The Milestones

The Milestones

I often get asked “Bench marking” questions. For instance – I’m 30.. what should I have saved by now?

 

So here’s a neat and simple break down:

First of all – every individual should have 3 months of their expenses in cash or cash-like equivalents. We call this the “emergency fund” and it is incredibly important for the general stability for your financial plan.

Second – As soon as you start working, you should contribute to your company’s available retirement plan and be saving about 15% of your income between retirement plan savings and your own personal savings.

And lastly – all of the number targets that will be listed below assume that you want to maintain your current lifestyle during retirement. Which also means that you are living within your current income. Or simply, you are not currently spending more than you earn.  

The Milestones:

Age 30 – The goal is to have 1x salary saved. (Gross). So if you make $100,000 you should have saved about $100,000 by now.

Age 35 – Have 2x salary saved

Age 40 – Have 3x salary saved

Age 50 – Have 6x salary saved

Age 60 – Have 8x salary saved

Age 67 (average retirement age in US currently) – Have 10x salary saved

 

Now, a few key assumptions play a role here:

  • This will work if you start saving 15% of your income every year starting at age 25
  • You invest a least 50% of your savings in stocks on average over your lifetime
  • You retire at age 67

If you retire later, you will need to have less money saved. The opposite is true if you plan to retire before age 67.

If this makes you feel a little down today, then i’m sorry that i’m not sorry. BUT I’m happy to work with you to get your sh*t together.

The Magic of Compounding

The Magic of Compounding

Or what Albert Einstein called the 8th Wonder of the World!

I often get questions like, “Why should I invest in anything? Why not just leave my money under my mattress?” Aside from the obvious – your house could catch on fire and your life savings would go up in smoke, the true answer is that you’re missing out on the compounding that an investment offers.

Let’s start with – what is compounding?

Compounding, in finance, refers to the process in which an asset’s earnings, from either capital gains or interest, are reinvested over time to generate additional growth. Or basically – it’s interest on interest. So instead of just your principal earning money (linear growth), your principal and the accumulated interest on your principal earns money.

Let’s simplify; suppose $10,000 is held in an account that pays 5% interest annually. After the first year, or compounding period, the total in the account has risen to $10,500, a simple reflection of $500 in interest being added to the $10,000 principal. In year two, the account realizes 5% growth on both the original principal and the $500 of first-year interest, resulting in a second-year gain of $525 and a balance of $11,025. After 10 years, assuming no withdrawals and a steady 5% interest rate, the account would grow to $16,288.95.
Compound interest works on both assets and liabilities. While compounding boosts the value of an asset more rapidly, it can also increase the amount of money owed on a loan, as interest accumulates on the unpaid principal and previous interest charges.

Compounding can also work against consumers who have loans that carry very high interest rates, such as credit card debt. A credit card balance of $20,000 carried at an interest rate of 20% (compounded monthly) would result in total compound interest of $4,388 over one year or about $365 per month.

What’s A “Will”?

What’s A “Will”?

…and why you need one too.

A “Will” – simple person speak for “Last Will & Testament” is a legal document that expresses your wishes regarding the distribution of your property and the care of your minor children, and pets.. if applicable. Basically, it takes a lot of the guess work and legal expense out of the equation if you die, and relieves some burden from your children or whoever is left behind once you’re gone.

If you don’t have  a will in place, a court will decide how things are distributed in the event of your death. This means that your loved ones may not receive the assets you wish to leave them in the event of your death. Oh, and you want that will to be in writing; Oral wills are not widely recognized from a legal perspective.

Creating a will gives you sole discretion over the distribution of your assets. It lets you decide how your belongings – including cars, jewelry, assets of any kind, clothing, art, and so forth, should be distributed. If you have a business, you can also direct the smooth transition of that as well.

If you have minor children, a will allows you to appoint a guardian for them, and allows the guardian to receive compensation for taking care of your children. And last but not least, a will lets you direct your assets to the charity of your choice if you’re charitably inclined or in the event you need a good option for a remainder beneficiary (who will receive your assets in the event all of your family has predeceased you, unlikely… but it does happen).

