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Tag: Wealth Management

Retirement Planning: Before and After

Working with clients, I often find that retirement planning can be an ambiguous idea for many, with numerous factors and circumstances to consider, when many of us are just trying to get through the next year…or even the next week!  We plan for retirement because we know that we likely do not want to have to work forever, and we know that there are steps we should be taking now when time is on our side to ready ourselves for that freedom of “making work optional”. 

Once clients reach retirement, there is still often a significant change of thought process.  I often get questions from clients… “What do we do now?  How do we convert our accumulated assets into monthly spendable income? 

With your input, we endeavor to devise a plan that puts you on the road to financial security.  The result is designed to leave you with sufficient assets so you can maintain your desired lifestyle or pursue new interests that you may develop in retirement.

We can help you with the numbers.  But first, let’s ask some basic open-ended questions.

  • What are your values?
  • How do you feel about money?
  • What goals do you have for retirement?
  • When would you like to retire?  Full retirement or change of employment with reduced income for a time?
  • What would you like to do in retirement?
  • How would you spend your days?
  • Do you enjoy traveling?
  • What are your hobbies?
  • Do you want to stay in your home or are you considering a smaller place?
  • Would you like to live in a different location?
  • Would you move closer to family or kids?
  • Or would you choose a location based on climate or quality of life?

Your goals are your goals.  They are not mine.  They are not your family members’ goals, and they are not your friends’ goals.  Your personal values and goals play a big role in your retirement planning picture.

BEFORE RETIREMENT (Already retired?  You can skip ahead or read anyway and tell your friends!)

Retirement sounds great, but can’t we balance those savings with enjoying today as well?  Yes, and we should!  Here are some general retirement planning guidelines:

  1. Set aside six months of expenses in an emergency fund. While skyrocketing interest rates have hampered stock market performance over the last year, savers can currently earn 5% or more risk-free. We’d be happy to point you in the right direction.
  2. Save up to 15% of your income in your company’s 401k. If zero to 15 in one paycheck leaves you short of breath, start small and ratchet it up over time.  You won’t miss the cash. But if it turns out that 15% is too difficult or interferes with other financial goals, at least always capture your company’s match.  It’s free money!  Why leave any behind?
  3. Build a “Life Account”. Make sure your savings are not solely in your retirement account.  “Life” will likely happen prior to you reaching age 59 ½.  Build a comfortable level of funds in a taxable investment account that you can access without tax penalties when needed prior to retirement age.
  4. Get out of debt. This includes student loans, credit cards, and auto debt.  We can talk about whether you should try to pay down your mortgage in a timelier manner…it depends.
  5. Max out IRA/Roth IRA and HSA. Consider fully funding an IRA or Roth IRA account and max out your health savings account if it’s offered as a part of your health coverage.
  6. Are you 50 or older? If so, consider catch-up contributions for retirement savings.  For an IRA, you may contribute up to $7,500 in tax year 2023. The 401(k) contribution limit for 2023 is $22,500 for employees.  If you’re 50 or older, you’re eligible for an additional $7,500 in catch-up contributions.
  7. Diversify within asset classes and among asset classes. When you are young, a diversified portfolio that leans heavily on the equity side of the allocation is probably your best choice.  Dollar-cost averaging through regular contributions allows you to take advantage of market dips. As you near retirement, you will likely want to gradually reduce risk by shifting to fixed income investments and reducing your exposure to stocks.
  8. Leave room for fun. It is certainly important to set goals and to make a plan to achieve those goals.  It is also important to live a little!  Saving everything and living on sardines alone is not fun for most of us.  Retirement planning allows us to put our savings into perspective and to know where we want to go and what it will take to get there.  Once we have that picture, we can evaluate the tradeoffs of saving more and retiring earlier or spending more in retirement, or retiring later and being able to spend more either now or in retirement.  I believe there can be freedom in a healthy balance between saving for the future and enjoying life now.  It really is all about a personal plan to challenge you to define and to live your One Best Financial Life®.

AFTER RETIREMENT

Our retirement planning work is not done just because we reached that long-awaited goal of retirement!  The direction of our work and our questions pivot to maximizing this period of your life. 

There are many factors that can derail your retirement picture – investment risk, inflation risk, catastrophic illness, long-term care, and taxes to name some.  A comprehensive retirement planning process should account for stress testing these obstacles to provide confidence in the probability of your success under these scenarios. 

