financial planning

Rule #3

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Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?

If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.

You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.

This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.

There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.

Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.


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

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

All That And More!

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The narrow part of our duties here at 228 Main is striving to grow your buckets. (By this we mean trying to help you build your financial wealth.) But a much broader range of topics comes into play.

The next layer out from investment research and portfolio management, equally important, is effective investing behavior. Some of you seem to have been born with great instincts; others have proved to be trainable. We invest energy and time into describing what effective investing requires, as accurately as we are able, to help you be sure we are all on the same page.

Then there is the matter of how to connect your money to your life. What do you need in terms of portfolio cash flow or withdrawals to meet your goals in the real world? Which forms of investing for retirement are likely to get you to your goals? How much of an emergency fund is optimal for you? We work with you on nearly any money question.

If you take a step back from that, you find a whole philosophy of money and life. We attempt to provide perspectives on things that will help you and us find confidence, comfort and happiness with the choices we make. Achievement, reaching goals, spending wisely (as vital as investing well), perspective on events of the day, economic history, biographies of giants who have come before us… all find their way into our communications.

We get paid for managing wealth. All this other stuff is intended to help you have the resources you need to live as you would like to live. (We have longed believed that the better off you are, the better off we are likely to be.) Whatever counsel you need from us is free; anyone may read our essays, watch the videos, and follow us in social media.

Speaking of that, if you have reason to wish others could see our perspective on money and investing and life, you may point them to our digital communications. Better yet, we will add anyone you want to the list for our weekly short email—friends, children, whomever. Of course, we are too busy trying to grow your buckets to bother them, so being on the email list is a low-risk proposition. Just let us know.

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

Financial Planning and Fortune Tellers

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We recently reviewed a financial planner’s article about strategies for claiming Social Security. They had software to do a complex analysis. The software required inputs of some raw facts: estimated Social Security benefits at different ages, household cash flow requirements, financial balances.

But the software required inputs, answers to questions about the future:

How much will investments earn in the future?

What will tax rates be in the future?

What will inflation be in the future?

How will household cash flow needs change in the future?

Many software planning tools even ask for the answer to the ultimate question: what will the date on your death certificate be?

The problem is we can’t know the future. So calculating that financial balances would be a tiny amount higher 30 years from now if one course is chosen versus another is probably about as reliable as consulting a fortune teller. Especially when it comes to trying to guess when your retirement will “end”!

But when it comes out of a computer, with charts and graphs and year-by-year tables of numbers, presented by a well-dressed person with initials after their name, it seems real.

At the dawn of the computer age, a phrase was used to describe the analytical version of “you reap what you sow”: “garbage in, garbage out” (or GIGO).1 We might do well to remember it.

Clients, if you would like to puzzle through any financial issue, we would be happy to use real life dialogue to sort out how the alternatives might work out. 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.

 

Pin It Down

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Social Security is a key piece of the retirement puzzle for most people. The benefits can be worth a substantial amount of money, Each one of us must make decisions about our participation.

We advocate getting facts specific to your situation before making up your mind about what to do. There is a lot of information floating around, not all of it accurate. If you do a Google search on the term “social security” you find more than six billion references.

But there is only one Social Security Administration, and its official websites may be a good place to begin. The reality may be more complicated than indicated by articles in the media.

Recently a client wondered about whether to defer retirement benefits to age 70. Supposedly the benefit of waiting past Full Retirement Age would be an 8% increase per year, calculated to the month. But when they looked at their online benefit statement at SSA.GOV, the benefit of waiting to age 70 benefit was 17% greater than indicated by the 8% formula.

How could this be?

Social Security retirement benefits are based on your best 35 years of earnings, indexed for inflation. Working beyond Full Retirement Age would replace a low wage year from earlier in life with higher current earnings, for this client. So there were two factors working in favor of deferral, not just one.

Pin down the specific facts for your situation before making up your mind. Clients, if you would like help with this or to talk about 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.

This is an individual example and is not representative of any specific investment. Your results may vary.

