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!

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.

From First Home to Last Home

One of the questions I get from clients who are a bit older is “can I age in place?”  “Aging in place” simply means, is your home set up so that you can maneuver around as you grow less nimble and perhaps need some mechanical assistance to get around (walker, wheelchair, etc.). This includes having wider doorways, door handles instead of knobs, a shower stall without a ledge versus a bathtub, lower countertops in the kitchen, etc. You’ll notice that I didn’t mention being all on one floor or having a master suite on the main floor. While the data is still relatively new, there is a school of thought that NOT doing stairs is actually exacerbating some aging issues here in America. Now, the study I read compared us to Europeans and that’s like comparing apples to Big Macs but there is a kernel of reality there so this will be interesting to watch as more Boomers age. Of course, some situations make one floor living more realistic but stop and think about whether it is something you “want” or something you “think you should have.”

Contrary to popular belief, size does matter – no one has ever said to me “boy, I really like maintaining this big house now that everyone has moved on – I want to buy a bigger house.”  Bigger houses just cost more and there’s more to maintain both inside and out. Take yard work as an example. While I miss the joy of driving my John Deere with the 60” deck, cup holder, and cruise control, I absolutely do not miss being tied to spending 3+ hours mowing each and every week. It now takes me roughly 17 minutes to mow my front lawn with my little 17’ battery-powered push mower, which means I can throw dinner on the stove, mow the lawn, and be back in before it finishes. Quite a difference. Before you start shopping, make a list of the things you absolutely have to have, the aspects that would be nice to have, AND the features you don’t want. This will shape your search.

So let’s talk money – Remember, a home is where you make it. Often, the hardest part of the moving question is making sure we strip out the emotional aspect of the issue so that it’s more about the financial logistics. VERY, Very, very few people in the Greater Rochester area sell their current home and clear enough to retire on, or even to shore up their retirement significantly. More often, they end up spending slightly more than they clear from their current home (either in actual home cost or in the costs of owning the new home) so the question becomes how to handle the difference. Sometimes the house itself is slightly more expensive, sometimes they move from a less expensive property tax area to a more expensive one, or perhaps it’s as simple as leaving Fairport Electric and being stunned by what the real world pays to turn on their lights. Just ask my parents about their sticker shock when they opened their first Avon water bill compared to the Penfield bill they’d been getting for 40 years (when my mom’s on a roll, trust me, it comes up even 10+ years later).

I encourage all of my “I’m/We’re thinking of moving” clients to build a cash flow worksheet as if they already live in “the new place.” For research purposes, go house shopping and pick a house you’d like.  Take a look at what you’ll pay for it versus the current town assessment and calculate what the annual tax bill is going to be. So many people forget that the tax basis resets after a sale and use the old tax costs in their projections. If a house is assessed at $175,000 but you’re buying it for $210,000, you’ll need to bump up the tax line in your cash flow worksheet by 20% from what you see on the Zillow/Realtor/Whatever database. 

What about moving costs? Are you planning on remodeling? Big project or just paint? Do it yourself or use a contractor? Keep going and pick apart everything you can think of about your current house and your projected house. Once you’ve done an armchair cash flow worksheet, you’ll be ready to start shopping.

There is so much more to this particular question but this should get you moving down the right path (or driveway, so to speak). Doing this work ahead of time might help you realize that there’s no place like home, even if it’s the home you already have.

Another Year, Another Box of Shred

With the New Year’s holiday in the rearview mirror, now is when nearly everyone’s minds begin to drift towards dealing with the annual PIA called Tax Day. Even if you are one of the lucky ones who no longer need to file, you can’t tell me that there isn’t just the faintest tickle in the back of your brain that says “oh lord, is it that time of year again?!?!?!” As part of the annual ritual, we often try to discard something (or somethings) as a way of making room for all the new stuff we need to keep. I thought it would be a good idea to do a quick rundown of what you really should keep, what’s optional, and what can hit the shred bin. 

