By Brad Thomason, CPA
 
 
The amount of Social Security related content on Youtube, and the internet at large is to me, astounding.  Pretty much everything you need to know is summed up in a few pages, available directly from the government (both the Social Security Administration and the IRS).  Yet there is a seemingly endless stream of repetitive content flowing to online outlets; and, one must assume, an eager audience for it.
 
I’m no expert on everything that is out there, but the gist of a lot of it seems to be how to get the greatest possible benefit.  Which as a stand-alone proposition is certainly reasonable.
 
But my concern is the part that is unspoken.  Because I think a lot of this content is aimed at folks trying to come up with some sort of plan to retire (ideally early) that just barely squeaks by as theoretically workable, and they are looking to some Social Security “hack” to somehow provide the last little nudge to get them there.
 
Folks, if you are thinking that an extra $100 or $200 a month from Social Security is going to be the thing that gets you over the hump, let me just go ahead and tell you.  It isn’t.
 
That’s because there aren’t any circumstances (that I can think of) where that small a swing is a reasonable basis for determining something ought to be close-enough to work.  That’s the case irrespective of whether the money comes from Social Security, or anywhere else (yes, I’m looking at you, dividend “experts”).
 
To be comfortable that you can reasonably hang up your spurs, you need a whole lot more margin for error than that.  The big questions in retirement management are interested in whether or not you can keep things going for twenty years or twenty five years or thirty years.  Not whether you can wiggle and contort enough to make year one work. 
 
Year one should be a given.  So should years five, and ten, and fifteen.  If they aren’t, you are not even approaching the realm of a secure position.  Retirement should not be an imminent event for you.
 
Don’t think that I’m telling you that you should be willfully ignorant about the inner workings of Social Security.  Don’t think I’m proposing that you should just accept less than you could get.  Don’t think that I’m suggesting that Social Security is an unimportant input.  For most folks it is in fact a very important input.
 
But it’s only one important input, and it is not the one that financially secure people rely upon to provide pull-able levers, flexible tactics and cushions against monetary shocks as they navigate retirement.  It’s more like the thing in the background that you take as a given, and build from there. 
 
So to end where we started, Social Security minutia is not where you need to be focusing your attention.  If you don’t have a clear-cut case for retiring with just the minimal, basic benefit from Social Security, then you already know what you need to know, for the moment.  The rest of your equation is not far enough along to be considering a near-term retirement, in the first place.  Work on those other parts instead, be realistic about the size of the resource base you actually need for a robust financial position, and accept that getting there may take some more time.
 
Once all of that is done, as something in the spirit of an after-thought, if you can figure out a way to wring a couple of extra bucks out of Social Security, so be it.  But treat it like a final snack after dessert, not any of the earlier, more substantive courses.  Certainly not the focus of the meal.
 
Otherwise you stand to make a big mistake (forfeiting your ability to get a paycheck) at the point in your life when you have the fewest options available to make up the difference.  That’s a tough one to contemplate, especially when it is completely avoidable in most circumstances. 
 
Plus, you’ll waste a lot less time on Youtube.  Or at least have more time for watching cat videos (which is another thing I really don’t understand).

By Brad Thomason, CPA
 
 
Human nature seems to be to conflate where possible to make things simple.  Problem is, conflation often cuts out important information.
 
I had a conversation with a guy one time, who had read a good bit of my stuff, and he said, “So basically, you’re anti investment advisor.”
 
Not exactly.
 
I explained to him that there were situations in which I thought using a pro – be it a registered investment advisor, trust/entity lawyer, tax strategist, business consultant, whatever – made sense, and situations where it didn’t.  I also pointed out, sensible or not, there was going to be a cost, which had to be an upfront consideration in assessing the question.  It’s really never a good idea to make a decision about doing or not doing much of anything in which the cost is not weighed; much less cases where it doesn’t even seem to be consciously acknowledged that a cost exists in the first place.
 
The root of his conclusion, I suspect, was predicated on my oft-repeated position that people should take an active role in planning and executing their own retirement income campaign.  I am not a fan of dumping everything in a professional’s lap, a la here, you take care of it.  I also do not think a lot of those interactions in which the client meekly gives a shoulder shrug and says, ‘I just do whatever he tells me to.’ 
 
