Darren Straniero, CFP® OnPlane Financial Advisors
- 16100 Riffle Ford Road , Darnestown, MD 20878
- (703) 856-7979
About Darren Straniero, CFP®
My professional purpose changed when my wife and I were blessed to go from having 1 child to 5 children in just 2.5 years. That wasn’t built into our financial plan!
Today, I help BigLaw Associate attorneys solve a problem I call “financial contempt”.
In the legal world, this would refer to the offense of being disobedient to or disrespectful of a court of law and its officers. In my world, it’s a disregard for something that should be taken into account, financially.
Basically, what I’ve found is that even some of the smartest people (like attorneys!) make small, consistent mistakes with their finances. And over time, these mistakes – if left unchecked – can cost you thousands of dollars in excess taxes, fees, and opportunity cost. Eventually this can cause your financial life to become out of balance.
By providing direction and accountability in my clients’ financial lives, I help them get the right answers to their questions before problems arise. In short, I manage the future for you, so you can spend more time today focusing on the other meaningful areas of your life.
I’m a Certified Financial Planner® professional who has spent the last 10+ years in the financial services industry. My practice revolves around three key phrases:
-Life is NOT a straight line (see: 4 kids in 2.5 years!)
-Focus on factors YOU can control
-Do well. Be well. Financially
You’ll find me talking about these a bunch in my blog.
There’s more to life than work, though.
My wife, Jill, and I were married in 2008. We have five kids: Jackson, Thomas, Charley, AnnaMay (twin girls), and Sutton. We love watching our kids play sports and both Jill and I coach their teams – sometimes we even coach together! We also love to go the beach and we spend time in the summers in Rehoboth Beach, DE.
If I’m not managing the future for clients or with my amazing wife & five kids, you might find me coaching, cooking, golfing, or playing cribbage.
Recently I saw the trailer for Top Gun 2. I love the original Top Gun movie. I'm not sold on the sequel - are they ever any good?
One of my favorite lines from the original Top Gun movie occurs when the Top Gun class is in session outside and Charlie is debriefing the pilots on the MIG fighter jet. Maverick interjects and well…watch for yourself.
"Because I was inverted."
Man, I love that line.
Today, you might be hearing some talk about the term "inverted" in a different fashion, as in the inverted yield curve.
An inverted yield curve is a reference to bonds. More specifically, an inverted yield curve happens when it costs more money to lend at shorter term rates than it does at longer term rates.
Typically a bond will pay a higher interest rate for longer terms. And that makes sense. Here’s why:
If you gave me money and I promised to return it in one week, you wouldn't require a lot of (if any) interest on that money. But if I promised to return it in 10+ years, you'd probably want a higher rate of interest. After all, you aren't getting your money back for 10+ years. And it's possible you don't get it back at all. So a smart investor (you!) wants to be compensated nicely for those risks:
The lost use of your money for the next 10+ years
The risk of not getting it back
Simply put, that's why a longer term bond should pay more interest than a shorter term bond.
Sometimes - like our current environment - the bond market gets a little wacky and short term Government bonds pay or cost more than a longer term Government bond. In fact, it's only happened 9 times when the 10-year Treasury bond has paid less than the 2-year Treasury. This current environment marks 10 times.
So what is this telling us?
It can tell us many things, if we look for them. One headline you might read is this indicator has a pretty good track record of happening before a recession. It doesn't predict a recession per se. But in the past when it's happened, a recession has followed any time from shortly thereafter up to roughly 24 months later. So there's that.
On the contrary, you can also read suggestions refuting this "trend" and pointing to other measures causing our inverted yield curve.
Two points to remember:
We are not market predictors
We could imagine these short term rates might be running high because tight monetary policy is slowing the economy. Or we could surmise that investors (read: day traders, stock pickers) are worried about long term growth and are pushing down the long term rates reaching for the safer, longer term Treasury bonds. We might imagine it could be a reaction to policy making or that negative bond yields in Europe & Japan have reached into the US bond market and pushed down Treasury interest rates. Or who knows what else it could be. No one knows, really.
And since we can only use indicators for informational purposes, we are going to turn to our second point.
This is an opportunity to focus or refocus on financial factors we can control.
Where are you in your financial journey?
Does your income depend on the stock market? If so, will you be able to meet your income needs in the event of a market decline?
Does your spouse's or your income depend on a strong economy? Is your pillow money sufficient in the event of a job loss or reduction in income?
