Adversity or Opportunity?


In the past two weeks, market volatility has spiked and major indices have traded down 7% or more.  I follow the market closely and monitor the situation for news which might impact our portfolios.  Generally, I prefer to use this space to discuss beneficial financial planning topics, but I know that everyone is wondering about the market, so here is my take on the situation.

The recent pull-back has been relatively minor and probably long-overdue, given that we’ve gone five years since a significant correction.  The good news is that stock fundamentals are strong and the US economic recovery remains in place, although actual growth is somewhat tepid. While equity prices have risen, valuations are within a normal range and not at the elevated levels we saw in previous bubbles.  With interest rates remaining extremely low, “risk” assets like stocks still offer greater potential return than cash or fixed income.

Having shared my opinion, I have to say that it really doesn’t matter what I think will happen.  Anyone who thinks that data is “proof” of what the market is going to do is fooling themselves.  No one can predict the market.  Fortunately, long-term investment success does not require a crystal ball.  What it does require is a well-researched and executed plan, a diversified allocation, and most importantly, the fortitude and discipline to stick to your plan.

I was asked this week if I got my clients out of the market before the recent turmoil.  No, I didn’t and I didn’t sell any of my own stock positions, either.  I was doing the opposite this week: buying in a number of portfolios.  And I was quite happy to have the opportunity to pick up ETF shares 5-10% lower than they cost just three or four weeks ago.  I’m focused on the long-term opportunity and not the present adversity.  Although I don’t know where the market will be one month from now, I strongly believe that the market will be significantly higher in 10 years from now and that is what really matters.

So rather than worry about the troubles of the day and the things you cannot control, I believe investors are best served by focusing on the things you can control, such as:

  • establishing a target asset allocation to match your risk tolerance, required return, and time horizon;
  • diversifying to eliminate company-specific risks;
  • keeping investment expenses low and reducing tax drag to a minimum; and
  • how much you save and invest.

Of these four, the last one is crucial to your individual success.  The news tends to make us focus on trying to improve short-term investment performance, instead of how much you should be saving.  If your goal is accumulation, it’s more important to be thinking about how to increase your saving than how to increase your return.  We have to learn to ignore the noise of the daily media so we can stay focused on how to achieve our long-term objectives.

Optimism is key.  Not a blind naivete, but the confidence to know that you are on the right path, and the recognition that sometimes the path is uphill.  I remember a bit of wisdom I heard years ago “You make your money in bear markets, you just don’t know it until later.”  If you’ve got five or more years to retirement, you should welcome each pullback in the market as a tremendous opportunity.

With this understanding, there are some small ways to take advantage of the recent market turmoil and use the recent drop in prices to your advantage:

  • Put excess cash to work; if you haven’t made your IRA contribution, now is a good time.
  • Rebalance your portfolio.
  • Swap losing positions to harvest tax losses; replace your high expense funds with tax-efficient, low cost ETFs.  Use the downturn as an opportunity to clean up your portfolio.
  • Add Emerging Market equities, if you don’t have any.  EM is down more than domestic equities and has lagged for several years.

Market timing may be an alluring mirage, but ultimately is a counterproductive distraction for investors.  If you’re able to take advantage of the pullback, that’s fine, but if you’re already invested, don’t think that you have to “do something”.  Most of the time, doing nothing is ultimately the best option!

Community Property and Marriage


In Community Property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), assets acquired during marriage are considered to be jointly owned regardless of how the account or asset is titled.  Separate property includes assets which pre-date the marriage as well as inheritances and gifts received during the marriage.  In the case of a divorce, community property is split equitably while separate property will remain with its original owner.

Assets are considered to be community property unless you can provide clear and convincing evidence that they are separate.  You may have heard that you only need to keep your financial records for six years, as that is the length of time that the IRS can go back for an audit (unless you submitted a false or fraudulent return, in which case there is no statute of limitations).  However, for the purpose of proving separate property, you have to keep documentation permanently.

It is important to also understand that income from separate property is considered community income in Texas.  If funds are commingled, contributions added, or dividends reinvested, you may inadvertently cause separate property to become characterized as community property.  

When a couple is getting married, it is important for both spouses to understand their individual separate property rights and to take steps to ensure that their assets maintain their separate property character.  We suggest having all income, such as interest and dividends, swept from the separate account automatically when received and deposited into a joint account.  Capital gains from mutual funds can be reinvested, and of course, you can sell one position and use the proceeds to purchase another another one in the account.

In Texas, we have an “inception of title” rule which means that any asset acquired before marriage is separate, even if debt for the asset is discharged with community income.  For example, a home purchased before one day before the wedding will forever be a separate asset, even if the mortgage is paid during the marriage.  The same applies for a business entity – if created before the marriage, it will be separate property, and if created during the marriage, it’s a community asset, regardless of debt or title of ownership.  Debt can be a part of community property, so any debt acquired by one spouse during marriage may be considered to be a joint debt.

