Living with uncertainty

As a financial planner, I love helping my clients figure out what they want their lives to look like, then coming up with the options to get them there. I’m all about planning! I like to think I understand the limits of planning and that I accept that life is unpredictable and can’t ultimately be controlled. Some weeks that is easier than others.

Life at 97

Thank goodness for minor league baseball (10 days away) and Big Band music! Those, paired with love of family and good food, keep my 97 year old dad, Les Agnello, going. He’s at a stage of life where he lives in the moment with little recall of the recent past and difficulty imagining the future (other than the aforementioned start of baseball season). Frankly, I’m envious!

Dad and me at the Winston-Salem Dash final home game of the 2018 season.

I can’t help but see that Dad is more frail with each passing month. He continues to be able to climb the 16 steps to the main floor of our house to have dinner with us each evening, but with increasing difficulty. As his strength wanes, so does my confidence. I no longer bring him to the house when Ron is away. I’m not sure that, by myself, I can keep him safe enough on those stairs. What will our lives look like when Dad can no longer climb the stairs and be part of our everyday home life?

Safety is an illusion

In the past six weeks, Dad has twice had falls, each time with the first fall followed by a second a day later. He uses a walker, has an attentive physician, his meds have been checked, he gets physical therapy, lives in an assisted living, but I have nightmares about not being able to keep him safe. Because, as much as I love him, I can’t. The only safety from physical harm would come with confinement…and that would wring every last bit of joy from Dad’s life. So we continue, taking one day at a time, moving into an unknown and unknowable future, doing the best we can today.

Dad at the Carolina Theater with Glenn Miller Orchestra band director Nick Hilscher and singer Hannah Truckenbrod in January 2019.

I still believe it’s better to have a plan, though life’s not very subtle reminders that the future is uncertain are coming through loud and clear! If you want help planning care for your loved one, give me a call at (336) 701-2612.

Why I love Roth IRAs

Many years ago a financial planner pointed out to me that when I retired, all of my sources of income would be taxable (pension, traditional IRAs, Social Security). He suggested I start a Roth IRA so that I would have an option to draw down funds without any tax consequence. This is one of the best pieces of advice I’ve ever received!

What’s a Roth IRA?

Most retirement accounts (traditional IRAs, employer sponsored retirement accounts) are tax deferred. Your taxable income is reduced by the amount you contribute to the account. This lowers your tax bill now. However, when you draw from the account in retirement, you have to pay the piper—your draws are taxed as ordinary income. If you contribute $5,000 to a traditional IRA, you save yourself from paying taxes on $5,000 of income this year. If it doubles to $10,000, that’s what you’ll be taxed on later, when you take the money out.

With a Roth IRA, there’s no tax deferral. You pay taxes on your income now, but you don’t owe anything when you take money out of the Roth in retirement. If your current tax is 20%, you’ll pay $1,000 in taxes on your $5,000 and end up with $4,000 to contribute to your Roth. But then when it has doubled to $8,000, you won’t pay taxes on drawing that money down in retirement--sweet!

Both is a better strategy

There are lots of good reasons to use both tax deferred accounts and a Roth IRA as part of your investment strategy:

Tax deferred:    

• If you can participate in an employer sponsored retirement plan to which your employer will also contribute—do it and lucky you! For example, if you have the option of a 401k with a match up to 3%, definitely contribute the 3%. While you’ll have to wait for the employer’s matching 3% to vest, you still have twice as many dollars in your retirement account today to grow and compound.

• It makes good sense not to pay today what we can defer until tomorrow or even later. As Wimpy says, “I’ll gladly pay you Tuesday for a hamburger today" This is the logic behind tax deferred accounts—you defer paying taxes until some date far in the future. Because a dollar today is worth more than a future dollar, the later we pay the better. However, realize that when you do pay taxes down the road, it won’t be on the amount you contributed (the $5,000 on the example above)…it’ll be on the entire appreciated value that you draw—or the $10,000 above. So, if you were in the 20% tax bracket, you saved paying $1,000 when you made the contribution, but now you’re going to pay $2,000 when the money comes out.

