Have you ever received an offer for zero percent interest to finance a large purchase at a store? One of those deals where you have a year to pay it off, and if you do, there will not be any finance charges? Sounds great right? Well, it is great, right up until you miss the fine print and they charge you interest on the entire amount financed at the end of the financing period.

This actually happened to one of my family members recently, and it is such a duplicitous business practice that I thought everyone should know about it. My family member purchased a fairly large item at a Jewelry Store in the St. John’s Town Center. The experience in the store, they claimed, was amazing. The service was top notch, and they were very pleased with the item purchased. On top of the great service, they were offered another great deal. For the same price as what they would have paid up front, they could get zero percent financing for a year.

As a Certified Financial Planner™, I love zero percent financing deals. If you are already going to buy something, and somebody says you can pay the same amount later that you can pay now, this is a great deal for the buyer! I have used these deals many times in my life to pay for medium to large purchases, and they have all worked out very well.

Because this seemed like such a good deal, my family member took them up on their offer to provide them with interest-free financing through First Comenity Bank. They received the first statement in the mail a couple of weeks later, and everything looked correct. The total balance was what they had agreed to pay in the store, and the APR was listed as 0.0%. The minimum payment was 1/12th of the total balance, which would put them on track to pay the entire balance in the 12 month period. They immediately paid the minimum payment, and set up recurring equal payments for the next 11 months. When month 12 arrived, they sent the last payment and had a small celebration to enjoy having paid off the balance in full. However, that was not the end of the story.

One month later, they received another statement, and much to their surprise, this statement listed their minimum payment due as $35. Upon further examination of the statement, it showed that they had been charged for interest on the entire purchase to the tune of several hundred dollars. How was this possible when they had paid the amount in full within the 12 month period? They picked up the phone and called First Comenity Bank and asked that question. It turns out that the 12 month grace period on the interest rate had started ticking when they made the purchase at Jared, not when they received their first statement!

The company had set their minimum payment to pay off the balance in 12 months, but not within the time limit for the actual zero percent interest deal. Had they divided the total amount due by 11 instead of 12 and made those payments, the interest would have never been charged. But because their 12th payment actually fell more than 365 days after the purchase, the bank went back and charged them interest on the full amount financed.

According to Comenity Bank, they had done nothing wrong, they could not erase the finance charge, and in short, they were out of luck and had to pay it. They got angry, threatened to publicly disparage the company and their business practices, but First Comenity Bank held firm that they had done nothing wrong. What do you think?

Once in a while, a real-life question arises in our office that is simply too complex for an immediate answer. That happened a couple weeks ago, when the question arose, “What earnings are considered for determining Social Security benefits?” Like most Social Security issues, the answer is complicated, reflecting the complexity of the entire Social Security system.

There are two central issues regarding Social Security benefits; (a) What You Will Receive, and (b) What You Will Keep.” Explaining these concepts requires an understanding of a few basic concepts:

  • Earned Income is money you received as direct compensation for current work, plus compensation for some of your past efforts that are classified as work
  • Social Security Earnings are computed from Earned Income per individual
  • Lifetime Social Security Earnings means the aggregate Social Security Earnings of an individual’s lifetime
  • Filing Date refers to the day you choose to start receiving Social Security benefits.
  • Full Retirement Age (FRA)is the first day when you are allowed by law to file for unreduced Social Security monthly benefits.

What You Will Receive (in monthly benefits) is a function of both your personal Lifetime Social Security Earnings and your Filing Date relative to FRA. (For this discussion, we are ignoring the possibility that at some point you might claim spousal benefits.) Pensions, retirement annuities, etc. do not count, as those are considered fringe benefits, similar to insurance payments.

Items classified as Earned Income are primarily reported on Line 1 of your 1040, plus Schedule C if applicable. The highest 35 Earned Income years of a person’s working life are aggregated for the Lifetime Social Security Earnings.

FRA is a moving target, depending on your year and month of birth. Initially, FRA was 65 for everyone, but in the 1980s the Social Security System was amended to delay its own future bankruptcy. One of the primary changes was to increase FRA for people who would not be claiming for many years. We received sufficient notice of the changes. (A similar revision is likely in the next few years to again delay bankruptcy of the Social Security System.)

