Take The Right Financial Road In 2018

I recently read about a 28-year old New Jersey man who typed the wrong address into his rental car’s GPS in Iceland and drove six hours in the wrong direction – SIX! – from the airport to a fishing village in the north of the country….when he was just trying to get to his hotel. Now, his first mistake is quite understandable. I’ve been to Iceland and they are apparently too cheap to buy a vowel because every word is virtually unpronounceable. But, despite the long drive and “poor road conditions” he plowed on because that’s, ahem, what the GPS told him. And he never questioned that Reykjavik’s airport would be 6 hours from, well, Reykjavik. That’s like assuming Lexington’s airport is in Detroit.

This was really quite funny until I realized how many people figuratively make this same mistake in their financial lives. Unfortunately, they assume they’re on the right road until told otherwise. Maybe they assume contributing just enough to their employer’s retirement plan to receive the match will eventually produce enough to support them in retirement. Or maybe they’re contributing as much to debt payments each year as their savings. Or maybe they’re invested completely wrong for their long-term goals.

These people aren’t stupid – they usually just don’t have the time to properly plan for what they will really need in the future. To complete the comparison with our Icelandic mis-adventurer, it is quite common for people to be on the wrong road but not know it until they’ve hit a destination that’s figuratively six hours from their desired destination. Only, the stakes are much higher if you don’t realize your mistake until you hit age 60.

So, here are some suggestions for getting on the right road in 2018:

1. Pay yourself first

Automate your contributions to your employer’s retirement plan and any other investment plans first. Then, develop your budget from what’s left. How many times have you heard that cutting out that daily latte will aid your retirement? No, I like that latte, you say. So, don’t make the choice between your financial freedom and your latte. Pay toward your financial freedom first, then choose between a latte and maybe a beer that evening. That approach is not only better for your long-term financial health but you’ll feel a lot less guilty each day too.

2. Pay down high-interest debt

Not all debt is equal and not all debt is bad. In general, if all of your debt – student loans, mortgage, car loan or lease, credit card debt – is more than 36% of your gross monthly income, that’s too much. Additionally, if a loan has a high interest rate – probably about 6% or higher – that should be taken care of too. (Read more on how to determine if debt is acceptable or a problem here -https://lexingtonfinancialplanner.blog/2017/10/27/should-cal-and-rick-pay-down-debt-or-save-for-retirement/.  If you find yourself in one of those situations, make a plan to retire that debt as soon as you can. Again, automate your payments so you don’t have to choose between making that debt payment and your daily latte.

3. Save for some short-term fun

Around the office I’m kind of known as the saver-police. “No soup for you, save!” (A paraphrased Seinfeld reference, by the way) But that’s not true, Lisa and I are good savers, but we also prioritize our spending for fun too. After we save for our future, we have chosen to use our dollars to travel rather than buy expensive cars or buy a bigger house. We would rather enjoy a nice vacation each year, like two weeks in London last summer, than drive a Mercedes. Now, that’s not a choice for everyone, just us. In any case, choose a short-term saving goal for 2018 and make it part of your monthly budget. Recently, new clients wanted to build saving for regular, nice international trips into their financial plan. We showed them how to do that while still making significant progress toward their financial freedom.

If you would like to talk about your long-term and short-term financial goals, please email me at steve@moneywatchadvisors.com or call me at 859-268-1117.


What You Can Learn From Reviewing Your Financial Situation in 2017

Don’t read this blog post now – save it for the week between Christmas and New Year’s and read it then. Let’s face it, you’re running around like your hair is on fire trying to finish work projects, attend parties and finish your gift buying. But that week after Christmas is usually pretty slow. If you’re working, there aren’t a lot of phone calls. If you aren’t working, outside of a movie or maybe ice skating, there’s plenty of free time. Take one hour during that week and 1) Read this blog post; and 2) Review the following items:

Did you meet your short-term goals for the year?

We should always write down our goals for the year, right? Exercise more, read more for pleasure, etc. Because writing down a goal helps make it real and measurable. But, do we? Uhhh, did I save that cocktail napkin somewhere?

Whether we have our 2017 financial goals written down or not we probably still have a pretty good idea of what we intended to do. Did you want to establish a budget? Did you intend to save a certain amount of money for retirement for the year? Did you want to pay down student loans or maybe refinance your student loans? Did you shoot to establish an emergency fund to cover 3-6 months of living expenses should something interrupt your income?

