Dec 13, 2022
Investing for retirement Using IRA, Roth and 401(k) Plans
For the past 20 years, most individuals have saved and invested for retirement on their own because company pension plans are largely a thing of the past. Living on Social Security alone during retirement isn’t appealing for most of us, since the maximum benefit is around $40k/year for 2022.1 But how much and where should we invest for retirement? The short answer: Most individuals should be saving and investing about 15% of their income into a retirement savings/investment plan such as an IRA or 401(k) or 403(b), or some combination.2
Companies typically offer some form of retirement savings plan with employee contributions coming directly out of their paychecks. These are many times 401(k) or 403(b) plans but could also be 457 or deferred compensation plans, depending on the employer and type of business. Many but not all companies will match a specific percentage of their employees’ contributions, which if you’re lucky enough to have this option, you should be taking advantage of it because this is “free money”. Investment options for these types of retirement savings plans are generally selected by the employees from a pre-defined list of 15 to 50 mutual fund or similar options. The IRS does set annual contribution limits for the employee portion, which for 2022 is $20.5k for employees under age 50 and $27k for employees aged 50 or older.3
Many but not all companies will match a specific percentage of their employees’ contributions, which if you’re lucky enough to have this option, you should be taking advantage of it because this is “free money”
If you work for a small company, or for yourself as an independent contractor, you may not have a company-sponsored 401(k) or 403(b) or 457 plan available. In this case, you could set up a Simplified Employee Pension, or SEP, plan if you own your own business or work for yourself as a consultant or entrepreneur. Small companies sometimes do offer a SIMPLE plan, which operates much like a 401(k) but has lower annual contribution limits and requires employers to match at a specific safe-harbor level. But if none of those is available, employees can contribute to their own Individual Retirement Account, or IRA, set up directly with a brokerage firm or bank. Annual IRA contribution limits are even lower than the others mentioned, and sometimes higher income individuals may be prohibited from making contributions altogether (e.g., Roth IRA) or may lose the tax deduction (e.g., traditional IRA). Investment options in IRAs are virtually unlimited, with most any stock, bond, ETF, or mutual fund available.
when it comes to saving for retirement, sooner is always better than later
But later, in retirement, all monies distributed from these plans are considered taxable income. The tax benefit comes on the front end when contributions are made. Once a retiree turns 72 years old, Required Minimum Distributions (RMD’s) apply, necessitating withdrawals be taken according to an IRS table.
In contrast, Roth IRAs do not provide a front-end tax benefit, meaning employee contributions to Roth IRAs are not deductible. But unlike traditional IRAs, Roth IRA distributions come out tax-free during retirement if the Roth account has been in place for 5 or more years and the employee is 59 ½ years old or older. Roth IRA tax benefits are accrued on the back end, meaning during retirement when distributions are taken to supplement Social Security income. Today many employer-sponsored retirement plans also allow employee 401(k) contributions to be designated as Roth. This is an excellent way to build up a large retirement account which may be available tax-free in retirement. And because monies inside a Roth account have already been taxed, no RMD’s are generally required.
Which is better – Traditional or Roth? Both, actually! Using either or both retirement savings/investing vehicle is better than not saving/investing at all, and when it comes to saving for retirement, sooner is always better than later, and higher contributions are always better than lower. If I were advising a 25-year-old employee just starting out and making $50k per year, I’d suggest building up the Roth 401(k) and/or Roth IRA as much as possible since a tax deduction now isn’t as critical at this juncture. But if my client was 58 years old and making $650k annually, I’d suggest they use all the tax deductions they can get right now, because they’re in a very high tax bracket already. This means using a traditional 401(k) or IRA for this client would be my suggestion.
1 Social Security website https://faq.ssa.gov/en-US/
2 What Percentage of your Salary Should go Toward Retirement?, Investopedia, by Tim Parker, March 30, 2022
3 401(k) Contribution Limits Rising Next Year, by Jackie Stewart and Elaine Silvestrini, Kiplinger, September 23, 2022
More Articles Written By Scott
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ with WWM Financial in Carlsbad, CA, an SEC-registered investment advisor. He can be contacted by phone on 760-692-5190 or by email at scott@wwmfinancial.com .
WWM Financial is an SEC Registered Investment Advisor.
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Dec 7, 2022
I’m a CERTIFIED FINANCIAL PLANNER™, or CFP®, meaning I help clients create plans to meet their major financial goals (e.g., retirement, start new business). The key element is a Financial Plan, which forms a roadmap to and through retirement or whatever financial goal(s) a client has established.