• If money is so tight that they only way you can contribute to an IRA is with the tax break available with traditional IRAs, go for it—better to save for retirement than not to save.

• Part of the case for tax deferred retirement accounts is that we’ll be in a lower tax bracket when we retire than while we’re working. For example, you were in the 20% tax bracket when you earned the $5,000, so you deferred paying $1,000 in taxes. Now in retirement you’re in the 15% tax bracket, so you’ll only pay $750 on the original $5,000 (or $1,500 on the entire appreciated balance of $10,000).

Roth IRAs:          

• There’s no way of predicting if and how our tax code will change. It doesn’t make sense to bank on getting better tax treatment in retirement than you do today.

• What if the tax code doesn’t change? You may not actually be in a lower tax bracket when you retire. Most of us would like to have as much income in retirement as we do while working. As one pre-retiree points out, in retirement “every day is gonna be Saturday, but I’m supposed to spend less? Unlikely!” Of course, you won’t have the expense of contributing to retirement savings accounts or commuting or buying work clothes…but it doesn’t take too many trips to see the grandkids or volunteer to help hurricane victims or see the world to keep your expenses in retirement at a pre-retirement level.

• Psychologically, it’s easier to pay taxes during your earning/accumulation years than during your retirement/spending down years. We have more financial flexibility while we’re still in the work force seeing dollars roll in, particularly during our peak earning years.

• Unlike traditional IRAs and employer sponsored retirement plans, there are no RMDs on Roth IRAs. You have the ability to take money or not in retirement. The timing is up to you.

• A final important difference between Roth and traditional IRAs is that you can take back the funds you’ve contributed to a Roth (but NOT any appreciation or earnings on those funds) without a penalty or tax consequence. There are far greater restrictions on taking money out of a traditional IRA before reaching age 59-1/2.  With a Roth, the dollars you contribute are after tax, so you can also take them back out without being taxed.  Hold on, now—you do need to save for retirement! I’m not suggesting that you pull funds from your Roth IRA to remodel the kitchen or ski at Breckenridge. However, a Roth can be a nice place to stash your emergency funds—you can easily take your contributions back out and, in the meantime, you don’t pay taxes on the bit of interest they earn.

• Ideally, though, the Roth is a good home for your highest return assets. It feels great to invest after tax dollars in a Roth IRA and see them double and then double again over time, knowing that the taxes are already paid and what’s in there is free and clear!

Photo by Sebastian Voortman from Pexels

The Fine Print

 My love story about Roth IRAs (Roth 401ks have similar benefits but are beyond the scope of this post) is just intended to get you thinking. I don’t give investment advice except to clients whose situations I know enough about to do a good job. However, the IRS does have rules on who can contribute to Roth IRAs:

• Married couples filing jointly with modified adjusted gross income of less than $189,000, and

• Singles with modified gross income of less than $120,000

You can still make 2018 contributions until your 2018 income tax return is due—April 15, 2019 for most of us!

You can contribute the lesser of:

• $5,500 ($6,500 if you are 50 or over) or

• your taxable compensation

And the contribution limits will go up in 2019 to $6,000 or $7,000 for people 50 or over.

For more information, refer to IRS Publication 590A and IRS Publication 590B (Doesn’t everyone love reading IRS publications?)

I’m now stepping down from my soapbox. If you want to work with a financial planner to figure out whether a Roth IRA is right for you, give me a call at (336) 701-2612.

Photo by Daria Rem from Pexels

Confession of a reluctant saver

Nature or nurture?