“What You Will Receive” is a function of individual earnings: “What You Will Keep”is an entirely different topic, and will be the subject of next week’s Blog.

Van Wie Financial is fee-only. For a reason.

Regardless of a person’s age and educational status, part of whom he or she will become is determined by events experienced during his or her early years. Looking back over today’s total population, various groups can be identified by events occurring in their formative years. In no way does this mean that every person of a similar age is exactly the same as others in that age group, but certain generalities can be made when defining their investment preferences. For example:

  • The so-called “Greatest Generation (born before 1946),” a moniker assigned by Tom Brokaw to World War II-era Americans, was comprised of two population groups: people who fought in uniform, and people who contributed to the war effort as civilians. Everyone was in the struggle, all together as (likely) never before and never since (with the possible exception of 9/11). About 420,000 Americans died in the War. The fortunate ones who returned home prioritized families and a consumer-driven, hardworking, peacetime economic engine. These people had little access to equity markets, as pensions and annuities ruled the day for retirement planning.
  • Baby Boomers (born between 1946 and 1964) were the aftermath of our newly-won peace. As a Boomer myself, I understand this generation most of all. Our formative events included the war in Vietnam, integration, and the resignation of Richard Nixon. Our parents emphasized education, and as a result, we were often the first college graduates in our extended families. As we reached our peak earning years, the Internet, discount brokerages, and Qualified Retirement Plans enabled investment accounts to thrive. While 9/11 startled the markets (and us), we overcame the shock, prosperity returned, and wealth grew rapidly.
  • Generation X (born between 1965 and 1976) grew up in the shadow of an entirely new era of perpetual war (especially the Cold War), although it has been prosecuted primarily on other continents. Their parents joined the NASDAQ craze of the 1990s, only to experience the devastating “Dot-com” bust at the end of the Century. The “Crash,” coupled with 9/11 and the Great Recession, led Gen-Xers to be reluctant to trust in our markets. Following the market devastation of the era, prosperity returned, and Generation X now loves the equity markets for the action.
  • Generation Y (born between 1977 and 1996; also called Millennials), were raised in an era of peace, prosperity, and innovation. As they matured, ubiquitous electronic devices dominated their time and energy. Their entire lives have revolved around communication power that continues to stun prior generations. Young investors need to get an early start to address the expected cost of living in second half 21st Century America.
  • Generation Z (born after 1996), have no interest in how things “used to be done.” Every byte of data is available instantly, and the totality of information is overwhelming. Directing this group toward a planned and organized financial future is a challenge for any person aspiring to become a financial advisor. No one yet knows what future events will impact this group.

Investing priorities and styles very much depend on priorities that were developed early in life. The “Greatest Generation,” and even more so their parents and grandparents, are primarily stock-averse, as the Crash of ’29 and the Great Recession shaped their fears for life. More recent generations are accepting of investment strategies involving equities. All ages should remember that no one investment strategy will provide a general level of confidence, success and prosperity. Diversification over time provides the best chance to achieve true Financial Independence, regardless of demographics.

Van Wie Financial is fee-only. For a reason.

When prosperity in California is finally and forever declared dead, it will be ruled a suicide. California will have only itself to blame, as the California State Government and Court System will be responsible for the premature death of the California’s business climate and livability. The single reason California business is still breathing is that the Golden State had so far to fall, having been endowed with the gold, the weather, the coastline, and so much more. It was so wealthy that Larry Gatlin wrote and performed the masterpiece song, All the Gold in California.

Death by a Thousand Paper Cuts was an ancient method of Chinese execution, one that has morphed into describing any slow, but eventually deadly, progression of individually small wounds. I imagine that most California business owners, large and small, feel that happening to them, as they watch their business climate degrade. Increasing homelessness, drug addiction, crime (related items), taxes and regulations, all confront California businesses every day. None of these conditions are improving, and elected leaders do not appear to care.

People are fleeing California in droves, and they are taking their businesses (and their gold) with them to Nevada, Texas, Florida, and the like. As businesses and wealthy individuals leave, prosperity in California decreases, one “paper cut” at a time. These losses add up; and in fact, they compound. The exodus will eventually prove financially deadly.

