55 And Behind On Retirement Saving?

It isn’t at all unusual for someone in their 50’s or even early 60’s to ask us for advice as they approach retirement with too little savings. As you might guess, there are as many reasons for being behind as there are people: a late start saving, frequent job changes, personal student loan debt, college expenses for their children, or just plain bad luck. Our first advice? Forgive yourself, your predicament is not about the past, it’s about the future. Let’s consider Joey’s story:

Joey is 55 years old and makes $80,000 per year. Joey spends almost all his money on clothes and sandwiches but decides he should probably get ready for retirement in 10 years. He has saved $150,000 in a retirement account and decides to save 10% of his salary, $8,000 per year, over the next ten years. Projecting average annual returns of 7% from a diversified portfolio, when Joey turns 65 he will have accumulated wealth of about $405,000. Using a reasonable withdrawal rate of 5% per year, Joey will have $20,000 per year for his expenses. Let’s add in Social Security: Joey will be eligible at age 67 and will draw $2,360 per month, approximately, at that age – $28,320 per year.

Uh, oh, at age 65 can Joey live on that $20,000 rather than $57,600 per year in take-home income he is used to($80,000 – $8,000 in retirement contributions – 20% for taxes = $57,600)? He will have to do that for 2 years until he can take that $28,320 per year in Social Security.

At age 67, his income will be approximately $48,320 ($20,000 from his retirement plus Social Security) – still well below (16% below) that $57,600 per year he needs.

So, how much will Joey need in retirement savings at age 65? He will need a total of about $585,000 plus Social Security to maintain his current lifestyle of $57,600 per year. That’s $180,000 more than he is projected to have in 10 years.

Joey has four broad options:

1. Save the same amount but earn 11.55% annually on his investments – an unrealistic expectation.

2. Save $21,000 per year instead of $8,000.

3. Work and save for a little over 14 years, rather than 10. Joey will be 69 at that time, so not completely out of line.

4. Combine strategies of saving more each year and working a little longer too by reducing his current living expenses. For instance, can Joey downsize his home and invest the savings toward his retirement?

The power of compounding is real and is a great reason to start saving and investing at as young an age as possible to be able to achieve your financial independence as soon as possible. But, as Joey shows us, life doesn’t always go according to plan. So, if you find yourself in Joey’s situation, estimate how much you will need to have saved when you retire and develop a plan to get there…and start today!

Don’t Feel Guilty About Your Debt, Take Control

I have a fond memory of my maternal Grandfather sitting me down soon before I graduated from college and telling me, “Steve, whatever you do, don’t borrow money.” While Grandpa John lived far from an easy life as a dairy farmer in Nebraska, he and his mother did inherit the farm when his father died so he didn’t have to incur debt to get started. Circumstances are just different now. Buying a home or even a car is almost impossible without a mortgage or car loan. According to AARP, larger mortgages, higher student loans and a greater overall comfort with debt than displayed by earlier generations has increased the average debt for households approaching retirement by nearly 160% from 1989 to 2010.

Consider Fred and Ethel, both age 45. While they both have good jobs, they have just paid off their student loans and, as a result, are worried they’re a little behind getting started saving for their financial freedom. In addition, when their two children were born they purchased a home and minivan whose payments are stretching their budget. Plus, because their monthly cash flow can be tight, they occasionally build up some expensive credit card debt that takes a few months to pay off. Now, their situation is quite common and really isn’t their fault. Given a choice of incurring student loans or not going to college, they clearly chose the right path for them. So, if Fred and Ethel asked us for advice here is what we would say:

1. Don’t feel guilty, your predicament is not about the past, it’s about the future. Now is the time to plan in order to get where you want.

2. Create a budget that attempts to limit household debt to no more than 36% of gross income – mortgage, car loans, credit card debt. This might not be possible right away but, when the minivan is paid off, keep driving it for a few more years rather than buying a new one.

3. Create an emergency fund by including a regular payment within your budget until you have accumulated the equivalent of about three months of expenses. This will help you avoid incurring ridiculously expensive credit card debt when unexpected expenses pop up.

4. Pay yourself first by making regular contributions, pre-tax if possible, to retirement accounts. Whether it be a workplace retirement plan like a 403(b) or 401(k) or an Individual Retirement Account, include a monthly contribution in your budget. Make the contribution automatic, preferably taken from your paycheck, as you won’t miss what you don’t see in the first place. So, pay for items you want but don’t necessarily need with dollars leftover at the end of the month, rather than leaving retirement contributions for leftover dollars.

