So many theories – What’s the reality

How many times have you read a headline that fairly screams “retirement crisis” or some variation on that theme.  I often get the question – Am I saving enough? Or, How much should I be saving?  There are number of handy rules of thumb that can point people in the right direction but each requires a bit more understanding than simply a percentage or a dollar figure.

Let’s begin with a better understanding of where to start.  If you look at your paycheck the first number we need is your “net pay” which is how we will form our baseline.  Take that number and multiply it by the number of paychecks you receive each year then divide that by 12 for your monthly baseline cash flow.  That’s pretty simple math and it gives us something we can start to work with (a bit of a simplification, yes, I completely agree).  Rule of Thumb #1 – the higher that number, the more you should be saving.  Why is this?  For starters, Social Security is going to cover a higher percentage of a lower monthly amount than a higher amount. 

Let’s run through an example:  Let’s say your annual salary is $65,000.  Depending on your tax and insurance deductions (let’s leave your retirement savings out of it for now), your take home might be something in the range of $43,500 or $3,630 a month.  On the other hand, let’s say your annual salary is $95,000, your monthly take home might be something closer to $5,300.  If the average Social Security is $1,540/month, then you can quickly see that $1,540 covers a bigger chunk of $3,630 per month than it does $5,300 which means the higher earner needs to save more to make up the difference.

The next step is to consider whether or not you have a pension (and yes, there are still plenty of those floating around out there).  If you do have access to a pension and you are the lower earner in the above scenario, then you don’t need to save nearly as much as the higher earner does who might not have access to that pension.  This leads me to Rule of Thumb #2 – if you don’t have access to a pension, the more you should be saving.  Of course, having a pension isn’t fool-proof and you may want to be saving more to insulate yourself from the risks associated with non-government based pensions but that’s now a matter of choice rather than baseline survival.

So now we have some idea of how much we need and what structured resources we might have available so let’s turn to what we should be saving.  You’ll often hear “you should be saving 10% (or 15%, or 20%) of your income” or “you need to save up 10x your salary.”  That give us Rule of Thumb #3 – Target 10% of your salary since it is an easier equation to work with.  That being said, don’t forget that if you are receiving a matching contribution from your employer that counts towards your 10%.  If your income is higher and you don’t have a pension, you should be thinking about saving a higher percentage.  If you want to retire before your Social Security Full Retirement age, ditto.  If you want to retire before you are Medicare eligible or earlier, double ditto.  If you are getting started later in life, want to retire before you are Medicare eligible, and have a healthy income, perhaps consider couch surfing for a while so you can catch up on your retirement savings.

But what about all those “what’s your number” ads? So here’s the challenge with those – what’s the time frame leading up to that “number?”  What life expectancy is being use in that calculation?  What’s rate of return on your assets?  What rate of inflation is being used for your expenses?  All of your expenses, or is a different rate being used for your medical expenses?  What rate of inflation is being used on the Social Security benefits?  Rule of Thumb #4 – f you are using one of the many computer formulas available on line, make sure you understand how they are calculating what you need to save to make your “number.”

Of course, all of this starts with the making sure you have a good handle on your cash flow, have your non-housing debt eliminated (or under control), and are considering a retirement lifestyle roughly equal to your current lifestyle.  Here you have Rule of Thumb #5 – If you aren’t sure where to begin, begin at the beginning.  Start saving 1% of your pay (net or gross, your choice) and put a note in your calendar for three months later.  This lets your budget adjust for 3 months.  When that three months is up, increase your savings by 1% and mark your calendar out three more months.  Repeat this process until you’re saving at least 10%.  Can’t find 1% (or whatever you need)?  Come on in and I’ll help you find it (full & fair disclosure, my version of what you need in life is probably going to look different than yours….).

So there you have it – a solid five Rules of Thumb to bring some perspective to your long-term savings plan.  Draw yourself a little hand-turkey (remember those from kindergarten), label the fingers, and post it on your fridge as a reminder on how to secure your future.  And who said money isn’t fun!

