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The years leading up to your target retirement date are an important part of your financial plan. This is the time to determine how much income you’ll need during retirement, where that income will come from, and how much more you’ll need to save.

A financial advisor can recommend the best investment strategy for your savings as well as the most tax-efficient way to make withdrawals. It’s no surprise that the foundation of a good retirement plan starts with a budget – because the less you spend, the more you are able to save.

Here are four ways to set a budget before retirement:                             

Track daily and monthly spending

It’s a smart idea to track both your daily and monthly spending when setting a retirement budget. This will account for regular monthly expenses as well as daily splurges and unplanned purchases. Using software such as Mint or You Need a Budget can help make tracking your expenses easier.

Cut unnecessary expenses

Once you start tracking your spending, you’ll be able to identify unnecessary purchases and start to cut them out – or at least reduce them. Getting rid of a credit card or two may help in this regard. If you still have trouble, you may want to consider going to a cash-only system to get the job done.

Continue saving

After you free up some disposable income by tracking spending and cutting unnecessary expenses, you can start increasing your retirement savings. Setting up pre-authorized transfers into your retirement accounts ensures your savings are invested – and not spent elsewhere.

 Get professional advice

According to Marketwatch seeking professional financial advice can have a positive impact on your retirement budget as well as your investment accounts. Partnering with a financial advisor can help you keep track of your monthly expenses and keep you accountable for your retirement budget goals.

Your needs in retirement will differ from your pre-retirement budget needs…sometimes significantly. A financial advisor can help adjust your spending levels to help achieve your retirement goals.

To learn more about creating a budget before retirement or to start setting your retirement goals, contact us today. We are happy to start the conversation and help you make smart retirement plans.

 

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California. Brian is a CERTIFIED FINANCIAL PLANNER(TM) professional who specializes in investment management. He holds a MBA and a Master’s Degree in Financial Analysis. He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.

Here are 10 things to consider as you weigh potential tax moves between now and the end of the year…

  1. Set aside time to plan

Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There’s a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes on December 31, so don’t procrastinate.

  1. Defer income to next year

Consider opportunities to defer income to 2018, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

  1. Accelerate deductions

You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2018, could make a difference on your 2017 return.

  1. Factor in the AMT

If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2017, prepaying 2018 state and local taxes probably won’t help your 2017 tax situation, but could hurt your 2018 bottom line. Taking the time to determine whether you may be subject to the AMT before you make any year-end moves could help save you from making a costly mistake.

  1. Bump up withholding to cover a tax shortfall

If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly through the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments.

6. Maximize retirement savings

Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2017 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.

 

  1. Take any required distributions

Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.

  1. Weigh year-end investment moves

You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

  1. Beware the net investment income tax

Don’t forget to account for the 3.8% net investment income tax. This additional tax may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).

  1. Get help if you need it

There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation and help you determine if any year-end moves make sense for you.

Copyright 2006-2017 Broadridge Investor Communication Solutions, Inc. All rights reserved.

You can find out more about Financial Planning Days here:

http://financialplanningdays.org/

FOR IMMEDIATE RELEASE:

Date: September 22, 2017
Contact: Brian R. Littlejohn
Sherwood Investment Management LLC
707.776.7331
brian@sherwoodim.com
www.sherwoodim.com

Local Financial Advisor Joins Leading Association of Fee‐Only Financial Planners:
Brian R. Littlejohn of Sherwood Investment Management LLC accepted for
membership in the National Association of Personal Financial Advisors (NAPFA)

CHICAGO, IL – Brian R. Littlejohn of Sherwood Investment Management LLC in Petaluma, CA has been accepted for membership in the NATIONAL ASSOCIATION OF PERSONAL FINANCIAL ADVISORS (NAPFA). With membership, Littlejohn becomes affiliated with an organization of more than 2,900 of the most‐qualified financial advisors in the nation who deliver independent and objective, fee‐only advice.

