Sustain - Jarred Bunch

Transcript

step 3: sustain Sustaining your wealth means different things to different people. For some it’s just about not losing money. For others, it’s about making sure their money, their legacy, carries on through generations after they’ve passed away. Maybe it’s maintaining the ability to do what you want when you want. Or, maintaining the same lifestyle you have now in retirement. Sustaining your wealth can mean any combination of those. Before we dive in, let’s put things in neutral for a moment. The sustain phase of your financial life usually begins when you enter retirement. This is the time of your life where you want to enjoy your wealth, to enjoy the life that you’ve spent the last 40-plus years building. Part of ensuring this phase of your life is successful comes from knowing what can erode your money. But the other part comes from knowing how to get more out of your money. How to enjoy your wealth and increase your happiness during what can often be an anxious time in your life. Jonathan Clements, financial writer and author, defined a three-prong strategy for getting more out of your money. While we have chosen to apply this to the Sustain phase of your life, it’s worth noting that this ideology has merit whether you’re investing (growing) money or spending it. Essentially, Clements picked three verbs to help you live a better financial life: 1. Reflect 2. Pause 3. Focus Three Verbs for a Better Financial Life The best way to figure out what truly makes you happy is to spend time reflecting on the past. Think back to moments where you felt consumed with pure happiness. What were you doing? Where were you? Who were you with? This can help you identify the things and people that are most important to you, and how to spend your time. If this feeling struck you while going for a run or volunteering your time, these may be good hobbies to fill your spare time with. If you were with your family, spending more time with them may help you feel more satisfied. If you were on vacation, maybe traveling is for you. Reflecting on what makes you happy and filling your time with those things can make your retirement more enjoyable. reflect Think about this in relation to money as well. What’s an example of a time where spending money made you truly happy? If it was a family vacation, maybe try planning an annual one. If it was donating to an important cause, look for other ways to help charitable organizations. There is plenty of research proving the theory that spending money on experiences rather than material items makes people happier. Put it to the test – when you look back on times where you felt happy spending your money, what were you doing most of the time, buying experiences or things? In addition to the happy times, it’s also a good idea to recall times 2 where you were disappointed in yourself or unhappy. What decision lead to this? Perhaps it was a bad investment or a missed opportunity. Reflecting on these times can help you realize what you may want to avoid in order to maintain a happy retirement. More specifically, take the time to think about a decision you are contemplating before making it. All too often, we are quick to act and slow to think. That’s where we can get ourselves into trouble. One of the first benefits associated with taking the time to pause is that it gives you time to adjust to the information you’ve heard. For example, say you wake up tomorrow morning and the market drops 500 points. Anxiety and fear may prompt you to want to sell in order to get out of the market. This is where many investors can get into trouble, because they act under emotional duress without thinking. But when you pause, it gives you a window where you can breathe and think about whether or not the decision you are tempted to make is the right one. Taking the time to think can make you realize that market hiccups are going to happen, they aren’t a reason to make drastic changes. Selling would also cause you to incur a loss, and miss out on the rebound that is more than likely around the corner. pause The same is true when spending money. We often fall in love quickly with flashy, expensive things and buy them out of impulse, just because we can. You’ve probably made a purchase like this at some point. How did you feel afterward? Did you regret that choice or see that it probably wasn’t the best use of your money? Taking the pause before making a decision helps us avoid mistakes and boosts our happiness – there’s plenty of research that shows waiting to make a purchase or making it a special treat boosts happiness. What we choose to focus on has a large effect on our happiness. Your attitude toward money is important, it’s what drives your actions and general behavior. But your attitude comes from your mindset, from what you choose to focus on in your life. The wealthy don’t enjoy their daily life any more than you, but studies repeatedly show that wealthier people tend to say they’re happy more than those who earn less money. Why? Perhaps it’s because of the way they view their lives. Regardless of how much money they make, most wealthy people don’t let money dictate their lives. They