Are You Ready For Life After Work?

Imagine for a moment that your working career is coming to an end and retirement is on the horizon. What does that look like for you? Are you going to travel to exotic destinations, live in a golf course community, spend more time with the grand kids, volunteer in areas that you are passionate about or live out your bucket list items?

Ironically, is our company’s web address and we help many people plan for their life after work.  One of the most common questions that we are often asked at the Financial Enhancement Group when it pertains to nearing retirement is; “How much money am I going to need to be able to retire?”

That is a great question and asked by nearly everyone. Unfortunately, I don’t have a one size fits all answer to the question. Everyone’s situation is different and unique. However, there are some common themes that we look at to help our families get to their destination.

When asked the question, “How much money are we going to need for retirement?”, most people have a number in mind or a benchmark number that they are trying to reach. They do so thinking about how much income can be drawn off that magical number or that hitting that goal will provide a certain comfort level.  I don’t focus on getting my families that I take care of to a benchmark number. What needs to be focused on is replacing their standard of living, not income.

For example, it may take someone $4,000 a month to cover their living expenses and lifestyle, but their income is $6,000 a month. The focus isn’t on replacing the $6,000 a month in income they are making when they live off $4,000 monthly. In retirement, the plan is to replace the $4,000 that covers their living expenses and lifestyle. Replacing someone’s standard of living can be done in quite a few ways. First, as the advisor, I have to look at what type of fixed income will be coming in from pensions, social security, rental income, annuities, etc. For some, their fixed income will cover their entire standard of living and for others, we have to find ways to supplement their income through drawing down their investments. History has long suggested a standard 4% withdrawal rate from the portfolio, that can increase with inflation. However, history did not involve a period with such low dividend yields (modestly high valuations) and near-zero percent interest rates as we are experiencing now. In past stock market downturns, bond returns have been there to keep a balanced portfolio afloat. I encourage a 3.5% to 3.75% withdrawal rate (at this time!) depending on the mindset of the client. That means that if you built your retirement nest egg to $1,000,000, you could withdraw approximately $35,000 to $37,500 to help supplement your income.

Once I figure out where and how the income is going to come from, the next factor is making sure that it is done so to maximize tax efficiency. Tax efficiency is a critical component that a lot of folks don’t think about when it comes to retirement planning.

There are many different things to consider when planning for your retirement journey. If you haven’t done so, I would encourage you to employ the help of a qualified financial planner that works for a fee rather than sells products as answers. They will be able to help guide you in making the correct retirement decisions, so you can enjoy your life after work.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.


Social Security: “Just the Facts Ma’am”

In the days of black and white televisions, when the remote control was one of your children, Jack Webb created and starred in a series called Dragnet.  He played Joe Friday, a detective sergeant on the Los Angeles police squad.

At the beginning of each show the narrator would start off with, “Ladies and gentlemen the story you are about to hear is true, only the names have been changed to protect the innocent.”

No one who has ever seen an episode would ever accuse any of the actors of over playing their roles or being off of their ADHD meds.  No hype, no long drawn out fights, they were stories about finding the truth (a.k.a the facts).

Apply that searching for truth to the Old-Age, Survivors and Disability Insurance Program or as you and I know it, Social Security.  You see there’s this disconnect from the truth that seems to have invaded the public’s mindset about Social Security where opinions outweigh the facts.

Let’s start with some historical facts:

-The program was enacted in 1935 by the FDR administration and Congress.

-The first benefit paid was to a gentleman who received a lump sum payment (this was the only form the benefit was paid during the startup period from January 1937 through December 1939) of seventeen cents.

-Ida May Fuller was the first recipient of a monthly check.

-Originally the first three digits in your Social Security number represented the geographical region where you lived at the time you applied.  As of 2011 a randomized system has been put in place.  Over four hundred and fifty million numbers have been issued with over $11 trillion in benefits paid.

These are some interesting facts, but what do we as individuals need to know? 

Dum dee dum dum

This is the city,
I work here
I’m a financial advisor
It was Tuesday February 3rd, it was cold, I was working the investment desk when my boss handed me the case of Stan and Margaret. 

Both will see their 62nd birthday early this year and they are fully employed. Stan’s income annually is $70,000 and Margaret’s is $55,000, they both plan to continue working until they reach FRA (Full Retirement Age) which for them is 66 years and two months.  Stan and Margaret have been married for 39 years, raised a family, have been active in their church and community all of their lives.  They have been good stewards of their incomes and have consistently saved for their retirement through their employer provided plans.  Saving has been their focus, not planning. Sound familiar?

