Does Your Money Work for You?

Transcription

1 PHONE POTERACK Does Your Money Work for You? WRITTEN BY: Ryan Poterack, CEO

2 Letter from the Author: The Purpose of Your Money You ve been taught money is intrinsically great, but money is actually only a potential means to an end since it has no inherent value. Money is just ink on paper until you exchange it for something that you value! Money can provide freedom. Freedom provides choices! So much of what you have learned about money to this point even from professionals in the financial services industry has been about your numbers, which are quantitative. I refer to your numbers as your hard facts. Financial professionals may use a boilerplate toolbox and a methodology that treats everyone with the same numbers (age, wealth, income, etc.) in the same way. Are you the same as everyone else? Might your values, attitudes, or circumstances be unique? If I want to know what you care about your values, your objectives, your fears, your life experiences, your biases then who else in the world can give me those answers better than you? Of course, no one can! I refer to this critical information as your soft facts, which are qualitative. No two people have the exact same soft facts. Therefore, any financial professional who ignores or minimizes the importance of your story may not be able to help you achieve your ideal outcomes or hit your goals. This ebook is about making life decisions because almost every decision you make involves some financial planning aspect. It s about empowering you to make the decisions that are right for you. It s about giving you the courage to pursue your goals and dreams. 2

3 Our Table Mission of Contents Financial Planning Basics...4 Defining The Fiduciary Standard... 5 Financial Decision-Making... 6 Your Lifestyle Paycheck Assessing Your IRA Exit Strategy You Get What You Pay For In Life...11 Financial Advisory Industry...12 You Don t Have to Do It Alone...13 It s All About You

4 Financial Our MissionPlanning Basics Somewhere along the line, you ve been taught your objective is to build a big pile of money. In your sixties maybe a little younger if you ve planned well you retire after building up this big pile of money. You ve also been taught not to spend the pile of money! You ve been taught to spend only the interest and the dividends from your pile of money what I call the scraps and to protect the pile itself, which is called your principal. However, ask yourself this: if you spend three or four decades building up a pile of money to only spend the scraps, then who gets to spend the pile of money? You may fear running out of money. I get it! Nobody wants to be old, sane and broke. That is a bad combination! Your money in retirement has only two potential purposes: Your own fun and lifestyle. Somebody else s fun and lifestyle. If you don t spend your money on your own fun and lifestyle, somebody else or some organization will inherit it and spend your money the way they see fit! So what is more important to you? Your own fun and lifestyle or leaving your money to your kids or an organization? Far too many people continue using growth strategies for income objectives in retirement. The objectives of a 60-year old are nothing like the objectives of a 30-year old, yet many employ similar strategies. In my experience, too many financial professionals don t know the difference either! 4

5 Defining Our MissionThe Fiduciary Standard The Fiduciary standard, established as part of the Investment Advisers Act of 1940 and regulated by the SEC or State Securities Regulators, requires investment advisors to put their client s interests above their own. Fiduciaries have a professional responsibility to recommend solutions in the best interest of their clients. Fiduciaries do not agree with a client s bias or opinions simply to make a sale. A Fiduciary must confront bias for what it is. As a Fiduciary myself, I have a responsibility to explain why certain products or strategies are in my clients best interest based on their desired outcomes. Of course, I will never forget whose money it is. If a client says, No, I don t want that option on the table, then we may move on to the next best option for that client. However, if I believe a product or strategy can help the client achieve their desired outcomes, I won t avoid what may be a difficult conversation. Fiduciaries are in the business of building consultative relationships. However, I can only recommend what is in your best interests within the framework you permit. There are many decisions people make that are objectively not in their own best interests. 5

6 Financial Decision-Making There are three categories of financial decision-making: SPECULATING Speculation occurs most often when emotion becomes the primary driver of decisions. Speculation is reacting to headlines and world events. Speculation is buying a stock based on: A recommendation from a friend. Your employment with the company you buy stock in. Media hype or commercials persuading your opinion. High dividend yields. Or the company having a great product or service. Just because a company is well-known doesn t mean their stock is a great buy at today s price. Speculation is a magnet for the better deal crowd! Too often speculators end up chasing returns resulting in buy high, sell low transactions. INVESTING Investing is very different from speculating. Investing is a deliberate strategy done for the long term. Long term means at least five years but more likely ten years and beyond. Investing is about time frame, disciplined allocation, and measurable objectives for your money. World events and economic gyrations will occur and are not predictable, therefore they should not substantially alter investing strategies. For every hot stock tip, there s a stock failure. Investors are not rattled by the daily noise of markets and media. 6

