Welcome to the Future!

Something amazing happened yesterday in my tax practice. For the first time ever, I did a tax return with my client Brett Kelly entirely via EverNote. For some of you, this might not seem like a big deal. CPAs talk a lot about having “paperless” offices. Despite their best intentions though, very few actually do it. Sure, they might have LESS paper. But I’ve never seen a CPA firm do a return without any paper at all.


Until now. Of course, the night Brett and I agreed to write our posts about this, Evernote came out with their own post that stole our thunder. But, their post is mostly about the theory of how it can be done. Brett and I actually did it!


As tax documents came in throughout the year, Brett clipped them all to EverNote. He shared the notebook with me, then came to my office for his appointment. I opened the notebook on one monitor and my tax software on the other. I went through all the documents one by one and prepared the return.


Then I printed all the vouchers, signature sheets and a copy of his returns to pdf and dropped them back into the notebook. When Brett got home, he had everything he needed to file the return, already stored. We even had to make a few adjustments the next day, all of which was done by Brett uploading some additional notes and me just swapping out pdfs.


And that’s it. No paper. None. Not a single piece. And everything is stored and searchable for easy future reference.


Welcome to the freaking future folks!

Work Makes Wealth

If you follow me on twitter, then you know that I just recently fired a client. Sometimes this is a necessary evil, and there is typically one very common reason for having to fire a client. Their expectations and your expectations simply don’t line up. Any good service professional will tell you that managing client expectations is the key to success, but sometimes it just can’t happen when the client is starting from a place of irrational expectations. This is where this client was, and their irrational expectation is a great example of a VERY common misconception so I thought I would write it out.


Retail investments do not create wealth.

WORK is the only thing that can create wealth.


This is the misconception that caused me to have to fire a client. They assumed that if they paid me for financial advice, and gave me $100,000 I could make them wealthy with it.


The world simply does not work that way.


The purpose of investments and financial planning is to grow wealth and protect it. Or maybe the goal is to generate income from your wealth.  But you will NEVER create wealth through your investments. You need to have MADE the money first. The only way to make money is by adding value. Since it is really tough to add value buying and selling stocks, you can see how the immutable laws of finance will not allow you to create a great deal of wealth that way.


Now, on the other hand, if you own your own small business for example you can create LOTS of value for your customers and therefore build up a significant amount of wealth. The only significant way to create wealth for 99% of the population is their work. If you work and spend less than you make, you can create wealth by saving. Then, you can take that wealth you created and grow it by investing.


So if you are normal person, and you save into a 401(k) or an IRA, or a brokerage account, that is great! But do not expect those investments themselves to make you wealthy, it simply won’t work. The greatest driver of the growth of your wealth is how much YOU put into the account.


Now, I am being a little general here. Yes, there are private investors who invest in companies and make money. Some people, like Warren Buffet, have made tremendous amounts of money by investing. But the reality is, these people are still working, even though they are working at investing. And yes, there are real estate developers out there that make millions by developing property, for example. The secret is, unless you are already wealthy, you don’t have enough money to create real wealth through investment.  Since none of us are venture capitalists or professional investors or multi-millionaires go with me here and ignore that aspect.


Now, the sad fact is that there are people and professionals out there who will tell you the opposite. If you give them your money, they will make you rich. If you pay for this class, they will teach you to be rich, etc. And you can give them your money and you will not be any more wealthy (and possibly less) than if you had just worked hard and saved in a smart way.


They are lying to you. Every. Single. Time.


It isn’t easy to get rich, so get back to work!

Retiring is Simple – The Stunning Conclusion

I think this is my favorite section, because I let all the air out of the people who sell the “best” investments or deride “bad investments”:

Reduction of Risk

Understand the fundamental difference between accumulation and retirement

In retirement, risk is a far greater enemy than lack of returns. In accumulation, diversification is your main method of reducing risk. The biggest challenge that you face is losing too much because all your eggs are in one basket. But in retirement, you are looking at inflation risk, interest rate risk, market risk, liquidity risk, longevity risk, sequence of return risk, and more. Balancing between these can be tricky. In retirement, you also don’t have nearly as much earning potential. In accumulation, you have the benefit of dollar cost averaging because you are an “income statement” person. This means that your greatest value is your human capital that allows you to earn an income. Retirement is almost entirely a “balance sheet” game. Your human capital is nearly depleted and has been turned into physical capital. If you lose it, there are very few options for replacing it!