But that has more to do with capitulation of sovereignty/responsibility, a common path to suboptimal outcomes.  Not the mere presence of the fee-charging professional.
 
Here’s perhaps a simple way to understand it.  College endowments hire outside investment managers all the time.  When they want to deploy some capital in the direction of a particular market or asset class, they seek a presumed expert in that arena, grant them a portion of capital to oversee, and send them off to get the returns.   
 
If that sounds like hiring someone to do a job, then a did a good job of describing it.  Because that’s exactly what’s going on.  The fact that the endowment wants access to the person’s knowledge and abilities in no way clouds the picture as to who is in charge.  The endowment seeks to receive benefits (in excess of the cost, by the way), but they are benefits which were identified by the endowment as part of a strategy that the endowment managers (not the hired gun) established, and it is utterly clear at every level where the sovereignty lies.  The sub-manager knows that there will be accountability, perhaps rigorously measured and enforced, and that the funding for the whole allocation can be pulled if the performance is not there.  The only aspect of dependency is that the manager is depending on the owner of the capital for payment of fees on services rendered.  That’s it.  No dependency flowing the other way.  No notion that the endowment would be at a loss for what to do if the pro vanished into thin air.
 
That strikes me as a good use of professional help.
 
Things go differently in the private realm, of course, since you don’t have your own staff to run this stuff like the endowment does.  But the basic premise holds.  Directing activities is not the same thing as being someone’s ward; and the difference between the two is a big enough difference to make…well, a big difference.
 
Another thing that I have said many times, in many different ways, is that once you have all you think you are going to need, you need to reallocate your holdings to reduce your risk exposure.  One of the most straight-forward ways do that, functionally speaking, is through products offered by insurance companies.
 
Buying insurance, be it a policy for specific coverage, or using an annuity as a means to interest or lifetime income, is an act in transferring risk.  We all implicitly know that, I think.  But transferring it to whom?  Why, the pros in the employ of the insurance company. 
 
Think about it: to remain able to deliver on promises made (a legal requirement, monitored closely each year by the insurance departments of all of the states in which the insurer operates) they have to have people on staff charged with managing the assets.  That is to say, doing the job of making sure returns come about, so that you don’t have to.
 
Anyway, it really comes down to this.  Managing money requires someone being present to do it.  If that someone isn’t going to be you, it still needs to be done.  So now it’s a conversation about hiring a professional.  Just understand that having that conversation as a person engaged in directing is very different than having it as a person focused solely on being a spectator or being cared for.  Beyond that, there will be some sort of cost, which necessarily needs to be less than the benefits received.
 
But yea, if you’ve thought about those things, have a sense of how you will benefit in excess of what it is going to cost, and can afford it, using a pro can be perfectly reasonable.  Though take note that those are some pretty substantial pre-conditions; and without them then the answer to the question is not the same. 

By Brad Thomason, CPA

​As the result of all the news coverage about COVID, your average lay person probably knows more about the mechanics of immune responses and the vaccines that love them (or is it the other way around?) than was the case circa 2019.
 
When the immune system meets a new compound it says, “Ah, what’s this?” What makes a disease a bad disease is that in that moment of wide-eyed wonder, the virus or bacterium replicates fast enough to cause problems before it fully dawns on the immune system that the body is under attack.
 
This moment of pause is a significant event in all forms of interactive conflict.  For instance, in boxing, the jab – that multi-tool of pugilism – is often used quite effectively to throw off your opponent’s timing, especially when he’s in the middle of a planned attack of a series of punches (i.e. a ‘combination’).  When a guy is one movement into a choreographed set of, say, four strikes, and you unexpectedly bop him in the nose, it tends to break his concentration.  As such, he may stop for just a second.  That saves you from getting hit multiple times, at minimum; and maybe it lets you counter attack him instead and do some damage before he regains the presence of mind to block or move.
 
Nations do this sort of thing with submarines, cruise missiles, etc. 
 
A moment of surprise followed by indecision can be a bad thing if you’re a white blood cell, a heavy-weight contender, or a convoy of military vehicles trying to be all sneaky back in the mountains or other boondocks.
 
