financial plans beyond the basics
May 9, 2022
In this podcast, John Brennan, Senior Vice President of Trust & Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts, talks with John Maher about financial planning beyond the basics. He explains how to divert your current cash flow into savings. Then, he dives into topics such as when to start saving, how to boost your finances during retirement, and how a financial planner can help you.
Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice President of Trust & Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is personal financial plans beyond the basics. Welcome, John.
John Brennan: Hi, John.
Cash Flow and Financial Planning
John Maher: John, we talked a little bit about some of the basics or ABC's of financial plans previously, and we want to go into some more details. The first thing that we want to talk about is cash flow in your financial plan. Can you talk a little bit about cash flow, and what that is and how you think about it in terms of an overall financial plan?
John Brennan: Sure. Cash flows are really what it sounds like, streams of income. And so how do you capture these incomes in order to create reservoirs of capital in order to improve your financial situation? So even if you think of the Colorado River flowing down from Colorado, it gets diverted in these various areas to agriculture, it gets diverted to Southern California, it gets diverted here and there to create farms. Same thing with your cash flow. If you can divert 10% of your gross income into a retirement plan, 10% might not sound like much, it might not be that much on year one, but after doing it for five years, those flows can add up.
What you want to do, a good financial plan won't make you a millionaire in year one, but after year 20, it will certainly improve your financial situation, as hopefully your income rises and the dollars accumulate. That's the power of flow. This idea that these monies are moving over time, accumulating over time to your benefit.
John Maher: And so is the basic idea there that just you should make sure that you're taking some portion of your income and making sure that you're diverting it, if you will? Like you said with the river, that you're diverting it into your financial plan, into your investments or whatever it is?
John Brennan: Right.
John Maher: Okay.
When to Start Saving for Retirement
John Brennan: One of my favorite financial planning quotes is, "The best time to plant a tree was 20 years ago. The second best time is today." The notion that, start. Start, take that first step. I always try and, you want to be positive, just it never, it's kind of... I don't want to say it's never too late, but I've seen a lot of people make a big difference even if they've had a major setback of divorce, bankruptcy. People in their forties, I've seen by retirement age, be really in pretty good financial shape for diligence, paying attention, and working a plan.
John Maher: There's never a point at which you would say, "Oh, don't even bother doing it"?
John Brennan: Well, there is, but...
John Maher: Yeah, I mean, if you've already hit retirement age, it might be too late then, but basically like don't not start just because you haven't started yet. Just because you didn't in your twenties or your thirties or whatever, if you're in your forties and you're just getting started, it's better to start then than never at all.
John Brennan: Yeah, and also working a plan, I've seen a lot of comebacks. There are comeback stories. There's good stories out there. Doing the best with what you have, you can make a difference.
The Role of Tax Planning in Financial Planning
John Maher: Okay. We could probably do a whole talk just on this one, but the next topic would be tax planning. How does tax planning fit into your overall financial plan?
John Brennan: With tax planning, we talked earlier about this notion of a monthly nut, the yearly portfolio. Get one year's worth of data. Part of that one year's worth of data is taxes, because it's probably one of your largest expenses. Now, also going back to something we talked about in the basics, one of the things that happens with tax planning is that most people have withholding taken out of their paychecks.
Why? It saves them that positive step of having to write the check once a month, once a quarter or whatever it is, to the government. You're really better off if you don't see it. The other thing, too, couple of things around tax planning. I'm a big fan of people putting money in their 401(k) or their employer plans, because it goes back to that notion of paying yourself first. Comes out of your paycheck, goes into the 401(k). You never see it, you never miss it. Not only that, when you put money in your retirement plan, that gets deducted off your gross income.
So if you're making 60 grand a year and you're putting in $10,000 in your retirement plan, your taxes are only going to be on the 50 grand. They do not tax that income, and not only that, once it's in the retirement plan, you pay taxes on the growth. You're not paying taxes on the dividends, you're not paying taxes on the interest, you're not paying any capital gains taxes. So it grows in this cocoon, where not only you pay less income taxes, you're not paying taxes on its growth. So really think it's kind of the best deal going. The other thing too about taxes is you've got to be aware that the sands shift with taxes. A big thing happened with Trump's tax reforms, where probably a lot of people realized that tax form, that 1040 got a lot smaller, because Trump raised the standard deduction. He doubled it.
