Is it possible to apply leadership and life lessons from the military to your financial life? The answer is a resounding YES. I’ve been in the financial industry long enough to hear some pretty creative metaphors for financial stewardship, and to be fair, some are fantastic, while others are weak or overused. I mean, if I hear another golf metaphor used for a financial concept, I may develop a headache right on the spot.
The reason we financial professionals use metaphors is because we are attempting to create clarity for our clients and prospective clients. Let’s be honest here—we all prefer ideas and explanations that are simple and easy to understand because the greater our level of understanding, the more empowered we feel to take action. Relating something we understand with something we view as complex is one way to make that type of connection.
So, what can a Navy Seal teach you about personal finance? Before I tell you, I’m not going to paint with broad brush strokes here—the specific man I’m referring to is Jocko Willink, who is developing somewhat of a cult following due to the release of his book Extreme Ownership (co-authored with Leif Babin), his consulting company Echelon Front, and his growing podcast audience.
Full disclosure- I have never heard Jocko discuss specific financial ideas, but the themes of his discussions on leadership and discipline have many real life applications to both business and individuals who want to succeed with their money.
This is not just the book title—it’s the theme that leaders must take 100% responsibility for their results. It’s described as, “Leaders must own everything in their world; there is no one else to blame.” You may not view yourself as a leader—you many not have a leadership position at your job, but you are 100% responsible for your personal finances. True, you may have some obstacles and outside influences, yet that still doesn’t release you from personal responsibility. It is way to easy to blame someone or something other than yourself, but what good comes of that? If you want to reach your financial goals—first you must actually have goals (crazy, right?). Next, you must be willing to take 100% responsibility for reaching them.
Simplicity > Complexity
One area that our society is failing at is financial literacy. We teach algebra and geometry in high school, yet we don’t sit our kids down and show them the destructive nature of credit card debt or how to balance a checking account. The end result of this is that most of us learn our financial habits from outside influences such as our parents, and habits, unfortunately, are not the same thing as principles. If you want to win with your finances, you must develop a set of simple financial principles that are unwavering. Often times, people fall into the trap that financial matters are too complex and difficult to understand, so they fail to do anything. Or, they begin—but eventually fall right back into their old habits.
Don’t fall for the complexity trap. If you are exploring a strategy or course of action that cannot be explained simply, don’t go for it. This is one of the most common mistakes I see people making with their financial lives—things are too complex. The best financial advisors should be able to explain things so that you understand them— in fact, it’s part of our job to make the complex become simple. Beware those strategies and ideas that can’t be simplified.
Overthinking When It’s Time to Act
This next paragraph is an exact quote from Jocko where he describes the danger of overthinking your tactics when in combat:
“You’re preparing to take a building and you come up with a plan. You set up two elements to cover and move so you can take the target. But as you begin looking at the map and imagery, you notice that there is another outhouse about 150 meters away from the house. And now that you see it, you decide to break apart your team and dedicate some guys to watch that that outhouse just in case. You might think that you’ve covered all of your bases but what you’ve REALLY done is separate your units, increased your communication problems, separated your fields of fire, disaggregated your fire power, diminished your unity of command, broken your SOP…eliminated your tactical advantage for the mere chance that when you hit the house at 2am, the guy is in the outhouse. This is what overthinking can get you.”
Please understand that there is a huge difference between doing your due diligence and overthinking. As an advisor, I want my clients to ask questions and seek understanding. I think any good advisor would welcome that dialogue. However, there comes a point with any plan or strategy when it’s time to execute. Overthinking or analysis paralysis rarely benefits anyone in the long-term. Jocko says,
“When people get super detailed about planning, they often fall into the trap of planning for something that can’t be known. How about instead of making a plan for something that can’t possibly be known, make a plan that’s adaptable!”
There are some aspects about your finances and your future that simply cannot be known. It doesn’t matter how many thousands of permutations you attempt to analyze, unknowns will remain unknown —until they are known! Plans that are flexible and adaptable are superior to those that aren’t.
Discipline Equals Freedom.