Or a person trying to navigate retirement.
 
A vaccine lets the body get to have a look at the dangerous compound, work through the getting to know you bit – followed by decided dislike – and move on to the counter-act and defeat phase. Gives it a head start for later when an actual infection tries to make a run.
 
Much of our work is in the vein of talking about the kinds of decisions you will have to make as your retirement plays out, and highlighting some of the problems which frequently occur in typical cases.
 
Our work has little to do with saying what the future will hold, and everything to do with talking about possibilities in the hopes that if you get thrown a curve ball it will be a type that isn’t a total shock. If you’ve already thought about it before it happens, then you can at least consider how you might respond; and maybe even have prepared some defenses, too.
 
Protecting against a temporary moment of being frozen in place may not seem like much, but it may be enough. We’re trying to deal with a world where problems can’t be predicted or stopped but might be able to be dulled just enough if a sneak attack can be prevented.  Which, in turn, may end up making a really big difference in how your future plays out.

By Brad Thomason, CPA
 
 
The Dow Jones Industrial Average is a price-weighted index, whereas the Standard & Poor’s 500 is a market-cap weighted index.
 
If, at this minute, you are thinking to yourself, “Bradley, why on Earth would I ever care about that?,” I’m about to tell you.
 
Not all indexes (or indices, if you prefer…) are calculated the same way.  I’m not going to brutalize you with the whys and hows of the various methods.  But just know that in a market-cap weighted index, the biggest, most valuable stocks exert the most power on the value of the index.
 
Which companies are now the big ones exerting extra pressure on the S&P 500?  The big tech stocks.
 
Historically, are tech stocks more volatile or less volatile?
 
Tech stocks, for the last few decades have almost always been high-multiple stocks which are valued based on their growth potential, rather than the old-school book value/multiple-of-earnings type of process traditionally applied to companies working in the more tangible fields.  That’s a valuation basis that inherently focuses more on what a company may become, as opposed to what it already is. 
 
Which also inherently must leave the door open for the possibility that it will fail to fully attain that theoretical potential. 
 
An abiding characteristic of high-multiple stocks is that in times of malaise and panic, their prices usually get hammered worse than your average ticker.  Investors who are willing to push their shares higher in times of prosperity, seem to know that they are skating on thin ice, and usually head for the exits much more vigorously at the first little sounds of cracking.
 
A mini version of this happened just the other day, around Thanksgiving, when news about the Omicron variant started coming out.  Nothing really changed in the economy.  But the prospect of a new wave was a scary enough piece of speculation to trigger a low-grade sell-off.  High multiples and bad news do not play well together.  In that particular example the prices snapped back fairly quickly once the news was not so new.  But in actual crashes, the timescale is much longer, even when the underlying mechanics are the same.
 
So what if you had a situation where, over time, a country’s highest multiple growth stocks sustained enough success that they eventually came to be that country’s largest market cap stocks, too?  And the predominant stock market index for that country used a market-cap weighting…
 
It has been the case now for the past two or three years that the S&P 500 index has been dragged around disproportionately by the biggest components at the top of the list.  Like the top fifty; and at times the top fifteen or twenty.  The other 450 - 485 have had net behavior which was at times much different, but you wouldn’t know it just by looking at the index quote on the news.  If you weren’t watching the individual pieces, you wouldn’t necessarily notice it.
 
Since the movement over that period has been up, up, up, you probably weren’t watching the pieces.  The news from the market seemed to be unequivocally good, so why bother, right?
 
What, if anything, does all of that tell us about what the next stock market crash might look like? 
 
Well, if the market gets spooked by some sort of sustained bad news, the first and most severe casualties are likely to be the ones with the highest speculative multiples in the first place.  Since, at this moment in history, those stocks also happen to be many of the mega-caps, then they are going to have an out-sized impact on the resulting index measurements.  They have to, based on the formula they use to get the index number.

 
In other words, our responsible (but somewhat inattentive) retirement saver may have put a bunch of money into index funds or ETFs, thinking that doing so was a boringly-conservative thing to do, only to find out that doing so at the present time instead had the effect of causing them to be over-weighted to the tech sector – currently at record high valuation levels. 
 
