Finance 101: June 2024
In June the financial advisors at Ruedi Wealth Management wrote four more columns for The News-Gazette’s business extra section. Make sure to look for them every Saturday in the weekend edition of the paper, but in case you missed any in June all four are below.
What Moves the Needle?
Ryan Repko, CFP®
After years of helping people plan for retirement, I have noticed that there are a relative handful of decisions that really have a big impact on retirement. Other decisions have an impact, but not one that makes or breaks a retirement. There are also a multitude of decisions that receive a lot of attention and unnecessarily worry from investors, but don’t actually make a huge difference. Below are some examples of retirement planning decisions and their relative importance.
When I think of retirement decisions that really move the needle, the first thing I think of is how you divide your investment portfolio between stocks and bonds or “asset allocation.” If retirees enter a multi-decade retirement with too much in bonds or cash, they run the risk that the purchasing power of their portfolio will be stripped away by inflation. If they enter retirement with too much in stocks, they run the risk that a temporary decline comes along and causes them to deplete their portfolio to such an extent it can never recover. It is essential to get this decision correct.
A person’s withdrawal strategy, the order in which they withdraw from various accounts does have an impact, and one that can be felt in retirement. So does tax location – how you choose to divide different types of investments among the various account types. They are important to get correct, but not as important as asset allocation and portfolio withdrawal rate, which can really make or break a retirement. I would also put the Roth versus Traditional 401(k)/IRA decision in this “lesser significant” category.
Then there are some decisions that have little to no impact. Subtle tweaks to how you divide your money between US and International stocks, or large cap stocks versus growth stocks, make little difference to a lifetime retirement plan. Whether you invest your money in a Vanguard S&P 500 ETF or Fidelity S&P 500 ETF makes no practical difference. Whether you hold your investments in a brokerage account at Charles Schwab, Fidelity, or Vanguard, etc. also makes no practical difference.
Obviously, you want to get as many of these decisions right as you possibly can. But you don’t want to worry so much about perfecting every decision, that you freeze up or skip investing entirely, thus getting the asset allocation decision wrong. It is important to understand which decisions are really important and to get those things right before worrying about some of the other decisions. If you think you need help with that, you may want to talk to a retirement planner.
Ryan Repko is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Liquidity Events
Paul R. Ruedi, CFP®
This past weekend I was chatting with a friend who is thinking about selling his business. I instinctively referred to this sale using financial jargon and called it a “liquidity event,” only to be met by a blank stare. A liquidity event is, in the most basic sense, something that causes a person to suddenly have a lot of cash. In my experience there are two main types of liquidity events people are likely to encounter.
The first is the sale of a home that has been owned for a long time. A home that has been owned for multiple decades is very likely to have a low mortgage balance or could be completely paid off. On top of that, the house has likely appreciated substantially over the decades. Special tax treatment for the sale of primary residences often means that no tax is owed on the sale. All these things combined make it very possible that if a house is sold, the homeowner will end up with a lot of cash proceeds from the sale.
Another use of the term liquidity event refers to selling a business. In this case a person is taking something completely illiquid (an individual business) and selling it for cash. Navigating the actual sale will require a lot of negotiation and expertise, and there will likely be a large tax impact from the sale. But after all the dust has settled, it is very possible that someone who sells a business will suddenly have more cash on hand than they have ever had in their life.
A pile of cash a person didn’t really plan on having can be a recipe for mistakes. Often the person simply freezes and keeps the proceeds from a liquidity event in cash. This isn’t necessarily wrong, but there is such a large opportunity cost to holding cash that most people realize they need to find a better home for their newfound liquidity.
Though navigating the sale of an asset requires its own expertise, how to manage the proceeds of a sale in order to create a stream of spending you can live off of is an entirely different type of expertise. A financial planner can look at the assets from a sale, consider how they can be invested, and show how those assets can turn into an income stream you can’t outlive. If you have recently experienced a liquidity event and need help deciding how to turn your newfound liquidity into sustainable income, 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.
One-Stop Stock Investing
Paul R. Ruedi, CFP®
In investing and in life, there is something to be said for keeping things simple. Despite this, people often still want to tinker and find the perfect stock portfolio – striking the correct balance of many different funds to get the “optimal” portfolio. But this level of tinkering doesn’t have a major impact on your outcome as an investor. The vast majority of people would be better off keeping things simple by investing in as few funds as possible.
Financial advisors often feel like they need a portfolio of a dozen funds to look like they are doing something special. But there really isn’t a secret sauce. If you can get the same exposure to the same underlying investments in fewer funds, you should.
When people my age ask me how to invest in stocks, lately I’ve been defaulting to telling them to simply buy Vanguard’s Total World Stock ETF. This ETF owns over 9,800 companies from all over the globe in many different industries. At an expense ratio of 0.07% it is an extremely cost-effective way to invest all over the globe. With an investment solution that provides such a high level of diversification at such a low cost, I have a hard time justifying making anyone’s life more complicated than that.
The one reason it could be beneficial to use multiple funds would be to strategically over-weight certain groups of stocks. For example, an advisor may choose to overweight smaller company stocks or those with low relative prices to seek higher expected returns. But even this can be done in a single-fund portfolio these days.
The Avantis Investors All Equity ETF, for example, provides diversified exposure to stocks all around the globe, but strategically over-weights small companies and value companies to pursue higher expected returns. Doing so comes at a higher cost than the Vanguard ETF, as the fund expense ratio is 0.25%. But the idea is that the higher expected returns will more than make up for the increased expenses. With more single-fund options like this coming to market all the time, the reasons for having a large number of funds continue to diminish.
If an investor is seeking exposure to the total global stock market, there really aren’t compelling reasons to move past a one-fund portfolio. The portfolio itself will be simple, but figuring out how it fits into a financial plan that funds your most important goals can still be complicated. If you need help figuring how your portfolio fits into a financial plan, 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.
Long-Term Care
Paul A. Ruedi
One of the largest retirement risks is looming at the end of a person’s life expectancy, and nobody really likes to think about it: long-term care. But how many people will actually need it, and for how long? How much should a person expect to pay?
According to the Administration for Community Living, 69% of people will need some form of long-term care, and the average length they need it for is for 3 years. When people read that, their minds likely run to a 70% chance of staying in a nursing home for 3 years, but that isn’t the case. The 70% number and 3-year average length of care both usually include some length of home care, and often that home care is provided by a family member who isn’t paid.
If you look at the amount of people who will need care in facilities, the number drops to 37%. The average amount of time care is required is only a year. But of course, even one year of costs can be substantial.
According to the 2023 Genworth Cost of Care survey, a private room in a nursing home in Champaign, IL is an average of $9,916 per month. That is just shy of $119,000 per year. For people who wish to have 24/7 in-home care rather than moving to a nursing home, the costs are significantly higher. It is easy to see how difficult it could be to pay for multiple years of long-term care for one spouse, let alone two.
Additionally concerning to retirees is that they will receive little, if any, help from Medicare to pay for long-term care expenses, and only if the care is for recoverable illnesses after a 3-day hospital stay. Medicare will pay for a skilled nursing facility for 20 days, then pay 80% of the cost for the next 80 days, but after that first 100 days, Medicare pays nothing. It will be entirely up to retirees or their families to pay for long-term care beyond that point.
Long-term care expenses at the end of life can be costly and can completely destroy a retirement if not planned for correctly. Retirees can address this risk by either buying enough insurance to pay for a long-term care expense, or having enough assets set aside to fund the expenses themselves. If you need help creating a plan to fund potential long-term care expenses, you may want to talk to a retirement planner.
Paul Ruedi is the CEO of 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.