So what happens, that means a lot of people who were, he doubled it and then he reduced the amount you could deduct for local taxes. These are pretty big shifts in personal tax planning. So these sands shift, and you've just got to be aware of it. I've been talking to some of my peers and colleagues lately who are of an age where they lose the deduction that they have for adult children who are in college, and they lose the benefit of the education deduction. They lose them as dependents, and all of a sudden their tax goes up.
People might get a raise and they might shift wage brackets, but the amount they have withheld could be too low. So then all of a sudden, April 15th, there you go, you get punched in the face with a $6,000 tax bill. Not fun. So, with tax planning, an ounce of prevention is worth a pound of cure, and so there is power in that, and you've just got to be aware of what's changing. And the other thing too, as I mentioned, the high standard deduction has eliminated a lot of the power of itemized deductions for people. We were talking about debt earlier, people used to deduct mortgage interests as an itemized deduction. There's less of that now because it's harder to hit those numbers. It's harder to hit that, get above that standard deduction, because most people are just going to hit that $24,000 or whatever it is, which simplifies their tax return, but it also sort of disempowers a certain amount of tax planning.
So we have our year's worth of data. We have our cash flows set up. We're ahead of our taxes, in that if only we're prepared for our taxes so that the check we have to write the government come April 15th is small. We don't get punched in the face. So, the notion, and one of the things that the notion of planning is about, is creating wealth. I feel think I've said to you, John, the number one thing to do is to start. Time is your best asset in planning. The more time you have, the longer you have for your investments to potentially grow and accumulate. This is particularly true for young people, particularly true for retirement. You want to start early, because the power of compounding is powerful.
We talked about that in our investment book, which I know is also available on our website, but the notion of time is your friend when you have a savings goal. That is either a savings goal to accumulate funds or to eliminate debt. So if you can do something with your cash flows where, again, you don't really see it, you don't really feel it, over time it can make a big difference. The notion on this is with compounding interest, either in growth or sort of knocking debt down. Alongside this is the idea of someone who starts saving at age 18 for their retirement. You can start, if you really start early, it gives you so much power, because if you start late, you have to save that much more of your assets. So you can save a smaller percentage if you start early, versus a larger percentage if you start late.
What Financial Goals Should People Have?
John Maher: Moving to achieving your financial goals. It's something that people always think about, and what are some of the financial goals that people might have as part of their financial plan, and what are some of the ways that people can start to achieve those goals?
John Brennan: A big thing around goals is a lot of people want to own a home, right? That's a goal. That is the American dream, own your own home. So what you want to be aware of with that, it used to be that you would say your housing costs you'd want to be about 30% of your gross income. I would say housing has become more expensive for people as housing itself becomes more expensive. I meet a lot of people who are, I would call over-housed, meaning it might take, you get paid on a weekly basis, it might take two checks just to cover your housing. That's a lot. That can lead to you being over-housed, that can lead to financial strain elsewhere. That can mean you can never go out to dinner, that can mean that you can't save money for your retirement.
So from a planning perspective, that's something that's going to beat you up over time. We're back to this notion of time plus finances. That's sort of one of those mistakes, and that's also the advantage of planning. You want to be aware, and I tell people to, when you can, try and keep those costs modest as much as you can, because it's a great comfort to have, going back to the Dickens' quote in the other podcast we did, having money at the end of the month, having a little bit of accumulated savings, it's going to work out. So don't buy too much house.
Education costs, be careful. I think people don't always understand the implications. It's kind of crazy that we churn 18-year-olds out of high school, and then we ask them to make impactful decisions that are going to affect not only, we want them to choose a profession and pay for it in advance, and it's all going to work out fine.
John Maher: Right.
John Brennan: It's not always working out fine, so culturally, we've got to deal with that one. I think education has gotten too expensive and I think something to really be conscious of. I know parents sometimes feel guilty if they don't help their kids, or they feel guilty about their kids' debt, and that can be a drag on performance, drag on operations.
The Importance of Insurance
John Brennan: The other thing, and we've kind of touched on this here in our conversations, is lack of insurance. Insurance can save you from ruin, especially in healthcare. We talked about this in the last podcast, and I pulled up the stat I was looking at. Two-thirds of personal bankruptcies are due to medical bills, and 20% of bankruptcy filers are 55 plus. So as you get older, that insurance becomes more expensive, because then also as you get older, you'll end up having more healthcare needs because you're getting older. Insurance is critical. I think it's critical younger in your life, but it's certainly critical there.
Another type of insurance that is sort of a basic, which I think people overlook, term life insurance. Families with small kids, you need to insure for the loss of income. I think a family where there's one breadwinner or two, life insurance is relatively cheap, especially term life insurance, and it is insurance against catastrophe. If you lose a breadwinner, life insurance is designed to make up for that loss.