don’t spend their days watching their investment accounts, pinching pennies or stressing over budgets. They don’t spend their days worried that they don’t have enough. focus Obviously, we can’t always control our paychecks. But we can control how we view our life. Don’t trap yourself in a scarcity mindset – a mindset where you feel poor. It’s not just asking how you can make more money. Ask how you can put your money to work more effectively for you. Take the time to write out your good habits, the things got you to where you are today. Have you stuck to them? How you can improve them? What can you do to accomplish more? Make the conscious effort to focus on what actions you are taking to better yourself each day – and stick to them forever – and you may start to view your life in a more abundant way. More 3 than material items, focus on the other riches around you, like friends and family. Focusing on nurturing these riches are important for your happiness as well. Now, let’s examine the other side of the coin. In addition to enjoying your wealth, you need to know how to preserve your wealth. That’s what the sustain phase of life is all about. If you can’t adequately offset the threats to your wealth’s vitality, succeeding in this phase can be hard to come by. In 1982, Forbes published its first-ever list documenting the 400 wealthiest Americans. In 2004, only 50 people from the original list qualified again. Of the people from the original list, 145 had died or deliberately dispersed their wealth, and 205 cited that their wealth had been eroded. The first challenge may lie in acquiring wealth, but it’s evident that a real challenge today is sustaining wealth for long periods of time. We see it time and time again, massive fortunes can bottom out quicker than the time they took to build. Why does this keep happening? Because most people, even some of the wealthiest people in the world, do not truly understand how money behaves. Math vs. Money If there’s only one thing that you take away from this book, it should be that math and money are NOT the same thing. Designing financial strategies based solely on mathematic calculations is one way to guarantee the possibility of failure. When it comes to finance, mathematical calculations are more or less assumptions about tomorrow based on the circumstances of today. Math today will be the same as math tomorrow. But money today won’t be the same as money tomorrow. It was Newton who stated that an object at rest will stay at rest and an object in motion will stay in motion. This is extremely relevant to math and money. For example, say you went to the store today and bought five bananas. Then you went back two weeks later and brought home five more bananas. How many bananas do you now have? The answer isn’t 10 bananas. Even though according to math, it should be. Over the last two weeks, physical and environmental properties have been working against your bananas to erode them. You may not have any bananas from the original batch that are still edible. So, you may still only have five bananas (the new ones you just went to the store and bought). Now let’s talk dollars. If you have $10,000 today and you need $20,000 in the future, you can’t simply add $10,000 to what you have and get the same result every time. Just like bananas, money has uncontrollable economic factors working to erode it, factors such as taxes, inflation, 4 interest rates and more. They constantly cause the value of money to change. On the other hand, the mathematical solution to the question what is 10,000 + 10,0000 has been, and always will be, 20,000. That’s because math is a stagnant, proven science. It’s not an object in motion, there’s nothing working to erode it. Money is not like math. Rather, money is an object in motion. Money is like a banana. The 10 Biggest Wealth Eroding Factors 1. Inflation. This is the general increase in the price of goods and services. In January 1980, the average cost of a new home was $72,400. In January of 2016, the average cost was $365,600. Prices for milk, gas, stamps and more have continued to increase over the years as well. This is because the dollar has gotten weaker over the years; it was stronger in the 1980s. When the government pumps large sums of money into the economy, it causes the dollar to weaken. More than likely, inflation will continue to rise in the future, the dollar will continue to get weaker. Today, and for the rest of your life, your money must earn a rate of return above inflation just to maintain its purchasing power. 2. Taxes. Did you know that when the Federal Income Tax was first enacted, it was only meant to be temporary? Its main purpose was to help fund the Civil War. But in 1916, the 16th amendment to the constitution ratified it into law. This is a tax that everyone is required to pay by law, with the top marginal tax rate fluctuating right now around 40%. On top of income tax, you are also subjected to state and city taxes, sales tax, real estate tax, even estate tax depending on your net worth at the time of your death. Minimizing the amount of money taken out of your pocket increases your ability to create wealth. 