2016 Holiday Update

MONEY TALKS – 2016 was a very eventful year for the Hoole family. In January we officially packed up and moved our family to Southern, NH. Windham is a quaint little town 3 miles north of the Massachusetts border with lots of outdoor attractions such as parks, a town beach, a public golf course, and the Rail Trail; an abandoned rail bed that was converted to a walking and biking path. While the town itself has lots to offer, probably the best part about the move is our new neighborhood. There are tons of kids close in age to Carsyn, and the neighbors and the community as a whole have been very welcoming.

While we officially moved into our new home on January 8th, we had a 3rd birthday party to host for Carsyn just two days later. To some this might sound a bit crazy, but thanks to my wife Alisyn, the party went off without a hitch. Carsyn of course loved being the center of attention and reveled in any gifts that involved Disney princesses.

In February we took a family trip to Maui. The entire Hoole family came along including my parents, brother, and sister. It was our first family vacation since our disastrous trip to San Juan Puerto Rico in 2006 that featured a trip to the hospital, a scooter crash, and a car accident. Thankfully our trip to Hawaii was much less eventful. For many of us it was our first time to the Hawaiian Islands. While there we visited Haleakala – a 10,000 foot volcano, Pearl Harbor, drove the road to Hana, and went to a luau. Carsyn seemed to enjoy the luau the best, despite the tropical rain storm that blew in right as we were about to eat our dinner. When we got back to our hotel Carsyn even showed us her version on the hula dance, which to our dismay looked like something you would see in a Rihanna music video.

In July we took our annual summer vacation to Lake Winnipesaukee. Carsyn enjoys driving grandpa’s boat and is starting to swim on her own with a little help from her arm floats. Her favorite activities this year were swimming with the dogs at Braun Bay – a large sand bar where people “tailgate” on their boats, playing games at FunSpot – the world’s largest arcade, and singing and dancing at cookouts (as I mentioned, she really enjoys being the center of attention).

On December 7th we welcomed our second child, Brody Robert Hoole. He was born at Beth Israel in Boston and was a healthy 8.53 pounds and 20” long. The first few nights he seemed determined to never let us sleep, but just recently is finally giving us 4 hour stretches between feedings. Carsyn is very excited to have a younger brother and is already showing us what an amazing big sister she is going to be. She calls Brody “my baby”, wants to help as much as possible, and is very concerned when he cries. Although it’s clear there are going to be some growing pains when it comes to the latter. Just last night she mentioned that she doesn’t want a baby brother because he hurts her ears when he cries.

Carsyn is very excited for Christmas to come. This year she seems to be grasping the holiday concept and is eagerly awaiting Santa Claus, although she is somewhat perturbed how Santa is going to fit in our gas fireplace. Just recently after our first snowfall Carsyn looked out the window and asked, “Is it Christmas?” Since then we’ve been watching Rudolph (or as she calls him Rudolph the Rainbow Snowman) and the Grinch on repeat. But I don’t mind because this is usually coupled with her snuggling with me in our big leather chair with a cup of Cheez-Its.

Otherwise the year was filled with us learning our way around town, my wife adjusting to her commute from Windham to Boston every day, and me getting a crash course in home ownership. So that’s it. Another year in the books, and what an amazing year it was. My family and I wish you all the best. Have a wonderful holiday season and a happy new year!

Speculative trading, no thanks. I’ll take my chances at the casino.

A good friend of mine called the other day and we quickly got into the run-of-the-mill chatter about the kid’s going back to school, last week’s Patriots game, and how things were going at work. Before long, the conversation turned into a story about an airline stock he had just bought. As it turns out, his purchase was prompted by a recent drop in the share price and his perception that it couldn’t go any lower. Yet, after he purchased the stock, the price dropped ominously further. Fearing he would lose everything, he panicked and sold his holdings at a loss. Being the empathetic friend that I am, I sarcastically responded by asking if he wanted to go to the casino – because he might as well have been betting his money at the Roulette Table. I then tried to explain to him that what he was doing was called speculative trading, and he would be much better off if he developed an investment strategy instead.

