By Brad Thomason, CPA
​
 
We have a problem.  A measurement problem, to be precise.
 
If you are a money manager and you are trying to convince the client/potential client population that it is sensible for them to pay your fees, the most straight-forward way is to demonstrate that your approach beats the market.
 
There’s an extra layer of complexity that we could add to this discussion, in which we talk about doing so at levels of risk that are less than market risk – followed by a lot of arcane and swirly exposition about how exactly one gauges and expresses such risk.  But even if we have that, the thing most people are going to look at is whether or not the manager beat the market return.  A particularly thoughtful client might listen to an explanation of how a sub-market performance was expectable and acceptable due to the dramatically decreased risk.  Might even give it buy-in and feel like they are a member of the enlightened, among a mass of the dim.  Might even be right about that, as a matter of fact.
 
But let’s face it: if you’re a manager, the easiest sales pitch is one in which you can claim (legitimately, of course) that your process did better than a market/index investor would have done.
 
As such, the investor community gets a lot of sales messaging from the manager community about returns.  Mornignstar, in fact, exists for little reason other than to facilitate such comparisons.
 
None of this is hard to see.  None of this is hard to understand.
 
Also, none of this actually addresses this problem I alluded to before.
 
With all the talk of returns and market comparisons, it’s easy to lose sight of the fact that as an investor, your goal is not to beat the market.  May be your manager’s.  But it isn’t yours.  Or at least, I would argue, it shouldn’t be.
 
Asked differently:  What, exactly, should you, as an investor and not a manager, be more concerned with measuring as the basis of investment success?
 
Here’s a quick, one-question pop quiz to prove my point:
 
If Sally needs to earn 7% this year in the stock portion of her retirement savings in order to keep her plan on track, and the market falls 35%, will Sally be happy about the fact that, due to her manager’s good ministrations, she is only down 31%?
 
I’m bettin’ the answer is NO.
 
What do you think?  Does the manager’s market-beating performance end up being what matters most in that little tale?
 
An old poker player was once asked how he managed to maintain a good streak against the latest crop of young, aggressive gunslingers.  He said it was simple.  You just had to remember that poker wasn’t about winning hands; it was about winning money.  While the youngsters were smashing each other up trying to see who could “take down more pots,” the old guy just sat back until a) he got good cards, and b) the other guys had already thrown in a bunch of money ahead of him.  Then he stepped in and cleaned them out.  Sometimes one or two pots in an entire night were enough to send him home with big wins.  He played a different game than the other guys, simply by remembering what was important and what wasn’t. 
 
On the day you retire, which do you think will matter more to you: whether you got the returns you needed during the growth years, or the number of times during those years that you beat the market?
 
Measurements and goals which focus on the wrong thing are a clear path to problems.  Luckily, in this case, it’s easy to fix.  Let your manager worry about beating the market and all the promotional value that goes with it.  You just make sure you’re doing what you need to do to get the returns your plan says it needs each year, even if those returns are less than you could have gotten doing something else.  If you needed 7% in a year and you got 7%, that’s a winning year.  Everything else that went on outside of your portfolio, including the market return, is in distant second in terms of its importance.

By Brad Thomason, CPA

 
Clearly, it was one of the better ideas that any one had ever had.  Twas the week before Christmas and I was zipping through the local Walmart to get a few ingredients for dinner, and check something in the sporting goods section for a last minute gift.  For reasons I can’t really explain, I veered down one of the toy aisles, and saw a box containing five jigsaw puzzles.  Each was a movie poster-style picture, depicting one of the Pixar movies.  Though an infrequent impulse buyer, I scooped it up and took it home, nonetheless.

Then I opened all five puzzles at the same time…and dumped all the pieces into a single container.  All 2,350 of them.  Well, 2,349 of them, as we would later learn.  But you get the point.

This action drew various responses from members of my family, which ran the range from, “Oh my gosh, Dad,” to “What have you done?!”

However, for the next two-and-a-half days this stroke of unappreciated genius lead to the proverbial “hours of family fun.”  The kids (who aren’t really kids anymore…) and I sat at the dining room table for hours, listening to music, singing at varying degrees of volume and quality, talking smack to each other, and grinding through the substantial task of divide-and-conquer that I had manufactured.  Some of us stayed up late; others of us fussed at the first group the following morning for all the noise.  It really was a lot of fun.  And in the end, we did in fact sort the mess and solve all five puzzles.  Ten minutes before dinner on Christmas Eve.  So we took a quick pic, destroyed the evidence, and returned the room to its intended use, as if the whole puzzle-gate business had never occurred.  All-in-all, a pretty cool holiday memory.

