By Brad Thomason, CPA
​

I have come to accept what many a chagrinned fisherman before me has also surrendered to:  the fact that February is just not a good month for us here in these ole United States.  Other than Florida, the prospects are just too hit or miss; and even in Florida the circumstances are by no means certain.  Florida gets winter weather (relatively speaking, anyway) too, and passing systems work the same way as that little cup you put the dice in when you play Yahtzee.  Fantastic fishing one day can evaporate by the next, only to reform elsewhere.  Or it might not.  If you go to Florida, and you are willing to move day-by-day, for up to a couple of hundred miles, switching up your target species as conditions dictate, you can do some good in February.  But that’s about the most you can hope for.
 
When friends ask you the week before what the plan is, the first reaction is to guffaw and declare you wish you knew.
 
The old expression about man planning and God laughing seems much too close by to be amusing.
 
There are a lot of things we deal with that we simply have no control or even influence over.  This has led some to question whether planning – for anything – really makes much sense at all in the final analysis.
 
I’ve always thought of having a plan as less a declaration that the people are in control, and more a reference to work back to when circumstances knock you off course from time to time.  A plan represents intent which persists beyond the current moment, and maybe for many decades out into the future.  The paradox of the whole situation is that virtually no one ever pulls off a plan as it is originally conceived, and yet no one who ever accomplishes much over a sustained time period does so without meaning to, and working toward it.  In other words, executing a plan of some sort, such as it may be.
 
We frequently engage in an exercise around here in which we consider the question, “What would I do if I were the king/queen of the world?”  In other words, if you could have things go any way you wanted them to go, what would you bring about?  The fact that you can’t just wave a magic wand and make it happen doesn’t matter.  Answering the question focuses your thoughts and often makes quite obvious what you should be working for.  That understanding becomes this line of intent that I’m referring to.
 
As events play out, there’s no real choice other than reacting to them in the moment, and then taking stock once the moment has passed.  Will you persist with the same approach, or adapt to a different one? 
 
It’s much harder to answer that question if you don’t know how you would like to see things work out in the end.
 
So we plan.  Not because we think we are in control.  Not because we think we’ll be left alone by the universe to do our work uninterrupted.  But precisely because we don’t expect those things.  When things don’t break our way – either because we didn’t control something we could have, or because it was never in our grasp to begin with – we are better off if we can shake it off quickly and get about the business of figuring out what to do as a result of it.  It is in that moment, when instability is running highest, that the existence of the plan reaches its highest importance, too.
 
Unless we’re still just talking about fishing.  In which case, waiting for March is probably the better bet.

​By Brad Thomason, CPA
 
 
A frequent topic in discussions about retirement planning takes the form of questions like Am I on track, and How much money should I have at age X?
 
It’s not hard to see where questions of this type come from.  Getting in position for a successful retirement doesn’t happen overnight, so it’s only natural to want to get some gauge on the progress of the undertaking. 
 
Unfortunately, I think this may be an area (yet another one…) where firm answers are not easy to find.  Consider the following two cases.
 
Our first thirty-year old got a degree, got a good job, has worked diligently to take advantage of opportunities and has been among the most rapid advancers within her profession’s peer group.  She doesn’t have any debt to speak of other than a mortgage, has a written budget which she follows faithfully and already has material, positive balances in all of her savings and retirement accounts.
 
Our second thirty-year old has a job, but is in all respects just a mediocre performer.  A number of younger persons have already out-paced him in terms of career advancement.  He spends more or less what he earns as soon as he gets it, has a lot of toys to show for it, and a collection of credit card statements, as well.  His spending varies widely from one month to then next, and is far more likely to follow what he wants than what he needs, or how much cash is available to pay for the purchase.  Other than a few hundred bucks, he has no savings to speak of.
 
Now if I ask you which one it would be better to be, I think that the near-universal response would be the first.
 
Yet nothing in what I have just presented actually tells you anything at all about the odds of who will or won’t eventually succeed in retirement (where ‘succeed’ means something like having enough money to pay for everything that there’s a need to pay for).
 
What I have told you does not account for the possibility that our diligent subject, despite unassailably responsible behavior, ultimately fails because she lives to be 99 years old; while the other one succeeds – financially, anyway – by having a lethal heart attack at age 72, before he has a chance to go broke.
 
