Old Adages Die Hard: What Worked in the Past May Not Work Today!

More people are renting (not buying) houses, particularly millennials. The old adage that “paying rent is foolish, own your house as soon as you can” is no longer being universally followed.  Lots of reasons: cost of college education, student debt, relative cost of houses, flat wages, more flexibility and others.  Today we 327 million Americans live in 124 million households, of which 64% (or 79 million) are owner-occupied and 36% (or 45 million) are renter-occupied. In 2008, homeownership hit 69% and has been declining ever since.

It starts with the increasing cost of college.  Back in the mid 1960s, in-state tuition, fees, room and board for one year at the University of Illinois was $1,100.  Annual Inflation from 1965 to now has been 4.4% meaning $1,100 would have increased 10 times to $11,000 in current dollars.  Yet, today’s in-state tuition, room & board at Champaign is $31,000, a 28 times (or 7.9% average annual) increase.  Yes, students often get scholarships and don’t pay full price, but even a $22,000 price tag would represent a 20 times increase.

It’s no surprise that in the last 20 years, many students following the old adage “get a college education at any price” found it necessary to incur debt to complete college.  Today over 44 million students and/or their parents owe $1.6 trillion in student debt.  Among the class of 2018, 69% took out student loans with the average debt being $37,000, up $20,000 each since 2005.  And here is the sad part: according to the NY Fed Reserve, 4 in 10 recent college graduates are in jobs that don’t require degrees.  Ouch. In today’s changing economy, taking on “good debt” to get a degree doesn’t work for everyone, like it did 50 years ago.

At the same time, houses in many communities have increased in value greater than general inflation.  Elise and I bought our first house in Arlington Heights, IL in 1970 when we were 22.   It was 1,300 sq. ft., 3 bedrooms and one bath and cost $21,000.  I was making $13,000 a year as a starting CPA and Elise made $8,000 teaching.  Today that same house is shown on Zillow at $315,000.  That’s a 15 times increase in 50 years. At the same time, the first year salary for a CPA in public accounting is now, according to Robert Half, about $50,000-$60,000. Let’s use $60,000.  That’s less than a 5x increase.  Houses, on the other hand, have increased at 5.6% per year. CPA salaries have increased 3.1%.  The cost of living in that 50 years went up 3.8%. Wages, even in good occupations, have lagged inflation. Our house 50 years ago represented about one times our annual income.  Today the average home is over 4 times the owners’ income.  That makes housing a huge cost of the family budget.

In addition, today it is so much more difficult to assemble the down payment. We needed 20% or $4,200; which came from $3,500 savings we accumulated during our first year working full-time and a $700 gift from my mother. A “starter” house today can cost $250,000 or more.  20% is $50,000, which for many is more than their first year gross income.  And, from that income, they have taxes, rent, food and other expenses and, in many cases, student debt, to pay before they have money for savings. Saving 10% is great, 20% is phenomenal.  But even at 20%, that’s only $10,000 per year and they would need five years to get to $50,000.  No surprise that it is estimated the 2/3 of millennials would require at least 2 decades to accumulate a 20% down payment.

Certainly, houses can become wealth builders because of the leverage of the mortgage.  If your $250,000 house appreciates 2% a year, that is a 10% or $5,000 increase on your theoretical $50,000 down payment. But what happens when real estate markets go down as they did after the 2008 financial crisis?  The loss is increased.  Many young people saw siblings or parents suffer a big downturn in equity 10 years ago and are not ready to jump in.

Furthermore, young people who can scrape up the down payment and recognize the long term benefits of home ownership, may not be willing to commit to one house or one location for six to seven years.  With closing costs and commissions, buying, owning and selling a house in too short a period can be costly and not produce positive returns.

Lastly, many people want flexibility and don’t want to be tied to a house. They want flexibility to change locations and jobs.  They want flexibility with their time and don’t want to spend their weekends mowing the grass or perform continual repairs on the house. In changing states like Illinois, with a shrinking population and less likelihood of significant appreciation, their house can be a burden.  For them, renting provides them flexibility and peace of mind.