Only fee‐only financial advisors, who meet NAPFA’s stringent membership qualifications, are eligible to become NAPFA‐Registered Financial Advisors. Those standards require advisors to only receive compensation directly from their clients, to act in clients’ best interests at all times, and to provide comprehensive planning services. In addition, NAPFA has some of the profession’s most rigorous education and professional development requirements. All candidates for membership are required to submit a complete comprehensive financial plan for a full‐scale peer review or participate in a peer‐review interview discussing the advisor’s approach to comprehensive financial planning. Furthermore, NAPFA’s continuing education requirements exceed those of any other association of financial advisors.

“I congratulate Brian for demonstrating his dedication to provide effective, transparent, client‐centered services by upholding the high standards that NAPFA sets for all its members,” said NAPFA Chair Tim Kober.

In contrast to most financial professionals, NAPFA members receive no commissions or other rewards for selling financial products. Those forms of compensation create potential conflicts of interest that may serve to undermine an advisor’s objectivity and fiduciary responsibility. It is for this reason that all NAPFA members must sign the Fiduciary Oath that explicitly promises to “to place the clients’ interests first.”

Mr. Kober continued: “NAPFA members offer what today’s consumers want, an advisor that provides comprehensive financial planning advice in their best interest with cost transparency. We welcome Brian to our ranks and look forward to his contributions to our organization.”

ABOUT BRIAN

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor. To learn more, visit www.sherwoodim.com.

ABOUT NAPFA

Since 1983, The National Association of Personal Financial Advisors (NAPFA) has provided Fee‐Only financial planners across the country with some of the strictest guidelines possible for professional competency, comprehensive financial planning, and Fee‐Only compensation. With more than 2,900 members across the country, NAPFA has become the leading professional association in the United States dedicated to the advancement of Fee‐Only financial planning. For more information on NAPFA, please visit www.napfa.org.

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Robert Shiller won the Nobel Prize in economics a couple years ago.  You can read the short interview here:

https://www.usatoday.com/story/money/markets/2017/09/20/one-big-thing-economist-shiller-says-preventing-1929-like-stock-market-crash/684243001/

You know you should be saving for retirement, but how?  What’s the best way to set yourself up for success going forward?  We distill it for you below:

IRA vs. 401(k)

You should contribute to both types of accounts if possible in order to receive the maximum tax benefit. Just remember that 401(k) plans have a contribution limit of $18,000 (plus a $6,000 catch-up contribution for those age 50+) in 2017 and IRAs have a contribution limit of $5,500 (plus a $1,000 catch-up contribution for those age 50+), subject to certain income limits.  Thus, it may be possible for some individuals to contribute a total of $30,500 to both types of accounts in 2017.

Traditional or Roth IRA?

A traditional IRA usually works best for those individuals who are close to retirement and are in a higher tax bracket now than they expect to be in when they begin making withdrawals.  Otherwise, a Roth IRA is probably the superior choice.  Roth IRAs don’t impose required minimum distributions at age 70.5 like Traditional IRAs do and qualified distributions from them are free from taxes and penalties.  The same cannot be said for Traditional IRAs.

The Optimal Approach

Step #1 is to start saving for retirement as soon as possible.  Begin by contributing to your 401(k) in order to receive the maximum match from your employer.  Once you’ve received the maximum match, stop allocating funds to the 401(k) and start making contributions to an IRA.  If you are able to contribute the maximum allowable amount to the IRA and still have money left over, begin directing it back to the 401(k) again.  Your goal should be to contribute the maximum amount to both accounts.

Do you have questions about your particular situation?  Please don’t hesitate to get in touch.

(1) If you don’t understand how an investment works, don’t go there. Inverse and leveraged ETFs fall into this category for most people…swaps and other derivatives often underlie these securities. There are plenty of high-quality investments (like stocks & bonds) that are much easier to understand. It’s better to be safe than to get burned by an investment that zigs when you’re expecting it to zag.

(2) Do due diligence. You wouldn’t spend thousands on a car before doing a little bit of research on it, would you? You would at least get the CARFAX report, right? The same can be said for most investments. You should have some prior knowledge of an investment’s risk/return characteristics and know how it would fit into your overall portfolio BEFORE you pull the trigger.

(3) Think long-term by tuning out the noise. Part of the noise I’m talking about here is daily price fluctuations. If you’re a long-term investor, you can (and should) ignore those. You can also ignore most of the investing “experts” you see on TV (or the internet these days); they are usually featured for the conviction they display when the camera is rolling and not necessarily their investing prowess.

