Month: October 2021

Many people view retirement as a 30-year vacation, full of leisure and travel. But new retirees often find that retirement isn’t the carefree life they expected. They miss having social interactions, a sense of achievement and daily structure — and as a result, some experience weight gain, marital discord, depression or substance abuse.

And many retirees, especially those who retire early, end up returning to the workforce.

Retirement often looks different today than it has in the past. And as you reconsider how you want to spend your golden years, it’s a good idea to contemplate big-picture life goals and current desires.

Maybe some of those dreams don’t have to wait until retirement.

Rethinking retirement

Rather than leave careers they enjoy, some baby boomers are working well beyond the traditional retirement age of 65 or phasing into retirement over time. Increasing longevity and improving health outcomes also relate to this decision.

But these boomers aren’t necessarily working 40-hour weeks. Companies are growing more receptive to employees’ desires for flexible schedules, including three- or four-day work weeks or remote work. These arrangements free pre-retirees to spend time on travel, hobbies and other goals — and lead to enhanced productivity and job satisfaction.

Work-life balance is the key ingredient to happiness. According to John Wasik’s New York Times article Facing Retirement, but Easing Your Way Out the Door,” many workers enjoy their reduced schedules so much that they’re extending the arrangements for years longer than they planned.

Figuring out what you want now

In his book 4 Hour Workweek,” author Tim Ferris argues that reduced workweeks are a growing trend for all workers, not just pre-retirees. Technology and the “Uberization of the global economy allow workers to leverage overseas vendors and virtual assistants and focus on their “highest and best use” skills, in and out of the office. You don’t have to wait for that magical moment in time called retirement.

“Someday is a disease that will take your dreams to the grave with you,” Ferris writes. “Lifestyle Design is not interested in creating an excess of idle time, which is poison, but the positive use of free time, defined simply as doing what you want as opposed to what you feel obligated to do.”

My favorite parts of the book are the exercises that help you identify what you want to have, be and do within the next six to 12 months. These are similar to the questions I pose to clients when I first meet them. Younger clients often have no problem identifying 10 or more things they want to achieve before they die, but clients who are in their late 50s and older tend to have a harder time completing these exercises and may even focus on their kids’ needs instead of their own.

Here’s a sample of the questions Ferris uses to get people back in touch with the things that excite them and guide them through the goal identification process:

  • What are you good at?
  • What could you be best at?
  • What makes you happy?
  • What excites you?
  • What are you most proud of having accomplished in your life and how can you repeat this or develop it further?

Financial planners are life planners

Life planning creates the foundation for your financial plan. When I understand my clients’ goals, I can ensure that their money is allocated and prioritized to help them reach those goals. The financial plan then comes to life in a powerful way for clients. They can envision the future — whether it’s 12 months or 20 years from now.

Does your financial planner ask you questions like the ones above? Is he or she more interested in you or your money? Find a planner who provides holistic financial planning services and helps you start working through your bucket list. You don’t have to wait until retirement to start enjoying your time or your money.

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Most people think they’ll be ready to retire when they hit a certain age or accumulate a set amount of assets. Unfortunately, they rarely do the math to determine whether their savings will sustain them after they retire. According to the 2015 Retirement Confidence Survey by the Employee Benefit Research Institute, only 48% of workers reported that they or their spouses have tried to calculate how much money they’ll need to live comfortably in retirement, and people who did attempt this calculation generally ‘guesstimated’ the numbers.

The EBRI found that most Americans spend more time preparing for the holidays than for retirement.

To stay out of financial trouble after you retire, it’s important to start planning well ahead of time. And that involves taking a hard look at the numbers.

Work the problem

Retirement projection is a big math problem, and to get the right answer, you must plug in the right figures. To start, you must have a good grasp of how much income you can expect from retirement income streams such as Social Security and pensions.

The next step is crucial: understanding how much you’re going to spend in retirement. This can be much tougher to predict, but accurate projections can mean the difference between having adequate funds for the rest of your life and outliving your savings. Neglecting this important step before making the decision to retire is unwise; deciding when to retire should be based on your financial capacity.