Speculation is defined as the act of taking on considerable risk for the opportunity to generate large gains. We have all heard the old adage; no risk, no reward. However, the word “risk” by default means that the reward is never guaranteed. In the case of my friend, he assumed or speculated that the price of the airline stock had dropped so low that it could only go up from there. When the price dropped even further, he had no long term investment plan to rely on, and ultimately let his emotions take control over his investment objectives. This over reactive mentality is shared by many and is basic human nature. It’s the same reason why, for the last 20 years, the S&P 500 Index averaged 9.22% per year, while the average equity fund investor earned just 5.02% over that same time period. Even though my friend was correct in that the airline stock had indeed dropped over 15% in the last 10 days, its year to date performance was actually up over 9%. So you tell me, was the stock up or down when my friend made his purchase?

An investment strategy on the other hand captures your investment objectives while taking into account your time horizon as well as your risk tolerance. A good investment strategy should be a clearly defined written document that you can refer to in times of distress. While investing with a disciplined approach may not be as exciting as speculative trading, it has been proven to yield higher returns over time. In fact, most experts will agree that trying to time the market is nearly an impossible strategy. Instead of purchasing an individual airline stock based on speculation, a better alternative would be to develop your own long term investment strategy that meets your goals and objectives. One might decide to invest consistent amounts of money in a mutual fund at regular periodic intervals. By investing over time, you are lessening the risk of investing a large amount in a single investment at the wrong time. Likewise, by investing in a mutual fund, it provides you with broad market exposure at a fraction of the costs of diversifying into individuals stocks.

Many of us let our own emotions get in the way of making logical investment decisions. The most common of all is to buy when the market is high in hopes of riding the wave or to sell when the market is down out of fear of losing everything. Yet logically we all know that the market will eventually auto correct itself given enough time. Developing a sound investment strategy and sticking to it will likely yield you higher returns than any other investment moves you make. If fact I would argue that the actual selection of the funds within your portfolio is far less important than the strategy behind them.

10 Financial Tips for a More Secure Future

Most of us are forced to make hundreds of decisions on a daily basis. Some decisions may be as simple as choosing what color socks to wear, while others, such as whether or not to accept a new job offer, may take hours of deliberation. At the end of the day, most of us are tired and don’t want to make a hasty decision that could affect our long term financial security. With that in mind, here are 10 simple tips that will go a long way in helping to secure your financial future.

  1. Invest now – The earlier you begin saving, the more time your money has to grow. The goal is to have your money work for you by compounding over time. Gains from each year build on the prior year’s gains. Over the course of 30+ years, this can result in tremendous accumulation.
  2. Pay yourself first – If your company has a retirement plan, such as a 401(k), 403(b), or 457 plan, enroll as soon as you are eligible. Most company retirement plans allow you to enroll in a plan where your contributions are automatically deducted from your paycheck and directly deposited into the retirement plan. The beauty of automatic deductions is, since you never see the money, it’s nearly impossible for you to spend it.
  3. Maximize your employer match – Most employers will match your contributions up to a certain percentage. Make sure you contribute enough to take full advantage your employer’s match. When you don’t take advantage of a company match, you’re leaving money on the table. While some employers may not start matching your contributions immediately, that doesn’t mean you can’t start contributing in the interim.
  4. Use tax advantaged savings plans – If your employer doesn’t have a group retirement plan, or if you are already maxing out your contributions, consider starting your own Individual Retirement Account (IRA). A traditional IRA lets you put up to $5,500 per year ($6,500 if over 50) in a tax deferred account. You can deduct the $5,500 from your income, and your money grows tax free until it is withdrawn.
  5. Create an emergency fund – You should have enough cash to cover the greater of 10% of your gross household income or four months of expenses without having to tap into retirement savings or investments that are subject to market fluctuations. This liquidity helps protect your long term savings in the event of an emergency.
  6. Review your insurance – Being uninsured or underinsured can put you and your family at risk. Regularly review your insurance policies (homeowners, auto, etc.) so that you have the adequate coverage. Disability insurance is a must for anyone who is working, and life insurance should be considered for anyone where others depend on their income.
  7. Pay off consumer debt – Credit cards can have interest rates well into the double digits. Paying off credit card debt is a great way to create a surplus cash flow in the future. Credit card purchases are generally for short term items that have no lasting value. Learning to live within your means can go a long way towards financial independence.
  8. Make more; save more –Each time you get a raise, increase your employer-sponsored retirement plan contribution rate. This has multiple benefits. You are increasing your retirement savings on a regular basis and you are controlling the rate in which your standard of living increases.
  9. Invest in yourself – Going back to school to finish up your college degree or to pursue a master’s degree may cost you a lot upfront, but it will afford you more opportunities in the workplace. This should result in higher career earnings that easily exceed your education expenses.
  10. Own your home – Purchasing a personal residence has several advantages. One advantage is the long term leverage you receive when financing your home. Regardless of how much equity you have in your home, it appreciates at the same rate. Another advantage is that the mortgage interest and property taxes you pay on your mortgage are tax deductible. Furthermore, the first $250k ($500k if married) of gains when you sell your home are tax free. What other investment vehicles out there allow you to make $250k without paying a dime in taxes?

