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The Cordant Blog

Social Security Income: How to Delay and Optimize for Taxes

by Isaac Presley, CFA on March 22, 2017

We received a couple of questions on our recent post “How to Increase Retirement Wealth With the Right Withdrawal Order” and will address the first one here. (Note: as we mentioned earlier this year, we will be making an effort to address more reader questions on the blog this year, so, if you have questions send them in.)

The question has to do with the issue of taxes. Specifically, is taking IRA distributions before you are required smart given a potential increase in taxes paid on Social Security income or is it better to delay Social Security in the first place. Here’s the question:

What about the effect of taxable income on SS taxes? Or delay SS with additional withdraws from retirement accounts to cover delay in SS?

This question breaks down into a couple of parts: First, how social security income is taxed and second when to start taking it.

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Make an Appointment Now to Update Your Financial Plan for 2017

by Scott Malbasa on March 16, 2017

We know that time doesn’t slow down for anyone, but it’s hard to believe we are already more than two months into 2017. Now that you have settled into the year and have hopefully made some headway on your resolutions, it’s time to get serious about making your finances a priority for the rest of the year.

As you reflect on the financial decisions you made in the past, this is an ideal time to determine new goals and focus your attention on your financial plan to set yourself up for a successful 2017.

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Don’t Let Life Imitate Art When It Comes To Estate Planning

by Scott Gerlach, CFP on March 14, 2017

With #OscarGate squarely in our rear-view mirror, Hollywood can now resume their "normal" lives, and the rest of us can only speculate how the singular moment in the world's most popular award show was botched by someone in the financial services industry. Talk about bizarre. While I'd like to use this space to poke fun at the rich and famous in La-La Land, er, Los Angeles, I'm going to attempt to turn a quasi-movie review into a lesson in estate planning. 

On Christmas day I joined many Americans at the movie theater and saw Manchester by the Sea, starring Casey Affleck (actual winner of Best Actor award). Not your typical uplifting holiday movie (read: depressing), I was struck by one key part of the plot that enabled the rest of the story to unfold. 

The movie unwinds like this: Lee, an irritable, lonely handyman in Boston gets a call one day that his older brother Joe's heart has given out and he needs to make his way back to his hometown, Manchester by the Sea, immediately. Upon Lee's arrival, he learns that Joe has passed away and left Lee as guardian of his teenage son, Patrick. From there, the story focuses on the struggle that Lee faces while trying to cope with his new life as caretaker for Patrick, while also facing the demons that plagued his previous life in Manchester. 

At a critical point in the movie,

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Contradicting Warren Buffett: When Volatility is Risk

by Isaac Presley, CFA on March 08, 2017

Last week I enjoyed dinner with a group of people, one of which happened to be a hedge fund manager and fellow CFA charterholder. As us finance-types are wont to do, we quickly made our way to a discussion of every investment nerd’s favorite question: what is risk?

Warren Buffett, in his 2014 Berkshire Hathaway annual letter (page 18), shared his views on the topic:

That lesson [that stocks are less risky than cash-equivalent holdings over the long-term] has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. 

Buffett is pointing out that over the long-term stocks are an attractive way to grow capital while cash and their equivalents (i.e., treasury bills) do little more than keep pace with inflation, as can be seen in the chart below. He’s obviously correct on this point, investing in stocks has historically been one of the best things you can do to compound your wealth. 

Now then, does this mean people should ignore volatility and only own stocks? I’d say no. Buffett aside, most of us don’t live in the long-term; we live in the present and volatility is a risk that must be managed in the present.

So, despite my better judgment, I'm going to a disagree with one of, if not the greatest investor of all time and my new friend, the hedge fund manager with the NYU law degree and Stanford MBA to his credit—in other words, two very bright people.

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How To Reduce Your Target Number and Retire Earlier

by Isaac Presley, CFA on March 02, 2017

In a recent article, Michael Kitces points out the dual benefits in staying off of the hedonic treadmill as it relates to income increases throughout your career—higher savings today and a lower required replacement income (meaning a lower portfolio balance is needed) when you retire. These two factors make a powerful combination in moving anyone towards their retirement number much quicker than someone who’s lifestyle quickly adjusts to any increases in income. While this concept is absolutely true and should be required reading for anyone with a significant amount time to retirement, my fear is that making radical changes to your level of spending, and therefore lifestyle, near retirement is simply unpalatable for most.

So, might there be another solution? Is there another tactic which allows you to hit your target retirement number quicker but without making drastic changes to your lifestyle?

There is, and it's already gaining traction due to the changing demographics of retirees and the shifting nature of work in modern society. 

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10 Things We Believe Wealth Management Should Be

by Isaac Presley, CFA on February 17, 2017

1. We believe in being intentional

What do you want to accomplish? Why do you want to accomplish it? Gaining this clarity by answering these “big questions” leads to better outcomes and a higher chance of success.

When you get clear on your objectives, only then can the best strategy be put in place to accomplish them. Being intentional about the results you seek will keep you focused on the goal and prevent opportunistic decision-making that can derail you, your investment strategy and your financial plan.

As Stephen Covey says, “Begin with the end in mind.”