Take just a few minutes and measure whether you accomplished those items you intended to – even if you didn’t write them down as a specific goal. If you hit the mark, raise a glass of eggnog for yourself. If not, choose one goal – the most important financial goal for 2018 – and write it on your computer somewhere where you won’t lose it. Make it measureable and achievable and, if possible, make it systematic where you don’t have to think about it each month.

How did your investments perform?

The stock market has been amazing this year. Not only is the S&P 500 up about 18%, there has been very little volatility – ups and downs of the market. In fact, this year has seen the lowest volatility since 1970. So, how did your investments perform?

Because the stock market has performed so well, this is a good time to look at your asset allocation: what percentage of your investments are in categories like Long Term Income, Growth, Real Estate and International? As stocks increase, including stock mutual funds, it’s easy for your portfolio to get too heavily weighted toward stock mutual funds, exposing you to unnecessary risk when the stock market declines at some point. One of my favorite quotes comes from the former boxer, Mike Tyson, who once said, “Everybody has a plan until they get hit in the mouth.” In our context, when you’re figuratively hit in the mouth when the stock market declines, do you have a plan? In other words, are you properly diversified so your portfolio includes funds that aren’t tied directly to the stock market and they hopefully zig when the market zags? In addition, is your portfolio structured for your personal time horizon and goals?

Did you follow your long-term plan?

Did you save as much for retirement as your long-term plan calls for? Is the total of your investment assets where you planned for them to be at your age? If you are behind, what is the cause?

A well thought-out financial plan should examine your current lifestyle/expenses and inflate them to a point in time when you would like to stop working. Age 55? Age 65? Then, how much in investment assets are required in order to produce annual income sufficient to cover those expenses for the rest of your life? Then, your plan should have concrete steps and measurable goals along the way to eat that elephant one bite at a time.

Merry Christmas, Happy Hanukkah and Happy New Year! Thank you for reading my blog – you can subscribe at the bottom of this post and have it delivered via email each week – and look for it again on Friday, January 5.



Smart Money Moves Prior to Year-End

I love Christmas but I find Christmas-time stressful. Let’s face it, the world just seems to spin faster during December. We’re already busy with work and family and then we add a slew of fun things like holiday parties, office open houses, gift buying and decorating to our schedule. Who has time for all this fun?!

I’m sure you’ve seen and maybe even read end-of-year financial checklists. While well-intended, I’m sure, I laugh out loud when I read suggestions like, “compute all your expenses for the year in a spreadsheet and develop a budget for next year”, or “review all your estate planning documents to make sure they are up to date.” Yeah, right, I’ll get on that just as soon as I replace all the batteries in the smoke detectors and re-grout the bathtub.

So, in the spirit of the Holidays, here is my advice on what deserves your attention before the end of the year and, what is important, but can wait until January.

Spend a few minutes on these items now:


Whether you suspect you will receive a refund or pay Uncle Sam in April, there are a few things you can do now to reduce your tax liability and help yourself in the process:

• Check if you have contributed the IRS-mandated maximum to your retirement plans – 401(k) or 403(b). The limit for those under age 50 is $18,000 per year, while those of us 50 and over can contribute up to $24,000 per year. Note to UK employees, you may contribute to a 457(b) plan in addition to your 403(b). So, if you’ve maxed out your 403(b) contributions you can also contribute $18k or $24k to your 457(b). That’s a great UK benefit.

• You may also contribute to an IRA or Roth IRA depending on your income and whether or not you have a qualified retirement plan at work. The rules can be a bit convoluted but you may be able to make a tax-deductible contribution to an IRA for $5,500 or an after-tax contribution to a Roth IRA for the same amount. For instance, if you have a 401(k) or 403(b) at work and your adjusted gross income (AGI) is less than $99,000 if married and less than $63,000 if single, you may make a tax-deductible contribution to an IRA. If your income exceeds those limits, consider a Roth IRA contribution if you are single and your AGI is less than $118,000 or $186,000 if married. (You can actually contribute to an IRA or Roth until April 17, 2018)

• If your income is too high to allow a tax-deductible contribution to an IRA and you don’t already have one, consider an after-tax contribution to an IRA and then converting the IRA to a Roth IRA. That move won’t decrease your tax liability this year but is a good long-term tax strategy for high earners who can benefit from tax-free earnings until the assets are withdrawn after age 59 ½.

