WTF, SVB?! A TL;DR

Silicon Valley Bank

While many were watching the Oscar’s, finance fans were watching the implosion of Silicon Valley Bank (SVB), the 16th largest bank in America.

Our TL;DR on what happened to SVB:

  • SVB’s primary customer base was the startup community. They were not very profitable for SVB (not big borrowers i.e. few mortgages and business loans).
  • 2020/2021: Low-interest rates + easy money environment allows startups to raise massive capital. SVB receives massive deposits (deposits grew from $74B in June 2020 to $212B in December 2022).
  • SVB customers still didn’t need loans, but SVB wanted to make some money… so they invested in longer-duration bonds with an average yield of 1.60%.
  • Enter 2022: Interest rates begin increasing.
  • Money no longer flowing as it once did, SVB startup customers start feeling pressure. Deposits slow, withdrawals increase.
  • Wednesday (3/8): SVB frees up money in their bond portfolio for customer withdrawals. They sell $21B of those longer-duration bonds for a $1.8B loss.
  • Perception: SVB looks financially shaky.
  • Thursday (3/9): Bank run begins. Customers request $42B of withdrawals.
  • Friday (3/10): SVB stops withdrawals, doesn’t open for business.
  • Sat/Sun (3/11-12): SVB customers with account balances > FDIC insurance limits fear they’ll lose their money.
  • Monday (3/13): US Government expresses that banking is a “system of confidence” and promises to make customers whole.

Who’s at fault?

Some blame the depositors for perpetuating their own bank’s demise.

Some blame regulators for missing SVB’s (now) obvious excessive risks.

Some blame the Fed for hiking rates so quickly.

While all of the above certainly didn’t help, it seems clear that SVB’s managers, supervisors, and leadership bear the burden of responsibility.

They miscalculated their risk.

Namely, they took duration risk on their bonds while also having extremely rate-sensitive, quick-moving, well-informed customers.

Conclusion:

While depositors with balances exceeding FDIC-insured limits seem to be in the clear this go-round, the failure of Silicon Valley Bank should be a cautionary warning to everyone.

Nature Is Medicine

Nature is medicine

We live in a fast-paced world, surrounded by technology and endless responsibilities. With so much to do, it’s easy to overlook the importance of connecting with nature.

Many of us intuitively recognize that spending time in nature can be restorative. But, did you know that it can also have a positive impact on our physical and mental health?

The benefits of spending time in nature are undeniable and well-documented and many experts now consider time in the outdoors to be a form of medicine for the mind and body.

As we’re squarely in the middle of winter here in NJ, we wanted to provide some food for thought (and motivation!) to get outside.

What we can learn from the Nordics:

For those living in regions that experience cold winters and shorter/darker days, it’s convenient to not spend time outdoors during the winter months.

However, we can learn quite a lot from the Nordics. Those in Denmark, Sweden, Norway, Finland and Iceland experience notoriously long and harsh winters yet find time to embrace the outdoors year-round.

Some of the things we can learn from them include:

  1. Dress appropriately: People in cold Nordic countries have learned to dress in layers and wear warm clothing to stay comfortable in harsh weather conditions.
  2. Stay active: People in these countries are known to be active, and they often engage in outdoor activities such as skiing, snowshoeing, and hiking, which can provide numerous physical and mental health benefits.
  3. Incorporate friends + community: Spending time outdoors is often a social activity in Nordic countries, and people there have developed a strong sense of community through their shared love of nature.
  4. Soak in natural light: During the winter months, there is limited daylight in many Nordic countries, and people there have learned the importance of getting outside and exposing themselves to natural light to boost their mood and counteract the effects of seasonal affective disorder (SAD).

While many still believe that we “catch a cold” from time spent in the cold outdoors, consider that exposure to cold temperatures can actually increase the production of white blood cells and other immune system components to fight off infection and disease.

Translation: Spending time in the cold may actually improve our immune system and help to build resilience.

What we can learn from the Japanese:

In recent years the Japanese practice of “shinrin-yoku,” or forest bathing, has gained traction globally.

Forest bathing? Yes. Forest bathing.

Forest bathing involves spending time in forests and other natural environments to improve physical and mental health. The concept is based on the idea that spending time in nature can help reduce stress and improve overall well-being by stimulating the senses and promoting a deep connection with the natural world.

In 2016, after seeing a growing body of research supporting the benefits of forest bathing, the Japanese Ministry of Agriculture, Forestry, and Fisheries even launched a national forest therapy program, with the goal of promoting the health benefits of spending time in forests.

Some forest bathing best practices:

  1. Disconnect from technology: Turn off your phone and other devices to fully immerse yourself in the natural environment.
  2. Slow down and focus on your senses: Use your senses to engage with the environment, such as by paying attention to the sounds, smells, and textures of the forest.
  3. Walk slowly and mindfully: Take a slow, leisurely walk, paying attention to your body and breathing.
  4. Do it regularly: Regularly spending time in nature (ideally 5hrs/wk) can help to sustain the benefits over time.

Grounding:

Perhaps not a great winter activity, grounding (also known as earthing) is a practice that involves direct physical contact with the earth, such as walking barefoot on grass, sand, or soil.

Now, before you check to see if our tin foil hats are strapped on too tight, hear us out.

The idea behind grounding is that it helps to reduce inflammation and improve overall health by promoting the transfer of electrons from the earth to the body.

The earth is a source of free electrons, which are negatively charged particles that can help to neutralize positively charged particles in the body that contribute to inflammation and other health problems.

When we walk barefoot on the ground, the soles of our feet come into direct contact with the earth, allowing us to absorb these free electrons into our bodies.

While current research is still preliminary, many people report feeling improved physical and mental well-being after spending time grounded, and there is a growing body of scientific evidence to support the potential health benefits of this practice.

Noted benefits include reducing inflammation, stress, and anxiety. It’s also believed that grounding can have an impact on the nervous system and the circadian rhythm, helping to regulate the production of hormones and improve sleep.

Some grounding best practices:

  1. Spend time barefoot outside: Spend time walking barefoot on grass, sand, or soil, or sit with bare feet on the ground, to allow for direct physical contact with the earth.
  2. Use grounding products: There are a variety of grounding products available, such as mats and sheets, that can help to promote the transfer of electrons from the earth to the body.
  3. Practice mindfulness: Combine grounding with mindfulness practices, such as meditation, to help focus your attention on the present moment and enhance the benefits of grounding.
  4. Incorporate it daily: Make grounding a regular part of your daily routine, such as by spending time barefoot outside each morning or evening.

What the studies say:

Numerous studies have shown that spending time in nature can have a positive impact on mental health and well-being.

A few of them:

International Journal of Environmental Research and Public Health:

Study found that exposure to forest environments resulted in lower levels of cortisol, lower blood pressure, improved mood, reduced symptoms of depression and anxiety, and improvements in overall life satisfaction.

Environmental Science & Technology:

Study found that just five minutes of exposure to nature can lower stress levels and improve overall mood.

American Journal of Public Health:

Study found that people who live in areas with higher levels of green space have a lower risk of obesity, type 2 diabetes, and cardiovascular disease.

Journal of Affective Disorders:

Study found that participation in nature-based therapy reduced symptoms of anxiety and depression in patients with major depressive disorder. Additionally, outdoor light therapy was an effective treatment for season affective disorder (SAD), and a review of existing research found that exposure to natural light, especially during the winter months, can have a positive impact on SAD symptoms.

PLOS ONE:

Study found that participants who took a two-hour forest bath showed a significant decrease in symptoms of anxiety and depression, as well as improved sleep and overall well-being.

Journal of Inflammation Research:

Study found that grounding reduced inflammation markers in the body.

Additional Sources:

Final Thoughts:

We all want to feel our best, especially in the thick of winter.

Whether it’s bundling up like the Nordics, forest bathing like the Japanese, or grounding like your tin-foil-hat-wearing financial planners (ehmm… Dennis), your time outdoors will pay dividends for your health.

Make the investment (i.e. get outside!) and reap the returns for mind, body, and soul.

A Looming Debt Ceiling

Debt Ceiling

If you follow business/financial news at all, it’s likely that you’re aware of the looming debt ceiling crisis.

In this month’s contribution, we want to peel back the onion and provide a clearer understanding of what it’s all about.

Why is the debt ceiling important?

Also known as the statutory debt limit, the debt ceiling is a legal limit set by the United States Congress on the amount of debt that the federal government can accumulate.

When the government spends more money than it takes in through taxes and other revenue, it borrows money to make up the difference. This borrowed money increases the government’s debt.

When the debt reaches the legal limit set by the debt ceiling, the government is unable to borrow any more money until the debt ceiling is raised by Congress.

Implications of Hitting the Ceiling

Consequences could include:

  • Government shutdown of certain non-essential operations.
  • Default on debt obligations which would likely result in increased volatility (and short-term hit) to the economy and financial markets.
  • US credit rating could get downgraded.
  • Borrowing could get more expensive.
  • Treasury holders of maturing treasuries will be SOL.

History of Debt Ceiling Crises:

This isn’t the first time that political brinksmanship has pushed us towards defaulting on our national debt.

  • 1917: Modern concept of the debt ceiling is established.
  • 1940s-1950s: Debt ceiling was raised during WWII and the post-war period to finance the war effort + support growth.
  •  1970s-Early 2000s: The debt ceiling was raised multiple times with little controversy or public debate.
  • 2011: A political dispute over the debt ceiling resulted in the first-ever U.S. credit downgrade and a stock market sell-off.
  • 2013: Debt ceiling dispute resulted in 16-day government shutdown.
  • 2015/2017/2019: Congress successfully negotiated last-minute compromises that avoided hitting the ceiling.

Different Views on Debt and Deficits: 

While there are certainly many different views on sovereign debt and deficit spending, we wanted to share two views from two authors we’ve recently read:

Stephanie Kelton: Author of The Deficit Myth

Stephanie argues that we should not conflate federal debt and personal (i.e. household) debt.

Kelton, a proponent of Modern Monetary Theory (MMT), argues that the government is not like a household in that it does not have to balance its books to avoid default.

Instead, Kelton and other MMT’ers advocate that so long as the federal government has access to real resources (labor/capital), the government can always a) create money and b) pay its debts.

MMT also suggests that the government should be focused on spending to address important social/economic needs and that hyperinflation (i.e. currency depreciation) is a valid, yet ancillary, concern that can be controlled via fiscal discipline.

Kelton and MMT note that as long as a government controls its own currency, it has the ability to use monetary policy to influence the value of its currency.

For example, the government can decrease (or increase) the money supply, which can lead to currency appreciation (or devaluation).

Note that MMT is still a developing theory and its full implications/limitations are still being debated by economists and policymakers.

Ray Dalio: Famed investor and author of Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

Ray Dalio outlines how poorly managed monetary policy can directly influence the fall of empires.

Dalio, who has conventional macroeconomic views and is supportive of market-based solutions, argues that the management of sovereign debt and deficits is critical for effective governance.

Dalio’s principles are focused on promoting economic growth, fostering innovation, and developing effective governance systems that can:

a) minimize the odds of rampant inflation and

b) manage the complex economic and political challenges of the 21st century.

He argues that large debt and deficits can have significant consequences for the economy and the financial markets, particularly when interest rates are rising.

Dalio’s book also provides historical context for the U.S. dollar – the world’s most recent reserve currency – noting that its dominance can lead policymakers to abuse its position by printing too much money, leading to inflation and (eventually) devaluation of the currency.

Overall, Dalio’s views on the U.S. dollar as the world’s reserve currency reflect a nuanced perspective, recognizing the benefits and risks of the current system and the importance of considering both short- and long-term implications of monetary and fiscal policy decisions.

What you can do:

In short: not much.

If the US defaults on its debt payments, there will be very few places to run or hide within the financial markets.

Geopolitically, this could be another strike (at least symbolically) against the idea of US exceptionalism and increase existing power struggles between the US and China.

Here at wHealth Advisors, we’d like to think that our elected officials understand both game theory + the stakes of the game they’re playing.

Perhaps we give them too much credit.

Either way, we’re rationally optimistic that we’ll avoid devolving into a developing country and that a compromise on the debt ceiling will be reached – one that might result in increasing the debt ceiling, decreasing spending, or some mix of both.

Health is Wealth: Virtual Event (client-only)

Health is Wealth

BIG NEWS!

In 2023, we are partnering with Stevyn Guinnip, a financially-focused health coach and founder of Grow Wellthy!

Over the course of 2023 we’ll be offering four virtual events that will help our clients look at their financial plans through the lens of health.

Event Details:

  • Topic: “Health Is Wealth”
  • Date: Wednesday, January 25th
  • Time:  4pm ET

Why Are We Doing This?

With lifespans getting longer and healthcare costs staying high, the impact of poor (as well as exceptionally good) health will have major implications for your household finances.

When working with you and your finances, we never want to miss the forest for the trees.

Good health – whether physical, mental, or emotional – is critical for creating the life of your dreams.

 Remember: Even the most bulletproof financial plans mean nothing if health is lost along the way.

 Statements that might resonate with your health journey: 

  • “I feel like I mortgaged my health to grow my career.”
  • “I wish I could get healthier, but I can’t fit it into my schedule.”
  • “I’ve tried different health kicks, but nothing seems to stick.”

If any of these sound familiar, we encourage you to join us for this virtual event.

Sign up & mark your calendar

Follow this LINK EXPIRED and enter the registration code “WHEALTH” when signing up.

We’ll see you there!

SECURE 2.0 Act: If You Don’t Know, Now You Know

SECURE 2.0 Act

On December 23, 2022, Congress passed the SECURE 2.0 Act. This comes roughly three years after the original SECURE Act which was passed in 2019. SECURE 2.0 expands the original.

While there are far too many changes to summarize into one blog, we took a stab at highlighting those that will impact most people’s personal finances.

Increase in the Required Minimum Distribution (RMD) Age

  • Current Rule: RMDs from your qualified accounts (IRA/401k/403b etc.) needed to be taken in the year you turn 72.
  • SECURE 2.0: Increases the RMD age as follows:
    • For individuals who turn 72 in 2023, RMDs will be pushed back to age 73
    • The RMD age will be 73 through 2032
    • Beginning in 2033, the RMD age will increase to 75

Changes to Workplace Plans

  • RMDs for Roths:
    • Previously, Roth IRA participants were not required to take RMDs, but Roth 401(k) participants were. Under the new plan, beginning in 2024, Roth 401(k) accounts will not be required to take RMDs.
  • Increase in Catch-Up Contributions
    • If you are age 50 or older, you are allowed to make catch-up contributions above the regular contribution limit. For 2023, the catch-up contribution is $7,500 above the regular deferral limit of $22,500.
    • Beginning in 2025, employees aged 60 through 63 are allowed even higher catch-up contributions – the greater of $10,000 or 150% of the regular catch-up contribution amount (indexed for inflation).
  • Mandatory Roth Catch-Up Contributions
    • Beginning in 2024, all catch-up contributions for participants age 50 or older with wages in excess of $145,000 (indexed for inflation) will be Roth.
  • Employer Retirement Plan Contributions can now be Roth
    • Currently, all employer contributions are made on a pre-tax basis
    • Effective immediately, employees will have the option of having company contributions made to a Roth account. If this option is selected, the contribution will be included in the employee’s income in the year of contribution.
  • Matches on Student Debt
    • Beginning in 2024, employers have the option to make matching plan contributions on student loan repayments made by employees.
  • SIMPLE and SEP IRA contributions
    • Previously, SIMPLE and SEP IRA accounts could only be funded with pre-tax dollars.
    • Effective in 2023, SECURE 2.0 will permit each of these plans to accept after-tax Roth contributions.
  • Establishing a Solo 401(k)
    • Currently, a self-employed person must open a new solo 401(k) and make elective deferrals by December 31st of the plan’s tax year.
    • Effective in 2023, SECURE 2.0 now allows sole proprietors to open a new 401 (k) plan up until the due date of their tax return (no extension deadlines).

New Exceptions to the 10% early distribution penalty

  • SECURE 2.0 expands current 10% penalty exceptions to include:
    • Disaster relief
    • Domestic abuse
    • Terminal illness
    • Emergency need

Rollovers from 529 plans to Roth IRAs

  • Beginning in 2024, owners of a 529 account will be able to roll funds into a Roth IRA, with the following conditions:
    • The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan (owner and beneficiary cannot be the same).
    • The 529 account must have been open for 15 years.
    • Any contributions to the 529 plan made in the last 5 years are ineligible to be moved to a Roth IRA.
    • The maximum amount that can be transferred from the 529 to the Roth IRA during the individual’s lifetime is $35,000.
    • Maximum rollover is subject to annual Roth contribution limits.

Penalty for missed RMDs is reduced

  • Currently, the penalty for missing an RMD is 50% of the missed amount.
  • With SECURE 2.0, the penalty is reduced to 25% and if corrected in a timely manner, the penalty is reduced to 10%.

Qualified Longevity Annuity Contracts (QLAC)

  • QLACs are deferred fixed income vehicles that allow funds in a qualified retirement plan to be converted into an annuity.
  • Currently, you can not use more than 25% of your retirement account balances, or $145,000 (whichever is less), to purchase a QLAC.
  • With SECURE 2.0, the 25% asset limitation is repealed and the dollar limit is increased to $200,000.

Final Thoughts:

As always, be in touch if you have any questions regarding any of these changes.

For a deeper dive on SECURE 2.0 you can see the Senate Finance committee’s full update here.

Optimizing Your Nervous System

This Wellness blog was first featured in our December 2022 monthly newsletter. Similar to that month’s financial contribution, this article is written 99.9% by AI. The first sentence started “At whealthfa.com, we believe…” and I amended to “At wHealth Advisors…”.

What I asked ChatGPT to do:

“Write whealthfa.com blog about the dangers of our nervous system being in sympathetic state too often, and the benefits of being in a parasympathetic state.”

Optimizing Your Nervous System

At wHealth Advisors, we believe that maintaining a balance between the body’s parasympathetic and sympathetic nervous systems is crucial for overall health and well-being. In this post, we’ll explore the dangers of the sympathetic nervous system being in a constant state of activation, and the benefits of supporting the parasympathetic system.

First, it’s important to understand the role of the parasympathetic and sympathetic nervous systems in the body. The parasympathetic system is responsible for promoting relaxation and rest, while the sympathetic system is responsible for the body’s fight-or-flight response. When the body is in a state of balance, these two systems work together to maintain overall health and well-being. However, when the sympathetic system becomes overactive, it can have negative effects on the body.

One of the dangers of the sympathetic nervous system being in a constant state of activation is that it can lead to feelings of chronic stress and anxiety. When the body is in a state of chronic stress, it can have negative effects on the immune system, cardiovascular health, and overall well-being. This can lead to a variety of health problems, including headaches, insomnia, and digestive issues.

Another danger of the sympathetic nervous system being in a constant state of activation is that it can lead to increased levels of the hormone cortisol. Cortisol is a hormone that is released by the body in response to stress, and it has many important functions in the body. However, when cortisol levels are constantly elevated, it can have negative effects on the body, including weight gain, decreased immunity, and impaired cognitive function.

On the other hand, the benefits of supporting the parasympathetic nervous system are numerous. When the parasympathetic system is active, the body is able to relax and rest, which can promote overall health and well-being. The parasympathetic system can also help to regulate the body’s stress response, and can support the immune, digestive, and cardiovascular systems.

In conclusion, the sympathetic nervous system plays an important role in the body’s fight-or-flight response. However, when the sympathetic system is in a constant state of activation, it can have negative effects on the body. On the other hand, supporting the parasympathetic system can promote relaxation and rest, and can support overall health and well-being. By incorporating techniques such as deep breathing, mindfulness, and regular exercise into our daily routine, we can support the parasympathetic system and maintain a healthy balance between the two nervous systems.

AI Wrote This Blog

DALL-E

For this month’s contribution, we allowed AI to write this blog.

A few weeks back I learned about the artificial intelligence company known as OpenAI.

DALL-E

What initially brought OpenAI onto my radar was their AI image generator known as DALL-E.

HOW IT WORKS: You type in whatever you have in mind and the AI generator spits out four different image variations.

Some results are obscure, fragmented, and not useful.

Some are surprisingly on point.

The image used in this section is a DALL-E generated image that was populated after searching:

“A Van Gogh illustration of a financial planner”

Voila!

 ChatGPT:

Just the other day I learned about OpenAI’s most recent innovation – ChatGPT. ChatGPT is another AI tool that “optimizes language dialogues for conversation.”

After an initial vetting of the system with obvious questions such as

“is artificial intelligence superior to human intelligence?” 

and

“is it called pork roll or taylor ham?” 

I was satisfied enough with the results and figured it was ready to be deployed for a finance newsletter.

My questions/prompts to ChatGBP in bold followed by ChatGPT’s responses.

Question 1: What are the most devastating, yet avoidable, financial missteps?

The most devastating, yet avoidable, financial missteps can vary depending on an individual’s financial situation and goals. However, some common financial missteps that can have a significant impact on an individual’s financial well-being include:

  1. Not saving for emergencies: Not having an emergency fund can leave individuals vulnerable to financial shocks, such as a job loss or medical expense. Without an emergency fund, individuals may be forced to take on high-interest debt or make other financial decisions that could have long-term consequences.
  2. Not planning for retirement: Not saving enough for retirement or failing to plan for retirement can leave individuals without a stable source of income in their later years. This can make it difficult for individuals to maintain their standard of living and may lead to financial stress and hardship in old age.
  3. Not having adequate insurance: Not having adequate insurance coverage can leave individuals vulnerable to financial losses from unexpected events, such as accidents, illnesses, or natural disasters. Without insurance, individuals may be forced to pay out of pocket for expenses that could be covered by a policy.
  4. Not managing debt: Not managing debt effectively can lead to high-interest payments and financial strain. This can make it difficult for individuals to meet their financial obligations and may impact their credit score and overall financial health.

Overall, avoiding these and other financial missteps can help individuals to manage their finances and avoid financial hardship. It is important to seek professional advice and guidance to help avoid costly financial mistakes.

wHealth Advisors’ Review of Answer: We agree!

Question 2: Should I place assets in international tax havens?

It is generally not recommended to place assets in international tax havens, as doing so can be complex and potentially risky.

Tax havens are countries or territories that offer low or no taxes to individuals and businesses, and are often used by wealthy individuals and corporations to avoid paying taxes in their home countries.

While placing assets in international tax havens may offer some tax benefits, it can also be difficult to manage and may be subject to regulations and reporting requirements.

Additionally, tax havens can be associated with financial crimes and illicit activities, and may not be considered reputable or trustworthy by some investors.

Therefore, it is generally best to consult with a financial planner or advisor before making the decision to place assets in international tax havens.

wHealth Advisors’ Review of Answer: ::PHEW:: We agree!

Question 3: Can you share a positive and negative investment thesis for Amazon (AMZN)?

A positive investment thesis for investing in Amazon (AMZN) could include the following:

  1. Amazon is a dominant player in the e-commerce market and has a strong competitive advantage. The company’s scale, customer base, and range of products and services make it a formidable competitor in the online retail space.
  2. Amazon has a diverse range of businesses, including e-commerce, cloud computing, and digital advertising, which provides the company with multiple sources of revenue and helps to mitigate risk.
  3. Amazon has a history of strong financial performance, with consistent revenue and profit growth. The company’s financial strength and stability make it an attractive investment for investors.
  4. Amazon has a strong brand and reputation, which has helped the company to build a loyal customer base and maintain its position as a market leader.
  5. Amazon’s focus on innovation and customer satisfaction has helped the company to stay ahead of the competition and drive growth. The company’s commitment to continuous improvement and expansion into new markets makes it well-positioned for future growth.

Overall, Amazon’s strong market position, diverse business portfolio, and track record of financial success make it a compelling investment opportunity for investors.

A negative investment thesis for Amazon (AMZN) could include the following:

  1. Amazon faces intense competition from other e-commerce companies, such as Walmart and Alibaba, which could erode the company’s market share and profitability.
  2. Amazon’s business model relies heavily on low prices and thin profit margins, which could make the company vulnerable to changes in the economic environment or shifts in consumer behavior.
  3. Amazon’s expansion into new markets and industries, such as healthcare and groceries, may not be successful and could result in significant losses for the company.
  4. Amazon’s reliance on third-party sellers and fulfillment centers has raised concerns about the company’s ability to maintain quality control and protect customer data. This could damage the company’s reputation and impact its financial performance.
  5. Amazon’s valuation is high relative to its peers and historical averages, which could make the stock overvalued and potentially vulnerable to a decline in price.

Overall, Amazon faces a number of potential risks that could impact its financial performance and make it a less attractive investment for some investors.

wHealth Advisors’ Review of Answer: …Wow…

Question 4: How will AI disrupt individuals’ ability to earn money?

Artificial intelligence (AI) has the potential to disrupt individuals’ ability to earn money in a number of ways. Some of the potential ways that AI could impact individuals’ ability to earn money include:

  1. Automation of jobs: As AI technologies advance, they may be able to perform many tasks that are currently done by human workers, such as data entry, customer service, and assembly line work. This could result in the loss of jobs for human workers and make it more difficult for them to find employment and earn income.
  2. Increased competition: As AI technologies become more advanced, they may be able to perform tasks that were previously considered too complex or time-consuming for machines to handle. This could lead to increased competition for jobs that require higher-level skills, such as problem-solving and critical thinking, making it more difficult for human workers to find and retain high-paying jobs.
  3. Changes in the job market: The use of AI technologies may also lead to changes in the job market, with the creation of new types of jobs that require skills in AI and related technologies. This could create new opportunities for workers with the right skills and education, but it could also make it more difficult for workers without those skills to find and maintain employment.

