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savings

The Power of Awareness

It's been more than a few times that I've written about the single greatest tool in working toward long-term financial success....controlling what you can control. 

As we all have likely noticed, we don't get to control how much snow falls from the sky, but we do get within reason, the opportunity to decide where we live. If you can't stand winter and you're living in Buffalo there's a fundamental disconnect. True, work may tie us to where we live so that's maybe not the best analogy.  How about this one....

You don't get to pick the direction of the stock market but you do get to decide how much you spend and save/invest.

Many times during my term as U.S. President and Chairman of the Financial Planning Association, I was asked about the "luxury" of dealing with high net worth Clients. My comment was almost always the same; "the only difference between high net worth Clients and my "typical" Client was that the high net worth folks had more zero's after their numbers but roughly all the same problems. As it turns out, the net worth of folks who don't have to worry about either their spending or saving is a strata that few of us will ever attain. It's about as unlikely as it is that your child will be an NBA, NFL, NHL or MLB star.  And trust me, those are pretty daunting odds.

As Wade Slome, CFA, CFP® recounted in a recent Wall Street/CheatSheet article......

"First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7% of every dollar you earn. (30% of every dollar if you're 55 now). Fourth, earn at least 3% above inflation on your investments every year. (Easy, just find the best funds for the best price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced buy a house or send a kid to college. Sixth, time your retirement so that the last cent is spend on the day you die...."

(The above is taken from a New York Times 2012 article)

Ok, sounds easy enough. 

Or; we could just control what we can control, namely spending and savings. 

How many times I've been told by Clients, both potential and existing, that "I don't want to live on a budget..." is many more times than I'd like to mention. Of course, controlling what you spend doesn't necessarily mean "living on budget" any more than being aware of the fact that high cholesterol will kill you keeps any of us from enjoying fatty food.  What we do however, is to have an embedded understanding that there's only so much of "this" or so much of "that" you can do without there being consequences.  Spending and saving are the same.  You don't have to strap down every line item to a finite dollar amount, never to be under or over spent on ever under any circumstances without the penalty of death. No, it's more like your next rib-eye steak or Wendy's Bacon Cheeseburger......you enjoy it for what it is, aware of the looming consequences for repeated over indulgence combined with the mitigating and complicating efforts of a host of other factors. 

We gravely under estimate the power of awareness in our lives. 

Sound cash flow planning pays off in awareness more than it does that you favor one line item of spending more than another; or that you favor your retirement savings over your personal savings. While exact preferences can have some minor complicating factors, those factors pale in comparison to the consequences of no awareness. I'd much rather have to figure out which "bucket" we're going to take money from to maintain a robust retirement lifestyle than figure out how the heck we're ever going to be able to fund a retirement at all. 

So, my advice would be this....don't think "rules" when you can think "awareness." 

Controlling what you can control could be re-worded I think into- "be aware of what you need to be aware of.."

One thing remains the same, whether we're discussing "budgeting" or "awareness." 

It takes a few things to accomplish either; 

  • Some degree of thoughtful work 
  • A desire to allow awareness to happen
  • An appreciation for adjustments, mis-steps and course corrections
  • A metric for keeping score
  • An appreciation for the "up-ness" and "down-ness" of things

I read a recent article on the value of focusing on your processes instead of your "goals." The point of the article was that if you focused on your process, your goals would come and with much less stress and pressure. The analogy in the article was that if you tweaked your back in your gym workout and your goal was 10 machines, 15 reps per machine, four times a week, you might be tempted to press on if your "slipped disk" happened early enough in the day because you have a goal to keep. But realizing instead that you have a process, you just skip that day's back related exercises knowing that there's always the next work out and the one after that. If you focus on your process as "four workouts per week consistently and I'll be in much better shape" it's a bit easier to see how over the long term, you're likely to get to the same place, without as much stress and worry. 

Build a process for controlling what you can control (aka should be have higher awareness of) and focus on that rather than every detail and appreciate that over time, you're going to get it right much more than you get it wrong.

That's why they say that the plan is nothing...but planning is everything. 

It's all about awareness. 

 

 

myRA and Missing the Point

President Obama's first salvo on at least working on American's retirement problem is being met with a decent grade for "effort" but little else. 