Separate Property can sometimes be an issue for first marriages, however, most first marriages are with young couples who have little or no assets.  It’s a more common concern for couples getting married (or re-married) in their 40’s, 50’s, or later who may have substantial separate property and who often have children from a previous relationship.  These issues could be addressed by a pre-nuptial agreement, and if you do decide to have a pre or post-nuptial agreement, both spouses should have separate counsel.  The nine states which do have community property laws, all have slightly different rules, so be sure to use an attorney and advisor who are familiar with your state’s laws.

If you’re getting married or remarried, your financial advisor should be having these conversations with you well in advance of the marriage and be taking steps to ensure your separate property rights will be maintained.

Bringing Financial Planning to All


In my first position as a financial advisor, I worked at a “Broker Dealer”, where we charged commissions on the sale of products.  As an educator in my previous career, the sales aspect of the job was challenging and at odds with my belief that good financial planning encompasses much more than just which funds or securities to buy.  Any investor in a transactional account is bound wonder from time to time if a trade is being suggested to improve their portfolio, or because the broker needs to make a sale.

In order to focus on a more holistic approach, in 2012, I joined a Registered Investment Advisor (RIA), a firm which did not charge commissions on the sale of investments, but charged a management fee based on the assets under management.  I think this is a much better solution for both investors and advisors.  It’s completely transparent and the client pays for on-going service, rather than upfront commissions.  This eliminates feeling like you have to stay on guard to make sure a broker is not placing unnecessary trades to make more revenue for their firm. A fee-based account places investors and advisors on the same side: if the portfolio goes up in value, the advisor will make more, and if the portfolio declines, so will the advisor’s compensation.

While the RIA approach has many advantages over the commission platform, as a business model, it is difficult to spend a great deal of time on a client with limited assets as the revenue is low and it might take years to justify the initial time and costs.  As a result, most RIA firms have minimum account sizes, often $1 million or more; at my previous firm, we did not take any clients under this level.  It was a good business model for the firm, and it gave me the chance to focus extensively on investment research, developing portfolio models, and implementing trades across $375 million in client assets.

However, I found it frustrating to have to turn away friends and family who wanted to use my services.  I believe in the American dream of financial independence.  I want to help others achieve those dreams and not limit my efforts to solely helping those who have already accomplished their financial goals.

That’s why we created a two-part structure at Good Life Wealth Management – to have the ability to help clients of all sizes and ages.  Here’s how it works:

Families with over $250,000 in investable assets will participate in our comprehensive Good Life Wealth Management Program.  This includes creating a financial plan and customized management of your assets in a tax-efficient investment portfolio.  The fee is 1% annually, (charged quarterly).  This approach provides established investors with an ongoing financial plan that addresses your unique needs and changes as your situation requires.

For families below $250,000, we offer our innovative Wealth Builder Program.  We create the financial plan you need today, with a focus on improving both sides of your net worth statement: your assets and your liabilities.  We invest your accounts using no-transaction fee funds or ETFs, and will advise how to allocate your other accounts such as 401(k)s.  Rather than charging as a percentage of your accounts, the Wealth Builder Program costs just $99 a month, which can be paid by credit card or debited directly from your accounts.

Using a monthly retainer is a relatively new approach in the RIA business, but I think is the crucial next step we need to bring the benefits of financial planning to the 90% of Americans currently not being served by the “$1 million and up” firms.

For more information on this approach, check out this article in October’s Think Advisor magazine, which quotes myself and other advisors who are leading and advocating for this change in the industry.  Here’s the link:

The Geography of Retirement

Retirees move for various reasons: to find a better climate, to spend more time pursuing activities they love, or to be closer to family.  Sometimes, the decision is based on a desire to downsize and reduce their cost of living. There are many financial considerations regarding your choice of retirement location, but there are three key factors that I would use as a starting point when weighing your options.

1) Look at total costs and not just income taxes if moving out of state.  Every year, I see articles about retiring to “tax-free” states like Florida or Texas.  There are seven states which have no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.  Additionally, New Hampshire and Tennessee do not tax personal wages, but do tax dividends and interest.  While moving to a tax-free state sounds like a great idea, there may be other costs of living that could offset those state tax-savings.  Be sure to calculate the cost of property taxes, property insurance, and sales taxes.  For a retiree who has $50,000 in annual income, the savings in income tax may be relatively small and your total living expenses could actually increase if you move to another state.  It’s better to look at your whole cost of living, especially if your income in retirement will be modest.

When you look at property taxes, make sure to research whether your state offers any property tax programs for seniors.  Texas, for example, will freeze school taxes for residents over 65, placing a ceiling on the tax on your primary residence.  Some states offer seniors an income-based reduction on property taxes; it’s worth going through that paperwork to confirm you are eligible, rather than assuming you’re eligible and finding out later that you will not receive the tax rebate.

