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Wealth Eroding Factors in Retirement 

You think once you get to retirement its easy living, smooth sailing, you’ve made it, right? Don’t think so fast. There are a whole set of new factors trying to eat at your wealth. Here are a few you may have to deal with:

Eroding Factors in Retirement

There are six eroding factors that will specifically affect your retirement:  

Duration of Retirement: How long do you anticipate your retirement lasting? You may retire at 55 or 73 and that makes a big difference. How long you plan on pulling from your assets impacts how much you can take and how much you need to save.  Plus, people are living much longer so you may have to stretch your retirement dollars to age 100 or beyond.  

Distribution Rate: A recent study by Merrill Lynch surveyed wealthy individuals and 20% of individuals did not know what distribution rate would enable them to sustain their wealth indefinitely. Nearly a quarter thought that a 10% distribution rate was reasonable and would last forever. Only about 1/6 had a more realistic distribution rate of 3% or lower. Most financial institutions site a 4% or lower safe withdrawal rate in order to have the best chance of sustaining your wealth.  This really impacts how you invest both now and into retirement.  

Children and Grandchildren: Having children and grandchildren is a wonderful thing. I have three children and they are the absolute joys of my life. As they get older, they get more expensive. Even when you enter your retirement years they can be a financial drain. It’s not that you won’t happily help them but you need to make that part of your financial model. How will you handle it should it happen?   

A friend of mine had to adopt his daughter’s two young children just as he was entering retirement. That’s a significant financial commitment that is affecting his retirement. You don’t know what will happen with your children, grandchildren, or spouse. Stress test it with your financial model so that if it happens you won’t be financially devastated.   

Legacy: Also, consider what you want to leave behind. What is your legacy? This is an area you really need to search inside yourself to figure out. Each person is different – money for the children, a charity, a cause, or nothing (spend it all). There’s no right answer, it’s just what you want to do. But it’s definitely part of your financial life.  

Risk: While risk is an issue throughout your life, it becomes more pronounced when 1) you are older and approaching your retirement years, and 2) when you have a lot at risk. Our entire approach is about risk management for your entire financial life, no matter how old you are. From protecting your assets (which includes you), to your investments, to maintaining financial balance.   

If you’ve done all that we’ve suggested to this point then you are probably good to go. However, you may need to look at tilting your investment style more conservatively, or reallocating to allow for more income. Or making sure your strategy has downside risk protection that allows you to be in equities for a longer period even well into retirement. Have uncorrelated buckets of money is critical as well. 

For investments, one of your biggest risks is sequence of return risk. That’s the risk of your investments being caught in a downturn at a critical time when you need them most. For example, what happens if the market crashes when you are 67 and retired? What about when you are 70 or 75? This is where having a defined investment policy statement and buckets of “cash” will allow you to weather the storms you may encounter. See the section on a strong financial position later in this booklet.  

Communication: This is a critical area that most people don’t even consider. Your loved ones should know where your most important financial information lies. Introduce whoever may be taking over your estate, not matter how small it may/may not be, to your financial advisor(s). Let them know your plans, wishes, goals for your assets. It seems a bit morbid for some people but it’s a critical conversation to have and to maintain as you get older. Communication plays a role in planning your legacy as well. It’s not enough to state your wishes out loud. You need to put them on paper and protect them by communicating your wishes through a will or a trust.

Get Started

There are many other areas to consider but most people ignore these. If you need help designing your plan for retirement or just a second look, we’re happy to help. Jumpstart YOUR knowledge of all the major wealth eroding factors by downloading our free ebook today:

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Rules for Financial Success

For most of us, some phase of growth is the stage we’re in. Growth is the phase of accumulation, positioning, cash flow, savings, making short & long-term decisions. This is where your financial model is used the most. Each decision you make has a ripple effect in this phase, so it helps to have some rules to use as guidelines.

Ideally, achieving financial balance should be your first goal. This can be done by adhering to simple rules that ready you for growth:

  1. Annual Savings (15-20% of gross income)
  2. Short-term Liquidity (3-6 months of cash, 6-12 months of near-liquid assets)
  3. Short-term Debt (ZERO)

The Rules

RULE: Become a first class saver by saving 15%-20% of your income annually. This is one of the most important ingredients to reaching your full financial potential. If you can’t do this, then everything else has to work that much harder. It puts additional pressure on all other aspects of your financial life, including a greater likelihood of failure! What is standing in the way of your saving this amount? Write it down. Figure out how to overcome these obstacles so you can reach your full financial potential. Hint: Remember, your financial model can help you find lost opportunity. You can recapture those dollars, and add that to your savings.

