Just Throw It in the Back of Your Car

Nov 18, 2019 David Kennon

What is financial planning?  When somebody says they do “retirement planning,” what does that really mean? Most people would agree with the statement: It is important to have a financial plan. But when asked, “What exactly does a proper retirement plan look like?” I get a lot of blank stares. Most “retirement plans” aren’t plans at all. Over the past 17 years, I have been to countless conferences, meetings, training sessions, and seminars on financial and retirement planning. And after all of that time and effort I have discovered two things: Many financial advisors talk a lot about planning, but at the end of the day, the vast majority of their focus centers around portfolio management. Investment portfolio management and retirement planning are not the same things. The way financial advisors are taught to execute financial plans is generally WAY overly complicated. Maybe it’s happened to you. You engage a financial advisor to begin a retirement planning process. After a meeting or two, you are given a two-inch thick binder with incredible amounts of information and data and projections. After about the 15th chart, your eyes start to glaze over. You may think to yourself: This is too confusing. Forget it. If you don’t understand your retirement plan, it isn’t a plan at all. It is a binder of information that you toss in the back of your car. So what IS a retirement plan? It is the process of taking all of the pieces of your financial puzzle and fitting them together in such a way that your LIFE and MONEY are maximized for your retirement. At its purest level, it only needs to contain two pieces of information. How much money do you need each month to live your life? How much money can you safely spend on a monthly basis? That’s it. Of course, it’s important to understand how all the pieces fit together. If you don’t, it’s easy to stray off course. If you haven’t noticed there is a lot of “noise” out there when it comes to managing your money. Having a financial plan for retirement is not enough. You need to have a financial plan for retirement that you clearly understand and believe in. But I have great news.  A clear, concise, flexible plan does not have to be 50 pages of indecipherable data and charts.  In fact, the financial retirement planning process I’ve developed over the past 18 years only consists of two pages. Your retirement plan should answer these questions. Can I retire? Can I take that trip to Ireland? Can I spoil my grandkids more? Do I need to tighten up my budget? Can I afford a new kitchen? Do I understand how I’m investing my money? Do I need to work longer? Can I help my kids out with their down payment? Do I need to worry? Retirement planning is about more than money. Do you want to make sure that all of your money is invested appropriately for your goals and life situation? Of course. But without an actual plan, a well-managed portfolio ends up just being numbers on a piece of paper that do not palpably affect your LIFE. I can’t tell you the number of times I have sat down with people who have done financial planning but when I ask them any of the questions listed above, they look at me with blank stares. Retirement planning should be clear, concise, logical, and actionable. It should be a plan not just for your finances, but for your retirement mentality. How do you want to live during your retirement? How will you make that life happen? That’s what your plan should answer. If you are nearing retirement or recently retired, you are standing at a crossroads. You have two options: Option 1: Life Without a Plan. The vast majority of Americans take the road where they live their retired lives without a plan. In a sense, they walk around the rest of their days with their hands in the air saying, “I hope this works. I hope I don’t run out of my money. I hope spending money on this trip isn’t a mistake.”  This is a pretty crummy way to live your “golden years.” Option 2: The Winning Way. You can take the time required to put together a plan. It takes a little bit of work, but, I assure you, it is worth it. With a clear plan in place, you are empowered to live the life you deserve, now. You get to live your life with a sense of opportunity and creativity, instead of one of fear. You WIN retirement! If you are not currently a client and would to look into a plan for yourself please reach out at david@kennonfinancial.com. Be Blessed, Dave

Surprise Taxes Once Retired

Nov 11, 2019 David Kennon

Human beings love to pay attention to the bad stuff and ignore the good.  It is wired into our DNA. If you are a caveman the good stuff doesn’t matter when a woolly mammoth is about to sit on your family.

So here is a quick reality check to remind you that investing in stocks and bonds isn’t all about crashes and recessions.

Year to date returns:

Stocks:  +23%

Bonds:   +8%

Remember that awful recession in 2008?  Worse one we’ve seen in 30 years? By the end of that year, stocks were down 37%.  But that was only one year. Here we are, in one year, making nearly ⅔ of what you would have lost in 2008.  And let’s not forget your money would have quadrupled between 2009 and now if you stuck it out in the markets.

The stock market actually does actually go up sometimes (no matter what the media focuses on).  In fact over the past 200 years it has averaged around 10%.

Retirement Tax Information You Need to Know

One of the biggest (and happiest) surprises many retirees enjoy is how little they are taxed once they retire.

Note:  I am not a CPA.  I am not licensed to give tax advice, so I am just going to give you some really juicy tax facts.

So let’s take a look at what taxes you can expect to pay during your golden years.