My Dog’s Name is FIDO, not FICO

With all of this new house buying and car replacement action going on, I’ve been getting some questions about credit scores, so, as the phrase goes, let’s talk….
Right off the bat, let’s clarify some terminology, which means we are back to the whole daffodil/narcissus adage—a FICO score is a credit score but not all credit scores are FICO scores. A FICO score is only one of several available scores. There’s the VantageScore, the Beacon, and Empirica, as well as a more tailored “mortgage FICO.” There are also some regional organizations that provide scores for more tailored uses. These days, some form of this score is a main factor in how we secure mortgages, credit cards, car loans, car insurance, life insurance, even job opportunities. This is an interesting state of affairs given that the flaws in the calculation are vast and prejudicial.
What goes into these scores? Let’s look at the factors FICO uses: 

Your payment history (35% of your score): Are you paying your accounts as agreed, do you have any delinquent accounts or accounts in collections, is there a bankruptcy on public record?

The balances on the credit you have available (30% of your score): How do your balances relate to your available credit? Note, this isn’t as it relates to your income, rather it’s as it relates to the total amount of your available credit. This category also includes installment loans and mortgage loans.

The length of your credit (15% of your score): How long have you had the account(s) open and what is the average account age? This factor is one of the reasons we close cards slowly.

New credit you’ve put in place, (10% of your score): Have there been recent inquiries or new accounts opened, changes to public records, or has something gone to collections? 

The types of credit you have in your name (10% of your score): What types of debt are you carrying? Credit cards, auto loans, student loans, mortgages, lines of credit, etc….  

Now, if you are reading between the lines, I’m sure you can see a few flaws with this process….

The most obvious flaw is that to have a strong FICO score, you have to be carrying some debt. If they are rating you based on your payment history and you don’t carry any debt then you don’t have a payment history to rate. How can that happen, you ask? Let’s say you are recently divorced and renting an apartment until you decide on your next steps, you are using your debit card so that you are spending your cash wisely, and drive a paid for car (or don’t have a car and are using Uber/Lyft to get around as many of our big city brethren now do). These are all very fiscally responsible things to do, right? Zing….none of that is helping your credit score and it could be hurting it.

If your payment history experiences one late payment, even though all of your other factors are stellar, that single bad payment can take six months (or more) to cycle through for your score to improve. 

Curiously, unlike the theory our judicial system aspires to, with a credit score, you are guilty until proven innocent and you better plan on setting aside a decent chunk of time to sort out an error. This is why we check our credit reports on a regular basis.

Something larger than a late payment, like bankruptcy, stays on your credit for seven years or longer. Many criminal felons spend less time than that in jail (with no ding on their score…).  Also, considering that one of the main reasons for bankruptcy in the US is due to medical debt, you can start to see how this scoring system has a flaw or two.

Finally, let’s talk about monopolies and conflicts of interest. We’re hearing all about how “Big Tech” is creating monopolies and that they should be broken up but no one (except perhaps Senator Warren) has spent much news time talking about how one single company now influences more than 10 billion credit/underwriting decisions every year or that to obtain and secure a high score inherently means maintaining multiple credit cards (which, if not handled efficiently means annual fees and additional risks of fraud and theft).
I know, I know…what the heck got in Kitty’s organically grown, responsibly harvested, and processed shredded wheat this morning caused this she’s on a tear? The gist of the situation is this: It drives me nuts that we have very little overall control over the situation. That being said, if we [grudgingly] accept that this score is going to impact our lives and no one else is going to sort out the inherent flaws, it’s up to us to put a strategy in place to make the most of the situation just to spite the powers that be (one of my favourite activities!). If your score, or the score of a loved one, isn’t strong, let’s talk about a strategy to get it back.

Settling Mom’s Estate: What do I pay?

Here at LindenFinancial Consultants, we often have to deal with topics that most people would rather not, and death is one of them. A particularly common question we hear from people settling an estate is: which of these bills do I really have to pay? Let’s talk about after-death cash flow.

There are always going to be some bills after someone dies that come every month like utilities, phone, mortgages, home equity loans, etc… and few people have any questions about covering those. It’s dealing with the less obvious ones that I often hear the “do we really have to pay this?” question.  As I’m sure you can guess, I usually respond with my favourite reply of “it depends.” 

