One of our firm’s core values is continuous improvement—i.e., getting better every day. This post highlights the massive change that can result from a daily focus on improving and celebrates two members of the Cordant team living out this value and who have accomplished significant things this year.
One of the great advantages of being a long-term investor is the luxury of checking out of the daily financial news cycle. Diversification and a long time horizon silences much of the noise. But, whether or not an individual can actually ignore the news cycle and short-term market changes and not react to them is another story. When the news implies that you should be concerned, it’s hard to stay calm.
At the end of 2015, the Federal Reserve began raising the federal funds rate and the increases have continued this year. These policy decisions are exactly the type of short-term change that long-term investors shouldn’t worry about. But it’s hard when news suggests otherwise—as NPR’s Marketplace reminded me the other day on my drive to work. The story, as with any story discussing a change to interest rates, is obligated to remind the listener that a bond’s price moves inversely with interest rates. In other words, as Interest rates rise, bond prices fall. The visualization looks like this:
It’s that visualization that understandably causes clients to reach out and say, “I heard that interest rates are rising, should I be concerned? Should we be getting out of US Bonds?”
It’s with this concern in mind, that I want to explain first, why rising rates should not be scary; and second, explain why you may even want to look at it as a good thing.
“Change is the only constant in life.” There can be many different applications of the Greek philosopher Heraclitus’ words of wisdom, but one that is especially relevant to this blog post is planning for retirement. For soon-to-be retirees, understanding how to adjust to life after work can be stressful and overwhelming. And as the Baby Boomer generation continues their mass transit from the corner office to the golf course, more and more people are having to deal with one particularly stressful variable – Health Care. How much does it cost? Which plan should I choose? Should I fund my HSA?
With health care costs continuing to rise faster than other costs (food, utilities, shelter, etc.), understanding the landscape of available options is as important as ever. And when you consider that in 2019 individuals will no longer to be required to have basic health care coverage, insurance costs could continue to rise as healthy people are removed from the risk pools.
For some, a potential solution could be Healthcare Sharing Programs (HSP’s). While not new, the aforementioned rise in health care costs have made this alternative more popular. Because HSP’s are incredibly nuanced and no one is the same, this blog will provide a very high level introductory into HSP’s.
Though I’m not qualified to give life advice, one thing I’ve learned through the years is that life is all about tradeoffs. For many decisions, the tradeoffs are obvious. Do I join friends for a beer or go for a run along the river? Admittedly, I don’t always make the most prudent decision on this one, but I do understand one path will lead to short-term gain, while the other will probably be better for me in the long-run (no pun intended!). Fortunately for me, (when I’m creative enough) the events don’t have to be mutually exclusive.
At Cordant, our primary role is to help our clients maximize the probability of reaching their objectives. While straightforward, the challenge is making recommendations in the face of uncertainty—the most obvious being the direction of the capital markets (stocks and bonds) in the short-term. I have strong conviction, based off of historical information, that in the long-run, things will continue to go up. But, for this week or this month, your guess is as good as mine.
On numerous occasions, the need to put pre-Medicare healthcare costs in context arises with this conversation:
Me: “When would you like to retire?”
Client: “Well, I’d like to retire soon but know that I can’t. I have to work until at least age 65 so that I have health insurance…”
The client in the above dialogue might be right; he or she may indeed need to work until age 65. Pre-Medicare healthcare costs are a factor in the retirement decision and a significant one at that. But so is a mortgage, so is the need to buy a car, buy groceries, support family, etc. Every living objective that equates to a cost is a factor. Pre-Medicare health care costs play a role in the overall determination of whether you can afford to retire, but these are costs that are too frequently blown out of proportion.
Health insurance coverage prior to Medicare is a highly political and highly publicized topic. It is often in the news and is a part of our day-to-day conversations. The result is that it often seems like a bigger retirement factor than it actually is, and people ping to age 65 (the age of Medicare eligibility) because working until 65 means not having to bridge the gap between employer-provided insurance and Medicare—it means not having to worry about it.
This is why we encourage anyone evaluating their preparedness for retirement to take three steps to help them understand the impact of pre-Medicare health care costs on their retirement decision. By doing so, it’s not an unnecessary point of anxiety. The steps include, first, giving pre-Medicare health care costs appropriate context; second, knowing what it costs and how long one you will have to pay for it; and third, knowing what the worst case might look like. Taking these three steps helps you understand the impact and make a more informed decision about when to retire.
