Blog - Financial Convergence

ESTATE PLANNING: YOU DECIDE OR THE STATE WILL!

Fri, 31 Aug 2018 17:46:00 GMT

Everyone automatically has an estate! That will be news to many who read this. What do you mean I already have an Estate? You literally have to do nothing to have an estate. An Estate by definition is “all the money and property owned by a particular person, especially at death.” In other words, all of your assets, personal property, real estate, life insurance, automobiles, etc. make up your estate. Nothing is required for you to have an estate.

Your estate will be disbursed one of two ways. According to your wishes and directives or the governments and judges will decide for you and your family. Either you decide or the government will!

That process is known as Probate. Probate is a court action that determines what happens to your assets when you pass away. It’s a very public proceeding where all of your assets and estate information becomes public information. The average probate takes 12-18 months to complete. If you have assets in multiple states then there will be multiple probate actions necessary. Probate is very expensive. You have multiple fees, Attorney costs, and court costs to settle your estate. The costs can vary from 1% to as high as 12%. Essentially if you do nothing then they decide and it is very costly to your family estate.

So all you have to do is set up a Living and Last will, right? Unfortunately not! Wills, provide direction and state your wishes and intentions. However, Wills do not avoid the probate process. The courts still make the final decisions for you. Granted, most probate process judges follow those intention, but many times they are confusing and are subject to interpretation. They still decide for you. This is one of the most misunderstood topics regarding estate planning today. Just to be clear, a Last Will & Testament does not prevent probate. In fact having only a Will guarantees probate . There are some small estate exceptions but for the vast majority probate will be part of the process if all you have in place is a Last Will & Testament.

How then do you ensure your wishes regarding your estate are established according to your desires and avoid probate all together? That is where a Living Trust comes in. A Living Trust is a legally binding document that very specifically spells out your choices, lists all your assets when documented properly and allows for your heirs (spouse, children, etc) to receive estate assets according to your desires. Equally important, is that you avoid probate all together. That means avoiding all the costs associated with probate. Remember earlier, costs can run from 1%-12% in some cases. If you had a $200K estate, after probate it could be reduced by as much as $24K . Leaving only $176K and could take well over a year to settle. It is also important to note the the cost of 1% to 12% is based on the gross estate, not the net worth of the estate. So in the previous example let’s say the $200k estate was the worth of a house and their was still $100k mortgage on that house. The cost would still be as much as $24k dollars, leaving only $76k by the time probate was settled.

This is why Financial Convergence exists. To establish inheritance and create financial independence. We are offering a free 1 hour consultation to anyone who wants to learn more. Click below to schedule.

There are two compelling questions everyone needs to answer:

Who do you want to make decisions if you were incapacitated or passed away: You or the courts (probate)?
How much of your estate do you want to be paid to courts and lawyers?

Who needs a Living Trust? If any of the following apply then establishing a Living Trust is recommended: Married, Have Minor Children, Homeowners, have assets of $50K or more, Don’t want the courts making decisions for you.

We believe in helping families obtain a functional financial education. We also provide a simple, cost effective way to establish your Living Trust and properly title all of your assets into your Living Trust. First is a simple interview process. Second is printing and notarizing your Living Trust Documents. Third, is to title your assets into your Living Trust with a Patent Pending Funding Kit and it doesn’t cost thousands! Setting up your Living Trust will give certainty and create peace of mind! For those wanting to learn more, take action now

Download the Understanding Estate Planning eBook!

Disclaimer:

This blog and this website do not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

THE COST OF LOSS

Tue, 26 Jun 2018 15:54:00 GMT

“ Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it . ”

— Albert Einstein

As it turns out, Einstein was a financial planning guru just as much as he was one in theoretical physics. In another article we discussed the Cost of Costs This is a follow up or addition to discuss as well, the Cost of Loss. Retirement thinking is broken, outdated, and ineffective. I for one will never retire; the goal is to build financial capacity that allows me to “get to” do things instead of “have to.” Whether that’s international travel, volunteer work, multiple business ventures, cross-country RV trips, or whatever else you can think of. The ultimate goal of financial planning is that you “get to” control your entire schedule and that you have the money to enjoy a certain lifestyle. In other words, you “get to” live life from a place of financial certainty!

However, many lose sight of the impact that loss has on their future income and the level of certainty that they are missing out on.. We want to bring adjustment to thinking that says “Buy and Hold” is best. The one element that very few, if any of the traditional Financial Planning players talk about is time. As soon as you introduce time into the retirement equation, “Buy and Hold” no longer works. If one year before your plan is set to take effect you lose half of what you had, you are not going to “get to” live the lifestyle you want to live. You’ll be a slave to an uncertain income future.

