Thinking Beyond Numbers

Many of us of us struggle to keep up. Often times finances are the last thing on our minds until there is a problem with them. This is part of a series of articles written to help you Organize Your Finances. As other articles come out, you can find them by clicking on the Organize category, or Organize Your Finances tab at the top.
—
Now that you’ve set your goals, and taken stock of your situation with a cash flow analysis, you can determine the steps necessary to accomplish your goals. You do this by putting yourself in situations that will add to your success. This might be visiting an advisor for financial help, a travel agent for information about a destination, or joining clubs and associations that will teach you what you need to know for your goal. 

Financial planning really only involves 3 steps:

1. Figure out your goal
2. Access your current situation
3. Determine steps to get you where you want to be.

Most people just save and wait until they’re a few years from retirement and then ask me, can I retire? Planning gets you headed in the right direction right from the start. A basic example would look like this:

Goal - Retire in 8 years at 67 on $65,000/yr income
Current Situation – Investments, $500,000
Steps – To Be Determined

You could retire at 67 under this scenario if you had $1 million in investments and social security. In order to do this have to save about $22,000/yr and earn 6%. This would give you a little more than $1 million at 67. Using the general 4% withdrawal rule of thumb, you could expect $40,000 income from $1 million dollars (1,000,000 x 0.04 = $40,000). Social security income of about $25,000/yr, plus $40,000 income from a $1,000,000 investment portfolio should, in theory, give you $65,000 worth of income in retirement.

This is an overly simplistic example. The 4% withdrawal rule of thumb is based on research that suggests a 60/40 stock to bond portfolio, which in theory should give you the $40,000 income over about 30 years. Factors such as inflation, investment returns, and even increased life expectancy can alter your plan. So it’s important to revisit your plan every now and then.

The more factors, the more complicated your plan. When to take social security, IF you have pension income, what your spending habits are, all can change your outcome. But it’s still better to have a plan and change it, than to wait until you’re 66 and ask “can I retire?”

You can find some basic planning software online at Bloomberg, FINRA, SmartMoney, and many others.

Here is a video from Morningstar where Harold Evensky of Evensky and Katz explains the Bucket System of investing.

This concept essential visualizes what most advisors do with Asset Allocation. According to Investopedia.com,

An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time.

The cash and equivalent portion is usually 4% to 8% or 1 or 2 years worth of income and expenses. This takes care of the alternative bucket, or in this case, investment. Where most bucket investors get confused is that you don’t have to have the buckets in different accounts. It just makes it easier to conceptualize. You can actually invest different funds for the buckets in one account. Morningstar does a good job explaining this in some Sample Retirement Portfolios Using the Bucket Approach. The only caveat I would add is that you don’t need to diversify your buckets so much. As someone who subscribes in the KISS philosophy, I believe you could actually use a couple short and intermediate term funds for those buckets. What do you think?

Many of my clients worry about the AMT (alternative minimum tax). The IRS’s  recent e-newsletter had some good points on AMT. From IRS Issue Number: IRS Tax Tip 2013-17:

The Alternative Minimum Tax may apply to you if your income is above a certain amount. Here are five facts the IRS wants you to know about the AMT:

1. You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.

2. The 2012 AMT exemption amounts for each filing status are:

• Single and Head of Household = $50,600;
• Married Filing Joint and Qualifying Widow(er) = $78,750; and
• Married Filing Separate = $39,375.

3. AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.

4. You should use IRS e-file to prepare and file your tax return. You figure AMT using different rules than those you use to figure your regular income tax. IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for you.

5. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

Visit IRS.gov for more information about AMT. You should also check Form 6251, Alternative Minimum Tax – Individuals and its instructions. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Many of my readers may have read my latest article on How Much Should You Be Saving? pt2 and were a little concerned because you might not be saving enough. If you  fall into this category, I suggest you watch this great 17 minute Ted Talk by Shlomo Benartzis on Saving for Tomorrow, Tomorrow. He does a great job of demystifying why we do what we do with finances and how to change it.

 

A recent article by Joe Tomlinson at Advisor Perspective discusses some solutions to a broken retirement system here in the US. Some of the ideas being tossed around include:

• Creating a government mandated retirement account with guaranteed 3% return on investment.
• Required Defined Contributions (401k).
• Auto enrollment into 401k, 403bs, etc. when available OR an IRA when no retirement plan is available.

401(k) example–Required contribution rates
Asset Allocation	Average Return	Median Contribution	90% Confidence Contribution
0% Stocks, 100% Bonds	3.20%	17.0%	21.8%
25% Stocks, 75% Bonds	4.58%	13.3%	18.2%
50% Stocks, 50% Bonds	5.95%	10.2%	16.5%
75% Stocks, 25% Bonds	7.33%	7.6%	15.8%
100% Stocks, 0% Bonds	8.70%	6.0%	15.2%

 

In other words, if you save for 35 years, and cannot stomach any risk, and need to have a 100% bond portfolio, you’d need to save 21.8% of your salary to be 90% confident that you could retire. On the other extreme, if you were a risk taker and had ALL stocks, you’d need to save 15% to have the same confidence. This coincides with an earlier blog I wrote, How Much Should You Be Saving?

The most interesting part is that PEOPLE aren’t saving that much. Well, most people I work with do, but that’s because they come to me looking for advice on their savings. But according to the Federal Reserve, the average savings rate is 3.7%. See below.

