Shotwell Rutter Baer

Here at Shotwell Rutter Baer, we have a genuine bright spot to brag about in 2020. We launched a Financial Planning internship program this year and were lucky enough to hire Joel. He is currently a senior in Michigan State’s International Business program. Last week, Nick and I sat down and interviewed Joel for our podcast. We talked about the whole experience and what he learned about the world of personal financial planning.

Of course, this year it couldn’t be a “normal” internship. Joel was not able to come to the office all summer and shadow us as we worked and met with clients. In fact, our interview with Joel back in early March was one of the last in-person meetings before the Covid shutdown began. Joel was eager to start, however, and helped us adapt our internship plans to fit the world of virtual meetings. In some ways, it may have improved the experience. He got to meet a wider variety of clients than he would have otherwise if he were just in the Lansing office. Being virtual has allowed us to continue the internship into the fall as it’s easier to work around schedules.

Joel talks about how he was glad to be able to put his analytical learning to use in real-world problems. He was surprised to find we spend more time helping clients with high-level planning and problem-solving compared to building portfolios. If you do the planning right the portfolio will take care of itself. And, if you’re doing it right, the portfolio should be boring. Along the way, he learned about the different types of advisory businesses and why we choose to be a fiduciary registered investment advisory firm rather than part of a brokerage firm.

Here is the link to The Investment Answer book that Joel mentioned in this episode.

We’re glad to have Joel as part of our team as he finishes up his degree. As is often the case, you learn a lot about what you do when you have to stop and teach it to someone else, and having an intern who isn’t afraid to stop us and ask questions has helped us reexamine our processes and be more deliberate about our day-to-day approach and become better at what we do.

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

Don’t wonder if your financial advisor is trustworthy and on the level. Do some research. Trust but verify.

Bernie Madoff was arrested in December 2008 when his sons revealed that his giant asset management firm was a Ponzi scheme. He had stolen an estimated $64 BILLION dollars in client assets. While most bad behavior in the investment world doesn’t rise to Bernie’s level, twelve years later his name remains synonymous with the public’s worry about trust in the investment business.

Financial planning and investment relationships must be built on trust. As the client, you are trusting your advisor to act in your best interest with some of the most important stuff in your life aside from your family’s health. Nothing is fool-proof, but here are some things you can do to protect yourself and verify that your trust is well-placed:

Look up your advisor on Broker Check. This website is the public access point to the official licensing and registration for Investment Advisor Representatives (the official word for those of us who work for registered investment advisory firms) and Registered Representatives (brokers who work for brokerage firms).

Note that the actual licenses aren’t that important. We have different requirements depending on whether we are registered on the state or national level, and the type of firm for which we work. To make sure that your advisor is legitimate, you can:

Any time a client makes a formal complaint against an advisor, it is recorded here. That means that sometimes the complaints aren’t necessarily legitimate or they can be explained. So, if you find disclosure events on your advisor’s record, look for adequate explanations.

Credentials, such as the Certified Financial Planner designation, are helpful, as the designating boards have standards of conduct that advisors must follow. Certified Financial Planner professionals do commit to bi-annual ethics training. They are required to disclose to the board any legal issues with which they may be involved. However, bad actors can often fool those who are supposed to police the advisors at the same time they are fooling the public. Remember that Bernie Madoff was the chairman of the National Association of Securities Dealers and was supposed to be acting in his clients’ interests.

Your statements for your accounts should come from an independent, reviewable third party. For instance, while our clients receive a statement with our logo and our firm’s name on them, they are produced by our independent custodians. This is either SEI Private Trust Company or TD Ameritrade.

While we often produce performance reports ourselves, our clients still have access to official statements that don’t come from us. Clients should review these statements and make sure they match up to their understanding of their accounts. Check things like:

Pay attention to other correspondence from your custodian. Many custodians periodically send letters to confirm bank links associated with an account. Check those bank links and make sure they connect your investment account to your actual bank account. Review transaction confirmations and distribution notices as well.