This all begs the question, “What next?” The answer, recently emerged from the California Senate Appropriations Committee. On a 5-2 vote, the Committee approved a new standard for who can be considered an independent contractor, versus a W-2 employee of the company. All this follows in the wake of the “Dynamex” California Supreme Court decision in 2018, in which delivery drivers were ruled to have been incorrectly classified as independent contractors.

In essence, elected “do-gooders” in California are creating, in their minds at least, a Utopian society in which all companies are wildly successful. Fringe benefits for W-2 employees (not for 1099 Independent Contractors) are motivating the politicians. Health insurance, vacations, personal time, holiday pay, family leave, minimum wage, ad infinitum, are California’s requirements for having anyone perform services for your California business. Some businesses can afford all these, but others cannot.

The 20th Century’s eminent economist, Milton Friedman, observed that “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” He must have been studying the California legislature, as that seems to be their modus operandi. Faced with insurmountable impediments to success, many businesses simply fold. Some are portable, and they often re-open in other, more business-friendly, locales.

According to Forbes Magazine, losses of population and wealth from 2011 to 2016 totaled 243,000 Californians earning $7.7 Billion annually. The pace of outflow is accelerating; the end result is inevitable.

Somehow, today’s “leaders” in California are calling “no harm, no foul,” as they claim the State has a budget surplus. That claim is not supported by California’s Balance Sheet, which shows massive debt. This debt includes over $1 Trillion (12 Zeros) just in unfunded pension liabilities. With about 12% of the U.S. population, California owes about 20% of the unfunded pension liabilities in the entire country.

Herb Stein, economist and father of always-entertaining Ben Stein (“Bueller, Bueller, Bueller”) once proclaimed that, “If something cannot go on forever, it will stop.” California has only taxing authority, not money printing authority. Therefore, the State’s unsustainable accumulation of debt must eventually come to a halt.

No one can predict what day it will happen, and we dread hearing a proclamation of instability from California. The inevitable reaction in Congress is always to “do something.” This would lead to a bailout of California. With your money. With my money. With printed money. With inflationary, electronic, fiat dollars.

Van Wie Financial is fee-only. For a reason.

As someone who has openly supported Capital Gains Indexing for decades, I am very happy to have read recent stories about this proposal arising again in Congress. Many prior attempts to pass indexing over three decades have failed, but this time just might be different. Indexing is a common term, but may need some explanation as it pertains to capital gains. Indexing is merely an alternative method of taxing monetary gains on sales of assets.

It is important to know the difference between “real” and “nominal” profits. Nominal refers to an actual number of dollars; i.e. if you buy something for $100 and later sell it for $200, your nominal profit is $100. “Real” profit, however, reduces that profit on the same sale by the change in value of the dollar since your purchase. During your holding period, if accumulated inflation were 20%, your “real” profit would be $80.00 (nominal profit minus inflation). Indexed Capital Gains Tax would be due only on the inflation-adjusted profit of $80.

Paying tax on inflationary gains (100% of the nominal profit) has never made sense to me. Taxing only the non-inflationary gain is, on its face, a very logical proposal. However, there are several complexities, rendering passage and implementation of Indexing an intricate endeavor. In no particular order, they include:

  • Our biased media complex complains that 86% of the benefit would accrue to the top 1% of income earners.
  • The government reports the “cost” of indexing would be a large loss of revenue. They do not consider changes in human behavior resulting from lower taxes.
  • Record-keeping requirements would be more burdensome, and the government’s inflation measure (Consumer Price Index, or CPI) would have to be applied to all purchase and sale records.
  • It has occasionally happened in the past that inflation went negative for a period of time, which would result in owing extra tax if the holding period happened to correspond to a deflationary period.

Indexing is a method of reducing taxes on Capital Gains from asset sales. We have experience with Capital Gains Tax Cuts, dating back to the Clinton Administration. In the 1990s, Capital Gains Tax Rates were cut, and the resultant increase in tax revenues was astounding. Indexing is also a form of Capital Gains Tax Cut, and as such is most likely to result in increases in both economic activity and tax revenue. After all, tax cuts have worked every time they were tried. This is the crux of human behavioral changes in response to reductions in taxation.

Cutting taxes for Americans is always met with resistance from those who prefer larger and more invasive government. Still, this time I believe that the current push to Index Capital Gains may become successful. If so, income planning, tax planning, and estate planning will all be enhanced for the average citizen. One does not have to be wealthy to benefit from user-friendly tax laws. My fingers are crossed.