Overall, AI has the potential to disrupt individuals’ ability to earn money by automating jobs, increasing competition, and changing the job market. It is important for individuals to stay informed about developments in AI and related technologies and to adapt their skills and education to prepare for these changes.

wHealth Advisors’ Review of Answer: We appreciate AI’s candor!

Start adapting those skills because the future is now.

Other fun/helpful AI that we stumbled upon in the making of this newsletter:

  • Character.ai: Want to have a discussion with an AI version of Socrates? Albert Einstein? Elon Musk? Or, perhaps you need to discuss things with an AI dating coach, life coach, or psychologist? Take your pick at Character.ai.
  • Adept.ai: According to TechCrunch, “Adept aims to build AI that can automate any software process.” What’s that mean? Maybe you need to add a new client to your CRM with notes… or lookup a new home that meets certain criteria… or get profit margin details from a Google Sheet… just ask Adept to do it.Check out the videos on the “about” section of the website. NOTE: You can’t use this product yet but there’s a waitlist to join if interested.
  • Lensa: An all-in-one image editing app that renders selfies into artwork. NOTE: The app is free to download, and there’s a free trial, but in general the service costs $3.99 for 50 images.

72-Hour Longevity Fast (Nov 2022)

Without wasting time – this is an invitation to join me in an upcoming 72hr longevity fast. If this isn’t your cup of tea – totally get it, feel free to ignore this and get on with life. For those interested… read on!

Many of you will be familiar with “intermittent fasting” – it’s quite popular these days.

For the past three years I (Dennis) have been practicing a form of IF known as time-restricted eating (TRE) – that is, only eating food between 1pm-7pm. I’ve been practicing this 4-5 days a week, typically Monday through Thursday.

Giving the body a 12-18hr rest from eating has been linked to improved metabolic health (particularly due to the caloric restriction).

Multi-day fasting, on the other hand, offers it’s own range of potential health and lifespan-promoting benefits. After learning of these wide ranging benefits, I performed my first 72hr fast at the start of 2022. Over the summer I followed up with another 60hr fast.

I’ve openly shared these experiences on Instagram (@thewhealthadvisor) and, since then, have received both questions and potential interest from friends, colleagues, clients, and beyond.

As such, I figured I’d formally invite any interested individuals to share in the experience of my upcoming fast. Doing a multi-day fast isn’t exactly the most pleasant experience, but the benefits seem (to me) to be worth the effort.

Let’s dig in.

Autophagy:

The main thing that got me interested in extended fasting – that is, fasting beyond 24hrs – was the process known as autophagy. Derived from Greek, autophagy means “to eat oneself.”

On October 3rd 2016, the Nobel Assembly at Karolinska Institutet awarded the Nobel Prize in Physiology or Medicine to Yoshinori Ohsumi for his discoveries of mechanisms for Autophagy.

Put simply, autophagy is the body’s mechanism of getting rid of all the broken down, old cell machinery (organelles, proteins and cell membranes) when there’s no longer enough energy to sustain it. It is a regulated, orderly process to degrade and recycle cellular components.

Autophagy Benefits:

Research suggests that some of the most important autophagy benefits include:

  • Providing cells with molecular building blocks and energy
  • Recycling damaged proteins, organelles and aggregates
  • Regulating functions of cells’ mitochondria, which help produce energy but can be damaged by oxidative stress
  • Clearing damaged endoplasmic reticulum and peroxisomes
  • Protecting the nervous system and encouraging growth of brain and nerve cells. Autophagy seems to improve cognitive function, brain structure and neuroplasticity.
  • Supporting growth of heart cells and protecting against heart disease
  • Enhancing the immune system by eliminating intracellular pathogens
  • Defending against misfolded, toxic proteins that contribute to a number of amyloid diseases
  • Protecting stability of DNA
  • Preventing damage to healthy tissues and organs (known as necrosis)
  • Potentially fighting cancer, neurodegenerative disease and other illnesses

One of the most reliable ways to get your body to begin autophagy is through nutrient deprivation. For those new to fasting, doing a 24-36hr fast could be one way to explore a fasting practice and still reap many of the benefits of autophagy.

Researchers believe that autophagy is a survival mechanism that has anti-aging benefits.
It helps cleanse waste from the body, provides energy, and potentially fights cancer, neurodegenerative disease, and other chronic illnesses.
My original goal was to do a 48-72hr fast each quarter of the year. I missed my Q2 fast but am very much looking forward to this one.

Upcoming Fasting Schedule + Preparation:

Personally, my upcoming fast will begin after finishing lunch (around 12pm) on Wednesday (11/2) and will end with lunch on Saturday (11/5).
In advance of the fast, I am hosting a virtual group meet-up on Zoom on Monday (10/24) at 8pm ET.

We’ll discuss:

  • what to avoid 48hrs prior to fasting
  • how to enter the fast
  • what you can consume during your fast
  • staying hydrated + electrolyte supplements
  • easing the hunger pangs
  • how to break your fast (gently & slowly)

For those interested, I’ve also created a WhatsApp group where all those participating can ask questions, provide moral support, and commiserate with each other.

DISCLAIMERS:

  • THIS IS NOT MEDICAL ADVICE. Please consult with a doctor or medical professional before participating.
  • Only a handful of studies measuring fasting and autophagy exist in humans. More research is needed to fully understand the benefits and implications of autophagy.

Interested in joining? Curious to learn more?

  • Watch the video (below)
  • Explore the resources (below the video)
  • Send me an email expressing your interest and plan to join us on the virtual meet-up on Monday (10/24) at 8pm!

You can’t enjoy wealth if you’re not in good health.

Additional Resources:

72-Hour Fast: Benefits And Dangers

How to renew your body: Fasting and autophagy

Fasting for Health and Longevity: Nobel Prize Winning Research on Cell Aging

What Actually Happens To Your Body During A Fast, Hour By Hour

A Comprehensive Guide To Fasting

Men’s Health: The Wisemen Retreat “FIRE” Experience

The Wisemen Project is a men’s group that melds proven, ancient techniques of movement, breath work and meditation with cutting edge scientific research.

The group was formed as a powerful antidote to the seemingly endless noise, stress, disease and disconnection in our modern world.

The primary pillars center around:

Fuel:

Our food and what we “feed” our brains.

Mind:

Cultivating resiliency and proper brain function.

Move: 

Movement to heal the mind, body and soul.

Rest:

Dialing in the proper amount, type, and frequency of rest to allow mind and body to recover and grow.

Social:

Community is interwoven within the fibers of our ancestral DNA, helps to reduce stress/anxiety, improve mental health, and increase our lifespan.

Wealth:

Perspective, action, discipline, and reflection to cultivate an abundance mindset.

Retreat Details:

What: 

This “Fire” retreat is carefully designed to eliminate that which may be weighing you down (extra unwanted weight, poor patterns, negativity, anxiety etc.) and ignite your true potential within.

Where: 

Woodridge, NY

When: 

October 13-16

Men – consider investing in yourself and spending a weekend with a community that empowers you from within, so you can show up for yourself, and for the ones you love.

If you decide to join, be sure to use the code “friend5” for a 5% discount at checkout.

DISCLAIMER: There is no financial incentive or underlying remuneration for wHealth Advisors in promoting this event.

Preparing Children for their Financial Future

Preparing children for their financial future is a key concern of many parents. A a follow-up to last month’s contribution focused on financial considerations for those between 15-24 years old, we wanted to continue that theme but focusing on what parents can do for their children who are even younger.

Paying Allowance:

Determining How Much

Before determining how much to pay, it’s worth coming up with a plan for how the money is earned in order to manage your child’s expectations.

While using a paid chore system can teach kids responsibility and the value of earning money from doing work (i.e. $7 for mowing the lawn), some families may view chores as a communal effort that are shared among all members of the household.

Either way, when it comes to determining how much weekly allowance to pay, it’s really up to you. However, it’s not uncommon to pay somewhere in the range of $1-$2 for each year of the child’s age. So, by this measure, a 12-year-old would get an allowance ranging somewhere between $12 to $24 per week. For reference, according to RoosterMoney, the average weekly allowance that parents pay is $19.30.

For a teenager, if encouraging them to buy their own clothes and pay for most of their own activities, a weekly allowance could certainly be in the range of $25 per week or more.

Be consistent

Regardless of whether allowance is tied to chores or not, many experts recommend making at least a portion of a child’s allowance fixed (regardless of their chore completion or behavior) and paying it consistently on the same set date – whether weekly, biweekly, or monthly.

Avoid the temptation of caving in and paying allowance early as allowance is supposed to teach kids good saving/spending habits. These lessons are hard but better to learn when young than to become a future payday loan borrower!

Help them set goals

As parents, we play a major role in helping our children learn self-control and the value of delayed gratification (some may be familiar with the Stanford Marshmallow Test).

By giving our children more agency in the spending/saving of their money they can learn the value of skipping short-term wants in exchange for longer-term goals.

One way to structure this could be to require kids to put a portion of their allowance into long-term savings/goals, a portion toward a charity/cause they care about, and to keep the remaining available for immediate spending.

Banking + debit cards

Opening a high yield savings account for your child’s “longer-term savings” – and/or setting up a separate savings account for any specific goals they might have – is a great way to introduce them to online banking and showing them the interest (however miniscule) that accumulates.

Additionally, some parents preparing their children for their financial future will appreciate the prepaid debit cards and online platforms that help make managing allowances a bit easier. Some options include Greenlight, Copper, and GoHenry.

Protecting their identity/credit:

Freeze your child’s credit

While preparing your children for their financial future, ensure that their finances don’t get derailed by no fault of their own. By freezing your child’s credit you prevent criminals from opening lines of credit using your child’s personal data (which can be a maddingly laborious process to unwind). Each of the three credit bureaus will require copies of the following:

  • Parent’s driver’s license / government ID
  • Parent’s birth certificate
  • Parent’s Social Security card
  • Child’s birth certificate
  • Child’s Social Security card
  • A utility bill or bank insurance statement with parent’s name/address on it

Note that all three credit bureaus have different forms to process credit freezes for a minor. Equifax has this form, TransUnion has this form, and Experian has this online form that prints to PDF (select “add or remove a security freeze for a minor”).

Protect Social Security numbers

Whenever prompted to provide your child’s SSN, leave this field blank unless you are explicitly required to provide it and understand a) why it’s necessary and b) how it will be protected.

Pay attention to mail

Credit preapproval offers in your child’s name are always worth investigating. Receiving any correspondence from a collection agency addressed to your child is a major red flag.

Keep your child’s documents locked away

Important documents like birth certificates and Social Security cards should be stored in a home fireproof safe – never in your purse, wallet, or car.

Monitor health insurance claim information

A health insurance claim that lists your child’s name but never actually happened can indicate that your child’s personal information has been used to access health insurance benefits.

Investing

For Education: 529 Accounts

When it comes to your children’s education saving, 529s are a reliable, tax-advantaged saving vehicles. From a tax standpoint, 529s grow tax-deferred and withdrawals are tax-free so long as they’re used for qualified education expenses.

While originally limited to post-secondary education costs, you can now take tax-free withdrawals from 529s to pay for apprenticeship programs as well as up to $10,000 per year of K-12 private education.

When it comes to choosing a 529 plan, it’s good to know whether your state offers a state tax deduction for 529 contributions. If so, there may be benefits to using one of your state’s designated 529 plans. However, if your state does not offer a tax deduction for 529 contributions, feel free to use any 529 plan but consider plans like My529 that are affordable and provide access to low-fee, quality index funds (both Vanguard and Dimensional Funds).

For Long-term Growth: UTMAs/UGMAs and Roth IRAs

UTMAs/UGMAs:

These are custodial brokerage accounts that parents can set up for their minor children. Deciding which to open can depend on the state you live in but both are great accounts to begin improving your child’s financial/investment literacy while also saving and investing for the future. Parents commonly use these accounts to give their children a head start in saving for a wedding, a down payment on their first home, or to just get a base of money to begin compounding for the long-term.

Parents should be aware that while they may be the ones funding these accounts, the transfers into the accounts are irrevocable – that is, the money becomes official property of the minor once transferred-in. Upon the minor turning 18 (or 21 in some states), they will reach the age of majority and be able to use the funds at their discretion.

One planning opportunity for parents with low basis stock positions is to “gift” the low basis shares to the minor child’s UTMA/UGMA. In doing this – and beware of the many variables that can change the mechanics of this [CONSULT WITH YOUR TAX ADVISOR] there can be opportunities to sell the position in the minor’s account, thus recognizing the gain at the minor’s lower/nonexistent capital gains rate.

Roth IRAs:

For children that have earned income but are still in the lowest tax brackets, contributing to a Roth IRA sets the table for potentially decades of tax-free compounding.

For parents that are also business owners, it may behoove them to put children on payroll, assuming there is a real business need and that the pay is commensurate with the work/time.

Parents that can hire their children are able to a) lower their reported income (thereby reducing self-employment/income taxes) and b) provide the child with “earned income” which can go towards their annual Roth IRA contribution. Again – consult with your tax advisor!

DISCLAIMER TO PARENTS Get Your Own Sh*t In Order, FIRST!

As much as we love our children, we mustn’t forget to put our own oxygen masks on first.

Emergency Fund

Having a child naturally increases the odds of having some unplanned expenses. Additionally, the mere fact that you’re now financially responsible for someone beyond yourself raises the stakes for “rainy day” planning. As such, having an emergency war chest to keep things running smoothly in the event of job loss, illness, or a large unexpected expense is crucial.

Generally, when it comes to emergency funds, we suggest keeping three to six months’ worth of essential living expenses readily available in a high yield savings account (Marcus, AMEX, and CapitalOne all offer competitive APYs).

Education Planning vs. Retirement

If you’re torn on whether to invest for your child’s college or your own retirement, more often than not: choose retirement. Children can borrow money to get a college education, you cannot borrow to fund your retirement.

We all want to provide our children with the best education money can buy, but be wary of placing too much investment in this area if it means you’ll be neglecting your own future (in which case you’ll be the financial burden to them later on!).

With college education costs continuing to outpace inflation, it behooves nearly all parents to consider meeting with a college planning expert to navigate the nuances so that parents (and their children!) can get the most for their money.

Insurance:

Health Insurance: 

Be aware of your plan’s family deductibles (especially if in a high deductible health plan [HDHP]) so that hospital bills don’t leave you in a financial bind.

Life Insurance: 

Having a sufficient amount of term life insurance can go a long way in helping a family stay afloat if one parent dies while the children are still too young to provide for themselves. Life insurance death benefits are tax-free and can create breathing room for a widow(er) to figure out the best next steps for the family. This could include taking unpaid time away from work, paying off the mortgage, funding the kids’ tuition/childcare, or any other obligation that the deceased spouse can no longer help with.

Disability Insurance:

While parents may have employer-provided disability insurance, we recommend making sure that it’s sufficient coverage to pay for essential expenses like your mortgage, debt, childcare, and household expenses. Separately, it is always worth considering getting a private/individual policy to supplement any existing coverage that is customized to your needs and “portable” should you leave your current employer. Keep in mind that some policies may pay benefits only if you can’t perform any work at all. If you have a high paying job that requires specific skills, consider an “own occupation” policy.

Maximize Available Tax Credits:

Unlike the Child Tax Credit (CTC) which is picked up on nearly all tax planning software, the Child and Dependent Care Tax Credit is one that is regularly missed as it requires parents to report care expenses. Most parents that pay for childcare while working (or looking for work) can claim this credit.

To qualify, children must be under the age of 13 and parents must report expenses paid for babysitting, daycare, preschool, summer camps, and even nannying arrangements.

Families are eligible to receive up to $8,000 in credits depending on the number of children and household adjusted gross income (AGI). Be aware, parents are required to provide their caregiver’s name, tax identification information (i.e. Tax ID or SSN), and the amount of expenses.

Estate Planning

When it comes to drafting a will, one of the most important parts is selecting who you would like to serve as guardian to your children. Have a conversation with an attorney to make sure other parts of your estate plan are in order (powers of attorney for financial and health care decisions) and be sure to keep beneficiary designations up to date (note: beneficiary designations supersede your will!). Your attorney can help you determine if setting up a trust makes sense for your situation and goals.

Final Thoughts

The last thing we will ever attempt to do is tell someone how to raise their children. We know our lane and parenting advice is not it. Ultimately, though, all parents want the best for their children – kids that are confident, kind, and successful.

When it comes to parenting – regardless of the topic – a common refrain suggests that it’s most important to model the behavior you want your child to exhibit. Preparing children for their financial future begins with you, the parent. By getting your own financial affairs in order, you can speak more confidently/transparently about household finances and raise financially intelligent children that feel empowered to take on the world.

With the cost of raising a child from 0-18 continuing to climb (now up to over $300k), the fewer missteps the better.

Improving Longevity Through Relationships

Improving longevity through relationships is a crucial health pillar that receives far less attention than it deserves.  As we’ve discussed before when it comes to longevity, it’s well documented that only about 20% of how long the average person lives is dictated by genes, the other 80% is influenced by lifestyle and environment.

While longevity is inherently tied to a myriad of factors, Dan Buettner, a National Geographic Fellow and founder of the Blue Zones Project, has identified a few regions around the world – now recognized as “Blue Zones” – where people reach age 100 at 10 times greater rates than in the US.

One might assume that factors such as air quality/pollution, proportion of people who are obese, and the amount of daily physical activity might largely influence outcomes. However, it’s been found that these factors only have a small influence on overall lifespan.

It turns out that relationships are one of the most impactful predictors of longevity.

The Science of Relationships

A research project that followed data across 308,849 individuals for 7.5 years indicated that individuals with adequate social relationships have a 50% greater likelihood of survival compared to those with poor or insufficient social relationships. The magnitude of this effect is comparable with quitting smoking and it exceeds many well-known risk factors for mortality (e.g., obesity, physical inactivity).

When multidimensional assessments of social relationships were considered, the odds of mortality increased by 91% among the socially isolated.

Hormones are believed to play a significant role in the causal connection between relationships and lifespan.

For instance, face to face interactions promote the release of a multitude of neurotransmitters. When we interact with others, our dopamine and oxytocin levels increase and our cortisol (i.e. stress hormone) levels decrease.

Said another way, face-to-face interaction increases our confidence, happiness, and empathy and lowers our inflammation-inducing stress.

Dunbar’s Number

The Oxford evolutionary psychologist, Robin Dunbar, is best known for his namesake “Dunbar’s number.” At it’s core, Dunbar’s number is the number of meaningful and stable relationships you can have at any one time. That includes extended family as well as friends.

The proposed number is 150 although the range of variation is somewhere between 100 and 250.

When examining historical, anthropological, and contemporary psychological data about group sizes, Dunbar found remarkable consistency around the number 150.

This number aligns closely to early hunter-gatherer societies as well as many modern groupings: offices, communes, factories, military organizations, 11th Century English villages, even Christmas card lists.

When the number exceeds 150, a network is unlikely to last long or cohere well.

However, after spending decades studying the complexities of friendship, Dunbar discovered many more numbers that shape our close relationships.

Turns out, Dunbar’s number is less of an absolute numerical threshold than a series of concentric circles, each standing for different kinds of relationships.

A quick summary of these layers:

  • 1.5: Our most intimate, romantic relationship.
  • 5: Our “shoulders-to-cry-on” friendships. They are the ones who will drop everything to support us when our world falls apart.
  • 15: Includes the previous five, these are our core social partners – our best friends. They are our main social companions.
  • 50: Our big-weekend-barbecue people.
  • 150: Our weddings and funerals group who would come to a once-in-a-lifetime event.
  • 500: Our acquaintances
  • 1500: The people whose name you know
  • 5000: Number of known faces.

Relationships Are An Investment

The strength of a given relationship is directly correlated with how much time and effort is invested.

Ironically, despite living in the most “socially connected” time in human history, technology has diluted many of our relationships.

Instead of relying on apps/email/social media to stay in touch, use technology for good – leverage it as a conduit for scheduling a deeper, more meaningful check-in (ideally in-person).

In a country that spends more than $100 billion annually on diets, health club memberships, and nutritional supplements – investing the time/energy into the social fabric of our lives is free, low-hanging fruit with immense ROI.

Curating Healthy Relationships

Many relationships change with the seasons.

We evolve and we grow – so, too, our relationships.

As relationships come and go throughout our lifetimes, the loss of certain relationships shouldn’t be viewed negatively, but rather as healthy pruning. 

As Dunbar reminds us, we have a limited bandwidth for maintaining relationships: every fizzled relationship presents an opportunity to welcome a new one.

One of the commonalities of the world’s longest-lived people in the Blue Zones is that they often “curate” social circles that support healthy behaviors.

Healthy habits and behavior are, quite literally, contagious. Conversely, deleterious behaviors (i.e. obesity, smoking, excessive drinking, loneliness, unhappiness) are also contagious.

Jim Rohn was famously quoted as saying that “we are the average of the five people we spend the most time with.”

The best way to improve longevity through relationships is to begin by surrounding yourself with relationships that fill your cup.

Men’s Health:

Relationships are crucial for men and women in all stages of life.

However, men – especially as they age – are more likely to lack deep, meaningful friendships.

This lack of connection typically leads to one of the most frequent stressors in mens’ lives: loneliness.

CALL TO ACTION:

Men – consider joining me (Dennis) in Woodridge, NY between October 13-16 at the next retreat hosted by The Wisemen Project.

The weekend will combine ancient wisdom with modern science and include:

  • mobility and functional movement
  • yoga and qigong
  • meditative practices and breathwork
  • hiking
  • cold and heat immersion
  • organic chef prepared meals
  • human connection
  • and so much more

For those interested in learning more, feel free to reach out to me directly. If you decide to join, be sure to use the code “friend5” for a 5% discount at checkout.

Preparing Young Adults for their Financial Future

With back-to-school right around the corner, we wanted to use this blog to address preparing young adults for their financial future. particularly those between the ages of 15-24. While some of these topics are especially important for young people, many are relevant for all ages.

Budgeting

There is a common misconception that “budgeting” is restrictive – that one must eliminate life’s pleasures – trading a night out with friends for a single serving of Cup Noodles ramen at home. Not so.

Rather, having a budget simply means that you’re thinking about money decisions before making them. The idea is to become more intentional with your spending so that you’re not forced to stay home, alone, eating Cup Noodles simply due to short-sighted planning.

So, in the same way that a recent college entrant has to learn about balancing their classes, homework, study hours, extracurriculars, and social life, they also need to learn how to prioritize their financial wants vs. needs.

Not having experience managing month-to-month living expenses is no excuse for unconsciously blowing through funds – whether their own funds, loaned funds, or the supplemental money provided by the bank of mom & dad.

Budget Practice for Young People

One way for our children to manage their wants vs. needs as it relates to finances is to give them a sense of agency and personal responsibility in how funds are spent.

High Schoolers

When it comes to back-to-school shopping, consider giving your high schooler a budget to spend on new clothes, shoes, backpacks, and other discretionary items they may need. If you’re feeling generous you can even let them know that whatever they don’t spend, they can keep.

“Want those new Jordan’s? Have at it! But don’t complain when you’re remaining funds only afford you a pair of shorts and a t-shirt!”

Those $60 Vans almost immediately begin looking more appealing.

College-aged Kids

For parents providing their college-aged kids with supplemental funds, consider setting parameters around monthly living expenses.

Always re-funding their checking account and/or paying off the credit card bill in full each month is unlikely to instill personal responsibility as it relates to finances.

Instead, consider setting a monthly amount that you’ll contribute to their debit account. If you’re child exceeds that and there’s still five days left in the month they’ll either learn to love those Cup Noodles or they’ll adapt… or they’ll get frustrated and tell you you’re a bad parent.

In any case – they’re learning through living.

Big Ticket Expenses

Inevitably, there will be cases when your child asks for your support for bigger ticket expenses.

Examples: a spring break trip, studying abroad, or purchasing a car.

Does your child need to fund any one of these fully through their summer job, work-study, or internship? As parents, that’s your call. It’s likely that many parents reading this either self-funded these things or skipped out on them because both parental support and personal funds were lacking.

However, for parents that are lending financial support to children, getting your child to contribute towards the larger goal – perhaps a defined percentage or an agreed upon amount – is a great way for them to have skin in the game.

Developing a Good Credit History

Building good credit history is an important task. In an increasingly cashless society, creating a track record that shows you are a reliable borrower is a major step in the right direction towards financial independence. The sooner one begins, the better.

Secured Credit Cards

Getting a credit card can be a challenge for those without a credit history. This is where secured credit cards come in. Children over the age of 18 can qualify, regardless of income.

REASON: A secured credit card requires putting down a security deposit (think: collateral) that acts as the card’s credit limit. It’s kind of like your little one riding with training wheels again… but it builds their credit history.

We found Bankrate’s list of secured credit cards helpful to sort through the variety of options.

Do note that secured credit cards are not the only way for a young person to get access to a card that builds their credit history – they can also be added as an authorized user on a family member’s credit card.

Establishing good credit at a young age can open up opportunities down the road and credit scores can impact all of the following:

  •  Leasing an apartment
  • Setting up utilities
  • Applying for a job
  • Buying or leasing a car
  • Purchasing a cell phone plan
  • Interest rates for credit cards and various loans

Additionally – there are some basic rules of thumb to ensure that credit is being used appropriately and improving a new borrower’s credit score:

  • Set up automatic payments (to ensure no missed payments)
  • Keep credit utilization below 30% credit utilization (i.e. staying below 30% of total credit limit)
  • Pay off your balances in full when due (i.e. not paying off immediately after each transaction)
  • Make student loan payments on time

DID YOU KNOW: Your three free credit reports can be accessed directly from annualcreditreport.com – the only source for free credit reports as authorized by Federal law.

