It's sometimes said that good friends are those who stretch and test you, help broaden your sense of what's possible. Assuming that’s true I have a friend to thank for missing this week’s blog post.

Instead of my usual routine, as you read this note I’ll be part of a team paddling nearly 400 miles down the Missouri river in a dragon boat. These boats were first developed in ancient China and are primarily used for sprints. The boat we’ll be using has been set up for distance as the team is attempting to break the world record for miles travelled by dragon boat. Why? Because it's there, I guess. 

I’ve never seen a dragon boat in person and my paddling experience is, well, let’s just say it’s under development. This journey is expected to take roughly 50 or so hours pretty much nonstop. It will be an interesting experience, to say the least, and with any luck I’ll soon be thanking my friend for this invitation into the unknown.  

I'll be back with another post next Tuesday. In the meantime, I wish you a good week and hope that you take an opportunity sometime soon to embrace the spirit of adventure.

- Brandon

Have questions? Ask us. We can help.

How much is enough? How do we begin to answer that sort of question? Some days I think I’m close, while other days I’m miles away, adrift in the countercurrent and watching “enough” chase the horizon. Is enough a static goal in and of itself, or a constantly shifting target? These questions can quickly transcend the realm of personal finance, but let’s spend a few minutes considering the questions from the financial planning angle.

I’m wondering about this after reading some articles referring to a report from Schwab suggesting that Americans think it takes about $2.2 million of net worth to feel wealthy and $774,000 to feel comfortable. These numbers are higher than 2021 but lower than pre-pandemic levels and seem to move around a lot.

Here’s a link to the information if you’d like to read more.

https://www.aboutschwab.com/modern-wealth-survey-2022

How do people come up with these numbers? Is it someone’s best guess about how much money it takes to retire, since retiring from full-time work is usually the stated goal in surveys like this? Those numbers are averaged over the country as well, so your San Fran nest egg needs to be bigger than if you were in Denver or Houston, for example. Home equity is included, so regional economic differences impact the numbers in that way too. Additionally, who’s to say that one person’s goals and expectations are even remotely close to someone else’s, regardless of where they live. Depending on one’s situation, $500,000 can go pretty far toward funding retirement while millions in the hands of a spendthrift might never be enough.

Whatever the dollar amount, we need a better way to determine if what we have is enough, or if we’re on the right track to get there. Otherwise we end up saving blindly, hoping that we’re doing enough to get enough, so to speak. Unfortunately, this leaves the average American in their 40’s, for example, woefully behind the curve with about $106,000 in their 401(k) as of earlier this year, according to tracking updated annually by Fidelity. Maybe they’re close to Schwab’s “comfortable” number if they own a house with lots of equity, but I doubt it, at least on average.

And making this more challenging is how elusive the definition of enough is. It is a moving target. People reevaluate their goals and life interrupts best laid plans. Accidents, even serendipitous events, happen that can cost large amounts of money.

That said, here’s a basic framework for figuring out if you’ve arrived at enough:

You have no debt, or at least very manageable debt. (Debt with a fixed interest rate on principal low enough that your payments are easily covered by dependable income.)

You have sufficient cash flow to cover your recurring expenses.

You have other savings to cover unexpected costs without derailing your cash flow. But since by definition these costs are unexpected, how do we plan for them?

Peeling back the layers soon makes a simple exercise into something complicated and nerve-wracking. The first parts about debt and cash flow are relatively simple. But how can you know if you have enough when there are so many other unknown variables to consider?

This is where financial planning software comes in. We plug in the basic stuff like your assets and liabilities and known sources of cash flow. We make realistic assumptions about how much your money can grow and how much inflation we’ll have to deal with. On top of these basic inputs we add a variety of future one-off or periodic expenses. This can be replacing cars every X years, or paying for that new roof you know you’ll need but don’t know exactly when. We’ll add layers of expense for self-funding long-term care or money for helping the kids buy a first home. In short, we attempt to replicate what your actual spending pattern might look like in retirement: smooth with periods of lumpiness.

The result is a complicated set of variables that can be tweaked in a variety of ways but that can also show if you’re on the right track to being able to afford all this or, even better, if you’re already there = enough.