We must break the traditional thinking around “Buy and Hold.” In the traditional model, if I’m 30 years old and accumulate $100K in traditional retirement savings - I think I have time to recover if I need to. If I suffer a loss, I’m going to continue to hold so my fund recuperates. The issue, is one of simple math - if I lose 50%, it’s going to take a 100% gain to get my loss back. That 50% loss amortized at 7% over the next 30 years is well over $1M. I’ve just lost $1M+ in future earnings simply because I didn’t recognize the opportunity cost of holding my money in an environment of uncontrollable risk. The same traditional thinking suggests that this is only a loss if I sell. Technically that is true. Remember time? At some point you have to sell to pull the income, right? Just because something is technically true does not make it practically valuable! Many people think that they have no other option; that risk is just a part of the game. Not true!

If I can get in touch with and really understand what risks actually exist and threaten my current financial makeup, and what the losses I’m experiencing actually are, then I’ll begin to make different choices.

The traditional “Buy and Hold” methodology tries to convince us that losing principle is just part of the game. That line of thinking never really counts the cost of loss. When those dollars are ear tagged for “getting to” later in life (retirement money), then losses and time are not your friend. Risk Management is simply about understanding your risk/reward ratio in relation to time. When we introduce loss into the compounding equation, we render what Einstein called the 8th Wonder of the World, compounding interest useless. Loss negates the benefits of compounding interest! Typically, when we invest, we are wise to the notion of compounding interest. When principal, the actual dollars we put to work, accrue interest, and then that total sum gains interest, and so on and so forth.

When loss is introduced into the compounding interest equation, then it is a mathematical fact that compounding interest no longer works. It’s a broken equation. You can have simple interest, but not real compounding interest.

Let’s look at a simple example. I have $100K invested, and over the next 10 years, it goes up 10%, then down 10%, then up 10%, and so on. (Insert Graphic)What is my average rate of return? This isn’t a trick question: it’s 0%.However, that doesn’t mean that I have $100K left at the end of the 10-year period. If you do the math, you’ll find that at the end of the 10 years, I’m left with $95K. That’s a Real Rate of Return of -5%. What? How can that be? If you do the same math with 50% gains and losses alternating your Real Rate of Return is -43% and you have $57K left after 10yrs or cycles. When we introduce loss into the equation it means, my money no longer grows with compounding interest, and I have the disappointment that goes with it.

This loss not only affects me in the short-term , but in the long-term as well. That $5K or $57K could have been reinvested, gaining a healthy rate of return, and growing into a larger number. I’ve lost an untold sum of money based off a “0%” average rate of return….. for the investment. As an investor I have a -5% Real Rate of Return even though the investment had an average rate of return that was 0..

What’s the lesson here? Know what your real rates of returns are as an investor. Learn how to control risk, particularly with your “get to” money. If you truly want to “get to” instead of “have to” then understanding father times role is very important. Let’s take personal responsibility for how and where our money is being invested, and ultimately learn, grow, and thrive. As it turns out, ignore-ance isn’t bliss after all. To ignore something this import will never serve you well.

“ Investors do not risk principle money and have the potential of gains. Speculators risk principle money and have the potential for gains. ”

— Podcast: How to lose money

There is a big difference between speculating and investing. The best definition I have heard in a while is from a podcast entitled How to lose money. "Investors do not risk principle money and have the potential of gains. Speculators risk principle money and have the potential for gains." Invest, don’t speculate! What percentage of your hard earned money is at risk of losing the principal amount you put into it? If you don't know right off the bat, then it is time to find out. It is important to become aware of the real risks and how they impact your desired outcomes.

We like to say that connection begins with a conversation. Reach out to begin the conversation about you. Your goals, dreams and ambitions. We will be very transparent and seek first to understand before partnering with you to craft strategies with real results. It begins with a conversation.

Download The Retirement experiment eBook!

LIVING DANGEROUSLY SAFE

Fri, 09 Mar 2018 19:03:00 GMT

Living boring and living risk-averse are two different things. Our culture has romanticized the idea of taking risk. While “no risk, no reward” may be a popular saying, it is just as ignorant as it is popular. Often times, we minimize protection from risk in our lives because it isn’t a romantic subject. Sometimes, we get so focused on winning the game that we forget about not losing. We have been conditioned to have an either/or mentality when it comes to our money - either I take a big risk for a big reward, or I hunker down and don’t grow my money at all. Think about your finances like you’re playing offense and defense in a basketball game. Many times, we focus so hard on offense that we forget about defense, and then we lose (ask the Phoenix Suns of the 2000’s how that worked out for them). Defense is just as important as offense.

We often minimize protection in our life because it is not exciting. Our culture’s fascination with risking it all has led to many possessing a “Blessed are the risk-takers” financial theology. Yet, there is nothing rewarding about leaving your family unprotected. Where is there a written law or principle that says to grow our money means we have to put the money we invest at risk. The “great gain takes great risk” mentality is dangerous. A true investment is when you can protect the principal money you put into something and have the potential for gain. Protecting what you value is a core value for those who achieve financial autonomy. In fact, being risk-averse is one of the main characteristics that sets the financially independent and free apart from everyone else. They don’t hand wealth down from generation to generation because of the extraordinary risks they are taking. In fact, they are extremely risk-averse, understanding that winning the money game is just as much about defense as it is offense.

