The Retirement Answer? A Blank Stare

blank stare emoji

The Retirement Answer? A Blank Stare

I had just asked a 59-year-old, “You said you can retire in 3 years. How will you spend your time after that?” Expressionless, all he gave was a blank stare.

“I never thought about it,” he replied.

Unfortunately, he wasn’t the first 59-year-old with that answer. “I don’t know” is a more common answer than most think. 

More To Retirement Life Than Money 

According to a study by United Capital, when asked about their financial life stories, most people talked about working and spending, not saving and investing.

Over the decades of our working lives, we tend to follow a formula: Work. Spend. (Save). Repeat. We do this knowing one day those (savings we try not to think about or touch) should equal a nice sum, hopefully enough to reach the nirvana of “financial independence.”

Along the way, we can get trapped into planning meals and vacations, but not a potential 25-year chapter of our life. If nothing trips up the formula (divorce, premature death, disability), then a milestone birthday, the loss of a parent, or the arrival of a new boss may cause one to someday dial up a financial planner and ask, “Am I there yet?”  

Are You “There” Yet?

To which the answer is usually, “That depends.”

That depends…on where “there” is. “There” = how, with whom, and where you will find purpose, meaning, and happiness in life after Work-Spend-(Save)-Repeat.

Once that’s known, “there” can be translated into real financial goals. If you don’t know what “there” looks like, then attempts to answer the question are merely rough guesses. More importantly, if you don’t know, you’re not likely to enjoy that supposed nirvana time nearly as much.  

There are many thought leaders contributing to discoveries about the time of life past “Working” and before “Old.” That time of life, which will be 25 or 30 years for a lucky few, goes by many names: Your Third Age. The Third Stage. The Encore Years. Your Life’s Next Chapter.

Examples of such leaders include Dori Mintzer and Mitch Anthony.

According to experts like these, retirement planned well has the potential to be a time of peak fulfillment and meaning. Not planned well or planned at all, potential paths lead to boredom and, in the worst cases, clinical depression.

Real Retirement Planning 

Many people think “retirement planning” means “IRA investments” or “401K rollovers” or “pension options.” Those are certainly part of it. But the best, yet sometimes the most difficult, kind of retirement planning is not found on your retirement account statements. It’s found inside of you. 

Begin with a blank stare, and build your “There.”

Not sure where to begin? Check out this free download: https://www.hollydonaldsonfinancialplanner.com/wp-content/uploads/2018/11/Beyond-the-Numbers-Whats-Retirement-Money-For.pdf for a questionnaire about what kind of retirement lifestyle choices are ideal for you.  

Continue ReadingThe Retirement Answer? A Blank Stare

Before You Click Renew: Fall Enrollment Reminders

Before you click Renew – Fall Enrollment Reminders.

When it comes to employer, private health, and Medicare benefits, it’s easy to simply renew last year’s choices.

However, it can be worth the extra time to look closely at all options, and how they might have changed.

“Research shows employees only spend 17 minutes electing their benefits, while Netflix users spend an average of 18 minutes deciding what to watch,” according to Kiplinger’s: http://bit.ly/Kiplingers-Benefits.

Under 65: Health Insurance

If you are under 65, check for HSA (Health Savings Account) eligibility on your policy. Contributing to a family HSA can save roughly $2000/year in taxes (depending on your marginal tax bracket). Plus, if you are relatively healthy and do not use the HSA, your earnings grow tax-free until retirement. Click here [https://www.hollydonaldsonfinancialplanner.com/hsas-over-iras/] for the reasons why HSA’s beat IRA’s as retirement accounts.

HSA eligibility, unlike IRA eligibility, is not dependent upon having earned income. The last year you can contribute to an HSA is the year before you turn 65.

65 or Over: Medicare

If you are 65 or over, your first opportunity to enroll begins 3 months before you turn 65 and continues until 3 months after, unless you are still employed. Sign up for Part B at the first opportunity (after leaving your employer), otherwise your premiums increase 8% – 10% per year.

Enrollment for existing Medicare beneficiaries for 2022 runs from October 15 – December 7.

If you are on prescriptions, the formulary – the list of drugs that Part D covers – might have changed. Make sure your prescriptions will still be covered. Stories abound of huge jumps in co-pays after January 1. At www.medicare.gov, you can input your prescriptions and the site will advise you which Part D plan covers the meds you need.

Long-Term Care Insurance

Group long-term care offerings through employers are becoming a benefit of the past. Private policies can be bought with better coverage, but premiums are increasing. If you are at least 40 and have access to a group policy, strongly consider enrollment. Most group policies are portable if you leave the employer. Also consider shopping your group coverage against a private policy.

Long-Term Disability

The younger you are, and the more education you have, then the more likely that your potential earnings capacity over your lifetime, known as your “human capital,” is your biggest financial asset. Protect it with LTD coverage.

We are all more likely to be disabled than to die. Most employers provide short-term disability for 90 days.

Long-term disability coverage, if offered, varies from 40% to 80% of compensation until age 65. Some employers provide the opportunity to purchase supplemental coverage; others don’t.

Finally, check whether you are covered for “own-occupation” or “any-occupation.”

Group Life Insurance

Many employers provide one year’s salary as a default for group life insurance, with the option to purchase more for the employee or the employee’s spouse or domestic partner. It’s usually a good deal.

