Often in social conversations, it’s not uncommon to hear us say, “That reminds me of a scene in the movie…” to emphasize a point. Movies have a powerful way of presenting memorable situations where real life decisions and money intersect. Given the financial lens we view the world through, these financial themes jump off the screen to us.
So in today’s episode, we put on our movie critic hats and have some fun discussing lessons we’ve spotted in films that we all can learn from. Some are obvious but in others, you have to dig a bit deeper. Allison Berger joins us in this fun-filled episode to discover financial influences in the best and worst that Hollywood has to offer.
Many times, the large financial outcomes in life are a result of a lot of little decisions along the way in emotionally-charged environments. The circumstances range from pressure-filled decisions amidst a tragedy to pre-conceived notions of long-held family belief systems around money. Some can seem more cliche, like always have a plan B or pay attention to the small print, but paying attention to the emotions that lead to these moments can provide the most intriguing insights. Other messages reinforce strong values that help position you for long-term success, like the benefit of hard work and having an open mind.
Here’s a summary of the movies we discussed:
Gone Girl – This is an intense 2014 thriller with loads of money themes. The movie begins during the 2008 financial crisis and the featured couple loses their jobs. A twisted and circuitous journey ensues from there.
Money themes: This couple could benefit from better financial communication. Strangely, a financial advisor wasn’t around to help (wink, wink). Separately, she keeps all her money in a money belt after she goes on the run. This is a terrible idea! It’s no wonder her money gets stolen as you should never keep all of your money in one place, even when on the run. Finally, do your best to set yourself up so you are not forced to rely on someone else financially.
Edge of Tomorrow – Tom Cruise stars in this 2014 Sci-Fi film. He plays a public relations guy thrown into the battle who gets stuck in a time loop.
Financial lessons: You may not see a financial theme here but we can’t help but think about what we might do financially if we could do yesterday over again with the knowledge that we have today. There are so many uncertainties when dealing with investing which is why balance is so important. When you have a process to help you deal with all the options that are out there. We all have 20/20 hindsight but this movie can be a great thought exercise. What would you learn from today? Would you invest more? Spend differently? Or maybe create an automatic savings plan to make sure you’re saving?
Crazy Rich Asians– This 2018 film is rich with money themes. It is basically set in a rich fantasyland in Singapore.
Financial themes: Money alone will not make you happy, it’s the experiences money buys that can provide lasting happiness. Related, it’s dangerous to have your identity attached to money. Communicating openly with your partner about finances can prevent larger emotional disagreements along the line. Even further, the pressure of misplaced expectations around money can be problematic between spouses. This is why it’s important to choose your spouse wisely as research shows in The Next Millionaire Next Door.
Miracle – This is a family-friendly 2004 Disney movie. Miracle is the story of an Olympic hockey team before Olympians were allowed to be professionals in their fields.
Money lessons: The movie shows the value of hard work without money attached. At the end of the film, it showed what each character’s career was after their hockey career. This movie holds powerful lessons to show kids not to rely on one thing, especially a sport, to provide income for the rest of their lives.
Be sure and listen to the rest for the our takeaways from 3 other movies, including one in Allison’s favorite classic series of movies.
Nobody likes to talk about the 2 certainties of life: death and taxes. So much so that we delay important decisions on how to deal with our assets for our heirs. On this episode, Cameron Hendricks and Grayson Blazek join in to discuss specifics on how to handle accounts and property, filing taxes and how to better prepare for passing on your estate to your loved ones. Find out how to handle all of this now to save your loved ones added stress during a difficult time.
To ensure that others are prepared for your own passing, make sure that your loved ones understand your financial life as a whole. This will make your passing a much smoother process. It is important to ensure your will is readily available and is up to date. Another way to be prepared is to have your assets properly titled. It's also important to periodically check all of your accounts’ beneficiaries to ensure that you have the right beneficiaries named and that you don’t have too many. The more information that you provide up front will really help along the way.
Taxes can be confusing enough, but doing the taxes of for the deceased is even more challenging. This is why it is so important to ensure that your loved ones have all the information that they need to prepare your final tax return during this time. Before making someone an executor of your estate it is important to talk to them and give them all of the information that they may need. This will make sure that everything transitions as smoothly as possible. If you are the executor of the estate make sure that you know where all of these income sources are. The more information that you provide up front will really help along the way.
Preparing taxes for the deceased isn’t as complicated as you may think. A person that has passed is called the decedent. Whether you are the surviving spouse or the child of a parent that has recently passed someone will need to work through a couple of tax returns for the decedent. You will have to fill out the final 1040. It is similar to every other tax return that you have filled out. You can continue to file as married filing jointly if you don’t remarry within the year and you will include any income received. The second form you may encounter is the estate income tax return. The last tax form you may need is the gift tax return. Listen to this episode to hear Cameron Hendricks and Grayson Blazek provide their expertise on preparing taxes for the deceased.
There is a myth that people think everything is going to be taxed upon death, but that is untrue. Life insurance is not taxed and 401K’s and IRA’s will not be taxed in the way you think. When passing wealth to your heirs think about whether they are ready to be heirs. You can set up a testamentary trust and create rules around the trust to prepare your heirs for receiving an inheritance. You want to make sure to have an estate plan. The default estate plan will certainly not be what you actually want. Remember, you won’t be around to clarify your wishes so make sure you clearly state your intentions.
You may have seen more news stories mentioning Opportunity Zones of late, but there are still plenty of questions surrounding this part of the latest tax reform. Today we're discussing the ins and outs of investing in Opportunity Zones to help you understand how, in the right circumstances, they could help you save thousands on your taxes. We’ll discuss what opportunity zones are, why they were created, what the tax benefits are and how to spot the risks involved when investing in opportunity zones.
The new tax law was created to spur economic investment in low-income areas throughout the U.S. by providing individual investors with tax incentives for investing in impoverished communities. The low-income areas are called opportunity zones and are identified by governors of each state. Although it was rolled out in 2017 it wasn’t until recently that the IRS updated investors on how the program is actually going to work. This program is geared toward long-term private investors with a high net worth. There are 3 benefits to the tax side of this law: tax deferral, tax reduction, and tax elimination for an investment held for more than 10 years. The primary purpose of the reform is to help economically distressed communities and in turn, it can help you save thousands in taxes. Find out how by listening to this episode of Financial Symmetry.
Under the new tax reform law, you can defer capital gain tax from the sale of real estate, a business, or stock. You can also reduce your taxes on something you recently sold and even completely eliminate taxes by reinvesting.
Here’s an example:
You sell something and earn a million in capital gain. Normally you would pay $240,000 in taxes on that capital gain. Now with the opportunity zones if you reinvest your capital gains into a qualified opportunity zone fund within 180 days you get to defer the capital gain tax on the million dollar sale. So instead of paying those $240,000 in taxes in 2019, you won’t have to pay that until 2026. Then in 2026 if you continue to hold that investment in the opportunity zone then you only pay tax on $850,000 of the million dollar original capital gain. So you’ll save about $36,000 there. But the biggest benefit overall for the program is that if you put that money into a new investment for 10 years or more you’ll pay no capital gains tax on the original investment.
To invest in opportunity zones and save on capital gains taxes you can invest in a qualified opportunity fund. A qualified opportunity fund is a corporation or partnership that is created for the purpose of investing in qualified opportunity zone property and holds at least 90% of its assets in qualified opportunity zones. The typical investment options are real estate, such as multi-unit apartment buildings, or a business located in a qualified opportunity zone.
You have to spend 100% of the purchase price in the first 30 months. So if you purchase a property for $800,000 then you have to spend another $800,000 within 30 months. The idea is that you are substantially improving the property for the amount that it is valued at. If you buy a business the same rules apply. You have to improve it somehow for that purchase amount. Remember, this is not an investment in the stock market, there is a higher degree of research involved.
There are different risks involved in taking advantage of the new tax reform law. As with all investing situations, attention to detail is key. Here are some of the risks with this type of investment.
