Social Security, The Chance to Make a Huge Mistake

In my role as a financial planner, I interact with people at various stages of life.  If I were to categorize these stages in retirement planning terms, in very rough terms, there are four:  pre-accumulation, accumulation, transition, and retirement.  Each stage is important and has certain common features and needs, but the mistakes that we see tend to be concentrated in the transition years.

We’ve often referred to the transition years as the Retirement Red Zone, in a reference to the NFL Red Zone, the last 20 yards to the goal line.  There’s extra pressure and anxiety, just like in the NFL.  We typically can sense that anxiety in clients around 5-7 years before retiring from full time employment, and it often extends into the first year or two of retirement.  And why would that be?  There are a number of anxiety factors outside of money, including change of social network and purpose, but money always plays a major role.  The major source of income is soon going to be shut off, and how will you comfortably and reliably fill that gap?

There is a lot going on, and clients often feel that something has to be done.  A solid Retirement Income plan should consider pensions, portfolio positioning in extreme detail, reliability of expected returns, liquidity, order of asset use, tax planning, part-time employment, inheritance, gift planning, and of course, Social Security.

I tend to think about Social Security as an asset to be managed.  I am not sure that other people do, however, since it is impossible to call up Social Security and ask for a withdrawal.  Still, the lifetime value of your Social Security benefit is likely to be substantial, and can be dramatically larger or smaller depending on your claiming strategy, timing, and longevity.

There is one misunderstanding that comes up frequently.  Clients and Prospective clients often indicate that they intend to quickly fill the lack of employment income with Social Security.  I suspect that it feels better emotionally to have the money coming in.  Digging deeper, some clients have mentally combined their desired retirement date with their intention of when to claim Social Security, as a single point in time.

However, after we do our planning work, very few of our financial plans show claiming Social Security early as the best result.  It is quite common for the optimal claiming strategy for a married couple will show $300,000 or more in additional projected lifetime benefits over and above the worst claiming strategy.  More often than not, claiming at age 62 is the worst strategy available.  Yet, for Americans as a whole, age 62 is the most popular filing age.  Interestingly, since the 1980’s, about 2/3rds of the population has claimed social security before their FRA, with about half claiming it as soon as possible.  https://www.ssa.gov/policy/docs/ssb/v74n4/v74n4p21-text.html#chart1

In real dollar terms for a person in their early 50’s, if your Social Security benefit was $3,000 per month at a Full Retirement Age of 67, you could choose to take your benefit at 62 for about $2,100, or wait until age 70 and receive $3,720, or some number and age in between.  Roughly speaking, the benefit has a guaranteed increase of 5-8% per year, plus cost of living adjustments.  https://www.ssa.gov/policy/docs/ssb/v74n4/v74n4p21.html 

For many clients, we encourage preserving and growing the Social Security benefit for a later date, while using other assets to cover retirement spending in the meantime.  I want to be very clear that this general statement is not a prescription for you, as differences in family longevity, health, spouse ages and incomes, prior marriages and deaths, and other factors can all affect your projected benefits, as well as your overall retirement income plan.  We go through a lot of discussions, planning, and projections before making a recommendation to any client.  Still, the truth is that in our current low interest rate environment, it is rare to find another investment that has a guaranteed increase of 5-8% per year plus a cost of living adjustment. 

If you follow this thought to its logical conclusion, for a client to delay claiming Social Security, they have to live on something else for several years, and that can feel uncomfortable.  If you are like most, the short story is that you may need 3-8 years or so of providing for your own expenses, during the first, best, and often most expensive retirement years.  Let’s face it, you are likely to travel and consume much more entertainment in your 50’s and 60’s than your 80’s or 90’s.  Unless you have a pension, generally you have to live mostly off your investments.  Of course, it might be fun to pick up part-time work as a supplement, often as a “near-hobby.”  Like gardening?  Work at the flower shop or garden center.  Like guns?  Work at the shooting range. 

Living nearly completely from a portfolio for a few years often requires uncomfortably high portfolio withdrawal rates.  It is not uncommon to be withdrawing 7%, 8%, and sometimes more, per year for a few years.  This situation would be completely unsustainable were it not for the relief when Social Security is switched on, at the higher monthly amount.  When planned correctly, the Social Security benefit replaces most of the withdrawals and reduces the strain on the portfolio, so that the withdrawal rate is often below 3%, sometimes below 1% after Social Security is on.  It is not unusual for a financial plan to show dwindling assets up to the age at which we turn on Social Security, and accumulating assets afterward.