The only check you should ever write directly to an advisory firm should be to pay a fee. If you are depositing funds to your account, the check should always be made out to the account custodian. As with the statements, for our clients that would be TD Ameritrade or SEI Private Trust Company. If a financial advisor instructs you to do anything different, this would be a red flag.

Promises of returns that seem too good to be true are a red flag. Another flag would be if a performance report shows steady growth when the markets have been falling. Check your performance against the benchmarks. A good money manager may beat the market occasionally, but rarely consistently and rarely by large amounts.

All these suggestions boil down to one basic idea: Trust but verify. An advisory relationship that isn’t built on trust is probably doomed to failure. Verify that your trust is well placed, and the relationship can flourish.

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

Frequently when we meet people who handle their own investments, they like to talk about individual stocks. I can understand why. Individual stocks have a story that you can wrap your head around, such as Pfizer creating a vaccine for Corona Virus, to borrow from current headlines. Or Tesla bringing the auto industry forward into the next century.

Financial planners almost always recommend using mutual funds – portfolios made up of many different stocks and bonds – to build a portfolio. They’re boring compared to the excitement of individual stocks, but in the long-run, they are a better solution for building a portfolio.

The diversification gained by investing in funds greatly reduces portfolio risk. There are two main types of risk in the stock market.

#1. Systemic risk. A short-term, general risk that’s associated with being in the stock market. The market tends to rise and fall in anticipation of economic change. Systemic risk affects all stocks together and there is no way to avoid it if you’re going to be in the market. The risk is part of the system. While in the short-run, systemic risk is a concern, in the long-run investors are rewarded for taking systemic risk as the economy, and thus the market grows.

#2. Non-systemic risk.  This is inherent to investing in individual stocks. Non-systemic risk, sometimes called business risk, is the concern that a company can have problems that are specific to its business rather than the whole market. For instance, a drug company can have a trial go poorly, or a car company can have a safety issue. While individual stocks always have systemic risk, rising and falling with the general market, these non-systemic risks add another layer of concern. Companies can lose value through management mistakes, fraud, or just bad luck. They can even go bankrupt leaving their stock worthless.

While taking systemic risk pays off in the long-run, there is no evidence that taking the additional non-systemic risk of investing in individual companies leads to better returns. Over time, individual stocks tend to perform in line with the broad market. If they outperform the market for a period, they will also underperform at some point, bringing the induvial stock’s return in line with the rest of the stock market.

You may get lucky and buy at the beginning of a period of outperformance. Then you also need to be lucky and sell the stock before it begins to underperform. Because markets are usually efficient, which means that the price of a stock today is based on everyone’s opinion of all the public information available about a company, timing these cycles is mostly making lucky guesses.

The non-systemic risk of investing in individual stocks can be eliminated by diversification.  Spreading the risk around among many different companies. Research has shown that it takes between forty and fifty stocks to create enough diversification that non-systemic risk is no longer a concern. Mutual funds do this automatically, making it possible to buy a whole package of stocks at once for instant diversification.

This chart compares Pfizer stock to the Standard and Poor’s 500 Index over the last 25 years. There are times when Pfizer outperforms the broad market, but there are also times when it lags and the market catches up. In the long – run, both end up in about the same place.

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

Low-interest rates may not be good for your savings account, but it could save you thousands of dollars on your mortgage loan. How do you tell if now’s the right time for you to refinance your existing mortgage?

You may think that this would be a cut and dry decision. If you can get a lower interest rate than what you are currently paying, then you should go ahead and pull the trigger. Unfortunately, mortgages are not that simple. There are several issues to consider when deciding whether to refinance.

Start by looking at your current loan and compare your current interest rate to the new advertised rates. A general rule of thumb is to refinance if new rates are at least 1% lower than your current rate

Keep in mind that when your mortgage payments are calculated, a larger portion of your early payments goes toward interest than toward principle. If you have been paying on your current loan for several years, you may have paid a lot of the interest already while a large portion of your payment is applied to principal. Refinancing will start the loan over again, and more of the payment will be interest.

