Zynergy

Retirement Planning

FAQ: Financial Advisor Designations?

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Frequently Asked Questions: Financial Advisor Designations?

If you have been searching for, and interviewing, financial advisors lately, you may have found that some advisors carry certain financial advisor designations (e.g. CFP®, CFA, CPA, etc.). If you are confused about what these letters represent, and have some questions, you are not alone. Many advisors choose to further their education so that they gain the knowledge and fine-tune their advice so that they can serve their clients better. But how do you select an advisor that is right for your needs? Below I will highlight three of the more commonly held financial advisor designations in hopes that it will clear some of the confusion and lead you to find the advisor that is best suited to meet your needs.

Certified Financial Planner (CFP®)

The Certified Financial Planner™ designation is awarded by the Certified Financial Planner Board of Standards to those individuals who meet rigorous education, training, and ethical standards. Before an individual may call oneself a Certified Financial Planner™ he/she must first meet an education requirement which includes completing financial planning coursework and holding a bachelor’s degree from an accredited college or university. He/She will then need to demonstrate that they attained the knowledge and competency to provide comprehensive financial planning bypassing the CFP® exam. Upon passing the exam he/she will need to complete (or have completed) 6,000 hours of professional experience related to the financial planning process and agree to adhere to the CFP Board’s ethical and professional standards for the practice of financial planning. A CFP®, unlike other types of financial advisors, is held to a fiduciary standard. Therefore, they must provide financial advice and guidance that is in their client’s best interest.

Through the financial planning process, a CFP® will help its clients create and monitor a financial plan. They typically start out by determining your financial goals and assessing your current financial needs. They will then move on to providing advice on everything from specific investments to saving for a down payment on a home, to planning for retirement. You will also find that some CFP®s specialize in a certain area such as divorce and retirement planning, while others tend to work with specific clients, like small business owners or retirees. Therefore, it is important to understand what type of advice you need so that you can select the advisor who best fits that need.

Chartered Financial Analyst (CFA®)

The Chartered Financial Analyst (CFA®) designation is awarded by the CFA Institute and is awarded to financial professionals who are competent in investment analysis and portfolio management. The CFA Institute’s mission is to promote and develop a high level of education, ethical, and professional standards in the investment industry. In order to earn the CFA® designation, an individual must demonstrate his/her expertise in financial research, portfolio management, risk analysis, and risk management. Similar to the CFP® designation, the requirements of becoming a CFA® are rigorous and can take several years to complete. Before an individual can call himself a CFA® he/she must have a bachelor’s degree, 4,000 hours of relevant work experience over at least three consecutive years, and pass a series of three, six-hour exams. Lastly, he/she must adhere to the CFA Institute’s Code of Ethics and Professional Conduct.

The skillset of a CFA® is focused on high-level investment management, economics, financial reporting, corporate finance, and complex equity investing strategies. Therefore, they are typically employed at large financial institutions and asset managers where they perform investment research and analysis. However, you may find some who serves as the Chief Financial Officer (CFO) for a company or who choose to work in the public sector for the Federal Government or a local government. The main difference between a CFP® and a CFA® comes down to who they work with. A CFA® typically works with corporate clients on the investment analysis side, while a CFP® works with individual investors to build a financial plan.

Certified Public Accountant (CPA)

Certified Public Accountant is a professional designation awarded to a licensed accountant. Unlike the CFP® and CFA®, the CPA license is issued by the Board of Accountancy in each state. Therefore, the requirements to obtain a CPA license will differ among the states; however, all states will require a certain level of accounting education to become a CPA. In most states, this includes 150 credit hours in college-level accounting and some states may even require relevant work experience before being licensed to practice as a CPA. In addition, an individual must pass the Uniform CPA Exam and may be required to complete an ethics course.

While the CPA designation is common among tax preparers and accountants, you will find that CPAs are employed in many fields across multiple industries. Some CPAs will choose to help individuals with tax preparation and filing, while others may provide bookkeeping services, financial reporting, and auditing for large corporations. You may also find some CPAs who provide investment advisory and financial planning services.

While there are many financial advisor designations available today, most of them do not carry the same level of education requirements and time commitment that the above designations do. This is why the designations listed above are considered to be the gold standard in the financial services industry. When working with a financial advisor, you want to make sure that they are not only competent in their advice but that they are acting in your best interest. When you choose to work with a  CFP®, CFA®, and/or CPA you can be confident that you will be in good hands.

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Q: What is rebalancing and why is it important? 

A: Rebalancing your portfolio involves shifting your investments among different asset classes to keep your portfolio in line with your target allocation.  Not only does this approach ensure that you are buying low and selling high, but can also eliminate the temptation to time the market.  Since we cannot consistently predict what a particular asset class will do in the future, it is impossible to know the optimum time to sell an asset to maximize profits.  But by rebalancing your asset allocation at least once a year, you will be taking advantage of market volatility and using it in your favor.  You will also be keeping your portfolio in line with your risk tolerance so that you can achieve your long-term goals.  

Asset classes (i.e. stocks, bonds, real estate, commodities, etc.) do not move in lock-step with each other.  For example, when stock prices are heading higher, bond prices tend to fall.  The opposite is also true: when stocks prices are declining, bond prices will typically increase.  This performance dynamic will result in a shift in your asset allocation, and if not monitored appropriately, could leave your portfolio exposed to a higher rate of fluctuation, perhaps more than you are comfortable with.   

For example, let’s say a newly retired individual chose to invest her retirement savings in a portfolio that consisted of 60% stocks and 40% bonds, which is consistent with her risk tolerance.  Let’s further assume the stock market performed very well over the first two years of her retirement.  Without rebalancing her portfolio, she may be surprised to find that her retirement portfolio now consists of 80% stocks and 20% bonds.  This mix will be outside her comfort zone and if the stock market begins to decline, she will experience a larger decline in her portfolio due to the higher exposure to stocks.  Higher fluctuation in her portfolio may cause panic and leave her no other option other than to liquidate her portfolio, at what could be a large loss.  Therefore, in order to eliminate trying to time the market and avoid panic selling, you want to make sure that you rebalance your portfolio at least every year in an effort to bring your asset allocation back in line with your risk tolerance.  

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When you were gathered around the TV with friends and family getting ready to celebrate the beginning of the New Year, I am sure that the last thing on your mind was your budget.  I get it; budgeting is not fun or exciting, but it is one of the most important things to put in place in your journey to financial freedom.

The beginning of the year is the optimal time to take some time to reflect on what it is that you would like to accomplish over the course of the next twelve months.  Would you like to retire? Purchase a new home or a vacation home? Pay down debt? Increase your retirement savings?   Whatever your goals are, the first thing that you need to do is to review your budget.  Understanding how you are spending your money will allow you to make the necessary changes so that you can align your spending with your goals and objectives.  If you do not have a budget in place, then there is no better time than now to start.

The first step in budgeting is determining where you are spending your money.  Therefore, it is critical to track your expenses, because it is only then that you can understand where your money is going.  If you do not know where your money is going, then you will most likely have a difficult time making changes to your spending habits going forward.  It is typically easier for many people to have a good understanding of their fixed expenses (e.g. mortgage, rent, utilities, car payment, cell phone, etc.) because they tend to be the same amount from month to month.  However, an area where most people struggle is understanding the number of their variable expenses.  Variable expenses are those expenses that change from month to month (e.g. groceries, dining out, entertainment, clothing, etc.)  Having a tracking system in place will allow you to stay on top of both your fixed expenses and variable expenses, providing you with the vital information you need in order to achieve your goals.  There are a variety of ways to track expenses (pen and paper, a spreadsheet, or a software program).

At Zynergy Retirement Planning, we recommend our members to utilize Mint.com.  Mint.com is a free service that allows you to link your various checking accounts and credit cards so that you can get a comprehensive view of your total spending. Once you have all your accounts loaded into the software, take a look at your spending over the past twelve months.  Is your spending consistent with your goals, objectives, and values?  If so, you are on the right path to financial freedom.  However, if your spending is not in-line with your goals you now have all the information that you need to make the necessary changes to get where you want to be.  It is also important to note that you should monitor your budget over the course of the year.  You do not want to create it and then walk away.  Life happens and there will be changes to your financial situation over the course of the year.  Incorporating these changes into your budget will help you remain on target to accomplish your goals.   

