“You need to make more money…”

My budget coach and I sat there silent in the face of what seemed like an impossible reality.

For me, and perhaps for some of you, the option to make more money was laughable.  At that life stage, I was in the midst of a financial tornado: our nation’s economy was hung-over from the market crash of 2008, my employer at the time lost a grant that substantially reduced my paycheck, and an unexpected illness and injury lead to weighty bills and rendered additional work next to impossible.

Each month I felt like I was scraping up pennies just to make ends meet – Maybe some of you feel the same today.

Unavoidable realities like a job loss, illness, injury, and accidents are financial burdens that most of us will face at some point in our life.  The support of a funded emergency savings account is a solid way to ease some of the financial blows that come our way.

I am happy to report that, though it took some time and sacrifice, I was able to meet my “impossible” goal to have a funded emergency-savings account, and I would like to share with you some of the helpful tips I learned along the way.

organize where your dollars are going

There is a link between paying attention and success, so consider paying close attention to where your dollars are going.  List all purchases, spending, and expenses for the month and ask: What, When, How Much and Why are dollars leaving my account?  What are the “surprise” expenses?  Take a moment to consider needs vs. wants.

Next, (you may have guessed it—and even groaned) consider making a budget. If you hate dealing with money or do not even know where to start, there is HOPE!  There are many creative ways to budget that do not take a lot of time or effort but help you to pay attention and stay on track.

• If you don’t have a budget consider: YNAB; Mint; Cash Envelope System (or digital); The  50/30/20 method, value-based budget, or unconventional alternatives such as a visa cash card loaded weekly/monthly with your budgeted amount.  I found success with the 50/30/20 method combined with the envelope system.

• If you do have a budget, look closely at the How Much and Why.  Consider setting a goal to check on your spending and expenses once a week and ask:  How am I doing?  What can I change to improve?

Open a Savings Account and Set Goals

This is not just wishful thinking – it is preparing to succeed.  Many financial institutions will allow you to open a savings account simply and easily online.

Here are a few recommended examples for high yield online savings:

• Capital One

• Ally Bank

For most households, an appropriate emergency-savings buffer is three-months of your living expenses.  Write it down.  Take a moment to imagine that amount and how you will feel when you meet your goal.

Set a goal: Ask your employer about directing a portion of your paycheck directly to your savings account.  An alternative is to set monthly, automatic transfers from your checking to your savings account.  It is generally best to have this occur the day after payday to give your funds a day to settle.

Setup auto-deposits: This also may help with large, annual bills.  Take your annual bill and divide it by twelve – this is how much you need to save every month to pay for this bill outright – Plus, you may actually save money when you pay in full!

Boost your savings when that “Free Money” comes your way

You just got your tax return.  You just got a stimulus check.  Your grandma just sent you a birthday card.  Your company gave you an unexpected bonus.

Your heart, your peers, and your social network cheer:  Treat yourself!

It is easy to think of unexpected cash as “free money.” Yet if your goal is to build up an emergency savings fund, “free money” is a great way to get a big boost.  To satisfy that itch to have a treat, consider making a deal with yourself:  I will set aside 20% (or $20, or whatever you feel you can stick to) into my savings account, and the rest I can use for a treat.

If you plan for your treats and stick to your plan, you gain a double reward.

hustle and Ask for deals

While it may not be a benefit to bundle in services you will not use, it is a wise idea to call your service providers to ask about unadvertised promotions.  Our household was able to keep our high-speed internet bill at $30/mo for nearly 5 years by calling once a year to ask about current promotions, specials, and loyalty rewards.  This annual phone call saved a total of $240 per year.

Tighten Your budget’s Belt

Unsubscribe: Do you know how much you really spend on your subscriptions? Look at your credit or debit card statements for a few months and see what you find.  Often, we sign up for a free month trial and forget to cancel, we don’t notice the $50 because it’s billed annually, or we don’t actually use what the subscription offers.  

Take what is free: Did you know that most libraries have free audio, video, and eBook apps?  Did you know that Harvard offers a whole range of classes for free?!  As you make good choices about reducing your subscriptions, consider taking advantage of the huge range of free courses, events, activities, and entertainment.

Dine-in: Eating out is to your budget what driving a semi-truck is to fuel efficiency: a drain.  Your budget will stretch further on fewer dollars when you eat at home.  Consider leveraging the percent principle noted above – Make a goal for eating at home so that eating out becomes a treat. Don’t know how to cook?  Learning can be easy! Or fancy!  Hate cooking and think you don’t have time?  Cooking can be simple!

Every little bit counts: One of the key-ways dollars sneak away from our wallet is thinking, “It’s only $10 a month” or “Three-dollars won’t go very far” – Perhaps it’s just the cost of your morning coffee. If the only thing you do is make your coffee at home, you stand to save approximately $800 a year or more.  And look closely:  that’s only one cup of coffee a day!

Make it fun: There are dozens of ways to save money and even have fun while you’re at it! Here are a few to get started:  Staycation!  Be a Winner! Grocery Wins!  Become a Hunter! Up-Cycle!  “Use it up, wear it out, make it do or do without…” – Calvin Coolidge

CELEBRATE THE LITTLE VICTORIES

I hope this has given you some practical steps and encouragement to begin an emergency savings account for when life, inevitably, happens.  In closing, I want to offer the most powerful tool you have: Hope.

