When Should You Retire?

When to retire is the essential question that most people who seek financial planning help want to have answered. People of a certain age want to know if they have enough money to retire now, or, if not, how long they have to work and how much more they have to save before they can retire. Entire software programs are designed just so such people can have these questions answered with an adequate degree of certainty. What do I think? Read on.

Quit When You Suck

Now-retired NFL quarterback Peyton Manning, while he was still playing, said, “I’ll quit when I suck.” Peyton has found a second career as a TV pitchman. Nevertheless, there is wisdom to the notion that you should continue to work until you are no good at it anymore. Of course, Peyton made that statement from the standpoint that he really enjoyed being an NFL quarterback and was being paid millions of dollars per year to be one. Not all of us are in that position. However, if you are getting on in years and have been building your career, you hopefully are in a job you like (or are at least ok with) and you are likely making more money per year than you ever have. If you feel like you are still good at what you do and are making a contribution to your employer, and if you still basically like going to work every day, then keep doing it. Most financial planners will tell you that your retirement finances will continue to improve the longer you continue to work.

What Do You Want To Do When You Are Retired?

If you aren’t going to work every day, what do you want to do with yourself? Without a job in the picture, that will be a lot of hours every day that you need to fill up with activities. Do you get bored easily on the weekends? If so, you should probably keep working because every day is Saturday when you are retired. The point is that you need to have a plan for what you will do with your time once you retire. Do you think you will travel constantly? Maybe, but travel costs money. Ideally, you should find something to do that either makes you or saves you money or that doesn’t cost much. Taking care of grandkids or working in your garage shop (as long as you already have all of the tools you need because new tools are expensive) can be good activities that can put some coin in your pocket.

Unexpected Retirement

This article posted at money.usnews.com says that a survey has found that 48% of retirees were forced to retire unexpectedly due to their own health, a loved one’s health, or job redundancy. The point is that you may not get to choose when you retire when retirement chooses you. Unexpected retirement is one reason why you have been contributing to your retirement accounts all of these years, and why there is a disability insurance element to Social Security. Consider yourself fortunate if you can choose when you retire rather than having retirement foisted upon you.

Health Insurance

As the cost of health insurance continues to go up and its future availability remains at least in question, some people stay working substantially so that they and their families can continue to have health insurance. I believe that health insurance is an issue to consider but should not be the only reason why you should continue to work. I believe that there will always be health insurance available to you, even if you have complicated pre-existing conditions that may involve expensive medications. You may have to pay up for it but consider its cost versus continuing to work and have your insurance through your job – it still may be worth it to retire and pay for your insurance through COBRA and, eventually, the exchanges.

IMO

If you notice, none of the considerations I outline here involve a financial projection or a Monte Carlo analysis of how much money you have now and whether it will be enough to retire on. Instead, I believe the qualitative factors should be more important considerations. Do I still like my job and am I still good at it? Do I want to do something else with my time once I retire? Will my employer still allow me to work? It is probably better off for your finances if you keep working, but there comes a time for all of us when we have had enough. If and when you come to that place and you have run the numbers and you have enough money to live on, then go ahead and take the leap into retirement. If you want reinforcement for your decision, contact me so I can help you think it all through.

Don’t Do As the Government Does

This article by economist Brian Wesbury makes the case that the high level of US Government debt (about $1 Trillion annually and about $22.5 Trillion in total) isn’t killing us because interest rates are low, which means the amount of interest we have to pay to bondholders to service the debt remains low (about 1.8%) relative to our country’s GDP. Wesbury goes on to say that the real issues are government spending, the pending insolvency of Social Security and Medicare, and the ramifications of increased entitlement spending on the working populace.

Don’t Make the Logical Leap

You might read this and think, Ok, if the government can pile on debt and not suffer the consequences, then why can’t I? After all, interest rates are low for me, also, right? My job situation is good and I anticipate increasing salary in the future, so why not take advantage of these low rates and buy anything I want now? Why not borrow all I need to send my child to an expensive private college?