What an amazing phrase. This can be applied to so many areas of our lives—our health, our wealth, our business, etc. When it comes to personal finance, you must take ownership of your decisions and your outcomes—the good, the bad, and the ugly. This begins with developing the discipline it takes to reach your goals (again—do you have financial goals?).
I run into people all the time that believe they’ll “get serious” about retirement in their 50s. I won’t get into the arithmetic of that talking point, rather I’ll say this- “If you haven’t developed the discipline to save a percentage of your earnings in your 30s and 40s, how do you expect to save 2-3 times that much in your 50s?” The simple truth is that it’s not likely to happen because it’s too painful.
Personal finance is a game of discipline. There’s no other way around it. You must determine your goals and work with the level of discipline required to reach them. Stay focused. Be Adaptable. Take Ownership of the outcome. At least, that’s what I think Jocko would say.
Investment Advisory Services offered through AlphaStar Capital Management, LLC., a SEC Registered Investment Advisor. AlphaStar Capital Management, LLC and Vertex Capital Advisors, LLC are independent entities. Insurance products and services are offered through individually licensed and appointed agents in various jurisdictions. Vertex Capital Advisors, LLC does not offer legal or tax advice.
Receiving an inheritance is nothing short of a blessing. With increased longevity taking hold of both the Baby Boomers and their parents, it’s likely going to stretch many a nest egg just to make it through one’s retirement years. If you consider that healthcare costs also tend to be the highest in the last few years of life, the odds of receiving a considerable inheritance will most likely continue to dwindle for many of us in the years ahead. However, if you are fortunate enough to benefit from an inheritance, here’s my top 5 list of things you should do with those funds.
Note: This is a general list and by no means should it be considered all-inclusive. Each and every person’s financial situation is unique, and it’s quite possible that you may have a better use for the funds than the ones listed below. My reasons are to be used as a general guide, and they are in no particular order.
Pay Off Student Loan Debt.
Student loans continue to be the weight around the necks of those who have them OR those who are obligated to help pay for them (like parents who’ve co-signed a loan). With the increasing cost of going to college outpacing many people’s ability to afford school, the student loan industry is alive and well. Unfortunately, students are carrying these loans for years and years beyond their graduation date, which hinders their ability to save, purchase a home, or invest earnings from employment. If you inherit money that enables you to pay off your student loan debts, do it!
Make a Down Payment on a Home
Interest rates, while beginning to see some upward pressure, are still very favorable for home buyers. If you have been looking for the opportunity to get away from the apartment life and become a homeowner, getting an inheritance may afford you with the opportunity. I have heard some people tell me that renting is so much simpler, and they have the ability to have roommates help with the costs of the apartment. To them I say you can have roommates at your house as well. The difference is they will be helping you create equity in a home. The key, of course, is to make a wise purchase and not attempt to buy more house than you can reasonably afford.
*In some cases, an inheritance may enable you to pay off a mortgage. In my opinion, this financial move is highly dependent on the individual situation, so I would consult with a CERTIFIED FINANCIAL PLANNER™ if this applies to you.
Eliminate Credit Card Debt
This one goes somewhat hand in hand with student loan debt; however, there are many people who continuously carry a credit card balance that have no business doing so. It may seem a bit bittersweet taking inheritance funds, which feel like found money, and putting them into a credit card bill. However, your mental accounting is failing you if you think this way. You see, the credit card money is money you didn’t have that you’ve spent—now you must pay it back. Also, credit card interest rates can be unforgiving, as I have seen rates as high as 19.99% on some cards. With rates like that, it’s almost impossible to get that debt paid down. Go ahead and eat the frog—pay that bill off before you can talk yourself out of it.
Invest The Funds
This one should be obvious, but it must be included because while it seems obvious, few people have the willpower to delay consumption today by investing for tomorrow. However, it is common for many of us to feel like we are behind on saving and investing for our retirement years. Inheritance money can offer an opportunity to add a boost to your investment accounts, or if you don’t have any investments, this can be your opportunity to begin your investing journey.