I’m clueless when it comes to cars. I take the bus to work, MAX to the airport and pretty much avoid driving at all costs (thanks Uber!). And despite my best efforts, my life is still dependent on them. You can imagine my anxiety when it comes to dealing with mechanics. They might as well be speaking a foreign language. As with most of life’s mundane occurrences, I can relate with Seinfeld’s George Costanza and Jerry Seinfeld conversation about mechanics.
As a financial planner, I’m sympathetic to those intimidated or frustrated with the financial services industry. After all, getting a new carburetor is one thing, investing your nest-egg or navigating the tax-code is whole other. For those that feel this way about coordinating their finances, this blog post is for you and is going to focus on one area of financial planning that has gained popularity in recent years: Health Savings Accounts.
“The drama’s done. Why then here does any one step forth? — Because one did survive the wreck.” –The narrator, Ishmael, in Herman Mellville’s Moby Dick.
If you weren’t concerned about cyber security at the beginning of 2017, my guess is that changed in the time before the New Year. Tracking events like the Equifax hack, understanding their effect, and acting in their wake took attention and effort. If you’ve ever gotten to the last page of Moby Dick you might remember reading the above sentences. You may have found yourself, as I did, relating in a peculiar way to the narrator. Because after coming to the end of an 800+ page book, you may have thought: Reading that was a lot of work and required a lot of my time and headspace. I survived, but what do I do now?… Not to mention, that whale is still out there.
As ’17 comes to an end, I have the same feelings about cyber security as I did when I read the end of Moby Dick. I have read what feels like hundreds of pages of articles describing hacks, possible consequences, and ways in which I could protect myself and our clients. I took steps such as setting up 2-factor identifications and freezing my credit, and we recommended clients do the same. And yet, the whale remains at large! I don’t feel secure from the Equifax hike, much less all cyber threats.
I still find myself asking, what now? What can I do to protect myself?
The fact of the matter is that cybercrime and fraud are on-going, evolving threats and constant vigilance is key. The answer to the “What can I do to protect myself?” question is an ongoing and evolving process. With that in mind, I want to take this opportunity to review 8 ways to protect yourself with the current best practices.
“Money is like soap, the more you handle it, the less you will have.” Gene Fama
The typical owner of an individual bond couldn’t care less about the current price of that bond. When asked “why not?” they’ll say it’s because they plan on holding it to maturity.
This is a technically wrong but a behaviorally useful way of looking at things.
Because what this bond investor cares about is getting their principal back at the end and earning a little interest along the way—no thought is given to the bonds changing price between the purchase date and maturity—they’ve essentially taken the bond and placed it in a drawer until it matures. They’re in it for the long run—something that is easy to do with individual bonds as they are more expensive to trade with less transparent prices that are quoted less frequently. These are all negatives but with one behavioral benefit: a lower temptation for action.
Long-term investors would do well to pull a page from the typical bond investor’s playbook and put their entire portfolio in a drawer.*
In “Five Simple Behavioural Tips For Better Long-Term Investment Decision Making” Joe Wiggins, CFA offers a simple suggestion to “check your portfolio less frequently.”
As we enter December, the last month on the calendar marks the final chance to cross your financial T’s and dot your I’s. For many, this means making last-minute charitable contributions, maxing out your 401k or ensuring your health care is solidified for next year. And for those individuals in their 70’s, this means satisfying their Required Minimum Distributions (RMDs).
Boring for many, I love these year-end opportunities for financial optimization. Year-end is a great time of year for something else I love –football! With college football bowl season about to begin and NFL playoffs around the corner, the action on the field is as intense as ever. And while the on-field action is all good and dandy, I always get a kick out of the “coach speak” and endless clichés heard from coaches dancing around uncomfortable questions posed by their adversaries in the media this time of year.
Admittedly, comparing RMDs and football may be a “stretch”, but I promise this won’t be an exercise in futility. With that, let’s put our visor on, grab the clipboard, and break down everything you need to know about RMDs from the sidelines. Before we begin, it should be noted that this post will only focus on standard RMDs and will not be tackling Inherited RMDs, which have slightly different rules.