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It is that time of year again…time to work on your New Year’s resolutions and start fresh with your finances. While many think about their resolutions in terms of eating better, exercising, reading more, etc., not many people think about it in terms of their finances.  The beginning of the new year is a great time to think about how you can improve your finances so that you can achieve your goals.  Whether it includes buying a home, saving more for retirement, putting away money for a child’s college education, creating a budget, paying down debt; having a financial plan and a strategy for the year ahead can be a great way to reduce stress and put you in control of your financial life.  If you want 2022 to be a better year for your money, consider incorporating some of the items below into your New Year’s resolutions:

  • Create a budget – I will be the first to admit that budgeting is not a fun exercise.  However, a solid financial plan starts with a well-thought-out budget.  A spending plan can not only help you make progress towards your financial goals but can also help reduce stress throughout the year.  Consider tracking your expenses via a software program to get a good understanding of where your money is going.
  • Build an emergency fund – An emergency fund is a cornerstone of a financial plan. It is a great way to ensure that you are covered should you need cash to cover an emergency.  This way you do not have to rely on a credit card or dip into your long-term investments to get the cash you need.  While the textbooks say that you should have three to six months of your living expenses in an emergency fund, this could be an overwhelming number for some to achieve in the short term.  For those who do not have an emergency fund at this time, I would suggest that you commit to saving at least $1,000 in your emergency fund.  Once there, you can add to the fund over the course of the year should you find yourself with excess cash flow.  Better yet, choose a time frame in which you would like to target for a fully-funded emergency fund.  This way you can add the monthly amount going into your emergency fund to your budget.
  • Pay down debt – If you have outstanding credit card balances or other debt with a high-interest rate, then now is a good time to commit to eliminating your debts for good.  Perhaps it would make sense for you to refinance your debt into a lower interest rate.  Refinancing your debt may provide you with a lower monthly payment, which will improve your monthly cash flow.  These extra dollars can be applied to extra principal payments on your debt, redirected into your emergency fund, or put aside and invested for other long-term goals.
  • Make sure you get your free money – Do you have access to a retirement plan (401k, 403b, TSA) at work?  If so, do you know if your company offers a matching contribution?  Contributing to a retirement plan is an excellent way to save for retirement in a tax-efficient manner.  Most companies that have a retirement plan, but not all, will match an employee’s contributions, up to a certain amount.  This is virtually free money! If your company has a matching program in place then I would suggest that you take full advantage of the match, or at least as much as your budget will allow.  Do not leave free money on the table.
  • Review risk tolerance – If you experienced a life change over the past year or if you are expecting a change in the new year, then now is a good time to take a fresh look at your risk tolerance.  Understanding how you respond to market risk can have a positive, or negative, impact on your ability to achieve your goals.  If you are taking on too much risk than you can handle and we find ourselves in the middle of a bear market, how will you respond? If you are like most investors, you will most likely sell at the bottom and not be around for the recovery.  This can have a devastating impact on your long-term financial security.  Have an honest conversation with yourself about your risk tolerance.  Ask yourself: if the market drops 30% or 40%, how is that going to make me feel?  Will that cause me to abandon my long-term investment plan? If so, you may want to think about reallocating your portfolio so that it is in line with your risk tolerance.
  • Rebalance portfolio –Rebalancing your portfolio involves shifting your investments among different asset classes to keep your portfolio in line with your target allocation.  Not only does this approach ensure that you are buying low and selling high but can also eliminate the temptation to time the market.  Since we cannot consistently predict what a particular asset class will do in the future, it is impossible to know the optimum time to sell an asset to maximize profits.  But by rebalancing your asset allocation at least once a year, you will be taking advantage of the market.  You will also be keeping your portfolio in line with your risk tolerance so that you can achieve your long-term goals.
  • Review insurance – Reviewing your various insurance policies is a great way to not only to know how much you are paying for these policies but, more importantly, to determine if you have too much insurance – in which case you can probably save some premium dollars by reducing the coverage – or not a sufficient amount of insurance – in which case you may need to increase your coverage in certain areas.  Creating an inventory of your insurance policies (life, disability, auto, homeowners, renters, etc.) is a great first step in understanding the cost and coverage of your policies.
  • Estate planning documents – I know that it is never easy to talk about estate planning.  However, it is extremely important that you have the basic estate planning documents in place.  These include a Last Will and Testament, Power of Attorney, and Medical Directive.  Not only will these documents name your beneficiaries but will also allow you to name a trusted person, or persons, who you would like to take your place should you not be in the position to make financial or medical decisions for yourself.  If you already have these documents, it is still important to review them from time to time to ensure that they are consistent with your current estate planning goals.

Take control of your finances, and start fresh this new year with a plan for how you are going to handle your cash! We are here to help, so if you have any questions, feel free to contact Zynergy Retirement today.

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Q:  How can I protect my investment portfolio and savings from a rise in inflation?

A: Inflation is discussed a lot in today’s environment.  Whether it be an impact on your grocery bill, filling up your car, or your daily Starbucks run, many are wondering how they can hedge their investment portfolio and other savings against a rise in inflation.  

Here are some short-term hedges that can be used to help protect your portfolio and savings from rising inflation:

  • Treasury Inflation-Protected Securities (TIPS): When purchasing fixed-income securities, investors face purchasing power, or inflation, risk.  As you can imagine, inflation reduces the purchasing power of the dollars that you receive from security.  In an effort to protect investors from the impact of inflation, the U.S government first introduced TIPS in 1997. TIPS pay a fixed rate of interest, but the principal amount of the bond is adjusted by changes in the Consumer Price Index (CPI) every six months.  As inflation increases, the interest paid on the bond increases, and if deflation occurs, the interest on the bond decreases. 
  • Series I Savings Bonds:  I-bonds are another type of fixed income security that is issued by the U.S. government.  The “I” in I-bonds stands for inflation, which means that the interest rate is a component of both a fixed interest rate and the CPI that will adjust up or down every 6-months based on inflation data.  If inflation rises, the interest rate of the bond goes up.  If inflation falls, so will the interest rate.
  • Stocks:  Inflation can actually be good for stocks, up to a certain point.  Inflation typically begins to increase when the economy is expanding.  These periods of economic expansion are often associated with rising employment, leading to increased consumer spending, which translates into higher corporate profits.  Higher corporate profits will most likely result in a higher demand for the company’s stock, which will translate into rising stock prices. 
  • Commodities:  Think of a commodity (i.e., gold, oil, copper, lumber, etc.) as the inputs needed to create a particular good or service.  Unlike bonds, and to some extent stocks, commodities tend to increase in value during inflationary periods.  As the demand for goods and services increases, the price of those goods will increase, which will increase the prices of the commodities it takes to produce those goods and services. 

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By Bill Gallagher, CFP®, MPAS®

Will You Pass on What you Have Learned?

“When gone am I, the last of the Jedi will you be.  The Force runs strong in your family.  Pass on what you have learned.” – Yoda

It is tough not to listen to Yoda; I mean, he lived for 900 years.  He has seen a lot during his life and was always willing to pass on the wisdom of his years to others.  Before Yoda’s spirit became “one with the Force,” he shared some of this wisdom with Luke Skywalker.  His message was simple: the galaxy needs the Jedi, and it is up to Luke to teach the “ways of the Force” to the next generation.  Yoda understood that by teaching the Jedi traditions to the younger generation, there will always be someone there to protect the galaxy from the darkness.  As I thought more about Yoda’s advice, I realized how this message can be related to financial planning, especially when we think about estate planning.

Non-Financial Aspects of Financial Planning

Over the years as a financial planner, I have learned that the numbers only tell half of the story.  Some may say that the numbers tell the whole story, but there are many non-financial aspects of financial planning that I believe is just as important as the financial aspects.  While we can apply this message to many financial planning topics, let’s take a minute and think about this within the context of estate planning.  I am sure that when someone mentions estate planning the first few things that come to mind for many people, including myself, are the financial aspects.  Will my estate be subject to estate or gift taxes? What is the cost of probate? What are the costs associated with my final expenses? How much will ultimately be leftover for my spouse or the children?  Don’t get me wrong, these are very important financial aspects which you need to consider.  You want to ensure that the full value of your estate passes effectively and efficiently to your loved ones.  However, this is not where the conversation should end.  There are other important, non-financial considerations everyone should take into account when it comes to estate planning.  For example, have you thought about the family traditions you would like to pass along to the next generation?  

Family Traditions & Values

Family traditions help provide family members with a sense of togetherness and can create positive memories that can be shared not only today but also in the future.  They are a way of passing the family’s values, heritage, and culture from generation to generation.  It is important to remember that it was these traditions that shaped your childhood and made you into the person you are today.  Therefore, they should not be overlooked.  I know that life can be hectic at times, and it is easy to take family traditions for granted.  That is why it is crucial to take some time to reflect on these traditions, because if you neglect to, then they will go away with you.  When you are reflecting on these traditions it may be helpful to think about the positive memories you have from your childhood.  Perhaps you shared special moments or activities with your parents, grandparents, or siblings.  Maybe it was cooking Sunday dinner with your grandmother, or working in the garage with your grandfather, or gathering around the fireplace and telling the stories of the older family generation.  Passing down these traditions will create a strong bond between family members and provide the following generations with the same fond memories.