If risk is reduced properly, your plans have a higher chance of working. It has been shown in numerous studies that if you are taking constant withdrawals; a 90/10 portfolio, which will typically have a higher long-run return, has a lower success rate than, say a 70/30 portfolio. But if you take some of that 90/10 portfolio and buy a pension like investment, you could get the same probability of success, but at a higher rate of return. This is not because one investment is better than another; it is simply because the risks have been reduced. And reducing risk does not always mean reducing return!


There are no “bad” products, just bad uses

Different products have different characteristics. You most likely need different products to accomplish your retirement goals. I typically advise to clients to avoid ‘one-trick ponies’. If all I have is a hammer to sell you, all your problems look like nails! There is NO single product that can solve all your retirement goals. And that is the only thing about investments that I can guarantee! Every product has its own strengths and weaknesses. A fixed annuity is great because you can get a fixed, guaranteed income stream which eliminates market risk. But you have to give up your cash so your liquidity risk is very high. Buying mutual funds are a great way to get professional stock and bond management and a diversified portfolio can reduce your inflation risk and interest rate risk. But it exposes you to a great deal of market risk! A variable annuity can be great investment that can compromise between both of these types of products, but it is typically more expensive. Is this extra fee worth it? Maybe, it depends on your situation! A savings account will completely eliminate market risk. But what about inflation or longevity risk? You might not realize it, but judged in terms of inflation risk, a savings account is VERY risky!


You need a mix of all these different products to reduce the risk. You can have money in a savings account, a mutual fund, and a fixed annuity and they will each reduce the risks of the other investments. The old adage it true here, the whole CAN be greater than the sum of its parts!


Retiring is Simple Part Deux

Ok, here is the continuation:


Clearly defined goals

Whether you are at retirement now or not, having clearly defined goals can mean the difference between retiring comfortably, and working forever, never know what you are working for. What is your goal for retirement? To save ‘some’? Did you pick some arbitrary number, like say $1 million, that may be unattainable (by the way, less than 3% of Americans have a net worth above $1M) or unnecessary?


I tell my clients all the time, “if you don’t know where you are going, how will you know if you get there?” Goals are also very rarely as simple as one number. I wish that retirement and savings could be that simple, but unfortunately it isn’t. You have to save for retirement, but maybe you are saving for your retirement home as well. You are probably saving for a college expense for kids or grandkids. Perhaps you want to travel for a year once you retire. All of these goals have distinct time frames and distinct levels of necessity (i.e. buying yourself a Ferrari when you retire is a great goal, but not as important a goal as say, having enough income to pay your monthly bills.) Because these goals have distinct characteristics, how you save for each one could be very different.


Once you create your goals, you want to assign specific assets to each. This gets a little more complicated, but can still be conceptually simple. This IRA is invested aggressively, for retirement in 25 years. This brokerage account is invested moderately for college in 5 years. Etc. If you have multiple goals (and we all do!) why do you only have one investment strategy?


Easy to understand investments

Sometime I wish investments were easy. A lot of clients get so frustrated with the complexity that they just do nothing. But this doesn’t need to happen! Even if you don’t understand all the intricacies of an investment, you should still have a solid understanding of the basics of your investments. My advice to clients is this: “if you can’t explain, at a basic level, how your investments work to someone like your neighbor do NOT buy them”. There are two things involved in getting to this point. The first is, if your advisor can’t make you understand the investment, there is a good chance he or she doesn’t fully understand it either and you should avoid them. The second has to do with trust. An advisor can explain the basics to you, but it is unrealistic to expect that you will fully understand every detail of that investment. We spend days and weeks studying these things and some of it just can’t be distilled down for a lay-person. You MUST believe that your advisor has your best interest at heart, because a certain amount of trust in this case is going to be mandatory. My advice? Understand how your advisor gets paid and you will understand how (or if) they are incentive to help you.


