When A Loved One Dies

It’s a confusing time; there’s a lot of emotion. Unfortunately, few people have developed a roadmap. Now, you can have one.

Jim Lorenzen, CFP®, AIF®

When  a loved one dies, it can be a bit chaotic. I remember when my parents passed away, they had lived a very long and happy life.   When the time came, it wasn’t unexpected and we had plenty of time to prepare, both emotionally and financially.  This end-of-life timing scenario was predictable.

Unfortunately, that isn’t always the case.  Sometimes it can happen unpredictably.  When that happens, often there’s no plan in place – not even a roadmap.  It can wait.  We’ll do it later.

Not a good idea.

I want you to have something to work with.  You don’t have to fill-out any forms; just click on the form links and you can download them immediately.

These should provide you with the roadmap you need – you may want to print these out or save them to your hard drive – and don’t forget to get help.

Nothing beats experienced guidance.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Stock Market Volatility Can Wreak Havoc on 4% Withdrawal Rates.

Financial planning is often more about what we don’t know than what we think we know.

Jim Lorenzen, CFP®, AIF®

Often financial planning and wealth management is more about the unknowns in life than the knowns.

After years of supporting roles on the Flintstones, Barney and Betty decided to retire from acting in cartoons (it’s hard to be a cartoon character!) and enjoy life.  Using a 4% withdrawal rate, they planned to take $40,000 a year from their $1 million retirement account which, with their Social Security, would provide them with everything they needed for life.  Growth of investments would give them their inflation hedge.

“Security is mostly a superstition: it doesn’t exist in nature”  –  Helen Keller

They retired in 1999.  Unfortunately, after three years his inflation-adjusted withdrawals and the market’s poor performance had eroded his portfolio to less than $540,000.  At this point, his withdrawals now represented almost 8% of his portfolio value.   Bad problem.  Inflation made those withdrawals necessary but the 8% withdrawal rate simply wasn’t sustainable.

The market was good to him for the next five years; but, by the end of 2007, their portfolio was still less than $670,000, meaning withdrawals still amounted to more than 7% of portfolio value.

Then came 2008-9 – the melt-down.  Their nest-egg plummeted to less than $400,000 and withdrawals now represented more than 12% of account value (cost of living still going up!)

4% didn’t work too well for Barney and Betty.  Fred and Wilma (actually, more Wilma that Fred) had told them they needed a real plan that would be stress-tested for all the unknowns in life. 

Planning isn’t about what we know; sometimes it’s knowing what we don’t know – and recognizing that often there are things we don’t know we don’t know.   It’s more about managing risk than money; and planning for the unknowns. 

Nothing beats experienced guidance.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Like the S&P 500 Index?

Maybe you should look under the hood.

Jim Lorenzen, CFP®, AIF®

Like indexing?  Like the S&P?  You can get an index fund!  Sounds good.  Let’s face it, most (virtually all) investment management companies fail to beat the S&P index on a consistent basis.  We all know that.

There’s a good reason for it:  An index doesn’t have expenses while, in the real world, all assets have a cost of ownership – expenses – attached.

If your home is worth $500,000 and your local housing market, including your home, increased by 10%, your home and the market would become worth $550,000.  Did you tie the housing index?  Of course not.  You had to pay property taxes, homeowner’s insurance, maintenance and repair costs, mortgage interest, maybe even HOA and other costs that are required.   Sometime, just for fun, add up all your annual costs and see what your annual expense ratio is (total costs of ownership divided by your home’s current value).  You might be surprised, but I digress.

Expenses aside, how about using a fund replicating the S&P index (that’s as close as you’ll get)?  Let’s look under the hood.

According to Craig L. Israelsen, PhD, an Executive-in-Residence in the Personal Financial Planning program in the Woodbury School of Business at Utah Valley University, if all holdings in the index were weighted equally, each company holding would have a fixed weight of about 0.20% in the index.  However, the holdings aren’t weighted equally; their weighted according to their market capitalization.  This means that roughly 42% of the assets in a market cap-weighted S&P index are held in just 25 of the 500 stocks – another way of saying that the largest 5% of stocks represent over 40% of the allocation.

The practical implication of all this:  half the stocks in the market cap-weighted S&P index have very little impact on performance.

When tech goes up, the cap-weighted S&P index looks good.  When tech takes a nose-dive, not so good.