If you didn’t sign up at your initial enrollment, you may need to submit to a paramedic exam if you request more coverage.

Employer Stock Options/Restricted Stock Purchases

The most common error among holders of options and restricted stock is concentration of investments, and future earnings, in that employer. This is usually because those employees own employer stock outright, plus options, plus more stock in a retirement plan through a company match. That’s a lot of eggs in one basket.

You may be highly satisfied with the company’s potential.  (So were Enron employees.) Stuff happens. Before making major moves, consult a CPA or CFP. Employer stock decisions can have major tax consequences.

These are just a few of several benefits options commonly found with larger employers. Walking through elections with your financial planner is a good idea at enrollment time. Make a special appointment to do so in advance of the holiday crunch. (Book a 90-minute planning appointment for a Financial Checkup direct at: https://go.oncehub.com/HollyDMeetings)

For questions about planning services, pick the best time for Holly to call you: https://go.oncehub.com/hollypthomas.

Continue ReadingBefore You Click Renew: Fall Enrollment Reminders

Death By A Thousand Indecisions

indecisions

“Then indecision brings its own delays, And days are lost lamenting over lost days. Are you in earnest? Seize this very minute; What you can do, or dream you can do, begin it; Boldness has genius, power and magic in it.”

Johann Wolfgang von Goethe, Faust

Death by a thousand indecisions. As Goethe asked, are you “in earnest”? When it comes to decisionmaking, sometimes it’s quick: Ready-Fire-Aim. With other decisions, we take our sweet time. How much is indecision costing you?

Like death from a thousand cuts, indecisions can slowly deplete our energy, leaving little behind for ourselves or others.

Decisions are Draining

That’s because decisions are draining. Neuropsychologists like Dr. Moira Somers tell us that decisionmaking depletes our mental energy. According to Dr. Somers, every day we wake up with a finite amount of mental energy. As the day goes by, the more decisions we make, the less energy we have. And the bigger they are, the more energy they use.

Think about life’s transitions. One reason transition times, good or sad, are so stressful and exhausting – a move, a death, retirement, a child, a divorce – is the many seemingly small, plus a few momentous, decisions.

Further, lack of sleep, hunger, grief or even excitement can start the whole day off depleted.

Then, every indecision we “make” is a decision. In fact, a pattern of indecisions can take physical form, and stress us out every time we see it.

What does not-deciding look like? A pile of unfiled papers. Empty boxes stacked in the garage. The “miscellaneous drawer” in the kitchen. The “junk room.” Scattered financial accounts in too many places. Unfinished projects.

With a finite amount of mental energy at hand, who can blame any of us for having some kind of to-be-decided pile/stack/assortment hanging over us all the time?

Dealing with Indecision

What to do about it?

  • Make big decisions in the morning, before depletion sets in.
  • Automate it: Use a system to take care of small decisions automatically
  • Eliminate it: Ask often, “How important is it?”
  • Date-Activate it: Calendar the decision to deal with and be done
  • Delegate it: Ask for help

Automate It

An automation example I love and have yet to implement is the decision of what to wear. Michael Kitces, a noted financial expert, famously has a closet full of the same blue shirts, pants, and shoes. One less decision each day for a busy guy.

Another example is cooking. Thanks to Cassy Joy Garcia’s book, Cook Once: Eat All Week, our household now pre-preps ingredients on Sunday. Then, each work night is 15-30 minutes to assemble and cook the ingredients with pre-planned healthy recipes. The meals are delicious, but the best part is not having to make the decision of what’s for dinner. Hallelujah.

Eliminate It

In the summer of 2021 I began thinking about a new car. My financial plan called for me to sell my would-be 7 year old car in January 2022 and buy another one. I couldn’t decide what kind of car to buy.

Aware that the indecision was draining me, I wondered why I was having such a hard time deciding. Then it hit me. I didn’t need a new car. In fact, I didn’t need a car at all. My husband and I had both switched to working from home. Why did I need a shiny hunk of metal to sit in the garage? We had my husband’s car, which was only 2 years old. We ran a 6 week experiment without using my car to see if it caused any problems.

When we saw that it didn’t, I felt immense relief. This told me I was making the right decision. Besides, it was a good time to sell a used car. $15,000 later, we are both very happy about eliminating that decision!

Date-Activate It

My calendar rules my life. It tells me what to do, where, and when. If this is not you, then this tip might not work.

One decision that goes on the calendar every year is whether to take a ski trip and if so, where. The local ski clubs publish their trips around August/September. Ski season pass discounts usually end on Labor Day. So I have the calendar marked for that timeframe to do my research, poll my skiing girlfriends, and make the decision. While it feels sooner in the season than I would like to make a commitment, if I did not give myself a deadline, I would dilly dally into December as all of the good trips filled up. And in the meantime, I would be spending a huge amount of mental energy on something that’s supposed to be fun.

Delegate It

Part of my indecision problem has been the flawed belief that I should be able to do everything myself (and perfectly, which is a topic for another blog post).

However, after a divorce, when my brain was extra foggy, I had significant success with hiring a friend to help organize. At the same time, I had estate planning documents updated with a local attorney. With my friend’s insight, coordination, and diligence, I quickly had an uber-organized office AND an updated “emergency box.” I felt the fog lifting as things came together.