RULE: You should always have at 3-6 months of cold hard cash on hand. It would even be wise to have 6-12 months of near-cash (i.e. short-term bonds) that are easily accessible as well. A cash cushion provides multiple benefits, such as giving you the ability to increase your insurance deductibles and lower your premium payments. It gives you peace of mind knowing that whatever short-term obstacle (accident, fire, job loss, illness) may pop up that you can easily handle it without having to go into debt. Plus, you have the ability to capitalize on an opportunity that may present itself, take a trip, make a substantial purchase (whether it be something you need or simply want) and more.

Cash can also make you a happier person in general. In Jonathan Clements’ book, How to Think About Money, his research found that those with cash on hand – and in the bank – were much happier than those without any or with small amounts.

HELPFUL TIP: Opt out of your 401(k) until you have built up your short-term liquidity! Take care of today first and you will be better equipped to take care of tomorrow. Statistics show that 28% of all 401ks have loans against them, and it’s because this liquidity bucket is neglected or never filled to being with.

Understanding the 401(k)

401(k) Traps:

  • 10% penalty if you withdraw before 59 ½
  • Taxed as ordinary income
  • Limited investment options
  • Must withdraw a portion at 70 ½ or suffer a penalty
  • Match can go away
  • Can create double taxation
  • Can’t use it to pay for other life events
  • Typically use more expensive mutual funds

Are all 401(k)s bad? NO! If your company has one and they provide a company match, you should at least participate to the point of the match. But not until after you have sufficient liquidity. Discuss this with your personal advisor.

RULE: Short-term debt should be zero. Period. Liabilities are what hold most people back. Short-term debt negates any future profits on your balance sheet. For example, $19,200 debt x 5% interest (lost opportunity) = $253,570 in 10 years. In 20 years, it’s upwards of $666,000.  

Two of the most common short-term expenses among our clients are automobiles and credit cards. Cars depreciate 50% after the first three years on average. Look for used cars with low mileage that you can drive for a long time. You can often find a used car that is 25% cheaper than a new car. So if you must carry auto debt, then do it smarter.

Credit card debt can wreak havoc on your financial life. Interest rates average around 15%. That’s extremely high! This is exactly why Rule 3 is so important. If you have adequate liquidity not only can you pay off your credit cards every month, but you can limit what you charge on them since you have the ability to pay for things in cash. Think of it this way – if you have credit card debt carrying 15% interest, every dollar you don’t completely pay off costs you $0.15 each year. While there are always special circumstances, a good general rule of thumb to live by is if you can’t pay for it in cash, you probably can’t afford it.

You may need to slow down short-term debt payments in order to build liquidity and get protection in place first. You may even need to restructure your debt. But it is critical that you follow this order to provide relief, reduce stress, and build the foundation for growth.

LIFE HACK: if you are saving 15-20% of your gross income then short-term debt may just become part of your lifestyle burn rate.

While we’re on the subject of debt, we need to briefly discuss mortgages. Even though a mortgage isn’t considered short-term debt, it is a guaranteed debt that almost everyone will have to experience. Your mortgage payment should not exceed 15% of your gross income. My father used to tell me to buy as much house as you can afford. Back in the day, and still, people saw their house as an investment. However, what we do know is that real estate can and does decline in value. We also know that you can’t eat your house, it doesn’t produce income, and has multiple expenses (maintenance, taxes, updates, etc.). Any equity in your home is semi-restricted and you may not be able to access it when you need it most. Therefore, your mortgage payment should be part of your lifestyle burn rate, not your savings.

What do you do if your payment exceeds this number? First, ask yourself if the payment is preventing you from saving 15-20% of your gross income. If not, then consider it part of your lifestyle and know you may have to limit yourself in other areas. If so, then you could consider refinancing, selling, or maybe you just have to stay put.

Learn how to apply these simple financial rules to a model you WILL succeed with:

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How a Healthy Lifestyle Affects Your Financial Future

As financial consultants, we spend a lot of time focused on the health of your financial accounts. We take deep looks at your rates of return, cash flow, investment mix, and more to determine the ideal financial model for building your life. But we don’t often talk about your physical health, something that can have a huge impact on your financial future.

As the US has found itself in the midst of an obesity epidemic, skyrocketing health care costs, and uncertainty surrounding how to solve these issues, it is more important than ever that you take care of your physical health. Not only will this help you live longer, but maintaining a healthy lifestyle can mean a huge difference in your net worth and financial legacy.

Poor Health Can Cost You More Than $150K+ Over a Lifetime

Read that heading again. We aren’t referring solely to the costs of healthcare here. A National Bureau of Economic Research paper published in 2017 found that the average difference in net worth between a healthy 65-year-old man and an unhealthy 65-year-old man to be over $150,000. They also found that workers who led unhealthy lifestyles for more than 16 years lost approximately $4,000 in annual wages.