That’s because once you’re retired, your main source of income ends, and expenses will be covered out of savings, investments and retirement income streams. Spending is perhaps the biggest variable in retirement planning calculations. It’s easy to be complacent during working years, when a steady paycheck is coming in. So it makes sense that a huge paradigm shift occurs when the paychecks stop and cash flow shortages have to be covered from savings. Creating your own paycheck from your savings can be overwhelming.

Set a retirement spending plan

For all of these reasons, establishing a realistic retirement budget is critical. To do this effectively, consider these steps:

1. Envision your life during retirement. Make a list of what you’ll be doing and how you’ll be living. What will a typical day look like? What kinds of hobbies or volunteer work will you participate in? Will you embark on a second career? How much will you travel? Will you move to another location or maintain two residences? How much support will you provide for your kids and grandkids? What is on your bucket list and how much will realizing it cost?

2. Keep track of your current spending for at least three months. Be sure to include expenses that occur less frequently, such as insurance and dues.

3. Review this spending record. My clients are often surprised to see where they’re spending their money. This exercise enables them to align their spending with their goals, values and desires. They’re more committed to a spending plan once they have determined where their money is going because this prompts them to set priorities to ensure that they don’t spend frivolously or on items that aren’t priorities.

4. Make changes in your spending now to reflect the retirement lifestyle you envision. How will your expenses change upon retiring? Does your spending jibe with the goals you identified in the first step? Be sure to revise entries for certain expense categories, such as travel, entertainment and housing, to reflect these goals. Don’t forget to account for uncovered medical expenses and supplemental health insurance premiums, including Medicare Part B.

Watch your withdrawal rates

Once you have put together a spending plan, you can determine how much of your expenses would be covered from your investments. Most financial planners recommend that people who retire at 65 withdraw no more than 4% of savings annually. If you withdraw much more than that, you’re likely to outlive your funds, so you might need to work longer. If you retire earlier than 65, you will likely need to adjust that withdrawal rate downward, as you’ll be making withdrawals longer.

Consider working with a financial planner who specializes in retirement planning. He or she can walk you through the planning process and potentially give you confidence about the capacity of your investment portfolio to provide adequate income after you retire. The planner can also help you realize that you’re not on track and need to make changes.

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Baby Boomers are more active than their parent’s generation and want to live life to its fullest.  A volatile market and these changing attitudes have redefined the way Americans retire.  I spoke about this new trend of un-retirement with the news team at WLTX recently.  Here is a clip.

According to a recent article by Mitch Anthony in Financial Advisor magazine, a trend of people choosing to work into their 60s, 70s, and beyond is now a fact of life.  Call what you want, either “partial retirement or un-retirement,” but the new reality is that we will be living much longer;  which means not only will we want our investment portfolios to stretch out over our lifetime, but we also will be looking to engage in our bucket list and pursue meaningful activities.  Did you know that 83% of baby boomers plan on working after retirement and roughly 12% of people working say they will never retire?  There are many reasons including economic as well as social and psychological. In fact, after retirement (especially early retirement) there is a greater risk of depression and substance abuse.

A study done by the Rand Corporation in 2009 indicates that:

50% of retirees will follow a non-traditional retirement path of partial or un-retirement due to the following factors.

  • Lives built around leisure are not as satisfying as they hoped.
  • There is a sense of identity loss.
  • There is still a need for intellectual and social stimulation.
  • There could be issues with the new routine of spending more time with your spouse.

To counter these issues it is important to realize that retirement is a process that has multiple phases or stages it is not a discrete date.  Consider the following steps:

  • Start to identify and engage in hobbies or activities that you would like to pursue in retirement as you approach your desired retirement date.
  • “Test drive” your new routine as best you can by, for example, vacationing where you want to live or spending more time with your spouse.
  • Schedule out a typical day/week to get a more realistic idea of how you will spend your time.
  • Consider a second career or volunteer opportunity.
  • Work with a financial planner to ensure that your money will enable you to realize your important life dreams and goals.
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The latest statement from your 401K plan may not be pretty; the market was down for the quarter, putting additional pressure on Americans who are worried about having enough for retirement.  I spoke with the WLTX morning team this morning to help put this in perspective.

