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The One-Page Financial Plan: A Book Review

I recently read Carl Richard’s “The One-Page Financial Plan” and was impressed with Richard’s approach to working through some complex financial issues.  In particular, he focused almost exclusively on the emotional issues that investors face.  What does money mean to the investor?  What are the investor’s goals?  It’s these issues that overwhelm many investors to the point where they give up or procrastinate for years.

For folks that need a plan and don’t know where to start, this is a useful resource.  It’s simple and easy to follow and the principles are very similar to what I employ with my clients. This is a great guide to help investors think about money in terms of goals and how to get on the same page with a spouse on what the future looks like.  It is the most difficult part of financial planning.

It lacks specificity and implementation ideas.  Since every investor has a unique situation.  This makes the title of the book a little misleading since you don’t end up with a true financial plan on one page.  The book doesn’t go into detail about growth rate assumptions or serial payments or how to calculate time value of money.  Rather it focuses on concepts at a high level.

If the goal is to starting thinking and talking about the future, this is a great place to start.

Important Changes to Social Security

Big changes to Social Security usually take years to plan, develop and roll out. But not this time. Congress has suddenly shut down two popular claiming strategies that have been growing in popularity over the last few years. File & suspend and restricted application claiming strategies will disappear in the next 6 months.

I’m not surprised that these strategies have been cancelled. They exploited a loophole in Social Security and in some cases allowed retirees to collect more than the social security system could handle. What’s most surprising is how quickly these changes will occur. See the chart below to see how it affects you.

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Interested in learning more?

Social Security Discussion

CNBC posted an article online yesterday about how to collect social security. It’s over simplified and generalizes the issues and concepts.  The interesting part was the number of comments the article received.  Close to 600 comments over the last 36 hours!  It was scary to browse through these comments to see all the misinformation that was being spread among the commenters.

If you’re thinking about Social Security, or have questions, talk to us.  We can help to think through the issues with you and help you avoid some of the common mistakes folks make.

How to Save for Retirement When You Can’t Work Longer

When working longer is no longer an option, it is time to develop strategies to maximize your remaining resources. A combination of planning, adapting and downsizing may be the best course.

Evaluate the Situation

At age 60 or so, life has usually simplified. Children are gone by now and expenses have become more predictable. Since Social Security is still on the horizon, you must find ways to create income from what remains. A realistic draw-down strategy and a workable budget are critical to a comfortable retirement.

Reduce Expenses

If your budget prohibits maintaining your prior lifestyle,  expenses must be reduced. Many retirees enjoy creating economical solutions to everyday activities. Senior discounts abound while shopping for auto insurance and other products designed for seniors will lower expenses.  Perhaps you could even cut the cord to cable TV.

Housing Options: Downsize, Reverse Mortgage or Line of Credit

Downsizing to a smaller, less expensive home is an option. You’ll save on mortgage, taxes, insurance and utility costs. You may also withdraw equity from the sale of your original home.

A reverse mortgage can be an option if you prefer to stay where you are and have substantial equity. You can remain in your home while the bank pays you a monthly payment to own your home after you are gone.

Tax Consideration for Retirement Accounts

Before Social Security starts and you have little or no taxable income, the early period is a great time to convert 401ks and Traditional IRAs into Roth IRAs. In doing so, you convert all your retirement assets into accounts from which future withdrawals are tax free. This minimizes the tax burden from the conversion.

Delaying Social Security

If your resources allow, delay Social Security as long as possible. Each year you delay beyond 62 increases your benefits substantially. And if you can wait until 70, the benefits increase by 8% each year past the defined retirement. If Social Security benefits are due for both individuals, it may be practical to draw from the lesser account at retirement age and allow the other to grow to the maximum at 70 years of age.

Annuities

In the current low interest environment, payback on annuities is historically low. However, when interest rates rise, these insurance company-backed policies that you purchase can guarantee a fixed payout for the rest of your lives.

If you’re approaching retirement and concerned that you haven’t saved enough but know that working longer is out of the question, there are a lot of options to consider.  Start with looking for ways to reduce your expenses.  That will have the greatest affect.  Hopefully, a combination of these strategies can make up for the difference.

The Myth of Putting All Your Eggs in One Basket

We’ve all heard not to put all our eggs in one basket when it comes to investing. Most of us would agree that sure, it’s good to have diversification but it seems like this concept of diversification has become misunderstood.

When someone says to me “I don’t want all my eggs in one basket,” they are saying they want to spread their risks out. An investor that invests only in the US stock market is putting all of his eggs in one basket. An investor who invests only in bonds is putting all of her eggs in one basket. They aren’t diversifying their portfolio and as a result are taking on risk.

Some investors make a mistake and think they are diversifying their investments, but in reality the opposite is more likely. Here are a few examples to consider:

Common Problems of Improper “Diversification”

  1. Multitude of Accounts: If an investor has a lot of different assets in different accounts it may be hard to track them all. They receive multiple statements in the mail and have to navigate different custodians when they need to make changes. It could cause confusion particularly around tax time. It becomes an administrative issue.
  2. Tax Impact: Having multiple accounts may cloud one’s view of tax consequences. They could be dealing with gains and losses in different accounts. If not coordinated, an investor could be paying more in taxes than needed. We refer to this as a tax loss harvesting strategy, where we sell investments at a loss to offset ones we’ve sold for a gain.
  3. Similar Underlying Investments: A common situation occurs when an investor has multiple mutual funds from different fund companies, thinking they are diversified. But in reality, those funds may own the same or similar underlying investments. The investor may be putting all their eggs in one basket and not even realize it. Similarly, we see investors who own utility stocks and income oriented mutual funds. When we dig into the holdings of the mutual fund, we aren’t surprised to see it comprised of utility stocks, as well. Again, the investor is putting a lot of their eggs in one basket.
  4. IRA RMD: Required Minimum Distribution (RMD) can be a massive headache if you haven’t consolidated your IRAs or 401(k)s. Missing an RMD (or not taking it out) can result in a 50% penalty.

Get Rid of Unintended Risks

As we’ve seen, the myth of diversifying assets can be misleading. It’s important to understand the true implication of diversification. Knowing how to invest properly by getting rid of unintended risks and allocating your retirement portfolio can give investors peace of mind and confidence in this present economy.