What I have told you does not account for the possibility that our second character wakes up one morning in his mid-fifties, realizes how careless he has been over the course of his adult years, and motivated by both shame and fear, goes on a fifteen year earnings kick the likes of which our buttoned-down first subject would have never even thought about for the simple reason that she didn’t need to think about it.
 
The point is, looking at someone’s “progress” a long way away from when that person will retire has little predictive value.  The further away, the less it has, likely to the point of telling you nothing at all.  Too much can change as the years go by, and some of the possibilities can be quite large relative to the pieces of the equation that were being examined before the event.  Just ask Jed Clampett.  Random events are not obligated to be one particular size or another; they are uncertain both as to occurrence and impact.  Which ends up being a really important, but not-so obvious, part of the equation.
 
Ultimately the measurement which matters most is the one you do at the point that someone is about to pull the trigger on retiring.  On the day you plan to retire, do you or do you not have the resources necessary to consider the upcoming task (of paying for the rest of your life) to be fully endowed?  Note that this is a binary question.  It’s either a yes or a no; whereas the same question, asked every other day leading up to The Day, would have to be answered as some sort of inexact maybe/maybe not (again, because of those random events being possible).
 
In practical terms, people are not going to stop wondering about what their progress is.  But in the midst of that exercise, I suggest that people keep two things in mind.
 
First, the appearance of being on-track is not a guarantee of a successful outcome in the making.
 
Second, being behind in your progress (by whatever method you wish to try to estimate that fuzzy notion) doesn’t impact your ability to make future progress, and do so for as long as you continue to try.  Nor does it preclude you from pushing your retirement date out, should you decide to do so.
 
The only measurement date that really matters is the one that coincides with the day of action, the day that you hang up your spurs and retire.  Even though you can check the score any time you like, remember that doing so is no different than checking in with five minutes left to go in the second quarter, the end of the fourth inning, after round six, etc.  Maybe it tells you something.  But it really doesn’t tell you much.  Although it can certainly lead to you think it means more – for good, or for bad - than it actually does.
 
So if you choose to check early, remember to proceed with caution.

By Brad Thomason, CPA

Let me tell you briefly why we do what we do; the Win we’re after, so to speak.
 
People aren’t born knowing how to plan and execute a successful retirement.  Nor, once they learn that retirement is a thing, do they get to the point of really understanding what it’s all about in one step.  Clearly, there’s a process.  Our interest is in supporting and encouraging people who have decided that going through that process is important and worth the effort.
 
But I run into trouble when I try to pick a term to describe a person who has been through that process and reached the other side.
 
That’s because all of the terms that would be sensible carry a lot of connotation and maybe even some unavoidable judgment. 
 
Shall I call you informed?  Shall I call you enlightened?  Shall I call you mature or fully developed or rigorous of thought?  Shall I say you get it? 
 
And what about the beginning state?  It’s not your fault that you didn’t come out of the womb an expert (oh, I forgot to propose calling you an Expert just a second ago; sorry about that).  But what do we call that state?  Immature?  Ignorant?  Clueless?  Doesn’t get it?
 
They all fit, factually speaking.  But they don’t sound very nice; and insulting folks, on purpose or otherwise, isn’t part of the mission.
 
So you see, this is sort of a moment where words – or at least a concise label – fails.
 
In any event, the take away is that there’s a process out there, and it includes going through stages of no information, to learning to reject bad/incomplete information, and ultimately becoming aware of the actual things you need to know and understand to move confidently and competently towards the goal.
 
If you are early in that process, I don’t want a choice of words on my part to be offensive or discouraging.  So I’ll just say I’m glad you’re on the path.
 
If you have reached that later stage, I don’t want heap on too much implied praise via some vaunted title, because that may distract from the fact that knowing is a key precursor, but it signals the start of the real hard work, not the end of it.  Knowing what to do and doing it are not the same.
 
In the final analysis, we do this work because we are interested in people who are engaging in the process.  That goes for folks at either end, and all along the way.  There are some problems in talking about it with neat, clean verbiage.  But if you are aware of the process I’m describing and already engaging with it, you probably don’t need such specifics in the first place.
 
Just keep at it.  And, good work.

By Brad Thomason, CPA​

One of the things that gets in the way of having easy conversations about retirement planning is that many of the most important variables are important, not for their effect in a given year, but because of the cumulative effects that pile up as the years go by.
 