“Success is failure turned inside out—the silver tint of the clouds of doubt.” - John Greenleaf Whittier

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As one of currently sixty-four B Corp investment advisory firms in the United States, we get asked why Human Investing decided to pursue the B Corp certification. In the spirit of B Corp’s “Together We Are A Force for Good,” I thought I would share a few insights along with highlights from our most-recent recertification.

Why B Corp?

Like training for any number of professions, mastering a skill, or even raising children, becoming a B Corp involves many considerations. These considerations range from how a company is structured to how it operates, the impact its products and services have within the marketplace, and the company’s desire to support new initiatives towards growth. Additionally, assessing the ability to measure and track progress is key, as well as the ability to support the financial commitment. A not-so-secret ingredient and common denominator among B Corps is a strong (even passionate) desire to provide a better workplace for all. Beyond the structural considerations, the reason(s) a company pursues this certification may stem from a grass-roots motivation, a desire to take part in a rigorous assessment of their business practices, or more formal ESG (environmental, social, and governance) goals. Whatever the reason may be, it is available to for-profit companies of all sizes and industries with at least one year of operations. In many states, while the B Corp is not within the tax code, it is acknowledged as a benefit corporation. The purpose of this is to focus on and highlight stakeholder benefits along with shareholder benefits. Stakeholders are clients/customers, employees, vendors, as well as the community and the environment we live and work in. Once certified, a company’s legal documents (i.e. operating agreement), are required to be revised to include this language.

We have often communicated our B Corp certification as: what LEED certification is to a building or Organic is to milk, B Corp is to Human Investing. Becoming a B Corp is about stepping into the rigors of a standard that expects more. Attaining the certification has allowed us to verify how we operate and highlight what sets us apart. When initially hearing about the B corporation, we felt that being a B Corp already existed in the DNA of Human Investing. Walking through the initial certification gave us the first look into whether that was true and where we needed to focus our improvements.

Entering the initial and ongoing B Corp re-certifications have and continue to be a mirror by which we reflect on who we say we are against actual company data. In today’s world, it is easy to espouse ‘to be’ something. It is quite a different story to invite the effort and rigors into that narrative which, in turn, give validation to the words. As we learned more about what the B Corp organization was trying to accomplish, with its Declaration of Interdependence stating: “That we must be the change we seek in the world. That all business ought to be conducted as if people and place mattered. That, through their products, practices, and profits, business should aspire to do no harm and benefit all. To do so requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations,” we saw how it might fit with our structure as a for-profit company, our desire to be a company with high ideals, and our mission to serve the financial pursuits of all people.

The Certification Process 

Our initial certification process in 2014 included questions from 5 different areas: governance, workers, community, environment, and customers. It was like lifting the lid on a shiny car to find out what was really going on under the hood. Accompanying answers to the questions were our company financials along with various forms of data and information to corroborate our responses. Once our B-Corp submission was reviewed, accepted, and exceeded the 80-point minimum we were certified and ready to share the story.

We have recently completed our second re-certification and can confirm the process is becoming more stringent. Data has entered the certification (as with the rest of the business world) in a whole new way.  While the depth and breadth of the questions brought new challenges this time around, it also gave us the opportunity to give feedback to help shape future questions.

Keep Reaching Higher

Our story as a B Corporation continues to grow and evolve. We continue to communicate with clients and vendors not only what the certification is about but why it matters. More and more prospective clients are recognizing the logo on our website and expressing their desire to work with a registered investment advisory firm who is also a B Corp. We have encouraged some institutional clients to consider the certification as well. The challenges of our day are greater, but there is no time like the present to keep reaching higher, for the good of all!

If your firm is considering the B Corp certification and you have questions, please reach out to me at jill@humaninvesting.com, or check out the various resources from B Corp below. And remember that at the heart of it all, becoming a B Corp is a verb.

Additional Resources:

Assessment Info

Certification Requirements

Saving your hard-earned dollars is a better game plan than frivolously spending money. However, keeping your savings in cash (not investing the dollars) is also risky. This risk is called inflation. To substantiate inflation, we found the increase in price of Stumptown Coffee Roasters lattes since 2014.  

**This article is not about Stumptown increasing the costs of their lattes. Suppliers, just like buyers, pay more for the goods they buy when inflation is rising. Stumptown consistently ranks among the best coffee shops in Portland!**

Flashback! It’s 2014…

You have $5.00 to go spend at Stumptown Roasters. That will buy you a delicious medium latte for $3.75 and a shortbread cookie for $1.25. Treat yourself!

Let’s say, instead of spending that $5.00 in 2014, you put it under your mattress for safe keeping. You find the $5.00 a few years later and still frequent Stumptown. We are going to run through a few scenarios of the purchasing power of that same $5.00 bill.

Two years have passed, and it is now 2016.

Your beloved medium latte now costs $4.00, and the shortbread cookie costs $1.35. You find $.35 in your pocket (does finding coins ever happen anymore?!), so you make the purchase possible.