Are you comfortable with where your money goes, and why?
Maverick and Goose used their time being inverted as an opportunity to "communicate." While I don't suggest keeping up with foreign relations in the same manner as Mav & Goose, I do think our time being inverted is a good time to communicate as well. Check in with your spouse, check in with your financial advisor.
We can’t control if/when we experience a recession.
We can control how prepared we are if/when we do experience one.
Have questions? LMK or schedule a time to talk.
Today we’re exploring solutions to a very common question I hear from clients and potential clients alike:
"We're maxing out our retirement accounts at work and we want to save more money. What are our options?"
First, if this sounds like you - congratulations. You’re probably saving at a pretty high clip relative to your income. And second, you're probably getting that employer match which means you're taking full advantage of your compensation.
In the Metro DC area, the median household income is $82372. So if your spouse and you are simply "average" earners and you're maxing out your retirement accounts at work, you're saving 23% of your gross annual income.
This is pretty sweet as you may remember from The Great Chase that rate of savings is a far better measurement for financial success than rate of return.
I imagine some of you reading this might make more than that. And you might be able to save more money than what you're allowed to sock away in the 401(k). Here's an example: we have an annual household income of $300,000 and both spouses work. And they're good savers, saving 18% of their gross annual income ($54,000). Both are maxing out their 401(k) plans at work to the tune of $38,000 ($19k x 2, right?). This leaves another $16,000 of money we can (want?) to do something with.
So what can we do? Let's take a look…
Get that Pillow Full of Money
That's my way of saying make sure your emergency/rainy day fund is full. I call it pillow money because while google will tell you anything from 3 months to 12 months of living expenses, I've found that measurement doesn't work for everyone. Everyone has different cash flow needs. Remember, this stuff is personal!
Fund an IRA
The IRS allows everyone to open and fund an IRA. If you can contribute to a 401(k) at work, your ability to deduct your contribution is limited by the amount you make. However, everyone can still fund it up to $6000 (2019) and $6500 for folks age 50 and older. The contributions are post-tax however the funds grow tax deferred and when you take the money out in retirement you are only taxed on the gains, or the amount of money that grew over time. Since we're already participating in the 401(k) and IRA's require you take money out during retirement, this isn't my favorite option for super savers. It also locks money up since IRA's have penalties for taking money out before age 59.5.
*we won't get into this today, but another option here is to execute what's known as a "backdoor" ROTH IRA. Again, since ROTH IRA's have lower income thresholds this move offers high earners the opportunity to fund a ROTH IRA.
Open a Taxable Brokerage Account
Another option is to open a taxable brokerage account. These can be jointly owned or separately owned. Since we've already maxed out our tax-deferred employer plan and maybe the IRA option, the taxable brokerage account is a good choice here. The only tax-advantage here is growth inside the account can be taxed at capital gains rates. Capital gains rates are typically lower than what an individual might pay in "ordinary" tax rates, but not always. Another advantage here is the funds are semi-liquid. You typically won't pay any fees for needing the money before retirement. The only caveat here to liquidity is the risk associated with having money invested in the market.
Employer Plan After-Tax Option
I’ve come to really like this next option. Maybe even love it. For some of you, your employer will allow you to contribute to your 401(k) plan above and beyond the $19,000 maximum. Any funds contributed in this case go in as after-tax dollars similar to the IRA example above. We also get the tax-deferred growth similar to the 401(k) and IRA option. This is an advantage over the taxable brokerage account. However, we also lose the liquidity advantage. The biggest advantage to this strategy is this: when we leave our employer and/or retire and choose to roll that money out of the plan, we can roll it into a Roth IRA. When it comes to contributing to a Roth IRA, they have pretty low income thresholds. By implementing this savings strategy, we can effect what's known as a "mega Roth" option since we can typically put 25% of income or up to $56k/year (for 2019) into the Employer's plan. Roth IRA's are great because again we get the tax-deferred growth while we're working and saving. Even better, ALL of the growth and contributions come to us TAX FREE during retirement. One added bonus of the ROTH IRA is we don't have to required distributions during retirement.