As you can see, the financial planning process is not all about numbers.  There are non-financial aspects of your life that you need to incorporate into your financial plan in order to get the full story.  Aligning your financial goals with your non-financial will provide you with the opportunity for success.  And when it comes to estate planning, do as Yoda suggested and “pass on what you have learned.” 

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In June 2013, the National Institute on Retirement Security published the results of a study entitled “The Retirement Savings Crisis”, Is it Worse Than We Think?” The main purpose of the study was to determine if American households are financially prepared for retirement. The results of the study were rather sobering, as it suggests the majority of households are not as well prepared as they may have thought. Some of the highlights from the study were:

  • More than 38 million working-age households (45%) do not own any retirement account assets, whether in an employer-sponsored 401(k) plan or in IRAs.
  • The average working household has virtually no retirement savings. When all households are included – not just those with retirement accounts – the median retirement account balance is just $3,000 for all working-age households and $12,000 for those households near retirement.
  • 92% of working households are not on target to meet their retirement goals.

If this trend continues, Americans will likely need to find other ways by which to support their lifestyle during retirement rather than rely on retirement savings. Typically, the fallback position centers on either the decision to defer retirement by working to an older age or to make sacrifices to lifestyle and spend less. Neither of these is necessarily attractive to someone who has reached the point where retirement is a serious consideration.

HOME EQUITY TO THE RESCUE?

Those who own a home are in a unique position whereby they may have the opportunity to utilize the equity in their home to help fill the income or asset gap should they have a retirement income shortfall.

There are four primary ways by which an individual can access the equity in their home:

  • Home Equity Loan (or second mortgage)
  • Home Equity Line of Credit (“HELOC”)
  • Home sale and downsize
  • Home Equity Conversion Mortgage (Reverse Mortgage)

Following is a brief overview of each of these strategies. Each has its own advantages and disadvantages. Before deciding to implement any of these strategies it is important to speak with your financial advisor to determine the best course of action given your unique financial position.

Home Equity Loan

A Home Equity Loan allows a homeowner to access their home equity by taking a lump sum of money that will need to be paid back over a certain specified period of time (i.e. 10 years, 15 years or 30 years).

The advantages of a Home Equity Loan include:

  • A home equity loan carries a fixed interest rate. A retiree can plan on the loan payment being fixed for the entire term of the loan. This can be helpful for those that are on a fixed budget.
  • The interest the borrower pays on the loan may be claimed as a mortgage interest deduction. According to IRS Publication 936, the Federal Government allows the borrower to deduct the interest from the loan as long as the proceeds were used to buy, build, or substantially improve the borrower’s home. Further, a borrower can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1,000,000 ($500,000 if married filing separately)) apply if the borrower is deducting mortgage interest from indebtedness incurred before December 31st, 2017.

The disadvantages of a Home Equity Loan include:

  • The full balance of the loan begins to accrue interest as soon as the funds are disbursed. This may cause the borrower to pay more interest over time.
  • The borrower must start repaying the loan soon after it is disbursed. These payments may place a constraint on the borrower’s cash flow which could lead them to deplete their investment assets to help fill the income gap.
  • Because the home equity loan is an amortizing loan, each installment includes repayment of principal as well as interest. As such, the earliest payments on the loan largely interest, with very little reduction in the outstanding loan balance.
  • To qualify, the borrower must undergo a credit check and prove their financial assets and sources of income to the lender. Proving sources of income for retirees may prove difficult, as many have no employment income.
  • If the retiree is unable to meet the loan’s obligations, he or she may find themselves in a position of defaulting on the loan, resulting in foreclosure on the home.
  • Given the disadvantages associated with these loans, according to Allen (2015), a Home Equity Loan is typically an appropriate strategy for those retirees with a high-risk tolerance and sufficient sources of income.

Home Equity Line of Credit (HELOC)

A home equity line of credit is another way for a homeowner to access their home equity. When a borrower is approved for a HELOC, he or she does not receive a lump sum payment. Instead, the funds can be drawn upon when and as needed up to the amount of the credit line.

The advantages to a Home Equity Line of Credit include:

  • They are typically easier to establish than a traditional home equity loan, and closing costs are typically below that of a home equity loan.
  • The initial interest rate charged on a HELOC is typically lower than interest rates on home equity loans.
  • Interest is assessed on the amount the homeowner borrows against the home’s equity, not on the full amount of the line of credit.
  • The interest the borrower pays on the loan may be claimed as a mortgage interest deduction. According to IRS Publication 936, the Federal Government allows the borrower to deduct the interest from the loan as long as the proceeds were used to buy, build, or substantially improve the borrower’s home. Further, a borrower can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1,000,000 ($500,000 if married filing separately)) apply if the borrower is deducting mortgage interest from indebtedness incurred before December 31st, 2017.

Disadvantages include:

  • Interest rates are not fixed and are typically tied to a published interest rate such as the Prime Rate. The rate of interest calculated on the outstanding loan balance will therefore vary over time. In a rising interest rate environment, the borrower can find that the amount of the monthly payment may rise to a level that further squeezes their budget.
  • If the retiree is unable to meet the loan’s obligations, they may find themselves in a position of defaulting on the loan, resulting in foreclosure.
  • While the underwriting process may not be as stringent as for a home equity loan, to qualify, the borrower must undergo a credit check and prove their financial assets and sources of income. Proving sources of income for retirees may prove to be difficult as they typically have no employment income.

Home Sale and Downsize

Another way for a retiree to access home equity is by selling their existing home and downsizing.

Advantages include:

  • The liquidity gained from the sale may be used to purchase a new home that is perhaps better suited to the homeowner’s needs.
  • When “downsizing”, the homeowner can reduce or eliminate mortgage payments if the new home is purchased for cash or with a smaller mortgage.
  • To the extent the cost of the new home is less than the proceeds from the sale, excess proceeds can be invested to help provide additional income to help support the homeowner’s lifestyle.
  • Downsizing to a less expensive home may also reduce carrying costs like the amount being paid for taxes, homeowner’s insurance, utilities, etc.

Disadvantages include:

  • The decision to sell requires that the homeowner overcome the emotional hurdle of selling the home where many family memories were made.
  • To the extent the home is sold for more than its cost basis, the homeowner may have to pay tax on the capital gains from the sale. However, homeowners filing a joint return may be eligible to exclude the first $500,000 of capital gain from taxation. ($250,000 for those filing a single return). IRS Publication 523 states that the exclusion is available if you owned the home and used it as your primary residence during at least 2 of the last 5 years before the date of sale, you didn’t acquire the home through a like-kind exchange during the past 5 years, and you didn’t claim any exclusion for the sale of the home that occurred during a 2-year period ending on the date of sale of the home.

Home Equity Conversion Mortgage (Reverse Mortgage)

Lastly, a homeowner that is at least 62 years old may access the equity in their home through what is often referred to as a reverse mortgage. To be eligible for a reverse mortgage the home must be a single-family home or a 2 to 4-unit home with one unit occupied by the borrower. Certain condominiums and manufactured homes (trailers, etc.) will also qualify if they meet the requirements.

The amount a borrower may receive through a reverse mortgage depends on the following factors: (1) the age of the youngest borrower or eligible non-borrowing spouse, (2) the current interest rate, and (3) the lesser of the appraised value of the home or the mortgage limit of $822,325 (as of January 1, 2021) imposed by the FHA on reverse mortgages.

A reverse mortgage is referred to as a non-recourse, asset-based loan that does not require repayment until the borrower leaves the home (Allen, 2015, p. 75). Reverse mortgages are appropriate for those who would like to age in place (i.e. remain in their home), have enough financial resources to maintain the home (i.e. paying property taxes, homeowner’s insurance, etc.), and for those who may be looking to supplement their retirement income or to provide an emergency fund.

The clear majority of reverse mortgages in the United States are Home Equity Conversion Mortgages, which are regulated and insured by the Federal Government by the Department of Housing and Urban Development (HUD) and the Federal Housing Authority (Pfau, 2016, p. 45). For many years, reverse mortgages were sold inappropriately by lenders which often included high-pressure sales techniques and carried sizable loan origination fees. As a result, the Federal Government made changes to the reverse mortgage facility, increasing the regulations associated with them to protect the borrower by ensuring they have the financial wherewithal to continue to maintain the property.

