Chris Kimmet

  • WHAT PHYSICIANS SHOULD KNOW ABOUT DISABILITY INSURANCE

    Why Disability Insurance is Important: Protecting Your Greatest Asset

    As a physician one of your greatest assets is your ability to earn a substantial income once you have completed your training and residency, and you should protect it with disability insurance. Most physicians will graduate with a healthy amount of student loan debt from years of schooling, likely totaling in the hundreds of thousands of dollars. And while this might be a daunting amount to have to pay back, the opportunity to earn a great income throughout your working career makes the investment worthwhile.

    If your ability to practice medicine in your chosen field and use the skills that you have gained during your years of school and training were to disappear, the ability to pay off your student loans, not to mention being able to achieve your goals and live a life that you enjoy would be drastically reduced. Insurance companies estimate that as many as one in seven doctors will be disabled at some point during their career. The importance of your future income and the high likelihood of needing to rely on disability insurance are the reasons why it is such an important topic for all physicians to understand.

    Short-Term vs Long-Term Disability Insurance

    There are different variations of disability insurance: short-term and long-term disability insurance policies. The benefit period – or how long you receive payments if you become disabled – can last up to two years for short-term policies. Long-term policies are designed to cover your working career, with most policies ending at the age of 65. For this article we will be focusing on the more important of the two, long-term disability insurance (LTD).

    The Benefits and Drawbacks of Employer-Provided/Sponsored Group Long-Term Disability Insurance

    Many employers offer a group long-term disability insurance to employees. This is a great first step in protecting your long-term earning potential, but relying solely on employer-provided coverage can come with some drawbacks.

    Some of the benefits of employer sponsored long-term disability insurance are:

    • Lower cost
    • Easier to qualify for (usually does not require medical screening)

    The list of potential drawbacks for employer-provided coverage is longer, but that doesn’t mean that employer-provided disability insurance is a bad thing it just means you have some extra homework to do when choosing an individual long-term disability insurance policy to make sure you are getting the correct coverage.

    Potential drawbacks are:

    • Any occupation definition of total disability
    • No portability if you leave your employer
    • Benefits are taxable (when employer paid)
    • Offsets with other benefits such as social security
    • Capped benefit amount

    An employer-provided group long-term disability policy is a great place to start when it comes to coverage, but you are almost certainly going to want to supplement that coverage with an individual policy that provides a full level of income replacement as well as the ability to maintain coverage if you switch employers in the future. Let’s look at an example of the benefits from a group policy and why you would want to supplement with an individual policy as well.

    Employer provided long-term disability coverage typically has a maximum monthly benefit cap along with only replacing a percentage of an employee’s. Also since this is usually a benefit provided by your employer on a pretax basis, the employee ends up paying income tax on the benefit they receive, so for example:

    Let’s say Doctor Doom earns $400,000 per year and is covered by a LTD plan that covers 60% of income up to a maximum of $15,000 per month. Under the plan they are insured as if they are making $300,000 (60% of $300,000 provides for $180,000 or $15,000 per month, the plans monthly benefit). Dr. Doom would also still owe income tax on the $180,000, lowering their benefit further.

    Important Contract Provisions and Riders

    There are different provisions and riders that are included in a disability insurance policy that may affect the cost and benefits that you are entitled to receive should you need to make a claim. The list below contains a few of the most important provisions and riders to understand when choosing a policy.

    Definition of Total Disability: Own-Occupation vs Any Occupation

    The definition of disability is an important distinction within the policy. Under an own-occupation definition, someone would be considered disabled if they could not perform the functions of their occupation, whereas with an any occupation definition as long as they could perform the functions of any occupation, they would not be considered disabled.

    A basic example would be if a surgeon who through illness or injury lost their fine motor control and could no longer perform surgery (their occupation), but could still work an office job, they would be considered disabled under an own-occupation definition but not an any occupation definition.

    Residual Disability

    This is a provision that allows a partial benefit to be paid if someone is not totally disabled but are in a situation where they cannot perform all the duties of their occupation or cannot work as many hours and suffer a reduction in income.

    Elimination Period

    This is the period of time before you are able to start taking benefits. You can think of this as being similar to the deductible in a health insurance plan. 90 days is a typical length for most long-term policies, but elimination periods of 0 days, 180 days, or longer can also be selected.

    Benefit Period

    The benefit period is the period of time that the policy will pay out disability benefits. This can range in time from two years all the way up to the insured’s lifetime. The most common benefit period is up to age 65

    Recovery and Transition Benefits

    Policies can offer a recovery or transition benefits to continue paying benefits to someone after the insured has fully recovered. For example, in the case of a solo-practitioner who has been disabled for a significant period of time and eventually recovers. They will likely have seen a number of their patients leave and find other physicians. Transition benefits could be used to supplement their income as they build back their patient base and income.

    Non-Cancellable and Guaranteed Renewable

    When a policy is both non-cancelable and guaranteed renewable it means that the insurer cannot change the policy terms or increase the premiums as long as the insured pays the scheduled premium. This offers the insured the greatest amount of protection. There are policies that are only guaranteed renewal (not non-cancellable) which allow the insurer to change premium rates in the future. This may provide the insured with savings on the initial premiums but leaves them open to rate increases in the future.

    Future Increase Option, Benefit Increase Rider, Benefit Purchase Rider, Benefit Update

    These options allow the insured to increase benefits or purchase more coverage in the future. Importantly the insured is able purchase additional benefits without undergoing additional medical underwriting. These are beneficial options for physicians early in their career as they can purchase increased benefits to keep up with their increases in salary without having to go through the medical underwriting process again.

    Catastrophic Coverage

    A catastrophic disability benefit rider allows you to receive an additional monthly benefit if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment. The reasoning behind this rider is that the additional benefits could be used to pay for someone to provide in-home care or medical expenses not covered under your traditional health insurance.

