How to Become a Saver

Setting yourself up for success is an easy process to understand, but requires effort and persistence to implement.  For many of us, the transition to becoming a saver will happen over years. 

The key is to achieve positive cash flow (you make more money than you spend). To do this you need to live below your means (less money going out than coming in).

You can do this by reducing your expenses, or by increasing your means (or both). Keep in mind, increasing your income alone will not position you to be a saver. Out spending your income is not a condition limited to any specific income range. You need to have a clear goal of what you want to achieve and the strategies that support that goal.   

Strategies that may help you reduce your expenses include:

1.      If you did not initiate the transaction, delay any decision on it by at least 24 hours. This means avoiding spur of the moment purchasing decisions. Always make a list of what you need before you go shopping. Buying something that you think is a “good deal”, is like tying another weight to your ankle if the net effect is that you have less money in your account due to something that was not a necessity. Online sellers are adept at the “good/time dependent deal” appeal. When shopping online, set aside your items in the “save for later” file. Wait a day (or two) then go back in and clean up your cart so that you are only getting what you need.   

2.      Master your budget.  Use an excel spreadsheet (budget template), or just a simple pencil and paper. There are several apps out there, and your bank may have something tied to your account that will help. All that matters is that the process gives you complete visibility to your expenses, in relation to your income. As you gain this intimate knowledge of your spending habits, where you can improve will stand out to you.

3.      Some regular, fixed expenses (mortgage, rent, utilities, internet subscription, etc), are best done on auto pay (bank account / credit card).  For all other expenses become a cash spender (gas/clothing/food/entertainment/etc). This will help provide you a visceral association with the personal wealth you are exchanging for goods and services. 

4.      Avoid increasing your “standard of living” by increasing your liabilities with your income.  When you begin to earn more, save a disproportionate amount.  Think of this as increasing your savings faster than your lifestyle. 

5.      Always get a second estimate (or third) on any major expense.  Price comparing will help save you money on any needed purchase.

Strategies that may help you increase your means include:

1.      If your current job does not offer you more income opportunity, look at securing a second source of income (Remember, the best time to look for a second job is while you are employed. Most of us have an implicit bias that values someone more because they are currently employed).

2.      If you have a skill, consider contracting it to others. Use your imagination with this.  There are online platforms (intermediaries) for selling most services.  

3.      Consider the “gig” economy (on demand delivery <your car | your gas>, home based customer support roles, etc.).

4.      Share expenses. If you are in a position to have a roommate or to split a cost with another person, Consider it.  If it fits your personality and comfort level, then hosting extra space for short term use (AirBnb, etc.) might work out well. 

Once you achieve positive cash flow, you have the ability to begin to build financial wealth. 

Retirement Planning

The purpose of planning for retirement, for most of us, is to insure that we have the resources (health care, cash flow, housing, social connections, etc) to pursue those things that will provide us a sense of security and fulfillment, throughout life.

In today’s public/private sector work environment, the risks of retirement have been shifted onto the individual.  Whether they are a public servant, self-employed, or work for a private employer, a significant portion of retirement is based on personal choices of whether to participate, and at what level.      

Because of this, the employer, how much is earned, the degree to which one can take advantage of choices offered, and a personal sense of discipline, will drastically shape the retirement picture.

When it comes to planning for retirement there are endless options one can explore.  Let’s begin with some basic assumptions:

·        It is never to early to think about the long game of financial retirement planning.

·        It is never too late to evaluate choices, and the options still available.

Early in life:

Start saving today.  Once you have set aside fall back funds (3+ months of “needs”), begin saving for your goals.  Is it a house, a car, an opportunity to pursue a dream?  Building up funds for your goals will keep you from making the cardinal mistake of raiding retirement funds to pay for a “want”. 

Make the most of your retirement choices.  While the choices available to you will dictate what this means, there are some basic guidelines.

1.      Don’t leave money on the table.  If your employer will match funds, then contribute enough to ensure the matching. 