Investors are going to open their quarterly statement and feel like they need some medication; so the best advice is try to keep your emotions in check.  If you stay invested, you are ultimately rewarded with better returns.  To put it in perspective, here is a chart that shows how your returns would be affected if you missed the top x# of days in the market.  Normally, large upswings occur just after significant drops so if you try to “market time” you will be affected by this:

Stay Invested

Market Returns S&P 500 12-31-90 to 12-31-10
Fully Invested9.14%
Missed Top 10 Days5.27%
Missed Top 30 Days0.71%
Missed Top 100 Days-9.80%

In addition to keeping your emotions in check make sure avoid these three mistakes:

  1. Contribute too little to get your full company match- this is like leaving free money on the table.

Here is a great example that illustrates this point: John walks into Steve’s Superstore and notices that there is a special this week.  For every two bags of groceries he buys (up to eight max) Steve will give John a free bag of groceries! How many bags of groceries should John buy this week? A)2 B)4 C)6 D)8 or more

Answer: D)

Your company match is a great way to save. Don’t leave money on the table!!!!

2.  Take out a loan from your retirement account- most often these are not paid back and it only derails your retirement. Note that 401K Loans are subject to pay back period of 5 years (10 years for a home purchase) and are payable in full upon termination. If they are not paid on schedule a tax plus penalty will be assessed. It is also important to know that these accounts are creditor protected, so if you need to declare bankruptcy at least your retirement savings will be safe. 3.   Save too little– 10% is the absolute least you should be contributing; you will need to save much more if you are older and behind with respect to your retirement savings.  Here is a great quote from William Bernstein: “Each $ you do not save at 25 will mean 2X inflation adjusted dollars you will need to save at 35, 4X if you begin saving at 45, 8X if you begin at 55….If you lack substantial savings at 45 you are in serious trouble.”From The Investor’s Manifesto Preparing for Prosperity, Armageddon, and Everything in Between

If you can keep a level head and avoid these mistakes you can hopefully stay on a path toward financial health in retirement.

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Most people wouldn’t want to say no to a gift. And imagine if it were coming from the IRS, which people tend to associate with taking more than giving. Yet every year, many people do just that by failing to use their health savings account properly.

Health savings accounts (HSAs) are a great way to set aside money for health care expenses, and the government offers taxpayers a huge incentive to participate in these accounts. HSA contributions of up to $3,350 per individual or $6,650 per family (with an extra $1,000 if you are age 55 or older) are made with pretax dollars. Money in the accounts can grow tax-free. And withdrawals aren’t taxed if used for qualified medical expenses. That’s quite a gift.

In addition, some employers contribute to employees’ HSA for them. In such instances, you are also getting a gift from your employer.

To have an HSA, you must be enrolled in a high-deductible health insurance plan. Ownership of HSAs is soaring as more Americans choose such plans in order to get lower premiums. Unfortunately, most account holders aren’t taking full advantage of the tax-free nature of these accounts. Roughly 87% of the $30 billion held in HSAs is held as cash in debit accounts, meaning the funds aren’t invested.

HSA owners choose to keep their contributions in cash so they can use them to pay for current health care expenses. But in doing so, they forgo the compounded returns that make these accounts such powerful savings vehicles for the future.

One possible reason for this is that many people are used to the “use it or lose it” nature of flexible spending accounts (FSAs) and think their HSAs work the same way. They don’t: Unused money in an HSA can roll over from year to year. FSAs have been around for years but have been declining in popularity because of the growth of HSAs and the fact that FSA contributions are limited to only $2,550 annually (2015).

Another reason people pay for current expenses out of their HSAs, instead of using them as savings vehicles for future medical expenses, is that they don’t have enough cash in savings or an emergency fund to cover out-of-pocket or unanticipated health expenditures.

For those account holders who do have adequate funds available for such costs, it makes more sense to invest the money in their HSA and not draw funds from the account to pay for medical expenses. Say, for example, that I start my plan at age 30 and contribute $3,000 a year for the next 35 years until age 65, when contributions are no longer allowed. If I invest in a high-growth fund that returns 8% on an annualized basis, I will have over $500,000 that I can withdraw tax free for medical and long-term care expenses in retirement. This money was never taxed and, if used for qualified medical expenses, it never will be.

