About Charles Lewis Sizemore, CFA

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How to Save for Retirement AND Spend on Your Kids

I saw a headline recently that caught my attention:

“Raising Children Increases Risk of a Retirement Shortfall”

Gee, ya think?

Why not tell me that the sky is blue while you’re at it, or that eating at McDonald’s on a daily basis is bad for my health.

Some things are so patently obvious that they don’t really need to be said. Yet Boston College’s Center for Retirement Research decided to prove empirically what we all instinctively know: Raising kids is expensive, and every dollar spent on child rearing is a dollar not available to be allocated to other things, such as your 401k plan.

I openly weep when I see my credit card bill every month.

It cost me more than $2,000 to send my two sons to ski school for four days earlier this month. I’m embarrassed to put into print what it cost me to take the family to Disney World. And the grocery bills… You would think I was feeding a marauding army.

It’s all worth it, of course. But meeting my retirement goals and raising my kids sometimes requires some financial gymnastics.

If you’re like me – in the prime of your career and playing the balancing act of supporting a family while also saving for retirement – I have a few suggestions, which I first shared with my Peak Income subscribers several weeks ago, to help you.

1. Pay Yourself First

I know this advice is so overused it’s almost cliché, but hear me out.

When the shekels are tight and you’re choosing between funding your retirement account or bankrolling some new request/demand from your kids (Disney trip…sigh…), it’s not selfish to choose to fund your retirement account first.

Think about it. If you’re not prepared for retirement, you’re going to end up being a financial burden to your kids decades from now. You might even have to move in with them.

That’s depressing, and no one wants that. It’s better to skip that expensive family vacation or the umpteenth round of private soccer lessons this year, top up the retirement account, and save yourself and your kids the eventual humiliation of having to move in together.

2. Don’t Be Penny Wise and Pound Foolish

Financial writer David Bach made a career out of telling people to skip their daily trip to Starbucks and invest the savings in an index fund.

Well, that’s not bad advice, I guess. But how many cappuccinos would you have to skip in order to really make a difference?

Your far bigger expenses are your home and your vehicles.

So, rather than skimp on those little luxuries like the occasional trip to Starbucks, try to avoid buying more house than you need. Yes, the urge to keep up with the Joneses can be hard to suppress. But if you can save several hundred dollars per month by living in a more modest home or driving a more modest car, it will go a long way towards helping you meet other expenses.

As recently as the 1960s, it was perfectly normal for a middle-class family of six to live in a, 1,500-square-foot house. Your family of four doesn’t really need 3,500 square feet with two living rooms and vaulted ceilings.

If you’re already in a home that was probably a little too expensive for you, selling it and downsizing may or may not make sense. But at the bare minimum, resist the urge to splurge on a $50,000 kitchen remodeling. It’s rarely worth the money.

3. Quality Time With Your Kids Doesn’t Have to Be Expensive

I’m as guilty as anyone about trying to buy my kids’ affections. It’s normal. Few things are more gratifying that seeing your kids happy, and it’s so temping to just dump money on them.
But this doesn’t mean you need to constantly shower them with expensive gifts, vacation or experiences. You don’t have to take them to the Super Bowl. Simply sitting on the couch with them and watching it is good enough.

Or better, go outside and actually toss a football with them. It costs you nothing, and it will be far more rewarding for both you and the kids.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Make Presidents Day Worth It

I’m not one to complain about a holiday. A day off is a day off, and it’s healthy.

Though I have to say, Presidents Day isn’t one of my favorites.

To start, it’s in February and it’s usually too cold to do a holiday-type thing like firing up the grill. Football season is over, and there’s generally not much to watch on TV. And I don’t know about you, but I’m still worn out from Christmas with the extended family.

So, it usually ends up being a day to binge watch Netflix and get caught up on paperwork and not much else.

But beyond that… Presidents Day?