Thought they were playing it safe and boring, but in actuality volunteered for concentrated exposure to the most highly-valued, volatile stocks in the land.  Oops.
 
And maybe Ouch, too.
 
All because of some nerd math that you didn’t even know was something you had to worry about.
 
But now you do.  So that’s at least a step in the right direction.
 
In a real crash, you really don’t want to be in stocks in the first place.  Historically, about eight out of every ten stocks typically follow the major market moves, especially the downward ones.  This next time it could go differently, though.  Because of the excess “air” that’s in the really big stuff, the mid caps and small caps could have a different time of it, and maybe even fair pretty well. 
 
But if all you have is index-denominated holdings, you may never feel that difference.  The rapidly- deflating giants will be enough to sink the whole index, and your account balance, too.

By Brad Thomason, CPA
 
 
If you want to be wealthier in one year than you are today, mechanically, two basic requirements need to be met.  First, earn a return.  Second, don’t withdraw anything.
 
That’s it.  If both of those conditions are met then in a year you will be wealthier than you are today (at least with respect to your investment portfolio, proper.  I’m ignoring changes to debt levels, home value, business holdings, etc, for purposes of keeping this discussion simple). 
 
Perhaps it seems like it should be more complicated than that.  For some reason we tend to want things which are important to be the result of grand means and requirements.  But in this case, it’s just those two things.
 
There’s nothing much to add.  But it probably is worth an extra minute to dig a little bit deeper into what is there, such as it is.  That’s often a good route to better understanding.
 
First, just take note of the fact that wealthier necessarily means more wealthy.  So to set that up there had to be some wealth to begin with.  Without some basic amount of wealth at the beginning, there’s no means for earning that return.
 
On the matter of withdrawals, to say don’t do any at all is admittedly sort of blunt-instrument-esque.  If you earn ten and withdraw two you are still eight ahead, for instance.  So we don’t actually, mathematically, have to have an absolute moratorium on withdrawals.
 
But if the goal is to get as much wealth growth as we can (for the level of risk incurred), then we don’t want to spend any of the return.  I like to use the term ‘give your money a life of its own.’  This is what I mean by that. 
 
If your investments earn returns, let them fuel future investments and future returns, and higher levels of growth.  Don’t spend them on a fancy vacation or a new car you don’t need.  That sort of thing. 
 
Eventually, when you get to retirement, you will need to use that accumulated wealth to pay the bills.  But inventing voluntary bills along the way works at cross purposes to that larger mission.  Ultimately, I’m not saying don’t go on the vacation or buy the car, by the way, as much as I’m saying if you do spend those dollars, let them come from this year’s paychecks.  Don’t raid your brokerage account to get them.  Not if creating the best possible chance of a successful retirement is your goal.
 
So that’s it.  Two things.  Use your old money to make new money, and then send the new money out to earn some more new money of its own instead of spending it.  Repeat year after year.  Get ever-wealthier.  Retire secure.

By Brad Thomason, CPA
 
 
Oh inflation, you are some tricky stuff. 
 
In principle, so simple that a school child can understand.  In practice, so complex as to befuddle the collective brain power of economists, banking regulators and financial advisors, the world over.
 
Inflation is a topic in the news these days, for the first time in a long time.  I think I saw a headline the other day that inflation is now at a 31 year high, or something like that.  The type of inflation we are seeing right now is, at the moment, generally considered to be a temporary effect of the pandemic.  First there were breaks in production at the beginning of the pandemic, followed by what is essentially a glorified traffic jam right now in global shipping.  Net result, goods can’t get to market, supply goes down, prices go up.  Econ 101 stuff.
 
I think it is fair to say that most prognosticators expect prices to go back to “normal” once the supply issues are resolved.  I guess if I had to take a position (which I don’t, since I’m not an economist), I would say that seems the most likely of the possibilities.
 
But it certainly isn’t the only possibility.  There are a couple of pretty significant data points that don’t fit so cleanly up under that thesis.
 
