Practical Applications of Financial Concepts: Action Items for Real Life Success

1. Practical Applications of Financial Concepts:Action Items for Real Life Success American Association of Individual Investors February 2019 John M. Scherer, CFP™ Trinity Financial Planning, LLC 6405 Century Ave #104 Middleton, WI 53562 608-829-1010 www.trinfin.com

2. TODAY’S AGENDA • Personal Investments in Plain English • Bond Ladder for Peace of Mind in Retirement • Why the Next Market Decline Will Feel Worse • A Historical Look at Income Taxes • Getting Financial Advice • The Key to Financial Happiness

3. housekeeping • With a wide range of attendees, the goal is for everyone to take away something • For those more advanced, think about some of these topics for your children or friends • This is a discussion not a soliloquy – questions are welcomed! • Remember that simple and easy are two very different things

4. Personal Investments In Plain English

5. Crops in the field • Goal of the fields: • Growth • Profit • Risks in the fields: • Floods • Droughts • Pests • Prices

6. the pantry • Purpose of the pantry • Reliability • Provide steady food source in winter • Hedge against other lean times • Risks in the pantry • Maybe longevity?

7. Stocks = Crops in the field • Goal of stocks: • Growth • Risks in stocks: • Market crash • Economy / Recession • Earnings • Politics

8. Fixed income = the pantry • Purpose of Fixed Income • Reliability / Security • Provide steady cash flow • Hedge against lean times • Risks in the pantry • Few if government / FDIC insured

9. A Bond Ladder For Peace Of Mind In Retirement

10. traditional bond ladder Typically used to do things like: • Create a stream of income • Manage interest rate risk • Manage investment risk

11. Cash flow (liability matching) bond ladder • Use government backed Treasury or Agency STRIPs or CDs (FDIC insured) • Maturity values and dates match cash flow needs • Each year decide whether to sell stocks if they are up, or use maturing bond for cash flow

12. Cash flow bond ladder • Provides the needed cash flow, guaranteed • Eliminates the concerns about interest rate or reinvestment risk

13. 2.3 –

14. The Next Market Decline Could Feel Worse How A 5% Decline Can Be The Same As A 30% Decline

15. Recent Market Declines in %

16. Recent Market Declines in Dollars • Assume $1,000 contributed in year 1 & increased by $1,000 each year • So amount invested was $2,000 in year 2; $3,000 in year 3, etc.

17. A couple of great tools • Thinking about Risk: • Simulated Passive Investor Experience data from Index Funds Advisors • Market Stuff in General: • JPMorgan’s Guide to the Markets, especially Intra-Year Declines

18. A historical look at income taxes

19. Historical tax rates • Tax Foundation has a wealth of information • Includes a great look at historical tax rates and brackets • Top tax bracket • In 2013 = 39.6% (today 37%) • In 1981 = 70% • In 1963 = 91% • Interesting historical note: only two tax brackets 1988-90

20. historical tax rates for regular people • Married couple, both teachers • Top pay scale today is around $60,000 • Assume taxable income of $100,000 • Tax bracket 2013 = 25% (today 24%) • Tax bracket 1981 = • 43% !

21. historical tax rates for regular people • The point is NOT that taxes are going up in the future • Rather, think long-term and globally about tax decisions you make today

22. yeah, but did people really pay 70% in taxes? • Effective top tax rates have remained around 20% • Piketty, et al studied effective tax rates of the top 0.1% of taxpayer income • Causes include • Aggressive tax avoidance • Changes in what defines ‘income’ • Law changes regarding tax deferral

23. 401k contribution limits

24. 401k employee limits (actual) • Employee Deferral Limits (actual) • 1978 – 1981: $45,475 • 1982 – 1985: $30,000 • 1986 – 2018: $7,000 - $18,500 ($24,500)

25. 401k employee deferral limits (perspective) • Employee Deferral Limits (perspective) • 1978: $45,475 • In today’s dollars: about $150,000 • 1982: $30,000 • In today’s dollars: about $70,000

26. Getting financial advice

27. GETTING FINANCIAL ADVICE • Most people don’t need ongoing advice (despite what wall street wants you to believe) • When you don’t need advice • When you should consider paying for financial advice • Why I hired my own financial advisor

28. MOST PEOPLE DON’T NEED ONGOING ADVICE WHEN THEY: • Are young / just starting out • Following the ‘Five Fundamentals’ is 80+% of the game • Have a situation that is simple • Smaller investment portfolio • Only tax-deferred investment accounts • No changes on the horizon

