By Carl Trevison and Stephen Bearce “How much cash should I have now?” It seems like a simple question, but the answer can be complicated — especially in times of market volatility. Apart from an emergency fund, the amount of cash or liquid assets you need depends on many factors, including the current state of the market and major life events. “There isn’t really a general rule in terms of a number,” says Michael Taylor, CFA, Vice President – Investment Strategy Analyst at Wells Fargo Investment Institute. “We do say it shouldn’t be more than maybe 10% of your overall portfolio or maybe three to six months’ worth of living expenses.” Taylor notes that the number could change depending on what’s going on in the economy and markets. “You should make sure your emergency fund and cash reserves can meet your current needs,” he says. Taylor shares five events that should prompt a conversation with your financial advisor about how much cash to have on hand. 1. When the market is in flux The state of the market can have an impact on how much cash you should have on hand, how long you decide to hold an asset as cash, or when to convert assets to cash. This can be especially true when you foresee a large discretionary purchase such as a vacation home or a luxury vehicle. “Plan for those purchases or defer them so you don’t have to liquidate assets at a loss during market uncertainty,” Taylor says. 2. When your job status may change If you’re contemplating a career move such as starting a business, retiring soon, or facing a possible layoff, consider meeting with your financial advisor. “If you don’t have enough cash on hand during those transition periods, you might have to dip into…
Financial Focus By Carl Trevision and Stephen Bearce Wells Fargo Advisors asked colleagues and friends what they would tell someone who has just graduated and/or is starting a new phase in their lives. Here are some of the thoughts they shared. As you enter a new stage of your life, it makes sense to give some thought to how your money factors into your routines and habits. Take a close look at your money attitudes and behaviors. Maybe you have saved every dollar you ever received for every birthday and holiday since you were young. Or maybe you’ve spent every one of those dollars and do the same with every paycheck. This may be a good time to recognize and perhaps start to change any behaviors that may be contributing to a less-than-optimal outcome. It is never too late to start paying yourself first. Be intentional in your money decisions. It is tempting, if starting out with a new job with a steady income higher than you’ve ever had before, to want to go on a spending spree. Before you start spending, give careful thought to ALL the jobs that money can do for you. Money can buy things, but it can also, depending on how you use it, create stability or help you reach goals you set for yourself. Devote some time to think about the role money will play in your life. Your decisions about money can have very positive or very negative results. (Will money be your friend or your enemy?) Have a plan. Some people have a clear plan for their entire lives and start to work that plan upon graduation or at the beginning or completion of a life milestone. If you are not one of those people, at least create a one-year plan for…
By Carl Trevison and Stephen Bearce Investors may like to think they’re completely rational in their decision-making, but that’s highly unlikely. We don’t stop being human beings when it comes to investing, so psychology and emotions are apt to play roles — sometimes large ones — in the choices we make. Behavioral finance studies investors’ real-life behavior and common biases. It considers the roles emotions and psychology play in making financial decisions and aims to identify factors that cause investors to sometimes act irrationally. A key concept in behavioral finance is “prospect theory,” which describes how investors make decisions involving risk and gain. Studies have shown people frequently consider losses far more undesirable than they find comparable gains desirable. For example, take the following scenarios: Given the first scenario, most people will avoid the risk and take option one (the sure $3,000 gain). On the other hand, when presented the second scenario, most favor option two (the 75% chance of losing $4,000) because it offers the possibility of avoiding the pain of a loss. Keep in mind — and this is important — all four choices are mathematically equivalent. This means individuals’ responses were based primarily on their emotional reactions to fear of loss vs. enjoyment of gain, not rational decision-making. The psychology of risk and reward If you ever wonder why markets sometimes act in ways that defy logic, behavioral finance helps explain it. For example, bubbles can form when prices rise based on investors’ emotional reactions rather than the fundamentals. Once their sentiment eventually changes, a precipitous sell-off can follow. Take what’s come to be known as the dot-com bubble of the late 1990s. Soon after the internet’s introduction, investors realized its potential to transform our everyday lives (which it clearly has). What they were over-optimistic about were…
