“Help” is Not a Four Letter Word

Mar 15, 2021 David Kennon

My wife fought breast cancer five years ago. As you can imagine, we learned a lot about a lot of facets of life. She had great doctors, the surgery was grueling, but overall she completed the “process” of battling the disease alive and well.  That isn’t the part of the experience that surprised us the most.   What surprised us was all the help.   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?”   We have some family down here, but they could only do so much. Somehow, we had to balance my wife’s care, and the rest she needed, with the very real-life demands of raising four children.   Then something amazing happened.   People came out of the woodwork to help us. While some were friends before the illness, most 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? Hardship faced alone is suffering. Hardship faced with help is still hard, but it is easier. I watch people refuse help a lot.   On one occasion, a woman–we’ll call her Debbie—was sitting with me in my office and said, “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.”   Then she said, “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?”   This woman was willing to suffer alone rather than accept help from her daughter, literally one of her closest relationships on Earth. She was also going to miss out on the joyful experience of living near her grandchildren, and the amazing blessing of gratitude when you receive help freely given.   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. During my wife’s battle with cancer, we realized that many people in the world are givers. They move through the world actively 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? I think one reason is because people are so ashamed to need help that they won’t ever ask for it.   When you are in need, you have to go out there, swallow your fear, and tell people.   Talk to your family, your friends, your church. Get your story 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 Debbie. Were Debbie’s kids upset that their Mom was “coming home?” Doubtful. Her daughter had three kids of her own. She was probably 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. Her eldest was probably happy and grateful she could help her mother in return.   Repeat after me: You are not how much money you make. Your value, to your family, friends, community, is not conditional on whether or not 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

 

Will Inflation Ruin Your Retired Years?

Mar 8, 2021 David Kennon

As a 20-year veteran in the financial industry, I’ve been trained, repeatedly, on how to design a retirement financial plan. I’ve come to the conclusion that many of the assumptions present in generic planning software are inaccurate. One common variable which nearly every planning tool emphasizes is the effect of inflation.   Most tools assume a 3 percent inflation rate throughout your retired years. If you do the math, that means that a gallon of milk which costs $5 now, will cost $10 twenty-four years from now.   While a 3 percent inflation rate is a reasonable assumption, it can really throw a wrench in most retirement scenarios.   It stands to reason that if your monthly budget is presently $4000, you can expect for it to be $8000 a quarter century from now.   A little scary, isn’t it? Maybe you should just sit on all of your savings as long as possible so that inflation doesn’t ruin you. You don’t want to spend your nineties living in a cardboard box behind a gas station.   Luckily, I have great news. The fear of inflation is a bunch of B.S. Or more accurately, the underlying assumptions in these calculations are missing one enormously important factor: You will spend significantly less money in your eighties and nineties than you will in your sixties and seventies.   The U.S. Bureau of Labor Statistics found that retirees between the age of 65 and 74 spend 35 percent more money than retirees older than 75.The Government Accountability Office found that Americans spend 41 percent less in their early seventies compared with their late forties.   How can this be? You pay off your mortgage. This is an important variable to consider when designing a retirement budget. If your $1200 mortgage payment is going to end in six years, you need to account for that reduction in required monthly funds. You will spend less on clothing, travel, gas, food, and entertainment. That doesn’t mean you don’t travel or go out to eat. Think about it—you won’t have to buy a new work wardrobe every year or so. You won’t have to pay for your kids to travel with you (if you have them). You’ll still go out, but you may go out less. You will not be buying a new car every few years. Hopefully, in the next ten years there are more public transportation options anyway, so all of us can stop buying a new car every few years! Medical expenses generally do not increase until the end-of-life stage, at which point there can be a small spike in spending. Remember that 90 percent of retirees in America spend less than $2,000 a year on medical expenses while on Medicare. Social security accounts for inflation. Another key factor to remember is that your social security payments will grow with inflation. Social security increases are based on the Consumer Price Index (or CPI). Let’s say Bobby Biggins retired 25 years ago with a monthly social security benefit of $1,000. Today that same monthly benefit would total $1,755.   For 2021, Social Security increased by 1.3 percent for those of you receiving benefits. If you have yet to take social security, the 1.3 percent is still added to your future benefit.   So, to review, as you get older, inflation will increase the costs of goods and services, but this increase is offset by the natural reduction in spending as you age. Social security will take inflation into account when determining your monthly benefit.   So what does all of this mean? For many of you, you may be able to spend more money earlier in your retirement.   Don’t let the online retirement calculators fool you. You may be in much better long-term shape than you realize.   Be Blessed,   Dave   Please forward this article to a friend.  They need the encouragement!  They can get on the newsletter list by going here.