One caveat is that Social Security benefits may change over the next few years, as Congress addresses the financial reality of the future of the program.  We’ve addressed that in the past, and regardless of what happens, the benefit will still be significant enough to think carefully about.

There are several other important details to get right during the transition years, and every detail is interwoven with the next.  Today I have touched on Social Security, and the importance of getting it right as one element of prudent retirement income planning.  As a quick reminder, a solid plan should consider portfolio positioning (in much greater detail than most advisors provide), reliability of expected returns, liquidity, order of use relative to tax planning, inheritance and gift planning, all coordinated with Social Security.  That’s what we do well.  If you want to chat about it, feel free to call or email me:  patrick@maccofinancial.com.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. Investors should consider their personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision, as these may further impact the results of the comparisons. Keep in mind that results will vary as investing involves risk, fluctuating returns, and the possibility of loss. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Patrick Stoa and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

What does Fiduciary mean, and why does it matter?

You may have heard the term fiduciary.  Perhaps you even have a sense that there is something important about it, but you are not quite clear on exactly what it means or why it is important.  Let’s help you with that, starting with a little history.

The story of this word probably started at the dawn of humanity, but we can knowingly document it’s conceptually history back to about 3,800 years ago, with the Code of Hammurabi (Circa 1790 BC).  Within the Code, about half of the laws dealt with trade, liability, and care of other’s property.  Later, Aristotle gave input in the mid 350 B.C.  The concept of Fiduciary was solidified in Roman Law.  Cicero (106 B.C. to 43 B.C) was quoted as saying: 

“Therefore, legal proceedings for betrayal of a commission are established, involving penalties no less disgraceful than those for theft. I suppose because in cases where we ourselves cannot be present, the vicarious faith of friends is substituted; and he who impairs that confidence attacks the common bulwark of all men and, as far as depends on him, disturbs the bonds of society. For we cannot do everything ourselves; different people are more capable in different matters” (“Oration for Sextus Roscius of America”).

In it’s current form, the word Fiduciary comes from the Latin rood Fiducia, which means “trust, confidence, assurance, and reliance.”

With the very rich and deep history, it is safe to infer that the fiduciary is fundamental to human nature.  The word has been put to the test through court cases in many jurisdictions, with predictably similar results.  Arguably the current standard in the United States is best represented by the Uniform Prudent Investor Act of 1994.  Technically this act is model legislation, and not a uniform law.  However, the Uniform Prudent Investor Act or the similar Uniform Trust Code, are widely adopted in several states, and referred to by the courts frequently.  In particular, it is instructive to view the Duties that are inherent in the Uniform Prudent Investors Act.

Here we will comment on these duties, but do so with a filter towards the financial advisory business, rather than being a Trustee.  The two duties that shine through are:

·         Duty of Care (or Standard of Care) - the duty to make reasonable decisions based upon proper due diligence.  In plain English, this standard asks the question:  “Would a person, of similar responsibility and professionalism, find the recommendations and actions made to be reasonable, given the same available information.”  I think it is important to reiterate that this duty requires due diligence.  Not asking basic questions about a client’s situation would be a failure of this duty, as would placing clients in strange or concentrated investments without a good reason to do so. 

·         Duty of Loyalty – the duty to place the client’s interest as primary.  If there are conflicts, they must be avoided and/or reduced, and they must be disclosed.  If a trustee, or an advisor, recommends something because of their own benefit, that is a conflict.  The advisor must attempt to be impartial in their dealings. 

There are other named duties in the act, such as to diversify, to control costs, and to monitor, although each of these can be inferred from the Duty of Care.

Almost all our engagements and recommendations with clients are Fiduciary.  Why does that matter to you?  Ironically, many advisors were not required or did not follow a Fiduciary standard.  Under current regulations, all advisors are now required to act as Fiduciaries for new recommendations in retirement accounts (for example IRA accounts).  However, they were not required to do that until very recently, and your account might be grandfathered, with some specific exceptions, under the old, weaker, “suitability” rules.

