My annual medical check-up last week has given me a whole new perspective on my clients’ annual financial reviews.  

Rather than poke, prod, squeeze, smash, or radiate body parts, I’m more-or-less doing the same with someone’s financial parts when I’m doing annual reviews.

It’s a status-check and a stress-test to make sure everything is going as well as it can.  This is why I encourage everyone to meet with their financial planner at least annually.

It’s worth the time and effort to bring your anxiety down and your joy up.

Annual Reviews Are Time Well-Spent 

I love my primary care physician, and I genuinely enjoy seeing her, the human being.

But I don’t love check-ups.  

First of all, it’s a lot of time.  Those appointments have to be done in person, and they almost always generate at least two other appointments to outside providers, which also have to be done in person.

Second, while I give consent to being poked, prodded and squeezed, it still feels invasive.  

And lastly, there’s that anxiety factor of test results.  Am I okay?  For how long will I be okay?  

The financial annual review is not much different, although the majority of my reviews tend to be virtual these days. 

Reviews require clients take time to collect documents, answer my seemingly endless questions, take time out of their days to meet me.  And then do all the appointments that I create as a result of our meeting – the estate planning attorney, the CPA, the insurance agent, etc.

It can feel invasive, even if a client knows me well.  People will talk about their sex lives before they’ll talk about their money.  Money can be a delicate subject.

And there is the anxiety factor.  Some of it is client-induced because they’re feeling guilty about what they did not get done this last year or what they spent their money on.  

There is also the worry about having saved enough, sociopolitical and economic world events, the state of the markets, and whether their financial futures are solid.

This process, though, actually reduces anxiety.  You get to ask your questions.  You get to see your finances stress-tested.  You get to hear “you are going to be okay.”

The Best Part:  The Annual Reset

We do these annual check-ups partially because we feel like we’re supposed to, but also because we want to know the status of our well-being, medical or financial.

The best part of the annual review is getting a “reset.”  We can’t change the past, but we can make mid-flight corrections to put us on a solid future path.  

We now have a new baseline from which to work.  We can catch issues early, gather information, and make conscious decisions.  

Rinse, repeat.  Then you’re done for the year for the most part.   

As We Age, Check-Ups Become More Important

Getting old isn’t for wimps.  

Used to be I could skip an annual medical check-up for years.  Not so much anymore.  

My doctor seems to be on top of making sure I get in to see her annually now.  

This is true for financial check-ups as well.  The stakes get a little higher as we get older and approach Phase 3 (otherwise known as retirement) or have a health issue come up or have a family member that needs more support.  

That, Which Watched, Improves

Who knows who said this first, but it’s true:  Those things that we monitor in our lives and keep an eye on tend to improve.  

Clients get to see their progress from year to year.  They get to hear “you are on track.”  They get to see what we predicted come true.  They get to see the fruits of their labors.  

They get to see that they will be able to pay for that college education, or take that much-dreamed-for trip, and know that one day they don’t have to work for a paycheck.

Totally worth it.

If you’d like to talk about what an annual review would look like for you, please reach out.

Believe it or not, May is my most expensive month for skiing.  

I don’t even ski in May.  I don’t much care for spring skiing, and I’m not going to travel to the Southern Hemisphere to ski.  

Yet here I am loading up on ski passes for the following season, and ski passes aren’t cheap.

This is why I keep track of my spending annually and you might too.

Big Ticket Items Happen Less Often, But They Happen Regularly

There are other items that typically get paid for once or twice a year:  quarterly income taxes, property taxes, vacation travel, large medical expenses, and this list goes on.

They are not going away.  (Nor do you want them to, including, if you’re honest, the taxes.)

You want money around to pay them.  Most of my clients do, even if by simply not overspending.  The money ends up available in their accounts when it’s needed.

Paying for those expenses aside, there’s real value to know how much you spend annually.  

