Brad, Author at Sherman Wealth Management

LACK OF FINANCIAL LITERACY IN AMERICA’S SCHOOLS

“According to Money, the average millennial household “owes $14,800 in student loans.” Writer Kerri Anne Renzulli explains that while debt averages vary across each generation, people of all ages are demonstrating a greater comfort with debt. As everyone becomes more comfortable with financing and credit, there is a greater risk that accumulated debt will never be paid off in full.

‘Younger people are taking on debt at a higher rate and paying it off at a lower rate,’ says Lucia Dunn, an economics professor at Ohio State University who has studied consumer debt. ‘When they reach age 75, the debt picture for them will look a lot different than what we currently see. When you project out these trends, it is not so optimistic.’

The country should take a proactive approach in preventing debt from spiraling further. Requiring personal finance in high schools with the goal of establishing financial literacy in young people before they become independent is a logical first step.” (Read entire article here https://www.nola.com/interact/2018/11/should_high_schools_be_require.html)

Last week, I had the privilege of volunteering as part of Leadership Montgomery at Finance Park at Thomas Edison High School in Montgomery County. Growing up, I was involved with Junior Achievement in high school and jumped at the opportunity to be included in this experience with some 7^th graders from Briggs Chaney Middle School. As part of this program, I spoke to the students about managing debt, establishing credit, the benefit of low interest rates on your monthly payments, and the idea of “wants vs. needs.” In today’s world, many adults still struggle with these concepts and even many Wharton students lack a basic financial education.(https://www.cnbc.com/2019/04/26/even-mba-students-could-use-some-basic-money-lessons.html). It is extremely important that we start basic financial education at an early age so that our children have the financial wisdom necessary to become successful adults.

https://youtu.be/Pmb7oyq-OTc

What The Shift In The Federal Reserve Language Means For You

Yesterday, the Federal Reserve held its benchmark rate at 2.5%. It only took one word from Fed Chair Jerome Powell on inflation to send the markets reeling, and that word was “transitory.” According to this CNBC article “Traders have been speculating that recent weaker inflation readings would concern the Federal Reserve so much that it would cut interest rates later this year. Powell knocked that idea, by explaining that the central bank still sees the weakness as the result of “transitory” factors, such as portfolio management services, lower apparel prices and airfares. The Fed’s target on inflation is 2%, and the core PCE rate watched by the Fed fell to a surprising 1.6% in the first quarter.” President Donald Trump, who earlier this week urged the Fed to cut the rate by 1 percentage point was most likely frustrated with the Fed chair as well.

Since the Fed did not indicate which direction the next move may be, this is a good time to review any variable interest rates you have (student loans, etc.). Use this opportunity to pay down these types of
debts and boost your savings cushions. And, for those of you who might be getting tax refunds,
you may want to think about using that money to add to your savings or pay down debt.
As your April 30 bank statements come in, this is an opportune time to re-evaluate your
checking and savings accounts. If you aren’t earning at least 2% for your short-term goals, you
should be looking into some new options.

With some mortgage rates are at a low of 3.125%, there are hopes that this will continue to
stimulate the housing market. It’s also a good time to look at your current mortgage rate. If
you have an ARM that’s expiring (adjustable rate mortgage), now is good time to consider
whether it might be worth converting that to a fixed rate mortgage. Now is the time to take advantage of lower long term rates that may not be here forever.

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Coaching Students at the MCPS Business Pitch Challenge

As the son of a Montgomery county school teacher, I was so honored to mentor a group of hard- working students from Albert Einstein High School in Montgomery County rise to success in giving an incredible pitch to the judges at the Business Pitch Challenge. As the month of April is Financial Literacy Month, this was a great time for me to help make an impact in increasing the financial literacy among students. These students have the privilege of taking a business and finance course at the high school level. They are already much more advanced in their understanding of business operation and level of financial understanding than the majority of this country. As of 2019, 19 states require high school students to study financial literacy before earning a diploma, which is up from 17 in 2018 and 13 in 2011. It is great to see this progress year to year. At the business Pitch challenge, I listened to the students’ pitch which included a deep analysis of revenue, profit margin, and expenses of their business idea: a drone delivery service, which would deliver packages from door to door.