If you plan on moving in the next few years, refinancing isn’t your best choice. The front-end fees of a mortgage can set you back a few thousand dollars. You will recoup the front-end fees by paying lower interest over the life of your loan, but often the breakeven point is 5-7 years down the road. It’s a best practice to work with your loan officer or financial advisor to determine what that breakeven point would be for your specific loan.

If you are about to retire and your income is changing, you may not qualify for the same terms that you would if you were working. Likewise, if you have an adjustable-rate mortgage that is about to adjust to a higher interest rate, you may not have the time to wait for a lower interest rate.

Having a mortgage in retirement can also be challenging from a planning perspective. You’ve likely heard that you shouldn’t have any debt when you retire, yet lots of folks retire happily with a mortgage they are still paying. How well you tolerate risk is helpful in determining whether you should pay off your mortgage before retirement. It’s best to bring this up with your financial planner as you create your retirement plan to find the best solution for you. Just know that if you plan on paying off your mortgage before you retire in the next 5-10 years, it’s probably best not to refinance.

If you owe more than 80% of the value of your house, refinancing might not be your best option. You may find it difficult to refinance, and you will likely be subject to private mortgage insurance (PMI). The terms of your loan significantly increase when you owe less than 80% of the value of your house. Avoiding PMI can make a big difference in your breakeven point of refinancing.

Likewise, if you have paid off most of your mortgage, refinancing may not make sense. Keep in mind that early in a mortgage, more of the payment is interest while later in the mortgage more of the payment is principal. Refinancing re-starts that clock. If you’ve been paying on a 30-year mortgage for a long time and refinance to another 30-year mortgage, your payment will be lower but your interest cost over the life of the new mortgage will likely be higher than staying put.

Your credit score is another significant factor in the rate and terms of your mortgage loan. If you had a lower credit score when you got your mortgage and things have improved, chances are you are in a better position to get a lower rate. The combination of a lower interest rate environment and a higher credit score could improve the interest rate on your refinance by quite a bit. You’ll still want to calculate the fees and cost of refinancing to determine your breakeven point. The more of a drop in interest, the more likely it is that a refinance is in your best interest.

One of the things that you want to consider is if your goal is to lower your payment or to reduce your interest expense. If you are looking to reduce your payment so that you can transition into retirement or save that money toward your retirement in a ROTH IRA, then you probably want to look at a long term 20-30 year fixed loan. If your goal is to reduce the interest that you pay over the life of the loan, then you want to look at a 15-year loan and even make a bi-weekly or extra principal payment every month to pay it down quicker.

It’s usually not a great idea to refinance a mortgage to pay off other debts (cash-out refinance). It might make financial sense to pay off the high-interest debts (credit cards, unsecured loans, etc.), but it typically won’t fix your problems. You would be better off staying where you are and tracking and managing your budget regularly. We find that the quick fix that doesn’t address the underlying issue of managing your cash flow won’t work. It would be best if you put in the hard work to create and live by a budget. Once you do that, you stand a much better chance of not getting into the same position over again.

Interested in learning more about whether a refinance is right for your financial plan? Download our 2020 Refinancing Guide or contact us at [email protected]

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

Many employers now offer high-deductible insurance plans that qualify participants to save money in a health savings account. These plans have lower premiums than other health insurance policies but higher out-of-pocket costs.

There are some very good financial planning reasons to consider using one of these plans. But first, consider this:

Does your plan qualify?

Do you have the ability to save?

Do you have enough in an HSA to cover the potential deductibles and co-pays?

# 1. Tax-Deductible Contributions

HSA contributions are tax-deductible, regardless of your income or whether you participate in a retirement plan. For 2020, an individual can contribute $3,550 and a family can contribute $7,100. Participants over age 50 can contribute an additional $1000. That can equate to significant tax savings if you are in a higher tax bracket.

#2. Tax -Free Qualified Healthcare Distributions

When you pay for healthcare from an HSA, the distributions are tax -free. The list of qualified healthcare expenses covers everything from acupuncture to prescriptions and weight-loss programs. Since you deducted the funds you deposited to your HSA from your taxable income, the effect is the same as being able to deduct your healthcare costs from your taxes without all the complexity. Before retirement, most health insurance premiums are excluded. However, long-term care insurance premiums are considered a qualified expense.