Think of the lost opportunity to make smarter investments! Imagine how you could grow your nest egg with the savings from fewer visits to the doctor’s office. Being more active contributes to the confidence necessary to compete for and win business opportunities that can increase your cash flow and your lifestyle. Taking time to maintain and improve your physical health can transform your present as well as your financial future. Some steps you can take to begin that transformation include.

  • Eliminate Vices for Better Cash Flow – We all fall prey to vices sometimes. If your weakness is for smoking, alcohol, fast food, or sweets, reducing or eliminating that habit can have a twofold effect on the trajectory of your life. Not only will you have cost savings from going without, but your body’s health will improve as well. That discipline can go a long way in saving you the costs of medical treatment and expensive habits.
  • Investing in Healthy Food OptionsEating healthily can be intimidating – not only is there the initial cash outlay of buying better produce and ingredients, but also the labor of shopping, preparing, and cooking the meals. However, eating healthier foods keeps you fuller longer due to better, more plentiful nutrients. There are numerous free recipe websites and how-to videos online to help you make healthy choices easier to make as well. And while it will take some time to get used to, once you’ve detoxed from processed junk foods you will feel better eating these healthy options.
  • Alternative Transport OptionsCommuting is a necessary evil in life. If you live close to your workplace, have you considered walking, jogging, or cycling to work? These options all save you money by reducing fuel and maintenance costs on your personal vehicle while pulling double-duty to help you get a little hidden exercise in your day. Sometimes this can help reduce insurance costs for your personal vehicle too, if your policy is based on an average annual mileage.

It’s not always easy to make these disciplined, healthy choices, but it’s worth it. Take some time to figure out how you can fit some healthier decisions into your daily life to help put a little juice behind your financial model.

While we aren’t certified personal trainers, we are qualified to take a look at your financial path for the future. Interested in improving your current financial situation and living the live you want today? Complete this questionnaire to get started!

Uncertain Futures and the Importance of an Abundance Mindset

Turbulent times in the world can magnify troubles and make them seem even larger than they are. Whether investment woes, unexpected bills, or uncertainty in a career, these problems can dominate your mindspace and keep you trapped in a vicious cycle of pain and fear. These problems can seem even bigger in times of rapid change and uncertainty.

We’ve written at length about abundance mindsets and how to cultivate them. It’s time to reiterate and clarify what a mindset of abundance is and isn’t. There’s a lot of misinformation available online designed to get your clicks and attention. We wrote this article to help clear up what an abundance mindset is, why it matters, and how to apply it to your life in times of uncertainty and strife.

What an Abundance Mindset Isn’t

An abundance mindset is not an expectation that things will turn out okay on their own or that prosperity will fall into your lap. It is not complacency, laziness, or blind acceptance. Too many people jumping on the bandwagon of abundance seem to believe that it means the world will provide success, regardless of effort and commitment. And that just isn’t true.

If you’ve heard the old adage “God helps those who help themselves,” you’re on a good track to understanding the mindset of abundance. An abundance mindset means knowing that there is enough out there for you to live your best life and to provide for your loved ones and your dreams. Just because abundance is available, though, it doesn’t mean it will just come to you. You have to go chase that success and work for it. It is only through hard work, discipline, and resilience that we can access the abundance the world has available. By committing to the correct, repeatable behaviors, we can tap into that flow of abundance and reach a better life. But it’s not a handout – the world requires you to work for and earn the lifestyle you are trying to achieve.

Why an Abundance Mindset is So Important

The opposite of an abundance mindset is one of scarcity. A scarcity mindset says that you have to jealously protect what you have in that moment because it is yours and the world may come take it away. It says that this current salary, investment, job, or lifestyle is the best and only one available and I cannot move away from it. It’s a fear-motivated way of thinking that can derail even the strongest financial model.

If you operate from a place of abundance, you know that there are always alternative solutions and methods available to hit your goals and achieve the life you want. Whereas a scarcity mindset says “don’t look for a better investment mix, a 4% return is steady and good,” an abundance mindset knows that exploring a different mix can help you hack your future and achieve a greater, sustainable growth. Abundance knows that the opportunity for greatness is out there, so long as you do the work and research to earn it.

How To Commit to a Mindset of Abundance

To build an abundance mindset, you need to change your relationship with money. Many people suffering from a scarcity mindset have an overly emotional relationship to their money. You need to accept that money is a tool, a means to an end, and a way to help you achieve your best life. Don’t play fast and loose with your decision-making, but be patient and determined. Move with confidence and do the day-in and day-out work needed to commit to a financial lifestyle today that enables the lifestyle  you want to live in the future.

It’s an ever-changing journey, but building a lifestyle committed to abundance can create great change for you and your loved ones. We can help you build the right financial model to get there.