In an ideal world, if you are agreeing to be the executor of an estate, pulling that person’s credit report would be part of the process so you know what the estate has for obligations. Unfortunately, while not impossible, pulling the credit report for someone who is either on their way out the door or well on through it, isn’t particularly easy. That being said, it can be well worth the effort so that you are making educated decisions about the estate. Here are some, but not all, of the liabilities you might be faced with:

Secured debt – This is going to cover primarily mortgages, home equity lines of credit, and vehicle loans. If the debt is secured then the estate or heir has to keep making the payments or sell the property to clear the debt. This one’s pretty cut and dry so let’s move on to unsecured liabilities.

Credit cards – I’ve lost count of the number of people surprised by the balances being carried on credit cards once they start sorting out the estate details. If the deceased was an “owner” of the card then, technically that debt is owed. If the deceased was an “authorized signer” on a card, then their estate isn’t liable for the debt (the “owner” is). What’s the difference you ask? The “owner” is the person (or persons) who applied for the card and signed the application whereas the “authorized signer” is someone who has a card that is associated with the “owner’s” account but didn’t actually participate in the application. This is an important distinction when getting divorced as well. In the event of the “owner’s” death, the credit card company can come after the estate for payment but if there isn’t anything left in the estate and there isn’t a “co-owner” of the card to hold liable, they are pretty much out of luck.

Medical bills – Final medical bills are often considered either the responsibility of the surviving spouse or the estate and this is usually buried in the paperwork being signed when someone is admitted to a hospital or senior facility. If there is no money in the estate and the survivor has relatively little for assets and income, these bills might be waived otherwise they should be paid or a payment structure arranged.

Student loans – While I’d love to say that everyone dies of old age, unfortunately, that isn’t always the case (the average age of a widow in the U.S. is down to the mid-50s) and that can mean passing away with liabilities we wouldn’t see with our older population. If the student loan is a Federal loan, it is usually forgiven. If it is with a non-Federal entity it may or may not be forgiven which means the estate might be required to clear that loan from the estate’s assets. As with credit card debt, a hard-nosed negotiation can often get this lowered or removed from the balance sheet.

Now, let’s say there are some unsecured liabilities and the main assets are life insurance benefits and/or retirement account dollars. If those assets are settled straight out to the beneficiaries then those dollars are protected from having to clear the unsecured liabilities. If the beneficiary designation says “estate” or there isn’t a designation then those dollars head on over to the estate account where they are used to clear the liabilities, and the remainder, if there is any, gets settled by way of the will. Even if you aren’t carrying any debt, one of the best gifts you can give your heirs is making sure your beneficiary designations are all in place and this extends to the estates of all your loved ones.

When/If we head into a more challenging economic situation and you are the one cleaning up someone’s estate, remember that you don’t have to make any payments on unsecured debt until you are ready to (OK, you can’t take forever, but you can certainly take a month or two to figure things out). Don’t let someone coax, cajole, or threaten you into making even one payment—doing that can be the equivalent of acknowledging liability for the whole debt and be a real pain if that isn’t in the estate’s best interest.

That’s Not Me: Identity Theft

Today, we’re talking about identity theft which means I’m going to try and condense a two-hour workshop into a few paragraphs so here goes…Right out of the gate, let’s make sure we’re using proper definitions. There’s identity theft and there’s actual theft. If someone steals your actual credit card/credit card number and heads off to BJ’s for diapers (a surprisingly common thing to do since diapers can be resold), under our current legal system, that isn’t identity theft, that’s actual theft. They stole your money. Now, let’s say that person “borrowed” your personal data, opened a new credit card and THEN went shopping for diapers at BJ’s—that’s identity theft. Does it make it any less traumatic to differentiate between the two? No, not in the slightest but it is good to know they are different things from a legal perspective.

If you are worried about someone stealing your identity, it’s both good and depressing to know that a common culprit is someone you know or lives (or works) with you. Account takeover fraud is one of the most prevalent types of fraud and one of the most preventable. Something as simple as using two-factor authentication when accessing any of your accounts goes a long way towards preventing fraudulent transactions (and it goes without saying that you really shouldn’t be doing any financial stuff from your phone—yup, I know that’s killing some of you but it’s a fact…). When was the last time you swept through your various services and changed your passwords? If you have those passwords automatically load when you enter a site, you should probably just go ahead and send the thief a Venmo now (another startling vulnerable system).

