There’s an old fable called “The Miser and his Gold” that has an important financial lesson for us to learn. But to make it more interesting (and updated with 21st century language), we’re changing it to “The Tightwad and his Stack of Benjamins.” It goes something like this…
Once upon a time, there was a tightwad who used to hide his stack of Benjamins at the foot of a tree in his garden. Every week he’d go and dig it up and gloat over his riches. After gloating for a while, he’d bury his stack of Benjamins back in the dirt.
A robber noticed this, snuck over during the night, dug up the stack of Benjamins and ran off with the tightwad’s wealth.
A few days later when the tightwad came to gloat over his stack of Benjamins, he found nothing but an empty hole. He screamed so loudly that the neighbors came to see what was wrong. He told them how he used to come visit his stack of Benjamins and enjoy looking at it.
“Did you ever take any of it out to go buy things with it?” one of them asked.
“No,” he said. “I only came to look at it.”
“Well, come over here and look at the hole where it used to be,” one of his neighbors told him. “It will do you just as much good.”
The moral of the story? Wealth unused might as well not exist. Having money for the sake of having money is a pretty useless activity. Money is only useful to the extent that we put it to use. It’s called currency for a reason. The root word there is current. That means it should be moving, not stagnant.
In helping people construct their retirement plans, I come across a lot of examples of money that doesn’t have a current. Here’s just a couple of cases…
1) Money in the Bank
There’s no disputing that everybody needs an emergency fund. It’s also a good idea to have money in the bank that’s earmarked for a certain purpose—like maybe a new car that you’ll be buying in a few months or the family vacation you’ll be taking later this year.
If you own a lot of rental property, it might make sense to have a bigger-than-average emergency fund to cover those months where you have a tenant vacancy or a lot of repairs that you have to do.
But at some point, too much money in the bank is a detriment. Even if you’re earning an interest rate of 1% (which is actually relatively generous in today’s interest rate environment), you’re actually losing money. Inflation hums along at a rate of about 3%. That means you’re losing 2% in buying power every year with that money that’s sitting in the bank collecting dust.
2) Unused Inheritance
Inheritances can be tricky. Some people get an inheritance and can’t sit on it for even a year before they’ve blown through it.
For other people, an inheritance comes with a lot of emotions attached to it. Sometimes I’ll hear statements like this…
“This is the money dad spent his entire life cultivating. I don’t want to do anything different with it because he’d be mad at me if I lost it.”
Or...
”My parents were always good with money and I’m not, so I’m just going to leave it alone and not make any changes to how they invested it.”
And so the money sits there with no real direction or mission. Usually, statements like this are just a different way of saying, “My parents are gone and this money is the only part of them I have left so if I just leave it sitting here, it will be like my parents are still around.”
Understandable. And I’m not saying that you have to go out and make sweeping changes to your dad’s portfolio right after you stop by the funeral home and write the check for his burial. But too often, I see people afraid to do anything at all with their inheritance, for years and years, because of all the emotions tied up in it.
Two things for you to consider if you’re in that boat:
First of all, if your parents did well enough financially to leave you any sort of substantial inheritance, they probably didn’t do it by ignoring their money and hoping things worked out for the best. They probably worked really hard, saved very intentionally, and invested intelligently to build their wealth. So sticking your head in the sand and trying to avoid the emotions connected to this money isn’t really an approach that’s in harmony with their philosophy.
Secondly, if they wanted to pass money on to you (instead of spending it all themselves), they probably didn’t do it hoping that this money would be a burden that carries a lot of emotional baggage for you. They probably wanted it to positively impact your life. So…take the necessary steps to figure out how to best make that happen.
Or just go dig a hole in your backyard and stare at it every day. Whichever works best for you.
The Baby in the Front Seat
“I really hope that’s a doll and not an actual baby,” I told Molly.
We were headed east on I-40 when I saw the baby’s head leaned up against the window. The van was in the lane to our left and a couple of car lengths ahead of us. There were two older kids in the back, but we just couldn’t quite tell if that was a real baby in the front seat or not.
We assumed that it was probably a doll because of the position of the head. If it was a baby, that would be a really awkward way to be holding it (as if there’s a way to hold a baby in the front seat of a minivan traveling 75 mph on the interstate that isn’t awkward).
So after an initial panic, we came to the conclusion that it was just a doll. No need to alert the authorities.
And then…it moved.
The baby’s head moved! It was now clear that this wasn’t a doll. This was a baby.
We started discussing our options. Are we supposed to alert the local gendarme? Do we just mind our own business and let these wildly irresponsible folks go about their day? What’s the protocol for this?
As we were mulling over our options, the van merged over in front of us. So I took the opportunity to pull over into the left lane and pull up beside them so that Molly could at least give them a nasty look.