Other important financial know-hows for young adults:

Knowing How a Bank Account Works

Do they understand:

  • minimum balance requirements?
  • overdraft and service fees and how to avoid them?
  • how long it can take to transfer funds between different accounts and institutions?

Being Smart About Cybersecurity

Many students use shared Wi-Fi networks that are not secure – are they aware of this?
Consider investing in a Virtual Private Network (VPN) to establish a secure, encrypted connection between your child’s computer and the internet.

Renting Textbooks

No need to buy new if you can rent or buy used.

Student Loans & Delayed Gratification

For those that take out student loans, it’s not uncommon to have some extra funds available after tuition/room/board fees are paid.

No – these funds are not fun money. Student loan borrowers should be reminded that the longer these surplus loan funds can be stretched, the less they’ll need to fork over for monthly repayment when they begin working.

Long-term Investing

Children with on-the-books earned income are also likely to be in a low (or zero %) tax bracket. This presents a great opportunity to open and fund the golden egg of their future financial plan: a Roth IRA.

Final Thoughts:

Discussing household finances is, unfortunately, a taboo subject in many families. However, the more proactive we can be in preparing young adults for their financial future the better we can equip them with information to help them avoid common pitfalls and succeed.

So – please – think about those young adults (or soon-to-be young adults) in your life and share what you can. Each of us stands on the shoulders of those before us. Even if you don’t feel that your lived experience is worth sharing, it’s highly likely that a young person could glean gems of wisdom from both your financial successes and your defeats.

Parents: Also be aware of recent FAFSA updates and the pros and cons of cosigning a student loan.

CLIENTS: We are offering an on-demand financial literacy course that your children have access to for FREE. This is not only a great educational opportunity for them, but also something they can leverage on their resume or school application.

Please be in touch if this might be of interest.

The Dreaded “R” Word

The Dreaded "R" Word

Probably like you, we’re hearing the dreaded “R” word – recession – being referenced quite a bit lately.

In fact, in the month of June, Google Trends – which analyzes the popularity of Google Search across various regions and languages – indicated that searches for “recession” have officially surpassed those for “inflation.”

What’s causing the dim outlook?

In simplest terms: Uncertainty.

Most of that uncertainty lands squarely around the recently overtaken Google Search favorite: inflation.

At the European Central Bank Forum in Sintra, Portugal last week, Fed Chair Jerome Powell – the man with quite possibly the most unenviable job in America right now – said:

“I think we now understand better how little we understand about inflation” and that there is “no guarantee the central bank can tame runaway inflation without hurting the job market.”

Not the most reassuring words.

Inflation Blame

A succinct summary of inflation contributors (credit to Barry Ritholtz):

  1. Covid-19
  2. Congress
  3. President Biden CARES Act 3
  4. President Trump CARES Act 2
  5. Consumers (who overspent without regard to cost)
  6. Consumers (shift to goods)
  7. Russian invasion of Ukraine
  8. Just In Time Delivery (supply chain)
  9. Fed/Monetary Policy
  10. Wages/Unemployment Insurance
  11. Home Shortages
  12. Semiconductors/Automobiles
  13. Corporate Profit Seeking
  14. Tax Cuts (2017) / Infrastructure (2022)
  15. Crypto

Inflation: The Path Forward

Between a rock and a hard place, the Fed has made clear that it will prioritize reining in inflation.

To do this, the Fed will continue tightening monetary policy. Quantitative easing (QE discussed more in previous contribution) has been discontinued and additional interest rate increases are planned.

The question then becomes – as Powell alluded to in Sintra – whether the Fed can achieve this without further upending the broader economy.

So, does all this point towards the inevitability of a recession?

Let’s start with the basics.

What is a Recession?

Recessions are an unavoidable contraction in a nation’s economy, a natural part of the business cycle.

While many consider two consecutive quarters of declining GDP to be a recession, the non-partisan National Bureau of Economic Research (NBER) – the official arbiter of recessions – defines it slightly different.

According to NBER, “a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months” that manifests itself in the data tied to “industrial production, employment, real income, and wholesale-retail sales.”

Essentially three criteria that must be met to officially qualify as a recession: depth, diffusion, and duration.

What causes a recession?

Recessions can be set off in a variety of ways. Some causes include:

  • Sudden economic shocks (1973 OPEC energy crisis)
  • Bursting of asset/debt bubbles (‘01 dot-com bubble, ’08 subprime mortgage crisis)
  • Too much inflation/deflation (US inflation in ‘70s, Japan deflation in ‘90s)

Is another recession inevitable?

It’s pretty much guaranteed, yes.

Since 1854 (the first year we have official economic data), the United States has experienced 35 recessions which have occurred, on average, nearly every 4-5 years.

A chart outlining some of these recessions (and their respective GDP contractions and durations) was featured in a blog post of ours from 2019 (also a timely read considering Le Tour just started!):

The Next Recession and What We Can Learn from the Tour de France.

Why do we care about recessions?

Recessions have real world consequences:

  • Unemployment can rise: Recessions can lead to less spending/consumption which can result in layoffs, pay/benefit cuts, and heightened job insecurity. For job seekers, recessions can be a challenging time because there is less hiring and employees will typically have less leverage in pay negotiations.
  • Businesses can fail: The same reduction in spending/consumption that leads to unemployment can also directly lead to businesses being forced into bankruptcy.
  • Retirement plans can be upset: The retirement landscape is already full of landmines for the average American. Sprinkle in a recession + inflation and you have an environment that will be unforgiving to overspending/mistakes. Those that retain jobs may decide to stick around longer to weather the storm.
  • Borrowing can get more difficult: As the broader economy slows down, or backtracks into recession territory, it’s not uncommon for lenders to tighten their standards for mortgages, vehicle financing, and other types of loans.

Is the United States heading for a recession?

It’s all opinion and speculation until it’s here. Poll various economists, strategists, and bankers and you will get inconsistent answers.

Even better yet – and perhaps just as reliable – ask your neighbor what they think. Consumer sentiment alone speaks volumes.

While recessions are hard to predict, leading indicators are pointing to the U.S. inching closer to one:

Room for optimism?

The consumer makes up 70% of the economy and there is an argument that, based on US household holdings of cash and cash equivalents, that the US consumer has never been more prepared for a slowdown:

US Household Holdings of Cash & Cash Equivalents

And no, the cash is not necessarily being hoarded by just the wealthiest households. Those in the bottom half are holding 45% more cash than from two years earlier.

Growth in total household wealth also provides a glimmer of hope.

Between Q4 2019 and the end of Q1 2022, total household wealth increased from $109.9T to $141.1 T – an increase of nearly 30%. All this while the ratio of household debt to disposable income dropped to the lowest levels of anytime seen between 1980-2020.

Air flight – another indicator of consumer sentiment measured by TSA checkpoints – is also seeing it’s highest levels of passengers since the start of the pandemic. This is a great sign when considering that business travel is still down 30%.

Will this continue? Anyone’s guess. But at the moment the average US consumer has more cash, less debt, and more overall wealth than they’ve ever experienced.

Closing Thoughts:

The next time you hear the dreaded “R” word referenced, consider taking a page out of the Stoics’ playbook: prioritize the things within our control, and ignore the rest.

We have no way of knowing, or control over, when the economy will rebound, when inflation will subside, or when the market will be primed to recover it’s losses.

However, the things we can control include:

Financial:

  • Spending habits (and potentially adjusting in light of inflation)
  • Making strategic tax-planning decisions
  • Paying down high interest debts
  • Continuing to invest in the market.

Life:

  • What we consume (food, media)
  • Our mental and physical fitness
  • Who we choose to spend time with
  • The amount of sleep we get
  • Our body language and breath
  • Our opinions, attitudes, aspirations, dreams, desires, and goals.
  • The number of times we smile, say “thank you,” or express gratitude for all we do have today
  • Our level of honesty with self and others

In the words of Epictetus, “He is a wise man who does not grieve for the things which he has not, but rejoices for those which he has.”

Attention: Our True Source of Wealth

Attention

Time is often cited as one of the most (if not the most) valuable currencies.

In his recent feature on the Tim Ferriss Show, Sam Harris disputes this.

Sam posits that attention, not time, is our most valuable form of wealth.

Time’s shortcoming: distraction.

Consider how much of our attention is spent on:

  • thinking about the daily tasks that need to get done
  • deciding what to eat
  • buying things (or thinking about buying things)
  • our exercise routine
  • our sleep
  • our social interactions
  • our dependents
  • an “important” thing coming up next week/month
  • social media
  • entertainment (i.e. Netflix, podcasts etc.)

From one thing to the next, there is always something competing for our precious attention.

The problem arises, though, when we attempt to juggle multiple tasks that each individually require our full attention.

Ever try having a live, in-person conversation while typing on your phone (or computer) at the same time? Most (if not all) of us have. Besides the rude factor, juggling these two tasks – or really, any two tasks – happens to be impossible.

Studies show that our brains are incapable of multitasking. Anytime that you believe you are successfully multitasking, you are really just switching your attention from one task to another.

Besides being mentally taxing, multitasking incurs a “switch cost” each time we hop from one task to another. Consequently, it almost always takes longer to complete two tasks simultaneously compared to monotasking.

Research indicates that this “switching cost” may cost as much as 40% of our productive time.

Living An Examined Life

Each time we do something – pleasant or not – it’s worth recognizing that while we’re doing it, it may be our last time.

For instance:

  • there will be a last time that your baby wakes up in the middle of the night crying.
  • there will be a last time that your child asks you to read a bedtime story.
  • there will be a last time that you go to the beach.
  • there will be a last time that you get to enjoy dinner, or a phone call, with a certain loved one.

Embracing our finitude – as morbid as it may seem – can add beauty to all areas of life, even the inconveniences.

Additionally, embracing the fleetingness of life can also help us prioritize how to direct our attention.

Prioritizing Your Attention

We largely become the things we pay attention to.

By cultivating mindfulness and finding peace in the present we’re better able to prioritize what we direct our attention towards.

Are our thought patterns so ingrained that we’re stuck on autopilot as forever victims to distraction?

Or, is it possible for us to ignore the things not worthy of our attention and focus solely on the things that make us better versions of ourselves?

Rising above being passive “victims” of life’s distractions begins with prioritizing presence: being here, now.

Final Thoughts

During the podcast, Sam Harris references the “ghost of mediocrity” that can sometimes loom over the present.

If we’re mindful, we can feel it hanging over us when a conversation is not going well, or when a workout is lacking motivation, or when you’re feeling uninspired/unproductive.

With mindful, focused attention, we can:

  • recognize these moments as they happen
  • cast aside the immediate past
  • and make all that’s ahead from the present moment forward better.

Life is comprised of fleeting moments, finite opportunities, and distractions.

Guard your focus and connect more deeply with what matters most.

Lastly, if you haven’t already tried, visit our previous blog about Living Your Eulogy Virtues. This can be another good exercise for living a more intentional, examined life.

The Changing Longevity Landscape

die young late

Living beyond age 100 may become commonplace.

Now, before I go down this rabbit hole, a disclaimer: Extending lifespan beyond known biological bounds is still sci-fi stuff.

However, also consider modern innovations that were also once considered sci-fi:

  • Airflight (planes/jets/helicopters/jetpacks)
  • Space travel
  • Landing on the moon
  • The International Space Station
  • Driverless cars
  • Mobile phones
  • The internet
  • Lab-grown meat
  • Machine learning
  • Video calls
  • 3D printing
  • Smart homes
  • Underwater exploration
  • Online metaverse
  • Wearable tech
  • DNA sequencing

So with an open mind, let’s dive in.

Aging = A Disease

Research focused on the root causes of human mortality is increasingly pointing towards one common denominator: aging.

Aging? As the cause of mortality? Yes, bear with me.

At it’s most basic level, aging is nothing more than an accumulation of damage: breakages in the machinery of your cells combined with build ups of metabolic waste which lead to the failure of biological systems. With the exception of acute accidents, the most common causes of death (heart disease, cancer, neurological disease/degeneration) all increase as we age.

On June 18, 2018, the World Health Organization even added a new disease code which every country in the world is encouraged to use. The code was MG2A: old age.

Aging From 30,000 Feet:
  • Lifestyle and genetics influence cellular health.
  • Cellular health determines our rate of aging.
  • The process of aging leads to biological misfires, cellular breakdown, and disease/death.

Two Theories of Aging:

While slowing down the process of aging could help in forestalling disease, it’s still unclear to what degree aging can be slowed, paused, or reversed.

As it stands now, there are two basic theories surrounding aging/lifespan:

  1. Biological Limit on Life: According to this theory, humans (along with all other species) have a natural limit to their lifespans that cannot be exceeded. Using mathematical modeling, researchers from the journal Nature Communications predict that after 120 to 150 years of age the human body loses its ability to recover from illness and injury.
  2. Longevity Escape Velocity: Also known as age escape velocity and actuarial escape velocity, this is the situation in which technology extends a person’s life expectancy at a faster rate than they are aging. In other words, the potential for immortality. Some gerontologists believe that the odds of LEV are as high as 50% and that we could learn the answer within the next 15 years.

Regardless of which theory ultimately ends up proving correct, it is quite likely that lifespans will continue to be extended (perhaps dramatically) beyond the averages of today. According to the CDC, the average life expectancy for a female in the US is 80.5, for males it is 75.1.

Odds of living to 100 (with vitality)

Simply making it to the triple digit milestone is currently out of reach for many. Per data from the Social Security Administration, for a married couple where both spouses are 65 years old, there is a 8.7% chance that at least one member of the couple will live to 100.

Now, while the US does have the highest number of centenarians globally (approx. 97,000 people, or 0.03% of the US population), they are a rare bunch.

Getting to 115 is currently a 1-in-100-million proposition. And reaching 130 is a mathematical improbability of the highest order. At least it is right now.

However, for those able to invest in their health and maintain physical and cognitive function over these next 10-15 years, the future is looking bright.

According to Dr. David Sinclair, author of Lifespan and co-director for Biology of Aging Research at Harvard Medical School, “if even a few of the therapies and treatments that are most promising come to fruition, it is not an unreasonable expectation for anyone who is alive and healthy today to reach 100 in good health—active and engaged at levels we’d expect of healthy 50-year-olds today.”

The Science

You may have heard the following:

Genetics load the gun, but lifestyle pulls the trigger.

Studies of family genealogies and identical twins place the genetic influences on longevity at between 10% and 25% which, by any estimation, is surprisingly low. Conversely, your lifestyle accounts for 75%-90%.

In other words: Our DNA is not our destiny, lifestyle plays an outsized role.

With recent advancements in both technology and medicine, our longevity rates may be increasing faster than many realize.

Perhaps the greatest leap forward occurred in 2012 when Shinya Yamanaka discovered what he referred to as the “elixir of life.”

And no, the “elixir” was not a trendy food or supplement. It was the discovery of a process called “reprogramming” – that is, in a crude oversimplified sense: using genome-editing CRIPR technology to revert mature cells into younger cells.

This discovery would earn Yamanaka the Nobel Prize of Medicine.

Following Yamanaka’s discovery, we’ve entered a period of exponential medicine: genome sequencing, RNA transcriptomics, Wnt pathway modifiers, vaccines, liquid biopsies, CAR-T cells, gene therapy, exosomes, and stem cells are just a sampling of the technologies (many of which the world’s billionaires are fast-tracking).

The ability to reprogram cells along with these other interventions could prove revolutionary in delaying biological decline.

For instance, when it comes to cancer, the body is always producing cancer it’s just that our immune system zaps the cancer 99% of the time. Early stage cancers, those in stage 1 and stage 2, are highly curable. It’s when a cancer metastasizes beyond those initial stages that the fight typically becomes more difficult.

In the case of cancer, as opposed to being reactive to the symptoms before it’s too late, there is now proactive screening for 60+ different cancers to catch them in the earlier, more treatable stages.

Proactive care, as opposed to reactive treatment, is the future of healthcare.

Lifespan vs. Healthspan

In a previous blog on the Centenarian Olympics, we discussed the idea of “backcasting” – or reverse engineering – the tasks that you would need to be able to complete at age 100 to maintain independence and how you could begin training for them today. The reason for this is that, for many of us, the goal is not to simply increase the quantity of years lived. Instead, it’s to increase the quality of our years by decreasing the number of years nursing disease.

Between 1950 and 2020 the world population swelled from 2.9B people to 7.8B people. During that same window of time, average (global) life expectancy rose 26 years, from 47 to 73 years of age. While life expectancy has risen, maintaining health, function, and overall quality of life has lagged.

Unlike the average lifespan, which is now 79.3 years in the US, the average healthspan (i.e. period of one’s life that one is healthy) is only 63.1 years old. In other words, roughly 1/5 of an individual’s life is now spent managing end of life morbidity.

With new medical advancements and lifestyle improvements it’s looking more and more likely that there are solutions to close the gap between the quantity of your years (lifespan) and the quality of them (healthspan).

Financial Planning & Playing the Long Game

At wHealth Advisors, we view the traditional definition of “wealth” – your investments, salary, net worth etc. – as a bit limiting and one dimensional. Like the term “success”, true “wealth”… ehmm wHealth… is more nuanced, nebulous, and unique to each of us. What is optimal for me may not be optimal for you.

Therefore, the wHealthy person is the one with a uniquely optimized balance of financial independence, health (mental/physical/emotional/spiritual), rest, and social connection. They are also likely to have sufficient degree of autonomy and purpose in their professional and/or personal life.

All the returns in life – whether in finances, health, knowledge, or relationships – are the product of good decisions being compounded over long periods. Therefore, improving our overall wHealth is not typically something we can change dramatically overnight, it’s incremental.

Final Thoughts

As financial planners, we feel immense responsibility – and gratitude – in applying our technical expertise to empower our clients to be the people, and live the lives, they’ve always dreamed of.

The maxim of “health is wealth” is all too cliché and oftentimes not met with action. Like with finances as is the case with health – the best time to have started investing in it was 10 years ago… the second best time is today.

So, assuming that you could live with vitality to (or beyond!) age 100 – how might that change the way you make decisions today?

Would you make any changes to your current lifestyle?

Would you invest more into (or divest from) certain relationships?

Would you dedicate more attention to any areas of your overall health (mental, physical, emotional, spiritual etc.)?

Would you make different career decisions/transitions?

Would you invest more time, energy, and intention into closing the gap between who you are today and the best version of yourself?

Let us know so we can begin planning for that future today!

Conscious Breathing: Our Hardwired Superpower

Depression, anxiety, and sleep dysfunction rates among both children and adults have reached epidemic levels and are getting increasingly worse. To our own detriment, many of us go through life not aware of the benefits of conscious breathing.

Out of all the daily self-care modalities available, conscious breathing is arguably the lowest hanging fruit. It does not require much time, it is accessible to individuals of all abilities, and it is free.

Benefits:

One of the greatest benefits of conscious breathing – an umbrella term encapsulating different types of breathwork – is its ability to reprogram our nervous system and combat low-grade, chronic stress.

Physiologically, as opposed to the sympathetic “fight or flight” system, conscious breathing turns on the parasympathetic system – also referred to as the “rest and digest” system – which is essential for overall health and longevity.

Breathwork is essentially our inner pharmacy to calm the mind, relax the body, and even provide us with a boost of energy/clarity. It’s no wonder that the Department of Defense and Navy Seals ascribe to different forms of conscious breathing.

Personally, breathwork can be helpful before, during, or after a difficult, or stressful event. It can help keep us calm in traffic or down-regulate our thoughts/emotions before bed. Professionally, it can calm our nerves before a meeting or speaking engagement.

Interoceptive Awareness

Just as we’re attune to our body’s need to eat or to go to the bathroom, so too should we be mindful of our body telling us we need to breathe. Holocaust survivor Viktor Frankl wrote:

“Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.”

By getting more in touch with what’s going on within us we can better control how we respond to the world around us.

Explore for yourself and consider teaching your children about the benefits of conscious breathing before their sporting events, exams, and during any moments of anxiousness.

Resources

In our blog post on cold therapy, we shared the 4-7-8 breathing technique. Linked below are some additional videos that we’ve found helpful:

5 Ways To Improve Your Breathing with James Nestor (12 minutes)

Breathing Techniques (4 minutes)

Nervous System Reset – Guided Breathwork (22 minutes)

 

The Federal Reserve’s Toolkit + Market Hangover

The Federal Reserve’s toolkit consist of two blunt tools: the fed funds rate + quantitative easing. In this month’s contribution we’ll discuss the potential short and long-tail impacts of both.

On Wednesday (5/4/2022), in an effort to bring down rising inflation without disrupting economic activity, the Federal Reserve boosted interest rates by 50 basis points (.50%).

Like downing a Pedialyte following a three-day bender, the markets initially reacted positively. However, nausea quickly set in and the previous day gains were quickly reversed. By the end of the following trading day, ol’ S&P 500 and it’s tech pal Nasdaq were both sitting on the toilet holding trashcans, down 3.6% and 5% respectively. The single worst day for the market since June 2020.

In fact, last week marked the fifth consecutive weekly decline in the S&P 500, it’s longest losing streak since June 2011.

April CPI data released the following Wednesday (5/11/2022) showed another upward inflation surprise (above analyst expectations) and suggests that the deceleration is going to be painstakingly slow.

What’s going on?

In short: A lot.

  • Covid Supply & Demand Constraints: Domestically, although things are beginning to look better, the dust has still not settled from the logjams created by Covid. Internationally, China’s most recent bout of Covid-19 lockdowns has reduced the supply of Chinese exports and dampened demand for imports.
  • Oil Shock: Sanctions against Russia are forcing countries reliant on Russian oil to explore other energy suppliers/solutions which has driven up global oil prices.
  • Inflation: No matter how transitory the Fed believes inflation may be, they’re no longer sitting around and waiting for the situation to rectify itself. They are now deploying their limited arsenal of blunt tools to bring this down.

This last point re: inflation/Fed tools deserves some extra attention.

Federal Reserve: The Bartender

As already mentioned, the primary tools in the Federal Reserve’s toolkit are:

  1. controlling the federal funds rates (which impacts interest rates)
  2. quantitative easing (QE) which introduces new money into the money supply.

In another alcohol analogy, imagine the Fed as our bartender.

Interest rates:

If the bartender wanted to incentivize drinking (helllllllo happy hour!), the bartender could lower the prices which might increase consumption. The drink servers (banks) would let all the patrons (individuals/investors etc.) know that drink prices are down – get ‘em while you can! This is, in effect, what lowering the fed funds rate does for our economy – it lowers the cost of borrowing and incentivizes investment.

Conversely, perhaps the party is really hoppin’ and there’s a line around the corner to get in, the bartender might then increase drink prices (i.e. increase the fed funds rate) to slow down the debauchery (i.e. irrational exuberance).

 Quantitative Easing:

QE is the other strategy that the bartender (Fed) deploys to get a dreadfully boring party (i.e. crashing economy) poppin’ again.

In this scenario, you can only order drinks (i.e. do business) with the drink servers (banks). During happy hour, the bartender notices that the servers (banks) aren’t hawking drinks (lending), they have empty trays. To get them up and active again, the bartender loads up the drink trays (i.e. Fed buys long term securities from the open market) but lowers the amount of alcohol in each cup (i.e. the fed’s asset purchases increase the banks’ reserves which results in lowers yields + more money in circulation).

This action results in the drink servers (banks) being flush with heavy trays of drinks (excess reserves) and incentivized to get back out to doing business (lending).

Ugh, yes – monetary policy is nuanced and there are some obvious holes in these oversimplified analogies but hopefully this is kinda helpful?!

A Recent History of Fed Interventions

While the Fed has deployed it’s influence on interest rates by increasing/decreasing the federal funds rate in the past, this tool had traditionally been reserved to rein in inflation and/or unemployment.

However, beginning with Alan Greenspan following the 1987 stock market crash, Federal Reserve chairs began lowering interest rates for one additional reason besides controlling inflation/unemployment: to proactively halt excessive stock market declines. This “Greenspan Put,” as it became known, acted as a form of insurance against market losses.

Since then, the Fed has intervened with lowering interest rates on a number of occasions to minimize stock market volatility/losses: the savings and loan crisis, the Gulf War, Mexican peso crisis, Asian financial crisis, Long-Term Capital Management (LTCM) crisis, Y2K, dotcom bubble, and 2008 financial crisis.

Quantitative easing (QE), on the other hand, is a more recent monetary policy first deployed by Japan in 2001 to stymie the collapse of their financial market. In the US, QE was deployed following the 2008 crisis in three separate waves: in 2009, 2010, and 2012.

As mentioned earlier, QE is when central banks introduce new money into the money supply. In practice, this is done by central banks purchasing longer-term securities from the open market. This action drives up money supply and encourages institutions to keep lending (and investing!).

While it’s the Treasury that controls the printing of money, it’s the Federal Reserve that effectively decides how much money is created (in the form of actual paper money + credit).

What the Fed is doing now

Most recently, as global financial markets began nosediving due to Covid-19 lockdowns, the Federal Reserve stepped in with a broad array of actions to limit the damage.

First, they reduced the fed funds rate to ground zero (0.0%-0.25%) which brought the cost of borrowing to historic lows. They also pursued quantitative easing (QE) which included large purchases of U.S. government and mortgage-backed securities as well as lending to support households, employers, financial market participants, and state and local governments.