Cumulative effect is difficult (to impossible) to track using the kind of mental math tricks we use for calculating how much we should earn in a year from a particular rate of return, or how much money we need to put in the bank to cover the checks we’re about to write.  Cumulative implies several, over time, which in turn means lots of calculations.  It’s just too easy to get lost – quickly – if you try to track that sort of thing in your head; and instinctively we usually avoid even trying .
 
This, in turn, leads to an unnerving situation in which the thing that seems to be the obvious choice may be the exact opposite of what you ought to do; and what you ought to do, first pass, makes absolutely no sense.
 
An investment of $100,000 will earn $7,500 next year if the rate of return is 7.5%.  It will earn $500 more if the rate is instead, 8%.  Five hundred bucks isn’t a lot of money. 
 
But if you let that difference ride and compound for twenty years in a tax-deferred environment, the cumulative difference is over forty thousand dollars.  Which sort of is a lot of money, especially relative to where we started.
 
We’ve modeled real estate investment deals before where we put in assumptions like “no net income for the first five years” and still had the project be an obvious green-light when viewed from the perspective of a fifteen or twenty year holding period. 
 
How?  Such a deal commonly has multiple places where cumulative effect can creep into the equation: the pay down of the mortgage reduces future interest charges; once money is reserved for repairs and maintenance we may get to allocate more to income or debt reduction in future years; the longer the holding period, the more rent checks we get (like selling a product, the more times someone pays to use your property for a month, the more your sales tally goes up).  Notice that I didn’t even mention things like rent increases or property appreciation.  Or the option of using the earnings from early projects to fund additional projects in the future, increasing the total amount of productive capacity in operation.
 
All of these things are essentially impossible to see if all you look at is cost to acquire and monthly rent potential (in this particular case).  Nor are the effects particularly noteworthy in any given period.  But what they accumulate to in the end certainly may be.
 
When the topic is retirement (an exercise in trying to envision what several decades might look like) small changes in rate of return, inflation assumptions, the timing of medical expenses and a long list of other things can and will affect the results in ways that almost always seem out of proportion to the change itself.  It’s just the way it is.
 
That’s why it’s so important to engage in more than surface level thought.  The way things appear on the surface is frequently not indicative of the true effect that they may have over time.  What seems like a good idea may be a bad one; and at times you may find yourself wondering why on earth anyone would consider some action which seems to obviously be wrong, and yet, isn’t.  You can be fooled either way. 
 
The only way I know to not get fooled is to take the time to be thorough.  Which won’t guarantee you a favorable outcome, by the way.  But one of the implications of living in a world where big cumulative effects can come from small inputs, is that it can work in your favor, too.  You don’t have to avoid walking into too many mistakes before it starts to have a positive effect.  So even if you can’t catch them all, nor get guarantees of how random events will unfold, catching even some of the avoidable ones can make a big difference.  Which makes it worth the effort.

By Brad Thomason, CPA

​When you look at the size and scale of the modern financial industry it would be easy to think that you are witnessing the refined, ultimate expression of the ‘right way’ to do financial services.  If you buy into the notion that form follows function, surely a modern financial behemoth is a best-of-class example of the principle.
 
Well, it might be.  But the function that lead to the form may be something different than what you think it is.
 
This is not a piece about questioning the motives of large corporations or implying that they are secretly out to get you.  But I am going to point out a few things which, in the end, though certainly a lot less malevolent, may nonetheless cause you some concern about relying on them too heavily.
 