Although many insurance agents and investment advisors claim to be “financial planners”, they specialize in insurance or investment management and don’t have the educational or experiential background required to practice true financial planning, as delineated by the CFP® Board of Standards https://www.letsmakeaplan.org/how-to-choose-a-planner/why-choose-a-cfp-professional .
To create a financial plan, CFP®’s first gather client information such as investment, Social Security, pension, and annuity statements, if applicable, insurance policies, work and tax information, spending profiles, and family details. Financial plans are goal-centric, meaning client goals drive the planning exercise and ultimately determine retirement readiness and margin-of-safety. Most clients need help establishing their goals, or at least adding breadth, specificity, and reality. Consequently, part of my planning process is discussing potential goals with clients and helping them refine and quantify their goals.
The “big-one” is how much retirement income is needed. This is a critical planning variable and one I look at from a couple different perspectives. How much is the client spending now, during her/his working years? Is the client following a budget? Most aren’t, so I typically improvise by factoring down their pre-retirement income (e.g., plan for 80% of working income throughout retirement). Retirement income is also one of the many scenarios I run, meaning once the baseline financial plan is established, I vary the level of retirement income to see how various spending levels impact the plan.
In all, I run between 25 and 35 different scenarios, which collectively provides a “stress-test” while helping clients understand their margin-of-safety. Scenarios vary unknowns like inflation, rate of return, Social Security filing strategies, lifespan, long-term care needs, as well as retirement income. Each scenario results from running 1,000 simulations – called a Monte Carlo simulator – to determine the probability of success. Planners have software tools to help run these simulations. Retirement is considered successful when clients don’t run out of money before running out of time – i.e., they don’t burn through their investments before passing away.
The “big-one” is how much retirement income is needed.
If the primary goal is a successful retirement, the plan will assess a client’s readiness prior to retirement and form an action plan to get them on track for those who don’t already have adequate margin-of-safety. Do they need to save and invest more, work longer, reset their income goals, change the way they’re currently investing, do part-time work during retirement, or some combination? Once someone has retired, a financial plan can still be valuable as a statistical decision-making tool, providing a framework for making important financial decisions. I’ve developed and applied financial plans to many client decisions over the years, sometimes helping clients decide if they have enough money to move to another state, purchase a boat or RV, start a new business, fund a planned giving program, or retire in another country.
Retirement is considered successful when clients don’t run out of money before running out of time – i.e., they don’t burn through their investments before passing away.
Creating a financial plan can help individuals and families in many ways, transcending retirement planning while serving as a statistical decision-making framework. If interested in having a customized financial plan developed for you, make sure you’re working with a CERTIFIED FINANCIAL PLANNER™, or CFP®, to ensure you’re getting solid planning and suitable advice.
More Articles Written by Scott
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ with WWM Financial in Carlsbad, CA, an SEC-registered investment advisor. He can be contacted by phone on 760-692-5190 or by email at scott@wwmfinancial.com .
WWM Financial is an SEC Registered Investment Advisor.
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Jul 1, 2021
Sustainable Investing Becoming Mainstream
By Scott McClatchey, CFP®
Doesn’t it seem like every advertisement or press release includes the word “sustainable” these days? Everyone is bragging about reducing their carbon footprint or converting to renewable energy sources. It reminds me of the late 1990’s when companies wanted to add “dotcom” to their name, whether they were in the info-tech industry or not. Remember pets.com?
With that in mind, it may not be surprising that you can now purchase sustainable investments. The idea is to align your investing strategy with your environmental or social beliefs and value system.
Over a century ago, Quakers asked for a portfolio free of the “sin stocks”, which generally meant companies in the tobacco, alcohol, gambling, weapons, and oil & gas businesses. Their request led to Socially Responsible Investing, or SRI, which primarily screened out specific industries. But over time SRI evolved or morphed into today’s ESG, which stands for Environmental, Social, and Governance.
In ESG investing, synonymous with sustainable or green investing, portfolio managers consider Environmental, Social, and Governance factors when selecting stocks or bonds, along with more traditional financial parameters. Some ESG managers still start by screening out certain industries, but then they apply an ESG rating system to decide which of the available stocks to purchase. Today it’s possible to buy mutual funds, ETFs, hedge funds, or private equity funds with sustainable features built into the portfolio selection criteria. Many believe ESG investing can reduce portfolio risk and generate competitive returns while helping investors align their values with their investments.
But buyer beware: One fund company’s ESG fund might not make the cut at another, more specialized, ESG fund company. That’s because ESG criteria is not yet standardized. Fortunately, there are some small or boutique companies who specialize in ESG investing and have a solid systematic process for integrating environmental, social, and governance criteria into their investment selections.
