Finance 101: February 2023

In February the financial advisors at Ruedi Wealth Management wrote five more finance 101 columns for The News-Gazette’s Business Extra section. Make sure to look for them in the paper every Sunday, but just in case you missed any of the columns from February you can find them below.

I Delayed Retirement Last Year. Now What?

Paul Ruedi

One of the interesting phenomena you see during bear markets is people delaying retirement due to investment performance. It makes intuitive sense, as people see lower account balances and simply feel they no longer have the assets to retire. As a retirement planner I usually like to emphasize that delaying retirement during a bear market can have huge positive impact on your retirement lifestyle going forward. But people who pursue this path often find it is difficult to go back to planning to retire on their terms, and instead end up waiting hopelessly for the market to recover fully.

Many people delayed retiring last year due to their investment portfolios being down. We had been spoiled by bear markets that recovered extremely quickly leading up to that time, so I am sure many thought they will just wait a year or less and retire once the market has recovered. But here we are a year later, and though the market is off its lows, most investor’s portfolio balances are still firmly below their old highs. What should those people do now?

Do-it-yourself investors who were planning to follow something like the 4% rule can simply wait for the market to recover and then stick with their original plan. If they are just itching to retire now, they may also just re-run the numbers at their current account balance and withdraw accordingly, even if that withdrawal is a slightly lower amount.

But retirement planning is much more nuanced than just taking a percentage of a portfolio. People who delayed retirement for a year need to fund one less year of retirement spending –which means they need a slightly lower amount of assets to fund the same ongoing spending. Expectations of future returns also matter, perhaps even more than the extra year of working. When we build financial plans when the market is at all-time-highs we are conservative in our initial spending number to account for the possibility of lower returns going forward. At lower prices we feel comfortable being slightly less conservative.

All this means that even though the market is down, a person may be able to retire this year with the same retirement spending expectations as they had going into last year before the market dropped. But you have to do some complicated math to make sure this is the case. If you are unable to do that yourself, you may want to talk to a retirement planner.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.

Dealing with Income Uncertainty

Paul R. Ruedi, CFP®

Though there seems to be some confusion and debate about whether or not we are actually in a recession, many people are concerned about the future of the economy and what that could mean for them. With so many headlines about large layoffs from major companies, people are starting to wonder just how safe their incomes are in a way they likely haven’t in the last couple years. Though there are some things you can’t control regarding your income, there are some things you can do to prevent a decrease or interruption in income from completely derailing your finances.

The first way to insulate yourself from a decrease or loss of income, is to always live below your means. To the extent possible, try to live your life in a way that provides some extra buffer room in your budget. In addition to providing extra savings in good times, it makes it less likely you will need to make painful cuts should your income decrease.

I realize telling people to live below their means or leave extra buffer room in their budget isn’t always the easiest advice to implement, because some lifestyle costs cannot be easily cut or reduced. Though you can’t change the past, you can be more frugal going forward. No, you don’t have to plan to radically downsize your house or subside entirely on ramen noodles. But if your income may change, don’t sign yourself up to go on expensive vacations you’ll have to pay for later. Try to keep any major purchases like cars to what is absolutely essential and practical. Don’t put off necessary things, but perhaps put some spending items on hold for just a little longer until your financial picture is more certain.

In addition to living below your means, a cash emergency fund can help people get through many financial hiccups like a disruption in income. The textbook recommendation from the Certified Financial Planner Board, is for people to have three to six months of non-discretionary expenses saved in cash to deal with financial curveballs. But that number can vary depending on how easily your income can be replaced and other factors like whether you are the sole provider for your household.

Though in general you don’t want to hoard an unnecessary amount of cash, if you are worried about your future income and job prospects you may want to hold more cash than you would otherwise. If you aren’t sure what is the right amount to set aside, you may want to talk to a financial advisor.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.

Consistency is Key

Paul R. Ruedi, CFP®

This week when I was struggling for column ideas I decided to take a break to get some exercise, which proves I will procrastinate by just about any means necessary. But of course during my workout an idea came to me: getting results in the gym and getting results from your savings are really quite similar. Both require long periods of consistent behavior, but people always look for shortcuts and set themselves up for disappointment.

If you exercise once every two weeks, you aren’t likely to get results. Results come from disciplined consistency and showing up several days a week, regardless of how motivated you feel. Physical fitness is not achieved in one big workout. It requires years or decades of consistency.

Saving and investing require a similar consistency if you want to get results. If you want to chip away at a monumental savings goal like funding a retirement, you can’t simply hope to save here and there when it is convenient. It won’t be done in a single year or lump sum. You will need to plan for years or decades of consistent saving before you notice any material progress towards such a big goal.

