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Control and Influence

October 1, 2024
Financial Lessons, Uncategorized

As the father to four young men, one of my goals is to successfully make the transition from a relationship of control to one of influence. Control is easy, right? Do this, don’t do that. For example, don’t take off your clothes and turn the garden hose on the sweet little Japanese family that your mom tutors. In my defense, I didn’t think I would have to provide such counsel to my 4-year-old, but I guess I should have. First-time parent rookie mistake, I guess. Or please do take off your clothes before using the restroom. Thought I covered that in the first several years or so, but I guess not. (Sophomore slump with #2 – child #2, that is.) And one of my personal favorites of #2, please don’t tell the hairy man at the pool that you thought cavemen were extinct. On second thought, maybe control isn’t that easy. But in the world of personal finance, believe it or not, control is a bit more obtainable.

Today and every day, and in every facet of our lives, we should be focusing more on things we can control and worrying less about the things we can’t. In the world of finance, for example, none of us has any control over the markets, taxes, interest rates, inflation or the headlines of tomorrow’s news outlets. Yet, such things can affect our outlook on our financial situation and lead us down the path of worry and anxiety. And left unchecked, that worry can lead to paralyzing fear, or possibly worse, emotionally charged decisions. Both of which can be detrimental to our financial wellbeing. So, what should we focus on? There are essentially four primary factors within your control when it comes to your finances. I’ll present these in a “self-fulfilling prophesy” kind of way.

I can control how much I spend. Unless you have an unlimited supply of resources, your spending will need to be controlled. Similar to exercise, it can be difficult and painful, but it can be done. And you’ll be better off because of it. Let’s define spending as how much you’re choosing to live on every day and how much you’re choosing to spend to enjoy your life today and in the years to come.

I can control how much I save. I will save X amount now, so that I’ll have Y amount to spend later. If you’re still in the wealth accumulation stage, you or your spouse likely have access to a 401(k) retirement savings plan. And in some cases, your employer may incentivize you to save for retirement by offering an employer “match.” That is, your employer will match a certain percentage of your contribution (to your plan) up to a certain percentage of your salary. In such a case, your decision to save not only provides for your contribution to be spent later, but your employer matching contribution as well. The industry term there is “free money”. And yet another contributor to your retirement account will be the law of compounding returns – what Einstein called the 8^th wonder of the world – whereby you’re earning returns on both your original investment and on returns you received previously. Picture a snowball rolling down a mountain, picking up more snow as it goes. Before long, your snowball is a heaping mound of cash. You catch my drift. See what I did there? (Bonus Track: Look up the Rule of 72 and thank me later.)

I control how much risk I take. Indeed, you do. Not every person that invests in the stock market is 100% invested in stocks. In fact, an August of 2024 survey from Empower Retirement has the average stock allocation for those in their 20s, 30s and 40s to be approximately 50% of their total portfolio. Can you guess which age group from that same survey is credited with holding the 2^nd highest percentage of cash at a whopping 30.8%? Wrong – those in their 20s. Bested only by retirees 70 and older.¹ A post for another day, maybe, but such a conservative and seemingly “risk-averse” strategy may be anything but.

I control the timing of my financial decisions. Yes, you do. Like when you pull the trigger on a large purchase, or decide to retire, change jobs or (these days) even take on a second job. Also within your control is the timing of when to save more, spend less, invest more aggressively. They say, Timing is everything. I don’t know about everything, but it’s a fairly big lever to pull with respect to your financial security.

As I’m sure you’ve recognized by now, these four areas of control are inextricably linked. You’d be hard pressed to change one without affecting the other. Again, assuming resources are finite, if you choose to spend more, then you’ve also chosen to save less. If you’re spending less, you very well could be saving more. And saving more (or saving less) will certainly subject your goals to more (or less) risk, right? If, for example, you’re spending a great deal of money now on Alabama season tickets, you’ll presumably have less money saved to put your daughter through Auburn. (We’ll do anything for our kids, won’t we?) And anytime you’ve chosen to make any changes in savings, spending or risk taken – or not – you’ve made a decision in timing.