2) Consider travel costs.  It’s one thing to enjoy a vacation for a few weeks, but some retirees find themselves feeling disconnected and missing out on family activities if they move away permanently.  They find themselves coming back “home” more frequently and for longer periods.  Before long, they’re spending $5,000 a year or more on travel costs between two locations.  That’s fine if that’s the lifestyle you want, but it is an expense that you must consider if you’re thinking that moving is going to be a cost-saving plan.  How will you feel about not spending holidays with your family, or missing your grandchildren’s birthdays and soccer games?  Is the cost and hassle of travel going to make it worth while to move?

3) Know your health care coverage.  If you are part of a health care network, such as a Medicare Advantage Plan (part C), what is covered out of state?  This is a common issue for snowbirds who divide their time between a northern home and their southern winter get-away.  I’ve spoken with quite a few whose “plan” is to have all of their appointments and check-ups take place when they’re home.  But what happens if you get sick while you’re away?  Out-of-network care may be very expensive or not covered by your insurance.  It’s a risk both to your health and your finances.

This concern also applies for US citizens who are looking to move abroad to a low-cost location.  It’s relatively easy to receive your Social Security and Pension out of the country, but for Medicare, you will have very limited or no coverage.  Be sure to read this Medicare brochure before deciding to move overseas: Medicare Coverage Outside the United States.

If you decide to live abroad, you may think you don’t need to enroll in Medicare Part B.  But if you later move back to the US, there will be a penalty (permanently higher premiums) to enroll in Part B if you didn’t sign up at age 65.  And you must have Part B in order to participate in Medicare Advantage or to enroll in Prescription Drug coverage (part D).  So be very careful you understand the potential future costs if you are planning on turning down Part B at age 65.

5 Techniques for Goal Achievement


Goal Setting is a key step to the financial planning process, and helping clients achieve goals is the value I provide.  Everyone would like to be wealthy, but that is not a goal.  To me, it only becomes a goal when we can state a clear, tangible objective.  So, if you’d like to retire, we’d calculate how to make that happen and develop a specific goal like “accumulate $2.1 million dollars by 2026.”  That long-term goal gives us a timeline and dictates what we need to do each year and month to make your goal a reality.  We can observe if you are on track and make adjustments as needed in the years ahead.  The key step though is translating an ambiguous desire into a goal which is measurable.

Below are 5 Techniques For Goal Achievement, starting with high-level and moving to detail-oriented.  The key is finding not the tool which you like the most, but the tool which helps you address the area where you are most likely to fall down or become distracted or disillusioned with your goal.  If you need motivation and confidence, focus on the the high-level tools; if you need help with implementing goals, focus on the daily tools.  And while I’m writing about financial goals specifically, these concepts could be applied to any goal you want to achieve.

1) Visualize your goal with a daily reminder and affirmation.

For the retirement goal above, write a check to yourself for $2.1 million, with a date of January 1, 2026.  Put the check someplace you will see it everyday.  Over time, our goals will naturally start to shape our behavior.  Daily repetition helps internalize the goal and we come to see it as inevitable, rejecting any fear or self-doubt.

2) Chart your goal road map.

Why do you need a road map?  Imagine you wanted to drive from Dallas to New York.  You could just start driving and figure you’ll get there eventually through trial and error.  But most people prefer to know where they are going and to choose the most direct route.  This makes perfect sense for a long drive, but most people haven’t taken the same step of putting together a plan of how to accomplish other long-term goals relating to their finances, career, or health. Sometimes our destination is not on the road we are on today and we have to know when it’s time to change direction.  This is the difference between hoping we accomplish our goals versus knowing what we need to do today and tomorrow to get to a destination that may be years away.

3) Keep a daily goal journal.

Often times, to reach our goals, it requires that we upgrade our daily habits.  This can apply to financial behavior, but also to improving your diet, exercise, or your performance at work.  Making a change is challenging because our habits become ingrained and second nature to us.  It’s helpful to be able to see ourselves and our behavior from an objective, outside point of view.  The best way I’ve found to increase our self-awareness is through keeping a daily journal.  The journal becomes a mirror to see ourselves better.  Write down what you do each day relating to your goal, your progress or set-backs, and how you felt about the day’s activity.  This focuses your attention on today which is the only day that you can really control.  A journal motivates you to do what you need to do and feel good about your progress.  Sometimes, simply knowing that you have to write down your day’s activities will keep you on track and prevent you from old behaviors which you want to change.

4) Focus on accomplishing the essential with the 90% rule.