Let’s start with what you should be keeping forever (or “permanently”). You should be maintaining copies of all of your tax returns along with records of payments for any tax liabilities and the supporting tax documents (those W2s, etc…) forever and ever. This category also includes your divorce documents, military service records, birth & death certificates, and medical records. Now don’t freak out on me – we’re really only talking a handful of papers for every year more than seven years old and I have my historical returns from 1986 to 2013 in a single Bankers Box. These days, you can scan or receive many of these documents as a .pdf. There are pros and cons to keeping things electronically though. Pros: electronic versions definitely take up less space in a small home. Cons: I know of a couple different people whose electronic backup was corrupted and all those records are gone. Of course, I also know of two different house fires that toasted the family paper documents so that’s not a perfect solution either. Me, I’m a paper gal so I’ll continue to use my “permanent records” box as a shelf for my cats to look out the window, but I am considering spending one of those free weekends everyone keeps talking about experiencing to scan some old stuff…

The next category is the things you need to keep for seven years. This time frame is somewhat deceptive since the seven years usually start AFTER a triggering event. Seven years AFTER you sell a property or investment, you can shred the documents related to that investment. Seven years AFTER you leave a job and roll your 401k, you can get rid of the old documents (although I’ll be the first to say this one’s on my list of “overkill” criteria). If in doubt, this is the time frame I encourage people to use. We can thin the ranks a little by only keeping year-end statements as long as it is a year-end summary statement, not just the December or 4th quarter statement.    

Finally, we have the short-term category (three years). This applies to mainly bank statements, to which you are saying “bank statements? I can get those on my bank’s website.” To which I say “maybe…”  Most financial institutions only keep about 18 months on the public-access sites. Longer than that, they may or may not have them and most banks will charge you for the privilege of accessing your own records (sometimes by the page).

So why do you need your bank statements? Let’s segue to a quick recap of the IRS auditing schedules: The last three years is completely open season for the IRS (three years from the return date OR the filing date, whichever is later). Now, IF you get audited and they find something hinky, they can go back another three years and root around like a pig looking for truffles. If that “hinky” turns out to be considered fraud, there is no time limit – you might as well make up the spare bedroom and invite the auditor to stay for a while (to digress, am I the only one who took a small amount of perverse pleasure in watching Wednesday’s implosion? Talking about the IRS just brought that to mind – I wonder why….). If you don’t file a return, which is perfectly legit for some people, there is no time limit on the audit period (which is why I often encourage people to file a free & easy EZ or SR form even if they don’t owe anything just to get the clock started). Should you be worried about an audit? Not in the slightest. Using 2017 stats, assuming you made less than $200k and don’t have a business, only 1 in 364 returns got audited and the majority of those were computer audits (the “our records don’t match” kind). The IRS focuses its dwindling resources on what they call the “traditionally non-compliant” and few of you are international small business owners. Does this mean you shouldn’t keep your bank statements – I didn’t say that in the slightest…  

Here is a link to download a handy set of Records Retention Guidelines.

Global and International Funds

While I’ve been trying to curb my news junkie tendencies, the staggering variety of train wrecks and car crashes to read about these days threatens to overwhelm one. What I find so interesting (well, I find a million different things interesting but for the purposes of this missive we’ll narrow that down) is that the nature of the catastrophes domestically differs somewhat in make-up from those that are occurring in other countries (or at least what’s getting coverage). And, of course, that leads me to thinking about finances domestically and internationally (penalty points to all of you rolling your eyes right now). I’m sure you’ve all heard the old gardening quip: A daffodil is a narcissus but not all narcissus are daffodils. I think that quip has some value in the investing world when we think of global investing versus international investing.

Stepping back, let’s do some definitions: for our purposes, “global” means the whole globe, all 195+ countries including the US (or “domestic” markets) whereas “international” means the whole globe except the US. Generally, a company is classified where the company is headquartered so while it may be a global company, if its headquarters is in the US then it is a “domestic” company whereas a global company with its headquarters in Ireland is an “international” company. 

Now, I know what you’re saying – why bother with investing internationally when I can just buy a global fund. Yes, that would seem logical but I think we’ve established that logic doesn’t always function properly when it comes to investing (or elections, pandemics, congressional aid, etc…). A quick survey of a half dozen “global” funds shows that all of them invest over half of their positions in domestic markets which means you aren’t really getting all that much international exposure, particularly if that one global fund only represents a portion of your investment allocation. If we are looking at target date and/or asset allocation fund (those all-in-one/one-stop-shop funds), that percentage drops to about 20% or even lower.