The problem with that line of thinking is that You Are Not the US Government. That means that you do not print money, and you do not have the ability to 100% roll over your debt and not make principal payments. Instead, banks who lend to you for your home, car, or credit card, expect that their loans will be paid back. Interest rates may be low, but it is the principal payment requirements that crush people and hold them hostage to their lenders. Also: You can’t borrow at the same rates that the US Government can. At present, the US Government can get a loan for 10 Years at a rate of about 1.7% interest-only. It’s called a 10-Year US Treasury Bond. You can’t get that deal. The best you can get on a home loan is a 30-year loan in the low 3%-range, principal and interest included, with a 20% down payment, collateralized by your house. This is a good deal at a low rate, but it isn’t as good as what the US Treasury can get.

IMO

Don’t do as the government does. Don’t decide, “Hey, rates are low, so let’s borrow up to the hilt!” That’s a poor decision that will keep you in hock for years. Not that the US Government isn’t also in hock for years, but they print the money, and they don’t have to pay back the principal. Don’t look to the US Government as an example of good financial discipline. Instead, be your own example, and avoid adding to your debt pile.

The Perils of Student Debt

In its September 14, 2019 edition, the Wall Street Journal published a multi-page expose on the financial situation of people in their 20’s. The Journal described the lives of several people from various places in the US and discussed what issues they have and what might be preventing them from getting to where they want to be.

Student Loans Are a Drag

If you didn’t read the expose, I can sum up its findings for you: Having student loans can put a real drag on one’s finances. Student debt causes people to stay in jobs they don’t like because they need to pay the bills. People are reluctant to buy cars and homes because they don’t have enough money remaining to do so after paying off student loans. Savings rates are low because it is hard to save if one is making student loan payments. People feel forced to go into credit card debt because they feel they don’t have enough to live on after paying student loans. The Journal uses the word “crushing”, and I believe that accurately describes student debt.

Changes in Thinking

I believe there are a couple of notions that must change going forward:

  1. Student loans are not “good” debt. Getting an education and earning a degree are great goals, but it is not great to go into debt to do so because it restricts one’s flexibility. Debt may work to impose discipline if lack of discipline is an issue, but I don’t know that the concept of discipline resonates with the teenage college student who is thinking about taking out more student debt. Student debt is unsecured debt, meaning there is no collateral, so there is no asset that the debtholder could conceivably sell in order to pay off the debt. Instead, paying off student debt is a long, hard slog.
  2. As a society, we need to become more accepting of kids who decide to pursue alternatives to an education that would necessitate them going into debt. Going the community college route, or taking online classes, or getting certificates or accreditations from trade schools make much more sense than being burdened for years with college debt.

Don’t Allow Your Kids To Go Into Debt

My advice here is aimed more at parents than it is at debtholders, who are just kids: Don’t allow your kids to go into major student debt just because you want them to go to a prestigious college or because they want to keep pace with their friends. Instead, work with them to look for alternatives that still can open doors for them while keeping them out of debt so they can do what they want when they complete their education.

IMO

Avoiding student debt is an excellent early lesson one can learn and live by. John might be envious of Bill’s expensive private college education while John is going to community college, but Bill will likely be envious of John when John graduates from State College U debt-free while Bill graduates with $70,000 of student debt. It might be a hard sell for young people at the time, but the future rewards for student debt avoidance are high.

Beware of Subscription Creep!

Apple just announced its Apple TV+ service will go live on November 1 and will cost a mere $4.99 per month. Sounds like a good deal! Does your kid also want in on Apple’s streaming video game service? That will be another $4.99 per month. What about Apple Music? Apple News? All of these offer something worthwhile but each charges a monthly subscription fee. Then there are the non-Apple subscriptions: Netflix, Hulu, HBO, Showtime. Probably you still pay for Cable TV or DirecTV on top of these. All have monthly fees. Then there is your home WiFi and phone service. Do you still have a landline to go with your cell phone? (Tired of answering robocalls on both? That’s another can of worms!) All of these cost you money every month.