If you have children, paying for college is likely on your parental radar. If you are not yet attending college, having an inheritance that can cover some or all of your college expenses is an incredible advantage! Now—when I say college expenses, I’m not talking about pizza or beer. I’m talking about tuition, room & board, and textbooks. Using inheritance funds to help eliminate the need to take on student loans OR to reduce the amount of loans is not something that should be discounted. For parents with kids, giving them a debt-free education opportunity can be one of the greatest financial advantages you offer your children…just don’t let them study something like Art Philosophy or another program that has little chance of affording them the ability to earn an income after graduation.
I can think of more ideas for how to use inheritance funds—some others that I didn’t put in my top 5 could be:
-create a savings fund
-donate to charity
-fund/payoff wedding expenses
-purchase investment property (real estate)
-pay off a car note
Gaining an inheritance is a gift, and you should leverage that gift for maximum impact. Of course, I’m not an all work, no play type of person; therefore, I do believe you should set aside a portion of the funds to be used for some type of memorable experience or personal enjoyment. However, I cannot stress enough that the “fun” money should not take a priority over the “smart” money. Leverage those inheritance dollars for maximum financial impact!
Investment Advisory Services offered through AlphaStar Capital Management, LLC, a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. AlphaStar Capital Management, LLC and Vertex Capital Advisors, LLC are independent entities. Insurance products and services are offered through Vertex Capital Advisors, LLC by individually licensed and appointed agents in various jurisdictions. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by Vertex Capital Advisors, LLC.
According to the 2016 Insurance Barometer Study by Life Happens and LIMRA, 1 out 3 households would have immediate trouble paying living expenses if the primary wage earner died unexpectedly. Note: I added the word “unexpectedly” to that sentence because let’s face it, most of us go through our lives each day with our minds focused on other things. Very little time or energy is usually given to thinking about “What If” scenarios, especially if it involves our own demise. Believe me, I get it—it’s just not something that we enjoy thinking about.
In fact, the same exact study (the 2017 version) just published a nice infographic that shows us what most people spend their time thinking about when it comes to economic and financial matters:
As you can see, healthcare is a primary concern— followed by retirement and college education planning. Down at the bottom, there is a little bit of space left for the elephant in the room:
“What would happen to those I love if I didn’t come home today?”
“What would happen if I couldn’t physically work any longer?”
The solution to questions and concerns like these isn’t complicated…it’s insurance.
Last week, I had lunch with Marv Feldman, who is the CEO of Life Happens, and I asked him what he thought the biggest mistake people were making when it came to life insurance, disability, or long-term care. Without missing a beat, Marv looked at me and said,
“Everyone knows what insurance is, but few people understand what insurance does.”
In my last post, I wrote about the importance of creating a comprehensive financial plan. In fact, I believe this is the most important thing you can do to set yourself on a course to reach your financial goals. A critical part of that plan is to first consider the major risks and how to eliminate or reduce them.
Most insurance premiums require an investment of 1-3% of gross household income to protect the downside risk for things like dying too soon or being impacted by a disability. This “cost” as so many view it, is really the solution. If you want to see just how impactful life insurance can be, watch this video:
In the many years that I have been fortunate to work with couples and families as they plan for their financial future, I have seen, heard, and witnessed just about every type of financial mindset you can imagine. From the “Free Spirits” to the “Doom and Gloom” to the “Fiscal Hawks”— it’s been a colorful journey. One thing that continues to surprise me is the persistence of the idea that all that matters is the allocation of one’s portfolio.
In our retirement workshops, we often discuss several retirement planning issues and concerns that we frequently hear from folks who come to see us. The overwhelming majority of people who attend are coming to learn how they can make their retirement income last longer than they do. However, we still see people who have been trained to believe that the “right” portfolio is all that matters. I say “trained” because I believe that the majority of what some people know comes from the marketing of Wall Street and financial institutions.
Instead on focusing on just portfolio allocations— investors and clients should be focusing on creating an actual PLAN.
“Why is that?”, you ask.
The answer is simple— A portfolio is simply a tool that should be used to achieve your financial goals. The measure of a portfolio’s long-term success should be how well it enables you to meet your goals—NOT how it performed against the S&P 500 last year. The best benchmark for a portfolio is the answer to these questions,
“Am I on track to make sure I know for certain that I’ll never run out of income during retirement?”
