The How to Retire Early Series

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I like my job as a financial planner. I really do. I like helping people try to achieve their financial goals, and I love helping people achieve their life goals. It took a while a first, but I’ve even come to enjoy wearing a suit and tie pretty much every single day and trying to look the part.

I also like the beach. I like getting up when I want to and going to bed when I choose. I like not shaving every now and then. I love spending lots of time with my wife, my family, my friends, and my dog. And oh, it would be nice to be able to read for pleasure again, do a little community theatre, and get out my old trombone…

My point is that even though I like what I do for a living, part of me is already looking forward to retirement. Now I’m pretty certain I’ll still be willing to help family, friends, and my favorite clients under the right circumstances even after I’ve turned the light off in my office for the final time, but I’m also pretty sure that my job puts enough pressure on me to make me not want to work as hard as I do if, financially, I didn’t have to.

Many people my age seem to feel the same way, and with that in mind, I think it is high time for me to write a series on what you need to do to retire early. Over the next several weeks, I’ll discuss how reaching financial independence really is now versus later and why it is absolutely critical for you to start strong so you can finish even stronger. I want to cover how important real estate and health insurance are to retirement planning. I will also give you some retirement cash flow strategies to consider, and even explore why you might not want to retire early after all, even if you could!

If you’re already shaking your head and wondering why someone my age might already have the audacity to be thinking about retirement, let me offer the simple response that you can’t blame us! My generation has seen our parents and grandparents laid off or forced out at the end of their careers, we’ve seen pensions reduced and “guaranteed” benefits cut, and we’re uncomfortable relying totally on Social Security. To the people roughly my age, I’d offer that if we’re going to have a chance of financially making it in retirement, we need to act now - not 20 or 30 years from now!

I hope you’ll join me on this exciting journey and consider my thoughts and suggestions throughout this series. Please spread the word to your family, friends, and anyone planning for retirement or already in retirement who you think could benefit. Thank you!

-Tom

Save the World and Your Budget

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I think all of the Earth Day billboards, television commercials, and radio ads have gotten to me. Maybe it was all of the time I spent looking out the window at the beautiful, glistening winter wonderland while I was working from home during those couple of weeks in February. Who knows what exactly motivated me to go down this road, but I thought I’d share some thoughts on how you can merge cost savings and investing with your inner “tree-hugger.” Here goes:

1. Adjust your temperature settings - Whether you get in the manual habit of adjusting the temperature a few degrees right before you leave the house for work and right before you go to bed or you have one of those fancy, programmable thermostats, paying attention to your temperature settings can save energy and money. Now, don’t go to extremes during the day and crank your air conditioning at night (or else the extra energy it takes to get your house cool could actually take more energy and cost more money), but a few degrees here and there can actually provide some cost savings.
2. Use energy-friendly and eco-friendly light bulbs - They still cost a little more upfront, but these bulbs use less electricity (which can lower your power bill), and based on my experience, they really do seem to last longer. Buying one pricier bulb instead of several cheaper bulbs over the course of a few years provides some cost savings on the light bulbs themselves and also means less harrowing adventures on the ladder!
3. Print less - Paper is expensive, and print cartridges are just ridiculous. Do you really need to hit print when you’ve got a perfectly good digital copy at your disposal? Can you spell check and proofread a little more carefully so you don’t have to print multiple times? What about double-sided printing to get twice as much per page? Save some trees and some money!
4. Do a home energy audit - I know people who can probably do this themselves, and I know people (like me) who would probably be better served to have a contractor take a look, but the eventual savings from undergoing a home energy audit and making a few changes/upgrades to your residence can be substantial. Leaky air flow, poorly sealed windows, and less than stellar insulation could be causing you to use a lot more energy, and in turn, causing you to spend more. A home energy audit may be especially worth consideration if your home is older.
5. Work from home - If your employer will allow it, try working from home periodically. If you can stay focused, you will probably get more done than you would at work, and more importantly, you get to stay in your embarrassing bedroom slippers while saving gas money and reducing emissions.
6. Invest your portfolios in a Socially Responsible Investment (SRI) strategy - This won’t save you a lot of costs, and it could help or hurt your investment returns depending on the particular market cycle, but if you feel very strongly about only investing in companies with environmentally-friendly and non-health-damaging products, this may be for you. Typically an SRI strategy excludes things like stocks from tobacco companies, alcohol companies, lumber operations, and oil and gas companies. Some SRI strategies go so far as to exclude bonds from certain countries that don’t have glowing human rights records or companies whose boards of directors don’t seem to act as good citizens. I know people who love this type of investment strategy and are willing to pursue less-than-optimal investment allocations because they feel their personal principles are more important, but I do not advise this type of strategy for most. If you are interested in this type of strategy, I should caution you that what is socially responsible is sometimes highly subjective, so finding a mutual fund that shares your politics and views perfectly could be challenging, and unfortunately for SRI investors, sometimes companies like Phillip Morris, Anheuser Busch, and Exxon can be pretty good investments.

