Michael J Eugenio, CFP® was quoted in this article published by Investopedia today, September 15, 2017. The article by Jim Probasco is directed at baby boomers hitting the retirement circuit without enough money saved.
Among the Top 6 Expenses That Are Cutting into Retirement Savings, Mike’s quote was featured as the 2nd leading expense:
2. Credit Cards and Other Accounts
“The average household pays out $2,630 in credit card interest each year. The more you reduce this amount, the more you can put into your nest egg.
‘Never roll consumer debt into a home mortgage,’ cautions Michael J Eugenio, CFP®, president of Eugenio Financial, Lake Oswego, Ore. ‘While it might save money monthly, long term you have added an enormous amount of interest. That car payment that you had 30 payments left on, now just became a 30-year car payment.’
Instead, first ask for a credit card rate reduction. If that’s a no-go, look into a balance transfer to another card with a lower rate. Or, if you can pay off your credit card debt within a year or so, look for a card with a 0% APR for 12 to 18 months. The interest you paid can go into your retirement savings.”
Use a rate comparison tool such as this one by Bankrate. And don’t just do it once; check on a regular basis.”
For more on retirement planning by Michael Eugenio, you may find this article of interest: Managing Cash Flow in Retirement – Critical to Portfolio Planning
Eugenio Financial is a Fee-Only Independent Registered Investment Advisor, Michael Eugenio, is a Certified Financial Planner CFP™
If you wish to discuss your portfolio and/or any other money management matters, feel free to CONTACT US. We look forward to hearing from you!
Let’s say you want to borrow Other People’s Money for a Car Purchase
You go to Bank “A” and they quote you a variable rate of 6%. You go to bank “B” and they quote you 1.9% fixed. Which bank will you choose to do business with?
Naturally you would choose Bank “B” The cost of money is clearly less than Bank “A”
Bank “A” is your portfolio. You have accumulated enough cash to pay cash for the car. Let’s assume your portfolio has averaged about 6% over the last 10 years or so. Why take money out of an account that has averaged 6%? Of course, we have no way of knowing what the future holds in store for us. But history would seem to be on your side. Additionally, by taking money from your portfolio, may very well cause tax issues that are avoidable.
Bank “B” is your favorite local bank.
Let’s do some simple Math. Your portfolio historically has earned 6%, the cost of the loan is 1.9%. Take the 6% earnings, subtract the 1.9% loan cost and you are ahead of the game by 4.1% Had you removed the money from the portfolio the “Opportunity Cost” plus the loss of compound growth and added taxation can easily do significant harm to your financial future.
Now, let’s change the scenario. You have savings at your favorite bank earning significantly less than 1% The loan is still 1.9%. If you have enough to cover 3-6 months of living expenses in reserve, then take the extra cash and pay cash for the car, or at least pay down the loan. Makes little sense to hold “lazy money” when the cost of borrowing exceeds the earnings on savings.
Buy vs. Lease
All that sounds good Mike, but the dealer is telling me he can get me into a lease and it will cost much less than buying.
Let’s take a closer look. Lease is just a fancy way of saying “renting” You have no ownership in the car.
For example, that new car with all the frills will cost you $35,000. After 20% down you finance it for 60 months @ 1.9%. your monthly payment is $490 per month. At the end, you “own” the car. Let’s assume after depreciation the value of the car is $15,000. You can continue to drive it, or possibly sell it and use the $15,000 for a new vehicle. Either way you have an asset.
The lease on the other hand is $350 per month for 36 months, and an extra 15% lease payment. At the end, you have paid $17,850, and you turn in the car. Hopefully you didn’t exceed the very limited mileage allowance and the car is in immaculate condition when you return it. Either one could wind up costing you many hundreds or even thousands of dollars extra.
Now that you’ve turned in the car, what do you do? Do another lease or step up and buy another car? At the end of the original 5-year period, the person who purchased and paid a little extra every month has the better deal. The only people who come out ahead on a lease are the dealers. You paid them for half the value of the car, and they will resell for the remainder, plus a handsome profit.