I encouraged the students to deepen their analysis by cutting costs through changing their business model from serving as a manufacturing company to serving as a software as a service business. This way, the company would be able to cut down on high fixed costs and focus on driving recurring revenue. The important thing to note is that the students were able to hold a discussion on cost-benefit analysis, while most high school students could not due to their limited understanding of financial metrics. Whether the Drone package delivery service would become a million -dollar company or not, these students have won the lottery by attending a school that would allow them to study finance before the rest of their peers across the country. The earlier students start to understand this material, the better. As they reach college and beyond, it is crucial that they become financially literate, which will make them financially smarter. It is crucial that young adults are able to make potentially complex decisions about student loans, mortgages, credit, and managing retirement-savings accounts. According to research studies, on average, students in states that require financial literacy courses in high school have lower credit card balances and pay for college using lower cost student loans than students living in states without this mandate. States with the mandate to incorporate financial literacy courses into the curriculum have seen an overall improvement in credit scores and a lower rate of late payments on credit cards among young adults. This shows how important it is for students to begin increasing their financial literacy as early as high school.

As a financial advisory firm, Sherman Wealth is a big proponent of starting to increase financial literacy at an early age. We are excited that students in Montgomery county are working to increase their understanding of business strategy and financial information, which is what we think will help them long term. This is why I was excited to be a part of the business pitch competition and help coach the students into developing strategic ideas and better their business model

Teachers Get Screwed The Most

It’s very unfortunate that school teachers, arguably one of the largest value-ads to communities across this nation, are getting taken to the woodshed on their retirement options. It’s 2019 and public school districts still haven’t found a way to properly help these individuals build a nest egg. We hear and see it all the time. In fact, we met with a 66-year old teacher yesterday from right here in Montgomery Country. As we wrapped up the introductory meeting, we already knew what would be uncovered as we began going over her statements. Sure enough, we were correct. To be frank, seeing this stuff is really frustrating, especially to me, a son of a public school teacher, who learned all of this first hand.

Most Americans who save for retirement at work have a basic 401(k) plan. These are offered at most companies and provide a decent selection of investment opportunities. The fees may be a little high, but these employees can build a properly diversified portfolio and it’s a win-win in the end for everyone involved. But there is a whole other sub-set of Americans who do not get to participate in a 401(k) plan. These include public school teachers, clergy members, employees of religious institutions or nonprofits, etc. These individuals are allowed to invest in what is known as a 403(b) plan. As a result, the people who do the most good in the world, spending their careers assisting others for below-average pay, often get screwed the most.

But it’s not their fault. They have to invest in something, right? And if this is their only option, what else are they to do? Most 403(b) accounts are peppered with complex, expensive products that usually cost their owners tens of thousands of dollars over their careers. How is this possible? One reason is that the 403(b) accounts that many workers contribute to are not held to the same rules and regulations as a 401(k). When these employees are told that these are approved products, they automatically assume the school district did some due diligence on it. Think again. We hate to be the bearer of bad news, but the district you work in doesn’t pay any attention to these plans or products. To them, it’s just another hassle.

Be wary of any adviser who takes commissions of any sort from investment or insurance companies. Ask whether any adviser your organization hires will be on call for one-on-one advice, too. We once talked to a teacher who said she literally called around to vendors in her state, looking for anything with a fee under 1.50%. What’s the worst part? No one could meet those (very simple) requirements. In fact, according to the analysis prepared by Aon Hewitt, the average fees charged on variable and fixed annuities and mutual funds included in a 403(b) plan look like this:

Variable annuities: 2.25%.
Fixed annuities: 1.15%.
Mutual funds: 0.97%.

By contrast, the average expense ratio of an ETF is just 0.44%. Unfortunately, ETFs rarely appear as an investment option in 403(b) plans.

