Take Tesco’s Prudent Advice: The Magical Power of Compounding

In investing, time is your friend.  The longer an investor can commit funds to a strategy, the greater the possibility of success.  I’m sure, for many of us, we wish we could give our younger selves the advice to start saving earlier. In young adulthood, often times there are many demands on cash flow, and it can feel difficult to get ahead.  Working long hours in an entry-level job with student loans, rent, a car payment, and learning to deal with (gulp) taxes can be overwhelming.  The thought of setting aside precious net earnings for retirement which may be forty years or more down the road seems preposterous.

However, making a very small sacrifice now can have an exponentially powerful effect later in life.  Let’s look at the impact of starting to save and invest early vs later in life.  Assume we have four individuals at different stages of their lives who want to begin a monthly investment strategy with the aim of accumulating $1m by the time they reach age 65.  They are all aggressive investors and want to implement an equity-only strategy that will earn 10% on an annualized basis.  The table below shows the impact of compounding growth and time in the market (gross of costs):

Age 20 30 40 50
Monthly Investment $95.40 $263.39 $753.67 $2,412.72
Total Lifetime Cost of Investment $51,516 $110,624 $226,101 $434,290
Assumed Annualized Rate of Return 10% 10% 10% 10%
Value of Investment age 65* $1 million $1 million $1 million $1 million


*No assurance or guarantee can be given that an investment portfolio commenced at any age will reach a specific target value as the outcome will be dependent on various factors, such as market conditions, choice of asset allocation and costs.  The value of investments can go down as well as up.

The difference in the lifetime capital requirement is striking. We are faced with demands on our cash flow every day.  Some are fixed (mortgages, taxes, etc).  However, we all have an element of discretionary spending in our budget. The choice to dine out versus eat at home, buy a name brand vs generic product, fly economy vs business class…the list goes on. By making small changes to our discretionary spending, regardless of the phase of life we are in, we can direct more capital into long-term savings and vastly increase the likelihood of reaching our goals.

If you are reading this and you are in your 20s or 30s, take heed and consider making the choice to invest in your future financial well-being by adopting small changes in your lifestyle.  If you are closer to retirement (or perhaps in retirement), don’t lose heart.  It’s still important to regularly review your expenditure and consider if there areas in which you can reduce costs.  As the Tesco slogan says “Every Little Helps”.

Risk Warnings and Important Information

The value of investments can go down as well as up depending on market conditions and you may not get back the original amount invested. Investments involve risk and your capital is always at risk. Past performance is not a reliable indicator of future results. There is no guarantee strategies will be successful.

The above article does not take into account the specific goals or requirements of individuals. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.

Demystifying Social Security

Social Security benefits form a bedrock of retirement income for tens of millions of Americans. And yet, many would agree that the program is mired with unnecessary complexity which makes claiming benefits confusing.  My intent is to use this blog post to help demystify some of the confusing elements of the Social Security retirement benefit.

First, a bit of background and historical context. The Old Age, Survivors, and Disability Insurance (OASDI) program, better known as Social Security, was enacted by Congress in 1935 to help Americans suffering in the wake of the Great Depression. Originally intended as a retirement income program, Social Security expanded over time to include disability benefits and family/survivor benefits in the event of premature death.  Social Security is designed as a pay-as-you-go program which means that the benefits of current retirees are funded by the current contributions of today’s workforce through FICA and self-employment taxes.  As long as an individual accrues 40 credits (done over 10 years in most cases) of eligible employment, they have an entitlement to Social Security income (SSI) benefits.

To determine an individual’s benefit entitlement, the highest 35 years of earnings are averaged (and adjusted for inflation) to arrive at the primary insurance amount (PIA). The PIA is the benefit an individual will receive at their normal retirement age (i.e., 66 or 67, depending on your year of birth). An individual can elect to begin Social Security benefits as early as age 62 or as late as age 70.  The PIA is adjusted up or down depending on when benefits commence.  For individuals or couples with sufficient assets or other pensions, it is often advantageous to delay drawing on Social Security until age 70 because for each year you wait, the benefit increases by approximately 8%.  This is essentially an 8% return backed by the US government.  A strategy involving delaying the onset of Social Security will likely necessity earlier distributions from other retirement assets, but with proper planning, this can be easily managed.

Even if you never worked outside the home, if you are married you may still have an entitlement to a spousal benefit. If both spouses have their own work history, the lower-earning spouse has the option to claim based on his/her own earnings history or take the spousal benefit from the partner, if higher.  However, the timing of making a claim can impact the total benefit payment and the amount of the benefit subject to tax.  In 2018, if a married couple has more than $44,000 in provisional income[1], they will pay tax on 85% of their SSI benefit.  Moreover, if you or your spouse have earnings from a pension a job that wasn’t covered by Social Security (e.g., a state pension from work abroad), you may be affected by the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO).  These are more nuanced topics that may require the assistance of your accountant.