Keeping Track of Annual Expenses Has Gotten Easier

Hear me on this:  You do not need to keep track of every last penny and where it was spent to make good decisions about your spending.  Tracking pennies will keep just about anyone from starting the task.

Instead, lean on tools you probably already have.

These days, most of your banking and credit card institutions send you a history of how you spent your money over the last year.

The categorization is terrible.  Ignore it.  (Or fix it, but again, not necessary.)

What you want to see is how much you spent.  

This is a great marker to compare to your gross income, your take-home pay, and what you spent last year.

While looking at your spending compared to your gross and net income gives you some short-term perspective, the real value is in the long-term view.

Compare Last Year to This Year

Most banking platforms will also have a function where you can ask it to compare this year’s spending to last year’s spending.  Run the report.

What I like about this function is it allows you to see:

• One-time big-ticket items.   
  
  • How often are these happening?  
  • What are they?
  • If they’re happening annually, it’s time to consider them part of your spending plan rather than thinking “well, that won’t happen again.” If something “random” is going to happen again, it might as well be planned for.

• The effect of life changes.
  
  • Do you really spend less when the kids are off at college?
  • Do you really spend less when a kid is no longer on “payroll”?
  • Do you really spend less when a household income earner is no longer bringing home a paycheck?

• The effect of world events.
  
  • Did your spending really go down during the pandemic in 2020?
  • Did inflation in 2023 really affect your household or did you just talk about the price of eggs?
  • Is inflation a regular experience that you don’t feel when it’s not dramatic?

Valuable Lessons To Take from this Exercise

Every person/family’s spending is different and personal.  

Sure, I can ballpark what a family of four living in the San Francisco Bay Area might spend in a year.   However, some will spend far more and some will spend far less.

And it doesn’t matter to anyone except that person and/or that person’s family.

The information is hugely valuable to you, though, because that helps you plan for the long-haul.  

• You know what you can expect to spend.
• You know how you will behave if a big expenditure comes up that is out of your control.
• You have some insight about how you will spend your time and your money once you quit working.
• You will create priorities among expenditures that are important to you as you move into the last third of your life.

The best part:  you only need an annual review to get that perspective.  

If you want to talk about spending plans or planning, please reach out.

The HELOC and the SBLOC are two tools I think all investors should have and are the ones most often overlooked.

How HELOCs Work

Most people are familiar with a home equity line of credit.  Homeowners go to a bank.  If there’s enough equity in the house and if their income can qualify to carry the payment on the available balance, they are granted an equity line.  That equity line is secured by the home equity.

HELOCs work like a credit card but usually have higher credit limits.  Like a credit card, you only pay interest on balances that you carry.  You can spend up to the available balance and if you pay it all off, it’s there to be spent again.  Super convenient.

Frequently these accounts have annual fees, but they are also frequently waived if you ask.

How SBLOCs Work

Not everyone has heard of a securities-backed line of credit. 

Like a HELOC, they are an equity line against an asset – in this case, it’s not a home but a non-retirement securities account. 

However, they are much easier to obtain because there’s no underwriting and there are rarely fees to set one up.  The line of credit is usually about 50% of the non-retirement account.

Like the HELOC, you can spend up to the available balance and if you pay it all off, it’s there to be spent again.  Super convenient.

Even better than the HELOC, however, the SBLOC has no required payments.  Yes, the balance grows, but assuming your stock portfolio does, too, even better.  This provides for a powerful cash management tool.

The best part about the SBLOC is that securities do not need to be liquidated with potential capital gains taxes to be paid to purchase an item or to pay for an expense.  That stock with long-term embedded capital gains can remain invested, AND you can meet your cash flow needs.

SBLOC payments also do now show up on a credit report, so it has less impact on future credit decisions.

Perhaps it’s no surprise that most investors who can get an SBLOC do.

Your Second Reserve Account

What I like about both of these options is that they are security tools.  This is not an advertisement for frivolous spending. 

Remember, I define financial security as the ability to weather any financial storm or take advantage of any financial opportunity.  These tools are here to provide financial stability.