College education. It's a hot topic these days. Or maybe since like forever. Setting money aside for your child(ren)'s college education is important to many of us. Over 30 states + DC offer a state tax deduction for contributing to your state's 529 plan. So obviously there's a small tax benefit to contributing to these plans. Another added benefit is obvious to me - setting money aside for your kid's education. 529 plans work much like a ROTH IRA in that contributions are made with after-tax dollars, the money grows tax-deferred, and, when used for qualifying education expenses, is TAX FREE. The laws around 529 plans used to only cover college expenses. Today, you can even use your 529 plan to fund private school grades K-12. The drawbacks to 529 plans: again, money is not liquid. In fact, it's not even yours anymore. It belongs to your kid. If your kid is fortunate enough to earn a scholarship, you might be able to gift the funds to a sibling or relative. Rules around this and other distribution options apply. Be sure to understand them before starting this or any other investment plan.
Permanent Life Insurance
For the right situation, permanent life insurance can be an option for extra savings dollars. The first benefit here is the permanent death benefit. As long you pay the premium the death benefit will never disappear, unlike term life insurance which only covers you for a specific period of time. Guaranteed rates of return and protection of principal are another plus. Most permanent life insurance policies like whole life insurance will never go down in value. In addition, you might have access to money income tax free and policies can offer liquidity in certain situations. High earners seeking a permanent death benefit can use the right life insurance policy as an added bonus to their asset allocation and retirement plan.
Home Down Payment or Rental Property
If you're looking to move into a new house or are wanting that vacation home, socking money away for this exciting event is always an option. Or maybe you want to get into owning a rental property. Both of these are options for super savers looking for another place to stash their cash.
Maybe you're curious about private equity or a startup company via a friend/colleague/crowdfunding website. Or you might want to start your own business. While this option carries quite a bit more risk, the rewards can be much greater than what you might reap investing in a typical stock market investment. Not always, but sometimes. That's a big advantage. The drawback? Obviously the risk of seeing your entire investment go to $0. In addition, these investments are rarely if ever liquid so your funds are often tied up until a liquidation event.
This list is by no means an exhaustive list and in no particular order - nor are they recommendations. Again, your personal financial situation is different from mine, which is different than the person next to you. My advice: meet with a financial planner and see what would be the best option(s) for your personal situation before taking action on any of these options.
If you find yourself wondering what to do next when it comes to saving and investing (more of) your money, let's talk.Let's Talk
Most of you reading this likely contribute to your employer's 401(k) plan. And a good percentage of you also receive matching contributions from your employer. Or if you own your own business, you might contribute to and also be responsible for the matching contributions. I imagine you've heard these employer matching contributions referred to as "free money". Sure, we can call it that and if it feels good, do it. If you aren't taking advantage of your company's match you're leaving money on the table. I guess that's where the idea of "free money" came from. I'm not sure. At the end of the day, the reality is you're not getting paid your full compensation.
Wait, what did he just say?!
Yeah, you heard me.
In today's retirement landscape, the employee is (mostly) responsible for funding their own retirement. Pensions have and are going the way of the dinosaur. Today, the 401(k) is the primary retirement investment vehicle. The average percentage of eligible employees who have a balance in their 401(k)plan is 88.7 percent, and 84.9 percent made contributions to their plan in 2016*.
From the employer's perspective, matching contributions have a couple of key benefits:
Since they're paid to the employee, matching contributions to a 401(k) are viewed as compensation. In turn, they lower an employer’s taxable income for the year, also reducing their tax liability.
When it comes to hiring new employees, the 401(k) match can definitely help employers stand out against the competition.
These two points are important to keep in mind. So let's talk about what the 401(k) Match is and why those two points above should really matter to you. Like really matter.
The 401(k) Match
A 401(k) match happens when an employer agrees to "match" an employee's contribution. This typically ranges from 3% - 6% of an employee's compensation, or salary. On top of that, the employer can match 100%, or dollar-for dollar, all the way down to 25%, which would be $0.25 of the employer's money for every dollar of your money. On top of that, they can put a cap on how much they'll contribute. And sometimes the employer puts a cap on how much of your salary they'll match to. Confused? Let's break it down…
Johnny recently started working for The ACME Company. They pay him $100,000 per year. ACME has a generous match. They match 100% (dollar for dollar) up to 6% of his salary.
$100,000 x 6% = $6000.
Knowing this then we know Johnny, at the bare minimum, should be contributing $6000 to his 401(k) to take full advantage of The ACME Co matching program. If he does this, then he'll contribute $6000 and The ACME Co will also contribute $6000. As we'll see in a little bit, this is a big deal.