My parents raised four kids on a school teacher’s salary. While I was growing up, saving was not a topic of dinnertime conversation. In my case, it could have been nature, nurture, or any combination of the two—I was not a natural saver. As a child, I spent my allowance…I didn’t even have a piggy bank. As a teenager, I opened first a checking account, then a credit card account, never a savings account. As a young adult, I lived right on the financial edge, lying awake at night wondering if I’d be able to juggle my paycheck to cover all of my bills. The only thing that kept me from trading in my MGB for a 1969 Jaguar XKE with a V12 was that I could see that even if I gave up eating I wouldn’t have enough money left for an oil change. It didn’t hurt that the XKE was an automatic (this was way before the Internet, so the car in front of me was the car that was available). I led a charmed life and got away with all of this, which set me up to keep doing the same.

Cash flow turns positive

In my 30’s, there was grad school to pay off and a sailboat to buy and outfit, neither conducive to saving, despite my attractive salary as an institutional investor. Anyway, my employer was putting money into my pension fund. Didn’t that cover “saving for retirement”? When I transitioned to being self-employed, running a sailing vacation business in the Virgin Islands with my partner Ron, we did put money into IRAs. This saving was mainly motivated by my desire not to pay any more taxes than necessary. Believe it or not, in the days before cellphones and widespread Internet access, when you lived on a sailboat and took people on sailing vacations for a living, the opportunities to spend money were few and far between. We spent money on our guests and for the business, but rarely on ourselves. For the first time in my life, income regularly exceeded expenses.

My moment of truth

Even when you have an MBA and finance is your thing, you make the same mistakes as everyone else…they’re just more embarrassing and harder to explain away. I couldn’t stand seeing a pile of cash earning virtually nothing when the stock market was running wild. So I invested it…in tech stocks…at the height of the tech bubble. Within a year, we had lost more than 50%. Coincidentally, we were also ready for a life makeover. We gave up the sailing vacation business and sailed back to the US to plan our next chapter. We needed our “savings” to cover our expenses. Not only did we buy at the top of the market, we had to sell at the bottom of the market—oops! That hurt financially, but it also hurt my pride to make several compound foolish mistakes by ignoring time tested truths:

• Keep an emergency fund that is liquid (accessible and free from market risk)

• Match your investment time horizon to when you’ll need those funds

• Diversify—use low cost mutual funds and ETFs (exchange traded funds) to invest in a variety of companies and industries.

The Demise of the Reluctant Saver

Did I mention that I’ve led a charmed life? We were fortunate to get our new, North Carolina-based, lives up and running before we ran through all that remained of our savings. While our tech stock debacle was still recent enough to sting, we started saving for future emergencies. It wasn’t a lot, but we followed these two rules:

1) Pay yourself first! Paycheck comes in, savings goes out, before anything else.

2) Make it automatic. By having an automatic draw set up immediately after payday, we always pay ourselves first.

For one who became a saver later in life, it was surprising how good it felt to see the emergency fund grow. Nice to know that when the car breaks down you don’t have to charge the repair to a credit card! And, as impossible as it may seem at the outset, you will see the day when you have the recommended three to six months of living expenses saved. You’ll be thrilled by the sense of freedom you’ll feel, and the peace of mind!

Need help planning your own transformation? Give me a call at (336) 701-2612.

Emergency savings decoded

Wondering if you need an emergency savings fund? The short answer for most of us is yes. Have you seen the statistic—that the majority of Americans wouldn’t be able to manage an unexpected $400 car repair? The odds are that you do need an emergency fund to be able to navigate life’s curve balls and still sleep at night.

How much do I need?

 Your emergency stash should cover those unexpected car or home repairs, medical bills and other expenses you couldn’t predict. But one of the most important functions of this financial buffer is to cover a loss of income. To be effective, you should target saving:

·        3 months of living expenses if you have a two-income household, or

·        6 months of living expenses if you have a one-income household

Few of us plan to lose our jobs, whether for economic, performance, or health reasons…or just due to bad luck. Nor do we expect that it would take long to replace our employment income, if we needed to. Having worked with long-term unemployed professionals during the last recession in North Carolina, I can tell you that these folks didn’t anticipate their misfortunes either! Several months of living expenses in savings reduces stress while you get life sorted out.