As soon as we got right up beside them, Molly looked over, prepared to give her most scornful, judgmental you-can’t-possibly-be-serious scowl.
And then she started laughing hysterically.
“It’s his knee,” she said. “It’s not a baby, it’s the guy’s knee.”
Crisis averted. And we were pretty glad that we didn’t call the police to report these reprobates with an infant in the front seat.
So what’s the lesson here? The lesson is that sometimes you need to inspect the situation a little more deeply before you start jumping to conclusions. And we see examples of that all the time in the financial world. Here’s just two of them….
1) “The market was up big but my account didn’t grow much last year!”
At first blush, this might seem problematic. But it’s important to take a step back and understand why your account didn’t grow much. Is it because it’s poorly allocated, or is the slow growth by design?
If you need that money in just a couple of years, you want it to be invested conservatively, instead of following the market. So that lack of growth should be coming with a trade-off in the form of reduced volatility or downside. Looking a little deeper will help you determine if the lack of growth is intentional, or the result of incompetence.
2) “My fees are too high—I found another advisor who will charge me less!”
Too often, people get too fixated on what fee their advisor is charging and don’t pay enough attention to what they’re actually getting in return.
Here’s a good example to illustrate the point. Suppose you’re looking for a landscaping company to take care of your yard. One company is going to charge $100/month, while the other one charges $135/month. Which one is better?
The answer seems obvious, right?
But what if we dig a little deeper and determine that the services aren’t exactly the same? The first company is going to show up once a week and mow the grass. That’s what you get for $100/month.
The second company is going to mow the grass, but they’re also going to run the edger around the driveway and the sidewalk, weed eat along the fence around the back of the house, and pick up trash by the road. They’re going to come by every week in the fall and rake leaves. They’ll re-seed in the winter and fertilize in the spring. And they’ll come by twice a year and trim the hedges.
Suddenly that $135/month fee sounds pretty good compared to the guy who’s charging $100, but only mowing the yard and nothing else.
So let’s put that in a financial context. Suppose you have an advisor who says they’ll manage your account for a 1% fee. Are they providing any other services in addition to managing that specific account?
What if somebody else is charging 1.25%, or maybe even 1.5% or 1.75%. Are those people also just managing the account? Or are they providing advice on how you should allocate your 401k? Helping you make decisions about Social Security or pensions? Helping you with cash management, long term care planning, or estate planning? Giving you tax advice?
There’s not a specific menu of services that automatically justifies a certain fee. But it’s important that you have an apples-to-apples discussion if you’re comparing one fee/advisor to another.
So before you freak out about the baby in the front seat of your portfolio, dig a little bit deeper. If it’s just a knee, there’s no need to work yourself into a lather.
The Great Suit Caper of 2017
My friend Zack got married last Saturday in Greenville, South Carolina. He’s the life of the party wherever he goes, so he has a deep pool of friends. I was one of his 10 groomsmen.
We all ordered matching suits from Jos A Bank (believe it or not they had a special going on). We were told that the suits would be shipped to our house and then we’d just need to go get them tailored.
As of February 25 (two weeks before the wedding), I still hadn’t gotten a suit. So I stopped by Jos A Bank to see what was up. After they called around to a couple of different stores and eventually got in touch with FedEx to track the shipping, we determined that the suit had actually been shipped to my old house in Hillsborough. I haven’t lived there in three years, but Zack apparently didn’t have my current address so that’s what he gave them. So I had to drive up to Hillsborough and knock on their door. Sure enough, my suit had been sitting in their living room for three weeks while they tried to figure out what they were supposed to do with it.
So now I was in a rush to get it tailored so that I could get it back in time. Picked it up just a few days before the wedding and stuck it in my closet with a full three days to spare. Crisis averted.
Fast forward to Saturday. The wedding party was supposed to be at the venue two hours before the ceremony. So there’s all 10 of the groomsmen hanging out in the parking lot. We’d been there about an hour when Sam grabbed my jacket sleeve and held it up next to his.
“Why do our suits look different?” he wanted to know.
They were similar, but slightly different colors, and definitely different texture. I looked around. His suit looked like everybody else’s, mine didn’t. So I peeked inside at my tag.
Van Heusen. Not Jos A Bank.
After all the rushing around and driving to Hillsborough and paying extra to expedite the tailoring, I’d grabbed the wrong suit out of my closet when I was packing. And now I was almost four hours from home with a wedding starting in an hour, and I’m in the wrong suit.
Suffice it to say that the rest of the wedding party got a good laugh out of it. We decided that we wouldn’t be mentioning this to the bride just yet. It’s something that will be funny in a few weeks, but not at that moment.
It turned out to not be a big deal. It was one of those situations where you wouldn’t really know that something was amiss unless you were specifically looking for it. I was the tallest of the ten groomsmen, so I was at the far end of the line during the ceremony, seemingly a football field away from Zack.