Four years have passed, and it is now 2018.

That same tasty medium latte now costs $4.50, and the shortbread cookie costs $1.50. You might be going home hungry.

Fast forward six years to 2020…

Your medium latte now costs $4.75, and the shortbread cookie costs $1.60. Assuming you would leave the barista a tip, your $5.00 bill cannot even buy you a coffee. You might be going home thirsty and hungry.

Magnifying inflation’s effects on bigger life decisions

In this example, the cost of a coffee and a cookie only changed by $1.33 over six years. While that may not seem significant (the increase is less than $2!), the cost of goods did increase by 26%. If you apply that percent increase to a larger purchase like a home, a car, or education savings, you may not be able to afford what you intended.

One way to maintain purchasing power is to invest the $5.00 into the stock market. If you bought the S&P 500 in 2014, then that same $5.00 would be worth around $9.40 today in 2020, which is enough to pay for a coffee and cookie from Stumptown. For simplicity purposes, we only looked at the rising cost of coffee and S&P 500 return since 2014. To further substantiate the decrease of purchasing power over time, we included a chart that compares the S&P 500 total return to the purchasing power of a dollar since 1990. 

If you have questions or need help preparing an investment strategy for your savings, please contact our team at Human Investing. We drink good coffee.  

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Benjamin Franklin’s quote applies to many choices we make – including personal finances. If we don’t take his message to heart, then a lack of planning can be costly.

There are traditionally two paths one will take when purchasing a large expense. They will either build a plan ahead of time to achieve a financial goal, or—the more popular path—worry about it when the expense arises. It is important to consider the hidden cost when financing a large future expense.

NOT PLANNING AHEAD MAY cost you more than YOU THINK.

Let’s take the example of a future expense of $25,000 for any situation*.

*Fill in the blank: year of college for a child 👩‍🎓, down payment for a home🏠, wedding 👰🏻, car purchase 🚘, vacation 🌞, etc.

How do you pay for the $25,000 future expense?

In this hypothetical, an individual can choose to (A) make a monthly investment over the next 10 years or (B) borrow the $25,000 and make monthly payments to pay off debt for the next 10 years. See the cost break down here:

Note: This is for illustrative purposes only. Investment returns, interest rates, and loan periods will vary.

SO WHAT ARE YOU PLANNING FOR TOMORROW?

Building a savings plan and starting early provides 27% in savings over 10 years, with a total cost of only $18,240. Conversely, the cost of convenience by borrowing adds to the overall cost by more than 33%, raising the cost to $33,360. This example is at a 6% interest rate, but unfortunately, much consumer debt is often financed on a credit card with an average APR now above 16%. A 16% interest rate on a one-time expense would more than double the cost over 10 years.

This simple illustration provides a two-sided application. As illustrated above, building a financial plan can save someone thousands of dollars. Procrastinating and not building a plan can in turn cost someone thousands. Either way you look at it, it is important to consider the real cost of any financial endeavor in order to make a well-informed decision.

Our team at Human Investing is available if you have questions or would like help building a financial plan.

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Why Save for College?

For many reasons, planning and saving for college is essential. The pursuit of a college education is a wise investment. In most cases, college graduates will earn significantly more over their lifetime than those who opt out of post-secondary education. However, this comes at a high cost. Beyond the purchase of a home, the decision to pursue higher education is commonly the second largest expense of an individual’s/family’s lifetime. Importantly, the inability to save and plan for college early can dramatically impact assets set aside for other savings goals such as retirement or paying off a primary residence.  

You Can Fund Your College Tuition Out of Pocket and with Loans

Let’s say for whatever reason, funding college now for your child is not an option. The estimated annual cost of college at a four-year, in-state university is $27,000. When including inflation, from birth to sending a student away to college, total costs are estimated at over $190,000. Assuming you or your child, through student loans, need to borrow to fund schooling, the estimated cost balloons to nearly $250,000, which includes interest at 5% on the borrowed tuition over ten years.  

Or You Can Start Saving at Birth

Using the same assumptions as before, but this time you pre-fund college (start now) over the course of 18 years at $6,000 per year. You should have just about enough to pay the balance of school. In short, the savings of $108,000 over 18 years, plus the growth of $88,500 (just over 6% compounded monthly), covers the cost of higher education.  

What’s the Difference?

Funding college early reduces the future funding liability by six figures. If there is an ability to pre-fund college, in whole or part, it is a great choice with lasting financial implications. By saving at the birth of a child or grandchild, a family could save approximately $140,000 per child ($250,000 versus $108,000), if they desired to fund 100% of college expenses at a 4-year, in-state university by saving to a 529 plan versus paying through student loans.  

Paying with a home equity line of credit (HELOC), a student loan, or even out of present cashflow should be avoided if possible. Even less optimal is pulling funds from retirement accounts. Although sometimes necessary, taking retirement account distributions to pay for college will potentially increase your tax bracket and the could be subject to penalties. More importantly, it reduces assets available for your retirement when earning additional income is often difficult. 

What are the Benefits of 529 College Savings Plans?