In whose best interest in the car dealer working in?
It rarely every makes sense for an individual to lease a car, unless you think you need a new care every couple of years. There are better and smarter things to do with your money, other than buying cars every couple of years.
Cash Flow Key Aspect of Portfolio Management
One of the more critical aspects of Financial Planning and Portfolio Management, for both the client and the advisor, is to understand the client’s household Cash Flow. It is important to routinely track income and expenses to get a reliable base when doing Financial Planning, and especially important for Retirement Planning. Because this information can and does change, sometimes dramatically, it needs to be kept up to date so that Planning and Portfolio Management can be adjusted to meet the client’s needs.
We recommend that clients use the miracle of technology and online banking to help them with the day-to-day tracking. Quicken has proven to be a popular as well as powerful tool for keeping the information current. Mint is another popular choice and it’s free, but in my opinion, not as robust. These and other products at first glance might seem complicated, but once set up, they are easy to use and definitely worth the initial effort. These programs will track income and expenses, and then produce reports that consolidate the information in an understandable format.
Tracking Income & Expenses
Keeping track of Income & Expenses will tell us several things that help with Financial Planning and Portfolio Management.
- First of all, it helps us decide how much to maintain in emergency reserve accounts to cover the unexpected events of life: things like water heaters leaking and ruining the flooring, or a new roof, or a major car repair.
- Second, it helps us answer the question “Where does all the money go?” A lot of people have no clue how much they are spending or what they are spending it on. It really is beneficial to know, so that we can determine if these expenses will be on-going and will need to be taken into account for retirement planning.
- Third, it helps us to figure out how much can comfortably be directed to savings and investments every month while still working. This is crucial to building a healthy Portfolio that will help support the client’s lifestyle during retirement.
- Fourth, understanding current cash flow needs will indicate how much is going to be needed in retirement and determines how much should be in savings and investments to cover these needs. It also makes it easier to figure out when the client will be in a position to retire comfortably.
Lastly, getting a good handle on cash flow is important to figure out if there is any discretionary cash available to take advantage of strategies to help lower taxes.
To summarize, the Importance of Cash Flow should never be ignored when planning for retirement. Maintaining a regular accounting of income, taxes, and expenses allows the client to take these all-important steps:
- Clear debt
- Determine where the cash goes
- Identify disposable income
- Establish basis for unplanned situations
- Determine criteria for insurance decisions
- Plan for retirement
- Build a foundation for wealth creation
Financial Planning, Retirement Planning and Portfolio Management all rely on a good understanding of the current financial situation. Planning for the future takes some work, but it will be worth it in the end to have a comfortable, stress-free lifestyle in retirement.
Today the stock market had a crazy day with the S&P 500 dropping almost 2%.
They blame Trump and the chaos surrounding his supposed cozy relationship with Russia. Let’s keep this in perspective. The S&P 500 is up over 7% from Jan 2017 through May of 2017. If today was the last day of the year, we’d count 7% up as a pretty good year.
At Eugenio Financial, we build portfolios to get through tough times such as these.
When managing money, we start with a Model portfolio that is back tested with over 20 years of Data. Back testing shows how well it would perform in good markets, as well as in bad markets. Most of our portfolios carry no more than 55% in the US Stock Market. The rest is spread out among other asset categories such as International Stocks, Bonds, Real Estate and Cash. This keeps the portfolio from working in lock step with the stock market. When markets are crazy like they are now, our Model portfolio will drop, but not nearly as hard. Recovery of the portfolio will typically come more quickly than the overall stock market.
There is an adage of investing success, “It is not market timing, but time in the market”. The one lesson I have learned after many years of doing this, is that once we have a strategy, we must stay disciplined to that strategy. Tweak it, rebalance it from time to time, but stay focused. Eventually this bad market will pass; the stock market will recover and most likely will go on to new highs. It has always worked that way; I have no reason to believe it won’t happen again.
Wisdom from the Oracle of Omaha
Warren Buffet, who is one of the richest people in the world, made almost all of his money in the stock market. He was interviewed recently by one of the talking heads. Here’s a paraphrased version of that conversation.
