The single most important thing you need to know about risk as you plan your retirement is that you can’t avoid it. The less risk you’re willing to take in the stock market, the more vulnerable you make yourself to inflation risk. If you overweight your portfolio to bonds because you want to avoid market risk, you end up facing business and interest rate risk. In general, the financial planning industry lists seven types of risks all investors face: default, business, liquidity, inflation, interest rate, political and market risks. Each risk affects the balance of your retirement portfolio, but you control the position of the fulcrum. We call that risk tolerance and we ask all clients and prospective clients to answer a series of questions to determine theirs. Most people find that their risk tolerance decreases as the get closer to retirement for both practical and emotional reasons. They have less time to make up for any sudden dips in the market and probably should shift assets onto more stable ground as they anticipate withdrawing from them Additionally, their sleeping level decreases as they become more hyper-focused on their accounts. Other factors influencing risk tolerance include major life changes like marriage, divorce, promotions, job loss, birth of children, inheritance, home purchase, caring for elderly parents, medical disability etc. Because these dramatic changes can have a profound effect on your risk tolerance, it is important to check your risk tolerance periodically, particularly after experiencing any of these events. According to Finametrica, the risk tolerance surveyor to which we subscribe, the first part of the process is determining how much risk is required for you to meet your goals: What annual return will you need on your investments to meet them, given what you think you can save? Next, figure out your risk capacity, which is different from your risk tolerance. Given your budget, retirement timeline and financial assets, how much risk… | Read More »
The first and most important step toward financial health is education. All other steps follow that one. As retirement options become increasingly sophisticated, fine print consequently more lengthy, and pensions decidedly rare, investors need to work harder to understand the impact of the important choices they make. Fortunately, access to quality financial education has improved. Podcasts, blogs, books, seminars and financial education classes all offer plenty of valuable information, most literally available at your fingertips. Of course, you need to check your sources and be leery of sales pitches, but that still leaves a wide variety of legitimate options. Winch Financial offers financial classes in several locations through the University of Wisconsin continuing education system and, while we cover the information in our syllabus, we also tailor each class to its participants because finances are personal and everyone’s risk/reward profile is unique. We also send out a weekly commentary, which not only covers what happens in the stock market each week, but also offers some explanations behind the moves. Many of us subscribe to a variety of financial podcasts. We also follow Dave Ramsey and have taken his Financial Peace University course. If you do one thing for your retirement this year, we urge you to educate yourself. That education is going to lead to other tasks, so here are a few more steps you can take to get financially fit this year: Track you expenses. This may seem like a tedious task (because it is), but you can make it easier by making it part of your daily routine. Digital banking has made it easier to categorize expenses and we find that seeing where your money goes makes you much more intentional about your spending. Once you’ve tracked your expenses for a few months, you can set a realistic budget pretty easily. Random budgets waste time. The best budgets develop from your own spending habits. Change your passwords. This… | Read More »
Though it may feel like coal in your Christmas stocking at first, our Christmas Cash Challenge really is a way to give yourself the kind of present that lasts throughout the year. Let your credit cards be your adult elf on a shelf and stash them in places you can’t reach easily during the Christmas season. Without quick access to them, you can avoid spontaneous over-spending. A cash-only Christmas requires discipline, but it’s the kind of hard work that makes you and your presents more thoughtful and genuine. Anyone can click a link and mass purchase an eye-catching trinket. To find the true spirit of Christmas, and save yourself the true pain of February bills, you need to think hard about all of the special people on your gift list and remember that the best gifts come from your heart, not your credit line. You’ll have far less buyer’s remorse when you pay with cash because you only have to think how much you’ve spent once – at the time of purchase. Pay with a credit card and you think about the cost three times – when you’ve made the purchase, when you receive your credit card bill, and when you pay that bill. Cash purchases are much cleaner. It’s harder to part with cash when you can watch it dwindle from the palm of your hand. You can swipe your credit card pretty effortlessly but, while the card itself will still look shiny and new, that tiresome debt will continue to accumulate. Celebrate St. Nick Day the old fashioned way, with cash. We challenge you to put your credit card away for all 19 of the remaining shopping days until Christmas. We promise you’ll be glad you did.
Last weekend, our friend Tom, an experienced hunter, shot a deer with his cross bow from his stand on our property in northern Wisconsin. With a light snow falling, Tom left his stand, tracked the deer a ways, found and began field dressing the animal. A noise caught his attention and he looked up. Just to his left, a large bobcat stood ready to pounce. Tom stood and made himself large, and the bobcat ran away. But, what turned out to be a cool hunting story could have had more dire consequences. It’s important to consider your surroundings when moving through the woods. Not understanding the full picture can unnecessarily land you in a dangerous position. It’s the same with finances. An advisor has to consider your whole landscape – age, income, budget, life expectancy, marital status, risk tolerance – when addressing each element of a retirement plan. Danger lurks in the woods. Will your money last your life? Will an unexpected health crisis drain your finances? Can you maintain control over your healthcare decisions? Do you understand your policy’s fine print? In order to provide the best answers to these questions, and to solve some of the issues they raise, a registered investment advisor has a fiduciary responsibility to review your financial documents, to clear the woods of any visible threats. Your retirement plan should be tailored to your current and anticipated needs. The good news is resources are available to do this. For instance, there are a lot of options to pay for long-term care – traditional long term care policies, annuity hybrid policies, life insurance with LTC riders, self-funding and more. These opportunities are all available for you, but it’s important to get a clear look at your financial picture to choose the most appropriate one. November marks deer hunting season in Wisconsin, and it is also Long Term Care Awareness month. If you have any concerns… | Read More »
In our last post we talked about the importance of saving enough in your employer sponsored retirement plan and cautioned that even if you were contributing your full match, it might not be enough. The vast majority of us will need additional savings and a good place to accumulate that is in a Roth IRA. A Roth IRA is an excellent savings vehicle because, unlike the traditional IRA, the money in a Roth grows tax free and the withdrawals are not taxed either. This makes it preferable to the traditional IRA for retirement savings, but there are other advantages to a Roth IRA as well. Here are four reasons you should save money in a Roth IRA: The Roth IRA gives much more freedom of choice. In an effort to keep the plan simple, many 401(k) and 403(b) plans do not include investment choices that would help diversify your portfolio, nor do they offer the most cost-effective investments available. Most employer plans limit you to investing in only a handful of mutual funds. While mutual funds are good investment vehicles, ETFs (Exchange Traded Funds) have emerged as a favorable alternative to mutual funds because of their lower cost and flexibility. In a portfolio that is large enough to accommodate them, individual stock holdings are also a good choice for low expense and diversification. The money in a Roth IRA that is not inherited is not subject to a Required Minimum Distribution (RMD). Roth IRAs are funded with after-tax money and the withdrawals from a Roth are not taxed on the way out. Because of this, the IRS has no need to force withdrawals from a Roth because there are no taxes to collect. Not being subject to an RMD makes the Roth IRA a more flexible option for retirement income. You can also continue to contribute to your Roth after the RMD mandatory age of 70½ if you are still… | Read More »