 

Is Your Checking Account Hungry?

Mar 1, 2021 David Kennon

When I take on new clients there are certain rules that I ask them to follow. One of the most important rules is: As soon as you retire, each month you take an income check from your retirement and investment accounts, whether you need it or not.   Here’s a quick example:   Mr. and Mrs. Smith retire with $500,000 in savings. We determine that by utilizing a diversified portfolio of stocks and bonds (with at least half of the money in stocks), it would allow them to withdraw $25,000 a year from their savings. Looking over 200 years of economic history, this is a sustainable and reasonable withdrawal amount.   Now, do Mr. and Mrs. Smith dip into their account whenever they need some money, making sure they don’t go over the $25,000? No.   Do Mr. and Mrs. Smith take all $25,000 at once at the beginning of the year? No.   There is definitely a psychology to retirement spending and I’ve learned, over the past 20 years, that neither of these approaches works particularly well.   If you only dip into your account when you “need to,” most people find it to be a painful experience.   Remember, you are children of Depression-era parents. To many of you, withdrawing money from your retirement savings can conjure up thoughts like, “I hope this isn’t a mistake. I hope I don’t run out of money. This feels so irresponsible. This money doesn’t even really belong to me, it belongs to retirement.”   What about taking the $25,000 all at once? While this is a better option than above, I’ve found that generally speaking, human beings live their financial lives on a monthly basis. Most, if not all of your bills are due monthly. You’ve been getting paid monthly or bi-weekly your entire life. It can be difficult to budget a $25,000 lump sum to last the entire year.   After years of in-the-trenches financial planning experience, I’ve determined the best strategy, by far, is to receive income checks on a monthly basis. In the example above, Mr. and Mrs. Smith take their $25,000 over 12 months (around $2000/mo).   This not only allows you to know exactly how much money you can spend in any given month, but it also takes away the pain of withdrawing money from your retirement savings “as needed.”   For whatever reason, when human beings see their checking account growing as the investment income checks roll in each month, they treat that money differently than if it was still in their retirement savings accounts.   Think about this for a second. If you had $500,000 in your retirement savings and that account grew to $525,000 during the year, you might say to yourself, “Oh, that’s nice. At least the money is growing.” And then you go about your day and probably don’t think much about it.   But if that $25,000 ended up in your checking account, you might say, “Wow! This is awesome. Instead of me working, my money is working for me. It’s like I’m getting a ‘paycheck’ for doing nothing! How am I going to spend my money to make my retirement more awesome?” As you can see, these are radically different experiences of the same investment result.   And don’t forget, the central tenet of the Retirement Revolution is you need to spend the money you receive. You are not going to end up like the majority of Americans who are dying with significantly more money than they’ve ever had before in their lives.   You are going to live an empowered and fulfilling retirement armed with the knowledge that you are spending exactly the right balance between too little and too much.   So if, as you are receiving your monthly investment income check, you find yourself saying, “I had better stick this money in the bank and save as much as I can. I sure don’t want to outlive my money.” Stop!   Spend. The. Money.   I’m not telling you to become materialistic. I’m not telling you to buy stuff you don’t really want or need. I’m telling you to live your life with a sense of opportunity and openness to reinventing yourself during your retired years.   So get those checks rolling in, spend the money, and find comfort in the fact that you have a plan in place that has stood the test of time.   Be Blessed,   Dave

 