#3. Balances Grow Tax-Free

Unlike Flexible Spending Accounts, you do not have to use your Health Savings Account balances up each year. You can accumulate balances. And, unlike savings or regular investment accounts, you do not pay taxes on any growth you receive on your account balance. This allows everything you earn in the account to remain for future expenses.

#4. Delay Qualified Distributions

Most HSA participants take distributions from their accounts to cover expenses as they are incurred. However, you can delay taking distributions indefinitely. If you can cover medical expenses from your regular savings, you can leave your HSA funds to grow tax–free for retirement. By saving your expense records, you can then take funds from the HSA in later years and they will still be treated as qualified, tax–free distributions.

#5. Invest the Balance

Most major investment custodians now offer HSA investment accounts. If you accumulate balances above what you need to cover current expenses, you can move funds into an investment account and invest those funds for the long-term just as you would a retirement account. We recommend keeping one or two years of potential spending needs in a cash HSA and then investing balances beyond that level.

#6. Non-Healthcare Distributions are treated like IRA distributions After Age 65

In retirement, qualified healthcare expenses are still tax-free. Most retirees have no trouble coming up with medical expenses on which to spend their HSA balances. However, the worst-case scenario after age 65 is that distributions from an HSA that aren’t used to cover health care costs are treated just like distributions from other pre-tax retirement accounts, such as IRAs and 401ks, and taxed as income.

#7. Medicare Part A and B Premiums can be a Qualified Expense During Retirement 

Health Savings Account balances can also be used to pay for Medicare Part A and Part B premiums. Medicare supplements are generally not considered a qualifying expense, and most retirees don’t pay a premium for Medicare Part A. However, Medicare Part B requires a premium that is usually deducted directly from Social Security payments. Having those payments come from an HSA instead reduces taxable income in retirement and can add up to significant savings.

Our financial advisors at Shotwell Rutter Baer are happy to discuss your current and future health savings goals and can help you determine where your money will best work for you so you can optimize your HSA.

Contact us today by calling 517-321-4832 or email [email protected]. We look forward to hearing from you.

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

Do you have money in savings that could be working better for you somewhere else?

Interest rates are low right now. That’s great if you are a borrower, but not so great if you have savings in the bank. With all the economic upheaval from the Covid – 19 Pandemic, the Federal Reserve has committed to keeping the Fed Funds Rate low for at least the next few years. Other rates, including savings rates, are governed by the market but take their cue from the Fed. Banks have plenty of cash on hand right now, so there’s no reason for them to offer higher rates on savings any time soon. This article outlines some things to consider with your savings when interest rates are low.

When interest rates on savings accounts are high, you can assume that inflation is higher as well, or expected to rise soon. The real income (what you’re left with when you subtract inflation from the interest you earn) hasn’t changed much historically when interest rates have changed. If rates are falling, inflation is falling as well, and vice versa.

The chart above shows interest income and real income (what you keep after inflation) for six-month certificates of deposit going back to the 1990s. You can see that from 1990-2008, the difference between interest income (shaded blue on the chart) and real income (the orange line) stayed about the same. However, since the financial crisis, real income for savings has been negative. In this environment, you shouldn’t hold more cash than you need, but at the same time don’t let a negative real return on cash holdings push you to over-invest funds that you need in the short-term.

As anyone who has worked with us knows, we always advocate that people have a contingency fund set aside in savings, along with cash to cover any spending needs for the next 12-24 months. But what do you do with those funds when savings accounts are paying next to zero and have a negative real return?

Whether we’re talking about stocks, bonds, or cash savings, the yield tells you how the market ranks the investment risk. If one investment is yielding significantly more than another investment, there will be a reason. Sometimes one bank might offer a slightly higher rate than another bank because they want to attract new customers, and that doesn’t necessarily mean more risk. But if you see a significant difference, say more than ½ of a percent, you need to dig deeper and make sure the savings vehicle you are looking at makes sense.