I believe every homeowner should have a HELOC and every investor should have an SBLOC as well.  It’s just good financial planning.

But Why Pay Interest?

This is frequently the go-to question for those considering a HELOC or SBLOC.  This often comes from a place of fear and what investors think of as financial “prudence.”  They think, Why pay interest and increase the cost of a purchase when I can pay in cash?

In low interest rate environments, it is a no-brainer to use debt to manage cash flow.  Even in higher interest rate environments, it can be the smartest use of money for tax reasons, income reasons, and family wealth transfer reasons. 

When debt is used strategically there may be interest payments to make, but if it improves your financial position in the long run and increases your financial security in the short run, it’s a tool that can serve you well.

If you would like to talk HELOCs, SBLOCs, or the strategic use of debt, please reach out.

While sitting family style at dinner on the Amtrak train with my two new friends this past New Year’s Eve, I was asked:  “What’s your best financial advice these days?”

Yes, Amtrak.  The train cars are totally stuck in the 90s – one outlet in our room, no wifi, no interior upgrades.  It’s more fun than it sounds.

Yes, new friends.  Didn’t even know how much they paid for their train ticket, let alone how much they had in assets. 

I know nothing about them, and they want advice.  Welcome to my world.

I contemplated punting and telling them I couldn’t give advice without knowing them, but then I thought, What answer applies to most people?

That answer?

Tax diversification.

More Money for Milk

Most folks who are moving into Phase 3 (otherwise known as retirement) have a big-ticket spending item called “income taxes” – federal and likely state income taxes. 

If these folks have been W2 employees for most of their Phase 2 life (their working years), they often haven’t had their eyes on how much they pay in taxes, even at tax time.  They look at their net take-home pay and create a spending plan from there. 

Nothing wrong with that strategy.  It works when trying to live within one’s means. 

The problem is it does not take into account the full picture of income and expenses, and it’s hard to fix a problem when you don’t know you have one.

When Phase 3 arrives and money is withdrawn from retirement accounts, clients are often shocked at how much is withheld from the withdrawal for taxes.

And taxes are probably the biggest line item in their spending plan.

When clients reduce the size of that spending item, they have more money for other things.  Like milk.  Or travel or gifts or whatever. 

Have Accounts with Differing Tax Treatment

One of the “tricks” of managing taxes is to have accounts with varying tax treatments.

“Earned income” tax treatment taxes income as if you had gone to work and earned it.  The vast majority of retirement accounts (401k, 403b, IRAs) have this treatment.  Most people enter Phase 3 with at least one of these accounts.

“Long-term capital gains” tax treatment taxes only the gain on an asset sold and typically at a lower rate than earned income, especially in low-income years.   The people who can take advantage of these types of accounts usually have a brokerage account filled with stocks and bonds.

“Tax-free” tax treatment is just that:  free of taxes.  There are a variety of ways to get tax-free income, the most common of these being the Roth version of traditional retirement accounts – the Roth IRA, the Roth 401k and the Roth 403b.

Use that Variety of Accounts to Your Advantage

When you have a variety of accounts from which to pull money, you now have the ability to play what I call a “tax margin game.”  This game allows you get the amount of money you need and pay the least in taxes.

This best understood by example.  I’m going to oversimplify to make it easy.  I’m also only going to talk about federal taxes and not state taxes, which can vary widely in tax rates.

Let’s say a couple needs $100K in spending money after they pay taxes.

Option 1:  This couple could withdraw all this money from an IRA.  That’s taxed at an earned-income rate.  Let’s say that rate is 20% on the first $100K and 30% on the next $100K.

They take out $100K and pay $20K in taxes, leaving $80K to spend.

They need $20K more, but at a 30% tax rate, they have to liquidate almost $29K to yield $20K in spending money.

Their total withdrawal?  $129K.

Total tax bill?  $29K.