Spending all of that time working those puzzles really drew my attention to one of the basic truths of the universe, not exactly news but one that’s still worth mentioning on an endless loop.  Sometimes it takes a while to really see what’s right there in front of your face.

If you think about it, what better example of this principle could there be than a jigsaw puzzle?  Once you flip the pieces right-side up, you are literally looking at everything you need to know to put the puzzle together, in a single view.  Yet it takes hours of going back over the same terrain to actually see what you need to see to do it.  I couldn’t tell you the number of times one of us announced that it was a certainty that a particular piece was simply not there, only to find it some minutes/hours/days later.  As I mentioned above, there was only one piece actually missing by the end.  But there were many more assumed-to-be missing pieces throughout the course of the project.  “Hidden in plain sight” was much more than a turn of phrase for all of us by the time things wrapped up.

To work a puzzle you have to stare.  You have to look at the same thing more than once.  You have to accept that there will be realizations which come later, and you have no earthly idea why they came that time and not before.  To do so takes attention, focus, and above all, time.  Like erosion, it’s a business model rooted in sustained pressure over long duration.

If you think about it, as you have gotten older, isn’t it the case that knowledge has become less about going wider, and more about going deeper?  I’m not suggesting a person ever runs out of new things to learn, especially when it comes to hobbies, and travel and things like that.  But the big stuff, the core matters that affect everyone moving through the adult world?  You had all that pretty well in hand decades ago, didn’t you?  Or, at least you had the basic version, the 75% to 80% you needed to know to not completely make a mess of your life.

Since that time though, for me anyway, the important growth in knowledge has come from going deeper into those things.  From trudging on down the path, full in the grips of diminishing return, to try to go from 80% to 90% and then to 95%.  From looking at what I’ve already looked at before, even thinking things I’ve already thought before, in the hopes that the continued engagement will spawn some new realization.  Miraculously, such efforts almost always deliver the goods.

As complex topics go, retirement is one of the deeper wells that I have found.  It is deceptively complex, likely because of the vast number of moving parts which may come into play.  To really understand the major principles requires lots of time and contemplation.  And to study every little fold and nuance?  I don’t know, but I’ll tell you later if I ever get there.

Part of doing well at retirement, I think, is making sure that you have realistic expectations about how long it’s going to take just to understand what it is that you need to be doing.  Then, allocate the time and put in the hours.
 
No one expects to solve a 1,000 piece jigsaw puzzle in half an hour.  If retirement was an actual jigsaw puzzle I’m not sure how many pieces it would have.  But a lot more than 1,000.  Or even 10,000, I imagine.  Strictly speaking I don’t really know because I’ve never tried to tackle one with that many pieces.  If I did though, I wouldn’t expect it to go fast, and I would (hopefully) not let myself get discouraged that a big block of time would be required to achieve the goal.

Which, I think, is a big part of the prescription for how to approach comprehensive retirement planning.  You just gotta take time to stare.  Then, stare.

By Brad Thomason, CPA
 
 
I like the word ‘might’ a lot.  I find it to be one of the most frequent tools I use when I’m working, especially on planning and advisory exercises.
 
Not such a big fan of ‘will’ and ‘won’t, and their close kin.  Hardly ever have a use for them when I’m in the workshop, so to speak.
 
Might makes people squirm, it’s true.  When you want the definitive, and the conditional is all that’s on offer, it grates.  Grates on me, too.
 
Would I like to be able to say, “Oh yes, I’m sure this investment approach will certainly turn out just the way you hope?”  How about, “Listen, you won’t ever have to worry about that?”  Come on.  You know the answer.
 
But people who have been fully inoculated with might just seem to instinctively understand that they can’t just make a plan, check it off the list, set it down forever and go on to the next thing.  That sort of approach would make them nervous.  They start thinking after awhile that maybe they ought to check back on it, just to make sure everything is going OK.  It probably is, right?  But, like, I mean, what if it isn’t?
 
That’s good.  That’s the right mindset, and the right action step.  Check back.  Check in.  Internalize the fact that this whole retirement thing is a process, not an event.
 
You do not have to develop any kind of super-human abilities to pull this off.  It still riles me up when I work on something that doesn’t end up going the way I want it to.  Makes me furious, at times.  So that’s hardly the mark of some sort of transcendent being. 
 
But what is never in the equation for me is an expectation that things – investments, projects, business initiatives, whatever - will always go the way I want them to.  As a result I’m never surprised when something comes off the rails.  Don’t like it. Don’t enjoy having to get Plan B (or D, or F…) ready to go.  But it’s not a shock.  I have learned to accept that it is just a feature of the landscape, and I can keep on working towards whatever the goal is.  Annoyed or frustrated though I may be.
 