As mentioned above, one of the major benefits of a reverse mortgage is to allow the homeowner to age in place. However, just because the home may be subject to a reverse mortgage does not mean that the borrower must remain in the home. The borrower can sell the home, but just like a conventional mortgage, they must repay the reverse mortgage loan balance when the home is sold. In addition, the homeowner can leave the home to his heirs. The heirs will inherit the home upon the death of the borrower. However, before the heirs receive title to the property, they must repay the reverse mortgage loan balance. If the heirs are not interested in keeping the home, they have the option of selling it. Again, they would be responsible for repaying the reverse mortgage balance upon the sale of the home.

Advantages of reverse mortgages include:

  • The ability to access the equity in one’s home, within limits, via a lump sum, an open line of credit, or through regular monthly disbursements without having to make loan repayments, as long as the borrower remains in the home. Please note, if the borrower lives with a spouse who is a co-borrower, then the co-borrowing spouse may continue to live in the home should the borrower move to a nursing home or assisted living facility.
  • Proceeds from a reverse mortgage may be used to pay off an existing first mortgage, home equity loan, or HELOC (within the stated limits), thereby eliminating principal and interest payments on such loans. Since re-payments are not required on the reverse mortgage, the borrower can substantially reduce their monthly out-flows.
  • According to IRS Publication 936, payments received under a reverse mortgage are considered loan advances. Therefore, disbursements received are not taxable.
  • A reverse mortgage is especially beneficial for those that do not have sufficient balances in retirement savings. Implementing a reverse mortgage will provide them access to otherwise “dead equity” that can help them fill any retirement income gaps.

Although reverse mortgages have some benefits, retirees need to be aware of some of their disadvantages.

Disadvantages of reverse mortgages include:

  • Origination fees and closing costs can be high.
  • The principal amount of the loan plus interest must be repaid upon the death of the borrower, or if the home is no longer the borrower’s principal residence (or the borrower moves out due to health reasons for 12 months or longer), or if the borrower defaults on the terms of the loan.

If you are close to retirement, or in retirement, and are looking for ways to utilize your home equity to supplement your income it is important that you speak with your financial advisor to make sure that any of the above strategies are appropriate for your unique financial situation.

  • Allen, James, R. (2015). Using the Personal Residence for Retirement Income. Journal of Financial Service Professionals. 69(4). Pp 71-79.
  • Pfau, Wade. (2016). Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement. McLean, VA. Retirement Researcher Media.
  • Rhee, Nari. (2013). The Retirement Savings Crisis: Is it Worse Than We Think? Washington, DC. National Institute on Retirement Security.
  • United States Department of the Treasury. Internal Revenue Service. Publication 936 (2019): Home Mortgage Interest Deduction. Internal Revenue Service.

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Resolve to Become Healthier

For many people, healthcare will be one of their largest expenses in retirement. A couple age 65 who retired in 2020 is estimated to need $295,000 to cover medical expenses throughout retirement, according to Fidelity Benefits Consulting. By the way, that estimate does not include any costs associated with nursing-home care. It applies only to retirees with traditional Medicare insurance coverage. It does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

Here’s a key to that estimate: It’s calculated for average retirees, but the cost could be more or less depending on where you live, your longevity and your health.

Fidelity says many people nearing retirement underestimate the amount of savings they may need to cover health-care costs. In one poll, respondents guessed that they would need only $50,000.

So to save money, get healthy or healthier. Eat better. Exercise. Your health can have a big impact on your wealth.

Spend Less

Set a threshold for your big purchases. It’s one thing to spend $20 at Target on a whim, but if you ever want to buy something $50 or $100 or more, give yourself at least a 24-hour waiting period to make sure you’re reflecting on the purchase. Ask yourself what you’re giving up in lieu of this purchase. Is it going to be that you’re not going to go out for the next month? Where are you going to make up the difference? Because it’s money that hasn’t been accounted for.

We recommend setting your threshold at $50 or $100, depending on your budget. During your waiting period, ask yourself why you want this item and what it means for you — whether you really need it or want it to keep up with the Joneses. If it’s more the latter, remind yourself that when you’re comparing yourself to other people, you’re seeing their best self — not the financial issues behind-the-scenes that make you keep up with them.

If there’s a particular category of your budget that needs scaling back, look at your past spending to set a limit. For instance, if you know you’re spending $400 a month on going out, say, ‘I’m going to cut that in half — I won’t go out to dinner but I’ll go out to lunch and brunch with friends.” So, have a conversation about where you’re willing to make adjustments to meet this goal.

Plan for the Holidays

Time goes by quickly; look how fast last year went. This is the perfect time to plan for this year. Determine your holiday budget based on what you spent last year. Examine who you are buying for, food, travel, entertainment, decorations, postage, etc., and start saving. If possible, start shopping now. It will give you time to look for deals as well as purchase that perfect something without all the holiday stress.

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FAQ: How much cash is enough for my emergency reserve?

When it comes to your emergency reserve, rules of thumb abound.

“You need 6 months of living expenses in cash!”

“Always keep enough cash to cover your basic expenses for one year!”

“You must have at least $10,000!”

“Subtract your age from your IQ and multiply by $500!”

The truth is, rules of thumb may be good advice for the population (okay, maybe not the last one), but can be terrible for any individual.

An emergency reserve is the safe, liquid, accessible cash you keep in a checking, savings, or money market account that you can access when unforeseen expenses occur, or you experience a job loss. Most financial advisors will recommend 6 -12 months of living expenses in this account, however, that may not be appropriate for you.

We believe there is a balance between sleeping well and eating well. With a little extra cash tucked under the mattress, you may sleep very well at night, which is very important. However, too much extra cash will sit in savings earning almost nothing while inflation erodes its value over time and prevents you from a better lifestyle….eating well.

As an example, you may feel very comfortable with $100,000 in your savings account in case an emergency arises, allowing you to sleep comfortably at night, but that $100,000 earning less than 1% in today’s environment means you are missing out on investing some of those funds and earning much higher returns over time. This cost is likely to be to the tune of tens of thousands of dollars over five or more years. The loss of this return can certainly hamper your lifestyle and spending.

The point is, like most things in life, it’s important to find balance. Figure out what the right balance of sleeping well and eating well is for you. Start by thinking about 6-12 months of living expenses and decide if that is too much for your personality (my income is safe, and I would rather my money work harder for me) or makes you very uncomfortable (a good night’s sleep is worth several thousand dollars a year to me). Once you figure out what that number is for you, invest the rest with the confidence that you have some cash to help through the rough patches!

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FAQ: I’m near retirement and with the election right around the corner, shouldn’t I be very conservative until after the election is over?

We have been fielding this one often lately, and understandably so. The 2020 election seems like none we have experienced in history. The rhetoric is far more partisan than it has ever been, and there doesn’t seem to be any candidate that identifies with the average American’s values. We’ve heard concerns about a potential change in power and fears about no change in power, fears that the results will be catastrophic, and even apocalyptic. And no matter where one falls on the political spectrum, there is an overwhelming fear across the board: “Are we all done for? Surely this time is different!”

Only it’s not.

In fact, we experience contentious, partisan elections of our President every four years. Each time, the fear is the same. The 2016 election, only four short years ago was just as partisan, just as frustrating, and just as venomous in its rhetoric. The line I heard from seven of my members at the time was “No matter who wins, we’re doomed.” We weren’t.

President Donald Trump has been President for almost 4 years and despite what you think of him as a President (we are limiting our discussion to investing), investors have done well during his term. Once he was elected, the market crashed more than 1,000 points overnight before the sun even came up with the headlines of a Trump victory. However, by the time the market opened at 9:30am the next morning, the Dow was down only 200 points. This was just about a 1% decline…hardly a crash. After that, it was straight up (practically) for 18-months. Now, that may be fine if you are a Trump fan, but what if Hillary Clinton had won?

Actually, we don’t know what would have happened if Clinton had won since any guess would be pure speculation, but the last two Democratic Presidents, President Bill Clinton and President Barack Obama presided over some of the best stock markets in our history even as they regulated and raised taxes. While President George W. Bush presided over one of the worst, despite implementing very similar policies to President Trump.

The point is not to favor one party over the other in our investment strategy; in fact, quite the opposite. History shows us that it simply does not matter. Markets perform poorly and well for Presidents who are Democrats and for Presidents who are Republicans. The result has less to do with who is in power and how high taxes are, and more to do with where we fall in the current economic cycle. President Bush inherited an overblown economy with the highest stock valuations since 1929. No amount of tax cuts and deregulation would have saved the stock market during his tenure. President Obama came into power almost at the trough of one of the worst economic crises of our lifetimes; the market had almost nowhere to go but up.

