Tag: Financial Planning

Reverse Budgeting

March 10, 2022
Uncategorized

How Much Do I Spend in Retirement? Does it Really Matter? What if I could budget without…budgeting?

At CapSouth, it is our mission to help clients define and live their One Best Financial Life™. We challenge clients to consider their values and what is important to them, and then to develop actionable goals that we endeavor to help them achieve. This leads to the need to have a sound financial plan in place that considers a client’s assets and resources, and projects their probability of meeting those stated goals. We want clients to live with confidence in peace of mind, knowing that they are on track to live the life they want to live. Sometimes the focus of planning needs to be encouraging a client to scale back and pace their spending to allow for a more secure retirement. Other times that planning focus should be to urge a client to spend more, to travel, to take the family with them on vacations and make memories…to live their life more fully. In all cases, we are looking for the client’s confidence zone in their plan to serve as guard rails, so that they are not worried about running out of money, and on the other end, they are not leaving significant assets behind that are unplanned for.

More often than not, it seems, we meet with clients who do not have a clear idea of how much they spend. Particularly when a couple nearing retirement comes to us as a new prospect, a common answer is that they have just always lived within their means, or spent less than they made. How much you spend in retirement is very important in planning. Depending on your age at retirement and your assets, a seemingly small change in your annual spending can make a significant difference in the success of your plan. Many people plan for thirty years or more in retirement – a long time for inflation and market fluctuations to catch up with you and to affect your probability of meeting all your goals and objectives. We have invested in sophisticated software to factor in these variables for you, to allow you to simply think of how much you will need for retirement in today’s dollars. That does require us, though, to have an accurate number for that element. Whether we are planning for annual living expenses of $50,000 or $500,000, we need some assurance that this number is reliable.

But who wants to budget? You should see some of the facial expressions we get when we mention that “B word”! And if you are newly in, or approaching, retirement, how do you really know what your retirement lifestyle will be and what it will cost you? Further, trying to look at past or future spending can be even more difficult when you have varying sources of income throughout the year. Fear not, we have a solution. Reverse Budgeting. I believe in giving credit where it is due, so I will tell you this is not my concept; I learned it from CapSouth’s founder, Donald Bolden, years ago, and I have been recommending it to clients in retirement ever since.

Here’s how it works:

As best you can, come up with an idea of what you expect your basic living expenses to be in retirement. This should not include other specified goals in your plan such as travel, new cars, etc., but your basic living expenses of utilities, groceries, fuel, clothing, dining out, and the like. For illustration purposes, let’s say that number comes out to $5,000 per month.
Now, figure up what regular income sources you have such as Social Security, pensions, rental income, etc. For this number, let’s assume $3,000 per month.
Set up an “operating account” for your household and start it with a cushion balance of your comfort level. Let’s use $25,000. (Note: You and your spouse may decide to have two operating accounts; the concept still works.)
We would then work with you to establish a conservative Cash Management Account (CMA) among your accounts at Schwab, from which we would establish a recurring monthly transfer of the $2,000 per month to supplement your income and meet your expected expenses of $5,000 per month. We typically recommend this transfer being set up to occur on the 5^th of each month rather than the 1^st, to help track which deposit was for which month and to not allow weekends or holidays to confuse things.
What about those random sources of income throughout the year? Still employed and have a varying income? Receive additional bonuses? It is so easy to allow yourself to quickly spend that seemingly “extra” income without realizing it, giving yourself (and us) an inaccurate picture of the cost of your lifestyle. Under the Reverse Budgeting model, all variable income is deposited into the cash management account at Schwab, adding to the funds available to provide for your monthly transfers to your operating account.
It is likely no surprise to you that some months will cost more than others. You may have family visiting and spend more on groceries. You might have an anniversary and treat yourself to a nice dinner and some gifts to celebrate. Your refrigerator might need to be repaired or replaced. However, if we look back at this operating account in six months, a year, or more, we can get an idea of what you were really spending.

If that $25,000 cushion is down to $5,000, then we have a problem and need to make adjustments. We would review to see if there were a number of non-recurring, unexpected expenses during that period, or if life just cost more than you thought. We could increase the goal for living expenses in the plan to see if the new amount is still successful or what trade-offs need to be considered. If your regular monthly expenses are $6,000 or $7,000, then maybe you need to consider reducing those big trips each year from three down to two.