Here are two more tips to make sure you get the most out of your HSA going forward:

1. Invest in low-cost funds

To further maximize your potential for compounded returns, invest in low-cost funds. If your workplace HSA offers only high-cost or limited choices, you can transfer your balance to a lower-cost administrator. I recommend Health Savings Administrators, as they have 20 Vanguard funds to choose from. Another alternative is HSA Bank, which has a self-directed option with access to funds on the TD Ameritrade platform. Note that your current plan may impose a transfer fee, so check first to see whether moving your account makes good financial sense.

2. Reimburse yourself for past expenses many years in the future

You can also use your HSA to reimburse yourself for medical costs that you incurred in the past, as long as you keep records. So keep receipts and a running tally each year of your out-of-pocket expenses for possible future reimbursement. (There is currently no time limit on when you can withdraw the money for future reimbursement of past expenses).

If you have the opportunity and desire to participate in an HSA, take advantage of the free gift from the IRS by maximizing its benefits.

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At the end of 2015 (December 18th, 2015) Congress passed legislation that allowed Qualified Charitable Distributions from IRAs to count toward Required Minimum Distributions aka RMDs.  This change was made effective retroactively to the beginning of 2015.  Going forward retirees over 70 ½ can now make charitable distributions from their IRAs that will count toward satisfying their RMDs.  

First, what is a Required Minimum Distribution or RMD?

An RMD is required by law for all IRA owners post 70 ½. You technically have until the April following the year you turn 70 and ½ to make your first distribution, but if you delay until that time you will have two RMDs due that year.  RMDs are also required from retirement plans such as 401Ks and 403bs if you are no longer working for the company where you hold that account.  See this related article.

What are the details of the new QCD law?

The QCD can fulfill your RMD calculation for the year but:

  • You must be age 70 ½ at the time of the distribution.
  • The distribution must be sent directly to the charity from the IRA.
  • The distribution won’t be included in your taxable income.
  • You will not be allowed to receive a deduction for the donation.
  • The QCD is capped at $100,000.
  • QCDs can come from IRAs (and SEPs and Simple IRAs if you are currently not contributing), not 401Ks or other work retirement plans.

What are the main benefits of using a QCD for RMDs?

Since your gross income will be reduced by the amount of the QCD you may be able to:

  • Reduce your Medicare Part B premiums which are based on modified adjusted gross income (MAGI) and increase at certain income thresholds.
  • Reduce taxes on your Social Security benefits- for couples, if your modified adjusted gross income is between $32,000 and $44,000, you pay income tax on up to 50 percent of your benefits for income over $44,000 up to 85 percent of your benefits are taxed. For individual filers, the numbers are (between $25,000 and $34,000 up to 50% of your benefits are taxed and after $34,000 in income up to 85% of benefits are taxed).
  • Reduce the chance that itemized deductions and exemptions will be phased-out.
  • Eliminate exposure to the 3.8% investment surtax on net investment income.

Who might be a good candidate for a QCD?

If you are charitably inclined, don’t necessarily need you entire RMD distribution to live on, and are close to the thresholds for higher Medicare Part B premiums, having your deductions phased out, or being exposed to the surtax on your investment income this may be a good strategy for you.

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Most people prefer to write a check for their charitable contributions because it is convenient, quick, and simple. But if they have relatively large gifts (of say approximately $10K or more a year) and have appreciated stocks or mutual funds which they have held for over a year*, they are missing out on the enhanced tax benefits of donating securities.

When you gift appreciated securities you get bonus tax advantages over gifting cash.  Not only do you get a deduction for the amount of securities donated; you also eliminate any future capital gains on the sale of the security.    First, you receive a charitable income tax deduction equal to the fair market value of the donated securities.  For large donations, you can receive a deduction in this year for up to 30% of your adjusted gross income and can then carry over the balance for up to 5 years.  In addition, you are able to forgo the capital gains tax that you would have paid on the difference between your original purchase price and the current market value. Depending on your tax bracket, the capital gains tax could be as high as 23.8% (plus state capital gains taxes).