An increasing type of identity theft is medical identity theft where someone creates a duplicate persona then uses it (or more likely, sells it) to access medical care. Unfortunately, for our aging population, the more you use our medical system, the more likely this is to happen—sort of a double whammy of unpleasantness when you need that MRI only to discover that your insurance already paid for someone else’s MRI and effectively used up your sliver of available and affordable benefit. Of course, our inefficient healthcare system doesn’t help the situation with its sometimes unfathomable billing practices but that’s a bigger fish than we can fry here. Suffice it to say, keeping track of your medical records (or your parents) goes a long way towards making sure you are on top of your exposure.

Two other common forms that we’re seeing more and more are tax-related identity theft (where someone files an early return using your Social Security number and claims a refund before you’ve even pulled all your records together) and, particularly during the pandemic, unemployment benefits identity theft. This is primarily based on all those identities that were stolen from the IRS and Equifax a number of years ago. Why, you might ask? These thieves were no dummies. They stole the information, sat on it for a few years until it became stale, then swooped in and bombarded the systems when they saw weakness.

So what can you do? Some simple things are:
1) Always select “credit” when you are using your debit card. 
2) Learn to love your shredder (or drop your paperwork off here and use the commercial service we use here). 
3) Have everything online?  Make sure you pull down a hard copy at least annually so you have something to work from if you do have to deal with a theft issue. 
4) Carve out a few moments and pull your full credit report. You are entitled to one free report from each of the main agencies once a year so head out to and pull one of the reports then mark your calendar to repeat the process four months from now. Look through the report and make sure you recognize all of the addresses listed, the various lines of credit reported, and whether there is an “authorized signer” on any of the cards. Repeat the process for everyone in your family, including your youngsters – stealing/cloning a child’s identity is surprisingly popular since it is usually years before anyone discovers the issue.

Another strategy is to “freeze” your credit which can help to reduce your risk of identity theft, since potential new lenders can’t access your credit reports while the freeze is in place. Although, you should know that in doing so you might not be able to renew your health insurance if you use the NYS (or other state-based) Exchange or a government-based program, your property/casualty insurance premiums will probably increase since those companies pull their client’s credit scores when calculating insurance costs or making changes to a policy, and accessing the Social Security Administration’s system will be problematic if you don’t already have an account established.

There’s lots more but this is a weekly missive, not a weekly War & Peace chapter. Please feel free to contact us if you have any questions.

Health Savings Accounts: Both Scary and Useful

Now that tax season is behind us, we can take a little breather and think about actions we can take to help with next year’s taxes as well as better support our retirement prospects. Most companies’ open enrollment season starts in the Fall so this gives you plenty of time to evaluate whether or not a Health Savings Account (HSA) might work for you.

What is an HSA? Not only is it a tax-deductible account you can use to save money to cover medical expenses tax-free; it’s also a tax-deductible account you can save money into for retirement. In a nutshell, you can contribute money into one and take a tax deduction for that tax year, you can invest those dollars and let them build tax-deferred, and then, in retirement, you can draw them out tax-free. There really isn’t another type of account like it.
For the here and now—if you are a somewhat heavy user of medical services, and you have the nice low and consistent co-pays, it’s unlikely that you will pay enough in co-pays to be able to take advantage of the medical tax deduction because of the high threshold that deduction uses (7.5% of your AGI). By switching to a High Deductible Health Plan and using an HSA, you can fund the HSA with tax-deductible dollars then pay for those services from that account tax-free. Once you’ve met your insurance deductible, your insurance kicks in and pays for any additional services you might need throughout the year. Is it really that simple? Of course not, but very often it does make much more financial sense than the co-pay process. A little more work at first—yup.  A little more money in your pocket overall—more than likely. You can even complete a once-in-a-lifetime rollover from your IRA into your HSA to frontload your account.
For the big upcoming medical events—another strategy is to use an HSA in anticipation of big medical events. Let’s say you are a young healthy person but you know you’re going to want to start a family (we’ve already talked about Baby Talk and how expensive giving birth is and you can count on spending many times more than that that if you need help to get pregnant), or perhaps you’ve been having a hip / knee / shoulder / reproductive / nasal / digestive / etc. issue that you know you’ll need to deal with at some point. These are big-ticket medical expenses where most insurance policies require a significant contribution from the participant. You could fund an HSA every year, with the contributions rolling from one year to the next and building along the way because you’ve invested them in a conservative allocation. Then, when your planned for event finally happens, you use the balance in one fell swoop when the bills come in.
For retirement—want to get the most out of this type of account? Fully fund an HSA and let the dollars roll until you need them for those hearing aids and dental care in retirement (which aren’t usually covered by Medicare). Sure you could contribute to your company retirement plan or an IRA and take the tax deduction now but then you’ll pay taxes when you take the money out, something you won’t do with an HSA. You could also use a Roth IRA but you won’t get a tax deduction now like you do with an HSA. This strategy requires a little more budgetary attention since you’ll want to cover your current medical expenses out of pocket to make the most of the strategy but that’s not out of the realm of possibility with a little prep work.