The big-name fund players are also introducing ESG funds these days, but if you want to ensure funds meet your own ESG goals and adhere to your personal values, it pays to dig into the specific ESG criteria for each fund.
Environmental criteria might include climate change policies, plans, or practices, greenhouse gas emissions, carbon footprint, water usage or conservation, recycling, renewable energy, or green products. Social criteria include employee treatment, pay, benefits, perks, engagement, and turnover, training and development, safety policies, diversity and inclusion in hiring and promoting, ethical supply chain sourcing, consumer service responsiveness and protections, lawsuits, recalls, and regulatory fines/penalties, as well as company stances on social justice issues. Governance refers to executive compensation, bonuses, and perks, use of golden parachutes, diversity of board of directors and senior executives, proxy access, multiple-class stock structures, communications transparency, lawsuit history, and regulatory compliance.
Sustainable investing is a departure from shareholder value maximization. Today’s more enlightened management teams understand that, to satisfy both inside and outside stakeholders, it may be necessary to depart from a profit-at-any-cost business model. In my opinion, this is a welcome change, and over time I expect ESG investing will become more and more mainstream.
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNERTM with WWM Financial, an SEC registered Investment Advisor in Carlsbad, CA. He can be contacted by phone on 760-692-5190 or by email at scott@wwmfinancial.com .
Jun 11, 2021
Decrypting the Investment Industry Puzzle
By Scott McClatchey, CFP®
Confused by all the industry jargon many financial professionals like to use? You’re not alone. Equity, fiduciary, wirehouse, robo-advisors, fixed income, and ETF’s are but a few words which may be confusing if you’re not familiar with this industry. In this article, I’ll hopefully give you a better sense what all these terms – and a few more – mean in simple, understandable language. My intent is to de-mystify the investment industry and provide a sort of “decoder ring” for consumers to use.
If you’re searching for an investment professional to manage your portfolio or need a financial planner to help with retirement planning, the financial services industry offers two very different business approaches. The “wirehouse” model consists of financial professionals who work for a large firm, typically with a national footprint, and receive support and benefits from that firm. Many wirehouses are divisions of the banking conglomerates. Sometimes these wirehouses will feature proprietary investment offerings along with cross-branded service offerings.
The other model consists of “independent” financial professionals working as independent contractors either in conjunction with a broker/dealer or a registered investment adviser (RIA). Independent financial professionals generally own their own computers and office equipment, rent office space, pay their own phone and Internet bills, place their own ads or sponsorships, and purchase wholesale account services to conduct their business. These “independents” are business owners just like locally owned restaurant owners, chiropractors, plumbers, or auto mechanics.
I am an independent advisor, for example, as are the other client-facing advisors at WWM Financial, which is set up as an RIA. In 2007, I co-founded Alliance Investment Planning Group, located in Carbondale, IL, which is affiliated with the largest independent broker-dealer in the U.S. These are two examples of the “independent” model. A notable difference is in naming conventions: Wirehouses have branches of the parent firm located throughout the U.S., all carrying the name of their parent company. Whereas independents generally create their own name – e.g., WWM Financial, Alliance Investment Planning Group, Jack & Jill’s Investment Group, Humpty Dumpty’s Planning LLC.
In terms of the financial professionals themselves, there are different types of professionals depending on which licenses have been obtained and services are being offered, along with the commensurate regulations that apply to each type. For example, a registered representative, which is more commonly called a securities broker or stockbroker, has passed FINRA exams such as the Series 7 exam and is licensed to sell different securities and products such as stocks, bonds, options, and mutual funds. Registered rep’s are regulated by FINRA, the self-regulatory organization (SRO) authorized and overseen by the Securities and Exchange Commission, or SEC, and are transactions-based providers held to a suitability standard which requires brokers to only recommend investment products suitable for a client’s circumstances. Registered rep’s generally follow a more sales-oriented model, charging commissions for the purchase and sale of securities similar to those in a wirehouse.
The other primary type of financial professional is an investment adviser representative, more commonly referred to as a financial advisor or investment advisor. Financial/investment advisors must pass the Series 65 exam (or a combination of the Series 7 and 66 or possess a professional designation such as the CFP® or ChFC®) and are regulated by their state or the SEC, depending on how many assets they manage. Financial/investment advisors counsel clients on investing and financial issues and are held to a higher legal standard (e.g., than suitability) called a fiduciary standard or duty. Most financial/investment advisors do not charge sales commissions for investment products, but rather an asset-based fee for their ongoing investment advice typically expressed as a percentage of the assets under management. The fiduciary duty requires advisors to place their client’s interests above their own, and to eliminate conflicts of interest and properly disclose to their clients all those that are not. Suitability is essentially a subset of the fiduciary duty.