Subscription Creep

Subscription Creep is what happens when you continue to add new, fun-sounding services on top of services that you previously purchased, without paring back on those previous services. Subscription Creep can add up to multiple hundreds of dollars per month. It may not seem like much money while you are still working and have enough monthly income to pay for it all. And, if you really enjoy all of these services on a regular basis, then have at it and more power to you! However, don’t spend yourself into the poor house just because you can’t wait for the next season of The Handmaid’s Tale on Hulu.

Be Careful

If you already subscribe to some subscription services, be very careful before you add additional services. Ask yourself first of all if you really have extra time and will use this service. Understand what content this new service currently offers. If you aren’t so big on the service’s current offerings, don’t opt-in. Wait a year or so and reassess – perhaps the service has improved. You can always opt-in at a later date.

Like Your Closet

I often hear people say, “My closet is full, so I’m not buying any more clothes until I have a chance to give some old clothes away.” Good concept, and one that I recommend for these subscription services. Do you truly have a gap of unused time that is just waiting to be filled by a new subscription service? Or is your “closet” of entertainment options already full? If it is, you should consider cleaning it out before you buy something new. Unfortunately, you can’t donate to the needy as you can with old clothes, but you can rid yourself of some serious overhead by purging your unused or little-used services.

Kondo Your Services

Marie Kondo wrote “The Life-Changing Magic of Tidying”. In a nutshell, Kondo says to hold an item you own and think, “Does this item spark joy for me?” If it does, keep it. If it does not, toss it. This turned her name into a verb. You should use that verb with respect to your subscription services. If it sparks joy for you, meaning that you actually use it and derive value from it, then keep it. Otherwise, don’t. And, don’t add anything new until you can “kondo” what you already have.

IMO

There are so many subscription services out there including for entertainment as well as for many other services. Watch out for Subscription Creep and don’t get oversubscribed because it could cost you hundreds of dollars per month that you might like to have back!

Data vs. Narrative

This blog post by Brian Wesbury, chief economist of First Trust Advisors, illustrates that the data do not confirm some of the narratives that the economic media are running with. Instead, the data has been positive and point toward continued economic growth in the US and away from a recession. Wesbury addresses 3 narratives and shows that the data do not support the narrative. Here is a summary of Wesbury’s blog:

Narrative: Tariffs are causing trade uncertainty which will cause the US economy to slow, perhaps into recession.
Fact: US worldwide trade has grown by 16.3% since 2016. Trade with China is down about 12% but trade with Vietnam is up 33% and trade with Taiwan is up 20%. Other countries are picking up the slack due to the drop in trade with China. As Wesbury points out, trade is dynamic.

Narrative: Business investment is weak, meaning the stimulus from the 2017 tax cuts has ended.
Fact: Business fixed investment (including equipment plus structures and intellectual property) has grown at a 4.5% annual rate, and real business investment in equipment only has grown at 3.4%. These do not suggest a slowdown, much less a recession.

Narrative: The jobs report last week was weak and this points to the end of the “sugar high” and a looming recession.
Fact: Private sector job growth was strong. Civilian employment grew by 590,000. Wages and labor force participation grew and initial jobless claims remained low. Again, no indication of a recession.

IMO

I believe the outlook for the US economy is good and that we are not about to be in a recession any time soon. We have a mountain of debt but rates remain low so it is manageable for now. Data in the private sector particularly point to continued growth. This is bullish for stocks as well as for real estate.