With that being said, you should still know the basics. What are the potential rewards? How much is this expected to earn in the long run? What are the potential risks? How much could I lose? What would have to happen for me to lose 5%, 10% or 50%? Is this investment more expensive than another? If so, what benefit am I getting for that extra cost? There are very few ‘bad’ investments out there. It is much more common for a good investment to be used in a bad way.


Once you understand the risk and rewards, you also need to know how these risks and rewards work with your goals. You might have an investment that has a great return potential, but could be down 20% in a given year. This would not be a good investment for your 15 year-old’s college fund, but could be very appropriate for your goal of retirement in 30 years. You might think that, because you are retired, you should be conservative and put lots of money in the bank. This might be appropriate for some money, but these accounts will always underperform inflation.


If you do this properly, it becomes very simple to have a good handle on your financial plan! I have been told that it works like magic… You know where you want to be and why. You know what assets are working for you towards those goals and how. So with a couple quick updates (remember clarity?) you can easily see if and how much progress you are making towards your goals.


Retiring is Simple

So I wrote this article to turn into a presentation for a couple speaking engagements I am doing. It turned out pretty good so, in keeping with my whole theme of “this stuff isn’t that hard, just keep it simple” i thought I would post it here.


It is long, so I am going to break it into three parts, so make sure to stay tuned:

The three tricks to retiring in any economy:

Clarity, Simplicity, Reduction of Risk.


Simple! These are the most important things you need to be focused on when thinking about retirement. Not how many stars a fund got from Morningstar, not what the past 10 years of yield have been on a particular bond, not on which insurance company has a + or – next to their rating.


Most of my clients are so confused by retirement because they are being overwhelmed with investment product information. So much so, that they forget that THEY are supposed to be the center of their retirement universe, NOT the investments.



Knowing what you have.

Most clients come to me with a mess. They have IRAs they opened years ago, a couple small 401(k)s, maybe an ETrade account. I even had a client that didn’t know that you could add money to an IRA, so when they went to open one each year at the bank, they opened a new account. At retirement they have 40 IRAs with between 5,000 and 10,000 in each one! When you ask them what their net worth is, they stare blankly. They don’t know if they can retire, because they don’t even know what they have, let alone what they can do with it. Clarity is the first step to a good retirement plan. Knowing what you have and what the goal of that money is allows you to sleep at night.


It should take no more than 5 minutes to see your entire net worth. In this day and age, there is no reason that you should not have the ability to view your financial information quickly and easily. But understanding how much you have in assets is only half the battle. More and more people are going into retirement with some sort of debt still: mortgages, credit cards, car loans, business loans, etc. Sometimes we tell people to pay their debt off ahead of time, sometimes we go into retirement with the debt, but not knowing about it makes it impossible to plan for. Having debt isn’t a non-starter for retirement, but NOT KNOWING can be. You have to have solid understanding of what the payments look like, over the entire life of your retirement, so you can plan for them and ensure that the money will be available to pay those debts.


It is also critical to understand your income streams. An income stream (like Social Security or a pension) are an asset, just like anything else. Many people dramatically underestimate the value of their pension. Did you know that if you wanted to buy the pension that a typical teacher gets at retirement, say, $50,000 a year at age 65, it would cost you more than $675,000? If you retired at 60 that number would be more than $760,000. That is a major asset! What about Social Security? The typical retiree gets about $1700 a month and that translates into an asset worth $275,000. That is an awfully big asset to throw away! Other people dramatically overestimate the value of a pension plan as well. If you underperform inflation by just 1% a year, in 20 years you will have lost nearly 20% of your purchasing power! Knowing what you have coming and how long it will last is critical, as it is easy to make mistakes on pensions. I once had a client, when offered his choice of payouts options at age 60, selected on of the highest amounts. He didn’t realize that this limited the time frame. Fast forward 15 years and now he is 75 and the pension STOPS! Without assets to replace that income, that could be a REAL problem.