Saving several months of living expenses may seem daunting, but you can build up to it over time. The best way to start is by making it automatic. Have a set amount transferred to savings when your pay arrives. Most of us don’t even realize the money is gone. Even if you’re paying off credit cards or student loans, set aside a fixed amount each pay period for your emergency savings and make it automatic. Those of us born without the saving gene have an amazing ability to spend all that we take in. So don’t wait until you’ve paid for everything else to save because there won’t be anything left.

Where should I keep my emergency savings?

 Your emergency funds need to be:

·        Accessible: easy enough to get to in an emergency but not easy to dip in to for everyday expenses, and

·        Free from market risk: money saved for emergencies needs to hold its value and not be subject to the ups and downs of the market.

To meet these requirements, your emergency fund should be in a separate account designed for savings:

·        Regular savings, offered by banks and credit unions

·        High-yield savings, offered by online banks

·        Money-markets, offered by banks, mutual fund and investment companies

These account types will earn a modest return while keeping your money available when you need it. It is critical to keep expenses low so they don’t wipe out your already small return. Keep an eye on the expense ratios when comparing money-market funds!

A Roth IRA, if you’re eligible to contribute to one, can be a great place to keep your emergency fund. Unlike traditional IRAs, there are no penalties or taxes due if you withdraw your contributions from a Roth IRA, just make sure not to take out any of the earnings. And you won’t have to pay income taxes on what you do earn on your Roth. Remember, though, if you are using a Roth to save for emergencies, your investments should be in savings or money market accounts that meet the criteria above.

Can Emergency Savings be invested to earn more?

 In a word—no. Stock or even bond investments can be expected to earn more over time than the savings accounts recommended for emergency funds. But the key is “over time”. By investing your emergency fund, you are exposed to market volatility. Your account balance is constantly changing and not always in an upward trend. There’s no peace of mind when you lose your job at the same time the market is down and your emergency fund has taken a 40% hit! We give up the possible upside on this particular pot of money in return for a stable balance that’ll be there when we need it.

Emergency savings boost confidence and provide peace of mind. Get started today!

More questions about your money? Call us at (336) 701-2612.

How to get started saving

This is America Saves Week! Check out this very helpful e-book, Save With A Plan, for steps to get on track with your finances. Need more help? Get in touch here.

Happy Saving!

Safety is riskier than you realize

The title is a direct quote from Barbara Sher’s I Could Do Anything If I Only Knew What It Was, an excellent read if you’re trying to figure out what you want from life.  I highlighted it as a reminder to myself. Unless I’m willing to step outside of my comfort zone, I have no hope of living the life I seek.

I spend a lot of time with older people. They are keenly aware that all we have in life is time. Looking back over a long life, people regret misusing their time, not pursuing their dreams. No one says, “I tried to be a (fill in your dream) and I wish I hadn’t”. Nope, because the simple act of taking a step to make your wish real changes your life. Merely stepping on to the path gives your life purpose and makes it meaningful.

Two important take aways from I Could Do Anything…

1)      You don’t have to bet everything on a big change to follow your dream. Take the easy first steps without giving up your day job and selling the house. If you would love a different career, learn about the entry requirements, take a class, join a group, get to know people who are doing what you want to do.

2)      The outcome doesn’t really matter. What?!? Overcoming fear and discomfort to take steps to realize your dream will make your life more exciting and give it meaning, regardless of whether that particular goal is ever achieved. There’s nothing like living a meaningful life to open your eyes to opportunities you would never have imagined otherwise. Dreams morph and change over time…and that’s not a bad thing.

Let those two points reassure you—the decision isn’t no risk or all risk. Loosening our grip on safety is the path to a purposeful life.

The Ultimate Valentine’s gift

Valentine’s Day is just around the corner, so you may be thinking of chocolate, flowers, romantic dinners and sappy cards. I love all of those! But this year let’s make Valentine’s Day a time to demonstrate our love in a more practical way—by sharing information.