Talking head: “Mr. Buffet, today was a bad day in the stock market. We estimate that you may have lost over ten million dollars. Certainly, you must be very concerned?”
Mr. Buffet: “I have no concerns whatsoever. Markets like these come and go.”
Talking head: “But sir, you lost so much money, are you going to do something to protect yourself from losses? Perhaps you are getting ready to sell and get out of the market?”
Mr. Buffet: “No, actually I’m buying right now.”
Talking head: “Buying? Oh, my goodness how can you buy at a time like this?”
Mr. Buffet: “You see when markets go down and everybody is selling, that’s when I buy. I buy because everything is cheap and on sale. When markets go up, that’s when I sell, because everything is expensive and I make profits. “Please understand, that’s how I got rich.”
Talking head: “But that could take a long time.”
Mr. Buffet: “That’s ok, I have plenty of time*, and I can wait.”
If Warren Buffet isn’t panicking, why should we?
*Mr. Buffet is 85.
A big topic of conversation these days seems to revolve around the possibilities of Artificial Intelligence’ (AI)’ and Robotics.
Autonomous cars are front and center, with several tech companies falling all over themselves to be the first to mass market driverless cars. Smart Phones are no longer the next big thing, but part of our everyday lives, even though we depend on our children and grandchildren to help us operate and maintain.
In the investment world, the ‘fintechies’ (financial technologists) want us to believe that a ‘Robo Advisor’ can and will replace a Professional Financial Advisor.
Professional vs. Programmed Portfolio Management
A robo-advisor is essentially programmed (passive) portfolio management based on generic goals and risk profiles. A true professional financial advisor can provide active and customized portfolio management, provide securities advice, as well as address such issues as estate and retirement planning, cash-flow management, social security analysis and more.
Robo-advisors may serve a purpose for younger accumulators, tech-savvy Millennials and DIY investors, but not so for those who are thinking of, planning for, or in retirement.
Case in Point
By way of example, let me tell you a story:
Joe & Mary (names have been changed to protect privacy) have been Financial Planning & Portfolio Management clients for over 20 years. About 10 years ago, Mary at age 70 was diagnosed with early stage Alzheimer’s disease. Joe age 71 was still working part time and hoped to do so for a few more years. We met to develop a plan that would solidify their cash flow so that Mary could receive the proper medical treatment she would need. This included making some tweaks to their modest portfolio. Joe was very concerned how to make the portfolio last longer than he and Mary.
As time went on, Mary slowly lost her memory and cognitive abilities. Joe and I had many conversations, some about money, some about how things were going, and sometimes just to talk about other important stuff, like how his Oregon State Beavers were doing at the college world series.
When Joe turned 75 he decided it was time to fully retire. Over the years, Joe and I had made plans to be ready when the inevitable came to pass. Mary was continuing to decline in health, but Joe wanted to keep her home as long as he would be able to take care of her. We made additional adjustments to his portfolio so that it would keep up with the added financial pressures. Market volatility is always a concern, especially to retirees, so our job was to constantly monitor the markets and adjust as dictated by training and experience, as well as my personal understanding of Joe and Mary’s position.
As time went by, Joe and I discussed the importance of keeping his Estate Plan up to date. We also discussed that it would be a good idea to start including his daughter, Marcia, into the conversations so that she was aware of everything in the event she ever had to step in and help.
Then, life went completely off the rails for Joe and Mary. Joe was diagnosed with terminal cancer and given 6 months to live. Marcia and Joe met with me to review the entire financial picture, as well as the Estate Plan that we had just updated.
Sadly, it was agreed that Joe and Mary needed to go into Assisted Living. Mary now needed Memory Care and could no longer live with Joe. They needed to clean out their house of 40 years and sell it. Painful for everyone, but it had to be done.
Joe, Marcia and I discussed how to make sure that Joe and Mary could handle the $10,000 per month for Assisted Living and Memory Care. We put a plan together that included filing a claim against Mary’s Long Term Care Policy, along with using the cash from the sale of the house, as well as some cash available from Joe’s life insurance policy.