Imagine a pyramid of goals, with long-term at the top, supported by intermediate goals, and short-term goals at the base.  Start each day with a short to-do list of what is essential to complete today to advance your goals.  It’s easy to get bogged down in putting out fires and responding to issues, rather than following your own agenda. For a perfectionist, it’s difficult to leave a task, email, or project, until it is 100% complete to the best of your abilities.  The reality is that there is not enough time to be a perfectionist about everything and it is a better use of time to focus on touching everything that is on your essential to-do list.  The 90% rule is asking yourself if each task truly requires 100% perfection or if it just needs a 90% summary.  Do you really need to write a 10-page essay with footnotes, or will a 2-page overview accomplish the desired outcome?  It may take 2 hours for a “100% job”, but only 45 minutes for a “90% job”.  Some tasks do require 100%, but recognizing the difference allows you to spend more time on the essentials that will get you closer to accomplishing goals.

5) Stop procrastinating by using a timer.

Oftentimes, a task seems so monumental that we don’t even know where to begin.  Or it’s something we don’t enjoy doing, so we put it off for as long as possible.  We become so concerned about how long it will take to finish that we never even begin.  Take the pressure off yourself!  Instead of worrying about finishing the task, just pick an amount of time you can spend right now: 15 minutes, 30 minutes, whatever. Set a timer and let yourself to focus exclusively on that one item, with no checking email or other interruptions, until the timer rings.  You can do anything for 15 minutes.  You’ll surprise yourself how often you can complete a dreaded task in 15 minutes, or get 90% of it done.  This tool takes advantage of the fact that we have a limited amount of concentration (often only 15-30 minutes) on any subject. Our use of electronic media today can often hinder our focus. Consider setting specific times each day to check email, Facebook, etc., to avoid having your schedule hijacked by distractions.

The AFM Pension Plan: What Every Musician Needs to Know

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If you’re a professional musician in the US, you likely received your annual statement from the American Federation of Musicians Employers’ Pension Plan in the past several weeks. The main purpose of the mailing is to verify your Covered Earnings from the past year. Professional musicians often have basic questions about the AFM Pension, in part, because the annual statement doesn’t tell you very much about your personal situation other than your reported earnings and the amount your employer(s) contributed to the pension fund.

Give the importance of the Pension Fund to the retirement planning of musicians, here are five key questions about the plan that every musician should know.

  1. What is the Fund?

The AFM Employers’ Pension Fund (EPF) is a Trust Fund established by the AFM and funded through contributions from employers throughout the country, as required under a Collective Bargaining Agreement. Whether you’re a member of the Chicago Symphony, a Broadway theater musician, or a free-lance performer, you may be covered by the EPF. Currently, there are over 50,000 musician participants (active and retired) in the plan, and the fund has assets of over $1.7 Billion.

  1. How do I find out how much I am going to get?

The pension benefit you will receive depends on your contributions and the age you retire. While it is possible to calculate your benefit manually (it’s just algebra), it is much easier and simpler to use their website at Create your own Participant Login and use the Pension Estimator tool. Please note that while your contributions and earnings are always in annual amounts, the pension amounts shown are monthly benefits.

To be vested in the pension, you must have received covered earnings for 5 years, or 20 quarters. You receive a “quarter” of credit for $750 of covered earnings, and you will receive a full year of credits if you earned at least $3,000 in that year.

The normal age of retirement is 65 for the pension, but you can start as early as 55, provided you are retired at that age. If you are still working after 65, you can elect to start your pension at 65 and keep working, or you can delay benefits until you do retire and your benefit amount will be actuarially increased based on the age you decide to start benefits.

Once you’re logged on to the website and are on the Pension Estimator, you can create various scenarios to see what your pension benefit might be. If you’re vested, you’re guaranteed a benefit. If you want to find out how much benefit you’re eligible for based on your past earnings, enter 0 under Estimated Additional Contributions, and then hit “Calculate Benefit”. This defaults to age 65 for retirement, but you can make it for any age between 55 and 65. When you enter 0, your estimate doesn’t include any future earnings, so you will probably also want to create other estimates based on the future number of years you plan to work. As a simple estimate, you might take the past year’s employer contribution to the plan and multiply it by the number of years you plan to work.  Just remember that the estimate is based on today’s payout and crediting rules, which could be changed in the future.

  1. What are the payout options?

First, if your expected lifetime payments total less than $5,000, the EPF will give you a “cash-out” and send you a lump-sum payout. This is mandatory. However, if the expected payments exceed $5,000, there is no option to take a lump-sum or a rollover. You must take the monthly payments.

You can elect a Single Life Benefit (SLB), a 50% Joint and Survivor, or a 75% Joint and Survivor. The survivor options will pay you for life and then pay a reduced benefit (50% or 75%) to your “joint annuitant” for the rest of their life. If you are married, the plan defaults to the 50% J&S, but anyone can elect one of the joint and survivor options, regardless of your marital status. The joint amount is calculated as a percentage of the SLB, with a reduction based on the age difference between you and your joint annuitant. The younger your joint annuitant, the greater the reduction and the lower your monthly benefit amount. Your joint annuitant must be within 19 years of your age to elect the 75% plan.