Here’s the really tricky part. Stockbrokers and investment advisors can be found in either wirehouses or broker-dealers or RIAs. In fact, some financial professionals are dual-registered, meaning they can offer financial products on a transactional commission basis as a registered rep, but can also provide ongoing financial or investment advice on a fee basis. So for example, a dual-registered broker/advisor affiliated with an independent broker/dealer could be managing a taxable account for a client set up as a commission-based brokerage account, meaning the broker is held to the suitability standard for this transactional account. That same client may have another account with the same financial professional set up as a fee-based account, which would legally be held to the higher fiduciary standard. Confused? Yes, I understand, it isn’t as easy as it should be to figure out what type of professional you’re working with, how they’re compensated, and what legal standard they’re held to. My advice? Ask, and do your research before hiring someone. The SEC provides a site for consumers to help with that research: www.adviserinfo.sec.gov.
To make matters even more confusing, there are many credentials available and in use inside the financial services industry by brokers and advisors, some very meaningful and others less so. Perhaps the most respected and significant designations are the CERTIFIED FINANCIAL PLANNERTM, or CFP®, the Chartered Financial Consultant, or ChFC, and the Chartered Financial Analyst, or CFA.1 These designations all require college-level coursework, passage of examinations, extensive time commitments, and sometimes an experience and ethics criteria as well. The CFP® and ChFC credentials require knowledge and testing on a broad array of financial topics, including taxes, insurance, investments, employee benefits, retirement planning, educational savings plans, and estate planning. If you want to work with someone who has invested time and effort into their career and has a broad financial knowledge base, it might be worth considering a CFP® or ChFC professional. CFA’s, on the other hand, are more specialized in investments and specifically investment analysis. Many mutual fund or hedge fund managers are CFA’s, generally cutting their teeth as an investment analyst initially before eventually becoming the fund manager. Which is better? It depends on what you’re looking for. If you only need help evaluating investment products, a CFA may be a reasonable choice. But if you’re looking for a financial partner or consultant to help you navigate life’s myriad financial challenges, the CFP® or ChFC designations may be more useful in identifying prospective advisors for you to work with.
It’s important to realize that the credentials are distinct from the type of financial professional you’re dealing with. A few registered rep’s, for example, have obtained a CFP® designation. And many investment advisors do not have CFP®’s or ChFC’s or CFA’s. But more commonly, CFP® and ChFC designations are associated with financial/investment advisors who do business as fee-based advisors/planners acting in a fiduciary capacity. And CFA’s are more common in the fund management world (i.e., mutual fund, hedge fund, endowments) than in the client-facing world (i.e., stockbrokers, advisors). This isn’t a hard and fast rule, but rather an observation on where the industry is today, and where it appears to be headed. Each issuer of these designations provides an online search to determine if your advisor’s designation is in good standing.
To wrap this up, I wanted to quickly cover a few terms that sometimes confuse consumers unfamiliar with the financial services industry. When brokers/advisors refer to “equities”, they’re generally talking about stocks. Whereas when they refer to “fixed income”, they’re generally talking about bonds. Which is unfortunate because bonds do not have fixed returns like bank CD’s, unless the bonds are held to maturity. Investors who sell their bonds in the secondary market before maturity may get more, or less, than what the bond was originally sold for. ETF’s are exchange-traded funds, a security similar to a mutual fund but actually traded on the stock exchanges. Most ETF’s are index-trackers, but not all. ADR’s are American Depository Receipts, which is how American investors can purchase foreign stocks listed on foreign exchanges, since each ADR represents a specific number of shares of a foreign-listed stock. Finally, “robo-advisors” aren’t advisors at all, but rather automated investing services using computer algorithms to build and manage an investment portfolio.
I hope this short article helps decrypt some of the confusing language used by the investment industry.
1 “Four Best Financial Certifications” by Ellen Chang, U.S. News & World Report, August 11, 2020
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNERTM with WWM Financial, an SEC registered Investment Advisor in Carlsbad, CA. He can be contacted by phone on 760-692-5190 or by email at scott@wwmfinancial.com .
Disclaimer:
This commentary on this website reflects the personal opinions, viewpoints and analyses of the WWM Financial employees providing such comments, and should not be regarded as a description of advisory services provided by WWM Financial or performance returns of any WWM Financial Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. WWM Financial manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Jul 21, 2020
If I asked you what happened in the summer of 1969, what would you say? For those answering Woodstock, you’re right, the groundbreaking Woodstock Music & Art Fair took place over 3 days in August 1969 on a farm in Bethel, NY. The cultural significance of Woodstock persists, and in some sense, is arguably more relevant today than it has been for decades as US citizens have again taken to the streets in a rising tide of protests not seen since the civil rights era. And as a music lover, it’s hard to ignore the impact musicians such as Jimi Hendrix, Janis Joplin, Jefferson Airplane, CCR, Joe Cocker, Crosby Stills Nash & Young, Arlo Guthrie, Joan Baez, and Richie Havens had on the young baby boomers sliding around in the muddy fields that day who have since come to symbolize that era’s expression of peace and love. Music then, as now, provided a much-needed escape from the turbulence of the Vietnam War and the widespread unrest associated with the civil rights movement.
