With the recent roller-coaster-like activity we’ve seen in the market, I thought this article would be well worth sharing: 7 Ways Your Brain Makes You A Terrible Investor
During these last few weeks and months, we’ve advised most clients to stick with their current strategy and to avoid the thoughts discussed in the article.
As individuals approach retirement they often ask themselves what they should do to maximize their income. Specifically, they may wonder if they should pay down their debts (credit cards, auto loans, or a mortgage) or should they invest more in the markets. The answer is often times more complicated than they expect.
It’s important for investors to understand what the after-tax cost of borrowing is, especially when a mortgage with interest rate is involved. It’s possible that after-tax returns can be higher than after-tax cost of debt. Borrowers who pay a low interest rate are in a better position to invest. Other factors that determine whether or not someone should invest instead of pay down debt favor the entrepreneur and people who are willing to take risks. An investor with a loan costing them 2% per year may want to keep that debt and instead invest in the market if they think they can get 5%-6%.
Risk is determined by several factors such as age, income, time frame, market activity and taxes. Most experienced investors are aware that equities can be high risk assets. A leading factor that favors investing is high disposable income, which allows for higher risk tolerance. If we revisit the above example, the investor does run the risk of investing in the market in a bad year. In that case the investor still has to service the debt, but also watch their portfolio decline in value. The higher the interest rate on the loan, the more risk the investor takes that the return on the investments will not beat the interest rate.
Even though debt seems like a bad word, it is helpful to a credit score to have a certain amount of debt or credit history. The first priority should be saving up six months worth of monthly expenses as part of an emergency or safety net fund. Once this fund is in place, excess money can be used to pay down debt or invest. The main barometer for deciding between debt and investing is debt-to-income ratio. If the ratio is high, paying debt is usually the wiser choice. Tight cash flow is a red flag that budget cuts will be needed.
With low interest rates like we’ve seen, now is a good time to review your situation.
The media is causing millions of Americans to make a serious mistake when it comes to social security collection strategies. We see articles that discuss ways to “maximize” the social security benefit using clever, new methods such as the “file and suspend” approach. But they completely miss the ball on the most critical issue. They do not stop and ask what your GOALS are for Social Security, which should be the discussed first. Only then should specific strategies be evaluated. Here are a few goals to consider:
Once you know your goal, then you can move to the next step and decide how should you collect the benefit. Maximizing the cumulative benefit is just one goal and may be a poor choice once you take the time to compare them to other options.
Leaving a job can be a frightening proposal, even if you’re moving up in the world—navigating retirement plan rollovers, lost and gained benefits, pay and cost-of-living changes, and the other variables can feel quite daunting. Fortunately, if you take a moment and relax, you’ll find that a methodical, thoughtful approach makes it all much easier. Today, we’ll help you navigate your way through the financials of leaving a job without getting stressed about the endeavor.
Take a close, hard look at the benefits you’re losing as you leave your job, noting the value of stock options, leave time, child-care, insurance, etc. If you’re moving immediately into a new job, you’ll want to evaluate what you’re gaining the same way, for ease of comparison. A firm understanding of the actual value of what you’re losing or gaining is important.
Not every valuable benefit vanishes when you leave a job. You might have several decisions to make about more flexible benefits, such as stock options, which you’ll want to go over with a tax or finance professional—the details around these decisions can get quite complex quite quickly, so don’t let yourself drown alone in the specifics of rolling over your 401k to a new plan or an IRA, keeping or selling stock options, etc.
If you’ve noted a loss of value in moving to a new job, that information can be useful for negotiating additional pay, benefits, and one-time expense coverage (for relocation, etc.). Otherwise, look to a financial planning adviser for assistance in finding moves you can make to shrink the gap—you may be able to defray relocation expenses with tax deductions, qualify for new credits, etc.
When the dust settles, it’s time to conduct a thorough self-audit and see where your income, benefits, investments, retirement savings, and other financial considerations all stand. Make sure to review plans which, while not directly associated with the job you’re leaving, may interact strangely with your new situation—insurance, investments, estate plans, and the like all need a second look over after a major change such as leaving a job. Take your time, get professional financial planning assistance, and do it right, so you can rest assured that your big change is a move in the right direction.
A reporter from Financial Planning Magazine, recently posed a question to several financial advisors asking:
“What happens when an elderly retired client runs out of money?”
Below is my response, which was included in the article:
WATCH WITHDRAWAL RATES
Michael Lecours, an advisor at Ohanesian/Lecours in West Hartford, Conn., says the time to address the issue of running out of money with retirees is when they start increasing withdrawal rates from their savings.
“We can see the writing on the wall five to 10 years away,” Lecours says. “After a conversation, most clients recognize the issue and find ways to reduce their expenses. They make plans to downsize, move in with a family member, or scale back on their lifestyle.”
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