Below are some general concepts to evaluate during this period of life:

  1. Think of retirement in phases. Our ability to enjoy our retirement years often wanes over time due to our health.  This is sometimes referred to as your go-go years, your slow-go years, and your no-go years.  You may decide that you want to continue to work part-time in the early years of retirement.  You may want a larger travel budget that reduces over time.
  2. Increase your reserve fund. While six months’ expenses may be an adequate emergency fund during working years, you may want to extend that to a year’s worth of expenses during retirement.  This comfort level is certainly different for each client, however the objective is to not have to liquidate funds in a down market.  This consideration will also factor into recommendations of investment allocations across various accounts or “buckets” of money.
  3. Systematize and Keep It Simple. We generally recommend evaluating your regular living expenses and your current income sources, and then setting up an automatic, once per month transfer from an investment account to your checking account for the difference.  For you, there is still a systematic income each month that resembles the paycheck you received prior to retirement.  Your overall investment allocation can be set up so that the account those transfers are coming from is invested with about a year’s worth of funds at a conservative risk level.  This account is then replenished periodically from other accounts based on market conditions and tax strategies.  The goal is for you to be able to enjoy life, and for us to manage that income flow for you.
  4. Consider Social Security carefully. Various timing strategies are available for claiming Social Security benefits.  Many times clients are eager to begin drawing their benefits as soon as they can – after all, they have been paying into them for years.  However, claiming early can have significant impacts on your total benefit.  Though you can begin drawing at age 62, you will receive a reduction of 5/9th of one percent for each month you draw earlier than your full retirement age (FRA) up to 36 months, and 5/12th of one percent for each month thereafter.  For example, drawing at age 62 when your FRA is age 67 will result in about a 30% reduction in your benefit. Delaying Social Security after your FRA has benefits worth considering.  You receive a guaranteed 8% increase for each year you defer your benefit from your FRA to your age 70.  This is in addition to any cost of living adjustment. For married couples, the timing of Social Security claiming is of particular importance for the spouse with the higher benefit amount.  After the death of the first spouse, the surviving spouse will get the higher of the two benefits.  The lower benefit amount will then cease. It is also of note that a divorced individual who was married to their previous spouse for more than ten years has the right to claim on the former spouse’s benefit without affecting the former spouse’s personal benefit. When should you file?  The answer will depend on your specific circumstances and the greater context of your financial plan, including the consideration of your health and family longevity.  A greater Social Security benefit is helpful if you or your spouse are alive to receive it.
  5. Don’t Forget Taxes. Tax planning is arguably more important than ever in retirement.  The timing and order of withdrawals from various types of accounts can have significant tax consequences – negative and positive. For clients with no concern over beneficiaries, maybe withdrawing from taxable accounts first, then tax-deferred, and finally tax-free accounts is best.  However, even in this example, consideration should be given to current and future tax rates and brackets, and the impact of Medicare IRMAA charges and Social Security taxation on a surviving spouse. Clients who expect to leave funds to their children or other heirs should add particular consideration to substantially appreciated assets that might be better held and passed at death to obtain the step-up in basis for the heirs. Roth conversions can be utilized to take advantage of lower income years or lower tax rates, moving assets from tax-deferred to tax-free growth going forward. Charitable goals can increase the benefit of sound charitable planning.  Utilization of batched giving, a donor advised fund, or maintaining tax deferred funds for future qualified charitable distributions after age 70 ½ are some valuable strategies that may apply.
  6. Remember that your plan knows about those dollars, too. Clients sometimes mention spending accumulated funds held in outside accounts on splurge purchases with a comment like, “But those were from my funds in my other account.”  Or, “those funds came from the sale of that investment property I had”.  It is very important to remember that your plan has likely accounted for those funds, too. 

When building a client’s plan, we discuss various resources including retirement accounts, pension incomes, rental property, private investments, etc.  Sometimes those income sources are for limited periods, or they might come in as a one-time future infusion of income.  Your plan factors these income sources in, as well as the growth on those assets once received, to fund your current and future retirement goals. 

Inflation can have a significant impact on your retirement expenses over time.  The longer a retirement period, the greater the impact.  By the time that the long-term care need occurs, the cost will likely be much greater than you might think.  The cost of your current lifestyle will likely cost substantially more twenty years from now.  Funding those future goals generally requires growth of your assets over time. 

It is easy to think of your current expenses and to get too comfortable with those being covered by part-time income, short-term or level pension amounts, etc.  It is important, though, to have a comprehensive retirement plan that keeps everything in perspective and to remember that your plan is counting on those excess funds received to be invested in accordance with long-term investment allocation.