The Woodstock Music & Art Fair in Bethel, NY, August 1969
But what I had in mind wasn’t Woodstock at all, but rather Neil Armstrong’s walk on the moon which took place a month before Woodstock on July 20, 1969 at 1:17 pm PT. It turns out the “space race” was also a phenomenon largely playing out in the 1960’s, as the Soviet Union (now known as the Russian Federation or just Russia) and the United States battled to become the first to establish a space-based beachhead. Sputnik was the ‘shot heard round the world’ to begin the “race”, and Apollo 11 represented the finish line. By the time Armstrong famously uttered, “That’s one small step for a man, one giant leap for mankind,” the world was transfixed and forever changed. I still remember watching the first images from the moon’s surface, even though I was only a 10-year old boy in small town America at that time.
The Apollo missions leading up to Apollo 11 that July 1969 were anything but preordained, as NASA had never done anything even close to this before. The complexity of Apollo was extraordinary even by today’s standards, but it was almost unimaginable, and unbelievable, by 1960’s era standards. Mainframe computers were just becoming useful, but weren’t yet miniaturized because VLSI didn’t come into being until the 1970’s. Apollo missions were conducted using a guidance computer less powerful than what you carry in your pocket today. In fact, today’s iPhone can process instructions 120 Million times faster than Apollo 11’s guidance computer! Let that sink in for a minute or two.
Neil Armstrong became the first human to walk on the moon in July 1969
How did they do it? Well, through lots and lots of hard work, persistence, dedication, planning, testing, thinking, more planning, more testing, rethinking, rehearsing, and so on. As I learned when I hired into the satellite industry in 1982, double or triple redundancy is a best practice for all spacecraft, and contingency planning is critical to the success of every mission. In short, getting to the moon and back safely wasn’t easy, and Apollo is certainly an example of leadership and teamwork at its very best. Anyone who has watched the movie Apollo 13 understands how difficult, stressful, and complex these missions were. But the leadership exemplified by people like Gene Kranz, who famously replied, “No, this is going to be our finest hour” when asked during the mission if Apollo 13 was going to be NASA’s darkest moment, is but one example of how it all came together, and how the US came to “win” the space race. Incidentally, the movie line also attributed to Kranz “Failure is not an option” was more of the movie’s theme or tagline than an actual quote, according to multiple sources.1
APOLLO 13: AMERICA’S FINEST HOUR virtual event at San Diego Air & Space Museum on 50th anniversary
What does this have to do with me, someone who has been practicing financial planning for over 14 years? In a strange sort of way, growing up watching the Apollo missions on TV and following every nuance prepared me not only for my upcoming career as a satellite systems engineer and business-marketing executive after that, but it also taught me important lessons I still apply today in my financial planning practice. I started as a communications payload systems engineer, responsible for incubating and babysitting the communications payload from early design to eventual test, launch, and on-orbit operations. In big-aerospace, at least in my day, systems engineering was a kind of jack-of-all-trades profession wherein we needed to have the communications and business skills necessary to work with our customers and the program management team, but we also needed to have adequate technical depth to work with designers, thermal and structural engineers, test engineers, safety specialists, quality assurance personnel, and operations specialists. Using a hub & spoke analogy, system engineers were the hub and all the other professions were the spokes. Or you can think of a conductor with the various musicians in his/her symphony orchestra.
HUGHES Satellites circa 1980’s, before the HS 601/702 family of 3-axis satellites were developed
Fast forward to today, and my role is again to be the hub, or “symphony conductor”, of a group of specialists. But today, as a CERTIFIED FINANCIAL PLANNERTM, the specialists I work with (i.e., the spokes) are portfolio managers, bond traders, stock analysts, estate planners, tax CPA’s, retirement plan specialists, college savings plan experts, annuity and insurance agents, Social Security specialists, and mortgage brokers. Because to serve my clients, I need to “conduct” a symphony orchestra consisting of all the financial experts who can, collectively, help me best assist my clients with their financial challenges. One skill I’ve carried over from my aerospace engineering days is problem solving. To survive in systems engineering, it’s necessary to become a good, if not great, problem solver. As a financial planner, those skills come in handy almost every day as I work with different clients having different goals, circumstances, and challenges. There is more of a quantitative or statistical basis to modern-day finance than many realize, and for the average finance major, these are some of their toughest courses and most difficult career challenges. But for someone with a Master’s in Electrical Engineering and experience in aerospace systems engineering, this stuff is relatively easy for me. It’s just simple math.