So where does influence come in? Great question. Influence certainly has its role in your finances. As we’ve stated, none of us will likely ever move the stock market, nor will we affect the tax structure or control interest rates.

Each of those, however, will influence what we can control.

Let’s say inflation rises – a lot. And you find yourself barely having the money for the things you need – much less the things you want. Now what? Well, that means you’ll need to prioritize and spend less on the things you could do without and save more for the things you really want. Or possibly change the amount of risk you’re taking to increase the chance you’ll make more money for the things you want. Maybe you’ll choose to work longer? Or maybe you’ll have to find a new job or possibly a second one? Or it could easily be some combination of these. It’s important that we understand when it’s time to adjust the factors that are within our control – our spending, our saving, the risk we take, and the timing of our decisions. Many factors can and will influence our decision-making process. Which begs the question,

Do you know what matters most to you in your financial life?

A quick answer can be found in your check register. Or for those of you under the age of 50, your online bank statements. Your answer to that question will guide you as you create a plan to help you live your one best financial life. And through that financial plan, you’ll be able to manipulate those areas within your control in anticipation of those influencing forces outside of it.

As for my boys, #1 is married and finishing up med school, #2 is a junior at Auburn and literally creating his own path toward a career of film/sharks/ecotourism, #3 is a senior in high school and likely to change the world through music, and #4 is a sophomore in high school and winning the hearts of college basketball and soccer coaches alike. All accomplished young men in their own rights, but all benefiting from the influence of those who’ve gone before them. I’m honored to be a part of that counsel. Whether serving as a father or a financial advisor, having influence for the betterment of one’s life is a legacy I’m proud to be a part of.

Article by: Billy McCarthy, Investment Advisor

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or www.capsouthwm.com/what-we-do/ Call 800.929.1001 to schedule an appointment to speak with an advisor.

¹What is the average allocation by age? (Empower Retirement, The Currency, 08.07.24)

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Do You Have Enough Life Insurance?

August 27, 2024
Insurance

Your life insurance needs change as your life changes. When you are young, you may not have a need for life insurance. However, as you take on more responsibility and your family grows, your insurance need increases but then decrease after your children are grown.

You should periodically review your life insurance coverage to ensure that it adequately reflects your life situation. Here are several methods to consider in determining your life insurance needs.

Income rule

The most basic rule of thumb is the income rule, which states that your insurance need would be equal to six or eight times your gross annual income. For example, a person earning a gross annual income of $60,000 should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.

Income plus expenses

This rule considers your insurance need to be equal to five times your gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs (e.g., college). For example, assume that your gross annual income is $60,000 and your total expenses are $160,000. Your insurance need would be equal to $460,000 ($60,000 x 5 + $160,000).

Income replacement calculation

The income replacement calculation is based on the theory that the family income earners should buy enough life insurance to replace the loss of income due to an untimely death. Under this approach, the amount you should consider purchasing is based on the value of the income that you can expect to earn during your lifetime, taking into account such factors as inflation and anticipated salary increases, as well as the interest that the lump-sum life insurance proceeds will generate.

Family needs

With the family needs approach, you would purchase enough life insurance to allow your family to meet its various expenses in the event of your death. Under the family needs approach, you divide your family’s needs into three main categories:

Immediate needs at death (cash needed for funeral and other expenses)
Ongoing needs (income needed to maintain your family’s lifestyle)
Special funding needs (college funding, bequests to charity and children, etc.)

Once you determine the total amount of your family’s needs, you should consider purchasing enough life insurance to cover that amount, taking into consideration the interest that the proceeds of it could earn over time.

Estate preservation and liquidity needs

This approach attempts to calculate the amount of life insurance needed upon your death to settle your estate. This method takes into consideration the amount of life insurance required to maintain the current value of your estate for your family, while potentially providing the cash needed to cover death expenses and taxes. Using this method, you should consider purchasing enough life insurance to cover potential estate taxes, along with funeral, accounting, and legal expenses associated with the administration of your estate. The life insurance may allow you to preserve the value of your estate at the level prior to your death and to help prevent an unwanted sale of assets to pay estate taxes and related expenses.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.