Financially it all came together very nicely, and Joe and Mary, while in the twilight of their years, can at least have the satisfaction of knowing that their financial life is in good order and that they will not be a financial burden to their children.
How would Artificial Intelligence have helped Joe & Mary? Could they talk to the “App” to discuss how best to handle this critical situation? Would the App have provided moral support or guidance?
My belief is that better outcomes happen when the Trained Professional can apply his energy and wisdom and let the computers take care of the data management. Better outcomes happen when the Artificial Intelligence acts in a supportive role to the human element, not the primary role.
Ask yourself this series of questions on Robo vs. Trained Professional:
- Would you hire a Robo Doctor or Dentist?
- Would you hire a Robo Lawyer?
- How about a Robo Landscaper?
Then why hire a Robot to plan and manage your future?
This article also appears in Investopedia and Yahoo! Finance.
In one of my previous Blogs I discussed the merits of possibly delaying your Social Security until age 70. Under optimal conditions this could mean many more thousands of dollars for your retirement over your lifetime.
One strategy that has been popular with spouses was to delay full Social Security and claim the spousal benefit. This allowed the spouse to claim half of what the other spouse would have received at their full Retirement Age. This also allowed time for her or his benefit to grow by 8% over 4-5 years.
This was seen by politicians as gaming the system, so they changed the rules and phased out the spousal benefit. But they allowed some concessions. If you turned 62 prior to January 2, 2016, then here’s nifty strategy. When you turn 66+ and are eligible for full retirement benefits from Social Security, you have the option of suspending your benefit until you turn 70. Social Security guarantees an annual 8% benefit increase for every year you wait. That 32% increase can be significant over time.
Once you suspend your benefit until you reach 70, you are eligible for 50% of what your spouse would have received when he/she reaches their full retirement age.
For example, let’s say the husband’s benefit at age 66 was $1,500 per month. Now a couple of years later, the wife is eligible for her benefit. Her full amount would be $2,000 per month. She suspends that benefit in favor of $750 as the spousal benefit. In 4 years, her benefit would then be valued at $2,640 per month.
Why take the lower amount now? The reason is because over her lifetime it could be worth thousands more than she would have received by claiming the traditional path.
The above scenario is precisely why President Obama wanted this loop hole closed. Too rich of a benefit.
Unfortunately, President Obama was successful and anyone who turned 62 after January 2, 2016, can no longer use the spousal benefit strategy.
However, they can still defer their benefit until age 70 gaining the generous 8% per year increase.
By delaying your benefits until later you are adding more pressure to your portfolio in the first few years of retirement. However, as the increased social security benefit comes into the picture the amount of reliance on your portfolio should diminish, thus may leave you with more money later in life.
Summary of Changes
In short, the changes to Social Security claiming strategies are summed up in the following bullet points:
- Folks who had already implemented a “file and suspend” strategy, will be “grandfathered” and allowed to continue with their claiming strategy.
- Clients who qualify had until April 30, 2016, to implement a “file and suspend” strategy if they attained full retirement age by the end of this 6-month window. After this period, any request to suspend benefits will stop all payments of benefits on a worker’s record including spousal and other family benefits.
Decisions you make about Social Security are probably the most important and critical financial decisions you will ever make. Let a professional help you through the maze.
There are many factors that need to be considered before delaying full Social Security income. One needs to consider, health, financial standard of living requirements, taxes, insurance, the size of your portfolio, etc. A well trained Financial Planner / Advisor will take the time to calculate your options and review the best course of action.
Eugenio Financial can help. Just reach out anytime to —
This article is also published in Investopedia and NASDAQ
The Fiduciary Standard has been around for hundreds of years. (Yes! The Fiduciary Standard can trace its roots to 17th century England.) Very simply put, it means you place your trust and confidence in the hands of a professional to take care of your financial needs. The professional fiduciary is expected to perform and advise you based on your best interests, even if it comes into conflict with the advisor’s own interests.