One is the fact that the price of oil has gone up quite a bit.  And how much of that is attributable to delivery logistics is open for debate.  For several years now oil has been trading in the lower end of its range.  This recent move higher – still well short of the top end of the historical price range – is a somewhat naturally-occurring feature of the oil market.  Yes, I’m sure there’s plenty of banter out there about this group wanting more production, or that country making some other decision.  But if you turned off the news and looked just at the price chart, it wouldn’t jump out at you that anything overly extraordinary was going on.  Commodities fluctuate up and down, over time, just because they do.
 
Oil not only impacts transportation costs, it is also a key input in a lot of products that you wouldn’t immediately think of as petroleum-based (fibers in clothing; corn, by way of fertilizer and tractor fuel, etc).
 
So if oil stays high, even after the supply chain is flowing smoothly again, those costs might still drive, or at least support, higher price levels.
 
Another possible factor is that wages have actually risen over the last few years, and one of the classic definitions of inflation is “more dollars chasing the same quantity of goods.”  So that too argues for some persistence, maybe even permanence.  Who knows?
 
In recent years, the year-to-year rate of inflation has not been particularly high, and I have had some conversations in which people asked me if that was really still something that they needed to worry about.  I’ve always said yes.  That’s gotten me some skeptical looks.  But to think otherwise would be to think that a historical trend that is centuries old had, for some reason, stopped.
 
But I understand where the question comes from.  What we are seeing on the inflation front, at the moment, certainly stands in contrast to what has been going on for the past few years.  Which is the aspect of the topic I want to highlight in this post.
 
Inflation does not follow a smooth line of progression.  Instead, it follows a pattern of surges and pauses.
 
When we model for it we usually use a flat rate each year.  We do this because it is infinitely easier, mechanically; not because it necessary reflects what we expect to happen.  Also, significantly, even though we don’t expect it to be perfectly smooth, we have zero insight into when the surges will come.  So it’s not like we have a better version of the future that we could put into the projections, but just don’t want to mess with it.  Which gets us back to the flat-rate assumption, which we know is unlikely to be right, but is nonetheless the strongest of the imperfect candidates available.
 
The fact that inflation changes from year to year has substantial implications for managing the years of retirement.  Indeed, it is this variable nature of inflation that is a prime reason why we say you need to monitor what happens, replacing projected data with actual results each year, as those results occur, and then reassessing the overall situation. 
 
Notably, the fact that investment result can be variable is actually less of a driver than inflation (and medical spending).  That’s because in retirement, if you have down-shifted your risk level, you won’t have as much variance – if any at all - in your returns.  That is in fact a big part of what ‘lower risk’ means in this context:  higher likelihood of getting exactly the return you think you will get, as is the case with most interest-bearing instruments which are held to maturity.
 
So if we take all of that together, and we put in a meaningful assumption for inflation, then it is not as big a deal when we have a surge like the one we are seeing right now, whether the surge remains permanent or not.  If you made projections five years ago, you would probably view current inflation as something of a catch-up to the inflation that was predicted for the four previous years, but never fully manifested.
 
Bottomline, inflation is still real and still something we have to account for.  Moreover, even though we might put it into the calculations as a consistent force, we should keep in mind that it is not in reality.  Doing so helps to keep things in perspective, and acts as an inoculant against sharing in the hysteria when the media starts writing headlines of impending doom and gloom.  Like rainfall, inflation is just part of the natural landscape.  You can spend a lot of time and effort trying to figure it out and predict it… and likely failing as often as you succeed.  Or, you can just accept that it is, get an umbrella, and shrug your shoulders when it comes along. That’s my preference.  Both for rain, and inflation.

By Brad Thomason, CPA
 
​
Today we’re going to talk about annuities and the people who buy them.
 
Quick point of clarification: I’ll be discussing fixed annuities, not variable annuities.  Variable annuities are a hybrid insurance product and registered security, all wrapped into one.  They are often hopelessly complicated, and frequently maligned because they tend to have high fee structures.  By contrast, fixed annuities are not exactly the simplest things in the world; but they are nonetheless pure insurance contracts that don’t seem like they are trying to be the Swiss Army knives of the financial product world.
 