3. Technological Changes. The last 20 years have seen some of the most radical changes in technology. It seems some new advancement is made almost daily. You now essentially demand to have access to the latest and greatest technological gadgets. But for consumers, a world with the potential for unlimited technological growth can mean bad news for your money. You either have to pay to keep up, or get seemingly left behind. 4. Planned Obsolescence. Many products are not designed to last long. Appliances, cars, clothes, shoes, gadgets, almost every consumable good is not made to last forever. Some of this is done on purpose, so that you have to keep buying new products. And it’s not that they just break, rip or fall apart – that would be too easy. Companies are regularly designing bigger, better, glossier versions to replace old ones. This is how they get you to buy, even when it’s not out of necessity. It’s the same mindset as technological changes – purchases can be out of necessity or want, but you’ll either pay to keep up or feel like you’ve been left behind. 5 6 5. Financial Expenses. This is how much it costs for you to hold your money in different financial accounts. The financial industry is full of costs, both knowable and hidden. For instance, some banks require you to maintain a certain minimum in your account, or they can charge you a fee. Investing is probably one of the most oversaturated services when it comes to fees. They’re everywhere: up-front fees, 12b-1 fees, expense ratios, front-end loads, back-end loads, administrative fees, trading costs, commissions, and more. Any advisor you engage or investment you are considering should not only be 100% transparent about the cost, but the return value should justify the fee and the strategy should be tailored to offset it. 6. Lost Opportunity Cost. We already talked about this in Grow, but it’s worth repeating. Since we just talked about taxes and fees, let’s consider the following: You can either pay $2,000 in tax on an investment for 30 years or you can invest $2,000 annually, earning 6% growth. Paying $2,000 in tax over the next 30 years doesn’t merely cost you $60,000, but rather costs you $167,603; the amount of money you could’ve had, had you invested the $2,000 instead. 7. Interest Rate Fluctuations. Right now, we’re holding on to the longest pause on an increase in interest rates since before 2009. And everyone is just waiting for the scales to tip. When interest rates increase, this means that loaned money will cost you more, the difference between paying on a mortgage with a 3% interest rate or a 6% interest rate. When it comes to investing, interest rates may cause certain assets, like bonds, to rise and fall. If you’re dependent on maintaining a certain interest rate, you have to be able to offset these fluctuations. 8. Stock Market Fluctuations. Remember this – average returns mean nothing. You don’t take home average returns. You take home the compound return. This return is affected by the daily fluctuation of the market. It can rise or fall, eroding your wealth in the process (see the section later on about risk versus volatility). For example, say a portfolio worth $100,000 experiences a 50% loss. It’s now worth $50,000. If you experienced a 50% gain the next quarter, your portfolio is only worth $75,000 (50% of $50,000 equals $25,000). While your average return is 0%, you actually experienced a growth rate of negative 25%. Markets fluctuate daily, so it’s important to understand how to mitigate this volatility. 9. Interest Charges and Loans. These are direct costs for money you have borrowed, whether it is credit card interest, mortgage, auto loan, or other revolving credit. This is a direct expense and drawdown to your ability to save or invest. At least with mortgages you can deduct the interest and rates are often the lowest you can get versus other types of loans. However, it’s still a cost and your home is not an investment. Remember our previous discussion on mortgages? Credit cards are carrying interest rates in upwards of 15%. If our money continuously earned 15%, we would all be better off. 10. Lawsuits. If you’re not protected from creditors and lawsuits, you’re walking around with a target on your back. If you remember, we told you back in Protection that it’s is about more than just “insurance.” It’s about protecting your life’s work from being taken from you. What if tomorrow morning you get in a car accident, and the other driver is injured so badly they can never work again? If their lawyer determines they could’ve made an additional $2 million over the next 30 plus years, who pays that? Well, your insurance policy states the insurance company is only on the hook for $500,000 in liability coverage. Guess who they’re going after for the other $1.5 million? You. Eroding Factors in Retirement There are even eroding factors that will specifically affect your retirement: Duration of Retirement. How long do you anticipate your retirement lasting? You may retire at 55 or 73 and that makes a big difference. How long you plan on pulling from your assets impacts how much you can take and how much you need to save. Distribution Rate. A recent study by Merrill