Option 2:  This couple could withdraw money from an IRA and a brokerage account. 

As in the first example, this couple could withdraw the first $100K from an IRA account.  After paying 20% in taxes, they now have $80K.

Then they could liquidate some stock, where they would only be charged 15% in taxes.  They would only have to liquidate about $24K to get an additional $20K to spend.

Their total withdrawal?  $124K.

Total tax bill?  $24K.

Option 3:  Withdraw money from an IRA and a Roth IRA.

As in the first two options, this couple could withdraw the first $100K from an IRA account.  After paying 20% in taxes, they now have $80K.

Then they could take out $20k from a Roth IRA and pay no taxes to get the additional $20K they need for spending money.

Their total withdrawal?  $120K.

Total tax bill?  $20K.

Option 4:  This couple could withdraw money from an IRA, a brokerage account and a Roth IRA. Let’s say this couple liquidates:

• $80K from an IRA, pays $16K in taxes, gets $64K to spend;
• $20K from a brokerage account, pays $3K in taxes, gets $17K to spend;
• $19K from a Roth IRA, pays $0 in taxes, gets $19K to spend.

Their total withdrawal?  $119K.

Total tax bill?  $19K.

The configurations here are endless and of course other considerations need to be taken into account like required minimum distributions, estate planning considerations, tax-loss harvesting opportunities, any carryforward losses, etc.

Result?  More Flexibility and Options … and Milk

Regardless of other considerations, you can see how having money in a variety of places can improve your financial situation.

Generally, people like to have more money than less to spend. 

Generally, people like to pay less in taxes.

Generally, people want to keep as much money working for them as possible.

If you take some time to allocate assets in a variety of accounts that have differing tax consequences, you can improve your overall financial situation. 

We don’t know what Congress will do about taxes or how it will impact your situation, but if you have a variety of accounts, you are giving yourself the flexibility and options to meet whatever situation might present to you.

If you want to talk about how to tax-diversify your accounts, please reach out.

One last sports analogy, and I’m done.  At least for a little while. Promise.

And here goes the bracket pools – a chance for fun, friendly competition, and maybe a little money.  March Madness is truly a little mad.

The way to increase the level of all three?  Know the rules of the game. 

Same goes for investing.

What the Heck Is a Bracket?

The collegiate men’s basketball tournament starts in March, spans three weekends, and usually ends by the first weekend in April. 

By the first Thursday of the tournament, there are typically 64 teams.  They play a single-elimination tournament until the final two teams battle it out for the championship title.

The list of competing teams and who plays against who typically comes out the Sunday or Monday before the first Thursday.   This is called the bracket.

When those awaited brackets arrive, groups of people – friends, family, office colleagues, etc. – will have contests to see who can pick the most winners in that bracket. 

(And, yes, there’s a tournament and bracket for the women, too, but that bracket is used way less frequently.  I know…big surprise.)

In investing, we talk about tax brackets – totally different concept and visual for another blog post.  You only need the gist of taxes to understand this blog.

Figure Out the Scoring System

Besides figuring out where to get a tournament bracket and fill it out, the next big question is, How is the contest scored? 

This is important. 

You might make different decisions if you knew what it took to win.  I’ve seen some contests where if you picked the championship winner – a pick worth 32 points – your chances of winning the whole thing increase dramatically because picking a first-round winner was only worth 2 points.

In another variation, the points earned each round might be the same, making picking a lot of game winners in the first round critical to winning the contest because there are 32 games in that round compared to one game in the final round.  

Strategies can change based on the scoring rules.

Investments Have “Scoring Systems” Too

There’s the obvious one:  Taxes. 

Investments can be taxable, tax-deferred or tax-free. 

In basketball, shooting from inside the three-point line usually results in more points than shooting from three-point range (it’s further away).

Same with investing:  You want to make sure you’re getting the best opportunity to make good money. 