We have seen situations where people have come to us to “fix the mess” from other advisors.  In the last year we have seen prospective clients with portfolios that were inappropriate for a variety of reasons, including portfolios that were too aggressive, very illiquid, over-concentrated in certain sectors, or locked up in products with high surrender fees.  None of these situations would have passed a fiduciary standard.  Unfortunately, they were all sold by someone following the lower suitability standard.

We’d love to implement your financial plan with the diligence and process that a fiduciary standard calls for.  If you have any questions, please feel free to reach out to us.

- Patrick Stoa

Protect your Loved Ones with Legal Planning

We work with clients through all stages of life and through multiple generations. From going to college, paying off debt, getting married, saving for a house and of course, planning for retirement. And while accomplishing these important financial and life goals is critical, it can all go up in smoke in an instant if you haven’t planned properly. Premature death, disability, and an inability to handle one’s own affairs can leave you and your loved ones in a difficult position. Luckily, there are some simple things you can do to plan for the unforeseen and protect your loved ones and your financial legacy.

Before we begin, it’s helpful to acknowledge the fact that we will all die. And because we are living longer that we once did, it’s also helpful to acknowledge that there is a good chance we will become incapacitated and unable to handle our own affairs. I know this is probably not a pleasant thought. But forcing ourselves to think about these things with objectivity helps change in our mind not IF these things will happen, but when. And that helps us think about the things that we or a loved one would have to take care of in their or our absence.

So what are the things that would need to be taken care of? Yes, there are the bank accounts, investment accounts and insurance policies. But there are also houses, titled vehicles and equity in privately held businesses. There are also medical decisions, deathbed decisions and final wishes that you may want to codify now while you are still able to. So how do you do all of that?

The first and easiest thing to do is to visit the institutions where you have accounts. First, make sure they are titled properly. If you are married, make sure they are in joint ownership and that all names are current. If you have retirement accounts and/or life insurance policies, make sure the beneficiaries are correct. And take that a step further and specify a contingent beneficiary, someone who would take the place of the primary beneficiary if that need arose. Contingents are commonly children or a trust if you’ve done that planning. If you have an account that you want someone to be able to help you with, consider signing a Limited Trading Authorization. Unless that person is a spouse, do not list them as a joint owner. This can trigger gift taxes and could subject your accounts to legal action if that person defaulted on her/his own obligations, and could trigger penalties for Medicaid eligibility. Finally, if you have an account that is not an IRA, Roth IRA or Trust, many institutions have what they call a Transfer/Payable on Death (TOD/POD) option which functions much like a beneficiary designation in that it determines where those proceeds go once the owner(s) passes away. All of these things can be done without an attorney and for little or no cost at all.

Even if you’ve done some of the planning discussed above, there are still circumstances that necessitate more formal legal planning and consultation with a trusted estate planning attorney. If you are still living but want someone to be able to make decisions on your behalf, consider a Durable Power of Attorney (POA). A POA is a document that specifies a person – the attorney in fact – to make certain financial and other decisions on your behalf. This document becomes active once you become incapacitated, or allows the attorney in fact to function while you are in full health. A basic POA document ceases upon incapacitation but a DURABLE POA document persists through incapacitation. Make sure yours is drafted in such a way to fit your objectives. Lastly, all POAs cease upon death.

In addition to a POA, you may want a Healthcare POA. This is a document that allows a person to make medical decisions when you are not able. Say, whether to perform a surgery while you are unconscious. A Living Will is similar to a Healthcare POA in that it deals with medical treatment but is exclusive to deathbed concerns.

Once we die, there are typically two documents that will determine what happens. A will and a trust. A will is a document that tells a court what you want done with anything left in your estate after you pass away. In the state of Wisconsin, it also allows you to nominate a guardian for any minor children. If you have minor children, get a will right away. There are a couple considerations regarding a will. It is still subject to probate and as such, is a public document. This means that executing your will could take months and will be a public process. Some of which can be avoided by using a trust. Secondly, any beneficiary designations or TOD/POD on any accounts takes precedence over a will. Make sure those documents are either in agreement or that you approve of any discontinuity between them. Finally, a will is a good tool for telling the assets where to go but not usually for exercising persistent control over an asset.