A fixed annuity is an agreement with an insurance company to receive income in exchange for a lump sum (or in some cases, a series of payments).  Because these are multi-year commitments, there is always some sort of interest being paid, in one form or another.  Frequently there are multiple payout options for a particular contract, at least at first glance.  Substantively however, there are really only two options:  income for life, or income for some shorter period of time (of which there may be more than one shorter period offered).
 
Understanding what is going on here is fairly simple if you recall that the reason insurance exists in the first place is to transfer risk away from the person paying for the insurance. 
 
People who select to receive income for some period less than life (e.g. once a quarter for ten years, monthly for five years, etc) are essentially taking out the contract in order to collect interest.  The rate on annuities is frequently higher than for CDs and Treasury Bonds, so the risk being shifted is the risk of being able to find something that pays a higher rate.  Insurance companies have money managers, bond traders, and so forth already on staff.  By taking out the contract, the annuity purchaser is essentially getting access to the work these people do, rather than having to do it (or find someone to do it) themselves.
 
However, people who choose the income-for-life option are addressing a very different risk:  the risk of living too long and running out of money.
 
Let’s say that a 65 year-old person expects to have enough money to live on for the next 20 years.  On the one hand, that’s a good thing.  Twenty years of apparent security is a lot more than most people have.  Then again, people can and do live past 85.  What happens then?
 
Well, if the person owns an annuity for which the life income option has been selected, the annuity payments will continue past 85.  The insurance company will be legally obligated to keep paying out as long as that person is alive, just as they are legally obligated to replace a car if it gets stolen, or a roof if a tree falls through it.  In the more extreme case, where the person lives another fifteen or twenty years past 85, he/she will continue to receive income far in excess of what the original savings amount could have (safely) produced had the annuity contract not been entered into.
 
Again, the thing that is being insured, in this case, is the risk associated with living too long.  Which may be a very expensive proposition, depending on how long it lasts.
 
What happens if the person doesn’t live past 85?  Same thing that happens if no one steals your car or all of your trees behave themselves.  The insurance company keeps the premiums, and you had years of peace of mind of knowing that they were on the hook if the bad thing happened.
 
So those are the two basic uses of annuity contracts (with numerous variations on the themes, accepted).
 
When you articulate a pair of options people inevitably ask you which is better.  In this case, there isn’t an answer to that question; at least not in the spirit that the question is posed.  Think of annuities, instead, as a tool capable of doing a couple of different jobs.  If you are in the market to complete either one of those jobs (i.e. interest earnings, or income you can’t out-live) then an annuity contract is a tool you want to take a look at.  It might be the best tool for the particular job that you are interested in, and even if not, it might be a sensible one to use alongside some of the other financial instruments/products out there.

By Brad Thomason, CPA
​
 
Do you remember the Six Million Dollar Man?  Even though I was a kid at the time, it was not lost on me that such a sum was supposed to be essentially incomprehensible by a normal human.  Later, when I was in high school, I have a vague recollection of someone associated with the military (a recruiter, I guess) pointing out, in the afterglow of Topgun, that six million is about what the US government had to invest to get a fighter pilot all the way trained.  I think he told us that because he was trying to impress us.  I don’t specifically recall; but I bet it worked.
 
Well, times change, and amounts which once seemed titanic have a way of becoming more mundane.  Six million dollars is still many, many more dollars than I would want to fork over for a barbeque sandwich.  Even with the sides.  But it is no longer a number so big that one simply can’t wrap the old head around it.  You may not have six million dollars.  But the mere idea of it doesn’t utterly boggle the mind the way it did when Lee Majors was jumping around with that springing sound in the background.
  
I was thinking about all of that because the other day I was doing some modeling for a client, and it turned out that over the period of time we were looking at, the investment portfolio was going to need to generate about six million for the plan to work.
 
Now, before you start thinking that this guy must be super-rich and has a massive annual budget to go with it, I’ll go ahead and tell you, he isn’t and he doesn’t.  I can’t give you any personal details, of course.  But his request was more in the form of “what would it take?” rather than “what should I do with my actual savings?”
 
So since it was a hypothetical in the first place, I can give you the broad strokes.
 