Many people don’t take advantage of things because they don’t know about it. We’re here to give you ideas and strategies that you may not be aware of. The overall goal of the new tax law is a great cause but the investment options are still pretty new. This was just an overview of rules and regulations, so do your own research. Don’t let taxes decide your investment decisions. Remember a bad investment is still a bad investment no matter what the tax benefits are.
Rolling over your 401K is a complicated process so we brought in a few experts that have helped our clients rollover hundreds of 401K’s. Understanding the unexpected roadblocks surrounding a 401K rollover is a vital step in making the best decisions with your money. So listen to this episode to hear steps of how to properly rollover a 401K quickly and efficiently.
Maybe you just left a job or maybe you need an in-service rollover but you are at the point that you need to rollover your 401K. So how do you do it? Unfortunately, there isn’t only one way. It depends on the type of account you have and where you want the money to go. If you have a brokerage account linked to your 401K it will make the task a bit easier. Brokerage links give you the opportunity to invest in funds at a lower cost. If you have just quit or left your job you need to ensure that all of your contributions and your employer contributions have settled before you move your 401K or you will have to redo the process again once it does settle.
401K rollover paperwork can be quite daunting. Nowadays there are many forms that you can fill out online, but there are still actual papers that must be completed in person. The paperwork can be a bit confusing and overwhelming, but it is important to fill everything out correctly. Even if you mis-check just one box they won’t process your rollover and you’ll have to start the process all over again. Oftentimes you may need your spouse to sign, a notary to sign, and you’ll also need your plan administrator to sign. Sometimes finding the plan administrator can be tricky. If you know the right people to call the paperwork really doesn’t take much time. It can take a few days or even a few weeks to complete the paperwork. If you feel daunted by all the paperwork you might want to consider hiring a professional to help you out.
It's important to reduce your risk of being out of the market. You want to ensure that your money is out of the market for as little time as possible. Pay careful attention to the timing and ensure that you have all your ducks in a row first. This means that you need to have the accounts where the money is going set up beforehand. If you have a brokerage link you can reduce the time out of the market. You’ll also want to double check where your allocations are in case you need to change those settings. There are many steps involved in moving your 401K and you may have to contact different service representatives to get all of your questions answered.
Having your money pulled out of the market for any amount of time can be costly. If there is a way to expedite getting your check you’ll want to do it. Think about it, if you have your money out of the market and it goes up a few points you’ll be losing out trying to get it all back in. Getting the money back in as quickly as possible is important. Having a brokerage account linked to your 401K can give you the opportunity to invest in funds at a lower cost. Listen to the experts, Heather and Angela, to help you understand how to rollover a 401K to make your transition run as smoothly as possible.
What does your financial future look like? Do you feel it is secure and well planned out or are you just winging it? Winging it is a great idea for a Sunday afternoon drive or deciding to what to eat for dinner, but winging your financial future is a dangerous decision that will put your future stability at stake. Learn why people decide to wing it and what you should be doing instead, on this episode of the Financial Symmetry show.
Short video recap here: https://www.youtube.com/watch?v=UCFFhFpRpVc
We love numbers on this show. They help to illustrate the point we are trying to make and sometimes they are truly shocking.
Why do people do this to themselves? Why do they choose to leave their financial future up to chance? I think there are 3 main reasons.
Are you overconfident about your ability to handle your finances? 57% of adults feel more confident today than they felt 3 years ago about their finances. Do you feel a bit overconfident due to the recent success of the financial markets? Overconfidence is a villain when it comes to good decision making. Usually the more intelligent you are the more overconfident you are. Mark Twain had a powerful quote that sums up overconfidence well, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” A great way to ensure that you aren’t being too overconfident in your financial decisions is to hire a financial advisor. Having an objective 3rd party view of things can really help you keep things in perspective.
The internet is starting to play a major role in creating greater confirmation bias. People tend to follow their own views and they will seek out news that confirms what they already think about something. If someone has a negative worldview and they read an article about how the market will be crashing they will nod their heads and think, yes this is the truth. To combat confirmation bias think of the acronym WRAP from the book Decisive by Chip and Dan Heath.
People think they know more than they do about how the future will unfold. More often than not, the future will surprise us. Our conclusions about the future are often based on our emotions. They can also be affected by recency bias. Recency bias is a bias based on the fact that people tend to think that what happened to them recently will happen to them in the future. This can be seen frequently with finances for instance, if you have received a big bonus, or especially when it comes to stocks. Are you allowing recency bias to affect your financial future?
Financial advice has long been a male dominated industry. Women represent 51% of the US population, but only 23% of CFP® professionals are women and this percentage has stagnated over the past decade. Why is there a feminine famine in financial planning? Today we’ve invited Allison Berger and Grace Kvantas back on the show to discuss the 6 main challenges that prevent women from becoming financial advisors. As we shed light on these topics, we share ways we are fighting against these stigmas. We also celebrate Grace as the latest partner of Financial Symmetry. Listen to this episode to hear why there aren’t many women in financial planning but also why that should change.
See show notes here: https://wp.me/p6NrVS-3ar
Grace is a rarity among women in the field. She knew that she wanted to become a financial advisor at the age of 15. Her dad was a CFP® and it was at that young age that she realized that she was taught money lessons at home that many others never received. She wanted to help others learn what her dad had taught her. In college, she learned so much more about finance, but she still didn’t understand the depth of what one learns as a CFP®. It was only on the job that she began to understand all that a financial advisor really does. Listen to this episode to hear about Grace’s journey to becoming a CFP®.
Many people don’t know the difference between a financial advisor and a CFP®. The CFP® designation is the standard of excellence in financial planning. Becoming a CFP® takes a bit of work. You must have a bachelor’s degree and take the coursework first prior to taking the CFP exam. Candidates also need to have 3 years of qualifying experience or 2 years working directly with CFP professionals. After obtaining the CFP designation, Certified Financial Planners must maintain continuing education.
Now is a fantastic time to become a financial advisor. The average age of financial planners is over 50 and ⅓ of advisors are projected to retire within the next 10 years. Women are uniquely positioned to excel as financial advisors in the years ahead. Listen to this episode to hear why 72% of women who pursue the CFP® designation report high levels of career satisfaction.
We walk through the CFP Board whitepaper detailing recommendations to increase the number of women CFP® professionals and the reasons women are not pursuing this career path.
You've just sold your business. Or maybe you received an inheritance. Making decisions on how to handle the lump sum proceeds can be paralyzing. We all have that fear of making a mistake with the money and when the stakes are high, the fear is heightened. You might be wondering how wise it is to invest a big chunk of money with the markets near all time highs. When dealing with a lump sum, there is more to consider than just investment decisions. Listen to this episode to hear about the things you may not have thought about when considering your lump sum investment options.
You may have received an inheritance, sold a business, or received stock options or restricted stock. However you received the money, there are really only three things you can do with it. You can spend it, pay down debt, or invest it. In fact, spending a portion of your newfound wealth to treat yourself is a good first step. Then take a step back and analyze your new financial picture. How have your goals changed? Is retirement now just around the corner? How will you need to invest to accomplish your new objectives? Many people are quick to want to pay off all debt. But first analyze the kind of debt you have before rushing to pay it all off. Paying off credit card debt is generally a good idea, but you might want to rethink paying off your mortgage. Before you make any decisions on what to do with the money you should take some time and consider all of your options carefully.
When receiving a lump sum of money, it is important to estimate the tax burden that comes with it. You don’t want to spend all of the money and then discover that you owe a large amount in taxes. No one likes to pay penalties so it is important to do some tax planning first. Take a comprehensive view of your tax strategies with a professional to help you consider all the options. There are many strategies you can consider to help ease the tax burden. A donor-advised fund is a great choice for the charitably inclined. Are their retirement accounts (SEP-IRA, 401k, Roth IRA, HSA's) you haven't been maxing prior to the lump sum? Could front-loading a 529 account be right for you? What's your plan for health insurance and how will the premium tax credit affect you? You also want to consider the timing to ensure that your strategies are used in the same calendar year that you receive the lump sum.