Knowing what you need

Once you know what you have, you also have to know what you need. Before retiring, we are going to design an income stream to support your lifestyle. If the numbers work, you can retire comfortably. There are lots of ‘rules of thumb’ for how much income you need. But do you really want to bet your entire retirement on guessing what income you will need in retirement?


There are many big expenses that can come up in retirement. I once did a plan for a client. They were not wealthy, just typical middle class people. We did a great plan, and they had enough money to retire on a budget that they were comfortable with, with some extra ‘emergency’ money set aside for those unknowns in life. What they neglected to tell me during their planning phase was that they had told their three grandkids that they were going to help pay for college. They assumed that, because they had $500,000 in assets, that taking out 25 or 30k for wouldn’t be a problem. After all, what was $25,000 next 500k or even 750k? What they didn’t realize is that, taken together, that was 10% of their investments. Just because an account has money in it, doesn’t mean it isn’t doing anything. Those accounts were all being used to produce their income. So take 10% of it out, and they just gave themselves a 10% pay cut FOREVER. And it isn’t always big chunks like $25k or 30K. I have seen clients bleed themselves dry because their son or daughter got into trouble again and “just needs $4,000 or $5,000 to float them”.


When looking at retirement expenses, clarity is important. You need to make a budget. You need to clearly understand how much money you will have each month in retirement. Only then can you make decisions about whether or not you can or want to retire.


Ups and downs happen in life, retired or not. Any good retirement plan needs to take that into account. If you need every dollar you have to produce income, then you probably can’t retire. “Stress-testing” your plan is critical. Can you afford if the market is down 10%? What about 40%?





A Professional Pants Kicking…

My oh-so brilliant brother pointed out that, while he agreed with many of my points, I tended to still use some of the partisan political language that may lead to some misunderstanding… To that end, he sent me this excellent article from the greatest newspaper on Earth (no exaggeration, it is the only news media I have ever found that is worth following and I read it every week): The Economist. Don’t let the name fool you, while it does have a business and economics tilt, there is a great deal of straight news along with political commentary and reporting.

After reading the article I responded to my brother by saying “Yeah, thats what I said…” albeit I could never have said it with the numerical support and elegant writing that The Economist does.

So check out the article here. And you can see a more detailed (and supported) version of what I was saying…

And although it is not a book, I am going to officially add The Economist magazine to my Business Guru Reading List. You won’t find a better updates or analysis on current events anywhere.

More Kicking in More Pants

This is a follow-up/extension of my last blog post Education and Economics. A couple years ago, a young man named William Kamkwamba received a lot of attention for the very cool windmill he built at his home in Africa. There are a two TED talks featuring him, his first and his second interview. But I think that best interview is the one he did on the Daily Show with Jon Stewart.


I want to make some very important points, so we are going to do an interactive type blog post here, ready? Ok, go watch the Jon Stewart video now and remember what the lines are that struck you the most.


All Done? Ok, let’s break this thing down. Most people I talk to hear the story and think, ‘oh, how neat! Isn’t he clever’? First things first… if that video doesn’t inspire and also scare the shit out of you, then you missed the point.  I want to walk you through what I think are the most important points/comments that he made.


Built a windmill at the age of 14

Ok, we haven’t even started yet and he is already awesome. Can you even get your 14 year old to finish their damn baking soda volcano for science class without your help? Yes? Great, if they can build by themselves ANYTHING that requires a dynamo, you don’t have to read this blog post.


Oh, by the way, he did it during a FAMINE that forced him to drop out of school.

How many of you have had to do ANYTHING while at the same time wondering if your family was going to starve to death? Imagine the kind of dedication, optimism, and perseverance that that would require. It puts the work ethic of nearly every American (myself included!) I have met to shame.


He couldn’t read English very well, so he taught himself mostly from the pictures

Really? He taught himself about electromagnetics with pictures? How many college graduates do you know that could do that? This is a guy who had to drop out of school and then decided to go to the lirary to educate himself. How many Americans do you know would voluntarily learn a new skill with no prodding or some sort of bribe? In fact, one of the key drivers of the sustained unemployment is that many of the unemployed have antiquated or non-existent skill sets. And no one can figure how to fix that problem! Really? The US Government can’t figure out how to solve this problem but an African boy with an elementary education did? COME ON PEOPLE!