It’s no surprise then that the WSJ reported last week that a record number of families earning $100,000 a year or more are renting.  In 2019, 19% of households with six-figure income rented their house, up from 12% in 2006.  Rentals are not only apartment buildings around city centers, but also single-family houses.  The big home-rental companies are betting that high earners will continue renting.

Yes, the world has changed greatly in the last 50 years and it will keep changing.  When I look back, I realize we baby boomers had it awfully good.  The old adages worked for us. But today, buying a house is not the “slam dunk” decision we had years ago, nor is a college degree.  The personal financial playbook followed by past generations doesn’t add up for many people these days.  It’s time for a new plan customized for new generations and that’s exactly what we do at DWM.

Money and Time

 

time-money-hourglass.jpg

As the old saying goes, “Time is Money.” One of the great laws of business is that time equals money: The more time you can efficiently utilize, the less time you waste and the more money you make. Some may call this the opportunity cost of laziness. By being lazy you essentially give up the opportunity to make money. You’ve likely heard the phrase in some form or another a thousand times before, and it makes sense. However, have you ever considered it the other way around?

It may feel strange saying it out loud at first, but the saying can go both ways. Money is time. Time is one of the most valuable resources on earth. Thinking of money in terms of time is one of the best ways to adopt a healthy attitude about spending and stop splurge spending. If you know the true cost of your dollar you may be more inclined to save it.

To start, you must factor in all hours spent at or around the office, commuting, and at seminars over the course of a year. Once you’ve established the number of hours spent on work-related items, you will then have the denominator for your true hourly wage calculation.

The next step will be establishing any costs associated with your work. There are a lot of people who are unaware their job may actually have costs associated with it. Aside from the amount of time spent at work, most spend a considerable amount in preparation for their job. The cost associated with job preparation includes gas and care repairs for daily commuting, daycare costs, coffee, work clothes, and some may even include the occasional happy hour after work. Once you’ve established the amount of money you spend on your job on a weekly or annual basis, then subtract this number from your weekly or annual salary. Now subtract taxes to arrive at your net salary.

Now we are ready to calculate your true hourly wage. Take your net salary, add back any retirement plan contributions you may have been making, and divide this by the number of hours spent on work-related items to arrive at your true hourly wage.

Example:

Let’s assume an employee works 40 hours per week, spends 10 hours on work-related items. This employee gets paid $40,000 a year, spends $8,000 per year on work-related items, and pays about 20% ($8,000) in taxes between state and federal per year. The true hourly wage of this employee would be $9.23 per hour ($24,000 divided by 2,600 work hours per year). Compare this to a naked eye analysis of this employee’s salary, $19.23 per hour, and you will notice a $10 per hour difference for this employee. This means each dollar this employee spends costs him or her more than 6 minutes at work.

Knowing the true cost of your dollar, you may find yourself reluctant to splurge on that next big item. It’s important to remember that the relationship between your money and your time isn’t always that straightforward. While you can certainly calculate the cost per hour of use for a given splurge item, (a $160 chair used for 480 hours a year and used for five years will have a cost per hour of $0.06), this should not be the only consideration in spending. For both spending your time and your money, there is always at least one item we can all spend it on: That which makes you happy.

My, How Jobs Have Changed

Hope you had a super Labor Day weekend!  Wonderful to be with family and friends.  It’s amazing how jobs have changed over the years.  The NYT over the weekend illustrated how life is so much different for workers by comparing two janitors working for two top companies then and now.

Gail Evans was a janitor for Eastman Kodak in Rochester, NY almost forty years ago.  She was a full-time employee, received 4 weeks paid vacation, reimbursement for some tuition costs to go to college and bonuses. And, when the Kodak facility was temporarily closed, the company kept paying her and had her perform other work.  Ms. Evans took computer classes at night, got her college degree in 1987 and ultimately became chief technology officer for Kodak.