The joint benefit is a valuable resource to take care of your spouse or partner, if they should outlive you, and it’s a relative bargain. Choose carefully, because your election at retirement is permanent. If you do outlive your joint annuitant, there is no option to change your plan or to select another joint annuitant.

The amount of your AFM pension is highly sensitive to the age of the participant at retirement. If you started benefits at 55, you’d receive only 37% of the benefit amount you’d receive at age 65. And that is assuming you didn’t work after 55 and had no additional contributions! Also, if you work past 65, your benefit also can grow significantly. For example, if you work to age 68, your benefit base would be increased by 35%, on top of the additional benefits you accrued from working between 65 and 68. This is one reason (of many) that some musicians are reluctant to retire – for every year they keep working, their pension is increasing by at least 10-11%.

  1. How does the AFM-EPF compare with Social Security benefits?

With Social Security, Full Retirement Age is 66 (increasing to 67 for individuals born after 1954), but you may start benefits as early as 62, or delay to 70. With the AFM EPP, Full Retirement Age is 65, but you can start as early as 55; you can delay the EPP past 65 only if you are still working and contributing to the plan.

One big difference is that Social Security has Cost of Living Adjustments (COLAs) based on inflation, whereas the AFM EPP does not. The amount you receive will remain the same for the rest of your life. Because there are no COLAs in the AFM plan, you have to be careful and not start benefits too early. If you can afford to wait until 65, it is a huge advantage to wait to full retirement age to receive benefits, even if you stopped working earlier. The reason is that you are guaranteed a 10-11% increase in benefits for each year waiting, which is better than Social Security (which increases by a maximum of 8% a year). You may or may not get 10-11% in your investment portfolio, but waiting on the pension is a guaranteed increase for life. Most musicians will receive both the AFM EPP and Social Security, but you do not have to start them at the same time.

With Social Security, your spouse may receive a survivor benefit. If your Social Security benefit is greater than your spouse’s benefit, then he or she will receive your benefit amount for the rest of their life, and their own benefit goes away. (If their SS benefit is already greater than your amount, they will not receive any increase or survivor’s benefit.) With the AFM plan, you don’t have to be married to have a joint annuitant and they can receive 50% or 75% of your amount after your death.

  1. I heard the plan is in trouble. Is my pension safe?

The AFM EPP is overseen by the Federal government and is covered by the Pension Benefit Guarantee Corporation (PBGC), which is similar to the FDIC in regulating pension plans and providing protection for individual participants. The plan itself has been considered to be in “critical status” since 2010, which occurs when the projected assets are insufficient to cover the projected liabilities. That description is a bit of a simplification, but the current “red zone” status means that the plan is required to create a rehabilitation plan to address the potential shortfall. They have reduced the benefits that will be paid on earnings contributed after 2010, and the board trustees, actuaries, and investment managers are working to monitor and fine tune the plan to ensure that it will be solvent for future retirees.

In the very unlikely event that the plan should fail, individual participants would have their benefits insured by the PBGC. While this should give some comfort, I should point out that there are limits to PBGC coverage based on the number of years of service, so it is possible that some participants would not be fully covered if their benefit amount exceeded the levels of protection under the PBGC.  I don’t think we need to be overly concerned about the viability of the pension plan, but I would council any musician to not rely solely on the pension.  You need to have other sources of assets and cash flow to provide a strong and secure retirement.

I don’t think anyone becomes a musician for the money, but musicians have the same financial needs and concerns as any other professional.  Unfortunately, a lot of musicians don’t pay much attention to their own financial planning, and don’t know where to turn for honest advice. I’ve been a member of the AFM since I was 19 and take great joy in helping my fellow musicians plan for a secure financial future. If you have retirement planning questions that might be a good topic for a blog, please email me at Chances are that others may have the same questions! And of course, please feel free to call me at 214-478-3398 if you’d like to chat about any of your financial questions or concerns.

5 Tax Mistakes New Retirees Must Avoid


New retirees often overlook the bite that taxes will take out of their income.  Even though they are no longer receiving a paycheck, taxes can still add up in retirement.  There are quite a few ways to reduce these taxes, which unfortunately, most people will miss on their own. Here are 5 mistakes you can avoid through careful planning.

1) Taking a large withdrawal from a retirement account in one year. If your income is modest and you will require $60,000 from an IRA, you will pay much less in taxes by taking withdrawals of $20,000 over three years versus taking $60,000 out in one year.  Plan ahead and aim to smooth your withdrawals from qualified accounts, or better yet, take only RMDs.  Don’t wait until an emergency or for a large expense to plan your IRA distributions.