Your 529 Dollars Will Grow without Being Taxed. There are a plethora of benefits for a 529 account—but the most important is tax-exempt investment growth. If 529 funds are used toward qualifying education expenses (tuition, room & board, books, computer, etc.), there is no taxation on the earnings. If the college savings account has remaining funds after all tuition is paid, the parent or custodian could change the beneficiary to another family member or sibling. If there are no other beneficiaries to use the funds, the funds can be drawn out and used for anything. However, if designated 529 funds are used for the “anything” bucket, the growth on the account will be taxed at ordinary income levels and earnings will be subject to a 10% penalty. 

If the student receives a scholarship, funds equal to that amount of the scholarship could be withdrawn from the 529 and not subject to a 10% penalty, but there would still be ordinary income taxation on the earnings withdrawn for purposes other than qualified education expenses.

Another benefit of a 529 plan is that it has a low impact on FAFSA, in qualifying for federal aid.   

You Can Maximize Tax Credits. Depending on the state in which you live, there may be a state tax deduction for contributions to a state-sponsored 529 plan. For example, if you live in Oregon, you can receive a state tax credit of 5% of your contribution up to 100% of your contribution, depending on income limits. The maximum tax credit in any year is $300. There are also college tax credits on tuition that may be available depending on your income level. 

It is important to coordinate the use of your 529 plan dollars with your tax advisor to maximize these potential credits.

COLLEGE SAVINGS PLANS ADAPT AS YOUR CHILD APPROACHES COLLEGE

College savings plans have a shorter overall time horizon than a typical investment or retirement account. If an account is open when the child is born, 18 years will pass before funds are set for distribution. By the time the student is applying for colleges, funds should be invested more conservatively so as not to put funds at risk of loss at the time of liquidation and use for college expenses. As a rule of thumb, the earlier you start saving, the more aggressive you can be—but as college approaches, getting more conservative is a wise approach. This can often be solved with an age-based, target-date fund offered by 529 plans, in which the investments automatically adjust from stocks to bonds and cash as the child approaches college. 

Talk about These Things During “Windshield Time”

There are many financial considerations when sending your children to college. Optimally, you and your significant other are making a choice early in life about how you hope to partner with your child in paying for school—if at all. If the choice is to help pay for some, or all expenses, discussions surrounding what paying for school looks like is essential. 

Does paying for school include a two-year stint at a community college? What about a state school, private school, or a school of their choice? Each of these questions and considerations are great for a road-trip—something we like to call “windshield time.”

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The financial world can be a confusing place filled with jargon, technicalities, and little to no guarantees. Research suggests that those who are financially literate tend to have better financial outcomes. Financially literacy is typically measured by asking some core financial concept questions. Let’s walk through some financial literacy questions from the National Financial Capability Study, and explain the why behind the answer. Feel free to guess and score yourself at the end:

Question 1 - interest:

Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

A. Less than $102
B. Exactly $102
C. More than $102

Answer: C, more than $102.

Explanation: The key part here is “After 5 years”. We are told the interest rate is 2% per year. That means every year, 2% gets added to our principal balance. To break it down year by year:

The interest earned increases each year. This is due to compound interest: the original principal ($100) grows, and the interest you earned previously (in year 2, $2) both earn interest. At the end of 5 years, we have $110.41 which is C More than $102.

Why this matters: Interest affects you when you save money to grow it, or borrow money to pay it back later. Knowing how interest can work for or against you is critical for financial success.

Question 2 - inflation:

Imagine the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

A. Less than today
B. Exactly the same
C. More than today

Answer: A, Less Than today.

Explanation: They key here is the inflation rate is higher than the savings rate. Inflation is growing at 2%, meaning the price of goods (rent, utilities, food, cars, etc.) is going up by 2% each year. The cost of $100 of goods today will be $102 in 1 year. Your interest on savings is growing at 1% a year. That means in 1 year you will have $101 to spend on goods. In 1 year, you will have $101 to buy $102 worth of goods. Your ability to buy is A less than today.

Why this matters: Even if you keep your money “safe” in the bank or under the mattress, inflation is going to make that money less and less valuable. Thus why investing is so important. Investing can be scary due to downturns in the market, but ultimately the odds are in your favor to grow your money over time. Unless you can save significant portions of your income, growing your savings faster than inflation is critical for being able to retire.

Question 3 - Risk Diversification:

Buying a single company’s stock usually provides a safer return than a stock mutual fund.

A. True
B. False

Answer: B, False.

Explanation: To answer this question correctly, it is important to understand both risk and that a mutual fund owns a variety of companies. They keyword here is safer. Financial markets have two types of risk: market risk and company-specific risk (aka systematic risk and nonsystematic risk respectively).

Market risk refers to risk all companies face. Examples of market risk include a change to the US tax code, a global pandemic, or shifts in consumer tastes like a shift from fast food to organic freshly prepared food. You will always face market risk because every company is exposed to these risks. Company-specific risk refers to risks unique to one company. Examples of company-specific risk include sudden changes in management, a press release about product defects, mass recalls, or a superior/cheaper product released by a rival company. Because you own a variety of companies in a stock mutual fund, you diversify away (i.e. reduce your risk) if any single, specific company has a terrible event.