It isn’t uncommon for an unexpected death to result in stress for the survivors that goes way beyond the grief. If you lost your partner, would you know the location of all of your accounts, the safety deposit box key, or the main water shutoff for your home? Dividing up tasks makes sense for efficiency; it also results in pockets of specialized knowledge. Unless we deliberately and systematically share information, our loved ones are at risk should we be out-of-commission or absent.

Organizing our financial and household information feels like an overwhelming task. That’s why even most financial planners, masters of organizing information that we are, haven’t done it! Financial planner Steve Juetten and his wife Nancy created the “Life Goes on Roadmap” to make this process manageable and fun…when they realized that they hadn’t put together their own information. Feel better now? I do!

Whether you go with the roadmap, create your own spreadsheet or Word document (stored securely, please!) or take out paper and pen (again, stored securely), do your loved ones a big favor and get started now. Step by step, even if it’s only 15 minutes a week, you can knock this out. Each step you take provides your partner or family with information they didn’t have before—that is valuable progress. This Valentine’s Day, consider the ultimate practical gift of information to go along with the chocolates!

Becoming a Warrior

Last weekend we took my dad to see a local production of “Happy Days” the musical. Yep—that “Happy Days”, based on the 70’s TV show about life in the late 50’s. Never thought I would be quoting Fonzie, but one of his lines early in the play hit the mark: I’m not a worrier, I’m a warrior (not a direct quote cause my English teacher mother wouldn’t approve of the use of ain’t).

Worrier → Warrior

Words to live by!

We know that worrying serves no practical purpose but does make us anxious and miserable. So let’s reframe our worries and be warriors. Let’s courageously attack the roots of worry.

Many of us feel financially insecure, whether we have $500 or $5,000,000. We’ll never know for sure if it’s enough, but we can educate ourselves on the most likely outcomes. Spoiler alert: even when we can see on an intellectual level that we’re in ok, good, or great shape, it doesn’t automatically stop us from worrying. However, by reframing our worry and choosing to be warriors, we’ll fearlessly seek out the information that over time will calm our anxieties.

In the process of educating ourselves we may not like the probably outcomes we find. Switching in to warrior mode leads us to make changes now so the future options will be different. Let’s not resign ourselves to a mountain of debt or a soul-sucking job. The warrior in us can take steps to reshape our lives. Reframe your worry, choose to be a warrior, and lead the life you want!

Happiness and Money—what’s the link?

We’ve all heard the proverb “Money can’t buy happiness”…but haven’t  you also caught yourself thinking that getting a raise or bonus or winning the lottery would make life so much better? Personally and professionally, I’m fascinated by the relationship between money and happiness. I just finished reading Happy Money: The Science of Smarter Spending by Elizabeth Dunn and Michael Norton. Normally books head back to the library as soon as I read the last page, but this one has given me so much to ponder:

·        Income gains beyond $75,000/year don’t increase happiness, but

·        How we spend our money can make us happier

It turns out that most of us don’t really know what makes us happy, so happier spending is a two part process. First, pay attention to how you feel when you buy that latte or take a friend to lunch. Then, using what you’ve learned, take a moment to pause and be deliberate before spending.

Dunn and Norton outline five principles that anyone can apply to wring more happiness from money. Not surprisingly, choosing to spend money on experiences, other people, and to free up time give us more pleasure than buying more stuff. But there’s much more packed in this small volume—I highly recommend it!

For a quick overview of Dunn and Norton’s work, check out this video:

Elizabeth Dunn: Happiness and Money

Happy Spending!

Check out Garrett Planning Network members quoted on Lifehacker

Several financial planners with the Garrett Planning Network, including me, were quoted recently in Alicia Adamczyk’s article on converting Roth IRAs:

Lifehacker Should You Convert to a Roth

Garrett Planning Network, of which I’m a proud member, is a nationwide group of hundreds of independent, Fee-Only financial planners providing advice to people from all walks of life, without minimum account requirements, sales commissions, or long-term commitments. We members proudly embrace our fiduciary duty, always placing our clients' best interests first.