Marta Ramos cleans floors for Apple in Cupertino, CA.  She isn’t on Apple’s payroll. She works for one of Apple’s contractors.  Ms. Ramos hasn’t had a vacation in years-she can’t afford the lost wages.  Going back to school is out of the question. There are no bonuses and no opportunities for some other role at Apple.  Ms. Ramos earns $16.60 per hour, about the same as Ms. Evans did in inflation-adjusted terms.  But her only hope for advancement is to become a “team leader”, which pays an extra $.50 per hour.

Over the last 35 years, American corporations have increasingly focused on improving their bottom line by focusing on their core competency and outsourcing the rest. Part of the success of the Silicon Valley giants of today has come from their ability to attain huge revenues and profits with relatively few workers.  It’s led to huge profits for shareholders, helped grow the U.S. economy, but also has fueled inequality.

In 1993, three of the then tech giants – Kodak, IBM and AT&T – employed 675,000 employees to produce $243 billion of revenue in inflation-adjusted dollars.  Today, Apple, Alphabet and Google produce $333 billion in annual revenue with less than 1/3 of that number, employing only 205,000 employees.

Apple is quick to point out that its products generate many jobs beyond those who receive an Apple paycheck.  It estimates that 1.5 million people work in the “app economy.” However, research shows that the shift to a contracting economy has put downward pressure on compensation.  Many corporations hire full-time employees only for the most important jobs and outsource the rest; obtaining contractors at the time and place needed for the lowest price possible. It’s not just janitors and security guards that are outsourced.  There are also people who test operating systems, review social media posts and screen job applicants, for example.  It’s understandable: companies face really tough competition and if they don’t keep their work force lean, they risk losing out to a competitor that does.

In addition, outsourcing often results in a culture of transience.  Contracted workers are often changing jobs every 12 to 18 months, which obviously can be stressful to them and their family.  Contractors generally don’t receive stock options nor robust health insurance.  Also, retirement plans, even for full-time employees, have changed considerably in the last 35 years. In 1979, 28% of workers were covered by a company paid pension program and 7% had a 401(k). In 2014, only 2% of workers were covered by a pension plan and 34% had a 401(k) plan, which of course, means that most of the funding now is coming from the worker.

Here’s what’s really amazing.  With all these changes, job satisfaction has gone up.  For the first time since 2005, more than half of U.S. workers say they’re satisfied with their jobs.  This optimism has led to consumer spending increasing every month this year and a strong economy.  Apparently, after a decade of job cuts, minimal raises and reduced benefits, workers have lowered their expectations.  Rick Wartzman, author of “The End of Loyalty: The Rise and Fall of Good Jobs in America,” feels that young workers today “don’t even know what they are missing.”

On Monday, we celebrated Labor Day, honoring working people.  That’s particularly important these days as many workers don’t have it nearly good as it was 30-40 years ago.  Even so, American values, spirit and resiliency continue to be very evident in these ever-changing times. Perhaps we need another holiday, “Resilience Day.”  Time to get the grill heated up again!

Now’s the time to plan your 529!

Summmerrrtttime!  Every day in the summer at our office here in Charleston, we are regaled with the carriage tour drivers’ versions of this famous song from Porgy & Bess.  We end up having that song stuck in our head a lot of the time!  Already the ads for back to school sales are appearing and it reminds us that, while the “livin’ is easy” right now, the hustle of getting kids ready to head back to school isn’t far away.  We hate to interrupt your summer fun, but it is a good idea to get ready for college tuition payments no matter what age those students are!

We wanted to highlight the particular advantages of using 529 plans for funding your education purposes, as it is the most cost-effective way to manage the expenses of higher education.  Enacted in 1996, Section 529 of the Internal Revenue Service Code allows an account owner to establish a plan to pay for a beneficiary’s qualified higher education expenses using two types of plans – a pre-paid tuition program or the more popular, state-administered college savings plan.  The beneficiary can be a family member or friend or an owner can set up a 529 account for their own benefit.  Anyone can then donate to the account, regardless of the owner or beneficiary.  Funds can be deposited and used almost immediately (need to wait 10 days) or can be invested and grown until needed.  Surprisingly, according to a Wall Street Journal article recently, only 14% of Americans plan to use 529s to pay for college.

