Work Hard, Save Your Money, and Don’t Forget to Stop and Smell the Roses

When I was a teenager, one of my favorite musicians was Mac Davis, a crossover country and pop star whose hits included “Baby, Don’t Get Hooked on Me” and “One Hell of a Woman.” I still remember one summer, when I was about 15 or 16 and working at the Ohio State Fair. He was performing at the fair, and I was lucky enough to meet him. That memory resurfaced this weekend, when I found myself thinking of another one of his hits while I was enjoying a weekend in New York City with my wife, Gina.

A couple of weeks ago, I posted “Are You Living Too Frugally?” It was a discussion about the tendency of a large number of retirees to spend well beneath their ability. They have become so accustomed to saving money and watching their expenses that they find themselves sitting on a big pile of money late in life that they are hesitant to spend. In the article, I tried to convey that while it is important to keep funds available in the event of a financial or health emergency, it’s also important to experience life. We want to make sure that we cross off our bucket list items before it’s too late.

This weekend, I thought about how important it is to live life before retirement as well. The other hit song from Mac Davis that I alluded to earlier was “Stop and Smell the Roses.” The lyrics of that song convey the message about how important it is to make sure you have a balance between your work and your personal life. Taking it one step further, it’s important to get that work/life balance in order throughout your life, not just in retirement.Before you went to work this morning in the city, did you spend some time with your family?

While Gina and I both enjoy our work, we sometimes find ourselves wrapped up in the daily tasks of running our respective businesses. We don’t work physically hard, but we do work hard and often spend the majority of our waking hours inside our business. We are both in the client service industry, so it’s important to make sure that we take care of the things that our clients expect from us. But it’s just as important for us to step away at times so that we can refresh ourselves and recharge our batteries. We are not going to do our clients any good if we end up burned out and not giving our all when we are working.

Plan for the Future, but Take Care of the Present

It’s important to make sure you take time for you and your loved ones. Life is about more than the work we do. As a financial advisor, I’m always emphasizing how important it is to save and invest for our future selves, but it’s just as important to take care of our present selves. We all hear way too many stories about someone we know who passes away at far too young of an age. We get only one shot at this life, and we need to make sure that we are making the best of it. As the saying goes, “I’ve never met someone on their deathbed who wishes they had spent more time at the office.”

This weekend, Gina and I stepped away to focus on our work/life balance. I was attending a conference in New York City, which ended on Friday. On Friday afternoon, Gina flew up to join me. We spent the weekend in Manhattan, sampling the city life. We ate at some nice restaurants, did a couple of runs through Central Park, attended a couple of Broadway shows, and toured the 9-11 Memorial in the Financial District. We didn’t do any work for the entire weekend, which is unusual for us.

We spent quality time with each other and had fun. That’s what’s really important, isn’t it? As I write this, we are on the plane heading home. It’s back to work tomorrow. And while we may be a little tired and might still be recovering from our weekend in the Big Apple, we both feel refreshed, relaxed, and ready to work.

Yes, it’s important to plan for your future and make sure you are prepared for the days when you are no longer working. Save. Invest. Make sure you and your family are protected and that your financial house is in order. Work hard and do the best you can at whatever career you have chosen. But it’s equally important to “Stop and Smell the Roses” along the way.

Which Account Should I Use for Cash Flow in Retirement?

If you think that saving for retirement is hard, wait until it comes time to spend it. When you are working and making contributions to a retirement plan, it’s pretty easy. You open a retirement account, contribute to it regularly, and off you go. If you are lucky enough to have a company-sponsored plan, you make your deposits into the account via payroll deduction.

Oh sure, you will have to actually sign up for the retirement plan. And you will have to make decisions about a few things, but it’s pretty easy. When you open the account, you will name a beneficiary who will inherit the assets if something happens to you. Next, you’ll have to decide how much to contribute to the account. I would suggest that you shoot for at least 10% of your gross pay, but anything is better than nothing. If you are really lucky, your company will match your contribution—that’s free money! Make sure you are contributing at least enough to get the full company match. Finally, you’ll need to make decisions about how your account is invested. Often, when just starting out, a target retirement date fund is a good choice.