There is a big difference between speculating and real investing. If you believe that risking the hard earned money you are using to build the future you desire is necessary, then you may be forgetting to play defense. Protective measures in our lives give us the ability to live with more certainty, and make risk less dangerous. Bungee jumping without a bungee is just free falling towards your death - attach the bungee (protective measure) and now it becomes an enjoyable activity. Speculating is like bungee jumping without the bungie! Protect what you value. Learn more by downloading Redefining Retirement

Download The Retirement experiment eBook!

Free ebook

TILL DEATH DO US PART

Fri, 02 Mar 2018 17:37:00 GMT

Stop us if you’ve heard this one before. There are only two things certain in life: Death and Taxes. What you may not have heard, however, is that you have at least some options.

Here at Financial Convergence, one of the most serioius risks we discuss with our clients is current and future taxation. Think about it. Every year, you have a general idea of what you’re going to make, and thus a typical idea of what you’ll have to pay in taxes. It’s the most predictable expense you have all year.

Are you thinking of current and future taxation when you make financial choices? If not, it's time to start including this notion into your financial decision making process. If you’re a good citizen like we think you are, you’ll be paying taxes until the day you die. However, there’s no reason to be a better citizen than you need to be, and pony up more to Uncle Sam. There’s a multitude of tax efficient strategies available to individuals at every income level, yet it’s mainly the wealthy that seem to take advantage of them. Which makes sense since they are masters at managing their taxation.

Register for a free 1HR Tax Efficiency Analysis.

Free Analysis

Now with the biggest update to our tax code since 1986 recently going into effect, there’s a 7 year window to take advantage (as of right now, the individual tax cuts sunset in 2025). Personal income and pass-through tax rates are at their lowest rates in decades and probably will not go lower for quite some time, if ever. With a national debt above $20 Trillion (not including the additional 50 trillion in unfunded future liabilities), the bill will come due eventually. When it does, our government will have two choices: cut spending or raise taxes. In reality, the choice will have to be a blend of both strategies.

So, if taxes are the lowest they’ll ever be right now, does it make sense to defer taxation on our retirement strategies until some future date? This is what that would look like. Mr. John has been able to put away 500k towards his retirement over 20 years. That money has grown up to 2 million in a tax deferred account by the time he retires. He has dreamed and planned on sailing with his wife, traveling to see his grandchildren, and seeing the world. When Mr. John is ready to start utilizing that 2 million (which equates to about 80k a year in income) he no longer has any major tax write offs. He has sold his business, his kids are moved out, and he owns his house outright. Tax rates have gone up to combat the national debt and now his tax rate is 50%. Mr. John can no longer count on 80k a year, he has to figure out how to live off of 40k. His lifestyle choices have just been cut in half. Will it be the sailboat, his grandchildren, or the world he doesn’t get to see?

We don’t like living our lives with the level of uncertainty that Mr. John created for himself. We like to control our risk in every area that we have the power to do so, are you like that too? Luckily for Mr. John it’s not too late. There are options that create tax exempt savings for a tax free future, and one’s that can convert tax deferred dollars into tax exempt money.

Over the years, we’ve seen how even a little bit of strategy can go a long way in saving individuals hundreds of thousands of dollars in taxes over their lifetimes. With the recent tax changes, there is an unprecedented opportunity to change how future taxation might affect you. We know there is a lot of noise out there. We help our clients ask the right questions and provide a real world analysis of their tax effeciency. Register for a free 1 Hour Tax Efficiency Analysis.

Register for a free 1HR Tax Efficiency Analysis.

Free Analysis

THE RISK OF AVOIDANCE

Fri, 02 Feb 2018 17:05:00 GMT

I don’t know about you, but I hate going to the doctor’s office. I avoid it at all costs. Personally, the thought of “what if something is wrong with me” can be overwhelming. Or is that just something that I tell myself to justify my avoidance? Honestly, there are a lot of things that I work hard at avoiding in my life. Another one is the scale. I’ve struggled most my life with living a healthy lifestyle and seeing that number on the scale does not make me feel hopeful. I realize that I’ve substituted responsibility in my life with avoidance. I’ve kept telling myself that as long as I don’t pay attention to it it won’t pay attention to me. Remember playing hide and seek as a child? We thought that just covering up our own eyes would keep the others from seeing us. This strategy has not served me well into adulthood.

Several years ago I realized that I was playing this version of hide and seek with another area in my life: money. I thought that if I didn’t pay any attention to it, that I would not have to worry about it. Through some bumps and bruises I learned that no matter what level of involvement I wanted to take, I was still responsible for 100% of the consequences. Taking the road of avoidance caused me to be willingly unaware of potential risks my money was exposed to. Maybe you’re using this “strategy” as well - from personal experience, I can promise you that being willfully ignorant to risk in your life is never a good choice.