Although there is no allowable federal tax deduction for 529 contributions, the income and gain in the account are not taxable, as long as they are used for qualified education expenses.  These qualified expenses include tuition, room & board, books and, in a 2015 legislative change, payments for many technological expenses like a computer, printer or internet access, even if not specifically required by the educational institution.  The costs for off-campus housing can also qualify, as long as the amount used matches the average cost of resident-living at your university.  Many states, like SC and IL, also allow a tax deduction for 529 contributions to in-state plans.  Another recent legislative change allows for an increase from one to two annual investment selection changes per year, unless there is a rollover and then a change can be made at that time.  This gives the 529 owner a little more benefit, flexibility and control over their accounts.

When funding 529 accounts, we recommend that our clients not fund more than 50% of the total cost of estimated expenses for the education of their student before the student selects and starts college.  One nice feature about 529 plans is that they are transferrable to a sibling or other close family member, if a student doesn’t use or exhaust their entire 529 account.    However, you don’t want to overfund an account and then have some leftover.  Only the gains in the account are taxed, but there is a 10% penalty on the account if the funds are withdrawn and not used for qualified education expenses.  Another reason for not overfunding is that there are many scholarships available – you may have an accomplished science whiz or an amazing athlete that earns scholarship money.  Once final amounts of tuition requirements are determined, 529 account owners can make necessary additional contributions to take advantage of tax benefits.

There are many scholarship opportunities available for those who take the time to look and apply.  Checking with the high school guidance counselor, local civic groups or community organizations about scholarships or awards opportunities can give your high school student some hands on involvement in paying for their own education!  All high school seniors should also fill out the annual FAFSA (Free Application for Federal Student Aid).  There are many opportunities for earning money for college and nothing should be ruled out.

We know that using 529 accounts is the least expensive way to pay for college.  Research shows that the most expensive way to pay is by taking out student loans or paying out of pocket as the student needs it.  At DWM, we want to help you strategize how to save for and pay for any education expenses that you may have before you, no matter when those costs are expected.  We can help you evaluate the various state plans and the investment options in the 529s and calculate an appropriate annual or lump sum amount of savings.  We will be glad to help make your summertime livin’ easy and carefree!  Okay, now back to summer fun…already in progress!

Successful Investing Strategies for Millennials

We have all heard how important it is to start saving for retirement at a young age; but what exactly does that mean? A lot of young working people will sock money away in a savings account and think they are doing the right thing. While having cash for a rainy day/unexpected life event is very important, it is not at all how to save for retirement or save for a big purchase (i.e. down payment on a mortgage/new car). The secret behind it all is something called “compounding interest”. Compounding interest is something that happens over the course of many years and is hands down the best strategy to obtaining financial freedom.

For starters, it is important to understand what kind of account you are funding. Ideally, funding both a qualified account and non-qualified account is important. Qualified accounts are tax-advantaged retirement accounts such as Traditional IRAs, Roth IRAs, and 401ks. The beauty about these accounts is that they can grow either tax-deferred (such as a Traditional IRA) or tax-exempt (i.e. Roth IRA), however they cannot be tapped until a later age without penalty. Qualified accounts also come with contribution limits so one cannot put in an indefinite amount. Although you will pay tax on earnings upon sale of investments within non-qualified accounts, the good news is that the funds are available for withdrawal at any time with no age restriction.

We understand young workers may not be able to fund both kinds of accounts early in their careers, therefore, we recommend funding the qualified accounts (retirement) first, followed by the taxable, non-retirement accounts.

Click here to learn a little more about Roth and Traditional IRA’s (qualified/retirement accounts).

The next step is to determine what kind of asset allocation aligns with your ‘Risk Tolerance Level’. We recommend consulting an investment expert, like DWM, to help determine your risk level profile (e.g. defensive, conservative, balanced, moderate, or aggressive) and the funds you should be invested in. Assuming your risk tolerance lands you in a “balanced” portfolio, you should expect a targeted long term rate of return of 6 to 8% per year. This may not sound like an enormous annual rate of return, but after compounding interest over a long investment time horizon, one is capable of achieving impressive portfolio numbers.