2) Taking a withdrawal from a retirement account to avoid a capital gain on selling a stock.  The IRA withdrawal will be fully taxable as ordinary income, but a long-term capital gain would be taxed at the lower rate of 15% (or 20% if you’re in the top tax bracket).  Only the gains portion of the sale is taxable, whereas 100% of the IRA distribution is taxable.  For ETFs and individual stocks, you can even specify which lots to sell, giving you the opportunity to sell the lots with the highest cost basis, rather than the default first in, first out, or average cost method used by mutual funds.

3) Inefficient Asset Location.  I often see that portfolios are set up with bonds in a taxable account and stocks in the IRA, so that retirees can take the income from the bonds and avoid touching the stocks in the IRA.  Actually, it would be much more tax efficient to reverse the locations and place the bonds in the IRA.

Bond interest is taxed as ordinary income, as are IRA distributions. Put your bonds in the IRA and take your bond income from the IRA, as the distributions will be taxed exactly the same.  Place your stocks in the taxable account, and you can receive favorable tax rates (15%) on capital gains and dividends, and you won’t have any capital gains until you sell.  (If you’ve been burned by taxable distributions from equity mutual funds, it’s time for you to learn about ETFs.)

Keeping high growth stocks out of your IRA will also reduce your future RMDs and reduce the taxes that will have to be paid by your heirs.  Heirs receive a step-up in basis on stocks in a taxable account, but not in an IRA.  By placing bonds in your IRA, you can reduce future taxes in many ways.  This concept can often be difficult for people to grasp, so if you’d like an example, feel free to email me or give me a call.

4) Selling the oldest savings bonds.  Many retirees hold EE savings bonds but are not managing these bonds.  Some older bonds had fixed rates or guaranteed minimums, whereas bonds issued starting May 2005 currently pay only 0.50%.  (This resets every 6 months, and this rate is current through 10/31/2014.)  As a result, you’re better off selling your newer bonds and keeping the older ones (pre-2005) which have higher interest rates.  Don’t forget that the bonds are guaranteed to reach their face value in 20 years, so you may be rewarded by holding on to a 17 year old bond for a couple more years.  EE bonds will receive interest for up to 30 years, which is the maximum time you should hold bonds.  By selling the newer bonds, you will pay less in taxes compared to selling older bonds which have appreciated more.  Use the tools at to keep track of the current values and interest rates on your EE bonds.

5) Failing to harvest losses on investments. While your heirs will receive a step-up in cost basis for an appreciated security, they will lose any tax benefits associated with a position at a loss.  Sell the position and redeploy the capital as needed to maintain your target asset allocation.  A loss can be used to offset any capital gains in that year, plus $3,000 can be used against ordinary income and any remaining loss will carry forward to future years.

New retirees can undermine their retirement planning if they ignore the impact of taxes.  It can be costly to make changes after the fact, so it’s best to make sure you have a plan in place before retirement.  It’s not a once and done event either, because managing taxes is an ongoing process.  Many people turn to a financial planner for selecting investments, and discover that they receive even greater benefits from other areas such as tax management.

Machiavelli and Happiness in an Age of Materialism


Hence it is to be remarked that, in seizing a state, the usurper ought to examine closely into all those injuries which it is necessary for him to inflict, and to do them all at one stroke so as not to have to repeat them daily; and thus by not unsettling men he will be able to reassure them, and win them to himself by benefits. He who does otherwise, either from timidity or evil advice, is always compelled to keep the knife in his hand; neither can he rely on his subjects, nor can they attach themselves to him, owing to their continued and repeated wrongs. For injuries ought to be done all at one time, so that, being tasted less, they offend less; benefits ought to be given little by little, so that the flavour of them may last longer.

– Niccolo Machiavelli, The Prince (1505)

Machiavelli’s political treatise, The Prince, remains an interesting, at times brutish, study of human nature 500 years after being written. If you’ll grant me some liberty in interpretation, his advice to experience pain quickly and reward slowly applies nicely to today’s field of behavioral finance.

The Hedonic Treadmill is a psychological premise that people require constant effort to maintain satisfaction, or “happiness”, if you will. A related concept is Habituation, which is that we tend to have a baseline state of happiness, and that when events move us above or below that level, we gradually become used to the new situation and revert back to our previous levels of satisfaction. Both principles suggest that to increase and maintain happiness, we have to work at it continually.

Consumer spending is important to our economy, but at the household level, we’re spending more and more money to realize a middle class lifestyle. Economists look at things like the change in the price of a gallon of milk as inflation, but it might also be relevant to consider how living has changed for the typical family. In 1973, the average new house size was 1,660 square feet, compared to 2,679 square feet last year. Over the same time, the average household size has shrunk from 3.01 persons to 2.54. Today, we have many more bills – cell phone, internet, satellite TV – than existed 40 years ago.  These are all great improvements over previous technology, but the cost of a middle class lifestyle has likely grown well in excess of the reported inflation rates in the CPI.  But are we happier for the increased spending?