1.        The form of the modern financial firm is based on providing services to a lot of people that have more or less similar needs.  Which is not the same thing as saying that the service offerings are the ones that best meet the needs of the customers.  The key to all large, corporate businesses comes down to repetition at scale.  They need to be able to do the same things, again and again, with a lot of efficiency.  So if efficiency and repeatability are the prime drivers of how they provide services, that sort of automatically knocks any notion of best fit out of the running, doesn’t it?  To make money they have to do a pretty good job (not a very good job, and certainly not a great job) of providing services which may confer some benefit – if not optimal benefit – at a high level of efficiency.  The service offering that is best for them, may not be the service offering that’s best for you - a principle which is ever on display at any restaurant that has a drive-thru window, by the way.  Same basic proposition.  McDonald’s can certainly keep you from starving, and adequately satisfy any food-is-fuel needs you may have.  But that doesn’t mean there aren’t other levels which could be attained were it not so necessary for them to book such a high quantity of iterations.
2.       Providing service at scale takes scale.  Which means people.  Lots of people.  What are the odds that every person that works at a large mutual fund company or bank is an actual financial expert?  When you call the service line, how do you really know if you reached such an expert, or whether the person who took your call has more training in being polite than they do in actual matters of finance?
3.       Are you representative of the typical client of a large financial firm?  Do you fit the same mold as the typical person that they are usually dealing with?  Public statistics, going back decades, clearly show that the average person doesn’t have anywhere near enough savings to even make a meaningful start at a prosperous retirement.  If you are actually working to properly endow your retirement and set the stage for a success that spans decades, you are materially different than the bulk of the people that they provide service to.  That may not mean that they can’t deliver something of benefit, but it does further the idea that what you really need may be something very different than what they are offering.  The typical person they talk to day in and day out probably differs from you in substantial and important ways.
4.       Do the large firms actually have a track record of success?  That is to say, client success stories?  What percentage empty their accounts over a few years and go away?  Seems like it would have to be a large portion.  But even if the ones that didn’t have to spend everything, how many of those occurred simply because the person didn’t live that long?  I know that’s an uncomfortable question, but it raises an important consideration; not just for financial firm clients, but in general.  How often, when a retirement failure doesn’t occur, is that the result of the person not living long enough for the retirement plan to be truly tested in the first place?  The clients of large firms that live a long time and have adequate resources for the whole thing are the ones who had a lot of resources in the first place.  It’s not fair to say that the firm played no role whatsoever in the positive outcome.  But it is fair to wonder if the outcome was in the cards even without the firm’s input.  In the case of large portfolios, it seems plausible that such could be the case.
  
I don’t assume from the start that the financial industry is evil, per se.  I’ve seen some things over the years that convince me that everything is not pristine.  But I’ve known some good people who worked hard and truly cared about their clients, too.
 
So better we skip over the question of good and evil and focus instead on the substance of what’s there.  Obviously you would rather work with a firm that is successful than one that is struggling.  But don’t automatically assume that their success is a reflection of a set of service offerings which rises to the level of best-available for your needs.  They can succeed by doing pretty well for a lot of people that have some of the same needs you do.  Between that reality and ‘what’s best for you’ there’s quite a bit of space; and its space that can exist even if you are dealing with folks who aren’t actively out to get you.
 
If you go to McDonald’s, you aren’t going for prime rib and aged Bourdeaux.  The difference is, with McDonald’s you realize that going in.  Make sure to realize it when you deal with a large provider of financial services, too.

By Brad Thomason, CPA

​​If you offer something attractive to a child and ask do you want to buy this, the child will say Yes.
 
If you offer something attractive to an adult and ask do you want to buy this, the adult will ask how much it costs.
 
Note that persons below a particular age can and do act like adults.  Note too, that persons far above a particular age may act like children.
 
(Despite the fact that this would be a great jumping off point to discuss the politics of many progressive initiatives, that's not where we're headed.  Not a political blog, after all.  We'll stay in our lane.  But the similarity is interesting.  Anyway…)
 
Many people find the idea of hiring an investment advisor attractive.  They will say that they like the idea of guidance and expert input.  In actuality it is frequently the case that what they like best is the idea of handing off an unattractive task to someone else (I have people to take care of that sort of thing…); and maybe setting the stage to have someone to blame if things don't go well.
 
There are lots of reasons to be your own chief financial counsel.  I have addressed these elsewhere and am not going to try to cover them all again here.  Instead I'll just focus on one aspect:  monetary cost.  Frankly, it may be more than reason enough.
 
Many advisors set their fees based on the size of your portfolio.  A standard approach is to charge 1% of "assets under management."
 
If a 50 year-old with $800,000 asks How much is this going to cost, the advisor will answer - truthfully - $8,000.
 
Eight grand doesn't sound like so much to pay for a better shot at a successful retirement.
 
The problem though is that $8,000 is the one-year cost, not the full cost.  Remember, retirement is a decades-long discussion.  Not to mention the fact that hiring the pro may not actually increase your odds of success, in the first place.  But I digress.
 
Let's do some quick math (which means that if you take the time to do the actual math you'll discover that my short-cuts actually understate the full cost; but they are easier to follow and I think they'll make the broader point, just the same).
 