Van Wie Financial is fee-only. For a reason.

According to a survey conducted by consumer research firm Hearts & Wallets, people who are confronted with daunting financial tasks tend to use the time-tested method of attacking them: running away. The old “pretend it isn’t a problem and maybe it will go away” method is favored by most age groups in the survey. At the same time, people across all age groups are also admitting that a range of financial tasks are more important for them than ever before. This is where our industry comes in. There are a group of people that say they would never use a financial planner because of the cost. But what is a better strategy: paying a professional to help guide you through the complicated retirement process or closing your eyes and hoping for the best? I would imagine that even after paying a financial professional, the first strategy will yield better outcomes close to 100% of the time.

For retirees and pre-retirees, there are two tasks that stand out as being extremely important. The first is “knowing how to find resources and plan financially in retirement” which sounds an awful lot like how to pick a good financial planner. The second is “developing a strategy to withdraw from multiple accounts”. If you do a good job on the first task and pick a competent, fee-only fiduciary financial planner, he or she will certainly develop a plan to help with the second part.

For “Accumulators,” the group that is more than five years away from retirement and still working and saving money for retirement, the biggest needs are “choosing investments” and “handling market volatility emotionally.” If you listen to our radio show, you know that every time we see a bout of market volatility, our firm addresses it quickly with an email giving our thoughts about what is happening, why it is happening, and our strategy for getting through it. Because we have chosen investments appropriately up front, this strategy is usually to remain calm and not make any rash moves unless we feel there is a reason to do so, which there rarely is.

Accumulators are not the only group that has trouble picking investments, this is a pain point across all ages. In fact, almost half of pre-retirees and a quarter of retirees also have this problem. However, most of them never do anything about it. 16% of those Accumulators who have trouble picking appropriate investments actually seek help with it. That leaves 84% of them without any help, either ignoring the problem or picking blindly. Accumulators are not alone in this, as only 11% of pre-retirees who have trouble “developing a strategy to withdraw income from multiple accounts during retirement” have looked for help on this topic.

From the survey, it appears that simply getting started is the biggest obstacle to many people. This can be caused by not prioritizing finding a financial planner, disorganization, or the embarrassment of having someone else tell them what they already know. Don’t let these things stop you. Get your financial future in shape by going to see a fee-only, fiduciary Certified Financial Planner™, and do it sooner rather than later. I guarantee you that no matter how bad you think your financial fitness is, they have seen worse. In our 20+ years of combined experience, we have seen almost everything, and there is very little that shocks us. Our goal is to help, not to belittle you. Take that first step on your path to financial freedom.

For the past couple weeks, this blog series examined the individual nature of establishing retirement income goals. Finding no “magic bullet” number for the needed size of a “nest egg,” we concentrated on sources of retirement income in order to arrive at an individual income goal. We discussed the components of income, as well as the formulas for achieving success.

Today we ask the age-old question, “What could possibly go wrong?” The road to financial independence is paved with perils, some more controllable than others. Here are a few potential pitfalls for long-term planning:

  • Social Security is inadequately funded to maintain current levels beyond the year 2034, and a reduction of benefits for retirees may result (Congress can fix this, but I am not holding my breath)
  • Pensions (Defined Benefit Plans) are becoming scarce, as employers convert to Defined Contribution Plans such as 401(k)s and 403(b)s, placing the onus on the employee for long-term investing success
  • Educational Loans are hindering the savings levels of many Americans, and are not only affecting the very young; 35% of student loan balances are owed by people over age 40 (from MIT AgeLab)
  • Divorce, which can split assets and interrupt planned accumulation at any age; 34% of divorces occur between couple married at least 30 years, and 12% are among those married 40 or more years (from Pew Research)
  • Bear Markets can happen just before or just after retirement, causing disruptions in planning the “4% Withdrawal Rule”
  • Involuntary Retirement, which affects 1 in 4 Americans, whether from layoff, illness, or other factors, interrupts the last years of planned accumulation
  • Unexpected and Uninsured Expenses emanating from disasters, illnesses, family members’ needs, etc., can rapidly deplete assets
  • Inflation has occasional spikes, and can last for prolonged periods, driving down the value of your monthly income

The best-laid plans of mice and men, as Robert Burns noted, often go astray. Van Wie Financial has been party to some of the most successful retirement planning imaginable, but we have also witnessed situations where one or more of the above problems above have interrupted potential successes. We believe that planning should include a “fudge factor” for financial independence. For many young people, we are excluding consideration of Social Security benefits (at their request) when planning for financial independence. They believe that if they do receive any eventual benefits, it will be icing on the retirement cake. As much as we believe that there will remain some level of Social Security benefits, who could possibly argue with an approach so conservative that it doesn’t rely on Social Security?