Through quantitative easing (QE), the Fed’s balance sheet has now swelled to nearly $9T (nearly double that following the ’08 financial crisis).

The Hangover

The combination of lower interest rates and $9T of QE is like a shot of adrenaline, or a Red Bull Vodka – it gives an immediate bump but a potentially painful come-down.

At wHealth Advisors, while we’re rationally optimistic that the long-term return potential in the stock market remains strong, there a number of hurdles facing the short/medium term:

  • Increasing National Deficit: The current national debt is approaching $30T. The 2017 Tax Cuts and Jobs Act resulted in record corporate profits and strong stock market performance. However, the cuts essentially 1) borrowed economic growth from the future and 2) are expected to add $2-2.2T to the national deficit over the next six years. The 2017 tax cuts + QE response to Covid-19 have swelled the deficit and put the US on a “fiscally unsustainable” path, to quote the Government Accountability Office (GAO).
  • Tax Hikes Likely: There seems to be little interest in reducing federal expenditures. As such, without extreme austerity, the only other solution to combat rising deficits is increasing taxes (likely impacting both individual/corporate rates).
  • Slower Growth: Economists expect 2.3% GDP growth per year, on average, over the next 10 years, even after accounting for expectations of increased economic activity in the near term. This compares to historical average GDP growth of 3.1% per year since 1948.
  • Muted 10yr Equity Outlook: A lower economic outlook combined with record high equity valuations has many fund companies bracing investors for lower expected returns going forward. Vanguard forecasts US equities to have a 10yr annualized return between 2.0-4.0% and international equities to range between 5.1-7.1%.

 Final Thoughts:

The Fed’s QE actions, creating $9T more or less out of thin air, is somewhat uncharted territory. It will take time to fully understand the ramifications of this. For the time being, we’ve got inflation and a choppy stock market.

In the immediate future, the Fed has made clear that they are willing to increase unemployment to slow down inflation. To do this, the Fed is targeting a 2.25% fed funds rate and aiming to reduce their $9T balance sheet by $1T over next 12 months.

Over the short-medium term, continued stock market volatility will be inescapable. Actively reducing equity allocations in anticipation of, or in reaction to, fed funds rate increases is unlikely to lead to better investment outcomes.

Over the longer-term, investors who maintain a broadly diversified portfolio and use information in market prices to systematically focus on higher expected returns (i.e. exactly what we do for our clients at wHealth Advisors) should be better positioned for long-term investment success.

Resilient financial plans are designed with unpredictable, gloomy outlooks in mind. Please be in touch if you have any questions or concerns regarding your plan’s resiliency for the road ahead.

The SEC Finally Enforces ESG

SEC enforces ESG disclosure

With Earth Month upon us, we’re happy to report one small, incremental bit of progress in finance:

The Securities and Exchange Commission (SEC) will finally enforce ESG disclosure and begin requiring public companies to share their greenhouse gas pollution and climate risks.

Pressure Has Mounted – The SEC Finally Enforces ESG Disclosure

Back in a 2019 blog post we wrote about our key takeaways from three finance-focused climate events we attended.

The events had confirmed our understanding that ESG investing – that is, investing in funds that claim to prioritize environmental, social, and governance (ESG) factors – was subjective and, at best, financial industry “greenwashing.” 

Reason: Up until now, the SEC has not required public companies to disclose any ESG metrics. Without metrics, ESG fund managers were forced to make subjective judgement calls about their fund’s holdings (note: unless explicitly stated, ESG funds rarely divested from any specific companies or asset classes). Despite this reality, fund companies marketed these funds as fuzzy, feel-good environmentally-socially-conscious investment solutions.

At the time, the SEC defended it’s position by claiming that ESG metrics were nonmaterial to shareholders/investors.

Since then, and considering that there is now over $40 trillion in assets globally invested in ESG funds, there has been significant pushback from nearly all corners of the investment world. Individual and institutional investors, state pension funds, endowments, and even sovereign wealth funds have all pushed for more ESG disclosure.

Why Do Investors Want More ESG Disclosure?

One possible answer is, for the same reason they want good consistent financial disclosure: They want to be able to understand how companies work, so that they can buy the good ones and avoid the risky ones.

And most of the SEC’s proposal is about that sort of thing: Climate risks can affect a company’s business and financial results, so investors need to understand those risks to understand the business.

In other words, an about-face:

Emissions + climate risks = material information for shareholders/investors

Major Shift

This marks a major shift in how corporations must show they are dealing with climate change.

For the first time ever, the SEC finally enforces ESG and plans to require businesses to outline the risks a warming planet poses to their operations. In fact, some large companies will have to provide information on emissions they don’t make themselves, but come from other firms in their supply chain.

The rules will require companies to:

  • describe what climate-related risks they face and how they manage those risks
  • disclose, if applicable, a “transition plan” to adapt to a warming world, or whether they “use scenario analysis to assess the resilience of their business strategy to climate-related risks,”
  • disclose and quantify the use of carbon offsets
  • disclose how their financials are affected by climate risk

In essence, the SEC is proposing a complex accounting regime for ESG, a legally approved set of Generally Accepted Climate Principles, with its own body of technical standards and its own set of climate attestation professionals.

Takeaway:

While we’re optimistic that these new disclosure requirements will improve ESG investing, do note that it will take time. Implementation will take place between fiscal year 2023 and 2026 (depending on the size of company).

While increased disclosure of public companies is good, the UN’s Intergovernmental Panel on Climate Change’s (IPCC) latest climate report suggested that ESG investing “does not yield meaningful social or environmental outcomes.”

Instead, the report cited, in order to avert the increasingly likely scenario of catastrophic global warming, the world needs stronger government policy and enhanced regulation.

Happy Earth Month. 

How will you do your small part to honor Mother Earth this year?

Let us know!

The Centenarian Olympics

Training for the Centenarian Olympics

Training for a long, healthful, and functional life is not the same as training for performance. Eminent longevity doctor, Dr. Peter Attia, notes that, for most people, the body will fail before the other systems (brain, heart, etc.).

To identify the training protocols that would allow one to compete in what he refers to as “The Centenarian Olympics,” Dr. Attia suggests we should “backcast” (i.e. the opposite of forecast), or reverse engineer, the activities that we would need to do at age 100 and begin training for them today.

Some things your 100-year-old self may need to do:

  • Play with your potential future grandkids and great grandkids
  • Lift a 30lb suitcase into an overhead bin
  • Get up from the ground
  • Go grocery shopping and carry two 10lb grocery bags up/down two flights of stairs
  • Bathe, shower, and dress yourself independently

Dr. Attia has said: “If you have the aspiration of kicking ass when you’re 85, you can’t afford to be average when you’re 50.”

When backcasting these activities, the training protocols are based around a few essential pillars:

  • Stability
  • Strength
  • Aerobic Performance
  • Anaerobic Output

Let’s talk about each of these:

Stability: 

The foundation of the four exercise components – most people start to fail first with their stability. Dr. Attia recommends working with a qualified Postural Restoration Institute professional. You can also practice stability focused routines/exercises which include Pilates, yoga, and tai chi, to name a few. For those striving to be functional 100-year-olds, light stretching should be part of the daily routine and longer 60-minutes stability-focused sessions can be completed weekly.

Strength: 

Aging robs us of our strength – we lose 35-40% of our strength between age 20 and 80. Approximately 1-2% of our strength is lost each year after age 50. In fact, grip strength alone is shown to be a reliable biomarker for future injury (and death) prevention. To maintain strength, longevity experts suggest strength training three days per week. Some longevity-focused strength training exercises are linked here.

Aerobic Performance: 

Aerobic exercise consists of less intense, longer bouts of activity. Dr. Attia is a big proponent of Zone 2 heart rate training for aerobic performance – that is, the highest metabolic output/work that you can sustain while keeping your heartrate 60-70% of your max + lactate level below two millimole per liter.

In other words, for many of us, this might translate to walking uphill on a treadmill at a 15% incline going 3-3.4mph. Another option is riding a stationary bicycle at a pace that allows you to carry a conversation, but the conversation feels a bit strained (the person you’re speaking with would know you’re exercising). Zone 2 aerobic training should, ideally, account for 2-4hrs of your overall activity per week.

Anaerobic Output: 

Anaerobic activities are much more efficient and therefore do not require as much time as aerobic. This type of activity is more intense and focused on your Zone 5 heart rate (i.e. 90-100% of maximum HR). Anaerobic-focused workouts include HIIT, Tabata, and different boot-camp type workouts. However, they can be even shorter (30-60sec) “all-out” bursts of exertion performed by running/rowing/cycling or anything that gets your HR to Zone 5.

Less discussed, but arguably just as important as your physical training for the long haul, is the quality of your sleep. Take a look at our past blog for ways to improve your sleep and increase your quality of life.

When Worlds Collide

Investors need to be prepared for when worlds collide. Collisions – whether they be on a macro level (like war, famine, geopolitical strife etc.) or on the micro level (a professional transition, the loss of a loved one, a disability etc.) – can disorient even the most emotionally stable.

In this piece, a contribution from our March 2022 newsletter, we share our thoughts on what we’re seeing from the 30,000ft, global viewpoint. We also narrow our scope and discuss what you – personal finance investors – can do in light of all the noise, volatility, and events that are beyond your control.

The Macro

Russia-Ukraine:

The events in Ukraine are heartbreaking. We’re certainly not qualified to speak about the political implications of this invasion, but anytime there is aggression and loss of life, it is a tragedy.

From a financial perspective, markets had been bracing for a possible Russian invasion for much of February. Leading up to the invasion there was increased market volatility and a drop in the major indexes.

Oil Ban:

Just yesterday, the Biden administration announced an executive order halting all imports of Russian oil.

Roughly 8% of US imports of crude oil and petroleum products came from Russia in 2021, representing just 1% of Russia’s total oil exports globally. However, some US allies have indicated they may follow our lead with similar embargos.

These oil bans will impact global oil supply and inevitably result in gas prices continuing their steady incline (which have already climbed more than 60% this year).

Macro Movers and Market Impact:

Between the growing Russia-Ukraine crisis, continued inflation, rising commodity/metal prices, and the anticipated Federal Reserve interest rate hikes, it’s anyone’s guess just how much corporate profits (and your portfolios) will be impacted.

The image (below) shows how the market has fared during previous global events.

Our advice: Ignore the Macro

As we look ahead, from a personal finance standpoint, we encourage you to not react emotionally (i.e. buying/selling in a panic) based on macro events that are beyond your control. Reacting to events is, in essence, just another form of market timing.

If you flee the market after a major crisis, you are faced with yet another market timing dilemma: when to reenter. In many cases, the decision to reinvest comes after a rebound has already begun, resulting in missed opportunity (think back to March 2020).

Moving in and out of the market can also incur additional costs and have potential tax implications for investors.

The Micro

Instead, we encourage you to focus on the micro – that is, the levers that are within your control:

  • Saving at least 15% (ideally 20%) of income
  • Controlling your household expenses
  • Maximizing tax savings and tax-efficiency
  • Having a globally diversified portfolio for long-term resiliency

Parting Thoughts:

Let us all reflect on how much we do have during these times of crisis. Out of all the hands we could have been dealt, we got ours. We made it through a global pandemic, we have safety/security, and our physiological needs are met (i.e. clean air, food, water, shelter, clothing). Many of us are especially lucky and also have meaningful relationships, connection, and love with friends and family.

To quote Viktor Frankl:

“For the world is in a bad state, but everything will become still worse unless each of us does his best.”

Have gratitude for what you have, ignore what’s beyond your control, and give it your best.

Sleep Hacking: Proven Tips For Better Sleep

By “hacking” your sleep – that is, following proven tips to optimize both the quality and duration of your sleep – you can set yourself up for a successful, productive day.

Impacts of Insufficient Sleep

If having a successful day is not the motivator you need, consider that consistent inadequate sleep is strongly associated with high blood pressure, diabetes, heart attack, heart failure, and stroke. Other potential problems include obesity, depression, impairment in immunity and lower sex drive.

For those in their 50s and 60s, the NIH recently concluded a study which indicated that getting six or less hours of sleep per night was linked to developing dementia.

So, whether you’re interested in optimizing your day, or you just care about your health…

Consider the following sleep hacking tips for getting a good night’s rest:

  1. Increase bright light exposure during the day. Living in alignment to the circadian cycle helps your body’s hormones. Daytime bright light exposure can improve sleep quality and duration. Spending 30-45 minutes getting direct sunlight exposure into your eyes (note: exposure, not staring at the sun!) within the first hour after waking is best. If getting daily sunlight exposure is not practical, consider investing in artificial light boxes for your workspace.
  2. Reduce blue light exposure in the evening. Translation: Have a “digital sunset” and do your best to not look at blue light emitting devices like smartphones and computers. Reason: Blue light tricks your body’s hormones into thinking it’s daytime and reduces melatonin levels. If staying away from blue light feels unrealistic, consider blue light blocking glasses (or blue light lens that clip onto your prescription glasses) and/or downloading free apps such as f.lux to block blue light on your laptop/computer.
  3. Drink your coffee, strategically. The best time to drink coffee is mid- to late-morning when cortisol levels are lower. Upon waking, your cortisol spikes (telling body: time to start the day!) but it dips back down after 2-4hrs of being awake (i.e. between 9:30-11:30am for most people). Aim to drink your coffee during this trough and to be finished at least 6hrs before bed (caffeine can stay elevated in blood for 6-8hrs).
  4. Avoid alcohol at night. Alcohol is a central nervous system depressant that can induce relaxation and sleepiness. While it may help you fall asleep it severely impacts the quality of your sleep due to it’s affects on your melatonin and human growth hormone production. In one 2018 study, low alcohol consumption (< 1 drink for women, < 2 drinks for men) decreased sleep quality by 9.3%. Moderate consumption (1 drink for women, 2 drinks for men) decreased sleep quality by 24%. High alcohol consumption (>1 drink for women, >2 drinks for men) decreased sleep quality by 39.2%.
  5. Optimize your bedroom environment. Minimize external noise, light, and artificial light from devices like alarm clocks. Sleep in a comfortble temperature, for many people this is around 70°F or lower as increased body/room temperature can increase wakefulness.
  6. Don’t eat late in the evening. Consuming food late at night may affect sleep quality and the natural release of HGH and melatonin. Aim to finish eating (including snacks) at least 2hrs before bed.
  7. Relax, clear your mind. Whether it’s reading a book, taking a bath, or doing guided breathwork/meditation/visualization exercises, the goal is to calm the body and prepare for sleep. Apps such as Headspace, Calm, and even Peloton have sleep-specific meditations (but wear your blue light blockers if using your phone/tablet/computer!).
  8. Rule out a sleep disorder. It’s thought that 24% of men, 9% of women, and 3% of children may have sleep apnea. Signs include snoring, mouth breathing, breathing pauses during sleep, and daytime sleepiness. If you think you may have sleep apnea, discuss this with your doctor, functional dentist, or a sleep specialist that can recommend a sleep study or polysomnogram to diagnose it.
  9. Mouth tape. Say what? This may sound bizarre but many of us breathe through our mouths when we sleep, and the health benefits of nose breathing are undeniable. Mouth taping increases nitric oxide intake (which is produced in the sinuses), reduces teeth grinding, and reduces dry mouth (which is harmful to your oral microbiome & dental health). There are specific types of tape for mouth taping however you can also use medical grade (sensitive) tape which is more affordable.

By making some of these small, yet intentional sleep hacking decisions over the course of our day we can optimize our sleep and improve our lives.

Reminder: Gents – the inaugural Wisemen Experience men’s health retreat still has room available. Consider joining if interested in applying ancient/science-based wellness modalities to improve your life as a partner, parent, professional… and beyond.

IG Live: wHealth Advisors speaks with The Wisemen Project

Wisemen

wHealth Advisors co-founder, Dennis McNamara, recently spoke with Christian Valeriani of The Wisemen Project regarding men’s health and the constant juggling of priorities men face as parents, partners, and professionals.

The conversation centers on the intersection of health and habits and making “investments” in your health to maximize your long-term ROI (both personally and financially).

Instagram Live: Dennis McNamara & Christian Valeriani talk shop

NOTE: Conversation gets going around the 4-minute mark.

If this conversation piqued your interest be sure check out the upcoming Wisemen Experience and note that the early bird discount has been extended to January 1st, 2022.

The Role of Alternative Investments in Your Portfolio

For decades, pundits have taken a stab at writing the obituary for the traditional 60/40 portfolio (i.e. 60% stocks/40% bonds).

At first glance, this seems laughable. Over the last 90 years, a traditional 60/40 portfolio returned over 8% per year – like the S&P 500 which returned 9.5% over that period – but… with 40% less volatility!

However, these days, when accounting for historically low interest rates and rising inflation (which may or may not be transitory), the 60/40 bears may have their strongest case in recent memory.

This then begs the question: what now?

For a variety of reasons, there is still plenty of merit to 60/40 portfolios. However, we do appreciate the potential of certain investments to increase portfolio diversification. For investment opportunities beyond that of traditional stocks and bonds, we classify these in the portfolio as Alternative Investments (or, alts).

What are alternative investments?

Alts are essentially a catchall for any investment besides stocks, bonds, and cash (or cash equivalents). They provide an opportunity to gain exposure to areas not traditionally captured in a stock/bond portfolio that may or may not offer above market returns. Some of the more common types of alternative investments include:

  • Real Estate – crowdsourced or private commercial/residential property ownership, private/public Real Estate Investment Trusts (REITs)
  • Commodities – such as crude oil, corn, soy, wheat, and coffee
  • Precious metals – such as gold, silver, and lithium
  • Cryptocurrency – purchasing coins, NFTs, or investing in public companies at the fore of crypto/blockchain/web3
  • Private Equity – locking up funds with a private equity firm to invest in non-public, private companies often via leveraged buyouts and/or venture capital
  • Collectibles – tangible assets such as art, fine wine, and vehicles

What are the benefits of alternative investments?

  • Diversification. This is the primary benefit. Alternative investments are typically a counterweight to conventional stock/bond assets and may perform well even if stock/bond returns are poor due to low correlations.
  • May have greater upside. Alternative investments, often due to their concentrated positions, can potentially offer outsized returns compared to traditional mutual fund/ETF investments.
  • Expertise can be an edge. An example of this would be an experienced real estate fix-and-flipper who can spot an opportunity and has the team/know-how to carry out the vision. Another example might be an art collector that knows how to spot undervalued works of art. All this to say, unique skills/interests in niche areas can set you apart.

What are the drawback of alternative investments?

  • Illiquidity. Many alternative investments may be illiquid and difficult to exit. In the case of most non-tradable private REITs, your investment might be tied up for 7+ years before you can access the funds.
  • Lack of regulation. Reporting requirements for many alternative investments are minimal compared to those of public companies in the stock market. This can create difficulty when valuing the alt’s underlying assets, which can make pricing and price transparency less straightforward.
  • Investment platforms can fail. Many online platforms for alternative investing are start-ups that may or may not succeed. You need to understand how your funds will be handled should the company fail or be acquired.
  • Investment minimums may apply. High investments minimums are common and may make certain alts impractical/inaccessible for smaller investors.
  • High fees. Alternatives can have many fees that are unique to the investment. Private equity typically charges large asset management fees. Real estate can have many unplanned repair/maintenance/legal expenses. Wine collecting through Vinovest charges 2.5%-2.85% for climate-controlled and insured wine storage! Compare those fees to traditional index funds which have small expense ratios, no purchase fees, no redemption fees, and no 12b-1 fees.
  • Complexity. Alternative investments are often complex instruments and may require a higher level of due diligence. If you are considering alternative investments, you also want to be sure that you research and understand the potential tax implications associated with them.

Takeaway

Ultimately, investors need to be aware of both the upside and downside potential of any investment. The suitability of any given alternative investment should be considered against an individual investor’s:

  1. time horizon
  2. appetite for risk
  3. ability/capacity to take on outsized risk, and
  4. any unique skills/interests that strengthen the odds of making a profitable investment.

Four simple tips to take back your health

Take back your health

While genetics certainly play a role, the overwhelming majority of our health outcomes are a product of our nourishment (including the content our brains consume!), rest, activity, and habits. Wherever you are in your health journey, consider these four steps to improve your health.

1. Eat The Rainbow

Phytonutrients—special plant chemicals that interact with your biology – can act like switches on your DNA to heal your body (called epigenetics). Phytonutrients can be found in blueberries, arugula, broccoli, bok choy, raspberries, purple cabbage, and more. Functional medicine practitioner, Dr. Mark Hyman, suggests making vegetables the bulk of your meals, and add in a small serving of quality protein, like grass-fed meats, organic or pasture-raised poultry, or wild-caught fish, while also being generous with healthy fats (think: avocado, nuts, seeds, and olive oil).

2. Do Not Neglect Your Sleep

Our screens (TVs, laptops, smartphones etc.) all emit blue light. This confuses our body and suppresses melatonin which impacts the quality of our sleep and can disturb our circadian rhythm. Consider purchasing blue light blocking glasses and/or not looking at your phone or TV for at least one hour (ideally two) before going to sleep.

Upon waking up, consider starting your morning with meditation/journaling, 15 minutes of sunlight, and a tall glass of water.

Keeping your room cool and dark and maintaining a consistent sleep and wake schedule also help support a healthy sleep routine.

3. Move Your Body

No, you don’t need a gym. All you need is your body and a little bit of space for some HIIT, yoga, or stretching. Exercise increases the number of mitochondria – or the “powerhouse” of the cell –  improving your body’s ability to produce energy. In other words, the more mitochondria you have, the more energy you can generate during exercise, the faster and longer you can exercise, and the more resilient you become to aging, illness, and disease.

Here are three workouts on YouTube. They are for different levels of fitness, so be sure to consult your trainer or physician if you’re just getting started:

4. Reduce Stress and Anxiety

One of the risk factors for worsened COVID-19 is fear and anxiety, which, let’s face it, most folks have been struggling with throughout 2020 and 2021. We can’t change the facts, but we can change our response to what is happening around us. Just taking the time to breathe, do a digital detox, spend time in nature, connect with loved ones, and do joyful things can significantly reduce anxiety. Eating whole, balanced meals reduces anxiety because it keeps our blood sugar balanced.

Take note of how you spend your time daily and what sorts of inputs you allow into your life. If you are constantly doing things that feed your anxiety, it’s time for some habit changes. Make a list of things that reduce feelings of stress and anxiety, and make time for them daily.

Takeaway:

Start with these four simple strategies to improve your health, and you’ll be surprised at how much better you feel. For the men, also be aware of the upcoming Men’s Health Retreat with The Wisemen Project.

Men’s Health: The Wisemen Retreat

The Wisemen Retreat

About The Wisemen Project

The Wisemen Project is a men’s holistic health group that melds proven, ancient techniques of movement, breath work and meditation with cutting edge scientific research. The group was formed as a powerful antidote to the seemingly endless noise, stress, disease and disconnection in our modern world.

The primary pillars center around:

  • Fuel: Our food and what we “feed” our brains.
  • Mind: Cultivating resiliency and proper brain function.
  • Move: Movement to heal the mind, body and soul.
  • Rest: Dialing in the proper amount, type, and frequency of rest to allow mind and body to recover and grow.
  •  Social: Community is interwoven within the fibers of our ancestral DNA, helps to reduce stress/anxiety, improve mental health, and increase our lifespan.
  • Wealth: Perspective, action, discipline, and reflection to cultivate an abundance mindset.

About The Retreat:

Tucked in the northern-most terrain of the Pocono Mountains, situated a couple of hours away from NYC and Philadelphia, the retreat will be hosted at The Barn at Boyd’s Mills.

The retreat aims to be an opportunity to disconnect from modern stressors and practice proven principles to optimize your health.

Activities:

  • Exercise, functional movement
  • Daily hikes
  • Deep & extensive breath work
  • Cold baths & fire
  • Grounding/earthing
  • Stress reduction modalities
  • Qigong/meditation
  • Nourishing and sustainable foods, chef prepared meals
  • Human connection/reconnection

Why wHealth Advisors is sharing:

“It is health that is real wealth and not pieces of gold and silver.”

– Mahatma Ghandi

Our long-term goals, visions, and portfolios are more likely to be derailed if we neglect our health. Health itself is a priceless wealth and we strongly support investing in it while you can.

As someone who is personally passionate about men’s health and follows evidence-based protocols for personal health optimization, I (Dennis) am very much looking forward to the activities and connection that this retreat is sure to offer.

Please feel free to pass this info along to anyone you think could benefit. There are 16 seats available and the early bird discount ends in December.

SIGN UP:

The early bird discount ends on 12/1/2021 – sign up now while seats are available.

Disclaimer:

There is no financial incentive or underlying remuneration for wHealth Advisors in promoting this event.

 

 Federal Tax Proposal – A Summary

TAX

The Biden administration recently announced a number of tax proposals to fund new government investments. The current version may not be the final form, but many of its features are likely to become law. Below is a summary of what is most likely to impact families.

Income Tax Rates

  • Increase in the marginal tax rate: The top marginal tax rate would increase from 37% to 39.6% for income greater than $400,000 if you file as single and $450,000 if filed as married filing jointly (MFJ). These changes would go into effect for the 2022 tax year.

 

  • Increase in the top long-term capital gains rate: The highest marginal long-term capital gains rate would increase from 20% to 25% for incomes higher than $400,000 (single) or $450,000 (married filing jointly). The change in rate to 25% would be effective as of September 13, 2021 unless a sale was already under contract prior to that date.