29. When you are young or just starting out • Focus on basics • Follow the Five Fundamentals of Fiscal Fitness • Pay Yourself First • Have Sufficient Liquidity • Maximize Tax-Advantaged Retirement Plans • Secure Proper Insurance • Avoid Consumer Debt

30. THE FIVE FUNDAMENTALS – PAY YOURSELF FIRST • Pay Yourself First • Save 10% of combined gross income if you start in your 20’s • 15% if you start in your 30’s • 20% if you start in your 40’s

31. THE FIVE FUNDAMENTALS – HAVE SUFFICIENT LIQUIDITY • Pay Yourself First • Have Sufficient Liquidity • Liquid Cash = 10% of annual income • Emergency Reserves = 20% of annual income • Double these numbers if self-employed

32. THE FIVE FUNDAMENTALS - MAXIMIZE TAX-ADVANTAGED SAVINGS • Pay Yourself First • Have Sufficient Liquidity • Maximize Tax-Advantaged Savings • Employer plan (at least up to match) • Roth IRA / 401k / 403b / 457 • H.S.A.

33. THE FIVE FUNDAMENTALS – SECURE PROPER INSURANCE • Pay Yourself First • Have Sufficient Liquidity • Maximize Tax-Advantaged Retirement Plans • Secure Proper Insurance • Insure the big things • Health • Income • Liability • Life (if needed)

34. THE FIVE FUNDAMENTALS – PAY OFF CONSUMER DEBT • Pay Yourself First • Have Sufficient Liquidity • Maximize Tax-Advantaged Retirement Plans • Secure Proper Insurance • Avoid Consumer Debt • Credit cards • Cars • Maybe student loans • Does not include mortgage

35. WHEN YOUR FINANCIAL SITUATION IS FAIRLY SIMPLE • Smaller investment portfolio • Market declines & little investment mistakes make less of an impact in net worth • Only tax-deferred investment accounts • Taxes & asset location don’t apply • No changes on the horizon • If your status quo isn’t going to change, there’s not likely many changes needed in your planning

36. WHEN YOUR FINANCIAL SITUATION IS FAIRLY SIMPLE • Be honest about your situation • Nothing is more cliché than ‘Just a simple financial question…’ • A tax return with a small business, a farm, and four K-1’s is not simple!

37. consider getting financial advice when you • Have a large portfolio • Have a significant mix of taxable and tax-deferred investments • Are in a time of transition • Want to do other things with your time / are intimidated by it / aren’t interested* • Are looking for insight instead of just information

38. getting financial advice – portfolio size • When your portfolio is large enough • Small improvements can have meaningful dollar improvements • Market declines can cause a measurable pucker-factor

39. getting financial Advice – mix of investments • When you have a significant mix of taxable and tax-deferred investments • Asset location can be a meaningful improvement • Designing and monitoring asset location isn’t simple

40. getting financial advice – in transition • When you are in a time of transition • Guidance can be especially helpful when moving from earning a living to living off your earnings • Proactive tax planning can make a big difference when tax brackets change • Many people only experience big transitions like retirement once • Having someone who has been through the process before and has perspective can be helpful

41. getting financial advice - not interested in diy • When you just don’t want to spend your time managing your financial affairs • Hiring financial help is a viable option • Similar to hiring a housekeeper or staying in a Marriott vs. Super 8 • If you are intimidated by money or think managing finances is too complicated for you • Remember that the financial services industry wants you to believe this • Ask yourself if that’s really true

42. getting financial advice – seeking insight • When you are making really big decisions • There is more information available today than ever before • Wisdom is still at a premium • The real value of a good financial advisor in in helping with decision-making

43. Why I hired a financial planner

44. The Key To Financial Happiness

45. THE KEY TO FINANCIAL HAPPINESS I * G * N * O * R * E * A * N * C * E

46. THE KEY TO FINANCIAL HAPPINESS • Ignore-ance, not ignorance • Have a philosophy & strategy, then stick to it • In today’s 24/7 world, nearly everything is just noise • Think back to Monday, October 19, 1987

47. BLACK MONDAY - OCTOBER 19,1987 • Dow Jones dropped 22+% in one day. How did you hear about it? • No smart phone app or Twitter • No internet • No CNBC • Compare that to Christmas Eve 2018

48. Don’t worry about the stock market - just Stick to investing • “The stock market is a giant distraction to the business of investing.” - John C. Bogle • So just stop it!

49. The hallmark of a great investment process • “Benign neglect, bordering on sloth, remains the hallmark of our investment process.” - Warren Buffett

50. Buffett part 2 • Warren Buffett’s instructions to his trustee is to invest his wife’s money • 90% in • A very low-cost S&P 500 index fund • 10% in • Short-term government bonds