2.      Get the maximum from your benefits.  Group insurance rates (disability, life, health),  Stock grants and participation plans, health care options  (i.e. If a  high deductible health plan is the right fit for you then a Health Savings Account has the potential to provide creative flexibility for making health care choices down the road), etc.

3.      When you leave your employer, do not cash out your accounts.  The accounts are held through a separate custodian, and you continue to have access to viewing your accounts.  You can transfer the account to a new custodian later.  In the meantime treat a retirement account as a black box that you do not have access to until retirement.

4.      If you meet the income caps, consider a Roth IRA1,2.

a.       After 5 years of ownership, and age 59 ½, the withdrawals are tax free (They will not contribute to the tax determination of your social security).

b.      You never have to pull the money out if you don’t need it (tremendous planning benefit).

c.      Potential tax free income that can be passed on to an heir.

d.      You can contribute as along as you have earned income.

5.      If you have too much income, a non-deductible IRA contribution and a Roth conversion may make sense for you.

6.      The math works in your favor.

a.      If you pay 21 cents in tax for every extra dollar you earn and keep , then each dollar you put in your qualified work account (401k/403b/457/SEP/SIMPLE/TSP/etc) only cost you 79 cents (what you would have received if it was taxable income instead).  An instant 21% return by delaying the tax!!!

b.      If it is a Roth, you invest the 79 cents and then avoid any taxation at retirement (you must maintain the account for 5 years and be 59 ½ ), and for a bonus - you do not have to report the income against your social security income.  Perhaps avoiding federal tax all together after retirement.

c.      Compounding your earnings makes your dollars earn more dollars.  Then those dollars go on earning even more dollars.  It adds up!! 

Later in life:

Regardless of where you are at against your target, keep saving. 

1.      After age 50, you can make catch up contributions to retirement accounts that can really boost your savings.  Amounts vary by account type.

2.      If you have not acquired a pension or other annuity type income, and have not saved enough,  then consider if converting a qualified account to a Roth Conversion IRA makes sense.  You will need to be able to pay the tax on the amount you convert.  Then if you are retiring with only a Roth and your Social Security (no other income) there is a good chance you will graduate from paying federal income tax.  

3.      You need to apply for Medicare 3 months + your 65th birthday.  If you do not have an account with Social Security, log in and set it up - https://www.ssa.gov/

Whether you save in an IRA, 401/3/57, TSP, state retirement fund, Roth, CD’s, assets, or your savings account (to name but a few), will depend on what is available to you and your personal preferences.  The important things is to start saving. 

Remember, no one is looking out for you but yourself.  You have to take ownership of your choices, regardless of your stage of life.  When you decide you are ready, come in from the financial cold and let’s discuss how you can adjust your savings/retirement to better position yourself for your hard earned retirement.

1 https://www.rothira.com/

2 https://www.irs.gov/retirement-plans/roth-iras

How Fees Impact your Return

How Fees can Eat up Your Return

When you open a brokerage account, you are entering a contract for a service.  Generally, you are going to pay a transactional fee and/or and account fee to a custodian that will handle the documentation, record keeping, and  clearing process for your investments.  Your first transaction results in a “loss”, against your investment, equal to the fees paid to execute it.  The only way to recover the loss is to hold the investment and hope that it provides positive returns through appreciation and/or dividends.  Knowing what your investment will cost you, can help you make an informed decision about where, and how,  to invest.

When you invest your savings, using a mutual fund approach , you will pay a variety of fees.  Knowing what these fees are, and limiting them, will add to your overall return.

1.      Brokerage fees and trade commissions – Paid for the execution and record keeping associated with your account.  Vary widely, based on full service vs discount brokerage. ($4.95-$751).

a.      Account fees – Often there are annual fees for maintenance of an account ($10-$752,3,4).  