• This is a great time of year to reduce your taxable income by making a donation to your favorite charity or charities. And, if Congress passes a new tax law these rules may change for next year, so take advantage now and help those who really need it. Lisa and I favor God’s Pantry Food Bank, the YMCA and, of course, the University of Kentucky.

• Tax loss harvesting is a tool that can also reduce your taxable income. If you own investment assets in a taxable account – not your work retirement plan or an IRA – you may sell assets that have declined in value during the year and 1) Use the losses to offset any gains realized from selling assets that have increased during the year; or 2) Deduct up to $3,000 in losses from your taxable income. You may also carry forward losses to future tax years. But don’t sell an asset just to get the tax deduction if you think the investment has potential for the future.

Focus on these items when you have time now or in January:

Did you meet your short-term financial goals for the year?

How did your investments perform this year?

Did you make progress toward your long-term financial goals?

I will discuss these in the Friday, December 15 Lexington Financial Planner blog post.







These Six Traits Predict Your Ability to Build Wealth

I have a distinct memory of sitting on a tractor on my grandfather’s Nebraska farm as an adolescent and telling my father and brother that I was going to be a millionaire someday. My Dad laughed out loud and asked how I was going to manage that? I shrugged and said, “I just will.” I never had a get-rich-quick scheme or a vision to create the next Pay Pal, I just kind of had a gut feeling that I would go to college, get a good job, and save. In fact, I already had a good track record of saving, reaching my parents’ stated threshold of $1,000 before they would allow me to invest in the stock market. Fortunately, my wife is also a good saver and – with advice as clients of Moneywatch Advisors for 25 years – that has resulted in an accumulation of wealth greater than we imagined possible.

But what makes a person a good saver? Is it an innate skill that we have or don’t have? Can it be learned? Can a spender become a good saver?

The book, The Millionaire Next Door illustrated that wealth is what you accumulate, not what you spend. Wealthy people have figured out how to turn their income into wealth – savings – that can be used on their future selves.

So, are there traits that wealth builders – savers – have in common? What makes some people good at turning their income into wealth?

Sarah Fallaw, daughter of the Millionaire Next Door author Thomas Stanley, and an industrial psychologist Ph.D., has researched and discovered six distinct and consistent traits that predict if someone will be good at wealth building. They are:

Frugality – your willingness and ability to spend below your means;
Responsibility – do you believe you have control over your financial outcomes or do you believe wealth just happens to people?
Confidence – do you have the confidence to believe you’re capable of improving your situation?
Planning and Monitoring – can you set goals and monitor your progress?
Focus – do you have the discipline to avoid distractions and stay on track to your goals?
Social Indifference – do you feel a need to spend to display social status or are you socially indifferent to the spending habits of others?

Clearly, most of these traits are either innate or learned behaviors by the time we’re income-earning adults. But, Dr. Fallaw’s research shows that we can improve these traits – sometimes by ourselves and sometimes with help.

In fact, the investment firm Vanguard’s “Advisor’s Alpha” study has researched financial advisors around the country and found advisors add, on average, 3% in incremental return to a client’s investment portfolio annually. This means clients’ annual returns are, on average, 3% better if they use an advisor than if they go it alone. More important to this conversation is that 1.5% of that incremental return is related strictly to helping their clients change and/or improve their financial behaviors. Advisors help them develop and enhance those six traits that are important to building wealth.

Need to be more frugal? Maybe assistance developing a budget will help.

Need help setting goals and monitoring your progress? A good financial planner will make that the first exercise in the engagement.

Do you have a desire to become a “millionaire next door”? If so, really think about those six traits and, as honestly and objectively as you can, ask yourself how good you are at each one. And, then, what areas would benefit from some help?

Retirement or College – Which Comes First?

The term “sandwich generation” commonly refers to those people who are caring for aging parents and their children at the same time. Today, I introduce a new term – The Financial Sandwich Generation.

We often see clients in their mid-30’s to early 40’s attempting to save for their own retirements even while they pay off their own student loan debt. Adding to that balancing act, they are also having children and are now concerned with saving for their college educations too. We may actually be witnessing the very first generation that has to deal with three major obligations all at the same time – 1) Student loan debt; 2) Retirement; and now 3) College funding for their kids. Thus, the Financial Sandwich Generation. (Trademark pending)

So, how should this new generation prioritize their obligations? First, this should be approached similarly to the instructions we receive on an airplane before takeoff – you know, the ones we never listen to. They tell us that if the cabin loses pressure, oxygen masks will automatically drop from the ceiling panel above us. Put on your mask first, then assist your child. Those instructions should be our model for prioritizing our obligations as well. As a parent, that is the exact opposite of what we naturally want to do, right? We’re used to subrogating everything to our offspring – love, food, comfort of all types. So, all of a sudden, we’re expected to be selfish and put our needs first? Why and how?