7 PLANNING Speculating might as well be gambling, which can be fun with some of your money. Investing is very numbers-oriented relating to inputs and outputs. Successful investing is important to successful planning and should be logical, disciplined and consistently reviewed over a long time-frame. Planning seeks to eliminate speculation, harness the growth of successful long-term investing, and be strategic about an individual s unique purpose for their money. Effective planning is about the efficient use of your money, not simply the growth of your money. Tax planning, risk management, distribution planning, and estate planning. Where investing is one dimensional, planning is multidimensional. 7

8 Your Our Mission Lifestyle Paycheck You are likely in one of two groups: retired or still working. If you are still working, hopefully you feel reasonably confident in the stability of your paycheck. A stable paycheck allows you to continue living your current lifestyle, save and invest for the future, handle uncertainty better, sleep more comfortably and generally feel better about life and your future than if you didn t have your paycheck! It is important to recognize that a lifestyle is driven directly by cash flow, not by total savings and investments. Of course, having a bigger pile of money provides greater resources to provide cash flow. However, the financial industry (and most consumers) will tend to focus on building a large pile of money (accumulation) instead of building a healthy retirement paycheck (cash flow)! Which brings me to my main point: whether working or retired, you know what your income is, and your lifestyle is built around this number. This is your lifestyle paycheck! As a retired person, you will want to be confident in your lifestyle paycheck. If you are confident in your cash flow, then the inevitable stock market fluctuation is less scary. At Poterack Capital Advisory, our retirement income planning process is sophisticated. We use a metric called your Income Stability Ratio (ISR) which measures how much of your retirement income, desired over your lifetime, is guaranteed versus being dependent on stock market ups and downs. Guarantees are subject to the claims paying ability to the issuing company. Your money psychology in retirement will be very similar to when you were working. As a guideline, we target at least a 75% ISR in retirement. Therefore, clients can feel comfortable and confident in their lifestyle and then use their pile of money for large purchases, special vacations or unexpected events. 8

9 Assessing Our Mission Your IRA Exit Strategy The IRS tax code can be favorable to married couples and unfavorable to single people in a relative sense. The IRS doesn t distinguish between happily or unhappily married couples. Married is married and a better tax treatment can be a benefit of marriage. The IRS doesn t care why you are single. If you re single because you don t believe in marriage, you re single. You got divorced, even from a destructive relationship, you re single. You lost your spouse to cancer, you re single. Unmarried is single PERIOD. I will describe one of the most common situations in which consumers may not be well served by what they think they know about the financial industry. Since IRAs were created in 1974 and 401K plans began in 1979, many Americans began accumulating money primarily through pre-tax contributions. The lure was and remains, tax-deferred savings for a long-term retirement objective. This approach is neither good or bad, but like most things in life, there are benefits and limitations to the strategy. However, it is rare to read anything negative about this approach to serving your retirement objective. We have all heard the following: Maximize your pre-tax contributions You ll be in a lower tax bracket later Protect your principal Only withdraw the required minimum from your IRA and other phrases my industry expects you to accept without critical thinking. 9

10 Assessing Our Mission Your IRA Exit Strategy If you continue to defer taxes on your Traditional IRA and 401K money, it might feel good in the short-term, but you are not avoiding anything. By deferring taxes as much and long as you can, you are simply kicking the can down the road where the tax burden is likely to be much higher. The more successful you are at saving and investing while working, the less likely you are to be in a lower tax bracket when you withdraw your IRA/401K money! Here is the dirty little secret in the IRS tax code: If you are married, it is unfortunate, but realistic to expect that you or your spouse will die at some point. When this happens, (whether you or your spouse die first) the survivor will file as a single taxpayer. You are likely unaware that the tax bracket for a single person with $50,000 of taxable income, is over 83% higher than the same $50,000 tax bracket for a married couple! 1 It may not be possible to predict investment performance, but as the saying goes, death and taxes are certain. When your spouse dies, the RMD and all withdrawals from your combined IRAs and 401Ks will be subject to the IRS single filing status. The tax consequences for leaving your IRA and 401K money to your children may be worse, depending on their tax bracket and your children s spending behavior (with your inheritance). What is your IRA Exit Strategy? As a Fiduciary, I trust but verify every phrase or platitude put out there by brokers and in advertising on behalf of my clients. Critical and strategic thinking seeks to profit from known facts, not speculative opinion. The tax bracket applied to your IRA and 401K money is a moving target every year based on your specific situation. Annually reviewing your tax situation to determine opportunities to pay the least income taxes on your IRA and 401k accounts is valuable to many of our clients and their heirs. 1 A married couple filing jointly with a $50,000 household income are in the 12% federal tax bracket; a single person with the same household income is in the 22% federal tax bracket. Source: 2018 IRS tax code 10