 

You know I’m all about saving some money, but I’m certainly not opposed to saving the world. I hope you’ll try steps 1-5, and if you feel passionately about what your portfolio is actually invested in, consider number 6.

 

Happy Earth Day!

 

-Tom

Mary, Mary, Quite Contrarian

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Mary, Mary, quite contrary. How does your garden grow? No, I haven’t lost it or begun experiencing some sort of Benjamin Button-like reverse-aging process. I just think this old, English nursery rhyme might have a little more to do with successful long-term investing than you might think! Let me explain.

Have you ever jumped on a sports team’s bandwagon? Have you ever jumped off and been accused of being a “fair weather” fan? Have you ever resisted a trend, such as smartphones or Facebook, and eventually come around? Did you by chance donate your seersucker suit or throw away your boat shoes right before they came back in style? I’m a loyal sports fan, and the day I wear a seersucker suit will be quite a day, but I must admit that I can think of several times in my life where I arrived a little late to the metaphorical party, and even a few occasions when I rode a trend, a belief, or an idea all the way down the metaphorical flagpole. I usually stick to my guns, and I will always stand up for what I truly believe in, but it is often much easier to get caught up in what everyone else is doing and follow the crowd. It’s often warmer in the herd, so to speak.

Unfortunately, the bandwagon doesn’t always lead to successful investing. I’ve heard it jokingly said that if someone continuously buys stocks high and sells stocks low, they will repeat their actions until they are broke. It’s a witty and true statement, but it’s definitely not funny. I’ve also heard it said that any stock tip you hear is already too late, and unless you know something you probably shouldn’t know, I tend to believe that is pretty accurate. In my book, successful investing is about developing a prudent, long-term investment strategy with an appropriate mix of stocks, bonds, cash, and other investments for your risk tolerance and age/stage in life, and sticking with it. Successful investing is about investing, not trading. It’s about not chasing past performance and trying to repeat recent results with last year’s hottest industry, sector, or stock. Successful investing is about avoiding the temptation of a $700 “poison” apple (or should I say AAPL?), and at the same time, knowing to ignore the same overly sardonic radio host who has been telling you to go to all cash or gold for the last five years. Sometimes you can buy a stock high and ride it higher or sell a stock low and it will still go lower. However, I have come to believe that successful portfolio management is usually about investing in a diversified strategy filled with quality companies; buying some positions for value and some positions for growth; watching closely and looking for occasional tactical opportunities; and riding the market volatility as if it were a cross between a mechanical bull and an eventually upward-headed escalator.

I cannot tell you how many potential clients and friends have come to me recently ready to get back in the market now that the market has been on a fairly steady upward climb for almost five years. Unfortunately, they’ve been on the sidelines, primarily invested in what they put their temporarily battered portfolios in near the bottom of the last real market downturn. In the long term, it’s good that they are getting back in, but I can tell you right now that we are closer to the next temporary downturn today than we were yesterday. I just hope they don’t sell at the next bottom and repeat until they are…

So many people cheer for a winning team and so few for a losing team. As I said earlier, it’s natural and easy to do, but successful investing is about having a really good strategy in place that you understand, believe in, and have confidence in. It’s about digging in for the long haul and letting your portfolio do its job. It’s sometimes about selling when the tide is coming in and buying when the tide is going out. It’s about cautiously looking around when the masses are stampeding in one direction into all stocks or all bonds or all cash or all precious metals and at least considering the road less travelled. Now don’t take this strategy to the extreme and sell a bunch of good stocks so you can buy a bunch of “stinkers,” but rather reflect on where markets are going, not where they have been.