Do you think if you took your 14 year old out of school he would say “I want to learn more, mom! I’m going to the library!”?



Out of materials he found

Ok, so we forget about the age thing, the famine thing and the lack of education thing (which is a BIG consolation to us). Assume you are pretty clever and dedicated; you have the plans, (which are probably step by step you found on Google, which is cheating, but we will let it slide). Now you have to find the parts. So you go to Amazon, EBay, who knows what else to buy the things you need. Oh wait? No internet? No supplies of any sort? So I have to understand the ideas well enough to look at SCRAPS and find things that will fill the purpose I need. That requires creativity and ingenuity beyond what most of have even dreamt about, I think. And don’t even get me started, on the circuit breaker he built to fix the problem of power surges in his house…


The basic story is amazing enough. But after watching it a few times, I started to realize there was an even more amazing thing here than the core story. And it was William’s mentality and belief system. Let’s take a couple quotes and look at them:


“At the time I wasn’t reading English very well, so most of the time I was using diagrams”

What he says here is not nearly as amazing to me as what he DOESN’T say. Which is “oh poor me, look how hard this was for me!” He just did what it took to get the job done, and doesn’t think that he should get extra attention stretching himself. What an amazing concept.


“Ok, if you are saying I am crazy, then I am crazy. But there is this picture in this book of a windmill and someone, somewhere made it, it didn’t fall out of the sky”

Holy cow. He saw a picture and thought, “If someone else did this then I can too”. Did he ask what supplies, time or education the other person had? NO! If someone else did it, I can to. This reminds me of a phrase that my good friend Patrick uses all the time ‘no excuses, play like a champion!’. We have entire generations people who think nothing of saying “Well I would or could but…insert lame excuses which really boil down to laziness here…


“Yes I want to go to college, but I am working on my SATs so I can”

Really? If an American DID pull this off, he would parlay it into a scholarship anywhere. THIS guy, however, doesn’t use take advantage of what he has done and still follows the rules of everyone else to get into college.


“I had never seen a computer or heard of the internet… what kind of animal is Google?… ok, let’s Google windmills…. Where was this Google all this time?!”

All I am going to say is: imagine if this kid had had a freaking IPad with 4G.


I never get tired of watching this video. It continually amazed me. And here is the connection to my other blog post about how we ruined our country by being spoiled and taking advantage of all the productivity and wealth we have. Think he is an exception? Sure, he probably is. Like, one in a million? Ok. There are 4 BILLION PEOPLE in the developing world. That means there are four thousand more people like him. Think about how many brand new Fortune 500 companies we could get out of that! And that is just the geniuses. Most of us aren’t a genius! So I will give you the benefit of the doubt and assume you are still very special and are 1 in 1,000. That is four MILLION PEOPLE. That could do the same thing you can, if given half a chance (and considering some of them are STARVING, would do it for a whole lot less!).


This is like quantum physics. If it doesn’t change the way you see the world, then you simply don’t understand it. So seriously. Watch this video and be afraid, be very afraid. And then start working HARD!

Education & Economics: A Kick in the Pants

I just read an article on Seth Godin’s blog about the education system in the US. It was an excellent article that ties into a book I am reading called Endgame by John Maulding. I am not reviewing this book for the blog, but I was struck by how these two pieces work together. An idea that I have thought about (and tried to explain) for some time now began to crystallize.

Here is a summary of Seth’s piece:

  • At the turn of the century, industrialists were outraged that Congress was going to outlaw child labor. “We can’t afford to hire adult workers,” they said.
  • Congress sold this plan to them by explaining that they would end up getting more compliant and productive workers after they have gone to school, because school teaches them to sit in rows and do as they are told.
  • Large scale education was built on creating people that work well inside the system, not creating scholars.
  • There are two types of jobs in the world. In tradable jobs , you are instructed to do something that can be done anywhere, like designing cars or answering phones. Non-tradable jobs must be done in place, like preparing food or performing services.
  • While service jobs are great, we need to have both in our economy, but from 1990 to 2008, the US economy only created 600,000 tradable jobs.
  • If you perform a job where someone tells you exactly what to do, then they can find someone cheaper than you to do it.
  • Despite this, the school systems are churning out millions of kids looking for jobs where someone tells them exactly what to do.