Not all investment advisors are held to this standard. Many brokers, registered representatives and insurance agents are held to a lesser standard referred to as suitability. They may offer you a product that may solve a problem. But did they keep your best interests at heart? Do they have a complete understanding of your financial situation?
A Fiduciary will have complete knowledge of everything about your financial life before making any recommendations.
- A broker may offer you a Variable Annuity or an Indexed Annuity and tell you that it will resolve all of your investment needs. What he may have failed to tell you is that the Variable Annuity comes with limited investment options, very high fees, and commissions. Also, the Variable Annuity has steep penalties if you try to cash it out early. Usually you must keep these things between 8-10 years — some of them longer. He also may neglect to tell you that the sale of the Variable Annuity qualified him for an all-expense paid lavish trip. He knows that a couple of low-cost mutual funds would have done the same thing with much less cost, but his commission would have been lower, and he would miss out on that trip (that you indirectly paid for). In whose best interest did your broker work? Did he disclose to you the commission or the trip he would earn?
- The broker is not held responsible if the product he sells you didn’t work out. He will most likely fail to provide ongoing oversight or service. You can only hold him responsible if you can show that what he sold you was inappropriate (unsuitable). An example of an inappropriate sale would be to invest most of your portfolio into something with no liquidity and no exit strategy.
An Investment Advisor held to Fiduciary Standard…
- …is going to take the time to learn what the issues are that need resolution, then he will place you into an investment portfolio that will best suit your needs. He will also resolve any conflict of interest by not taking any commissions or going on any company-paid trips. The conflict resolution is resolved through a fee arrangement between you and the advisor. It is further reconciled with disclosure of any potential conflicts of interest. This way you know that he is working in your best interest.
Non-Fiduciary vs. Fiduciary Approach:
- A broker, non-fiduciary, while making sure the product is appropriate for you, very often takes the approach of a solution (product) looking for a problem.
- A Fiduciary will take the exact opposite approach by recognizing the problem first, then finding a solution. Once a Fiduciary builds a plan for you, he has a responsibility to execute and monitor that plan for as long as you remain his client. If something goes wrong, he will make every effort to fix it. A good advisor will have performed Due Diligence on any and all products he uses as investment tools. He also will perform Due Diligence on any outside advisors he might recommend.
Further, a Fiduciary is not bound to any one company. Brokers very often can be limited to the products offered by one company. Brokers very often maintain relationships with investment company representatives that promise expensive meals or lavish outings to win the brokers business. This is very similar to a Washington Lobbyist who curries favor with your representatives in Congress. A Fiduciary will avoid all of that.
Think of it this way:
You don’t feel well, so you go to your doctor to find out what is wrong. He does a cursory exam then writes you a prescription. He then informs you that there is no charge for the office visit, however you will need to fill the Rx at the pharmacy across the hall. No need for a follow up visit! What he didn’t tell you is everybody is given the same Rx, no matter the illness. He further failed to disclose that the pharmacy gives him 8% on every prescription they fill for his patients. Now the pharmacist tells you that the doctor wrote you a prescription for a Generic Rx. The pharmacists lets you know that the name brand might be more effective, yes it is more expensive, but don’t worry its covered by insurance.
You may or may not have received the right medicine for your illness, but in whose best interest are the doctor and pharmacists working? Yours or theirs?
Determining the ‘Real Deal’
How can you determine who is an Investment Fiduciary and who is working on commission? If your advisor carries a designation such as Certified Financial Planner (CFP®) and presents himself as an Independent Registered Investment Advisor (RIA) then you have the ‘Real Deal’.
- An RIA only works on a fee arrangement between his client and his firm. He accepts no outside compensation, gifts or gratuities. Additionally, an RIA is governed by the Securities act of 1940 which puts into law the Fiduciary Standard.
- A CFP® is governed by the CFP Board of Standards which maintains a high degree of fiduciary responsibilities for its designees. Those standards include Integrity, Objectivity, Competence, Fairness, Confidentiality and Professionalism.