There were two basic questions.  The first, if a 55 year old needed an income of $120K a year (today’s dollars), what would that look like by age 70 if inflation were three percent every year?  Second, assuming some Social Security, and investment performance of 7% pre-retirement and 4% post-retirement, how much starting capital (i.e. at 55) would it take to fund that scenario all the way to age one hundred?
 
So we grossed up the income, entered the other assumptions, and regressed the matter back to the conclusion that the balance at age 55 would need to be about $1.5 million. 
 
That’s sort of a simplistic way to look at the matter, and if we had been trying to do more than satisfy a curiosity, we would have used additional methods, looked for corroboration and generally sought to fine tune where we could.  But for this assignment, the basic route was enough to provide the necessary approximation.
 
While looking at the year-by-year results, we also took a look at the total investment earnings over the period.  Over six million dollars, as I mentioned earlier.
 
Let me state that a different way: the whole exercise was going to cost just shy of $9.5 million.  Being alive for decades ain’t cheap, even if you aren’t being extravagant.  Of that total, the initial capital amount plus all of the Social Security was going to take out about $3 million of the total.  So the investments were going to have to earn the rest.
 
The reason I’m pointing this out is because it is very easy to think of investment returns as just some percentage number you drop into a spreadsheet that serves to make the totals end up where you want them.
 
But investment returns represent actual dollars that have to be made, one way or the other.
 
Are you thinking of retirement in terms of “what do I need to be doing to earn six million dollars?”
 
In some respects the whole reason you want investments is because you don’t have to do anything for them to make money.  But that, too, is just a touch simplistic for the real world.  You might not have to toil in the field to make the dividend or interest payment spring into being.  But you do have to be diligent about keeping the capital deployed, and thoughtful about where you put it, so that the risks inherent to the particular investment don’t lead to more exposure than your situation can reasonably abide.  Investment capital represents productive capacity, but it is up to you to steer it to the places where the production can occur.
 
So yea, what’s your plan to make six million dollars (or whatever your number is)?  I think that is a pretty good thing to think about, man.

By Brad Thomason, CPA

I think that in the modern world, among thoughtful persons, the notions ‘money isn’t everything’ and ‘you can’t buy happiness’ are accepted as truisms.
 
At the same time I think it is brutally true that if a person is having money troubles the odds are very high that it will spill over into other areas of life and make it much harder to realize much sustained/uninterrupted joy.
 
So that’s sort of a paradox.
 
Here’s another.  Most people think nothing at all of spending forty or fifty hours a week for forty years to be able to pay the bills that come rolling in every month.  Yet they balk at the idea of having to spend extra time setting the stage to be able to do nothing once they retire.  It’s as if the simple passage of years is supposed to magically take care of all of their needs for two or three decades (or more) after they decide to hang up their spurs.  Or perhaps, they put in their forty at the office, so it isn’t right that they should be asked to put in any more time/effort/thought as payment for some far-distant future benefit.
 
That has always seemed like a mismatch to me, too.
 
Well, we live in a world of paradoxes, and being upset by their mere presence or investing great efforts to attempt to resolve the unresolvable isn’t going to be anyone’s first, best use of time.
 
But I will tell you this.  I’ve noticed that most of the people who end up doing well financially in retirement get there via one of three paths:
 
1.    Those who accepted a lower salary during their working years in exchange for old-style retirement benefits.  Folks like school teachers, government workers, etc.
2.      Those who engaged in some sort of active money making, and did well with it.  This would include business owners, professionals who have their own practice, and what you might think of as active investors like traders, real estate developers, and so forth.  Notably, these people make a lot more money than the average person; and in the really successful cases, manage to keep their living expenses from growing at the same rate as their revenue.
3.       Those who are extremely diligent at being financially responsible, across the broad spectrum of variables, their entire adult life, and who pile up a win one grain of sand at a time over a period of decades.
 
There are other paths to the goal than just these three.  But in my experience, these three are the most common.
 
What I think is significant about all of these is that they inherently require aspects of extra effort, or sacrifice or both.  These people did not get into the win column by accident, nor did they get there without paying a price.  They might not have gone so far as to make their entire existence about amassing wealth and nothing else.  But neither did they ignore it or act on any feelings of being slighted at having to make some sort of investment.
 