Let’s look at this simple example that compares a cash gift to a gift of an appreciated security.

Say Mrs. Charity Bell, who is in the 25% marginal Federal tax bracket (32% including state taxes) wants to gift $10,000 to her favorite local charity.  If she writes a check, her tax deduction is $10,000 and the net cost of her gift is $10,000-$3,200=$6,800.

Comparison of Donation Techniques  Donate Cash Write a checkDonate Stock Contribute securities directly to charity
Current fair market value of securities$10,000$10,000
Taxes Avoided$3,200$4,400**
Charitable Contribution/Charitable Deduction$10,000$10,000
Net Cost of Charitable Deduction$6,800$5,600

**does not include state capital gains tax

Now, suppose instead of writing a check, Charity donates $10,000 of a growth mutual fund or stock she bought ten years ago for $2,000.  She will still get a $10,000 income tax charitable deduction, and reduce her taxes by the same amount of $3,200.  However, she now has avoided ever paying long term capital gains tax on her appreciation.  In her case since she is in the 15% tax bracket, she eliminates $1,200 (15%x$8,000) of capital gains tax from being incurred.  By gifting stock instead of cash, the total taxes avoided were $3,200+$1,200 or $4,400.  The net cost of her gift is thus further reduced from $6,800 to $5,600.

But wait! You still have another potential tax benefit.  If you buy back those same shares at the current market value you now have adjusted your cost basis higher going forward, which will result in a lower tax bill when you sell in the future.  If she buys $10,000 of the mutual fund now to replace her gifted shares, her new cost basis is $10,000, instead of $2,000.  If the fund grows to $15,000 in 10 years, when Charity sells she will only incur a $5,000 gain, as opposed to a $13,000 gain if she had gifted cash instead of shares.

So when does gifting appreciated securities make sense?

Donating appreciated securities may make sense for you if:

  • You have a large concentrated position of an appreciated stock and want to reduce your exposure to risk and/or diversify your portfolio.
  • You do not want to or cannot wait for the “step up in basis” at death.
  • You can’t find the purchase history for the security or it is too difficult to determine the cost basis.

Using this approach may not make sense in the following situations:

  • The securities have been held less than 12 months.*
  • There is a relatively short time period until the step up in basis occurs at death.
  • Even after the sale of securities, you are in the 15% tax bracket and would not have capital gains exposure.
  • You do not itemize your deductions.
  • You currently have a loss on the securities.

*It would not be advisable to donate securities purchased less than 12 months ago as your charitable income tax deduction would be limited to your cost basis, or original purchase price.

Note: the impact of this approach is larger for higher tax and capital gains rates.  Pease limitations to itemized deductions may reduce the overall value of deductions for adjusted gross incomes over $300,000 if married filing jointly or over $250,000 for a single taxpayer.

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Most of us kick off the New Year with intentions of improving the management of our finances.  Here are some actionable steps to take to move your finances forward in 2014.

Visualize success.

This is the most important step.  If we can visualize ourselves successfully achieving our goals, we are more likely to take action to make them happen.  What would financial success look like for you a year from now?  Would it mean that your cash or investment balances have reached a certain figure? Or, would it mean that you had sufficient insurance to protect your family? That you were able to not increase your debt? Or that you had more confidence about your financial knowledge?  Write down your goals and discuss them with someone close to you to ensure that you are made accountable.

If spending is a problem for you and you find yourself wanting to make an impulse purchase, instead stop and pause a moment to visualize your bank account and investment accounts growing.  If an early retirement is important to you; envision yourself enjoying an early retirement. These daily meditations may be enough to dissuade you from buying those $300 shoes or daily latte at the coffee shop.  They can incentivize you to increase your savings rate into your retirement account at work or open a taxable retirement account to supplement savings.

Another important visual is to keep a card with the balance of your bank account or conversely your credit card balance in your wallet. Look at it often and update the number weekly. It will make you feel good about the progress you are making, and will make you think twice before buying an impulse item.

Spend with a purpose.