(4) Don’t go robo. Why? Think 2008. Faulty algorithms were largely to blame for the sub-prime mortgage crisis in 2008. Algorithms underlie robo-investing programs. Also, having come into existence in 2008, the technology is largely untested in severe market down-turns. The robos might work fine in a down-turn. Then again, they might not. I don’t know about you, but that’s a risk I’d rather not take with my money.

(5) Consider working with a credentialed (CFP® or CFA) human. They can often be more objective and level-headed with your money than you can during times of market tumult. In other words, most of them aren’t going to sell all your stocks after the market has bottomed. They will have considered your risk tolerance and time horizon when crafting your asset allocation and are thus prepared to help you weather just about any financial storm that might come along.

 

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California. Brian is a CERTIFIED FINANCIAL PLANNER(TM) professional who specializes in investment management. He holds a MBA and a Master’s Degree in Financial Analysis. He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.

Brian sat down and spoke with Investopedia last month as part of its Advisor Insights program.  A transcript of part of the conversation is below:

INVESTOPEDIA: What inspired you to become an advisor?

BRIAN: I think it’s really been a combination of two things: (1) having a keen interest in the subject matter…answering often life-changing questions like Will I be able to retire early? How can I use my resources to help make the world a better place? and (2) helping others…I think I may be genetically predisposed to service…I was an officer in the United States Air Force for eight years before joining what I would call a very service-focused wealth management firm in Colorado.  A big piece of the helping part is educating clients.  Personal finance can be a rather daunting place without knowing the laws, knowing the jargon, and knowing the underlying math involved.  Some of it isn’t very intuitive.  One example I like to use is if you lose 40% of your portfolio’s value, you must gain 67% to get back to square one again.

INVESTOPEDIA: Can you tell us about your practice?

BRIAN: First things first…integrity is paramount at Sherwood.  We set the highest ethical standards for ourselves and stick to them.  Above and beyond that, we’re fiduciaries so we’re obligated to act in our clients’ best interests at all times.  We take that obligation very seriously…it permeates all we do.  If we’re not convinced that something will be good for our clients, we don’t get involved.  Period.

Along those same lines, we’re completely independent.  We’re not owned by a larger firm as many practices are these days.  I think most people would be surprised by how many financial services firms are owned by larger companies that they probably haven’t heard of before.  It’s similar to Yum Brands owning KFC, Taco Bell, and Pizza Hut.  We’ve all heard of those mainstream brands…Yum not so much.  That’s the way it often is in financial services.  Anyway, our independence means that we’re completely free to do what’s best for our clients and that’s exactly how we…and they like it.

Additionally, I should mention that we’re fee-only.  We never receive commissions for pushing certain investment products.  That helps to keep our interests aligned with those of our clients.

I set Sherwood up as a boutique practice so that I could provide a select number of clients with superior service…the idea being when clients call, they get me.  When clients provide sensitive information, I’m the only one at the firm who sees it.  Larger firms are unable to offer those kinds of assurances. Further, our clients will never be targeted or accosted because someone saw them walk into a big fancy wealth management office because I don’t have one.  I meet with clients at their homes, virtually, or in nondescript public locations.  It’s all very low-key and relaxed.  Our clients also find it to be very convenient for their often hectic schedules.

The second part of our service model is providing excellent financial advice.  Having been in the industry for over a decade now, I’m well-versed in personal finance matters in general and investment management specifically.  I’ve also earned two Master’s Degrees in finance as well as the CERTIFIED FINANCIAL PLANNER(TM) or CFP(R) designation.  However, the degrees and designations themselves really don’t matter…they’re just tools. What matters is being able to advise clients from a position of knowledge…providing them with the highest quality advice so that they are able to realize the best possible outcomes…achieving their financial goals.  That’s the real rewarding part of what we do here at Sherwood.

INVESTOPEDIA: What are your investing values?