It turns out that hiring help accelerated my decision making and used less energy. Perhaps this is what Goethe meant by the boldness in beginning. Delegating to others can be bold.

Getting Better and Better

Goethe said in that boldness to begin the decision we find genius, power, and magic. Further, there is a spiraling effect – the fewer decisions left to make, the more time to do what we do best. This is far better than a daily slog through indecision-infused mud.

At some point, with excess energy, I felt ready to give back. Someone close to me suddenly lost her husband and her mother within a three month period. She had an overwhelming number of decisions to make about seemingly small stuff, and was in a grief-stricken state to be doing so. I feIt the capacity to help her. I could not have made that statement before I had my own house in order. I don’t know if that counts as genius, power, and magic, but it felt really good to do.

What About You?

What if you took an indecision pile and automated, eliminated, date-activated, or delegated?

Who might you then be able to help?

Genius, power, and magic are waiting, if we have the boldness to begin.

Continue ReadingDeath By A Thousand Indecisions

Student Loan Forgiveness 2022? 6 Questions To Ask

Student loan forgiveness 2022? Where do your student loans stand right now? It can be pretty confusing to figure that out. Covid deferrals, loan servicer mistakes, and now forgiveness have led to a mish-mash of options. However, the big financial mistake you can make is to assume you don’t qualify for some kind of relief.

One piece of good news on the mish-mash front, especially if you have more than one loan: Those loans can now be seen on one page at www.studentaid.gov. No more checking on each servicer’s website for your information. It has a helpful feature. The site divides your loans into those that can be forgiven (through any existing forgiveness program, not only the most recent one), and those that cannot (mostly private loans).

To use studentaid.gov, you will need an FSA ID. This is different from your loan number. Apply for one at the website, and you’re in.

6 Questions to Ask Yourself

Before deciding, like Seinfeld’s Soup Nazi, “No forgiveness for you,” (90s reference – might make no sense to recent graduates), ask yourself these 6 questions to start:

1) Were your loan payments ever on some kind of income-driven repayment plan (IDR)? If so or you are not sure, see “Income-Driven Repayment Loans,” below.
2) Have you worked in medicine, education, or for government, at all since graduation? You may have been given bad advice about Public Service Loan Forgiveness. Skip to “Public Service Loan Forgiveness,” below.
3) Does your employer offer any type of student loan reimbursement benefit? If not, might they consider one? It’s tax-free to both you and them until 12/31/25. For more info, see “Tax-Free Student Loan Reimbursement,” below.
4) Did you repay some or all of your Covid-deferred loans in the last 33 months despite the fact they were on deferral? Skip to – “Forgiveness – What We Know So Far,” below.
5) Is your household Adjusted Gross Income (look on your tax return or ask your CPA or CFP) less than $125K (single) or $250K (married)? Skip to – “Forgiveness – What We Know So Far,” below
6) If you are a parent of a current student getting loans, is your household Adjusted Gross Income (look on your tax return or ask your CPA or CFP) less than $125K (single) or $250K (married)? Skip to – “Forgiveness – What We Know So Far,” below

Income-Driven Repayment Loans

If your loan payments were ever calculated based on your income, you may be entitled to some relief. Many errors were made in the calculations of those payments, mostly in the loan servicers’ favor. Most of those errors have now been corrected. You may owe less than you think. You may also qualify for lower payments.

Go to student aid.gov, sign up for an FSA ID, and find out.

Public Service Loan Forgiveness

A study showed that nearly all applications for PSLF had been rejected over the past several years when many of them should have been approved. Additionally the loans suffered from accounting errors.

Plus, more jobs have now been added to the PSLF program eligibility.

****But in order to have your case reviewed, you have to enroll at the student aid.gov site by getting an FSA ID by 10/31/22.****

Anyone in medicine, education or government work should go ahead and enroll. Enrolling sooner than later will reduce the chance of getting caught up in a last-minute rush of applicants.

Tax-Free Student Loan Reimbursement

With the 2017 Tax Act, employers and employees were given a special benefit. Employers can reimburse employee’s student loans up to $5250 (but any tuition directly reimbursed is subtracted first). The employers get to deduct the compensation, and the employee doesn’t pay tax on it. This benefit is available regardless of salary, income, or occupation.

Because the 2017 Act sunsets in 2026, however, this means that this benefit is only available until 12/31/25, unless it’s extended by Congress.

Ask your employer if this benefit is available to you. If you work for a small-ish employer, that employer may not be aware of this benefit. Given the tight labor market, it might be a good time to make the request to add it, or to provide it for you.

Forgiveness – What We Know So Far

While many of the details still have to be worked out, you’re probably aware that the recently-enacted loan forgiveness applies if you are single with Adjusted Gross Income (AGI) of less than $125K or married with AGI of less than $250K.

Again before letting that internal Soup Nazi strike you down, remember AGI is not your gross income/salary. If you are a W2 employee, your AGI would be approximately:
Salary+Bonus minus Retirement contributions minus HSA (Health Savings Account) contributions.


In addition to retirement and HSA contributions, there are many other adjustments that can affect your AGI, but they are less common. The point is that if you make $135K and think you don’t qualify, think again. If you contribute $6K to your 401K and $6K to your HSA, your AGI is $123K, so you actually do.

