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 

Stop Refusing Help

Oct 28, 2019 David Kennon

My wife fought through breast cancer three years ago. As you can imagine, we learned a lot about many different facets of life. The doctors were responsive and the surgery set quickly. We felt like the entire process was handled relatively well. That isn’t the part of the experience that surprised us the most.

When you face a life-threatening illness (with four very young children) certain thoughts run through your mind. “How are we going to make it through this? How can we raise these kids and provide the rest that Mom needs? We have some family down here, but they can only do so much.”

Then something amazing happened.

People came out of the woodwork to help us. While we knew some of these people as friends before the illness, most of them were mere acquaintances. Maybe someone we met once or twice. Sometimes we were served by people who didn’t even know us, but knew we were in a time of need.

It was an incredible experience. You don’t know what support is there until you really need it.

So what’s my point? Let me share it through an anecdote.

Sarah, a divorced woman in her sixties, comes to me in a state of terror. She hadn’t saved any money. Her social security wasn’t enough to cover her bills. She was in a very tight spot. Even I wasn’t sure of her best course of action. Next she mentioned, “My sister lives on the West Coast. She told me she would be happy to take me in. But I don’t want to be a burden. It’s embarrassing and sad and I’m sure she would resent having to bail out her older sister.”

Do you see the moral in this modern-day allegory? If not, here’s one more.

Debbie, a widow in her sixties sits with me in my office. “I poured my life into my kids. I wanted them to be productive, happy adults. I sacrificed so much for their well-being, I guess I neglected myself. I have almost no savings. I’m 68 years old. There aren’t many jobs available to me. I’m still renting my place. I have no place to go.” Next she mentioned, “At least my kids are all doing well. They seem happy, they all have good jobs and families. In fact, my oldest suggested that they convert the second floor of the garage into a mother-in-law suite. But I can’t do that to my kids. Do they really want their mother getting in the way of things?”

See it now? Both of these women were willing to suffer rather than accept freely given help. Don’t be like Sarah and Debbie.

Most people are not providers throughout their lives. Sometimes you have to be okay with being the receiver, rather than the giver. The world is filled with caretakers, ready and eager to help. As we learned during my wife’s bout with cancer, we realized that many people in the world are givers. They scan their immediate environment looking for people in need. And when they find someone they spring into action.

Why, then, do we assume nobody is willing to help? Why do we feel embarrassed and ashamed when we are unable to be the provider? There are people waiting to help you. There is no shame in asking for help. Let the helpers do their job.

During my wife’s trials, we found that many other people with cancer did not get nearly as much help and support. Why? Simple. You have to go out there, swallow your fear, and tell people. Talk to your family, your friends, your church. Get it out there. Few people will judge you, and you won’t believe the helpers that start coming out from the woodwork. If you try to go it alone you will struggle.

And let’s go back to the situations referenced above. Did Sarah’s sister really see her as a burden? For all Sarah knows, there is nothing more her sister wants than living with her sibling. Maybe her sister has been praying for this day for years. People generally don’t offer to help with significant life situations unless they really mean it.

Were Debbie’s kids upset that their Mom was “coming home?” No! Her daughter had three kids of her own. They were desperate for help. Who cares if Mom doesn’t have any money? That’s not what Mom is about. Mom sacrificed her whole life for her children. Why else would they extend such generosity?

You are not how much money you make. You are not only valuable to your family, friends, community if you are paying your own way. 

My wife comes from the Thai culture, and in that society it is assumed that as people get older, younger generations are there to help. It would be seen as blasphemy to turn away a family member in need. Almost every culture in the world has functioned this way for hundreds of years.

What a liberating concept! All those helpers out there are just waiting for someone like you to express a need. Let them do what they do best. Otherwise the helpers of this world have nothing to do.

Be Blessed,

Dave

How Much Retirement Spending is Too Much?

Oct 21, 2019 David Kennon

Over the 18 years I’ve spent in this field, I’ve had plenty of time and opportunity to think about the best ways to manage investment portfolios.

I’ve also answered a lot of questions in those 18 years. One of the most difficult questions I have to answer is also one of the most common. “Dave, how much money can we safely spend once we retire?” As you may or may not know, the vast majority of Americans have no idea how to answer that question. I’m guessing you probably struggle with that question yourself.

Here is the problem: You don’t want to just sit on your money, living in fear, only to one day die with more money than ever but with little to no fulfillment or joy from your retired years. That is not an acceptable solution.