Why this matters: Don’t invest all your money in one company. Especially if you work for that company, and your compensation is based on the company doing well. By spreading out your investments, you reduce your risk of catastrophic returns, and smooth out the ride so you can sleep at night.

Question 4 - interest of the life of a loan:

A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the interest paid over the life of the loan will be less

A. True
B. False

Answer: A, True.

Explanation: Because of the shorter life of the mortgage loan, you pay less interest. Remember in question 1, interest compounds every year. When you borrow money, that compounding works against you. Therefore, the faster you are paying off debt, the less time for interest to compound and grow the total amount you have to payoff. The monthly payments are typically larger, but the overall interest paid is less.

To illustrate with numbers, let’s look at the difference between a 15 year & 30 year mortgage, assuming a 5% interest rate for both:

Why this matters: You can see from the example how much money is saved by opting for a 15 year mortgage. Can you afford that extra monthly payment? That’s worth investigating, but you’ll never explore your choices if you don’t know what they are. You can also usually get a lower interest rate for shorter term debts, which saves you even more money. Anytime you borrow any amount of money, the faster you can pay it off, the less you will pay total. Even if you don’t get a lower rate on the debt, if you pay off the principal sooner, that means there’s less interest compounding against you. When looking to borrow money, evaluate what term (length of time) works best for you and your budget. You want to minimize your cost of borrowing, but you also want to give yourself enough flexibility that you’re confident you will make all those payments on time, regardless of what life brings.

Question 5 - Bond prices and interest:

If interest rates rise, what will typically happen to bond prices?

A. They will fall
B. They will stay the same
C. They will rise

Answer: A, they will fall.

Explanation: This is the question most people get wrong. A bond is government or corporate debt. The government or company pays you coupons (interest payments) based on the issued interest rate. At the end of the bond’s life, it matures, and you get the principal back.

Imagine Disney issues bonds paying 5% interest, the current market rate. You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures. If interest rates rise next year (say to 8%), and Disney issues new bonds, they will issue them at the new interest rate. Your neighbor Laura decides to buy $1,000, and she gets an $80 coupon from Mickey Mouse every year. Because interest rates rose, the value of your bond paying $50/month goes down in value, less than $1,000, because the $1,000 could buy Laura’s bond paying $80/month. The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000.

Why this matters: Interest rates change over time. This causes bond prices to change. Bonds will still be less volatile than equities, but they do also fluctuate in value. Don’t panic when you see interest rates rise, and your bond prices going down in value. This is both normal and expected. Rising interest rates are also usually a healthy sign for the economy, and so your equities will generally be rising in value to help offset the loss in value of your bonds. The reverse is also true here. Falling interest rates tend to indicate a less healthy economy (think about when rates have dropped significantly & quickly; the 07-08 financial crisis and COVID-19) which means falling stock prices. Because they don’t tend to move together (uncorrelated), bonds and stocks are an excellent pair for smoothing out your investment returns.

How did you do?

If you got some questions wrong, I hope you understand the why behind the answers and how to utilize this knowledge to better your financial life. If you have questions about financial vocabulary or systems you’d like me to blog about, please email me at andrewg@humaninvesting.com. If want to talk to an advisor, please email us at hi@humaninvesting.com.

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Target-date funds – also known as lifecycle funds -- adjust their allocation (stocks, bonds, cash equivalents) as time passes. The embedded strategy allows individual investors to select their target retirement year, and then sit back, relax, and enjoy the ride. While the nature of a target date fund is designed as such, it is still important for investors to periodically review their strategy with a financial advisor.

To help illustrate the different stages, Rachelle Locey has illustrated different life stages for a fictious person, Sophia.  For purposes of this example, assume the year is 2020, Sophia is 20 years-old, and she expects to retire at age 65.

**Note: this is an example and not a guarantee of what the Fidelity Fund 2065 (FFSFX) will look like in the future**

Meet Sophia

Age 20: Sophia has a part-time job and some extra dollars to invest. She opens a Roth IRA account and invests in the Fidelity Freedom Fund 2065 (FFSFX). With nearly 45 years before retirement, she can benefit from the potential growth of equities and other long-term assets. In 2020, her asset allocation looks like this:

*all percentages are rounded*

Age 25-45: Sophia switches employers three times and works full-time at each job. Her same target-date fund (FFSFX) maintains a consistent asset-allocation during the first twenty years of her career. Even though she is getting older, Sophia is still categorized as a young investor.

Age 50: It is not until Sophia is age 50 that her Fidelity Freedom Fund will experience a noticeable shift in asset allocation. She is now considered a middle-aged investor since her expected retirement age of 65 is only 15 years away. The fund starts to move some dollars out of stocks into more conservative investments.

Age 55: Sophia is still considered a middle-aged investor. Since these dollars are geared towards retirement, the fund will continue to shift away from equities and towards less risky assets.

Age 60: Sophia’s retirement is only 5 years away! Once again, her asset allocation will shift away from equities and towards less risky assets that are designed to protect her hard-earned dollars.