So, who’s fault is this? Ultimately, it falls on the individual school districts to properly vet the companies and salesman who are finding their ways into schools, like cockroaches in the night. We wrote a piece recently on why it’s an employer’s responsibility to ensure that their employees are being properly educated and informed on their retirement options. It is not the individuals responsibility to research the best choices. In all honesty, these individuals wouldn’t even know where to start in regards to due diligence between various products and funds.

In the end, 403(b) plans in the modern world are outdated compared to their for-profit employer 401(k) plan peers by roughly 20 years. Most importantly, their existing multi-provider record keeper platforms, incredibly long investment menus, and inability to employ proper, institutionally-focused investment options have created an environment that impairs retirement outcomes for participants. It’s a sad reality for those who contribute to our society in such a respectable and positive way.

If you are school teacher and are having trouble navigating your 403(b) plan and are unsure of where to turn for conflict free advice, please feel free to reach out to us and we’d be happy to assist you and any manner.

The Importance of Financial Literacy

It was recently announced that the state of South Carolina was pushing to pass a bill that would require all high school students to take a course on financial literacy in order to graduate. Five states (Alabama, Missouri, Tennessee, Utah, and Virginia) are the only other states to have passed a similar law. As professionals who strive to preach the importance of this topic, we are very happy to see these developments. In fact, we think it’s particularly great that we, as a nation, are beginning to demand that children learn the basic of personal finance, before they step out into the real world.

But first off, let’s tackle what the actual definition of “financial literacy” is. Financial literacy is the combination of financial, credit and debt management and the overall knowledge that is required to make responsible decisions regarding financial matters. Really, we are talking about the impact of finances on the daily issues an average family may encounter.

Is the rate of financial literacy low in the US? Yep. (Actually, it’s low around the world.) Of course, the level of financial literacy varies according to education and income levels. However, there is a lot of evidence out there that shows that highly educated individuals with above-average incomes are almost equally as under-educated on these topics as those who may live a more modest lifestyle.

source: S&P GLOBAL FINLIT SURVEY

Given this information, it is becoming increasingly more important to ensure that we are preparing our children with this knowledge well before they are starting college, creating families, and living an “adult” life. Why? Because it’s about the “long game”. Financial literacy is critical in helping people plan for retirement and avoiding high levels of debt. Last year, a study from TIAA-CREF showed that those with high levels of financial literacy are more likely to make astute decisions and typically, over their lifetime, amass twice as much wealth as those without a plan.

If you can’t build a simple household budget, then you are likely financially illiterate. If you are oblivious to money-related decisions, are unsure of the consequences of these decisions, or you simply don’t care, then you’re financially illiterate. Most importantly, If you have learned the “hard way” over the years that not being up-to-date on financial matters has affected your life in a negative way, it is imperative that you do not allow your children to make the same mistakes. Important financial decisions are popping up earlier and earlier in life, as the world becomes more complex. You don’t “build” wealth and then figure out how to manage it properly. That ability to grow comes with managing it properly along the way.

The statistics mentioned above are some of main reasons we have created the “Beers with Brad” seminar series. We feel that increasing your financial literacy is incredibly important to your long term financial goals and obligations. If you are in the DC/Maryland/ Virginia area and would like to hear more, feel free to stop by our next event.

Who is responsible for 401(k) participation?

If someone were to ask the famous Nobel Prize winner Richard Thaler this question, I think his answer would clearly be “managers and executives”. And to be honest, he makes a pretty compelling point.

As a man who has spent his career studying human behavior, Thaler draws the conclusion that humans are predictably irrational and consistently make choices which are not in their best interest. While this seems very simple on the outside, the findings are quite complex. Here’s a great example: only 50% of US workers participate in a workplace retirement plan. While some don’t have access to this type of benefit, many do have access, and simply don’t take advantage of it. Yet, we know that saving for retirement (and taking every advantage) is the optimal route to take.