How to Get a 16% CD

Feb 22, 2021 David Kennon

Are you worried you are going to run out of money during retirement? Do you feel an underlying sense of dread and unease whenever the subject of retirement planning comes up? You’re not alone.   I get pretty passionate when discussing this, because I’ve seen the same weary, anxious look on the faces of far too many good, hard-working people like you. Why is this whole retirement thing so darn scary? You shouldn’t have to live like this!   Retiring Baby Boomers are in the eye of the storm. Several different “fear factors” are converging together, all of them working to ensure you are as stressed as possible about your finances once you retire.   #1 Your parents were alive for the Great Depression. You are a product of your upbringing. You were told to “work hard and save, but never spend a dollar.” If you do spend any money the sky will fall and you will end up living under a bridge, with only rats as friends, scrounging for food from dumpsters, and bathing in a retention pond.   #2 Pensions are a thing of the past. The golden age of defined benefit pension plans is long gone. No longer are people retiring to the security of a guaranteed pension. Could you imagine if, at retirement, your company started paying you $3000/mo for life!  This actually used to happen!  Now, it is up to you to plan for your old age.   #3 The financial media is hysterically negative. This irresponsible fear-mongering affects everyone. It is hard to stay calm when a guy, in a suit, on a major TV network, is saying things like, “The worst crash of our generation is coming.”   Without the benefit of my professional expertise, I’d be scared too!   #4 Your “safe” savings choices aren’t working anymore. Interest rates are at historic lows. In the early 2000s you could have found a 5-year CD paying five percent without too much trouble.   But now, we are going on 15 years where CDs, money markets, and other “guaranteed” financial vehicles have been paying less than one percent. In many cases much less than one percent. Right now, nationally, the average interest rate on a savings account is .08 percent.   What does all this mean? Retirees, for the first time, are almost being forced to employ stocks and bonds in their retirement portfolio. What other choice do you have? Most people understand that getting .01 percent of their retirement savings is not the answer.   If you were living in 1981 right now you could walk into your friendly neighborhood bank and put your money into a three-month CD and get around 16 percent interest. Whoa! Who would even consider putting their money in the stock market if you could get 16 percent guaranteed at the bank?   Sadly, we are not living in 1981. But, I have amazing news! You do not need to be scared of stocks and bonds. In fact, this unique interest rate environment might “force” you into utilizing the most powerful financial vehicle ever conceived by human kind.   In fact, if you had invested $100,000 in 1981 into a diversified portfolio of 50 percent stocks and 50 percent bonds: It would have been worth $355,222 by 1990. It would have been worth $1,286,677 in 2000. It would have been worth $1,706,259 in 2010. And your current account balance would be worth a whopping $4,804,801 (as of December 2020).   So I want you to be encouraged. The four “fear factors” working against you do not have to sabotage your retirement. With a little bit of education and planning you are going to thrive!   Be Blessed,   Dave   P.S.- I’ve started my Social Security classes again.  You can sign up here.

 