We experience a brief increase in happiness from buying new items, but habituation has two effects: (1) the enjoyment we get from a new item quickly wears off, and (2) once we do become accustomed to the “bigger and better” item, we are generally unwilling to replace it with a lower cost option. Once we have a smart phone, there’s no going back to a regular phone. After living in a 3,000 square foot house, a 2,000 square foot house feels too small. If you’ve owned a luxury car, you won’t want to drive a simpler car. Will a Kia get you to work as effectively as a Mercedes? Yes, of course, but that’s not the reason we buy an expensive car. We decide what we want and then we rationalize why we have to have it.

I chose the name Good Life Wealth Management, because I view money as a tool to help us enjoy life. Not in the materialistic sense of fancy cars or fine wine, but in the holistic pursuit of finding meaning and balance. The Good Life, then, is not achieved by the acquisition of items, but by enjoying a state of financial independence and using those resources to live fully. It’s my job to help investors find that freedom and I love my job. It’s the last thing I think about at night and the first thing I think about in the morning.

I share the following six principles to define what we stand for. This is how we can seek happiness and financial security in an age of materialism.  If these make sense to you, then I think our financial planning approach and sense of purpose will resonate strongly with your goals.

  1. Spend money on experiences rather than things. I went on a hot air balloon ride this summer. If I considered the cost for a one-hour flight, it was perhaps expensive. However, I have since spent many hours thinking about that wonderful experience and enjoying my photographs of that day. I’ll always have those memories.
  2. As Machiavelli suggests, take pain quickly and rewards slowly. If you decide to make spending cuts to be able to save more, make the cuts deep and immediate. If you want to save an additional $1,000 a month, you’re not going to get there by giving up a daily coffee. And you’re setting yourself up for continual frustration because you will have to make that sacrifice every day going forward. By making many small changes, it will feel like a death by 1000 cuts. Instead, have the courage to make a big move like downsizing or finding a different job. Once you adjust to the new change, it will be fine and it is not going to impact your happiness in the long-run. (To see an extreme example of a human’s ability to adapt, two friends recently completed a Buy Nothing Year, with interesting reflections on their experience.) Take your rewards slowly to enjoy them. Feed your Hedonic Treadmill gradually.
  3. Saving is not self-denial. Some people view saving and investing from a negative view – they only do it out of fear. Fear of falling behind, fear of not having enough, fear of dying broke. No one wants to experience any of those unpleasant things, but fear will only motivate you to save so much. And you’ll resent the saving because you’re doing it because you have to and not because you want to. Saving can be its own reward. Make it fun and a game to see how much you can save. If you want to be financially independent, take the steps that will get you there as soon as possible. Do it for yourself – the more you save, the faster you achieve your next goal. Be laser-focused, driven, and determined when you have a goal. Saving is a virtuous cycle when it becomes an ingrained habit.
  4. Money doesn’t define us and our value is not a number. If I did lose everything, I know I could make it all back. And I’d make it back even faster because I wouldn’t make all the mistakes I did the first time around! That doesn’t mean it’s okay to be reckless with investing, only that money is not the most important thing in life. And once you have money-making knowledge and skills, you realize that wealth is abundantly available for those willing to save and invest.
  5. Our concept of frugality was framed by our parents or grandparents who lived through the Great Depression in the 1930’s. They learned to be self-reliant and strong, but for some, those tough times created permanent fear and mistrust. (Can you feel fulfilled and happy if you bury cash in coffee cans in your back yard because you think banks will lose your money?)  The new frugality is about simplicity, optimism, and making the decision to place financial independence ahead of consumerism. It’s a positive choice and not a negative reaction based on hoarding, fear of loss, or mistrust of the system. Used properly, frugality is having the maturity to make decisions today that will be smart 10 years from now. It’s a recognition that “more stuff” does not create lasting happiness.
  6. Tis better to give than receive. Donate, volunteer, make a difference. Happiness comes from a sense of purpose and living to the best of your abilities. Daniel Kahneman found that higher income increased happiness, but only up to about $75,000. Above that level, individual differences prevailed. Money does not create happiness, but we do know what is the most common cause for unhappiness: loneliness. Connect with people. Use your money to visit friends, take someone to lunch, or travel and make new friends.

Is your money helping you move closer towards financial independence or is the rising tide of middle class materialism keeping those goals a distant dream?  If you’re not sure where to begin, give me a call and let’s get to work on your financial plan.

Retirement Withdrawal Rates


If you’re close to retirement, a key planning question is How much can I withdraw from my portfolio annually?  Or in financial planning terms, what is a safe withdrawal rate?  It’s a challenging question because we don’t know future rates of return.  But what we do know is that you can’t just project “average” or historical returns in a straight line and use that as your basis for withdrawals.