But consistency is difficult, so people are always tempted to look for shortcuts. Making matters worse, there are plenty of products and gimmicks out there to convince them of things we all know are too good to be true. In fitness it is the suspiciously short workout program, the miracle supplement, or strange diet.

When it comes to saving and investing, we have people promising returns with no risk, fad investments, and an infinite number of other get-rich-quick schemes. But you will notice in reality that nobody gets healthy because of miracle supplements, and nobody funds their retirement on fad investments and get-rich-quick schemes. There are no shortcuts.

Because both physical fitness and saving require discipline and years of hard work, people often burn out quickly when they fail to see immediate results. It is important you push through this and measure your progress over larger time scales. With physical fitness you can measure how much you can lift, how fast you can run a mile, etc.

When it comes to saving, it is easiest to measure your progress towards your goals over time using a financial plan rather than trying to make sense of a constantly fluctuating account balance. If you aren’t sure how to build a financial plan and measure your progress towards your savings goals, you may want to talk to a financial planner.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.

When Should You Buy Convenience?

Paul Ruedi

I have always said that money doesn’t make people happy, but it sure does solve a lot of problems and buy flexibility. These days with more and more households requiring two incomes to make ends meet, people are often looking for ways to outsource tasks that take up their time. Things like yardwork, cleaning, and watching children often are the first to be outsourced. Though this may seem like unnecessary extra spending since somebody in the household can do it for “free,” there may be a good financial justification for outsourcing tasks.

Suppose a family wanted to hire a cleaning service to come over and clean their house once a month for $200. The sticker shock may sound like a lot, but if it saves a person from doing 8 hours of cleaning, it prices those hours saved at $25 per hour. If the person who would have otherwise cleaned the house can make more than that per hour (after tax) he or she would be better off outsourcing cleaning to spend more hours working to earn a higher amount.

I suppose that was a little too perfect of an example, because in reality a person likely won’t work the exact hours saved to make up for any spending on convenience. Though it may not happen every day or week, spending less time and energy on cleaning the house allows you more time and energy to advance your career, which can overall make you better off.

But if you do not have the opportunity to earn more money in your career and have extra hours to spare, then you may want to save those costs by doing things yourself. If someone in the example above makes only $15 dollars per hour at their job, they would be better off to save the $25 per hour on cleaning and do it themselves.

This is just one example but I can think of several more. I think one of the most common decisions people wrestle with is to work and pay for childcare or designate a parent to stay home and raise children. Though I can’t possibly cover all the emotional sides of that decision, the financial side is the same: can that person make more after-tax income than the cost. There is no one-size-fits all answer when it comes to buying convenience, so people should always be aware of the numerical side to make sure they are doing something wise, not something frivolous.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.

Money Market Funds

Paul R. Ruedi, CFP®

In the very recent past when interest rates were practically zero and inflation was very low, there wasn’t much to be gained by holding an emergency fund in something other than cash. But with interest rates now several percent higher, for the first time in a long time the most liquid and least volatile investments are starting to produce a return that could make a difference to investors. One of those options, a money market fund, is a great option for investors who want to safely park their short-term savings or emergency fund.

A money market fund is essentially a mutual fund that invests in literal cash, investments that are more or less equivalent to cash, and very short-term, high-quality bonds. This results in a fund that maintains a very stable value, but low returns. They are purchased just like a regular mutual fund through brokerage firms like Charles, Schwab, Fidelity, etc. and banks. They are regulated by the SEC, and although they are often used as an alternative to a savings account, they are not insured for loss by the FDIC like a savings account.

Money market funds are priced at a Net Asset Value of $1, and generally speaking, they maintain this value. This forces fund managers to pay out any income the fund provides as interest to investors on a regular basis. In rare cases, money market funds can “break the buck” and fall below a $1 net asset value. For example, in 2008 a money market fund experienced losses due to the collapse of Lehman Brothers and fell to a NAV of $0.97. So even though money market funds are generally very stable, they are not completely without risk.

Money market funds are a great place to park money that you don’t need to have on hand immediately, but may need to use in the foreseeable future. However, investors should be cautioned not to hold an unnecessarily large amount in money market funds for long periods of time, because even with 4% yields like we are seeing now, they still provide a negative return once you account for taxes and inflation.

Though a safe place to hold money for a short period of time, they do not provide enough of a return to grow your portfolio and achieve a goal like funding retirement. But if you have some cash you don’t need immediately, you may want to consider a money market fund so at least it is earning something. If you aren’t sure if you can do that yourself, you may want to talk to a financial professional.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.

Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.