So, what other options are there?

You could take your nest egg, divide it by the number of years you think you are going to live and dole out that money throughout your retired years. The problem with this line of thinking is obvious — you don’t know how long you will live. While you deserve to enjoy the fruits of your labor now, you don’t want to do it at the expense of your long-term financial health.

We don’t want to die rich in cash but poor in fun, and we don’t want to run out of money.  What is the solution?

This is a tough question, isn’t in?  Luckily, I have an answer. While no answer is perfect, this is the best technique I can muster:  You spend the money that the money is making.  

Let me say that again: If your CD is making 3%, spend the 3%. If your portfolio of stocks and bonds is returning 5% on average, spend that. If you have all your money buried in the backyard … I’m afraid I can’t help you there.

This is completely logical, right?  If you only spend the earnings, you will never run out of money.  You will always have at least the principal. It is the perfect balance between spending too much and spending too little.

“What if I have to go to a nursing home?”  You still have the principal. You still have the original amount.

“What if I live to 105?” You still have the principal. You still have the original amount.

Once you agree that you can safely spend the money your money is making, the next question is: Where do I put my money to maximize the “money that the money is making?”

This is where nearly two decades of research, study and experience come in handy. The answer: A diversified and balanced portfolio of stocks and bonds. Period. While some people are so ultra-conservative that they are happy with the 2% return on their money market, I think it is the wrong answer. I always recommend that you utilize the stocks and bonds strategy, and then withdraw 5% per year. The growth of the portfolio will fill it back up each year and then you do it again.

“But Dave, my portfolio doesn’t have the same return every year. Do I spend more money the years that I make a lot of money on my investments, and no money of the years they go down?”No, you take out 5% per year, regardless of the year’s return.

Hundreds of years of data point to the same fact: If your portfolio doesn’t average 5%, it is the first time in modern economic history where it hasn’t.

Remember, if the stock market is down on the year, bonds are almost certainly up. Bad year in the markets? Take your 5% from the bond part of the portfolio that year. Stock market has a great year? Pull the money from the stock part of the portfolio that year. This way you can literally “take the money that the money is making.” If stocks are down, you take the profits from bonds. If stocks are up, you take the profits from stocks.

“But Dave, sometimes I see my portfolio values going down AND I’m taking out my 5%.”  I know it feels strange, but the strategy holds true. If you want a more thorough investment discussion, I’ve written dozens of articles on the subject. Just go to www.KennonFinancial.com.

So spend that money that the money is making without fear.  Be empowered to know that you are spending the perfect balance between too little and too much.

Be Blessed,

Dave

Is the Dream Retirement Based on a Lie?

Oct 14, 2019 David Kennon

What is the dream retirement supposed to look like? This is a question I’ve often wrestled with over my professional career. I constantly tell retirees to live fearlessly and boldly — refusing to give in to the fear of running out of money.

But, once the fear of outliving your money has been extinguished, what’s next?  Margaritas by the pool?  Golf every day?  Dinners out and sleeping in?

It’s this — the “what comes next” of retirement, that is the real struggle.

Where did retirement come from?

The concept of retirement itself is a modern, man-made phenomenon. Did you know that our modern understanding of “retirement” was created as recently as 1881 by Otto von Bismarch?

According to an article in the San Diego Tribune, “When farming dominated the economy, most men worked as long as their health held out. As they aged, though, they often cut their hours and turned the most physically demanding chores over to sons or hired hands. In 1880, when half of Americans worked on a farm, 78 percent of American men worked past age 65.”

While I’m glad you don’t have to work in the fields until the day your drop, it doesn’t change the fact that human beings were not designed to work for forty years and then live life of leisure for twenty or thirty years until they died.  Human beings were designed to be fruitful and active as long as their physical health held out.

Retirement is NOT non-stop leisure.

That is the lie, and if you buy into it, before long you too will feel the same sense of unease. “Is this all there really is?”

Ever since the Industrial Revolution, Americans have heard the same message: Work hard for forty years, even if you hate the work, because when you retire, then you can start to be happy.  THEN you start living your life.

Does this way of thinking even make any sense? Who invented the concept of the dream retirement, anyway?  Who has told us that palm trees, warm breezes, leisure, and endless afternoons of golf lead to a fulfilling retired life?

Salespeople.