Want to pay off your mortgage early – think again!

Back in the mid 70’s and early 80’s mortgage burning parties were once an iconic theme in American culture. In fact, a few of you may remember the 1982 Settling Debts episode of M*A*S*H where Hawkeye and friends threw a mortgage burning party for Colonel Potter. Customarily, when a family paid off their mortgage it was considered a rite of passage. Family and friends would gather round the fire while the mortgage documents were engulfed in flames followed by a spirited party. Although a lot has changed since 1982, such as the average 30-year fixed mortgage rate dropping from 16.4% to 4.25% in 2014, the American mentality that paying off your mortgage is a celebratory event has not. In fact, this concept is so deeply engrained that many have developed a fear of mortgages, mortgage aversion as I call it, to the point where they are putting every extra dollar they can scrub from their paychecks towards paying off their mortgage early. While paying off your mortgage may give you a sense of security, it can actually impede your financial progress.

First, I want to begin by dispelling the notion that all debt is bad debt. When the item being financed lasts longer than the loan, e.g. your home, that is good debt. Likewise, if the debt provides a long term future benefit, such as a college loan allowing you to get a higher paying job, that is also good debt. Consumer debt from dinning out, shopping, and traveling is bad debt because the debt last much longer than the product itself.

Understanding that a home mortgage is good debt is a step in the right direction. Now let’s examine the ways a mortgage can actually help you and why paying off a mortgage can lead to financial dysfunction. As you may know, mortgage interest is tax deductible. You need to take that into account when calculating the real after-tax rate of return. For example, if you are in the 25% tax bracket, a 6% mortgage actually costs you 4.5% after taxes. Meanwhile, over the past 30 years the stock market has averaged close to 10% annually. If you took $500 a month and invested it in the stock market for 30 years with a 10% return, you would have over $1.1 million. Even after capital gains taxes you would have over $960,000. By comparison, over that same time period, if you took that same $500/month and applied that towards your $400,000 mortgage with a 6% interest rate, you would save less than $183,000 in interest. Thus, by not paying off your mortgage and investing your money, you would save over $777,000; not to mention the money you would have saved in taxes by deducting the additional interest you would have paid. We have all heard the old adage, “don’t put all your eggs in one basket,” – well owning your home outright without adequate cash reserves and investment savings is doing exactly that. In this case, paying off debt early leads to a more volatile and risky portfolio. This lack of diversification can be particularly devastating if the value of real estate drops significantly, like in 2008.

Developing a functional asset allocation strategy that includes your home as well as your investments is an important tool that can help you to reach you goals in life. For most people their home is their biggest asset; yet, many of us don’t properly leverage it to help achieve a more balanced and safer investment portfolio. For more information on functional asset allocation strategies please contact your local financial advisor.

Saving for College – What a 529 plan can do for you

As a new parent myself, I recently experienced the euphoria of getting home from the hospital with my beautiful daughter. However, planner that I am, not far behind was the anxious feeling of, “how am I ever going to afford to send her to college?” I started to investigate what options were available by sifting through the maze of literature posted on the front of every business & finance magazine. I was familiar with 529 plans, but I didn’t know all the details and was concerned that it would limit my daughter’s college choices. As it turns out, I was half right. There are two different types of 529 plans with very different features from one another.