If you are self-employed you probably have even more deductions, so a thorough tax review would be in order. Maybe an amended return for 2021 might be worthwhile if you find a deduction that was missed.

The amounts that can be forgiven are $10,000 for all borrowers with public loans (not private ones), and an additional $10,000 if they were also Pell Grant recipients. The website at student aid.gov will tell you which loans you have that are forgivable.

What if you paid off your loans within the past year and you would otherwise qualify for forgiveness? Surprise – you will be able to apply for a refund. Details on that yet to come, though.

What if you are the parent of a current student? As long as the student had loans as of 7/31/22, and your household’s AGI falls below the income eligibility figures, your child’s loan(s) would qualify for forgiveness.

Summary – Several Strategies

In summary, now there are several strategies to employ that can help ease the burden of student loan debt. Consult with a knowledgable CPA or CFP on what opportunities there might be for you.

You can make an appointment to speak with us about your student loans or other concerns on our Contact Us page.

Continue ReadingStudent Loan Forgiveness 2022? 6 Questions To Ask

Parents, Aging and Finances

Parents, aging, and finances. Talking about aging with parents can be one of those difficult conversations we want to put off for another day. Like other difficult conversations, though, avoidance usually makes it harder.

Transitions in aging can fall into four broad categories: financial matters; health care decisions; living arrangements; and transportation. This week’s post tackles the topic of finances.

Helping Parents With Finances

The downside of the digital age is that it makes seniors more susceptible to fraud and scams. They can send or spend money anywhere, or divulge sensitive information, with one click. Without being physically present, adult children might not be as quick to catch the warning signs that a parent has become susceptible.

The most common kind of elder financial abuse occurs from people close to the parent. Sometimes it can be a new person in their lives – a girlfriend or boyfriend, a housekeeper, or a companion caregiver. Checking up on new friends and companions might not feel good, but is a necessary step.

Are parents located far away? In her wsj.com article, Veronica Dagher interviews financial advisors and aging experts on how to help parents with finances from a distance.

By volunteering to help with bill paying, the person with the DPOA can begin to get acquainted with the parent’s accounts, particularly what kind of expenses are normal and which are not.

Parents: Start Early, Small and Often

Parents would be wise to communicate early with adult children. While the topic of money is taboo in many households, it will make everyone’s life easier if the parent is open and communicative. It’s helpful to know how many accounts there are, how the accounts are managed, and approximate amounts or a range of amounts in each. Describe how the transition of help with money would go in an ideal world. Other steps:

  • Provide contact information for the financial advisor, investment manager, lawyer, and accountant.
  • Arrange an annual family meeting with any or all of the above.
  • Begin conversations early with small topics first. Allow everyone involved to grow into their roles.
  • Build on that trust to expand financial duties as time goes on.

Adult Children: Start Early, Small, and Often

For the adult children, instead of anticipating one future difficult conversation, experts recommend thinking of each topic as a continuous conversation to be had over a number of months or years. Following are some pointers.

Start the conversation with curiosity.

“Mom/Dad, if you should ever reach the point where you’re unable to (balance your checkbook, drive on the interstate, feel confident about a medical decision, feel comfortable living on your own), what would you like to have happen?”

“What would be an example of something that would indicate the point at which you would like help?”

Listen intently. Even if it is not what you would like, check for understanding by repeating back what you heard. For example, “So what I hear you saying is that, if you have a fall, that’s when you’ll ask for help. Is that true?” Sometimes when we hear things back, we change our minds, or clarify.

Things To Do Now

As noted in Dagher’s article, one of the most important documents is a Durable Power of Attorney (DPOA). If a DPOA is more than a few years old, or there has been a change in health status, have it reviewed by an elder law attorney. The attorney will make sure the powers granted are up to date with current law and broad enough for the parent’s current situation.

Since so much of our financial lives are online, it’s also wise for a parent to share emails, userids, and passwords with the person named as DPOA. Ideally, all of the financial institutions where a parent has accounts would have copies of the DPOA and confirm they recognize it as valid.

By volunteering to help with bill paying, the person with the DPOA can

  • begin to get acquainted with the parent’s accounts
  • become known to the institutions where accounts are held and
  • learn what kind of expenses are normal and which are not.

Additionally, it tends to work better if just one person is named as DPOA. Then name a backup or successor in case they are unavailable. Joint DPOAs can be a headache.

DPOA Does Not Work for Health Care

While the DPOA covers financial and legal matters, it does not address health care decisions. For those, a health care proxy or Designation of Health Care Surrogate is necessary. With Covid-19, family members may not be allowed in the hospital. Should an emergency happen, the health care proxy, as well as any living will, DNR (Do Not Resuscitate), or DNH (Do Not Hospitalize) documents should be provided to paramedics and/or hospital staff.

For a free resource specifically addressing the talk about end-of-life care, see The Conversation Project, at https://theconversationproject.org/starter-kits/. For a primer on the 4 basic estate planning documents needed by everyone, see Part 2 of 2 – The Talk That Only Gets Tougher – 4 Documents.

Simple But Not Easy

These are difficult scenarios to think about or talk about. The most important thing to do now is begin with a single step. Whether you are the parent of adult children, or the adult child of an aging parent, it’s never too early to broach the topic. Rather than waiting until it’s too late, start while it seems too soon. That kind of talk will be a lot easier.