Investment managers want you to build up your portfolio because they are in the business of selling retirement plans. Even after you’ve saved more money than you need, they keep selling.

Family vacations and cruises during retirement are fantastic opportunities, but the tourism industry is bloated with offerings designed just to pinch as many of your pennies as they can.

Florida’s entire economy is built on the hope that retirees continue to move here!

None of these industries are trying to help you live a satisfying retired life. They are trying to sell you something.

Make retirement YOUR dream come true.

So, assuming you’re not a farmer in the 1800s, what do you do? You plan for retirement. Not just your finances, but your life goals and aspirations. What are you going to do with all that free time?

Deepen your relationships with your family. Take that family vacation. Go camping. Visit national parks. Babysit grandkids, or great-grandkids. Spend time talking and sharing stories. Focus on deepening the relationships in your life.

Serve. You have skills that are desperately needed in the community. Find an organization that is doing something you believe in, then pick up the phone and see how you can help!  You have a lifetime worth of experiences and skills.

Write your personal memoir. Do you have a story that you’ve always wanted to tell? With today’s technology, many people are finding it easy to self-publish professional-looking autobiographies.

Start a business. Ideally, once you retire you will no longer be driven by financial necessity.  If you don’t need to worry about making huge profits, a small business can be extremely rewarding and fun. Here’s a great article with some ideas to get you started.

Teach and mentor. You have a lot of life knowledge. What are you passionate about?  Start a free course a local library or club. Mentor young people to help them gain perspective on current events or learn professional skills.

Live that better life right now.

Don’t believe the hype. The American Dream of retiring to the beach just isn’t all it’s cracked up to be. Your retirement can be whatever you want it to be, as long as it’s fulfilling and meaningful to you.

And the best part is, you don’t need to wait until you retire to enjoy your life. You can do all of these things right now.

Live a life filled with loved ones, new experiences, and opportunities now, and when you retire you won’t be asking, “What do I do now?”

Instead, you’ll ask, “What haven’t I done yet? What ELSE can I do?”

Be Blessed,

Dave

Financial Kickbacks

Oct 8, 2019 David Kennon

How Do Financial Advisors Get Paid?

(What is a “Fiduciary” Anyways?)

Broker vs. Registered Representation vs. Investment Advisor Representative vs Fiduciary.

Whew! Why does this have to be so complicated?

Whenever you choose to work with a financial advisor they fall into one of two camps: brokers and fiduciaries.  What’s the difference?

Let’s start with broker relationships.  Brokers are paid transactionally.  If you are working with a broker and they put you into some sort of financial product, they are paid via a commission.  If they move your money to another spot later down the road- they get paid again. It’s transactional.

In my personal experience, when working with a broker, people like you can’t help but say to themselves, “Sure, Dave seems like a nice guy and he certainly knows what he is doing, BUT…. is he using this particular product because he’s getting paid more?  Is there some sort of financial kickback, lurking in the background, which helped him make his decision?”

In addition, whenever a broker suggests a change to an investment strategy you might say to yourself, “Is he doing this so that he can get paid again?  Or is this actually in my best interest?”

Brokers are held to a “suitability standard” which means they are “required to implement an investment strategy that meets the objectives of the investor.”  Notice that it doesn’t say, “Brokers have to put you in the absolute best investments for your situation.” It only says that it must at least loosely satisfy what you are looking for.

Am I splitting hairs?  Let’s take a look at how fiduciaries must operate under the legal standard: “…the fiduciary standard simply means that the advisor puts their clients’ interests above their own. For example, the advisor is prohibited from making trades that may result in higher commissions for the advisor or his or her investment firm.”

The other big difference is how a fiduciary is paid.  An advisor entering into a fiduciary arrangement with a client is not allowed to receive commissions.  Their compensation is not transactional. Generally, fiduciaries are paid an advisory fee (usually around a 1% annual fee) which fosters a professional, long-term relationship vs. a limited, transaction-oriented one.

How does the 1% fee work?  Let’s say at the end of the year, you look at your portfolio’s performance and you see an 8% gain.  In reality, the portfolio returned 9%. Most advisors would bill (directly from the account) .25% each quarter to total the 1%.  The fees are completely transparent and listed on your statement.

With a broker, it is difficult to determine their compensation, which usually consists of hidden fees that are difficult to translate.