1. State income tax. If you live in Florida, there is no state income tax.
2. Social security payroll tax. You do not pay into the social security system once you stop working.  That saves you 6.2%.
3. Medicare payroll tax. You do not pay taxes into Medicare once you stop working.  That saves you 1.45%.
4. Federal income tax. This is the main tax you will be paying once retired.  I have more good news! You may be in a lower tax rate than you expect.

Generically what I’ve found is:

If you are married and bring in less than $5000/mo you will pay NO income tax.

If you are single and bring in less than $3000/mo you will pay NO income tax.

Let’s look at a scenario.

Bob and Lisa Wiggins are in their 60’s and retired.  Each month they receive income from:

Bob’s social security-                  $1500/mo

Lisa’s social security-                   $2000/mo

Mary’s teacher’s pension-             $1000/mo

Withdrawals from Bob’s IRA-     $500/mo

This equals $5000/mo.  When they file their tax return they will owe no income tax, no state income tax.  Nothing. That is $5000 cash in their pocket. That is amazing news!

What is happening here?  A big part is due to the fact that social security is only taxed if you reach a certain level of income.

This concept is incredibly important to understand.  Why? Many people with whom I speak are terrified of living on less income once retired than while working.

Let’s say Bob and Lisa were making $90,000 combined while working.  That could be a big problem, right? $7500 a month was coming into the household while working, but only $5000/mo once retired.

But at work, by the time they paid social security tax, medicare tax, federal income tax, and contributed money into their 401k’s they were bringing home around…$5000/mo.  So really their net income is the same in both scenarios. Also great news!

What happens if you make more than $5000/mo?  Taxes can still be pretty manageable.

If you bring in $5000-$6000 taxes are around $200/mo.  $6000-$7000 is around $400/mo.

If you want to look into your own retirement tax situation, Turbo Tax has a very helpful tax calculator.

Bottom Line:  You may have more money in your pockets each month than you were expecting.

Be Blessed,

Dave

Losing Money By Not Losing Money

Nov 4, 2019 David Kennon

I often hear people say to me, “I lost all my money in the stock market in 2008.” Or “I lost all my money in the stock market in 2001.”

Really?!  Did the stock market go to ZERO?

The Facts:

In the 2008 Great Recession, the S & P 500 dropped over 37%.  Remember this was a historically bad recession.

Never forget: markets temporarily go down and permanently go up. You had all your money back in a few years.

In 2001 the S & P dropped 12%, and went down 22% more in 2002.   It took about 3 years to get all your money back.

So, how are these people “losing all their money?”

What they really should be saying is:

“I got some hot stock tips from my neighbor.  I then went ahead and started day-trading those stocks.  I was really good at it! Then the stupid economy tanked and my stupid account ended up at zero.”

Or they should really be saying:

“I invested $100,000 in a hot, new stock focusing on crypto-currency, and then the stupid thing crashed and I ended up with nothing.”

Or

“I had all of money invested in company stock in my 401k and the stupid company went out of business.”

People who possess a well-diversified, balanced portfolio are not going to lose all their money.   For those who hang in there, it is just not a realistic possibility.

Next time your neighbor or Aunt Jenny tells you about how they lost all their money in the stock market, don’t let it infect your own thinking.  You don’t know the whole story. And not knowing the whole story can be harmful to your financial health!

In the same vein….

In the past week I have had three separate people say the same thing to me.

“I kept my money in cash since the 2008 crash because while I understand I’m not going to MAKE any money- at least I’m not going to LOSE any money.”

After the first person told me this, I thought to myself, “I guess that is reasonable.  At least they feel safe and secure.”

After the second person, I thought to myself, “I guess that makes sense, but is this really a rationale and logical way to approach this situation?”

After the third person, I thought to myself, “But you ARE losing money.  You ARE losing money!”

You are losing money in three different ways.

1. 1. While you may be eliminating market risk, there are other risks at play here. Inflation risk is a very real issue.  If inflation is increasing the price of goods and services by 3% per year and your money is making 1% per year, you are losing 2% per year of purchasing power.
2. 2. You are also exposing yourself to opportunity risk. If a balanced portfolio of stocks and bonds were to return 10%, you just LOST 10%.  Just because you didn’t see a red “minus” next to your account number, doesn’t mean you didn’t lose money.
3. 3. The biggest risk you face in retirement is “longevity risk” which is the risk that you are going to live much longer than you expected. You money needs to keep growing, period.  You can’t rely on a 2% CD.
4. 4. Here is a real gut punch to anyone who moved their money to cash in 2008.  $100,000 invested in the stock market in early 2009, is now worth $412,000.  That means you LOST $312,000. There is no other way to look at it. That is a much larger loss than the actual crash itself.

Ironically, if your money is “safely” working for you during your retired years, you could be dramatically increasing your chances of running out of money.

That’s right.  People who are trying to protect themselves from running out of money might run out of money by trying to protect themselves from running out of money (wow, that was a weird sentence).

Be Blessed,

Dave