We would all love to have a crystal ball to tell us the perfect time and place to invest our money. Instead, we ask questions like, should you invest it all at once? Should you invest in small increments over time? Or do what too many people do, and don’t do anything. Vanguard had an article which analyzed these lump sum investment options from a historical perspective. It turned out that about two-thirds of the time it was better to invest all at once. But, if you were prone to sell if experiencing a big loss in first few months, then investing over the next year may be best. Bottom line was that if you wait too long, you could end up regretting it. We all have that fear of making a mistake, but that fear of missing out in a rising market compounds the difficulty of long-term decision making. Understand that your decisions won’t be perfect but at the end of the day, it's all about the big picture. Think about your investment strategy. What assets make the most sense for your goals? Implementing a customized strategy for your specific desires will give you the comfort of being able to sleep at night, knowing you have a plan in place.
Have you checked out the new federal tax forms? You probably don’t want to wait until the last minute to prepare your taxes this year. With the new tax code here you’ll want to give yourself plenty of time to get familiar with the new federal tax forms. But before you get started you need to arm yourself with as much information as you can about the new tax code. That’s why today we brought our very own tax extraordinaire, Grayson Blazek to share his extensive knowledge of the new federal tax forms. Listen to this episode as Grayson helps us understand what the new tax forms look like, what’s changed, how to save and be more efficient on taxes, and what planning opportunities there are to prepare for next year.
Well, that time of year is here again, everyone’s favorite season: tax season! You may have heard that there are many new changes this year to the 1040. The idea behind the new federal tax form is to simplify the tax filing process. The new 1040 is touted as a postcard, while not exactly postcard sized, it is down from 79 lines to 23. Although there are only 23 lines on the new tax form there are several addendums which utilize a building block approach. There might be a touch of confusion for the first few years, but the new tax forms should be pretty easy to get used to. Listen as Grayson explains the new federal tax forms and takes us on a tour of the new 1040.
Obviously, the changes in the tax code are not only in the format. There are several other changes made as well. They eliminated personal exemptions which were $4500 per taxpayer on the 2017 return as well as dependents. The child tax credit used to be $1000 per child but has been increased to $2000 per child. The income threshold has been increased. There has also been a substantial change to standard and itemized deductions. And it is estimated that the number of people that will itemize their deductions will lower from 20% to 5%. Although there are fewer deductions your overall tax burden may be similar. Listen to this episode to hear what else has changed with the new tax code.
When preparing your taxes each year you have the opportunity to reflect on what you could have done to decrease your overall tax burden and what you can do in the future to ease your tax burden. Consider whether you should be taking advantage of your retirement savings accounts or health savings accounts. You can also think about your deductions and how efficiently you can space your charitable deductions. Decide whether you could donate every other year to get past the new threshold for itemized deductions. A donor-advised fund is a great tool to use when planning for your taxes. There are many other planning opportunities to consider so listen in to discover how you can begin planning next year’s taxes.
It wasn't that long ago that the most popular television show in America was named "Who wants to be a Millionaire?" Before that, in the 1980s, we were enamored with "Lifestyles of the Rich and Famous." There's something about the idea of becoming a Millionaire that fascinates us. But what is it about the wealthy that sets them apart from the rest of the population? How are their choices different from the average investor? If you've ever read Thomas J. Stanley’s The Millionaire Next Door, you might have a bit of an idea. We recently read The Next Millionaire Next Door by Dr. Stanley's daughter, Dr. Sarah Stanley Fallow, to learn about new insights into the minds of the next generation of millionaires. If you're curious about the strategies, discipline, and characteristics of millionaires and how they may have changed over the past 20 years, you'll want to listen to this episode.
See the full show notes here: https://wp.me/p6NrVS-39r
It may be surprising to find out that wealthy people are just like you and me. Most millionaires that were surveyed drive practical cars like Toyotas, Hondas, and Fords that are about 3 years old. Remember millionaire is a term that describes wealth, not income. Your income is what you have today, and wealth is what you have tomorrow. In the U.S. in 2018 there were 11 million households with a net wealth greater than a million dollars. The book separated the wealthy into 3 groups, under accumulators of wealth (UAW’s), average accumulators of wealth (AAW’s), and prodigious accumulators of wealth (PAW’s).
There are 5 important characteristics of the wealthy.
Do you have these characteristics of rich people?
There were many interesting findings of the characteristics of millionaires in the book. Not surprisingly, education was critical to the success of most millionaires. 93% of those surveyed had a college degree and 60% had a graduate degree. What may be surprising to some, is that attending a private school or even a top-rated school was not important. The ability to focus is a key factor in the success of the wealthy. Another important characteristic mentioned, is the ability to track spending. The vast majority understand where their money goes.
These are the least important success factors of the wealthy.
It sounds like wealthy people spend their time just as carefully as they spend their money. Wealthy people work more than the average American. They work about 38 hours a week on average, whereas the rest of Americans average 32 hours a week. Millionaires read more too. Books build a framework of knowledge for you to look back upon and analyze. Wealthy spend much less time on social media than the average Joe. They average only 2 hours a week and other Americans average 14 hours a week. Rich people also exercise more and spend more time caring for their family. How do you compare to the millionaires around you?
Money and relationships don’t always go hand in hand. Making you wonder if you and your partner are speaking the same financial language. If money is causing stress in your relationship, you are not alone. 31% of couples say that the biggest cause of stress in their relationship is money. We want to help you communicate better with your partner about money. On this episode, Allison Berger joins us to discuss four common financial disagreements in couples. Listen in to learn how to better your relationship with your partner and with money.
Does one person in your relationship spend more than the other? Oftentimes one partner feels that the other spends too much. This is so common since opposites attract in relationships. Our partners help to balance us out. So what can you do if you feel that your partner spends too much? Communication is key. It is important to be on the same team and make sure that you have the same financial goals. You can create a financial plan to keep you in check and keep you both on the same page. This way you can see if you are meeting your financial goals. Having a financial advisor can also be a great way to get a 3rd party’s view on the situation. The advisor can help take an objective opinion when there are arguments about spending that arise.
One spouse generally enjoys security more than the other and the other prefers to spend more money. When you have a financial plan in place, you can coordinate how best to save and invest for your specific objectives. Paying yourself first is a great first step. Automating your savings makes life so much easier. One way to easily increase your savings is by doing so when your income goes up. You can simply increase your 401K contribution whenever you get a raise. Another way to save more is to look for opportunities to increase your savings. If you pay off a car you can use the money you used to pay each month for savings instead.
The most common question we hear centers around people wondering if they will have enough? To best answer this question, the amount of risk in your strategy will play a tremendous role. Everyone has a different risk tolerance when it comes to investing. Sometimes one partner prefers to take risky investments and the other prefers to play it safe. Once again communication is key to understanding how your partner feels about investing. First, you should think about what your financial goals are as a couple. Open communication and education can help you understand each other’s feelings about risk tolerance. Learning about investments can also help you feel more comfortable about investing.
Debt can be an unnerving issue for some causing some to lose sleep at night. Understanding your feelings on debt as well as your partner’s feelings can help defuse arguments before they even pop up. People have different feelings about money based on past experiences. Often our concerns about money manifest in childhood. Learning both why you and your partner feel the way you do about money can help you better communicate your needs and come up with a financial plan that you can both agree upon.
Our listeners and clients often ask: Is now a good time to invest? Or what should I invest in? We give feedback on both these questions in our 2019 Investment Outlook episode. Be sure to check out the show notes for this episode in particular as we provide detailed charts to help demonstrate our discussion. If you are curious as to whether now is the time to jump into the stock market, what role bonds play in your portfolio, or what the experts say about the future of the markets then you'll want to listen to this episode.
After logging strong returns in 2017, global equity markets delivered negative returns in US dollar terms in 2018. Common news stories in 2018 included reports on global economic growth, corporate earnings, record low unemployment in the US, the implementation of Brexit, US trade wars, and a flattening US Treasury yield curve.