To learn more about CapSouth and the services we provide, visit our website at https://capsouthwm.com/what-we-do/or click here to schedule a Discovery Call.

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Why Retirement Isn’t Like the Summer Holidays

August 21, 2024
Uncategorized

Summer holidays are a time to relax, unwind, and escape the daily grind.

For many of us, they’re the only time of the year we get to sit back, fall asleep in the sun and completely switch off. It’s no wonder, then, that many of us dream of the day when we can leave our jobs and finally embark on that endless summer holiday: aka retirement.

However, while the notion of a perpetual break might sound appealing, retirement isn’t quite the same as an endless summer holiday. In reality, it requires careful planning, both financially and emotionally, to ensure it’s a success.

The myth of retirement as an endless holiday

The idea of retirement as a never-ending holiday is logical, but it’s also misleading.

Holidays offer an opportunity to recharge before returning to our regular lives. Retirement, on the other hand, is a permanent transition into a new phase of life.

Unlike a holiday, where our time off is finite and focused on getting away from it all, retirement can be a complex mix of leisure and the need for continued purpose and engagement.

Often new retirees can feel unprepared for this. While initially they might enjoy escaping from the commute, from workplace politics and meetings about meetings, many new retirees find themselves adrift once the novelty has worn off. Many miss the sense of identity and purpose that a job brings; others mourn the camaraderie of being part of a team.

These unexpected changes can have a detrimental effect on health and wellbeing. One oft quoted statistic says that retired people, especially those in the first year of retirement, are approximately 40% more likely to experience a heart attack or stroke than those who keep working. In addition, almost 1 in 3 retirees say they feel depressed – a rate higher than that of the adult population overall.

The phases of retirement

So what’s the solution? Thinking about retirement not as one single event, but as a journey through various phases, each with its own challenges and opportunities, can help you understand the emotions that might lay ahead:

The honeymoon phase: This initial phase of retirement is often marked by excitement and a sense of freedom. This phase can last from a few months to a couple of years.
Disenchantment: The next phase is often where the idealized vision of retirement collides with reality. Without structure or goals, many retirees find themselves feeling lost or even unhappy during this phase.
Reorientation: This stage is crucial for establishing a new sense of purpose and direction. New hobbies, activities, volunteer opportunities, or part-time work can provide you with that sense of accomplishment and fulfilment you’ve been missing.
Stability: Finally comes a stage of stability. This is when you’ve adapted to your new lifestyle, established a routine, and fully embraced a balanced mix of leisure and purposeful activities.

Creating an emotional plan

The secret to successfully transitioning into retirement is preparation. Thinking about how you might move through each retirement ‘stage’ can help you anticipate challenges, set realistic expectations, and create a plan that ensures a fulfilling and meaningful retirement.

This plan is designed to sit neatly next to your financial plan:

Define your purpose: Consider retirement as the start of a new chapter that offers opportunities for personal development. Have a think about what gives your life meaning, outside of work – what have you always wanted to do, but haven’t had the time or opportunity? Think about how you can incorporate these elements into your retirement lifestyle. Whether it’s volunteering, pursuing hobbies, or spending time with family, having a sense of purpose is vital for emotional wellbeing.
Establish routines: While the freedom to do as you please is appealing, having a routine can provide structure and prevent feelings of aimlessness. Think about designing a plan at the start of the week that balances practical chores and activities you love doing.
Stay connected: Having strong social ties is essential to emotional wellbeing. Especially for men who, research shows, tend to have fewer social networks and social support compared to women in retirement. Joining clubs or groups and developing relationships with friends and family can help to combat feelings of loneliness and isolation.

While the idea of retirement as an endless holiday is appealing, it’s essential to recognize that it’s very different from two weeks away in the sun. It’s a significant life transition that requires thoughtful planning. But by understanding the different potential phases of retirement and preparing for your emotional needs, you can ensure satisfying retirement journey.

As financial planners, we’re well equipped to help you with this process. We can offer guidance and support to help you navigate the complexities of retirement both financially and emotionally, so you achieve the fulfilling lifestyle you deserve.