By Carl Trevison and Stephen Bearce When the daily news is filled with discussions about inflation, interest rates, market volatility, and endless other angst-producing events, how you react could make a difference in your financial outcomes. These tips may help you sort through the noise and create an action plan that fits your situation. Evaluate The first step is to evaluate. Do you have a current retirement income plan that you have been following? If your plan is documented, it is likely that it includes how much cash flow you need to meet your day-to-day expenses as well as for discretionary spending. Pull out your plan and take a look to determine where adjustments might be applied. If you do not have a plan or it has not been updated to reflect your current circumstances, document your assets, income sources, expenses, and debt. Gathering all the information in one place helps clearly define your total money picture. In the process, you may uncover expenditures that can be reduced or eliminated. A few adjustments may be enough to reduce the pressure on your income flow. Retain or adjust If your plan is addressing your current needs, it can be reassuring to confirm that your plan is working as you had expected. If your income needs no longer match your income plan, depending on your circumstances, there are actions you may want to consider to get your plan on track. These may include: Altering your withdrawal strategy to change the amount in taxes you pay on your retirement income to give you greater spending power Reallocating your assets or temporarily reducing withdrawal amounts to address any concerns about drawing down your investments in a down market Including inflation-indexed investments or other income-generating strategies in your portfolio Adding an annuity with income protection,…
By Carl Trevison and Stephen Bearce Four key considerations could help young adults create a mindset to succeed with saving and investing for the future. Michelle Wan, Wells Fargo Investment Institute senior wealth investment solutions analyst, has met many younger clients who have had reservations about investing. “Young investors may find themselves delaying investing for retirement because it seems so far in the future. Alternatively, they may enjoy trading volatile investment instruments for rapid profits,” she says. “They don’t realize how important it is to methodically develop planning and investing goals at a young age. Time is a young saver’s greatest ally.” Here, Wan shares four key considerations for young savers when it comes to prioritizing long-term savings and investment plans. Adopt a planning mindset One key factor is having a planning mindset — a positive and proactive stance that could set savers on a path to positive financial outcomes. A planning mindset can provide a road map that can help strengthen a person’s financial future. Start with small changes Small changes in your financial behavior today could have a big impact on long-term success. Creating a budget, building healthy financial habits, and becoming more comfortable and familiar with investing could go a long way in contributing toward achieving long-term financial goals. Some practices to consider: Automatically transferring part of your income into a savings account or an investment account Paying down student loans to avoid late fees and damage to credit scores Begin saving and investing now Start saving for retirement as soon as you can. The sooner you start, the more time every dollar saved has the potential to grow. If dollars saved early in your working years generate investment gains year after year, they can have a much bigger impact on the size of your account balance…
By Carl Trevison and Stephen Bearce We all use credit in our daily lives, whether it’s to help optimize cash flow, create tax efficiencies, or make purchases. A rising-interest-rate environment could be a good time to take a closer look at liquidity strategies and other forms of borrowing. Using cash versus borrowing It could make sense to pay cash instead of borrowing in some instances. Let’s say you have a fair amount of cash and are not planning to invest it in the market. That could be a good solution for buying a car or a house, paying for a child’s education, or expanding a business. Amid higher interest rates, paying cash could be a better option than securing a long-term loan to buy a costly item. “Increased rates may also impact purchasing power for bigger-ticket items (such as homes, boats, and airplanes) traditionally financed over longer periods,” says Brian Singsank, senior lead wealth custom lending specialist, Wells Fargo Wealth & Investment Management. “It’s important to evaluate your balance sheet and wealth plan to make sure they are aligned to help meet upcoming liquidity needs.” Also, if you have an existing variable-rate loan, such as an adjustable-rate mortgage or line of credit, that rate could go up, resulting in higher interest costs. “If it’s still a long-term funding need, when interest rates are rising could be the time to evaluate,” Singsank says. Whatever you decide, timing can be critical. Your investment planners can help you decide on what is best for your current situation. Discuss credit and liquidity needs with your advisors “Be proactive when interest rates change,” says Singsank. “Consider reviewing your wealth plan and related credit and liquidity needs with your banker, advisor, your CPA, and even an estate-planning specialist.” Singsank recommends starting those conversations by sharing your…
By Carl Trevison and Stephen Bearce To determine how much you will need to fund your retirement, it’s helpful to estimate what your budget will look like. These four questions could help you identify your retirement lifestyle and plan for the related costs. What will I be doing? Do I plan to continue working past age 65 or after I reach my full retirement age? Full time or part time? Are there hobbies I want to pursue that will either cost money or make money? Is there volunteer work that may also have costs associated? Do I plan to travel? Where? Are there things I enjoy that have related costs? Where will I be living? Will I stay in my current home or downsize to something smaller or a rental property? Will I move to a retirement community or assisted living facility? Will I sell my home and replace it with an RV or other alternative living option? What situations could impact my expenditures? What health care coverage do I need for my health conditions? Do I have an emergency fund for unexpected situations such as a health care crisis or property loss due to a natural disaster? What if I stop working sooner than expected? What happens if I experience a significant income loss? What barriers are keeping me from investing? I have nothing extra to invest. I have education loans or other debt. I don’t know how to start an investment plan. I have time to start saving later. Next steps Prepare rather than panic. Create an outline from your answers to these questions. It should give you the framework to calculate the income you may need to support your retirement lifestyle. Decide to adjust your spending patterns today. Choose something you really don’t need and redirect that…