A trust can be helpful in a number of circumstances. As stated above, if you wish to exercise control over an asset for any length of time after your death, a trust is a must. You can set distribution restrictions, requirements for distribution, and much more. Further, trusts are private documents and are not subject to probate. This means that a Trustee or Successor Trustee can begin acting on the trust and carrying out your wishes within days after your passing. In addition to determining how you want your trust to function, it is also wise to thoughtfully consider who you want to administer the trust in your absence. This is commonly a surviving family member. And while this can sometimes work, we often find that family members do not know their obligations in serving as a trustee which can subject them to legal action by the beneficiaries. To mitigate this, we will sometimes recommend a trust company to serve as a corporate trustee. A corporate trustee has the expertise to administer your trust and can also be a disinterested 3rd party which can help family dynamics in difficult times.

While the items here can be daunting, I hope you can see they are of the utmost importance. When my wife and I went through this process in 2012 with our attorney, it took longer than I anticipated. But when we were done, I felt much peace knowing that my family would be in good shape should something bad happen. Make this your 2-month goal; you’ll be glad you did.
Regards
-Michael Macco, Financial Advisor

"Any opinions are those of Michael Macco and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Raymond James does not offer legal advice. You should discuss any legal matters with the appropriate professional."

Planning for the Future Needs to Include Insurance

Let’s be frank; no one likes to pay for insurance. It’s one of those things we do because we’re “responsible adults”. But in many cases we’re paying to protect ourselves against something that isn’t likely to happen. Most people don’t totally destroy their cars. Most houses don’t burn down. But when those things do happen, they can have catastrophic financial effects on those who are ill-prepared. While this is true for things like houses and cars, it’s also true when it comes to planning your financial future. Let’s take a quick dive into three areas we think are critically important to address when thinking about your financial plan.

Life Insurance
While it’s true we are all going to die someday, that doesn’t necessarily mean we will always need life insurance. Think about it. What is the financial risk associated with death? For me, that’s the money I’m supposed to save during my working career for retirement. Or the income I was supposed to make. Or the debt I was supposed to pay off. But like many, I’m hoping to retire at, say, 65. And my plan is to have all of those needs met by then. Therefore, contrary to what many life insurance salesmen would have you believe (you know who you are) in my opinion most people don’t need permanent life insurance (whole, variable, universal, etc.) and are best served by a term policy that coincides roughly with retirement. And that’s good for you. Because term insurance is almost always the cheaper way to go. For me, that’s a 30 year term policy.

So how much should you get? My formula is simple. First figure out what you want to accomplish in the case of your untimely demise. For me, I’d want to leave my wife with a paid-off house, a new van (she loves her Sienna), some money in a college fund for our kids and a reasonable stream of income. Then do the math. Add up the one-time expenses that would need to be paid off first. $200k for a house, $30k for the van (plus trade-ins), and $35k in two 529 college funds. So that’s $300k. Then determine what kind of income your family would need once those debts are gone. Say that’s $50k per year. Take that number and divide it by 5% ($50k/.05 = $1,000,000). And then add those numbers up. So if I had a $1.3MM 30yr term policy and I died before retirement, Beth could take that money, pay off our debt, buy a new car, invest $1MM in a decent portfolio and draw 5% for the rest of her life¹.

Disability Insurance
But what if I don’t die? What if I’m just in a bad car accident and I become disabled and can’t work anymore? Now my family is without my income and I’m probably also a financial burden on them. Enter disability insurance. There are actually two kinds of disability insurance. Short-term and long-term. Because we’re big advocates of having cash emergency funds, we don’t usually recommend the short-term variety. Long-term disability is highly customizable so you should definitely go through an agent to make sure you’re buying a policy that functions as you would expect it to if you should ever need it. It typically would kick in after 90 days of disability (elimination period) and if you pay the premiums with after-tax dollars, the income stream is tax-free! And you want to make sure it isn’t structured in such a way where if you can flip burgers, it won’t pay. Moral of the story: if you’re the primary wage earner and your family would be ruined without your salary, call us and consider getting a disability policy in place.