Most of us would say we make wise decisions for ourselves and our families, but the data does not back up this sentiment. Thaler has also found that people only save money if it’s automatic. Thus, he feels to most important aspects of a 401(k) offering are:

Automatic enrollment
Automatic escalation
Good default low-cost investment options
Helping individuals roll their 401(k) into an IRA when they change jobs

Again, this seems like a very easy concept for CEOs and managers to adopt, but that doesn’t seem to be the case. Thaler proclaims, “If the employees at your firm are not saving enough for retirement, realize that it is your fault. And that is because we know how to make saving for retirement much easier and more successful.” But since so many workers aren’t saving, he places the blame on the managers themselves.

But why should you care? Because the financial wellness of your employees will affect the bottom line of your business. A report released by Gallup on the Economics of Well-being tells us that having a low sense of financial stability can lead to “stress, anxiety, insomnia, headaches, and depression”. All of these emotions lead to reduced productivity and output. And worse? Employee retention also tends to spike.

Step one: HR managers and senior executives should make 401(k) participation an “opt-out” decision. This creates a wall to prevent individuals from harming themselves by passing on automatic retirement savings. Second, escalating the amount of these contributions -over time – will allow your employees to increase their savings rate. Most studies have shown that your monthly savings rate is the number one statistic that will decide whether you will be able to retire on time or not.

Third, it is imperative that these retirement plans have low-cost investment options for employees to choose from. Simple index funds really will get the job done. In much of his work, Thaler points to the fact that humans are consistently irrational, so nudging them towards smart investment choices is important.

The key to checking off these boxes is most likely automation. Managers and CEOs have the authority to make these decisions. In theory, the financial stability of your employees (and the ability for them to feel that stability) is largely dependent these types of executives. However, when said managers do indeed take these steps, it’s really a win-win situation for everyone involved. Your employees’ minds aren’t elsewhere, worrying about paying the mortgage or whether they have enough saved to cover a medical emergency. Employees come to work with a clear head. They feel happier and therefore you get more production out of your employees.

If you are a small business owner and feel that you may be spending too much on 401(k) plan costs or that your employees are bringing non-related stress into the workplace, please feel free to reach out to us. We work with multiple small business and their employees in the DC Metro to help bring a sense of peace and stability to personal financial planning issues.

How empty nesters can get back on track

Now that you’re done spending money on clothing, food, child care – and don’t forget the biggest expense, education – it’s time to focus on your own financial needs. After all, the average cost of raising a child today in middle-class America is nearly $250,000, excluding college tuition expenses. These types of numbers leave many couples in “catch up” mode when it comes to their savings and retirement planning.

The first step, as we all know, is creating a plan. You can’t make any headway towards debt and savings goals without a clear, executable strategy. Three big keys are: concentrate on building up your investments, boost your credit, and reevaluate your real estate needs. This is a major inflection point in your life, and thus an ideal time to consider all these topics.

Regarding your savings, your cash flow is (hopefully) growing, or at least turning positive. Because you have a limited amount of time to get things in order, taking action in the areas mentioned above should be done as soon as possible, especially if any emergency funds have been drained. More parents tend to undersave and overspend while their children are still living under their roof. Here are some questions to ask yourself:

Do we have enough cash to make it through the next economic contraction or bear market?
Is our credit card debt manageable?
Are the balances in our 401(k) and IRA accounts where they need to be?
Is our house “too much” for us without the children?
Do they kids still need insurance?

Now that some of your larger expenses have come and gone, there must be a mental shift from “paying the bills” to “creating a better future”. You will need to monitor your assets more closely now, and extra money should be going more towards retirement accounts and less towards material things. There is good news for those who may be a little behind, as the IRS has increased contribution limits in 2019 for 401(k) and IRA accounts.

However, one key to keeping your nest empty is taking the time to educate your children on the importance of personal finance. This is a very important step in creating and maintaining a “moat” around your new-found savings. The more educated your children are on the basics of day-to-day money management, the less likely they are to need your assistance in the immediate future. These are great opportunities to preach to them about not living beyond their means, sticking to a budget, saving a little each month, and the consequences of debt.

