The Millennial Perspective: Starting Late, Retiring Fearless

According to Pew Research Center, Millennials are individuals born between 1981 and 1996. We grew up in a time before the internet was a part of everyday life and playing outside or playing video games were the best options to keep us occupied. We grew up in the rapidly changing age of technology and social media. We also, unfortunately, grew up and are still facing the ramifications of the Great Recession of 2008. This has brought on a number of financial concerns among Millennials and has caused delay for many milestone events, such as buying a home and starting a family. The average Millennial makes $35,592 a year and has a net worth of less than $8,000 according to Business Insider. The average Millennial also has a student loan balance of roughly $30,000 for four years of college. The lower income and high cost of student loan debt on top of the cost of living makes it hard to start a life and save for the future.

As any Millennial would do, I took to social media to gather the opinions of my fellow Millennials about what concerns they faced regarding their financial future. Much to my surprise, several people joined in the conversation. Some said that their biggest concern was paying off student loans, others said buying a home, saving for their children’s futures, or starting a family in general. We will touch more on those subjects later, but one of the most popular answers I received was saving for retirement. Many of us are told to start saving for retirement as early as possible and many of us fear about the future of Social Security. However, when it comes time to set up our 401(k), 403(b), or whatever kind of retirement plans are available, if any, from our employers we find that the suggested amount to invest in the plan is far more than we can afford and still have a comfortable lifestyle. I remember when it came time to sign up for the retirement plan at one of my jobs which I thought paid fairly well for someone my age. The suggested investment each month was a third of my total gross pay, or in other words, the pay before any taxes or deductions. This would have left me with just enough money to pay my rent, my car note, and utilities each month. I, unfortunately, opted out of saving for retirement at that time. 

So, how do we start to save for our futures when we can hardly afford the present? Balance. It is important to find a good balance between what you need to live, what you can save for the future, and still have some funds left over to pay yourself, even if that means setting aside more savings. How do you find this balance? Planning. Sit down and look at how much you are making and how much you are spending, and create a budget that works for you and stick to that plan. Even if you are not investing in a retirement plan with your employer, you can start to save for your future. It doesn’t have to be much to start, but we have to start somewhere. Talk to a Certified Financial Planner™, get a second opinion if you have to, do whatever you need to do to feel comfortable when making these kinds of decisions and ensure that you are making the right choices to plan for your future. Retirement doesn’t have to be a lost cause or a fantasy for Millennials. As Jonas Salk said, “Hope lies in dreams, in imagination, and in the courage of those who dare to make dreams into reality.”


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Liquidity is Everything!

One of the most frightening stories I have heard about a retiree is the one where her daughter came to our office and her face was ghostly pale. No, this isn’t a fictional character. Sadly, this story is too often told and true. Our client’s mother had been talked into an investment that “guarantees her a return with a bonus paid up front”. This particular investment sounds good but the problem was the mother’s age was 89 years young! Suitability is the key word for this type of investment. 

Investments that require prolonged surrender periods, the time at which you can recover your original investment without a penalty, should be skeptically analyzed for appropriateness for the investor. In the present instance, our client’s mother was 89 years of age and the investment had a surrender period of 12 years. Her mother would be 101 years of age before she could recover her $300,000 original investment. I will admit that U.S. citizens are living longer that that experienced in the 1860’s but the likelihood of living to 101 and not needing her funds for medical care is improbable. 

Not only did her mother invest the $300,000, she had very little liquid funds available should in-home aides be required or nursing home care admittance become a necessity. By investing in illiquid, long-term investments, the client’s mother would not experience the type of lifestyle she was accustomed. Diversification is an excellent tool to minimize exposure to this type of danger. These products are not illegal or unusual. The biggest hurdle for many people is that the products are sold by individuals with a benefit for themselves. Commissions on some of these products can be 10% or higher. 

A better alternative is to utilize investments that ladder or vary in maturity. For example, if you need fixed income interest payments, perhaps you would want to purchase individual, highly-rated bonds with varying maturity dates. Some jumbo certificates of deposit may be utilized for laddering purposes so that your interest rates vary depending on the term of the deposit.

If something sounds too good to be true, it usually is. There is no substitute for sound, independent, financial advice delivered by a fiduciary advisor. Select someone that does not have a vested interest in the sale of the product but rather the success of the client’s investment in meeting their goals. As a Certified Financial Planner™ professional, it is our policy and process to place the client’s interests ahead of our own. There is another old question I ask some of my financial professional colleagues that brings this thought to light: “Would you invest your mother’s money in the same way as you are recommending your 89 year old client?”. 