Many are still wondering why should we invest overseas given returns in the US have been so strong? Investors should remember that non-US stocks help provide valuable diversification benefits, and that recent performance is not a reliable indicator of future returns. It is worth noting that if we look at the past 20 years going back to 1999, US equity markets have only outperformed in 10 of those years—the same expected by chance. We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000-2009, commonly known as the “lost decade” among US investors. While the S&P 500 recorded its worst ever 10-year cumulative total return of –9.1%, the MSCI World ex USA Index returned 17.5%, and the MSCI Emerging Markets Index returned 154.3%. In periods such as this, investors were rewarded for holding a globally diversified portfolio.
Are there risks today to invest in the stock market? Yes. Have their been risks in the past? Yes. Through all these risks the global stock market has gone from $1 to $59 from 1970 to 2017
History has found certain periods have resulted in higher returns than others. Part of this can be explained by starting valuation. Valuation is one of the best indicators of long-term returns (i.e. 10 years), but it is a horrible short-term timing strategy. One popular valuation metric we’ve discussed in the past is the cyclically-adjusted price-to-earnings (CAPE) ratio. Instead of dividing price by the past 12 months of earnings, the CAPE ratio divides price by the average inflation-adjusted earnings of the past ten years. The idea is to smooth out the good and bad years created by the business cycle.
Is the CAPE Ratio a good predictor of future returns? According to a study by Research Affiliates titled CAPE Fear: Why CAPE Naysayers are Wrong, starting CAPE Ratio has between a 48% to 91% correlation to future 10-year returns across 12 countries. So yes, starting valuations do matter over the subsequent 10-year period.
In addition, below Exhibit 4 is the average future 10-year real return based on starting US CAPE Ratio. As of December 31, 2018, below are the current CAPE ratios of the major equity markets:
As noted in our recent blog, Crystal Balls and CAPE, when one market (US or foreign) was trading at a material premium (such as today), the other market stock market outperformed over the subsequent 10-year period.
Our belief is that high quality bonds in your portfolio provide the following benefits:
Bond returns are largely driven by the term and credit quality of a bond. Long-term bonds experience bigger price movements for a given change in interest rates. Investor are expected to be compensated for taking that extra risk as a result. The same can be said for lower credit quality bonds such as high yield bonds. As the current time the spreads – the gap between the yield on credit and Treasuries – have remained narrow by historical standards. For bond investors, that means the compensation for taking on credit risk is relatively low, and the upside from here could be quite limited.
Future returns of bonds are highly correlated to the starting yield. Therefore, as of 12/31/2018 the yield on the Barclays U.S. Aggregate Index was approximately 3.28% which is depicted in the exhibit below. Therefore, over the next 7-10 years investors can expect returns similar to starting yield levels. Overall, bond yields have increased over the last couple years, but remain low compared to historical levels.
The Federal Reserve raised rates four times in 2018 and nine total adjustments over the past four years. The benchmark interest rate is in a range of 2.25% to 2.5%. The benefit of this is many investors have seen higher returns from their bank accounts but borrowing costs have also increased. What will the Federal Reserve do next? I have no idea, but below are the current market/Fed expectations as of December 31, 2018. You’ll notice the Federal Reserve and market is not expecting material rate increases from this point forward.
To summarize, with low returns expected for US stocks and bonds many investors allocated primarily to US stocks will be disappointed with returns over the next ten years. As a result, individuals may need to either work longer or spend less than expected to reach their financial goals.
For current savers a market decline should be viewed positively as it allows them to buy stocks at cheaper prices. For existing or soon-to-be-retirees it is important to understand your risk capacity and risk tolerance and adjust your asset allocation accordingly. You’ll need equity for long-term growth, but it is important to have high-quality bonds for current spending.
What can you do about potential lower returns? First, focus on what you can control (spending, taxes, estate planning, etc.) and your long-term financial plan. If you don’t have a financial plan in place, it’s the perfect time to contact a fee-only financial planner such as Financial Symmetry. Second, implement a long-term, disciplined investment strategy. And no, buying the mutual fund/ETF/stock that has done the best over the last three years is not a strategy. If you don’t have a disciplined strategy or want to learn more about our process click here to download our white paper.
What are the habits of successful investors? You may think that there are big differences between successful and unsuccessful investors. In the book Atomic Habits, by James Clear, he identifies the small habits that lead to success in life, these habits apply to investors just like anyone else. We all have intentions of doing the right thing, but there is a big gap between intention and action. Only about half of our intentions turn into actions. Join us on this episode to find out what sets successful investors apart from the rest of us.
See the Full Show Notes Here:
https://www.financialsymmetry.com/6-habits-of-successful-investors-ep-77/
Making small changes can really make the difference in your life. When you bridge the gap between your intentions and actions you begin to change your habits and start on a path to success. Implementing these strategies can help to make you a better investor and they can be applied to many other areas of your life as well. Listen to this episode of Financial Symmetry to hear how you can create successful habits as an investor and these can bleed over to other areas of your life.
If asked, most people are hopeful they will have a happy retirement. They're just not sure they are taking all the necessary steps to get there. We all have those moments in our busy lives where we stop and ponder, am I doing what I need to enjoy retirement? But then our busyness continues and takes over any productive changes we considered. As financial advisors, we work with people in all phases of life and often chat with retirees that have walked this path. The happiest of them agree, there are 4 main areas that contribute to their happiness. If you want to prepare for a happy retirement then listen to this episode to hear 4 secrets to a happy retirement.
The happiest retirees are able to move their bodies so that they can remain active. Physical exercise has the benefit of getting the endorphins going and creating joy. Staying active is an important part of maintaining a healthy lifestyle as you age. You can’t wait until you retire to become active or it will be too late. Part of creating a healthy body is by moving more now. Even though it can be a challenge to find the time to create a healthy exercise habit, this is an important part of ensuring that your body will work the way you want as you age. Are you doing what you can now to make sure your body will still function the way you want in your golden years?
Happy retirees have enough money to retire with and are financially independent. Are you doing everything you can to ensure that you will have a comfortable retirement? What savings rates do you need to have to have a comfortable retirement? How do you know that your money won’t run out when you retire? There are so many questions about money and retirement. A financial advisor can help ease your concerns about finances in retirement.
Having enough money means you will have less stress. A financial plan will help you make sure that you are saving enough. This may be obvious to some, but the fact is, only 35% of pre-retirees have a written financial plan. If you are unsure if you are saving enough now is the time to meet with a professional that can give you peace of mind. We recommend finding a fee-only financial planner to help you make sure you are doing all that you can to have the savings you need so that you won’t have to worry your way through retirement.
You need not only have a financial plan but a personal plan as well. If you have a strong sense of purpose that drives you this will help you to spend your retirement in a fulfilling way. Volunteering your time is a great way to further your knowledge and pass on your wisdom. Creating a life of purpose doesn’t just ensure that you aren’t sitting at home watching tv all day, it can result in leaving a legacy behind. What are your retirement plans? Are you planning to retire to something rather than away from something?
Happy retirees have friends. The happiest retirees interviewed have stated that they have a sufficient amount of friendships. Those with fewer friends are 3 times less likely to be happy. Are you developing friendships right now that will transcend the test of time? Creating friendships through common interests is a great way to ensure that you will have a number of friendships when you finally leave the work world behind. So how are you doing in these 4 areas? Do you feel like you are setting yourself up for a happy retirement?
2018 gave us a December to remember, with the S&P 500 index losing 9% for the month, locking in the worst December performance since 1931.
From peak to the most recent bottom, the S&P 500 has fallen more than 20%, marking the first bear market since 2008-09. Now the bear market is here, are you prepared to deal with it?
This most recent drop has given us all a scare. Does the drop have you worried?
Did you prepare for the bear market beforehand?
Preparing for stock market drops prior to experiencing one, helps you digest results when it occurs. It doesn't change the fact that disciplined investing is difficult. And while you'll never be excited about stock market declines, you can be prepared.
On this episode, we clue you in on the tricks for surviving a bear market. You’ll learn what a bear market is, the questions people typically ask when the markets drop, how to prepare for a bear market, and how to recognize a bargain when you see one. The markets are always changing, are you ready for what’s ahead? Listen to this episode to help you weather the storms that bear markets bring.