The main question to ask yourself is this: Do I even know what risks are present in my life? Do I suffer from the “Ostrich” syndrome, where I just stick my head in the sand and am oblivious to all around me? Or am I active in learning about the risks that rear their heads up in my financial planning?

For example, in addition to market risk, fees are a massive risk to your future earnings. A 1% difference in fees can mean the loss of hundreds of thousands of dollars over a lifetime, and not understanding the difference between an Investor’s Rate of Return (what you make) and Fund Rate of Return (what the fund made as a whole) can mean you go years thinking your money is growing at 8%, when in reality the growth is less than half of that.

Being aware of the risks present in my environment is the first step toward protecting myself from them. There’s no shame in admitting to have been ignorant up until this point - we’ve all been there. However, there is now no more excuse to keep living in ignorance. It is too costly - both for you and those coming after you.

The first thing to consider: What level of risk are your choices creating in your life? And then the kicker: What level of risk are you willing to live with? Not all risk is created equal. What you don't know could be hurting you. Avoiding or postponing learning about what level of financial risk you may or may not have opens the door to financial awareness. Armed with awareness, you can eliminate unnecessary risk. Download

The Retirement Experiment , it will reshape how you see your financial future and give a new perspective. We like to say "Learn, Grow, Thrive!

Download The Retirement experiment eBook!

Free Ebook

LIVING YOUR LEGACY

Fri, 05 Jan 2018 15:58:00 GMT

Many of us are familiar with the concept of leaving a legacy . However, how many of us are familiar with living our legacy ? Legacy is not just what's left over when you die. Legacy is now.

About five or six years ago I read a book called the Dream Manager. The premise is simple - the books talks about how a company wanted to improve company culture, and in doing so realized that living one’s dreams and desires are vital to a fulfilled life. I was inspired after reading it and wanted to incorporate its principles into my own life. I even bought it for my good friend Phil, who is a pastor of a small church and a father to four young sons. A year after I gave the book to Phil, we were catching up and he began to thank me for buying him this book. I had completely forgotten about giving it to him. He started to share how he was inspired and started teaching his children the importance of realizing their dreams. He built a dream board with them and has been helping them create a safe place to live out their desires. He even bought the book for a friend who owns a business and is now implementing these ideals as well. Then business owner bought it for his son! I felt so honored and blessed knowing that I was able to contribute in a way that impacted him, his family, and his community. Phil's kids are now growing up in an environment where their dreams have real value and are relentlessly being pursued. All of this because I bought my friend a book.

Legacy is what we invest in the people around us, and the difference we make in our communities. Legacy is more than money, although it includes that. It’s time for us to take back the definition of this powerful word! Some of you, when you hear the word legacy, think of million-dollar inheritances and mansions. True legacy is something else entirely. It is the difference you’ve made mentoring youth in Big Brothers Big Sisters, the vacations you’ve taken your kids on, and the Sunday afternoons spent playing football in the yard. The thread that binds all of these experiences together is time. To live your legacy, you actually have to be alive! It is not a concept for the dead. However, you must be intentional about the affect you’re having on the world around you in order to live the legacy you want.

“Wise men plant trees whose shade they know they shall never sit under”

— Greek Proverb

We are not interested in just leaving a legacy - we want to live a legacy! We want to see the impact our time here on earth has while we are still here. We want to be intentional about investing our time, passion, energy, gifts, and money to better the world for a generation we’ll never see. This Greek proverb sums it up best: "Wise men plant trees whose shade the know they shall never see."

I have not heard legacy expressed very often in terms of the present. Growing up, the only times I can recall hearing about legacy was at a funeral in remembrance of someone. They talked about things they left behind. I don’t hear people speaking about legacy in regards to the living or in the present tense. Let’s change that! A good friend and colleague of mine says “a legacy is what we leave inside of those we love and an inheritance is what gives them capacity to do something about it”

- Levi Sherley.

I would add a legacy is what we are leaving in those we love, today, right now. I for one, am a product of the legacy of my close friends, living family members and active mentors in my life. I am living their legacy right along side of them. As it turns out, I am also making deposits into their lives which in turn is my living legacy!

Legacy is determined by the choices we make, the people we impact, and the difference that we make, right now. When it comes to finances, there are a myriad of ways to live a legacy. We are passionate about living our legacy, and want to see you do the same. You are in control of your own legacy; what do you want it to be?

Are you ready to do something about it? We work with our clients everyday not just on the mechanics of money, but on the beliefs that will empower them to live financially free. For individuals, we begin by understanding what is most important to them as it relates to living their legacy, now. Not in the future or when they are gone but now. We also help businesses bring enrichment into the lives of their workforce. Learn more about our employee enrichment program.

We offer a 1 hour capacity coaching session to start the conversation. Schedule your Free Capacity Coaching Session now!

Free 1 hour Capacity Coaching Session
Learn More

We help businesses bring enrichment into the lives of their workforce. Learn more about our employee enrichment program.

Employee Enrichment Program
Learn More

4 REASONS PERSONAL BUDGETING DOES NOT WORK.

Sat, 22 Jul 2017 01:53:00 GMT

Budgets are more like a balancing acts. They are not effective and motivating us!