Are you interested in radically improving your financial mindset and building a brigh financial future? Complete this questionnaire today and start working with our world-class team of advisors.

Unique Challenges in Wealth-Building for Physicians

Doctors are frequent subjects for television, books, and other forms of cultural reflection. They’ve been glamorized and satirized and held in great esteem. They’re trusted advisors and spokespeople for improving health. Along with all of this acclaim comes one of the highest salaries in America- averaging just under $300,000 in 2017.

There’s more to a physician’s life than respect and a paycheck, though.

High patient loads. Long hours. Paperwork. Lengthy reimbursement processes. Conference attendance. High debt levels from medical school. A physician’s work can be incredibly stressful for their body, mind, and bank account balance. Doctors face many of the same challenges as your average professional, as well as some unique hurdles to building a wealthy, healthy life and financial future.

Student Debt

The debt carried by Americans in the form of student loans is becoming a national crisis. While the average college graduate has $37,000 in loans, a new physician averages $190,000 in debt, according to the American Medical Association in 2017. These huge amounts can make payment plans and managing income seem insurmountable. Depending on a physician’s specialty, they can expect that average salary to be far lower. Couple high payments with associated necessities (such as malpractice insurance) and doctors face some very big obstacles. As in all cases, though, the right financial model can help you build positive momentum and push past those high debt loads. It just takes the right planning and commitment.

Disability Risks

Physicians depends on their bodies and their minds to secure their livelihoods. Should you become injured and unable to work for a time, it can be devastating to your practice and your income. Add that to high debt loads and required monthly payments and it can spell disaster for your personal finance. Doctors should carefully explore disability insurance options to make sure that their entire life value is covered in case of an extreme injury. As always, weigh your options and pay special attention to the elimination period (the span of time you must wait before receiving payments from the policy.)

Stress and Burnout

It’s not just the risk of being injured on the job that physicians have to contend with. Healthcare workers are under incredible stress due to the nature of their work. It is often filled with the highest highs and lowest lows of patients’ lives. That stress can cause severe burnout for those workers who struggle with the demands of the job and the impacts on their everyday life. Rates of depression, burnout, and other psychological issues are prevalent in healthcare professionals, making the right mindset even more important and difficult to attain. Practicing self-care, seeking balance, and focusing on gratitude and abundance mindsets can help, particularly when pushing against these huge peaks of stress and demands on your time and attention.

Luckily, you don’t have to be alone in managing the financial side of things. JarredBunch is ready to be your partner in alleviating the financial stresses of this life. Our experience in building effective, proven financial models and guiding our clients towards financial independence and prosperity can help ease your mind and keep you focused on the work only you can do for your patients, your loved ones, and yourself.

Complete this questionnaire to get the conversation started – we’re ready to help you.

How Do the Wealthiest Invest?

In our series on growing your wealth we’ve discussed healthy behaviors for priming your finances for growth, how to write a personal investing statements, and how to avoid unhealthy ways of thinking about investments. These are all essential for growing your finances in a way that serves your life. It is equally important that we have positive role models to study and look up to.

Unfortunately we can’t all be the Oracle of Omaha, but we can learn from behaviors of some of the wealthiest investors in the US. A recent study completed by U.S. Trust of nearly 700 high net worth investors (investable assets exceeding $3 million) found the following:

Wealthy Investing Behaviors

  1. Wealthy investors maintain a fairly high amount of account liquidity. More than half of the surveyed investors keep their liquidity high so that can take full advantage of an opportunity when it becomes available. This is not out of fear or caution, but a strategic decision to keep reserves ready to move quickly. How many channels of your portfolio could be easily liquidated and put to use?
  2. Large cash positions are a common portfolio feature. To further demonstrate the importance of multiple liquidity access points, 60% of surveyed investors have at least 10% of their portfolio in cash. This isn’t a conservative move, but a decisive and strategic commitment to be ready for the future. What percentage of your personal finance is held in cold hard cash?
  3. Long-term goals are more important than short-term growth. Wealthy investors are willing to forego short-term, rapid gains in favor of risk mitigation and steady growth over time. They know that the long-term is what will sustain them over time, and they focus their discipline accordingly.
  4. Mitigating tax burdens is a priority. More than half of those surveyed emphasized the importance of minimized the impact of taxes on their investments. This rated above pursuing higher returns. Wealthy investors are largely focused on their net pay, rather than the gross before taxes. Managing this burden is key for success. Do you know the tax rate for all of your assets?
  5. Tangible assets are important. Almost half of the surveyed individuals have invested in some sort of tangible asset, such as real estate. These can produce passive income and grow in value over time, offering growth and a revenue stream. Do you have secondary income sources?
  6. Credit can be used for good. Nearly 65% of surveyed investors agree that credit can be used to build wealth strategically. While their knowledge is powerful, it is important to note the risk associated here. Consider using credit cards for spending you already planned on doing (so long as you pay them off weekly) or increase your payments on low interest mortgages or student loans to save on interest. This will free up more long-term cash to invest.
  7. Consider the impact of your investments. Beyond your own finances, your investments can affect society and the world. Many mutual funds and ETFs present opportunities to invest your money in companies based on their social values and impacts on society or the Earth as a whole. Many wealthy investors perceive socially responsible companies as being less risky to invest in. What social values and impacts do you want to support through your investments?