Before it was rechristened “Presidents Day” we used to celebrate George Washington’s birthday, and I was good with that. Every country needs iconic heroes as part of its founding story, and Washington is our guy.

He was our victorious general in the War of Independence, the only man to be unanimously elected by the Electoral College, and he set the precedent for limited executive power by retiring after two terms.

But do we really need a holiday to celebrate the lives of the other 44 sons of b*tches that have held the post?

There are so many worthwhile Americans whose lives we could celebrate. Generals, pioneers, explorers, astronauts, scientists, entrepreneurs, inventors, writers… even athletes or musicians. Any of these would be more worthy of a public holiday than the parasitic blowhards that have come and gone from the White House.

But I digress.

One nice aspect of Presidents Day is that it gives us a breather early in the year to think about our financial goals. We’re a month and a half into 2019, but we still have more than 10 months of the year left to go.

So, if your work, like the market, is closed today, here’s a to-do list of some smart financial moves you can make at home.

Revisit your 401k and IRA beneficiary form

I know this sounds about as exciting as watching paint dry, but this is important and you can knock it out in five minutes.

Most people don’t know this, but your IRA and 401k beneficiary forms are generally more important than your will and testament. Apart from perhaps your home equity, it’s likely that your retirement accounts are the most valuable thing you own. And the beneficiary designations you made when you opened the accounts take precedent over your will.

Let me explain. Let’s say you’ve been at your current job for 10 years and that you were married when you started the job. But two years in, life intervened. You got divorced and then found yourself remarried again a few years later but you forgot to update your 401k beneficiary form.

If you were to get hit by a bus today, your ex-spouse would inherit your 401k, regardless of what your will and testament says, leaving your new spouse with nothing. And there’s not a thing they could do about it. The law is very clear that the beneficiary forms associated with the retirement plan trump whatever your will says.

So… take a few minutes today to make sure your beneficiary designations are in good order. Your heirs will thank you.

Revisit your contribution levels

You didn’t think you were going to escape a financial planning article from me without my customary nagging to save more, did you?

As you might know, the 401k contribution limits were raised this year from $18,500 to $19,000 or from $24,500 to $25,000 if you’re 50 or older.

Really try to hit those numbers, or at least get as close as you reasonably can even if it means pushing yourself and forgoing a few small luxuries. Every dollar you stuff in the 401k is a dollar that is safe from the tax man, potentially for decades.

I eat my own cooking here. I maxed out my 401k last year, and I’m on pace to contribute the full $19,000 by September of this year.

Make this a priority. You’ll never miss whatever it was you were going to fritter your money away on.

Turn off your phone

I’m a workaholic, which, if I am to be honest, is no less unhealthy than any other addiction.

But I make a real effort to carve out time to spend with my kids and just be present, undistracted by work, the stock market or whatever else was on my mind that day.

For me, this usually means getting home around 5:30 p.m., spending a good two or three hours talking, playing and just generally being around my kids. Once they go to bed, I usually work for a few more hours before calling it a night. But the important thing is that the phone and computer get turned off during family time.

So, be respectful to your family and turn off your phone when you’re around them. No, don’t just turn the volume down. Turn it off, and preferably put it in another room. Remove the temptation to compulsively look at it.

Let’s be honest, whatever you were doing on your phone probably wasn’t important. But your family relationships are.

This Presidents Day is going to be a little different for my family. My oldest son is playing in a competitive international soccer tournament in Orlando. Win or lose, it should be a fantastic experience for him. But naturally, it’s a lot more fun to win, so wish him luck!

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What Jack Bogle Left Behind

On Wednesday, we lost John “Jack” Bogle, the founder of the Vanguard mutual fund empire and the inventor of the modern index fund. He was 89.

I doubt if there is a stock market in heaven. Something that evil and capable of producing human suffering really belongs in hell. But if there is a stock exchange in the next life, then Mr. Bogle should be its chairman. He did more than probably any single person in history to improve the odds for regular investors like you and me.