I am not defending any one candidate or party. The lesson of history is that there are plenty of factors that are consistent with market performance over time, the largest being valuation at the time of purchase. One factor that has essentially zero correlation is elections and the political party in power. Focus on what is important for your long-term investing and ignore the “noise” which seems important in the moment. If you had followed this advice in 2016, you were far happier, and wealthier, for it. If you trusted your “gut” and sold before the election, you had almost no opportunity to buy back in at a lower price. The longer you waited to reinvest, the more return you missed.

Stay the course, stay invested for the long-term, and watch your money grow through both Republican and Democrats tenures!

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Retirement should be filled with freedom, leisure, travel, and time with our loved ones. However, it can also be filled with angst if we don’t properly plan for potentially 30+ years of expenses without the income from a job. Most people only retire once, which means you have no experience doing it and once your choices are made, there are no do-overs, so getting it right the first time is essential.

As retirement planners, one of the top questions we receive from our members and prospects is regarding the option that is offered by their pension plan at retirement. “Should I take the lump-sum or collect the monthly annuity payments that are guaranteed?” A decision that is so important and so final can only lead to anxiety, however, by arming yourself with information, you can make the decision that is best for you. Here are the benefits of each pension planning option:

Annuity

  1. Sleep – The annuity option is traditionally the best option for your peace of mind.  There is something very comforting about knowing you will get a monthly paycheck regularly for the rest of your life.
  2. Longevity – People today live longer.  Medical advancements and healthier lifestyles have led to projections of most baby boomers living longer than they expect.  The annuity option is a fantastic decision if you outlive your life expectancy.
  3. Safety & Security – Although nothing in life is guaranteed, the certainty of most annuity payments is very strong.  Most annuities are backed by re-insurance companies (large companies that will be an additional back-up in the case of a default by the annuity provider) or the state.  This leads to a very safe and secure cash stream in most cases.

Lump-Sum

  1. Loss of Cash – You may have a nice stream of income, but losing the lump-sum means losing large chunks of money potentially available for big-ticket purchases or emergencies.  If your child needs to borrow $50,000 for a bridge loan to build a house, your annuity can’t help.
  2. Inflation – The silent killer of a robust annuity payment in early retirement is inflation.  For those of you who skipped Econ 101, inflation is the gradual increase in prices over time.  Most annuities today do not have a cost of living adjustment attached to them so a $3,000 monthly annuity payment today will be $3,000 in 25 years.  That may seem like a decent chunk of change each month when your property taxes are $8,000 a year, but in 25 years when they gradually reach $25,000, you may be wondering where all of your money went.
  3. Estate Planning – The major downside of taking the annuity is the loss of your money.  This means, with few exceptions, if you and your spouse are in the car for a nice Sunday drive the first year of your retirement and are killed in an accident, there will be nothing left for your heirs.  The stream of cash dies with you and this can be very troubling when deciding to give up hundreds of thousands of dollars for a few thousand dollars a month.

When contemplating which pension planning decision is right for you, think about your values and beliefs.  Is it more important to have safety and security or more money and access to it?  Is inflation protection important to you or are you more worried about longevity? This is an important decision, but armed with the right information, you can decide what pension planning strategy will provide you with what you value most. Of course, if the decision seems too difficult, contact a good fee-only financial planner to help you make sense of it all.

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FAQ: Is now the time to buy Apple stock since it split and is cheap?

Answer: No.

We are getting this one a lot lately. Apple and Tesla are both darlings of the tech world recently and both announced stock splits at the same time. There seem to be two fundamental problems with this question, first is that a split adds any value to a stock or company, and second that the company is cheap because the price is lower.

Problem #1 – A stock split is nothing more than a shake-up of the numbers that dictate a stock. Each company that is traded publicly has a certain number of shares outstanding, called the float. The other relevant metric is the price of each one of these shares. If I own ABC Corp, a cloud-based web services company, they may issue 1 million shares of stock when they incorporate. This means if you own one share, you will own 1/1 millionth of the company. As we learned in elementary school, slicing a pizza pie into more slices does not increase the size of the pie, it merely reduces the size of each slice. If your share of ABC Corp is worth $10, the entire company is worth $10 million. If the company grows and the stock increases in price to $20, the company is now worth $20 million. The Board of Directors of ABC decides a stock split is in order and offers a 2-for-1 split (I will receive 2 shares for each one I own), thus the shares outstanding doubles while the price is cut in half. Again, each slice of pizza is cut in half, but the pie size remains the same. There is no value created from a split. The shares may become cheaper for the average investor to afford, but in a world of fractional share purchases and 401k’s, I don’t think this advantage provides any material value.

Problem #2 – The price of Apple stock may be lower than it was before the split, however, as demonstrated above its value is unchanged. In the case of stocks, value is measured as future earnings per share. Obviously, the idea of measuring anything related to the future is what makes markets. Some people think the earnings will grow at a very quick rate and others think they will grow slowly…or not at all. In the case of Apple, the stock is priced at an extremely unreasonable growth rate based on the last 5 years. Apple is trading at essentially double the market as a whole on an earnings basis. However, Apple has grown its revenue by less than 3% per year on average for the last 5 years. This is far from the growth rates seen by other tech companies such as Google, Amazon, or even Tesla. In fact, this growth rate is slightly less than the average growth rate of the entire S&P 500. The iPhone, which has actually hardly grown at all in the last 3 years is 50% of Apple’s revenue and unless they have something up their sleeve that will change the world in a market that is massive, such as energy, transportation, or health care, it is unlikely that the current valuation is justified.

Sure, as long as there are speculators, the stock may go higher. Nobody can predict the short-term moves of any one investment. Rampant speculation could push the valuation of Apple significantly higher from here. However, speculating is never a good long-term investment strategy. Stay away from Apple until it is unloved by the majority of investors like it was in 2013, and you may be able to buy it at a bargain. Or better yet, take our advice, avoid individual stocks altogether, and stick with a diversified portfolio of low-cost index funds.

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Making money is hard. Saving money is hard. However, sometimes, there are simple, easy steps that can be taken that can put thousands of dollars in your pocket. Here are three techniques you can implement right now that can do just that for very little time or effort:

  1. Shop your insurances. I know this sounds boring and dull, but some of the best financial strategies are. Insurance premiums for home, auto, life, health, and disability can be a large percentage of your annual budget. Oftentimes, things change with the company you are currently using or in your personal situation that can cause the company that was the best value for you years ago to become the highest price in the market for your needs. Getting quotes on these insurances every two years or so will not cost you much more than an hour or two of your time and is very likely to reap large rewards. We recently recommended this to a member of ours who seemed to be paying very high homeowners insurance premiums. They had been with the same company for 15 years and did not realize their costs were going steadily higher. After quoting through three different companies they were able to secure the exact same coverage from a highly rated insurer and save more than $3,000 per year. This, all for the cost of about two hours of time. Certainly, well worth the effort.
  2. Mortgage Refinance. If you own a house and have a mortgage, the interest you pay on that mortgage can be hundreds of thousands of dollars over its lifetime. Falling interest rates are a gift to homeowners as lower rates offer the opportunity at refinancing your mortgage at a lower rate and potentially knock tens of thousands of dollars off your interest payments. As I write this, rates are at historic lows, and thus, looking at refinancing your mortgage should be high on your priority list. For not much more than a few hours of your time, you can save lots of money over the next 15 or 30 years of your loan. This seems like a smart use of your time.
  3. Review the fund fees in your IRA or 401k. Investment costs, like mortgage interest, can cost you hundreds of thousands of dollars over your investing life. In fact, the difference of 1% in expenses annually compounded over 30 years of investing can cost an investor more than $200,000 by retirement. That’s not pocket change. Regularly review your 401k and IRA funds to make sure your focus is on costs, getting the same funds for the lowest fees. It is not uncommon to see one S&P 500 fund that charges 1.4% and one that charges .04%. If you have $100,000 invested that is a savings of more than $1,300 per year. Over time, when compounding is accounted for, the savings are compelling.

Each of these three money-saving options should be reviewed regularly, every two to three years. Stay focused, invest a little time, and save lots of money.

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FAQ: Now that I’m retired, what do you think if I invest in only high dividend stocks for the income they provide?

Answer: This is a question we get from time to time that can be very concerning. Anytime investors put most or all of their investments in one asset class, they are setting themselves up for problems, however, more than that, the nature of this question typically means that the person asking is unaware of the risks associated with this strategy.