Contrast that to the main tenets in the Maulding book (remember, the Maulding book is an entire book on economics, so paraphrasing is not easy nor is it inclusive). Maulding writes about the staggering amount of debt that we as US citizens are now responsible for, both individual and government debt. The level of debt is not sustainable and must be paid down.

To pay it down, we either have to increase productivity (which can ONLY be done by new technology, like the internet, or by increasing population) or decrease consumption. This does NOT just mean cuts in government spending. What it means is that a larger portion of our GDP will be consumed by debt reduction, which means it is NOT available for investment or consumption. This puts a significant drag on our economy, which will most likely lead to a sustained period of decreased consumption (read: standard of living) for most Americans. Period. That’s it. There is no other choice!

For every person that is receiving government payments (like unemployment insurance) that money has to come out of other businesses and individuals in the form of taxes, which means even LESS money is available for consumption and investment. We all have to work much harder, to make LESS MONEY. (Note that “less money” does not necessarily mean fewer physical dollars; it could very well mean that our dollars just buy less stuff).

See the connection, yet?

I admit it can be tenuous. But here it is: we trained generations of people to think that if they did what they were told, they would be taken care of. We created the entitlement mentality.

On the flip side of that, the people in charge assumed, “if the people do what they are told, we HAVE to compensate them.” This created the system we live in now, where we just assume that if we suit up and show up, we will be able to afford 50″ HDTVs, gadgets of all types, whatever kind of food we want whenever we want, vacations, cars, etc, etc, etc.

American workers have been chronically overpaid. Disagree? The debt we have as a country is proof of that. How does an individual rack up debt? They spend more than they make. Expand that idea to a country. We consumed more goods and services than we produced as a country and we funded the shortfall with borrowing. But now we have to pay it back and to do so, we have to cut consumption. But at the same time the developing economies are getting stronger and more productive which means by definition, their citizens will be able to buy more and more, while we buy less and less.

If you think that the last two years have been really tough, you ain’t seen nothing yet! How many people do you know that are actually living worse than they were a few years ago? How much REAL belt tightening have you seen? There is more, MUCH more to come. And the education system failed us by not giving us the tools to do something about it for ourselves.

How many of the unemployed that you know (and we all know some!) have taken it upon themselves to increase their skill set or educate themselves further? This is a personal pet peeve: Unemployment is something like 12% in California where I live and I still struggle to find decent employees at a reasonable wage, and I am not hiring for minimum wage jobs!

My premise is this: If you want to continue to live in the manner you have become accustomed to, you have to work harder and longer than you ever have. As soon as a few people start accepting this fact, they will start taking the jobs they thought they were too good for or that didn’t pay enough. This will start the downward spiral of wages and along with it, standards of living. It may take a decade or more, but once it starts, it will be a decade like none of us has ever seen. And it has barely even begun …

The Financial Planning Process Part 3

Welcome back friends!


I know you all have been thinking about what buckets you want and are ready and raring to start funding them! Right? GOOD! Let’s get it going…


OK, Before you get to fund the cool buckets, like Income & Growth or Guaranteed Income (where we get to use really cool financial products and investments) you MUST fund your Emergency Bucket. Most people will tell you that you should have about  6 months of living expenses in this bucket. That is a good guideline, but there are always lots of variables that can increase or decrease this number. If you are retired, tend to go more towards 12 months. If you are younger you can decrease that number a bit. It also depends on how conservative you are.