A Saturday morning ritual was is to meet with friends at a local restaurant to discuss the week’s events and solve the world’s problems.  One of their friends in the group just retired early and is remarking how wonderful it is to not be on the clock.  He related his story about the ease of which he signed up for Social Security over the phone.  He advised everyone there to sign up as soon as they could because everyone their age needs to get their benefit before the system runs out of money. 

FactThe Social Security Administration has projected that if changes are not made to the system by 2033 there will only be enough funds to provide all Social Security recipients with 77% of their benefits.

One such change was approved in the budget bill in December of 2015.  This change put an end to the strategy known as “File and Suspend” by April 30, 2016.  This one act alone will reportedly save $9 billion per year.

On the drive home Stan and Margaret discuss Social Security, Stan comments they have worked hard, paid their taxes and deserve to receive their fair share of benefits.  The following week they both call and request that their benefit from Social Security begin.

An emotional decision without intellectual contemplation usually leads to a less than desirably outcome.”

FactSocial Security statements project what your monthly benefit known as your PIA (Primary Insurance Amount) will be when you attain FRA.  When you file early your benefit is reduced based on the number of months you received the benefit before you reached full retirement age (FRA). 

Stan’s PIA is $2,400, taking his benefit at 62 it will be reduced to $1,800.  Margaret’s PIA is $1,800 and hers will be reduced to $1,350, a loss of $1,050 per month of income on this rule along.  Some individuals have to make this kind of sacrifice to live; others who rely on opinions instead of facts and sound planning will have less than optimal results. 

FactWhen claiming Social Security early and earning W-2 income there are limits on how much income you can make and not have your Social Security affected/decreased.  This year the income limit has been raised to $16,920.  The rule is $1 will be withheld for every $2 dollars earned above the $16,920 limit. 

Ouch!  Stan & Margaret’s desire to work until they reach 66 will dramatically reduce the actual benefits they will receive.  We would hope that when they made the call to Social Security someone would have asked them this question, “Will you have earned income?”

Many individuals know and understand some of these basic rules but, there are literally thousands of them in the program that can affect your benefits. 

Anyone who knows about the show Dragnet, associates the character Joe Friday with the phrase “Just the facts Ma’am”, but the truth is that character never said that specific line.  Over the years parodies of the show created it.  Yet we take it as fact.   

Saving alone is not a plan. Taking the advice of others who don’t know your specific situation, or acting out of fear is not a plan.  Taxes, all types of income, fixed and social expenses must be carefully considered when planning for your retirement. Your future must be guided by more than just opinion, hearsay and rumor.  You need and deserve to have knowledgeable and professional individuals who have your best interest placed first in all investment and financial decisions that WILL affect your future.

Let the FACTS guide you.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

The S&P 500 Tops $20 Trillion

No doubt about it – $20 trillion is one big number. But what does this mile marker mean when viewed through the lens of your retirement savings? The S&P500 is expressed in terms of market capitalization which is simple to understand once you learn it but very confusing along the way. Your retirement account is most likely comprised of “large cap, mid cap, small cap, growth and value companies!” Sounds like a recipe and it really is, as each word and phrase says something different about the “ingredients” in your plan.

Market capitalization has nothing to do with the profitability of a business, the cash on hand, the patents, the buildings or the people. Rather, market capitalization refers to the current price for one share of stock multiplied by the number of outstanding shares. Each S&P company differs in the number of shares initially authorized and then issued and traded on the equity markets.

Apple, the world’s largest company by market cap, is currently trading at $135 per share. The market cap is an astonishing $710 billion dollars. That tells us that there are over five billion shares of stock outstanding, all with identical value and voting rights. Like Apple, Cimarex Energy (XEC) trades for approximately $135 a share but its market cap is only $12.8 billion. It has less than 95 million shares of stock outstanding. The price per share tells you nothing!

The $20 trillion S&P 500 number represents the market cap of each and every company included in the index. Apple alone is almost 4% of the entire S&P 500!

The numbers have scaled up since I entered the industry in 1987.  We have added “mega caps” into the mix. Mega caps are usually over $200 billion.  Large caps are $10 billion or more though many in the industry, including me, feel this number should be closer to $15 billion. Mid-caps are $2 billion to $10 billion and small caps are $300 million and up. The cap has nothing to do with the size of the business, the headlines in the news or the number of people employed, but it does signify where investors find the most value. Arguably that perception of value comes directly from the business model, profitability, etc.

Growth implies that fund managers believe the price per share of the companies they are buying is a fair value for what the company will eventually become. That is why companies like Amazon had a market cap greater than many other companies even before it became profitable.

Value infers that managers are buying companies where the current share price is worth the value of the underlying company today. These companies tend to pay dividends where growth oriented companies tend to reinvest capital.