If that cushion is up to $50,000, we also have an inaccurate plan and need to make adjustments. We might encourage you to consider what goals you had for retirement spending that you haven’t been doing and challenge you to do what you said that you valued. It could also open the door for more travel, giving to charity or your family, upgrading your vehicle, buying a second home…whatever that looks like for you. If you are doing everything you want to, then we need to acknowledge that you are going to likely leave more behind than you might have thought, and we may need to review your estate plan to make sure it aligns with your wishes.

This is a simplified example, and we recognize that yours may be more complex. Life certainly will happen, and circumstances will change. Planning is never complete, and we continue to monitor, review, and update assumptions over time. Reverse Budgeting is a tool that can help to provide more confidence and reliability to your financial planning process, without having to focus on the “B word” of budgeting. We may not be able to tell where the money is going, but we (and you) can tell how much is needed to maintain your lifestyle.

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

By: Scott McDowall, CFP®

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.

The Nuts & Bolts of Wealth Accumulation

January 11, 2022
Uncategorized

Wealth accumulation is the act of increasing your net worth over time.

The modern approach to Wealth accumulation relies on increasing accumulation during the earning years and the draw-down of accumulated wealth during the retirement years.

The accumulation phase tends to take place during our 30’s, 40’s, and 50’s. The preservation stage begins once we begin approaching retirement age. This will lead us to entering the distribution or draw-down phase during retirement.

Wealth Accumulation Strategies:

Lower Expenses

One of the first steps in a successful Wealth accumulation strategy is lowering expenses. Lowering expenses may be easy enough to say but following through can be the hardest part. Creating a budget can be one of the best ways to start lowering your expenses.

You could begin the process by identifying your total monthly expenses. Figure out how much you’re spending each month vs the amount of income you are receiving. Once you have the expenses nailed down, you can proceed with creating trade-offs. These trade-offs may come in the form of cooking meals instead of dining out or pouring that cup of coffee before your leave home vs. stopping at Starbucks. According to the U.S Bureau of Labor Statics, pre-pandemic housing, transportation and food costs make up more than 60% of U.S. Consumer spending. (Consumer expenditures report 2019, 2020)

These tradeoffs may seem small, but small is where most of us need to start. This small start can help us use excess income to pay down high interest debt, which will ultimately lead to the accumulation of wealth.

Increase Income

We have already discussed lowering expenses. Now we can talk a little bit about increasing your income. You may be thinking, “If I knew how to increase my income, I wouldn’t need to read this article”. In some ways this thought may be accurate, however increasing your income will not help with the accumulation of wealth if your expenses continue to inflate at the same rate.

People tend to earn higher wages by means of a promotion or career change. The area of concern we face revolves around the inherent nature of humans to buy the big new house or brand-new car. I’m not saying that buying a bigger house or brand-new car is bad, but I will put caution around this action until your budget can support the increased debt while continuing to accumulate wealth. This means that you may need to focus on eliminating other debt before embarking on the new lifestyle.

What if you can’t seem to get that promotion or land that new career? You may want to consider working more hours. Working additional hours may help increase temporary wages long enough to pay down debt. Once this debt reduction has taken place, you may be able to reduce working hours while still accumulating wealth.

Keep in mind, we would want to create that emergency fund, based off budgetary needs. This Emergency fund should be in place before trying to advance to the last strategy that I have listed in this article.

The Entrepreneurial Spirit

We have now arrived. Our journey started by lowering expenses and creating a budget. We have also increased our income, which led us to accumulating excess cash and creating our emergency fund. Now, the fun begins. We are ready to invest our accumulated cash in a variety of ways. Let’s talk for a moment about growing our accumulated wealth. There are many ways to grow wealth, but we will focus on the following three: investment accounts, entrepreneurship, and real-estate.