A Crash Course in Market Crashes

Feb 16, 2021 David Kennon

A Crash Course on Market Crashes   Did you know that most “normal” investors actually lost much less money during market “crashes” than the media reports?   I’ve been doing some historical digging and I’ve discovered some shocking truths. I hear a lot of horror stories about how much money people have lost during past crashes. You never know! You might be next! Get ready to live in a cardboard box!   The markets have had five significant crashes in the past 100 years. The Great Depression (1929) World War II (1939) Oil Embargo/Nixon Resignation (1973) The Dot Com/Technology Bubble (2000) The Great Recession/Real Estate Bubble (2008) It may come as a surprise to many of you that there were decades-long periods without any major ‘’corrections” in the markets. But I want to point out another interesting statistical curiosity.   Crashes typically cause short-term damage.   Allow me to explain through an analogy. If you invested all of your money at the beginning of 1929,1940, 1973, 2000, or 2008, you would have had a bad time. But in the real world, you generally don’t suddenly invest all of your money at once. It is a gradual process as you save money and contribute to retirement accounts over many years.   We need to look at the years preceding the crashes to get a true sense of how damaging they were to real people’s financial lives.   Let’s start with the years preceding the Great Depression. 1926: +11.6 percent 1927: +37.5 percent 1928: +43.6 percent This means that if you had $100,000 invested in 1925, you saw it grow to $220,000 by the time the markets faltered. Over the next four years, your value dropped to $80,000. The markets then skyrocketed upwards again. By the end of 1936 your account was worth $241,000.   This means that over ten years (1925-1935) your investment in the S&P 500 would have increased from $100,000 to $241,000. That’s an increase of 141 percent.   This was during the worst downturn in the history of the stock market.   The World War II crash saw a similar phenomenon. From 1935-1945 (with the markets dropping significantly in 1937, 1940, and 1941) your $100,000 investment would have turned into $242,000. How? 1936 had a 34 percent return. 1938: 31 percent 1942: 20 percent 1943: 26 percent 1944: 20 percent 1945: 36 percent Who cares if you had a few bad years in between?   The years preceding and following the crash in 1973-74? Same thing. If you invested money from 1970 to 1980 (with the markets dropping 40 percent during the downturn), your $100,000 turned into $170,000.   The years leading up to the Dot Com Bubble in the early 2000s is the best example of this concept. The 1990s was the best decade the markets had ever seen. Your $100,000 investment turned into a whopping $530,000 during the 90s. Did you lose 40 percent from 2000-2002? Yes. But you would have still been WAY ahead.   Lastly, the crash nearest and dearest to our hearts; the real estate bubble was possibly the worst economic event since the Great Depression. But the 37 percent lost in 2008 was mitigated by solid returns before and after. If you invested $100,000 in 2005, today it would be worth $428,000.   I think you get my point by now. Stock market crashes do not occur in a vacuum. We need to look at returns before and after to get a better understanding of the true cost of downturns.   What does all of this mean for you?   Keep calm and carry on.   Be Blessed,   Dave   P.S.-  Think of someone you know that would benefit from this info.  Now, forward this email to them.  Thanks!

 

Hedge Funds, Gamestop and Short-Selling Explained

Feb 8, 2021 David Kennon

I imagine you’ve heard a lot in the news about Gamestop stock. You’ve probably heard things about hedge funds and shorting stocks and other incomprehensible chatter.   Let’s take a look.   This is actually a great time to talk about hedge funds as a whole, and then we will get into the nitty-gritty of this current situation.   A hedge fund is an investment managed by fancy people that uses non-traditional ways to make money. Normally you need to be quite wealthy to buy into the fund.   Here are some of their strategies:   Many hedge fund managers use leverage to boost returns. This means that they borrow money and then use the proceeds of that loan to invest. While they need to pay interest on the money they borrowed, their strategy is to make more money on their investments than the interest rate from the loan.   This can dramatically increase risk. It’s kind of like getting a $300,000 loan on a house and its value goes down to $150,000. If the bank wants the money from the loan back, you are in a big pickle.   Many hedge fund buy companies that are facing bankruptcy, hoping they recover, which makes could make the hedge fund a profit.   Shorting stocks. This is what got hedge funds in trouble with Gamestop. Shorting stocks means that the managers are betting that the stock price is going to go down. This is a silly bet considering the stock market goes up almost all of the time.   They invest in non-traditional asset classes such as currencies and commodities.   Often, times they utilize quantitative strategies using computer models to identify investment opportunities. They can utilize an unlimited number of variables, which are programmed into complex, frequently-updated algorithms. (sounds fancy- means nothing)   It’s not fair that only the rich have access to such investments! Why can’t the common man make money like the rich? Right?   I have a dirty little secret. In my opinion, hedge funds are a completely bogus investment that pull money from the wealthy because they like the exclusivity of the investment opportunity.   All of those strategies I just mentioned above? None of them are proven to work. None of them. They might sound enticing, but that doesn’t mean they are a good idea.   Now don’t get me wrong. I don’t think hedge fund managers are intentionally ripping people off. They really believe that they can make more money for their clients than the use of traditional investing strategies.   The fees on hedge funds are high. They use a “2 and 20” model. That means they get 2% of the portfolio value as well as 20% of the gains. If you invested $100,000 into a hedge fund and the fund made $10,000, you would receive around $6,000. Great deal right? (I’m being sarcastic.)   This brings me to Warren Buffett and a bet he made ten years ago. His bet was this: He bet $1,000,000 that the S&P 500 would make more money than hedge fund managers.   The hedge funds would blow Warren Buffett’s boring strategy out of the water, right? The hedge funds had every strategy at their disposal. Investing in the 500 biggest companies in the U.S. is so boring.   The final score over ten years:   The S&P 500 made       125.8% The hedge funds made  36%   This is why I absolutely love the current David vs. Goliath battle on Wall Street. A bunch of younger investors are intentionally buying up shares of companies that will hurt hedge funds badly.   Gamestop is a struggling retail video game chain. Some feel like it could be bankrupt in the coming years. Several hedge funds made a huge bet that the stock would go down. They did something called “shorting the stock.”   I’m not going to go into the technical details. You can just look up a video on Youtube.   But if you short a stock that is valued at $100, if it goes down to $80 you make $20. It is the opposite of conventional investing.   But what if the investment goes up? This is where it gets complicated.  Let’s look at the Gamestop example.   A bunch of millennials online figured out that one particular hedge fund made a huge bet that Gamestop would go down in value. This group said, “Let’s stick it to these fat-cat Wall Street guys.  We know that if the stock price goes up they are in a very tough position.”   At the end of the day, Gamestop went up by 1700%. These hedge fund managers were hemorrhaging money. The hedge fund managers started to panic and the trades they made drove the price up even more. The price kept going up because the hedge fund guys had to fulfill their short sale. It got out of control. One hedge fund lost 50% overnight. There were a couple of hedge funds that would have gone to zero, but a couple of other funds bailed them out with loans.   So were the hedge fund managers hurt by all of this? No. Their clients were devastated. The fund managers already made hundreds of millions of dollars for themselves. And their clients? Oh well. They knew the risks when they bought in. (I’m being sarcastic again.)   All of this to say:. I grit my teeth anytime I hear the word “hedge fund.” They trick the wealthy into paying Wall Street guys crazy amounts of money for an investment product that stinks.   Be Blessed,   Dave

