders. It costs $19.95 for each report however it’s worth the price to access scores and discover the primary factors that affect them. You may also simulate financial decisions to see how they affect a FICO® score.

The lifetime of “love & debt don’t mix,” mantra.

Money scripts are the messages we internalize early on from our environment. Family, friends, even our culture shape perceptions and actions with money. Unfortunately, I’ve witnessed poor money scripts that survive multiple generations.

Rarely do we ponder our internal money scripts. Partly because they’re so much a part of us it’s tough to step away and examine objectively. Couples should practice financial vulnerability before marriage where they share their strengths, weaknesses and provide full disclosure of the financials they’re bringing to the union. Unfortunately, this isn’t a typical outcome.

Early on, I suggest the new bride initiate a joint exercise where individual money scripts are outlined and used to form a promise or cast a re-script that blossoms a mutual money philosophy that accelerates wealth creation.

Based on my research, the greatest financial synergies come from a similar money philosophy, particularly around debt management. A couple that treats debt as a weight and lives a modest lifestyle, especially when it comes to mortgage liability, can increase their net worth at the least, twice as fast as new couples with comparable incomes.

Think of the following as positive money scripts:

“It’s most important to save.”

“Debt is stress so I pay off my credit cards in full every month.”

“My parents taught me to respect every dollar.”

“I always pay myself first.”

Here’s a joint money philosophy shared with me:

“As partners, we want to avoid money stress by saving 10% of our income and pay off student loans in full within 5 years. We will direct 25% of our income to this effort.”

Keep words simple. Passionate. Narrow down to the accomplishments envisioned. Print the philosophy and secure it to the fridge so it’s read on a regular basis. A joint money script will grow, revise as wealth does, life changes and families begin.

Let’s do the Social Security Bump.

Per the Center for Retirement Research at Boston College, nearly half of 62-year-old working women didn’t make any money for at least one year in their earnings history on record with the Social Security Administration.

Most likely, this group took a break from the workforce or cut hours to raise children. To be eligible for Social Security retirement benefits, a future recipient must rack up 35 years of earnings history.

Women, based on their life expectancies, have more to gain financially than men for working longer as each zero or low earnings year is replaced by years with greater earnings. In other words, women should do their best to maintain their skill sets and look to return to the workforce and gain a greater bump in future Social Security benefits.

According to research by Matt Rutledge and John Lindner of the Center, women who beef up their earnings record and delay collecting benefits until age 70 (not collect early at 62), can increase their monthly Social Security by 12 percent. For men, it’s half as they typically have more years of higher earnings during their working period.

Social Security planning is a crucial element of an overall financial planning process. Newly married couples are not concerned about Social Security. I agree. They should be focused on becoming human earnings machines. However, it’s crucial for new brides to understand upfront that leaving the workforce or curtailing work hours should be considered temporary.

Unrequited love is bad enough; financial regrets that can darken a lifelong partnership can be tragic, too.

Women should lead, set the tone for household financial boundaries and decisions. Why? Because most likely, they’re going to be the ones left behind. Women live longer than men. In all countries without a single exception.

I bet Johnny Maestro would be happy to know.

About the best that could happen.