Ready to join the ranks of wealthy investors? Begin your journey with our JBWealthFit.com curriculum to grow your investing knowledge and skill set. Or contact us directly to schedule a consultation. We’re excited to help you on this journey to change your life.

The Right Mindset for Growth

There are simple rules to follow to prime your financial engine for more effective growth. Following these can be difficult for some, but these general rules all offer benefits. It is not enough to only prime your finances for growth though – you must also prepare and adapt your mindset and view of the world to weather the uncertainty of the market.

These are some common mental pitfalls that can torpedo your investment strategy and impede your financial wellness:

Nine Negative Investing Behaviors

  • Loss Aversion: We feel loss more deeply than the happiness that comes from gains. Avoiding loss can cause you to hold on too long to a failing investment, have unrealistic expectations of low-risk investment returns, and make poor stock selections based on these expectations. It hurts, but you have to know this: some volatility and loss is to be expected in any financial model.
  • Narrow Framing: When you make decisions without considering all possible implications. Narrow framing leads to market bubbles and bad investments based on hype and chasing growth that has already occurred. This can have impacts far beyond individual investors, as in the dot-com and housing bubbles of the 2000s.
  • Mental Accounting: Not tracking your finances on paper can lead to varying levels of due diligence and planning. Arbitrary categorization can work against your goals, like impulse-spending your tax refund or bonus.
  • Diversification: Diversification should be used as a whole across your portfolios, and be evaluated based on overall risk, rather than industry sector. Many investors chase risky profits across many industries and consider themselves “diversified.”
  • Herding: It’s easy to follow the crowd and this can play off our tendency toward confirmation bias. There’s comfort here, but remember how many people lost their shirts in following the crowd on recent bubble bursts.
  • Regret Aversion: We experience much more mental pain when we commit an error than when we miss on an opportunity due to inaction. This causes investors to sell too early to lock in on profits, missing out on larger gains later. Some may hold their positions too long, hoping for an upswing to erase their standing losses that grow each day.
  • Media Response: Don’t be too eager to buy into what talking heads are selling you – confirmation bias can be deceiving. Failing to examine potential negative impacts or researching alternative information sources can lead to narrow thinking and narrow investing that can net big losses.  
  • Overconfidence: Nobody can constantly beat the market. Even investing “gurus” take consistent losses in their financial models. If you don’t plan to roll with the punches and absorb volatility, your financial model will quickly be broken and you could wind up broke.
  • Anchoring: Our previous experiences inform our outlook, worldview, and plans for tackling the future. Even if they don’t apply. These informational anchors can hold you down if you fail to recognize them for what they are and move beyond this frame of reference.

These negative behaviors can cause you to abandon key points of your financial model and sound investment strategy. Remember, it’s all about time in the market, not timing the market. If you want to grow your wealth you need to face some intellectual discomfort to recognize and overcome these negative behavioral impulses in yourself.

Your Investment Policy Statement

A powerful way to overcome these negative tendencies in yourself is to draft a personal Investment Policy Statement. Much like a personal manifesto or a company’s mission statement, this is meant to help you unify behind a vision guiding your investment strategy toward your financial goals. Some areas to consider including are:

  • Purpose: What is your purpose and goal for your IPS?
  • Values: What values guide your life and decisions? How do you want your investment decisions to support these?
  • Objectives: What do you want to achieve through your investments? What timeline, risk tolerance, and performance objectives figure into those goals?
  • Duties: What role does everyone on your investment team play? What is your involvement? What expectations do you have for yourself and the rest of your team?
  • Portfolio selection: What investments (based on your previous statements) will comprise your portfolio? Laying out a complete picture here can be a powerful evaluative tool.
  • Performance: How do you select your investments and what standards must they meet in order to remain as a holding or purchase goal? Base these decisions on your statements and objective facts.
  • Costs: Any costs associated with managing your portfolio should be 100% transparent.
  • Review: How often will your portfolio and IPS be reviewed? We recommend at least annually. Make sure that as your life changes you update your strategies to fit your future needs.