And let’s be honest. Nobody at a wedding is paying any attention to Groomsman #10.
So other than the people that I couldn’t resist telling (which actually was quite a few), nobody knew the difference. We’ll see how the pictures look in a few weeks.
But in a lot of ways, that whole situation reminds me of a retirement plan.
In any given year (assuming your portfolio is invested intelligently), you’re going to have some investments that perform incredibly well. And you’re going to have some that aren’t looking so great—investments that are wearing the wrong suit, if you will.
But that’s ok. Because the next year, that investment that performed incredibly well this year might be in the toilet. And this year’s stinker might be the winner next year. That’s why you don’t go all-in on any one particular strategy,.
To quote my friend Bob Payne at Payne Capital Management, “I don’t know what asset class is going to be up in value next year, but I know that our portfolios are going to have some of it.”
If you’re having a wedding, it’s inevitable that something is going to go wrong along the way. (Hopefully I won’t be the one responsible for it every time). But if the sound system is working and the bride doesn’t trip and fall and the food is good, nobody is going to notice the goober in the Van Heusen suit who’s supposed to be wearing Jos A Bank.
In your portfolio, it’s inevitable that you’re going to have something that goes wrong. But as long as you planned well, you’re going to have a lot more things that turn out just fine.
Anyway, sorry about that, Zack and Nicole. I’m sure you’ll still make beautiful children anyway.
An Oscar-Winning Retirement
Molly asked if it would bother me if she had the Oscars on TV in our room while I drifted off to sleep. I couldn’t think of a more sleep-inducing television experience than a bunch of self-congratulatory Hollywood communists patting each other on the back and giving shout-outs to their middle school drama teacher who believed in them when no one else did. So I was happy to oblige that request.
I did slightly wake up about an hour later when she started yelling “WHAT IS HAPPENING RIGHT NOW??” But I was still more interested in sleeping, so I just rolled back over and didn’t think anything of it.
When I woke up the next morning, Twitter was ablaze with a bunch of jokes that I didn’t understand. After I finally saw the footage, the jokes started to make sense.
If you somehow haven’t seen the glorious awkwardness of the moment, you can check it out here.
As it turned out, the producers of something called La La Land spent about two minutes basking in the glory of their “Best Picture” victory before the red carpet got pulled out from under them and they had to cede the stage to the rightful winners, the producers of something called Moonlight. They handled it with as much dignity and class as anyone could have asked for, but you know that it felt like a punch in the gut.
Unfortunately, I’ve seen retirement pan out roughly the same way for people who didn’t do adequate planning.
It usually looks something like this…
You announce to everyone at work that you’re retiring. Some are jealous of you, others are genuinely happy for you, some seem to be outwardly happy but are actually jealous and don’t want you to know it. But there’s a lot of uproar and cake and congratulatory Hallmark cards and then you ride off into the sunset. The trophy is yours.
Maybe a year goes by. Or it could be several years. But then you start hearing this little whisper in the back of your head that says, “Hey bud, unless you die a lot sooner than you’re planning to, you’re going to run out of money.”
“But I had almost a million dollars,” you say. “Isn’t that plenty?”
So you go on for another few months and the whisper turns into a much louder voice.
So you go to visit a financial advisor. You talk about how much you don’t miss your job and the trip you took to Europe and the 14-pound catfish that you caught. And then the conversation turns to your portfolio and you discover that the whisper-turned-shout was actually right all along…you’re going to run out of money.
You’re now faced with a choice. You can either significantly reduce the quality of your lifestyle for your remaining years, or you can go back to work.
And now you find yourself in the same boat as the La La Land producers—you’re giving back your retirement trophy that you only got to hold for a couple of minutes before somebody came along and told you that you didn’t actually win. You try to handle it with dignity and class, but there’s no denying that it’s a gut punch.
Imagine how things would have been different if Warren Beatty had been handed the correct envelope and he’d simply read Moonlight as the winner from the very beginning. Sure, the La La Land guys would have been disappointed that they didn’t win, but they wouldn’t have had to endure the pain of having that momentary taste of euphoria only to have it yanked away moments later.
Now, imagine if you’d started working with a competent planner and constructed a well-conceived retirement plan a few years before you actually retired. You would have discovered that you actually couldn’t retire at the age you were planning, and while you would have been disappointed, at least you found out in advance. So you continue working for an extra couple of years, nobody else knows any different, and then you can enjoy the lifestyle that you wanted…instead of enjoying it temporarily only to have it taken away later.
The bottom line is that I’m constantly amazed by the number of people who waltz off into retirement without a real understanding of whether or not they’re retiring at the right time, or any inkling of how much they can legitimately spend each year once they no longer have a paycheck.
So just be sure you’re holding the right envelope. It’s much better for everyone that way.