2.      Fund fees5,6,7  

a.      Load fees – These cover the commission paid to the agent/firm that sells the fund.  They can be paid as “Front-End”, “Back-End”, or “Level Load” (1-8.5%).

b.      Transaction costs – Associated with the trading of the internal fund assets.  These costs will be less in funds with lower portfolio turnover.  High turnover can result in a trading drag of 0.8%-3% on a fund’s performance.  These fees are taken out of fund assets and are not reported separately (they are reflected in the funds return).

c.      Mutual Fund purchase fee “Shareholder fees / Redemption fees (Limited to 2%) / Exchange Fees” – some funds charge this fee whenever there is an exchange, purchase, or sale of fund shares ( costs vary).

d.      Account fees – Frequently charged for low value accounts (costs vary).

e.      Operating  Expense fees – Management/maintenance/advising fee.  This is the ongoing fee that is reported for the fund.  This annual fee can range from very little (0.05%-passively managed) to greater than 1.5% (actively managed).

f.       12b1 fees – Fees paid to the fund to cover marketing and selling of the fund, or to provide ongoing compensation of brokers who sell the funds (< 0.25% for services < 0.75% for commissions). 

3.      Advisory Firm Fees – The parent firm charges a fee. This is for the back office support and legacy costs.  If  you are sold a fund that carries a load, this fee usually covers the firm and the agent.

4.      Agent Fees – This fee is compensation for the individual you work directly with. 

a.      When an agent sells investment products, this usually comes from the commission (load) associated with the fund.

b.      When it is a fee-only firm the fee is either a set amount, or a percent of the Assets Under Management.

If it seems like there are a lot of fees, it is because there are.

These fees can make a significant impact to your savings goals.  For example: you make a one time investment of $100k, at an average return of 7%, over 20 years with two separate advisors.  Under advisor A, your annual total fees paid under Advisor A are 3%.  This results in an account balance, at the end of 20 years, of:

Advisor A = $222,258

Under advisor B, your annual total fees paid are 1.5%.  This results in an account balance, at the end of 20 years, of:

Advisor B = $299,663

This difference can be understood through the impact of fees.  Under Advisor A, when your account is up 7%, you only realize 4%.  When your account is down -2%, you realize -5% loss.  This is because fees are withheld from your account, usually through the liquidation of securities.

When working with a financial advisor, always identify the fees you will pay, and to whom they will be paid.  At SFM Financial Advisors, we focus on no-load funds and ETFs.  We work to manage the fees and the tax considerations so that you can keep more of your money working for you.  

A useful tool for comparing fund fees only, can be found at the FINRA web site,  Fund Analyzer .

Be informed and make better decisions.

1 https://www.brokerage-review.com/discount-broker/compare-brokerage-commissions.aspx

2 https://www.edwardjones.com/images/trust-company-ira-schedule-of-fees.pdf  

3 https://www.ameriprise.com/financial-planning/our-fees/brokerage-accounts-custodial-fees/

4 https://investor.vanguard.com/investing/account-fees  

5 https://www.sec.gov/fast-answers/answersmffeeshtm.html

6 https://www.finra.org/investors/funds-and-fees  

7 https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-mutual-fund-fees-expenses

Transfer concerns with TSP and the Basic Benefit Plan - Federal Employees

Federal Employees who complete 5 years of creditable civilian service may qualify for both the TSP retirement savings (individual and agency contributions during service) and the Basic Benefit Plan, (in addition to Social Security) under the Federal Employee Retirement System.

Both plans provide for retirement income after you have met the age and service requirements.

Often, federal retirees will feel compelled to consider transferring their account values from one or both of these retirement benefits for investing in alternative financial products. 

Prior to making such a decision, consider the following:

  1. What is the need driving the decision, and is it aligned with your goal(s)?
  2. TSP funds provide for broad diversification and risk management, at the lowest fee structure you are likely to find.
  3. You are in control of your TSP account. Beyond meeting your retirement age, there are no complex requirements or third parties between you and accessing your funds. 
  4. Once you liquidate your federal retirement accounts there is no going back (Unless you go back to work for the federal government). 

On occasion, there are valid reasons to consider pulling your funds from your federal accounts.  These reasons are due to circumstances unique to the individual.

Take away - The federal retirement benefit structure is hard to replicate, from a risk:return relationship, for the saver, or the retiree.