11 You Our Mission Get What You Pay For In Life If you think it s expensive to hire a professional to do the job, wait until you hire an amateur. - Red Adair, American oil-well firefighter There are many people who insist that it is less expensive to do any task or work yourself. This is small thinking, without any regard for the value of your time and the expertise of others. In most cases, for this to hold true, you must place a low dollar value on your time (likely far below your employment earnings) and believe you are the best person for the job. You and a financial professional likely know more collectively than you do alone. The financial professional may add to your knowledge and decision making beyond your own understanding. The tricky part is that you don t know if the value you would receive from the professional is worth what you are paying. I ve spent more than half of my life as a financial professional, and I recognize that there is a very wide gap in knowledge between a competent, experienced financial professional and a Do It Yourself Investor (DIYI) or typical consumer. However, there is also a significant experience gap between financial professionals, even if they have the same licenses and qualifications. This is also true of attorneys, physicians, accountants, and other professionals. We developed our Initial Case Analysis (ICA) to provide prospective clients the opportunity to get a taste of the quality work we do as well as a written audit of their financial, tax, insurance and estate planning. This is provided at no cost. DIYIs don t ask themselves challenging questions or pointed follow-up questions. Why would they? DIYIs rarely hold their performance accountable to a standard. In my experience, this behavior is often due to negative bias that the DIYI has toward financial professionals. If a bad experience with a product salesperson in the financial industry has prevented you from seeking advice, then I encourage you to experience the difference with our firm. Our ICA would likely be of great value to you. 11

12 Financial Our MissionAdvisory Industry Unfortunately, there is an appalling lack of financial education and transparency in our society. Even when financial education is provided in this industry, it is often not absorbed in a meaningful or substantial way. For example, a lot of the fees and expenses associated with investments are built inside of the products themselves. You don t know what you don t know. This statement is true in this moment as you read these words and will remain true now and forever. Professionals financial and otherwise have dedicated their talents and their lives to learning their profession and to applying financial strategies in real-world situations with clients. My knowledge grows continuously because I participate directly in so many life decisions that my clients contemplate and make every week. This creates experience and wisdom that simply cannot be replicated by an amateur. Communication and thorough process are key ingredients to a successful partnership with an advisor. This leads to an equal understanding of what your money is doing for you. 12

13 You Our Mission Don t Have to Do It Alone Having someone in your corner someone whose mission and responsibility it is to look out for what s best for you can be a source of emotional health and financial wealth. If you ve ever played an instrument, then imagine the gap between your skill level and that of a true professional. A guitar or piano sounds very different played by your fingers versus a professional s fingers. Same instruments, dramatically different outcomes. Growing up, did you dribble a basketball or bat a baseball? The same basketball or bat in the hands of a true professional seems capable of so much more than what you can accomplish alone. A writing pen can be used to note your to-do list or, in the hands of a genius, to compose a brilliant song or novel. You may buy financial products and believe those products will provide the same outcome as a professional advisor may provide. You may think obtaining the product at the lowest cost leads to the best outcome, or the cheapest instruments will make the sweetest music. If you recognize the difference between an amateur and a professional in all other areas of life, then why would financial planning be any different? Cost is always important. However, financial planning is strategic and involves integration, efficiency, coordination, creativity, and so much more. To be a savvy consumer of financial products and services, you must apply critical thinking to any decisions you make. Hold your biases up to the light of day. Choose a financial advisor who will both challenge and respect you. At Poterack Capital Advisory, it s all about you and your best interests. 13

14 It s Our All Mission About You If you take one thing away from this ebook, remember that the goal of your financial planning is being clear on what you want your money to do for you. If you would like more information on any topics covered in this ebook, make sure you are receiving my monthly newsletter which entitles you to attend events that we do not invite the general public to. Call or today to assure you are connected with us! Schedule a Visit Today! *Advisory Services offered through Capital Asset Advisory Services, LLC, a registered investment advisor. Poterack Capital Advisory, Inc. (PCA) does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. 14