How many times have you created a budget, and then invested large sums of time, energy, and emotion in comparing your desired results against this new standard you’re going to live by? You already know that the numbers don’t lie and taking emotion out of money decisions is best. The thinking goes like this: If I just save $X per day, month, or year and then invest it in $Y and get $Z% over time - presto - I will be free!

I would submit to you that our budget promoting money mindsets are in fact contributors to the lack of meaningful results that this type of planning produces in our lives. There is something missing, perhaps even more than one thing. There are, undoubtedly, more than the following four reasons why the act of budgeting does not produce desired outcomes. However, these four are foundational in understanding why traditional budget thinking is outdated.

Budgets are nothing more than measuring sticks. They are digits on a page that we manipulate to see how we can achieve financial nirvana, avoid catastrophe, or enjoy our next vacation. They are void of emotion. There are many who believe that money and emotion should not be in the same room together. As seemingly wise as that may appear, life simply does not work like that. We have mechanisms in our brain that trigger various responses, many of which are not logical. We all know about fight or flight mechanisms. There is another called the Reticular Activating System (RASK). In short, the Reticular Activating System (RAS) is in the base of our brain and regulates what our brain “lets in.” It is the part of our brain that causes us to see that thousands of people just bought the same car we did. Has anyone else driven down the road and all of a sudden noticed the same make and model of car you just bought? Budgets do not account for these type of human reactions when it comes to thinking about money.
The basic premise to budgeting is comparative constraint or predictive financial prejudice. In other words, we just round the corners of the square peg so it fits the round hole instead of getting a bigger hammer. All we do is find out how naughty we have been or brilliant we think we can be with our money. In speaking and coaching people around the subject of money for over 30 years, I have found that apathy around our finances in part comes from this thing we call budgeting. It triggers a strong fight or flight response in our brains.
A budget is never a good source of motivation. I am by no means suggesting that budgeting does not have its place. I am suggesting that a budget will not, in and of itself, change anything. How many times have you heard yourself say, “Well I just have to review my budget, or make one, or consult with someone who has one?” Motivation is an inside job that budgets just can’t replace. Whether we like it or not, we are feeling beings. We have a capacity to feel and for many, budgeting feels confining, regretful, and hard. Just mention budgeting to someone who has not figured out what’s really important to them about their money and I guarantee you will find someone who is demotivated. When budgeting comes up, these people experience many emotions. Then things like procrastination, avoidance, and distractions become the substitutes.
Budgets and the budgeting process are not effective at helping people learn to process through their competing desires. Competing desires outweigh smart accounting principles and constraint. How many times do we hear, “Just save more and spend less” or “You can’t have your cake and eat it too?” I don’t know about you, but I am tired of those types of statements. Processing competing desires is an emotional process that logic is ineffective at solving. I would submit to you that if you don’t have a compelling reason to tell your money what to do, then you probably won’t! Budgets do not provide a compelling reason.

So what does provide motivation? What will give you a reason to tell your money what to do? What will initiate that type of change, shift, and financial confidence? I believe that one key to unlocking those mysteries lies in what you believe to be true about money. Beliefs trump budgets every time. You will only create something to the extent that you believe it to be true. For example, if you believe that time is money, then you will probably always trade time for money. You create worlds where you are the engine. If you stop, the world stops spinning too. Believing something is true, causes your mind, thoughts, and actions to align. Begin to be intentional about what you believe is true about money and the motivation around money will begin to look like a whole new world.

Money is just money. What’s most important is the meaning we assign to money. Money is a tool. It is not time. Money is one part of a two part equation. Time is the 2nd part of that equation. Bringing meaning to money means exploring what you believe to be true about money, then opening your mind to new possibilities. One possibility I’d like to introduce is the idea of Capacity. Capacity has 3 parts: Time, Money and Contribution.

The next piece of this conversation answers the questions:

Capacity for what, exactly?
Capacity for whom?

When you process through beliefs about money, time, and contribution, you come out the other side armed with a new deeply seeded internal motivation that gives power, meaning, and motivation to deal with money in a proactive way. It becomes what is needed. Fuel for taking action!

Ray Dalio says it well in his book Principled: “Think for yourself. What do you want? What is true? What are you going to do about it?”

Are you ready to do something about it? To get over the frustration of breaking budgets time and time again? We work with our clients everyday not just on the mechanics of money, but on the beliefs that will empower them to live financially free. We offer a 1 hour capacity coaching session to start the conversation. Schedule your Free Capacity Coaching Session now!

Free 1Hr Capcity Coaching Session

Schedule Now

THE PAY LATER MYTH - TAX DEFERRAL

Fri, 07 Jul 2017 21:54:00 GMT

If someone came to you and said something like this...“You will be able to put money away for the future without the worry of paying taxes on it now. We can do that later. To make it even better for you we will allow you to lower (theoretically) how much you pay in taxes now. The rules are as follows. Once you choose to do so you cannot access that money without there being a cost to you until you are 59 ½ years old. When you access the money at 59 ½ + or any other time, then you can pay the taxes. That will of course include paying taxes on what you put in originally and all the growth. You also have to start pulling money out and paying taxes when you are 70 ½ or there will be another significant penalty for not doing so. Would you like to do that?”