Things not covered by your will:

  • Community Property
  • Proceeds from life-insurance policy payouts
  • Retirement account assets
  • Assets owned as “Joint Tenants With Rights of Survivor ship”
  • Transfer on death accounts

Basically any thing that already dictates a beneficiary won’t go through your will.

I think the most important thing a will does is provide peace for the family members you leave behind – they don’t have to try to figure out, in a time of grieving – exactly what you would have wanted, and most importantly, they won’t fight over dishes and nonsense if you have already written out who gets what.

Please ensure that the person who writes your will is a Trusts & Estate attorney, not a real estate attorney who happens to write wills on the side, but an active and practicing T & E attorney.

***I am not an attorney, nothing in this writing should be construed as legal advice. Please seek the advice of an attorney for all your legal needs***

Protect Me Against Everything!

Protect Me Against Everything!

Protect Me Against Everything!

Ahhhhh…. Life Insurance. So many ways, so many different types. So much.. fuss.

Honestly, every life insurance agent will find a way to solve any problem you have by having you buy life insurance. As always, the more you know, the less likely you are to get ripped off, so lets break it down!

Life Insurance – Insurance you purchase on your life (or someone else’s) that is paid out upon the death of the insured. Theoretically, you would only be purchasing this out of a financial need. So, for example, if you don’t have children, and literally NO ONE will suffer financially if you are gone, you probably don’t need life insurance. Burials may cost too much these days, but a $1 Million whole life policy is NOT necessary to account for a burial & funeral… I promise.

Types of Life Insurance:

  • Term Life Insurance
    • Life Insurance for a specific time period, or term, ie: 10 years, 20 years, 30 years, etc.
    • This is the cheapest type of Life Insurance
    • MOST people will only ever NEED a Term policy.
    • No bells and whistles, it is literally the simplest type
    • Does not build cash value
    • Once you stop paying, it goes away and is worth nothing

 

  • Whole Life Insurance
    • Life Insurance for your WHOLE LIFE.
    • Generally has a pretty high premium since it accounts for the projected cost of insurance when you are 99 years old (which is high).
    • Builds cash value
    • A portion of your annual premium goes towards paying the cost of insurance/expenses and a portion goes towards cash value. Usually these policies have a minimum guaranteed “rate of return” built into them.
    • If you under pay your premiums, you risk that the policy lapses, or blows up, when you are older, and you will have paid in nothing
    • IF you have a whole life policy, PLEASE make sure to ask the company through which you purchased it for an in-force illustration. This will show you the projected life span of the policy. Make sure it does not blow up.

 

  • Universal Life Insurance
    • Like a term life policy that lasts for your whole life
    • Generally more expensive than term life, but cheaper than Whole Life.
    • The excess of premium payments above the current cost of insurance is credited to the cash value of the policy. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, as well as any other policy charges and fees drawn from the cash value, even if no premium payment is made that month.
    • Usually the cash value works on an arch – the value will build up while the insured is young and then dramatically start to tumble as the cost of insurance increases in older ages. The cost of insurance is always increasing.
    • These policies need to be constantly evaluated for risk of lapsing. The cost of insurance can be changed at any time by the insurance company and you never want to completely run out of value in the policy.

 

  • Variable Life Insurance
    • Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account acts similar to a mutual fund – charges expenses/fees, and *hopefully* provides a return
    • The investment return and principal value of variable sub-accounts will fluctuate. Your cash value, and perhaps the death benefit will be determined by the performance of the chosen sub-accounts. Variable universal life insurance policies typically include mortality and expense risk charges, administrative fees, and fund expense charges.

 

  • Survivorship Life Insurance
    • Insures two people, usually a married couple, and generally benefits their heirs or survivors.
    • Is cheaper than other cash value policies because it is based on two lives
    • Is cheaper than buying two separate policies
    • May help with estate tax burdens.