Continue ReadingParents, Aging and Finances

The Ideal Retirement Plan: It’s About More Than Money

view from the porch

The ideal retirement plan: it’s about more than money.

I knew a man who couldn’t wait to retire from his government job. With a few decades of hard work and wise money decisions, he was able to call it quits at 55. Thrilled with his newfound financial freedom, he immediately took to cooking, golf, dating, traveling, fishing, and having fun. For the first few years, every time I saw him, I could see the lack of work responsibilities had lightened his step and his heart.

At 65, he moved to a Florida retirement community, the kind with nearly identical roofs, lawns and mailboxes. One of the few ways to stand out was by the cover on your golf cart. To outsiders, everyone looked the same, dressed the same, exercised the same, and seemed to absolutely love their new life in the sunshine.

Happy on the Outside But No One to Talk To

One day on the phone the man said, “Y’know, I really like talking with you. I don’t have anybody to talk to here.”

This was a shock. “What?” I said, “Surely there are some retired CEOs, executives, people that think like you there, that play golf, and that you have a lot in common with.”

“Nah,” he said, “I don’t have that much in common with anybody here.”

I thought that was crazy. He talked like them, dressed like them, shopped like them, and played golf and pickleball with them. He probably was just as well off, financially, as any of them. How could he not have someone to relate to?

Unfortunately at that time, I was unfamiliar with the signs of depression. Five years later, it took his life.

Three Myths About the Ideal Retirement

According to writer Mitch Anthony, there are three myths about the ideal retirement plan.

Myth 1: “This part of my life is going to be about ME.”
Anthony says, “This is a formula for emptiness.”

Myth 2: “I am going to surround myself with people like ME.”
Anthony’s reply: “This is a formula for stagnation.”

Myth 3: “I am going to do nothing but relax.”
Anthony: “This is a formula for boredom.”

Emptiness, stagnation, and boredom. Doesn’t sound much like the ideal retirement. Yet, these three myths form the basis of a lot of retirement plans.

A Mayo Clinic gerontologist told Anthony, “A life of total ease is two steps removed from a life of total disease. The first step is they get bored, the second step is they grow pessimistic, and then they get ill.”

The Dark Side of Retirement Plans

This is what writer Robert Laura termed the “dark side” of retirement. For some who don’t think about how to bring meaning and purpose to their life after work, serious mental health maladies, like depression and addiction, await. Florida retirement communities have some of the highest suicide rates in the country, particularly growing among white males over age 65.

Of course not everyone in retirement communities is depressed. It’s common to have constant fun, be social, and live vibrantly, filling time with volunteering, mentoring, and circles of friends.

Plan For More Than Money

For those like the man above, jumping off the work treadmill onto the retirement scene without a plan can be risky. Instead, South Dakota financial planner Rick Kahler responded to Laura’s article with several wise suggestions for the non-financial part of a retirement plan:


*Ask yourself how much of your identity is tied up in what you do, rather than who you are.
*Start creating a life to retire “to” rather than simply a job or business to retire “from.”
*Consider gradually reducing to part time and taking extended vacations, rather than showing up one day, and having nowhere to go the next.
*In your ideal week, identify how would you spend your time, and with whom?
*Have a diverse social network outside of work.

As one example, writer Douglas Bloch complained his parents’ retirement community had no children, while his retired friends were finding fulfillment in their own neighborhoods mentoring youngsters in math.

The best retirement plans start with a plan for a fulfilling life first, then match up the plan with money decisions. That’s why good planners ask, what’s the money for? For most, it’s not to support boredom, stagnation and decline. If you define what an ideal retirement means first for you, then your retirement plan and your retirement life have far better chances of success.

Dedication to Mental Health Awareness

Following May’s Mental Health Awareness month, every June I republish this story in memory of the man who inspired it. Retirement is a life transition that has an under appreciated impact on mental health.

Resources for Ideal Retirement Plans:

Dori Mintzer, Ph.D. has a weekly live interview series and podcast called “Revolutionize Retirement.” In it, she interviews experts on retirement life.

Mitch Anthony’s book, The New Retirementality.

Holly’s book, The Mindful Money Mentality: How To Find Balance in Your Financial Future

Sign up for our free monthly e-letter, “The View From the Porch.” We never share your email address.

Continue ReadingThe Ideal Retirement Plan: It’s About More Than Money

The ABCs of Behavioral Economics

The ABCs of Behavioral Economics: This article was originally published in NAPFA Advisor magazine.

Behavioral economics, with its long lexicon of “biases,” has enjoyed great popularity for a couple of decades. However, it’s also one area where financial planning students feel the least prepared. Experienced advisors, too, find this relatively new field fascinating, but yearn for practical ways to apply it, especially amid the market volatility of the past couple of years.

Sometimes it’s helpful to boil things down to basics. At the risk of oversimplifying, here are three reminders, A-B-C style, of what behavioral economics is about, how it works, and how advisors can use it.

A—What is behavioral economics about? A: Actors (economic ones) are not always rational.

Economists used to assume that actors (people and companies) always act rationally to increase their profit, wealth, or “utility.” The father of behavioral economics, Daniel Kahneman, won a 2002 Nobel Prize for proving they actually don’t. However, even today, both clients and advisors still tend to assume finance is about facts, not feelings.