What would you say? When framed this way, most would say no way, or perhaps something a little more colorful. Originally, the intention behind encouraging retirement savings this way was good. To be clear, I am not suggesting that you should not use or have tax deferred savings. What I am saying is that you should examine the facts and compare the outcomes.

When do most people have the lowest tax obligation in their life cycle? When they are accumulating wealth, working up the ranks, creating businesses, having children, buying a home, etc. All of these items lower taxation. It just doesn’t make as much sense to defer taxation when you have large write offs like homes, children, businesses, and the like. The vast majority of retirement (later) money is placed in tax deferred structures and the taxman comes to collect later in life. That is the moment most people have the fewest write offs. The children are grown, the house is paid off or down, the business is sold or being sold. The vast majority of people have, for decades, saved almost all of their future money toward retirement in tax deferred structures. The Boomer Generation is learning that lesson up close and personal as of this writing. The taxman comes later and collects on what you saved and grew for all of those years.

Taxation is inherently uncertain. This topic begs the question: is taxation going to be lower down the road or is it more likely to be higher? To keep things simple, our government has to balance budgets (eventually) the same way we do. Money in and money out. Our Government's income is taxation. With our national debt climbing, what is the most likely course of action for them to take?

There are really only two basic ways to solve the money issue. Make more or spend less, and our government is no exception. When I ask people which they think is most likely, they usually say “make more,” because I don’t see the government spending less. The truth is that we don’t know exactly what will happen down the road, but it is reasonable to guess that the probability of taxation being higher as we move into the future is very high.

The myth we’ve bought into is that you are saving money by deferring taxation, which is the primary attraction or benefit sold. For the overwhelming majority of people (90-95%), that simply is not true. We work with tax planners everyday, who themselves say very plainly that tax deferred structures do not save people anything. The “Tax Incentive” to save money on current taxation is, for the most part, a unicorn. There is no real tax savings. Only a deferred tax calculation. In other other words, all you do is kick the Tax Can down the road.

In short, you are lowering your adjustable gross income, thereby lowering how much you paid that year in taxes. The fact remains that deferring taxation does not create savings. All it does is defer the tax calculation. Again, it kicks the can down the road. If you actually calculate paying taxes now on the money you have set aside for later, then show how much your money has grown and compare it to paying taxes later, you will find that you pay significantly more in taxes by deferring your tax calculation.

We actually run a significant number of evaluations just like that with real people every day. If you pay taxes now and put your money into something that is tax exempt later, then the calculations are even more dramatic. When has paying later ever been a good idea? The term “Tax Advantaged” is subjective at best. Who determines the advantage? When do you see that advantage? Tax Deferred is touted as tax advantaged. It simply is not true for 95% of our tax paying citizens.

Let’s look at a real world application. Let’s say you are a 45 year old woman. You are driven, strong, and independent. You are a self employed as a CPA. Like many you have a SEP IRA. It is a traditional IRA specifically for self employed people. The contribution limits are higher and you decide you will put away $7500/yr until you are 65 and then start using that asset to pull income from at age 66.

Comparatively, you could instead pay the tax man today and put that money into a tax exempt option. You would put in $6,000/yr because you paid the tax man $1500 up front. Assuming the following factors for both options:

You earned a 7% annualized return
Your tax rate pre-retirement was 25% and your post retirement tax rate is 20%
At age 66 when you begin to pull money from that asset you were still earning roughly 7% annual rate of return.

The results are staggering! If you chose the SEP IRA, you would have paid the tax man through age 83 $93,000 in taxes. Conversely, if you chose the Tax Exempt option and paid the tax man up front, you would have paid $31,000. That is $62,000 less or 200% less in taxes! I’m all for playing my part, but that is alarming. When is paying later ever a good idea? Usually pay later comes with a price and this price is very high. Tax efficiency is important. It directly affects how much of your money stays your money. How much you get to utilize will depend on how tax efficient your money is.

We help individuals, businesses and estates craft tax efficient solutions. It begins with effectively assessing your current tax efficiency. Register for your free Tax efficient analysis.

Free Analysis

THE PRICE OF OPPORTUNITY COST THINKING

Sat, 01 Jul 2017 02:57:00 GMT

The idea that we are missing out is leading to real financial loss

How do we begin to understand light if we have never experienced the dark? It’s difficult to fully understand a particular thing without also knowing its counterpart or contrast. This is where the concept of Opportunity Cost comes in. It promises to show us the price we are paying; what we are missing out on by making a particular decision. While Opportunity Cost is a valuable thing to consider, it is not the “be all, end all” of making financial decisions. In fact, considering Opportunity Cost has led to real losses for millions. The contrast is real loss financially.

