Finance & flexibility? The link between yoga & your money

 If you think yoga and finance have nothing in common, you are wrong. It may not be obvious at first glance, but let me explain. On June 1st, Kim and I participated in a 90-minute Bikram Yoga session on the lawn of the Detroit Institute of Arts with another 350 other people. The idea was to share time together and nurture our body while enjoying the sun. 

Bikram Yoga is one way for me to release and renew. There’s such a sense of caring that goes into the each move, such deliberate breathing, and a centering of the mind that takes place.  Whether you’re practicing under the hot sun or in a 104-degree studio, water takes on a whole new meaning. It never tastes as nourishing and refreshing – so much better than sitting in front of the TV and watching the game.  

I usually feel so much better after a class, a feeling that lasts for up to 2 days. Yoga may sound like an easy, funny looking exercise routine, but I assure you this is tough stuff!  My entire body gets stretched and almost massaged from the 26 movements and two breathing exercises held in this class. By the end, you feel a huge sense of accomplishment ... kind of like a cleaning at the dentist or an annual review with your financial advisor. Yes, yoga and finance can relate!   

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Could The Dollar Lose World Reserve Currency Status?

 Clients have been asking about the potential that the U.S. could lose the role as the world reserve currency.  To really understand the issue, you need to know what a world reserve currency is and what advantages (if any) it gives the U.S. to be the world’s current leading reserve currency. 

World Reserve Currency: Protection & Stability

Almost all countries hold foreign financial reserves, whether they are in bonds or money markets, denominated in another country’s currency. In addition to this, countries will usually hold gold and special drawing rights with the International Monetary Fund. These reserves help protect a country’s currency from large swings in valuation. 

For instance, let’s say that large amounts of Japanese Yen were being sold on a global scale. The policy makers in Japan might not like the idea of their currency being depressed due to outside forces.  One strategy they might use to maintain the value of their currency is to tap into their foreign reserves (like U.S. dollars) and begin selling dollars and buying Yen.  This usually would have the effect of stabilizing the value of their local currency if they held enough U.S. dollars to make an impact on the Yen market.

Currency Liquidity

Think for a second about how many U.S. dollars the Japanese government would need to sell in order to have an impact on a global scale for the Yen.  The number is probably billions if not tens of billions of U.S. dollars. What this means is that for a reserve currency to have relevance and make sense for widespread use, it has to be very “liquid”.  Liquid means that the currency can be sold quickly and readily without having too much of an impact on the overall price.  The U.S. dollar is simply the only currency in the world currently that can make this claim. 

Alternatives to the Dollar

Some other currencies used today to bolster foreign reserves are the Euro and the British Pound/Sterling. The Euro is becoming more popular, but is still a very distant second to the U.S. dollar in terms of overall use.  In fact, recent estimates suggest that the U.S. dollar comprises 60% of foreign reserves with the Euro making up 20%.  With the recent economic troubles in Portugal, Spain, Greece, and Ireland, most experts don’t see the Euro overtaking the dollar anytime in the near future.  As far as the British Pound/Sterling goes, it would seem that the British economy is simply too small to support massive global use.  This goes back to my earlier point on liquidity.

A dark horse in reserve currency use is the Chinese Renminbi or Yuan.  The Chinese economy is certainly big enough to provide enough liquidity to global markets. However, due to tight Chinese government controls and some outright manipulation, other countries have shown hesitancy to adopt this currency on any large scale. So it would seem that the U.S. Dollar is fairly “safe” from being replaced as the world’s primary reserve currency for the time being, but why does it matter if the U.S. dollar is the world reserve currency, does it offer any competitive advantages?

Potential Advantages for U.S. Dollar as Currency Reserve

There are likely two main reasons the U.S. wants to remain as the world’s leading reserve currency. Since much of the reserves other countries hold are in the form of Treasury Bills, this has the effect of keeping a nice steady demand for bonds issued by our government.  This demand has helped to keep interest rates relatively stable over time.  Also, since the U.S. dollar is so widely accepted, American businesses do not usually need to arrange currency swaps when doing business internationally. It’s not clear what percentage this potentially adds to the bottom line for U.S. corporations, but several economists have said somewhere between 1-3%. 