Lynch surveyed wealthy individuals and 20% of individuals did not know what distribution rate would enable them to sustain their wealth indefinitely. Nearly a quarter thought that a 10% distribution rate was reasonable and would last forever. Only about 1/6 had a more realistic distribution rate of 3% or lower. Most financial institutions site a 4% or lower safe withdrawal rate in order to have the best chance of sustaining your wealth. Children and Grandchildren. Having children and grandchildren is a wonderful thing. I have three children and they are the absolute joys of my life. As they get older, they get more expensive. Even when you enter your retirement years they can be a financial drain. It’s not that you won’t happily help them but you need to make that part of your financial model. How will you handle it should it happen? A friend of mine had to adopt his daughter’s two young children just as he was entering retirement. That’s a significant financial commitment that is affecting his retirement. You don’t know what will happen with your children, grandchildren, or spouse. Stress test it with your financial model so that if it happens you won’t be financially devastated. Legacy. Also, consider what you want to leave behind. What is your legacy? This is an area you really need to search inside yourself to figure out. Each person is different – money for the children, a charity, a cause, or nothing (spend it all). There’s no right answer, it’s just what you want to do. But it’s definitely part of your financial life. 7 Risk. While risk is an issue throughout your life, it becomes more pronounced when 1) you are older and approaching your retirement years, and 2) when you have a lot at risk. The entire process we’ve discussed in these books has been about managing financial risk in your life, no matter how old you are. From protecting your assets (which includes you), to your investments, to maintaining financial balance. If you’ve done everything correctly from the first three books, then this part will be easy. You may need to look at tilting your investment style more conservatively, or reallocating to allow for more income. At this point you should have your buckets of assets from which to draw. For investments, one of your biggest risks is sequence of return risk. That’s the risk of your investments being caught in a downturn at a critical time when you need them most. For example, what happens if the market crashes when you are 67 and retired? What about when you are 70 or 75? This is where having a defined investment policy statement and buckets of “cash” will allow you to weather the storms you may encounter. See the section on a strong financial position later in this booklet. Communication. This is a critical area that most people don’t even consider. Your loved ones should know where your most important financial information lies. Introduce whoever may be taking over your estate, not matter how small it may/may not be, to your financial advisor(s). Let them know your plans, wishes, goals for your assets. It seems a bit morbid for some people but it’s a critical conversation to have and to maintain as you get older. Communication plays a role in planning your legacy as well. It’s not enough to state your wishes out loud. You need to put them on paper and protect them by communicating your wishes through a will or a trust. The 7 Rules for Building and Sustaining Wealth Despite what some people will tell you, success doesn’t always happen overnight. Very rarely are substantial amounts of wealth built overnight either. Remember that slow and steady wins the race too. Wealth that is built the right way, gradually over time will typically have a better chance of enduring than wealth that springs up in big pops. These seven rules make up the foundation for sustaining your wealth: 1. 8 Assemble a team. One of the most important steps in enhancing your chance of long-term wealth is assembling your team who will help you accomplish this. These should be your most trusted advisors. All of these advisors should know one another, and they should have open communication between them. Discussions should happen before changes are made in one area of your financial life, to evaluate their overall impact on your ability to reach your goals. Your family should know who this team is as well. 2. Establish a purpose. It’s important to establish the purpose of your wealth. And each bucket of money will have a different purpose that it’s serving, such as education, business opportunities, retirement, short-term goals like a house or vacation, etc. This helps clarify the questions of what your money is doing and why. It can also help you stay more disciplined. For example, if Money A’s purpose is for retirement, you know that you shouldn’t use it as part of a down payment on a house. That should come from Money B, whose purpose is to fund short-term goals. 