 

  • S Corporations: Business profits from S corporations will be subject to a 3.8% surtax for taxpayers with Modified Adjusted Gross Income (MAGI) above $400,000 (single) and $500,000 (MFJ).

 

  • Section 199A QBI Deduction: To be phased out for those earning over $400,000 (single) or $500,000 (MFJ).

 

  • Additional 3% surtax on ultra-high income: An additional flat tax of 3% would be applied on any MAGI above $2,500,000 for individuals filing as married filing separately or above $5,000,000 for MFJ or single.

Retirement Strategies and Plans

  • Roth conversions will no longer be allowed for high income individuals:
    • New rules would prohibit all Roth conversions for taxpayers in the highest ordinary income tax bracket (39.6%) beginning January 1, 2032.
    • Roth conversions of after-tax funds will be prohibited for ALL taxpayers beginning January 1, 2022. This would eliminate backdoor Roth as a planning strategy.

 

  • Restricts contributions to IRAs or Roth IRAs for high net worth individuals if:
    • Taxable income is greater than $400,000 (single) or $450,000 (MFJ) AND the total value of IRA and defined contribution plans exceed $10,000,000.
    • The limitation does not apply to contributions of employer plans such as a 401(k), SEP IRA, or pension plan.

 

  • Change in Required Minimum Distributions (RMD) for individuals whose aggregate retirement account size exceeds $10,000,000:
    • Imposes RMDs on large retirement account balances if:
      • Taxable income is greater than $400,000 (single) or $450,000 (MFJ), AND
      • The total value of IRA and defined contribution plans exceed $10,000,000

 

  • If combined balance is between $10,000,000 and $20,000,000, the owner must distribute 50% of the amount of the account balances in excess of $10,000,000.
  • If the balance is greater than $20,000,000, the RMD would be 100% in excess of $20,000,000, plus 50% of any amount over $10,000,000.

Additional Changes

  • Wash Sale rule: This will be expanded to include cryptocurrency and other digital assets, commodities, and foreign currencies.

 

  • Estate Tax Exemption would be reduced: Would revert back to $5,850,000 per person and $11,700,000 per couple. This was scheduled to happen in 2026, but under the new proposal, it would get accelerated to 2022.

 

  • Increased child tax credit and monthly advance payment extended until 2025: Monthly advance payments of $250 per qualifying child aged 6-17 and $300 per child below the age of 6 would continue.

 

  • Assets held within grantor trusts may become part of taxable estate: This would potentially eliminate the benefit of certain estate planning techniques, namely Irrevocable Life Insurance Trusts (ILITs).

S&P Gains 100% from March 2020 Low: Now what?

S&P 500 marks 100% gain since March 2020

After hitting “rock bottom” following global shutdowns related to the coronavirus in March 2020, the S&P 500 has roared ever since delivering a 100% return. You read that right: 100%.

SIDEBAR: Someone out there is highlighting this past 18 month window in their investing masterclass, illustrating that in times of financial crisis, the best action for your portfolio is inaction. Don’t sell. Be patient. Ride it out. But we digress…

What now?

After living through the shortest bear market in history, we’re now witnessing company valuations being pushed to new heights only surpassed by the dot-com bubble of the late 1990s. While this may sound unsettling, also consider that with interest rates so low, it would be equally worrying if equities weren’t expensive (reason: low interest rate yields push investors to equities).

So, at this juncture and with cash to invest, should you a) lean towards low interest fixed income that’s not (or barely) keeping up with inflation, or b) buy potentially overvalued equities? Pick your poison.

From our vantage point, choosing low interest debt or expensive equities is not an either/or proposition – everything comes back to diversification. Instead of chasing returns, we prefer the approach of aligning portfolio decisions to your unique life: your upcoming cash needs (and/or life transitions), your tax bracket, and your tolerance + ability to take risk.

While we’re not ones for reading the tea leaves, we did appreciate reviewing the latest JP Morgan Long-Term Capital Market Assumptions report. In it, they had a stark quote that stuck out:

“The price for dealing with the pandemic today comes at the cost of tomorrow’s returns in many conventional asset markets.”

Not exactly a glass half-full outlook for the road ahead.

The biggest challenges outlined by the report included:

  • Whether governments/business can rise to the climate challenge
  • Increased sovereign debt balances and an expectation for fiscal stimulus to continue
  • Stagnating globalization, companies shortening their supply chains
  • Era of US “exceptionalism” possibly coming to an end, leading to a weaker dollar

While we certainly believe that all challenges present opportunities, we feel equally strong that investors should prepare for muted annual returns over the next decade. We touched on this topic not long ago.

According to the same JP Morgan LTCMA report, over the next 10-15 years, inflation is anticipated to flatten at an overall rate of 2.0%. This is a tough pill to swallow when the same report projects compound return rates for the same period to be 1.10% for cash, 1.50% for intermediate Treasuries, and 2.50% for US investment grade corporate bonds.

For equities, the LTCMA report outlined the following predictions for the next 10-15 year investment time horizon:

  • 4.10% for US Large Cap
  • 4.60% for US Small Cap
  • 6.20% for US Value
  • 6.50% for US REITS
  • 5.20% for Euro equities
  • 6.10% for UK equities
  • 5.10% for Japanese equities
  • 6.80% for emerging market equity

Compare these expected returns to the 10% average annual return that the stock market has delivered over the last century. Not ideal.

Instead of guessing which asset class will perform best, or searching for the next Amazon to invest in, legendary investor and founder of Vanguard, John Bogle (who’s 3-fund “boring” portfolio outperformed the largest endowments in 2020, yet again), said it best:

“Don’t look for the needle in the haystack. Just buy the haystack.”

As evidence-based investors, we wholeheartedly agree with this approach.

Beware of Financial Scams

Scam Alert

A personal contact shared a story with us regarding their friend who recently fell victim to an online gift card scam.

The friend received an email from “Target” and was prompted to provide certain information to “verify their gift cards.” Unfortunately, the friend fell for the scam and within a few days had money withdrawn directly from their bank account. The impacted individual is now in the process of working with their bank to recover the stolen funds.

The State of Fraud

Scamming shows no signs of letting up. In its most recent report from the Internet Crime Complaint Center, the FBI saw the largest number of complaints, and the highest dollar losses, since the center was established 20 years ago. According to the FBI, the costliest scams involved business email compromise, romance or confidence fraud, and mimicking the account of a person or vendor known to the victim to gather personal or financial information.

How to avoid

  1. Beware of suspicious email address and fake invoices/attachments: Fraudsters are masters of deception. It’s not uncommon for them to send emails from addresses that might look familiar to you but which contain one spelling difference, or end in .net instead of .com. Never open links or attachments from email addresses that are unfamiliar. Additionally, if you receive a link or attachment that you weren’t expecting from what appears to be recognizable/legitimate email address, it never hurts to send a quick call or text to the sender to confirm.
  2. Ignore scammers pretending to be from the government: Most of us have probably received one of these phone calls. Someone reaches out on a phone call claiming to be from the IRS. In some cases, most recently, the caller will claim you are eligible for an “additional stimulus check.” In others, they’ll say you owe money and will warn that non-payment will result in legal recourse and penalties. Take note: the IRS will never make first contact via a phone call or request payment details for money-owed over the phone. If you receive a call, simply hang up the phone. The same goes for calls from the Social Security Administration and other government organizations.
  3. Be aware of the Social Security scam: Also done via phone call, the caller says your Social Security number has been linked to a crime involving drugs and/or sending money out of the country illegally. They inform you that your Social Security number is blocked and that by simply confirming your SSN and paying a small fee, it can be reactivated. Again: Hang up! The Social Security Administration will never call you on the phone and ask for your Social Security number.
  4. Scammers will tell you how to pay: All successful scams entail coercing the victim to part with sensitive information or to pay the scammer. Scammers may insist that you pay by sending money through a money transfer company. Others may suggest putting money on a gift card and then giving them the number on the back. Some will send you a check (that will later turn out to be fake), tell you to deposit it, and then send them money.
  5. Don’t fall for online pop-up warnings: Tech support scammers may try to lure you with a pop-up window that appears on your computer screen. It might look like an error message from your operating system or antivirus software. It may also use logos from trusted companies or websites. The message in the window warns of a security issue on your computer and directs you to call a phone number to get help. Simply ignore. If you are unsure of whether the message was legitimate, you can use your antivirus software to run a scan or contact the soliciting organization directly.

What to do if you are scammed

Anyone can fall victim to these scams. If you have paid someone, call your bank, money transfer app, or credit card company and see if they can reverse the charges. The Federal Reserve Board notes that if you report the fraud within two business days, liability is limited to $50. If you report it after that, you could face liability of up to $500, and if you report it after the 60-day window, subsequent fraudulent charges can wipe out your account entirely.

Final thoughts

Whether online or via phone, stay vigilant. Avoid clicking on suspicious links, and never give out personal information to a stranger over the phone. For online accounts, steer away from using short passwords which can be easily hacked by password cracker software. Instead, use strong passwords that are at least 12 digits long and contain numbers, letters, special characters, and a mix of lowercase and uppercase letters.

If you know someone who has been impacted, Identitytheft.gov is a great resource for mapping out a recovery plan.

Should I Be Worried About Inflation?

Inflation

The topic of inflation is getting lots of attention these days.

Inflation, for starters, is defined as the decline in purchasing power of a given currency. So, as an example, if the US Dollar experienced 2% inflation over a given period, the purchasing of $1 gets reduced to $0.98. Because a dollar is worth less, you must spend more to fill your gas tank, buy a gallon of milk, get a haircut etc. In other words, inflation increases your cost of living.

Is inflation good or bad?

Inflation can be a tricky economic indicator: If it is too high, it erases the purchasing power of consumers; if it is too low, it can reduce economic growth. Inflation can also be bad for stock markets as it often leads to higher interest rates, meaning big firms have to pay more to service their debts which can then erode their earnings.

What is causing inflation now?

Over the past 10 years inflation has basically held steady, averaging a bit under 2%.  However, over the past year, inflation has increased at a rate of 5%, well above the ten-year average.  While it is easy to point the finger at the Federal stimulus plans that pumped money back into the economy as the world came to a halt, the real cause of inflation seems to be a bit more nuanced.

Members of the Federal Reserve, along with a chorus of economists, argue that most of the inflation we are experiencing now can be attributed to bottlenecks in a variety of supply chains as demand surges with a reopening economy.

Translation: Consumers have cash to burn and suppliers are struggling to meet demand! The overwhelming majority of recent inflation is derived from spikes in industries that were hammered by the pandemic. Demand has skyrocketed in a few notable areas: raw materials, energy, metals, food, used automobiles, appliances, and travel.

Where does inflation go from here?

Whether inflation is transitory (i.e. brief, short-lived) or not is a common question being asked. If employment reports start to outpace analyst estimates, or, if inflation gets too high, the Federal Reserve may pull back on their $120B monthly bond purchases and eventually raise interest rates.

At their June meeting, the Fed moved up their targeted interest rates increase from 2024 to sometime in 2023. There are some members of the Federal Open Market Committee (FOMC) that believe the U.S. should start raising rates as early as 2022.

What’s it mean for you?

There is a possibility, not a certainty, that inflation may impact the everyday investor. Even if inflation moderates, as the Fed anticipates, it is still expected to run at almost 2.5% over the next five years, resulting in a negative inflation-adjusted return on Treasuries. With all that said, though, the economy is an incredibly complex and unpredictable system.

Should you be concerned? For those in, or nearing, retirement who live on a fixed income, any reduction in purchasing power can be unsettling. While there is no way to truly “inflation-proof” your portfolio, there are strategies that can lessen the blow:

  1. Maintain a globally diversified portfolio!
  2. Hold a portion of fixed income in Treasury Inflation-Protected Securities (TIPS)
  3. Consider Real Estate Investment Trusts as a hedge against inflation and underperforming equities (rents and values tend to increase when prices do)
  4. Avoid fixed income assets that have long durations (5+ years)
  5. Prioritize fixed rate debt > adjustable rate debt, and/or consider converting adjustable rate debt to fixed rate where practical.

Seven Types of Rest You Need

In a perfect world, we’d all get 8hrs of quality sleep each night. In reality, many of us fall short on this – either in terms of length (i.e. getting more like 6-7hrs) and/or quality (i.e. restlessness).

However, according to physician Saundra Dalton-Smith, M.D., author of Sacred Rest, “If you’re waking up (after sleeping) and still exhausted, the issue probably isn’t sleep. It’s likely a rest deficit.”

Listening to your body, and getting a better understanding of which type of rest you’re in need of is essential to recharging your battery and feeling your best.

Physical Rest:

Sign you need it: Physically exhausted, struggle to keep eyes open.

Rest to get: Go to sleep 30mins earlier, swap out the morning HIIT class for some restorative yoga.

Mental Rest:

Sign you need it: Brain feels like it’s going to mush. You’ve been staring at the same page for 10 minutes. You just sent a barely comprehensible email.

Rest to get: Turn off your screens. Repeat a calming mantra. Meditate or follow a guided meditation via Youtube or a meditation app (i.e. Calm, Headspace).

Social Rest:

Sign you need it: You feel alone, or disconnected/disengaged from friends and family.

Rest to get: Social rest feels like interacting with another person and leaving fuller than you started. It comes from meaningful interactions where there is no fear of disapproval or rejection – to be completely authentic with another human.

Social Rest – ideas to consider: Talk to a friend or close family member on the phone (NOT via text). Set aside time (15-30mins) to discuss day and emotions with spouse or partner. Go on a walk (or schedule one!) with a friend. Join a book club. Setup a coffee date with a friend. Plan a double date with another couple. Plan a getaway with your spouse or a friend.

Creative Rest:

Sign you need it: Sluggishness in solving problems or brainstorming new ideas.

Rest to get: Take some time to STOP doing and instead to observe, to think, to journal, to explore. Go on a walk in nature, or read an engrossing book. Anything to take the pressure to create off your mind.

Emotional Rest:

Sign you need it: Tolerance for strong feelings is a lot lower, you lose your temper more easily, you reach the tears threshold faster than usual.

Rest to get: Remove emotional triggers (like social media), give yourself space where you don’t have to react to others’ emotions and where you can be alone to process your own. Schedule a regular therapy session. Find people with whom you can be 100% yourself.

Spiritual Rest:

Sign you need it: Feeling afloat or unanchored. Feeling a lack of purpose or fulfillment.

Rest to get: Engage in something greater than yourself. Consider adding prayer, meditation, or even volunteerism/community involvement into your routine.

Sensory Rest:

Sign you need it: Your senses feel overwhelmed. This can be due to bright lights or noisy places, too much screen time, too many people talking to you at once etc.

Rest to get: Intentional sensory deprivation. Close your eyes for a minute in the middle of the day. Put down the screens past a certain time. Try to get yourself to a quiet place with minimal sensory distractions and let yourself take deep breaths away from all the input.

Cryptocurrency: Should I invest?

Crypto’s place in a portfolio:

Cryptocurrency has an identity crisis. Depending on who you ask, some view it as a security (like a stock), a commodity (like gold/oil), or a currency (like the US Dollar). Instead of adding to the semantics, we at wHealth Advisors take a more macro approach to crypto and view it simply as an “alternative asset.”

Besides cryptocurrency, some other examples of alternative assets are real estate investment trusts (REITs), art/collectibles, venture/angel/private equity investing, and commodities – to name a few.

Alternative assets can certainly have a place in the portfolio, however we always suggest minimizing personal expectations for investment returns. If you assume your alternative investment goes bust, how much does that hurt you (emotionally, financially etc.)? Does the loss impact your future goals, or is it just another blip on the radar? Similar to gambling, when it comes to alternative assets, only consider risking money that you are comfortable losing.

Depending on individual preferences/circumstances, an allocation of 0-10% of the overall portfolio to alternative assets can make sense. Additionally, and perhaps no surprise, but alternative assets are best suited for those with longer time horizons and/or higher tolerances for taking risk.

 So, should cryptocurrencies such as Bitcoin be a part of your portfolio?

For starters, investing in crypto is incredibly speculative. As we have seen over the past few weeks, a single tweet by a person of influence can spark extreme volatility. When taking a step back, there’s an argument to be made that cryptocurrency – and really, blockchain technology as a whole – is in its infancy a la the internet in the 80s/90s.

In some ways this is promising: the space will evolve, new entrants will emerge (and thus create new opportunities), and transactions will become more and more cost/energy efficient.

On the other hand, the larger and more mainstream this technology and way of transacting becomes, the more scrutiny it will be under (by domestic regulatory agencies and sovereign nations alike).

Before investing in cryptocurrencies, it is important to begin with the basics:

  • Have an emergency fund that is funded with 3-6mths (or more!) of living expenses.
  • Pay off any high interest debt.
  • Invest at least 15% of your gross income towards your long-term future (utilizing diversified mutual funds & ETFs).
  • Invest in your human capital i.e. your skills/career.

If, after satisfying the basics, you are willing to take on higher levels of risk and believe cryptocurrencies may be the next big thing, consider asking yourself the following questions:

  • How much am I willing to risk (i.e. between 0-10% of overall portfolio)?
  • What’s my endgame? How long will I hold? Or, at what target price will I sell?
  • Do I have a rudimentary understanding of cryptocurrency and blockchain technology?

If the answer to the last question is no – begin there.

Some resources to begin self-educating:

[PODCAST] Invest Like the Best: Chris Dixon and the potential of blockchain technology

[PODCAST] The Tim Ferriss Show: Balaji Srinivasan on the future of Bitcoin and Ethereum

[BOOK] Cryptocurrency Investing for Dummies

Estimating Returns: Hope for the Best, Plan for the Worst

Between 1926-2020, the US stock market return was basically 10% per year.

While it’d be great to bank on 10% per year, it unfortunately does not work that way. For those that want consistency over the long haul, they will have to accept lower returns (think: CDs, bonds). For those that truly want higher returns over the long haul, they’ll have to accept more volatility (i.e. the stock market, other speculative investments). Either way, you can never fully escape risk.

Interestingly, though, is how infrequent annual US stock market returns actually fall within the long-term 10% average.

If we look at the calendar year returns +/- 2% from the 10% average (so 8% to 12%), this has happened in just five calendar years (1926-2020). So around 5% of all years since 1926 have seen what would be considered “average” returns. In fact, there have been just as many yearly returns above 40% as returns in the 8% to 12% range. Just 18% of returns have been between 5% to 15% in any given year.

The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. The best 30 year return was 13.6% per year from 1975-2004. And the worst 30 year return was 8.0% per year from 1929-1958.

 What you can do about it:

It’s impossible to say if the next 30 years will be as kind to investors as the previous 30 were. For those that are still on the journey towards financial independence, it would be best to assume lower returns going forward. Instead of relying on continued 8-10%+ average annual returns (something beyond your control), personal savings and frugality are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.

As Morgan Housel, author of the “Psychology of Money” writes, “You can build wealth without a high income, but have no chance of building wealth without a high savings rates, it’s clear which one matters more.”

The Latest Investment Craze: Non-Fungible Tokens

Over the past month nonfungible tokens, or NFTs, have been all over the news. Saturday Night Live even got involved.

 What are they?

NFTs are cryptographic assets that are on the blockchain with unique identification codes and metadata that distinguish them from each other. Since they are unique, they cannot be traded or exchanged at equivalency, which differs from cryptocurrencies such as Bitcoin, which are identical to each other and therefore can be used in transactions (i.e. you can now buy a Tesla with Bitcoin).

 Why buy an NFT?

People are spending millions of dollars on NFT collectibles including artwork, digital images, sports cards, GIFs, music, video games, and other forms of creative art. By purchasing an NFT, you have a secure certificate of ownership over a digital object. As a collector, you are hoping that the value of the purchased item increases in value. For those that still remember the non-blockchain days, think of NFTs as a modern form of purchasing and collecting baseball cards. You buy them for your personal enjoyment and they may/may not appreciate in value.

 How to buy:

NFT’s can be bought on a variety of platforms, such as Nifty Gateway, Rarible, Open Sea, and The Sandbox. Each platform has an online gallery where you can browse, purchase, or bid on items in a similar fashion as an auction house. A purchase or winning bid is paid for with cryptocurrency. A digital wallet is necessary to store your purchase.

 Final thoughts:

NFT’s are relatively new. The current market is largely speculative and as with all markets, prices will fluctuate. In the modern and digital world we live in, NFTs will be another option for artists, creatives, and others to monetize their work, for collectors to purchase direct with fewer intermediaries, and for brands to establish their presence in the growing metaverse. Some further reading:

Minimalism: Financially prudent, environmentally responsible… the shortest route to happiness?

What could eschewing the non-essential mean for your life? A quicker path to financial freedom? A reduced environmental footprint? More joy while living and less regrets on your deathbed? Yes, yes, and (hopefully) yes.

In the most basic sense, minimalism is about intentionality: promoting the things that matter most while discarding the distractions. It’s a way to help us identify and actually prioritize what we deem to be of utmost importance.

Finances: A minimalist lifestyle is less expensive and creates room to either earn less or increase savings – both paths that speed up the journey to financial independence. A less expensive lifestyle means it’s also easier to create, and alter, an intentional/purposeful budget and to payoff bad debts (i.e. credit card debt).

Environment: Financial minimalism and environmental stewardship are often (but not always) intertwined. When you need less, you buy less. By buying less, you consume less.

A minimalist lifestyle should naturally lessen your environmental footprint, however completely abstaining from new purchases is not realistic for most. So, when buying, consider prioritizing quality over quantity and purchases that are energy efficient. While not always the case, these buying strategies can also be f inancially prudent ones over the long haul.

Happiness: You can’t buy your way to happiness. Minimalism is simply a tool that can assist you in finding freedom. Freedom from avoidable stresses, burdens, and fears. Freedom to prioritize your health and relationships. Freedom to reclaim your time, or to live in the moment. Freedom to create more, to grow as an individual. Real freedom.

Final Thoughts:

Minimalism is not about searching for happiness through things, but through life itself. Thus, it’s up to you to determine what is necessary and what is superfluous in your life.

Additional Reading:

5 Things People Regret Most on their Deathbed

Lessons from 2020

Lessons from 2020

2020 will be a year we will never forget. From a global pandemic and civil unrest, to an economic downfall that we continue to battle through today, it has been a challenging year that has impacted millions of individuals around the world. For investors, as we reflect on the past year, it’s critical we revisit some lessons learned to better ourselves moving forward. While it’s unlikely we’ll ever experience a year like 2020 again, many of the principles outlined below are timeless, and can serve as foundational reminders that are applicable every year.

 Having an investment philosophy you can stick with is paramount

While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. By adhering to a well-thought out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty. 

Create an investment plan that aligns with your risk tolerance

You want to have a plan in place that gives you peace of mind regardless of the market conditions. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise.

Don’t try and time the market

The 2020 market downturn offers an example of how the cycle of fear and greed can drive an investor’s reactive decisions. Back in March, there was widespread agreement that COVID-19 would have a negative impact on the economy, but to what extent? Who would’ve guessed we would’ve experienced the fastest bear market in history in which it took just 16 trading days for the S&P 500 to close down 20% from a peak only to be followed by the best 50-day rally in history?

Stay disciplined through market highs and lows

Financial downturns are unpleasant for all market participants. When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility.

Focus on what you can control

To have a better investment experience, people should focus on the things they can control. It starts with creating an investment plan based on market principles, informed by financial science, and tailored to your specific needs and goals.

This One Change to Financial Aid Could Negatively Impact Many Families

Apple on Book

At the end of 2020, Congress passed the Consolidated Appropriations Act. Most of the attention around this act, a $2.3 trillion spending bill, was focused on the COVID-19 relief provisions. However, also buried in that massive document were dramatic changes to student financial aid rules.  These changes will go into effect during the 2023-2024 school year when the FAFSA becomes available on October 1, 2022.  Some of these changes are long overdue and will be a benefit to families.  However, not all changes will be beneficial.

First, here is a brief rundown on some of the changes you can expect in the future: 

The FAFSA will be shorter and easier to fill out

The FAFSA currently has over 100 questions included in the application and many of them are confusing.  The new simplified version will have approximately 36 questions.  It also allows applicants to have both their taxed and untaxed income transferred to the FAFSA automatically, as opposed to manually entering it or having to self-report it.

“Expected Family Contribution” will be renamed “Student Aid Index”

The Expected Family Contribution, or EFC, is an index that schools use to determine a family’s eligibility for financial aid.  The formula includes such things as a family’s income, non-retirement assets, marital status, number of dependents, and how many children will be attending college at the same time.  Theoretically, the lower the EFC, the more aid could be available to a family.  This will get renamed to Student Aid Index, or SAI, but will operate similar to the EFC so there will be no impact to families financially.

Change in Custodial Parent

Under the current rules, the custodial parent in two household families (as a result of divorce or separation for instance) is the parent whose financial information is supplied.  The custodial parent is defined as the parent with whom the child lives with for the majority of the year.  As of 2022, the parent who supplies the most financial support will be required to fill out the FAFSA application, and this may not necessarily be the custodial parent.  The result – a higher EFC and less financial aid available to the family.

Pell Grant Eligibility

Pell Grants are a form of need-based financial aid that are awarded to low-income students to help offset college costs.  These typically do not need to be repaid.  This change is one of the positives of the new legislation. Under the current method, Pell eligibility is determined by a family’s EFC, the cost of attendance at the chosen school, and whether the enrollment status is part time or full time.  With the new rules, the size of the student’s family and their adjusted gross income will determine their Pell eligibility and size of the award.  Families that make less than the 175% federal poverty level will receive the maximum award, which is $6,495.