If you get an 8% return on a taxable investment but your effective tax bracket is 50%, the effective rate on that investment is 4% (8% minus 50%).  A 5% tax-free investment would make you more money because the effective rate is also 5%. 

You can also go from a man-to-man defense to a zone defense. 

Roth conversions are a great example:  Pay off your government partner in taxes now to get tax-free returns in the future when the opportunity arises and you have the resources to do so.

Ultimately, You Want To Win

The best strategy of all integrates many sub-strategies to maintain flexibility and options for as long as possible because we don’t know what challenge you’ll be up against next. 

Allocating your money among may types of investments – both in type, tax treatment, and philosophy – gives you all those sub-strategies to weather any challenge and take advantage of any opportunity.

If you want to talk about tax brackets, please reach out.

I’ve gone the entire ski season without using some cliché sports analogy about skiing and financial planning. 

So here it comes.

I’m taking skiing lessons and reviewing the basics.  I thought this would be boring.  And it was.  But the payoff was huge. 

This also happens with financial planning.

Lessons Make a Huge Difference

Whether it’s skiing or financial planning, making tiny tweaks can make a big difference initially and over time. 

I’m a good skier.  I still take lessons. Why?  Because they work. I get better.

Financial planning is similar.  Most people who come to me are doing a pretty good job with their finances.  It’s the little tweaks that make all the difference.

Getting better at skiing increases my fun factor and reduces my chances of getting injured immensely.  That’s worth the cost to me and the frustration of relearning something and changing my whole approach to skiing.

Your financial planning experience should be the same. 

The Basics Still Apply

Every time I go out with my teacher and after we’ve warmed up, we end up on some easy run doing drills.  I do my best to pay attention and not to roll my eyes.  (Good thing it’s a group class.)

Truth is, I’m not good at those drills, and if I were, I’m sure she’d move on.  

The basics matter.  Just last week I got a lesson on driving my skis with my feet and focusing on my toes.  I had forgotten this. 

Seems pretty basic and something I should be doing automatically.  Uh, no.

Two days later, I’m skiing with way more control and having way more fun.

Financial planning is no different. I often need to remind clients about some of the basics:

• Live within your means. If you have a spending plan, stick with it.  It’s the building block of a financial plan.
• Anticipate big expenditures: Integrate them into your plan, set the money aside, and spend it.  Strangely, spending it is often the hard part.  Spend it!
• Don’t forget recurring big expenditures: For instance, include getting a new or new-to-you car every 5-10 years.  You may not need one now, but if you have another 30+ years to live, you will likely buy several.
• Keep a reserve account: Ideally 3-12 months’ worth of expenses.  It’s easy with a big expenditure to want to use that cash and not sell investments, but that reduces your reserves.  Cash is still king.  Keep it around.
• Build in contingences: These are varied and unpredictable, but you should have a sense of the impact of long-term inflation, premature death, disability, and long-term care expenses. 

Practice, practice, practice

It takes time and practice to get used to pointing one’s skis straight downhill and anticipating and taking that first turn, especially when looking down the hill from the top is terrifying.

There are many times in life that can be financially terrifying:

• Hiring the first or fourth employee and meeting payroll.
• Making that first college tuition payment.
• Paying taxes on that first Roth conversion.
• Not making money but spending it in the first year of having no paycheck (retirement).

This list goes on.

My clients will tell you – and I have been witness to the same – that once you do these things several times, they are not so terrifying. 

And don’t forget to look back up from the bottom and think, “Wow!  Look at me!  I did THAT!”

Use the Buddy System

When going into the trees, deep powder, or outside avalanche mitigation areas, skiers are highly encouraged to be prepared for an avalanche and use the buddy system. 

Same goes for financial planning. 

Whether you use a friend, family member, or financial planner, have a buddy for an adventure.  It reduces the stress and increases the fun!  It also tends to reduce the instances of injuries or mishaps. 

Terrifying times of life are much better with a buddy.

If you want to talk skiing, please reach out.  And, yeah, we can talk financial planning, too.