    Cost of Living Adjustments

    COLA is a rider that provides increased cost of living adjustments for claim payments to keep up with inflation. This is especially important the younger you are when purchasing your policy as inflation can take a toll on benefit payments over time.

    Long-Term Disability Insurance Cost

    Long-term disability insurance for physicians can be expensive. Premium costs tend to be in the range of 2-6% of income, and traditionally policies are much more expensive for women than men. This is primarily due to the higher risk of disability for women due to pregnancy and pregnancy related illnesses. According to the Journal of the American Society of Certified Life Underwriters a 35-year old woman is three times as likely as a man of the same age to become disabled for 90 days or more.

    Graded vs Level Premiums

    Graded premiums start out lower than level premiums and increase over time, whereas level premiums will remain the same for the life of the policy. If you are hell-bent on paying off your student loans, saving a ton and becoming financially independent early in your career then the graded premiums might make sense. But for most physicians, getting coverage early in their careers and choosing level premiums is the better bet.

    Premium Frequency

    Insurers offer a few different payment frequency options: annual, quarterly, monthly. With more frequent payments costing more than making one annual payment. This can usually be changed without affecting the policy so starting out with monthly payments early in your career and then switching to an annual payment once you can afford it is a good option.

    This article provides an overview on the basics of disability insurance and is by no means an exhaustive guide. When selecting a disability policy make sure to get multiple quotes and understand the specifics of your policy and what it covers. Your skills and your income, especially at the start of your career, are your most important asset. Make sure to protect it by including disability insurance in your financial plan.

  • SHOULD YOU REFINANCE YOUR MORTGAGE?

    Mortgage rates have been trending down and the US National average for a 30-year mortgage hit 3.45% last week, a full percentage point lower than where it was the same time last year (4.41%). A lower rate means lower payments. If you bought a house today you’d pay $166 less per month on interest versus a year ago.

    But, assuming you already have a home, the drop in interest rates is leading many people to ask themselves if now is the right time to refinance their existing mortgage.

    There are many reasons why a homeowner may want to refinance a mortgage, locking in a lower interest rate is only one of them.

    Getting a lower payment.

    This is typically the biggest driver towards refinancing. By getting a new mortgage at a lower rate you can lower your monthly payment. With this type of refinance you are usually extending the amount of time and interest you will end up paying on your home.

    Extracting equity out of your home.

    By refinancing you can take advantage of property appreciation and/or your principal payments on your home and cash out some of the equity you’ve built up to use for home improvement projects or other uses.

    Reducing interest paid.

    Refinancing at a lower interest rate can save you on the total interest paid over the life of the loan.

    Refinancing to a shorter loan term.

    A shorter loan term can help you save on the total interest paid over the life of the loan albeit with higher monthly payments. Lower interest rates can help bring the monthly payments for a shorter term loan within reach.

    Locking in a fixed rate.

    Many adjustable rate loan options exist with the interest rate fluctuating over the life of the loan. Locking in at a fixed rate can give you peace of mind that your loan payments will not rise if interest rates do in the future.

    The refinancing process can look much like the process you went through when first buying your home and applying for a loan. Your mortgage lender will look at your credit score, income, savings and may ask for a new appraisal of the property. You can expect to pay closing costs on the new loan that can range from 1%-5% of the cost of the loan depending on the lender. Before starting the process, ask yourself a few questions first.

    How long do I plan to stay in this current home?

    This is a big one. Whether you are living in your forever home or if you plan to move within a few years will have a big effect on refinancing being a good financial decision. A lower monthly payment may seem enticing, but you need to run the numbers to see if you will break even after factoring in the closing costs at the beginning of the loan.

    How long do I have left on my current mortgage?

    The longer that you pay on a loan the more of your payment goes towards the principal versus interest. In the beginning most of your payment goes to interest and at the end the majority goes towards the principal. If you are closer to the end of your loan there may not be as much of a benefit to getting a lower interest rate. People also derive psychic income from paying off a large debt, so if you are close to having your mortgage paid off you may feel better having it gone rather than extending it and getting a lower payment.

    Am I still paying PMI on my loan?

    If you have to pay for private mortgage insurance on your loan because you borrowed more than 80% of your home’s value you may be able to get rid of PMI on your new loan by refinancing. You also may be able to stop paying PMI on your current loan if your home has appreciated and/or you’ve built up enough equity in your home. Usually this will require a new appraisal so check with your mortgage lender to be sure.

    How much equity do I have in the home?

    If you want to get cash out during a refinance then you will need to have the equity in your home to do so. Also, many lenders like you to have at least 80% equity in your home before going forward with a refinance.

    What interest rate do I think I will qualify for?

    If your financial situation has changed significantly since you applied for your original loan; making more money, paid off debt, increased your credit score. You could qualify for much better loan terms during your refinancing.

    Do I have any big financial decisions coming up soon?

    Don’t forget to consider any big life decisions you may have coming up. If your job situation is up in the air and you might have the opportunity to take a role that requires a move or more travel, then sitting tight might be the safest decision for now. Or if you thinking of starting a family or a business and your income may fluctuate in the near future, then it may be the right decision to take advantage of your current stability to lock in a new loan now at a lower rate.

  • WHAT SHOULD I DO WITH MY 401K RIGHT NOW?

    The swift drop in the stock market from all-time highs into a bear market has left investor’s heads spinning. Almost before anyone had time to fully process the fall, the market started to rebound. Down 30%+ from the peak, the stock market started to recover and as of the beginning of May was only around 15% below the all-time high in February.

    Good and bad headlines continue to alternate in the news. Historic unemployment numbers, better than expected results due to people socially isolating, infection hot spots popping up due to delayed action, and general unease and uncertainty about how long it will take for things to return to normal.

    So, what should investors expect for the future and more importantly what should they do about it? With regards to both the coronavirus and its impact on the economy and the stock market: Is the worst behind us or are we in store for more bad news before we start to turn the corner? I can’t answer these questions, but I can provide some advice for how to prepare your finances for the future.