A key challenge facing Social Security is an aging population. Americans are living longer, meaning they will be drawing on their benefits for a greater number of years.  At age 65, the average man can expect to live another 19 years, while the average woman can expect to live another 22 years[2]. Despite this fact and the incentive of an increased benefit associated with deferring to claim until a later age, approximately 40% of retirees claim their benefit at age 62 or shortly thereafter, resulting in a permanently reduced benefit[3].  We have a tendency to underestimate our life expectancy, but a real crisis could emerge if you outlive your life expectancy and prematurely deplete your assets.  If you begin drawing at 62, the benefit can be reduced by as much as 25% from your PIA or full-retirement benefit.  This is significant for a few reasons:

  1. If your spouse is claiming a benefit based on your benefit (as opposed to his or her own work history), the spousal benefit will also be reduced.
  2. You will have to supplement to a larger degree with other assets to fill the gap in your retirement income, likely resulting in greater depletion of your total wealth over time
  3. If you are still working at age 62, you may be subject to a further benefit reduction due if you breach the annual earnings limit (currently approx. $17,000 in 2018).
  4. Taxes can be imposed on as much as 85% of your Social Security benefit resulting in the need to further subsidize with other assets.

The decision of when to start Social Security requires a thorough break-even analysis of one’s retirement cash flow, including a consideration for longevity, taxes, inflation, and an assumed rate of return on investment assets. If an individual lives into her mid-80s, she is generally better off delaying the commencement of benefits. The above factors considered, there are often strong reasons to elect to claim early benefits, especially if cash flow is a concern immediately upon retiring.  Some argue that Social Security’s solvency or legislative changes could affect future benefits.  This is a valid concern but given how many Americans are reliant upon Social Security income, it is unlikely to see the program materially depleted as it would be very unpopular politically.  It is probable that we will see a restructuring of benefit calculations in order to deal with the growing population of retirees.

To learn more about SSI, visit www.ssa.gov or talk directly with your financial advisor.


[1] https://www.ssa.gov/planners/taxes.html

[2] “Calculators: Life Expectancy,” Social Security (2017), https://www.ssa.gov/planners/lifeexpectancy.html.

[3] “Social Security in the New Retirement,” Financial Engines, January 2016.

Simplifying US Tax Payments

Make Paying Your US Taxes Easier

It’s no secret that being a US taxpayer is onerous, especially for those living abroad. Preparing returns, filing supplemental schedules, and completing FBARs is tedious and complicated.  For many overseas taxpayers, the headache doesn’t end when the return is submitted. The “simple” exercise of remitting US tax payments can be challenging.  Often, this involves converting foreign currency, wiring funds to a US account, and/or posting checks from overseas (and hoping they aren’t lost in the mail).

Electronic Federal Tax Payment System®

The Electronic Federal Tax Payment System® (EFTPS) tax payment service is provided free by the U.S. Department of the Treasury. It enables US taxpayers to pay their federal taxes online, and this includes estimated payments. Businesses can also enroll for the service. The user completes an enrollment process and links their EFTPS account to a US bank account. Once enrolled, the user can access the site to make one-off payments, schedule estimates, and view payment history.

By using this service, taxpayers can reduce the risk of lost or mismatched payments and confirm when their payment has settled. For those who find there is nothing easy about US taxes, this just might make your life a little easier!

If you are a US taxpayer who has struggled with the logistical challenges of paying taxes while overseas, visit https://www.eftps.gov/eftps/ to enroll.

My Money’s on the Women

The recent Time’s Up and #MeToo movements have given me reason to reflect on the role of gender in the financial industry. When it comes to investing, common stereotypes plague women. For example, we’re too conservative or don’t understand enough about investments. We don’t save enough. We start too late. We lack confidence. I often (though not universally) see this in my own interactions with clients, especially married couples. Wives tend to defer to their husbands when it comes to making investment decisions and trust in the husband’s experience and decision-making. This is not a judgment, just an observation.

Tax Overhaul or Economic Recklessness?

As the Trump Administration celebrates its legislative victory of “sweeping tax reform” (most notably the reduction of corporate tax rates), there is reason to wary of the economics underpinning the new tax plan.  The assumptions as set forth by the administration’s economic advisors, such as Treasury Secretary Steve Mnuchin, depend in part on corporate growth projections and the belief that the tax breaks at the top will trickle down to middle class wage earners.