Anytime you put your hard-earned money to work for you to go out into the world and multiply, you are taking risk. Risks that are easy for investors to understand are market risk, the risk that my investment fluctuates in value, and default risk, the risk of whatever I invest in going belly up and losing my entire investment.

However, there are several unseen risks that are not always so apparent to investors. A good example of this is inflation risk. This is the risk that costs to purchase goods are going up quicker than the value of my investment. Thus, even though my investment appears safe and I will get what I invest plus some interest, the money returned to me will be less valuable than when I lent it out (i.e. it can buy fewer goods), even though the absolute value is more. This is a risk that is far less perceptible to investors than market fluctuations, but it can have just as terrible consequences if not properly managed.

In the case of high dividend-paying stocks, there are several less than transparent risks. The one any investor needs to be on the lookout for is a common investing error called a “dividend trap”. A “dividend trap” can occur when a company that pays a sizable dividend begins to see its stock price fall due to a systematic problem in its industry or poor management. As the stock price falls, the dividend yield (which is calculated by dividing the dividend paid in the past year by the stock price) can increase dramatically, making it look like a compelling investment. However, the fundamental problems with the underlying business mean the company will almost certainly cut the dividend in the future and possibly even go out of business.

(For example, General Motors is a $100 stock that pays a $6 (6%) annual dividend. However, the car business is in trouble and the company stock falls from $100 to $20 in three months. That 6% yield is now a whopping 30%. It may look like a fantastic dividend-paying stock, but the company is a shaky investment and will most likely cut this dividend in the near future. In the case of General Motors, they actually filed for bankruptcy in 2009. You would have lost 99% of your invested funds stretching for high dividends).

The most important lesson in investing is understanding the seen and unseen risks of your investments. Reaching for yield through dividend stocks can be a good part of a diversified portfolio, but as with almost all investment strategies, should be diversified. Diversification is the best way to manage all the risks you will face in your investing life.

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FAQ: Now that the market has corrected and is down, should I be doing anything different with my retirement investments?

Answer: This is an excellent question that we have been getting often since mid-March.

As the COVID-19 crisis continues to engulf our world in uncertainty, that lack of clarity has translated through to the manic-depressive stock market. The market selloff in mid-March was historic, with the S&P 500 bottoming out about 37% below its all-time high just a few weeks prior.

In addition to a panicky stock market, the traditional safe investments, like treasury bonds were hitting historic highs with the 10-year treasury offering record low yields (in the bond world, yield and price are negatively correlated, so when one goes up, the other falls) of .5% or less. Essentially, valuations of equities, especially when compared with bonds, seemed compelling.

However, the disparity was short-lived as the market remained at or near its lows for only a few days and immediately turned upwards, recovering more than half its losses.

Now, with exceedingly low yields on bonds (do I really want to lend the government money for 10 years and get less than 1% interest each year?) and a recovering stock market, should you change your allocation?

The answer depends on the traditional metrics of financial planning such as age, risk tolerance, time frame, and goals. If you are retired and drawing from your portfolio to provide your retirement income, you may not have the ability to take risks with that money. Volatility can be deadly to money you need to live off of for the next 3-5 years.

However, for those of you who are younger, have more than 5 years to retirement, and have a relatively high-risk tolerance, this may be an excellent time to move your portfolio to a more aggressive posture to take advantage of cheap valuations in equities and sell bonds at historically high prices.

Be smart, make your allocation decision based on your circumstances, and if you have the ability to weather the COVID-19 storm, take advantage of the opportunity presented. However, the stock market is not a casino. Do not gamble money you need in the near future on a hunch.

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We have just passed the one-month mark since the stock market bottom and since that time, stocks initially had a compelling rally off the lows followed by a period of malaise as volatility collapsed and the market now churns sideways.

On behalf of the team at Zynergy Retirement Planning, we hope you, your family, and your loved ones are staying safe and healthy. I don’t think it needs to be said (but I’ll say it anyway) that we are living through extraordinary and unprecedented times. Our thoughts and prayers are with the sick and dying and the health care workers tending to them.

This post, although a brief market recap, is more of a greeting to let you know we are still here if you need us and to give you a few updates on the state of things.

As for the portfolios, we have done nothing since the lows of mid-March. Although unable to predict the future, I am growing more confident that the lows we saw during that time will be the market lows of this crises. It does not mean that volatility is behind us, we should all prepare for more market swings, but I don’t expect we will plunge below the mid-March levels.

We are also no longer making an aggressive call for cash. Unfortunately, the window of panic selling that led to extremely low valuations was relatively short-lived, not much more than a week or so. Many of you were able to take advantage of this opportunity which has proven very profitable. The rest will need to wait for the next opportunity, however, valuations at this level do not justify and aggressive push for additional cash.

Essentially, it is time to do what all great investors do most of the time….nothing. The portfolios have been rebalanced and are all exactly as they should be given the current environment and valuations. There is not much to do in the way of longer-term financial planning until we have more clarity on the fight against the Coronavirus. Essentially, we wait.

Our office remains closed while Lauren, Michela, and I continue to work remotely. Like most businesses, we have no idea when our office will open again but will certainly let you know when we do. Please know that the office number is being forwarded to Michela’s cell phone, so we are still receiving business calls to the office. However, the easiest way to contact us is via our cell phones.

We hope to see all of you again very soon. Until that time, stay safe and take the necessary precautions to ensure your health and the health of your family members. We will all get through this crisis together!

Please call Lauren or me if you would like to talk about your particular situation. We are here if you want to discuss your account, the market, or your financial plan. I am available on my cell at 732-822-9719 or at the office at 732-784-2380 as is Lauren (cell: 732-272-3348). As always, thank you for the faith you have placed in Zynergy.

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Last week, stock markets around the world corrected in a violent selloff. Most of the major indexes were down more than 15% at their lowest levels due to fears of a Coronavirus pandemic and the economic impact that would have. This, just a little more than a week from the S&P 500 making record highs on an almost daily basis. In essence, a correction was due, and it came with a searing intensity.

Now what? What should retirees and long-term investors do? It is an interesting question as I am hopeful, if you are invested, your portfolio is properly diversified. A properly diversified means two things:

  1. You have eliminated single stock risk by not investing so much of your investments in any one stock (or any single investments) that its collapse would financially devastate you. This problem was solved decades ago with the advent of the mutual fund and more recently, the ETF.
  2. Your portfolio is composed of various types of investments with low or negative correlations to smooth out the bumps in volatile markets. Most portfolios should include large-cap U.S. stocks, small-cap U.S. stocks, international stocks, emerging market stocks, bonds, real estate, and cash. Understanding what allocation is right for your age, goals, and risk tolerance is perhaps the single most important thing you can do in investing. Far more important over the long-term than market timing or stock picking.

If we assume that you have at least some level of diversification for both of the above, let’s then discuss how to manage the current volatility:

Young investor: If you are under 50 years old and have a minimum of 10 years before you will need to tap these assets, there are a few things you can do to enhance your long-term return using this volatility to your advantage:

  1. Rebalance: Rebalancing your portfolio is simply bringing your portfolio back into alignment with the original allocation percentages. Essentially, you will sell what has done well and buy what has done poorly. This is a fantastic way to take advantage of market volatility and add to your investment performance over time.
  2. Invest more: Although we tend to encourage people to always invest when they have money for the long run as it will perform well over a long period of time, market selloffs are particularly good times to add new cash. It allows you to accumulate more shares for the same dollars and accumulation of shares should be young investors focus. However, be careful not to put all your free cash to work at the first sign of a dip. We had several people call us after the first 3% selloff wanting to put cash in and buy the dip. We advised patience and began encouraging new money when the market was down more than 10%. Any 3% move is not a pullback, it’s a fluctuation. Invest new money in stages as the market falls. Remember, you don’t have to invest new money so keep some on the sidelines for real panics.

Older Investor: Periods of extreme market volatility are especially difficult on older investors. If you plan to draw on your portfolio in less than 5 years or are currently drawing from it, it can be downright scary. However, the key is being properly diversified before the volatility occurs, not being reactive to it. By the time the market has fallen 15%-20%, if you were not diversified properly, it is too late. However, for those who were diversified coming into last week’s selloff, here are some steps you can take to take advantage of the market opportunity and ease the pain:

  1. Rebalance: As with younger investors, rebalancing during a time of extreme fluctuations is always a good idea.
  2. Use Conservative Investments for Distributions: Ideally, you do not want to sell stocks when prices are down to satisfy your distributions. As prices contract, you are required to sell more shares to receive the same dollar amount which can eat away at your portfolio quicker than anticipated. Ideally, when stocks fall, you will want to use cash, bonds, or any other high performing investment to satisfy your distribution requirements. Liquidate these investments while they are up, performing well, and you have to sell fewer to meet your cash flow needs. This strategy has the added benefit of helping rebalance the portfolio as selling what is performing well will bring the portfolio allocation back into alignment.