Let’s face it; we probably spend more time watching sports or reality TV than we do managing our finances.  It we could increase the time we spend each week to just a few hours a week it would help us become more financially independent.   Knowing how you spend your money is the first step to changing your behavior. Computer software programs like Quicken allow you to manually input all of your bills and expenditures (or download the information from your financial institutions). This process helps you track and monitor your investments and finances. By categorizing your expenditures, you will better understand your spending patterns and how they change over time.

Spending just a few hours a month will enable you to be more conscientious and intentional about your spending.  Review your expenditures for last year and put together a spending plan that aligns with your important life goals.  Each week spend about an hour paying bills (or reviewing your statements) to ensure that your expenditures are in on track and not deviating significantly from your limits.  Most importantly, if you do overspend on one area, make sure to reduce your expenditures elsewhere.  These tradeoffs are important.  They keep you accountable for your goals and ensure that you will be successful in your money management for the year.

Plan ahead.

You can save time and money if you comparison shop and perform preventative maintenance on your health and valuables.

Performing regular maintenance and prevention on your car, home, appliances and body will save you big bucks by increasing longevity and performance, and avoiding costly check-ups, repairs and replacements.  Take the time in January to schedule your annual auto maintenance, physical exams and dental appointments, and any regular household and appliance maintenance, like your auto checkups and heating and air inspection.

Don’t forget to comparison shop.  If you do have some large purchases scheduled for this year, make sure you spend some time reviewing local newspapers, and the internet for deals.  Use on-line price comparison tools, read consumer reviews, and make sure you ask for a rebate from a retailer, if you are ready to purchase an item and saw it listed for a lower price elsewhere. Never be shy about negotiating any purchase.

Curb your vices.

After you review your spending for last year, it is probably apparent to you (and possibly shocking) that you have some areas where you tend to overspend.  We all have addictions or habits we enjoy. For some it may be expensive shoes, and for others a daily Starbucks latte. And, of course, there are the usual culprits- alcohol, cigarettes, or food. Whatever your weakness, try to control or quit your habit.  Awareness of these problem areas is the first step toward making a change.  Try to keep on track especially in your danger areas to avoid overspending for the year.

Here are some tips to help you kick the habit and gain control of your finances as well as your cravings:

  • Limit major shopping excursions to once a month.
  • Make a shopping list and try not to stray from it.
  • Throw out catalogs once you receive them, or better yet, get your name removed from the mailing list by contacting the DMA.
  • If you do go out to eat, split an entrée with your companion or order appetizer portions for dinner. Limit alcohol to one drink or a drink at home beforehand so you don’t have to order one at the restaurant.
  • Quit smoking – If you smoke one $4.49 pack of cigarettes a day you will spend approximately $31 a week or $1,635 a year. If you saved that amount in a 401K and it earned a 7% return annually for the next 20 years, you would have over $67,000. In addition, your insurance rates and future medical bills will be lower.

Improve your financial IQ.

It is never too late to learn more about personal finances. You can dramatically enhance your understanding of finance and investments by committing just a few minutes each day to the following:

  • Review the end of year statements from your bank, retirement plan, and brokerage; research your funds to make sure you understand their objective, expenses, and long term performance relative to an appropriate benchmark.  A majority of investors have no idea what the total expenses are for their funds and money management.  If you are paying more than 1% for either, you should consider low cost index funds or fee only money management.
  • Read the Wall Street Journal, Money magazine or Kiplinger’s Personal Finance magazine.
  • Google any financial topics you don’t understand to learn more.

And don’t forget the kids…..

The average teenager will enter college without a basic understanding how to balance a checkbook, put together a budget or how compound interest works. Involve your children in the learning process by giving them an allowance and helping them construct a budget.

Read books about finance and investing with your kids. Some excellent books for kids to learn about finances are:

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My son recently turned 18, so we transferred his UGMA (uniform gift to minors account) into his own name.  But with money comes responsibility.  I told him that he must now balance his checkbook and debit balance each month.  He replied in quintessential teenage speak that, “kids now just look everything up on line.  No need to write anything down, or keep a separate ledger. ”

I agree that the internet has revolutionized how we store and track data, making it easy and quick to transfer sums of money and review our monthly statements. But it has also contributed to less awareness of our overall spending patterns.  Credit and debit card expenditures also make spending seem more remote.  The further removed we are from our transactions, the less “real” they become.