That’s it! Pretty simple. During your working years, you’ll hardly notice the retirement account. But boy, do you start paying attention to it when it comes to start spending it. Going from living on a regular paycheck to living off of your retirement funds is often more difficult than saving is! In last week’s post, Are You Living Too Frugally, I discussed how we are seeing a trend of older clients holding on to a big pile of money and underspending in their retirement years. I believe the perfect retirement plan ends with a bounced check to the funeral service. Just kidding. Sort of.

When you look to replace your paycheck, you must consider your resources and start to develop a plan of action. Usually there will be Social Security income and maybe a pension. The rest of the cash flow that you need to fund your lifestyle will have to come from your savings. Hopefully, you’ll have some after-tax savings—maybe cash you received when you downsized and sold your longtime home. You might have an IRA or a 401(k) or 403(b) from your working years. Maybe you have a Roth IRA. More and more people do.

The question then becomes “What’s the best way to take money out of my accounts?” The answer, like most answers in the financial planning world, is “It depends.” In the above scenario, our fictitious retired couple has three buckets of money to choose from. They have their after-tax money from the sale of the house. This money has already been taxed at some point, and any cash flow that comes from this bucket is not taxable again, except for the interest, dividends, and capital gains the investments generate. Our couple also has a bucket of tax-deferred money, which comes from their IRA, 401(k), or other retirement accounts. Any cash flow coming out of these accounts will be taxed as ordinary income. Finally, they have a couple of Roth IRA accounts that they funded in the years leading up to retirement. This gives them a bucket of tax-free money.

By managing which bucket you take money out of to fund your cash flow needs, you can, to some degree, control the tax consequences of your retirement income. For example, you might want to take distributions from your post-tax bucket first. Any cash taken from this account is not taxable, except for tax that may be due on the interest, dividends, and capital gains. But that’s generally OK because capital gains tax rates are lower than ordinary income tax rates. And, depending upon your tax bracket, they may be tax-free.

If you are taking distributions from your retirement account, those funds are considered ordinary income. Monitor how much you are taking, and if you are getting close to moving into a higher tax bracket and still need cash flow, you can take some distributions from the tax-free pile, your Roth accounts.

Please remember, the example above is just that—an example. It is not a recommendation. We do, however, recommend that everyone review their individual situation by doing some tax planning. Having a distribution plan in place can help you get the cash flow that you need while lessening the tax bite on those treasured retirement dollars.

A Teaching Moment for Teachers

Our teachers are a very special group. They work long hours for low pay, helping to shape the minds of our young. They are a very important part of our society. So why do the local governments that they serve allow them to be taken advantage of when it comes to their retirement planning?

I am lucky enough to have several clients who are either retired teachers or are planning to be one. In my work with them, I get to know their financial situation pretty well. While teachers don’t make a lot of money, they are one of the few groups who still receive a pension. If they qualify, and most do, the pension provides a monthly income for the rest of their life. But since the benefit amount is based on their income, they won’t be getting rich from the pension. When you add in any Social Security benefits, most teachers will be able to maintain a “modest” lifestyle.

But what if the teacher wants a little more? What if they can save a little from each paycheck to improve that future retirement lifestyle? In the private sector, many of us have access to a company retirement plan; most often, it’s a 401(k). We can have money withheld from our paycheck and have it invested automatically for our future. Our contributions are deducted pre-tax, and grow tax-deferred over the years. Teachers have access to a similar plan, but for them it is known as a 403(b).

In the private sector, the employer selects an investment firm to handle the administration and investing of the plan’s assets. For our teachers, the School Board selects a handful of “approved” providers from which the teachers can place their retirement funds. The problem comes from this list of “approved” providers.

It has been shown, and it just makes sense, that the costs of an investment portfolio are a huge factor in its long-term performance. At Rall Capital Management, we know that we can’t control the financial markets, so we don’t try. Instead, we work to control what we can control, one of the most important being the costs involved in managing the account.

Most of the plan providers that teachers have to choose from are insurance companies. That usually means that the retirement contributions are being invested in an annuity contract, often with layers of different types of expenses. Most of the other providers on the “approved” list are investment firms that put together a menu of funds for teachers to choose from. All too often, the funds on the menu have very high expense ratios, creating an unnecessary headwind for account performance.

The expenses in the plans that are available to our teachers are among the highest. In fact, the New York Times did a 5-part report highlighting the abuses across the country. The first part of the series is entitled, “Think Your Retirement Plan is Bad? Talk To a Teacher.” I think the title says a lot. The article says a lot more. And it showed me that the problem is not just local to Brevard County’s teachers. It’s like this across the country. Why?