Market fluctuations are the price of admission when investing in a diversified portfolio. Although the outsized performance the stock market furnishes over the long-term is necessary to outpace inflation for just about all investors, it can sting in the short-term. Avoid checking balances daily, rebalance where you can, and if possible, invest more. When you look back over your performance in 10+ years, you will be extremely happy with your performance and the Coronavirus will be a buzzword from the past like SARS or Brexit. Happy Investing!

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Deciding when to retire can be one of the biggest decisions of your life. If done right, you will only do it once, so it is important that you take the proper steps to ensure a part-time job as a Wal-Mart greeter is not required to make ends meet when you’re 80. Here are five things you must do give you the best chance at retirement success:

  1. Make a plan: I know, it is not surprising coming from a retirement planner that the most important thing is to put a plan in place. Although this advice may be a conflict of interest, it doesn’t mean it’s wrong. There is no single more important thing that you can do during your retirement than to plan for it. Working with an expert that can lay out your cash flows, optimize your assets, help you navigate government programs such as Social Security and Medicare, and developing a framework for your future is vital. This is the cornerstone from which your retirement will thrive.
  2. Stress Test: I’m an optimist. I believe every endeavor I dive into will work out with tremendous success. It’s how my brain is wired. However, in reality, this is not always the case. The best-laid plans are often derailed by unpredictable or even unprecedented events. That is why trying to anticipate the worst-case scenario in your retirement and understanding the results of your plan if it comes to fruition is important to having confidence as you enter your retirement. Many retirement plans are based on “average” rates of returns. However, only understanding the average is a common mistake. If my feet are in the oven and my head in the freezer, on average I am comfortable. Variability is an important component to a plan and understanding this will make you well prepare as you march headlong into retirement.
  3. Health Insurance: How will you pay for your medical expenses in retirement and how much will it cost you? For those over 65, the answer is relatively simple. Applying for Medicare and purchasing a supplemental policy is almost certainly your best and most cost-effective option. However, what if you or your spouse are younger 65 when you retire? Health insurance costs can be an excessive portion of your budget and may not cover as much as you think. Do your research and understand what your costs will be before making the jump into retirement.
  4. Social Security: Make sure you head into retirement with a well thought out plan of when you will draw on your Social Security retirement benefits. There are a lot of options for drawing your benefits and if you have a spouse, the options grow exponentially. It is often a tremendous mistake to just assume you will collect as soon as you are eligible or as soon as you retire. Take your time, talk with an expert, and make the best decision for you and your circumstances before you retire.
  5. Retire to Something: Your mental health in retirement is just as (if not more) important than your financial or physical health. Most people retire to escape something (the rat race, a difficult boss, a job they never liked), but very few think to retire to something. It is important to find purpose or meaning in your retirement. Retiring and sitting on the couch watching game shows is no strategy for retirement bliss. Spending time with love ones, volunteering, building a business, or seeing the world are all noble objectives that can lead you to happiness. Think about what you will be retiring to so you can be not only financially comfortable but loving every minute of it.

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FAQ: Now that the market is at all-time highs, how should I change my investments strategy?

Answer: This is an excellent question that we get from our members whenever the market makes new highs (which has been often, lately).

The answer is that a new high should have little relevance on your asset allocation. The economy is supposed to grow, businesses are supposed to work to become more efficient, and thus, the stock market is supposed to make new highs over time. In 1924, people were concerned when the Dow crossed over 100, in 1982, they were concerned when it crossed over 1,000, in 2011 they were concerned when it broke 10,000, and in 2016 when it broke 20,000. As I write this, the Dow Jones Industrial Average sits just shy of 29,000. Over that time, the growth has been compelling.

This is not to say that the market has not experienced financial challenges and lost decades along the way. We’ve had depressions, recessions, financial crisis, bursting bubbles, wars, and terror attacks. All of these periods are scary and can lead to dramatic declines. However, the one thing they all have in common is they were temporary. In time, the market recovered to make fresh highs, often leading to period of decades of fresh highs.

A better question may be related to market valuation. Are the investments I have in the market today (even at fresh highs), valued at or below historically average valuations? In today’s environment, the answer is yes. During periods right before major financial collapses such as the late 1920’s or the late 1990’s, valuations had no correlation with reality. A correction was inevitable, if not long overdue when it came.

Focus on an allocation based on your age and risk tolerance and ignore the rollercoaster ride the market will surely offer. Come retirement, you will be much more comfortable with this long-term approach.

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As planners who attempt to evaluate and manage numerous variables in our Member’s financial lives, the question of risk comes up often. To many novice investors, these questions are almost framed as if we, as retirement and financial experts, have some proprietary insight into the future, a crystal ball that has been honed by years of study and experience. Somehow, we must be able to predict the future.

In the case of more experienced investors, they tend to understand we cannot predict the future, but tend to expect minimal or no loss, again, due to our years of training and experience in this field. They expect that we will have a better intuition into the beginning of major market collapses and thus, once we see such dark clouds looming on the horizon, position ourselves to avoid the brunt of the storm.

The truth is far less exciting. In fact, as Certified Financial Planners™, we are constantly looking to protect our members and take advantage of opportunities that offer asymmetrical risk. Although this may sound like a big, sophisticated statisticians’ term, asymmetrical risk is really quite simple, it is the accepting of outsized returns for a small amount of risk. Or, in the case of risk protection, it is paying a very small price to protect against a major calamity.

In the case of investing, assume you found a casino game in which the bet was $10. The dealer flips a fair coin and if heads comes up, you lose your $10, however, if tails reveals itself, you are the winner of $30. How often would you play that game? As a CFP®, I would park myself in front of the dealer and tell my wife and kids I will see them next spring. Although I am not able to predict the next flip of the coin and I certainly cannot guarantee a win on any one attempt, I can promise that with enough games played, I win. In fact, the expected outcome over time is an average of a $5 profit per flip. This is a perfect example of asymmetrical risk. Of course, there is still risk I will lose my $10 on the first flip (maybe even $20, $30, $40, or more if I am very unlucky), but with enough patience, I’ll make a handsome return.

Asymmetrical risk is seen often in investing. When putting money to work in a diversified portfolio of stocks, bonds, real estate, and cash, there is certainly a chance that your return next month or next year will be negative (your first coin flip). It is the reason we tell people who only want to invest for a year or two to find a good CD or money market account to stash their cash. We do not want to risk the possibility of poor timing or bad luck that may spoil their plans. However, even long-term investors with poor luck will do fine with enough time and fortitude to withstand their poor luck.

A real-life example is during the financial crises of 2008-2009. If you invested $10,000 in the Dow Jones Industrial Average in the fall of 2007, you lost money for the next 18-months and in the spring of 2009, opened your account statement to find only about $5,000 remaining in your account (that is a long, unlucky streak of several heads in a row). However, the key was to keep playing. If you didn’t touch your money, continued to reinvest dividends, and rode out the rollercoaster, your account was valued at right around $20,000 in 2017. Despite your poor timing and bad luck, your investment doubled in 10 years. That is the type of asymmetrical risk we love.

A corollary to growing your assets is protecting them. Life insurance is a great example of asymmetric risk. For the relatively minor cost of a few hundred dollars a year, we can purchase a life insurance policy that will protect our loved ones from financial ruin if the unthinkable were to happen to us. We transfer this risk to the insurance company for such a small cost, we hardly notice the effect on our lifestyle.

As you plan out your financial future, particularly your retirement, think about how you can utilize asymmetrical risk to your advantage. There is certainly no guarantee that you will win each coin flip, however, with enough opportunities, you will put yourself in a very comfortable position to live your life on your terms. If this is not something you are comfortable managing yourself, give us a call, we are glad to help!

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FAQ: What is a Required Minimum Distribution (RMD) and Does it Apply to Me?

A Required Minimum Distribution (RMD) is an IRS rule that requires owners of pre-tax retirement accounts (Traditional IRA, 401k, SIMPLE IRA, SEP IRA) to begin taking an annual minimum distribution by April 1st of the year following the year they turn 70 ½.

Essentially, the IRS allowed you to make contributions to your retirement accounts pre-tax. Then all of that money grew tax deferred with the goal of saving for your later years
(retirement), and by 70 ½, they want you to begin taking the funds so they can tax them. Your 401k and IRA are tax-deferred accounts, not tax-free accounts.