Similarly, we treat expected inheritances as if they may never happen. In our lingo, it is a good to plan FOR an inheritance, but it is never good to plan ON an inheritance. Parents and grandparents have ways of spending down their net worth, often due to illness. They are also capable of changing their opinions regarding who is worthy of receiving an inheritance. As we said, what could possibly go wrong?

Whatever your age, and regardless of how much planning has already gotten done, there is an ongoing need for financial planning and continuous review for anyone interested in achieving their goal of true financial independence. No longer is a financial plan simply a printed document that hides on a shelf after a single reading. Modern planning is done with clients on an ongoing basis, and utilizes software that is adaptable enough to keep up with changes, both in personal lives and in markets. Trained Certified Financial Planners™ have the expertise and the tools to guide the process.

Van Wie Financial is fee-only. For a reason.

Last week, in this blog series, we examined the individual nature of establishing personal retirement income goals. There is no “magic bullet” number for accumulation of wealth prior to retirement. Everyone has an idea of the income they will need to live throughout retirement. Rather than targeting a preset amount of money in retirement accounts, we concentrate on sources of retirement income in order to arrive at an income-based goal.

Retirees will likely not be totally dependent on their savings in order to fund retirement. Most Americans will have Social Security benefits, and in addition, lesser numbers of people will have some combination of private pensions, public pensions, and private annuities. In each generation, many people will inherit wealth from parents and other relatives.

Once a desired income goal is agreed upon, all income sources are aggregated toward that goal. The difference (assuming it is a shortage) must be made up from savings (in both retirement and non-qualified accounts). It is generally not critical for income planning to have retirement assets of sufficient quantity to fund a complete retirement.

It is now time to introduce the concept of “Equivalent Net Worth,” or “ENW.” ENW is an intangible sum of money that works for you by supplying lifetime income, but you do not actually own the cash. For example, an income stream produced from a pension or annuity (Social Security qualifies as an annuity) has value, but you cannot actually touch the funds that produce the income.

Under this formula, Social Security recipients have an ENW based on their benefit level when they file. The ENW formula is based on the concept of a “safe withdrawal rate” of 4%. This means that a saver should be able to withdraw 4% of the balance from investment accounts annually, and still outlive the money. Calculating the amount of money needed simply uses the reciprocal of the withdrawal rate. This is done by multiplying annual cash income by 25.

Under this formula, every $10,000 of needed annual retirement income would require either a savings, or ENW, of $250,000 ($10,000 annually times 25). Today’s average Social Security benefit is $17,532 annually, the ENW of these recipients is $438,300 (25 times $17,532). Married couples have an even larger ENW, as spouses can collect from the other spouse’s Social Security account.

Having the above sum of $438,300 in cash will produce the same income as the Social Security payment. A saver with that much cash has a Net Worth (NW) that includes the base sum of $438,300. When the saver dies, his or her heirs will inherit the money in the account. However, when the Social Security recipient dies, the heirs have no cash to inherit. It is intangible, and therefore included as Equivalent Net Worth (ENW). The income stream is something of value, and reduces the need of the saver to reach a difficult savings goal.

A recent Charles Schwab & Co. survey revealed that the average targeted retirement savings for Americans is $1.7 Million. While very few people will ever save that much, the concept of Equivalent Net Worth tells us that we are more likely to reach our retirement income goals with a lesser savings goal. This observation should come as a relief to savers and investors.

According to the U.S. Bureau of Labor Statistics (bls.gov), only 3% of private-sector employees have pension benefits. These fortunate few often receive more than $50,000 annually, which has an ENW of $1,250,000. We often say that there 2 types of people in the country; those who have pensions, and those who wish they did. The numbers illustrate why. However, non-pensioners have other means of producing retirement income. In many cases, they are wealthier than they thought.