The big problem that people have when funding their Emergency bucket is that I tell them to put it in a money market or a savings account. “But then it doesn’t earn anything? How do I build wealth if I am earning .5% on my money?!” I don’t care what your Emergency Bucket earns. Its job is to BE THERE, that’s it. When you need money, you have it, period. None of this, ‘I can’t get that money right now because the market is down…” stuff. Its “earnings” are its liquidity and security. You cannot take the risks of investing in the market and complex financial products without having a solid base.


OK, after your emergency bucket is funded, it gets a little more interesting. Now we need to start selecting our other buckets. This can get a little confusing, because everyone is different with their goals. I usually try to limit people to three other buckets. If you are younger, or just starting out, your buckets will probably be a Savings Goal (for kid’s college or for a house, for example), Long Term Growth (funded with things like your 401(k) or IRAs) and Guaranteed Income. For someone more focused on retirement they would probably be Long Term Growth, Guaranteed Income, and Growth & Income Buckets.


I like to think of funding my buckets as a water fountain. You know the ones, where there is a level on top and once it fills up it spills over to the lower levels. The “stream” of water is the savings rate we calculated when we first started this process (you remember your savings rate, right?). Each month you have a certain amount of money that you can use to fund your buckets. The first level is your Emergency Bucket. If that isn’t at your target level, then ALL your savings goes there. Once that is where it is supposed to be, then it starts spilling over. For the younger folks, I would be roughly doing something like 50% Long Term Growth, 25% Savings Goal (or College), and 25% Guaranteed Income. For the folks more focused on retirement I would be doing 50% Guaranteed Income, 25% Long Term Growth, and 25% Growth and Income.


These obviously change quite a bit. If you work somewhere where you are going to get a pension, then you don’t need to fund your guaranteed income bucket, because it is already funded. If you save enough for your child’s education (or they get a scholarship or something) then you need to redirect that money somewhere else. Your allocations should be looked at each year or so.


You can also add more than two layers. Maybe you want to put $250 a month into your kid’s College Fund and put $500 a month into your 401(k). That would be level two. Then if you have more, it could go down to level three, your Guaranteed Income or Growth and Income Bucket.


There are millions of combinations of allocations and methods. The main point I want you all to understand is this:


  1. Your Emergency Buckets is ALWAYS first and mandatory.
  2. It takes a LONG time to save up large chunks of money. There is no getting rich quick in this world
  3. If you make it a point to fund some of your buckets, as best you can, each month, you are doing the best thing you can do have a comfortable life.


There is another separate conversation that has to do with what each of the buckets is then invested in, but I do not want to get into that in post and I might not at all. Investments are such complex idea, that I will probably say one thing and someone will do it wrong and I’ll get sued. And I don’t like getting sued.


But if you REALLY want to know what you think you should be investing your buckets in, call my office at 714-870-4542 and I would be happy to talk with you.






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The Financial Planning Process #2

Alrighty, here we are, back again, to continue the awesome journey that is “financial planning”. In our last post, you figured out two key pieces of information: where you are now and how much your “savings rate” is(or how much you can save each year). Do not be afraid if you feel like you don’t have much to start with, or if your savings rate is low. The fact that you are doing this process puts you about 7.4 steps ahead of most Americans. This part of the process involves figuring how and where to apply and invest that savings rate, to help you reach your goals.


Wait, “What goals?” you might be asking…


Good Question! We have to make those up! This is why it is the “fun” part of the process. Now, in the traditional financial planning process, we typically assign specific values to your goals (e.g. I want to live on $50,000 a year, indexed for inflation, starting when I turn 62, with an assumed tax rate of XX% and an assumed annual return of Y% with a standard deviation of Z) and use those variables to calculate exactly how much you need to save, including your starting point, each year, to reach that goal.


But that is basically just boring math (unless you are a dork like me) and not fun. So if you want to have a very SPECIFIC goal, I suggest you find a competent planner and have them run that calculation. Unless you want to take a college course on the time value of money and finance equations in which case, go nuts!


In our process, we start much more simply. I want to encourage you to stick to your budget and save as MUCH as you can. If we calculate a number and you can’t hit that, you might get disillusioned and  give up, which will put you in a much WORSE position. This is why I like to use the “Bucket” method. I did not invent this, it isn’t “my” method of planning, a lot of great planners across the country use this model or something very similar. The basic idea is this:


You have competing goals, with different time horizons and different risk tolerances, therefore, you need different investment strategies for each goal.