A savings vehicle may have liquidity risk – which means that you need to wait a certain amount of time to get your money back. Or there may be principle risk – which means that there is a chance you won’t get all of your principle back due to market issues or because the issuer is insolvent.

Bank certificates of deposit (CDs) usually pay a higher rate than a regular savings account because you are committing to leave your funds in the account for a specified period. If that timeframe fits your goals, then a certificate of deposit may be appropriate. For instance, if you are planning a remodeling project that is a year away, a 12 month CD might be a good choice. However, a cd would not be a good choice for your contingency fund, which you may need to use with no notice. Keep in mind that CDs work best in a steady or falling rate environment.  If rates will be lower in the future, then locking in the current rate for a while makes sense. But when rates rise, you want to be able to take advantage of the new, higher rate.

Fixed annuities are insurance products that pay a specified interest rate that is often higher than bank certificates and savings accounts and are sometimes promoted as an alternative savings vehicle. They will have a surrender period, during which you pay a penalty for withdrawing your funds early. If you are inclined to consider a fixed annuity for a portion of your savings, be sure you understand the contract terms and the surrender period and ensure that it matches your goals.

Some savings accounts offer higher yields if you keep a minimum balance in the account. In this instance, you are giving up a little bit of liquidity to maintain the higher interest, but the consequence, if you fall below the specified level, is usually just that you will receive the regular savings rate instead. If you have enough to meet the minimums, high-balance savings accounts can be a good option for cash right now.

When we’re dealing with money for short–term goals (for example, less than two years) we generally don’t want clients to risk losing their principle due to market fluctuations. Over longer periods of time, taking market risk is a good bet, but in the short–run market up and downs can be a problem. You don’t want to be in a situation where you need your contingency fund and must worry about the fund’s current value. Fixed savings accounts are best for these purposes, despite low returns, as the biggest concern is return OF your money, not return ON your money.

Aside from avoiding market fluctuations, it is important to make sure the savings account you choose is safe. Banks and Credit Unions are usually backed by federal deposit insurance up to $250,000 per depositor, per bank. If your savings exceeds those limits, you can divide them up between different institutions to maintain coverage.

 #4. Money that you don’t need soon can be added to investment portfolios:

Reassess your savings and consider your spending needs for the next few years. If you have funds in the bank that aren’t earmarked for contingencies, consider investing them rather than leaving them in savings. As always, keep your contingency funds and short-term spending in savings. Beyond that, you can consider increasing your investment portfolio. If appropriate, you can increase retirement plan contributions if the funds can be dedicated to that long–term goal. You can also consider setting up a non-retirement investment account for funds that aren’t earmarked for retirement but also aren’t needed in the next few years.

The chart below shows the difference between investing $100,000 in the S & P 500 (the five hundred largest US companies) 25 years ago compared to investing the same amount in cash investments. Over that period, cash investments would have grown by $68,000 but with no risk to principle. The stock investment would have grown by over $800,000 during that timeframe, but the ride would have been wild, including two major bear markets and the Coronavirus meltdown. When we’re investing for the long-term, those fluctuations become meaningless. But when we have short-term needs, cash is king. So we need to stick with cash vehicles even when rates are low.

Our financial advisors at Shotwell Rutter Baer are happy to discuss your current and future savings goals and help you determine where your money will best work for you so you can optimize your saving when interest rates are low.

Contact us today by calling 517-321-4832 or email [email protected]. We look forward to hearing from you.

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

How would you describe your relationship with money?

Money can’t buy you love. It’s as cliché as a cliché can be, and so it is also mostly true.

Trying to buy love, or buy happiness, is a fool’s errand. But, as with most things in life, the relationship between love, happiness, peace of mind – take your pick – and money is complicated.  Money can’t buy you any of those things off a shelf. But without a healthy relationship with money and an understanding of money’s role in your life, happiness will be hard to find. As financial planners, what we’re really trying to do is help people find that healthy relationship.