Retirement income planning can be confusing, and we can assist anyone desiring eventual financial independence.

Van Wie Financial is fee-only. For a reason.

Recently, Charles Schwab & Co. asked investors how much money they thought would be adequate to fund their retirements. The consensus (we weren’t told whether this was an average or a median) was $1.7 Million.

It should come as no surprise to anyone that very few people will ever accumulate that much money prior to retirement. This was confirmed by a Fidelity study from early 2019 that showed an average 401(k) balance of $195,000 for the age group 60 – 69 years. Younger people, as expected, had less.

We believe that the Schwab survey asked the wrong question. We would have asked how much annual income people believed they needed to be comfortable retiring. For years now, Van Wie Financial has been examining the retirement asset formula more thoroughly than simply looking at 401(k) balances. Not only are our results somewhat more optimistic, but they also suggest that society is in somewhat better condition than the hard and fast 401(k) numeric suggests.

The reason Americans accumulate retirement assets in 401(k)s, IRAs, etc. is to eventually monetize account balances into income streams for retirement years. We all have the same objective — financial independence. Every individual determines their required income level without regard to other people’s objectives. Variables include age, marital status, geographic location, and lifestyle.

Averaging a need for $1.7 Million is the surest way to mislead Americans into believing they can never achieve a reasonably comfortable retirement lifestyle. Were this universally true, we’d be praising and reaffirming that number. Life is seldom so quantifiable, and this time is no exception. Determining your own personal financial independence level is, well, personal.

Comprehensive Personal Financial Planning has developed into a complex array of variables, both controllable and otherwise. Examining your complex and individual situation is a requirement for success. Most people need to have some help along the way. In a nutshell, that is our day job.

Rather than discouraging people who are trying hard to do the right thing by planning a certain level of personal retirement income, we prefer to educate them on the various elements of wealth and how they intersect later on. It is usually more achievable than originally thought.

Next week we’ll introduce the concept of “Equivalent Net Worth,” which allows a person to customize his/her/their variables to arrive at financial independence.

Van Wie Financial is fee-only. For a reason.

Financial advisors, according to a March, 2019 survey by the Journal of Financial Planning, get no respect. Rodney (“no respect”) Dangerfield would have had a heyday with this survey, had he chosen the financial services industry. The survey results are disheartening for many of us, but there is much to be gained from a deep dive into the data.

A disgustingly low 2% of surveyed people claimed to trust financial industry professionals. Given slightly more latitude, 15% admitted to trusting financial professionals “a little.” We remain unimpressed with these results, so we decided to look into the reasons why so little faith is evident in our industry. As with so many occupations, this seems to be a case of a minority of practitioners making it more difficult for all of us.

There is an age-old joke that says, “95% of all lawyers give the rest of them a bad name.” We believe that the situation in the financial services industry is more or less the reverse of that. A few truly unscrupulous advisors ruin the image of the many good practitioners.

Potential clients of financial advisors are fortunate to have a method by which they are able to ascertain the trustworthiness of their potential advisors. Thanks to the fiduciary rule, clients are able to know whether their advisor is legally, morally, and ethically required to place the interests of the client ahead of the interests of the advisor. Simply put, every advisor is either a fiduciary or not, and clients are allowed (and encouraged) to ask. In fact, we believe these potential clients are obligated (to themselves and to their families) to ask. A non-answer from an advisor should be taken as a resounding, “No.”

Over time there have been too many rogue financial “advisors;” we believe that the term “ financial advisor” is used entirely too generously. Insurance salespeople, brokers, and various other transaction-based activities do not qualify as true financial advising. 93% of Americans surveyed believe that the advisor’s interests should be second to their own. Yet only 50% of clients know whether their advisor is a fiduciary. This disconnect is upsetting, because it is critical to the ongoing success of the relationship.

Aretha Franklin was not only entertaining, but very clear about her desire for R-E-S-P-E-C-T. She earned it; she got it. At Van Wie Financial, we are doing our level best to earn it. Today there are many indicators available to investors seeking out reliable advisors. Look for fee-only fiduciary advisors, preferably holding the Certified Financial Planner™ (CFP®) designation, and doing business as a Registered Investment Advisor, or RIA. Your odds of success will be excellent.

Van Wie Financial is fee-only. For a reason.