First Trust is a leading manager of mutual funds and ETF’s

Janus Henderson Funds

If you have a 401k or other similar retirement account, it is likely that your investment options include mutual funds from any of several mutual fund managers. The largest managers include Fidelity, Vanguard, American Funds/Capital Group, and others. A somewhat smaller player is Janus Henderson Funds. Janus is a survivor and you should feel safe with your money if you opt to allocate some of your retirement account to a fund within the Janus Henderson family of funds.

High-Tech Heyday

Janus was founded in Denver in 1969 (according to its website) and made a name for itself particularly during the “dot com” bubble era of the late 1990s and early 2000s. The Janus Twenty Fund became one of the hottest funds of the era, rising from about $27 in early 1997 to over $90 in March 2000 before doing a u-turn as its portfolio companies tanked (per Yahoo Finance). Janus’ fortunes sagged as the tech sector struggled to recover, yet they continued to grow and round out the stable of funds, and they eventually made it out the other end. Denver’s Janus merged with London’s Henderson in 2017, thereby boosting their combined offerings as well as their capital base.

Today

Go to the Janus Henderson website and you can see the array of products that they have. While not as broad and large as Fidelity, Janus Henderson retains its reputation as a good manager of equities and particularly of tech stocks. While they do offer ETF’s, Janus Henderson is primarily a mutual fund shop. The Twenty Fund was combined into the Forty Fund, which survives today with $13.5 Billion of assets and is the flagship of the company. Its managers, Doug Rao and Nick Schommer, were recently profiled in Investors Business Daily and emphasized their desire to invest in companies with “wide moats”, or well-protected markets and/or high barriers to entry. This sounds a lot like Warren Buffet’s methodology.

IMO

I admire Janus Henderson because it has adapted and survived. Janus could have tanked along with many of the hotshot companies of 20 years ago, but it successfully navigated through the minefield. Janus gained more stability through its merger with Henderson. If you have the opportunity to invest part of your retirement account with the Janus Forty or any of the Janus Henderson family of funds, I believe that your investment will be in good hands.

More Fixer-Upper Tips

I invest in fixer-upper houses from time to time, and someone suggested that I write about some of my experiences with these investments. While I don’t think that relaying fixer-upper war stories would make for interesting reading, I do think there are some general ideas that one should keep in mind when investing in and executing a fixer-upper that aren’t well portrayed in the various fixer-upper television shows.

Have an Edge

There are many stages to doing a fixer-upper:
– Buying the right property in the right neighborhood at the right price.
– Financing the property.
– Deciding how to fix it up and at what cost.
– Selling it.

There are other subsets of these stages. To be successful, you need to have an edge with at least one of these stages. This means you should be better than other people at this particular task. For instance, if you are handy, you might be able to complete some or all of the handiwork yourself at a low cost, and that would be your edge. Or, you might be a real estate agent and you can save money on commission payment at the exit, or you might have access to pocket listings to buy before they are released to the general public. Perhaps you can put your interior design skills and contacts to work to create a beautiful home. It is more difficult to make money if you pay retail for everything along the way, and so you should figure out what your edge is and exploit it.

Be Prepared To Make Decisions

During the fixer-upper process, you will need to be able to make good decisions quickly. I think this aspect is relatively well shown in the television shows. Time is money and so you need to make decisions about colors, styles, appliances, flooring, or whatever, in a rapid fashion. Because, if you hem and haw about your choices, you will hold up the project, and your contractors will get frustrated with you.

By The Book

While it might be tempting to bypass the appropriate approval processes, it is highly recommended that you not do so and instead do everything by the book. Make sure you obtain appropriate association, city, town or county approval to do any work you undertake. If you don’t, it might come back to bite you in a big way. Work that is completed without proper permits will be difficult to sell at the back end. Are you only doing interior work that doesn’t need prior approval? Great, but make sure you don’t need that permit or approval before you start your work.