Age 65: It is time to retire! Sophia has worked full-time for nearly 45 years. Since she no longer expects to earn income from an employer, she will begin to make withdrawals from her retirement account to support her daily life. As such, her asset allocation is expected to look something like this: 

Age 70+: Even though Sophia has reached her target year of retirement, her target-date fund will continue to exist. Human Investing wrote about what happens to target date funds after they reach the target year here.

Takeaways

There will be many life changes and developments between now and retirement. However, one thing will remain consistent: target-date funds continue to evolve over time. These funds remove the guessing game and can help an investment build a portfolio based on their time horizon.

Because the changes happen behind-the-scenes, investing in a target-date fund is one of the simplest ways to grow a retirement savings during earning years and protect savings during retirement years.

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Until recently, the availability of Nike Restricted Stock was limited to a select group of Nike Executives.  In 2018, Nike shifted its Stock Award program to include Restricted Stock Units (RSUs) to pair with the traditional Stock Options benefit.  This brought the concept of restricted stock to a wider base of Nike Executives, including more VPs and Directors.  With this broader availability, more questions have arisen about what Restricted Stock Units (RSUs) are, how to maximize this benefit, and what strategies should be considered.

RSU (Restricted stock units)

What exactly are RSUs?  An RSU is a form of stock-based compensation where the company grants the employee a specific number of shares of Nike stock that are restricted and will not be issued until they vest.  The shares are released and issued each year according to the vesting schedule, which is typically in equal installments over 3-4 years.  Each Nike executive has an individual account at Fidelity that is tied to the stock plan and receives and holds RSU shares as they vest.    

RSA (Restricted stock awards)

RSAs appear almost identical to RSUs and many executives may not notice the difference between them.  The main difference between the two is that with RSAs, shares are issued at the time of grant and you own them even before they vest.  With RSUs, the shares are not issued and owned until the shares vest and subsequently become available.  In either case, you cannot sell the shares until they vest.  RSAs at Nike are marginally better for one reason: they pay out dividends to the Executive even before the shares vest.  With RSUs, you only receive dividends after the shares vest.  

Taxes

As RSUs and RSAs vest, they are taxed as compensation and are subject to the same federal and state tax rates as your salary/bonus.  A portion of shares that vest is immediately sold to withhold taxes and are paid directly to the IRS and Oregon.  A common challenge that we see with tax planning is that the amount withheld for taxes is often much lower than what is needed for the high-income tax brackets that Nike Executives fall in to.  We typically see a tax withholding shortfall of up to 17%.  This can contribute to a frustrating experience during tax filing in April, where painful checks need to be written to the IRS and Oregon.  With proper tax planning and coordination with a CPA, this can be mitigated by calculating the tax shortfall and setting aside the cash necessary to cover that shortfall.

Once the shares vest and become available, they are identical to Nike stock shares that anyone could purchase on their own in an individual, joint, or trust account funded with money you have already paid taxes on, like a checking account.  The growth or decline of the stock from the day it vests is now subject to capital gain/loss tax rules, which is triggered when it is sold.  If the stock grows and you sell it in 12 months or less, it is subject to short-term capital gains rates, which is the same as your regular income.  If you hold the stock for more than 12 months, it would be subject to long-term capital gains, a rate that can be up to 20% lower than short-term capital gains.

Risk/Return

When compared to Nike stock options, Nike restricted stock is a more conservative form of stock compensation.  RSUs/RSAs will follow the exact movement, up or down, of Nike stock while stock option values move significantly higher or lower than the actual stock price.  Put simply, stock options have a much higher upside and downside than RSU/RSAs.  This difference is a significant factor in the decision that many Nike executives must make each year between RSUs, stock options, or a combination of the two. 

Planning Strategies

What planning strategies and opportunities exist for RSUs and RSAs?

1. Cash Needs – If you have needs for cash, whether for college expenses or a vacation and need to sell some of your Nike stock, RSUs/RSAs are typically your best option.  The tax impact is typically lower than Stock Options and ESPP shares.  Additionally, you are not sacrificing the significant growth opportunity that exists with stock options.

2. Tax Loss Diversification - Most Nike executives own a significant amount of Nike stock that makes up most of their overall net worth.  This may represent such a large portion within your overall investment portfolio that it poses a significant amount of risk.  Many want to diversify out of Nike stock into other investments, but the tax bill that would be generated by doing so is so painful that no action is taken.  Tax-Loss Diversifying is a way to diversify out of Nike by identifying and selling very specific stock shares that are at a loss during a market downturn. 

   We do not believe that you should sell an investment at the bottom of a market drop and leave it in cash, so it is important to execute the next step, which is reinvesting the proceeds. Proceeds should be reinvested by diversifying into many different stocks that have also dropped in value during the downturn.  This can come in the form of low-cost, diversified funds, that hold thousands of stocks in large, mid, small, and international stock companies.  In addition to diversifying, the tax loss that is created can lower your current or future taxes by offsetting capital gains or deducting up to $3,000/year from your ordinary income, like your salary.

3. Charitable Giving - Instead of using cash, make your charitable contributions from your RSUs/RSAs.  If you transfer this stock directly to the charity organization, you can still get the tax deduction for the value of the stock, and the charity can sell the stock to completely avoid any capital gains tax that would normally be due if you sold the stock on your own.  Please note that only stock that has been held for over 12 months is eligible for this preferential tax treatment.  For more details on utilizing Nike stock for charitable purposes see this article.