BRIAN: We produce customized, tax-efficient, and in most cases diversified investment portfolios for our clients.  Our basic philosophy is that financial markets in relatively advanced economies like our own are largely efficient.  As such, we’re more apt to employ passive investing strategies like index funds when adding these types of exposures to client portfolios.  On the other hand, where economies are less efficient like in emerging markets, we’re more likely to employ active strategies when gaining those types of exposures for our clients.  The technical term for this hybrid type of portfolio construction is called core & satellite.  I know, it all sounds very other-worldly and nebulous like a lot of financial jargon does, but I assure you it isn’t anything approaching rocket science…it’s just prudent investing principles being put into practice.

INVESTOPEDIA: What is the most important advice you routinely give clients?

BRIAN: Don’t watch your investment account balances on a daily basis.  That’s our job.  Go out and do something fun instead.  Take the kids or grandkids out for ice cream.  Play a round of golf.  Start that hobby vineyard you’ve been thinking about.  Sleep well at night knowing that we’ve got your financial future covered.  The markets will fluctuate; that’s what they do.  Together we’ll develop a thoughtful plan at the outset and stick to it through thick and thin times in the market. It’s kind of like marriage.

 

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.

 

As an investment adviser, we act as a “fiduciary” to our advisory clients. This means that we have a fundamental obligation to act in the best interests of our clients and to provide investment advice in our clients’ best interests. We owe our clients a duty of undivided loyalty and utmost good faith. We avoid engaging in any activities that conflict with the interests of our clients, and we take steps that are necessary to fulfill our obligations. We take reasonable care to avoid misleading clients and we provide full and fair disclosure of all material facts to our current and prospective clients. Generally, facts are “material” if a reasonable investor would consider them to be important. We eliminate, or at least disclose, all conflicts of interest that might incline us — consciously or unconsciously — to render advice that is not disinterested. If we do not avoid a conflict of interest that could impact the impartiality of our advice, we make full and frank disclosure of the conflict. We cannot use our clients’ assets for our own benefit or the benefit of other clients, at least without client consent. Departure from this fiduciary standard may constitute “fraud” upon our clients (under Section 206 of the Advisers Act).

Adapted from https://www.sec.gov/divisions/investment/advoverview.htm

 

Here are a couple videos on what it means to be a fiduciary:

https://www.youtube.com/watch?v=Dg5RRMAc1GY

https://www.youtube.com/watch?v=0tgQxvWfi0c

With interest rates on the rise, you might be wondering if you should be worried about the value of your bond portfolio.  Duration and a closely-related measure called convexity can help you find out…

Over the past six months, the benchmark rate on the 10-year Treasury note has risen from 1.4% to 2.4%. When interest rates rise, bond prices fall (and vice versa).  How much a particular bond’s price falls depends on two major factors: how much rates rise and the duration of the bond.

Duration measures how sensitive a bond’s price is to changes in interest rates.  The higher the duration, the higher the sensitivity.  If a bond you own has a duration of 4 and rates go up by 1%, its price will drop by approximately 4%.  If a bond I own has a duration of 6 and rates go up by 1%, its price will drop by approximately 6%.

It’s important to note that a drop in your bond’s price caused by a rise in interest rates isn’t all bad news.  Why is that the case?  The interest that the bond pays you at regular intervals (usually semiannually) can be reinvested at the new higher interest rate.

There are a number of bond characteristics that can affect its duration.  One such characteristic is the maturity of the bond.  As the maturity of the bond increases, its duration also increases.  Another characteristic is the coupon rate of the bond.  As the coupon rate increases, the duration of the bond decreases (and vice versa).

If duration is the bond-pricing Batman, then convexity would almost certainly play the part of Robin.  Oftentimes, duration alone isn’t enough to completely capture bond price movements caused by changes in interest rates.  In these cases, a convexity adjustment is used to fine-tune the price change estimate produced by duration alone.

Convexity is a favorable characteristic for a bond to have.  It causes the bond’s price to fall more slowly when interest rates rise and rise more quickly when interest rates fall.  As such, I highly recommend it!

This has been a very brief conceptual overview of bond duration and convexity.  Financial theory on the topics can get rather rigorous if you’re so inclined.  As always, if you have any questions about anything I’ve written here, please don’t hesitate to get in touch!

 

Note: This article was adapted from a presentation given to College for Financial Planning faculty members on February 7, 2017.

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.