Mixed Peer Reviews


Economists have not been universal in their praise of the new bill.  While different versions were circulating in the House of Representatives and the Senate, The University of Chicago’s Booth School of Business compiled feedback from their Initiative on Global Markets (IGM), and the results are a stark contrast to the rosy outlook pitched by the administration and members of the GOP[1]:


[1] http://www.igmchicago.org/surveys/tax-reform-2

China Rethinks US Debt

The question of the debt-to-GDP ratio is an important one. If corporate growth rates don’t meet the expectation, we could see a dramatic rise in the level of the national debt, which is currently at approximately $20 trillion. Of that $20 trillion, approximately $6.3 trillion is held by foreign countries with China holding nearly 20% of this foreign-held debt. Why does this matter? The US is reliant on this foreign investment in order to cover any shortfall between tax revenue raised and government expenditure. Recently, China expressed a cautionary warning that they may purchase less US debt. Such a change could have serious ramifications, including an increase in interest rates and a slowing of economic growth. This, in turn, would likely impact those corporate growth assumptions about which Mnuchin is so confident.

Sound the Alarm?

While the medium/long-term impacts of the new tax bill are uncertain and potentially worrying, there is no cause for panic. Changes in fiscal policy are part of the economic cycle and help maintain equilibrium in global markets. We have seen the US enjoy a sustained 9-year bull run since the recovery from the Global Financial Crisis began in 2009. It will not be surprising if US equities experience a correction or if the level of the national debt is a factor in such a correction. Such volatility is normal and helps to underscore why we adopt a globally-diversified asset mix in our strategies.

Cash Flow Planning

Cash Flow Planning

Risk tolerance over time

I attended a conference earlier this week and one of the featured speakers, Jeffery Coyle of Monograph Wealth Advisors in California, discussed the role of fixed income over time in an asset allocation strategy. The presentation was thought-provoking because it was, in many ways, contrary to generally accepted industry practices.

Conventional asset allocation strategies often suggest that a person’s risk tolerance may change over time and become less aggressive, particularly as they shift from accumulation to decumulation in retirement. By then, the time to build the nest egg has passed and the key driver becomes income generation and/or capital preservation. Within the industry, we have seen the emergence of target date fund strategies which implement this philosophy. The closer an individual gets to retirement, the more conservative their portfolio becomes as the equity weightings are reduced in favour of lower-volatility fixed income.

Have we got it wrong?

In reality, as we are living longer, many retirees have decades of post-employment years and they require their capital to sustain them. By shifting too much to fixed income or assets with low expected returns, we can sometimes see an increased risk of premature capital depletion. In addition, many individuals have a strong desire to create a legacy or leave an inheritance for their families. This means that, not only do we need to ensure adequate capital growth for the individual, but often we need to account for future generations as well.

The success of an individual’s wealth planning is directly linked to cash flow. If we accurately estimate one’s cash flow, it is much easier to calculate the required rate of return and the appropriate level of risk assets to include in a portfolio. Often, we use current expenditure as the starting point to help ensure one can maintain their present standard of living throughout retirement. However, Coyle suggests that if we consider the minimum required expenditure instead of the current outflows (i.e. stripping out discretionary spending), we can solve how much fixed income is required to cover this baseline need. Over time, this need decreases as one’s life expectancy reduces. This means, using this philosophy, an individual would actually shift toward a heavier equity weighting as they move into retirement. This unique approach could be incredibly powerful for high net worth individuals or families who are looking to maximize their estate or legacy over time.

Drown Out The Noise – You Are Smarter Than You Think

I spent a couple days earlier this week at an investment conference. Whilst there, I was reminded of the volumes of empirical evidence supporting our investment philosophy. It was reassuring and affirming.  Even though I’m “in the business,” I’m not immune to the noise that is everywhere.  Talking heads on TV telling us which stocks are winners; newspapers telling us the sky is falling; co-workers telling us how great their investments are the greatest thing since sliced bread. These distractions are ever-present, and it takes true resolve to not be swayed by these externalities. Clients will often ask what we think of a particular event (How will Brexit impact me?) or security (Should I buy some Apple?) or perceived future risk (But what if Trump is elected?).  These questions are relevant and valid, but they shouldn’t cause you to deviate from your long-term strategy.

Exercise Your Right to Vote While Abroad

Unless you’ve been living on a remote island with no access to communication for the last several months, you are no doubt aware of the highly controversial U.S. Presidential election campaign in which the nation is currently embroiled. Regardless of your political affiliation or preference (or abhorrence) for one candidate over another, this election cycle has reiterated the importance of being a part of the political process. The stakes are high as the candidates have widely diverging views on topics such as economic policy, immigration reform, gun control, LGBT rights and everything in between.

Be Brave, and Go Bargain Shopping

I had no idea how useful my psychology degree would be when I began working in finance. The study of behavioural finance has a growing audience as more and more economists, advisors, and investors realize that despite best intentions, emotions impact financial decision making, often in a detrimental manner. Most savvy investors accept that markets are efficient and that having a well-diversified strategy is a key to long-term success; those concepts are straightforward. However, sticking to one’s strategy in the face of plummeting stock prices and negative portfolio performance requires resilience and discipline.