I mean, obviously it can't in certain terms, but at least financially it would replace the stream of cash flows, and I think it's a good value and something that is part of any good financial plan. And the notion of just not saving. Again, we've talked about two basics here. Start, do something, and then save something. It takes time. You're not hitting the home run year one, but people should be aware that social just won't cut it. No one's going to come to your rescue, as we talked about earlier. There's no scholarships for retirement. You can't make up for that kind of loss.
Tips for Investment Portfolios
John Maher: Right, okay. One of the things that people probably think of first when they think of their personal financial plan would be their investment portfolio. Can you talk a little bit about investment portfolio and your thoughts and some helpful tips for that?
John Brennan: Well, when I was talking about investment portfolios, investment portfolios are great. You want to have a risk appropriate investment portfolio for your savings. Why? Because CD rates and savings rates are right now simply too low to generate the kind of compounding interest that's going to make a difference. Inflation's 3%, the rates on savings accounts right now are too low. It's driving people to the stock market, and you really need to have that type of equity investment, because that's where average returns can be 8%. That outstrips inflation. That kind of rate, you can work with over time. If that averages out, that can really work in your favor. So yeah, that's why when we talk about investments, that's what we're talking about. It's not enough to stuff cash in your coffee can or your mattress. Most middle class Americans have to engage some kind of risk to generate the dollars they need to retire.
John Maher: Okay.
Finances During Retirement
John Brennan: A little also, just some other notions that come up with retirement and come up as people grow older. We've talked about savings and investment, that's a great start. Something that I see helping people in their financial plans is people can work part-time in retirement. Sometimes people might be a substitute teacher a couple days a week. They might work 10 hours. They might bag groceries. They might, I don't know, mow lawns, but the power of a little bit of a cash flow, not only does it kind of keep you engaged and keep you active, when you're working, you're not spending money. That's another factor. If you have a little part-time gig, it can make a big difference.
The other thing too, people can have windfalls. There are people who sometimes get inheritances. Sometimes people are saved by the fact that they inherit assets from their parents. So that's something, it's just part of financial plans. And then the other thing too is real estate. Most Americans, their chief asset is their home. The problem with real estate as your investment and your home as your investment, is to make that money, you have to sell it. But still, you can do well there. Real estate can appreciate dramatically, as we've seen even recently.
John Maher: And a lot of people downsize when they retire. Maybe they had a house that was big enough for their three kids or something like that, and then once the kids are gone, they can downsize, sell their house, buy a smaller house for less money and then take that money that they've earned and put that into their retirement.
John Brennan: And if you're working in Downtown Boston, and if you have real estate in Boston, say, and then you don't need that proximity to a workplace that's in an urban area and you move to New Hampshire, think of what those numbers look like. You can all of a sudden live a different lifestyle and probably make a tremendous windfall.
How Can a Financial Planner Help You Prepare for Retirement?
John Maher: So kind of wrap this up for us, John, in terms of a personal financial plan, and maybe how a financial planner can help a person to organize all of these things and be thinking about these things to help them as they get older and get more toward their retirement.
John Brennan: The thing is, most people have an intuitive sense of how they're doing financially, but they don't have the depth. They don't have the ability to say, "Okay, the course I'm on now, where will I be in 20 years? If I keep doing what I'm doing, what's going to happen?" The power of a financial plan is that it answers that question. So you're not wondering, so you have a point on the horizon. If you're on a boat on the ocean, you've got to pick a point on the compass and head to it, right?
So, the power of a plan can offer you what these small behaviors will add up to. It removes some guesswork. It often provides tremendous peace of mind. I often talk to people about where they are financially and they're afraid they're going to be told, "Oh, no, you're going to be eating out of a cat food can." And I can say to them, "No, look, the numbers really look okay here."
I mean, you have to meet clients where they are, but the power of the plan is that forecasting. Obviously, it's a complicated world. A lot of things can happen, but a plan offers a certain amount of continuity. It eliminates some uncertainty and worry, and hopefully it sets you on a productive course to meet your goals, whatever they may be.
Contact Cape Ann to Talk About Your Financial Plans Today
John Maher: All right. Well, that's great information. John, thanks again for speaking with me today.
John Brennan: Sure thing, John.
John Maher: And for more information, contact Cape Ann Savings Trust & Financial Services at 978-283-7079, or visit the website at capeannsavings.bank.
Investments purchased through Cape Ann Savings Trust & Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.