Wealth Clarity Blog

President Obama, I understand that you are in Bellevue right now–just down the street–and I was wondering if you wanted to drop by our office for coffee?  If you are too busy I understand; however, if we did have coffee today, this is what I would want to say to you. 

I am generally a positive person but lately I find I’m getting tired and annoyed by all of the political rhetoric, posturing, and maneuvering.  With over twelve months until the next election there seems to be an endless stream of news stories documenting the huge challenges we face, the various solutions suggested by you and other congressional leaders and GOP contenders; unfortunately, the volume is only expected to rise in the coming months. My stamina to listen much longer is shrinking faster than the short summer here in Seattle.    

Don’t take this commentary to reflect any hidden political agenda because I’m not attempting to position one.  What I am attempting to highlight, however, has to do with what isn’t being said, and needs to be said:  

I am rooting for you to be successful as President of the United States—in fact, if everyone takes a minute to think about it, we all need you to be successful, because the consequences of failure are too great.  In fact, I want you to be remembered as the best President of my generation.  Your success is good for me, my family, my business, my clients, and our country.  

There are fourteen months in your elected term remaining and these are precious months for the U.S. with no time for waste.  Taking a position that nothing will get done, or can get done, because of a political stalemate is unacceptable.  It would be like the Seattle Seahawks fans hoping the team will lose this year so we can get a shot at drafting Andrew Luck (expected first round quarterback pick from Stanford) next year.  NO! We are on the same team as Americans and we want to succeed now, not next year with a new President.        

You clearly have a job that most Americans can’t and don’t want to perform, but from my “corner” office to your “oval” office I need you to do the following:  

1. Lead like you have never led before; don’t cave into the negativity or hide.
2. Be a leader that inspires me to be great and do great things in my family, my work, and my community.
3. Show us how to move forward as a country without regard to race, religion, or political beliefs. 
4. Admit mistakes quickly and openly, in hopes of finding the right game plan that will lead to success now.
5. Do what needs to be done because it needs to be done, not because it will get you reelected. If you fail, re-election won’t matter.
6. Give America the confidence to transform and once again achieve greatness in both our own eyes and that of the world.   

I’m rooting for you!  

Sincerely,

John C. Christianson, CFA

One of our jobs at Highland is to develop investment portfolios that maximize return and minimize risk.  While investment portfolios are critically important, it is only one facet of life; there are other areas of life that if properly considered, can guide you to a well managed life portfolio–something we at Highland refer to as living fully.

In that regard, when was the last time you took a hard look at your “life portfolio”?  By that I mean, checking to see if you have proper diversification, are balancing trade-offs, and measuring performance in key areas such as:  family, health, community, or even fun experiences?    

Personally, I value my health and want to have an active life well into my senior years.  Considering my current condition, I would rate my health possibly a 6 out of 10 (not very good).  To move that needle a little bit higher would be rather simple:  get more active.

In isolation, taking proactive steps towards better health sounds easy, right?  Well not really because I have a ton of excuses and embrace them all!  But considering my life goals, it’s worth it to me to invest the time, energy, and money on a trainer so I’ll have some accountability.  Check with me in 6 months; I expect to feel and look much better. (More importantly, check with me when I’m 70; how many times did I go skiing with my grandkids?)

For those who are interested in living fully, this can be a life changing exercise.  Budgeting effort, time and resources into the life you have always dreamed of can pay dividends in ways you could only hope for.  The daily or weekly investments you make now reap dividends and compound over time.

In my next post I’ll be sharing a few ideas on how to make simple and easy investments into your life portfolio that can help move you closer to living fully.

Contrary to the common approach of taking Social Security early, I’ve found that after running hundreds of financial plans, it’s often best to wait. 

The primary reasons people start early is the assumption they can earn better returns than the government or believe they might as well take what they can before entitlement reform kicks in.   While this is reasonable, the decision to take benefits early comes with steep lifetime benefit cuts that increases their risk of outliving their money.   This is further complicated by increasing life expectancies due to medical advancements.  By transferring more of the longevity risk to the government, retirees may find they can go into their later years with more confidence.

Most pundits believe social security reforms will focus on younger workers and won’t impact people who are near or in retirement.  Anything is possible but this makes sense due to the political difficulties of reducing benefits on this influential voting bloc.  One reason high net worth individuals might take benefits early is the risk they could be “means tested” in the future.  However, the potential benefit of starting early if this happened may not provide enough reward to offset the permanently reduced benefits that come with this decision.

With all this in mind, I’ll touch on three potential mistakes I see retirees make:

1)      Taking Benefits Too Early.  70% of retirees take benefits earlier than their normal retirement age.  Age 62 is the earliest you can start and the lifetime benefit reduction is 25%.  One rationale for taking early is you can earn returns on the money you receive; pushing the break-even age (compared with waiting) to the early 80’s if you do well.  What happens if you live past 80?  The life expectancy of a 62 year old female is 86.

2)      Not Considering Joint Life Expectancy.  Upon death, the surviving spouse’s benefit (if lower) jumps to the deceased spouses benefit.  If the husband has a higher benefit, there is a real planning opportunity due to lower male life expectancy.  The husband can wait until 70 to take benefits and receive 32% more compared to starting at 66, while his bride can start her benefits at 62.  If the husband dies first, she can step up to his higher benefit for the rest of her life.  This is especially powerful if the husband is older than his wife. 