Long-term Care Insurance
According to the US Department of Health and Human Services, about 70% of people turning age 65 can expect to use some form of long-term care². And as we live longer, those numbers are growing. And it’s expensive, costing anywhere from $6,000 to over $10,000 per month³! So being in a nursing home for 2-3 years can cost you hundreds of thousands of dollars. In many cases, this is orders of magnitude more expensive than buying some kind of long-term care insurance (LTCI). But what kind?

Traditionally, LTCI is purchased on an individual basis and much like auto or home insurance. You pay premiums every month (for LTCI, often until you die) and if you never use it, you lose it. For the most part, people seem to be ok with this when it comes to home and auto insurance. But when it comes to LTCI, that’s often looked at as a waste of money. Ironic, since the financial risks of nursing care are undoubtedly higher than replacing a car or maybe even a house. But if you’re in that camp, consider either “pooled coverage” or asset-based LTCI. 

Pooled coverage can be purchased by a couple with the coverage shared between them both. Since the likelihood of both spouses needing long-term care is not high (typically the healthy spouse takes care of the non-healthy spouse), it may be ok to purchase a slightly lower amount in aggregate (say 6 years in total coverage) than if that same couple had purchased individual policies (2 x 4 years = 8 years in total coverage). This can help keep the premiums down.

Asset-based long-term care is a kind of hybrid long-term care/life insurance product. These policies can have a cash value or death benefit that pays out if the policy owner never needs to pay for long-term care expenses. And while this sounds like a nice way to avoid potentially wasting money, the premiums are often quite high and cost-prohibitive. Making this primarily a product for those of high-net worth.

Like disability insurance, long-term care insurance can be highly customized with many optional features (riders) that can make the policy more powerful but also more expensive. For instance, considering the ever-increasing costs of medical care, it probably makes sense to have an inflation rider on your policy. If you’re interested in discussing the details of your situation and how to construct an LTCI policy for you, please give us a call (920) 617-6830.

Work Benefits
So what do you do if your work offers these types of benefits? Consider the following. First of all, they’re often group policies which means the costs are based on your group, not you as an individual. They are sometimes more expensive than if you would try to get coverage on your own. And what if your company decides to get rid of those benefits? There goes your risk management plan! If you don’t plan to work there for your whole life, or those policies aren’t portable (can’t take them with you when you leave), then don’t count on them. Consider getting your own insurance. Of course, if you aren’t insurable, group coverage is probably your only choice.

As you can see, insurance planning is a big part of financial planning. Doing it incorrectly or ignoring it completely can really harm you and your family. It can be the difference between living in wealth or languishing in poverty in the most extreme circumstances. This is why we’ve included insurance planning in our practice. If you or someone you know needs help in this area, don’t wait any longer. Call us today.

-Mike Macco, Financial Advisor

¹This is a hypothetical illustration and is not intended to reflect the actual performance of any particular product. Individual results will vary.
²http://longtermcare.gov/the-basics/who-needs-care/
³http://longtermcare.gov/costs-how-to-pay/costs-of-care/

Opinions expressed are those of Michael Macco and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk, investors may incur a profit or a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but we do no guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Long Term Care insurance policies have exclusions and/or limitations. The cost and availability of Long Term Care insurance depends on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

Want a prosperous retirement? Start with this.

How much money do you need for retirement? How much should you save each month to reach that goal? Can you afford that? What lifestyle can you afford if you save less than that? There is only one way to answer those questions. You must know what it takes to live your life now. If you know how much money you need to spend on a monthly basis now, you can work off of that number to determine how much you’ll need per month in retirement. Let me explain. (Warning: a little nerdy math ahead. Stick with it!)

If you think you need $50,000 per year that’s got to come from somewhere. Let’s say you have $18,000/year in social security. So you need to make up a difference of $32,000/year out of your own investments. So how much do you have to have invested to produce that stream of income for 30-40 years of retirement? Of course, that depends on how it’s invested. But generally speaking, we encourage our clients to withdraw only 4-6% of their investments per year. Hopefully growth will replace those withdrawals and over time, your money will last and you’ll be able to leave an inheritance. Withdraw more than that, and not only might you not leave an inheritance, you might run out of money prematurely! So if you wanted to keep your withdrawal rate at say, 5%, you’d need to have $640,000 invested somewhere. ($640,000 *.05 = $32,000). Make sense? But what if you only need $40k per year? Then you’d only need to have $440,000! (($40k-18k)/.05.) And there it is. The power of cash flow management. So how do you do it? It doesn’t have to be like pulling teeth!