Make sense? If you are 30 years old, how you invest for the house you want to buy (two years away) will be different than how you invest for your new baby’s college education (18 years away) which is different than how you invest for retirement (35 years away). In addition to time horizons, you also have to deal with the complexity of tax-deferred or non-tax deferred accounts.


But we will get to that later. For now, you need to start making “Buckets”. I have about 10 buckets that most clients use (they rarely use all of them) so look at this list and see which ones make sense for you:


Emergency Fund

This one is mandatory and belongs in EVERY financial plan. It is also the FIRST goal to be funded. It should always be in a 100% liquid FDIC insured account.


College Fund

This bucket is pretty self explanatory. It is designed to fund an education goal. Typically for your child, but I have also used this bucket for people that want to go back to school.


Savings Goal

This bucket is used if you are saving for a specific goal. It might be something large like a vacation house, a boat, or other expensive fun items. It can also be used for smaller items, like the annual family vacation, a new TV, or a swimming pool (yes, these are all things I have helped clients make buckets for). You can also have several of these buckets.


Stable Value

This is one of my favorite buckets and one that people tend to like as well but never really think of. This bucket is designed to be an added layer of usable capital, but earns more than your emergency fund, which is only ever in a savings account. The goal is that it is invested to beat inflation by 1% or so, but you will never have more than a 10% down-swing.  So if you need the money you never have to say “I can’t sell now, the market is down so much!” I would use this bucket a lot if you have a small business and want additional backstop on the business, or if you are thinking of starting another business, or expanding yours, anything that you might be saving for but that may not be a certainty.


Long Term Growth

This bucket (which is typically for retirement, but not always) is where the “gambling” money goes. It has the highest risk tolerance and the longest time horizon. This is typically where tax-deferred accounts go because we cannot access them until we are 60 years old. For folks that are already retired (70s or later), or have a high net-worth, I will refer to this as the “Legacy” bucket. These are funds that they basically do not need in their lifetime, so we are investing it based on the heirs’ needs and situations.



I typically use two buckets for retirement, because retirement is the BIG deal in financial planning and is also one of the most complex pieces of financial planning. Transitioning from accumulating wealth to living off of it can be a very scary and difficult thing to do. These buckets will differ from the ones above because they will typically be designed around producing income as their primary goal. In addition to the two buckets below, you will often still have several of the buckets above (like Stable Vale or Long-Term Growth). But these are the two that are typically specific to retirement:


Guaranteed Income

This is the bucket that pays us a “pension”. It is an income stream that has some sort of guarantee on it, so we know that our basic bills are paid, no matter what. If you happen to work for the Government (or you work for a Fortune 500 Company and it is the 20th Century, not the 21st) you probably already have this bucket funded with your pension plan. But most people don’t and they need a steady income stream to rely on.


Growth & Income

This bucket is the one that is used to fund “lifestyle” expenses. All that traveling you want to do, the hobbies you want to pursue, all that good retirementy (yes, retirementy is a technical term in financial planning. Trust me, I’m a professional) type stuff. Unlike the Guaranteed Income Bucket, this income stream can go up and down, which is why we only use it to fund the expenses that could get cut out if we needed too. It is also designed (later in retirement) to combat the inflation risk that will be inherent in most Guaranteed Income Bucket investments.


I was going to start talking about how to fund these buckets and in what order, and what percentages should go into each one, but I just realized I have been typing for a long a time and HOLY COW this post is already 1200 words, so this is where I will leave you for now. Think about these buckets and which goals you think are critical for this stage in your life. Tune in next time and I will help you pick those buckets and guide you on how to fund them.





Broker Dealer Disclosure:


All Securities through Money Concepts Capital Corp.  Member FINRA/SIPC

11440 N Jog Rd., Palm Beach Gardens, FL  33418  Tel: (561) 472-2000

NCH Wealth Advisors and Money Concepts are not affiliated.