What’s been surprising to me during years of doing this work is just how wide the spectrum of enough seems to be. Different people have different goals, their financial situations are unique, and what’s possible can be more than they imagined. Part of this has to do with how people tend to think of having enough as hitting a particular number, as discussed above. It’s easy to fixate on that and forget that a stream of future cash flows could also be thought of as a lump sum today, even though you can’t access it in that way. Take Social Security as an example. The average benefit is currently about $1,800 per month. Assuming you get your benefits for 20 years and cost of living adjustments average out to, say, 2.5% per year, those future cash flows are worth about $345,000 today. Could you add this present value of future cash flows to your thought process about having enough?

Here’s an online calculator if you want to plug in numbers for your pension, rental income, and so forth, to gauge present value. While not technically part of your net worth, it’s a different and maybe more expansive way to consider the resources you’ll have for retirement.

https://www.calculator.net/present-value-calculator.html

A few notes on the calculator: “Periods” could be months or years and the “Periodic Deposit” could be your monthly or annualized cash flow. Keep the interest rate reasonable but you can play with it to see how higher and lower rates impact present value.

So, having enough is really about your total combined resources and how they match up with your goals over time. The balance of your savings and investment accounts at any particular point is a big part of this but won’t by itself answer the question of whether you have enough.

Have questions? Ask us. We can help.

Since it’s a holiday I’m taking the day off from writing my blog. I’ll be back at it next week with our Quarterly Update. In the meantime, I hope you and your loved ones enjoy celebrating our nation’s 247^th birthday. Here’s to hoping that working to overcome our challenges only makes us stronger.

Happy Independence Day!

Have questions? Ask us. We can help.

I hope your week is going well so far. It’s a busy one on my side of things with big companies reporting earnings and the Fed meeting again tomorrow. Bond investors are pricing in a 99% chance the Fed will raise interest rates yet again, so no midsummer slowdown anytime soon.

Additionally, we keep edging closer to the date when Schwab fully absorbs the custodian I’ve been using for nearly ten years, TD Ameritrade. Some of my clients have been asking good questions about this so I thought I’d broaden my responses to include all of you. Maybe it’s too much inside baseball, but this information could provide some understanding of how my industry is structured and how that applies to you even if we’re not managing your investments.

As you may recall, Schwab announced its deal to buy TD Ameritrade way back in 2019. They got the required regulatory approval and planned to start absorbing TD the following year. Then the pandemic hit. Markets and investors went crazy for a while and that blended with myriad other issues to make Schwab push the pause button on merging the two companies and didn’t press play until earlier this year. The final push to integrate the two companies is set for this coming Labor Day weekend, and then what’s been ruefully referred to as Schwabitrade will move forward and TD Ameritrade will be no more.

Let’s look at the current custodial landscape a bit. TD Ameritrade, Schwab, and other firms like Fidelity and Vanguard are good examples of large custodians that serve a fundamental role in my industry and in your financial future as well. They’re custodians of your cash and investments. They’re responsible for keeping your assets safe from theft and fraudulent activity. They process your transactions while keeping track of everything so they (and you) can report that activity to the IRS. They also maintain the structure that lets firms like mine access your accounts, place trade orders, move money to your checking account, and so forth. In short, you couldn’t invest like you do today without a good custodian operating largely in the background. It would be too expensive and risky, as the victims of privately-held investment fraud and Ponzi schemes would grudgingly attest.

The role of custodian has become highly commoditized following Schwab and its main competitors “going to zero” in 2019, which meant they would no longer charge trade fees on the bulk of transactions they processed. This reshuffled the industry and helped fuel a wave of consolidation that we’re dealing with even today. Now the large custodians look very similar to each other and the differences between them are deep in the weeds. As with the big banks and other industries, personal and expert service has given way to impersonal subpar service and a reliance on automation.

So how do you know if you’re at the “right” custodian and how did I, as a fiduciary and “decider” on behalf of my clients, make the choice to merge into Schwab?

As I just mentioned, the big custodians are very similar in the fundamental services they offer. Where they differ has more to do with how you’ll be interacting with them and if you require special services, such as with advanced trading strategies or perhaps holding illiquid investments. There are smaller and boutique custodians that specialize in these areas, but I argue that they’re not for the typical retail investor.