Another lesson I learned early on in my aerospace career is risk management. Thinking through all the things that could go wrong on a space mission and building in redundancies where necessary, and then doing extensive contingency planning taught me an important life lesson and developed my risk mitigation skills beyond most ordinary finance programs. Today when I design a financial plan for a husband and wife and their 3 children, I apply those lessons to how I create the plan in the first place, but I also apply these concepts in discussions with the family. It’s not enough to run a Monte Carlo simulation once and tell my clients they’re adequately prepared for retirement. I run the software about 25-30 times to create a number of ‘what if’ scenarios so my clients can understand how their retirement would be impacted were inflation to be higher than we expected, or investment returns lower, or Social Security were to be cut by 10% or 25%, of if the husband or wife were to need assisted living or nursing home care later in life. This creates a risk matrix for the clients to use as a decision-making tool going forward.
Apollo 13 astronauts Fred Haise, Jim Lovell, and Jack Swigert return safely to Earth
When we discuss their plan, which is really a baseline plan plus 25-30 sensitivities or scenarios, we talk about margin of safety. Why? Because, like during the Apollo missions of the 1960’s, today’s retirement is fraught with things that can and do go wrong. Being prepared means building in an adequate margin of safety in order to handle all the ways things can unravel as retirement plays out over a 25 to 30 year period. Sometimes this also entails building in redundancies, just like on satellites. But in retirement planning, it’s more about creating multiple income streams — just in case one doesn’t pan out. That’s not to say I insist all my clients save and invest enough money to see 98% to 99% success likelihoods for their retirement plans. (In retirement planning, a successful retirement outcome means the client doesn’t run out of money before running out of time — i.e., passing away.) But I do want my clients to understand the “extra” risk they’re taking if they decide to retire this year versus next year or the year after. In some situations, I need to be the bearer of bad news and tell my clients they’re just not ready for retirement, from a money standpoint, anyway. Having 25-30 sets of statistical outcomes aids in this discussion, however, because the numbers tell the story for me. If someone expects to spend $125k per year in retirement and their planning outcomes predict a 23% to 31% probability of success, for example, they need to either rachet down their retirement income expectations and/or plan to work a little longer before retiring. Simply put, they’re not on track for a successful retirement.
Returning to the Apollo 13 movie, another analogy to financial planning comes from the real heroes of that extraordinary story. Mission Control played a pivotal role in orchestrating a successful conclusion to an unexpected and very dangerous situation. Had the astronauts been on their own, there’s no chance they would have returned home safely. These kind of “black swan” events happen in finance also, and how someone responds in the moment determines what their financial future will be, in a very tangible and unforgiving way. A “black swan” is an unpredictable, very low probability event that isn’t normally planned for or expected to happen, but if it does, it has a very severe impact. Examples are the Japanese bombing of Pearl Harbor in 1941, the terrorist attacks on September 11, 2001, and the coronavirus pandemic we’re currently experiencing. The point being, clients who are working with a professional financial planner who can provide a “Mission Control” function for their finances have a much greater chance of surviving during these financial calamities, and maybe even flourishing. It’s again a kind of hub & spoke architecture, but in this context, the hub – or financial planner – acts as the risk manager and troubleshooter for her clients, just like Mission Control did for Neil Armstrong and Jim Lovell. Functioning without this critical Mission Control element would be suicide in the manned spaceflight context. In personal finance, someone might get away with it for a while during “normal” times, but once an emergency ensues, it’s very difficult for someone untrained in finance, troubleshooting, and risk management to handle a black swan level financial crisis without incurring significant and likely permanent financial damage.
Flight director Gene Kranz and others in NASA’s Mission Control Center during Apollo 13 mission
You might be wondering at this point how a satellite systems engineer became a financial planner with responsibility for his clients’ financial future. That’s an interesting story which played out over many years. For the full version, I’ll offer to tell it over a craft beer sometime, but here’s the Cliffs Notes version. As a boy, I was fascinated with the Apollo missions and idolized Neil Armstrong as my hero. Naturally, I wanted to become an astronaut. But during my college years I realized I was overly susceptible to motion sickness, had horrible eyesight, and really didn’t want to live in Houston, so I decided to do the next best thing to becoming an astronaut. I hired into HUGHES Space & Communications Group in El Segundo, California to build satellites and spacecraft. It was a blast, but the seeds of my future financial career were sown during the 1980’s when I worked at HUGHES S&CG by day and drove to Westwood to study personal financial planning at UCLA in the evenings. The impetus was my onboarding at HUGHES when the HR rep asked how many tax withholdings I wanted to take, and what investment options I wanted to use for my 401k plan. My response at the time was, “401k plan, what’s that?” I signed up for night classes through UCLA Extension and learned about financial planning from seasoned CFP® professionals in the LA area who taught these courses. It’s was enlightening for me. I loved it! And I still do.