“Ahh,” you say, “but if I invest in a large cap domestic fund don’t I get global exposure through all those big global companies” to which I say “ahh, nice try grasshopper…” The great thing about international funds is that they invest in all sorts of companies that are doing all sorts of things that those big companies aren’t. Think of it this way – that big US company with its fingers in a dozen or more countries is like a big ole battleship. That ship isn’t going to change quickly or turn on a dime. What you are missing out on are all those little boats swooping around/in front of/loop-de-looping that big ship and that’s the exposure we want. Because of the different nature of their markets, we often see stronger dividends from those international companies (remember our conversation about the insulation dividends provide awhile back) and those other governments are doing different things to help support their economies that often mean more stable share pricing. Heap on top a dollop of completely different ways of reacting to the current pandemic and you are seeing some other countries rebound in ways our domestic markets can only fantasize about. For example, the Eurozone economy dropped way less last quarter than the US (-12.1% vs -33%) and is on track for a positive growth for the 3rd quarter whereas we probably won’t see true positive numbers for a while yet.

Now, I’m not in any way endorsing a wholesale flip to putting all of your dollars into international holdings. I’m merely saying that everything has its place in your portfolio, for one reason or another. If, after looking at your portfolio, you’re thinking of adding more international exposure, we can certainly have a conversation about your options. If you aren’t totally convinced that something international belongs in your portfolio, check out the news item about the laptop thieving boar in Germany – interesting stuff happens all over the globe and only a well -diversified portfolio has the chance to take advantage of it.

“Buy and Hold” Philosophy

Speaking with several prospective new clients over the last couple of weeks, I’ve been asked if I’m of the “buy and hold” philosophy so I thought I would expand on that a little.

Most mutual fund/ETF (Exchange Traded Funds) providers as well as a whole host of advisors endorse the buy and hold strategy for the long-haul but that’s really a simplistic view of things. In order to build solid 20 year portfolios, we need to understand who we are as investors and as people then put together a reasonably appropriate mix of investments that reflects those parameters. What simply saying “buy and hold” fails to do is take into account our changing personalities and our changing needs.  Expectations for a long-term portfolio are completely different to my 40 year old clients than they are for my 67 year old ones. Our ability to tolerate a recession is certainly different if we are working than if we have just recently retired. You’ve all heard my octopus analogy so let me take that another step and say that not only does our octopus need a variety of legs but, over time, the nature of those legs will need to change as well.

I would suggest we say “buy – hold – adjust” rather than “buy – hold – sit tight with fidgeting fingers and toes.” Too many in my industry have used the phrase “don’t worry, it will be fine/alright/platitude of the day,” which clearly doesn’t sooth any emotional needs. Yes, moving things around too often can be a recipe for disaster (at the least, a healthy dose of fees), but strategically moving things, as a result of our own introspection and adapting to our new environment (meant whichever way you choose), can be the right thing to do at just the right time. If we are aging from a time of accumulation towards one where we are going to need at least some income, then it’s time to adjust. If we can’t bear the thought of another protracted down cycle, then it’s time to if not circle the wagons, at least do a head count of our horses. If we are fast approaching the IRS’s demand for our Required Minimum Distribution then doing a little adjusting can make that hit a little less painful. If we’ve done our financial planning job well, there aren’t fires, just a candle or two that add ambiance rather than fear and panic.

Now if you’re on the young side (chronologically, not those of you who feel young at heart), have no portfolio income needs and the stomach of a hard core amusement park ride aficionado, then, by all means, buy, hold, and park the statement in a drawer (or don’t open the email depending on your choice of delivery method). But, if you aren’t all three, your portfolio is going to need some attention at least periodically so don’t be surprised if I make a suggestion here and there. The world is changing around us and our portfolios need to reflect that. Think of what our lives looked like in the 80s – seriously, would you wear your hair like that ever again??? Perhaps our portfolios should shed the blue eye shadow as well.