Throughout my early banking career, I made this assumption. For example, when the estate tax exemption was $675,000, I reveled in suggesting ways that nearly every client could save on estate taxes. One husband, whom I knew liked to argue, pushed back when I brought this up. “Why do you automatically assume I want to save taxes?” he blurted.

His wife looked at my jaw hanging open. I answered, meekly, “Because nearly everyone I talk to wants to save taxes?”

“Well, maybe I don’t!” he said. “The government has a lot of good programs.”

Before that day, I had never asked how anyone felt about paying taxes (who would ask such a stupid question?), or what the idea of legacy meant to someone (too personal, I might upset them). My job, before that day, was like Sergeant Joe Friday, “Nothin’ but the facts, ma’am.”

Now I know all facts, especially anything with the word “estate” in it, for goodness’ sake, come with feelings. It’s far better to get to the feelings first if we want any chance of rational decision making.

B- Why Does This Happen? B: Brains have powerful primitive parts.

In his 2011 best seller, Thinking: Fast and Slow, Kahneman divides the brain into two systems: System 1 and System 2. To oversimplify, System 1 is the older, primitive part, and it generates emotional responses. System 2 is the newer, intellectual part.

Most of the time we’re quite aware of what’s going on with System 2 (intellectual), and quite unaware of System 1 (emotional). We fail to remember how much more powerful System 1 is than System 2. To make matters worse, System 2 falsely believes it can override System 1 anytime it wants.

For example, have you ever been sitting at a traffic light and suddenly heard a honk from the car behind you? My System 1’s initial thought is, “Who the !@#$ is honking?” as I glare in the rear-view mirror. A fraction of a second later, it occurs to System 2 to, duh, see if the light turned green. System 1’s embarrassment kicks in with a little wave in the mirror, “Sorry!”

One of the signs of a true professional is the ability to override System 1 through experience and practice. Kahneman uses firefighters as an example. After many fires, they learn that fear doesn’t go away. They accept it as part of the job, then, with experience, use it to make split-second but measured decisions.

In the last couple of years, have you not been a little scared, at least once? A study from the Journal of Behavioral Finance showed financial professionals are just as prone to emotional errors as retail investors. Knowing and accepting this should make us even more cautious. Younger advisors know from their training not to act irrationally based on fear. Senior advisors know from experience not to act irrationally after seeing advisors who did.

Our System 2 can try saying, “I won’t be scared the next time the market falls 10%,” but your System 1 will decide that involuntarily, not you.

System 1 beats System 2 to the punch nearly every time because System 2 is wired to conserve energy. So, it allows System 1 to do most of the work, which mainly involves scanning for threats. Fear isn’t wrong. It’s unavoidable. Whether and how we handle it is our hallmark.

C—What can we do about it? C: Curiosity can help.

How do we foster conversations in which System 2 creates a measured response to System 1 impulses? One way is to concentrate on being curious. This means to expect our own emotional response but not react to it. Accept whatever the client brings up. Focus on better understanding the client’s responses.

Here is an example:

Client: “I think we should buy/sell/do something different than what we’ve been doing.”

Advisors’ thoughts under the influence of System 1:
Fear: “Are you leaving?”
Guilt: “I should have called you sooner.”
Contempt: “You stupid idiot!”
Impatience: “No. You are acting irrationally. I don’t have time for this. Here’s my advice. Take it or leave it.”

Advisors under System 2 (with System 1 emotions in the background):
“I understand, and I would like to hear more about what you’re thinking.” (Fear: Yikes! No! You might blame me for this.)

“It sounds like you are really concerned. Tell me more.” (Contempt: After all our meetings, why can’t you just be calm?)

“I’d be happy to talk about that further. Help me understand how you are feeling.” (Impatience: Do I really have to listen to this?)

We can help the client discover their emotions themselves, simply by creating a safe space for it. Upon reaching that point of self-discovery, ironically, they feel more understood by us. Once someone feels understood, only then will System 1 sometimes step aside and make them ready for System 2-based factual advice.

Sometimes Advisors Need to Hold the Advice

In a 2016 article for The Journal of Financial Planning, Brad Klontz wrote,


The secret is this: when we are doing our best work, we are bringing little or nothing new to the exchange. We are asking no questions. We are offering no advice. We are making no recommendations. We are providing no analysis or insights. We are abandoning our goals and agendas and are just bringing ourselves. Sure, we are facilitating a process, but we have learned that our effectiveness grows as our ability to be present grows. In our best moments, we are engaged in exquisite listening, which is the best therapy.

Klontz, Van Sutphen, and Fries, “Financial Planner as Healer: the Role of Financial Health Physician,” Journal of Financial Planning, December 2016

Behavioral economics can feel counterintuitive: Expect irrational responses, and accept that feelings are more powerful than facts. By not immediately reacting with advice, we become the best advisors.

For more on applying behavioral economics principles to real-life financial planning, see The Mindful Money Mentality: How To Find Balance in Your Financial Future.

Continue ReadingThe ABCs of Behavioral Economics

Inflation Relief: Florida 2022 Sales Tax Holidays

Inflation relief: Florida 2022 Sales Tax Holidays. In inflationary times, every bit of savings can help. Florida sales tax runs anywhere from 6% to 8%, depending upon the county where you are making the purchase. Several years ago the Florida legislature started sales tax “holidays,” beginning with the back-to-school season.

