Carry On

The stock market has fallen somewhat sharply the past two weeks. This is normal. Markets go up. Markets go down. The point of investing is not to guess what they will do in a given day or month but having confidence that there will be more good days than bad ones.

I wonder if talking about the stock market going down is just creating more concern where there really shouldn’t be any. That’s not to say I like seeing a statement with a lower balance on it; I don’t. But when any of us put money to work in the stock market, we sign up for the occasional bumpy ride. It’s been unusually smooth of late but this latest drawdown is quite normal.

As a reminder, the US stock market (as measured by the S&P 500 index) increased in value by nearly 22% last year. It has had a positive return for nine straight years. That is to say, my second grader had not been born the last time the market had a negative year.

Finally, downturns can be a great time to invest. After all, stocks are not as expensive as they were a few weeks ago. I don’t know (and neither does anyone else) if the market will experience a sharp rebound to the positive, continue on a downward slope, or muddle around somewhere in between the two. But I do know that having a plan and discipline will lead to better outcomes than worrying about how many points the Dow Jones moves by in a given day.

So my advice is carry on and enjoy cheering on Team USA in the Winter Olympics.

The Big Transition

“Should I stay or should I go?” - The Clash, 1982

The most important element of your financial plan is your career. When should you leave the military and transition to civilian life? Obviously the answer is different for everyone, but here I offer some pros and cons at the three most common transition points for officers:

Early Career: You commissioned right out of college and served your initial commitment of a few years. You’re now approaching your late 20s and want to enter the civilian world.

Pros: You’re young and can easily reinvent yourself in whatever civilian field you wish to pursue. You had great experience and responsibility at a young age, which is a valuable skill to take to a civilian job. You’re young enough to easily pursue medical, law, or business school if you want. You likely don’t have huge family obligations yet so can afford some risk when it comes to choosing what to do and where to live. If it doesn’t work out, you still have plenty of time to change again.

Cons: You feel behind peers who are your age but have been building their civilian careers for the past few years. You don’t get the same leadership opportunities as you had in the military. You’re not “entry-level” but don’t really qualify as having enough relevant experience in career fields unrelated to defense and government. Your network is still small, and not knowing what's out there can turn into fear of the unknown.

Mid-Career: You stayed in after your initial commitment, but now either by choice or force, you are getting out in your early 30s.

Pros: You have more experience and can hopefully jump into a leadership role in the civilian world. You’re still young enough to reinvent yourself if you want to change professions but will also have great opportunities in the defense industry, either for the government or a government contractor.

Cons: You’re halfway to a pension which has a huge value if you stay in the military a few years longer. It is a hard emotional transition leaving the world you have known for the past 10+ years and you feel a little old to be “starting over.” You may have a growing family with more obligations than you did a few years before making it more difficult to take risk in your civilian career.

End of Military Career: You stayed until at least 20 years of service and are retiring from a long military career.

Pros: You receive a sizeable pension (even with the upcoming changes) which will enable you to have some financial flexibility. You will likely have opportunities to enter the defense industry (government or private sector) in a senior level role. You know well how the military works and can translate that experience into a meaningful and successful career as a civilian.

Cons: It’s probably a little late to make a total career pivot. It’s not that it can’t be done but it’s unlikely you would want to go back to school or start back at the ground floor of an industry you have no experience in. The vast majority of people who retire from the military (at least where I live in the DC area) stay in the defense industry or government.

When weighing the pros and cons of staying in or getting out, many guesses and assumptions will be made. Hopefully this list gives you some perspective. Like any good financial plan, we make the best decisions we can with the information available at the time and carry on.

Should you really get that much of a tax deduction for contributing to your 401k?

Over the past few days, the media went a little bonkers about a proposal out of Washington that may or may not have reduced or eliminated the tax deduction for retirement plans such as a 401k. Wall Street Journal columnist Jason Zweig (who I generally really like and admire) went so far as to say “if you have pitchfork in your garage, keep it handy. Your 401k might need defending.”

It’s important to say upfront that I think everyone should take advantage of every tax benefit they are legally allowed to take advantage of. If you can contribute $18,000 per year for one spouse and an additional $18,000 for the second and receive a $36,000 tax deduction for doing so, by all means go for it. That being said, I don’t think it’s inappropriate to also say that such a system should likely not exist.

Sure, I am glad there is some incentive to save for retirement. It’s a strong motivator to save for the future and Uncle Sam would much rather we save for ourselves than for us to increasingly look to him to bail us out in our old age. But does the tax deduction really need to be quite as generous? No, it doesn’t. It disproportionately benefits the wealthy while offering only confusion to most workers concerned about saving for their future.