Now for the magic of compounding interest, what it can mean for your future, and why it is so important to start early for young workers. The best way to explain this is through an example:

If you contribute $5,500 to a Roth IRA (the max a Roth allows each year) starting at 22 years old and average 7% return per year until retirement at age 65, the $236,500 total contribution will turn into $1,566,121.

Compare that to socking away $5,500 into the same type of account, invested in the same exact funds, starting at age 40: Your account will grow to $372,220. This is still great and much better than not investing at all, but it would be a lot nicer to grow an account to over 1.5 million dollars versus less than 0.4 million dollars going into retirement.

An accepted estimate in the financial planning world is something called “The Rule of 72”. This is a quick and simple math equation that estimates how many years it will take to double an investment, given a certain annual rate of return. If we assume a 7% rate of return, we would divide 72 by 7 to come to a final answer of 10.24. So, with an annual return of 7%, it will take you a little over 10 years to double an investment. Therefore, a 25 year-old has the potential to double his/her invested money every 10 or so years from your early 20’s until retirement (4x over).

This means one would need to more than quintuple your annual income if you wait until age 40 vs. starting at 22 to make up for not putting away the $5,500 the 18 years prior (~$1.25 million) you technically missed out on.

Click here to see what amount you can achieve if you started putting $5,500 away today.

Another big misconception with saving young is “maxing out a 401(k)”. Many young workers will say they are maxing out their 401(k). However, simply putting away the 3-4% a company matches is not at all maxing out a 401(k), in fact, it is barely scratching the surface. As of 2017, the maximum employee contribution, per year to a 401(k), is $18,000- this is maxing out a 401(k). Let’s say a 25 year old makes $50,000 per year and is contributing 4% to his/her 401(k) that the company is matching. This 4% is only $2,000 per year and the match only becomes yours after it vests. It is important to understand your companies vesting schedule because in some cases it can take six years or more for that to actually be considered your money.

Another important step to saving/investing correctly is analyzing the investment menu within your 401(k). This involves studying the funds offered within a 401(k) and identifying an appropriate asset allocation target for yourself in-line with your risk tolerance. It is also important to look at the underlying fees within the funds of the 401(k). If you are in a large cap equity fund charging 70 basis points but there is another large cap fund that charges only 9 basis points, it can make a big difference over 20-30 years. Here at DWM, we do a 401(k) analysis for all clients because we understand the importance a few basis points can have on an individual and their family over the course of a lifetime.

We have all heard our millennial generation and future generations will never be able to retire because of different theories on social security and how rare pensions are today. This could not be further from the truth. We simply need to take our savings just as seriously as our expenses and we may be capable of not only retiring, but comfortably retiring and being able to leave a legacy for future generations. While a lot of millennials believe they are going to invent the next pet rock and become overnight millionaires, it might be a good idea to start saving the correct way because slow and steady does indeed win the race. 

Your Choice- $1 Million or $5,000 per Month for Life?

Most of our readers will likely have to make that type of decision someday.  From our perspective, it’s a pretty easy answer.  As Cuba Gooding, Jr. famously told Tom Cruise in “Jerry Maguire”:  “Show me the money!!”

Yet, an article in the WSJ on Monday tried to make the decision sound really tough, with losers on both sides.  It would have you believe that many will suffer from either an “illusion of poverty” or an “illusion of wealth” and are likely going to experience a disappointing retirement.  Really?

Researcher Daniel Goodwin at Microsoft Research asked people how adequate they would feel if they have $1 million at the time they retired.  He used a seven-point system with one being “totally inadequate” and seven being “totally adequate.”  Then, he asked them to rate instead an income each month in retirement of $5,000.

In theory, the choices are similar based on pricing of annuities. If a 65 year old paid $1 million for a “single premium immediate annuity” they could receive payments of $5,000 each month for their life.  Actuarially, a 65 year-old is expected to live 18-20 years.  So, 19 years of monthly payments of $5,000 would be $1,140,000 and represent a 1.4% annual return on the investment.