Nike RSUs and RSAs are an effective tool for Executives to both participate in the success of the company and to meet their personal financial goals.  They are a great compliment to Nike Stock Options and provide many planning opportunities to minimize the tax burden due to their flexibility.

If you want to know more about how to maximize your RSUs and RSAs, please get in touch.

You can schedule time with me on Calendly (click here to schedule an appointment), e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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Buckle up. Welcome to the rollercoaster ride of the year.

Find me one person who predicted the magnitude and velocity of the recent stock market selloff and rebound, and I will buy us tickets to Vegas. In 74 trading days, the stock market lost a third of its value and subsequently rallied by more than 40%. (Another friendly reminder that short-term market prognosis is speculative.)

Through discussions of this market phenomenon with clients, friends, and family, I have discovered a disconnect in how investors interpret investment returns. Take the S&P 500 for an example:

From its high on February 19th, the S&P 500 slid by more than -33% over the next 24 market days 📉

Following its low on March 23rd, the market quickly gained in value by more than 40% 🤯

It would appear that as of June 3rd, the market would be up 6.35% for the year (-33.79% + 40.14% = 6.35%). However, this is not the case for our investment account statements.

The reality is that the S&P 500 was still down -7.21%.

Why? Market pullbacks will have a greater magnitude than the market rebound.

This is because the percentage loss experienced in the pullback is based on a larger value than the rebound percentage. Thus, not all percentages can be evaluated in the same way.

An easier way to understand this is through the following example:

Take an account valued at $100,000. Now cut the account value in half (-50%), and its value is at $50,000. What return is needed to bring it back up to $100,000? You would need to double your account (+100%).

So what percentage of growth is needed to make up for a portfolio or market loss?

• A market loss of 1% requires a 1.01% return to get back to its beginning value.

• A market loss of 5% requires a 5.26% return to get back to its beginning value.

• A market loss of 10% requires an 11.11% return to get back to its beginning value.

As illustrated above, the greater the market loss, the greater are the market gains needed to recover.

In terms of the COVID-19 crash, a market drop of -33.79% requires +51.03% of market growth to make up for the loss incurred. 

*Note the exponential increase in the percentage gain needed to recover.

In application, it is important to consider the downside risk of investments with regards to your financial planning needs. Investment downside risk can have a greater detriment depending on an investor’s timeline and cash needs. (See our article on sequence risk here.)

Both patience and an intelligently designed investment strategy are the remedies to market loss. In the history of the US stock market, no matter how great the loss, subsequent market returns have always lead to new market highs. This is a trend we expect will continue.

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Target-date funds do not stop when they reach the target year. For example, Vanguard Target Date 2015 (VTXVX) still exists today even though it is 2020. Your dollars will not disappear!

Instead, target-date funds are designed to continue to serve the assumed age demographic of a specific retirement year. To provide a deeper understanding, we have outlined what will happen to 2020 target-date funds.

Target-date funds are designed one of two ways:

1. “Through” target-date funds: Continue to shift their asset mix (less stocks, more bonds) over a predetermined number of years. The dollars invested in a target-date fund will remain inside the fund.

2. “To” target-date funds: Reach the designated target year and merge with a retirement fund that maintains a specified asset allocation over time.

Either way – “through” or “to” target-date funds continue to be invested, and there is no required action-item for investors once the target year is reached.

2020 Target-Date Fund ExampleS

Since 2020 is a target year; let us look at what will happen to popular target-date funds.

Vanguard Target Retirement 2020 (VTWNX)

Vanguard’s glide path continues through for seven years (in this case 2027) until the asset allocation is 30% stocks and 70% bonds. After the seventh year, dollars merge into Vanguard Target Retirement Income (VTINX).

Fidelity Freedom 2020 Fund (FFFDX)

Fidelity Freedom’s glide path continues through for nearly twenty years (in this case 2040) until the asset allocation is 24% stocks and 76% bonds. After that, dollars merge into Fidelity Freedom Income (FFFAX).

T.Rowe Retirement 2020 Fund )TRRBX)

T.Rowe’s glide path continues through for thirty years (in this case 2050) until the asset allocation is 20% stocks and 80% bonds. These dollars do not merge with another fund, but instead maintain this asset allocation until the investor withdraws all dollars from the account.

AGAIN, YOUR DOLLARS WILL CONTINUE TO BE INVESTED OVER TIME.

The use and protection of retirement dollars (beyond a target year) is embedded in a fund’s lifecycle. Regardless of whether a target-date fund operates ‘through’ or ‘to’ the target year, your dollars will continue to be invested over time.

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Investors, savers, or even advisors rarely view a primary residence (the home you live in) as an asset in the same way a person would see a stock or bond.  Generally, I agree with this perspective—that a home is for raising children and creating lasting memories, and not viewed in the same light as Tesla, Microsoft, General Electric, or Apple.  However, there are three factors present in the market today that are cause for a new point of view.  That is, your home as an investment asset used to generate income or cash flow savings.