Being a feature of the landscape, it’s not something that ever goes away; and in turn, isn’t something you ever get past.  You do not graduate to a level where uncertainty leaves the equation (at least not while you’re still here on Earth).  So it remains something you always need to keep an eye on.
 
All of which gets us back to might.
 
Ultimately it comes down to a decision.  You just decide that might (or maybe, if you prefer) is going to be a good enough answer for you – not necessarily because you like the answer, but because it’s really the only legitimate one on offer.  Then, you orient your actions to that reality.  For goals that require long-term planning and execution, that means you just check in from time to time to see if what you expected and planned came to pass or not.  Reassess and adjust as necessary.
 
There will always be the crowd that has to operate on the basis of wills and won’ts, even when such notions are nothing more than surface-level illusions.  But if having the best chances for a successful retirement outcome are important, I don’t think being part of that crowd is going to help you.  Some of them get away with it.  But in the cases where they don’t, any comfort they sought from a simplistic world view, back in the beginning, often gives way to profound discomfort later on. 
 
And profound discomfort is one of the few things that we can classify definitively:  It’s safe to say you won’t like it.

By Brad Thomason, CPA
 
 
If I told you that there was a well with 100 gallons of water in it, and you knew that you used 5 gallons of water every day, it would be plain to all parties how many days the water would last.
 
If you had access to such a well, you would not be particularly concerned about water for the next few days.
 
But neither would it be lost on you that there was some significance to each trip to the well.
 
As a response you might consider whether or not there was something you could do to increase the amount of water in the well.  Though you’d need to find a method that didn’t put what was already there in great jeopardy.
 
Or, you might go looking for another source of water, so that you could delay going to the well at all for the time being. 
 
You might give some thought to trying to cut back on your water consumption.  But as soon as you started to think about it a little voice in your head would point out that even if you could cut back some, you likely couldn’t cut back a lot.  Certainly nowhere approaching zero.  Especially if you weren’t being wasteful with the water in the first place, then there might be very little if anything you could actually do to decrease your consumption by any quantity that would matter.
 
Finally, even if you couldn’t find a suitable replacement, maybe you could at least get a little from somewhere else so that you could take a smaller amount from the well each trip.  Even if you did that for only part of the time, it might make a difference.
 
How many annual trips to the retirement well do you have?  When you draw out a year’s worth of money, how much is left?  Are you sure you want to start going to that well, especially if you have the option to work a bit longer?  Even if you no longer want to work all of the time, have you looked at the potential impact of having an ongoing income that’s quite a bit smaller than what you were accustomed to during your career – not to try to live off of, but just to slow the rate of withdrawals?  It might surprise you how much difference a seemingly small amount could make.
 
Real wells fluctuate with rainfall and other factors, just as retirement finance is affected by investment returns, inflation and medical expenses.  So neither is exactly as static as I described above.  But loosely interpreted, it’s not a bad analogy.  I bet you get it.

By Brad Thomason, CPA
 
 
People who advise others on finance often get asked how much money would be OK to spend on something unnecessary, like a big vacation, or a fancy car or something like that.
 
Once, while stuck in an airport terminal, I watched fifteen or twenty minutes of a program with a well-known host.  I only watched for that long because I couldn’t handle any more, and started walking up and down the concourse to burn the time until the plane showed up, just to escape the TV. 
 
It was the call-in portion of the show (or maybe they did that for the whole time) and pretty much every caller would give a quick verbal overview of his or her job situation, balance sheet, etc, and then ask the host if it would be OK for them to spend $X on something unnecessary.  Inevitably, a two or three minute tongue-lashing would follow, in which the caller was told “no.”
 
I guess maybe I’ve been doing it wrong, because in all of these years I’ve never told a client that he/she couldn’t spend money on something, much less lectured them about their manifest financial irresponsibility for even asking.  Your money; spend it on whatever you want to.  Neither my job nor my prerogative to tell you that you can’t.
 
Though in fairness to the host, in every case the person doing the asking really didn’t have the sort of financial position where the frivolous extras being batted about were a real good idea.  Ending up with more money in your bass boat than your 401(k) account is not broadly understood as a step in the right direction.
 
Well, rather than dragging us into all of that, how about I just tell you instead how to figure out the answer for yourself.  This is actually a pretty quick one.
 
Most people come at the question in a form that resembles, “I wonder if it would be OK for me to spend $5,000 on a vacation?”  Or $10,000.  Or a horse, instead of a vacation.  Or whatever.
 