    Take stock of your personal finances

    First things first, do what you can to make sure your day to day and month to month expenses are covered. If you are lucky enough to have a stable income coming in at this time, now is the time to review your emergency savings and make sure it is adequate. Most financial advisors recommend between 3-6 months of expenses, but the ultimate number is whatever allows you to sleep soundly at night. If your employment situation is shaky or uncertain no one is going to razz you for having 9 months’ worth of cash in a savings account right now.

    If you are in an industry that has been hit hard by the effects of the coronavirus shutdown and you have or are in danger of losing your income, now is the time to prepare. The stimulus and increased unemployment benefits from the recently passed CARES act can help build a savings buffer, and federal student loan deferred payments may help some as well. If you are worried about missing payments for rent, your mortgage, or other essential services, reach out to your landlord, bank, or creditor before you’ve missed a payment to understand what options you may have for credits or deferral.

    If you feel secure about managing your cash flow then you can move onto the next level and consider what to do about your retirement investments.

    Continue your 401k contributions

    If your personal finances are locked down, you are able to continue working, and have an income coming in, then the right answer for almost everyone is to continue making your contributions as normal. No one can predict with any certainty if March was the low point for the stock market this year or if the worst is yet to come. During these times of market stress, our fight or flight instincts start to kick in and it can feel like you have to do something. But reacting based on your gut is rarely the right move and you should instead listen to Richard Bogle: “Don’t do something. Just stand there!”

    If you are in the early or middle stage of your career and still have a while to go before retirement then this is likely not the last time you will experience a market drop of 30% or more. This is just another example of the volatility you will need to live with to enjoy the returns that come with owning stocks, as well as an opportunity to buy them at a lower price than you could just two months ago. It’s better to focus on your time in the market rather than timing the market.

    If your company has cut matching 401k contributions because of worries about the economy you might want to review the available investments in your 401k and if they are high fee or otherwise don’t meet your needs you could shift your contributions to an IRA or Roth IRA. Just set a reminder to turn your 401k contributions back on when your company begins offering a match again.

    If you are able to increase your contribution, now is probably a good time to do it. Market crashes hurt while they are happening, but they do increase the forecast for future stock returns.

    Create a Financial Plan

    If you have a financial plan in place, now is the time to review it and reassess some of your original assumptions. Were you optimistic or pessimistic regarding your emergency fund, too conservative or aggressive in your asset allocation and risk tolerance, were you focusing on the right goals?

    The steady upward market climb during the past decade had the effect of lulling investors into a false sense of security, where every time the market dropped a few points investors started to scream “BTD!” (that’s “buy the dip!” for those of you who aren’t a part of fintwit). We haven’t seen it for a while, but the market can remain lower and decide not to hit new all time highs for a lot longer than we’ve experienced recently.

    If you don’t have a financial plan now is the time to put one together. As the saying goes, the best time to plant a tree was 30 years ago, the second-best time is today. The same sentiment applies to financial plans. The best time to put together a plan was in the middle of the 10-year bull market we just experienced, the second-best time is today.

    Consider your risk tolerance and asset allocation. If you were invested 100% in stocks or in an 80/20 stock/bond portfolio, how do you feel? If you were comfortable with the volatility and the drop in your portfolio’s value then that’s probably the right allocation for you. If, however you had some sleepless nights, it might be a good time to reconsider the level of volatility you can live with. The stock market will probably not be as rosy as the period from 2009-2019, so you need to make sure you can handle volatility when it comes. Some of the worst financial decisions happen when investors’ emotions get the better of them.

    Another option is to get some help from a financial advisor as you put together your financial plan. One of the biggest benefits from working with an advisor is having an experienced person to talk to and help guide you toward what the right decision is for your specific situation and then help you stick with it.

    With social distancing and stay-at-home orders in effect, many advisors are adding the ability to meet virtually with clients, while some have been working virtually with clients for years 😉

    Have questions about your specific situation?

  • WHAT SHOULD I DO WITH EXTRA SAVINGS?

    Covid-19 has impacted society and how we go about our day to day lives in many ways, and we will discover more changes as long as it remains a threat without a successful treatment or vaccine. Quarantines, reopening, subsequent outbreak related shutdowns, and looming waves of infection all have the capacity to change our behavior in ways we can’t predict. We have already seen the largest spike in unemployment in the history of the U.S. and some of the largest bailout/stimulus/aid packages passed in record time.

    One somewhat surprising financial effect has been the increased personal savings rate. The rate jumped from 8% in February up to 13.1% in March and according to the U.S. Bureau of Economic Analysis it hit a record 33% in April. I guess an increase shouldn’t be too surprising given that due to stay at home orders people weren’t able to spend at many of the places they usually do like restaurants and bars, and people with small kids didn’t have to pay for childcare (but still had to find a way to care for kids and get work done, if this is you, I’m in the same boat and I feel for you). Still, the magnitude of the increase is a bit shocking.

    If you are part of the lucky group with stable employment and you’ve seen your savings balance go up, what should you do now? Blowing it on stuff you don’t need from Amazon might seem appealing, but there are probably better uses for your excess cash.

    Create an emergency fund

    Step number one in all of personal finance is earn more than you spend, and step two is to set some cash aside in case of future emergencies. If you are someone that’s been operating right on the edge between income and spending, take this time to build up a cash cushion. The old statistic that 40% of people can’t afford a $400 emergency is said to be false, but that doesn’t mean that everyone is sitting pretty with plenty of savings, or wouldn’t be in a bad spot if they had to replace the transmission in their car tomorrow.

    The recommended emergency fund amount is between 3-6 months of expenses depending on your personal comfort level and situation. Chances are that the increased savings you may be experiencing is not enough to fully fund 3-6 months of expenses and that’s ok. Start by making a deposit to this fund and continue adding to it over time.