There are a few important things than can be tackled that will allow you to get off on the right foot towards rebuilding your retirement savings. The key is to capitalize on the new-found opportunities to do so. And one of those, in this moment, is a focus on your future, not your child’s future. Of course you should give them the tools to financially fend for themselves, but going forward the main goal is retirement for you and your spouse.

Tips for furloughed workers during the shutdown

Before we get started, lets recognize that this isn’t the first time there’s been a shutdown, and it probably won’t be the last. But that doesn’t change the fact that so many workers are now reaching their third week of no pay. There are roughly 800,000 federal employees who are not receiving paychecks right now, many of whom are located right here in the DC Metro area. While some are technically on a “leave of absence”, many are being expected to work for no pay. What’s worse is that federal employees already make, on average, quite a bit less than their private sector peers. On top of this, while most workers are expecting to be paid retroactively once the shutdown is over, it’s not mandatory.

First and foremost, take a look at your monthly budget and find items you can easily remove.

Another helpful tip is to contact your bank. In fact, one institution headquartered here in the DC Metro, Navy Federal Credit Union, is extending a zero-interest loan up to $6,000 with no fees and a grace period. Many banks are willing to make exceptions. Bank of America and Wells Fargo also have outreach programs that assist federal employees. Most institutions have similar processes in place for their employees that allow them to contact creditors and landlords in order to ask for assistance.

Another step that federal employees can take is to proactively reach out to creditors. Best move? Develop a simple letter that explains your situation: “I am a government employee who has lost income due to the government shutdown. Due to these events, my income has been drastically reduced for the time being and I am unable to make my payment in full this month.” On top this, don’t forget to include account numbers and contact information with the letter.

While filing for unemployment may seem like the best “quick fix”, that isn’t necessarily true. A large portion of these federal employees can apply for unemployment while on temporary leave of absence. Unfortunately, this doesn’t cover everyone. For those who are expected to report to work without pay (as mentioned above), do not qualify for these benefits. In most states (and D.C.), if you collect unemployment benefits, and then receive retroactive your pay, you will indeed be require to repay the government.

If you are a government worker who participate in the Thrift Savings Plan, you may take loans from their retirement savings if the furlough is expected to last 30 days or less. You may not take the loan if your leave goes beyond that period. However, remember than once you remove money from your retirement account, that money is no long invested in the market. You will also be required to repay the money, so this should be used as a last resort.

One last note to keep in mind: Be skeptical about picking up work while you are on furlough. Even though the government is shut down, you are still an employee of the federal government. Because of this, certain employment (outside the scope of your federal job)may be restricted.

While these tips may bring short-term relief, the best course of action is to develop a long-term plan for these types of situations. This will be the first time that a government shutdown has extended past two pay periods, making the financial situation for many households that much tighter. No one knows how long the current shutdown will last, or when the next will arise, and that is exactly the reason to be prepared for these types of scenarios.

If you are federal employee who has questions about your day-to-day income during the shutdown, and are wanting to talk to a professional, please feel free to reach out to us. We are more than happy to assist you in this time of instability.

Now is the time to check your W-4

The White House announced yesterday that tax refunds would be processed even though the government is still shut down. Which reminded me that now is a great time to revisit your W-4. Why? Because t’s very, very likely that the W-4 form on file with your employer is off. Last year, the Treasury Department and the IRS released updated withholding tables (below) to reflect the new Tax Cuts and Jobs Act. The legislation resulted in lower individual income tax rates, a doubled standard deduction and the elimination of personal exemptions.

As we know, taxes can be somewhat finicky: if not enough is withheld, you’ll owe money come tax time. Pay too much, and you end up with a large refund. On top that, while earning a bigger paycheck twice a month sounds awesome, it could come back to hurt you come April. With all this being said, we obviously want to be as close to zero as possible. But how do we accomplish this in a changing tax environment?