I’m not trying to be conspiratorial (or maybe I am) but I would dare to say that there’s some combination of politics and money at the core of the “approval” process. This system has been in place for years and any change is now subject to inertia. There’s not enough of a rank and file movement to improve the choices because most teachers don’t know. It’s been widely reported that most people don’t know how much they are paying to have their accounts managed. Teachers are no different.

It’s so much of a problem that I will typically advise my teacher clients to stop participating. What?? Advise a client to stop contributing to their retirement plan? No; we just advise them to redirect those contributions. Instead of investing in high cost annuities or other funds, I often recommend that they fund a Roth IRA instead. Roth IRA contributions are made with after-tax money and you lose the ability to have it taken directly from their paycheck, but that’s a small price to pay for the money you’ll save.

Inside the Roth, you can invest in low-cost funds that are often 1/10th the cost of many of the 403b accounts I’ve seen from my teacher clients. A 1-2% difference in costs over a number of years will make a huge difference in the value of your retirement account years from now.

One big difference between the 403(b) plan and the Roth IRA plan is the amount you can contribute. Like the private sector 401(k), participants in a 403(b) can contribute up to $18,000/year; $24,000 if you are over 50. You can only contribute $5,500 a year into a Roth IRA, or $6,500 if you are over 50. If you do have the ability to contribute more than the Roth maximum, one option would be to direct the excess to the 403(b) plan.

To become successful financially, you must do a lot of little things right. Not paying exorbitant investment expenses is one of those things.

So, if you are a teacher, here’s your homework: evaluate whether it makes more sense to fund your 403(b) account, or whether it would be better to fund a Roth IRA. If you are not a teacher, but you know one, please forward this article to him/her. They should know this!

A New Year's Resolution We Should All Try to Keep

The beginning of a new year always brings us the opportunity to make positive changes in our lives. Over the years, we’ve all set resolutions to lose weight, quit smoking, save more money, spend less, spend more time with our loved ones, etc. But there’s one resolution that I’ve never seen anyone talk about; one that we should really all consider.

I’m talking about creating or reviewing our estate documents. Yes, estate planning. Ok, so now that I’ve probably lost half of the people reading this, I’ll speak to the other half. Nobody likes to think about, let alone do, estate planning. We don’t want to think about our death, even though I’m pretty sure it’s eventually going to happen to all of us. But planning for how things are handled at our death is only one part of estate planning. The other part is planning for the possibility of becoming incapacitated. But no one likes to think about the possibility of a terrible illness or accident either.

As much as we don’t want to go through the estate planning process, it’s important that we do so. After all, estate planning is simply capturing the way we want things to be handled in the event of our death or incapacity. And who is better equipped to make those decisions besides us? And, if we take care of it, then we spare our loved ones from having to make hard decisions during a very difficult and emotional time.

For most people, an estate plan consists of a few simple documents. First, there’s a will. The main purposes of the will are to name the person you want to handle your estate and to document how you want your assets distributed when you pass away. But, if you are a young parent, there’s another very important reason to have a will. It will let the courts know who you want to serve as your child’s guardian if something were to happen to you.

Then there’s a document known as Health Care Directives. It can serve as a living will, which will detail the level of medical treatment you desire in the event that you are not able to communicate. It will also allow you to name a person who you want to make health care decisions for you if you can’t.

Next, there’s a Durable Power of Attorney. This document allows you to appoint the person who you would like to make financial decisions for you if you are unable to.

Finally, you should also consider your digital estate plan. This is something relatively new, but it reflects the age in which we live. If something happens to you, how do your loved ones handle your digital assets like your online photos and Facebook account? And how do they access your computer and passwords to all of your online accounts? Having a plan in place to answer those questions can make it much easier on our loved ones.

It is often said, that if you don’t have a formal estate plan in place, then your state has one for you. It’s true, the state has regulations in place on how things are handled when someone does not have estate documents. But wouldn’t you rather make the decisions than some government agency?

So, if you don’t have an estate plan in place, you could make it a resolution to get it done as soon as possible. There are a number of ways to get it done. We always recommend seeing an attorney who specializes in estate planning; then you know that it’s done properly. And, it’s not very expensive.

If you do have an estate plan in place, make a resolution to review your plan to see if it’s still appropriate. Lives change and laws change, so it’s important to make sure your plan is still up to date.