Stop and think about what really makes you happy. What do you really love? Or, perhaps more importantly, what would make you happy if you could just find a way to do it? Is it spending more time with your family? Traveling the world? Learning to read Latin and produce a new translation of The Aeneid? Living alone in a cabin on the side of a pond for two years?

Now think about what prevents you from pursuing that happiness. Is it a simple matter of having time? Or having the freedom to just up and leave your job? Do you have obligations to support your family?

In one way or another, almost every objection to pursuing your passion devolves into a code word for money, at least in part.

Do you want the freedom to move to Paraguay for half the year? Well, you’d lose your job.

Do you want to take the time to learn Latin? Well, it’s hard if your job requires that you grade these papers tonight and get up in the morning and go over lecture notes before your first coffee.

Don’t get me wrong. We’re not going to tell you to quit your job tomorrow, pack up, and go sit on a beach or build that cabin in the woods. But what we hope to do is help you find that balance where your pursuit of money has meaning and is tied to the activities and ideas about which you have passion and energy. Life is short. How we spend our time needs to be connected to the things we love and want to do and be to make it fulfilling and meaningful.

Let’s switch gears and look at the problem from the other side: Stop and think about what causes frustration in your life.

Where does stress (bad stress, anyway – there can be good stress, too) come from? We live in a complex world that moves fast. How do you save for retirement (and what does retirement even mean?) while you need to save for college, pay for band camp, and buy groceries for dinner?

Speaking of dinner, if you’re exhausted at the end of the day can’t you just buy take-out instead? There are many priorities chasing your time and your money, and sorting those priorities out requires more time and more knowledge.

As financial planners, we want to sit at that junction where your time, money, and happiness come together. We hope to help our clients identify and go after the things that bring them happiness and love by removing money obstacles, sorting out priorities, and identifying prudent financial actions to make all these things happen.

Sometimes it’s as simple as helping clients understand where their money and time are going so that they can make proactive changes. Often, we are helping to quantify how much should be going into retirement savings as opposed to college savings, or even savings at all. We can help you understand where that balance is between living for today and still being prudent about tomorrow. And while we can’t help you purchase love and happiness off the shelf, we can help you free up time and money to find those things that create happiness.

About Shotwell Rutter Baer

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

This article and podcast explain the different types of financial planning companies and how they get paid.

Choosing a financial planning firm to help you map out your future is not an easy task. There are several types of financial advisors who all charge clients a little bit differently. At Shotwell Rutter Baer we have chosen to be a fee-only, fiduciary, registered investment advisory firm, as we feel this serves our clients the best.

There are three main types of businesses in the investment world. Here are the things that we think you should think about and ask before you decide:

Employees working for brokerage firms are paid to sell products. If there was any dispute about their advice, they are held to a “suitability standard,” meaning that they only need to show that the investment recommendation they made was appropriate for your circumstances, not necessarily the best recommendation available. Licensed employees of brokerage firms are known as Registered Representatives of their firms and are usually compensated through product commissions.

Registered investment advisory firms are paid by their clients for their advice, rather than the products that they sell. They are held to a fiduciary standard, which means they have a legal obligation to try and put your interest ahead of their own interest and their firm’s interests when making recommendations. Advisors in this business model are known as Investment Advisory Representatives of a Registered Investment Advisory firm. This business model is often referred to as a Fee-Only Firm. Shotwell Rutter Baer is this type of firm.

To make matters more confusing, most brokerage firms also have a registered investment advisor subsidiary. These registered reps are said to be dual-registered, working as both employees of the brokerage firm on a suitability basis, paid by commissions to sell products. At the same time, they can also act as an investment advisory representative.

When they are offering advice and performing planning duties, they are supposed to be held to a fiduciary standard, but they can switch roles and offer you products on a commission basis with a suitability standard. Advisors in these types of firms often refer to themselves as Fee-Based, rather than fee-only. They can charge a fee for planning services and offer some investment advisory programs that are fee-based, but they can sell you insurance and annuities as well. In theory, they are required to explain to you when they switch roles.