From age 50 to age 60, with some modest appreciation, total fees paid could end up around $125,000.  Even with no growth, $8,000 a year for a decade is eighty grand, so that’s not such a huge estimate…
 
Let's assume you decide to take over at 60, and there are no more fees paid out (otherwise, this is going to get ridiculous; although plenty of financial firm clients are over the age of 60, for sure).  The $125,000 you paid out is not there to compound.  Had it been, when you retired at 70, it could quite plausibly have grown to be $250,000.
 
If you retired at 70 with the sort of money we're talking about, it could well be another ten or even fifteen years before you got around to spending this hypothetical portion of your portfolio (which, again, you don't have, because it went to fund your advisor's retirement instead of yours).  Maybe twenty.  
 
In that time, even accounting for a serious down-shift in rate of return (because you wisely reduced your risk exposure after having won the game of properly endowing your retirement), it could double again.
 
How much does that advisor in the window cost?  $8,000?  Yes.  $500,000?  Quite feasibly, yes again.
 
Attractive things can become automatic possessions when someone else is paying the tab.  That's why ten-year olds don't have to ask for the price.  But I suspect you are neither ten, nor in a situation where another person is underwriting the tab for your wants.

​By Brad Thomason, CPA
 
 
What do Warren Buffett and Arnold Schwarzenegger have in common?
 
Not a lot, most likely.  But at least one thing, which is sort of interesting.
 
Both were effectively “rich” before doing the thing that we know them for.
 
Schwarzenegger, as you know, spent a lot of time as a young man lifting weights.  But in the off hours between sessions at the gym, he and his workout partners did construction work.  As many of them were immigrants from Europe, they billed themselves as “old world craftsmen.”  The well-to-do of the Los Angeles area apparently liked the idea of that, and he and his crew had all the work they could do.  In time, Schwarzenegger started using the money he made doing construction to purchase properties which needed fixing up.  More and more, he was both contractor and project owner.  Such that by the time he got his first movie role, he was already a millionaire, by virtue of the value of his real estate holdings.
 
Warren Buffett bought his first share of Berkshire Hathaway in 1962.  This would be the start of a long series of transactions which would eventually end in the control of the company, and its transition to the flagship for his ever-growing financial realm.  But long before that, in 1956, at the age of 35, Buffett gave some serious thought to retiring.  As recounted in the biography Snowball, Buffett had already amassed $174,000 by that point, and was living comfortably on $1,000 per month.  You can multiply those amounts by 11 to get something approaching today’s dollars. Now, conventional wisdom would say that retiring at 35 is a silly idea, and to do so with only 15x what you spent each year would be risky.  At least for the average investor.  Which of course, Buffett was not.  It’s a moot point, since as we know, he certainly did not retire back then – nor at any point since.  But the facts are noteworthy.
 
What’s interesting about both of these cases is that they highlight the separation between having and growing wealth, versus earning a living and paying the bills. 
 
There are a couple of useful interpretations here.  If we come at it from the income angle, in both cases it appears in retrospect that neither had to spend too much time or effort checking that box.  It’s almost as if they took for granted that covering the monthly budget needed to be gotten out of the way with as little attention as possible, so that the focus could be placed on growing the wealth base.  Not that the income was unimportant; just that it wasn’t the only important thing.
 
Second, it really illustrates the idea that we all have two ledgers running at once, so to speak.  Ledger number one deals with taking care of this year’s requirements with this year’s earnings, while ledger number two deals with the ever-accumulating (we hope) pool of assets which will someday be called upon to do the job when the effort-based income stops.
 
It’s not necessary to become a movie star or an investing god in order to benefit from these examples.  Simply realize that a couple of very successful guys had basic needs squared away early so they could focus time and energy on building wealth.  Certainly it helped that neither seems to have spent too lavishly along the way.  But preserving and growing wealth requires that you have some to begin with.  It is quite clear in both cases that having wealth was very much an intended consequence of the respective efforts; nor did either fellow let up on the gas once he had some.
 
In the moment, engaged in the weekly cycle of going to work, and the monthly cycle of paying bills, it is easy to get focused on the inflows and outflows.  Just remember that the financial job has two pieces: today’s money and tomorrow’s money.  It’s is well to remember to give some attention to both.  It is even better to make it easy to do so by getting the first part squared away as soon as you can, so that you have plenty of time and attention span to devote to the second.