Yet, believe it or not, many people, feel that $5,000 per month is more adequate than the $1 million lump sum.  Mr. Goldstein says that this group suffers from the “illusion of poverty.”  Apparently, these folks are “inclined to think about wealth in terms of monthly income” and don’t want the “burden” of a lump sum which could run out someday.  Hence, they dial down their expenses, eliminate any wants or wishes and make do on their $5,000 per month.

Mr. Goldstein then suggests that I and most people may suffer from the “illusion of wealth.”  He thinks that those selecting the lump sum, through a false sense of security, may spend too much and run out of money. In fact, the larger the lump sum, the more likely the “extra millions will lose their meaning.”  Really?  Do we all suffer from illusions, as Mr. Goldstein suggests?  Are we all on the road to an unsuccessful retirement regardless of our choices?  It certainly doesn’t have to be that way.

Perhaps I should contact Mr. Goldstein and invite him (and his wife) to go through the DWM Boot Camp.  First, we’d sit down and help them with their goal setting. We’d help them identify their needs, wants and wishes.  We’d look at their assets, health care costs, income taxes, expected inflation and investment returns, and insurance and estate matters.  Ultimately, we’d help them design a financial plan.

If Mr. Goldstein was under an “illusion of poverty,” we’d show him that his $5,000 per month program is a poor choice.  To begin with, his $5,000 per month would lose its purchasing power each month due to inflation.  With 3% inflation, after 15 years of retirement, his $5,000 would only buy $3,200 worth of goods in today’s dollars.  Second, if he did a “personal annuity” by simply taking the lump sum, investing it, earning 6%, e.g., and withdrawing the $5,000 per month, his family would still have the $1 million in principal when he passed away.  No need for an illusion of poverty here.

On the other hand, if Mr. Goldstein was under an “illusion of wealth”, the plan would help him identify his needs, wants and wishes and would have helped evaluate whether those potential expenses were affordable based upon his assets, expected investment returns and the other metrics.  We would have created numerous scenarios to ultimately result in a plan that was successful.  The plan would be stress tested for items that could negatively impact that plan and monitored and modified over time.  In short, the plan would not suffer from an illusion of poverty nor of wealth.

We’re glad contributors Shlomo Benartzi and Hal Hershfield ran the article Monday focusing on Mr. Goldstein’s findings. Retirement/financial independence planning is extremely important.   However, we don’t agree that it has to be a dire situation with poor choices, lots of suffering and disappointments.   It’s simple: take the lump sum and put together your realistic plan with a fee-only adviser like DWM and then have us help you monitor it for the changes that will undoubtedly occur in the future. You’ve worked hard for your money, the time will come to enjoy it. As Ginny’s blog http://www.dwmgmt.com/blogs/82-2017-02-07-23-30-00.html pointed out a few weeks ago, retirement/financial independence should be a time for “jubilation” not illusions or disappointments.  Proper planning with the right team can make that happen.

Strategies to Stretch Your Nest Egg

cash as nest for eggsOne of the most emailed NYT articles in the last week has been Tara Siegel Bernard’s “6 Strategies to Extend Savings Without Working Longer.” We thought today we would take a look at her six suggestions and critique them.

Ms. Bernard’s suggestions:

Practice Living on Less. This is a great strategy to consider. Over the years, we’ve reviewed the finances of hundreds of clients and prospects. It’s amazing to see how little some spend, even when they could spend more. Of course, then there are others that spend vast sums of money and still seem to need more money to be happy. And, of course, there are lots of Goldilocks situations, whose spending seems “just right,” providing all they need to do all the things they want to do in a cost efficient manner, without wasting money.

Maximize Social Security. This is another very important strategy. Many couples are scheduled to receive over $1 million in social security benefits in their lifetimes. And, handled properly, they might increase that by 15 to 20%. Social security is a fairly complicated maze of rules. We use a software to investigate scenarios for clients to illustrate the impact of planning strategies. Of course, the 800 pound gorilla in the room is when the social security system will change. It’s a hot current topic, even in Presidential debates. Some proposals would raise retirement age, suspend COLAs, and limit or eliminate social security for those with retirement income and assets above a certain amount. Therefore, the analysis of maximizing social security needs to be reviewed while looking at possible changes to social security potentially impacting couples with significant anticipated retirement income and/or assets.