There is a strong implication in that first paragraph that you may be missing out on something better. An opportunity perhaps. Is there a price to pay for thinking you are missing out on some possible future outcome? I would submit that there may be. In our human nature, there is an ingrained sense that causes us to gravitate toward the perception that we are missing out on something. It is one of the main reasons for human progress . As a species, we are always looking to experience something better, but this is also the culprit for much of the financial instability we experience today.

This missing out syndrome can also be known as FOMO. The fear of missing out. Yes, this is a buzzword these days. I would like to frame it this way: there is a real, visceral response that we as humans have when we perceive that we may be missing out. People go to great lengths to belong, even when it causes them harm. Enter opportunity cost thinking.

We use this thing called Opportunity Cost to help bring contrast to things when we are making decisions. Things like money and investing. If I spend $300 a month dining out then I could be sacrificing the family vacation (opportunity). If I don’t buy more of that stock that just lost 25% of its value then I will miss out on the gains when it recovers. If I buy more now then my overall price is better, right?

By limiting our decision-making framework to just Opportunity Cost, we open ourselves up to self deception. I am so focused on crossing the street that I don’t see the car speeding toward me. Framing things in the context of what you might miss out on causes reactions in your brain to begin to make the case for a certain decisions without regard to other influences. When making decisions from this place, there can be large blind spots. These decisions inevitably lead to pain.

Let’s take an example. It is the year 2000, and you are 10 years from when you finally get to use the money you have been saving, investing and cultivating to buy your time back. Then you can do all the things you really want to do, like:

See family around the country whenever you want
Hit the beach
Golf
Go on trips with your friends
See the kids or grandkids ofter
And more

Your mantra has been, “I am invested for the long term,” or “I only lose when I sell,” or even “If my investments go down, it is an opportunity to buy more.” You are focused, proactive and optimistic, as is your advisor.

However, you are so focused on crossing the street (and getting to retirement) that you block out the speeding car headed your way. For those in 2000, setting their sights on retiring in 2010, it was exciting to imagine 2010 until the car came into view in 2008-2009. The focus on opportunity had created a blind spot to an important factor that had entered the equation. Time.

At some point in time, we need to sell those types of investments to have the income necessary to enjoy the fruit of that growth. Time had entered the equation, and traditional “Buy and Hold” thinking failed us. The loss was not opportunistic. It was, and is, very real.

After all, what is better? Taking the 12% return and cashing out, or staying in for the potential 25% return, only to lose enough to delay or prevent retirement or a financial goal you have set for yourself? Exposing our financial futures to market risk and principle loss for the potential of higher gains (that few of us ever realize) doesn’t really make much sense at all.

Case in point: Let’s talk about John Doe. John worked and saved significant portions of his money over 30 years. He stayed within the same overarching industry and moved up the ranks. He decided to set a retirement date for 2010 back in 2005. John is no stranger to risk because he watched his future money get significantly reduced in 1999-2001. He was in the typical 401K/IRA tax deferred structures invested in “Safer Mutual Funds”. Like his peers, John believed that risk - that type of risk - was necessary and part of the process. Unfortunately he is still working today at 73 years old. That is a real loss! Chasing possibilities can come with a price.

There is no real understanding that there is a difference between investing and speculating. If your principal money is at risk of loss, that is speculating. Investors know that preserving your principal is a prerequisite to being an investor.

Opportunity Cost thinking has proven to be very expensive in the context of perceived investments. When someone begins to frame their investments using opportunity cost, it becomes dangerous. Human bias plays a very real role in making decisions about our money. Opportunity cost thinking opens the door to potentially harmful outcomes.

Risk cannot be eliminated, but can be properly and effectively controlled. Consider working with those who have a firm understanding of bias as it relates to money management and wealth creation. Not the type of understanding that cites definitions, but one that comes from experience.

We work beside our clients and help bring awareness to their financial picture. Our promise is to clearly understand what is most important to you and deliver results. Connection begins with a conversation. Connect with us to begin yours.

Learn More

THE COST OF COSTS

Fri, 16 Jun 2017 19:24:00 GMT

The fees involved in the financial services world are notorious, yet few of us are able to wade through the jargon. Quite frankly, there is a lot of BS that traditional financial firms throw our way to hide the true price we’re paying. In turn, most of us don’t realize how much costs are actually costing us. Today, we’re going to quantify this Cost of Costs, and help you avoid the crippling effect fees can have on your financial outcomes.

First, a little background. The Cost of Costs is a foundational framework at Financial Convergence - any kind of costs involved in your future planning are robbing you of future income. This isn’t just our belief - it’s simple math.

Let’s look at an example. We call it the Triplets’ Tale. Manny, Moe, and Jack are 35 year old triplets. Each have $100K invested, and assuming an 8% rate of return over 30 years, there is only one difference between each of them: the costs they are paying! Manny’s actual costs are 3%, Moe’s actual costs are 2%, and Jack’s actual costs are 1%. What is the impact of these costs (or fees) to their future?