Keep Your Eye On The Prize

Most importantly, make sure you know what you intend to sell your property for, and back into your ideas and your costs from that end number. If you want to do a master bathroom that will cost $20,000 but you won’t get $20,000 of marginal value from that improvement, then you need to scale back your costs. I believe the fixer-upper television shows don’t do a good job of this aspect of the business. On TV, the sales price always seems to bail out the added or unexpected costs that the investors encounter along the fixer-upper process. It doesn’t always have a happy ending.

IMO

If you keep these ideas in mind if and when you decide to jump on the fixer-upper bandwagon, you stand a better chance of making money. As with anything else, the more you do it, the better you get at it. Start with a smaller project and work up from there. Make contacts along the way that can help you gain your edge. As I have stated before, doing fixer-uppers can be a fun side gig or even a main gig if you find that you have some talent with it.

Fixer-Upper Tip

Investing in a fixer-upper house and then either keeping it to rent or selling it is a good, fun thing to do especially if you are handy and/or have an “in” when it comes to the design or purchase of new wares for the house. If done correctly, one can make a decent living and have an enjoyable business doing fixer-uppers, and it can be an important part of one’s financial plan.

Chip and Joanna Gaines, Stars of HGTV’s Fixer Upper

Chip and Joanna

“Fixer-Upper” on HGTV with Chip and Joanna Gaines is over, and the stars are looking to move on to bigger things with regard to television. They are continuing to run and expand their Magnolia brand in Waco, Texas, and they are transforming Waco in the process. According to this article, tourism and home prices along with it are increasing.

Bad Idea

Although they are talented and have been successful thus far, there is one element of the Gaines’ business plan that I would not recommend: Their homes are setting the high end of home prices in Waco. Although they are trying to bend the curve upward, they are too far ahead of it. According to this article, the average Waco home sells for $215,000. The Gaines’, on the other hand, are selling homes for over $500,000, and even up to $950,000. More power to them if they can fetch those prices, but it is not a good idea to be that far above the market, regardless of how nice the house is or the cachet attached to the Gaines’ name.

Know Your Local Market

Instead, if you are looking to do a Fixer-Upper, you need to make sure you know what your market is. Buy something below the market price and be able to sell it at or close to the market price, factoring in all of the money you plan to spend to fix it up. When you sell the property, don’t stand out with a price that is 2 or 3 standard deviations from the mean. Rather, plan your exit price within 1 standard deviation, and work backward from there. If the acquisition price plus the amount you spend to fix it up results in an acceptable profit for you, then great! If not, don’t buy the house!

IMO

More power to the Gaines’, but don’t do what they are doing and try to reset an entire city market and point it upward in terms of the local economy and housing prices unless you want to establish a brand as they have. Instead, if you are planning to do one-off fixer-upper deals, stay in your lane and fit within the parameters of that local housing market.

Sweep Accounts: Watch Out!

This article from Investors.com highlights a new trend that some brokerages are using now to make more money from your account: Not all sweep accounts are created the same and you may need to make sure your excess funds are being swept into the right account.

Sweep Account

A “sweep account” is an account into which your excess cash is invested in order to earn interest. Typically a sweep account pays a money market interest rate, which is higher than a savings account interest rate. A sweep account that pays a money market rate is more in focus now because, at 2% or even slightly higher, the money market rate is higher than one can get in a longer-term bond. This is what a flat or inverted yield curve is all about.

Be Proactive

The Investors.com article shows that some brokerages – Schwab being the primary example – are not sweeping excess funds into money market funds. Schwab’s sweep account, for example, pays an interest rate of 0.61%, far lower than most other money market funds. Schwab has a money market fund, but if you are a Schwab account holder, you must proactively invest in its money market account. It’s easy to do – just do it through your online portal – but Schwab won’t do it for you. Schwab is not the only firm that does this. Merrill Edge, for instance, has a money market account that is not its standard sweep account.