Point being, they pick a dollar amount and a target for the money.
 
Let me suggest a different approach.
 
Assume that what you make in a year equals 100.  Further, let’s stipulate that by the time you finish paying the bills (including your taxes) and enjoy a bottle of wine here, a steak there, few other little extras, you’ve gone through, say 75.  On top of that, you’ve determined that you need to be putting back 14 every year towards retirement.
 
So all else being equal, once you’ve met the basics plus a little, you’ve used 89.  What about the other 11?
 
Whatever you want.  It’s your money. 
 
Return to your initial question:  is your personal version of “11” enough to pay for that thing you were asking about?
 
In other words, don’t ask the question without any real context on the situation.  Instead, make a rough sketch for what you might have to work with first, then start considering the specifics of how to allocate it.  Much easier that way. 
 
Also, understand that the problem with pressing the “expert” to just-answer-the-question comes down to the fact that this is a nuanced matter, hanging squarely in between a pair of oppositional forces which we have now discussed on several occasions.  Simple answers to complex matters are seldom helpful, so it’s best not to even go down that road in the first place.
 
It is quite literally the case that every dime you spend pre-retirement is a dime that will never earn you a return, nor be available to spend once you do retire. 
 
But it’s also true that it is mighty hard to live a life in which you ascetically beat the joy out of every little thing.
 
Civility and even enlightenment seem to make a soft plea for some middle ground, here.  So how much middle ground is there to actually work with?  Reference above calculation.
 
The reality is that you will probably never be able to state with certainty that it is perfectly OK to blow some money on something you don’t need.  In other words, to say “of course I can afford this, and there will never be even a hint of negative ramification in the future.”  Not if it’s more than a couple hundred bucks.
 
But you can certainly come to an understanding, pretty quickly, that you really can’t afford it.  At least not at the moment.  That’s the more important finding.
 
Beyond that, even if it looks like it won’t wreck you, you may decide that using a bit of the extra to do a little extra on your savings contributions this year would end up giving you just as much satisfaction as the other thing.  That also sets the stage for the potential of bigger excesses in future years. 
 
Either way, it’s really not that hard to figure out.  So you figure it out. After all, it’s likely to come up again in the future, and the TV guru might be off on an ostrich-watching junket, or flying around in a hot air balloon, or something; and in the end you’d just wind up having to decide for yourself, anyway. 

By Brad Thomason, CPA
 
 
Here is a stupid argument:  you should not invest in x because you can make more money by investing in y.
 
Now, I’m betting when you read that sentence, one of two things happened.  One possibility is that you nodded your head and thought to yourself, “Yep, I know where he’s going with this.”
 
Or, you thought, “I don’t know that the argument is stupid, but the fellow doing the writing sure sounds like he is.”
 
Touché.  But let me see if I can persuade you over into Group 1.
 
The reason it’s a stupid argument is because it inherently pre-supposes that how much money you make, the rate of return, is the basis of the decision, the most important consideration.
 
It is fair to say, and I will readily concede, that how much money you make will likely never be an unimportant factor.  But that doesn’t mean it’s the most important.  Not always.
 
Risk also matters.  So does liquidity.  There might be some aspect of timing that matters.  In a particular case, there might be special factors to take into account.  It’s complicated; or at least sometimes it is.
 
As you approach retirement, it becomes more important to think about shifting your holdings to less risky assets, and ones that have low levels of complexity.  You want predictable results, you want low odds of loss and you want it to be easy if someone else has to step in to help you out with managing your affairs.  That’s true pretty much in all cases.  In the ideal cases, doing so is more palatable because the job of building the wealth to suitable levels is already done at that point. 
 
The fact that you are taking an action which likely diminishes your earnings capacity is easier to live with, because you know you’ve won, and now it’s time to get off the field and use what you have to pay for some remaining years of peaceful existence.
 
Of course, getting more money is a benefit.  But benefits come in other forms, too.  That’s why, to simply pretend that the yield is the only thing that matters, is stupid.  Because it’s not.
 
Stock and mutual fund guys have been using this line of argument to beat up on bonds and annuities for years.  Don’t do it, they say.  You can make more if you leave your money in the market.  Dance with who brung ya, and all that.
 
Perhaps you could.  Perhaps.  But it isn’t a certainty.  Getting what you expect from a bond portfolio is more likely.  And getting what you expect from an annuity contract actually is about as certain as it gets, as a matter of law.
 
Anyway, I’m not going to try to convince anyone that money doesn’t matter and that having more of it isn’t a good thing.  But don’t let anyone else convince you that it’s the only thing that matters, ok? 
 