Is that good for baby-boomers now guarding their serious money for retirement?  Saving a point or two on investment expenses may not be the key issue for this group.  Wealth preservation and maintaining purchasing power for the long term may be more important.

Maybe there’s a better way to achieve long-term goals than riding the index roller coaster.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Does “Bucket Investing” Achieve Goals or Destroy Wealth?

Many investors, and advisors, like it; but there are some experts who apparently aren’t too sure.

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Jim Lorenzen, CFP®, AIF®

Does the ‘bucket’ approach to allocating assets to life goals make sense—or does it actually destroy wealth?   Mentally, bucket investing is simply assigning money to ‘buckets’, i.e. goals.  Advisors utilizing this  approach use a variety of buckets.  Even some celebrated elite advisors have used this method.  One uses a two bucket approach:  Bucket #1 contains a five-year cash reserve and  bucket #2 is then free to invest in longer-term investments, typically stocks, stock funds or exchange-traded funds (ETFs).

Many people find the approach appealing for several reasons:

  • No need to  wrestle with sequence-of-returns risk 
  • No need to worry about liquidating assets during a  down market
  • Comfort:  It comports comfortably with the well-know behavioral bias of mental  accounting.  It’s easy to understand having a withdrawal account and a long-term investment account.

Javier Estrada, a professor of financial management at the IESE Business School in Barcelona, Spain conducted a research study, some time back, on the merits of the ‘bucket approach’ to investing for achieving long-term financial goals.  His study included highly-detailed back-testing of both Monte Carlo and  bucket strategies, back-tested over a variety of time periods and methodologies.    His study uses\d a risk-adjusted success (RAS) measurement—it’s defined as the ratio between the mean-expected value of outcomes  and the standard deviation of outcomes

Are you asleep, yet?

Basically, he’s measuring downside risk-adjusted success—measuring only downside volatility—the dispersion of only failed outcomes as opposed to simply looking at the disparity of upside to downside outcomes.  

Okay, enough of the weeds.  His extensive research shows that while the bucket approach may have psychological  benefits, it doesn’t perform so well when tested  for the highest  likelihood of success.   It failed in all performance tests to provide enough money to cover the needed  withdrawals.  Estrada found that as he extended  the number of years for withdrawals to occur, the worse the strategy became.

Reasons for the failure?  Estrada explained:  “Most implementations of the bucket approach… distribute funds from more aggressive buckets into more conservative buckets, but not the other way around.  Put differently, although bucket strategies avoid selling low by withdrawing from bucket #1 after stocks performed badly, they do not take advantage of also buying low as static strategies do with rebalancing.”

The bucket approach is popular due chiefly to a lack of knowledge.  Surrendering to the mental  accounting bias allows investors to conveniently stop worrying.  While increasing the amount of money allocated to bucket #1 might allow them to sleep better, it also increases the odds of running out of money.

Oops.  Not good.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Hidden Surrender Charges

You could be paying them without knowing it. It pays to do some math.

Jim Lorenzen, CFP®, AIF®

I don’t know anyone, certified financial planner professionals included, who is a fan of surrender charges; but, economically they are a fact of life for many products simply to make the offering available and viable for the investment or financial product provider.

For consumers, the surrender charge represents an obstacle that stands between them and having total liquidity—and the charge itself reduces the value of the product should that liquidity be required at some future date.   Sometimes, however, consumers are already paying for the liquidity they desire even if they never need or use it!

Hypothetical example:   Mary and John have $150,000 “just in case”  money set-aside in savings.  They have no particular purpose for it but they like knowing it’s there if they should need it.  They’re not making much interest, of course, probably less than 2% – but they like the liquidity.   They’ve heard about another investment that in all likelihood could help them achieve a 5% return, but it has a surrender charge—something they would like to avoid—so they’re staying with their savings account.    In effect, due to the return difference, they’re paying 3% per year for their liquidity right now.  In three years, they will have paid 9% – $13,500!   In five years the liquidity/opportunity cost will be 15% – $22,500—even without growth. 

Maybe the alternative might be a better bet—especially if other questions result in favorable  answers:  Is the tax treatment different?  How much of the money is even subject to surrender charges and how much might be liquid without surrender charges?   Does it make sense to pay 3% in opportunity cost up front for liquidity they may not even use—or does it make more sense to pay for it when it’s needed?  And how much would it even be?

It pays  to do the math and examine all alternatives.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

No RMDs for 2020!