I’d argue that if there were a Mount Rushmore of finance, Mr. Bogle’s head should be on it. He was that influential. Before Bogle’s revolution, high management fees, shamefully high sales loads, and extreme tax inefficiency were the norm.

Today, the fees on many index funds are effectively zero. These are vehicles designed to be bought by cost-conscious investors rather than sold by predatory brokers looking to pocket a commission. You can largely thank Bogle for that.

You’ve probably already read plenty of eulogies to Bogle, so I’ll spare you another lengthy one here. Instead, let’s focus on some of the lessons learned from his long career.

No.1: Fees Matter

This is a big one.

Every dollar you spend in fees is a dollar that’s not available to grow and compound. And over an investing lifetime, it makes a big difference.

Let’s play with the math. Let’s say you invest $1,000 in two funds running identical strategies. The only difference is that one charges a fee that is 1% higher than the other. So, after fees, one returns 9% per year and the other returns 10%.

After 20 years, the fund with the after-fee return of 9% per year would grow to $5,604. Not too shabby. But the fund with the after-fee return of 10% would be worth $6,727, more than 20% higher.

This doesn’t mean that fee minimization is the only thing that matters, of course. If you’re getting a unique strategy or tailored advice, a “high” fee might be worth every penny. But to the extent you can eliminate fees, you obviously should because the savings compound over time.

No.2: Buying and Holding (Usually) Makes Sense

Bogle was proud of his invention, the index mutual fund, which he unveiled in 1975. But he was always a little skeptical of ETFs, even though his firm would eventually become a major player in that space.

While ETFs share the low-cost structure of index mutual funds and some of the same tax benefits, they tend to be used very differently. Unlike mutual funds, which can only be traded once per day, ETFs trade instantly throughout the day. This encourages excessive trading and a casino mentality. And that can lead to lousy returns and unnecessary capital gains taxes to pay.

Index investing worked because it was a long-term strategy. When you buy an index fund, you give up on trying to beat the market. You are the market. And over most long-term time horizons, being the market is just fine.

This doesn’t mean that Bogle was a proverbial Dr. Pangloss who always believed everything was hunky-dory and that stocks always shot up to the moon. In recent years, Bogle publicly stated many times that he expected stock returns to be in the ballpark of 4% per year at best over the next decade.

I’m less ideological than Bogle. I agree with him that indexing is a good strategy most of the time. But I’m not willing to completely throw active strategies out the window. At a time when stocks are priced to deliver lousy returns and the Fed is sucking liquidity out of the system, having more of your assets in active strategies (or, in my neck of the woods, high-yield income investments) makes sense. Passive indexing makes more sense when stocks are cheap priced to deliver high returns over the following years.

We’ll get there again. But we’re not there today.

No.3: Be Independent and Stick to Your Guns

When Bogle first proposed his idea for an index fund, most of his colleagues thought he had lost his mind. To them, a manager had to be paid to do something. Passively following an index seemed absurd.

Of course, as history would prove, Bogle was a visionary. He understood that the stock market had become increasingly hard for large for large-cap managers to beat. They couldn’t beat the market because, due to their size and clout, they had effectively become the market.

It should have been obvious, and Bogle wasn’t the only or even the first to notice it. But he was the first to do something about it, launching an index fund and taking on the entire Wall Street establishment in the process. And as a result, we all invest and trade in the new world he helped to create.

Rest in peace, Mr. Bogle. And on behalf of all investors, thank you.

This article first appeared on the Rich Investor.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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401k Not Enough For You? Add This.

Before I get started, it’s time for my customary beginning-of-the-year nag.

By the time you read this, you will have likely received your first paycheck of 2019. Take a minute to see how much of it you’ve diverted into your 401k plan. Are you on track to contribute the $19,000 for the year? (Or $25,000 if you’re 50 or older?)

If not, take a minute today to log in and increase your contribution levels. The longer you wait, the harder it will be to catch up. So, get it done now, before your next paycheck.