There is potentially a third benefit, referred to as “seigniorage” which is the profit a country makes in the difference of issuing currency versus production costs. Experts are deeply divided on whether this is significant or has a nominal impact. For more, take a look at the Federal Reserve’s white paper on the topic. Ultimately, if the U.S. dollar is less widely used, there will be some unpleasant ripple effects, but by no means would it likely be the doomsday scenario you might have heard about from the media.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-024135

Retirement Spending: Is My Savings Goal Too High?

 Determining how much you actually spend each month is really the first step in dialing in on how much money you need or want in retirement. (If you missed it, check out my last blog on this!) With so many payroll deductions (taxes, 401k savings, medical premiums, insurance, etc.) it can be pretty staggering when you crunch the numbers and see what you’re truly spending each month. It’s probably much less than you thought!  The good news is that several of these payroll deductions will disappear or be significantly reduced when you retire.  Let’s dive in and take a look at some of those items to shed some light on what might be your “number” for desired retirement spending.

The Good News on Taxes

There’s a good chance your tax liability will be lower in retirement.  Two items that go away upon retirement are Social Security and Medicare tax (FICA).  As an employee, you are responsible for kicking in 6.2% to Social Security and 1.45% to Medicare – a total of 7.65%. Think about it, that’s $7,650/yr if you earn $100,000 annually.  Kiss those taxes goodbye on your last day of work. 

When you begin to receive your Social Security benefit, the benefit may or may not be taxable, depending on your adjusted gross income (AGI).  However, most clients see at least some taxation of benefits. Per SSA.gov, the maximum amount of your benefit that can be subject to federal tax is 85%. Meaning if you were receiving $35,000/yr in benefits, the maximum taxable amount that would be included in your AGI would be $29,750 ($35,000 x 85%).  In addition, most states, including Michigan, do not tax Social Security benefits.

Pension , IRA, qualified retirement plan (401k, 403b, etc.) distributions will be included in your income for the year on the federal level – these income sources are treated as ordinary income.  This is why being cognizant of your current and future tax bracket is so important in proactive tax planning.  A few years ago, Michigan began taxing these income sources on the state level, but the amount that is included in taxable income for the year is dependent on your age and total benefits.

Forget Saving for Retirement

One of the many benefits of being retired is that you no longer have to save for retirement!  The maximum 401k contribution for someone over the age of 50 in 2014 is $23,000. We commonly see clients saving the maximum while in the latter half of their working years.  For a couple who both maximize their retirement plans at work, we are talking about a $46,000/yr outflow that will no longer exist upon retirement.    

Getting Rid of Debt

The goal of many is to be debt free (or close to it) upon retirement.  If your mortgage (not including taxes and insurance – unfortunately those items never go away) is $1,500/mo, this is $18,000/yr in savings … a huge amount if you are able to eliminate your house payment prior to retirement.  With rates as low as they have been, it often makes sense to keep the mortgage because it’s “cheap money”.  However, being debt free in retirement is a very personal decision and is typically more of a “what makes you sleep better at night” decision rather than a strictly “numbers” decision.

Adding it All Up

When you factor in what you are saving for retirement, taxes, and having a mortgage, many clients are shocked to realize that those items can eat up close to 50% of total gross income.  So, if a client has joint income of $200,000 we may propose $100,000 in retirement spending (when we do, they often look at us like we’re crazy).  But if we back out their total 401k savings of $46,000, Social Security and Medicare tax of $15,300 ($200,000 x 7.65%), their $1,500/mo or $18,000/yr mortgage and a total tax reduction of approximately $10,000 because less total dollars are being generated, that is a total of almost $90,000 that will no longer exist in retirement.  So what does that mean?  It means the couple can live the equivalent of their current $200,000 lifestyle on $110,000 in retirement – pretty close to the suggestion of $100,000 in retirement spending! 

For this reason, I cringe when I hear advice like, “You need $2,000,000 to have a fighting chance at retiring,” or, “You will spend 70% of your current income in retirement.”  Everyone’s situation is different and many folks are probably living on a heck of a lot less than they actually think.  If you’re retiring in the next 10 years, I urge you to walk through this process. Really start thinking about what you want to spend when that time comes.  It will help you plan accordingly and will hopefully significantly improve the chances of you reaching your retirement goals.