The above summarizes some of the changes you can expect to see in the 2023-24 school year. Now let’s focus on one that will negatively impact many families.  Currently, financial aid eligibility increases for families with more than one student enrolled in college at the same time.  Under the new law, the aid eligible to families will significantly decrease.

Let me explain with a fictitious family that includes two children who are two years apart. The first child will be in college by himself for his freshman and sophomore year, but the younger child will start college when the older one begins his junior year.  Therefore, the family will have two kids in college at the same time for two years. Both parents work and their combined income is $150,000.  The family also has assets of $150,000 which include cash and savings, taxable investment assets, and 529 plans.   The calculated expected family contribution (EFC) for this family is $40,000.

Before we dive deeper into the above family’s college financial situation, I would like to explain how the EFC is utilized by schools.  Your EFC is an indexed number that college financial aid offices use to determine how much financial aid a family is eligible for.  The formula for financial need is the Cost of Attendance (COA) less the Expected Family Contribution (EFC).  For example, if your EFC is $30,000 and you are applying to a school that costs $70,000, you will be eligible for $40,000 of need based aid.  ($70,000 COA – $30,000 EFC = $40,000 need).  It is important to point out – just because you are eligible for $40,000 in need-based aid, it does not mean you will receive this from the school your child applied to.  All schools vary in the determination of financial aid, so this will be solely dependent on the individual institution.

Now back to our fictitious family.  Under current guidelines with two students in college at the same time, this family’s EFC would be cut roughly in half for each student.  When this family has only one child in college for the first two years, the EFC that the college will use is $40,000.  However, once the second child starts school, the EFC will be roughly be cut in half to $20,000 per student.  The total EFC does not change, but the distribution of it does.  Therefore, the school that the older child attends will factor in the following EFC numbers for the four years he/she is in college as $40,000, $40,000, $20,000 and $20,000 and adjust the need based financial aid package accordingly, with more aid from the school being distributed in the last two years.  End result: the family is still expected to pay a total of $40,000 annually.

Under the new bill, the EFC no longer will be reduced with multiple kids in college at the same time.  Therefore, the above family’s EFC contribution would be $40,000 in year one and two for the oldest child and then $40,000 per child for the next two years.  That reduction is eliminated and so is the additional need-based aid that would come with it.  This will significantly increase the financial strain on families with two children attending college simultaneously.

The Expected Family Contribution index was designed to give insight to colleges on what a family could afford to pay each year. For families who have, or will have, multiple children attending college at the same time, this new rule is a major setback. Instead of being more accommodating to families facing the rising cost of college, this new rule essentially doubles a family’s expected contribution, which would decrease the amount of aid they’re eligible for.  We encourage all families who will be adversely impacted by this change to consider writing your Congressman or Congresswoman and requesting action to repeal this part of the bill.

2020: Market Review

Market Review 2020 Cover

The year 2020 proved to be one of the most tumultuous in modern history, marked by a number of developments that were historically… wait for it… unprecedented. But the year also demonstrated the resilience of people, institutions, and financial markets.

The novel coronavirus was already in the news early in the year, and concerns grew as more countries began reporting their first cases of COVID-19. Infections multiplied around the world through February, and by early March, when the outbreak was labeled a pandemic, it was clear that the crisis would affect nearly every area of our lives. The spring would see a spike in cases and a global economic contraction as people stayed closer to home, and another surge of infections would come during the summer. Governments and central banks worked to cushion the blow, providing financial support for individuals and businesses and adjusting lending rates.

On top of the health crisis, there was widespread civil unrest over the summer in the US tied to policing and racial justice. In August, Americans increasingly focused on the US presidential race in this unusual year. Politicians, supporters, and voting officials wrestled with the challenges of a campaign that at times was conducted virtually and with an election in the fall that would include a heightened level of mail-in and early voting. In the end, the results of the election would be disputed well into December. As autumn turned to winter, 2020 would end with both troubling and hopeful news: yet another spike in COVID-19 cases, along with the first deliveries of vaccines in the US and elsewhere.

For investors, the year was characterized by sharp swings for stocks. March saw the S&P 500 Index’s1 decline reach 33.79% from the previous high as the pandemic worsened. This was followed by a rally in April, and stocks reached their previous highs by August. Ultimately, despite a sequence of epic events and continued concerns over the pandemic, global stock market returns in 2020 were above their historical norm. The US market finished the year in record territory and with an 18.40% annual return for the S&P 500 Index. Non-US developed markets, as measured by the MSCI World ex USA Index,2 returned 7.59%. Emerging markets, as measured by the MSCI Emerging Markets Index, returned 18.31% for the year.

EXHIBIT 1 – Highs and Lows

MSCI All Country World Index with selected headlines from 2020

2020 Market Review

As always, past performance is no guarantee of future results.

Fixed income markets mirrored the extremity of equity behavior, with nearly unprecedented dispersion in returns during the first half of 2020. For example, in the first quarter, US corporate bonds underperformed US Treasuries by more than 11%, the most negative quarterly return difference in data going back a half century. But they soon swapped places: the second quarter was the second-most positive one on record for corporates over Treasuries, with a 7.74% advantage.3 Large return deviations were also observed between US and non-US fixed income as well as between inflation-protected and nominal bonds.

Global yield curves finished the year generally lower than at the start. US Treasury yields, for example, fell across the board, with drops of more than 1% on the short and intermediate portions of the curve.4 The US Treasury curve ended relatively flat in the short-term segment but upwardly sloped from the intermediate- to long-term segment. For 2020, the Bloomberg Barclays Global Aggregate Bond Index5 returned 5.58%.

EXHIBIT 2 – Sharp Shifts

US Credit minus US Treasury: Quarterly Returns, March 1973–December 2020

Past performance is no guarantee of future results.

 

Uncertainty remains about the pandemic and the broad impact of the new vaccines, continued lockdowns, and social distancing. But the events of 2020 provided investors with many lessons, affirming that following a disciplined and broadly diversified investment approach is a reliable way to pursue long-term investment goals.

 

Market Prices Quickly Reflect New Information about the Future

The fluctuating markets in the spring and summer were also a lesson in how markets incorporate new information and changes in expectations. From its peak on February 19, 2020, the S&P 500 Index fell 33.79% in less than five weeks as the news headlines suggested more extreme outcomes from the pandemic. But the recovery would be swift as well. Market participants were watching for news that would provide insights into the pandemic and the economy, such as daily infection and mortality rates, effective therapeutic treatments, and the potential for vaccine development. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions, one of the fastest snapbacks on record. This period highlighted the vital role of data in setting market expectations and underscored how quickly prices adjust to new information.

One major theme of the year was the perceived disconnect between markets and the economy. How could the equity markets recover and reach new highs when the economic news remained so bleak? The market’s behavior suggests investors were looking past the short-term impact of the pandemic to assess the expected rebound of business activity and an eventual return to more-normal conditions. Seen through that lens, the rebound in share prices reflected a market that is always looking ahead, incorporating both current news and expectations of the future into stock prices.

Owning the Winners and Losers

The 2020 economy and market also underscored the importance of staying broadly diversified across companies and industries. The downturn in stocks impacted some segments of the market more than others in ways that were consistent with the impact of the COVID-19 pandemic on certain types of businesses or industries. For example, airline, hospitality, and retail industries tended to suffer disproportionately with people around the world staying at home, whereas companies in communications, online shopping, and technology emerged as relative winners during the crisis. However, predicting at the beginning of 2020 exactly how this might play out would likely have proved challenging.

In the end, the economic turmoil inflicted great hardship on some firms while creating economic and social conditions that provided growth opportunities for other companies. In any market, there will be winners and losers—and investors have historically been well served by owning a broad range of companies rather than trying to pick winners and losers.

Sticking with Your Plan

Many news reports rightly emphasized the unprecedented nature of the health crisis, the emergency financial actions, and other extraordinary events during 2020. The year saw many “firsts”—and subsequent years will undoubtedly usher in many more. Yet 2020’s outcomes remind us that a consistent investment approach is a reliable path regardless of the market events we encounter. Investors who made moves by reacting to the moment may have missed opportunities. In March, spooked investors fled the stock and bond markets, as money-market funds experienced net flows for the month totaling $684 billion. Then, over the six-month period from April 1 to September 30, global equities and fixed income returned 29.54% and 3.16%, respectively. A move to cash in March may have been a costly decision for anxious investors.

 

EXHIBIT 3 – Cash Concerns + Global Equity Returns

Past performance is no guarantee of future results.

 

It was important for investors to avoid reacting to the dispersion in performance between asset classes, too, lest they miss out on turnarounds from early in the year to later. For example, small cap stocks on the whole fared better in the second half of the year than the first. The stark difference in performance between the first and second quarters across bond classes also drives home this point.

 

A Welcome Turn of the Calendar

Moving into 2021, many questions remain about the pandemic, new vaccines, business activity, changes in how people work and socialize, and the direction of global markets. Yet 2020’s economic and market tumult demonstrated that markets continue to function and that people can adapt to difficult circumstances. The year’s positive equity and fixed income returns remind that, with a solid investment approach and a commitment to staying the course, investors can focus on building long-term wealth, even in challenging times.

FOOTNOTES

  1. 1S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.
  2. 2MSCI data © MSCI 2021, all rights reserved. Indices are not available for direct investment.
  3. 3US corporate bonds represented by the Bloomberg Barclays US Credit Bond Index. US Treasuries represented by the Bloomberg Barclays US Treasury Bond Index. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment.
  4. 4ICE BofA government yield. ICE BofA index data © 2021 ICE Data Indices, LLC.
  5. 5Bloomberg Barclays data provided by Bloomberg. All rights reserved. Indices are not available for direct investment.

DISCLOSURES

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. wHealth Advisors accepts no responsibility for loss arising from the use of the information contained herein.

 

Cosigning a Student Loan: Pros & Cons

Student Loan Cosigner

Cosigning a Student Loan: Pros & Cons

The process of taking SAT/ACT exams, sending out handfuls of college applications, and eventually deciding on your school of choice is an emotional rollercoaster ride for even the most prepared and least anxious of students. At the very end of this arduous process, students (and parents!) find themselves at the very beginning of the next undertaking: financing a college education.

For lucky students, their parents or extended relatives are there to help. For many others, student loans are oftentimes the only viable option. As an immediate family member, extended relative, or family friend of someone pursuing a university-level education, you may be approached to cosign a student loan.

Much attention is given to student loans, however little attention is given to the impact of cosigning a student loan. For anyone that is considering a role as a cosigner, besides acknowledging the obvious benefit to the student borrower (i.e. they’ll be able to qualify for the loan!), it’s also necessary to know what’s at stake for you.

Who can cosign a student loan:
More often than not, a cosigner can be anyone with a strong credit history who has a willingness to help the student in question.

All lenders have their own cosigner requirements, however many institutions require cosigners to have a credit score of 670 or better and sufficient income to pay back the loan in the event the primary borrower defaults and is unable to repay. There are cases when lenders will go a step further to get a better sense of the cosigner’s overall stability – this can include reviewing the cosigner’s job history, how long they’ve lived in their home, and whether they’ve been in their job for at least a year.

Additionally, one of the least discussed (yet most important!) topics for deciding who should cosign a loan is the cosigner’s health. Many private lenders include language in the lending agreements that allow them to demand that the loan be paid in full upon the death of the cosigner. This is a point that deserves more attention considering that it’s not uncommon for grandparents (many who are older and may not be in their best health) to serve as cosigners.

What does it mean to cosign a student loan:
Personally, I’ve never encountered a student fresh out of high school who met the requirements to take out a student loan without a cosigner. This is likely due to their limited income and minimal (often non-existent) credit history. As the cosigner of a student loan, you are guaranteeing repayment of the debt. As cosigner, you hold a legal obligation to take over debt repayment in the event the borrower cannot keep up.

When banks lend money to borrowers for real estate in the form of a mortgage, the property itself serves as collateral. If the borrower is unable to keep up with their payments, the lender has peace of mind knowing it can cut its losses by seizing the property and selling it to a new buyer.

Considering that student loans are not backed by any physical collateral that can be seized and resold, a cosigner is a bank’s best option to recover an owed student debt.

Naturally, many students look towards their financially-stable family members to cosign student loans.

When parents or family friends of the borrower ask me for my thoughts on cosigning a student’s debt, I ask two questions:

  • Are you prepared for the responsibility to pay off this debt if the borrower cannot keep up with payments?
    • If no, DON’T cosign!
    • If yes, next question…
  • Do you, personally, have any large upcoming purchases/investments that will require borrowing a large sum of money (such as a new home purchase/mortgage or business loan)?
    • If yes, maybe don’t cosign. REASON: The cosigned loans will show up on your credit report and may complicate/restrict your ability to borrow.
    • If no, consider the borrower, your relationship with that person, and your confidence that they will be responsible in repaying the debt. If you accept the risks of being a cosigner and trust the borrower’s explicit commitment to repay the debt – go for it.

Benefits of cosigning a student loan:
For starters, the student borrowers are the primary beneficiaries of a cosigned loan. Cosigners allow students who would otherwise not qualify for a student loan to qualify and secure the funding needed to pursue their education. Additionally, if the cosigner is someone with stellar credit and strong income, the lender may take these facts into account and offer loans with lower, more competitive interest rates.

Many borrowers need cosigners for student loans due to not having much (if any) credit history. By having a student loan in their name and staying consistent on their monthly repayment, student borrowers are making significant (albeit unintentional) strides in establishing a personal credit history.

For cosigners, there’s little personal benefit to cosigning a loan (besides seeing a potential loved one pursue their dreams).

Drawbacks of cosigning a student loan:
A cosigner’s credit score will be impacted if the primary borrower misses a payment. Despite effectively serving as co-borrowers, cosigners rarely ever receive any formal notice that the primary borrower (i.e. the student) has missed payments. Unfortunately, missed payments are a common occurrence that frequently occur when borrowers are not setup for autopay or when a new loan servicer assumes the loan.

Another drawback to cosigning a loan is its impact on the cosigner’s debt-to-income ratio. As discussed before, the cosigned loan will show up on a cosigner’s credit report and may therefore reduce the cosigner’s ability to qualify for a personal loan or mortgage. Even if able to qualify for the loan, the increased debt-to-income ratio may result in the cosigner ending up with a less competitive interest rate.

In the event that the borrower is unable to repay the loan, collection agencies will look to the cosigner for payment. For most cosigners, this is the most significant drawback to cosigning a student loan and the one that must be most seriously considered when deciding to serve as a cosigner.

Even in the best of circumstances, a borrower and cosigner’s financial entanglement leaves the door wide open for relational stress.

How to decide whether to cosign a loan:
Making the final decision whether or not to cosign is personal. At a minimum, cosigners should have a sincere conversation with the prospective borrower to ensure the borrower understands the implications, and risk, to a) themselves and b) the cosigner.

It’s recommended that prospective cosigners also take an inventory of their own finances during this process. Be sure to consider your credit and to factor in whether or not any upcoming expenses will require a loan.

How to get a cosigner release:
Unfortunately, loan servicing companies never voluntarily let borrowers or cosigners know when they qualify for a cosigner release. Getting a cosigner release for a student loan typically requires that the borrower has graduated from school, has made at least 12 on-time payments, and has a sufficient credit score (credit score > 600) and income to repay the debt on their own. Additionally, it’s also typical that loan servicers will request the borrower (not the cosigner) to initiate the release process.

As a financial planning firm, we have clients who are the borrowers and others who are the cosigners. Regardless of borrower/cosigner status, we always work to have cosigners released as soon as possible.

  • Benefit of cosigner release to borrowers: Many private student loan promissory notes have provisions that allow the servicer to place the borrower in default (even if payments have been made on time) if the cosigner dies or files for bankruptcy. Releasing the cosigner as early as possible can prevent borrowers from experiencing surprise defaults and student loan balances automatically being due in full that are no fault of their own.
  • Benefit of cosigner release to cosigners: A parent or family member opts to cosign a student loan so that the borrower can pursue an advanced education. From the very beginning, it should be understood that releasing the cosigner should be a priority following the borrower’s graduation. Getting released as a cosigner means the former cosigner’s credit will no longer be impacted by missed payments and that the original borrower will be fully accountable for the debt.

The Consumer Federal Protection Bureau (CFPB) offers sample letter templates that borrowers/cosigners can send to servicers to request a consigner release.

For additional reading, our co-founder, Dennis McNamara, was featured in Forbes on this topic: https://www.forbes.com/advisor/student-loans/pros-and-cons-of-co-signing-a-student-loan/

Webinar: Financial Crash Course For DOCTORS

Medical Professionals

FINANCIAL CRASH COURSE FOR DOCTORS

wHealth Advisors is excited to announce a free webinar to help doctors (and those in training) get on a path towards financial independence.

Financial independence? Say what?

In a nutshell, financial independence means being financially secure enough that you continue working because you want to, not because you need to. Everyone’s situation is unique. Just as a good salary does not guarantee financial independence, mountains of student debt does not disqualify you.

For some, financial independence will mean making sacrifices. To others, it’s life as usual. In any case, it requires a vision, setting intentions, and having a roadmap that can evolve with you over time.

When: The Financial Crash Course for DOCTORS webinar will be given FOUR times (live) each Wednesday at 5pm (EDT) through the month of May. Seating is limited to 100 participants per webinar. We ask that you register using your work/school email – priority will be given to medical professionals.

What we’ll cover: Timely and timeless topics including:

  • COVID-19 Legislation: The impact on stimulus checks, student loans (including PSLF), and mortgages.
  • The NINE money mistakes doctors keep making
  • Fundamentals of Fiscal Fitness
  • Building a rock-solid financial foundation
  • The Juggle: Investing vs. student loan repayment
  • Physician mortgages: When they make sense (and when they don’t!)
  • Human capital: Investing in yourself

Why doctors? wHealth Advisors was founded on serving the medical community. While we can’t provide the resources they need most during this time (namely, PPE), we can offer what we know best: objective, evidenced-based financial guidance with no sales agenda or conflicts of interest.

The intended audience for this webinar includes those who are:

  • Medical/dental students
  • Interns/residents/fellows
  • Attendings or established docs that graduated medical/dental school within past 15 years

FIGS Giveaway: Following each webinar we will be randomly selecting a winner for a $25 FIGS gift card. Registering for the event is an automatic entry. Also – be sure to tag friends, classmates, and colleagues on our webinar-related Instagram posts (@whealthadvisors). More tags = more entries (limit = 10 total).

For any questions, please feel free to contact us at hello@whealthfa.com.

Follow links below to register on preferred date:

May 6, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_eZ7hj5awSyaVwOqBejqDOg

May 13, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_O2-njPcSQ_OeyH_H_57FJw

May 20, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_tX3J4IHTSh6IyNEqVNZtRw

May 27, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_FvLsh_flRRWpOf2GdV6SjQ

 

Terms & Conditions

Additional Resources:

Student Loans:

  • freestudentloanadvice.org: Great resource and created to ensure that all consumers have access to fair, free, student loan advice and dispute resolution.
  • nslds.ed.gov: National Student Loan Data System – best place to go when creating an inventory of your Federal loans.
  • www.annualcreditreport.com: Best place to go when creating an inventory of your private student loans.
  • Gradaway.com: Affordable student loan refinancing/consolidation company
    • $248 for balances < $100k
    • $349 for balances $100k – $250k
    • $449 for balances over $250k

Stimulus Checks:

NAPFA-Advisor-Checklist: NAPFA Checklist for interviewing Financial Advisors

Five Fundamentals of Fiscal Fitness

The Coronavirus and Market Volatility

Coronavirus

The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.

At wHealth Advisors, we accept the fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We’ve witnessed this volatility over the past 3-4 weeks. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. As an example, last month Apple announced that it expected revenue to take a hit from problems making and selling products in China. Airlines are preparing for the toll it will take on travel. Local businesses are worrying how their bottom lines will be impacted from preventive measures such as self-quarantines and social distancing. From the largest companies in the world down to our corner coffee shops, these are just a few examples of how the impact of the coronavirus is being assessed.

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.

When it comes to managing your portfolio, it’s prudent to develop (and stick with!) a long-term plan than can be maintained in a variety of conditions. For our clients, we consider a wide range of possible outcomes, both good and bad, when helping to establish an asset allocation and plan. Those preparations include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.

We send our best to you and yours. Wash your hands, avoid touching your eyes/nose/mouth, and, as always, feel free to contact us at hello@whealthfa.com.

10/16/2020 Editor Note: Our co-founder, Dennis McNamara, was featured as a financial expert on Dr. Wealth where he weighed in on investing in a post-COVID world. Link to contribution here: https://www.drwealth.com/investing-in-post-covid19-world/ 

Doctors Get Shafted When It Comes To Finances

Doctor Finance

Written by: Dennis McNamara

In a profession where it is expected that the practitioners embody the highest degrees of empathy, intellect, and work ethic – all for the benefit of others (and really, society at large) – why is it that doctors get the shaft when it comes to their finances?

Answering this question requires us to look at both the personal/financial circumstances many doctors face after graduating and the financial industry’s systemic shortcomings (or, outright inability) to provide fair service offerings to new doctors.

The Triple Whammy: Doctors Playing Catch-up

Let’s begin with the most significant financial circumstances that doctors are faced with, also known as the “Triple Whammy” – a term coined by author Dr. James M. Dahle MD of The White Coat Investor. The triple whammy is comprised of three factors that set doctors behind their non-doctor peers:

  • Significantly higher-than-average student loan balances
  • Delayed earnings due to schooling and residency/fellowship
  • Higher-than-average income tax brackets once finally earning

Dr. Dahle illustrates this uphill battle faced by doctors by describing a one-on-one race towards financial independence between a physician and their non-doctor peer:

If you compared the earnings/savings race between a physician and his college roommate to a 400-yard dash, the physician might be the faster runner, but he has to start fifty yards behind the starting line (student loans), he has to give his roommate a 15-second head start (lost earning years), and he has to run with a parachute tied to his waist (higher tax burden). It turns out the doctor has to be REALLY FAST (high earner with a very high savings rate) to still win.

Outside of the infrequent cases where medical school costs are paid for via family and/or scholarship, this triple whammy is inevitable for most doctors.

Burnout

A fourth circumstance faced by doctors is burnout – we might as well amend the “Triple Whammy” to be a “Quadruple Whammy” – it’s that significant. In fact, a survey of 15,000 physicians cited in a Wall St. Journal article (Abbott, 2020) noted that 42% of the physicians surveyed across 29 specialties reported feeling some sense of burnout.

It is not uncommon for doctors to lose interest in working in medicine. This is understandable as doctors are constantly asked to do more and more with less and less. Over time, this overloading can have significant consequences. Besides the impact on personal well-being, patient care, and the health care system, burnout can derail doctors’ financial futures (decreased productivity, increased risk of malpractice, higher rates of divorce, early/forced retirement).

By acknowledging both the a) high likelihood and b) personal/financial consequences of burnout, doctors need to plan accordingly. By living intentionally during peak earning years, doctors can aggressively repay their student loans, build a nest egg, and craft a lifestyle that can be sustained if/when there’s ever the desire/need to shift into a lower paying career.

Being handcuffed to a job simply for the pay, despite feeling drained, disenchanted, and possibly depressed, is a not a recipe for personal fulfillment or success.

Perhaps at some point a doctor wants to teach, work part-time, or spend some years on the “mommy/daddy track.” Others may desire working in a location that doesn’t pay as well, volunteering more, or walking away from medicine as a whole. While money is not the key to happiness, it can be an empowering tool for pivoting toward a role that is more fulfilling.

Getting finances on the right track early in a medical career is a great defense to combatting burnout and can make nearly any conceivable career transition more realistic.

So, what is a newly minted doctor to do?

Our best recommendation is to begin with education, some personal finance 101. For starters, whether it’s student loans, retirement planning, or being tax-savvy with your hard-earned dollars, The White Coat Investor is a quick read and great primer for getting familiarized with personal finance. If interested in scratching beyond the surface, the whitecoatinvestor.com has forums, articles, and vetted guest contributions that weigh-in and expound on additional topics. If reading and learning about finance feels like learning another language, that’s understandable – but do know that taking this time to understand the basics may be one of your better long-term investments.

Besides getting familiarized with finances, a newly minted doctor should invest in a professional consultation on their student loans. For many doctors just entering their residency, a student loan analysis may result in pursuing an income based repayment strategy and/or Public Service Loan Forgiveness. For doctors who have already completed their residency (or dentists who have shorter residencies), it may mean refinancing.

Questioning how much a student loan analysis could save you? Assuming you don’t qualify for any loan forgiveness, consider a basic refinancing scenario. If a doctor with $200k of student loan debt with an interest rate of 6.8% and a 10-year repayment schedule was able to refinance to a rate of 4.8%, their monthly payments would be reduced by $200. Over the 10 year repayment schedule this would save nearly $24,000 in interest payments.

The Financial Industry’s Shortcomings: Doctor beware!

This brings us to the next obstacle for doctors – the finance and insurance industries. Bill Bernstein, author of The Intelligent Asset Allocator, once noted, “If you assume that every financial professional you interact with is a hardened criminal, you’ll do okay.” As a financial planner, and it pains me to say, Bill’s quote is accurate. All investors, not just doctors, should approach the financial and insurance industries with antennas up. In many fields there is a code of conduct or standard of ethics to adhere to. In medicine, the common example of this is the Hippocratic Oath. Thought to have originated in c.a. 500 BCE, the Hippocratic Oath was a response to the charlatans who posed as doctors to swindle patients and make a quick buck. Though many medical institutions have moved away from the original Hippocratic Oath, many modern versions maintain the same theme: putting patients’ best interests first.