In time, I’ve found that helping clients achieve their goals and strive for financial independence is a very rewarding way to earn a living. I bring a lifetime of experiences to the table which collectively enable me to guide my clients while reducing their financial stress and allowing them to live the life they desire. It’s not rocket science, but it’s a worthwhile pursuit and, for me, a heck of a lot of fun!
Helping clients achieve their goals is what financial planning is all about.
1 https://www.quotes.net/movies/failure_is_not_an_option_(2003)_121063
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNERTM in Carlsbad, CA with WWM Financial, an SEC-Registered Investment Adviser. He can be contacted by phone on 760-692-5196 or by email at scott@wwmfinancial.com . Advisory services offered where client advisory agreements are in place and WWM Financial is properly licensed. Past performance may not be indicative of future results. No investor should assume future performance of any specific investment will be profitable. This communication is for informational purposes only and not intended to be investment advice. Please seek professional financial advice before investing.
Jun 15, 2020
What do tennis greats Bjorn Borg, John McEnroe, Chris Evert, and Rafael Nadal have in common, and what can they teach you about investing?
by Scott McClatchey, CFP®
Do you remember watching Bjorn Borg play tennis during the 1970’s? He won 6 French Open and 5 consecutive Wimbledon titles between 1974 and 1981, becoming the top ranked male player from 1977 through 1980. Borg was nothing if not steady, consistent, and cool-headed. He wasn’t overpowering physically, but was dominant mentally. Good luck trying to outlast or out-tough this guy! By the end of his matches, his opponents were worn out, mostly because of Borg’s precision, but also his looping but effective topspin and remarkably consistent groundstrokes.
Bjorn Borg faced off against John McEnroe in the 1980 Wimbledon finals
I still remember his classic 1980 Wimbledon finals win over John McEnroe. Johnny Mac got out to a fast start by blitzing Borg in the first set, but the Swede won sets 2 and 3, and even had a couple championship points at 5-4 in the fourth set. But McEnroe ended up winning the fourth set, by prevailing in a classic 34-point tiebreaker, 18 points to 16. This amazing tiebreaker is still talked about today, especially amongst those lucky enough to have seen it live. In the end, Borg was able to recover and take the fifth and final set, but it was clear a new competitor had arrived. What a contrast! McEnroe played a serve & volley game, keeping points short and, typically, dominating his serving games. Borg preferred to stay on the baseline and rely on steady, precision-placed passing shots. Their games couldn’t have been more different, and their personalities were complete opposites as well. Bjorn was almost icy cold on the court, never arguing a call or seeming to get upset, whereas John’s signature line became “You cannot be serious” after arguing call after call, and acting, many times, like a spoiled teenager on the court. He quite literally wore his emotions on his sleeve.
Another great rivalry from the same era was Chris Evert against Martina Navratilova on the women’s side of tennis during the 1970’s. Similar in some ways to Borg, Chris Evert was a baseliner, steady and accurate with her groundstrokes, winning many matches by keeping her cool and demonstrating amazing consistency and self-control. Evert won 18 Grand Slam singles titles and was the #1 women’s player from 1974-78 and again from 1980-81. From Florida, Chrissie achieved the highest winning percentage ever in the Open Era, winning 89.97% of her matches. And on clay, she was even better, winning 94.55% of her matches, also a record which still stands today. Navratilova was a serve & volley specialist, like McEnroe, who preferred to keep points short and overpower her opponents, especially when she was serving. Over time, Martina began to dominate her matches against Chris, which were typically in the finals of any given tournament. Chris was a perennial crowd favorite, but as time wore on, Martina improved her game and dominated women’s tennis, even against her friend and rival, Chris Evert. Over their careers, Martina won 10 out of 14 Grand Slam finals against Chris.
