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Are You Ready For Your Next Emergency?

August 27, 2016 By Scotty

We live in Uncertain Times. However, One Thing is Certain. You will need to pay for Unexpected, Urgent, Necessary Expenses Someday. You just don’t know when. That’s why you need an Emergency Fund.

Top Emergencies

1. Job Loss
2. Medical/Dental Emergencies
3. Car Repair
4. Unexpected Home Repairs
5. Unplanned Travel Expenses

The Key Point is that these Expenses must be Unexpected, Urgent, and Necessary. Don’t confuse Recurring Expenses with Emergency Expenses. Just because you forgot to save for your Annual Insurance Bill does not make it an Emergency Expense.

How Much Do I Need?

Your Emergency Fund should cover at least 6 Months of Essential Expenses like Housing, Food, Health Care, Insurance, Utilities, Transportation, Personal Expenses, and Debt. You may need more if you have a Single Income Household, work in a High-Risk Industry where Layoffs are common, have Volatile Income, or are Retired.

Emergency Budget

I like the idea of an “Emergency Budget.” That’s the Minimum Amount you would need to cover your “Essential Expenses” for at least 6 Months.

Example

Monthly Expense Amount 6 Month Expense

Mortgage/Rent $1,500 $9,000

Food $ 400 $2,400

Health Care $ 500 $3,000

Insurance $ 125 $ 750
Utilities $ 500 $3,000

Transportation $ 500 $3,000

Personal Expenses $ 300 $1,800

Debt $1,000 $6,000

Total $4,825 $28,950

How Do I Save That Much?

Start Small. Treat your Emergency Fund Savings like a Bill. Make it Automatic. Save First, and Spend Second. Skip Starbucks. Having an adequate Emergency Fund could keep you from having to declare Personal Bankruptcy.

Where Do I Put It?

It’s Important to build a Psychological Wall between your Spending Accounts and your Emergency Fund. Most Credit Unions will allow you to open an account with a Dollar. You can set a Savings Goal and then increase it as you pay off debt, get a Tax Refund, or get a Raise. Keep it in a Taxable Account…Tapping an IRA before Age 59 ½ will likely Trigger a Big Tax Bill Plus an Early-Withdrawal Penalty.

Do Not put your Emergency Fund in the Stock Market. You are most likely to need this Money during an Economic Recession, when the value of your Investments are dropping and your chances of becoming Unemployed Increase. I was Furloughed from my job as an EMS Pilot in 2010 due to Economic Conditions. My Emergency Fund kept me afloat until my company brought back the Furloughed Pilots.

Some folks might argue that Money sitting in a Savings/Money Market Account is not “Working For You.” I Disagree. Your Emergency Fund is “Working For You.” It is Buying you “Peace of Mind.”

View your Emergency Fund like an Insurance Policy…Only use it for a True Emergency…And Hope that Day Never Comes.

So, what do you think? Have you set aside a dedicated Emergency Fund? How Much? I would love to hear your comments.

Are You Feeling Lucky? Part Two

August 17, 2016 By Scotty

Don’t Mistake Luck for Skill. The correctness of an Investment Decision cannot be judged from the Outcome. When I worked as a Stockbroker I spoke with Dozens of Investors everyday. Many had proudly watched their Investment Portfolios grow substantially during the past 8 years. Some bragged about being Stock-Picking Geniuses.

What they didn’t realize is that they were measuring their performance over a very short Time Horizon, during One of the Biggest Bull Markets in American History. In Boom times, the Highest Returns often go to those who take the Most Risk. That doesn’t say anything about their being the Best Investors. How would those same Risk Takers’ Portfolios Perform during a Bear Market? You must consider “Alternative Histories,” the Other Things that Could Have Happened.

A Good Decision is one that’s Optimal at the Time it’s made, when the Future is by Definition Unknown. Thus, Correct Decisions are often Unsuccessful and Vice Versa. It’s Essential to have a Large Number of Observations…Lots of Years of Data before Judging an Investor’s Skill. As Warren Buffet says, “Only when the Tide goes out do you Discover who’s been Swimming Naked.”

A lot of Folks have been Swimming Naked during the past 8 Years. I Wonder how Lucky They will feel when the next Tide goes out…

So, What do you think? Have you ever confused Luck and Skill? I would Love to hear about it.

Never Forget the 6-Foot Tall Man who Drowned Crossing the Stream that was 5-Feet Deep on Average

August 16, 2016 By Scotty

Don’t depend on “Average” Portfolio Investment Returns to fund your Retirement. The “Average Returns” just might not occur until your money is all spent! That’s because there is a Fundamental Difference between an Accumulation Portfolio and a Distribution Portfolio. In the Accumulation Portfolio, Time is your Friend. The Longer the Money remains in your Portfolio, the Longer the Investment Returns can Compound. The Money you Invested and the Earnings on that Money you Invested Multiply.