And should they try, you might ought to factor that into your decision about whether to listen them on other topics, as well.

By Brad Thomason, CPA
 
 
People who are interested in pulling off a successful retirement often end up considering an awful lot of information over the course of the preparation phase.  In general, I think this is a good thing.  That said, if there aren’t some constraints on the openness to input, a number of problems, running the range from simple overload to damaging misinformation, can crop up.
 
So who should you be listening too?
 
Should you be interested in what billionaires have to say about managing your money?  Should you seek wisdom and counsel from someone who is younger than you that has already retired?
 
Maybe.  But maybe not.
 
I’ll pick on the early retirement guru first, not only because it’s pretty easy, but also because I realize a need to exercise a bit of caution insinuating that a billionaire isn’t a content expert on the topic of money.
 
If a guy who is forty-five wants you to watch his video about how he retired successfully at the age of thirty, you can save yourself the trouble.  Why?  Because at forty-five there’s no way that he could possibly know if his retirement is a successful one.
 
The true tests of a retirement plan come when you are in your nineties, after you have already lived without work income for many years, and after (to be blunt) you have already passed the life expectancy for your peer group.    
 
No forty-five year old has ever experienced anything like that.  As such, there is no basis for a declaration that the retirement was a success.  It’s like looking at the scoreboard at the end of the second inning.  They can say they successfully paid all the bills for the last fifteen years without having to have a job.  But those two claims are not the same.  Not even close.
 
Moreover, if you actually listen to most of these guys, they will soon start talking about their “side hustles.”
 
Folks, a ‘side hustle’ in Millennial-speak for, “I started a small business.”  Probably, “I started a small business, which is actually not that successful, but since I live really frugally, the little bit of money it does produce helps to delay the rate at which I’m depleting my other resources.”
 
In other words, they aren’t even actually retired, in the first place.
 
I think I can leave it right there.
 
As for the billionaires, I’m not sure they are your best candidate for advisor either.  But for a totally different reason.
 
I am prepared to stipulate, a priori and absent any other actual proof, that anyone who is a billionaire necessarily knows something about money and how to make it.
 
But a much more subtle point is the reason I would potentially discount what they have to say when the topic is how to manage money during retirement.
 
Most people, no matter what they manage to save, are probably going to get to the point where they have to start liquidating assets in retirement to keep the bills paid.  For something like 98% of the population, maybe more, that will be the case if they live long enough.  The longer a person lives, the more likely this becomes.
 
Billionaires are not in that boat, though.  If you are a billionaire, all other things being equal, it is likely that you can pay the bills from each year’s investment wins for far more years (decades.  centuries?) than a normal human life span.  But, still being human, you are susceptible to the same blind spot that we all are: assuming that everyone else is living in the same version of the world that you are.
 
When the odds of running out of money are nonexistent, then things like investment risk are sort of academic.  But in real life, for most people, being too aggressive can and has lead to severe financial damage and unmeasured heartache and regret.  Some people can afford the risks of pursuing maximized returns.  Most can’t.
 
I will stop short of saying ignore the billionaires.  But do keep in mind that one of the most significant financial events that most retirees encounter – the moment where you have to start spending down the principal – is likely not even on the billionaire’s radar screen.    
 
Real retirement stories don’t exist in the realm of the energetic middle-aged, nor in the land of bottomless riches.  As such, be thoughtful about how much guidance from those glamorous lands that you invite into your reality.

By Brad Thomason, CPA
 
 
 
People seem to be publicly upset a lot more these days than used to be the case.  So as I’ve watched that trend over the last few years and thought about it more than I did in the past, I’ve come to think that simple misunderstanding is responsible for a massive portion of the hurt and upset experienced by the human race, the world over.  For so many people in a state of literal outrage, it seems to me that even the tiniest bit of education could perhaps go a really long way.  Understanding how things actually work, and knowing enough to spot erroneous explanations or chains of logic, are important if for no other reason than to tamp down the number of people getting agitated over purely-imagined evils.
 
Well, I don’t think we can change the world.  On the other hand, it is sort of the purpose of this blog to provide clarity on the topics surrounding retirement.
 
With that in mind, I thought it might be beneficial to spend some time talking about the inner-workings of one of the truly foundational models in personal finance, that of the traditional pension.  This has nearly universal application in the US, not so much because every worker has an old-school pension, but because of Social Security, which works on the same basic framework.  So for that alone, it’s a good thing to know something about.
 
But it is also key to understanding what many consider to be a very important option in the retirement planning/management toolbox, the private annuity contract, with a lifetime payout of income.  Well, both understanding it, and avoiding anger-inducing misperceptions about it at the same time.
 
