budgeting

Up And Down Really Means Up And Down

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As long term investors we talk a lot about the need to weather short-term volatility in pursuit of long-term results. Our notion is that volatility is not risk, but an inherent feature of investing.

As years go by, many think of the market as having good years and bad years. This is based on the outcome for calendar years. The astonishing thing is how much movement there is during the course of the typical year.

“At least one year in four, roughly, the market declines.” We’ve said that about a billion times, to reiterate that our accounts are likely to also have good years and bad years, if one judges on annual returns. The object is to make a decent return over the whole course of the economic cycle, year by year and decade by decade.

But in those other three years out of four, the market also experiences declines during the course of the year. In an average year you may see a decline of 10 to 15% at some point during the year.

Our object is to leave long term money to work through the ups and downs, without selling out at a bad time. Three things help us do that:

1. A sense that everything will work out eventually, a mindset of optimism.

2. Awareness that downturns tend to be temporary, ultimately yielding to long term growth in the economy.

3. Knowing where our needed cash will come from, based on a sound cash flow plan.

Bottom line, even years that end up well can give us a rough ride. Knowing this can make it easier to deal with.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

Moving Target

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We have observed that spending in retirement is a moving target. One theory says we spend more money in the early years of retirement than in the later years. Financial planner Michael Stein describes it this way: the Go-Go years, the Slow-Go years, and the No-Go years.

Spending in retirement impacts some of our most fundamental plans and planning. Retirees have a wide range of lifestyles, avocations, and circumstances which take money. It’s a personal thing.

In our experience we see people spend less as they age. When we first noticed this trend, we wondered if that was because some people run low on money. However, we recently have taken note that people with resources tend to spend less as time goes on. (Health expenses may run counter to this trend, increasing toward the end of life).

Each person has their own objectives and habits, and life throws some curve balls too. Case by case, it could make sense to plan on spending more in the early years of retirement. Bucket list items, to be done once, might come early in retirement.

The Alaska cruise, trip to Hawaii, or tour of Europe should be undertaken when you have the time and money and health to do it. The boat or camper, if one is desired, should be purchased when one has more years to enjoy it.

One of the most gratifying parts of our work is working with people on their plans and planning. We’ve worked with some of you from mid-career all the way into many years of retirement. Each one of you is as different as a fingerprint.

Clients, if you would like to talk in more detail about your retirement aspirations or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

Simple or Complicated? You Choose

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The object of a household budget is to end up with control of your finances.

If you Google “steps in budgeting” you will find results ranging from three steps to ten steps. Each one involves accounting for all of your outlays to the penny. The process must be repeated every month, and requires ongoing work to maintain.

Budgeting works well for some people, particularly when money is tight. If you might not be able to afford food unless you pay careful attention, you probably better pay careful attention.

But another, far simpler method works for many others. You pay yourself first, and spend or save what is left over. Paying yourself first can take many forms, but the most fool-proof methods are automatic.

• 401(k) plan contributions at work, by payroll deduction.
• IRA or Roth contributions, by automatic monthly bank account transfers.
• Investment account deposits by automatic bank debits.

You may need to do some arithmetic to see if your monthly investment amounts are likely to get you where you want to go. (We can help with this.) After that is done, all you need to do is pay yourself first!

Some of you enjoy keeping careful records of spending, and we would not discourage that. At a minimum, being mindful about our outlays makes sense. But for others, the simpler method may fit in better to your real life. It is a personal choice.

Simple or complicated? You choose. Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No strategy assures success or protects against loss.

The Worst State to Retire In

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It seems like everywhere you turn, there are opinions about retirement. We have not seen this particular bit of advice, so here goes.

After thought and study, we conclude that the worst possible state for retirement is… the state of confusion. Confusion may seriously impair the retirement experience.

• If we don’t understand the income potential of our lump sum balances, we may either be unnecessarily tight with our budget, or run the risk of winding up broke.

• Running out of money is a common and natural fear. Arithmetic guided by experience and knowledge may ease that concern.