Assuming you’re not interested in these sorts of special use cases, it’s almost a coin flip as to which of the major custodians is best. Here are some of the high points for comparison as they will all offer:

Structural security. Each of your accounts is owned by you even though the account is held by the custodian. Your accounts aren’t comingled and, even if the custodian failed, your accounts wouldn’t be directly impacted. This is an important distinction that I’m asked about frequently, especially in the context of recent bank failures.

Insurance coverage on deposits. Each custodian provides coverage against bankruptcy and fraud or theft at the firm itself up to $500,000 through the Securities Investor Protection Corp and excess coverage through Lloyds of London. These custodians also offer FDIC coverage on cash deposits with their bank or perhaps with an affiliate bank. And for clarity, none of this coverage protects you from losing money on your investments – it’s just about risk of the custodian running into trouble.

A modern website and app. These are table stakes and the large custodians each do this well. Who has a better website or iPhone app? It’s entirely personal preference since you’ll be able to do the same essential things on whichever platform you choose.

Generally poor service with a reliance on digital and automation. Like with the big banks, the service quality you receive depends on who picks up the phone. But how often do you need to interact with them via phone or even in person anyway? Most of the time you’ll rely on their technology and how easy it is to use. Again, I think who is best here is all about personal preference. No large custodians consistently demonstrate great service – it’s the unfortunate reality of the time. Maybe AI helps with this but otherwise they’re all in the same boat for the foreseeable future.

Transferability of your data. I’ve mentioned how the custodians track and store your account data. A positive offshoot of this is being able to move all of that data electronically to another custodian. This is usually handled through the ACAT system, a regulated electronic transfer process that frees you to move between custodians without having to worry about adverse tax consequences or losing your historical data.

A few things the custodians don’t do:

They store your historical data but don’t provide detailed performance reporting. I have to pay a third party to verify client data from the custodian and then independently calculate performance. The custodians could do this themselves and perhaps charge for it, but none do.

They don’t provide investment advice or management services unless you pay for it separately. “Freemium” services abound but none are actually free.

They don’t operate as a non-profit organization. These companies absolutely have a profit motive and squeeze you in multiple ways, even while not charging you for most transactions. They push your cash into their own bank and proprietary funds, or both. They often sell your trade orders to the highest bidder. They consistently try upselling you to expensive products and services. And yes, they do all this while breathlessly telling you how they’re looking out for your best interests.

So again, your choice between the large custodians is all about personal preference since in most ways they’re nearly identical. Take your pick and you can move to another if necessary. You always need to be wary of cost, direct and indirect, but that’s true pretty much everywhere.

How did I choose to allow the upcoming move from TD to Schwab? In short, the other large custodians aren’t different enough from Schwab to justify the move and, among smaller or boutique custodians that cater to firms like mine, there wasn’t enough of a difference either. And in some cases the smaller firms are too new and would indirectly cost my clients money by limiting choice. That’s unacceptable for all the reasons you can imagine. And one solid prospect was bought by an upstart earlier this year as part of the industry consolidation already mentioned. C’est la vie, right?

Am I entirely happy about the move to Schwab? No, because I used to work there and don’t particularly like the culture, but that doesn’t directly impact how well they do their fundamental job of custodian. Maybe the ideal custodian will materialize out of all this someday, but that’s not likely anytime soon. Until then, Schwab presents the best combination of options in an environment that I feel I can successfully navigate on behalf of my clients.

Have questions? Ask us. We can help.

The second quarter (Q2) of 2023 was great for stocks at home and abroad, with much of the positive performance coming from a small group of stocks within a few sectors. Bonds struggled to maintain positive performance so far this year amid fears of higher interest rates and consternation about the federal government potentially defaulting on its debt. In short, it was another eventful quarter for investors that ended well, all things considered.