But, you may want to take IRA withdrawals anyway. The reason is simple: Taxes are On Sale!

Jim Lorenzen, CFP®, AIF®

Required minimum distributions (RMDs) have been eliminated for 2020 due to the COVID-19 pandemic; but, you just might want to consider taking a distribution anyway.   Why?

Taxes are on sale!  

The dirty little secret is that all that money in your IRA isn’t yours, unless you have so many deductions or credits that you can zero out all your income – not likely.   We have a tendency to look at our statement’s IRA balance and think all that money is ours.  It isn’t .  At some point, Uncle Sam will take a chunk of it.  It will happen when you begin withdrawing it.  So, the only question is at what rate?

Few people are aware that the current tax laws is set to expire – it ‘sunsets’ – on December 31,2025, about 5 years from now (that allows for tax increases without anyone in Congress having to vote for it, though many would happily do it earlier anyway).

So, you can take your IRA money now at ‘sale prices’ or take it later at higher prices.  Why would you want to do that (besides the obvious)?

The SECURE Act has eliminated the stretch IRA.  This means your heirs could have a big problem when you and your spouse pass away.  Odds are it will happen when your kids are in their peak earning years; want to guess what taxes might look like then?  When they inherit your IRA(s), they will be required fully liquidate those IRAs by the end of the 10th year – ouch!  Big tax bite.

What can you do?  Begin withdrawing your IRA money while taxes are on sale over the next five years and do a Roth conversion on the money each year.   You’ll pay taxes now at ‘sale prices’ and the money will grow inside the Roth IRAs tax-free.   Now, there’s no RMDs.   And, when the time comes, your kids will have to liquidate by the end of the 10th year – but the money will be tax free!

There’s a hidden benefit for you, too:  Taxable income is used to determine what percentage of your Social Security is deemed taxable; it’s also used to determine Medicare premiums.   The less money you have in your traditional IRAs, the less the RMDs – and the less taxable income you have.   Hmmm.

If you have a comprehensive financial plan, a Roth conversion analysis should be a normal part of your planning process.   The savings over the life of your plan, and to your kids, could be substantial.   There are a number of issues to be considered, age, possible penalties, etc., so be sure to talk with your financial advisor.  Don’t have one?  See below!

 

Is there a subject you would like to learn more about?  Let me know in just 1 minute!  You can do it here.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Three Tips for Building Family Wealth

There is more you can do, of course; but, these will get you on your way: 

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Jim Lorenzen, CFP®, AIF®

Most people work long hours for 30+ years trying to build wealth for themselves and their families  –  okay, it’s really for the vacation home and a nicer car, but the first part sounds better.

The truth is building family – inter-generational wealth – really isn’t that hard to do.  If you REALLY want to do that, these simple steps will get you started.

  1. Choose your beneficiaries wisely when allocating inheritance money.   Leave tax-deferred accounts (IRAs and non-qualified annuities, for example) to younger family members.  They’re likely in a lower tax bracket and have longer life expectancies for taking the required minimum distributions, which means the distributions will be smaller, as well.    Highly appreciated assets are best left to beneficiaries in higher tax brackets as long as the cost-basis can be stepped up to the current price levels.  This means wealthier recipients can sell the asset with little or no tax consequences.  The high-income beneficiaries would most benefit from the tax-free benefits from life insurance policies.   Life insurance is the most overlooked, yet one of the most valuable tools in the toolbox.   Where else could you create an estate with the stroke of a pen?

  2. Don’t be too eager to drop older life insurance policies.  Some may wonder why keep the policy if they no longer need it.  Those older policies may be paying an attractive interest rate, which is accumulating tax-deferred.  Secondly, those small premiums may well be worth the much larger tax-free payoff down the road.   How to tell?  Start by dividing the premium into the death benefit.  Got the answer?  If you think you’ll pass away before that number (in years), you probably should keep paying.   Remember, death benefits generally pass tax-free!

  3. Convert Grandpa’s IRA to a Roth IRA.    When grandpa passes away, his IRA assets will likely be passed down to children and grandchildren, which means they’ll have to begin taking taxable required minimum distributions (RMDs) – which means they’ll probably be taxed at a higher rate than grandpa would have paid on his own withdrawals (when grandpa passes away, the grandkids are probably in their peak earning years, paying higher taxes anyway.  Why force them into a higher bracket still?).  If grandpa converted some or all of his traditional IRAs to Roth IRAs while alive, this problem wouldn’t happen.  Smart kids might want to encourage this and even offer to pay the tax bill on the conversion now!