In long and strong bull markets, overconfidence is plentiful as positive returns inflate our perception of our investing skill-sets. But when the markets drop, we are quick to question our investment strategy. People ask themselves:
We feel the need to act when we see our nest egg evaporating. The biggest question people ask is: what do I need to do to preserve my money? If you feel like you need to sell and go to cash then you could be taking to much risk. Risk tolerance can be thrown out the window when things are going well. It’s when things go south, you learn your true risk tolerance levels. A poor decision in a bear market can often take years or even decades to recover from. Listen to this episode to help you learn how to make the right decisions in a bear market.
A bear market occurs when there’s a drop of 20% in a particular stock market. This differs from a recession which is declared after there are 2 consecutive quarters of negative GDP. Many people think there must be a recession to have a bear market, but not every bear market results in a recession. However, they do tend to work together. There’s about a 50/50 chance of having a bear market coincide with a recession. As painful, as bear markets can feel, they do happen much quicker than bull markets. The average length of your typical bear market is 1.4 years, contrasted with an average bull market at 4.5 years.
Bear markets can be scary to watch and unfortunately, the news channels cover them constantly. People pay more attention to bear markets since they are sensationalized by the news media. The most important thing to remember is to follow your strategy. If you feel like you need to get out immediately and go to cash then you are likely taking too much risk. Unfortunately, we can’t follow our intellect and instinct when it comes to investing. Our instincts influence us to stop the bleeding and sell stocks to hold more cash. The problem with that strategy is big up days occur very close to big down days. So when volatility spikes, your time in the market matters than trying to time the market.
The silver lining of a bear market, is the buying opportunity they create. For many investors that are steadily saving in their investment accounts, bear markets present bargains for higher long-term returns. But how do you know the best time to invest more in stock? How do you ensure that you are not buying too early? Studies show the best strategy is to invest a lump sum upon receiving, as your average long-term returns are higher with stocks vs. other alternatives. Our emotions tell a different story. Catching a falling knife is a risky game. This is where personal circumstances matter most. What does your future income, spending and savings rates look like? When will you need your savings? Answering questions like these gives you a head start on the best choices for your life. Because “knowing” what will happen in the short-term is a fool’s game. Understanding the historical context can help, if it gives you the confidence to begin and stay invested through potential worsening conditions.
Warren Buffet once said, “widespread fear is your friend as an investor because it serves up bargain purchases. Personal fear is your enemy and it will also be unwarranted.”
Welcome to Financial Symmetry, the podcast to help you discover financial opportunities that you may be missing as well as to warn you about many financial mistakes that you can make. We are here to help you improve your life through finances. Finances are so complicated which is why we are here to help you answer questions about your daily financial life. We are here to give helpful hints and education rather than financial advice. On this episode, we discuss our top 4 most popular podcasts of 2018. Listen to this episode to hear what our top 4 most popular podcasts were, as well as many of our favorite podcasts.
Our 4th most popular podcast aired relatively recently and we discussed why you should bother diversifying your portfolio with international stocks. On that episode, we highlighted why the U.S. has done so well and why you would want to have a mediocre portfolio by mixing it up with international stocks. We discussed the risks of investing internationally as well as our tendency toward home country bias. Episode 67 discussed the long-term benefits and how they can shine through our short-sighted viewpoints. Have you listened to the Why Bother Diversifying episode?
Episode 52 was the 3rd most popular podcast of 2018. The markets had just dropped when this one aired which makes everyone nervous. It’s important to remember that the markets frequently fluctuate. We often forget the rough times in the financial world which is why it is so important to have an investment plan. An investment plan isn’t there for the easy times when all is well, it’s there to help you through the hard times. That episode mentioned how to get through the emotional part of investing. We love to give you a glimpse behind the curtain so to speak so that you can see our own details and strategy that we use here at Financial Symmetry. Do you have a financial plan in place?
I’m glad this was the 2nd most popular episode in 2018. It discussed how we often act against our own best judgment. We tend to place more value in small rewards now rather than larger rewards in the future. This episode included easy steps that anyone can implement to improve their financial situation. We talked about small wins, automation, accountability, and how to have a bigger awareness of spending. Check out episode 60 to find out how to improve your financial decisions.
We were surprised by the number one episode of 2018. Episode 61 was our most downloaded episode. This one aired in June and discussed how to plan a more enjoyable vacation. We love encouraging experiences over things. Experiences create lasting memories and things are easily forgotten. Check out episode 61 if you are planning your next vacation. Find out which episode didn’t make it into the final 4 as well as which podcasts we really enjoy listening to on this episode of Financial Symmetry.
Working moms face a difficult balance. People often feel that most women have a choice whether to work outside the home, but the reality is, 65% of families need both parents to work. Women in the workforce is a family issue, not simply a women’s issue, so this episode is useful for more than just women. Allison and Grace join us again to dive into the topics of gender bias, women in the workforce, and they provide helpful strategies and resources to help anyone that is struggling with how to balance it all.
Studies have found that as women achieve more success in the workplace they lose their likeability. This can make it a challenge for women who want to chase success. Even directly out of college women seem to start out behind men as they begin their careers. Only 7% of women negotiate their first salary whereas 57% of men do. Men are often rewarded for their drive and ambition while those same traits in women are considered self-serving and greedy. In Sheryl Sandberg’s book Lean In, she gives useful advice on how to make the most of your career and motherhood. Discover how to overcome your own gender bias on this episode of Financial Symmetry.
Working moms aren’t the only ones that seek the perfect work-life balance. But is work-life balance a myth? One way to bring more balance into your life is to consider what is truly essential to you. Once you give yourself permission to stop trying to do it all then you can make your highest contribution to the things that really matter. The book Essentialism by Greg McKeown inspires readers to prioritize what they really need. This book can help you reconsider what is essential in your life. How can you reconsider what is important to you? Listen to this episode to hear more about this book and other resources for working moms.
Some people seem to be so great at managing their time. What Laura Vanderkam discovered is that when you focus on what matters to you then you will make time for what you want. She emphasizes that time is elastic and you can stretch it to get what you need out of life if you prioritize what is important to you. We are all given the same amount of time in a week, it’s how we use our time that counts. Successful women get paid for the quality of work that they do, not the hours that they put in. How do you prioritize your schedule and make time for what you really want?
As you come back to work after having a child your life changes immensely while that of your husband doesn’t change much at all. Even though men often take time off of work, they are not faced with the same kinds of difficult decisions that women face. When returning to work you have to consider how much you will miss your kids when you go back. You have to decide whether you should you stop your career and stay at home or continue to work. Those that normally cheer you on now question all of your decisions. Listen to this episode of Financial Symmetry to find some fantastic resources for working moms.
As the holidays near, visions of new tax savings dance in our heads. But knowing how to spot them is what really matters. With all the new tax law changes, Will Holt joins us again to guide you through seven tax opportunities you can take advantage of before year-end. Some of these tips can save you thousands of dollars, so listen in to see how you they may benefit your personal situation.
1. Tax Harvesting (Loss or Gain) – This hasn’t changed with the new tax law, but depending on your tax bracket, that percentage of tax you pay may have. If you’re facing a significant amount of capital gains or expect large capital gain distributions, with the rough October performance, you may want to consider tax loss harvesting. This allows you to offset some of those gains and even go a step further, by using $3,000 of net losses against your income. It may seem counterintuitive to sell at a loss, but it could be an opportunity to offset high taxes. If you are in the new 12% federal tax bracket and lower, realizing more gains could be an opportunity instead, as these could be realized at 0%. But knowing your tax rate and all expected income is required. Discuss with a professional to know for sure.
2. Max Retirement Contributions – Understanding how close you are to the max of your retirement accounts, could present extra tax-advantaged savings at the end of the year. Maxing your 401K contribution is the first place to check. If you get a big year-end bonus, this could be a good trigger. Don’t forget your HSA, as this account provides a triple threat of tax savings (tax deduction, tax deferral, tax-free withdrawals).