“If I get sick or die unexpectedly, how could my family be impacted? (this is big if one spouse handles all of the finances)
“If my spouse gets sick or dies unexpectedly, what’s my plan?”
“If I need to take care of my aging parents, will I need to provide financial assistance?”
“Is there anyone in my family that I want to help with education or financial expenses?”
“If taxes or healthcare costs go up unexpectedly , how will I be impacted?”
Of course, there are more questions…but you get the idea. Retirement planning is much, much more nuanced than making sure your portfolio allocation is appropriate for your age. In fact, fund giants like Vanguard are trying to find ways to add advice to their platform because they realizing how valuable financial expertise can be to clients today.
Right now, stock markets are touching all-time highs, as the DOW, S&P, and NASDAQ have all touched record closes during this current bull market run. More and more, we are seeing the slow grip of inertia and complacency weave their way into the mindset of investors. What an amazing time to put a solid plan in place without the fear of market volatility or unexpected life events hindering your thought process. Don’t let this opportunity to plan for the future pass by—take the time to build your plan today…one that will protect you tomorrow in ways that a portfolio can’t.
Investment Advisory Services offered through AlphaStar Capital Management, LLC, a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. AlphaStar Capital Management, LLC and Vertex Capital Advisors, LLC are independent entities.
What kind of retirement income can you expect if the stock market doesn’t produce the types of returns you’re anticipating? It’s no secret today that retirees are facing many challenges as they move into their retirement years. Longevity, for one, is becoming a real risk multiplier for the Baby Boomer generation since it amplifies the impact of several other risks retirees will face like inflation, cost of healthcare, and market risk. Now, it seems that some Boomers may be building their retirement plan upon flawed market return assumptions as well.
Are you relying on the “The Number”?
One of the most commonly used rules for distribution portfolios, which are portfolios that are now being used to provide income during one’s retirement, is what’s known as the 4% rule. The 4% rule originated from research done by William Bengen, who determined that an individual could safely withdraw 4% of the assets accumulated at retirement, adjust their spending for inflation, and have their portfolio survive a 30 year retirement period. (Bengen used portfolios that adjusted between 50% to 75% stocks, with the remaining percentage in bonds).
Naturally, this rule has helped frame the conversation around how much one needs to retire. For instance, if you’d like to have around $40,000/year in income, adjusted by inflation, the rule of thumb is that you’d need 1 million dollars invested in your retirement portfolio.
Ex: 4% X 1 million = $40,000
It has been over 20 years since the original findings came from that study, and since then, there has been additional research findings:
-Bengen’s original work didn’t account for taxes, advisory fees, or healthcare costs
-Diversification can actually help increase safe withdrawal rates
-Market valuations at the beginning of retirement have a disproportionate impact on portfolio success
Since the original research was formed, there have been many variations of the rule proposed. For the sake of this conversation, we’re going to keep it simple and focus on the philosophy behind the 4% rule and how it may impact retirees today, especially if retiree portfolios do not perform as expected.
History versus Today
There’s an old saying that we hear often in our industry, “Nothing beats the market over time.” The key word in that entire sentence is time. If you look at a long enough time horizon, equity returns can be quite compelling. One of the most serial offenders for abusing this principle is Dave Ramsey. (In the spirit of fairness, I will concede that I like Dave, and I think he is a great motivator in teaching people about the dangers of consumer debt. However, Dave is not a financial planner—something he openly admits.)
For years, Ramsey has promoted that people can invest in certain mutual funds and earn average returns of 12%, backing up his assertion with historical returns from 1926 until the end of 2012. That’s a 90 year time horizon for growth that I’m sure assumes perfect investor behavior; however, I would argue that, for retirees, what matters to them is their time horizon. Specifically, they don’t want to run out of money during their their retirement years. However, if retirees are expecting the markets to do the heavy lifting for them, they may be in for disappointment.
I have seen several different commentaries on this subject over the last year or two, but I’m going to highlight a couple of viewpoints in this post that I found interesting and easy to understand…
Will Boomers Drag Down Market Growth?