Why is this important?  Because, while working with a fiduciary, you never have to ask yourself, “Why is my advisor choosing this investment vs. that investment?  Why is my advisor making trades in my account?  Why is my advisor moving my money from one place to another?”

Within a fiduciary relationship, you are inherently on the same team.  When you do better, they do better.  The more your money grows, the more they make (the 1% fee is on a larger account value).

I’m not saying everyone needs to be working with a fiduciary.  Broker relationships can still be beneficial to some people. But in my own personal experience, client relationships, where I am operating as a fiduciary, seem to be the most productive and meaningful.

So how do you find out if your advisor is acting in a fiduciary capacity?  Just ask them!

Be Blessed,

Dave

Life Without a Plan

Sep 30, 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:

1. 1. 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.
2. 2. 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 5th 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.

1. 1. How much money do you need each month to live your life?
2. 2. 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.

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 17 years only consists of two pages.

Your retirement plan should answer these questions.

1. 1. How much am I spending each month now?
2. 2. When should I take social security?
3. 3. How do I most effectively get my money to work for me once I am no longer working?
4. 4. How much money can I safely spend from my retirement savings each month once I retire?
5. 5. How much will I have to pay in taxes in retirement?
6. 6. What happens if my spouse passes away?  What will my finances look like then?
7. 7. Do I have any “play” money above and beyond my budget each month? (Can you splurge?)

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!

Be Blessed,

Dave

Not Sure What to Wear

Sep 23, 2019 David Kennon

In this week’s article, I’m going to discuss practical, actionable tips to help those of us who live to work, instead of work to live.  Retiring for people whose identity rests in their professional work can be extra challenging. I heard a heartbreaking story one time.  A woman was telling me about the first day of her husband’s retirement.  Her husband was an executive at a Fortune 500 company most of his life.  When he retired at age 65,  she will never forget what he said on the first morning he woke up. As he rubbed the sleep out of his eyes, he swung his legs down onto the floor, looked a little confused and looked at his wife.  “What am I supposed to wear?”  He asked feebly.  His wife thought for a second and said, “Well, I guess dress just like you were going to go play tennis today.” He had no idea what to do with himself.  He had neglected to plan for his retirement. Don’t let this happen to you!  I have found, especially with men, that retiring can be a very challenging experience.  Women seem to be more relational and usually quickly find things to do with their time, such as babysit grandkids, volunteer, and help anyone in the family who is in need. I think about this myself sometimes.  I’m a “Type-A” individual.  I’ve been called lots of things: driven, dedicated…..kinda nerdy.  So am I one of the people out there who lives to work?   I’m not sure that I ever plan on retiring.  I am blessed to own a business that I intend to run multi-generationally with my children.  I fully plan on working until my 70’s and 80’s. So, without further ado, here are Dave Kennon’s Six Tips to Living an Awesome “Type A” Retirement. 1.You have to PLAN for retirement (both financially and personally).  Don’t’ expect retirement just to “happen.”  When you go on vacation, you usually will put some time into the itinerary, activities, and schedule.  Retirement is just a really LOOONG vacation. 2.For the first year or so, you may feel a little out-of-sorts.  You may not know what to do with yourself.  You may find the changeover from working to retired to be stressful.  This is normal.  You are not strange or unique.  This is a big transition.  For many people, it takes time to settle into the retirement of their dreams. 3.If possible, look into a consulting role once you retire.  It is a nice way to slowly and gently transition into retirement.  Plus, consulting is usually an awesome job.  You are the boss.  You work your own hours and usually get paid a reasonable income.  Check out sites like  FlexJobs.com to find this type of work, or just utilize the connections you already have. 4.Keep moving!  Retirement is NOT sitting by a pool drinking margaritas.  The advice I receive from nearly every happy and healthy retiree is this:  If you stop moving you die.  Pick up tennis, golf, biking, hiking, bird watching…whatever is interesting to you.  Just make sure it involves physical movement. 5.Volunteer.  Or better yet, start a small non-profit for a cause you love.  Start an animal shelter.  Build homes for the homeless.  Start an exotic cacti club.  Be proactive.  Use your “get er’ done” business skills. 6.Lastly and possibly most importantly: mentor.  The happiest and most fulfilled “Type-A” retirees whom I know have taken a few younger people under their wing.  The best place to start his process is a church.  If you do not attend church, there are many community centers that are in desperate need of talented retirees to build up the next generation of workers and citizens. Be Blessed, Dave