Want to make the most out of this strategy? Fund your company retirement plan up to the maximum you need to get the match, fully fund your HSA, and then throw additional dollars into your Roth or post-tax investment account—three legs of your retirement stool all set and ready to help you later in life.
Of course, there is a catch to all of this. In order to use a Health Savings Account, your health care plan must be a high-deductible one, not one of those co-pay plans, and that’s not always the right type of an account for everyone, which is why I bring this up now. In order to do our taxes for 2020, many of us had to at least take a peek at what we spent on medical costs for last year. Take an hour one day and do the math so you are ready for your next open enrollment. Which is better for you—using a High Deductible Health Plan and an HSA or using a co-pay based plan? While there are pros and cons to each, make sure that you are making the decision based on the numbers and not the emotions. Some people find the idea of a high deductible plan to be a little scary and I get it. Tackle those fears by looking at the numbers and building a plan. There is no insurance fairy godparent looking out for you so it’s up to all of us to make a well-informed choice.

First Comes Love, Then Comes Marriage

May makes me think of June and June makes me think of weddings. This week, let’s chat about getting hitched…tying the knot…plighting one’s troth (there’s one for the literary crowd out there). 
For the majority of human history, weddings were small, family and/or village-based affairs more along the lines of church potluck events. Only a small percentage had a wedding reception, as we currently think of them, and they were usually the wealthiest of the local community. The upper upper echelon in the largest of cities held grand affairs and they were primarily for political reasons. Over the last couple of centuries, as the middle class developed, these larger ceremonies crossed economic layers and became more common for more people. That being said, they were still fairly modest because there was no such thing as credit cards, retirement accounts, or home equity lines of credits (heck, there were barely banks as we know them).
It wasn’t until after World War II that big weddings became more popular across the board and the idea of overspending on the event rose in alignment with the phrase “Keeping up with the Jones.”  In 2019, the average wedding cost was over $28,000. That’s essentially $60 of necessary expense (the marriage license) and $27,940+ of discretionary expenses—and we all know how Kitty feels about discretionary expenses. In an interesting economic turn, prior to this point, the biggest expense of a wedding was often the groom’s suit, which was traditionally the first for the young man (and sometimes the only, just like his beloved – LOL!). I find it interesting that purchasing something practical for the family was the focal point of the wedding expenses, which certainly isn’t the case now. Now, tuxes are rented and expensive wedding gowns are rarely (if ever) worn again. 
How about the engagement ring? Throughout history, exchanging jewelry (usually but not always a ring) has been a part of the ceremony as a symbol of the contract being agreed to (bridal parties willing or not). It wasn’t until the Edwardian Age that engagement rings were exchanged. Even then, it wasn’t until the Roaring 20’s that anyone other than the “one percenter’s” exchanged rings that even remotely compared to what is routinely exchanged today. Of course, that lasted for about a decade before the Great Depression meant we once again exchanged simple bands. Then, along came De Beers who launched their “a diamond is forever” marketing campaign in 1948, and, suddenly, diamonds became part of the wedding culture. Once again, like Hallmark holidays or owning versus renting a home, our traditions were created by marketing teams.
Of course, a wedding is something to celebrate—a joining of souls who managed to find each other in this crazy madcap world is a wonderful thing. Both my parent’s and my own wedding pictures are part of my screen saver so I’m not a total Ice Queen. The question I pose is: are the events of one day really something to go into debt for? Raise your hand if, looking back through the years, you might think twice about spending so much money on the wedding (yours or your child’s) when you could have put some of it down on a new home, or paid rent for a year(+), or paid off school loans, or done a family VRBO, or, or, or. I would also suggest that dipping into your own savings to cover the costs of your child’s wedding should be done only after a thorough examination of your own long-term financial stability.
Let’s start a new tradition…have a simple pre-WWII wedding and throw a full-blown 10-year anniversary celebration. Since the average American marriage lasts ~8½ yrs., you do the math….