Here is the recommended order and reasoning:

• To be blunt, you can borrow for college but you can’t borrow for your retirement. So regular, automatic contributions to your planned retirement accounts should take priority – pay yourself first.
• Next comes your student loan debts. After a nuclear Armageddon, only two things will still exist: cockroaches and student loan debt. Even bankruptcy can’t erase that obligation. So, make those regular payments.
• Finally, saving for your children’s college education will require smaller monthly contributions the earlier you are able to start.

Saving for college can be daunting if you pay too much attention to the headlines about tuition so let’s look at an example:

If paying retail is for suckers, so is paying the full sticker price advertised for tuition. Very few do. So, don’t think you have to save 100% of the expected cost of attendance. Most experts agree that saving enough for one-half of the expected cost will suffice. The rest can come from tuition discounts, scholarships, other financial aid and, as a last resort, student loans.

According to the College Board Trends in College Pricing, the total 4-year cost of an in-state public university (tuition, fees, room and board) for a child just born will be $137,757 when the child is ready to head to the dorm. So, your goal should be to save half of that amount – $68,878. A large number, yes. But, let’s break it down:

If you save just $160 per month for 18 years in an account that earns 7% per year, on average, you will achieve your goal. In Lexington, that’s about half what the cable company charges for internet, phone and a reasonable TV package, so cut the cord and put your money into some real value. (Sorry, couldn’t resist taking a jab)

As always, having a plan to balance all your competing financial needs will put you on the right path to achieving all your financial goals, while easing your worries.


96% of Stocks Are Losers – How to Buy the Winners

Have you ever dreamed about going back in time? What would you do if you could? Other than telling Rick to guard Grant Hill to prevent the pass to Christian Laettner during the 1992 NCAA tournament, I would buy Apple stock. Why Apple? Because in the history of the markets since 1926, Apple has generated more profit for investors than any other American company – $1 Trillion. Hendrik Bessembinder, a name built for Pig Latin if I ever saw it, is a professor of Finance at Arizona State who has studied stock return data and concluded that most stocks aren’t good investments at all – many don’t even beat the paltry returns of one-month Treasury bills. What?

In fact, only 4% of all publicly traded companies have accounted for 100% of the net wealth earned by investors in the stock market since 1926. That means 96% of stocks are losers. Dr. Bessembinder defines net wealth as total stock returns in excess of 1-Month Treasury bills, which averaged 3.38%, so the total actual returns of Apple and these 4% are even higher than indicated.

So, all we have to do is figure out which stock will do the best over the next 20-30 years and we will be set! Or, of course, travel back in time and pick Apple – which may actually be easier to do. Dr. Bessembinder said, “In a market where most of the big gains are attributable to a few big winners that are hard to identify in advance, it makes a lot of sense to diversify to avoid the danger of omitting the big winners from your portfolio.”

Consider this: If a non-diversified portfolio has $500,000, all in U.S. stocks, and the market declines by 20%, the portfolio will decline approximately $100,000 to $400,000. If you are within a few years of retirement, that can be quite frightening. Now, in order for your investment assets to grow back to their pre-downturn amount, the stock market must gain 25% to reach their original value of $500,000. Even scarier.

But, if your portfolio is properly diversified, it shouldn’t match the ups and downs of just the U.S. stock market and it shouldn’t decline as much when the market declines.

Here is how to ensure you own the big winners over the next 20 years and are properly diversified: First, pick funds that contain a large number of stocks rather than purchasing individual stocks themselves. Second, pick funds that are attempting to generate returns by using different strategies. For instance:

Growth Funds seek to purchase stocks of companies that they believe have the potential to increase sales and earnings;
Value Funds seek to purchase stocks of companies where the current stock price doesn’t reflect the company’s value;
Small Cap Funds invest in companies with small market capitalizations;
Mid-Cap Funds invest in, you guessed it, mid-sized companies;
Large Cap Funds invest in, of course, larger companies.