Don’t take chances with your financial security. Apply generally acceptable and proven strategies for meeting your family’s needs. Let’s end this column with a quote from Warren Buffet, “Risk comes from not knowing what you are doing.” See you on the golf course!

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Should I Change My Investment Approach In Retirement?

While accumulating assets for retirement, many people utilize an employer retirement plan that allows consistent contributions while investing in a growth model. Their approach is to maximize the matching contribution from their employer and, perhaps, assume more risk than they would otherwise assume because of continued contributions. Let’s review the process of investing during retirement and the differences one will encounter throughout the distribution phase of the portfolio.

The most prevalent concern of any retiree is running out of money. To confront this fear, most retirees make the most critical mistakes with their investments. First, to seek safety in the portfolio, the retiree will change from a balanced portfolio of equities and bonds to a bond-dominant portfolio. Thinking the cash balance approach secures their cash during the contraction of the markets, the larger peril to the portfolio is the lack of participation in the expansion phase of the market cycle. In layman’s terms, the rate of return on most bonds will not be sufficient to maintain the retiree’s purchasing power during retirement. Rising costs of living expenses such as medical care, housing, food and other basic needs will preclude the portfolio from providing excess cash flow to the retiree unless the total portfolio is significant.

To resolve the concern of running out of money, we work with our clients to develop a sound investment approach that addresses inflationary pressure, periodic cash distribution requirements and market risk. One of the most effective tools to combat risk is to diversify. At the time of retirement, many of our clients will participate in an economics lesson. Albeit a short lesson, we simply ask, “how would you feel to be out of money and healthy?” This question is one that causes their face to wrinkle and the eyebrows to furrow. Typically, the answer given us is “I would not feel comfortable at all!” 

Obviously, we knew their answer but the exercise is one that makes them confront what risk truly is in their lives. So many people believe risk to be simply the loss of principal in their account. However, the greatest risk is outliving your means of support to where your longevity is not rewarded with peace and tranquility but rather anxiety. Our independent research has proven that most retirees sleep better at night knowing they will not be subjected to the need for family or state support. Independence is the reward for investing properly.

Seek out the advice of an independent financial advisor that specializes in retirement planning. You deserve a specialist for this phase of life just like your cardiovascular surgeon if you have health issues with your heart. If you have questions regarding your financial future, why not gain assurance that you are making the right decisions for your family? A visit with a Certified Financial Planner™ practitioner may give you the confidence you need to live your life in a manner you desire instead of simply existing. 

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Last-Minute Retirement Planning Ideas

When you look at the calendar and realize another year has passed, it is time for a few more strategies to enhance your retirement account. Some of these actions may seem simplistic in nature but investing is not as difficult as many people would like you to believe. Investing in a diversified portfolio and rebalancing periodically is about as simple as any process can be for protecting your future.

Before you leave the office for the holiday season, consider reviewing your current portfolio within your employer-provided plan. 2019 has been a year of significant market growth in the United States. Record highs have been reached this year and this is a good result for most equity investors. With such growth in a diversified portfolio it is likely that your risk level within the portfolio has increased, too. 

To maintain the acceptable level of risk you originally desired at the onset of your portfolio development, it is critical to sustain the original allocation. This is accomplished by rebalancing your portfolio based on one of two methods: 1) time; or 2) asset class. This example is purely for educational purposes. When the portfolio was originally established, you may have chosen a 50/50 equity to fixed income allocation. Considering the markets have been very positive on your portfolio and your allocation has expanded to 60% equities. Based on the current allocation, you are now experiencing a greater level of risk than you desire.

By performing the task of rebalancing (i.e., selling your equities and buying more fixed income) you are keeping your level of risk in line with your original target. This strategy is the basis for most theories of portfolio design and risk acceptance. However, you must possess a degree of discipline that does not become greedy when times are good and fearful when the economy is contracting. As an anecdote, we often inform our clients that they must “be fearful when others are greedy and greedy when others are fearful.” The stock markets are auction-based markets. Someone must be selling something for someone to buy it. This belief applies to new issues when a company desires to “go public”. The issuer of the stock is asking for a certain price (i.e., Initial Public Offering Price our IPO) and the public may desire to buy at that price.