When it comes to the financial industry, like Bernstein’s quote alludes, Caveat Emptor – “let the buyer beware.” In a field saturated with mutual fund salespeople, insurance salespeople, and stockbrokers – how does one find a financial professional they can trust?

The F-word: “Fiduciary”

Similar to the Hippocratic Oath, the financial professional that you choose to work with should be one who, at a minimum, adheres to the National Association of Personal Financial Advisor’s (NAPFA) fiduciary oath. According to NAPFA, this oath means that the professional shall:

  • Always act in good faith and with candor.
  • Be proactive in disclosing any conflicts of interest that may impact the client.
  • Not accept any referral fees or compensation contingent upon the purchase or sale of a financial product.

To know for sure whether the financial professional you’re working with, or the person that you’re interviewing to hire, is a fiduciary, ask that they put in writing and sign a statement that they will always put your financial interests ahead of their own and the firm they work for. If they are unwilling (or “unable”) to sign this, they are not a true fiduciary.

NOTE: Financial professionals are legally required to act as a fiduciary in ERISA plans such as 401ks, 403bs, IRAs, and pensions. So, if a financial advisor tells you, “Yes, of course, I act as a fiduciary in insert ERISA retirement plan” just know that this is nothing special. You want a professional that always acts as a fiduciary.

However, despite adhering to heightened code of ethics, many of the advisors that you can search for on NAPFA.org charge their clients by a percentage of the assets under management (or, AUM). That is, if you have $500,000 of investable assets and are seeking the advisor to manage those assets, you may be charged 1% (i.e. $5,000), on $1 million of investable assets you might pay that same 1%, or $10,000. These fees also do not account for the underlying expense ratios of the investments you’ll be placed in (oftentimes as high as another 1%).

Hiring an advisor when you have negative net worth

While we could take time to debate whether or not the AUM fee structure holds up under deeper ethical scrutiny when compared to a fixed/flat-fee which is not tied to investable assets (hint: it doesn’t), let’s get back to the point! For most doctors, even if they do their homework on NAPFA.org and find an advisor that acts as a fiduciary, will a young doctor meet the asset minimums to qualify as a client? Perhaps, but probably not.

When it comes to medical/dental school, roughly 80% of students will take on loans to pay for tuition. Out of those who borrow, the largest cohort (27%) take on between $200-300k of student debt (not including any undergraduate debt). Despite earning money during residency/fellowship, it’s likely that most doctors will become an attending while still having a negative net worth. That is, they may be a great saver and were able to accumulate $50,000 of cash/investments during residency, however they still have $200,000 of student debt – or a negative net worth of –$150,000. For an advisor that charges their fee as a percentage of the assets they’re managing, there is no way to be compensated for working with a young doctor.

Here’s when the charlatans of the finance and insurance industries begin rearing their ugly heads. When you hear that they’ll provide you anything for “free” – RUN AWAY!

Some of the worst places to get financial advice:

  • Unsolicited emails
  • Stock-picking internet forums
  • Your TV (turn off Jim Cramer!)
  • Your insurance agent
  • Your local brokerage shop (Morgan Stanley, Merrill Lynch, Edward Jones, UBS etc.)
  • Your bank or credit union

With a negative net worth and no (or minimal) assets to manage, the most unsavory financial and insurance reps capitalize on the opportunity to make a one-time sale of a product that can earn them a commission, score them a kickback, or help them hit a quota (behind the curtain: “one more sale and I win a trip to the Bahamas!”).

One more time for the people in back: DOCTOR BEWARE!

Final Thoughts: Who should doctors work with?

The top qualities that a doctor should consider in a financial planner are as follows:

  • Fiduciary: As discussed – someone legally sworn and obligated to always place your interests ahead of their own.
  • CFP® Credential: Certified Financial Planner™ marks are the gold standard. Advisors are required to complete extensive coursework and to pass a board administered exam.
  • Fee-only: Advisor is compensated only by the client and never earns commissions for product sales or referrals. NOTE: Fee-only and fee-based are not the same!
  • Independent: Not affiliated with or hired by any brokerage firm, bank, or insurance company.

Unfortunately, it can sometimes be a challenge finding advisors that check off all four of these. Luckily, there are sites such as FeeOnlyNetwork.com and ACPlanners.org that offer search functions based on your location. As the name suggests, FeeOnlyNetwork.com offers listings of fee-only advisors. On ACPlanners.org, the website for the Alliance of Comprehensive Planners (or, ACP), you can also search for advisors based on geography. While both organizations are reputable and their advisors meet most (often all) of the aforementioned qualities, it’s worth exploring ACP if you want an advisor who offers a broader scope of services (i.e. navigating student loans, starting a solo-401k, preparing you annual taxes etc.).

At wHealth Advisors, working with medical professionals is personal. Having a wife, a brother-in-law, and numerous relatives that have pursued the path of medicine we recognize the nuances of the journey, the challenges, and the endless opportunities – all while upholding the industry’s highest standards. The Ongoing Financial Planning of our website highlights our offerings for doctors in all stages of their careers ranging from residents to retirees. For those still pursuing the search for an advisor: Godspeed, good luck, and we hope to hear from you.

Related:

Podcast: Not A Medical Marvel (feat. Dennis McNamara CFP®)

Abbott, B. (2020). Physician Burnout is Widespread, Especially Those in Midcareer. The Wall Street Journal.

For any questions or clarifications please feel free to contact us at hello@whealthfa.com.

The SECURE Act: What you need to know

The SECURE Act

Written by: Dennis McNamara

Congress just passed a year-end bill known as the SECURE Act (i.e. Setting Every Community Up for Retirement Enhancement Act of 2019). While the name suggests both promise and opportunity in solving our nation’s retirement crisis, we at wHealth Advisors dug into the weeds and wanted to use our last blog post of 2019 to share some thoughts.

Let’s start with the GOOD:

  • Retirement deductions for those over 70.5 years old: For those who have earned income and happen to be over age 70.5, you can now contribute to an IRA.
  • Required minimum distributions bumped back from 70.5 to 72: For those who are not yet 72, required minimum distributions from qualified retirement accounts will now begin at 72 rather than 70.5.
  • Multiple Employer Retirement Plans: Allows two or more unrelated employers to join a pooled employer retirement plan (Dental and Medical practice owners/partners: This is for you!). These plans will need to be administered by a Registered Investment Advisor firm (like wHealth Advisors). If done correctly, this provision can create significant savings for both owners and participating employees.
  • Kiddie tax rates: Unearned income for a child under 18, or under 24 and a full-time student, to now be taxed at the parent’s marginal tax rate (as opposed to the previous trust tax rates which in most cases were higher than the parent’s tax rates).
  • 529 plan expansion of qualified expenses: Allows 529 funds to be used for registered apprenticeships, home/private/religious schooling, and up to $10,000 of qualified student loan repayments.

And now the BAD:

  • No more “stretch IRAs” for inherited retirement accounts: Before the SECURE Act, if you passed away and left a qualified retirement plan to your descendants (think: 401k, IRA, 403b etc.), the beneficiaries could take distributions from the inherited account over their own personal life expectancy (calculated by IRS). For example, suppose a 30 year old inherited an IRA from their parent. That 30 year old was previously able to take annual, piecemeal distributions and “stretch” the distributions from the qualified account until their death. After the SECURE Act, non-spouse inheritors of qualified retirement accounts must now have the funds distributed within 10 years of inheriting (note: this change begins for accounts inherited in 2020).
    • This is extremely detrimental to the average investor. REASON: Forces larger income distributions to beneficiaries even if the income is not needed. This will not only minimize the tax deferral benefits (having to take the money sooner prevents the funds from having a longer time horizon to grow tax free) but will also trigger many investors to be bumped into higher tax brackets. From a behavioral standpoint, forcing distributions over a 10 year period will likely result in more folks squandering inherited retirement accounts (thus giving annuity reps another mouth-watering opportunity to sell annuity products).
  • Employer retirement plans can offer “Lifetime Income Providers”: TRANSLATION – annuity companies and their advisors can now place more of their high-cost annuity products into employer retirement plans. Additionally, and according to the SECURE Act, there is no requirement for a fiduciary to select the least expensive option.

OTHER provisions worth noting:

  • In 2021 the IRS will make slight tweaks to it’s life expectancy tables (which will impact required minimum distributions). A small change but a positive one.
  • Increased tax credit for employers starting a retirement plan and for employers that setup a plan with auto-enrollment (again, a nice perk for the Dental/Medical practice owners!).
  • Penalty-free withdrawal (up to $5k) from retirement plans for individuals in case of birth of a child or adoption.
  • Federal medical expense deduction reduced to 7.5% of AGI (down from 10%).

As is often the case, what legislation gives with one hand it takes with the other. While we’re happy with some of the improvements, the most impactful changes (elimination of stretch IRAs, annuities in 401k plans) make it clear that the real winner of the SECURE Act is the insurance lobby.

For any questions or clarifications please feel free to contact us hello@whealthfa.com.

Climate Change and Your Portfolio

Written by: Dennis McNamara

Introduction

 As financial planners that adhere to an evidence-based investment philosophy, we at wHealth Advisors use historical stock market data to infer a potential range of future outcomes. With reliable data only going back to the mid-1920s, trying to predict future market performance based on these “historical” figures is a fool’s errand. Instead, we like to work with our clients to focus on the things that they can control:

  • Increasing saving rates, decreasing spending rates
  • Reducing the cost of asset management and investment expenses
  • Minimizing tax liabilities by proactive tax planning
  • Aligning stock market exposure to tolerance/ability to take risk
  • Ignoring market noise and sticking to the plan

An evidence-based climate scientist, on the other hand, relies on data that goes back roughly 11,500 years to the Paleolithic Ice Age – a more robust sample study, to say the least. So, let’s get right to the point of this blog: Climate change is real and it is going to impact the long-term performance of our global markets (and thus, our portfolios) in unpredictable ways. This is factual science, not a controversial position. For starters, look to PG&E, the California utility company that filed for bankruptcy this January after facing $30 billion in fire liabilities after its power lines sparked what became California’s deadliest wildfire yet last fall. Besides utility companies, climate change will inevitably impact business in nearly all industries – agriculture, insurance, and energy to name a few. All industries operate within a global ecosystem and any climate event that results in a negative outcome (regardless of region or industry) will have negative downstream effects to our financial markets.

In an effort to stay abreast of these potential impacts from an investment (and humanity) standpoint, I attended four events as part of Climate Week 2019 in NYC:

  • NYC Climate Strike (marched with my wife, son, and mother)
  • Climate Finance & Investment Summit hosted by the London Stock Exchange
  • 2019 Annual Climate Week Briefing hosted by Moody’s Investor Services
  • Quantifying Climate Risk hosted by S&P Global

What the world’s largest asset managers are doing:

Of the many speakers I had the pleasure to listen to, Hiro Mizuno, the Chief Investment Officer of the Government Pension Investment Fund (GPIF) of Japan, shared some of the most thought-provoking insights. As the CIO of GPIF, Hiro manages the single largest sovereign pension fund in the world. In a room full of big fish that included the NY State Comptroller (oversees NY State pension, 3rd largest in US, $210B) and Investment Director for CalSTRS (CA state pension, 2nd largest in US, $238B) – Hiro was the whale (manages over $1.5 TRILLION – approximately 1% of all assets in the world).

What makes Hiro’s insights so valuable is that, unlike a typical investor whose long-term outlook spans roughly 15-30 years, GPIF’s long-term outlook extends somewhere between 50-100 years. To Hiro, climate change is not some abstract thing, it’s a very real threat to the world (and thus, the world economy) and it requires action across all of society and industry today. Given GPIF’s size and time horizon, the fund is in a unique position to change the world. One way that it attempts to do this is by rewarding companies for behavior that it deems good for the world economy over the long-term while penalizing behavior that is bad. In theory, and in oversimplified terms, this rewarding/penalizing is done by overweighting (i.e. investing more) in the companies doing good and underweighting (i.e. investing less) in the companies that need to do better.

In order to judge whether a company is doing good or needs to do better, they are first compared to the other companies within the sector they operate. If the sector is energy, for example, we might compare Exxon, Shell, and BP. Companies are then compared to each other based on their Environmental, Social, and Governance (“ESG”) conduct. Breaking these three ESG legs down further:

  • Environmental: Considers a company’s greenhouse gas emissions, their waste and pollution outputs, and their water and land use.
  • Social: Considers workforce diversity, workplace safety standards, customer engagement, and community impact.
  • Governance: Considers company structure, transparency, and disclosure reporting.

When deciding which companies to reward/penalize, GPIF and other asset managers would consider factors that are common across all industries while also including factors that are unique to the sector. In this example, some of these factors would include the energy company’s greenhouse gas emissions, their investments in renewable energy and carbon capture technology, and their level of transparency/disclosure. In a perfect world, Exxon, Shell, and BP could be compared apples to apples and rewarded/penalized commensurate with their efforts. For example, if Exxon was doing the most to limit greenhouse gases, if it invested the most in renewables/carbon capture, and if it disclosed these metrics with reasonable transparency, they might receive a larger investment from GPIF. Inversely, if BP was the environmental laggard of the energy industry, GPIF could reduce their investment exposure on the basis that BP is not being a good environmental steward which is bad for the world economy over the long-term.

The Dilemma

According to Hiro and the other keynote speakers and panel participants, the biggest wrench that prevents this process from working as intended is the lack of transparency and disclosure by public companies (specifically, public companies in the US). The Securities and Exchange Commission (“SEC”) currently limits mandatory disclosure to issues that materially impact shareholders/investors. Unfortunately, the SEC does not deem the ESG metrics as having any “material” impact (despite a petition from $5 trillion worth of institutional investors that do deem ESG factors as having a “material” impact). Unlike the US, two dozen other countries require this type of mandatory reporting and seven stock exchanges already require ESG disclosure as a listing requirement.

Long story short: If a company is not measuring or reporting their greenhouse gas emissions, and the SEC does not mandate this reporting as part of shareholder disclosure, GPIF and other asset managers have little to no ability to factor ESG measures into their overweighting/underweighting analysis.

While there is much promise that modern finance can play a role in the fight against climate change, the current bureaucratic roadblocks make this an uphill battle. Withdrawal from the Paris Climate Agreement and the repeal of the Clean Power Plan make it clear that the current political environment does not favor enhanced ESG disclosure. According to S&P Global, only 15% of public companies have acceptable ESG reporting disclosures while 37% have taken NO action to disclose. Asset managers have since lowered the bar and are now rewarding companies simply on the basis of whether or not the company disclosed any ESG details/disclosures.

What this means for you, the individual investor

With the rising popularity of ESG-focused mutual funds and ETFs targeted towards individual investors, there are options to invest in funds that underweight greenhouse gas intensive industries (i.e. energy/utility companies) in favor of less environmentally offensive industries. However, similar to the dilemma faced by Hiro and GPIF, a lack of mandatory ESG disclosure means that these ESG-focused funds are being designed without any uniformly reported data (remember, 37% of companies don’t even report on ESG!).

There is also the question of subjectivity. What about companies with poor track records that are trying to improve? Take Dow Chemical Company, they (and acquired company, Dupont) have committed environmental travesties but recently pledged $1 billion to “nature-enhancing” projects between now and 2025. Does Dow belong in an ESG fund*? Given the chemical industry’s lack of transparency and disclosure, how does an ESG fund determine whether to overweight or underweight Dow vs. its competitors? Combine these subjectivity concerns with the fact that a) ESG mutual funds typically cost more than comparable index funds and b) many are still new and have a limited performance history – the decision to invest in ESG is complicated.

Conclusion

In order for the financial industry, and Chief Investment Officers such as Hiro, to have an impact on climate change, reporting requirements need to include ESG metrics. At this moment in time, even as a staunch environmentalist, I do not view an individual’s portfolio as an effective tool to combating climate change. My hope is that with increased ESG reporting standards that this will change. For now, and like the recommendations we provide to our clients, let’s focus on what we can control.

The most effective ways individuals can mitigate their carbon emissions (listed in order of impact**):

  • Have one fewer child (pound for pound the most environmentally impactful decision an individual can make. NOTE: Prince Harry and Meghan Markle recently committed to having just two children for this very reason.)
  • Live car-free (unrealistic for many, so consider hybrid/EV when purchasing a new vehicle)
  • Avoid airplane travel (also unrealistic for many, consider purchasing carbon offsets to minimize carbon footprint from air travel through social enterprise firms such as Terrapass)
  • Eat a plant-based diet (bonus: this is also linked to improved health and longevity)

In a time where many of us feel overwhelmed or disheartened about the risks ahead, I consider myself rationally optimistic. With risk comes opportunity. Capitalism, whatever your opinion on it, has afforded us a standard of living beyond what our ancestors could have ever imagined. By combining capitalistic forces with sound environmental policy (i.e. policy that is rooted in science!) I am confident that we can (and will) pivot to a more environmentally and financially sustainable future. The onus begins with each and every one of us – so ditch the car, go for a walk with your intentionally small family, and eat some veggies!

Hope that you enjoyed and thanks for taking the time to read! Please feel free to contact our team at hello@whealthfa.com.

*Dow Chemical Company is included in the Dimensional US Sustainability Core Fund (DFSIX).

** Seth Wynes and Kimberly A Nicholas 2017 Environ. Res. Lett. 12 074024

All 529s Are Not Created Equal

Client sitting around a table discussing fiances at wHealth Advisors office

At wHealth Advisors, we strive to educate our clients that the location of their assets is often just as important as the funds they invest in – this rule is no exception when it comes to utilizing 529 plans.

While most investment companies have faced an increased pressure to reduce their fees, most 529 plans have not. Why?

  1. Most states incentivize their residents to participate in 529 plans by offering a tax deduction for contributions.
  2. States only offer a limited menu of 529 plans (usually 1-3 different plan options).

The combination of these two factors has resulted in parents/grandparents simply settling with one of their state’s 529 plan offerings. With the steady flow of participants to state-designated 529 plans, fund managers have had little incentive to reduce their costs.

What many folks don’t realize is that a number of states (16 to be exact, NJ is one of them!) offer no substantive benefits (i.e. tax deductions) for using their state-designated 529 plans. To add insult to injury, Morningstar has just downgraded NJ’s Franklin Templeton 529 College Savings plan (1 of the 2 plans offered by NJ) from neutral to negative. REASON: The NJ Franklin Templeton plan’s most popular option, their “Growth” age-based plan, has an average fee of 1.19% while the national average expense ratio of 529 plans is .55%. Morningstar wrote about the NJ Franklin Templeton plan, saying that “subpar oversight at the state and program manager level decrease our confidence in the plan’s long-term prospects.” NOT the most promising review…

 

IMPACT:

If you invested $24,000 when your child/grandchild was three years old and left the funds untouched for 15 years, an average annual return of 7% would result in the NJ Franklin Templeton plan growing to $55,990 while the “average” 529 plan would have reached $61,291. An even lower-fee 529 plan (like one offered through Vanguard*) would have grown to $63,665 over that same period.

 

ACTION:

– NJ Residents: Given NJ’s lack of 529 tax incentives and less-than-compelling 529 plans, we advise clients to explore their options. Great options to consider include:

– NY Residents and beyond: Single NY tax filers can reduce their taxable income by $5,000 by making a $5,000 contribution to a NY 529. This amount increases to $10k for those who are married and file jointly.

  • BEWARE: While it’s great that NY (like many states) offers a tax deduction, be aware that participants have to choose between “Advisor-Guided Plans” and “Direct Plans” – always opt for the direct plans. Advisor-Guided Plans typically charge just over 5% for every 529 contribution. That is, each time you contribute money to the child’s 529 account, 5% of your contribution (no matter the size) goes directly to a financial salesperson’s pocket.

Don’t let fees drag down the precious funds you are setting aside for the next generation’s continuing education. As always, please feel free to contact our team to discuss this further

*Vanguard’s average 529 expense ratio is .28%

The Next Recession and What We Can Learn from the Tour de France

Three men racing on bicycles

Written by: Dennis McNamara

For the second year in a row I am a daily listener to Lance Armstrong’s podcast covering the 2019 Tour de France. As a race, the Tour’s terrain is always full of variety: flat stages, mountainous stages, and even stages with miles of cobblestones. As someone who has experienced the trials and tribulations of le Tour firsthand, Lance is rarely one to try and predict a winner. As an evidence-based investor, you also know how futile market predictions can be.

As a rider, like an investor, we can only control our actions. Riders have no control over the terrain, the weather, or the dense crowds (eh-hmm, hooligan fans) lining the roads. As an investor, we have no control over the amalgam of forces that create positive/negative market returns (i.e.  geopolitics, interest rates, currency risk etc.). Even when being pragmatic with all of the things that are in our control, we are never free from setbacks. This brings us back to the point of this article: recessions.

Looking at the chart below, we see that recessions occur roughly every four years. Given that our last recession was in 2009, it would seem that we’re due. When? Good luck guessing that one. All riders in the Tour know that there will be crashes; it’s simply a matter of when. As an investor, we need not forget that like crashes on the Tour, recessions are also a matter of when.

 

Market growth is not something that can continue indefinitely, economies need recessions to filter out the poor performers and allow opportunity for new entrants. In the Tour de France, how riders navigate the setbacks and challenging times can often be indicative to their overall performance. As an investor, those with the guts and capital to make purchases during a recession are the winners (i.e. buying depressed assets at a discount). Warren Buffett once shared the sage advice to “be fearful when others are greedy, and be greedy when others are fearful.” I’d have to ask Lance, but I feel like this holds true in both our financial markets and the Tour.

For those planning to retire or begin drawing down their assets in the near future (within the next 1-5 years), portfolio management can become a bit more nuanced. In short, it’s imperative to set aside at least a few years of living expenses in safe investments (i.e. short-term bonds with high credit quality). Why? Having these funds on the sidelines during a recession will allow you to ride out the market tumult, to not sell your equity positions out of necessity, and to be patient in waiting for the market recovery.

Aside from your portfolio allocation, the other area within your control as an investor (and arguably even more important) is your spending. If a Tour de France rider exerts all of his energy on the first mountain incline, how will he fare later in the Tour? Depleting too much energy too early in the Tour would be short-sighted and result in lackluster performance. Now, think of that same rider who exerted too much energy too early that now faces an immense challenge that is beyond his control. Good luck Chuck.

As an investor, depleting too much of your portfolio too early could have even more dire consequences than a cyclist overexerting themselves. In the event of a recession, those who rely on their portfolio assets for monthly/annual cash needs may be fine if maintaining a lifestyle within their means. However, for those living above their means, this perfect storm of a recessionary market combined with overspending will deteriorate a portfolio quickly. Trying to tighten your spending during a recession is fine, but for those in later stages of life who are already drawing down their assets for living expenses, decreased spending during a recession could be a case of too little too late.

Regardless of life stage, having a properly allocated portfolio and being conscious of your cash inflows and outflows is crucial to know in advance of a recession. Like a competitive cyclist, focus on what you can control. Whether cycling or investing, always work to be in a position of strength. If questions, contact us for a review so that when the sky is falling and market analysts cry catastrophe, you can kick back and enjoy the lighter things in life – like the Tour de France.

 

 

Trump’s Executive Order on Retirement: What You Should Know

Cheery blossom in the capital

Written by: John Munley

Out of all of President Trump’s colorful tweets recently, the one that caught our attention was a rather boring one relating to retirement, because we LOVE this stuff! While boring, if passed this could have a direct effect on how you live after 70 ½.

This summer President Trump signed an executive order for Treasury & Labor Departments to review ways to make small employer retirement plans more affordable and accessible in addition to extending and/or pushing back the Required Minimum Distribution (RMD) requirements.

In this edition, we’d like to focus on the RMD requirements and why this matters to you and making it through retirement.

 

What is a Required Minimum Distribution?

Broadly, a RMD is a Federal regulation that forces you to withdraw from your qualified retirement plans (IRA, 401(k), 403(b), 457) once you reach age 70 ½. There are situations where one may not have to take withdrawals, for instance if you are 70 ½ and still working with the employer that houses your 401(k). In the end it can be complicated, and for that we recommend consulting a financial planner, even better, a financial planner that does taxes. If you don’t have a financial planner, click here for a virtual consult.

 

Why Trump wants to change the RMD rules

Right now, if you’re 70 ½ and older but don’t need to access the money from your IRA yet the current RMD rules penalize you but if Trump’s exec order goes through, that could change. Between pensions, social security and after-tax investments, you might not need to withdraw from your IRAs to meet your expense needs. Since the government now requires you to take out pre-tax money, it means that your April tax bill increases. If my taxes increased on income I was forced to take, I wouldn’t be too happy about it either.

On the other hand, the government has given you tax-deferred growth for, most likely, decades before you have reached 70 ½. If you started with $50k in an IRA and it’s now worth $200k 20 years later, you haven’t paid a penny of tax on that $150k increase yet. So, the government politely 😉 asks for their tax money by requiring you to start withdrawing it.

Beyond the fact that this seems like an unfair policy to those who have earned and saved well, we’re living longer and therefore need our money to last longer. If you don’t need money from your qualified retirement accounts and are required to take it out, you have to pay taxes on those dollars; making it harder to plan and not outlive your assets. If the RMD requirements were reduced, then not only do you save money on the taxes you would have paid, but that tax money and the distribution itself will be able to continue to grow tax-deferred in the stock market – Yippie!

 

What those who want to keep the RMD the same are saying

Those who are against the change have three main objections:

  1. “It only helps the rich! Opponents to the change argue that those who don’t need to take money from their IRA’s in their 70’s are better off than those who need to in the           first place. So why change the rule to favor them?