5. Not all debt is bad – read here to learn the difference between good and bad debt:  Continue reading “Don’t Feel Guilty About Your Debt, Take Control”

I Spoke to a UK Investing Class: Thoughts From the Students

Eric Monday, UK’s Executive VP for Finance, is one of the brightest people I have ever known but he had a brief lapse in judgment when he recently asked me to speak to his class titled, “Personal Investing and Financial Planning.” This is a class for non-Business majors who are interested in learning about financial planning, decision making and investing activities. They discuss and learn about stocks and bonds, 401(k)’s, IRA’s, insurance and many topics most of the population never learns or even considers. Dr. Monday asked me to speak to the class about my career path, particularly my experience as a client of a financial planner, then becoming one. The students were bright and engaged and here are a few of the topics we discussed and the students’ thoughts:

How to buy a car:

Their curriculum covers the basics and I described how, 25 years ago, the buyer didn’t know the cost the dealer paid for the car so could only negotiate from the sticker price downward. Now, not only can the buyer learn the invoice price of the dealer but also what other people in your area paid for the same car recently. We also discussed the merits and pitfalls of leasing a car such as penalties for excess mileage, the advantages/disadvantages of changing cars every three years or so and the difficulty in negotiating a lease because most dealers start with the monthly lease price, rather than the cost of the car. Question (paraphrased): Will we really be purchasing cars in 10 years or will everyone just use a self-driving vehicle through a ride-sharing app? Uh, wow, hadn’t thought of that – next question!

What should we expect average annual investment returns to be?

I was pleasantly surprised that the initial response from the class was 7-10% annually. While many people, particularly young people, often believe the market will generate returns much higher than that, this range is actually quite reasonable and accurate. Good job.

What do you think when you hear the title, financial planner?

There were a variety of responses to this question but the answer I was expecting finally emerged – someone who sells products for a commission. Well, here was the softball I was itching to launch out of the park. While the financial services business has some bad actors – recent media stories even describe TIAA of pushing inappropriate products on their customers – what a person should search for is fee-only financial planner who acts as a fiduciary. Simply put, fee-only means the planner’s only compensation comes from you, the client. The planner receives no backdoor commissions from another entity to sell you products. A fiduciary, by law, dispenses advice solely in the client’s best interest. Period.

I only have about $1,000 to start investing, should I invest in riskier assets like penny stocks?

This was a great opportunity for us to discuss the concept of investing and what it really is. First, penny stocks are worth pennies for a reason – the companies aren’t worth more than that. Remember, when an investor buys a share of stock, she is buying a piece of that company. So, do you think that company will earn money over the next few years? Remember, investing isn’t the same thing as making a bet at Keeneland. We’re not gambling, we’re purchasing something we believe has value and will return that value to us. So, my advice? Invest that $1,000 into a low-cost, small-cap mutual fund, regularly add to it – and look forward to the returns in 10 years or more.

What is your reaction to the wild swings of the stock market over the last 10 days?

Crickets…..A good response for all of us.

Four Things To Do During A Stock Market Downturn

You have undoubtedly read and heard about the whiplash-producing stock market this week because the so-called experts at every newspaper and news channel have been talking about it incessantly. It reminds me of the breathless excitement of meteorologists prior to an anticipated snowstorm. In fact, these “experts” are about as accurate as the weather forecasters too. Part of the reason these trading days have been such a shock to many is that the markets have been so calm for so long. In fact, the market in 2017 exhibited the least volatility of any year in history. So, when we see a drop of 4% in the S&P 500 in one day, it is natural to feel some anxiety. Before you get too worked up, consider these four steps during a market downturn:

1. If you believe in your financial plan, do nothing

As long as your portfolio is structured to support your financial plan, don’t worry about it, do nothing. Your financial plan should provide you with the target you need to hit at a certain age – usually retirement age. That targeted dollar amount should be the amount of investment assets necessary to generate enough income for the rest of your life after social security and other possible income sources are considered. Your focus should be that target in that year, not your total next week.

2. Don’t panic and sell

People sometimes panic when the market jolts and they exacerbate the downturn by selling assets in response. Note this study: The S&P 500 made 9.85% per year from 1995 through 2014. If you sold your stock mutual funds and missed out on just the 10 best days during that period, that return drops to 6.1%. For example, if you began 1995 with $100,000, you would have $75,078 more at the end of 2014 by staying invested. So, don’t panic and move your money into cash.

3. Review your plan

If the volatility in the market makes you nervous, reassure yourself by checking your progress toward your goals. Look at your financial plan to make sure it is up to date, congratulate yourself on your progress so far and focus on your long-term goals. If circumstances have changed and your plan needs updating, recent events could be a good reminder to do that.

4. Manage risk by rebalancing your portfolio

Your financial plan should be supported by a portfolio that allocates a percentage to different asset classes – such as stock mutual funds, long-term income funds, international funds, possibly real estate funds – in a way that is appropriate for your individual circumstances. Reviewing your portfolio quarterly to ensure those asset classes are still allocated according to your plan is a good way to manage the risk of your portfolio and to stay on track.