Here’s a roundup of how major markets performed during the quarter and year-to-date, respectively:

• US Large Cap Stocks: up 8.7%, up 16.8%
• US Small Cap Stocks: up 5.7%, up 8%
• US Core Bonds: down nearly 1%, up 2.4%
• Developed Foreign Markets: up 3.3%, up 12.5%
• Emerging Markets: up 1%, up 5.2%

Clear winners during the first half of 2023 and Q2 were stocks that did poorly last year. Stocks in sectors like Technology, Communication Services, and Consumer Discretionary were up 40%, 36%, and 32% this year, respectively, as the quarter closed. The largest stocks beat the smallest handily, with the large-cap tech-heavy NASDAQ 100 index up 39% this year versus various small company indexes up in the mid-single digits. This large-cap bias helped the S&P 500, the typical US stock benchmark, rise 6.5% during June to finish the first half of the year up nearly 17%. This was quite the turnaround after these market indexes declined from 18% to nearly 40% last year!

The primary drivers of this uptick for stocks were declining inflation and our resilient economy, rising interest in artificial intelligence, and a relief rally after government officials avoided a debt default early in June.

Inflation peaked last summer at 9% and has been declining steadily since, dropping to 4% in May. The Federal Reserve has a stated goal of 2% inflation and has raised interest rates ten times since March of last year to slow the economy down. Among other things, this has increased short-term borrowing costs in the economy by about 5%. The Fed held off raising rates at its June meeting while suggesting that more rate increases could come later this year. Only time will tell if and how much more the Fed raises rates, but we’re marching closer to their 2% objective and more rate increases are getting harder to justify. This soothed investor concerns a bit during Q2, but lingering pessimism about Fed policy still took some wind out of the bond market’s sails as the quarter closed.

Also at play was the surging popularity of AI. Hyperbolic notions about the technology’s risk to humanity notwithstanding, investors caught the AI bug during Q2. This helped drive stocks like Apple, Microsoft, Alphabet (Google) to each rise 30+%, and chip maker NVIDIA to rise almost 190%! These companies help make up the top 25 list of the benchmark S&P 500 and this group’s total publicly traded share value has grown by nearly $4.5 trillion so far this year. The entire index grew by $5 trillion, according to Bespoke Investment Group, so it’s easy to see how one-sided this rally has been so far.

Also helping stocks was the eleventh-hour resolution of the drama around our nation’s debt ceiling and potential debt default. While nothing new per se, this time around the debt ceiling “crisis” took a toll on investor sentiment, helping various metrics reach some of the lowest points on record. Once the issue was resolved (or merely delayed, depending on your perspective) investors got back on the stocks bandwagon and drove indicators like CNN’s “Fear & Greed Index” to “Extreme Greed” after being at “Extreme Fear” barely a year prior. The popular AAII Bullish Sentiment index also jumped to its highest level in two years. Generally speaking, large upward moves in investor sentiment tend to linger and can help drive stock prices further in the short-term.

All of that sounds pretty good while being in stark contrast to where we felt we were a handful of months ago. But the outlook is mixed. We continue to see surprisingly good consumption, housing, and jobs numbers in the economy, but the impact of higher interest rates should eventually slow the wealth effect. Student loan repayments will restart soon, and analysts disagree on how much that will impact consumption. The commercial real estate picture in some major metros looks dire and the financial impact of that also takes a while to play out. Stocks were up while commodities were down nearly 9% last quarter as global manufacturing demand slowed. All this should eventually slow our economy in a meaningful way, we just don’t know by how much. Analyst opinions differ on near-term recession risk and potential severity while investors seem keen to shrug off recession risk in the short-term. Whose right is anyone’s guess.

One takeaway from Q2 juxtaposed with the market’s poor performance last year is how hard it is to forecast the future in a consistently accurate way. Stock market analysts get paid to do this and the good ones are right just a bit more than they’re wrong when averaged over, say, a ten-year period. That math works if you can hold on when the news gets scary and markets get volatile. But many people can’t. The rest of us try to focus on controlling what we can control and let time work for us. We don’t chase market trends – we diversify and rebalance as needed. And we don’t try to guess the “right” time to buy or sell, even though that’s what the media pushes every day. This approach isn’t always popular or even one that feels good all the time, but it’s one that works if you let it.

Have questions? Ask us. We can help. 

This week let’s get into our final installment of my conference notes. Hopefully some of these have been worthwhile. The content has been varied but our first few notes today are more like what you’d expect from a meeting of financial planners. The last note is a little different but, as with others in recent weeks, helpful with the human side of personal finance.