At the most basic level, all we need is a monthly number. If you’re like my mother-in-law, (Love you Deb!) you can simply write it all down in a spiral notebook. Or if you use your debit/credit card for everything, just look at a statement. Of course, if you want to get a little nerdier, you can use excel. Or if you want to get REALLY nerdy (Like me. I’m a budgeting junkie.), you can use both excel (My budgeting workbook. Check this out!) and some finance software like Quicken! I’ve also heard good things about YNAB.com (you’re welcome, Alaina) and Mint.com, which is “free” but ad-supported. But no matter what you use, try to record it all. Cash, debit, credit, automatic bill payments, ACH withdrawals, charitable contributions and even salary deferrals. Everything. At this point, you’re probably pretty close to the real answer. Take a victory lap! You’ve done more than most people. You could stop there and be able to do some legitimate long-term planning. But you’ve come so far and you’re nearly done.

Now, when I taught Dave Ramsey’s Financial Peace University class (yes, I’m one of those people), I got in the habit of not only accounting for my monthly spending, but also quarterly spending (Water bill, anyone?), and what I call “eventual spending”. These are expenses that I know I’ll have but I’m not exactly sure when. Like birthday and Christmas gifts, furniture replacement, vacations, home maintenance, car replacement/repair, etc. I just sweep a certain amount into savings each month and let it build up for those eventual expenses. Yes, it’s a lot. But it’s part of your cost of living and you’ll probably spend it in retirement so it needs to be quantified.

Sigh! That’s it. Well, step one. But it’s a huge step. And one that puts you in the driver’s seat. Armed with that budget, a financial advisor like ME is much more able to help YOU figure out what you need and how to get you there. Well done!

-Mike Macco

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mike Macco, and not necessarily those of Raymond James. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.  The hypothetical investment return figures represented are not intended to reflect the actual performance of any particular security or portfolio. Individual investor's results will vary. Raymond James is not affiliated with and does not endorse Dave Ramsey.

Types of Risk

Many investors view the stock market as risky, because they may lose money.  In our eyes, it is worthwhile to have some awareness of the various types of investment risk.  In our video, we share several sources of investment risk that you may not have fully considered.  Below, we talk in more detail about those risks.

First, let’s simply list a few of the investment risks, and we will dive deeper into a few of them to illustrate the point.  Here is a list of well-known risks:

•    Market Risk (also known as Systematic Risk)
•    Interest Rate Risk
•    Business Risk
•    Inflationary Risk
•    Liquidity Risk
•    Reinvestment Risk
•    Social/Political/Legislative Risk
•    Currency/Exchange Rate Risk
•    Call Risk and Credit Risk (specific to bonds)

Those are a lot of risks, but hopefully it is not overwhelming.  For example, in our last video we talked about diversification and asset allocation which, combined, can be used to mitigate (but not eliminate) several of the risks above, including Market Risk, Business Risk, Exchange Rate Risk, and even Social/Political/Legislative Risk.  

Today, I would like to point out Inflationary Risk, in particular.  An item costing $100 in 1985 would cost about $220 in 2015 due to inflation.  This is serious damage to your purchasing power and can make retirement a lot less enjoyable than you might want it to be.  In general, it is a good idea to have many of your investments at least keeping up with inflation.  Historically, stocks have done this while cash or near-cash investments have not.

Another current risk to be aware of is Interest Rate Risk.  Interest rates have been at historically low levels, and it is hard to imagine them doing anything other than going up.  As interest rates rise, the unfortunate result is that bonds go down in price.  We did not elaborate on the mechanism for this in the video, but we will do so here.  If a person owns a bond that is paying $50 per year on a $1,000 investment, that is a 5% return.  Now imagine that over a few years, the market interest rate has moved up to 10%, and the owner wishes to sell the bond.  Who will buy that bond at the full price of $1,000?  No one.  The new buyer wants to earn the current market rate.  Since the bond will continue to pay only $50, the way to achieve a current market rate is discount the price so that 10% is earned on the reduced price.  