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Any example is hypothetical in nature and is used for illustrative purposes only. Individual cases will vary. Every investor’s situation is unique. Please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Investors should consult a tax advisor about any possible state tax implications. C14-026884

Center Makes Crain's List of Top Money Managers

 For the second consecutive year, Center for Financial Planning has been recognized as one of the Detroit area’s largest money managers. The annual Top 25 recognition is a big deal to us because it means we are making our mark in southeast Michigan and beyond.

Center Partner Melissa Joy says the recognition puts CFP in great company.

We have never set a goal to be the largest firm around, but our size and community footprint here in Michigan helps us to deliver world-class financial planning service to an exceptional group of people – our clients. To us, success isn’t measured by dollars and cents, but by the lives we touch.”

Crain’s list is a compilation of money managers in Wayne, Oakland, Macomb, Washtenaw and Livingston counties. To see the complete list click here.

Criteria used to determine the Top 25 Managers is based on assets under management with discretion exclude master trusts, directed trusts, options, custodial accounts and advisory accounts over which no direct investment responsibility exists. Information was provided by the companies or from Form ADV. It is not a complete listing but the most comprehensive available.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. C14-028649

Retirement Spending: Finding Your Actual Cost of Living

 When you’re approaching retirement, it can be hard to determine how much you would like to spend when you stop working.  It’s a scary thought for most.  You wonder: Have I saved enough?  Is what I want to spend reasonable and safe?  It can seem a bit overwhelming, but hopefully part one of this two-part blog series will help to simplify that discussion. 

How much does my lifestyle really cost?

Start the conversation by figuring out your current cost of living. To illustrate, look at an example of how this figure might be much less than you think.  Tom and Mary are both age 58 and plan to retire at age 62.  The discussion of retirement planning is becoming increasingly important to them as they near retirement.  Tom works for Ford and earns $100,000/yr and Mary works as a teacher earning $55,000/yr.  Tom and Mary are great savers and each contribute the maximum to their 401k each year ($23,000 each, $46,000 total for 2014).  They have health insurance through Mary’s work and pay $400/mo for excellent coverage – they also save $200/mo towards a Health Savings Account (HSA) to be efficient with their out-of-pocket medical expenses each year.  They each pay into a group disability policy that costs $100/mo in total.  Of course, we can’t forget about taxes.  In 2013, they paid $12,000 in federal tax and $4,000 in Michigan state tax. Social Security and Medicare (FICA) cost them $11,858 (7.65% on their income).  Below is a breakdown of these payroll deductions on an annual basis:

Assuming no additional dollars are saved beyond the 401k, Tom and Mary are actually living on $72,742/yr ($155,000 – $82,258) – only 47% of what they are earning.  This is a great starting point but this is where we start to explore a bit by asking questions like: 

  • Are they happy with their current lifestyle? 
  • Do they feel constrained right now and want to spend more on things like travel in retirement?
  • Or, do they already travel and do the things they love on their $72,742/yr lifestyle? 
  • What personally meaningful things do they want to accomplish once they are retired? 

These kinds of questions open the discussion surrounding retirement spending and goals.  It is also worth mentioning that there will be several expenses and payroll deductions that will ultimately disappear or significantly reduce upon retirement.  I will go into detail on these items and show how things change in retirement in part two of this blog series – stay tuned!

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Any example is hypothetical in nature and is used for illustrative purposes only. Individual cases will vary. C14-026770

Elder Care Planning: Assisted Living

 In last month's post we talked about how most older adults would prefer to age in their own homes (age in place). This is often possible for a lifetime, but for some, physical and/or cognitive decline makes it necessary to look at housing options that provide care on-site. According to the recent Legg Mason study on Aging Clients, the national average cost to live in an assisted living community is $3,500 to $5,000 a month.

As we meet with our clients, we find that there are several reasons why looking for an assisted living community makes more sense than trying to age in place. These reasons can be reviewed looking at the 4 "C's": Comfort, Convenience, Companionship and Care.

Comfort in Knowing Care is Available

An older couple may find that they can no longer safely assist each other.  One person may require more assistance than the other, but caregiving can be extremely difficult and can often put the healthier spouse at risk for harm.  Or a widowed client, without family able to help, may find that bringing care into the home becomes too cost-prohibitive as the need for more hours of assistance escalates.  Just knowing that a qualified care provider is available within the community at all times can provide comfort in the way of peace of mind.