Factor 1: Money Market and Savings Account Rates

Money market rates have remained near zero for over a decade. This means for those holding money in checking, savings, and short-term bond investments, there is virtually no return on investment.  Include net of inflation, and investors are going backward.  Today, these shorter-term accounts serve the dual purpose of offering investors safety and liquidity, but little by way of yield.

Factor 2: Bond Rates

Bond rates have followed a similar "race to zero" that we saw in the money market and savings account rates.  As of today, an investor must go out ten years to receive .63% on a treasury bond.  In other words, a $1,000 investment yields just over $6 per year.  Bond investments are GREAT, and will forever be a cornerstone of a diversified portfolio.  However, too many investors and their advisors stockpile money into bonds as though it is the only safe way to make a return.  Importantly, like money markets, the "real" rate of return (after adjusting for inflation) is negative, going out 30 years!  You can find more exciting rate related info at the U.S. Treasury link here.     

Factor 3: Mortgage Rates

Mortgage rates have been at similar levels as today in both 2016 and 2012.  So, if you were lucky to buy your home or refinance at that time, there may not be much upside to a refinance.  For the rest of us, with the 30-year rate at 3% and the 15-year rate at 2.5%, now is the time to take a second look.  More rates from Rivermark Credit Union can be found here.

Your Home as an Investment

The opportunity for homeowners comes when they can look at these three factors (money market rates, bond rates, and mortgage rates) within an overall planning framework.  Below are a few examples of how this can work:

1. Mary and John are staring down retirement.  They have a 15-year loan at 4.5% that is five years from being paid off.  Their payment is around $1,900 per month, with a pay-off of around $100,000.  They have the choice of investing a final bonus of $100k from work at .63% and generating $52 per month income, or they can take that same bonus and pay off their home.  It seems like this should be a no-brainer—generate $52/month or save $1,900/month by not having a house payment.  But for whatever reason, the repetition of saving money (which is good) into safe investments (which is also good) is not considered within an overall planning context.  If acted upon, this scenario puts an extra $1,900 per month into this investor's pocket for paying off the home versus investing it into a bond.

2. Julie is 45 and has a goal of not having a house payment by the age of 60.  She has a $300,000, 30-year loan at 4%, and a payment of $1,432/month.  Julie has also accumulated $60,000 from real estate commissions she is looking to invest.  Investing in a 10-year Treasury would yield her $31.50/month.  A better alternative is to use the money to pay down her loan.  In doing so, she goes from a loan size of $300k to $240k.  Also, moving from a 30-year to a 15-year loan allows her to have no home loan by age 60.  Importantly, her rate is reduced from 4% to 2.5%.  Although her monthly payment is more by about $170/month, she saves $167,000 over 15 years in interest expenses—or $927/month! 

Conclusion

Recent events have presented opportunities for investors, savers, and homeowners.  Leveraging a comprehensive financial plan that considers your home, mortgage rates, and reinvestment rates could be the chance of a lifetime to save and earn. 

Join our forum on May 14

To learn more about how to leverage your home within a comprehensive financial plan, join Peter Fisher and Jill Novak for their forum, “How to Empower Homeowners during a Downturn” Thursday, May 14th at 9am PST. Sign up here.

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We are now crossing a zone of turbulence. The Captain has turned on the fasten seat belt sign. Please remain seated. Thank you.

Human Investing serves as a fiduciary on a variety of employer-sponsored retirement plans. We get the opportunity to meet with individuals with different vocations, interests, and life goals.  This is because we advise retirement plans ranging across different industries, different ownership structures, and different geographic locations. We have also established on-site client visits at different points in the year.

Over the years, we have provided advice throughout different market highs and lows.

That’s a lot of differences.

Despite these differences, we have a similar conversation with each retirement plan participant. We remind participants that it’s the decades and not the days that are important for building one’s retirement savings. Given the current market volatility, it’s not surprising that we have been receiving more phone calls than usual. And these calls are welcomed! It is our job to ensure that participants feel equipped and empowered to survive this turbulence.

Both financially and emotionally, one of the best ways to thrive in market volatility is to ensure that you have created a sound strategy for your 401k account.

What do we think is a sound strategy?

When we meet with 401k participants, we discuss their expected retirement age and then check these three boxes:

1. Savings Rate

2. Tax Advantages

3. Investment Strategy

Your retirement horizon is a key driver for the synchronization of tax advantages, a contribution amount, and an investment strategy geared for your retirement age. If we have spoken before, then we would have checked these boxes. Note that market volatility in and of itself does not uncheck boxes, but it often prompts us to review our account setup. 

If you are not expecting to access your dollars soon, then my gentle reminder to you is as follows: by doing nothing, you are doing something. If you sustain your contribution rate and remain invested in the stock market, your account will grow over time. To illustrate this concept, see the chart our team created to show the importance of being invested today.

Total values (assuming a 7% annual rate of return and an inflation rate of 3.22%). Actual results will vary.

Lastly, and most importantly, we recognize that today is stressful. We feel it, too. Quite frankly, there is something for everyone to worry about. Please take precautions and be mindful that your mental and physical health is of utmost importance during this time.

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