Review your financial plan with your advisor?  Don’t have an advisor or a plan?   Hmmmm.  See below.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

The Investment Model And It’s Amazing Hidden Powers.

Few understand the power of the investment allocation model, even in – especially in – times of crisis; but the power can be great when tied to a long-range financial plan.

Power of the Model

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Jim Lorenzen, CFP®, AIF®

I can almost guarantee that not many people fully realize the power of an investment model as a means to fulfill a long-range financial plan, even in – or especially in – times of crisis.

The chances of a V-shaped recovery appear to be slim; not just because of the chances of a new spike in the pandemic due to possible premature reopening of the economy, it’s more about how market recoveries generally occur; yet, the power of the investment model remains unknown to many.

Many people intuitively believe that a 20% loss can be recaptured with a 20% gain; but, of course it’s not true.   If you start out with $100, a 20% loss takes you down to $80.   But, to get back to $100, you need to see your $80 grow by 25% ($20 ÷ $80).  So, knowing that it takes a 25% gain to buy back a 20% loss, it’s easy to see why recoveries generally take longer than the original decline.

When we suffer declines in the market, it can be tempting for some people to sell on the way down in an attempt to cut their losses.  The problem, of course is that calling the ‘bottom’ is difficult, because recoveries seldom occur in a straight line.  Next thing they know, the recovery happened and they missed the rebound forcing them to buy back in at a new high.  As you can see from this chart, a simple buy-and-hold philosophy would have been much easier without forcing them to become a market genius.  After all, if Warren Buffett can’t time markets – and he says he can’t – than, why should we try?

Market Timing

That’s where the power of the investment allocation model comes in.

Those who’ve been smart enough to build their financial future with a blueprint tend to have a framework for fulfilling their long-range strategic plan.  On the investment side of their planning, the foundation is an customized asset allocation.  What few realize is that that allocation has an automatic buy low/sell high mechanism that comes built-in!

Let’s look at a simplified example:

Since we talking about stocks more than bonds, let’s use an example of a simple growth-oriented allocation that’s comprised of 70% stocks and 30% bonds, with the majority of the stocks in the domestic U.S. market (represented here using the S&P index) and a lesser amount in foreign stocks (represented here using a Europe, Asia, and Far East index).

Sample Allocation

Let’s assume our hypothetical investor has $500,000 invested.  To make it simple, basic stock-bond allocation would look like this:

Stocks:  $350,000   =  70%
Bonds:   $150,000   =  30%
Total:     $500,000   =  100%

Now, let’s suppose stocks drop by 20% (we’ll pretend bonds stay the same).  Our new allocation would look something like this:

Stocks:  $280,000  =  65%
Bonds:   $150,000  =  35%
Total:     $430,000  = 100%

Stocks are now underweighted by 5% and bonds are now overweighted 5%.  The great thing about models is that they can, and usually are, rebalanced on some type of schedule or according to some built-in protocol.  To get back to our original allocation, money will have to be reallocated from bonds into stocks – the rebalancing ensures that we’re now buying low.

In order to get stocks back to their 70% weighting, we’ll need to bring the stock total to $301,000 ($430,000 x 70%).  That will require moving $21,000 from bonds ($301,000 – $280,000).  So, our rebalanced allocation is now:

Stocks:  $301,000 = 70%
Bonds:   $129,000 = 30%
Total:     $430,000 = 100%

Now, over time, the stock market finally recovers the 25% needed to get back to where it was.  That 25% gain in stocks adds $75,250 to stock value:

Stocks:  $376,250  =  74%
Bonds:  $129,000  =  26%
Total:    $505,250  = 100%

Notice, we didn’t just get back to where we were before, we actually made money!  We ‘beat the market’?  How did that happen?  The market returned to where it was but we ended-up ahead!  

Rebalancing the investment model allowed us to buy low and sell high without being a market genius!

Now, of course, this is a over-simplified hypothetical (you can’t buy an index and I’ve ignored things like the time-frame involved, taxes, inflation, and a lot of other stuff), but, the concept is no less valid.

Oh, yes, rebalancing again now, getting us back to our original allocation, now means that we’re `selling high’ as the 4% overweighted stock money is now repositioned back to bonds until next time.

Not bad, eh?

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Would You Build A House Without a Blueprint?