Convenience of Resources

Assisted Living communities, while they are not "home," can provide conveniences not available to those who choose to age in place.  Meals are provided, so it is no longer necessary to cook.  Care providers are available on-site.  And things like transportation and organized trips are readily available.

Companionship Right Outside the Door

One of the biggest challenges for older adults can be socialization and companionship.  An assisted living community allows individuals the space to be by themselves, when and if they desire. But when having a conversation with someone is desired, it is literally right outside the door. Community rooms, small gathering areas, and organized social activities are readily available, providing a way to stay engaged and connected.

Care is Always There

The ability to make a call and have a care provider available in a moment's notice can be invaluable for older adults, especially those who are alone.  Knowing that help is near can also ease the burden of worry.

If you or someone you know thinks they may need to look at an assisted living community in the future, I recommend (as always) planning ahead.  Begin by researching assisted living communities that will fit your specific needs:

  • Vicinity to your home community and/or to family members
  • Services provided by the community fit your needs
  • Comfort level with the community and the types of residents

Include your family members in the discussion – consider potential challenges, resources and options. And last, but not least, take a look at cost.  Discussing the financial impact of future housing decisions with your financial planner is important and can help ensure financial independence for a lifetime.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-028648

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Richard Marston on Investing for a Lifetime

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 What does a financial planning geek do for fun? He visits the Wharton School of the University of Pennsylvania for a day of lectures! The first part of the day was spent hearing from Professor Richard C. Marston. Professor Marston is the James R.F. Guy Professor at Wharton, a graduate of Yale, MIT, and Oxford (on the east coast they would call him “wicked smart”). Moreover, he has taught asset allocation for over twenty years and in 2011 wrote the book Portfolio Design: A Modern Approach to Asset Allocation (Wiley, 2011). Needless to say, it was a thought-provoking and worthwhile day.

In two lectures -- the first taken from his new book, Investing for a Lifetime” Managing Wealth for the “New Normal” and the second titled “Investing with a Fifteen Year Perspective: Past and Future” – Marston shared what he believes to be some “best practices” in savings and investing. He talked about choosing an asset allocation focusing on stocks when you are still years from retirement. You then gradually shift towards a 50/50 portfolio while saving 15%-20% of income during the accumulation period. And once you reach retirement, he discussed spending 4% of accumulated wealth. My sense is that these are consistent messages that our clients have heard from us over the years. 

During one of the wicked smart professor’s lectures, he shared that as he gets older, he has a greater appreciation for the role that investor and advisor behavior plays in ultimate investment success.  For example, he believes in using active managers. He also believes that selecting the right investments is important (and he is paid by several family offices to do so), but behavior such as letting fear or greed control actions plays a critical role as well.

Professor Marston’s recent work also focuses on determining a savings goal for retirement. A common rule of thumb is that investors must save 8 times their income before they retire.  So, if you earn $100k, then you need $800k saved at retirement.  Professor Marston was intrigued by the simplicity of the general rule and decided to put it through his own analysis. In the end, his analysis suggested that 8 times income is probably too low for most people.  His own conclusions, obviously depending on the exact assumptions, ranged from 11.5 to 18.4 times income. In his opinion, your savings goals will vary widely depending on two main factors:

  • If you are single: Your savings must be higher because a couple will receive more in social security benefits at the same earnings (consider it a marriage premium).
  • If you earn much more than $100k: Your savings rate needs to be higher because social security plays a lessor role in your retirement income.

As a quick aside, I was pleased to hear Professor Marston include and emphasize the importance of social security in the retirement planning analysis.  Without it, the savings rates above would need to be increased significantly.  I invite you to read our many previous posts on social security and let us know if we can help answer any questions.

On the flight home from the lectures, I read Professor Marston’s newest book Investing for a Lifetime (Wiley, 2014). It’s about making saving and investing understandable to the investor.  Probably the most important statement, that occurs early and often, is SAVING IS MORE DIFFICULT THAN INVESTING. Meeting your life goals, such as retirement, is much more dependent on our savings than getting another 1% from investment portfolios.  As I have written in the past, saving is much more than dollars and cents; it takes discipline and perseverance.