The IRS created the 529 plan, or “Qualified Tuition Program,” in 1996 to help taxpayers set aside money for a designated beneficiary to be used for college expenses. While this is more commonly used by parents and grandparents who want to contribute towards their child or grandchild’s education, there are no rules preventing an adult from setting up an account for themselves or anyone else for that matter. Specifically there are two different types of 529 plans, the Prepaid Tuition Plan and the College Savings Plan. Each state offers their own 529 plan, and you need not be a resident of a particular state to invest in that state’s plan. Although 34 states offer a deduction for 529 contributions, Massachusetts is not one of them, so I recommend shopping around for a state plan that best fits your family’s needs.

The Prepaid Tuition Plan allows you to buy tuition certificates at today’s rates which can be applied towards tuition and fees at participating colleges in the future. The major benefit to choosing this option is it helps to fight against the rising cost of college tuition because you are essentially locking in a future tuition at today’s rates. For example, suppose public college tuition is $20,000 now and you contribute $5,000 to the plan. Since you prepaid 25% of the current year cost, if the tuition increased to $40,000, your certificate will be worth $10,000. One downside of tuition certificates is they only cover tuition and fees, they will not cover the cost of room and board, books, or supplies. Another downside is you are limited to the colleges and universities that participate in the plan. In the event your child decides not at attend one of the participating schools, you may withdraw your money at maturity, however, any earnings may be subject to taxation.

The more commonly used plan, known as the College Savings Plan, allows a participant to contribute after tax dollars. Any earnings are tax deferred and, if the money is used for qualified higher education expenses, withdrawals are federal income tax free. One advantage the College Savings Plan has over the Prepaid Tuition Plan is that qualified higher education expenses not only include tuition and fees, but also books along with room and board. Another advantage is you can use your account assets at virtually all accredited colleges and universities in the United States and eligible foreign institutions. If your child decides not to go to college, you can change the beneficiary on your account to an eligible family member or take out the money as a non-qualified withdrawal. However, if you do decide on the latter, keep in mind any earnings on non-qualified withdrawals are subject to federal income taxes at the recipient’s rate plus a 10% penalty.

My wife and I ultimately decided to enroll in a 529 College Savings Plan because we liked the flexibility offered with the plan. The option of choosing an accredited college worldwide gave us great comfort that our daughter could attend virtually any college or university of her liking. Furthermore, the College Savings Plan we enrolled in had minimal initial funding requirements and flexible funding options such as automatic monthly withdrawals that made our contributions effortless.  Choosing the right plan is up to you and your family, but before making such an important decision it is important to understand the facts. For more information visit www.savingforcollege.com or contact your local financial planner.

 

This article was featured in the Littleton Independent and the Westford Eagle on September 18, 2014.

Social Security – At what age should I start collecting?

Choosing when to retire is likely to be one of the most challenging decisions you will make in your lifetime. Although your retirement date and the date you begin collecting Social Security benefits do not have to be one in the same, they are closely correlated. Social Security income, despite only replacing 40% of the average wage earners pre-retirement income, remains a key component for those evaluating when to retire.

Conversely the benefit you receive from Social Security can vary greatly depending on when you decide to begin collecting.  Your Social Security benefits are calculated based on your full retirement age, which for those born between 1943 and 1954 is 66 years old.  Reduced benefits are available starting at age 62 for those who want to begin collecting before their full retirement age. On the other hand a special retirement credit is also available for those who delay collecting their Social Security benefits beyond their full retirement age, up to age 70. The decision then becomes, would you rather begin receiving a smaller benefit earlier in life for a longer period of time or wait for a larger benefit that you will not receive as long?

Let’s start by putting some numbers down to help illustrate the importance that timing has on your retirement benefit. Say your full retirement age is 66 years old and your monthly benefit is $1,000. If you elect to begin collecting at age 62, your benefit is reduced to $750, a 25% reduction. However, if you choose to wait until age 70, your benefit grows to $1,320 per month, a 32% increase.