So I sat my son down and gave him a tutorial on the basics of personal financial accounting.  We downloaded Quicken on to his computer.  Whereas, the investment account that he has can be automatically downloaded from the mutual fund company to Quicken; the money market account could not, so we determined that he would manually enter those transactions.  Checks would need to be entered just after they were written, but debit expenditures could be inputted by category once the monthly statement came in— (as long as he kept sufficient cash in the money market account to cover a few months of his expenditures).  He would be responsible for transferring money,as needed, from his investment account to the cash account (money market account).   I stressed the importance of having a separate accounting of the checks to ensure that they were ultimately received and cashed.  He would then be able to determine which check was sent to whom and thus track them down as well as ensure that no checks went missing. (This would be tough to do if he never recorded the transaction anywhere).

His monthly debit charges were primarily comprised of three categories– food, gas, and flying.  My son got his pilot’s license last year, and has a passion for flying.  He belongs to a flying club at school and spends his own money on this expensive hobby.   As we began to add up the monthly totals for these categories, he mentioned that he might not want to know how much he spent on flying.  My comment to him was:  “That is exactly why you need to add it up.  It is of utmost importance that you understand where your money is going each month, so that you don’t blow through your entire savings.”

Knowledge of spending patterns ensures that you have a sustainable budget.  This dovetails with my recommendation that all parents make their young adult kids pay for more expenses as they get older.  This enables them to slowly gain awareness of the cost of living and hopefully begin to budget for the future, when they have a full time job.  My son is responsible for a portion of his college costs, as well as his personal expenses including gas and car maintenance at college.  I give him an allotment for  food which, if he does not fully spend, can be used for other things.  The amount is less than what he would spend for a meal plan at school.

Once we went through the basics; it became clear to him that this monthly exercise would take no more than a few minutes.

This was our first lesson, and I will surely need to follow up monthly until the Quicken “training wheels” can come off; but my experience reminds me that the basics are not necessarily intuitive.  Making kids responsible for their expenses incentivizes them to get jobs and enables them to value their human capital and the money and quality of living that it can provide.  Additional time with our children to teach and  reinforce these skills, is key to their financial independence.

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When most of us think about how to allocate investments in retirement, we turn to the traditional approach– that an investor should invest in their “age in bonds”.  So, for example, a 60 year old couple nearing retirement would have roughly 40% of their money in the stock market and then gradually decrease that exposure over time, such that at age 80 they would have only 20% stock market exposure. 

Recent research, however, conducted by Michael Kitces and Wade Pfau, has debunked this thesis.  In fact, their thought-provoking research published in the Journal of Financial Planning suggests just the opposite.  

Their results suggest that a better approach to asset allocation may be to reduce exposure down to a lower allocation as an investor closes in on retirement, and then gradually increase that exposure over the course of retirement.  Their findings also indicate that:

“Portfolios that start off in the 10 percent to 30 percent equity range and use rising glide paths fare far better than static portfolios with 50 percent or 60 percent in equities. Rising glide paths also result in better outcomes when compared to portfolios that use a declining glide path.”

Their proposed method ensures that the retiree does not suffer losses in the precarious time period just prior to and after retirement and enables the retiree to maximize his or her spending during retirement.

The end result is that the preferred shape of the glide path throughout an investor’s lifetime would approximate a “V” or a “U”, where risk is minimized at the point of retirement and is higher at the beginning of the career and at end of retirement.  For example, an investor may start with a 70-30 allocation at age 25 and decrease that by 1% over 40 years until they reach a 30% stock allocation; after retirement the allocation would increase 1% per year over the next 35 years resulting in a 65% allocation at age 100.

This approach is especially appealing in today’s environment of low interest rates and high equity valuations.  A prudent approach for a new retiree might be to minimize the downside risk for their portfolio by starting with a low allocation to the stock market.  The equity exposure could then be increased each year such that bonds are not dominating the portfolio at a time when interest rates are likely to be rising. *

In essence, the approach is a way of considering valuations and asset allocation.  If stocks are overvalued when you retire, you certainly want to dial down exposure and if stocks correct afterward you will dollar cost average back in as the market rises.

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