However, once Withdrawals begin from a Distribution Portfolio, any Money removed from a Declining Balance will result in a Permanent Loss. This Loss is caused by “Sequence of Returns Risk.” Let me explain.

Accumulation Portfolio Example

In an Accumulation Portfolio with no Withdrawals, the Sequence of Returns does not matter. If the $500,000 beginning balance is subject to a “Good” Return Sequence of 100% Gain in Year One, followed by a 50% Loss in Year Two the ending Portfolio Balance is $500,000.

$500,000 + $500,000 = $1,000,000 – $500,000 = $500,000.

If that same Accumulation Portfolio beginning balance of $500,000 is subject to a “Bad” Return Sequence of 50% Loss in Year One, followed by a 100% Gain in Year Two, the ending Portfolio Balance is the same $500,000.

$500,000 – $250,000 = $250,000 + $250,000 = $500,000.

Distribution Portfolio Example

In a Distribution Portfolio with Withdrawals, the Sequence of Returns matters a Great Deal! For Example, our Retiree needs to withdraw $250,000 from that same $500,000 Portfolio after Year One.

If the $500,000 Distribution Portfolio beginning balance is subject to a “Good” Return Sequence of 100% Gain in Year One, followed by a $250,000 Withdrawal, followed by a 50% Loss in Year Two, the ending Balance is $375,000.

$500,000 + $500,000 = $1,000,000 – $250,000 = $750,000 – $375,000.

However, if the $500,000 Distribution Portfolio beginning balance is subject to a “Bad” Return Sequence of 50% Loss in Year One, followed by a $250,000 Withdrawal, followed by a 100% Gain in Year Two, our Retiree will be broke.

$500,000 – $250,000 = $250,000 – $250,000 = $0 x $0 = $0.

The 100% Return is Irrelevant because there isn’t any money left to Compound! The Point is, once Cash Outflows begin, it’s not enough for Returns to “Average Out” in the Long Run if the Portfolio could be Depleted before the “Good” Returns finally show up.

A 50/50 U.S. Stock/Bond Portfolio Blend returned about a 7% Average Annualized Return in the last Century. Therefore, some people are planning their Retirement expecting to Withdraw 7% from their Portfolio each year. That would be a mistake. The actual Sustainable Withdrawal Rate from a 50/50 Portfolio is actually closer to 4% adjusted annually for inflation.

Bridge builders don’t design their structures to withstand “Average” stresses. They build them to stand up against Extreme Events….Think about that the next time you cross a stream after a heavy rainfall…It might be a lot deeper than “Average.”

So, What do you think? Are you prepared for your Retirement? Have you thought about how much income you can Withdraw from your Retirement Portfolio? Please share your comments.

Are You Feeling Lucky?

August 12, 2016 By Scotty

Most people don’t realize just how important Luck is to having a successful and enjoyable Retirement. Let me Explain…

In Conventional Retirement Planning you compute your “Retirement Needs” by estimating your Lifespan, your Projected Rate of Investment Return, your Projected Rate of Inflation, your Projected Savings Rate and your Projected Expenses decades into the Future. You compute how much money you will need in your Retirement Portfolio to last your Lifetime.

What happens if you Retire at the Beginning of a Bear Market? What happens if you Retire at the start of a Hyper-Inflationary Period like we had in the 70’s? What if you Live until you are 120? Will those “Retirement Needs” estimates still be valid?

3 Financial Retirement Risks

You are exposed to 3 Primary Financial Risks in Retirement.

1. Longevity Risk. How long will you live? Most of us don’t know the answer to that question. That’s why it’s a Good Idea to have your Essential Expenses covered by a Guaranteed Income Stream like Social Security, a Pension, or an Annuity. Non-Essential Expenses can be paid from your Retirement Portfolio.

2. Market Risk. How much will your Investment Portfolio earn? No one knows for sure. If someone tells you otherwise…Don’t let them manage your Money. Historical Investment Returns are a Good Predictor of Future Risks, but, not necessarily of Future Returns.

3. Inflation Risk. How High will Inflation be during your Retirement? The Answer is Unknowable. A 3% Average Inflation Rate will eat up nearly 60% of your Portfolio’s Purchasing Power during a 30-year Retirement. For Example: a $500,000 Nest Egg would be worth $206,000 after 3 decades.

Solutions

So, what do you do to make sure you don’t get “Unlucky” with your Retirement?