 

I’m generally against whole life and universal or variable policies so to make things a bit more fair, here are some benefits of cash value policies:

  • You can loan against them
  • You don’t have to wait to die to use them – you can create an income stream from the cash value **this would be a taxable event in most policies**.
  • You can always increase your own benefit by pouring more into the policy
  • You can also decrease your benefit by reducing how much you put into the policy
  • Lifelong protection
  • Cashflows grow income tax free
  • Death Benefits are generally paid to beneficiaries free from income tax
  • Provide protection against creditors in many states
  • Are not counted in assets for college planning purposes.

 

All that being said, please speak to a qualified financial planner before making a decision on what life insurance to purchase, don’t let the salesmen.. sell you.

What Goes Up, Must Come Down

What Goes Up, Must Come Down

What Goes Up, Must Come Down

I think it’s time for us to touch upon INVESTMENTS! There are so many different investment types and investment vehicles out there. But let’s all be honest, the average investor really has the same type of investments in their portfolio. Most people have heard all of the below terms before, probably hundreds or thousands of times, and I constantly come across people who don’t know what they are. So.. here you go.

Stocks (or equity)

A stock is a share of ‘ownership’ that is issued by a Company to raise funds. Stock represents a claim on the company’s earnings (and losses). Many people confuse owning shares of a company with actually owning a piece of the company, this is incorrect. The chairs and tables at the corporate office still belong to the corporation – not to the shareholders. Owning stock gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and it gives you the right to sell your shares to somebody else.

If you own a majority of shares, your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors. Not so relevant to the average person, but very relevant when a company buys over another company.

Stocks are issued by companies to raise capital in order to grow the business. By buying shares of the company, you’re essentially betting that you will make money because the company will grow or profits will increase. Just keep in mind, companies don’t always grow, and very often they go bust – so you know, you’re risking losing all of your money as well.

Bonds

Bonds are fundamentally different from stocks. Bonds are a personal loan that purchasers of bonds are giving to a company, government, or municipality. Bondholders are creditors to the corporation, municipality, or government, and are entitled to interest as well as repayment of principal. Creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets in order to repay them. This inherently makes them significantly safer, and less risky, than stocks. Shareholders are last in line and usually receive nothing, or a few pennies, in the event of bankruptcy.

On the flip side, bondholders are ONLY entitled to receive the return given by the interest rate agreed upon by the bond, while shareholders can get great returns generated by increasing profits, theoretically to infinity.

Bonus point: many municipal and government issued bonds are tax advantaged. For instance, a New York City (NYC) resident owning a NYC school bond will pay not taxes on the interest received from the bond.

Mutual Funds

A Mutual Fund is an investment vehicle made up of a pool of monies collected from many investors for the purpose of investing in securities, such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s investments and attempt to produce capital gains and/or income for the fund’s investors. A Mutual Fund will usually have a stated investment objective and as such, the investments are made to align with the stated objective.

When thinking about how these operate- just remember – MUTUAL. All the expenses are shared, all the costs are shared, all the gains are shared, and, of course, all of the losses are shared. The amount of each that a shareholder of the fund will experience is directly proportional with the amount of the fund that the shareholder owns. When you buy a share of a mutual fund, you are actually buying the performance of its portfolio.

A mutual fund is both an investment and an actual company. This is strange, but is actually no different than how a share of AAPL is a representation of Apple, inc. When an investor buys Apple stock, he is buying part ownership of the company and its assets. Similarly, a mutual fund investor is buying part ownership of the mutual fund company and its assets. The difference is that Apple is in the business of making computers and smartphones, while a mutual fund company is in the business of making investments.

Exchange Traded Funds (ETF)

An ETF is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. Shareholders do not directly own or have any direct claim to the underlying investments in the fund, but they do own these assets indirectly. ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can be easily bought, sold or transferred in much the same way as shares of stock.

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike Mutual Funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes through the day as they are bought and sold and typically have higher daily liquidity and lower fees than mutual fund shares.

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin, and purchase as little as one share (there are no minimum deposit requirements). The expense ratios are significantly lower than those of the average mutual fund.

 

There are like 23074896237894678236 different types of investments and investment vehicles out there by these 4 are usually the core of any diversified portfolio and the core of most newspaper articles out there. So now when someone talks about Mutual Fund expense ratios in Investment News, you know a little more about what they’re referring to and why it matters.