Furthermore, to truly diversify a portfolio one must also invest in asset classes that aren’t closely correlated with the stock market. In other words, they zig when the market zags, and vice versa. Asset classes such as:

Long Term Income assets that are designed to generate income, not necessarily appreciate in value;
Real Estate funds that invest primarily in the stocks of real estate companies and seek growth through both capital appreciation and current income and are often a good hedge against inflation;
International funds that invest in non-U.S. companies and seek returns through the growth of those companies.

As always, your financial plan should guide your actions and your portfolio should be constructed so it supports your long-term goals. Diversifying properly will help you achieve those goals faster and with fewer ups and downs.



How the Trump, House Tax Proposal Affects You

Back in late September the Lexington Financial Planner blog wrote about how President Trump’s tax proposal would affect you. Now, the House Ways and Means Committee has revealed their tax bill so let’s take another look. No talking points, no politics, just math. Uh, fun math. No, seriously.

While the income subject to tax may be higher for many of us, at least those of us with those pesky kids, our overall taxes may be changed little because the tax rates are spread out farther among brackets. See below for the proposed new rates based on taxable income:

While it’s impossible to capture every person’s circumstances, let’s take a middle of the road example and apply the new proposal. So, as in September, let’s start with our fictitious couple and how much they pay under current tax law:

Current law:

Chandler and Monica earn a combined $125,000 in salary and each contribute 5% pre-tax to their employer’s retirement plan. For simplicity sake, we’ll ignore other pre-tax deductions like their pre-tax cost of their employer’s health insurance plan, and call their Adjusted Gross Income (AGI) $118,750. (Gross income minus their retirement contributions) Unlike our friends on TV, they have two children.

Under current law Monica and Chandler have a choice between subtracting the standard deduction of $12,700 from their AGI or itemizing deductions. As you can see below, their itemized deductions are more than their standard deduction, so they obviously deduct the larger amount:

• Mortgage interest deduction – $5,578 (Interest paid on their $200,000 house where they still owe $150,000)
• State and Local Income tax deduction – $9,797
• Property tax on their home – $2,000
• Charitable contributions – $1,000
Total: $18,375 (clearly more than the standard deduction of $12,700)

In addition to their itemized deductions, Monica and Chandler are also allowed to deduct $4,050 each as personal exemptions plus dependent exemptions for each of the kids, for a total of $16,200.

Finally, their AGI of $118,750 minus their itemized deductions of $18,375 minus their personal exemptions of $16,200 equals Taxable Income of $84,175 and Tax Liability of $12,521.

New Proposal:

Although mortgage interest and charitable contributions are still allowable as itemized deductions, state and local income tax deductions are not allowed. Property tax up to $10,000, however, can be included as an itemized deduction.

• Mortgage interest deduction – $5,578 (Interest paid on their $200,000 house where they still owe $150,000)
• Property tax on their home – $2,000
• Charitable contributions – $1,000
Total: $8,578 (now less than the new standard deduction of $24,000)

Monica and Chandler are no longer allowed to deduct $4,050 for their 4 personal and dependent exemptions because those have been rolled into the proposed standard deduction.

As a result, Chandler and Monica find their itemized deductions are lower than the proposed new standard deduction – $8,578 is lower than $24,000 – so they use the higher number.

Finally, their AGI of $118,750 minus the standard deduction of $24,000 equals their taxable income of $94,750. Based on the new, compressed tax brackets it appears their tax liability would be $11,988 – a tax savings of $533.

In addition, the tax plan highlights indicate an increase in the Child Tax Credit but it doesn’t contain details about how those credits will apply. The credit for their two children could lower their tax liability further.

Key Takeaways:

• Thankfully, and correctly, the proposal keeps the current deduction levels for retirement plans such as 401(k)’s, 403(b)’s, 457(b)’s ($18,000 for those under 50, $24,000 for those 50 and over) and IRA’s and Roth IRA’s ($5500 for those under 50, $6500 for those 50 and over). That’s very good news and good for those of us without a traditional pension (most of us).
• Although a married couple with two children will likely have lower overall deductions than they do now, the lower tax rates may very well lower their overall tax liability.
• Those without children will likely see their deductions increase, and their overall tax liability decrease.
• For those of us with children under age 17, the child tax credit increases but details are still sketchy about any phaseouts based on income.
• The tax rates on capital gains and investment income from taxable investment accounts remains the same.
• For those high earners and those with stock grants from their employers, the Alternative Minimum Tax is eliminated.
• The mortgage interest deduction only applies to mortgages of $500,000 and less where the current amount is $1M.