In a recent letter to his firm’s clients, Scott Krisiloff highlighted his belief that the wave of retiring baby boomers is going to have a profound impact on financial markets.* He wrote:
In an ideal environment, Boomers would be able to generate returns without having to sell assets. Income received from dividends and bond coupons would be enough. However, this isn’t a normal environment. Today very few if any assets are producing enough income to cover necessary expenses. With the dividend yield of the S&P 500 ETF at just 1.9% and the 10 year treasury yield at a similar level, back of the envelope math suggests that a Boomer would need a portfolio of $2.6 million to generate $50,000 per year in current income before taxes.
It’s my sense that most boomers and their financial advisors have probably not underwritten their retirement with the assumption of a 1.9% return on their investment portfolios though. This means that in order to generate the requisite income, Boomers will have to become sellers of assets in order to produce yield.
To be fair to Mr. Krisiloff, he does assert that he believes the impact of Boomers becoming more income focused will take time to develop; however, he does see it to be a trend that can create drag on overall market growth simply because the younger generations cannot afford to buy the assets as Boomers sell them at today’s valuations. This, it seems, lends itself to downward pressure on asset prices. Mr. Krisiloff goes on to write:
If you’re a Baby Boomer considering or approaching retirement, it’s important to keep in mind that today’s asset prices are inflated. The economic value of a portfolio at today’s levels can not necessarily be taken at face value. Stress your assumptions about the rate of return that your portfolio will generate. And if you have a strong stomach you may want to assume that the true value of your invested portfolio is about 30-35% lower than current levels. From those prices the standard 5-8% growth assumptions are more reasonable. The other alternative, which is the path that we are taking, is to utilize the tax advantages of retirement accounts to sell at these high levels.
If you’d like to read the full post from Scott Krisiloff, you can do it here.
*Scott Krisiloff is the Chief Investment Officer of Avondale Asset Management, a Los Angeles based investment firm.
How Do You Feel about Portfolio Failure?
Another view that I find even more clarifying on this topic comes from the research done by Blanchett, Finke, & Pfau. In their study from 2013, “The 4% Rule is Not Safe in a Low-Yield World,” they found that,
“…if we calibrate bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, the failure rate jumps to a whopping 57%,” which led to the conclusion that “the 4% rule cannot be treated as a safe initial withdrawal rate in today’s low-interest-rate environment.”
Naturally, some would argue that rates are due to rise, and they continued their study as if rates did indeed increase in 5 years and/or 10 years. In the 5 year scenario, the failure rate was still at 18%; and for rate increases that occurred in 10 years, the failure rate was 32%—roughly 1 out of 3 portfolios would fail.
The emphasis for me came with the statement,
“The bottom line is that the current low-yield environment is a retirement income game changer. And hoping that things will get better eventually is a risky strategy”….By relying on 20th century market returns which we may never see again we’re giving people a false sense of security.”
Finke then explains to advisors:
“I think an advisor has to think more carefully about constructing a retirement income portfolio that includes safeguards to prevent disaster if a client runs out of money.*”
As you can see, this topic is becoming more frequently debated and discussed; and fortunately, it’s a subject that will only continue to increase awareness because of the massive number of Baby Boomers retiring every day. Unfortunately, however, there are many individuals who are retiring on the idea that having a set “number” or investment strategy will be a panacea for their retirement income needs.
For this reason, we have chosen at our firm to focus on the cash flow side of retirement and protect income sources first and foremost for our clients. No matter how hard we try, we cannot force the equity markets to cooperate with our goals, but if I ever develop that skill, I promise I’ll tell you. What we MUST focus on is the things we can control—and build our plan to protect our retirement income. Then, we are able to construct portfolios that can give us the best chance for realizing our long-term investment goals.
As more and more Boomers retire and age into their retirement years, effective retirement income strategies will be paramount to their success. This is why social security claiming strategies are becoming an integral part of retirement income planning, and it’s also a reason that annuity income is beginning to see more and more praise in the academic world. Hopefully, this increased demand for cash flow and income security by the retiring Boomers will continue to be a driver of public awareness for the importance of having a comprehensive retirement income strategy and rewire future generations to consider cash flow generation over a specific account balance.