I wouldn’t. I also wouldn’t be driving in a strange city without a GPS.

Jim Lorenzen, CFP®, AIF®

It looks like the COVID-19 issue is going to be with us for awhile; the U.S. is still seeing over 25,000 new cases each day and some medical experts think we’re in a two-year process, which makes some sense considering the time it takes to get a vaccine into mass distribution, as well as getting the public to embrace it the way they did the polio vaccine in the 1950s.

Congress, of course, has been passing relief measures which, among some, are raising concerns about the national debt which now stands around at 100% of GDP while unemployment payments in excess of normal wages are creating a disincentive for some Americans to return to work until August, when those benefits are due to expire.

We’e in, of course, an ‘event-driven’ bear market which some would call a structural bear in that it is the result of a government-induced forced shut-down. Given that about 70% of our economy is driven by the consumer and no one knows when they will feel safe enough to work, shop, travel, and go to sporting events (a $12-billion industry) – not to mention the achievement of mass innoculation; some experts believe that the bear could last as long as 42 months.

Whenever economic crisis occurs – and it has on numerous occasions throughout history – the lesson comes home that building a financial house without a blueprint makes for bad construction and a poor outcome. That blueprint, of course, is a financial plan that serves as the foundation for an investment process – and a process is not a group of transactions. Today, of course, those who’ve done it the right way are seeing the value, and the power, of having a model to follow and stay within.

If you have a plan, make sure you keep it updated. If not, maybe it’s time to begin one.  If you’d like some help, you can begin your process here.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

How Social Security and Pensions Might Impact How You Arrange Your Nest-Egg.

Few people think about this, but you might want to.

Jim Lorenzen, CFP®, AIF®

Everyone intuitively understands the need to have a balanced approach to meet retirement needs; however, it’s also important to address risk in light of the long term inflation risk.  

Let’s take a hypothetical example using simple numbers.  And, suppose after all the data gathering, goal setting, and risk assessments have been completed in the financial planning process, June and Ward Cleaver (yes, I am that old) have decided they feel comfortable with a portfolio that’s comprised of 60% bonds and cash and 40% in stocks.  

June and Ward are retiring today after over thirty years of working and saving—they’ve done a lot of thing right—and have accumulated a nest-egg of $1 million.   So, in our simple example, that would indicate their money should be arranged with $600,000 allocated to bonds and cash, and $400,000 to stocks.  Simple.

But, suppose the two of them also have Social Security income—maybe even pension income, as well.  This additional ongoing cash flow shouldn’t be ignored in constructing their allocation.    Again, to keep numbers simple (I’m highly qualified for simple numbers).  Let’s say Ward and June have an additional $30,000 in annual ongoing income to augment their savings.   

What does that $30,000 annual income represent?  How much would someone need to have invested to provide the same income?

Assuming a 4% annual withdrawal rate on assets  – we’ll say that fits June and Ward’s situation  –  that $30,000 represents income on an additional $750,000 in assets… except these assets are illiquid:   June and Ward can only take the income, they can’t ‘cash in’ the principal.   It is like, in effect, an annuity, something some people use to simply ‘purchase’ a lifetime income.   I’m not a big proponent, but they do have their place in some situations—but that’s another story.

Nevertheless, if we consider that $30,000 annual income as actually representing an additional asset, June and Ward really effectively have $1,750,000 in assets, $750,000 of which we’ll consider illiquid and providing an income of $30,000 at 4%, but it never runs out of money.   If 60% of their total retirement ‘assets’ is to be allocated to bonds, their bond portfolio might now be $1,050,000 (60% of $1,750,000), $750,000 of which is already allocated and providing $30,000 in income. 

That leaves $300,000 ($1,050,000 – $750,000) to be allocated to bonds from their nest-egg.  This decreases their nest-egg bond and cash allocation from the original $600,000 to $300,000, and therefore raises their stock allocation from $400,000 to $700,000.   If long-term inflation is an issue – and it is – then were June and Ward really risking being under-allocated to stocks?

The ‘guaranteed’ $30,000 cash flow, representing an illiquid asset, provides them with the ability, i.e., gives them the freedom, to still address short-term needs and objectives with $300,000, while allowing more money, $700,000) to address long-term inflation risk.

Historically, stocks have performed, simply because they represent the economic engine of the United States.   And, it has never made sense to bet against the U.S.A.   Pistons drive the engine and the engine provides forward movement.

Jim

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.