Cryptocurrency: When FOMO Becomes Uh Oh

Over the past year, I’ve fielded a number of questions about the feasibility of investing in cryptocurrency so I thought I’d give you “Kitty’s Take” on the whole “let’s invest in something that doesn’t really exist” situation.
What is cryptocurrency anyway? Right out of the gate, we need to understand that these are currencies, not investments, and there are a lot of them (more than 50 at last count). There’s Bitcoin (currently trading at ~$49,500 per token), Dogecoin (trading at $0.41), and PancakeSwap (trading at $29.35 per token), just to name a few. For comparison, the $5 bill in my wallet is trading at…wait for it…$5. Let’s put it another way, when you invest in a share of Ford Motor Company, you own a little itty bitty sliver of Ford Motor Company. When you invest in a bond mutual fund, you become a little itty bitty recipient of the dividends of a bunch of bonds. When you buy a token of a cryptocurrency, you’re holding the rights to a little itty bitty share of…of…an electronic promise. 
Cryptocurrencies are usually positioned as an alternative to cash and these tokens can be traded for services and things but only as long as the company selling you those services and things accepts the cryptocurrency as a form of payment. On a positive note, these currencies are run on the blockchain principle, which has some great recordkeeping features meaning no more missing or inaccurate cost basis. Every transaction involving every token is tracked and, in theory, can be pulled out of the ether when you need it (or by someone monitoring your activities but that’s a whole other rabbit hole). On the downside, from a currency standpoint, while the vendor you are negotiating with may take Bitcoin, if you hold PancakeSwap, you have to log on to an exchange, replace your PancakeSwap tokens for Bitcoin tokens, for a fee, then return to the place of purchase and exchange your tokens for whatever it is that you are buying.
So why are these currencies so popular? Mainly it’s the convergence of several different factors, including a whole lot of marketing savvy using social media, layered with a lack of anything resembling regulation, and a year of millions of people looking for anything, literally anything, to distract themselves from the COVID situation. Mostly though, it’s been FOMO—”Fear of Missing Out”. Now, FOMO isn’t anything new. It’s been around for as long as humans have been walking upright. FOMO is that Dutch Duke in 1636 spending his ancestor’s fortune on tulip bulbs because his fellow Dukes were all talking about them (and no, that didn’t go well for anyone involved), and it’s the guy on YouTube telling you he traded enough Bitcoin to buy a house (and because it’s on the internet, it MUST be true…).
Now, I’m sure you are catching the vibe of my thoughts on the viability of buying cryptocurrency so let’s exit my brain and talk about some real-life issues. First off, about 7 million people in the US and over 2 billion people in the world are unbanked—meaning this new currency is completely out of the reach of all of those people. That’s not really going to improve our wealth inequality situation. For those who are banked and are using some form of this currency, apparently, not only can it be harmful to your net worth, using it can be unhealthy for your relationship, too. According to a Bloomberg study, ~60% of people who “invest” in cryptocurrencies say their beliefs or their investments have had a negative impact on their personal relationships. What if you’re banked and single, or not overly worried about your relationships? How about the environment. These cryptocurrencies are complete resource and energy hogs. To keep these currencies humming, there is an increasing number of server farms parked all over the globe and some of these farms have an energy consumption that is on par with the energy used by smaller countries. Even if all of those farms used renewable energy (chuckle, chuckle), all of those servers need rare minerals to build and some put mining for rare minerals in the same category as blood diamonds. Mmmmm…
Bottom line—consider following two simple rules: 1) things that are intangible, lack regulation, and have a lot more in common with gambling over at Turning Stone probably shouldn’t be in your portfolio if you need those dollars to meet your long-term goals and 2) if you don’t understand it and/or if you (or your advisor) can’t explain it to your mother, you probably should be putting your money to better use.