By Carl Trevison and Stephen Bearce Scammers are relentless when it comes to finding new ways to take advantage of people. They may claim to be contacting you on behalf of your bank, a government agency, a shipping/delivery company or any person or business with which you have a relationship. Their methods and messages can be very convincing. They employ a variety of scams (auto warranty renewal, problems with a Social Security payment, debts owed to the IRS, health insurance renewal, or a relative stranded and needing money for transportation) and often present a sense of urgency to attempt to gain information and/or money from their targets. The following tips could help you avoid becoming a victim of fraud: Verify the source Be certain that the person calling or contacting you is who they claim to be. Scammers can make calls and texts look s if they are coming from your bank or an actual business. Even a text or email that seems to have been sent by a friend may be coming from a phone number or account that has been hacked. Contact the person, bank, or business directly to confirm the legitimacy of the communication you received. If you did not initiate the communication using what you know is a legitimate telephone number, email address, or website account location, do not give out any personal information including your address, birth date, Social Security or account numbers, or PINs. Be vigilant On phone calls you receive: Don’t answer a call from an unfamiliar number. If you do answer a call from an unknown number, if prompted, do not enter a response to stop receiving calls. Hang up. If you do answer a call, ask questions before you answer any questions. Some scammers immediately ask “Can you hear me?” If…
By Carl Trevison and Stephen Bearce As a parent or grandparent, you likely want to teach children sound money habits and help them become financially successful adults. There are a variety of ways to instill good financial habits. The following two approaches allow you to gift assets to children while providing them with hands-on investment experience that may prove useful in the future. Custodial accounts Custodial accounts can be opened for your children before they turn 18. They can be a useful vehicle to teach them about the principles of money and investing. With these accounts, custodians control how investments are managed. Sharing account statements and the way you make decisions on your children’s behalf can be an opportunity to teach smart investment principles. There are a couple of considerations you will want to think about as you determine whether such an approach is right for you and your family. First, when funding these accounts, keep in mind that control of these accounts transfers to the child when the custodianship ends. This generally happens when the child reaches age 18, 19 or 21, depending on state law. You may not want your child to have control of more financial assets than they can handle at that age. It is also important to know that special tax rules, the “kiddie tax” rules, may also apply. The income or capital gains generated in these accounts could be taxed at trust income tax rates for children under age 19 (age 24 if a full-time student). This means your young child may have to file an income tax return of their own, and the tax bill could be higher than if you held the assets in your own name. Your tax advisor can help you determine how these rules would apply to your situation….
By Carl Trevison and Stephen Bearce Before you make the decision to move on from your job, review this checklist of important financial considerations. Some involve making sure your personal finances are in order, while others can help you explore all the implications of leaving your current job. Review your current retirement benefits. Check the schedule for your employer’s 401(k) and profit-sharing contributions to see how long you have to work to claim any matched funds. If you’re close to being fully vested (meaning you’re entitled not just to the dollars you contributed but also to the dollars your employer did), it may be worth sticking it out a little longer. Keep in mind that some plans require that you be employed on the last day of the plan year to get employer contributions for that year, even once you are vested. You may want to wait until after the plan year ends before you terminate employment so you don’t lose those contributions. Make a plan for your employer retirement account. If you have an employer-sponsored retirement plan, such as a 401(k), 403(b), or governmental 457(b), understand your options for your account. You may decide to take your money out and pay the associated taxes. And if you are younger than age 59½, there may be additional tax penalties for early withdrawal. Another option is to roll over your account into your retirement account at your new employer (if they allow it) or into an individual retirement account (IRA) that you set up. Some company plans allow you to keep your money in their plan; however, you will continue to be subject to the rules of that plan regarding investment choices, distribution options, and loan availability. If you have any concerns about the future viability of the company you are…
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