Finance 101: October 2023
In October the financial advisors at Ruedi Wealth Management wrote four “Finance 101” columns for The News-Gazette’s Business Extra section. Make sure to look for them every Sunday, but in case you missed the columns from October all four are below.
The Richest Person in the Graveyard
Paul R. Ruedi, CFP®
One of the most overlooked ways people can go wrong during retirement is by being overly conservative in their spending. Though it does make sense to be somewhat conservative, especially in the beginning of retirement, many people live unnecessarily frugal lives just to end up “the richest person in the graveyard.” Helping people avoid this situation is one of the unique ways advisors can create value for their clients.
The most common retirement spending rule is the 4% rule. This rule works as a starting point, but is so conservative that spending according to this rule can result in leaving behind an estate twice the size of your original portfolio. Such a high account balance at the end of life would leave most retirees wishing they had spent more.
An advisor can help you avoid that regret by developing a spending plan that balances the risk of running out of money with the equally important risk of not spending enough. They can periodically update the plan as you go through life and your portfolio balance changes to make sure you are heading in the right direction.
Retirement is rarely a completely consistent stream of spending – often “wants” and “needs” come up in chunks. Suppose you want to update your kitchen, buy a new car, or take your entire family on a vacation but never knew if you could afford to. An advisor can take everything about your financial plan into consideration and give you the green light to spend on big ticket items that you may have assumed you couldn’t afford.
People often end up wealthy because they are naturally frugal, and it can be difficult to get frugal people to spend money they can afford to spend. A good advisor will recognize your personality and make suggestions to ensure you actually live the lifestyle you can afford. A good advisor can subtly suggest you treat yourself to that first-class ticket or extra nice vacation by reminding you that you can easily afford it. They can even be blunt like Paul Sr. when he says things like, “if you don’t fly first class, your kids will.”
Some advisors try to quantify the value of advice in dollars and cents. But a good financial advisor has an impact beyond just the investment portfolio and financial plan; they help you get the most out of life. The vacations that otherwise wouldn’t have been taken, the gifts to family members during your lifetime that would not have been given – that is the value of a competent and caring advisor.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Key Estate Planning Documents
Daniel Ruedi, CFP®
Estate planning comes into play upon a person’s death or incapacitation; neither of which is particularly pleasant to think about. But you can save your loved ones a lot of headaches by having certain documents in place that explain how you would like things to be handled and who should handle them should something happen to you. My experience in financial planning suggests there are four key documents people should have.
A will describes how you would like your assets distributed when you pass away. In addition to making sure assets end up where you want them, a will can also include very important things like who will raise your dependent children should you pass away. In a will you will also name who you wish to take responsibility for distributing the assets, called the executor. This is a big responsibility, so make sure the person you choose is organized and up for the task.
A financial power of attorney allows someone to make financial decisions on your behalf should you no longer be able to. A financial power of attorney allows someone to completely take over your financial life; he or she can pay bills, manage your investments, and do really anything else they need to do to manage your financial affairs. Handing this amount of control over to someone should not be taken lightly; make sure you completely trust whoever you choose.
A health care power of attorney allows someone to make medical care decisions on your behalf should you no longer be able to do so yourself. You can limit the scope of this authority, but in any case it will be a large responsibility that should be given to someone you trust. You may also want to be careful who you choose, as some of the people closest to you who are emotional decision-makers may not be right for this role.
An advanced medical directive states in advance what medical care a person would like to receive, particularly with respect to life-prolonging care. Whether or not you want to be resuscitated, receive a feeding tube, or be put on a ventilator can be explicitly stated so people don’t have to guess what you would have wanted.
These are just four of the estate planning boxes we suggest people check off, but it is by no means a comprehensive list. Many people would benefit from different types of trusts, for example. If you do not have these documents in place, I’d highly recommend you talk to an estate planning attorney.
Daniel Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Is The S&P 500 Diversified?
Paul R. Ruedi, CFP®
With a multitude of funds that track the S&P 500 index investing billions of dollars on behalf of investors, it is safe to say the S&P 500 index fund is a staple of modern investing. But is an S&P 500 index fund a good one-stop-shop for stock investing? Is the S&P 500 really “diversified?”
Let’s start with the positives. S&P 500 funds are usually extremely inexpensive to invest in as a result of so many fund managers racing to the bottom on expenses to compete with each other. They don’t rely on a market timing or stock picking scheme, so S&P 500 index fund investors will reliably receive the returns large US stocks provide. Since the S&P 500 is the most widely used proxy for US stocks, investors will receive returns that closely follow what they see in the financial media, which minimizes fear of missing out and doubts about their investment portfolios.
But is it Diversified? 500 companies engaged in business all over the globe sure sounds diversified. I’d say it is likely better than betting your wealth on just a handful of stocks. However, one could argue that since it only represents large companies in the United States, it does not fully take advantage of every opportunity to diversify as a stock investor. That may not seem like a big deal, but even large, US companies can have a bad run. For example, during 2000-2009, the S&P 500 returned an abysmal negative 9%, after an entire decade.
The S&P 500 is a value-weighted index, meaning companies are owned in proportion to their market cap, and lately this has resulted in the index becoming increasingly concentrated in the largest handful of companies. As I write this, the largest seven companies make up over 28% of the S&P 500. Those companies have done particularly well this year, and as a result the S&P 500 has done well. But there are two sides to that coin, and if those handful of companies do poorly it will weigh on the index’s performance substantially.
So is an S&P 500 index fund a good one stop shop for investors? It is certainly a good start, and if the only index fund in your 401(k) plan is an S&P 500 fund, you can still feel good that your money is sensibly invested. But there is a benefit to owning other groups of stocks like small companies in the US or international companies, and those who have the opportunity to diversify beyond the S&P 500 should take advantage of it.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Keep Your Information Safe
Paul Ruedi
October is Cybersecurity Awareness Month, and though that may seem like a strange thing to make its way into a financial column, cybersecurity breaches represent one of the biggest threats to your finances. Americans 60 and older lost $3.1 billion to cyber fraud in 2022, an 84% increase from 2021, according to the FBI. As such I want to cover a few best practices we recommend to keep your information safe.
Do not click on any links or attachments in emails without verifying them with the supposed sender. You cannot assume that the email you received actually came from the person or company they are claiming to be. Hackers are clever and use similar-looking emails like amaz0n.com to trick people. If you are uncertain about a specific email, do not respond to the email or call any numbers listed in the email. Go to Google, look up that company’s support number and call that. The same goes for unexpected text messages asking you to click on links.
When sending emails, remember that they are a lot less secure than most people would assume and can be easily be intercepted by hackers. Avoid sending sensitive information like Social Security numbers, bank account numbers, or credit card numbers via email.
Use long, unique passwords for different accounts. These days people have to keep track of so many accounts and passwords it is tempting to use a similar password for all of them. But this is a huge mistake, because if one login is breached, the rest will likely follow. If keeping track of so many passwords sounds like a headache, there are password manager apps that can store them all for you.
Two-factor authentication is also a helpful tool to protect your information. In addition to asking for a password, many services offer to call, text, or use some other form of verification to add an extra layer of security when you sign in. It isn’t foolproof, but it is much more secure than just using passwords.
Keeping track of your bank account or credit card spending is relatively easy and enables you to catch anything that isn’t supposed to be there. Though this does not necessarily prevent your finances from being impacted, noticing fraudulent spending quickly and informing your bank or credit card company can greatly limit the damage.
Last but not least, don’t use public Wi-Fi networks. There are many ways hackers can find their way into your device or log anything you type while using that network.
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