If you are interested in learning more about investing for the long-term while managing volatility, resulting in a better retirement outcome, see a recent post on the importance of a diversified portfolio: Continue reading “Four Things To Do During A Stock Market Downturn”

What I Learned In My First Year As A Financial Planner

Although I prepared by studying evenings and weekends for two years to meet the coursework and exam requirements of the Certified Financial Planner process, leaving my friends both at the University of Kentucky and in Frankfort wasn’t easy. After doing the same thing professionally for over 20 years, though, I was ready for a new challenge that would engage my brain in a new and different way. So, after 25 years’ experience as a client of Moneywatch Advisors, I joined the firm. After my first year in the financial planning profession, here is what I have learned – about our clients, about the financial services industry and, most important, about myself:

  • Work-Life balance is the way to live: I’ve always known this intellectually, but I have now learned it emotionally as I now have time to take my son to school every day, drive him to soccer and lacrosse practices and travel with my wife to see my daughter dance ballet in college. I still work hard because I really enjoy what I’m doing but I also prioritize spending time with my loved ones. I am living the life I want and my goal is to help my clients do the same. 
  • Our real value is our clients’ peace of mind: Our niche is serving busy professionals who are consumed with their careers and busy with their families and don’t have time to plan and manage their financial futures. From UK faculty and staff to CPA’s to government relations professionals, we help our clients determine what amount of investment assets they will need to achieve their financial freedom, how much to save to reach their goal, how to save taxes while they save and how to invest their hard-earned savings to help them reach their goals as soon as possible. Our clients are smart but don’t have the time and inclination to tackle these issues on their own.
  • Short-term goals are as important as retirement goals: I probably should have learned this earlier in life, but we all must enjoy life now while also saving for our financial freedom. Whether it be a travel experience or a vacation home, include those desires in your financial plan too.
  • Trust between advisor and client is vital: Let’s face it, other than going to the doctor, opening one’s finances to a professional is about the most personal business transaction there is. Trust is key and we have to work every single day to build it and keep it.
  • Numbers are fine but people are what matter: While the planning and investing advice we provide is the core of what we do, how we relate to people is the key. The more we know about our clients’ hopes and dreams, the better we can help them achieve them. Being a good listener is clearly a core competency of a good financial planner.
  • The financial services industry doesn’t have a very good reputation: Both the New York Times and the Wall Street Journal have written about advisors in some of the huge firms being compensated for pushing clients into products that may not be right for them. As independent fiduciaries for our clients, we are required to provide advice that is in the best interest of our clients, not just advice that is suitable. I don’t know why anyone would choose an advisor that isn’t required to meet that highest standard, but we have to work hard to distinguish ourselves from the rest of the crowd.
  • I really like helping people in a personal way: Since Moneywatch helped guide Lisa and me to our own financial freedom that allowed me to tackle a new challenge, it has been really fun helping others do what we’ve already done.

People sometimes ask me if I wish I made this move years ago, and I always answer, “no.” I really enjoyed my time at UK advocating for the students, faculty and staff that  make it such a special place. And I am more well-rounded as a person because of that experience. But, if you have thoughts of a profession change later in your career, I would wholeheartedly encourage you to explore that opportunity.

Would You Trade A Bad Season For a Final Four Next Season?

If you looked at Twitter or Facebook after UK lost two games in a row last week – on the road to South Carolina and, even worse, at home to Florida – you would think the season was over. Distraught exclamations like, “I’m off the bandwagon”, “Cal’s one and done system doesn’t work” and “We’ll never make the tournament now” dominated the comments. There is a psychological term for this called Momentum Bias. Simply put, we tend to believe when things are going poorly they will continue to go poorly. Similarly, when we’re on a roll, we expect that to continue too. This same behavioral bias affects people’s views of the stock market. These emotions are quite normal and explains part of the value a good financial planner provides – we help remove the emotion from saving and investing by helping clients focus on their long-term goals.

Now, it’s easy to get frustrated with this team. They are talented but terribly inconsistent. Mind-boggling defensives lapses follow occasional flashes of offensive brilliance. We know they are the youngest team in the country because Cal reminds us of this fact whenever he can but compounding this have been injuries to Quade Green and Jarred Vanderbilt. As a result, at times during the Florida game there were players on the floor who hadn’t played as a unit before in a real game….ever. But, this isn’t news to you, dear reader. Even though we know these facts, however, our minds ignore them and only focus on what is in front of our faces – the mistakes and the losses. That is what is called Availability Bias. That is when we focus on the most recent data that is readily available to our brains, rather than taking into account all of the data on this team and this season. Let’s face it, if we beat West Virginia on the road Saturday, the Florida loss will be a distant memory, right?