Reduce Taxes. Another very important strategy. Like the first two, this just doesn’t happen; it requires planning. Again, there are lots of different planning ideas if income declines at retirement time. These may include possible Roth conversions, deductible rental losses, starting a consulting business and making sure your investments are allocated tax-efficiently. It’s a good idea to review your income taxes at least twice a year. Once early in the year when your returns are being prepared, and again in the late summer or early fall. Your wealth manager may have an idea or two for you and/or your CPA to consider at both times of year.

Get a Reverse Mortgage. Home equity is a huge asset for many. And, more and more people are “aging in place.” We’ve been modeling “reverse mortgages” for clients using our MoneyGuidePro software for years. One approach is a standby reverse mortgage, where borrowers obtain a line of credit to be used as needed. A reverse mortgage doesn’t have to be paid back until the borrower dies or moves out of the house.

Buy an Annuity. We don’t agree with Ms. Bernard on this one. You’ve read our blogs on annuities in the past. Annuities really appeal to folks for their simplicity and the idea that they get a “payment for life.” Here’s the problem: an annuity locks up your money and pretty much pays you back your principal plus a tiny (usually 2% or less per year) return. Can you imagine what happens if interest rates rise to double digits (like 35 years ago) and all of your money is now coming back at low fixed rates and you can’t get out of your contract? Here’s a better solution: build your own “liquid” annuity by creating a diversified investment portfolio from which you draw monthly amounts. And, this can be done without the huge commissions, costs and inflexibility of an annuity.

Radically Downsize. We don’t see this as an appropriate strategy for our clients. In Ms. Bernard’s example, she has a couple selling their farm in Essex, NY and moving to the Philippines, where they could afford to live on $2,000 a month. While their monthly overhead has been reduced, in my opinion, they are incurring a huge “cost” of moving away from family and friends at a very important time of life. If Ms. Bernard had eliminated the word “radically,” I would have agreed with her that this is a strategy to consider. Many couples should consider downsizing or right-sizing in retirement. Equity developed from this process could provide funding for other goals they might want.

Overall, I do commend the article by Ms. Bernard. She outlined some really good strategies and we’ve been recommending for decades. What she doesn’t suggest though is a strategy perhaps more important than her six:

Start your Long-Term Planning Early. Start in your 20s and early 30s to identify your needs, wants and wishes. Calculate what you might need over your lifetime. Develop a plan to get you there. Start saving, even if it’s a small amount, early on. And monitor your plan at least annually and update as you go. Don’t wait until you are on the brink of retirement to ask: “How do I stretch my nest egg?” Rather, as a young person, ask: “How soon can I achieve financial independence?” If you can, work with a wealth manager to help you objectively do this. At DWM, long-term planning is one of our major strengths and passions, for clients of all ages.

So Many Numbers: Which Ones Are Important?

stock-photo-old-typeset-166120136Our world is full of numbers. They’re everywhere. Our calendars just moved from 2014 to 2015. We get bombarded continually with numbers representing time, temperature, and, yes, stock market reports. NPR’s Eric Westervelt last week called numbers “the scaffolding that our economy, our technology and huge parts of our life are built on.”

For this blog, I thought it would be interesting to look at the origin of our numbers and then highlight five key numbers that are of real importance to your financial future.