With the right mindset and a clear investment policy guiding your financial model, you can hack your future and grow your wealth more effectively. These are real steps towards true financial freedom, of being able to rely on your own wealth for your future. Want to figure out the path forward together? Contact us to schedule a consultation.

The Rules of Financial Balancing

Achieving financial balance is no easy feat, but it provides countless benefits to your life in personal finance and beyond. Following the rules of financial balancing helps reduce your reliance on your paycheck and removes the fear and uncertainty that comes with living in debt or living hand to mouth.

Follow these basic rules to help get your financial house in order and start moving towards true financial freedom:

Maximum Protection

As discussed in our series on protecting your wealth and risk management, it is not enough to only protect your current possessions and investments. You must protect your full economic value- including future earnings- to achieve maximum protection. You can find a more in depth guide to achieving this in our previous posts, but building this safety around your income, investments, property, and life will help to protect yourself and your loved ones in case of a terrible tragedy. It may seem daunting at first, but the diligence needed to protect yourself and future is as important as the rest of these rules.

Annual Savings

What percentage of your income are you saving? We recommend that you save and invest 15% of your income annually. This may seem like a large number, but it is essential to achieving your full economic potential. If something is standing in your way of completing this goal, you must figure out how to break down that barrier – without this amount of liquidity and cash reserves, you put your family and future at a greater risk of financial catastrophe or failure. If you’ve struggled with debts, you can recapture those losses with the right financial model after you’ve eliminated that dead weight from your financial life.

Short Term Liquidity

You should always have 3-6 months of cash reserves on hand – this means enough cash to cover ALL of your expenses for that span of time, in case of a job loss or emergency. It is also smart to have 6-12 months of near cash in reserves held in an investment such as short-term bonds that are easily accessible. This cushion provides many benefits, including increasing your insurance deductibles to lower your premiums, freeing up more cash for investing and savings. These reserves give you peace of mind and the ability to navigate short term troubles without the added stress and worry of taking on debts.

A Balanced View of 401(K)s

Your 401(K) is a powerful tool for retirement. But it’s not an investment that you have easy access to. Taking loans against your 401(K) before retirement can cause major harm to your liquidity by robbing Peter to pay Paul. Early withdrawal is not any better, as you suffer an additional 10% penalty taxed as income, typically requiring you to pay taxes owed to the government. Even if you are just investing, your 401(K) can have limited options for investment selection, you can lose your employer match, and you typically pay for more expensive funds than in other similar accounts.

None of this is to say 401(k)s are bad. If your company offers one along with a company match, you should at least participate until you achieve the match, but only if you have achieved your short-term liquidity. This can be a complex balance to achieve and is an issue you should discuss in-depth with your trusted personal financial advisor.

Short Term Debt

Your short term debt should be zero. Carrying debts can wipe out your future profits as interest accrues and gains momentum. The two most common forms of short term debt that people carry are auto loans and credit card debt. You shouldn’t consider your car as an investment because it depreciates rapidly. A brand new car loses 50% of its value after the first three years on average. If you know how to shop smart, a used car that is 25% cheaper can be driven for years and preserve more of its value as an asset. Always use your debt intelligently!

Credit card debt can be one of the most crippling things for your financial life. An average interest rate of 15% means you pay $0.15 for every dollar you don’t pay off each year. As that accelerates, it can quickly grow out of control and destroy your financial life. If you can’t pay cash for something, you probably cannot afford it. Credit cards should be avoided, but held for cases of extreme emergencies or very special circumstances.

You may need to slow down other aspects of your financial life and even explore debt restructuring to achieve your target liquidity – this safety net is the most important part of your financial life. It’s crucial to follow these rules of balance in this order to move in a direction of health, stress reductions, happiness, and the best opportunity for financial growth.

Ready to get a complete picture of your financial health? Complete this questionnaire to get started with one of our advisors.

How Volatility Affects Investment Success

You don’t have to be a financial planner or analyst to know that the stock market ebbs and flows. But it would be wise to know why this phenomenon, known as volatility, happens and what it means for your investment success.

Let’s start with the basics.

What is Volatility?

As a measure of risk (uncertainty of loss), volatility refers to the amount of fluctuation in returns, and is typically stated as standard deviation. Rapid fluctuations in a short period of time mean high volatility, which is often caused by economic, corporate, and political changes.

Why Volatility Matters

Not to be ignored or considered par for the course, volatility has real impacts on your investments. How? Volatility diminishes compounded returns over time. As volatility increases, a portfolio’s compound returns (which is the money you eventually get) decrease. And this gets riskier and riskier the closer you are to retirement, as your portfolio has less time to bounce back. This could mean retirement delays if you don’t act quickly.