Investment accounts can include a tax advantaged IRA, 401k, 403b, Roth IRA (to name a few) or retail non-tax advantaged investment accounts. Tax deferred investment accounts can be a great way to grow wealth without the growth being hindered by taxes today. Sure, you will have to pay taxes on this growth eventually, however the tax advantage today can help that wealth grow faster. The Roth IRA can help you guarantee the taxes paid, at today’s rates, without hindering the future growth. You may be asking yourself, which one of these accounts should I use? The answer to that question would be, “It Depends”. It depends on the growth strategy that you may currently be using, your current position within the wealth accumulation process, or the need for current tax relief. The best way to decide an answer may be to make an appointment with a Certified Financial Planner or other fiduciary planner.

Entrepreneurship can be defined several different ways. The Entrepreneurial spirit is full of endless opportunities, but what does it really mean? Entrepreneurial is defined as “taking financial risks in the hope of profit, enterprising.” This can be done by starting a business, investing in an established business, or buying a business. It is important to do your homework on this strategy, as it can be a risky but rewarding endeavor.

Real-Estate

The last strategy that I will mention in this article revolves around real-estate. Real-estate can create several avenues for growing wealth. You could be looking to buy commercial buildings in hope of creating a fixed income stream while also allowing for property appreciation. Alternately, you may be looking to buy a piece of property with the intent of improving it to sell. Which option is for me you may ask? Well, it depends on the goal you are trying to achieve. This goal could be limiting taxable income by creating a passive income stream, or it could be rapid capital appreciation achieved from buying and selling properties. Either way, real-estate investments can help a person grow their accumulated wealth with an entrepreneurial spirit.

Conclusion.

We have discussed several great strategies for accumulating and growing wealth. All previously mentioned strategies tend to build on one another while developing an over-arching portfolio of growth assets. We all need a starting point; whether this means creating a budget to lower expenses or increasing income to accumulate excess cash. Everyone has an opportunity to build wealth, and sometimes building wealth can come with trade-offs. Our responsibility revolves around deciding on a solid path and understanding the trade-off’s required to achieve our goals. Many people measure wealth by the amount of money you have, or the cars in your garage, however accurately measuring wealth goes much deeper than a bank account balance.

I will leave you with this thought. What is the difference between being Rich and being Wealthy?

Anyone can have a large income, or hefty bank account to support a windfall of debt. Wealth on the other hand, is about learning how to make your money grow for you and sustain your future. Identifying and defining what type of life you want to live is one of the most important aspects of truly being wealthy. Our goal at CapSouth Wealth Management it to help you identify, define, and live your One Best Financial Life.

To learn more about CapSouth Wealth Management visit our website at www.CapSouthWM.com

If you would like to further discuss wealth accumulation strategies, request an appointment at www.CapSouthWM.com/conta ct or contact our office at 800.929.1001.

Article by: Wes Hayes, CapSouth Wealth Manager

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material has been prepared for planning purposes only and is not intended as specific advice. 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.

Financial Lessons from the Boys of Summer

December 2, 2021
Uncategorized

At the time this article was written, the Atlanta Braves and its fans were still celebrating their second World Series championship since moving to Atlanta in 1966. A little history for you, the Braves have actually won four Major League Baseball titles – the first in Boston in 1914, and the second in Milwaukee in 1955. And if you’ve followed the Bravos for any length of time, this championship is especially sweet considering the path they took to get there. More on that later. If the phrase, “it’s a marathon, not a sprint” applied to a sport other than its namesake, it’s baseball. Most teams will start around Valentine’s Day and two will finish just before the Peanut Festival begins. There are 162 games in the regular season – 150 or so receiving much less attention than those played in October. But if you’ve ever been part of a championship team of any sport or of any sort, you know that it was the preparation of February that led to the champaign in November. It wasn’t serendipity, far from it. I’m sure there was a good break or a bad call along the way adding to the story. But long before the first glove was restrung, or the first line- up card scribbled out, there was a plan.

Such is baseball.