    If you already have an emergency fund that you felt comfortable with heading into 2020, right now when the world is so uncertain is the perfect time to re-evaluate. Make sure your risk tolerance and comfort level aligns with the amount you have in savings. I think it’s helpful to think back to how you felt when the shutdowns started and everything was so uncertain when considering the correct emergency fund amount for you. I am not advocating for people to pull all of their money out of the stock market and keep it in cash, but having a decent emergency savings account, might come in handy and help you sleep much better in the coming months. Especially when it seems extremely likely that we will continue to deal with more uncertainty going forward.

    Review your spending habits

    It’s rare in life that someone or something mandates that you stop doing anything inessential. But that’s exactly what happened when the coronavirus shut downs occurred. Most of us had between 1 to 3 months of time where we were not allowed to do much outside of the basic functions of eating, sleeping, working, and caring for our children.

    It was definitely frustrating in the moment when you couldn’t go out and grab a meal at your favorite restaurants or get coffee in the morning before heading to work the way you would normally do. But it also offers an opportunity to take a look at your spending pre-shut down and more mindfully consider what actions you want to continue or change now that life is moving back in the direction of normal, or at least our new normal.

    Maybe during quarantine you discovered how much you like cooking for you and your family at home during the week. Or maybe you discovering how much you were spending on snacks and coffee and other things throughout the throughout the week. Or maybe you’re surprised that the extra money you have in your bank account because you were not able to head to happy hour for drinks 2 to 3 times a week like you previously were. On the flip-side you might realize just how much you relied on your weekly yoga session to destress after your work week, or how much your weekly date nights out helped you and your partner connect.

    The quarantine has provided a great chance to review how you spent your money and time before and consider if there are any changes worth noticing. It’s perfectly fine not to make any changes after life gets back to normal, the important part of this process is taking a mindful look at how you were spending in both situations and making sure that you’re aligning your money with your goals to live your best life.

    Give to those that need it the most

    If you’re fortunate enough to be in just as secure a financial position today as you were in February 2020 that’s great, but the effects of coronavirus and the shutdowns have impacted some people much more than others. The economic effects have impacted people unequally based on race, income and education. Those with higher income and higher education levels have seen minimal effects to their financial well-being. They have been able to continue working and in many cases working from home. The shutdown has more severely impacted communities of color and less educated workers who have seen a much higher rate of unemployment since the start of the shutdowns.

    If you are in a position to donate, now is a great time to give to charities that are helping those hit hardest during this time. There are many organizations that could use your help supporting the work they do. World Central Kitchen has been working to feed people during the coronavirus crisis, you can also support Feeding America or use their site to find local food banks that would gladly accept your help as well.

    Along with the increased economic impact that they have to deal with, minority communities have been disproportionately hit with the health impact of coronavirus as well. Blacks and Latinos are more likely than Whites to be infected by the coronavirus and are more likely to die as a result as well. The protests around the murder of George Floyd have helped shine a light on the systemic racism and injustice that these communities must deal with everyday. One small way you can help is by donating to Black Lives Matter, the NAACP Legal Defense and Education Fund, and the Loveland Foundation or another charity working to promote racial equity in the U.S.

    There are many causes and people that can use your help even more these days than in the past. I strongly recommend finding a way to support organizations like these or others that are important to you if you are able.

    Plan for future goals

    One of the most impactful things that you can do with any unanticipated cash is to you give yourself a head start on achieving your future goals. Putting a healthy chunk into savings account for a future house down payment, or maxing out your Roth IRA contributions for the year as well as getting a start on next years are great uses of excess funds.

    As they say compound interest is one of the most powerful forces in the universe, and it’s made even more powerful the earlier you put it to work. Giving yourself a head start on savings allows compound interest to work for you for longer and potentially reach your goal much more quickly.

    Don’t Look Back With Regret

    However you choose to spend your coronavirus savings windfall please do it wisely. There are still plenty of ways to spend and as the U.S. opens up it will be tempting to go wild or fall back into default spending patterns without realizing it. The worst outcome financially would be to look back at this time with regret that you wasted this opportunity to build up your savings, help others or set your future self up for success.

  • A late Christmas gift from Uncle Sam! Higher IRA and 401k contribution limits for 2019

    With all of the hubbub around the holiday season you probably missed a nice gift you received from Uncle Sam. And, like the forgetful uncle that he is, he forgot to give it to you until January, but as they say, it’s the thought that counts.

    So, what present am I talking about? Why, the $500 increase in IRA and 401k contribution limits of course!

    Contribution Limits for 2019

    For 2019 the maximum you can contribute to an IRA has increased to $6,000, up from $5,500 last year ($7,000 for individuals 50 or older). And for a 401k the maximum employer contribution increased to $19,000 up from $18,500 (this also applies to 403b, most 457 plans and the governments Thrift Savings Plan). Individuals 50 or older contributing to these plans (401k, 403b, 457, TSP) can still contribute an additional $6,000.

    What also increased were the income limits for the phaseout of when you can and can’t contribute to IRAs and Roths. You can find the full rundown of the changes on the IRS’s website here: IRA increases contribution limits for 2019.

    But don’t forget about 2018

    You also still have the option to contribute to your IRA or Roth for 2018. You can contribute right up to April 15. So, if you haven’t yet contributed this year you still have time to sock away up to $5,500 ($6,500 if your 50 or older) into your IRA and count it against 2018’s taxes.

    If your income is above the Roth contribution limits, you are unfortunately too late to enact a backdoor Roth contribution for 2018 since you had to complete those by Dec 31 2018. Maybe a financial planner could have helped make sure your financial tasks were completed on time wink, wink?

    What is the impact of that extra $500?

    You may yawn and think, “big whoop, an extra $500, what will that get me?” Well I’m glad you asked. Even though it might not seem like much, given it’s only an extra $41.67 a month. Depending on your investing time frame that $500 could add up to a serious bump in your portfolio over time.

    If We assume 7% growth within a tax advantaged account, after 10 years you would have an additional $6973. After 20 years it would be $20,624 and after 30 that would grow to $47,479. All from contributing just an extra $500 a year.