Another yearend strategy we recommend is a review of the individual assets classes within an allocation. For example, small cap stocks performed excellently in 2017 and declined in performance in 2018. However, in 2019, the asset class is, once again, performing well. I am not saying that you should own small cap mutual funds. As an illustration, you should review each of the different assets classes and determine the inherent risk within your portfolio.

To help our clients control the amount of risk within their portfolios, we developed a system that “stress tests” their holdings and overall allocation. By analyzing the risk of the portfolio, the investor can be more comfortable knowing their portfolio is not invested at levels of risk that cause them worry. Also, we believe diversification must be achieved in market sectors and geographically to control the risk component.

If you are confused by some of the language in this article, don’t let it keep you from moving forward to protect your future security. You may wish for someone to “stress test” your holdings, asset allocation and project potential for your future. Seek out a Certified Financial Planner™ practitioner and CPA that can help guide you through the confusion and help you reach your goals in a non-emotional and logical manner. 

For additional, free information about managing your portfolio in a manner that allows you to sleep at night, go visit the Compass Capital Management website. You will find a wealth of information to help you navigate life!

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Time is Running Out

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return. 

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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It’s All Taxable, Unless…

All of your income is taxable! This is the premise of the United States Government. However, provisions are addressed through tax legislation that allows certain types of income to be partially taxable or fully exempt from taxation. How do you know which income is tax-free? Is it unpatriotic to pay the least amount of income taxes you lawfully owe? 

Well, lets get one thought out of your mind. Judge Learned Hand, U.S. Court of Appeals in the early 20th century, is credited with stating “nobody owes any public duty to pay more [taxes] than the law demands.” What is fair in our system? The U.S. tax system is based on the honor of its citizens and their willingness to remit taxes timely for the efficient function of the government.

The Internal Revenue Code of 1986, as amended, provides us guidance in the treatment of assets and monies received during the course of the year. For those of us employed, the compensation received from our employers is taxable. However, what about the gift received from Aunt Sally? Is there a limit to what she can give you? Good news! As a beneficiary, or donee, of a gift, of any size, you owe no federal or state income taxes. That means, you could receive a gift of $10,000,000 and owe no income tax. Wow! If that is true, why do we pay tax on other income that is not “earned” during employment?

Section 61 of the Internal Revenue Code states, “… gross income means all income from whatever source derived…” For an item of income to be exempt from taxation, the item must meet specific criteria within the Internal Revenue Code. How does anyone make sense of all of this legal speak? It is critical to understand your tax situation since this expenditure is one of the largest allocations of most individual’s annual budget.

Does this mean your Social Security Benefits are taxable? The answer is maybe. If your income from sources, other than the Social Security Administration, exceeds $25,000 as a single filer or $32,000 as a joint filer, you may have to pay tax on a portion of your benefits. To illustrate the changes in tax laws, the process used by Congress to create revenue for the federal government, in tax years prior to 1987, individuals were not taxed on their Social Security Benefits. Tax laws change, literally, daily.

The solution to this income tax conundrum is to seek a tax adviser that not only understands the tax laws but specializes in planning. Our role as wealth advisors, for our clients, is to provide guidance on the critical areas of their finances that may impair the clients’ abilities to live a life by design. Don’t simply sign your returns each year and send them off hoping for the best. To gain more confidence in your tax responsibilities, seek out a CPA and Certified Financial Planner practitioner that understands the interaction between your planning for the future and the impact of taxation on your investments and income. You can truly take control of your taxes. In the words of Nike, JUST DO IT!

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Starting Late and Finishing Strong

Too many people give up on their dream retirement simply because they started too late (or so they think). One of the greatest opportunities to change your future to what you wish it to be is … to start today! Often, we experience a client that wishes to retire at age 65 and have saved little. Instead of simply acknowledging their lack of discipline, we provide solutions that will help them realize a better future but requires their participation on a plan that will be effective for them.

Let’s look at the most obvious savings point – employer retirement plans. If you work for an employer that provides a deferred savings plan such as a §401(k) Plan, you are in luck. Meet with your employer or human resource officer and determine when you can begin participating in the plan. If you are already enrolled in the plan but want to make changes to your savings rate (called your “deferral amount”) there are certain windows of time that must be observed.