Similar success stories can be found from planning within the personal finance game. And unless there’s a silver spoon in the way, you can clearly see the correlation. For most, living your one best financial life doesn’t happen by chance. It’s the result of implementing and monitoring a financial plan with adjustments being made along the way. It’s intentional. And it starts with understanding how you make financial decisions and the biases at play within us all. Do you ever avoid having financial discussions with those you care about most? Are there certain behaviors detrimental to your financial wellbeing that you seem to repeat again and again? Odds are, you have a history with one of these questions. Maybe even both. Take heart, you’re not alone. One study from a financial research firm found that people are “more comfortable” talking about race, sex, politics, mental health and marital discord than they are talking about money. Money can be hard to discuss for a variety of reasons, right? Maybe you were brought up in a home in which avoiding the “money talk” was modeled to you. Your parents never discussed it at the dinner table, so now you don’t. So why is that? It’s not like we want our children to learn financial stewardship through culture. The same culture that gives us the Real Housewives of (insert city here) or Pretty Little Liars. Maybe we avoid discussing money for fear of being compared to others, or maybe we just don’t know how to talk about money? Could it be that we hesitate to talk about money because how we spend it shines a light on what we value? I’ll pause here and let you reflect on that a moment.

When we realize why we make the decisions we make, and how those decisions reflect what we value, we’re gaining the understanding needed to create a personal financial plan.

Baseball has changed over the years. When I was a kid, they played “small-ball baseball” where teams emphasize getting runners on base and methodically moving them into scoring position and then advancing them across the plate. They do this through bunting, stealing bases, and just putting the ball in play. Defensively, this style calls for your pitcher to throw 80 to 90 pitches per outing. That’s old school, fundamental baseball. These days, however, teams (see: their owners) have moved toward the “knock out punch” style of baseball where hitters are swinging for the fences – or for the knock out – from one swing of the bat. Great for ratings, advertisers, owners, and those who’ve found baseball – boring. The Braves? Not so much. They won the old-fashioned way. For example, Braves players, Freddie Freeman and Austin Riley, as one writer offered, “drew walks like flies”.

(A “walk” is when a player opts not to swing for the fence and chooses to wait for the pitcher to throw strikes. And when the pitcher doesn’t (or can’t), he ends up “walking” the batter (on four bad pitches), thereby earning the batter a trip to first base – the first step toward home plate and another run.)

Once on base, they would “steal” the next base. And once in scoring position, (on second or third base), they would advance on the next hit, and add to the run total. Then, with pitchers able to consistently pitch into the 6^th and 7^th innings, you’re able to throw in a middle reliever for an inning or two to hold the lead and then turn it over to your closer. That’s the baseball that many of us grew up on. And there’s a reason for that – it’s methodical, it’s proven, it’s fundamental, and it requires a strategy.

And it’s all part of a plan.

As an advisory business, CapSouth focuses on the long-term goals of our clients while guiding them toward the financial life they’ve always wanted. It starts with an honest conversation that can fundamentally change the way you see your finances. Our discussions, as you may know, are not so much focused on amounts, as they are on values, goals, and behaviors. Our process puts the personal back in personal finance. Your life is not about numbers, amounts, percentages, and totals (as baseball may be.) Your life is the sum of your values, the priorities you establish and the decisions you make along the way. We’re not here to help you hit the long ball, we’re here to help you pursue your goals through one wise financial decision after the other. Understanding, of course, there may be bumps along the way.

Detours and forks in the road are not uncommon, and your financial plan should account for them.

In the middle of the summer, when our nation celebrates its independence, we also celebrate the Major League Baseball All-Star game. Both the American and National Leagues bring their best teams together for one game – for bragging rights, I guess. In old-school baseball (prior to 2017), the winner would have home field advantage in the World Series. That’s not the case any longer. Now they play for a pool of money. Surprise. But I digress. In 2021, your Atlanta Braves entered the all-star break with a record of 44-45 and had just lost its best player Ronald Acuna, Jr. to a torn ACL. Perhaps this is the equivalent to a significant market correction, or let’s call it a market slump in keeping with the metaphor. So what did the Braves do?

They relied on their plan.

They made adjustments, sure, traded some assets for others, but didn’t panic in the face of adversity. Their advisor, Coach Brian Snitker, having years of experience behind him with his team of coaches, led the way, making wise decisions with the resources they had in hopes of living their one best season. And boy did they.

As the Braves have shown, numbers, percentages and values may change throughout the course of a season – as is true in a financial season – but more important than continued, uninterrupted success throughout, is success when the season ends. The Braves finished well. How about you? How are you going to celebrate the end of your season? On the field hoisting a trophy? Or in the dugout watching someone else do it.

Finish well, won’t you?

And from all of us a CapSouth, may you and your family enjoy this season and many more!