Johnny's sister, Jenny, works for ACME's main competitor - The Roadrunner Inc. Jenny earns $200,000 per year. The Roadrunner Inc also has a generous match. They match 75% (or $0.75 per $1) up to 5% of Jenny's salary.
The math here gets a little tricky. First, we have to calculate 5% of Jenny's salary. So $200,000 x 5% = $10,000. Now we take $10,000 and multiply that by .75 (75%).
$10,000 x 75% = $7,500.
Boom! For Jenny to take full advantage of her company's matching contributions she has to contribute $7500. And by doing just that, she's able to double her contribution.
Okay, now we know what the match is and we've seen some examples of how it works. Let's address our two points above.
But It's Free Money
This is a pretty common statement around the matching contributions. I'm gonna have to disagree though. In point number one above, we know that 401(k) matching contributions are viewed as "compensation". The reality is our friend Johnny's full compensation is $106,000 and Jenny's full compensation is $207,500. The company you work for has budgeted and allocated these dollars to you. You simply don't receive the money directly in your paycheck.
I can't imagine a single one of you reading this would voluntarily take less money in your paycheck. By not taking advantage of your company match this is, in essence, exactly what you are doing.
It's a shift in mindset or how we frame it. But remember, it's still considered "compensation".
Know What Your Match Is
For those of you considering a move to another/new company, listen up. Take a few minutes to calculate the real dollar amount of your match. Remember, that's money earmarked for you. That way when you consider compensation offers from your new prospective employer, you can tell them what your true compensation is. And at the very least you'll know if their match is worse, the same, or better than your current employer.
Your Future Self Will Thank You
Other than not receiving the full compensation you're entitled to, missing out on the matching contribution can impact your retirement. Let's bring our friend Johnny back into the picture. We know he earns $100,000 and if he contributes 6% of his pay to his 401(k) he also earns his additional 6% of compensation via the match.
What if he only contributes 3%? Well, we know at least one fact: he's leaving 3% or $3000 of compensation out there. On top of that, the 3% is losing out on the opportunity to grow and compound. This is important.
Johnny gets paid 2x month and he puts $125/pay period or $250/month (times 12 = $3000) into the ACME 401(k) plan. Let's also assume ACME matches in conjunction with the employee contribution. So again, ACME match is $250 x 12 = $3,000. That's a combined total of $6000 per year going into Johnny's 401(k).
As we can see above and to the right, Johnny's investment earns a very stable and consistent 5% for the next 30 years and results in a hypothetical account balance of ~$416k.
Johnny is smart. In fact, he's probably saving more but to keep things simple our next example shows him saving just the right amount to receive his full compensation. Now he's saving 6% of his $100k salary and that's $6000/year or $500 per month. And ACME is matching his $1 for $1 so that's also $500/month. For simplicity sake, Johnny's total 401(k) contribution = $1000/month. All variables are the same as above but before we get to it I bet this hypothetical account balance will be exactly double what it was above…
Shocker, right? LOL. Of course it should be double.
The ROR was the same, the time frame was the same. We simply doubled our contribution amount. In a linear formula, well, you can figure that out. Now Johnny has ~$832k simply because he saved 2x and received 2x more of his matching "compensation".
That’s a win-win and his future self will most definitely thank him for it. He a) saved more money and b) earned his full compensation by doing so.
Still not convinced? Here's how important the matching compensation is. When Johnny contributed $6000 instead of $3000, he "earned" $3k per year more in compensation via the match. That's $90k over 30 years. Not a ton of money over 30 years.
But because he also invested it he was able to turn that $90k into nearly ~$208,000. Put differently, he was able to turn 3% of his compensation into 25% of his hypothetical account value.
$208,000 divided by $832,000…yup, that's 25%. And that’s a lot more than 3%.
Psst - remember, math ≠ money.
Wrapping things up, let’s have a quick review of what we talked about today:
Remember, it’s not free money. It’s compensation and it belongs to you.
Whether you’re looking at your current employer’s 401(k) plan or evaluating a future employer, be sure to know the value of your matching compensation.
Take advantage of the matching compensation and compounding interest. Both are your friend!
Have questions or not sure where to start? Let me know or book a quick call with me.Let's Chat
*Plan Sponsor Council of America (PSCA), 60th Annual Survey Reflecting 2016 Plan-Year Experience, February 12, 2018