If you are age 50 or older, you can take advantage of “catch-up” provisions within the law that can significantly reduce your current taxes and increase your savings exponentially. For 2019, the “catch-up” contribution amount is $6,000. Think about it. You can save an additional $500 per month on a tax-deferred basis. This will add up to a considerable increase in retirement savings over a ten-year period! If invested prudently, you will experience even greater potential growth until retirement.

The next step is to review your investments within the plan. Are you sufficiently allocated and diversified in your selection of investments? Don’t simply invest in the same manner as other employees. Invest in yourself by spending some quality time to understand the particular options and how you feel if the performance was not as projected. How would your retirement plans be affected if the performance was lacking?

By electing to save your maximum amount to your employer plan, you have essentially placed your goals on auto-pilot. You will automatically be saving money each pay period and it is a little more difficult to obtain the funds if an impulse to buy is experienced. 

Now, the really good news. Your employer-provided plan matches a certain limit of your contributions each year. This is money you will receive in your account that helps you grow your retirement savings. Let’s assume that your employer matches up to 5% of your salary (assuming you defer or invest at least 5% of your salary to the plan) and your total compensation is $60,000 per year. This means your employer will contribute $3,000 (or $250 per month) to your retirement account each year. If you work at least ten years you will have gained another $30,000 plus potential growth for retirement support!

If you are self-employed, you have a number of options that will benefit you if you started late saving for retirement. We will discuss these options in the next article.

Now, take the initiative today to set your course for retirement to be your best years ever! If you have questions about your employer’s plan account, retirement strategies or the tax impact on your cash flow to and through retirement, contact a Certified Financial PlannerTM practitioner to construct a retirement plan that works for you. Until next time…

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The Power of Habits

Habits are much easier to form than to change. Good or bad, habits are formed by all of us, sometimes subconsciously. For example, which leg do you place in your trousers each morning while dressing for the day? Do you even think about the process of dressing or is it simply a routine that you follow because you have performed the same process for many years?

What do habits have to do with your finances? Everything! Many of the habits involving finances are passed down from generation to generation. Did you know that by simply saving $200 per month and investing it prudently for a period of 25 years, one could amass one million dollars? My personal habit of saving started when I was a young child. Granted, money was a little more difficult to accumulate in the 60’s and 70’s but I digress.

Analyze your living expenses and keep in mind the following phrase: “If your lifestyle exceeds your income, your outlook will be bleak.” One habit that should be learned by everyone is the habit of saving. For example, lets assume both spouses are working and the family has excessive (or discretionary) cash flow each month. Why not assign that excess to a savings plan for future needs? We inform many of our clients that their income needs in retirement will be approximately 80% – 90% of the pre-retirement income. Many are shocked with this statement! Think about what is happening during the retirement phase of life. Are you simply going to stop driving your car, eating regularly, utilizing electricity and other utilities in your home? Of course not.

Another habit we hope you will consider is the habit of exercise. By “investing” in your physical fitness, you will reap generous benefits later in life. Mobility and wellness are easily maintained in our 70’s and 80’s rather than being developed in the same time period. Start now to develop the habit of quitting, yes, quitting. Quit drinking sugar-loaded drinks and consume water instead. Limit your caffeine intake each day. Stop eating processed foods and refined sugar. If you find your willpower lacking, seek out an accountability partner. These simple steps will start you on a path of fitness that will create adventures unsurpassed in your retirement years. 

By combining your new habits of saving for the future and maintaining your physical fitness, you have conquered a tremendous number of these hardships experienced by most retirees. Don’t fear being in the minority of retirees who maintain their mobility, mental health and financial security. We believe life is far more than money. Actually, to us, true wealth is all those things that money can’t buy and death can’t take away. If you seek to reach your potential in life, seek out a specialist that works with retirees and understands the challenges faced by this amazing group of citizens.

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How Do You Define Risk?

Danger! Danger! Red flashing lights! Sirens breaking through the still night awakening you from a deep sleep! These are simple, yet effective, methods of alerting you to risks that arise in life. Don’t you wish investment risk were that simple to alert you when you are about to face an inanimate action that has the power to destroy your life savings?

We accept certain risks in life everyday. Once you leave the safety of your bed, you may be subject to risk. Let’s focus on one type of risk – financial risk. You can control the level of risk in your financial life by taking prudent steps to minimize risk when possible. For example, if you are 80 years of age, it may be too risky to invest in a new tech startup with 50% of your retirement portfolio. If you were 24 years of age, this may be viewed more as an opportunity.