So when someone is talking about how to fix the retirement system, the solution might be  to first educate savers on how much they should be saving.
Note: While these are general savings rates, and do not consider other sources of retirement income such as social security, pensions, etc. they are pretty good guidelines.

 

Personal Savings Rate

The CNN/Money website has a feature called Help Desk where they provide answers to consumer financial questions. CNN/Money is shooting videos on a variety of subjects, including this video explaining the difference between Fee-Only and fee-based advisors. The video features immediate past NAPFA Chair Susan John. Enjoy!

We all need a shake up in our life every now and then to take us out of our comfort zone. Jim Blankenship has inspired several financial bloggers to challenge their readers, and the rest of America for that matter, to save an extra 1% from now forward. And so I pass along the challenge, along with links to several other articles from around the web, challenging you to increase your savings another 1%.

Take the challenge today! Increase your savings 1%.

From Ken Weingarten The 1% Challenge (Should you dare to accept it.)

From Jonathan White: Ways to increase your retirement contributions 1% in 2013

From Alan Moore: Financial Challenge – Should You Choose To Accept It

From Ann Minnium: Gifts That Matter

From Laura Scharr: In Crisis: Personal Savings- Here Are Six Steps to Improve Your Retirement Security

From Jim Blankenship: Add Your First 1% to Your 401(k)

From Steve Stewart: Seriously. What’s 1 percent gonna do?

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

 

According to Webster, appreciation means a favorable judgment or evaluation. It can also mean a sensitive awareness recognizing value or an expression of admiration, approval or gratitude. In financial terms it means an increase in value.

Etymonline.com says appreciation was referenced in 1790 as a “sense of ‘rise in value’”. It’s the convergence of sense or “sensitive awareness” with a “financial” increase in value that may explain why everything some people do appears to bring them value, or money. A breakdown of the linguistics of the sounds of the word may clarify its meaning:

apre = before
ci = see
a tion = a state of being

New Definition = Appreciation is a state of being (we) see before.

This may explain why positive thinkers tell you that you attract what you want by holding the feeling in your heart that you already have that which you seek. They have an attitude of gratitude. Every time they see a penny on the sidewalk, they don’t dismiss it as just a penny. They pick it up and hold it in their palm with appreciation.

Many of my readers know that most of my clients are also small business owners. Because of this, I like to share ideas every now and then on my blog that may lead to savings. After coming across the article Cost-Cutting Ideas You Might Not Have Thought Of in the Wall Street Journal it reminded me of some of the things I do to help save money in my small business. While the article in the journal was intended for larger businesses, I think small business owners can benefit from them as well. My focus today is on leveraging technology.

As a solo business owner, you can only be in one place at a time. Because I work with clients all over Michigan, I find it helpful to use technology to handle my back office needs. A few of my favorite services include:

1. VoiceNation – This telephony system allows me to have an 800 number for under $10 a month. Calls go straight to voicemail unless callers hit a number asking to be forwarded to someone, in this case, me. I have the phone forwarded to my cell phone. Voice messages are emailed in mp3 format to my email which I can check from my andriod phone. The number doubles as a fax. Faxes are emailed to me in a PDF format which I can also check on my phone. Being an 800 number, I do pay a toll of 8 cents per minute or faxed page, but the service gives me a flexible, inexpensive way to be accessible for my clients.
   
2. Google Apps for Business – There is little that this service doesn’t do. It starts out as email and quickly expands to calendar and contact management. Google Drive can might even become your document management system. You could even start intercompany websites. Google even offers Google Voice if you’d rather not pay for the Voicenation service. For $50 a year per user, this is a no brainer. Not to mention, you can find other apps in the Google Marketplace that allow you to have even better customer service such as:
3. Batchbook – Batchbook is a CRM or Client Relations Manager software that allows you to better service your customers. You can set appointments, track conversations, create tasks or a series of tasks to make sure that you are completing your projects. For example, when I have a client meeting to rebalance their portofolio, I can create a series of tasks that will schedule times to perform the trades, check to make sure the trades are processed, and communicate to the client the status of the transactions, all with the click of a button. Did I mention Batchbook is a social CRM, so you can easily communicate via LinkedIn, Facebook, or Twitter with your customers via Batchbook? Very cool!
4. Tungle – Tungle is a calendar service that allows customers to view your appointment and schedule their own appointments. It integrates with many other apps, including Batchbook, so you can schedule appointments directly inside Batchbook. You can even offer several time slots and have the client schedule the appointment themselves.
5. Android Phones – I can hear the iPhone lovers piling on now, but I am an avid android phone user largely because it integrates so well with ALL of the services mentioned above. A while back I was at a conference in Florida. I was able to answer emails, schedule appointments, and perform many of my scheduled tasks in between talks and on breaks using my android phone.

The more business owners utilize technology to better service their customers, the happier their customers will be because you can spend more time with them. Good service and building relationships is the back bone of small businesses. As the world changes, technology can help you change with it, sometimes at a very reasonable price.

Setting politics aside, a fellow fee-only advisor and M.D., Carolyn McClanahan, has done a really good job of giving us the Cliff Notes version of Obama’s Affordable Care Act. You can read about it on her Forbes Blog, or watch the video below.

Affordable Health Care Act – Carolyn McClanahan’s Cliffs Notes Version from Carolyn McClanahan on Vimeo.