 

  1. If President Trump’s aim is to help those who are in financial trouble, the rule change won’t achieve it. The average American 55-64 years old has little or no retirement savings to begin with. This proposed change will do nothing to help them. Opponents say this is just another tax break for the wealthy.

 

  1. Opponents also argue that this move will hurt our Federal Government’s already pressing budget deficit and reduce much needed tax revenue.

 

Some perspective on how you position yourself on this proposed law

5 Takeaways:

  1. If this bill goes into effect, then you will need to readjust your RMD plan going forward.
  2. If you adjust your RMD plan, your tax liability will change and you may need to update any withholding or estimated tax payments you have been commonly making.
  3. If you do not withdraw the appropriate amount from your IRAs as required, you could be facing a 50 percent penalty!
  4. If you still don’t want to withdraw the money and are charitably inclined – did you know that you can give your RMD to charity each year up to an amount of $100k per taxpayer and that amount is not taxable on your tax return. Consult a tax preparer on how to mark this appropriately on your 2018 tax return.
  5. We here at wHealth Advisors take care of all this for our clients – income tax projections so you know what you’re April tax bill will be the year before and proactive planning throughout the year prior to when your first Minimum Distribution is Required, how much to withhold, where to take it from, and how to donate and take the Qualified Charitable Distribution deduction on your tax return.

 

Regardless of what happens with Trump’s plan for RMD, your financial advisor can keep you on track to your life goals, now and in retirement.

The Path to Awesome: Top Three Financial Habits to Help You on Your Way – Part 3

A road going through nature landscape

Written by: John Munley

Build Good Credit, Early.

This is the third part of our three-part series on The Path To Awesome: Top Three Financial Habits to Help You on Your Way. I detailed in the first blog, that I was inspired to write these by a very personal response to Kid President’s exhortation that everyone find their own path to awesome. As a father and former young person myself, I see this as a chance to more widely share some of the conversations I’ve had with my own daughters about developing good financial habits to help us all get to our own, very special brand of awesome.

However, just because this wraps up our Path To Awesome discussion, the conversations about developing good financial habits won’t end, and they shouldn’t.

Throughout this conversation, I’ve (strongly) suggested that we who make the choice to take control of our life and meet our life goals need an awareness of who we are, the courage to follow our convictions and a base of knowledge that enables us to carry out our plans. These are assets we can acquire and must practice as we employ the Top 3 Financial Habits we’ll need to get to awesome: paying ourselves first; employing the magic of compounding; and using debt to our advantage — the topic of this final part of our discussion.

In fact, if you take nothing else from this article, please remember this: your credit score is a valuable asset. The good news is, you can control it. You can improve it and (the other not so good news is) you can ruin it. Pay attention to your credit report and use good debt to build up your credit rating.

 

Place Your Debts: Good Debt v.s. Bad Debt

You may be of the opinion that debt is always bad — albeit a necessary evil — but that’s not entirely true. There are some good reasons to open up a line of credit, ie: assume debt, and some smart uses for that line of credit.

Really? Debt can be a good thing?

Yes, really — but only if it’s part of your thoughtful, purposeful, goals-oriented plan.

You may have read a few articles about how high-flying financial wizards leverage debt to build empires, but you don’t have to be a Wall Street whiz kid to realize some advantages associated with ‘good debt’.

But what exactly IS good debt vs. bad debt? In a nutshell:

  • Good Debt is any debt that allows you to increase your wealth. It can be looked at as an investment, just like a bond or stock.
    • Examples
      • Mortgage – allows you to purchase your home, build net worth, receive tax benefits,
      • Home Equity Loan or Line of Credit – allows you to draw upon the built up equity in your home to use for home improvement, emergency situation, or other need,
      • Student Loans – provides you with better education, which should result in higher income potential or life achievement.

While….

  • Bad Debt is debt on consumables with no long term value.
    • Examples
      • Credit Card Debt – debt to supply short term living/spending needs – be careful!! Don’t hold revolving debt! Interest rates are also exorbitantly high.
      • Auto Loan – cars depreciate (ie: lose their value) very quickly. An auto loan is debt on a depreciating asset, as opposed to a mortgage which is debt on an APPRECIATING asset. However, occasionally automakers offer low interest rate incentive deals. To qualify for these low rates, borrowers need a high credit score (another good reason to build up that credit score).

For those of us just starting out in our careers, or even those of us who are gifting ourselves with a complete overhaul of how we manage our financial assets, this is a good, basic snapshot of the difference between good and bad debt.

 

Building Your Trustworthiness through Smart Debt

So, to buy that car, rent that apartment or buy that house — unless you’re paying cash — you want to get approved for a line of credit and get the best interest rate and most favorable payment terms, right? If lenders see you as trustworthy, you will!

 

If you can, it’s a  good idea to start establishing credit as early as the college-age years. A number of organizations and businesses use credit checks to approve applications, including landlords for your apartment, banks for your loans, even potential employers.

Conversely,

  • If you have no credit history, you are considered a risk and the lender may either not lend to you or lend to you at a higher interest rate than normal,
  • If you have bad credit, lenders will definitely not lend to you  and if by some chance they do, your interest rate will be astronomical, and
  • If you go to buy your first home (or a new home) and have low credit score, it might be hard to get a “pre-approval” from a bank. Usually, sellers want to see some kind of pre-approval to show you have the creditworthiness to even have your purchase offer considered.

So we see that we should all include building a trustworthy credit history as part of our life plan. Besides bank loans for things like cars and homes (and businesses, too), the other common type of debt people assume is:

 

Credit Card Debt

So what about credit card debt? Is it always ‘bad debt’?

The answer is the same as with other types of debt — it depends.

Is your use of a credit card part of a thoughtful, deliberate financial plan based on your life goals?

Or not?

It’s very easy to just swipe  your card and get your “stuff” without feeling the full impact of what it costs you. Too often, this leads people to live outside of their means, which almost always results in a self-defeating cycle of continuing to run up credit card debt.

There are two principal problems with credit card debt. Both of these problems come as the result of carrying a revolving balance (ie: you aren’t paying off the full amount you owe each and every month).

First, if you don’t make your payment on time, the lender charges you interest. If you carry a large credit card balance, you may be spending money you should be allocating to your savings into paying off that revolving (read: expensive and counterproductive) debt. How bad a move is this? Remember the magic of compounding? Yeah, it’s a bad move.

By carrying a revolving credit card debt, you are essentially robbing yourself of your own money to pay interest on the loan you took out to purchase items that you probably couldn’t afford according to your spending plan.

The second major problem with carrying large, revolving credit card debt balances is that you are going to pay a TON of interest on whatever you’ve purchased, driving up the cost for everything you buy on that credit card. For example, right now, credit cards are charging anywhere between 16% and 39% in interest. So that cute pair of shoes or that monogrammed newest-awesome-fiber-filled hiking jacket you bought for 50% off is going to cost you much more than you paid for it by the time you include the credit card interest payments on those items.

The lesson or good habit to learn and practice here is — pay off your credit cards monthly. And if you find that you can’t, then you are spending more than you earn.

 

All Credit Cards are NOT Created Equal

I don’t want to leave you with the impression that all credit card debt is bad. Credit cards are a great opportunity to build  good credit habits that prove your trustworthiness to lenders, thereby increasing your options to acquire good debt for important life goals. Just as with every opportunity, however, it pays to do some research and make smart choices about which credit cards are going to serve your purposes.

The fact is, these days there is a lot of competition among lenders to attract borrowers, and so the perks of credit cards are pretty high..Many credit cards offer rewards or cash back incentives to entice people to spend using their cards.  However, if you are applying for your first credit card, there are more important “perks” that you should be looking for such as no annual fee, low interest rates on balances, cash back for good grades, no late fee on first late payment, and no foreign transaction fees (Spending a semester abroad?).

Bottom line, do your research. You can shop smart for the kind and terms of debt you assume–just like the big wheels on Wall Street!

And don’t forget, every time you practice good financial habits like using good debt to build a high credit score, you are taking one more giant step along your path to awesome!

The Path to Awesome: Top Three Financial Habits to Help You on Your Way – Part 2

John Munley Financial Advisor at wHealth Advisors and family

Written by: John Munley

Last week, I shared some advice I want to gift to my young daughters about establishing good financial habits, early. My inspiration was a speech the principal at my daughter’s school gave during her moving up ceremony. I was especially moved by a quote by Kid President about The Path to Awesome.

 

This week, my focus is on some of the nitty-gritty specifics of early investing strategies because the money we earn (or receive as gifts) really can continue to grow with us — if we take even a few hours to learn more about some simple principles and investment tools. And this IS important (and I hope my daughters are listening!), because the earlier we begin using these principles and tools, the more money our investments will earn and the more freedom and options we’ll have as we travel on our path to awesome.

 

As we consider what will best serve our goals to build a solid financial future, remember that in order to accomplish these goals, we’re going to need three things: Awareness, Courage and Knowledge. We need these because, as with most decisions in life that have the potential to significantly propel us forward towards our goals, success depends on being aware of our feelings, thoughts, desires and fears about the goal; having the courage to take action and respond to the consequences of those actions, and acquiring the knowledge necessary to make the best possible decisions in the first place.

 

Depositing all your money in a traditional savings account is certainly one option for investing your money, and in some cases, it’s a great idea. But is it the best idea for building financial assets for the long-term?

 

Here’s an unambiguous answer — No. And here’s why.

 

#1: The Magic of Compound Interest

 

I am sure you have heard of the term compounding before but may not be sure exactly what it is. The easiest explanation — compounding means you are earning interest on your interest.

 

For example, let’s say you have $100 in an investment account and are earning 7% per year in interest. After your first year, you will have $107 in that account. In the second year, you will not only be earning interest on the original $100 but also on the $7 of interest you earned in the first year.

 

You’ve probably heard, repeatedly, about the benefits of starting to save at an early age — the earlier the better. Compound interest is the reason for this. Taking advantage of compounding is sound financial advice at any age, but the younger you are when you start saving, the longer your money has to grow. And the longer your time horizon, the more easily you can bounce along with the fluctuations in the equity markets.

 

I gave an example of compounding in my last blog. There, I was using it to prove my point that the earlier we begin saving, the more money we’ll have down the road, but it’s also a great example of the magic of compounding. Here’s a quick peek at how that works laid out in a neat little chart:

#2: Risk and Reward: How Courage and Knowledge Pay Off

You have worked hard for that paycheck.  You’ve set a goal for yourself to build your savings early and to give yourself the most options along your path to awesome.

 

Now, the question becomes how to invest that money so that it can do the job you need it to.

 

We just learned why compounding is the real-world magic we need. How best to wield it? Not through parking our money in a saving account, so how?

 

There are a (mind-boggling) host of investing options that come with various degrees of risk and return and, in general, the lower the risk, the lower the return will be. A savings account is certainly the least risky, but your return is also lower than with other options. The important thing to remember is that there is not just one right investment strategy and there are no get rich quick schemes.

 

In my opinion, though, the fact that you or your child is starting early (and if not early — let’s give ourselves a thumbs up for beginning today!) is the most important factor in reaching your goal. Let’s take this example: you graduate college and your new employer gives you a $10,000 sign on bonus. It would be very tempting to throw a party for you and your friends, or go out and spend that money on cool, self-congratulatory swag (but first you would remember the obvious taxes due – about $3,245 of them when you consider statutory federal and state tax withholding requirements, Medicare tax, and Social Security tax…so your $10,000 party would really only be $6,755 party).

 

But, being the wise person that you are, you remember from reading the earlier blog, So You Teenager Got Her First Job – Now What?,  that most Americans are not saving enough to maintain their standard of living in retirement. So instead of blowing that tidy sum, you save it. Depending on your goals, maybe you save all of it. I can tell you that if you are serious about financial freedom, saving the bonus into your new company’s 401k plan allows you to keep the whole $10k instead of netting only $6755 after tax as we discussed above.

 

Here’s where knowledge about personal finance is a most valuable asset. Take the time to learn why and how money can be a great tool to help you reach your biggest, most cherished goals. Community colleges often offer personal finance classes for reasonable tuition that will give you a good understanding of basic vocabulary and principles. Bottom line, the more you know, the better your decision-making.

 

For the sake of this example though, let’s keep it simple and compare your return on investment in two different scenarios: 1. Deposit your bonus in a traditional savings account (ie: Park and Ride), and 2. Invest your bonus in the stock market (Knowledge + Courage).

 

In scenario 1, if you simply dropped it into a savings account, you would only be starting off with $6,755 (remember those darn taxes) and based on the average historical rate of return for a traditional savings account (about 4.5% since 1954), after 43 years you could expect to have a total balance of $44,063. This savings rate would have resulted $37,308 of earnings over that time.

 

In scenario 2, you instead elect to save your bonus into your 401k. This gets you the full $10,000 (defer those taxes!) to invest. If we assume the long term average return of a moderate portfolio (made up of 60% in stocks and 40% in interest earning assets), saving that $10,000 bonus at the age of 22 into the a tax efficient, diversified investment portfolio would turn into $361,302 by the time you reached the age of 65. Now how many parties can you throw with that??! There’s that good old magic of compounding interest at work for you!

 

#3: Short Term Goals: When the Right Decision Means Spending NOW

Now, not all of your money should necessarily go into the equity market. After all, we need to grow and build and live and enjoy life along the way to retirement, right? Life is happening every day between here and retirement!

 

For our important short term goals such as traveling, a downpayment for a house, or purchasing a car, we want to keep our money safe and away from the volatility of the equity market and, more accessible. We want to make sure that money is readily available when you need it, so leaving a portion of your money assets in a savings account or other lower-risk investment is a great idea.

 

How much should you put into a straight savings account? I tell my daughters between 10% and 15%. As you see your income and your balances grow and you see your goals and aspirations develop, you may decide to rebalance this percentage.

 

Then, as you see your investments grow and start meeting some of those early goals — you’ll likely want to start working with a trusted financial life guide, someone who has expertise in not only how to save and invest but who also has a wealth of experience from helping others succeed…and lessons learned from other people’s mistakes.

 

Together, you can employ self-awareness, courage and knowledge to make sure you’re on the right path to awesome.

The Path to Awesome: Top Three Financial Habits to Help You on Your Way – Part 1

Wooden steps down to the beach

Written by: John Munley

My daughter recently had her moving up ceremony during which she and her class celebrated “graduating” from elementary school and starting their middle school years in the fall.  During the ceremony, the principal addressed the parents and students, quoting Robby Novak. Novak, who also goes by the name, Kid President, is a 13-year-old boy who, despite living with osteogenesis imperfecta, a rare genetic disorder that makes his bones extremely brittle, has built an online empire using his intelligence, charm, wit and boundless optimism to inspire others.

“Two roads diverged in the woods and I took the road less traveled and it hurt man. Really bad! Rocks! Thorns! And Glass! But what if there really were two paths. I want to be in the one that leads to Awesome!”

Was my daughter listening? I was. This advice is useful for people of any age, and it’s a message I hope my daughter heard, and heeds.

There have been many renditions of this theme, but they all have similar meaning:  one of the greatest gifts we have in life is the right to choose. We all have our own set of assets and liabilities, but ultimately — no matter what our circumstances — it’s up to us to choose which trail in life we want to take. And though it’s true that no two of us are exactly alike, like Robby, I believe that regardless of what everyone else does we should choose the trail that leads to our “Awesome”.

Now what does this all have to do with good financial habits?  Well, to follow your path to Awesome, I believe you need three things:

First, you need awareness about who you are, what is right for you, and where you want to go in life.

Next, you need to have the courage to follow your convictions.

Finally, you need a base of knowledge that lets you carry out your plan.

And here’s where I am going to build on Kid President’s advice with some advice of my own, hard-earned wisdom that I hope my daughters will heed along with Robby’s. Even if you’re not a teenager embarking on their first job, this is a good reminder about how to set priorities and blaze your own trail to awesome.

One of the most important things to remember about being Awesome is that it is not easy. Getting to your Awesome is an amazingly connected and complicated process because our own personal journey to awareness, courage and knowledge can’t be accomplished overnight. In my experience, we get to Awesome through hard work, determination, and sacrifice.

And though — first and foremost — the path to our Awesome is about personal fulfillment and contentment, one of the first things any of us can do to ensure success as we begin our adventure is to start practicing good financial habits, early. Because no matter what your Awesome looks and feels like, having a solid financial footing will make the rough patches easier and give us more options for celebrating our victories.

The three financial habits I wish I’d started earlier are not arcane, complicated concepts, but they do require awareness, courage and knowledge if we’re going to practice them successfully. They are: Pay yourself first, Don’t Just Park Your Money, and Avoid Building Excessive Credit Card Debt.

Pay yourself first.  What does paying yourself first mean, and why?

You provided your time, service and expertise — maybe even your physical strength. You got paid.

Shouldn’t the first person to benefit from that paycheck be you?

Of course. Your time, expertise and service is valuable. Prioritizing yourself when you get paid shows an awareness of the value you bring to your work.

So, before you go out and buy that concert ticket or video game, set aside a portion of your pay for yourself — to save. The first spending that you do each month should be a deposit to your own saving account and thinking of personal savings as the first bill to be paid each month will help you acquire wealth over time.

There is a lot of pressure to ignore your own value and prioritize other’s wants. But it takes some courage to put yourself first, or even to say no, or not now. Fashion-Store wants you to buy the latest style of jeans. Friends want you to blow half your pay on hanging out with them at the beach.

But if you do pay yourself first, your money (and it IS your money) will be able grow faster (and $$$$) as you’re able to take advantage of compound growth. And the more money you save, the more you will have to use for your goals on the way to Awesome.

A good way to develop and practice the habit of paying yourself first is to open up both a checking and savings account. Have your paycheck deposited directly into your checking account and then, on every payday the first thing you should do is transfer the money you want to save from the checking account into your savings account. This is good practice because you’re training yourself to prioritize your own needs and goals over the latest consumer trend or impulsive desire for instant gratification.

How much, though? How much should you put towards savings from each paycheck? Here’s where knowledge plays its part in your newfound, good financial habit-making.

How much you should save can either be a specific dollar amount, or a percentage of your earnings, depending on how much you’re earning, your age and your goals. At a minimum, I recommend putting 10% aside for savings. As you earn more money and see what your spending habits are like, you can adjust the amount to better meet your goals. Of course, you have to have goals to do this.

What are your goals on the road to Awesome?

One quick example of how saving early can reap HUGE rewards along the road to awesome: Start investing $2,000 a year in average yield (7%) stocks at 17, and stop contributing at 30. By the time you’re 65, you’ll have $515,231 (all earned with only $28,000 of your hard-earned money!). Alternatively, if you wait until you’re 31 to start saving, you can invest $2,000 a year until your 65 — that’s a $70,000 total investment — and you’ll only realize $295,827 by the time you’re 65.

Bottom line, no matter how old you are, #1 Habit: Pay Yourself First. Start NOW!

Enjoying this topic? Don’t miss Part 2 – “Don’t Just Park Your Money”

So Your Teenage Got Her First Job – Now What?

Woman checking out at counter

Written by: John Munley

My twin daughters got their first real jobs last summer, a common rite of passage through adolescence and good preparation for increased independence as they began their college adventure. I was a very proud parent. My kids would finally earn their own money and learn responsibility – or so I thought.

Little did I know at the time that my role and guidance as a parent was still very much needed.

When our children get that first paycheck and look aghast at the withholdings; that’s when we realize our kids know very little (or possibly, nothing) about how finances work. And maybe that shouldn’t be a surprise.

When something is provided to you automagically (like money for the movies or a new pair of yoga pants) you don’t need to know how it works. But when you’re the one holding the time card (and the debit card) it suddenly becomes super important.

If your kid is starting his or her first job this summer, you’ve got a great opportunity to talk with him or her about how we get paid and all the ways we could and should be spending those hard-earned dollars.

Here’s what to expect when your child works this summer.


Baby’s First W4 Form. You must be so proud.

After getting a job, the first thing that your teenager is most likely to bring you is a W-4 Tax Form. Employers use this form to withhold the proper amount of federal income tax from paychecks. The biggest challenge is deciding how many allowances to  claim. The more allowances you claim, the less federal income tax your employer will withhold from your paycheck.

The first thing that you want to check is if your teenager is exempt from having Federal taxes withheld  from her paycheck. The following chart published by the IRS will guide you to see if your child qualifies for exemption from withholding.

If your teenager does not qualify for exemption, then she must choose the number of personal allowances to claim. The Personal Allowances Worksheet consists of lines A through H and helps to calculate the allowances that your child should take. In most cases after filling out the worksheet, she will end up taking either zero or one allowance. With zero allowances, more federal taxes will be withheld which will lead to a larger refund at the end of the year. States may also have their own W-4’s which the employer may require.


The first paycheck. Where did all my money go?!

Your child gets a job for $10/hour and works 30 hours per week. When her first paycheck arrives, she’s shocked to learn that her total ‘take-home pay’ isn’t $300. You now get to explain the tax system and the difference between gross pay and net pay.

Use this as your basic script:

Gross is the amount earned based on salary and hours worked. Net is the actual take home pay after taxes are deducted. Everyone, regardless of age or income, has Social Security and Medicare taxes withheld from their paychecks which won’t be refunded when a tax return is filed. The Social Security tax counts towards your child’s earnings record, which is important as it’s used when determining her future benefits. If your child filed exempt on her W-4, no federal taxes are withdrawn. If she claimed zero or one, there will be federal taxes deducted from her earnings in addition to Social Security and Medicare. State taxes may also be deducted based on the state W-4 form that your child filled out.

Have fun laying all that out for her.

 

The double edged debit card.

How  we pay for goods and services is an important decision that I don’t think we  discuss as much as we should. Technology gives us multiple ways to pay for that new app or that concert ticket : debit cards, credit cards, checks, online payments, Venmo, Paypal, Apple Pay, etc.

Notice the one thing that I left out? Cash. The good old American dollar.

We live in a world where we hold less cash and increasingly use various cards and electronic payment methods. While paying electronically is convenient, there are some benefits when using cash.

First, we spend less when we use cash. Consumers are likely to spend more money using credit cards since it’s less painful than paying with cash. There is a separation in time between when the credit card is used to buy something and when the bill has to be paid, and this encourages us to be more impulsive spenders. With cash, we feel the pain of loss (our money!)  immediately.

Second, not only do credit card users spend more, but they’re spending more money to instantly gratify unhealthy choices (read: donuts and caramel lattes).

Finally, those who pay with cash enjoy a better relationship with their purchased products and are more likely to have an emotional attachment with their purchase.

I’m a realist, and I recognize that in today’s world cash is no longer king. Most transactions are carried out electronically and – eventually – we may see cash as currency disappear completely.  However, I think it’s important for teens to learn the value of cash. It is so easy moving money electronically from one place to another that it’s more like a videogame than a transaction.

It’s more painful to have to reach into your pocket or wallet and take out that $110 for the new pair of sneakers or $80 for the latest Xbox video game than it is to swipe a card or click the PayPal icon. When paying with cash, you think hard about the purchase you’re making. With credit cards and other electronic payment choices, you can buy it now and worry about the impact on your net worth later.

I encourage my twins to make half of their purchases using cash.  While the paper U.S. dollar exists, I want them to think hard about the purchases they make, and hopefully prevent them from building up debt or spending more than they have.

 

Saving for retirement (even though they’re totally never going to be that old).

One of the most important things your child can do at this early stage in their working lives is learn to save. I will tell you now that the last thing your kids want to hear is that they should begin putting money aside for retirement. The 45 to 50 years between the halcyon days of youth and when retirement will start for your child may as well be a million years away to them. However, the fact is that most Americans are not saving enough to maintain their standard of living in retirement.

Teaching our kids – now – the importance of setting money aside will pay huge dividends for them down the road. The most important reason to start saving now is the power of compounding, or the accumulation of extra money on the interest/gains received from investments. The more you invest and the earlier you start means your savings will have that much more time and potential to grow.

One of the best ways to start your child saving is through a Roth IRA. To contribute, you only need earned income from a job. Up to $5,500 can be contributed each year, and the contributions can be withdrawn tax-free and penalty-free at any age. After age 59 ½, the earnings can also be withdrawn tax-free.

Here’s a thought, tell your son or daughter that if they save $50 from every paycheck toward their future you’ll match it dollar for dollar.

 

The hard lesson: You can’t buy everything you want (but you can buy some big stuff later).

Now that your teenager is earning her own money, I’m sure she’s thinking about the numerous ways she can spend it. Now is a great time to introduce the concept of budgeting. And you can do this without a spreadsheet.

Your ultimate goal is to teach your kid how to achieve a balance between money coming in and money going out.

The first thing to do is to sit down with these spenders and clarify what you will pay for and what they are responsible for. This is especially important with college age kids. (My girls were shocked to learn I wasn’t going to pay for spring break.) Are they responsible for paying part of their tuition? Books? Social events? Meals?

You can do the same with high school kids as appropriate. Do they have to pay for any of their clothes or entertainment or meals with friends? This is your baseline for a spending plan. (Maybe we don’t say to our kids “budget” lest they think we’re cramping their new found ability to make it rain at Applebee’s.)

Help your teenager write down the income she’ll earn this year and all the known expenses she’ll be responsible for. After accounting for expenses, your child should come up with a list of goals she wants to achieve – buy a new computer, a fancy phone upgrade, maybe even a car. Now she’ll have a good understanding of how much money she needs to save to get there. And you might just get to keep some of your hard earned cash.