3)      Triggering the “Earnings Penalty.”  You temporarily lose $1 of benefit for every $2 of “earned income” over $14,160 if you take benefits before full retirement age, which can be a bad cash flow surprise.  You eventually get this back but it isn’t worth the rigmarole and tax headache.  If you are working part time after you retire from your full time job, it’s best to wait until full retirement age to start Social Security.

From a planning perspective, it’s good to look at scenarios assuming full and reduced benefits to see the implications.  The best age to start is unique to each retiree’s situation and depends on health and a host of other factors.  If you have recently signed up and want to reconsider, the good news is you can change your mind within the first twelve months. 

Due to the fact this is a very complex area, please don’t hesitate to contact me if you have additional questions.

I recently read a sign that said:

“The early bird gets the worm, but the second mouse gets the cheese”

This made me chuckle as I think about many businesses I’ve been a part of including Highland Private.  In my role as COO, I can frequently try to rush to market with a new product, service, or idea.  The myth is that the “early bird” to market is always going to create something disruptive and capture the outsized returns and rewards that go to the first entrant. 

However, a few historical facts give me pause:

• Facebook was not the first social media website
• Apple didn’t have the first smart phone
• Costco was not the first warehouse store

Jack Welch, the former CEO of General Electric was known to say that he didn’t want to be first to any innovation, but instead a close second.

I am constantly looking for the next idea; unfortunately, I am not that clever.  I have found that the best ideas are not really all that new, but rather ideas that have been successful with someone else; many times coming from a totally different industry.  Recycling these ideas and applying them to something of value in your business can have a much greater success rate. 

I recently read a book by Joseph Michelli titled The New Gold Standard.  The book is about The Ritz-Carlton Hotel Company and how they built an iconic luxury brand and legendary customer experience.  While it is a totally different industry, with a totally different story, the similarities to issues I face daily were amazing!  Their successes took a great deal of time and focus, and I learned a tremendous amount from their journey of success.  Why learn from your mistakes, when it’s easier to learn from someone else’s success? 

I don’t know about you, but I prefer cheese.

Who doesn’t want to part of something excellent?  When you are focused on excellence, you attract people who are also focused on it, and value it.  The end product is a great team.

While team greatness is a wonderful outcome, there’s a dark side of excellence: perfectionism. 

It is really easy to confuse excellence with perfection.  One of the beliefs a perfectionist will hold onto is “the irrational belief that you and/or your environment must be perfect”. (www.livestrong.com )  Not only is this unachievable, I believe the irony is that in this pursuit, the perfectionist becomes mediocre.

How can this be?  In the pursuit, the perfectionist is always looking to analyze more, polish more, think more, nit pick more, etc…, and suffer from paralysis.  Too many great ideas fail to get implemented, utilized, or even considered out of the fear that the outcome will not be perfect.

I am reminded of the General Patton quote, “I’d rather have a good plan executed today, than a perfect plan executed next week”.  The exception to this is if we are talking about life or death situations, and if so, I always defer to a perfect plan.

Ron Ashkenas, with the Harvard Business Review, wrote a great blog on “The Problem with Perfection”.   His thought was that rather than waiting for the perfect solution, start testing while collecting more data.  Start small, with low risk and be relentless in honestly reviewing the data.

Will you have a few duds? Maybe, but the advantage of field testing, reviewing and adjusting is a cycle that will accelerate learning, growing, and creating value.

Employee stock options can be a great way to achieve substantial wealth.  The difficulty is it can disappear quickly if not addressed properly. 

Something that has really dawned on me after helping executives with these decisions over many market cycles, is that option wealth is usually a once in a lifetime event.  Not realizing this, many executives place more emphasis on where they think the stock will go than on their long term goals.  This is further complicated by the general excitement they can have for a company they founded or helped build to be very successful.

Recently, I was helping an executive that had the majority of their net worth in options think through the issues.   I thought it might be helpful to list some key questions we reviewed that would be relevant to anyone in this fortunate, yet complex situation.

1)      Does the current after tax value of the options allow you to be financially independent today?  If so, it may mean it’s time to take risk off the table to secure the future.  If not, you may want to let run since you are still in wealth accumulation mode.

2)      What are the tax implications?  With some stock options, you can pay less tax if you exercise and hold the stock for at least a year.  With others, there’s no tax benefit to waiting.

3)      What are the risks of exercising and holding?  The risks are often higher than the benefits.  Upon exercise, there may be taxes.   If the stock declines, you’ll still be on the hook for the taxes.  Also, the expected return of the stock would need to be sufficiently high to offset the concentrated holding risk.

4)      Who is affected by this decision and how are they impacted?  When you explore this question, you might realize it’s more than just your family.  For example, if you have philanthropic goals, there may be many people beyond your family that will be impacted.

5)      Has your lifestyle expenses increased ahead of exercising the options?  It’s important to realize option wealth isn’t real until the options have been exercised and sold.  Up until that point, the wealth is on paper and subject to considerable concentrated holding risk.  If your current lifestyle is dependant on the current option value, it’s crucial to take some risk off.

The decision points around stock options can be complex, but they are surmountable.  Since future option values are so unpredictable, finding the time to formulate a strategy around realizing the option wealth is essential. 

If you would like me to address other issues about employee stock options, feel free to drop me a line.