 

Retirement Tax Information You Need to Know

Feb 1, 2021 David Kennon

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 good tax facts.   So let’s take a look at what taxes you can expect to pay during your golden years. State income tax. If you live in Florida, there is no state income tax. Social security payroll tax. You do not pay into the social security system once you stop working.  That saves you 6.2%. Medicare payroll tax. You do not pay taxes into Medicare once you stop working.  That saves you 1.45%. 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. How about this?  Massachusetts luxury tax kicks in when you spend more than $175 on clothes or shoes. It’s an additional 6.25% above and beyond the sales tax. New York charges an eight-cent tax on bagels. New York charges a 4% tax on car purchases in addition to any city or county taxes. California’s state income tax is 13.3%.  This means some people pay a total of 65% of their income in taxes.   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.   Why?   Social Security is only taxed if you reach certain income levels.   This is the formula:   If half of your Social Security payments + work income + IRA withdrawals + pensions equals less than $32,000 you pay no taxes on your Social Security.   Remember too that married couples now get a $24,000 standard deduction.   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 not being taxed.  The standard deduction is also a game-changer.   These concepts are 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.   Take a look at the table to get a general idea of what you have to pay in taxes. The figures are monthly tax liabilities.   For example, if you are married and make around $8000/mo in income you will have to pay around $800/mo in taxes.   Married              Single $0-5k                    0-3k $0 5k-6k $150           3k-4k $150 6k-7k $400           4k-5k $350 7k-8k $650           5k-6k $550 8k-9k $850           6k-7k $750 9k-10k $1,075      7k-8k $1,025 10k-11k $1,300    8k-9k $1,275 11k-12k $1,550    9k-10k $1,525 12k-13k $1,825   10k-11k $1,775 13k-14k $2,075   11k-12k $2,025 14k-15k $2,325   12k-13k $2,275 15k-16k $2,575   13k-14k $2,550 16k-17k $2,850   14k-15k $2,850 17k-18k $3,150   15k-16k $3,150   Be Blessed,   Dave