The myRA concept, that employers would offer a non-matching, guaranteed government bond fund as a retirement vehicle, is at it's least, an effort to stem a growing problem: too many American's retire without enough money to live their lives out in any reasonable level of comfort.  In a recent study, EBRI found that the average 401k balance at the end of 2012 was only about $63,000.

Unlike 401k plans that benefit from automatic enrollment, the myRA plan would not provide for automatic enrollment, raising the question as to whether or not the myRA concept would gain any traction at all with American workers. 

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A recent article on the Internet, chides the plan, noting that historical returns on the government bond fund to be used to fund the myRA have been historically low. In 2012 the fund returned just 1.47% and it's ten year average return was only 3.61%

But the article goes on to allow us to glimpse the real problem: Corporations are more interested in slashing benefit costs as means to increase profits, not increasing those costs. So, it's unlikely that adoption would be wide spread. 

So here again, we have a problem that's sorely out of focus.  And, frankly, on it's face, it appears that it's a classic "makers" vs. "takers" view.  It doesn't earn enough to be attractive, as if lower paid workers are going to be checking Baron's every week to see how their government retirement fund compared to the S&P 500 and; that having any amount of money set aside at retirement that normally wouldn't have been there is a waste of time if that number can't be 7 figures long, all on the left side of the decimal point. 

My guess would be that if you offered every struggling American newly retired household today, $23,000 tax free that they'd all take it, no?

So while the plan may in many views fail on it's merit and structure, one fact remains. It starts a national conversation about the need for the U.S. to have some sort of "mandated" retirement system.  In and of itself, that's a good thing. 

Are there other things we could do?  Sure.  Want a list? Then read on.

  • Put in place a post retirement tax bracket for low wage earners of 5%. The Tax Equity and Fiscal Responsibility Act which passed in the 1980's transitioned us from about 14 tax brackets to 3.  In case no one noticed, almost all American's will retire in exactly the same bracket they were in when they were working which kinda defeats the concept of retirement plans in general
  • Make it mandatory for employers to provide ongoing employee education on retirement planning and savings
  • Make it easier for financial advisors who are designated by law as fiduciaries to provide financial planning and wealth management services to employers for employees as a deductible corporate benefit
  • Make investment advisor and/or wealth management fees a normal itemized deduction not subject to limitation by Adjusted Gross Income for tax payers below a certain income level. Better yet, make it a tax credit for most and an itemized deduction for the rest
  • If earnings are your concern, have the U.S. Government enter into strategic alliances with firms like Vanguard, or iShares to offer an adjust investment plan using low cost index or ETF investments with pre-built portfolios to accept not less than and not more than 30% of all myRA contributions

Are there other things we could do? Sure, but it would seem that education about the issue would be the most helpful. Oh, and for those who on one hand are arguing about raising the minimum wage, let's be clear....if there's a lack of participation, it'll be because the participant doesn't think that they can afford it.  Raising the minimum wage should solve two problems then. 


Can we get a Greek update over here?

So, whatever happend to Greece?

Can you remember when seemingly for weeks at a time, all the financial buzz was about the sovereign debt default of a country with the economic prowess of something less than the State of Indiana?

FLASH! Wall Street found something(s) more compelling to use to scare you into trading your accounts....the fiscal cliff.  But wait, we solved that one.  Ok, the how about Sequestration. Oh, wait, that didn't pan out either, but not to worry we've got a budget battle looming so that'll be next.

See, it's much easier to scare with you stuff that's close to home than something half a world away. 

Having been through all the market tumults since the late 1970's I can tell you that our most successful Clients are the ones who never got scared, never got out and never stopped putting money in.  You know why many investors feel like their 401k plan is their best investment (ok, let's ignore for a second that for many it's their ONLY investment)? Because payroll deduction ensures that they'll keep funding their future no matter what happens to Greece or Indiana, even if they do monkey around with their investment mix (P.S., that seldom helps).

So, when the domestic scare tactics abate, don't be surprised if you're taken back to the plight in Europe or the developing markets or some other short term problem that "requires your immediate attention."

Warren Buffet, clearly one of the world's most successful investors said something to the effect of the way to build significant value in the stock market is to buy good companies and keep them. Ever wonder why Cramer has a TV show but not Buffet?

Because it's kinda hard to scare someone with a buy and hold strategy.

Wall Street wouldn't like a show like that.

But you would.