    Upping your contribution

    Now is the perfect time to increase your contribution for 2019 or make one for 2018. If you’re a W-2 employee you should receive your copy in the mail any day now.  By comparing your earned income in box 1 of your W-2 to the income limits at the link mentioned above you can figure out if you qualify to contribute to an IRA, Roth, or both. And if you plan to earn the same amount for 2019 this will help you decide where to contribute for the coming year as well.

    Another decision to make is when to make your 2019 contributions: in one $6,000 chunk or by dollar cost averaging with an automatic monthly contribution.

    The upside with automatic monthly investments is that you don’t have the worry about contributing $6,000 in one chunk then watching the market drop the next day. The downside is if the market decides to move steadily upward throughout the year, the impact of your monthly contribution is reduced each month.

    Historically the stock market finishes the year higher than where it started about ¾ of the time. Given this info you are likely better off making the lump sum contribution at the start of the year. But if it helps you to sleep at night by making the monthly contributions then go that route. We humans tend to feel the pain of loss much more acutely than the joy from a gain.If you are in Boise or beyond and would like to talk with a fee-only advisor about your IRA or 401k funding questions, or anything other questions you might have, give us a call. We are happy to help.

  • MILLENNIALS HAVE HOW MUCH IN THEIR 401(K)?!

    A recent article in Investor’s Business Daily got a lot of attention online. The subject of the article was how much the average 401(k) balance has increased over the past 10 years split out by generations. Millennials had an average balance of $137k in 2019 up from $10,500 in 2009. While Boomers had an average of $366k up from $98k 10 years ago.

    It seemed that most people responding to the article on social media had a similar reaction along the lines of, “that’s crazy, there’s no way that’s true”. And turns out they were mostly right. The data was taken from a fidelity survey of their 401k plan participants, but what wasn’t stated in the article was that these numbers only considered those individuals that had their same 401k account open for the past 10 years. Once you hear this detail the numbers start to make a bit more sense.

    The majority of millennials are still in the early stage of their careers which is typically a time where people take the opportunity to jump around between jobs, companies, and different places to live and see what fits them best. This is especially true for this generation as we have pushed marriage and home buying later either because of preferences, opportunities or both. It makes sense that those that have had a stable job with the same 401k for the past 10 years would have a much higher balance than the overall average. It’s probably a pretty limited set of the millennial cohort included in this data set, but I think there are a few points we can take away from this info, even if the article seems to have been constructed in a way to get people worked up and share it purely from a “would you look at this *#$&?!” angle.

    Just stick with it

    The accounts included in this group have been open for at least 10 years, which illustrates the amazing effect you can have by continuing to do the little things right month after month and compound them over time. Continuing to contribute to your 401k plan, paycheck after paycheck, is a great first step towards building up your retirement savings. Especially given the benefits that a 401k typically provides vs an IRA: employer matching, higher contribution limits, additional after-tax contributions if available.  

    It can be tempting when moving from one job to another to cash out your 401k rather than roll it over into a new 401k or IRA. There are a few times where cashing it out makes sense from a financial planning perspective, such as in the case of extreme hardships, but it’s typically a much better option to roll it into another plan and continue making your contributions and grow your funds for the future.

    The benefits of having a 401k 

    If your employer didn’t offer a 401k and you only had access to investing within an IRA (with contribution limits below $7k/year for the past decade) you would be hard pressed to grow your account in the same way without maxing out your IRA contribution every year over the past 10. However, with a 401k you could contribute up to $16,500 yourself and $49k total between you and your employer in 2009, and those numbers increased over the decade to $19,000 and $56k respectively. It’s obvious with a 401k that you could contribute much more, especially as your income grows, than with only an IRA, not to mention the benefits of receiving employer match contributions.

    If you don’t have access to a 401k consider asking your employer to offer one. Many small businesses do not offer a 401k because of concerns about cost and matching contributions, but in recent years 401k plan administration costs for small businesses have decreased and companies do not need to offer a full or even any match if they don’t want to. 401k plans have been shown to be great for retention of employees and I’m sure the individuals in the fidelity study are glad that they had the opportunity to invest in theirs over the past decade.

    What else can you do

    So, what can you do if you don’t have a 401k and it doesn’t look like you will get access to one anytime soon?

    • If you are a 1099 employee consider setting up a SEP-IRA. With a SEP you can contribute up to 25% of your earnings or $57k, whichever is lower, for 2020. This can be a way to goose your contribution above the traditional IRA limit of $6k. If you are not a 1099 employee but are considering it make sure to consult with a tax professional whether or not it makes sense to switch from a W-2 to self-employed because there are additional tax consequences to consider.
    • If you can, contribute to an HSA. Stack that on top of your IRA adds an additional $3,550 ($7,100 if you are married) that you can contribute to tax advantaged accounts. HSAs are also one of my favorite stealth retirement accounts because they are triple tax efficient if used correctly. You can contribute tax-free, the funds grow tax-free inside the account, and the funds can be withdrawn tax-free if used for qualifying medical expenses.

    So, there are steps you can take if your 401k or other retirement savings accounts aren’t at the level of those in the article, or otherwise where you’d like them to be. And if you’d like someone to help you put together a plan to boost your 401k or IRA contributions consider reaching out to a fee-only financial planner today.

  • SURVIVING THE HOLIDAY HANGOVER

    The calendar page has turned from December to January and another holiday season is in the rear-view mirror. If your holidays were anything like mine then you might be feeling a bit of a hangover from all of the overindulging of the last few weeks. It’s easy to get caught up while in the thick of the season and come out of December more stressed than when you went in. In my case this stems from a few different areas you might relate to: spending on gifts and other things, holiday travel, enjoying too many special treats at holiday get-togethers, and children gone feral after two weeks of too-much sugar and not enough routine.