It would also be great to simplify the retirement planning landscape. There are different contribution limits to 401k’s, IRAs, SEP IRAs, SIMPLE IRAs, and more. There are different rules and options for pre-tax contributions and post-tax contributions. There are rules on income limitations and employer funding requirements. This complexity benefits no one, except the financial planning and accounting profession that are paid to make sense of it. On behalf of the financial planning profession, there is plenty of work to do and help we can offer even if Congress were to reduce some of the complex rules. I would rather see this complexity go by the wayside so I could focus more on the more important issues facing my clients.

Do you want to make it easier for Americans to save for retirement? Make it simpler to do so. In the meantime, if you get a tax deduction for saving for your golden years, it is probably a good idea to take advantage of it.

What's Going on with the Fiduciary Rule?

So is this fiduciary rule going to happen or not? Brief recap: last year the Labor Department announced a rule requiring financial advisors to hold to a fiduciary standard when working with client’s retirement accounts. Donald Trump comes in and announces that his administration will relook at the rule and potentially canceling it. A few days later, a federal judge said the rule can proceed but it’s still uncertain if that will actually happen.

Financial advisors should act in the best interest of their clients. That’s not rocket science and so I do support the fiduciary rule. That doesn’t mean it’s perfect. If you want to see a summary of the problems the rule has, check out Cliff Asness’ (somewhat wonkish) article here.

The simple solution is for investors to work with a fiduciary now. We don’t need the Labor Department to make this happen, just awareness. Consumers can and should demand transparency in how their financial advisor is compensated and understand why certain financial strategies are recommended over others. But I hope that holding all financial professionals to a higher standard of care (as the fiduciary rule seeks to do) would elevate the financial planning profession to be more trusted by consumers. I also hope it eliminates the most egregious offenses of bad apples masquerading as “advisors” exploiting unsuspecting investors.

-Patrick

Navient Lawsuits and the Debacle that Student Loans Have Become

Navient, the “largest collector of student loan payments in the nation,” is facing lawsuits for making errors that have resulted in harm to borrowers and misleading borrowers about their options for their student loans. I came across a New York Times article on the subject and read it expecting to come away upset with yet another financial institution failing the very customers they were expected to serve. But, after reading the article, I didn’t feel angry with Navient but rather sympathetic toward them. Granted, I know nothing of the cases mentioned beyond what is in the article and am by no means an expert in laws regarding banking, lending, etc. I do think I have an above average knowledge of student loans and the income based repayment options now available so I’m no dummy on the topic either. So please take my reflection on the situation with a grain of salt and let me know if you think I’m wrong or missing some important information.

Why am I sympathetic to Navient?

  1. The NYT article relies almost exclusively on anecdotes. That’s not saying the stories of customers getting harmed aren’t true; it’s just that in an article meant to show me, the reader, why Navient is getting sued, no information was presented as to any systemic abuses that would justify a lawsuit.
  2. Navient as a loan servicer has little to do with income based repayment plans. These are applied for directly through the Department of Education and the loan servicer is notified afterwards. Navient can’t “deny” income based repayment options to a borrower. They’re not even involved. Yes, the process of understanding and getting income based repayment for student loans is complicated but that’s not Navient’s fault. Blame the Department of Education, or thank them for giving any sort of leeway at all.
  3. Does anyone really think it’s the loan servicer’s job to give financial planning advice? If you’ve tried to look into it, you know income based repayment is complicated. I would by no means expect Navient to be the one to advise me on this and am surprised anybody would. Hopefully they would point an inquiring borrower to the Federal Student Aid website that provides more information but beyond that, I’m not even sure what they could do.
  4. The article faults Navient with not applying payments correctly. Word of advice: if you mail a check for $10,000 to pay off your student loans, double check a few days later to make sure it’s credited against those loans. Again, I would think that’s common sense but I guess not. Maybe Navient is “losing” checks but there’s no information here to suggest that and (as far as I can tell) there’s little or no incentive for them to do so.

The real topic to discuss is student loans. There are options for refinancing, consolidating, getting a forbearance, various income based repayment options, several “regular” payment options, not to mention paying them down faster. What is best for you is not going to be what is best for everyone. If in doubt, a borrower should get advice from an expert whose job it is to give advice. A call center representative from a student loan servicer is not a financial advisor, nor should we expect them to be. I do hope Navient starts offering more information to help borrowers make good decisions but let’s not pretend that they should provide individualized financial planning advice that is impacted by things well beyond just your student loans.

If I’m off-base on something here, please let me know. Maybe I’m completely misunderstanding what is going on here and will be the first one to admit it if I am.

-Patrick