I’m not asking you to do anything in particular. I’m just asking you to think about being a little contrary to a majority of the bandwagon investors out there. Think about being a little contrarian.

Mary, Mary, quite contrarian. How does your portfolio grow?

-Tom

Types of Businesses

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Have you ever looked at someone’s business card and wondered what the “LLC” or “LLP” meant? Perhaps you’ve thought about starting your own business and wondered what type of business entity you should be. Maybe you’ve been curious about the differences between a C Corporation and an S Corporation but have never taken the time to find out. Look no further, as I’d like to briefly go over the similarities and differences among many of the most common types of businesses.

• Sole Proprietorship: A sole proprietorship is the simplest and most common structure chosen to start a business. This type of entity is an unincorporated business that is owned and run by an individual or an individual and his or her spouse. Setting up a sole proprietorship may require some licenses and permits, but it is relatively simple to start, usually inexpensive to form, and the tax implications from any income or expenses generated by such a business are simply part of the owner’s individual tax return (Form 1040) on Schedule C. A major downside of sole proprietorships is that there is no separation between the owner and the business, so an owner would be personally liable for any and all debts incurred by the business.
• Partnership: A partnership is a business owned by two or more people who are usually not spouses. Each partner contributes something to the business, such as property, money, or labor, in return for a share of the profits (or losses) generated by the business. There are two types of partnerships: a general partnership, where all profits, liabilities, and management duties are split by all of the partners, or a limited partnership, where one or more general partners manage the business and share fully in its profits and losses while one or more limited partners share in the profits of the business, but their personal risk of loss is limited to the extent of their investment. Partnerships require formal registration, and it’s usually best if a legal partnership agreement discussing how the partners will divide profits, resolve disputes, change ownership, and dissolve the partnership is in place before operations begin. Still, it’s a relatively easy and inexpensive way to set up a business. Partnerships have their own required tax returns (Form 1065), and those returns generate informational statements called K-1s that are given to each partner so that they can report their share of profits, losses, and expenses on their own personal tax returns.
• C Corporation: A C Corporation is a separate legal entity owned by its shareholders. Corporations are usually more complex and costly to form as they require formal registration, articles of incorporation, licenses, permits, and state applications. A C Corporation addresses several of the shortcomings of sole proprietorships and partnerships in the sense that shareholders' personal assets are protected from liability and only subject to losses equal to their investment in the corporation. Additionally, C Corporations can more easily raise additional capital by selling shares of stock in the company. C Corporations have their own required tax returns (Form 1120), and corporate income tax rates are often lower than individual income tax rates, but it’s important to realize that C Corporation income can actually be taxed twice, first at the corporate level and second at the individual shareholder level if the company pays out some of its profits to its shareholders (dividends).
• S Corporation: An S Corporation is a special type of corporation created by making an IRS election. An S Corporation election can be valuable to its shareholders because it allows for company profits, losses, and expenses to be taxed on their personal individual tax returns and avoids the double taxation C Corporations often generate for their shareholders. Making an S Corp election should be carefully considered, as the IRS does not offer this election or allow a company to keep this election unless they follow strict operational processes, limit the number of shareholders, and reasonably compensate their shareholders. It’s also worth mentioning that an S Corporation does not offer quite as strong of liability protection in some areas as a C Corporation does for its shareholders. 
• Limited Liability Company (LLC)/Limited Liability Partnership (LLP): An LLC is a hybrid type of legal entity that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a sole proprietorship or partnership. An LLC requires a lot of the complex registration and initial set-up requirements similar to that of a corporation, but the increased liability protection and “pass-through” taxation like that of a sole proprietorship or partnership makes this type of entity highly desirable to many entrepreneurs. An LLP is a lot like an LLC and similar to a general partnership, except partners do not have personal liability for the negligence of other partners.

 

What type of entity should a business be? It depends. Personal liability protection, tax implications, and the desires and goals of the founder or founders should dictate.

 

-Tom