Martina Navratilova and Chris Evert battled for tennis supremacy during the 1970’s
What’s the point of this trip down tennis’ memory lane, other than to irrevocably date myself? It’s really to illustrate that in tennis, it used to be possible to win using either style of play – i.e., serve & volley or baseline. In fact, for most of professional tennis’ rich history, serve & volleyers fought it out with baseliners year in and year out. There wasn’t really a dominant or preferred style that was thought to be superior. Today, that’s definitely changed. Baseliners dominate today’s game, while serve & volley players have become almost an anachronism. Rafael Nadal embodies today’s topspin-laden game, playing largely from the baseline but being able to hit nearly any location on the court, using angles that seem to defy physics at times. Rafa’s a tenacious competitor, every bit as icy-cold and even-tempered as Borg or Evert on the court. He’s a clay court specialist, but has learned to play well on any surface, so well in fact that he’s won 4 US Open titles, 2 Wimbledon titles, and 1 Australian Open title – not to mention his record 12 French Open titles! The Spaniard is amazing, improving every year while maintaining a mental toughness unparalleled in modern tennis. And when it comes to preparation and training, no one works harder or trains longer than Nadal. In a long, grueling match, it’s nearly always Rafa who seems freshest in the final set, winning the war of attrition time and time again.
Rafael Nadal is considered one of the greatest competitors to ever play the game
In my field, which is investing and financial planning, there are many parallels to tennis. Successful investment strategies and styles come into and out of favor, just like in tennis. For example, value investing (i.e., where stocks thought to be trading at a discount to their inherent value are purchased and held to benefit from the stock’s eventual return to its inherent value), has historically outperformed growth investing (i.e., where stocks of companies growing their revenues and earnings faster than the typical stock are bought at higher relative prices in hopes they’ll continue their supercharged growth phase). Over the years, value and growth rotate into and out of favor, but overall, value has been superior. However, more recently, growth stocks have done better than value stocks. Observers are wondering if investing has changed in a fundamental way such that growth stocks may continue to outperform value stocks for the foreseeable future, or even forever. It’s kind of like today’s tennis. Longstanding tennis fans are wondering if racket technology, strings, player conditioning and skillsets have changed the game in favor of baseliners permanently. Or will serve & volley someday make a comeback? At this point in time, we just don’t know the answer – to the changes seen recently in tennis, or in investing.
Racket technology has changed significantly over the years.
Another interesting parallel has to do with player consistency and mental toughness. In investing, letting emotions play a role in decision-making can cause erratic portfolio behavior and even destroy the best laid plans. Making investment decisions while in a stressed, or even euphoric, emotional state is not a good idea. Tennis players also, when they get mad or frustrated, typically don’t play their best. Most go down in a ball of flames once their emotions start to take over. This is definitely true of most amateur, club-level tennis players; and coincidentally, of most individual investors as well. Notably, John McEnroe was somehow able to contain and even channel his emotions into raising his level of tennis. In some matches where he seemed to come out flat or uninspired, he was sometimes able to argue calls, act like a teenager, and pull himself together in a way most players before or after haven’t been able to replicate.
John McEnroe is famous for his on-court protests and angry outbursts
Furthermore, having a steady, consistent, tough, even-tempered mindset was crucial to Borg and Evert, and Nadal as well, in wearing down their competitors during a match. Good investors many times share these traits, because investing for long-term goals, such as retirement, is a marathon and not a sprint. Like a 5-set Grand Slam tennis match, it doesn’t matter who comes out of the gate on fire, or who hits a few aces or winners in the first set, what matters is who stays the course and implements their plan through thick and thin. Financial planning and investing are very similar. Profiting from a ‘quick-hitter’ by buying and selling a stock within a couple months’ time may feel good and provide some bragging rights at the gym, but it’s not the end game. To win, investors must grind it out and persevere over the entire “match”, which in investing is your entire lifetime! Preparation and training are keys to success, just like in professional tennis, along with adapting to changes.
If you’d like to talk about the ‘good old days of tennis’, or learn more about investing and financial planning, I’d be honored to discuss either of these subjects with you. For me, these are lifelong passions, something I have always enjoyed watching, learning about, and keeping track of. As I age, I continue to enjoy watching tennis and seeing how it changes as players, technologies, and competition evolve. Financial planning and investing are also lifetime “sports” for me. I realize most people don’t enjoy finance like I do, which is why you might want to talk to someone like me who loves it enough to stay fresh and continuously “train and prepare” by monitoring changes, keeping up with trends, staying on top of best practices, and sticking with what works while making changes as necessary to stay current with the times and fine-tune strategies and approaches. For me, it’s not a job I go into the office to work on every day, it’s a lifelong pursuit of perfection, performance, and happiness. I enjoy the journey because it’s part of what I am, and who I am. It makes me happy. It’s what drives me.
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNERTM with WWM Financial in Carlsbad, CA. He can be contacted by phone on 760-692-5196 or by email at scott@wwmfinancial.com .
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