We believe that it is important for clients to have a financial planner who works for them, with their interest at heart, both philosophically and legally. A fee-only fiduciary advisor is paid for their advice, not products, and is free to recommend any investments that make sense for your situation.

If you are looking for a financial advisor, please consider Shotwell Rutter Baer. For a closer look at our process please check out our Strategic Reliable Blueprint.

If we aren’t the right fit for you, we will be happy to recommend some other options. We look forward to hearing from you.

About Shotwell Rutter Baer

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

Starting a new job that offers retirement benefits is great. But your employer’s retirement plan can offer a bewildering array of choices if you’re not used to the language of savings and investing. The good news is that getting started in retirement savings requires making only a few straight-forward decisions and understanding some basic investment concepts to keep you on track.

Don’t procrastinate or get caught up in the details. Get started saving into your retirement plan as soon as you can. It is better for you to make the wrong type of contribution or invest in the wrong fund than to not contribute at all. The most important thing is to get started right away.

You can always make changes down the road, but you can never make up a lost contribution or the value of compound interest. It’s easy to forget that the most important money you invest in a retirement plan is the first contribution because it has the longest time to grow. The other benefit of starting right away is that you probably haven’t gotten used to your new paycheck yet. By getting your contributions started before settling into a budgeting routine, it’s easier to get over the reduced take-home pay. Making bigger contributions later to make up for not starting sooner will feel more painful.

The best way to invest in your retirement plan with confidence is to know your budget and have a contingency fund established for emergencies. Many retirement plans have a waiting period for eligibility before you can begin participating, and that is a good time to get things in order.

Work out a monthly budget for your new job and set a monthly amount in saving to build up a contingency fund. When you reach eligibility the amount you have been subtracting from your pay to go into savings can now go into the plan and you won’t miss it as much. By having a contingency plan and a good handle on your budget, it will be easier to resist the urge to pull money back out of your retirement plan when surprises come up, like car repairs or home maintenance.

Most plans calculate contributions as a percentage of your gross pay. A good general rule of thumb is to shoot for 10% of your gross income in annual retirement savings, and 15% is better if you can afford to do so.

If your employer matches your contributions, try to start with an amount that captures all that match. For instance, if your company matches your contributions 50% for the first 6%, you should aim to start with 6% of your own money, which means your overall contribution between you and the company would be 9%. That gets you most of the way to your goal. As you get raises or bonuses, and as you get a feel for your budget with your new job, look for opportunities to increase your contribution.

There is a maximum amount you can contribute, depending on the type of plan. If you’re able to save more than the maximum you can begin an after-tax investment account.   If you meet certain income limitations, you can contribute to a traditional IRA or a Roth IRA in addition to your company’s plan.

Many, but not all, retirement plans allow for either traditional or pre-tax retirement contributions as well as Roth, or post-tax retirement contributions.

A traditional contribution is subtracted from your taxable income when you make the contribution, reducing your taxes this year. However, keep in mind that it is taxed when you take a distribution during retirement.

A Roth contribution is taxed as part of your income this year but is tax-free during retirement.

Choosing which type is best really depends on your tax bracket now versus your expected tax bracket in retirement – and that impossible to determine with any certainty. As a rule of thumb, we generally recommend that clients make Roth contributions if their tax bracket is lower than the 22% marginal tax bracket.

The marginal tax bracket in 2020 is currently defined as less than $40,000 in taxable income if you are single or $79,000 if you file jointly.

Beyond that, Roth contributions may still make sense, but it is a bit less cut and dry. But do not get hung up on the decision – you won’t be too wrong either way.

Getting this right is easier – and far less important when you’re starting out – then people realize. When you first start investing there is very little money in the account relative to the amount you are contributing each year, so the return on that money doesn’t have much impact.

For this reason, our advice is to go ahead and take a lot of market risk when you are starting out. Pick something low cost and full of stock, like an S&P 500 Fund, and just keep contributing for a while.

Another good option in this situation might be a target-date retirement fund. These funds are usually the default plan options, and they provide a diversified and managed investment option with the risk geared to be appropriate for when you may need to use the funds. Pick one that has a year that corresponds to when you may retire.  For instance, if you’re 25 right now, you might choose a fund with a target date of 2060. The fund will get more conservative as that date approaches.