Flush with a budget surplus this year, the legislature passed several more holidays which begin this summer. Some of them last a week, while others last up to 2 years. For a major purchase you might be considering, it pays to know the timetables.

Disaster Preparedness: May 28 – June 10, 2022

This has been an annual sales tax holiday for a few years now. If you are in or near Florida, and getting low on batteries, bungee cords, coolers, tarps, portable generator(s?), or several other items listed in the link below, you can save the sales tax by waiting until the week of May 28 to stock up.

Of note, the holiday includes all kinds of pet provisions – pet food, pet kennels, pet beds, leashes, and even pet waste disposal bags.

Here is the link to the 2022 list of exempted disaster preparedness items:

https://revenuelaw.floridarevenue.com/LawLibraryDocuments/2020/05/TIP-123007_TIP_20A01-02_FINAL_RLL.pdf

Big Deal – Home Hardening Disaster Preparedness: July 1, 2022 – June 30, 2024

This one is a bigger deal and can save major bucks. Impact-resistant windows, doors, and garage doors will be fully exempt from sales tax for 2 years starting July 1.

So if you are planning a major home improvement, talk to your contractor about placing the order after June 30. On a $5,000 order, in a 7% sales tax county, that’s a $350 savings.

Unlike most of the other holidays, this exemption also applies to commercial orders.

More detail on home hardening exemptions here: https://floridarevenue.com/taxes/tips/Documents/TIP_22A01-07.pdf

Also Big Deal – Appliances: July 1, 2022 – June 30, 2023

Thinking about replacing appliances? Wait until July 1 and you can save the sales tax on Energy Star appliances. High-end appliances are not included, and the definition of “high-end” appears to be about $1500 ($3000 for refrigerators). $1500 x 7% = $105 in possible savings.

More detail on appliance exemptions here: https://floridarevenue.com/taxes/tips/Documents/TIP_22A01-05.pdf

Children’s Books: May 14 – August 14, 2022

Sales tax on any book written for children under 12 is waived all summer. One of my personal favorites: The Four Money Bears by Mac Gardner. This website also has a fun financial literacy game for kids called “Berryville.”

Fun Events, Outdoor Supplies and Annual Passes: July 1 – July 7, 2022

This sales tax holiday began during the pandemic in 2020. Event tickets, camping supplies, paddle boards, kayaks, binoculars, grills, and bicycles are some of the larger ticket items included in the holiday.

Of note also – annual or season passes for museums, theater series, ballet, and state parks.

New for 2022: pool supplies and parts.

The complete list for events and supplies during “Freedom Week” is here: https://floridarevenue.com/taxes/tips/Documents/TIP_22A01-04.pdf

Children’s Diapers, Clothing and Shoes: July 1, 2022 – June 30, 2023

This has been proposed but blocked in the past. Finally parents and guardians of young kids will get a little relief.

But this is one of two holidays (the other being back-to-school) where the state outlines what is excluded, in addition to what is included. And, as I wrote in 2021, the inclusions and exclusions aren’t always easy to guess.

What constitutes “clothing” and “shoes” for this holiday for toddlers and babies? A few head-scratchers:

Snow ski boots – Yes; Fishing boots/waders – No

Snow ski suits – Yes; Skin diving suits – No

Hunting vests – Yes; Life jackets – No

Garden gloves – Yes; Bicycle gloves – No

Click for the complete list of diapers, clothing and shoes: https://floridarevenue.com/taxes/tips/Documents/TIP_22A01-06.pdf

Back-to-School: July 25 – August 7, 2022

New exemptions for 2022 include learning aids like puzzles, flash cards, and games.

See this year’s complete back-to-school list: https://floridarevenue.com/taxes/tips/Documents/TIP_22A01-08.pdf

New Holidays for 2022: Labor Day/Skilled Workers September 3 – September 9, 2022

Larger-ticket items on the “Tool Time” holiday include power tools under $300, power tool batteries, toolboxes, and work boots. It also includes shop lights, plumbing tools, and duffle bags.

More detail on “Tool Time” exemptions here: https://floridarevenue.com/taxes/tips/Documents/TIP_22A01-09.pdf

A Lack of Preparation Story

During Hurricane Irma in 2017, the middle of the spaghetti models 5 days out showed the storm was likely going up Florida’s east coast. This is the opposite coast from where we live. My husband and I got double-busy with clients who wanted to squeeze in appointments before it hit. We got caught up in the work and ignored our own preparations. I didn’t fill up my car, and we didn’t check our stock of Coleman stove propane canisters. By the time the forecast shifted, there was no gas to be found – for the car, for the stove – of any kind, anywhere.

Irma left us without power for 7 days. Cooking on a tiny charcoal grill in the backyard got old quickly. After 3 days, when the charcoal started getting low, the temperature inside climbed to 83 with humidity of 100, and the frozen fish was rotting, we called it quits and found a hotel with electricity that had managed to reopen.

For a Florida native, experienced with hurricanes, whose job title includes the word “planner,” it felt like I should have done better.

Lesson Learned

Next time I will pay attention to all the strings on the spaghetti model, not just the ones in the middle.

The sales tax waiver is a needed nudge for procrastinators like me. Disasters of all different sorts happen. Take advantage of the holidays to prepare yourself, and enjoy a little inflation relief.