2. We believe the best advice is tailored advice to you

All clients have different visions about what financial success looks like for them. No two people have an identical balance sheet, risk constraints, spending profile and investment objectives.

It’s for this reasons that our process is designed to begin with a discovery process so that we truly understand who you are and what you are trying to accomplish with your wealth. It’s only after this deep level of understanding is achieved can tailored advice, which leads to the best results, be delivered.

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[W]indexing: When Average Isn’t Average

by Isaac Presley, CFA on February 08, 2017

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. ~Arthur Schopenhauer

 

19th-century German philosopher, Arthur Schopenhauer thought truth (and in this case, we'll extrapolate to include “new ideas”) passed through three stages: ridicule, opposition, then acceptance. While the index fund, which turned 40 last year, is a new idea no longer, based on the massive shift in assets that are moving from active to passive, one could argue their “truth” is now self-evident.

According to Michael Mauboussin and others at Credit Suisse, “Since the end of 2006, investors have withdrawn nearly $1.2 trillion from actively managed U.S. equity mutual funds and have allocated roughly $1.4 trillion to U.S. equity index funds and exchange-traded funds (ETFs).” 

This shift from active to passive funds has driven total assets invested in index mutual funds to around $2 trillion with another $2 trillion invested in ETFs. 

Clearly, index investing is an idea that is catching on and gaining momentum.

But sometimes it feels like people are disappointed to have to “settle” for indexing. No one wants to be passive or merely average. It can feel to many like settling for meatloaf because you can’t afford the prime rib.

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Financial Rules of Thumb: Debunking Common Misconceptions about Retirement Planning

by Isaac Presley, CFA on February 02, 2017

Recently, legendary investor Charlie Ellis[1] was interviewed by Barry Ritholtz on his Bloomberg Masters in Business podcast. The whole interview is worth your time, but here I wanted to focus on just one of the topics they covered: The danger in using rules of thumb.

Here is the exchange:

Ritholtz: As an investor, how do you aim in the right direction?

Ellis: Well, I can’t give you a straight answer except in generalities because each of us is unique. But start with: how much money do you have? Are you saving money or spending money? How many years do you have before you need to cover your retirement or cover you kids going to college, or whatever is your objective? How much wealth do you have? How much income are you creating? Take all those things you can work out an investment strategy that makes good sense.

Let me give you an example; I'm 79. Most people would say, ‘At that age, you must have a lot of bonds.' I have no bonds. …First, I'm still working, and I have enough to cover my operating costs. And second, who am I investing for? I'm investing for my grandkids with an average age of ten.

To sum up his point on investing being all about aiming in the direction of your unique goals and avoiding rules of thumb when they don't match your aim, Ellis uses the following metaphor. Imagine a road trip to Chicago with the rule of thumb being the higher your average speed, the quicker you’ll reach your destination. Ellis instead says:

I don’t care how fast you drive to Chicago, just be sure you aren’t heading to Miami.

Investopedia lists several of these financial rules of thumb to be aware of and suggests taking them with a grain of salt as well:

While rules of thumbs are useful to people as general guidelines, they may be too oversimplified in many situations, leading to underestimating or overestimating an individual’s needs. Rules of thumb do not account for specific circumstances or factors occurring at a particular time or that could change over time, which should be considered for making sound financial decisions. 

So, what can you do to account for your specific circumstances when it comes to managing your finances? Well, we have some ideas.

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Checking in on the Portland Real Estate Market: Will Prices Continue to Rise?

by Isaac Presley, CFA on January 27, 2017

Real estate is all about “location, location, location” as the saying goes and lately, Portland is the place to be. One of the strongest markets nationally, prices have risen 10.3% over the last year compared to 5.1% nationally, as measured by the Case-Shiller Home Price 20-city composite index. In fact, among the metro areas measured by the 20-city index over the last 12 months, Portland was only topped by our neighbors to the north in Seattle which saw prices rise by 10.7%. Portland had led the way nationally for the previous eleven months.

Whether you’re actively in the market to buy or sell or simply watching the listings in your neighborhood, most people have noticed how hot the Portland market is right now. Seemingly everyone has heard a story from their sister/neighbor/colleague of multiple offers, above listing price, in the first weekend their house hits the market. I've heard of realtors lining up weekend showings on four of five houses only to have a couple of them go pending before they can reach the property with their clients.

Consequently, clients often ask for our take on the real estate market. How much longer can prices continue to climb at this rate? Are things about to crash? So, let’s take a look and check in on the Portland real estate market. (And for those outside of Portland, stick around. There are some national trends reviewed as well.)

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The Biggest Mistake Older Investors are Making Right Now

by Isaac Presley, CFA on January 19, 2017

Next month, Cordant is releasing a short eBook titled “Three Mistakes Intel Employees Make as They Approach Retirement.” (Shameless plug: sign up here to join our mailing list and make sure to get notified when it’s released.) One of the mistakes we identify in the eBook is a willingness for late-career employees to take on too much risk with their investments as they approach retirement.

It's a mistake we frequently see among Intel employees, many of which are striving to hit their “number” (a desired net worth) or simply maximize their last few years or decade of accumulating assets. What’s more, this penchant to increasing risk late in one’s career is heightened during bull markets—like we’ve had since 2009—according to a recent article in the Wall Street Journal.

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