There are no easy roads, but a disciplined approach to retirement planning that emphasizes consistent savings, a modest lifestyle based on your income, and minimal debt should serve you well as you travel the road toward financial security and retirement.  A sound financial plan also provides freedom.  Once you know you have your bases covered for retirement, you can feel more free to enjoy life now as well.

If you have questions about any of these concepts or how they might apply to your situation, please reach out to me or your CapSouth advisor.

To learn more about CapSouth Wealth Management visit our website at https://capsouthwm.com/what-we-do/or Connect With Us to learn more about our process.

By: Scott F. McDowall, CFP®

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.

Three Things to Consider in a Bear Market

I’d like to address the elephant in the room. This year has been incredibly volatile for the stock market, and we’ve experienced some steep declines.  It can be frustrating, confusing, and even frightening. Currently, we are in a bear market. Perhaps you have heard the term before and understand the feeling associated with a bear market but aren’t exactly sure what it is (besides scary). A bear market is when a market experiences a prolonged drop in investment prices. This is typically referenced when a broad market index falls by 20% or more from its recent high. There is tremendous noise in the media.  Many investors are anxiously looking at account balances more frequently, particularly after experiencing a long run for the bull market. Experiences with past down-market events may be triggering strong feelings of concern. One of my greatest strengths is being able to stay calm in difficult situations and it serves me well as an Advisor. To help you tackle a difficult situation head on in hopes of instilling some calm in the chaos, I’ll discuss three things to consider in a bear market

Communication with your Advisor is Critical

I love talking to my clients.  They share their dreams and lives with me. They trust me enough to delegate a large amount of their financial life to me.  It’s very difficult to do my job well without clear and consistent communication from clients. It’s also difficult to plan for clients without truly understanding how they feel about risk, how they view money and even some of the personal biases they may have in their approach due to previous experiences.  Some of my clients have never worked with an Advisor before working with me while others have unfortunately had very negative experiences working with an Advisor which is why they sought a change. For some, I serve as a sounding board and for others I offer trusted advice and guidance.  The one unofficial role I never knew I would take on is counselor.

We often think of money as transactional. Most of our money exchanges are even labeled as transactions. We use labels such as “good” and “bad” to describe debt, investments, and even Advisors.  We spend a great deal of time thinking about what we want to do with our money as well as thinking about what our money is doing in the markets.  We don’t often talk about how we feel about money or our life experiences with money.  This is ironic as the field of Behavioral Finance is growing. Research consistently indicates that client behavior is also a key indicator of financial success.  One of the leading organizations in the financial planning industry, FPA, recently announced a new partnership to offer its members a Psychology of Financial Planning Specialist program.  Covered in the program are topics such as Behavior Finance for Financial Planners, Counseling in Financial Planning Practice, and Implementing Financial Psychology into Practice. The industry has recognized what we as individuals may not be able to see right in front of us – dealing with money comes with a lot of emotion.  It’s time we start talking about it.

While I believe communication is always important, communicating with your Advisor during a bear market about how you are feeling is crucial.  A client recently shared that this was the first time they have ever felt uneasy.  We had a long conversation about why they felt uneasy.  We had reviewed the financial plan and were well in the confidence zone.  There was plenty of cash to fund their needs for an extended period. We began to peel back the layers and have the hard conversations around emotions.  Throughout the conversation I learned that when I said “everything is fine” the client perceived that as being dismissive. While that was never my intent, their honesty and vulnerability allowed me to clear the air and lean into even deeper conversation. I decided to ask the client a very tough question – are you uneasy because you have lost trust in me? Thankfully, they had not.  After a while, they shared that they felt uneasy because it was the first time that they were experiencing a bear market while in retirement.  It was scary to see the losses while on a fixed income.  The client’s vulnerability in sharing those feelings took courage. We walked back through their financial plan, discussed “what ifs” and discussed how we might address them in the future.  We didn’t abandon the plan and we didn’t make any sudden investment changes that were out of scope of the plan.

During this bear market, if you find yourself dealing with emotions that are new or ones you haven’t experienced in a while about your money, please tell your CapSouth Advisor.  We truly care about you and we are here to listen.  It is our responsibility to coach and guide you through the emotions so that we can limit behavioral influences. There is an adage that says, “the only people that get hurt on a roller coaster are the ones who jump off”.  Advisors often use this to explain how behavioral changes impact money such as selling when the market is declining. We understand the emotions and we will spend the time needed to address concerns.  Let us serve as the safety bar to keep you locked into the seat while we ride this roller coaster together.

