In this month’s edition of “Money Matters,” Scott discusses why investors should have a full understanding of their financial situation, and how they can determine if their finances are on track to achieve their financial goals.

Money Matters: Are Your Finances on Track? Transcript

0:00:00.1 Mark: WTIP is pleased to have a monthly feature called Money Matters intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He has taught hundreds of financial professionals retirement planning and wealth management strategies, and Scott joins us now by phone. Welcome, Scott.

0:00:20.8 Scott: Good morning, Mark.

0:00:22.6 Mark: Alright, we're gonna talk about financial goals this morning, how I know I'm on the right track. So when you say on the right track, what are we talking about financially?

0:00:34.6 Scott: Well, it's interesting. You turn on the news, you look at business news, which you hear coming over the radio, is often a lot of reports about how the markets are doing, and is the Dow up or down, or the S&P 500. And those are interesting benchmarks, they're valuable. But I'm a big advocate when I work with people, and what I try and teach is, what you really wanna focus on is how is your personal economy doing and how are your finances doing compared to where you would like to be in the future? Retirement is often a big goal and maintaining some level of lifestyle there, or other interim goals like maybe a new place to live, a new home, or helping with kids' or grandkids' education. So it's a matter of trying to look into the future, taking a look at what your financial goals would be, taking a look at where you're at now, what's reasonable, and using some math and some financial planning skills to work backwards and get an idea of like, "Am I on track or not?" Maybe you have a surplus or maybe you're behind the curve a little bit and need to think about how do you get back on there.

0:01:38.8 Mark: So we're talking about people that are in the position of, they're not retired yet possibly, they keep their eye on the stock market, but really there's other places that they should be looking as far as, "Have I saved enough? Can I save enough?" Those questions.

0:01:53.7 Scott: Yeah, and I think even for folks who are retired, if you retire at 65 or you're in your early 70s, you may have a long time horizon out in front of you, and it's not just very long-term about getting to retirement, but maybe you can also look at the question of, "This is what I have. How much can I safely spend of this lump sum or this bucket of money? Can I afford to make some gifts to my kids or my favorite charitable organization? Can we afford to take that big trip or buy the new car? What are some reasonable expectations given all the uncertainty that's out there in the markets and the economy, and with inflation or tax rates?" It's a big question. One of the top ones I see is basically, "Are we okay? And how do we know?"

0:02:41.5 Mark: Alright, so for an individual, where do they start if they wanna look at these things themselves? And at what point do they need to get some financial advice or some leadership on these things?

0:02:55.8 Scott: Yeah, that's a great question. I think for some folks, this question is kinda like stepping on the scale; they know they should probably do it sometimes but they kinda don't want to, or maybe they sort of do it peaking through their fingers over their eyes like, "Ah, I don't wanna know." But what I found is even people who maybe aren't real happy with their financial situation or they know they're behind, once you go through the homework and you sharpen the pencil and you run the numbers, there usually is... At least you know, "Okay, this is where I'm at, this is what the future is."

0:03:28.9 Scott: And you can start making some little steps in the right direction, make a big, big difference over time. So I definitely encourage people you either need to be a fairly disciplined and serious do-it-yourselfer, and there's some great books and blogs and tools out there for free to help you look at these questions. So do it yourself or hire a competent professional. But I think there's a very widely talked about rule of thumb called the 4% rule. That's one where you can get a starting point saying, "Hey, I know if I have a lump sum of money I can spend 4, it's actually 4.5%, off that portfolio, if I stay diversified, if I stick with the plan, and that should last me through a 30-year retirement." That's a good starting point. I like it. It's not perfect. It doesn't do a good job of allowing for lump sums in and out, there's a lot of question about the rates return, are they too high? Are they too low? But it's a reasonable starting point. I think maybe a better one or one to marry it up with is Internal Revenue Service, some of our favorite folks, they have a table called the Required Minimum Distribution Table.

0:04:38.6 Scott: And that's actually a good tool for do-it-yourselfers to use to calculate each year how much you can take out of a retirement portfolio without running out. But to your question, Mark, I am a big advocate of people. It's usually not just retirement, or even in retirement, it's not just a smooth line. There's a higher level of spending and maybe lower later on, maybe there's gifts, maybe there's big purchases. And that's really where I think working with a qualified certified financial planner who actually does financial planning projections and can model those inflows and outflows and use something called Monte Carlo Analysis can be really valuable.

0:05:16.5 Mark: Alright, and any other rules of thumb that you wanna mention this morning?

0:05:22.5 Scott: Well, I guess what I would say is I've been in these field for about 25 years now, I've taught in this for a long time, these things develop and evolve over time, and as much as I like some of these techniques and tools and use them day in and day out, I don't think any of them are perfect. There's some flaws in all the methodologies. It's still garbage in garbage out in terms of the assumptions, and it's evolving. And every year or every day is day one of the rest of your life, so I think it makes sense to consistently take a look at this over time and see what new tools, new methodologies are out there and where you're at and what makes sense going forward.

0:06:01.3 Mark: So, Scott, when I go to a financial advisor, because I'm thinking, "You know, this is just too complicated for me, or I've got this pot here, this pot here, I don't know how to put these things together." So with financial advisors, how does the fee thing work? Or what kinda... Am I asking them to do the work and gratis? Or am I asking them to help me reinvest my money or take a different look at it?

0:06:29.6 Scott: Well, there's a range of ways that financial advisors are paid. Traditionally...

0:06:34.3 Mark: Okay, thank you.

0:06:34.6 Scott: Yeah, traditionally some... Many would earn commissions on the sales of investment products or insurance products, and that's still out there widely. What's come to be more is the charging a fee as you would pay an accountant or an attorney for advice upfront, and I think it makes sense. I'm a little bit cautious if someone's willing to do a whole lot of work for free. You kinda wonder... There's an old economist saying, "There's no such thing as a free lunch." And so is this being used as a tool to maybe position and sell some products?

0:07:08.9 Scott: I'd be a little bit cautious about that versus someone who says, "Well, this is my hourly rate." Or, "This is what I charge for a project." And just a reasonable business arrangement in terms of, "Hey, I wanna pay you for your time and expertise." So there's people that earn commission, there's people who charge fees and commissions, that's very common, and then there's a smaller group that only charge fees and do not earn any commissions whatsoever, and they're called fee-only financial advisors. I actually prefer that model. It's... As Winston Churchill said about democracy, "It's the worst system out there, except for all the others." It's also not perfect, but I think it's the best model there is in terms of sitting on the same side of the table as the client and knowing that there's no product sales to try and cloud the agenda. It's just purely, "Hey, Mark, this is what we charge you for our time and effort."

0:08:03.2 Mark: Alright. That's very helpful, Scott, 'cause I think we're inundated with advertisements on television about different financial companies and things like that, but it sure makes sense to be working with an individual if you can. We're talking with Scott Oeth. We'll be talking finances with Scott on the first Wednesday of the month on North Shore Morning. And Scott, this has been really good this morning. Anything else that you'd like to add?

0:08:29.3 Scott: I have really enjoyed the conversation, Mark, and appreciate the opportunity.

0:08:32.7 Mark: Okay, thank you very much for talking with us today.

0:08:35.1 Scott: Likewise.