For our long-time clients, the book would provide a good refresher on many of the concepts we have discussed and encouraged over the years.  If you have a family member or friend starting their career or looking to take more control of their finances, Professor Marston has the ability to make the complex simple and I think his books would be a wonderful gift.

The second part of my Wharton School visit was spent hearing from Professor Christopher Geczy, Ph.D., another wicked smart guy.  I will leave that review for another post.  If you like Alpha, Beta, Correlation coefficient, Standard Deviation, R Squared, Systematic risk, and Idiosyncratic risk…well you are in for a treat!

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning Inc. and Richard C. Marston and not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Asset allocation does not ensure a profit or guarantee against a loss. C14-026186

Curtain Call

 The Center's Team enjoys sharing their knowledge with the press to help stories come to life, share facts and bring important topics to the forefront.  We are also honored when we are recognized by media and publications for our work and service to our profession. Here's what's new:

Center named as #228 on Financial Advisor Magazine's 2014 RIA Ranking

Center for Financial Planning, Inc. has been recognized among the nation's top-ranked investment advisory firms for the past four consecutive years.

Financial Advisor Magazine ranks the top registered investment advisory firms (RIAs) across the country based on a survey of firms' assets under management and percentage of growth. C14-025822

WISER ADVISOR.COM

Melissa Joy, CFP®: Melissa was quoted on WiserAdvisor.com in an article titled, “Gen X at the Crossroads: Baby Boomers’ Kids Could Face a Retirement Squeeze” by James O’Brien. C14-023684

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Factoring the Cost of Living in a Post-Retirement Relocation

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Your retirement plan may involve a move. You could be moving some place warm so you don’t have to put up with the wonderful Michigan winters or perhaps moving to be closer to your kids and grandkids.  Whatever the motivation, there is always a financial component in the decision-making process.

Paying for what you want vs. what you need

The cost to live in other areas of the country can be higher or lower, but some people don’t know the specific figures you will probably pay after you make the move.  Is a dollar in Michigan the same as a dollar in California or Utah? A recent conversation with a client evaluating relocating placed focus on this specific issue. His thinking was that it didn’t matter where you lived, you can always find a way to spend money.  While I certainly have to agree with him on that point, I think the bigger point is that there is a difference between spending money on things you want versus spending money on things you need.

Comparing Expenses

Let’s take a look at the cost of different goods and services in the two cities. These figures were taken from www.costofliving.org and they are an average estimate taken from people who live in Salt Lake City and San Francisco. The list of goods and services has more than 75 commonly purchased or used items but we’ll look at just a sampling of expenses.

As you can see, everything in San Fran is more expensive except the T-Bone steak. Unfortunately, after you pay for your basic living expenses, you might not have any money left over for that T-Bone! According to the living expense calculator on www.costofliving.org someone living on $70,000 of net income in Livonia, Michigan would need approximately $120,000 net in San Francisco.  In Salt Lake City, that same person would only need $69,000 to maintain the same standard of living. 

If you think a move might be in your future, talk to your financial advisor to weigh the costs associated with the new location and make sure it fits within your retirement income goal.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-022592

Center Summer Picnic Becomes a Tradition

 Tradition is an important part of The Center’s culture. That’s why we couldn’t be happier to see last year’s picnic turning into a tradition. For our 2nd Annual Center Picnic, The Center team gathered at Island Lake State Park in Brighton on July 19th. The day was filled with food, laughs, and competition. The weather wasn’t quite as cooperative as last year, but that didn’t stop anyone from enjoying the day. 

The picnic began with some friendly games of cornhole and balloon animals for the kids. We fueled up on burgers, hot dogs, sausages, chips, cupcakes, and cookies, and then the games began. 

Referred to by some as “The Boyce Show,” Dan was once again the Master of Ceremonies.  Even as the ominous clouds began to roll in, our MC reminded the team that, much like the financial markets, we can’t be deterred by an uncertain future!  Despite the periodic rain showers, Dan maintained order and fun with his trusty megaphone.

The competition was heated in the balloon toss, egg and spoon race, and volleyball matches where The Center team’s passion and determination shined through. We firmly believe the motto:

It’s not whether you win or lose, it’s how you play the game.

Everyone left the picnic feeling like a champion.  However, it should be noted that some team members claim they are already training for next year.

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Live YOUR Plan™