Putting an estate plan in place is not fun, and involves thinking about some unpleasant possibilities. But, but once you have it done, I can guarantee you’ll feel good about having checked it off your to-do list. And then you can get back to working on those other resolutions.

It's Summertime! A Perfect Time for a (Credit) Freeze!

Originally posted July 28, 2014.

The words "identity theft" in red binary code on computer monitor.

The words "identity theft" in red binary code on computer monitor.

One of the first steps in building a financial plan is to make sure that the assets you own are properly protected.  When we talk about protecting your assets, most people think of making sure their auto, homeowners and liability insurance policies are in place and sufficient.  If you are working, it's also important to make sure you are protecting your biggest asset, which for most people is the ability to get up and get out the door to earn a living.  We protect that asset using disability and life insurance.

But this article is going to focus on an asset you have worked hard to build and protect, and which is under constant attack.  We are talking about your identity.  Identity theft occurs when a thief pretends to be someone else by using their personal information to gain access to their credit, or other resources and benefits.

Identity theft is a term that was originally coined in 1964 and has been a growing problem for years. Advances in technology have turned this into a huge issue over the last several years.  Last year a new identity theft victim was hit every two seconds in America!  The number of victims climbed to 13.1 million in 2013 - an increase of more than 500,000 from the year before.

While it is obviously not possible to literally steal an identity, there are several ways that criminals make it pay:

  • Criminal identity theft occurs when someone is arrested for a crime and poses as another person to law enforcement.

  • Financial identity theft happens when the criminal uses your identity to obtain credit and buy goods or services

  • Identity cloning is when a person uses another person's information and assumes that identity in their daily life.

  • Medical identity theft occurs when the criminal uses someone else's identity to obtain medical care or drugs.

  • Child identity theft, which is generally the hardest to detect, is when the criminal uses a minor's Social Security number for some personal gain. The thieves can often establish lines of credit, get a driver's license or even buy a house using the child's identity. Sadly, this version of the crime is often carried out by a family member or friend of the family. Also, this type of identity theft can go on for years because the damage can go undetected until the child grows up and tries to access or establish credit.

As a financial advisor, I’m going to focus on the financial identity theft problem.  The potential for being a victim will only grow as we continue to move more of our financial lives online, where the thieves will continue to focus more and more attention.  So, what can we do to protect ourselves?  

Closeup of ice crystals with very shallow DOF

Closeup of ice crystals with very shallow DOF

Freeze It

While there are some companies that say they offer "identity theft protection", they tend to be expensive and of questionable value.  The single best thing you can do is to freeze your credit.  A credit freeze will prevent anyone from opening new credit in your name.  It's also very simple to do and it's fact, it's free in some states.  It used to be that you had to be a victim of identity theft to get the bureaus to freeze your credit.  But a few years ago, the three major credit bureaus gave everyone access for a small fee...usually $10 per agency.  Each state has their own rules, but in Florida, the fee to freeze is $10 per credit bureau… and it’s FREE if you are over 65!

If you freeze your credit, there is no impact on the existing lines of credit that you have.  You can go on using whatever credit lines and credit cards you have just as you were before the freeze.  You can also “thaw” your credit freeze if you need to access your credit files for a creditor, like a new car or home loan, or a new credit card.  There is typically a $10 charge to thaw your account.

Computer hacker stealing data from a laptop concept for network security, identity theft and computer crime

Computer hacker stealing data from a laptop concept for network security, identity theft and computer crime

Protect your financial identity by going online to the three credit bureaus, Equifax, Experian, and TransUnion.  Follow the directions at each of the links to freeze your credit with that bureau. After submitting your request, you will be given a Personal Identification Number (PIN) that you need to lock away and make sure you know where to find it.  This PIN is what you will need to thaw your credit when you need to. The next time that you need to apply for a new line of credit, ask your lender which credit bureau they'll be using, and you can unfreeze just that one.

So, for a total of $30 you can lock down your financial identity so that no one can possibly access credit in your name…even if they have all of your personal information.  A thief can have your social security number, date of birth, and even your driver’s license number, but if you have put a credit freeze on your finances, it won’t do them any good.

For more ways to protect yourself in the digital age, see our newest blog post!

By Bob Rall, CFP®

What is Your Most Valuable Asset?

Your most valuable asset might not be what you think it is; in this video, we reveal what it really is for most people, and list some of the ways you can protect it.