3. Convert a Roth IRA? – Doing a Roth conversion can help you stay in your tax bracket by moving an IRA into a Roth. With the new lower tax rates, this could be an opportunity to lower the inevitable tax you were going to pay on this savings. Additionally, you will be taking money out of a tax-deferred account and moving it into a tax-free account. This is a good option for early retirees with large taxable accounts. But you’ll need to be more precise going forward, as the opportunity to recharacterize if you overshoot is gone.
4. Bunching Charitable Contributions – The new tax law has increased the standard deduction for individuals to $12,000 and for married couples from $12,000 to $24,000. This means around 90% of people will now be taking the standard deduction according to the Tax Policy Center. If you forecast your itemized deductions could be higher than the standard amount, consider bunching your charitable contributions into 2-year bundles. One way to do that is by using a bunching tool called a donor-advised fund. The donor-advised fund allows for more flexibility in taking the deduction now, but still allowing for spreading contributions throughout the year. For more information about donor-advised funds, refer to episode 59 for more details.
5. Look at a Qualified Charitable Distribution Early in the Year – One of the opportunities, that hasn’t changed but is getting more attention, is the QCD or qualified charitable distribution. To enjoy this opportunity you are required to be age 70.5 and older as you can designate a portion of your required annual distribution directly to a charity. This takes some precision and should be targeted for earlier in the year when the RMD still needs to be taken as it must come directly out of an IRA and go directly to the charity of your choice.
6. 20% Deduction for Qualified Business Income – If you are a small business owner or entrepreneur the qualified business income deduction will be of interest. What’s come to be called the QBI deduction, or 199A deduction, is used for any business that is not a C corporation. If you have self-employed income or are an S Corporation, you can receive a deduction of 20% on your profit. However, there are income limitations. After you listen to this tip you’ll want to sit down with your tax professional and plan your taxes. We wrote a more detailed article on potential savings with QBI here.
7. Watch the Tax Torpedos – To truly understand your own tax planning, you have to watch specific income thresholds. We refer to these as tax torpedos. For example, if receiving a premium tax credit for health insurance, you could lose your entire subsidy if you surpass the income limitations by even $1. These are set according to the amount of family members (up to 4). A great example of why tax planning matters throughout the year as well. We discuss other important income thresholds dealing with the medicare premium surcharges, child tax credit cutoffs, and roth IRA limits.
As you prepare for the holiday season, make sure you take a second look at your tax planning. By watching out for these financial opportunities, you could end up saving yourself thousands of dollars in taxes. It’s important to have a multi-year tax strategy and always consider the big picture, not just what is happening now. Being financially smart means considering all aspects of your financial life. This time of year, that begins with looking for ways take advantage of new tax laws for your personal situation.
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If you've paid any attention to financial news recently, then you didn't have to look far, as stock market noise was at a peak. Media headlines were filled with phrases like: epic turmoil, getting crushed and no place to hide.
Emotionally charged words that make you feel like you need to do something to prevent losing more of your nest egg. But following our instincts when investing, can lead to dangerous outcomes.
In times like this, we need a strategy to give us proper perspective. On this episode of the Financial Symmetry podcast, we’ll discuss why market fluctuations are incredibly normal and provide techniques to help you cope with short-term volatility and keep your focus on long-term goals instead. If you’re getting nervous about the direction the market is taking, you’ll want to listen for steps to confront the inevitable next occurrence.
When listening to financial news it's important to remember that the media’s ultimate job is to sell advertisements. It's not their job to help you see the long-term picture or help you reach your financial goals. Easier said than done when markets around the world experience a 10-15% drops.
But if we back up, history provides a different perspective. Market volatility is reliably normal, but it can still make you feel nervous. To truly understand the ups and downs, take a look at the chart below from the Capital Group. There have been 12 full-blown bear markets since 1945. A 5% or more decline in the market typically occurs 3 times a year. And a 20% drop usually occurs about every 4 years. The past 10 years have actually been the anomaly. It is important to remember that a bear market isn’t a bad thing.
It’s actually a great time to reassess your investment plan and evaluate your risk tolerance.
With breaking news coming at us as quick as we want it with social media, it's even harder to block out the noise. Whether tweets or 24 hour cable news, today's financial news is near immediate compared to 30 years ago when you may not hear it until the next day.
In Jason Zweig's book, Your Money and Your Brain, he provides some powerful questions to prevent your feelings from overwhelming the facts. Instead of listening and reacting to the financial news du jour, stop to pause and think about if anything else has changed in your financial picture, other than price of your investment.
To successfully navigate a bear market, you have a long-term strategy in place. Cliche? Sure, but considering where you are in life now is instructive in developing your treatment plan for market short-term sickness.
If you're in your 20’s and 30’s don’t worry, there is still plenty of time. Investment choices still matter at these ages, but not nearly as much as your actual savings amounts. Choose and stick with an investment plan so you can steadily take advantage of the drop in stock prices, a fantastic long-term sale.
If in your 50's and 60's, it's much more important to focus on your overall investment strategy. How does your asset allocation match your retirement timeline? For many in this walk of life, investment returns will be larger than your annual savings amounts. You'll also be facing the sequence of return risk which can eat a big portion of your retirement without a strategy.
Professional help at this point, can help you respond accordingly to market events and more importantly, act as an accountability partner. Having a buffer between your emotions and the markets may be the most important financial decision you can make.
October is here so time to gather around the campfire. With Halloween around the corner, we are highlighting a few spooky financial stories that have scary circumstances. These feelings typically bleed in to stock markets as well. October is often wrongly characterized as the worst month for people to invest. Primarily because people remember the big historical market drops that happen during October. But scary moves for your portfolio aren't the only thing to fear in your financial planning. For all our listeners who love movies, you're in for a treat. We've picked 5 spooky financial stories that pair up with some classic Halloween movies. Listen in for some truly terrifying financial stories.
Remember Jack Nicholson’s classic movie, The Shining? "All work and no play makes Jack a dull boy.” Finding a work-life balance is difficult for so many of us. We had a client that saved diligently over a hard-working career. While building an impressive savings for retirement, he put off vacations, opting for promotions up the corporate ladder. But once he was finally ready to retire and enjoy his savings, he was diagnosed with a nebulous nerve condition that required daily care and limited physical motor functions preventing him from enjoying his hard earned savings. While we can't prevent crippling medical conditions, we can build in balance to our financial plans. Understanding how your savings and spending will transform throughout your life helps you make more confident decisions while enjoying time with those most important to you.
“I see dead people.” A now infamous quote from The Sixth Sense. This is because Haley Jo Osmond's character can see things others can’t. Similar scenarios occur when life is full of busyness that blinds us to opportunities that could make a noticeable long-term differences. Instead, by surrounding yourself with people who can spot things you can't see, you set yourself up for new opportunities to bolster your financial progress. The back-door Roth provides a great example. You may think you make too much money to enjoy the benefits of a Roth IRA, but maybe you didn't have enough time to fully understand and follow through with it.
The Blair Witch Project is a frightening scenario about a group of friends that wander into the woods without a plan. They lose their map and this leads them into trouble. Don’t let this be you. If you don’t have a plan you can swerve off course and lose your way to retirement. Many pre-retirees lose sleep over not having enough money because they didn’t set spending limits. You need to have a plan in place and know how much you can afford to spend and how much to save. Do you have a specific and customized plan for your life and your retirement?
Some employees are confused about how best to handle employee income incentives. This is much like the people in Tim Burton’s The Nightmare Before Christmas who are confused when Christmas comes to Halloween Town. Many employees don’t have the time or expertise of how best to deal with RSUs, ESPPs, and Stock Options. Partly due to the tough decisions of when to exercise, sell or hold. So many tend to hold, where positions build and concentration risk grows. This is breeding ground for nightmare scenarios of holding too long and not diversifying. Listen to this episode to learn how to deal with the familiarity bias and ensure that all your financial eggs are not in one basket.