Whether they meant to or not, these folks found a way to take up a middle position within the paradox.  They did not let money become everything.  But neither did they lose sight of the fact that money troubles can foster far-reaching pain, and as such, are worth making an effort to prevent.
 
On all fronts, those are good examples to follow.

By Brad Thomason, CPA

​A lot of people are wondering right now what to make of the stock market, and what to do about it.
 
There have been a number of points throughout the history of the last hundred years or so in which one could pile up all the theory and logic in the world on one side of the scale, and what actually happened in the market on the other, and the comparison would not even be close.  Sometimes for good, sometimes for ill, what actually happens in the market can at times be the utter opposite of what should have happened, based on any sensible notion of how the market supposedly works and what it is supposed to represent.
 
Since 2000, you can find entire ten-year periods in which the market gained less ground than it did within the last year.  I’m not sure either one of those facts make sense.  But I am sure that they happened, and that investors were affected by that market activity far more than they were by the mountains of academic papers stating that the market works a different way.
 
One of the features of market activity the past couple of years has been a tendency for a few tickers to drive most of the net growth, while most of the others sort of milled around, netting out each other’s moves within the index measurements.  This past period will be held up for many years to come as an example of why you just want to own the index and not try to pick individual stocks.  If you were picking blindly over the past few years, odds are you would not have picked the relatively few that did the moving.  But just because we have undeniably seen this sort of behavior recently, one cannot assume that it will continue to be that way in any sort of stable form going out into the future.  It might.  But, also, it might not.
 
Moments like these lead to a lot of head scratching.  The question of what to do gets muddled with the question of why did this happen, and the result for a lot of people is a kind of paralysis.  No one knows what to do, so they don’t do anything.
 
When I have conversations with people about this topic I usually suggest that they stop trying to figure out why the conditions are as they are.  You don’t have to be a properly-calibrated theorist to make money in the market.  Or lose it for that matter.  Pondering why is not such a productive act, especially if it isn’t your job to be able to (try to) explain it to others.
 
Instead, focus on the action step.  Because, it turns out, that may be a good bit more straight-forward.
 
If you haven’t retired yet, the standard response to a run up in one of your asset classes is to rebalance.  You still face the question of whether to stick with the allocations you had before the period of increase, or whether to go hunting for some new opportunities.  For instance, a lot of equities in other parts of the world have really taken a pounding during the last 18 months.  So if you do not have an international allocation, now would be a good time to ponder adding one.  Or, you can just use some of the gains from your US stocks to further build other domestic allocations in bonds, real estate, whatever.  But either way, taking some action is probably better than doing nothing.  A market run up provides you with a lot of new data, and new data is generally a good reason to reassess old decisions and plot new actions.
 
If you have retired, I would regard the matter much differently.  If you’ve read any of the other materials on this site you probably know that I generally take the position that the risk of the stock market is not an appropriate one for those who have already retired.  That goes double in cases where the person has reached a level of assets where it looks like they will be able to successfully fund their entire retirement need.  If you’ve won, get off the field.  That sort of thing.
 
Well, if you are already retired, and you had enough to endow your retirement, and you have still been in the market through this run up, congratulations.  You gambled and won.  So what’s your action step?  Guess that depends on whether you want to keep gambling or not.
 
I find that a lot of retirees push back on the idea of exiting the market because they think doing so somehow violates some theory or directive that they think they are supposed to be following.  They’ve read some book or listened to some talking head who has said that one is supposed to remain invested.
 
But if you press these authorities-on-the-matter for substantive reasons as to why that should be the case, most of the answers come down to being able to leave more money to someone else when you die.
 
Now, don’t get me wrong:  I think leaving money to your kids or your church or a favorite charity are all fine goals.  I just question why they would be on par with making sure you have all of your own financial needs covered.  I don’t think they should be thought of as equals; one is much more important, to my way of thinking.
 
So, if you are retired and wondering what to do about the stock market, am I telling you to take the money and run? 
 
I’m telling you that you certainly ought to give it some thought.