This is the most important piece of advice I can offer. Many beginning investors lose heart when they see the market drop and their hard-earned money goes down in value. It’s counter-intuitive, but for investors just starting out, falling markets are a good thing. You are buying more shares with your contributions when the market goes down. Then, when the market comes back up – and it always will – you see your account grow faster because of the higher number of shares.

Ignore the fluctuations, and, if you do anything differently during downturns, INCREASE your contribution. When the market drops, you can buy the same shares at a lower price. When the market returns in a positive direction, you’ll own more shares than you would have if the price had always remained high, and your returns will compound more quickly.

Don’t be afraid to ask for help. Hire an advisor to review your plan and help you determine how all these factors influence your future. Look at the fee you pay an advisor as an investment in your future, just as you view the contributions you make to the plan.

About Shotwell Rutter Baer

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

In response to the financial uncertainty caused by the Covid pandemic, Michigan State University has reduced salaries and cut the match to employee retirement plans. Previously, the university contributed 10% to employee retirement plans if the employee contributed 5%. The university administration is calling the cuts temporary, in hopes of restoring the old plan match after the 2021 fiscal year.

The old match of 10% was extremely generous, among the highest retirement plan matches around, but that doesn’t ease the pain of seeing it go away. It also doesn’t decrease the anxiety about what it might mean for your retirement plans. Here are our financial planning tips to help faculty and staff affected by these cuts:

While this cut to benefits is drastic in percentage terms, a 5% match is still considered quite generous in the corporate world. The old match of 10% was unheard of outside academia. If you are relying on the school for your salary over the long-term, the financial health of the institution is important. A benefit reduction may be easier to cope with than more drastic salary cuts or downsizing. If you are near retirement, the additional match may not be as important as it seems to be. If you are early in your career there is time to make up the difference through prudent retirement planning.

Review your budget and your cash flow. As we discussed in this earlier article about the MSU salary reductions, make sure your immediate needs are being met. Allowing missed payments and credit card debt to creep into the picture does not help your long-term financial health. Take care of business before looking for ways to shore up your retirement savings.

Get a feel for how much you need for retirement and determine the right amount to save to get you there. Check out our SRB Plan Process if you want comprehensive help getting your finances in order. It is likely you will need to increase your contributions now to make up for the reduced match. However,  it may not be necessary to try and cover the whole amount, and probably not all at once. Having a plan in place will help put the current cuts in perspective.

Once your current needs are met and you have an idea of what you need to save you can look at your contribution. Ultimately, you are responsible for your retirement savings, and that responsibility has now gotten bigger. Too often employees decide that if their company is not going to match, or reduces their match, then the employee should stop contributing as well. This is counterintuitive and an excuse for inaction but is a very common sentiment. You need to look past that and take charge of your future.

Moving retirement accounts into more conservative investments is a common reaction to market volatility and employment concerns, but this is generally a bad move. Even if you are near retirement, your portfolio will likely be invested for a long time, and short-term volatility is more of a distraction than a threat.

At the same time, there are no short-cuts. If you were taking the appropriate amount of risk with your retirement portfolio before the reduction, taking more risk now seeking a better return is not a prudent way to make up for the lost contributions.

As part of the planning process, we discuss with you the amount of risk that makes sense for your circumstances. The goal is to take enough risk to ensure growth over the long-term, without taking too much risk so that you would be in danger of not making near-term goals.

If you are in doubt, consider using a target-date fund for your portfolio. Target date funds create a portfolio that is designed for employees retiring in a particular range of years. For example, the MSU plan includes the Vanguard Target Date Fund 2030, which is geared toward participants who anticipating they will retire around the year 2030.

If you have been impacted by the Michigan State salary cuts and retirement match reduction and want help assessing the impact on your finances, reach out to our office. Our life planning approach to financial planning will help put these changes in the context of your overall situation, prioritize your financial choices, and get you on a path to success.