Ghostbusters 2 is a classic tale of reinvention. The Ghostbusters are forced to reinvent themselves after their business goes bust at the end of the first movie. But their is beauty in their resilience and how they trust in their expertise. This is a good metaphor for our own lives. It is important to invest in your own human capital and have the resilience to face negative events that can happen in your own life. If you continually improve your knowledge you will be able to bounce back from challenges and change the trajectory of your life. Investing in yourself will always bring a high return on your investment.
If you're a mid-career professional, life is full of demands. You've worked incredibly hard to get here. You're sandwiched between young kids and aging parents. Your job is challenging and life is busy. Be it a technology company, medical practice or your own small business, stress comes with the territory during this season of life. This is fertile ground for growing a financial mid-life crisis. With all that's going on, it’s hard to know if you are making the right financial choices, because you don't have time to stop and focus on the financial considerations of the moment. Understanding this, we've compiled a list of the 8 most important wealth builders for all of you hard-working mid-career professionals.
As income increases to it's highest point in life so far, higher spending follows suit during these years. Deciding how much to save brings new challenges as bigger questions come in to focus. Things like when you really want to retire, changing careers, buying a bigger home for kids, or just remodeling your current home. When entertaining life-changing transitions, taking inventory is the first step. Where have you saved to this point? How will a major life change impact the long-term picture. Weighing alternative lifestyles are ripe with complexity that only becomes clear when comparing planning customized scenarios.
Everyone loves finding more tax savings. The best way to ensure you don’t have unwelcome surprises come tax day is to dissect your tax planning at the end of each year. Many tax saving opportunities are left on the table when other priorities dominate your time. Longer work hours, traveling, and shuttling kids to events take all our attention in our 40s. Without proper attention, you never know when potential tax savings are missed.
When starting out, how much you are saving matters much more than the returns you can earn on those savings. But upon reaching mid-career higher earnings, your investment returns could become larger than the actual annual savings. At this point, your asset allocation moves front and center. Choosing how to divide your investments could pay off if busy lives don’t get in the way. Even an increase of 1.5%/year has a huge impact over time. As with many other things in personal finance, building wealth should be boring with little things adding up in a surprising way over time.
When the mid-career attention is divided, important items get ignored. Several of these include life, disability and health insurance for your family. We all know insurance can be expensive, but not having the right kind of insurance when you need it can be detrimental. Many people set up their beneficiaries when they first set up their accounts and then forget to ever update it. Part of your estate planning is choosing a guardian for your children and ensuring that the right people are the beneficiaries of your estate. Working with a professional can assure your estate is in order regardless of any eventuality.
When making your retirement decision, you likely get one chance to get it right. These type of situations are where checklists can shine. Understanding all your financial opportunities pre-retirement can make life-changing differences in your retirement journey. Which is why on today’s episode, we are giving you our beautifully detailed Pre-Retirement Checklist to help you make the best of your transition. Because the decisions you make now will have a lasting impact on when and how you can retire. This checklist provides you with a detailed step by step approach to giving you the tools to prepare for your best retirement.
“Good checklists...are precise. They are efficient, to the point, and easy to use even in the most difficult situations. They do not try to spell out everything--a checklist cannot fly a plane. Instead, they provide reminders of only the most critical and important steps--the ones that even the highly skilled professional using them could miss. Good checklists are, above all, practical.”
― Atul Gawande, The Checklist Manifesto
What Will Retirement Look Like?
Answering this question brings a smile to most people, as they secretly picture the time they'll have to do all the things they've put off. But the biggest secret is some of the biggest financial opportunities occur just before and a few years after retirement. Lowering taxes in your highest earning years, and maxing low tax brackets in the first few years of retirement helps you hold on to more of your hard-earned savings. With so many things to focus on during the retirement transition, maximizing all opportunities is difficult without reminders. Enter the pre-retirement checklist. With 60 items highlighted, you're sure to find something to look in to for your own situation. With a plan this detailed, you can be assured you will feel confidence in your retirement transition.
We are not built for discipline. We are built for novelty and excitement, not for careful attention to detail. Discipline is something we have to work at.”
― Atul Gawande, The Checklist Manifesto
How Much Can You Spend?
Surveys show when planning for retirement, a major concern is knowing how much you'll have to spend in retirement. Figuring out where income will come from is a significant part of retirement planning. Retirement income can come from social security, pensions, retirement savings, part-time work, and passive income. Knowing how you spend your money informs how much income you will need. Tracking 12 months of spending prior to retirement gives you a great start, but when forecasting you'll want to understand how your priorities will change throughout retirement. Taking time to work through the pre-retirement checklist helps spur thinking how spending may change. Taking a tour through the full pre-retirement checklist will help your achieve the most successful retirement for you and your family.
The Tax Diversification of Your Net Worth
Before you retire, taking inventory of assets and debts gives you meaningful feedback. You're now planning to start taking money out of all the accounts that you have nurtured and grown for so long. This actually may be challenging to watch as your savings begin to diminish. One of the more popular (and longest) sections of the pre-retirement checklist helps you understand how you can save more in taxes. Tax diversification helps structure your assets to be as tax efficient as possible.
Insurance Decisions
Insurance may be the biggest question in retirement these days, especially health insurance. Planning to retire before you are eligible for Medicare is creating a conundrum of choices for pre-retirees. For many COBRA will be your choice for up to 18 months after you leave your job. However, if you've diversified your savings effectively, you could find cheaper health insurance on the federal exchange via a subsidy. This takes specific tax planning annually. Outside of health insurance, you may not have thought about long-term care insurance, but it's something you should consider with the rising costs of long-term care. Working with a financial advisor, allows you to model potential scenarios of extended skilled nursing situations providing feedback if you can self-insure or not.
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It's easy to stick with investments that are leaving all other assets in the dust. In fact, logic tells us because they're performing so well, we should buy more of it. While you're at it, shouldn't you go ahead and dump the lousy performers in your portfolio? These emotions are what makes investing so difficult. Additionally, when you diversify your investments, mediocrity is inevitable. Given the tear U.S. Stocks have been on, it's a good time to talk through the risks and benefits of diversifying away from areas that have been the top performers. Despite how cliche it's become at this point, the phrase "past performance is no guarantee of future results" is still a truth. Memories of previous bubbles seem like the distant past. Some of us don't want to believe and others don't want to miss out on gains any longer. Whatever the reason, it's inherently difficult to diversify away from seemingly never-ending profits. So in this episode, we discuss the answer to why you even want to bother diversifying with international and emerging market stocks and what the results could be going forward.
The U.S. stock market has enjoyed outstanding results over the past ten years, earning around 10.7% per year (S&P 500 with dividends through August 2018). With numbers that consistent, it's hard to find a reason to diversify with international equities when U.S. stocks are on such a hot streak. But we live in an interconnected world, our coffee, cars, electronics, are all created across the globe. While US stocks represent just 50% of global market values, 70-75% of Americans invest solely in U.S. stocks, influenced by home country bias which is common throughout the world. Furthermore, out of the last 20 calendar years through 2016, no country had the best-performing equity market for more than two years. As Howard Marks once said, "There’s little I’m certain of, but these things are true: cycles always prevail eventually."
Having diversified investments means there's always something you'll despise in your portfolio. This amplifies the fear of missing out on a high flying tech performer. Especially the past 10 years, where U.S. stocks outpaced foreign and emerging stocks by over 6% per year during that period, which is why it's a challenge to remember the Lost Decade from the 10 years prior (2000-2009). Investing often makes us shortsighted. Creating pressure that tempts us to pick winners when markets aren't going our way. Even if diversification feels mediocre, it increases the reliability of longer-term outcomes. Allowing you to have winners in all types of market cycles.
We highlight 4 major risks when dealing with international investments in this episode. Tariffs and trade wars have dominated the news cycles of late, but so far it's more talk than action. Equity markets often react to short-term noise based on overblown fears and exuberant hopes. Currency fluctuations will affect the value of your foreign returns as well. A rising dollar against other currencies will hurt foreign stocks. We also discuss economic and geopolitical risks in many areas of the world. Yes, there's always a reason to avoid investing in poorly performing areas, but valuations should be considered. We mention and link an article below discussing the historically high correlation of valuation metrics with 10 year future returns. So despite the risks, this research raises some interesting questions about the prospects for international and emerging stocks going forward. But this requires discipline and diversification. The type of discipline that you could question for years. Likely the same way most investors were questioning U.S. stocks prospects in 2009. We've all seen how that's turned out.