Mr. Westervelt was interviewing Amir Aczel who has written a new book “Finding Zero: A Mathematician’s Odyssey to Uncover the Origins of Numbers.” Mr. Aczel believes the invention or discovery of numbers “is the greatest intellectual invention of the human mind.” We use Hindu-Arabic numerals. Before that, there were many other systems including the Mayans, the Babylonians, and, yes, the Romans. The big problem with the Roman number system is that it had no zero. The numbers didn’t cycle and hence multiplication or division was almost impossible. Five (V) times ten (X) is 50 or L in the Roman system. Each value was unique in the Roman system whereas in our system, numbers can cycle. Two with a zero after it is 20. And, zero is very important. Without it, numbers couldn’t cycle. It’s the reason that 9 numbers plus a zero allow us to write any number we want. Pretty amazing.

stock-photo-old-typeset-166120136Our world is full of numbers. They’re everywhere. Our calendars just moved from 2014 to 2015. We get bombarded continually with numbers representing time, temperature, and, yes, stock market reports. NPR’s Eric Westervelt last week called numbers “the scaffolding that our economy, our technology and huge parts of our life are built on.”

For this blog, I thought it would be interesting to look at the origin of our numbers and then highlight five key numbers that are of real importance to your financial future.

Mr. Westervelt was interviewing Amir Aczel who has written a new book “Finding Zero: A Mathematician’s Odyssey to Uncover the Origins of Numbers.” Mr. Aczel believes the invention or discovery of numbers “is the greatest intellectual invention of the human mind.” We use Hindu-Arabic numerals. Before that, there were many other systems including the Mayans, the Babylonians, and, yes, the Romans. The big problem with the Roman number system is that it had no zero. The numbers didn’t cycle and hence multiplication or division was almost impossible. Five (V) times ten (X) is 50 or L in the Roman system. Each value was unique in the Roman system whereas in our system, numbers can cycle. Two with a zero after it is 20. And, zero is very important. Without it, numbers couldn’t cycle. It’s the reason that 9 numbers plus a zero allow us to write any number we want. Pretty amazing.

Now, knowing a little more about our number system and with numbers seemingly everywhere, where do we focus our attention? Here are five key numbers that have a big impact on your ability to meet your financial goals:

Percentage of your paycheck that goes to savings/investments. This may be the most important decision in your life. By saving early, you can have a portion of earnings grow in a compound fashion for decades. Furthermore, by “paying yourself” off the top, you limit the amount available for everyday living expenses during your working years. This discipline helps you in two major ways to obtaining early financial independence- first, by creating the fund for “retirement” and second, by reducing the expenses you will likely have during “retirement.” BTW- there is no magic percentage. Everyone’s circumstances are different. Consider an amount of 10-20% of your gross pay.

Your Annual Living Expenses. Monitor your expenses for last year and group them in three categories- needs, wants and wishes. Review the data from a long-term perspective. Spending a considerable amount now on wants and wishes will obviously reduce the amount available in future years. It’s all about choices and accountability. For the most part, you alone can determine and control your level of expenses.

The Asset Allocation of Your Portfolio. This is one of your most important investment decisions. Based upon your risk profile you need to determine how best to split up your investment funds between stocks, bonds and alternatives (which can include real estate). Studies show that 90% of your investment returns are the result of your asset allocation.

The Net Returns on Your Portfolio. Research shows that fees really matter. A $1,000,000 portfolio that earns 5% net per year will grow to $4.3 million in 30 years. The same portfolio that earns 4% net per year will grow to $3.2MM. The difference is $1.1 million- a 26% reduction. Over long periods, loads, commissions, high operating expenses and management fees can be a significant drag on wealth creation. Low cost passive investments are best for stocks and bonds. Make sure you understand and monitor all fees charged to your portfolio. Make sure you are getting real value for all the fees. And certainly, know what your net returns have been, are expected to be and how they compare to the appropriate benchmarks.

Your Effective (average) and Marginal Tax Rate. Tax costs on earnings, investment returns and other income can be huge, particularly as a result of the increases caused by the Affordable Care Act. You and your advisors should know your tax rates and use them as a key factor in decision making and investment strategy. Furthermore, proactive planning designed to minimize taxes is a must for you and your advisors.

Over the last 45 years, I have worked with clients of all ages, income levels and circumstances. A common thread among those who have achieved or are achieving their financial goals is that they all knew of and monitored these five key numbers regularly, making adjustments as appropriate. And, of course, they use objective, proactive, value driven advisors like DWM to help them as well.

Why not make it a New Year’s Resolution to know and monitor these five key numbers for your financial future? It could change your life.