Conner's Corner

The War Chest

The War Chest
 

We know you are likely half-inebriated with all the coronavirus news—it has shoved aside most of our priorities and taken center stage. And make no mistake: it is nothing to dismiss. Governments around the world are taking enormous steps to keep citizens healthy, support businesses, and pass legislation to stimulate their economies.

Despite these steps, stock markets have fallen considerably. Clients are calling (if we haven’t beaten them to it!) to ask questions. Some are worried about their money, some are excited to buy while stocks are down, and some are unsure how to react. For those who are retired or close to it, a few voiced concerns about whether it will affect their income in retirement.

Fortunately, we focus on financial planning while designing your investment portfolios. The financial plan is built to weather times like these. They include what I like to call “The War Chest”.

                What is The War Chest? Imagine the large, wooden treasure chest a king might keep in his tower during wartime. Inside were gold, jewels, and coins that funded the kingdom’s protection! The War Chest is the emergency funds of a kingdom—in this case, your kingdom.

                For those who draw income from their accounts, it is money set aside for when times are bad. Part of your portfolio is conservative, stable, and easily accessible. It keeps us from selling other investments while they are down. Some investments we use hardly fluctuate or continue to grow, even during times like these. We give up some growth in exchange for stability, but it pays off now. It keeps families from changing their lifestyle (any more than they already are!).

                Remember: you will not need your life’s savings today. You will gradually need it, and we will carefully, thoughtfully generate income from optimal sources. Never hesitate to give us a call or shoot us an email—we are here for you. Having a year’s worth of cash available does not change the fact that there is a lot of uncertainty in the air. People will make mistakes in the emotion of the moment. With a plan in place, however, we can step back and recognize that this too shall pass.

                In the meantime, we will ascend the stairs of the tower and bring you The War Chest. I heard one of the guards say there might be some spare toilet paper in there.

Clouds, Inflation and Sharks

shark cloud
 

 

Clouds float past us, light and fluffy, every day. But are they actually light? The average cumulus cloud you see on a sunny day actually weighs about 1.1 million pounds! We know it is possible, but it still seems to defy logic.

Inflation also seems to defy logic. We talk with clients about inflation all the time, yet it remains a difficult idea to keep in mind when we plan for the future. 

Inflation is an economic phenomenon where prices increase over time. Phrased differently, money slowly buys us less over time. There are a few reasons why this happens, which we won’t cover today, but the Federal Reserve targets 2% inflation per year. Depending on the time period, the US averages about 3-3.5% a year. In the 70s, inflation averaged over 7% a year!

What does this mean?

  1. Money sitting in a bank account earning .1% a year is, in real terms, losing value.
  2. Assuming a 3.1% inflation rate, it takes about 22 years for a dollar to lose half its value.
  3. Something that cost $100 in 1914, all else equal, would cost $2,608.88 today!

Look no further than the gas pump: in 1950 gas was a whopping 18 cents per gallon.

Of course, some industries inflate at much greater rates. According to the Bureau of Labor Statistics, college tuition averages about 7.4% a year, and healthcare costs average about 5.28%. That means college costs are doubling every ten years!

What does this mean for you?

Considering inflation within one’s financial plan is critical to life’s big moments! It helps keep Future You financially secure twenty years after you stop working and start spoiling the grandkids. Factoring inflation in keeps weddings affordable, vacations within reach, and the elderly with their dignity.

Inflation also changes how we think about risk. Retirees concerned about losing money often become more conservative investors. But investing too conservatively can lower our investment returns and make inflation much more painful.

A last thing that defies reality: the Greenland shark’s lifespan is reportedly 500 years. Thank goodness I am not a Greenland shark parent with kids aspiring to be shark dentists. Hundreds of years of inflation would mean really expensive college.

 

 

The “Squirreling Away” Scenario

Squirrel
 

We commonly receive questions from new clients that stem from a “squirreling away” kind of perspective on their investments. Some come to us with many accounts and investments—each with their own unique purpose. A standalone mutual fund was purchased ten years ago for a future vacation or to help with a grandchild’s education. We see investment accounts meant to “pay the bills” in retirement, and we’ve even seen clients with their own “beef jerky habit” account or “fancy tie” fund. 

Each account originally had its own purpose and was treated separately from the others. While completely understandable and often convenient, it can lead to inefficiencies and higher tax bills. And for family members who aren’t in our own heads, it can be confusing!

Of course, there are times where separate accounts are not only helpful, but critical. Separating a checking account from an emergency account, for example, keeps us from dipping into emergency funds.

But we don’t want to be like squirrels, tucking away little acorns left and right. We can wind up with accounts and investments spread apart, not working in concert with each other. 

We love helping with this. By stepping back and looking at everything, sometimes we can increase expected investment returns AND reduce how much risk someone is taking at the same time! 

The difference in a big picture perspective? It can translate into retiring sooner, paying for an entire child’s college instead of a couple years, or maintaining one’s income with fewer investment scares.