On this episode of Financial Symmetry, Chad and Mike revisit a few previous episodes to cover some important financial questions that frequently come up. Taken from episode 6 is the question: Do I need a financial plan? With this question comes further questions. You’ll want to listen in to hear what the answers are. Episode 11 asks the question: What little things can you do to improve your financial life? There are so many little things you can do to improve your finances, listen to this episode to hear what they are. The last question is taken from episode 13. How will you pay for your child’s college? You won’t want to miss this episode to discover the answers to these financial questions.
Many people, including our clients, wonder if they really need a financial plan. Is it worth your time and money to create a financial plan? People that have a financial plan discover more opportunities to save money which is a great way to make the plan pay for itself and then some! Compare a financial plan to a doctor’s checkup. Revisiting your planner and your financial plan each year is a great way to stay on track and focused on your financial goals. A financial plan is not just for retirement, it is something you should begin when you start your career. Listen to this episode to hear why you wouldn’t want to live your life without a financial plan.
Improving your finances doesn’t necessarily mean that you need to let go of all little luxuries you have become accustomed to. There are actually quite a few things that you can implement now that are relatively painless. The most challenging part of implementing these action steps are simply setting them up. One simple way you can improve your financial future is to set up an automatic monthly deposit into your investment account. This used to be something difficult, but with the advent of mobile banking, it can literally be done with the push of a few buttons on your phone. Listen to this episode to hear simple steps you can take to improve your finances.
Another way people to improve your financial situation is to make the most of your 401K. Some people don’t even have this set up to take advantage of their employer match. They are leaving a 100% return on the table! Make sure that your 401k is set up to deposit the most that you can each month. When setting up your 401K it is important to diversify. Many people are afraid to do anything with their 401K account and simply leave it all in cash or employer stocks. They are missing out on a great way to grow their money. Listen to this episode to hear how important it is to set up your 401K properly so that you can get the most out of your retirement savings.
Paying for college can seem like such a daunting task. A state university education can cost $100K and a private university can be more than double that. There are a few things you can do right now to help you figure out how to pay for your children’s education. There are many different ways to pay for college, but the important thing is to have a strategy. It is important to choose the right school for your child, one that has the right fit. By knowing what you can afford this can be a great way to limit your child’s choices and help you choose the best fit. It is important to remember not to focus on the sticker price of the school because there are many ways to reduce the costs of tuition. Listen to this episode to hear some great ways to create a strategy for paying for college.
All of us have a subconscious financial bucket list of things we want to accomplish. After having meetings with thousands of clients collectively over the years, we have a pretty good sample size of the biggest checklist items people would include on their financial to-do list. Now it’s Chad’s turn to share reflections on his 40th birthday. While Mike looked back highlighting lessons he’d learned, Chad looks forward describing the biggest bucket list items people hope to accomplish within their personal finances. Everyone has different things that they worry about or financial goals they are trying to achieve. On this episode, we explore what really gets people excited about financial planning.
Most people have entertained thoughts about retiring early. It is a dream for most when starting out. The retire early movement is about having the financial freedom to spend your time as you choose. To retire early you need to understand what you spend, what you save, and how your investment portfolio should be allocated as a result. But many people don’t realize what they’re spending. Important points when considering an early retirement is finding the best way to withdraw your money from a tax perspective, having a disciplined investment strategy, and planning how to best pay for health insurance. Having a plan for these will help you decide if you can retire early.
How do you balance delaying gratification and celebrating achievements? Many people pencil in becoming a millionaire near the top of their bucket list. Despite being an arbitrary number, it’s one that is concrete and still a significant symbol of consistent savings over a working career. If you’ve ever read The Millionaire Next Door, you know the simplest way to reach this goal is to live below your means. By delaying gratification you can invest more in your future. Sometimes you may miss opportunities but your rewards will come later. Try to sustain your momentum by celebrating milestones along the way. According to the book, The Power of Moments, elevating smaller milestones on the journey can speed up your progress.
Not sure the Bucket List would exist if it weren’t for vacations. Thinking, planning, and sharing the trips we hope to take gives color to financial planning in unforgettable ways. Are you able to spend whatever you want on a vacation without guilt or worry? Steward Butterfield, the creator of Flickr and Slack, shared a great definition of levels of wealth related to vacations in a recent episode of the podcast How I Built This. Many clients rely on a financial advisor to give an objective third-party view of how much they should spend on a vacations. When talking through this with clients, we set up a customized yearly cash-flow plan that helps you see the longer-term effects of your vacation dreams. As we discussed in previous episodes, lasting experiences hold great value of their own, especially when planned for appropriately.
Searching for security creates a wave of emotions when dealing with money. For many, this manifests in the desire to pay off their mortgage. Many feel that true financial independence can only come from living completely debt free. But before you write that check to pay off the mortgage you may want to think twice. Is there value in having a mortgage? Could it be a good financial move to keep a mortgage even if you can pay it off? You have liquidity and equity even if you do carry a mortgage. Paying off a mortgage is an important level of security for many. If you are going to pay it off, you need to think first where the money will come from.
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One of the difficulties in decisions around retirement, is most people only get one chance. One of the more essential decisions centers around when and how you choose to take Social Security. Maximizing your benefit has huge impacts to you retiring well. So this is not a subject that should be independent of your complete retirement financial plan. Carefully analyzing the best options could mean hundreds of thousands dollar differences for you throughout retirement. So in this episode, we answered 8 of the top questions we hear about social security in less than 30 minutes. Our hope is that you'll have a desire to dig deeper in your on analysis, to assure you are making the best decisions for you and your family.
The social security program was created in 1935 to promote the economic security of the American people. It takes about 10 years of work history for someone to become eligible for the benefits. The system works on credits and you need 40 credits over your lifetime (earn up to 4 a year). If you're married, you're eligible for spousal benefits especially if you don’t have as much of a robust work history. There are also disability and widower benefits. If you land in the latter category you should work with a CFP to help you understand your best filing options. Social security benefits are calculated by taking your highest 35 years of earnings and your benefits are calculated by these.
The big question that everyone wants to know is, when should I claim social security benefits? The trick is, the answer is different for everyone. You can start claiming social security at age 62, which 34% of people do, or you could wait until age 70, which only 4% of claimers do. Full retirement age ranges from ages 65-67. Claiming your benefit before your full retirement age reduces your benefits by 5-6% annually. So claiming at age 62 could be a reduction of 25%. On the flip side, every year you wait to claim social security after full retirement age, your benefit grows by 8%. When deciding when to claim your benefit, health and life expectancy also should play a role in your decision. The decision about when to claim is an important one that can have significant financial ramifications.
A married couple has a lot to consider when it comes to thinking about filing for social security benefits. A spouse that hasn’t worked as much as the other is entitled to 50% of the higher earner’s social security benefit. For those born before January 1, 1954, the restricted benefit is still an option. Where one spouse, can take a "restricted" benefit equal to half their spouses monthly benefit. If one spouse passes early then the other spouse is entitled to the higher earner’s benefit amount. There are 3 main options for couples to consider: both spouses delaying, the higher earner delaying, or both taking early benefits. With singles, it is much easier to decide when to get your benefits, but still should be weighed with other income sources and current market environments.
A big influence on why people take Social Security early is the fear that it won't be there in the years to come. We've heard for years that the social security fund will eventually run dry. While it's true that the worker to retiree ratio is getting smaller, we shouldn’t have to worry about the program completely running dry in our lifetimes. Current projections show that social security will not be able to fully fund retirees beginning between 2033-2035. But, the system won’t run out completely and it could fund 70% if nothing is done to solve the problem. A few of the potential solutions include:
Listen in to hear the rest of the questions chocked full of useful information to help you uncover the mysteries behind the social security system.