Momentum Bias and Availability Bias both affect our views of the stock market too. As we watch our accounts grow each month it is quite tempting to believe it will continue that way. Let’s face it, we’re well into a 9-year Bull market. If Availability Bias limits our brains to the most recent data, it is easy to see why we only remember the up and focus less on the possibility the market will decline.

Little more than a year ago a friend of mine moved half of his investments, about $350,000, into cash the day after the election. He was scared to death of the affect he thought a Trump presidency would have on the market and didn’t want to lose money when the market dropped after he took office. In other words, Availability Bias focused him on that small piece of data and he let that data control his emotions. And that focus steered him away from the entire data set showing the economy was already doing well, companies were earning money and he had a long-term goal, not just a one-year window. I told him in the fall that, had he been a client at election time, we would have advised him not to sell his investments and to maintain his course. If he had listened to us, he would have earned about an additional $45,000 during that period.

As financial advisors, we focus on the long-term goals of our clients so they can ignore the daily bombardment of short-term noise we all hear. In short, we help remove the emotion from decisions. Our clients don’t have to worry because they know we’re handling it.

So, listen to me when I say…this team will be just fine. How many of us would gladly accept a loss in the 2nd round of the NCAA Tourney this year if it would mean a Final Four next season? I know I would. So, look at the broad picture, stay calm and focus on the ultimate goal – a 9th National Championship.


Monica and Chandler Predict the 2018 Stock Market

2017 was an amazing year for the stock market with the S&P 500 gaining over 19%. Even more amazing was the lack of volatility in the market – the swings in prices that make your stomach lurch like the Mystic Timbers roller coaster at King’s Island. For the first time EVER, the S&P 500 did not decline more than 3% in one day for an entire year! So, with that experience, it is easy to perceive the market as less risky.

Here is my prediction: the stock market will go down….someday. It may be today, it may be next week or it may be 2 years from now, who knows? Trust me on this – no one knows. And if you learn just one thing today, let that be it. In fact, if someone tells you they know for sure run, don’t walk, the other way.

So, if we don’t know what the market will do, how do we know what to invest in? Answer: We diversify our investments so all our money isn’t tied up in the same kind of investment. We want some of our investments to zig when others zag. In investors’ parlance, we want as little correlation among our various investments as possible. Why: Because over the long haul, less volatility in our portfolios should mean better returns that will help us reach our goals sooner.

To best illustrate, let’s take another peek into the financial lives of Monica and Chandler:

Monica and Chandler are now both in their early 40’s working at steady corporate jobs. Most important, the financial plan they prepared with their financial planner sets a goal to reach “financial freedom” by age 55. At that point, they both intend to still work, but earn less income in their dream jobs: Chandler as a yoga instructor and Monica as a fishing guide.

Now, Monica listens to a financial talk show on the radio and is absolutely convinced the stock market is going down this year because it went up so much last year. Chandler, on the other hand, loves the feeling of his account going up each month and wants more, more! In fact, he wants to invest even more aggressively and thinks Bitcoin might actually get him into the yoga studio by age 50.

If they follow Monica and move their money into “safer” or less volatile types of investments, like bond funds, they risk missing out on major gains if the stock market behaves this year like last. If they follow Chandler’s instincts and decide to invest more aggressively – maybe putting almost all their investments into stock funds, for instance, they risk a large drop in the value of their portfolio if the market tanks this year. Fact: Since 1871 the market has spent 40% of all years either rising or falling more than 20%. But, remember, we never know which direction, up or down.

Here is my advice to Monica and Chandler: Ignore the noise and even your gut feelings and stay the course. Maintain a portfolio that has a mix of different types of investments. Their particular mix should be constructed to support their goal to reach financial freedom in less than 20 years.

Let’s look at a little math to support the case: To use a round number, let’s assume Monica and Chandler’s investment assets, their portfolio, totals $1 Million. If all of it is completely invested in the stock market and the market falls by 10%, the new value of their portfolio is $900,000. To recapture that loss and have $1 Million again, the market must gain 11%.

Now, if their portfolio is diversified and only 60% of their investments are in the stock market and the market declines by 10%, that portion will decrease from $600,000 to $540,000. If the other assets stay level (an unlikely scenario but it helps explain our example), their portfolio only declines to $940,000, rather than $900,000. That’s a decrease of only 6% when the market declined by 10%.

Most important, now the market only has to increase 6.4% in order to get back to their original value of $1M, instead of 11%. Monica will be that much closer to the fish now.

Diversification is important but diversifying in a way that is right for your particular situation is even better. For help designing a portfolio for your specific needs, contact us at Steve@Moneywatchadvisors.com.