The 4% Rule – Retirement Fact or Fiction?

Many of my retired clients have mentioned that the working part of their lives was much easier than the retirement stage and I’m reminded of a t-shirt my husband would wear that said “Old age ain’t for sissies.” One of the most pressing questions I hear is “how do I determine a comfortable draw from my portfolio that ensures there is money left over when I am unexpectedly drawing breath at age 95?”  Enter a gentleman named William Bengen who postulated, in 1994, that a retiree could draw 4% from their assets, increasing their distributions by inflation each year, after rebalancing their portfolio annually.  Sounds like solid advice…and Swiss Cheese is still a cheese.

Let’s start with what that portfolio looked like back in 1994. Mr. Bengen did his calculations based on a portfolio that contained just two asset classes—intermediate Treasury bonds and large-cap stocks. Intermediate Treasuries were paying an enviable 5.92% in 1994 compared to 1.29% for those same issues right now. In his favour, the inflation rate when he did his research was 2.56%. That’s not terribly far off from our current non-medical inflation rate, although he didn’t account for the increasing amount an older person spends on medical expenses as they age. Another cheesy hole—this is based on a ~25 year draw so you have a choice: don’t retire early or don’t live too long.

All that number-crunching aside, there was a huge flaw in Bill’s strategy—annual rebalancing. While strong statistical data is hard to come by, years ago, the stat often quoted was that less than 15% of people rebalanced their portfolio annually. Anecdotally, I can tell you that the majority of people who swing through my office haven’t rebalanced their portfolio in several years and there’s a good percentage who have rarely, if ever, rebalanced their accounts. Rebalancing annually means every year, not just the years you feel like it and absolutely rebalancing during the years you don’t want to even open the envelope.

My next cheesy hole has less to do with Mr. Bengen’s calculations and more to do with people’s interpretation of his rule of thumb. You’d be surprised how many people layer their own interpretation on this mathematical theory and “feel” that it shouldn’t have to include taxes (boy, are those taxes inconvenient). On a $500,000 post-tax portfolio, 4% is $20,000 (let’s ignore that whole capital gains nonsense). To pull that same $20,000 from your $500,000 pre-tax portfolio, you have to pull at least $24,100, which is now closer to 5% of the portfolio, more than 20% more than the recommended draw. When you are building that retirement cash flow, make sure that you adjust your work based on what you have in your post-tax account and what you have in your pre-tax accounts (and no, we aren’t going to talk about Roths…. it’s been a long week)

I’m not saying that targeting a 4% draw is a bad thing. I love the idea of a structured stream of income since it makes my life a whole lot easier helping people build strong balanced portfolios with that goal in mind. I‘m just saying that what some talking heads call rules, I call guidelines and everyone needs to make sure they take into account as many variables as possible when they come up with the goals we are working towards. If you want to pull more than 4% in the early years of retirement, I hope you have a cash flow put together that has you spending a lot less than 4% in your later years. If you are in a higher tax bracket and all your money is pre-tax, your cash flow should be built on a lot less than 4% after tax.

If you are thinking of leaving a legacy for your kids, if there is an age difference of more than a couple of years between you and your partner, if one of you is the picture of health and one of you isn’t, then I would seriously reconsider becoming too enamoured with the 4% theory. In fact, there are mathematicians who are now saying a more realistic draw is closer to 2.5% (although I think that’s a little on the miserly side myself). As with so much of what we talk about, having a better understanding of what you have, what your resources can, and can’t, do, and setting some realistic (and somewhat flexible) expectations goes a long way towards helping you create a consistent, annual stream of income in retirement.