It’s OK if you’re worried about the stock market taking another spill. No one says you have to allocate your 401k to stocks. A money market or stable value fund is a perfectly fine option for now.

It’s simply to get your cash into the account to take advantage of the tax break and any employer matching. The actual investing can happen later.

All right, I got my annual January nag out of my system.

Now, let’s move on to the good stuff.

While the 401k is the backbone of most Americans’ financial plan, if you’re self-employed or a partner in a small business, you have even better options at your disposal. In addition to defined-contribution 401k plan, you can also build yourself a good, old-fashioned defined-benefit pension plan.

I know what your thinking. Words like “defined benefit” or “defined contribution” are enough to make your eyes glaze over. They might even be enough for you to consider the virtues of jabbing an icepick into your temples.

It’s boring. I know.

But hear me out, because if you play your cards right, you can potentially shield hundreds of thousands or dollars from the tax man… every year.

Paying Yourself First

Very few companies offer traditional pension plans today. They’re expensive to administer, they can be a legal minefield, and at the end of the day, no one wants the responsibility of caring for retired workers decades after they’ve quit working.

This is why most companies moved to defined-contribution plans like 401ks. There’s no real risk. Managing the portfolio is the responsibility of the worker, not the company. And if the nest egg doesn’t grow large enough to support the retiree in their golden years… well, that’s their problem.

Hey, I get it. If I were running a large enterprise, I wouldn’t want the open-ended liability of managing a traditional pension for my workers.

But my own retirement? That’s a different story. I don’t mind dealing with the hassle if I’m the one that gets the benefit.

So, with that as an introduction, let me introduce the cash-balance plan.

A cash-balance plan is a traditional defined-benefit pension plan designed for one-man shops or small businesses with a handful of partners. The formula for contribution limits is complex and depends on your age, income and the current value of your plan, among other things. So, it’s probably easiest to explain with examples.

If you’re 40 years old and make $250,000 per year in self-employment income, you can contribute around $106,000 to a cash-balance plan, saving tens of thousands of dollars in taxes. If you’re 50 years old and making $250,000 per year, the amount you can potentially contribute jumps up to over $180,000. And if you’re 55, the number gets close to $220,000.

Sheltering $220,000 per year from the tax man sounds a lot better than sheltering $19,000 to $25,000.

But here’s where it really gets fun. It doesn’t have to be an either/or decision. You can actually do both!

So, playing with examples again, let’s say you’re 50 years old and earn over $250,000. You can dump the first $25,000 into your 401k plan, pay yourself an extra 6% in matching or profit sharing, which would work out to another $15,000, and then top it off with a massive $180,000 contribution to your cash-balance plan.

That’s such a phenomenally good tax break, I can hardly believe it’s legal!

There are a few catches, of course. You need a professional to set up the plan and do the annual actuarial calculations, which will cost you several hundred or even a couple thousand dollars per year. You do not want to get cheap here and try to do it yourself, as making any mistakes can subject you to penalties and a potential tax nightmare.

You also have to invest the cash-balance plan conservatively. Just as is the case with an old-school traditional pension, any portfolio losses have to be made up with higher future contributions. It doesn’t matter if you’re the only participant in the plan and you’re effectively “paying yourself.” You face the same risk that General Motors or Ford do when their pension assets fall short of liabilities.

So, you’d want to make sure your cash-balance plan was invested primarily in bonds, CDs or other low-risk investments.

Once you’ve retired or reached the lifetime maximum contribution of around $2.6 million, you don’t have to worry about dealing with the administration of the cash-balance plan anymore. You can simply roll the balance into an IRA and manage it the same way you would with any other retirement account.

Regardless, if you’re looking to turbocharge your retirement savings, you should definitely look into cash-balance plans. There’s simply nothing else out there that can offer the same tax-deferred growth.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Today on Straight Talk Money…

I joined Chase Robertson and Peggy Tuck this morning on Straight Talk Money:

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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