So what is the right recipe for you? As a professional money manager (and amateur cook) I would tell you the recipe changes as the economy changes. As a CFP I would tell you that your mix should change as your stage of life changes.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

Consider This… Radio Show 2/18/2017

Here is this week’s radio show, hosted by Joe Clark, CFP with Sherri Contos.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

Who Will Be the First “Green Chip”?

Has this ever happened to you? You think of what you would describe as a clever term or phrase only to take to the internet and find out you were beat to the punch (and by more than a day or two).  Recently, I was looking through a long list of marijuana related stocks and it soon became clear that there were just a couple of established businesses scattered among acres of unproven, speculative companies that were more akin to a lottery ticket. Light bulb! I began to wonder which of these will be among the first to become a “green chip” stock.  Google results sadly returned the fact that “green chip” was used here and there for environmentally friendly stocks when they surged in popularity a decade ago. But given how nearly every corporation claims to be in the business of sustaining our environment in some way or the other, I would argue the green chip term should be reserved for those that ultimately gain establishment status as among the cannabis stocks. Plus, I think it’s more amusing to apply to Mary Jane stocks anyhow – so move over First Solar.

The term blue chip stock has some latitude in its meaning, but generally refers to large, financially sound companies that pay steady dividends. With 19 states having legalized medical use and another 8 for legal recreational use, investor attention has been on the rise (at least anecdotally in my case). Many are eager to strike green gold by identifying one of these future green chips and investing in them now.  I can’t call this crazy thinking at all since it’s only a matter of time for the great plains and southern states to catch up to the rest of the country.

Before a couple more thoughts on the investment aspect, I am curious about how the industry will fit within the notion of “socially responsible investing” or SRI.  Maybe it’s just in these southern and plains states that are dragging their feet on cannabis liberalization, but there will be undoubtedly investors who would prefer not to profit from marijuana.  SRI has been one of the most difficult aspects to investing I’ve encountered. Even with geographically clustered clients, you don’t always find ubiquitous ideals or for how those ideals should be reflected in their investments. Furthermore, even if there were ubiquity, a fiduciary’s responsibility is with all clients’ money so how can one let the ideal of client A, B & C impact D’s portfolio?

To make it even harder (for me anyhow), it’s difficult enough finding the commonality within an issue, let alone having it boiled down to the exact common factors to be considered for an SRI portfolio. Here’s an offbeat example that hopefully highlights the difficulty.

Company A: Peddles annuities onto unsuspecting school teachers, in turn smothering them unknowingly with 3-4% vehicles. Not stopping there, they then strand them to make their own investment selections.

Company B: Manufactures plant-based therapies to aid those with cancer from their pain and chemo nausea. That plant just happens to be socially taboo.

One is a financial cancer and the other one is fighting real cancer. One recently had it easier to do business in the U.S. and the other is still battled by half the country. Clearly some personal bias shines through this slant – but its particular striking to me because I could find company A in just about any investor portfolio, even if they have a “socially responsible” slant. Rarely, if ever, would you financial stocks in an SRI screen yet I would suspect you would find some resistance somewhere to benefiting from cannabis.

SRI is clearly on the rise but is well beyond my scope and I have more questions than answers. I do fully understand and respect those that wish to have their dollars invested in a way that aligns with their values.  It’s simply not in my personal jurisdiction – other than one last suggestion. Academic research has shown that SRI can lead to positive results, but in two ways. The first: Companies that “do good” tend to “do well”. The second: companies shunned as taboo also tends to do well (just take a quick look at cigarette stocks).   That goes right along with sage advice from one of my investing idols, Howard Marks, to “concentrate on the unloved, less-followed and therefore less-efficient sectors”. If, for some reason, investors drag their feet to get on board – marijuana very well could be an area worthy of more focus. I’m not saying this is the case right now but is certainly a possibility going forward.

Assuming the socially responsible bridge has been crossed, marijuana investments on the other side of that bridge range across many industries such as real estate, growing technologies, farms and of course health care. Health care seems like the obvious path for the first green chip, but we shall see. Please make special note that none of this is a recommendation to put money in that area. FEG’s specialty centers on risk management in the pursuit of balancing risk, return and taxes. That isn’t conducive to putting client dollars towards unproven, speculative plays. But, I would certainly encourage you to not dismiss it as the area isn’t one that should be written off either. It does seem to me at least that there is a rather large disconnect between the fact that we are more than halfway home towards nationwide legality but still in the very early stages of investor interest. Those two will reconcile over time and some will be rewarded with healthy profits on their early investment. If you do somehow find motivation to go fishing for green chips yourself – do use caution and do not buy a stock just because it is in a certain business. A good company does not always make a good stock.  But best of luck for turning your greenbacks into green chips.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.