Your Financial Plan Has a Long-Term Outlook

One of the things I love most about CapSouth is our dedication to Financial Planning.  For most of my life, I only thought of a Financial Advisor as someone who manages money.  My experience with them had been limited to those that work in the Broker world as an investment manager.  Unfortunately, our industry has limited regulation on how the title Financial Advisor is used.  I have had many new clients come to CapSouth with the same limited viewpoint.  When I explain that we view investment management as a commodity and that our real value comes in planning, it can be a true mindset shift.  Perhaps you had a similar experience when starting to work with us. We ask a lot of questions! We ask for a lot of information.  For those that are just starting to work with us, it can be overwhelming although we do our best to make the onboarding process enjoyable. With all the information provided we then craft a financial plan and begin working with you to implement it. We review the financial plan every year in meetings and are consistently adjusting it because life happens. We start to focus more on the Confidence Score to answer the question “am I going to be, okay?”

Like the Wizard of Oz, I’m going to give you a peek behind the Advisor curtain.  The Confidence Score is generated through a process called Monte Carlo simulation.  So, what is it and why does it matter? Surprisingly, it’s not unique to the financial industry. It’s also used in physics and engineering.   In our financial plans, we don’t have the certainty of knowing what the future holds. That includes knowing what the average rate of return will be for your plan. Therefore, the Monte Carlo simulation runs 1,000 trials of your plan using 1,000 different return possibilities to calculate the probability your plan will be successful. While you may not have considered worst case scenarios or bad returns, your financial plan already has. 

When we dig into these simulations and look at the 1,000 Trials detail, we can get an even better understanding of the numbers.  We can see year data in 5 year increments (Year 5, Year 10, etc.). We can also see End of Plan Dollars and The Year Your Money Goes to $0.  These time frames are charted out by Trial Percentile. They include 1%, 25%, 50%, 75% and 99%. My personal plan has a Confidence Score at 88% (at time of writing this).  When I look at these trials, I can see that in the very best scenario my plan would end with more money than my husband and I would know what to do with and would need a fantastic estate plan.  I can also see that in the very worst scenario, we would run out of money in the year 2049.  Does that scare me? Not at all.  The reason? It’s an extremely unlikely scenario just like the one that looks amazing. The most realistic scenario is somewhere in between, and it’s why my Confidence Score is reassuring.  (Friendly reminder here: This is not like school where the highest score is the best score.  If my score is in the blue zone, it is considered an overfunded plan, and I need to ensure my estate plan is in order because I will likely be leaving money to heirs). 

We don’t often get into these types of details in meetings because it can be data overload.  The key takeaway right now during a bear market is that your financial plan is not surprised by a down market with negative returns.  Neither is your Advisor.  We take a long-range approach and understand that markets go down just like they go up.  Historical charts show that the markets have always recovered.  While history is not a predictor of the future, it does give us data to consider.  While it can be difficult to zoom out when emotions are high it is important to remember the decisions made together with your Advisor when times were not as tumultuous.

It’s Not All Doom and Gloom

When we set the fear and frustration of a bear market aside for a moment, we can turn our focus to the bright spots in this market.  No, I’m not talking about a “sweet deal” a friend is telling you about or even buying treasuries at 4%.  I’m talking about the planning opportunities that present themselves during a bear market.

If you are still working or have cash on the sidelines, it’s an excellent opportunity to dollar-cost average new money into the market.  If you are participating in a company retirement plan, it’s likely that you are already using this approach. Each time you contribute to your 401(k) you are investing new money. This may be weekly, bi-weekly, or twice a month depending on how your payroll is processed.  It’s a great buying opportunity. I like to say we’re buying on sale and it’s an opportunity we haven’t had in a long time due to high market prices. We may only know that the bottom of the market has occurred when we are able to look back, so trying to time cash into the market isn’t a great approach.  By leveraging dollar-cost averaging, you smooth out your investment purchases and remove market timing.

Now is also a great time to consider a Roth IRA conversion.  Roth conversions are a part of our normal consideration process for clients with IRAs, but they are particularly appealing when markets are in decline and your portfolio value may be lower. Conversions now may increase the likelihood of tax free growth as the market recovers.  You may even be able to save on the tax bill you are paying now for that conversion due to the lower portfolio value. Less taxes and increased potential of tax free growth? That sounds like a great opportunity to be considering in a bear market.

A bear market also presents you with the opportunity to revisit your market risk tolerance. Are you feeling different now than how you felt when you originally discussed your risk tolerance with your Advisor? Perhaps you overestimated how much risk you could tolerate and need to evaluate dialing back market risk long term.  The opposite could also be true.  You may have always feared the worst and now, faced with a bear market, you aren’t as bothered as you thought you would be.  These are valuable, real-time insights that can help you and your Advisor plan for the long term.