Social Security and Medicare –

If you’re already drawing Social Security you’re no doubt aware of the 8.7% cost-of-living adjustment this year. That’s old news at this point after a runup in inflation last year. But it’s important to note that this bump helps those waiting to start their benefits as well. And since SSI benefits don’t deflate even if the economy does, this raises the floor that all future inflation adjustments will be based on.

As a reminder, Social Security COLAs are based on changes in the government’s primary measure of inflation from October to October. Inflation peaked last summer at 9% and has been trending lower ever since, down to 4% in May. Assuming this trend continues we could be down to 2-3% by October and a net decline from a year prior, implying no benefit increase for next year. 1-2% per year has been more the norm in the past decade or so, but we’ll find out when the SSA makes its announcement in October.

Regarding the program’s health, current projections are for the Social Security “trust fund” to cover about 80% of benefits by 2035 while still supporting 74% of benefits by 2097. That baseline assumes, as I understand it, a benefit reduction starting in 2035. That’s not etched in stone, of course, just part of a long-range projection with a trajectory that could, at least in theory, be altered at any time by Congress.

This probably sounds obvious, but the younger you are the riskier it is to assume current levels of Social Security benefits during your retirement. Who knows what our elected officials end up doing regarding this issue, so it’s prudent to plan and save appropriately to nurture and eventually hatch your own next egg. Ideally, whatever you receive from Social Security down the road is a bonus, not something you’re relying on to make ends meet.

Here’s a link to the SSA’s website for details on these projections and the variety of proposals lingering in Congress to shore up the system.

https://www.ssa.gov/oact/solvency/index.html

The Medicare Part B monthly base premium is $164.90 per person and gets more expensive as your adjusted gross income rises to $194,000 for joint returns and $97,000 for single filers. Part B and Part D premiums max out at around $637 per person per month for households with over $750,000 of AGI. Base Part B premiums are expected to be about $175 per month for 2024, but the final number won’t be announced until November.

IRA Beneficiaries –

There have been a lot of changes in recent years to how inherited IRAs are treated. Most of the complexity relates to non-spouses who inherit an IRA. For example, before 2019 a popular option for beneficiaries was to “stretch” the account balance over one’s life expectancy. Doing so reduced the tax burden on distributions and, at least hypothetically, allowed the account to grow and pass to the next generation. Then the SECURE Act did away with this by capping the stretch period to ten years from the year following the original account owner’s death. And then at the end of last year the SECURE Act 2.0 added more complexity.

One of the lingering issues following these changes was whether someone inheriting an IRA had flexibility as to which year they took distributions during the ten years mentioned above, or if they had to start immediately. The IRS issued proposed regulations to clarify the “at least as rapidly” rule, so we now understand that if the original account owner was taking required minimum distributions, then so must the beneficiary during the ten-year period. This is a bit of a turnaround but comes on the heels of a Covid-era waiver period for missed beneficiary RMDs. So, if you missed taking an RMD due to this issue, now is a good time to get started.

Interpersonal Neurobiology –

Two financial “life” planners presented their very interesting work on integrating the research of Dr. Dan Seigel into the realm of financial planning. If you haven’t heard of Dr. Seigel, he’s a psychotherapist, author, and either the creator or a chief proponent of the field of Interpersonal Neurobiology.

Frankly, the details of IPNB are beyond me but the gist is a series of tools to increase self-awareness and empathy through regulating our emotions by understanding the signals provided by our body and mind. That’s sort of a mouthful and might sound a little woo-woo, but cultivating more awareness and understanding can be helpful in the fractured and fractious times we’re living through.

How does this inform my work as a financial planner? Essentially, the presenters suggested that we need to be able to master our own preconceived notions and fears about money, risk, and uncertainty, for example, before we can do a better job helping clients in these areas. Empathy is important, as is patience and the ability to link the interpersonal nature of our work to the technical stuff. Easier said than done, but it’s good to see these sorts of conversations happening in the context of a financial planning conference.

Here's a link to Dr Seigel’s “Wheel of Awareness” if you’d like to check that out. There are some guided explanations of these concepts that are similar to meditation.  

https://drdansiegel.com/wheel-of-awareness/

Have questions? Ask us. We can help.