Baby Talk

Spring is in the air and it leads me to think of lambs. Yes, I have a thing for sheep…don’t know why but they just make me smile…and lambs lead me to think of babies which, apparently, is a pretty common thought as I’ve been having the baby conversation with several couples lately. For this week’s topic, I thought we’d take a little journey through the finances of having little ones.
Let’s start with the proverbial “twinkle in the eye” period of time. Long before there is a bun in the oven, you and your partner should have some serious conversations about the actual costs of getting pregnant.  While some women “fall” pregnant quite easily (“to fall pregnant”—a curious phrase with biblical origins intended to free men from responsibility—take from that what you will), an increasing number may need some assistance. Making sure both of you (or you and your financial advisor if you are single) are on the same page about how many rounds of help you are going to pay for is imperative. The average cost of one round of IVF is ~$12k and the average is three tries before success. Adoption isn’t cheap either (although my personal opinion is that it should be subsidized since that would be way cheaper than accommodating kids without parents through to adulthood – oooh, I’ll get some letters on that one…) and you’ll want to have upwards of $35k in the bank if this is the route you decide to take.
Next up, the prenatal and birthing process. While many health insurance policies will cover a good chunk of the prenatal care under their “wellness” strategy, some require a co-pay for each visit and those visits are pretty frequent in the last stretch leading up to the actual birth. If you need some additional testing— that’s not “wellness” anymore so cha-ching. Giving birth, on the other hand, is often considered “surgery” which can (and often does) result in healthcare bills running at least $2,500 for an uncomplicated birth.  Complications can increase that bill exponentially since you’ll be footing 20% of the costs under some policies. For comparison sake, the cost to have a kid in England: ~$60. The average cost to give birth in the US: more than $5,000.
You’ve brought your little bundle of joy home so, hopefully, you’ve had the child care conversation. The days of this being a gender thing are long gone—this is a fiscal issue at its core. Is one of you is going to stay home and, if so, for how long? Can the two of you alter your work schedules so that one of you is home and available throughout the week? Will you be pulling in relatives to cover some of the time?  Childcare is going to run you about $225/week (more for an infant, less for an older child). Step back and compare your take-home pay with child care costs and you can start to see why some choose to leave the workforce for at least a portion of their children’s early years. And speaking of child care, if you aren’t married, make sure you have put the paperwork in place to ensure that you are both legally listed as your child’s parent otherwise grabbing little Susie from child care unexpectedly can become quite a challenge.
And for all of you who are way past the actual pregnancy zone, grandbabies are the budget buster of all time. I strongly suggest that you have a line item in your cash flow that is specifically dedicated to how much you are going to spend on your grandchildren each year. Let’s put this another way—say you had two children and each of them now has two children. That’s four grandkids you’ll want to shower with all sorts of things. Now, let’s say those four grandkids are spaced over a decade because one of your kids got married early and popped out a couple of honeymoon babies and your other child waited to get married then waited to have their kids. You can start to see how easily this can throw off the budget of the grandparent generation. Having some definition on what you can afford to spend in total can help avoid the spending creep as one grandchild becomes three grandkids which then turns into five.
In closing, here’s an interesting fact—New Zealand recently became the first country in the world to provide bereavement time off for a miscarriage. Given the fact that nearly 20% of pregnancies end in a miscarriage and that the further along a woman is when she loses the pregnancy the more likely a couple is to divorce, a couple of days off seems like a decent gesture. Of course, that’s what it looks like to be governed by a woman.

Image credit: 4317153 © Jolita Marcinkene |

What are these percentages I pay with advisory firms and/or financial planners?

As we go through life, it’s okay to take a step back and question the world around us…especially when it comes to our financial wellbeing. That’s why we are launching our series, “Asking Better Questions.” This month’s featured question: “What are these percentages I pay with advisory firms and/or financial planners?”

It’s a great question! Moreover, if you take this question a step further, “Why do I pay percentages with my advisory firm or financial planner.”

Name anything else in life that you pay for using a percentage. When you buy your home, you know what you paid for it and you know what the payment will be. With your investments, however, the percentage you pay is often based on the assets that are being managed, which means that amount changes from quarter to quarter and year to year. Does your house payment do that? What about your car payment?

Talk to your advisor and put some dollars and cents to that percentage fee. Only then can you understand what you are paying for and make an assessment of the value you are receiving.