Have you found a great deal using a sales tax holiday? Please do share by leaving a comment.

Continue ReadingInflation Relief: Florida 2022 Sales Tax Holidays

Why am I getting a Tax Form 5498 in May?

Why am I getting a tax Form 5498 in May?You may be receiving a Form 5498 in May If you have a Health Savings Account, a Roth IRA, or other IRA. 

It might seem like you just got done receiving and compiling all your tax forms and now your financial institution sends another? Hello, isn’t that a little late? Or were they lazy because of the extended deadline this year? Do you have to call your accountant or financial planner, again?

Hold the calls. You may remember reporting to your accountant (or TurboTax) that you made some contributions to these accounts. Perhaps you made them last year, or perhaps you made them before the April 18 deadline and had them “count” for 2021.

What’s a Form 5498 for?

One purpose of the Form 5498 is for the financial institution (called a “custodian”) to verify to the IRS that you did indeed make the contribution that you claim you did on your tax return. It also tells the IRS what your Required Minimum Distribution will be for the current year, if you are over 72.

Since everyone usually has until the tax filing deadline to make contributions, the IRS usually gives custodians until May 31 to send Form 5498.

Check Form 5498 For Errors

Before you file the 5498 away, make sure it’s correct. Mistakes are common. In 2018, my husband and I both had erroneous 5498’s for our Health Savings Accounts. I made my 2017 contribution in February 2018 and he made his on an ongoing quarterly basis. Mine showed $0 contributions for 2017 and his showed 2 years’ worth. So we called the bank where they were held and got corrected ones sent to the IRS for 2018.

If your 5498 differs from what you reported on your 1040, at some point it could get noticed. One fantastic sunny day in the future, as you skip to your mailbox, you may find inside a skinny white envelope with “Internal Revenue Service” in the return address. Fantastic day ruined.

More than likely, all the letter will say is, “Hey, we noticed your 5498 doesn’t match your 1040. What gives?” But still. Save yourself the trouble of having to answer (or pay your accountant to answer for you) and do a quick check now.

It only takes a few minutes. Does your contribution amount for 2021 look correct? Did you take any 2021 HSA or IRA distributions, and if so, do those look correct? (If not, make sure the distributions say $0.) Is your SSN correct? How about your name, including your middle initial?

If anything looks amiss, contact your custodian to get a corrected 5498 issued ASAP.

One More Tax Task

By this time of year, it’s normal to feel sick of tax stuff. The last thing you may want to do is deal with another form, especially an erroneous one. If you don’t want the bother, at least forward it to your financial or tax professional to check it out and help. It’s no bother. Whether it’s May, July, January, or December – we deal with tax stuff all year long.

Continue ReadingWhy am I getting a Tax Form 5498 in May?

Guest Rap Song Post: It Won’t Go To Zero

Guest rap song post: It Won’t Go To Zero. In early 2010, Ken Robinson, JD and Certified Financial Planner in Ohio, produced a funny rap video with a serious educational message: “It Won’t Go to Zero.” Whenever markets start back on their once-in-a-while roller coaster ride, it’s a good time to resurrect Ken’s lyrics and rap-star antics. Thank you Ken!

In 2007, the stock market began falling and didn’t hit bottom until 2009. Although it recovered throughout 2009 and 2010, it took several months to 2 years for the investing public to actually believe it. Who could blame them after the traumatic crash – a 50% drop in the S&P 500 – in the fall of 2008? Ken’s video in early 2010 occurred during a recovery many didn’t yet recognize.

During those couple of years, people and pundits asked, “Is this time different?” “Will it ever come back?” “Is this the New Normal?” “What if it goes to zero?” In times like these, it is usually confusing and difficult to separate reality-based facts from emotional actions.

Get to the Chorus

The chorus of Ken’s song goes,

“The markets are resilient, and although they may bend, they won’t break, the stock downturn will come to an end. I can’t say what might finally make things turn around, but eventually we will get back on solid ground. I’m not here to be some investment hero, I’m just letting you know; the markets won’t go to zero.”

The lyrics are just as relevant today, in a different decade, under a different New Normal. I wouldn’t change a thing he’s saying. In fact, yesterday I had nearly this exact conversation. I just wish I’d had the talent to say it in a rap song.

Check it out: https://www.youtube.com/watch?v=C3GtxtWSZxE

Choose Composure

Ken’s message is to keep our composure. After a recent NBA playoff win over the Memphis Grizzlies, Steph Curry of the Golden State Warriors was asked by the reporter, “You were down 13 points. How did your team come back to win?”

His answer: “Composure.”

Fortunately for the Warriors they did not have pundits on the sidelines screaming, “You’re finished!” “A comeback is impossible!” “This time it’s different!” Unfortunately for the investing public, scary messages are way too available on nearly any media source we choose. And the primitive part of our brains is hard-wired to look for danger, whether or not it might truly exist.

Choose media messages wisely. When things get scary, no matter what you are hearing and reading, choose composure.

For more on the ways our brains mix up our money messages, see chapters 6 and 7 of The Mindful Money Mentality: How to Find Balance in Your Financial Future, or any of the books on our Recommendations page.

Continue ReadingGuest Rap Song Post: It Won’t Go To Zero