The key takeaway from this is that there are many risks to consider.  Sometimes the risks are the ones that scream from the media headlines on a daily basis.  Just as often, risk can be silent but can significantly affect the value of your investments, nonetheless.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830  

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mike Macco and Patrick Stoa and not necessarily those of Raymond James.

How to deal with market volatility

The start to 2016 has been marked by uncertainty in a number of areas. China, ISIS, Oil, etc. Not surprisingly, this uncertainty has caused plenty of fear and, consequently, volatility in global stock markets. Also not surprising are the familiar echoes from the “talking heads” on television and even some investors to “Get out!” or do something. Of course, there is no one-size-fits-all approach to investing or risk management. Every family’s situation is unique and calls for an equally unique approach. Indeed, with the typically short-term nature of these downturns, some investors likely ought to be buying, not selling.

So what does a person do when markets are volatile? Well one of the worst things a person could do is react emotionally and make a rash decision. Pause and ask yourself two questions: 1.) What is your investing time frame? 2.) How is your portfolio invested? If you’re 10 or more years from retirement and your portfolios are invested aggressively, that’s probably ok. Short-term volatility should not change a long-term investment strategy.

What if you’re closer to retirement or already retired? If you’re within 10 years of retiring, you probably should be lowering the risk in your portfolio already. Meaning moving some of your aggressive investments (often stock), toward less aggressive investments (often bonds). If that’s you, depending on your tolerance for risk, that probably means you have 50% - 75% of your total investments in stock. Because most people still need their investments to grow in retirement, that same logic applies; although the total percentage of stock may be in the slightly lower 40% -65% range. At Macco Financial Group, this is one of our guiding principles. And we work very hard to position our clients' portfolios for volatility so as not to expose them to excessive risk.

Finally, we recently hosted a conference call with Nicholas Lacy, Raymond James Asset Management Services’ (AMS) Chief Portfolio Strategist. Nick is greatly respected in the industry and shared some tremendous insight on AMS’ views of global markets, volatility, growth expectations and what they have done and are doing to position portfolios for the future. If you’d like to hear a replay of that call, it is embedded below. We will be proactively contacting clients. And we invite you or anyone else concerned about the markets to call our office at 888-617-6830.

Respectfully,
Michael J. Macco
President, Macco Financial Group
Investment Management Consultant

"Any opinions are those of Michael Macco and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results."

New Year's Resolution

It’s nearing the end of January.  Earlier this month, we put out a video about a financial New Year’s resolution.  This topic is important enough that we felt it should be our first blog post ever.

So, if you want to skip the rest – here it is:  In our opinion, you should increase the amount you are automatically investing right now.  Don’t think about it.  Don’t resolve to do it at a future time.  Just do it now.

This thought comes from a simple place.  Some of the people we see may be headed towards disappointment and all seem to have one thing in common.  They have not set enough aside for their future.

On the other hand, if I were to make a generalization about the people who have bright financial futures ahead of them:  they are prodigious savers and investors.  For the most part, they have set up their wealth accumulation plan to be automatic, via either large 401(k) contributions, large contributions into other investment accounts, or, in many cases, both. 

The fact that the accumulation is automatic is important.  If you have to remember to write a check every now and then, it probably won’t happen.  Compare that to the one-time effort to increase your 401(k) contributions by 1% or 2%, or the time it takes to set up or increase the automatic draft into an investment account.  It’s one and done, and then it actually happens.

Beyond actually happening, let’s talk about a couple of finer points.  First of all, if you have an Employee Retirement account such as a 401(k), and there is an employer match, be sure to contribute enough to earn all potential matching dollars.  That is free money.  Don’t let it slip away.

Next, what I have observed is that most people can almost always invest more than they are right now.  I challenge you to increase your automatic investment right now.  Even if the change is only $50 or $100 per month, commit to starting now, and continue for six months at least.  It has to be automatic.  If you are like most people, you will find out that you barely notice that the money is not in your checking account.  Then, in six months, if it has not hurt, do it again.  And again. 

Using this method, I have observed people more than double their monthly investments.  And that alone can make a significant impact on their long-term accumulation.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.  Any opinions are those of Patrick Stoa and not necessarily those of Raymond James.