1. You Save as much as possible, as soon as possible, as often as possible. The Essence of Retirement Investing is the Deferral of Current Income for Future Consumption.

2. You Diversify your Investments across several Asset Classes by buying Broad Market indexes.

3. You Spend Less. You live a “Thrifty Life.” You don’t need to be a Miser, just Frugal.

After all…We only get One Chance at our Retirement…We better get it Right…Let’s Not depend on Luck.

So, What do you think? Are you Ready for Retirement? Do you have any Questions, Comments, or Suggestions?

When Should You Begin Taking Social Security Benefits?

August 5, 2016 By Scotty

For most of us, Social Security is a big part of our Retirement Plan. We and our employers have been paying into the government program throughout our working career. Choosing when to begin receiving benefits is not a simple decision. You can elect to start receiving retirement benefits as early as age 62, or delay as long as age 70. Your claiming decision can have a huge impact on your Retirement Income.

Example

Your Social Security retirement benefits are based on your earnings during your working career. For our example, let’s say you are entitled to a benefit of $1,000/month at your Full Retirement Age. (Currently age 66 – 67 depending on your birthdate.) Your monthly benefit will be indexed to inflation for the rest of your life.

You can choose to start receiving retirement benefits at age 62 at a reduced payment of $750/month indexed to inflation for the rest of your life.

Or, you can choose to delay the start of retirement benefits until age 70 for an enhanced payment of $1,320/month indexed to inflation for the rest of your life.

What factors can help you choose when to claim Social Security retirement benefits?

Factors

1. Do you need the income now? If you need the money for immediate needs, you can claim early and live on a reduced benefit for the rest of your life.

2. Are you in good health? If you have a shorter than average lifespan you may want to claim benefits early. If you expect to live longer than average, you may want to wait to claim since the larger payments can protect you from running out of money in old age.

3. Do you have other income sources? If you have a large nest egg of tax-deferred assets like a 401k or Traditional IRA, you might talk to your tax advisor about the tax efficiency of drawing down those accounts while waiting to claim your higher Social Security benefit. That strategy might minimize taxes and Required Minimum Distributions from those tax-deferred accounts down the road.

4. Are you concerned about future stock market investment returns? Waiting to claim Social Security benefits can convert your Nest Egg’s uncertainty of market returns into the certainty of higher Social Security payments.

5. Could you claim early, invest the payments yourself, and earn a higher, guaranteed, after-tax return? Most estimates using 3% inflation and 6% earnings growth figure you would “Breakeven” about age 84. However, future investment growth rates are unpredictable. So is inflation. So is knowing how long you will live.

Your financial choice of when to claim your Social Security retirement benefit is highly personal. The decision to delay delivers the best results when there is Unexpected Inflation, Long Longevity, or Bad Investment Returns.

For more information go to ssa.gov. Create an account and you will be able to see your Earnings Record and Benefits Estimate.

We can help you evaluate different Social Security claiming strategies based on your unique circumstances. [Read more…] about When Should You Begin Taking Social Security Benefits?

Thrifty Tips of the Week 1

August 1, 2016 By Scotty

I am starting a new Weekly Feature to help you live a Thrifty Life. Each week I will list ways to live on less. Please add any “Thrifty Tips” of your own!

WEEK 1 TIPS

1. Eat In-Season Food. I recently bought a small watermelon for a buck at Sprouts and Red grapes for 88-cents/pound. It is harvest time for many fruits and vegetables. What a great combination, cheap and nutritious.!

2. Grow your own. My patio container garden is producing tomatoes, cucumbers, peppers, lemons and limes.

3. Buy Out-of-Season merchandise. You can find clearance specials for everything from swimsuits to kayaks. Just be careful to buy what you truly need…Don’t buy just because it’s a good deal.

4. Get Outside. Enjoy Natural Recreation. Developing an outdoor hobby can provide a lifetime of low cost enjoyment.

5. Get Inside. Cook at home. It is more nutritious and less expensive than eating out. Eat the leftovers for lunch at work. Save restaurants for special occasions.

6. Go to the Library. Give your family the gift of learning. Kids will love the special educational programs. You will love the Peace and Quiet.

7. Get Educated. Learn about Finance. Read books by William Bernstein, Jonathan Clements, Ben Graham, Howard Marks, Scott Burns, John Bogle. Skip the “Financial Pornography” of the Loud Mouths on TV, Radio and the Newsstand.

8. Invest in Yourself. Keep learning new things which interest you. Your favorite hobby may morph into your dream job.

9. Go on Vacation. Choose vacations which are rich in experiences. Create lifetime memories. Recharge your emotional batteries.

So, what do you Think? Can you add any “Thrifty Tips” of your own?

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