How to Minimize Volatility Risk

Diversification, or having a wide variety of investments within a portfolio, is often seen as a way to minimize volatility risk. The idea being that the good investment performance can balance the bad. But this doesn’t always work as intended. When it comes to minimizing volatility risk, you must think back to what affects volatility – often economic, corporate, or political uncertainty. And in these times of uncertainty, markets that may seem unrelated tend to act the same. Thus your diversification fails to protect your investments when needed most.

Debt funds are less prone to volatility than equity. However, there is a choice to make between short-term versus long-term debt, or income funds and dynamic bond funds, respectively. While dynamic bond funds can produce bigger wins, short-term debt offers a steadier return on investment with lower risk. Sometimes slow and steady wins the race, especially when you consider compounding returns.

Long-Term Investment Planning

Just because an average stock return is a certain percent doesn’t mean you will immediately realize that return. In fact, actual returns tend to fluctuate significantly higher and lower than the average. This is why it’s important to plan with the long-term average in mind. The long-term outlook allows good years to outweigh and balance the bad, eventually achieving the averages. However, reducing risks and volatility will be an important factor in reaching that long-term average and increasing the consistency of investment returns, which requires smart investment planning.

At JarredBunch, we support the use of financial models as the foundation for your investing strategy to help manage risks while capturing opportunities. This goes beyond traditional financial planning and portfolio management to provide a larger picture of a client’s financial life and needs. Our models help clients make smarter investment choices that reduce volatility risk, ultimately putting your investments to work for you – the way it should be.

Ready to take the next step? Drop us a line if you have questions or want help reaching your full financial potential.

What Will Your Financial Legacy Be?

So much literature surrounding financial health is focused on the grind of building balances, eliminating debt, and taking advantage of favorable markets. When is the last time you stopped to ask yourself “What does my eventual retirement mean for future generations?” Chances are it isn’t an idea that comes up very often, meaning you’re likely neglecting the key beneficiaries of your wealth planning.

The legacy you leave behind stretches far beyond your work history, your loved ones, and cherished memories. How you prepare for your retirement, health care, and financial needs can mean the difference between boon and burden for your children and loved ones. Studies increasingly show the reality of inter-generational poverty- the financial state that you leave behind is now more important than ever.

Your Family Legacy

Thinking of death is not a comfortable thing, but it is important as you plan for your eventual retirement. Proper budgeting and planning can keep you independent and avoid putting burdens of time, emotion, and finances spent on medical care for you. A medical emergency can incur tens of thousands of dollars of debt. Leaving that burden for your children can impact their own futures and those of their children.

A financial burden like healthcare debts can also further complicate the painful emotions of saying goodbye by introducing regret and resentment. Planning your finances properly and commiting to a healthy, preventative lifestyle can preserve your retirement and their financial futures, paving the path for prosperity and plenty of happy memories.

Your Legacy of Giving

What charities, causes, or organizations matter most to you? Charitable giving is incredibly important in life, but the proper financial plan can provide for you to make a substantial contribution after your death. This generous action can put a stamp on your values and beliefs that guided your life, and help improve lives and communities long after you are gone.

The Lessons We Teach

Most importantly, your financial status in death serves as a testament to your life. No matter your age, your children will still learn from you. Creating a positive legacy in this way can pass down important lessons of dignity, preparedness, self-reliance, and the positive impacts of a giving spirit to your children and grandchildren.

Saving at least 15% of your salary is a good start on your way to reaching this goal. Truly hacking your future, though, requires some more insight and planning. Contact us today for help making the best future we can together.

Protecting Your Wealth – A Balanced Financial Life

As we conclude our series on protecting your wealth and financial well-being, we are taking a deep dive into the importance of balancing your financial life. In order to protect your hard-earned wealth, it’s not enough to rely on risk management and a good insurance mix: you must balance your financial life entirely.

One of the most important aspects of financial balance is determining your lifestyle burn rate. Any financial choice you make that has the potential to incur debt should not remove your ability to remain in financial balance. You should still be able to save 15% – 20% of your income and maintain your core liquidity (3-6 months of income in cash, 6-12 months of income in near-cash reserves.) Those new debt payments must fit in as part of your lifestyle. If a decision you make negatively impacts your ability to maintain one of those things you are out of financial balance and the payment exceeds your lifestyle budget.

Other key guiding principles for maintaining your financial balance include:

Property and Casualty Insurance

These are important for covering the replacement value of your assets. You also want to ensure that your assets are protected if you are found to be at fault in a major accident. Do you know what amount your are responsible for versus your insurance’s responsibility? Review your policies and make sure that you can cover the terms within. If not, it’s time to shop around for a new policy with a premium and deductible tolerable for you.

Savings

You should actively be saving 15-20% of your gross income annually. Any less than this can mean missing out on millions over the course of your lifetime. You should have this amount spread across an emergency fund, liquid savings, investments, and retirement funds, each with their own financial model and game plan guiding them.