3. Understand the difference between risk and volatility. Risk simply means that probability that your investment will lose money. This is a common disconnect among investors. For some reason, many people think that to reap big rewards, you have to take big risks. But taking big risk just means a big chance of losing money. It has no direct effect on your returns. Volatility refers to the amount of fluctuation in a portfolio. When volatility increases, returns become more unstable. This erodes the investment’s compound return, the return you get to take home. Volatility has a direct impact on your return. Again, risk doesn’t directly impact your return – volatility does. You must mitigate volatility in order for your money to survive. 4. Time IN the market is what matters. Stock picking and market timing are common behaviors that plague investors and wreak havoc on their wealth. You can’t treat the market like an opponent you are trying to defeat. I promise that you will rarely get in or out at just the right time, you will never consistently pick a winning stock. Doing so can cause you to get burned by losses when getting in too early, and to lose large gains associated with recoveries. Market forecasters will fill your ear, but rarely your wallet. Sustaining your wealth means learning how to move with the market instead of fighting it. 5. Little changes can produce big results. Most people feel like they have to make huge adjustments in order to reach their full financial potential. But that couldn’t be further from the truth. For example, say you make $100,000 a year and are saving 10% of your salary every year into a portfolio that is earning a 7% return annually. Doing this for 35 years produces a gross value of $1,479,134. What if you increased your savings rate by 1%? The same scenario would produce a gross value of $1,627,048. That’s a difference of $147,914, just by saving 1% more of your money. 6. Avoid sudden wealth syndrome. Many people will experience coming into large sums of money quickly. An inheritance is a good example of this. Large commissions and bonuses could also be an example. There is a lot of temptation to spend that money quickly and not always the thought of how to responsibly utilize or grow that money. How many stories have you heard about someone who came into a large sum of money and squandered it quicker than they got it? If you anticipate you may encounter one of these situations at some point in your life, you should take that into consideration when designing your strategy. 9 7. Think like the wealthy when it comes to estate planning. The wealthy have three main goals when it comes to estate planning, 1) Maintain satisfactory streams of income, 2) Protect their wealth from creditors forever, 3) Keep their money outside the wealth transfer system forever. Trusts are a great way to accomplish this. And no, you don’t have to be “wealthy” in order to have a trust. Anyone with a sizable net worth would be wise to consider one. There are many benefits associated with a trust, its first being the ability to avoid the time, cost and stress of probate. Another key element is that all your assets are coordinated according to one set of instructions – your wishes for how you want your legacy to be distributed. The inheritance also passes to your beneficiaries free from estate, gift and even federal income taxes. Assets that are owned by the trust protect both you and beneficiaries from creditors, spouses, divorce and future death taxes. An Engine for Sustainable Wealth Our Efficient Capital Management Matrix was introduced to you as an engine for growth in Book 3. It will also fuel a powerful way to sustain your wealth by using savings, investments and permanent life insurance (cash value = safe money) cohesively. This can help you achieve two of your most important goals – producing greater retirement income and leaving a legacy for your loved ones. To demonstrate how this is cultivated by your ECM as opposed to traditional planning, let’s explore the story of Person A and Person B. Both Person A and Person B have $1 million of investible assets, but Person A has a $1 million term life insurance policy and Person B has a $1 million permanent life insurance policy that builds cash value. They both want to preserve a $1 million legacy for their loved ones. Person A does things the traditional way, while Person B uses the ECM as his formula for sustainable wealth. Based on the table below, what we can infer is that by using the ECM methodology, Person B essentially doubled their net cash flow, drastically decreased their tax cost, spent down their asset and still had $1 million legacy to leave their loved ones. The Efficient Capital Management Matrix The Traditional Way* / Person A Year Net Cash Flo w Legacy Value The Efficient Capit al Management W ay* / Person B Problems: Year 1 Net Cash Flo w Legacy Value Inflation 1 2 3 4 17 18 19 20 Totals $32,500 $32,500 $32,500 $32,500 $32,500 $32,500 $32,500 $32,500 $650,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 Sequence of Returns Risk Disinvestment Risk Law of Large Losses Taxes 1 2 3 4 17 18 19 20 Totals $62,743 $63,272 $63,828 $64,411 $75,264 $76,419 $77,632 $78,906 $1,969,757 $1,938,002 $1,904,659 $1,869,649 $1,218,507 $1,149,189 $1,076,405 $ 999,982 Solutions: Increased Spendable Income Minimize Sequence of Return Risk Limit Disinvestment Risk Maintain Legacy Live Your Ideal Lifestyl e $1,393,164 *This hypothetical Wealth Distribution Scenario is for illustrative purposes only. Net cash flow assumes the full basis for all assets. Other assumptions include a 20-year study period, $1,000,000 asset value, 5% rate of return and a 35% tax rate. This is not meant to be construed as investment or legal advice. You should consult a professional concerning your circumstances. 