$1,000 vs $100,000 Decisions
Mitch Custenborder wrote an article about $1,000 vs $100,000 decisions. Most investors want to see big returns, and who can blame them? However, I’d argue that is a $1,000 concern. The $100,000 thought would be “What return do I need”. Instead of focusing on returns and market movements that you and your advisor can’t fully control, focus on concepts that build and protect your wealth. Topics like; intentional goal setting. Your taxes, what you pay now, how to pay less, and how to protect the wealth you’ve built, or plan to build. I’m not saying investment returns don’t matter, because they do. Instead, spend time on concepts with controllable outcomes that dive long term results.
Defining Your Goals
Goals are uniquely specific to the individual(s). However, just about everyone has or had the goal of retiring. It’s great to tell an advisor “I want to retire at 65 and have an income of $X.XX”, but why is that your goal? What does that age and dollar amount afford you to do? Outside of 65 being close to full retirement age for social security and the Medicare claiming age, why do you want to retire at 65? furthermore, why $X.XX of income? Is that what you actually need? Is that what you were making before you stopped working, or is it an arbitrary number you picked because you think it’d be nice to spend $X.XX a month or year?
My point, be intentional with your goals. Know why 65 is the age you’ll retire. If it isn’t 65, pick an age because of a reason other than “that’s when everyone else retires”. Likewise, have a reason you want a specific income, not just because “it feels like the right amount”. It’s often difficult to imagine our future selves not working. In fact, it’s even harder to picture what we will be doing day-to-day. I hear from almost all of my retirees that golfing, gardening, and watching television gets old in the first few weeks. What they’ve told me doesn’t get old is having a purpose beyond the 9-5. So, understand your why. The why of your retirement age and the income needed to fund your spending goals. Spend time thinking about what your purpose will be after your traditional work ends. These are concepts you can actually control.
Control Your Taxes
If I were to ask what the average consumer’s three largest expenses are, you’d probably say; housing, transportation, and child care/food if you don’t have children. What most people don’t say is taxes. Generally, it’s because taxes are an afterthought. Understandably, because they are taken out before your three largest expenses.
For a couple making $250,000, after federal income tax, social security, Medicare, and Medicaid, your taxes paid are in the ballpark of 30%. Of course, this is before state, local, property, and excise taxes to name a few. Granted, some of these are deductions, but it’s not unrealistic to say that 1/3 of your income is eaten up by taxes. Going back to Mitch’s post, avoiding a morning coffee from Starbucks for $4-$8 seems trivial when you can use your mental bandwidth to plan on ways to reduce your $75,000 tax bill.
Taxes are complicated. Should you itemize or take the standard deduction? Are you taking all Schedule 1 deductions you are entitled to? Are you entitled to any tax credits? You may say, “John, that’s what my accountant or TurboTax is for”. Sure, both are great resources. But, there may be missed opportunities by not planning ahead. Generally, you can’t make 401k contributions after December 31st. As a result, you lose the ability to reduce your income in that tax year through contributions. Moreover, you likely aren’t talking to your accountant or using TurboTax until Mar or April of the following year, which is already to late for most tax planning. If nothing else, talk to your accountant about tax planning for the year to come and ask what you can do to reduce the you tax liabilities in the years to come.
Not All Tax Professionals and Processing Software Are Created Equal
There is a big difference between tax planners and tax processors. generally speaking, a tax planner will work with you throughout the year. At a minimum, they will give you ideas you could implement throughout the year. conversely, a tax processor is a person you give all your information to or software like TurboTax, that simply takes your information and completes your return. In this scenario, there is no planning. You provide the information, they input the data into their software, and you sign the return.
There is nothing wrong with a tax processor or using tax processing software. In fact, it may be a good option for you and your family. All I’m saying, know the difference between planning, processing, and the potential opportunity cost by not using a tax planner.
Protecting Your Wealth
You worked hard, or are working hard to build your wealth. Why wouldn’t you try and protect it? We insure just about everything of value in our lives; our homes, our cars, and our businesses, jewelry, etc. Unfortunately, protecting ourselves, our loved ones, and our wealth is often overlooked. At best, we are underinsured.
The Life Insurance and Market Research Association (LIMRA) estimates that only 59% of Americans have life insurance, and half of those individuals are underinsured. A premature death could financially devastate a family without proper coverage. At a minimum, you should talk to your financial advisor or use an online calculator to determine your life insurance needs. From there, you’ll be able to determine if it makes sense for you to increase, decrease, or keep the same amount of coverage you currently have.
A prolonged injury or illness could be financially devastating to you, and your family. This is where disability insurance can be beneficial. There are two types of disability policies, short-term and long-term.
If you or our spouse are the main income earner, your household budget requires both incomes, and you are unable to work for an extended period of time, having disability insurance should be considered. Having coverage could be the difference in needing to reduce your monthly spending and bankruptcy. An article by Health Affairs stated over 21% of bankruptcy filings were caused by a loss of at least two weeks of work-related income because of illness or injury.
Long-Term Care Insurance
An assisted living facility in Massachusetts costs roughly $67,918. A private room in a nursing home is around $157,899. It is projected that seven out of ten people will require some form of long-term care in their lifetime. If you are planning on leaving a legacy or wanting there to be enough money for your spouse after your death, a few years of long-term care needs can throw a wrench in those plans.
Insurance is about leveraging your dollars, piece of mind, and transfer of risk. In each of these examples, you are most likely looking at hundreds of thousands of dollars in cost or benefit to your family. While these examples may be $X,XXX concerns from cost standpoint, they becomes $XXX,XXX or $X,XXX,XXX planning decisions.
All things considered, your investment returns should be looked at as a means to an end. While important, performance should allow you to achieve your goals, not be the goal itself. Focus and plan for what you can control. Spend less time on $1,000 concerns and more time on big picture concepts.