    It’s easier than ever to spend more than you planned these days and that’s especially true during the Christmas shopping season. With every retailer touting their best prices of the year during black Friday, and again on cyber Monday, and yet again on the final weekend before Christmas (funny how that works), it just makes sense to pick up a few things for yourself while you’re at it. All of this can lead to a painful shock in January when you receive your credit card bill. This is another point for using cash for your purchases when you can, since it helps prevent adding on just “one more thing” that you probably didn’t need or budget for.

    There’s not much good to be said about traveling for the holidays. Icy roads, flight delays, and sleeping in a bed that’s a size or two smaller than what you’re used to at home (god bless those of you sleeping on an air mattress). But we endure it all to be with those we love this time of year. As we get older the guest beds become harder to endure and the prospect of not making the trip so we can sleep in our own house is that much more desirable. But for now, our boys are four and six years old and we feel fortunate that we are in a position where we can travel and they can spend the holidays playing with their cousins and being spoiled by their grandparents. I guess one silver lining is that after all of the time away, the first night back in your own bed is some of the best sleep you’ll have all year (absence does make the heart grow fonder after all).

    If your family is anything like mine, the holidays can seem like a competitive eating event staged over the course of two weeks. It’s hard not to overindulge when there are so many events and get-togethers where it seems the main purpose is to try to consume as many cakes, cookies, pies, and other sweet things as possible. The general consensus seems to be that any health eating habits can wait until everybody starts dieting with their new year’s resolutions. 

    Reading the preceding paragraphs might give you the impression that I’m a scrooge who doesn’t enjoy the holidays and only focuses on the downside of it all. But that’s part of what makes the January hangover so real. I have the memories of the time spent with family and giving and receiving gifts, but as the glow from those experiences fades we need to deal with the effects of our overindulgence, lack of sleep and higher than normal (or anticipated) bills coming due. So, what can we do about it?

    Well it’s no surprise that January is the biggest month for new gym signups and participation, and that Dry January is a new trend that people are jumping on as well. For most folks though, I recommend focusing on the basics rather than starting a new routine and hoping you’ll stick with it. If your budget feels stretched, and you feel stressed, use that as motivation to get back to basics and focus on a routine that works for you. One thing we’re doing in our household is preparing healthy meal plans for a week or more ahead of time to prevent falling back on going out for lunch or dinner.

    If you feel you have to try something bold to make a new start, like sign up for a new exercise class, try out a whole 30 or keto diet, or commit to a no-spend or dry January, then give yourself the best shot at sticking with it that you can by finding a way to hold yourself accountable. Some good ways to do this are to find a friend or partner that will participate with you so you can keep each other honest. If no one wants to join you, you can still ask a friend to hold you to your goal, or make a public announcement that you will donate money to a cause you dislike if you start to slack off. There’s a reason so many New Year’s resolutions never make it to February, but having an accountability partner or consequence can go a long way towards ensuring your success.

    Good luck to all of you. We made it through the holidays, we can make it through this too.

  • POLITICS AND INVESTING

    With all of the ups and downs in the stock market lately, and the multitude of different news headlines you see trying to explain it away – tariffs, potential interest rate cuts, rising or falling inflation, etc. You would be forgiven for worrying how the decisions or tweets made by those in the government will affect the stock market and your investments.

    Maybe you think that having Republicans in charge leads to stability so that businesses can plan and make investments for the future, and that’s better for the stock market than when Democrats are in power. While your neighbor is sure that the complete opposite is true because of the economic stimulus that flows from all of the liberal spending projects. I have heard both types of comments over the years, and I’m betting you have heard them or know someone who has blind faith in one party or the other as well.

    In 2010 I had a co-worker who was sure that the decisions congress and the federal reserve were making after the financial crisis were going to lead to runaway inflation, a recession, and another stock market crash, and was invested based on these outcomes.  Unluckily for them and their portfolio, but luckily for the rest of us none of those situations has come to pass and the S&P 500 has almost tripled from then till now.

    I’ve also heard people during the market drawdown at the end of 2018 say that they sold out of the stock market and wouldn’t invest again until “that bozo” was out of the white house. Right now, it is too soon to tell but the stock market did recover at the end of 2018 and has posted great performance through the first 2.5 years of this presidential term.

    While it may feel like the government has a big effect on the economy and the performance of the stock market, I’m here today to tell you that it’s hard to see much of a difference based on who is in charge. And there are many other things you should be focusing on instead.

    Democrats – Running up a deficit and that’s bad for the country and the markets… right?

    People tend to believe that since Democrats want to increase spending and expand social programs like Medicare for all that the US spends more money when they are in charge. Depending on who you talk to, experts will say that the spending is good because it can help stimulate the economy, while others will say that the increased spending is bad because it generates more debt we will have to pay back later.

    But either way, since the 1980s when Ronald Reagan was president the yearly budget deficit has tended to increase under Republican presidents and decrease under Democratic Presidents. So, maybe it’s Republicans who are spending and propping up the economy/saddling us with debt? Not exactly what you’d expect based on the stereotypes huh?

    Republicans – The party of business… or not?

    Experts also argue that the economy and the stock market both do better with a Republican president. After all, the GOP is considered the party of big business, which definitely leads to certainty and stability and a stronger economic outlook for the future. Except that’s not the case either.

    Looking at the economic data starting after WWII, America’s GDP has grown 4.4% per year when Democratic presidents were in office versus 2.5% per year for Republicans. While the stock market has performed similarly returning 9.7% annually for D’s versus 6.7% annually for R’s during roughly the same time period.

    And if certainty and stability from a business point of view is what you expect from a Republican president, you’d have a hard time making a successful argument that there is anything remotely stable about the decision making going on in the current White House. But, even with that all of that instability and the corresponding inability for America’s CEOs to make accurate plans for the future, the S&P 500 is still up over 30% from Jan 2017 to September 2019.

    What you should actually focus on, instead of which political party is in charge.

    Rather than pulling your money out of the stock market based on what happens next November, or any other gut related feeling you might have, focus on these three things that you can control.