10 If you would like to learn more about how using your ECM can help you succeed today and in the future, contact one of our advisors! A Strong Financial Position Supports a Future of Sustainable Wealth Money is an object in motion. Between inflation, taxes, fees, debt, retirement and life, your money is constantly bombarded by factors attempting to erode it. You have to have defensive strategies in place that are designed to mitigate the impact of these forces. Otherwise, not only does it become harder to sustain your wealth, but it becomes harder to reach your full financial potential. It’s worth noting that you can potentially acquire more money over your lifetime by offsetting the factors we have discussed here, than by trying to find the right investments that you hope will yield the highest returns. In order to do this, your mind has to shift from financial planning to financial positioning. While it’s true that those who fail to plan, plan to fail, even the best laid financial plans can’t predict what will happen in the future. When life happens, you have to be in a position to effectively react. Your financial model keeps you in a position where you are prepared for the unknown, where you’re practicing proactive risk management. This better reflects what money actually is: A constantly changing object in motion, as opposed to traditional financial thinking which often misses this concept. Here is what you can expect from your financial model: ·· ·· ·· ·· ·· ·· ·· ·· ·· ·· Maintaining an optimal financial position A well-coordinated and organized strategy that is monitored and updated daily The ability to monitor your financial health daily Evaluating your economic (risk) exposure based on your changing information Mitigating eroding factors such as taxes and fees The ability to stress-test financial decisions before implementing them Creating a clear and concise investment policy statement The ability to evaluate your lost opportunity cost and recapture lost dollars Empowering you to make smarter financial decisions An enhanced ability to reach your full financial potential Life is happening all around you. Build a financial model that can withstand it. 11 Unleash Your Full Financial Potential Your financial journey is comprised of the three stages that we have discussed throughout this course. They are the guiding principles for your financial evolution, the evolution of your life. Your foundation has to be rooted in protecting your life’s work. Addressing this first phase is very important. You can’t successfully make it through the other two without first doing this. Life is a constant cycle of growth. This is why you have to ensure that you know what you stand for along your journey, that what is most important to you is guiding your financial decisions. Money craves discipline, rules and framework within which it can prosper. When growing your money, think of it as your child. Treat it like one, nurturing it along the way. As your money starts to mature, it’s important that you deflect threats to its vitality. It shouldn’t lose its velocity either; after all, money is meant to be an object in motion. Your money has to outpace the world around it in order to survive. You are now equipped with the foundational elements to successfully navigate through the three critical phases of your financial life. Honing the concepts that we have discussed here will put you in the driver’s seat of your money. You will be empowered to make smarter financial decisions, and you can start to put your money to work for you. More importantly, you will gain the ability to reach your full financial potential, to live the life you want. 12 about jarred bunch consulting As an independent Registered Investment Advisory firm, our team is here to help you reach your full financial potential. To help you live the life you want to live. Our job is to educate, guide and counsel you toward that end. Free from the Wall Street BS, we act in your best interest as your fiduciary. Every day, we roll up our sleeves and go to work for you. The advice and solutions we render to our clients are not only at the highest degree of professional standards, but are also the same that we would render to ourselves and our families. Welcome to the smarter, faster, non-conforming, personal wealth building, always got your back, Bunch. contact us today to get started! www.JarredBunch.com | [email protected] | 1-855-288-5588 4830 W. Kennedy Blvd, Ste. 450, Tampa, FL 33609 9000 Keystone Crossing, Ste. 450, Indianapolis, IN 46240 DISCLOSURES Please remember to contact Jarred Bunch Consulting, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/ or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Jarred Bunch Consulting, LLC effect any transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.