When looking at the numbers in isolation one could easily conclude that waiting until age 70 to collect is the more prudent option because your benefit would be 76% larger than your benefit at 62. Yet numbers can be deceiving and often don’t tell the whole story. If you began collecting $1,320 at age 70 you would have to live into your eighties in order to come out ahead of your friend who began collecting at 62. In fact, if you live to the average life expectancy for someone your age, it does not make much of a difference if you begin collecting benefits at age 62, 66, 70, or any age in-between. That being said, approximately one third of 65 year olds today will reach the age of 90, and more than one in seven will reach 95.

So what exactly does all this mean? Absolutely nothing.  Unless you have a crystal ball and can see into the future no one knows when they will be knocking on heaven’s door. There is no correct age to begin collecting social security benefits because everyone’s circumstances are different. There are several key factors such as cash flow, health, and family longevity that should be considered before rushing to judgment.

The first step towards making an educated decision is to understand the facts as they relate to your specific situation. A good way to start is by checking out your earnings record on your Social Security Statement; to create an account go to www.socialsecurity.gov/mystatement. From there you can access your complete earnings record as well as your estimated monthly benefits at age 62, 66, and 70. Knowing your exact benefit may help you to determine the right time to begin collecting. For someone who is healthy with longevity in their family history, a better option may be to delay collecting until age 70. While someone who is beginning to develop some health problems may be better off taking the benefit at age 62 and traveling while they’re still mobile. Only you can decide the right time. For more information please visit www.ssa.gov or contact your local financial advisor.

This article was published in the Westford Eagle & Littleton Independent

Know your Financial Personality

Couples often have difficulty communicating with one-another especially when it relates to the issues they hold closest to their hearts; money, sex, and how to raise the kids. Often clients come to a financial advisor because they are tired of fighting about money and are looking for a third party to help. One way an advisor can assist their clients is by counseling them on their financial personality. Helping clients understand their behavior may allow them to reflect on past decisions and aid in their decision making going forward.

Bert Whitehead, author of “Why Smart People Do Stupid Things with Money,” first pioneered the Money Personality Matrix which plots a client’s risk acceptance against their spending propensity. Bert explains in his book how an individual’s personality shapes their financial perception which can lead to inherent conflicts of interest within their relationships. Understanding you and your partner’s money personality can help to foster a better relationship and may help you avoid some common financial pitfalls.

The Entrepreneur – Entrepreneurs have a strong passion for their business and are willing to take risks to make their dreams come true. They tend to be very competitive and keep score by counting their assets. When times are good, entrepreneurs are frequently very successful. However, they often reinvest too much of their profits back into their business rather than diversifying into stocks and bonds resulting in a lack of diversification and inadequate liquidity that can be crippling if the economy goes into a recession.

The Bon Vivant – Bon Vivants work long hours, make lots of money, and are very successful in what they do. They love anything that saves them time and are always buying the latest gadgets. Social status is important to them, and they often reward themselves for their hard work by buying brand name clothing or accessories. Bon Vivants frequently have very spotty portfolios because they were built over time without any foresight. They might buy shares in a company after a conversation with someone at a cocktail party or succumb to a high pressure sales pitch on risky investments. Nonetheless, the worst mistake they tend to make is to confuse hobbies with investments.

The Nester – A Nester’s favorite investment is their home. Anything they buy for their home, whether it’s patio furniture or a bathroom vanity, is considered an investment to them. They consider any money spent outside the home to be frivolous. They often over improve their homes to the point where it so closely reflects their personality that the new owner tears out most of what has been done. Terrible investments that nesters love to spend their money on are vacation homes and timeshares.

The Traveler – Travelers cherish experiences rather than physical objects. Their photo album is often their most prized possession. Generally they don’t care much about money and even brag about how few possessions they have. They love to travel and often seek employment in fields that facilitate their lifestyle. Travelers love to spend money on anything that has an educational component. If you have a friend or family member that is a “professional student,” chances are they’re a traveler. Travelers often have transitory relationships; however, it is not uncommon for them to find themselves in relationships with nesters.

Chances are you may relate to one or more of these personalities. You may find you relate to one personality type or another depending on the specific situation you are in, which is perfectly normal. Each personality type has positive and negative traits; the positive traits tend to promote financial well-being while negative traits often lead to financial dysfunction. Recognizing your own personality and that of your partner allows you to understand each other’s motivations leading to more sound decision making and financial stability for you both.

 

This article was published in the Littleton Independent on Thursday July 24th.