• Decisions about Social Security benefits and pension payouts may have a large impact on financial security. The advice one gets at coffee break or at the water cooler may not be the best.

• Health care transforms for most people in retirement. Putting all the pieces together can be confusing. Medicare Part A, Part B, Part D, and supplemental insurance all enter into it. Personal health and financial factors play roles, too.

We advocate thoughtful approaches to major life decisions. A framework of solid information and the right arithmetic may help reduce confusion.

All in all, the state of confidence is a far better place to retire than the state of confusion. Clients, if you would like to discuss this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

When the Money Runs Out

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Our advice generally has an upbeat slant to it, to the point that we occasionally get accused of being optimists. We believe our confidence in the future is soundly justified. We know, however, that not every situation is likely to have a happy ending. It takes money to do the things we want and need to do. Sometimes we simply don’t have enough of it.

This is the reason we are in business: to help clients make the most of their money. But there are limits to what prudent financial planning can accomplish. We think that our advice has value, but it isn’t magic. Our best efforts don’t always produce the resources we expected for major lifestyle needs. Other times, unexpected expenses such as legal or medical bills threaten our hard-earned wealth.

What to Do When Crisis Strikes

When faced with a financial crisis, the simplest step is cutting outlays. Even if you don’t have much in the way of luxuries to give up, you may find that some of the “necessary” expenses you took for granted can be reduced or eliminated. Maybe you are paying for an extra car you don’t really need, or more insurance coverage than makes sense, or a storage unit you could do without. We assume our bills are fixed, but on examination some of them may be reduced or eliminated.

Sometimes, though, your bills may be more than you can handle just by rearranging your budget, and that’s when the choices get really tough. At this point, your job is to sit down and figure out what the least bad option is.

Financial Strategies When Funds are Short

You can try to preserve your assets for as long as you can, investing conservatively and staying in stable assets to try to maintain balances. But simply seeking to maintain your value is not good enough if your assets are chipped away by your expenses. This route increases the likelihood that you will eventually run out of money. This strategy may only provide a nice, predictable trajectory until you hit zero.

Alternately, if you know you’re likely to hit zero eventually but you have a long-term investment strategy and don’t need the funds in the near future, you might take the opposite approach and invest more aggressively, pursuing growth to try to keep ahead of your expenses. Obviously, the risks are considerable; bear in mind that you should always keep a certain amount of funds to cover expenses in savings or conservative, liquid investments. There is a chance that you will lose your principal—but if you know that you are likely to run out of money in the end anyhow, the risk of running out slightly faster may be an acceptable trade-off for a chance to make it last longer.

Stay Realistic

In a situation like this, there is no right answer for everyone. The right answer for you is the one that you’re most comfortable with. It is important to remain realistic about your options, though. If you know that you need to draw $10,000 a year to live on for 20+ years of retirement, and your retirement portfolio is only $75,000, plugging your ears and insisting that everything will be sunshine and rainbows is probably only going to hurt you. Be wary of people peddling quick and easy cures for such financial woes–even if they are not outright frauds, odds are they do not have your best interests in mind.

If you feel you may be facing any tough financial decisions in your life, please call or email us to see if we can help you in your planning and thinking.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Organize Your Money: The Easy Way or the Hard Way

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Anyone with a passing interest in personal finance has read about the need to know where your money goes every month—to run your finances in accordance with a household budget. If you google “household budget” you will find millions of links. It turns out there is actually an easier way.

A typical budget would include line items for home expenses including utilities, telephone, insurance, property taxes, rent or mortgage payment; auto including payment, repairs, insurance, gasoline; personal items including health care, clothing, gifts, personal care, etc.; and so forth.

It takes a fair amount of time to determine what amounts should be budgeted in each category, and then to track your spending by category each month. Time is what life is made of—we should be careful how we spend it. Especially when there is an easier way. So simple, it fits in three words:

Pay. Yourself. First.

If you always save 10% of everything you ever make for the long haul, you probably will be able to retire at a decent age. PAY YOURSELF FIRST by electing that kind of percentage into employer retirement plan or other long-term investments.