Short-Term Debt and Short-Term Capital

Any short-term debts you take on should fit into your balanced lifestyle burn rate. Zero short-term debt is preferable, but you should rebalance your lifestyle plan if short-term debts are necessary. You should also have 6 to 12 months of expenses in liquid or near-liquid assets in case of emergency or disability. Doing so will cover you in case of unexpected gaps in pay or other unforeseen emergencies.

Mortgage Size

Are you the type of person who wants the biggest, nicest home on the block? If so, make sure that your mortgage fits into your lifestyle. A good rule of thumb is that your mortgage payments should not be bigger than 15% of your gross income.

Prematurely Funding 401K

While 15% to 20% of your gross income should be saved annually, you should avoid pumping too much into your 401K and other qualified retirement accounts. These funds are effectively locked away and carry stiff penalties for taking early distributions. You should never have more of your money out of your control than in it.

Net Income

Are you living a budgeted lifestyle? Or are you lying to yourself about cash flow challenges? Saving religiously and spending the rest on your lifestyle is the first step towards balancing your finances. Be honest with yourself about where your money is and show the discipline to live within your means.

Want to get a clearer picture about balancing your financial life? Complete this questionnaire to get started with us.

Protecting Your Wealth – Death and Income Loss

In continuing our series exploring more ways to protect your wealth, we’re taking an in-depth look at a sometimes uncomfortable subject: death and disability. These are always tragic outcomes, but the potential impacts of those can be mitigated through some careful planning and risk management.

As we’ve already discussed, taking an honest look at what a devastating loss would look like for your family and determining what coverage is most effective is essential. Doing so will help you make sure your family is taken care of in case of a tragedy.

Financial Impacts of Death and Disability

If you were to die today, what would your full economic value be? If you earn $75,000 annually at age 45, your minimum income earned until a retirement age of 67 would be $1,650,000. That is the amount of money your spouse and children would be missing out on. While many say you should ensure at a rate that will pay off debts alone, covering your full economic impact will better protect your family’s future. If you account for inflation, raises, bonuses, investments, and more, that amount needed can grow to as much as $3,000,000. Determining your full economic value can be a powerful tool in deciding what amount of insurance you need.

Term Life Insurance

Term life insurance is the simplest and cheapest option to buy. A general rule that is frequently repeated is “buy term and invest the difference.” If you are disciplined or working on a tight budget, this solution can be a powerful one. The trade off is that there is no benefit to term life unless you pass away. If you stop paying your premium, the coverage lapses as well. Some tips for buying term life insurance include:

  • Select level term so that your payments don’t creep up and decrease the affordability years from now.
  • Explore a convertible policy in case you want other options in the future
  • Understand that your protection only lasts for the time period you select and you will need a replacement strategy after it expires

Whole Life Insurance

Whole life insurance, also known as permanent life insurance, is another option. This policy has a guaranteed death benefit as well as a cash value that builds over time. You can pay a loan to yourself by accessing the cash value of this policy, accelerate death benefits if you become terminally ill, and even receive chronic illness benefits. These are often included as “riders” that you need to research and ask about to ensue they are included. As a trade-off, whole life is generally more expensive than term life insurance, so we recommend our clients to do a blend of both to keep costs manageable and receive excellent coverage and benefits. Some tips for buying whole life insurance include:

  • Buy from a  reputable mutual company
  • Make sure your policy has a guaranteed cash value growth
  • Make sure your policy has a guaranteed dividend rate (included in most policies)
  • Project what would happen if you change your premium, such as stopping payment when you retire to preserve your income

Disability Insurance

Should you experience an injury that causes your permanent disability, you may never be able to work again. If you are lucky, you will be able to find a workable solution in another industry, but it may not pay as well as your current one. In either case, you need to ensure your current income is protected with adequate disability insurance.

>Many companies offer disability insurance as a company benefit. Make sure that you understand the total amount of coverage. This way you can determine what coverage you need as a secondary policy. The goal is to replace as much of your income as possibility. Some tips for buying disability insurance include:

  • Make sure it has its own occupation coverage, which protects your income if you cannot work in your current role but can still work. (Think of a surgeon who injures their hands but can still work as a hospital administrator.)
  • Ideally, you will be the policy owner so you can transfer it outside of your current employer without it expiring.
  • Evaluate the elimination periods, the period of time before your policy starts paying a benefit. Extending your elimination can lower premiums, but you need to have a cash reserve or other solution in place to cover this time.

Determining what is right for you can be a daunting task. Plus, there are plenty of insurance salespeople out there trying to muddy the waters and sell you a confusing product. Understanding these basics will help, and we’re here to help you make sense of them. Give us a call or email for a quick conversation to see what’s right for you.