But first, pension basics.  Assume that you have to provide income for a bunch of workers who, on average, live for twenty years after they retire.  So if they retire at sixty five, on average, they all live to be eighty five (which, by the way, is not too far off actual life expectancies for people who have already made it into their sixties.  Note that life expectancy, in laymen’s terms, more or less means the point at which half the group is no longer living.  So half do not live to be 85, and the other half live longer than that.).
 
How much money does that take?  In simplest terms, for each worker, it takes one year of income times twenty years.
 
In reality that’s only the approximate figure because during the twenty years interest will be earned.  Also over the twenty years there will be some inflation, and to keep pace there will have to be some cost of living increases to the payout.  To some extent, those two offset each other though, so to keep life easy let’s just go with $X times 20 for purposes of this simple explanation.
 
It would be mathematically equivalent, more or less, to say that the pension plan has some pool of money for the person, and they are going to divide it into twenty portions, to be paid out one portion at a time.
 
So that’s the first point.  Some pool of money divided by some years of expected payouts.  However, understand that while this basic building block (a pool of money associated with each worker, individually) is a necessary part of the conceptualization process, that’s about as far as it goes.  As we will see, each worker’s pool of money, isn’t really their money; not in the same sense as having a bank account that they can withdraw from whenever they like.  It’s just sort of a gauge to help the pension track the level of resources available to meet the promises it has made.
 
To dig a little deeper, let’s consider the case that there are three workers covered by this plan, one who lives for only ten years, one who lives exactly the prescribed twenty years, and one who makes it thirty years.
 
Note that the wide disparity between these outcomes still reduces to an average lifespan of twenty years past retirement (10+20+30=60 years; 60/3 workers=20 years).  So our overall assumptions for the pension are still intact.  Though what happens individually veers of course rather substantially.
 
The first person does not end up receiving all of the money that the pension fund thought would be paid out.  The third person gets a whole lot more.  And where does the extra come from?  The money that was not paid out in the first case.
 
If we make an assessment of what happened, it goes like this:  all three workers were promised income for life, and all three workers got income for life.  They just didn’t all get the same amount of money (because “get the same amount of money” was never the promise, to begin with).
 
In order to make that possible, the pension plan simply had to have the ability to reallocate in order to fit the facts as they played out over the years (e.g. the death of the first worker).  Simple, but not insignificant.  In fact, that one feature is quite powerful, even critically necessary.  Without the ability to internally shift things around, the entire system could not function as it does.  To really get to the heart of the operation, we need to see the disconnect between what the pension initially allocates to each worker for planning purposes, and what each worker owns and ultimately receives.  That’s the key detail.
 
What’s described above is how the teachers’ retirement folks do it.  It’s what the Social Security Administration does.  It’s also what Medicare does when one person gets really sick in a given year, while five or six others don’t have any significant medical bills to speak of.  It’s what your home owners’ insurer does with the premiums they collect from, say thirty people, when one person has a fire but the other twenty nine people don’t.
 
In all of these cases, the entity managing the coverage shifts resources as necessary to meet the promises they made.  The promise – not the individual payout – is where they deliver the same thing to everyone in the group.  The fact that different group members get different actual payouts may not be an immediately obvious by-product of such a system.  But I think if you’ll think about it for a minute, it will become clear that it really couldn’t be any other way.  It’s the natural result of responding to uncertain outcomes which affect each person a little differently than everyone else.
 
Notably, in the scenarios described above, the “consumers” of those services don’t seem to have much problem with the way things are done.
 
But when the topic turns to purchasing your own life income from an annuity company in a one-on-one transaction, for some reason, everything seems to change.    
 
Probably the number one reason people do not choose the lifetime income option on an annuity contract (which in many cases may be the single most valuable benefit associated with the contract) is the concern that if they die after just a few years, the annuity company will “keep their money.”  If the number of payouts received by the annuity owner prior to death are equal to less than what they paid to purchase the annuity, then they will have made a bad deal.  And perhaps more importantly, the insurance company will have screwed them over by keeping the difference instead of giving it back to the person’s estate.  That’s the perception.  So they don’t do it, sometimes even getting preemptively angry at the very suggestion of it.  If they select an annuity at all, they take a payout for a guaranteed number of years to make sure nothing gets left behind.
 
Which is fine.  Nothing wrong with taking the deal just to collect the interest.  But in so doing, they give up the coverage associated with lifetime income.
 
For the record, I get it.  It is very hard not consider the possibility that you might be spending money, a substantial amount of money in this particular case, on something that will not benefit you in the future.  Even if that is exactly what you’ve already done with every other form of insurance you’ve ever purchased. 
 