The amount you are required to take depends on your balance at the close of business on December 31st of the previous year. Your first year of RMD’s, that balance is multiplied by 3.65%, which will give you the number you are required to distribute in that year. This percentage is based on your life expectancy and as you age, your life expectancy decreases, creating a higher percentage. If your account balance grows or remains the same, your RMD will grow as you age.

The only retirement account that does not require distributions after 70 ½ is a Roth IRA. Since a Roth is considered post tax money, the government does not care when you take it.

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It is a common fear. Nobody wants to be the one who invested money in March of 2000 or October of 2007. Investing at the top of a market rally can leave a sting not only to your investment account, but also to your pride. In fact, behavioral finance experiments have proven that people are twice as likely to fear this mistake than they are to be excited about jumping in at a market bottom. Humans are genetically designed to fear risk.

Unfortunately, market tops only make themselves evident in hindsight. It seems obviously now that March of 2000 should have been an easily predictable top in the midst of the tech bubble of the ‘90s; however, it clearly wasn’t to almost all investors. Throughout the ‘90s, the market closed at a new all-time high on 46% of the trading days. In addition, the NASDAQ market index grew more than 100% in 1999, the last year of the bubble. In fact, despite a NASDAQ correction of 80% during the three-year tech bust, the NASDAQ only retraced its gains from February 1998. What this means is that if you would have invested in July 1997, several years into the tech bull market of the ‘90s when the market was making all-time highs, you would have still been holding a profit in 2003 at the bottom of the bust.

Markets are supposed to grow. Economies and populations expand, thus, expanding global markets. Certainly, stock prices don’t increase in a straight line and short-term corrections and busts are the price we must pay for outsized market returns; however, markets grow over long periods of time. Selling investments simply because markets are at all-time highs is a recipe for long-term underperformance. You may occasionally make a good timing call and get out before a major correction, but I guarantee that correction will be short-lived and any savings will be more than offset by the dozens of times you sold in the midst of a long-term rally, missing significant potential growth in your portfolio. The key to successful investing is to stay in, continue to put new money to work through good times and bad (especially during the bad). This is the only sure-fire strategy that will pay off in the end.

However, just because you should not change your investment strategy during all-time market highs doesn’t mean there isn’t anything you can do. Here are a few things to consider when markets are booming:

  • Deleverage – During a good economy or market environment, the instinct may be to leverage up. Buy property, open credit cards, borrow to invest in a winning market. Although the lure may seem compelling, the opposite is almost always a better decision. Deleverage your financial life during a booming economy to prepare for the next bust. Pay off all consumer debt, pay down a mortgage, pay off your cars, etc. All of these will help position you in a strong place when there is an inevitable correction or bust to either survive or even thrive, picking up discounts when those less prepared need to sell their assets wholesale.
  • Rebalance your portfolio – If a market correction is a serious fear, perhaps a portfolio rebalance towards a slightly more conservative allocation is in order. This does not mean getting out of stocks entirely or ceasing monthly contributions to retirement accounts; rather simply moving away 10-15% from stocks toward more conservative investments. Leaning this portion toward investments such as treasury bonds or even gold will help protect the portfolio if there is a market correction while still letting the bulk of the portfolio grow to outpace inflation.
  • Increase emergency reserve – Everyone should have 3-6 months of cash sitting in an FDIC insured account in the case of an unforeseen emergency. Now maybe the time to increase this cash balance. During a market boom, redirecting a portion of contributions that are normally going towards aggressive investments into your emergency reserve to increase the balance to 9-months of living expenses will furnish a greater cushion if your prediction of a market and economic crash is correct.

Booms and busts are inevitable. Predicting them is impossible. 93% of automobile drivers think their driving skills are above average. I imagine that the percentage of average investors who think their skills are above average is higher than that. There are experts with years of education and experience in this field making millions of dollars a year who are terrible at predicting future market moves. Don’t make the mistake of thinking you can. Shore up your balance sheet using the three strategies above and keep investing. You will be much better off in the future!

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When the Honeymoon is over… again: How to Transition into Retirement with your Spouse

Shortly following my wedding, I attended a networking event where I saw several friends and colleagues for the first time since my recent nuptials. After being the subject of many well wishes and platitudes, a well-respected business woman, about 20 years my senior, pulled me to the aside, and said “So, how is it really?” She went on to share how difficult the transition had been for her many years prior and commiserated over the fact that even in the best of marriages, the adjustment is a huge deal. I remember feeling so relieved.

As she prepares to retire with her wonderful husband of many years, I wonder if we may have that same conversation someday soon, but in reverse. As a retirement planner, one of the themes that I pick up on again and again, is how hard the transition can be, even in the best of marriages.

Consider the following scenarios:

Joe and Ruth

Ruth was a homemaker and the queen of her castle. She kept the house, family and schedules running smoothly while juggling a social calendar of volunteering, time at the club and her weekly tennis game. For as long as they were married, Joe worked 40-60 hours a week, got to the gym daily and played golf with his buddies every Saturday morning. Weekends were spent with family and friends and they vacationed several times a year.

Now Joe is home… all the time.

Bill and Anne

In addition to raising their children, Bill and Anne managed two fulfilling careers. While they derive much of their purpose and fulfillment from their work, they have also prided themselves on a healthy work/life balance, and have a shared love of travel, a robust social calendar and several separate hobbies.

Now they are both home… and it feels like something is missing.

While retirement is an exciting time and often a lifelong goal, it does bring with it a period of adjustment. This typically comes after the initial period of retirement bliss (sound familiar?!) and can be difficult for an individual who is trying to figure out how to feel fulfilled, how to fill his or her days, etc. When you add another person in to the equation, there are now two people who are navigating this adjustment period together (but not necessarily in sync) which adds an additional layer of complexity.

What do you do to avoid feeling like the “Honeymoon is Over?!”

Hopefully, if you are this close to retirement, you have already done a comprehensive financial plan. But have you done a lifestyle plan? The lifestyle component of retirement planning is frequently overlooked but is nearly as important. The key (surprise, surprise) is communication.

Have the Conversation(s)

Just as you would counsel a young couple to plan for the marriage, not just the wedding, you need to plan beyond the retirement party. Have the conversation, over and over again. Start with pie in the sky retirement dreams. What would retirement look like for each of you if you had no restrictions? Will you work, travel, help family, volunteer, etc.? Will you move or stay in your current home? What aspects of those dreams are realistic and implementable? Where are there differences and similarities in your visions? Can you tweak them to create a shared vision? Get specific and start to drill down to what each day will look like. Keep a shared calendar so you can manage joint activities, but also so you can respect each other’s individual commitments.

Date Each Other

“Wait,” you may be thinking, “more time together?” It seems counterintuitive that the answer to having a lot more time together is even more time together. However, as you settle into your new routine, you may find that it begins to feel a little too routine. Introducing a date night, where you do something that you love doing together or try something new, may be just what you need. One retired couple I know does four to six “Surprise Date Weekends” each year. They rotate planning it, with each surprising the other and it has added a new level of excitement and romance to their relationship.

Create Your Own Space

Whether literally or figuratively, you’ll want to be sure to create your own space. Perhaps it means a dedicated room in the house, or space within a room, for each of you. It might just mean scheduled “me time,” but it’s important that you maintain some individuality.

In the case of Ruth and Joe, Ruth might feel overwhelmed by Joe being home all the time in the space that was traditionally hers alone for a minimum of forty hours a week. Joe, on the other hand, might have difficulty figuring out where he fits in. When they talk about it, they can determine that Ruth has certain routines that she needs to maintain for her own peace of mind, but there are some changes she can make easily to make Joe feel like less of an outsider in his own home.

Redistribute Responsibilities

Don’t be afraid to challenge the status quo. Now that you are both home and not managing work schedules, commuting, etc., it may be a good time to review all of the household/family responsibilities and change things up. You may even discover new talents and interests.

For the duration of the marriage of Anne and Bill, Anne was responsible for preparing dinner. For a myriad of reasons over the years, Anne was typically home earlier, so it just made sense for her to assume this responsibility. When she complained about being bored with the monotony of cooking every night for so many years, Bill offered to take over. It turned out that not only was he very good at it, but he truly enjoyed it too. In fact, his passion for cooking was so contagious, that many nights, Bill and Anne enjoy cooking together!

Most importantly, understand that this adjustment is a normal part of the retirement process. Give yourselves time to adjust and have patience as you work through it. Be sure to communicate your feelings and talk about how you are settling in. You may not be on the same page right away, but at least you’ll be on the same chapter!

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