Prior to 2019, it was common to withhold less from your pay if you had deductions that were itemized. However, that may no longer hold true considering the fact that the standard deduction is nearly twice what it previously was. Due of these new tax laws, a high percentage of households who itemized in previous years will no longer be able to do so (another reason to check up your withholding). Previous laws also allowed income earners to withhold less in taxes if you they had dependents. Going forward, these types of exemptions are gone, so those filers should review their pay stub to ensure that they’re not under-withheld.

Another reason to make sure your refund isn’t “too big” is because you will, more or less, be giving the government an interest-free loan. With cash accounts now paying above 2%, that money is better off working for you in your own account. This would allow you to pay off debt, add to your savings, or a multitude of things that are better than simply giving it to the US government for a year, which we have covered before.

If you are retired, one option is to use your Form W-4V to withhold a flat rate from your Social Security earnings. Further, use your Form W-4P to withhold from your pension. Additionally, there are new limits on deductions for state and local taxes and home mortgage interest, a big item for many in the DC Metro and other locales.

If you’re feeling confused about the upcoming tax season (which is almost upon us), please feel free to reach out to us. We have worked with many CPAs in the DC Metro area and would love to further assist you in finding the best fit for your tax questions.

Weekly Market Review 1/4/2019

Staying in theme, it was another wild week for stocks. Investors, who are probably over the volatility from 2018, were unfortunately required to sit through a couple more brutal sessions on Wednesday and Thursday, as the Dow Jones Industrial Average notched its worst start a year since 2000. However, following a reassuring tone from Fed Chairman Jerome Powell on Friday, large indices will actually finish the week in positive territory.

Earlier this week, President Trump seemingly doubled down on his willingness to let the government shutdown continue. The President is staying solid on his refusal to sign any funding bill that does not include $5 billion for a wall on the U.S.-Mexico border. Democrats remain insistent they will not provide the votes to give him that funding as the shutdown now stands at fourteen days.

Much of the worry in stocks began on Wednesday, when Apple had its worst day in 5 years, moving down almost 10% at one point. The company slashed its quarterly revenue outlook (almost a month before it’s scheduled earnings report), blaming its lowered projections on soft iPhone sales in Asia, with CEO Tim Cook publicly attributing some of the weakness to U.S.-China trade tensions.

Financial markets have been in turmoil over the past several months, in part over concern whether the Fed was being too aggressive in its stance on hiking rates. In fact, Chairman Powell himself has helped to fuel some of that speculation. On Friday, Powell did offer remarks to show that Fed policy will take into account economic conditions and be adjusted accordingly. Powell also noted that the economy still looks quite strong.

According to the data release this week, U.S. employers added 312,000 new jobs last month, nearly double the Street consensus of 177,000. Average hourly wages also rose, to an annual rate of 3.2%, while the headline unemployment rate bumped higher, to 3.9%. The strong December jobs report is a net positive for stocks because investors’ biggest concern has been slowing growth. On top of this, recent data shows that 2018 saw the most manufacturing job growth since 1988, with a net 264,000 jobs added over the previous twelve months.

Oil futures had their first weekly gain in a month, as the previously mentioned (and positive) economic data boosted the outlook for global growth in general. Prices also climbed Thursday as separate surveys showed December crude output from major producers saw their biggest monthly declines since January 2017.

U.S. retail sales were up 5.1% last year to reach than $850 billion, according to a Mastercard report that looks at consumer purchases from December 1 through 24. It was the strongest performance in six years. The National Retail Federation had projected that consumers, on average, planned to spend $1,007 for decorations, candy, gifts, and other purchases for themselves. It was also a great year for online retail, with sales jumping 19.1% over 2017 according to the same study. Apparel sales were up 7.9% year over year as well, showing the best growth since 2010.

Are you aware of what you’re paying in fees? Is your portfolio truly in line with your risk profile? You’d be surprised at the number of people who have never asked their advisor these questions. If you’d like to explore further, please feel free to schedule a meeting by clicking here!