If you put something into savings every payday, you’ll never get caught short by a broken appliance or unexpected home or auto repair. PAY YOURSELF FIRST by putting 5% of income into shorter-term savings. When your savings balance equals many months of income, you can transfer funds to long-term investments.

Depending on your circumstances, you may need to pay yourself more to reach your goals. But the 10% and 5% are a good place to start.

So with the ‘pay yourself first’ method, how much should you spend on everything else, all those other categories of things we need or want? Very simple: whatever is left over after you pay yourself first. Think twice about buying a money pit of any kind—it will imperil your goals. Spend as little as you need to on things that decline in value, like vehicles. And be careful about things that come with monthly bills, like pet horses or satellite TV. Housing and vehicles consume major fractions of our incomes, so make thoughtful decisions in those areas.

As long as you simply pay yourself first, you can get to where you want to go. Or you can do it the hard way: download one of those comprehensive budgets and get to work.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Persistence Pays in Many Ways

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We have noticed something so prevalent it borders on being a universal truth. In so many of life’s endeavors, persistence is the difference between success and failure.

Tenure in a career builds experience and skills and value to employers…and earning power. Building a reputation in business takes years but can pay off for decades. A friend tells us, a college degree tells potential employers one thing: a willingness to stick with something for at least four years. In a world where instant gratification is so dominant, persistence—or grit—is an asset.

Persistence usually implies effort, willpower, or self-control. But there are ways you can be financially persistent without much thought or effort.

A saver who commits to put $100 monthly into an investment or savings account will run into reasons why it would be OK to skip a month, perhaps intending to make it up later. Maybe they feel it’s not a good time to invest, the refrigerator will need replacing, or an auto repair popped up. So the commitment turns into 12 decisions each year, 120 decisions per decade, 480 decisions over a working career.

By simply setting up an automatic deposit from one’s checking account, one decision is made and it lasts for all time. It is much easier to get one decision right instead of twelve or hundreds.

Many people have 401(k)s, IRAs, or other voluntary retirement plans available to them. Here, too, inertia can help you build wealth. You sign up, and so many dollars go into the plan every payday without any sweat or effort on your part. Sometimes people nearing retirement find out they are in pretty good shape because a young person long ago put wealth-building on auto-pilot.

When you combine these automatic, systematic ways to invest with the power of compounding wealth, amazing things can happen. Call or write if you would like to discuss your situation in more detail.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Can You Afford Retirement?

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One of the most common reasons why clients seek our services is retirement. And there are many questions involved in the topic: how to determine if you can afford to retire, how to invest in order to be able to retire, how to invest after retirement, how to get a handle on how much it costs to live in retirement. Sometimes people put off planning because there is so much about the future that is unknown, it seems futile. But we can always get an idea of what is likely to happen, and that is the basis for planning.

The first task is to be able to fill in the blank in this sentence: “I think retirement will work out for me, because I will have ______ dollars coming in every month and that will let me live as I planned to.” We believe this is a better approach than using some percentage of pre-retirement income.

We know from working with hundreds of people over the years there is a wide range of actual outlays people in different circumstances spend in retirement. The key factor for you, however, is how much money you will need to do what you want to do. Some people travel, others do more gardening. One takes money, the other saves money. We can help you determine what you will need for your retirement.

The planning process might be vague or uncertain at the beginning, especially if you are seven or ten or more years away from retirement. As the years go by and you get closer, your plans will gain precision. After all it is much easier to predict a year or two ahead than a decade or two ahead. So the best course of action is to get started on a course of action. You can fine-tune your plans as you go along.

The second step is to add up the resources that will help provide income in retirement. These include monthly benefit amounts like Social Security and pensions, as well as lump sum retirement savings in the form of IRA’s or 401(k) or other retirement accounts, and other savings and investments.

Once you have a sense of your retirement income needs and resources, we can start in on the arithmetic and projections that will help you understand if you are on track. The next article in this series will cover our methods and philosophy for retirement calculations and investments.

If you would like to discuss your situation in detail, please schedule an in-office meeting or telephone conference. We enjoy the discussion, and never charge for it.