But as in all important decisions, you really do need to move past perception, and get to actual substance, before you make the call.  What’s ultimately on the table here is the question of who has financial responsibility for you living past your life expectancy, you or the insurance company?  That’s potentially a really big question. 
 
If you want them to assume that liability, you not only have to pay them to take the risk off your hands, you also have to realize you are entering a much larger equation where they (the insurance company) are having to simultaneously manage and make good on many promises of the sort they made to you.  To do that, they have to have the ability to reallocate resources, just like any other functioning player in these environments does. 
 
In other words, you have to realize that at the point in time you agree to life income, it stops being your money.  It’s the price you pay for the benefits promised as a voluntary member of the coverage group. 
 
If you think that has value, you should consider taking the deal.  If you don’t think it’s a fair trade, don’t take the deal.
 
But either way, I think it is important to be clear-eyed about what’s going on.  Keeps people from getting upset when they actually got exactly what was promised.  It’s also more fair.  Which is not trivial.  Because even though I’m unsure how important it is to insurance companies that people regarded them fairly, I do think that trying to be fair is good for the person doing it.  Call me old fashioned…
 
So there you have it.  A quick primer on the fundamentals of pensions and life income.  For things like Social Security, the situation is what it is and you don’t really get any say in the matter.  But it’s nice to know how things which affect you function. 
 
When it comes to voluntarily establishing an income stream by way of an annuity contract, each person will have to make an individual decision about how much they value the risks and benefits involved, and react/transact accordingly.  Though there may be ample room for different persons to come to different conclusions about those questions, it really doesn’t serve anyone’s interest to accommodate misperceptions about how the basic process works, or assume malign intent on the part of the parties involved with making the machinery work. 
 
Hopefully this piece clears some of that up, making for better decisions, and less risk of this topic being one which generates misunderstanding and the bad feelings that go with it. 

By Brad Thomason, CPA
 
 
Dividends?  Like ‘em.  But you gotta be a little careful.
 
As you no doubt know, dividends are periodic payments made by some companies to their shareholders.  They, along with interest payments, are the most common types of investment income.  For many retirees, they go a long way towards covering the portion of the household budget not paid for by Social Security.
 
But I don’t quite trust them.  Not completely.  Not as a long-term means to secure income.
 
I like them when they come, and I think that in general they are based on stable enough stuff that we shouldn’t just think of them as a bonus that we’re a little surprised to actually get.  But neither are they necessarily a permanent, enduring solution to the question of funding the monthly bills for decades to come.
 
There are three key things you must keep in mind when it comes to dividends.  If you do, it will emerge as obvious to you too that thinking of dividends as a bulletproof income tool is a bit of a bridge too far.
 
The first point is that dividends are optional.  As a general proposition, every single dividend payment has to be proactively and explicitly approved by the company’s board of directors.  While they may have a long track record of doing so, and attendant pride at the length of the unbroken run, they don’t have to pay one next quarter just because they have the last 100 quarters.  There is no legal requirement to pay a dividend, which is one of the chief reasons that companies use stock as a financing route instead of debt, on which they would be required to pay interest. 
 
Point two, even if they do pay a dividend, the dollar amount may change radically from what the last one was.  It is true that under normal circumstances they are not prone to fluctuate from quarter to quarter; and when they do it is more typical for them to go up a little each time, rather than bouncing around all over the place.  But the fact that they are both optional and decided upon one quarter at a time means that if the board is feeling a little nervous about the company’s financial position, near-term profitability prospects, or really any other concern, they may decide that preserving cash is more important than paying the dividend.  Even if they don’t vote to end it, they may vote to cut it.
 
Frankly, we could stop right there.  Basing your income on something that may change from period to period and may not even be paid at all, is plenty to call the whole thing into question.
 
But like I said, there’s a third matter.
 
Being a dividend recipient means being a shareholder.  Even if the dividend keeps getting paid out, and even if it stays the same amount as when you bought the stock, there’s no guarantee that the shares themselves will hold the same value you paid for them. 
 
Now you might take the position that as long as the dividend stays where it was, a drop in price is really not your problem.  And it may not be, not for many years.  But should the day ever come (because of inflation, because of medical expenses, etc) that your old level of income doesn’t quite do it anymore, you may have to sell some stock to pay the bills.  On that day, the fact that it fell from $40 a share to $20 during your holding period is going to matter.  All of the sudden, those dividends will start looking less like actual income and more like a consolation prize for the losses you were taking (but not feeling).
 
Taken together, that’s enough to prompt a bit of caution.  A need for some moderation.
 