Unlike a portfolio in accumulation, a portfolio under distribution is greatly dependent on the order of returns.  We might have a 7% average return over 30 years, but in certain rare circumstances, a portfolio under distribution could be wiped out if there were negative returns in the first handful of years.  This is known as sequence of returns risk.

Today, we have several reasons to believe that future returns may be lower than historical returns.  This impacts the level of withdrawal that we can safely achieve in a retirement portfolio.  In my planning process, I use projected returns rather than historical returns, because I am concerned that historical returns may over-estimate the likelihood of success.

This issue is too complex to address in the space of a blog post, but I want to educate as many people as possible about the challenges of funding a retirement in a lower return environment.  I have written a whitepaper on this subject and strongly encourage anyone interested in their retirement to read more:

Five Reasons Your Retirement Withdrawals are Too High

If you’re not close to retirement, this is still a relevant issue because the amount you need to accumulate is determined on your future retirement withdrawal rate.  A simple way to calculate your finish line is by multiplying the reciprocal of your withdrawal rate times your annual need.

For example, a 4% withdrawal rate (1/25), gives us a multiplier of 25.  A 5% withdrawal rate equals a multiplier of 20.  If your annual need is $100,000, your portfolio target would be $2,500,000 under a 4% withdrawal program. Decreasing the withdrawal rate from 5% to 4% would increase your portfolio target from $2 million to $2.5 million.  And that’s why the safe withdrawal rate matters to everyone seeking financial independence.

Socially Responsible Investing

Canadice 2014

Socially Responsible Investing (SRI) has taken off in recent years as many investors want to align their portfolio to reflect their personal beliefs.  Fortunately, it is becoming easier to access high quality SRI investments and we are happy to incorporate our clients’ wishes whenever possible. This year, the amount invested in SRI funds surpassed $100 Billion and I think it’s safe to say that SRI has moved from being a small niche to a mainstream approach.

I want to emphasize two very important considerations for anyone contemplating adopting SRI principles for their portfolio.  First, you may want to support an idea or sector, such as Solar Energy.  You might think that by buying stock in a solar company, you are supporting that company, but you’re not actually providing new capital.  Other than in an Initial Public Offering (IPO), trading shares is just buying and selling between investors in the open market.  Although solar power is a great idea, many investors suffered losses in recent years when the stock market eventually recognized that solar panels had become a commoditized product with low profit margins. If you want to buy individual stocks, be sure that you buy the company based on its investment fundamentals and not just because you believe in the idea or think it will be “the next big thing”.  Otherwise, you’d be better off investing in regular funds and using your profits to make donations to the causes you want to support.

For most investors, I suggest you avoid individual stocks altogether and instead choose from the many Socially Responsible funds and ETFs that are available today.  This brings me to my second recommendation: when selecting an SRI Fund, always look at its holdings, weightings, and diversification. SRI guidelines limit which stocks a fund manager can select. For example, they may be prohibited from owning alcohol, tobacco, nuclear power, or defense companies. As a result, SRI funds are often heavily weighted in just two or three sectors of the economy. Today, many (if not most) SRI funds have their largest holdings in the technology industry. Concentrated funds can look attractive when those sectors are performing well, but often perform very poorly when their top sectors tumble.  Make sure your funds are well diversified and that you are not buying a sector fund in disguise.

For a core US equity holding, consider the iShares KLD 400 Social Equity (ticker: DSI).  This is an index Exchange Traded Fund (ETF) that holds the 400 largest US companies that have been screened for positive environmental, social, and governance qualities.  If you currently have a large cap mutual fund in your portfolio, you could use DSI as a replacement to add an overlay of socially responsibility, while maintaining a liquid and diversified portfolio.  With an expense ratio of 0.50%, it is a relatively cheap way to build a core SRI equity position compared to most actively managed mutual funds.

I would, of course, use several other SRI funds to build out a more complete portfolio.  While equity investing tends to get most of the attention in SRI, investors should also consider their fixed income holdings.  When you own the bond of a company or government, you are in fact a lender who has provided capital and receives interest from that entity.  So if you decide to embrace the Socially Responsible Investing approach, don’t forget to also include your bond funds.  Alternatively, you could work with an advisor such as myself to help select individual bonds and build a bond ladder for your portfolio.

Unfortunately, I do not expect an SRI portfolio to outperform a traditional asset allocation, and anticipate it may even lag over time. SRI reduces sector diversification, but also SRI funds tend to have a higher expense ratio than the ETFs we use for our core equity positions. Still, I admire what SRI aims to accomplish, which is to tell corporate management that as owners, shareholders demand companies do the right thing for the environment, human rights, and society. It’s clear that corporate lapses can contribute to increased risks for our economy, not to mention for the company itself. Too many mutual funds and ETFs are not proactively using their capacity as the largest shareholders to advocate for improved corporate governance. That’s a bigger issue than I can tackle as an advisor and investor, but my hope is that SRI will help apply pressure to corporate boards to do better.