    1. Maximize your cash flow (Income – Expenses = Savings). Spending less than you earn is step number one towards successfully saving for the future. Maybe you can predict the stock market’s moves based on the daily political moves, but if you don’t have any savings to put to work as your investments then you still won’t get very far.

    2. Build a plan. What are you saving and investing for? How much do you want to have in savings for emergencies, how much do you need each month to pay for your mortgage and student loans, how much do you need for retirement? Think about these questions and put a plan in place. It is much easier to achieve a goal when you have a realistic expectation of the money/time/effort it will take to reach it.

    3. Understand your appetite for risk. Investing in the stock market has been the best strategy to achieve those long-term goals, but the stock market has good and bad days and everyone’s temperament is different. Having an idea of how you will react to stocks losing 20, 30 or 40% before recovering will help you build a plan that you can stick with for the long haul and see to completion.

    By focusing on these aspects of your financial life, instead of the day to day movements of the stock market or the election by election movements of the government, you put your focus on things that you can control, rather than worrying about things in life that no one can predict.

    If you’d like some assistance building a financial plan or understanding your risk tolerance and the decisions you should make to achieve your financial goals contact a financial planner today. At Steady Climb Financial Planning we have openings to bring on new clients in the fall. Schedule your free initial consultation today!

  • WHAT ARE ESG AND SRI FUNDS?

    Every generation has their different stereotypes informed by their attitudes and behaviors. This is caused by many different factors: the economic, political and social environment when they were growing up; changes in the media, communications, and travel options that occur over time; different education, family and lifestyle priorities.

    Digging into exactly why different generations prioritize different things isn’t the point of this post. We know the great depression or the baby boom era shaped those generations just as those of us today have been influenced by the great financial crisis and other recent events.

    What I find interesting are the ways in which these generational attitudes change and how the companies that want to receive their purchasing and investing dollars change to accommodate them.

    Younger Generational Values

    Taking a look at the younger generations: Millennials, the tail end of Gen X, upcoming Xennials, you hear some common themes that have shifted compared to past generations. They tend to value experiences over things, they are more concerned about the environment, they want to know the companies they purchase from and work for are good actors in the world.

    Corporations as Do-Gooders

    Companies have embraced some of these themes and have tried to earn their customers trust in different ways. Some by focusing on what they call their triple bottom line: social, environmental, and financial impact; rather than only worrying about their profits. Other companies can now be classified as B Corporations, which means they must balance their decisions between purpose and profit. And some companies, such as Patagonia, tout the work they do organizing and working to impact climate change.

    Individuals are interested in this not only from a consumer standpoint, but from an investing standpoint as well. Investors want to invest with companies they believe are operating in accordance with their values. This can be because investors believe it is the right thing to do, and also because they believe that companies that care about the same things they do – the environment, social issues, their community – will prosper and do better as a result.

    Similar to the early days of investing to track an index, investing in socially responsible or environmentally responsible companies in the past has been challenging. But as with most other things in capitalism, where there is a demand, a product will be created to meet it. Enter the SRI and ESG funds into the mutual fund and ETF landscape.

    People tend to use the two terms interchangeably but there is a big difference. Using the term ESG, means in addition to traditional valuation metrics like sales, cashflow, and debt; you are also considering the environmental, social, and governance practices when evaluating a company.

    ESG – Environmental, Social, Governance

    Environmental: Climate Change, Pollution, Renewable Energy Use, Protection of Natural Resources

    Social: Human Rights, Community Engagement, Employee Relations, Health and Safety, Child and Forced Labor

    Governance: Transparency, Quality of Governance, Conflicts of Interest, Independent of the Board of Directors, Ethical Conduct, Executive Compensation

    SRI – Socially Responsible Investments

    SRI goes a step further, when you use a set of values to screen companies based on their ESG metrics.

    Examples:

    • Investing in companies that increase transparency in their supply chain and manufacturing methods to improve worker health, safety and working conditions.
    • Not investing in companies that contribute to climate change, or ignore their effects on natural resources.
    • Investing in companies that support the use of renewable energy.
    • Not investing in firearms manufacturers.

    Due to the growing interest in investing in these types of companies, index companies have built SRI and ESG indices and funds to track them. Most of these funds are designed starting with an index like the S&P 500 and then removing or reducing the amount of companies with lower ESG scores.

    But rather than tracking an objective metric like company size or location, evaluating and scoring companies based on their SRI and ESG metrics is a subjective measure. Fund and index companies will weight things differently and you must do your due diligence when purchasing these funds to understand which companies are included.

    As this story from marketwatch illustrates depending on your views and what you deem to be socially responsible you might be surprised to learn that your SRI fund owns sugary soda companies or chemical manufacturers.

    The Future for SRI Funds

    As the younger generations move into their prime working and investing years I wouldn’t be surprised to see the demand for these types of funds increase. Since the Forum for Sustainable and Responsible Investment first began tracking them in 1995 the amount of assets invested in these funds has grown from $639 Billion to over $11 Trillion.

    If you are interested in aligning your investments with your values make sure you do your homework on the companies involved. If you have questions it would be a good idea to talk to a financial advisor, who could help you understand the differences and risks involved with different funds.

  • HOW DO FINANCIAL ADVISORS GET PAID?

    sometimes you gotta channel your inner jerry maguire : show me the money!

    Maybe you’ve heard the terms Fee-only, commissions, or Fee-based when it comes to investment advice. But, most people don’t really understand how their financial advisors get paid or even how much they are paying for financial advice. This is due in large part to the number of different ways “financial advisors” are compensated, and the fact there is set rule on who can and can’t use the term “advisor”.

    In this post I’ll describe three of the main ways that advisors are paid and the benefits and drawbacks of each. Then I’ll define a few terms I think you should know that can help you find the right type of advisor for you. Advisors can use pieces from all three of these fee structures, so be sure to ask any advisor to explain exactly how they are paid.

    I will state up front that I am  biased against the commission-based structure. It is unfortunately designed to introduce conflict between the broker and their clients, and push people into products and portfolios that are not right for them.