If you have a good set of holdings which is currently producing enough dividend income for the current needs, so be it.  But just understand that even though it works today, it may not work forever.  It bears thinking about what your next plan needs to look like, before the day comes that you need it.  Simultaneously, make sure that your attention on the payments themselves doesn’t distract you from the potentially more substantive matter, the resale value of your shares.
 
In practice, this set of concerns argues for basing some of the income on interest; and making sure that some of your money is invested in assets which remain at the same valuation levels all throughout the holding period.  Bonds, annuities and even CDs, all have some potential for involvement on those fronts. 
 
There’s plenty of room for customization, from one person to the next, as to which instruments and how much of each.  But as a general proposition, an approach to income that’s based 100% on dividends is a plan that I think you ought to be nervous about.  Nervous enough to change it, or at least nervous enough to spend some time thinking about how to change it should the need ever arise.

By Brad Thomason, CPA
 
 
It is a truism the world over that we do not want the kiddos playing with matches.  This is not in service of the fact that the little cherubs are malevolent and destructive creatures who need to be walled off from the means of carrying out dastardly intent.  Quite the opposite, they simply don’t have the necessary perspective to see the true scope of the risk.  They do not have a solid grasp of just how badly things can get out of hand, just how much real and awful damage can accrue from tiny little portions of carelessness.  What they don’t know can absolutely hurt them… and then go zipping right on past to hurt or even kill everyone else in the vicinity.
 
Today I want to talk about Youtube videos that discuss financial topics.  That intro was not intended to be an act of subtlety.  If you are running short on time, in fact, you can probably bail now.  It’s pretty likely you know what I’m going to say, and why.
 
For those of you who are still here, I want to make it clear that I do not wish to paint every producer of such content with the same brush.  Nor am I going to brand any of them as bad actors.  Benefit of the doubt, and all that.
 
But I will tell you there’s some real garbage on there.  So you need to be careful.
 
I’ve been in the advice-giving business for thirty years, more or less.  Almost from day one, I guess, I adopted a rigid position that if you are going to hold yourself out as an advisor on a particular topic, you have an obligation to know something about it.  Radical, I know.  But that’s just the kind of guy I am.
 
My position hasn’t moved.  Hasn’t even budged.  Adherence to this principal has lead to many instances over the years when I told a would-be client, “I’m not the guy you need to talk for that,” where ‘that’ was a topic I did not think I knew enough about to have any business giving advice on.   That business walked right out the door to another firm, and I have never regretted it even once.
 
The old (ancient) principle of being careful who you listen to has not changed.  Legitimate credibility springs forth from all the same places that Aristotle described.  Here’s a hint: number of followers and number of likes, were not on the list.
 
There is nothing inherent to Youtube as a platform which somehow diminishes the quality of quality content.  Good people do put good work on there.  It’s just that there are no barriers in place to make sure that content posted is quality content.  If ever there was a place where let-the-user-beware was more applicable, I’m not sure where it would have been.
 
A common red flag is someone telling you that everyone else on a topic is wrong, and that they alone have the secret knowledge that no one else in the entire financial industry has ever managed to figure out.  Which makes the whole notion sound really silly when I say it that way, doesn’t it?
 
I have something of a bum shoulder that’s been giving me trouble again over the last few months.  Recently I have been looking at various content (mostly from physical therapists, orthopedic surgeons, etc) about rehabbing tendon damage.  Of course, when you look at one video on a topic, the algorithm sends you more; which I admit can at times be helpful.  The other day, while scrolling through the suggestions, I clicked on something which looked fairly innocuous and professionally produced.  But I turned it off at about the two minute mark, because in the span of one hundred short seconds the guy said, four times, “your doctor won’t tell you this, because he doesn’t know it.”
 
This quick story demonstrates both how easy it is to get sucked into one of these things; as well as what to do about it.
 
I do believe that you can find some worthwhile information on Youtube.  Just expect to have to wade through a good bit of slop to find it.  People who do actual client work are not always the best performers, and folks who look great on camera sometimes say ridiculous things which can lead to great harm if you follow their suggestions.  Then again, sometimes the opposite is true, in both cases.
 
As such, looks, good or bad, may not tell you anything important.  Instead, substance is the name of the game.  You know, pretty much like it has always been.  If it is not obvious why the person doing the speaking would have any special knowledge on the topic, especially if what is being proposed strikes you as radical or just plain goofy, you probably have enough information to know what you should click next. 
 
Followed by promptly forgetting whatever the video said.  If you can.  I mean, sometimes this stuff is just so zany that it’s hard to unhear.  I remember this one knucklehead…