Financial Wellness

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We put a lot of time and energy into researching investments and managing portfolios. But there is more to financial wellness than being effective investors.

It is handy to understand where you are financially. Putting together a summary of what you have, and what you owe, is a great first step. What you own (your assets) less what you owe (your liabilities) is your net worth. This is a key indicator.

Not everyone is going to be great at creating and following a detailed budget. But it behooves each of us to think about where and how we spend money. At 228 Main, we don’t really have a lot of time to hector you or lecture you about spending money—you are the boss of balancing life in the present moment and preparing for the future.

When you know where you are, and understand the spending that needs to happen in your household, you can go to work on two ways to grow your net worth:

1. Reduce liabilities by paying debts off. One proven method is to pay some extra on the smallest one. When that is paid off, the amount of its payment plus the extra can be put on the next one until it is paid off, and so forth.

2. Increase assets by increasing your regular contributions to retirement or savings plans, or starting new accounts.

Once your plans are on track, there are some other niceties you might attend to, such as an emergency fund, managing your credit score, and beginning to think about your long-range goals.

What good is your money if it doesn’t connect at some point with your real life? That’s why we work to understand where you are, where you are trying to go, and the strategy and tactics you might use to get there.

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.

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.

Peak Experience

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You know we are endlessly fascinated by the search for investment bargains, the interplay of human behavior and the markets, and economic cycles. We enjoy talking with you, and collaborating on your plans and planning. But the pinnacle of our work is in a whole different category.

Once, a life-long friend of a close client had not been able to solve the question, “Can I afford to retire?” Mrs. S had raised two children on her own after being widowed at a young age, and was working at a job that had become onerous as she approached retirement age. For two years she had pursued the answer, but could not find it.

She needed to gain the confidence that she could retire. The resources were there, through her lifetime of diligent saving. We were able to explain the meaning of her wealth, how it could help her work toward where she wanted to go, in terms she could understand.

A year and a half after that, she called to ask another question. Would it be possible for her to own a home, or was that a pipe dream? She had spent thirty years in a modest rental duplex. Some time later she began her home search.

These questions, and others like them, are the reason we are in business. Our real work is not about making money. It is about helping clients make decisions that could change their lives.

Mrs. S was never our largest client. She never paid us the highest fees. But the personal satisfaction we felt from our work was vast.

Many will never need that much help. They come to a comfortable understanding of the meaning of their wealth without our context and perspective. We are still very happy to play a role investing their resources, and answering those financial planning questions that do arise.

Clients, if you would like to talk about these things 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.

 

Little Is Big

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We were working recently with a client whose spouse passed away last year. Major life changes usually require a series of conversations to get everything settled and all the adjustments made.

This conversation showed us that “little is big.” The household cash flow was just a bit shy of covering the bills. Savings on hand were slowly being eaten up, month by month. If you have been in this position, you know it feels bad. It affects your attitude in a negative way.

A simple adjustment, slightly increasing the monthly withdrawal from invested balances, fixes it so there will be a little money left over every month instead of a constant shortage. The amount isn’t material to the sustainability of her finances. It was little, but changed everything. Little is big.

The same notion applies to other things in other ways, including investment analysis. Imagine the dynamics of an industry whose business is steadily shrinking by 1% per year, compared to one that is growing by that much. The shrinking industry would tend to have too much supply, poor margins, and dispirited employees. A slight difference—a little growth instead of a little shrinkage, would change everything. Little is big.

It matters in retirement planning, too. We did some arithmetic for a client age 40 with a $180,000 retirement account balance and $9,000 per year in deposits. A 1% difference in annual returns, the difference between 7% and 8%, makes a $400,000 difference in the amount accumulated at age 65. Little is big. (This is arithmetic, not a projection nor a prediction. No guarantees.)

This raises a question: if every little thing is potentially big, how do you keep track of it all?

For us, the answer is to keep the big idea in mind, and try to make sure everything we do advances the big idea. Our big idea is to grow your bucket, and strive to make it serve you as you need. Paying attention to the little things working to advance the big idea, that we can do.

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.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.