    The three main fee structures are

    1) Commission based

    2) Assets Under Management (AUM)

    3) Flat fee – usually charged hourly, monthly, or quarterly

    1) Commissions.

    Pros: ?

    Cons: No fiduciary duty, incentives not aligned, higher likelihood of conflicts of interest

    In this model a client works with a stock broker or insurance broker, but they can also call themselves an advisor. When you buy your stocks, bonds, mutual funds, annuities, or insurance policies from this person they earn a commission from the company that provided it. Their client, you, doesn’t pay them anything directly, but you could be losing because of the misaligned incentives in the system.

    One of the main problems with this model are that the broker probably earns a higher commission from some products than others, which means they are incentivized to sell you those products more than others that pay them a lower commission. As a broker they are not legally bound to look out for your best interest. They just have to provide you with advice or products that are “suitable”. Consider this example:

    You want to purchase $100k of a balanced stock mutual fund for your retirement and they have 2 funds with similar performance to choose from. Fund A costs you, the client, 2% expenses annually, but Fund B only costs you 0.05% expenses annually. You would probably choose Fund B for yourself, right? But Fund A gives the broker a 5% commission and Fund B only gives them 1%. The broker will only make $1,000 by selling you Fund B instead of $5,000 if they sell you Fund A. If you were the broker which choice would you make?

    By having the fund companies and insurance companies pay your advisor instead of paying them yourself, you may feel like you are paying less for advice, but you might be paying more in ways you don’t realize or be pushed into buying products that aren’t right for you.

    2) Assets Under Management (AUM)

    Pros: Incentives aligned, easy to understand fee, fee isn’t a concern for monthly cashflow

    Cons: Fees can drag on investment performance, does value increase along with the fee increase, clients can forget what they are actually paying for advice, clients need to have adequate AUM to work with advisor

    In this model the advisor charges a fee based on the value of your portfolio that they advise you on, your assets that they manage. Typically, the fee is somewhere between 1%-2% and gets smaller as your portfolio gets larger, so 1.5% for $1M, 1% for $1M – $1.5M etc. But this is can vary greatly between different advisors, so make sure you ask before signing on the line that is dotted.

    This can be a good way for an advisor to structure their fees, and if they are only charging AUM then they would qualify as a fee-only advisor. In this structure the advisor and client’s incentives are aligned, as the advisor’s fee increases along with the growth in the value of the portfolio.

    These fees are typically paid out of the portfolio as well, rather than out of a client’s monthly cashflow. This can be nice for a client because they do not have to budget for monthly or quarterly payments to the advisor, but it also puts a 1% or greater, drag on the growth of the portfolio. Paying monthly or quarterly, the same as with your other recurring expenses could help improve your returns and judge the value you receive from your advisor for the fee you are paying. Another question a client should ask as their investments grow is if the value they receive from an advisor managing a $2M portfolio is twice as much as when they were managing a $1M portfolio.

    Another downside for the AUM model is that it is designed to work for a client that has an account for the advisor to manage. Such as a brokerage account, IRA, Roth, etc. For younger clients who are still in their prime working years, their largest accounts are probably their 401k’s. These reside with the 401k plan where they work, and cannot be managed by an Advisor unless rolled over into an IRA, which is likely not be the best option for most people.

    3) Flat fee – usually charged hourly, monthly, or quarterly

    Pros: Easiest fee structure to understand, doesn’t drag on investment performance, easy to judge value for fee, can work with clients without large AUM

    Cons: Usually have to pay out of monthly cashflow

    An advisor charging a flat fee looks like most of the transactions that we are used to, the advisor provides a service and the client pays them for it. This makes the flat fee model one of the easiest to understand one of the reasons why it is growing in popularity for advisors and clients alike.

    With this model an advisor can charge for specific work on an hourly or project basis, much like an attorney. Or an advisor can work with clients on an ongoing basis where clients pay a standard monthly or quarterly fee. This level of flexibility allows clients to pay for as much or as little service as they need.

    The fee charged for advisory or planning services can vary based on the needs of the client and the specialization of the advisor. An advisor may charge a higher fee to individuals with small businesses and rental property than to a younger single professional. Or an advisor might charge a higher fee to a client to prepare a retirement plan versus a client just needing investment management advice. Clients can find advisors charging from $150-$1000 per hour for different projects, and from $150-$500 or more per month for ongoing financial planning or financial advising relationships.

    The flat fee model allows an advisor to work with individuals who might not be a fit for an advisor that charges on AUM, while also helping prevent the conflicts of interest that can occur with the commission model.

    Helpful Terms To Understand

    Fee-only:

    When you see the term fee-only it is used to describe a registered investment advisor that has a fiduciary duty to serve their client’s best interest.

    Fee-based:

    The term fee-based was created by commission-based agents and brokers to muddy the waters and confuse consumers. As a term it means advisors charge a fee in addition to collecting commissions.

    Registered Investment Advisor

    A registered investment advisor is an advisor that has registered with the SEC to provide advice to their clients, they have a specific fiduciary duty to their clients to act in their client’s best interest.

    Certified Financial Planner (CFP®)

    The CFP® is a professional designation awarded by the CFP board. Someone holding the CFP® must have a bachelor degree, 6,000 hours of financial planning experience, complete the CFP® educational program and pass the final examination.

    Where you see someone using the terms fee-only, registered investment advisor, and CFP® you can be reasonably certain they are using an AUM fee structure, flat fee structure, or a combination of the two, but always do your due diligence and ask how they are compensated to be certain before entering into any agreement.

    At Steady Climb Financial Planning we are a fee-only, registered investment advisor located in Upper Arlington, Ohio, and I have earned the CFP®. You can learn more about the services we offer here: Planning, Investing, and more or about our firm here: About Us, or answer some general questions here: FAQ.

    If you are looking for a financial planner or are curious about how we can help, or just have some general questions, please contact us today.

    SHOOT US AN EMAIL!