I was recently having an in-depth conversation with one of my clients, and he said perhaps one of the truest statements I’ve ever heard when it comes to retirement planning. While we were discussing some potential ideas for him and his wife, he said:
“You know, you will probably create hundreds of these plans over the course of your lifetime. But, me, I only get to do this once…so I can’t afford to mess it up.”
Naturally, he was thinking about himself and his family when making this statement; however, his mindset reflects the thought process of plenty of workers today. The idea is that you only get one shot at having a successful retirement, so one had better make it count.
As more and more Boomers move into their retirement years, those of us in the financial industry are beginning to see changes in the retirement planning landscape. For one, people are living longer—-much longer—than they have in the past. In fact, I have a relative in my own family that worked for 34 years and is now entering his 31st year of retirement. How crazy is that?!
One might expect that with the Baby Boomer generation creating such demand for retirement planning services, there would be some definite benchmarks for how to measure retirement success. Unfortunately, the only thing our industry has agreed about is our disagreement on how to plan for retirement; and the continuous information dump provided by the internet only adds more layers of confusion and noise.
Some advisors will argue that retirement is all about “safe money” or “not losing” your nest egg, and others will stand for the exact opposite, saying “nothing beats the market over time.” The debate is endless, and in many ways, it can seem pointless, as proponents often care more about pushing their viewpoints than hearing those of their opposition. In the middle of this battleground stands the client, who just wants to enjoy a secure and safe retirement. In my opinion, this could quite possibly be the worst environment for someone who genuinely wants advice because they’re trapped in a world of debate about financial products.
So, how does someone go about trying to plan for their retirement? What should be the focus?
In my opinion, the most important facet of a retirement plan is having sources of guaranteed cash flow.
Now, for the sake of this discussion, let’s qualify what I consider to be guaranteed vs. non-guaranteed. In my view, guaranteed income sources would be: social security, pensions, or income from annuities (contractual guarantees only).
Income that I personally do not consider guaranteed is: bond interest, dividend payments, rental income, or any other type of distribution from a portfolio of securities.
Of course, this is the point where everyone’s biases begin to run wild, and they debate starts to rage. “How can you say that ______ is guaranteed?” or “Clearly, you must not understand the income reliability of __________.”
The goal here isn’t to get lost in the minutiae of social security reform proposals, pension funding, or the actuarial reliability of investment products. The point is this—- Cash Flow is what matters in retirement.
In the July 2014 Issue of the Harvard Business Review, Robert C. Merton writes:
“To begin with, putting relatively complex investment decisions in the hands of individuals with little or no financial expertise is problematic…More dangerous yet is the shift in focus away from retirement income to return on investment that has come with saver-managed DC plans: Investment decisions are now focused on the value of the funds, the returns on investment they deliver, and how volatile those returns are. Yet the primary concern of the saver remains what it always has been: Will I have sufficient income in retirement to live comfortably.”
Sadly, I believe that Merton is 100% correct in his beliefs. Financial discussions that focus on retirement planning are too often dominated by conversations about portfolio returns—-recent returns or projected returns—take your pick. Instead, we should be helping clients understand how the income pieces of their plans can fit together to establish an overall cash flow strategy.
From there, we can allow the clients to help determine what level of fluctuation they desire in their income streams. Naturally, some clients will not want to have any fluctuation; therefore, they will gravitate towards more of their assets being dedicated for income. Yet, some clients, will find themselves more open to some fluctuation, as long as they have a nice baseline of guaranteed income. These clients may be more inclined to place more assets in a growth-oriented strategy that allows for market fluctuation.
Our role as retirement income planners is to help clients navigate the multiple decisions they will face as they transition into the retirement season of their lives. But, I can honestly say that I have yet to meet with a client who didn’t have the desire for knowing their retirement cash flow potential as a very high priority. Workers today spend much of their energy in focusing on returns—too much energy. Returns are important; however, I don’t believe they should be the dominating factor in a planning process. If we want to work with the massive numbers of Baby Boomers moving into their retirement years, the conversation needs to begin with cash flow—-that’s where these clients experience their money and their retirement.
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