As specialists in retirement planning, we believe it is critical to properly measure and mitigate risk when possible. Many of our clients come to us with portfolios that are highly illiquid or invested in a manner that is not in their best interest. When we ask questions pertaining to their acceptable level of risk, the client will generally be moderate or conservative in their approach to investing their hard-earned money.

However, after a careful analytical analysis of their portfolio we inform them of their current investment risk level and their eyes pop open like they are watching a scene from a horror movie. To mitigate the risk, we believe several factors must be considered in their portfolio design:

  1. Consider liquidity needs
  2. Research suitable and appropriate types of investment positions
  3. Determine the tax-effect of the proposed investments
  4. Properly diversify the portfolio to control the level of risk acceptable by the client.

Simply investing the portfolio in its initial allocation does not resolve the client’s risk issues. Proper monitoring of the performance and appropriate rebalancing of the asset allocation to its original target are critical to maintaining the client’s risk level in the portfolio. The financial planning required for an advisor to fully understand the client’s long- and short-term needs and goals entails significant education, experience and knowledge of the economy.

Certified Financial Planner practitioners are professionals that maintain one of the highest credentials as a witness to their competency and ethics. Don’t risk your lifetime savings to risk. What you don’t know could truly ruin your future. Ask for a second opinion regarding your retirement portfolio. Better to find out early if there is a problem in your future.

Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee or future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loass, including total loss of principal

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Five Last-Minute Tax Savings Ideas for 2018

If you are like many people, you are procrastinating the filing of your 2018 individual income tax returns. Don’t worry, you still have time to reduce your 2018 income tax burden. Below are five ideas to reduce your taxes for last year:

  1. Contribute to an Individual Retirement Account (IRA). If you qualify, you may contribute $5,500 (or $6,500 if age 50 or older) to an IRA prior to April 15, 2019, and claim the deduction on your 2018 individual income tax return. This is a wonderful deduction in which you gain a benefit and continue to control your money.
  2. Contribute to a Health Savings Account (HSA). Many families have increased the amount of their health insurance deductible to offset the increase in policy premiums in recent years. If your policy qualifies as a “High-Deductible Plan”, you may open and contribute up to $3,450 for a single person, or $6,900 for family coverage, to a Health Savings Account. Similar to an IRA, this is an effective method of lowering your tax burden while you continue to control your funds. Remember, these accounts can only be used to pay for qualified medical expenditures. Your contribution must be performed prior to April 15, 2019.
  3. Establish and fund a Simplified Employee Pension (SEP) Plan. One of the most generous tax deductions, a SEP Plan is similar to a 401(k) plan in that it allows larger contributions annually than an IRA. This type of plan is available to individuals, corporations and partnerships with self-employment income. If you qualify, you may contribute a maximum of $55,000 to an SEP Plan prior to the filing of your income tax return and take the deduction in 2018. This is a unique opportunity for those individuals who can’t file their returns by April 15, 2019. You may contribute to this plan up to the extended due date for filing your return. Although a little more complicated than an IRA, the larger contribution limit allows significant tax savings and, more importantly, greater opportunity to grow your retirement savings.
  4. Contribute to the Oklahoma 529 Colleges Savings Plan. If you wish to benefit your children, and yourself, consider contributing to their college needs before April 15, 2019. You may contribute up to $10,000 per year filing as an individual or $20,000 per filing as a married couple. Based on Oklahoma’s current tax rate, this contribution may save you $500 to $1,000 of Oklahoma income tax for 2018. Another positive attribute about these plans is the right to transfer the funds among family members and utilize the growth of the account without taxation as long as the funds are spent on qualified educational expenses.
  5. Immediate Expensing of Qualified Business Assets. For many self-employed individuals, this section of the Internal Revenue Code is utilized to control their income tax liability in a significant way. For example, if you are self-employed and bought tangible personal property (an IRS term that simply means, “not land or buildings”), you may be availed a tremendous deduction against your income. The limit for this deduction for 2018 is $1,000,000. For most small businesses, this is an opportunity to invest in your business and take a tax deduction for doing so. Certain types of property must be purchased and limitations apply.

Don’t take chances with your income taxes. Consult a CPA or Certified Financial Planner practitioner to determine if you qualify for the above deductions. Remember, every dollar you save in taxes can be used by your family for something of your choice.

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