Above all else, remember that you are not alone. You are a part of the CapSouth family, and we value our long-term relationships with clients. We are here in the good times and in the bad. Do not hesitate to reach out to your Advisor at any time.

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: Jennifer Fensley, CFP®️,CRPS®️

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.

Am I Going to be Okay?

Am I Going to be Okay?

Worry is defined as a state of anxiety and uncertainty over actual or potential problems. That’s the noun form of the word. I’d like to focus on the verb form, if I might, which is defined: to give way to anxiety or unease, to allow one’s mind to dwell on difficulty or troubles. Anybody resemble that remark, as they say? [Billy raises his hand].  This may or may not come as a surprise, but my worry typically has little to do with the stock market.  

I worry more about things I’m less familiar with. How, for example, can I ensure my family remains safe through a global pandemic? Not only for their physical well-being, but from the effects of isolation from friends and teammates to media-driven fear and hyperbole.  Wading through the psychological make up of teenagers can be challenging enough let alone during the last two years! Well, I’m still not sure how to address all of that, but my belief is that my family and my children are here, in this community, in the midst of all that’s going on, at the precise time they were appointed to be. And sometimes, when you don’t have all the answers, you seek wise counsel in conversation with a friend or mentor, or maybe in the pages of a book. (Or in my case, you do both…and often.)

And then you keep moving.

How are you faring through all of this? A recent study* by the American Psychiatric Association suggests that 40% of Americans were anxious about becoming seriously ill or dying from coronavirus and 62% were worried about the same for their loved ones. Bad thing about worrying is that it’s a slippery slope – things you may not otherwise worry about now have you on edge.  Ordinary and routine events may now become sources for worry. And left unchecked, worry can – for some – manifest physically and affect the way you feel even to the point where you live in a constant state of fear and dread.  All of this leaving us wrestling with this question:

Am I going to be okay?

As many of you can attest, numbers aren’t the only things CapSouth pays attention to. And quite frankly, they’re not even the most important.  Sure, there are certain numbers that are likely to be part of the conversation. Returns, Probability of Success, for some, 33-18, for others.  But out of context, they’re only numbers. What gives meaning to those numbers is the life you want to live and how you’re planning to get there. Or as you’ve heard us say, living your one best financial life. A lot of what’s going on in the world today I don’t even have a name for. At least not one suitable for this article. Quite a bit of what we see, read, and hear these days is certainly good for news stories. (Not that I always believe it’s newsworthy. That’s a topic for another day.) They do, however, generate viewership, readership and advertising.  And so, the machine churns. And in the process, the narrative causes uncertainty, concern, and for some, full-fledged worry.  And so that machine churns, also.  

As it relates to your financial plan, to your one best financial life, allow us to join the conversation if you feel yourself slipping toward worry. Is it okay to be concerned? Of course, and it’s prudent. Your retirement assets may likely be the single largest asset you’ll ever have.  Is it okay to be uncertain? Of course, and it’s unavoidable at times. The news cycles have and will forever generate short-term market movement.  We see this play out daily.  The market’s going to go up, sideways, or down.  Whether you watch it on TV or on your phone, or maybe choose to go for a walk with a loved one instead – it’s going to happen. All of which, quite likely, in the same day. That said, please allow us to help you filter through the noise and help keep it in context.  Not all of it matters, and you don’t have to go through it alone.

There are some pretty sharp individuals you have working on your behalf here at CapSouth. I’ve spent ten years of my life working with them. People I trust and depend on greatly. Not just because of how smart they may be or how hard they work for the benefit our clients, but because of the type of individuals they are. I may be preaching to the choir as some of you have been around CapSouth longer than I have. One of our values is to treat others the way we want to be treated. Maybe it’s a clarification of a news event? Maybe it’s a recap of your estate plan?  Or maybe it’s just having someone who’ll listen.

We’re here. How can we help?  Click here to Connect With Us

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:  Billy McCarthy, Wealth Manager

*New Poll: COVID-19 Impacting Mental Well-Being: Americans Feeling Anxious, Especially for Loved Ones; Older Adults are Less Anxious

American Psychiatric Association, May 25, 2020

https://www.psychiatry.org/newsroom/news-releases/new-poll-covid-19-impacting-mental-well-being-americans-feeling-anxious-especially-for-loved-ones-older-adults-are-less-anxious.

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. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). CapSouth makes no representations whatsoever regarding any third party content/sites. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

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