Finally, don’t be fooled if an advisor tells you that his advice will cost you nothing. That is just silly. Of course, his advice comes with a cost, only it is built into and hidden in the product he sells you. He just failed to disclose the cost. If the investment underperforms or fails, then it cost you even more.
Contact Us to learn about Eugenio Financial services.
What will be the new President Trump impact on financial goals be for you, your portfolio?After a tumultuous and bitter presidential campaign, for better or worse, Donald Trump has been elected President of the United States. Some of you may be happy, others not so much; indeed you may be anxious because there are so many unknowns. However, regardless of your political affiliation, sentiment or otherwise, there will be some important financial implications.
Since the election, the S&P 500 & Dow Jones Industrials Index have shot up to record highs. We are calling it the “Trump Bump” Can this run up be sustained?
President Trump wants to reduce the corporate tax rates as well as the Individual Tax Rates. He wants less regulation and big changes to Obama Care. Infrastructure spending is also on his top 10 list.
Many will cheer this as good news for the economy and ultimately raise the value of the stock market. Only time will tell.
What’s an investor to do?
It is important to stay focused on your goals and objectives. Understand your time line for achieving those goals. There are some time horizons such as your retirement that are 20 to 30+ years.
Nobody can predict the future. Just ask the Atlanta Falcons!
Because the future is unknowable we need to build portfolios that balance rate of return while managing risk. Your portfolio should be allocated across several asset categories. They should be further diversified within each of those categories. This offers both breadth as well as depth. Coach Bill Belichick needed more than Tom Brady to win the Super Bowl. He needed different payers with different skill sets working as a well-trained, cohesive team. Building a portfolio is pretty similar to building a sports team. We insert the players (investments) that will best fit our team.
While not perfect, (Tom Brady started out pretty low in the draft) we look at each player’s history and try to predict how he will perform in the Big Leagues.
When we build a portfolio we have the luxury of looking at many years of history to help us pick the investments. By doing this we start to understand how it will perform in good times and bad. This gives you a portfolio that has stood the test of time, lived through good Presidents and bad ones. It has weathered good economies and bad ones. It has been knocked down only to recover and go onto new challenges & victories.
This gives you a fighting chance against the gods of fate
Nobody knows how the Trump administration will turn out, but a well-crafted portfolio that will be there long after DJT has moved on.
Recently my wife and I went out to Oregon wine country to enjoy one of our favorite ways to relax, seeking out fine Pinot Noir. We found some splendid Pinot’s made by some of the best wine makers in the Willamette Valley. With these superior wines came their above average prices. To a true oenophile these prices are easily justified by the excellence of the wines.
It’s always true that a quality professional makes his craft look easy. We thought, gee how hard can it be make a good wine? We could save a lot of money if we made own wine.
The first thing we realized is that we lack the grapes, de-stemmers, fermentation tanks, wine barrels, bottling machine, bottles, labels and corks. Wow, that’s going to take a lot of money! We found a local retailer who would provide all that and some guidance. The cost would be as much as 2/3 less than what we regularly pay.
We soon learned that we lacked any training, or experience. Worse yet, the retailer had no formal training either. As it turns out, her previous career was as a journalist. Additionally, we had no control over how the grapes were grown, harvested or fermented. We didn’t even know where the grapes came from. What we did learn is that the rejects were often passed off onto our unsuspecting retailer.
Never the less, we figured we could quickly learn as we go. After all we drink wine, so it stands to reason we can make it. As it turned out, the wine we proudly bottled was the worst wine we ever drank. In fact we regretfully poured it down the drain. A complete loss of time and money!
Any professional will tell you it’s important to delegate and put the right person in the right job to get results. You are ultimately in charge of your own money, and sometimes that means making the decision to let a professional money manager handle your investments.
I have spent the last 25+ years perfecting my craft through education, training and experience. Just like any winemaker deals with the ups and downs of the weather, I deal with the ups and downs of the economy and the financial markets.
Lessoned learned! Let the professional do what he does best, and we’ll pay a little more for an enjoyable wine experience.