It Makes a Difference

It makes a big difference if your sweep account pays 1% vs. 2%. Think about big institutions with millions of dollars invested. The extra 1% adds up to big money. For the small investor, the marginal interest you earn may not seem like much, but it is important not to feel taken advantage of. Also, think about it from the brokerage’s perspective: It’s a lot of money to them if they can avoid paying their customers an extra 1% on their deposits.

IMO

I recommend you go into your web portal or look at your statements to see what your excess cash is being swept into, and what the interest rate on that sweep account is. Then figure out if there is another equally-safe money market account available at your brokerage. It may be worth it to transfer your excess cash into the higher-paying account, especially if you anticipate the cash remaining there and if it is equally safe and easy to invest if a better opportunity presents itself.

Diversify Your Dividends

Interest rates are historically low. Granted, you can earn nearly 2% in a money market account, but that rate will decline if and when the Federal Reserve lowers interest rates. Longer-term bond rates are lower, with the 10-Year Treasury at 1.5%-ish. You might look at corporate bonds or a corporate bond fund: LQD, and investment-grade corporate bond fund, yields above 3%, so there is that option. However, the more common alternative to bonds for yield is stocks that pay dividends.

Dividends

With interest rates on traditional debt instruments as low as they are, dividend stocks become more attractive. What you should look for when you look to invest in dividend stocks, in addition to the current yield (the annualized dividend divided by the current stock price) is the opportunity for a hedge against inflation. For instance, the current yield on SPY, the S&P 500 Index ETF, is about 1.8%. If SPY’s price over the next year rises by the rate of inflation, say 3%, when added to the dividend, that is a 4.8% total return for the year, which is much better than you get with a bond, a 1 year CD, or most other traditional savings havens.

Diversify Your Dividend Portfolio

Many dividend-paying stocks are clustered into relatively few sectors. For instance, utilities, real estate investment trusts, large oil companies, and some traditional industrial companies typically pay higher dividends, or at least higher than the average S&P 500 company’s dividend. You might, for instance, buy 4 large oil company stocks – Chevron, Exxon, Shell, and BP all yield from between 4% and 7% – and declare victory on investing in dividend stocks. The problem is, stocks in one particular sector such as large oil companies tend to trade in unison. In my example, if the price of oil declines, your portfolio is likely to decline, and your hedge against inflation will not work out as planned. If oil goes down too much, these companies might lower their dividends, although companies typically make a strong effort at least to maintain their current level of dividends.

Dividend Funds

Regarding portfolio diversification, the typical financial planner might default to recommending mutual funds or ETF’s because they are diversified portfolios of securities. However, with the case of dividends, although there are many dividend funds, I am not a big fan, and I think you can do better on your own by buying individual holdings, as long as you know what you are getting yourself into individually and collectively.

IMO

I recommend that you target a yield percentage and pick a diversified portfolio of stocks that collectively earn that percentage. For example, set a goal to earn a 4% yield on a portion of your portfolio. Then pick stocks that earn 4% on a weighted-average basis. Some will earn more, and some less. The key is to make sure your portfolio is diversified among sectors, which means you should have 10 or more – a finance professor will tell you that you need 30 to be diversified, but you will be pretty well diversified with 10. Other things to watch out for:

  • Try to avoid stocks whose yields look too good to be true. There are stocks out there that yield 10% or more. Typically these are companies that are in trouble, so really high yields are a red flag.
  • Try to avoid master limited partnerships, or MLP’s. If you screen for “stocks that yield more than 4%”, many of your results will be MLP’s. There is nothing wrong with owning an MLP, as it is just a different form of ownership with voting rights different from what you find with stocks. The problem with MLP’s is that tax reporting at the end of the year is complicated because you get a K1 instead of a 1099, which could cause you to delay filing your taxes. The trend now is that companies that were previously structured as an MLP are converting to C-Corporation ownership so as to present investors with a cleaner ownership structure.

Another way to help to put together a diversified dividend portfolio that accomplishes what you want is to contact me and engage my services as a financial planner. I would enjoy helping you achieve your goals!