The answer? Staggering! At the end of the 30 years, Manny has $432,194; Moe has $574,349, and Jack has $761,225. Look at the difference between Manny and Jack. Jack paid 2% less in fees, and now has $329,031 more than his brother. That is 76% more - or nearly double the money!

Another way to look at this is to consider how long the money is expected to last (glide path). Assuming all three brothers start drawing income from that money at age 65, Manny’s money is expected to last him until age 73, Moe’s until age 78, and Jack’s until age 95. Paying 1% more in fees costs you approximately 5 years of income, and 2% more in fees takes away 10+ years.

Now, let’s take this a step further. What are costs (traditional mutual funds and financial firms) taking away from me in terms of future gains? In a recent Forbes article, “How much do mutual funds really cost?” , Kenneth Kim concludes that a plurality of people are paying above 5% in actual real costs. Quoting Kim now:

That is a staggering 78% of potential gains you just lost!

So how do you count the cost? You’re busy with the kids, business, soccer games, and all the rest. When you get the investment statement in the mail, you throw it in the drawer. There’s no judgment here, but here lies what we call the “Ostrich Problem.” When we act like the Ostrich, we have our head in the sand, and pretend that there are no predators in our environment. It’s the “If I can’t see them they can’t hurt me” approach. The solution is not necessarily pleasant, but it is simple.

The first step is to become aware of where you really are by calculating your actual rates of return . There is an investment rate of return, which is what the entire mutual fund or particular investment made. By industry standard your financial institution must share with you. What is not mandated is that you see the Investor’s Rate of Return (your actual rate of return as an investor). What you are actually making on your money or the real rate of return.

So how do we figure this out? First, we identify how much money we put in, find the current balance, and then determine the amount of time the growth took. Was it over 1 year, 5 years, etc.? You need these 3 components to figure out what’s really going on with your money. For example, we have a client with a 529 plan (College Savings). His account statement showed a $7K balance. When he came in for our annual meeting, I took the analysis a step further and found out how much money he had initially invested. His statement said that he had an 8.25% investment rate of return. Once we did the math, it was actually 4% (Investor Rate of Return). Then he asked me the most profound question - what happened to the other 4.25%? I said nothing for 30 seconds, and it dawned on him: “That’s what it cost me to have that investment.” It cost him 50% of his returns, and he thought he was paying less than 1% in fees.

The math doesn’t lie. Understand the cost of costs, because costs are costing you more than you think.

So what are costs costing you? Have you ever heard yourself or someone around you say, “It takes money to make money?” Is it possible that a statement or belief like that has unintended consequences? Consider this for a moment: that statement insinuates that costs are part of the process, so questioning them becomes a lower priority. Therefore, we don’t really count the costs. We simply pay them and write them off as part of “doing business.” When you realize that it doesn’t have to be this way, the question then becomes: What kind of costs are there? And how can you control or eliminate them?

Most people who own mutual funds don't really know the costs. There are 17 potential costs in any given mutual fund. Most think that what is disclosed on the literature is all that they are paying. That marketing costs know as 12b1 fees are all that is required to be disclosed. In other words that fee is on 1 of 17 possible real costs that you will see on a disclosure document. It becomes very complex and tedious to figure out fund by fund what you are actually paying. There is a much easier way to get a handle on what you, not the fund, is actually making. We would be happy to help teach you how to calculate your investor or actual rate of return. We think it is wise to advise you at this point that it is not what prints out on your mutual fund statement. For a no obligations lesson on how you can calculate your Actual Rate of Return not the funds rate of return, select the Learn How button below and fill in the information.

Calculate your actual rate of return!

Learn How

Attention Business Owners, Executives and HR Directors

Free 401(k) Analysis

Do you know what the fees in your 401(k) are costing you and your employee's? How is your 401(k) preforming compared to other companies? Give us some quick information for your free Benchmark Analysis.

Blog - Financial Convergence

ESTATE PLANNING: YOU DECIDE OR THE STATE WILL!

Download the Understanding Estate Planning eBook!

THE COST OF LOSS

Download The Retirement experiment eBook!

LIVING DANGEROUSLY SAFE

Download The Retirement experiment eBook!

TILL DEATH DO US PART

Register for a free 1HR Tax Efficiency Analysis.

Register for a free 1HR Tax Efficiency Analysis.

THE RISK OF AVOIDANCE

Download The Retirement experiment eBook!

LIVING YOUR LEGACY

Free 1 hour Capacity Coaching Session Learn More

Employee Enrichment Program Learn More

4 REASONS PERSONAL BUDGETING DOES NOT WORK.

Free 1Hr Capcity Coaching Session

THE PAY LATER MYTH - TAX DEFERRAL

THE PRICE OF OPPORTUNITY COST THINKING

THE COST OF COSTS

Calculate your actual rate of return!

Attention Business Owners, Executives and HR Directors

Free 1 hour Capacity Coaching Session
Learn More

Employee Enrichment Program
Learn More