00:00 Danny Howes: Good morning Vero Beach. Welcome to the Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome. Hope everybody’s having a good week. We are continuing to see huge, huge drops in the stock market. This week is no exception. And we are definitely seeing some correction territory on some of the major indices particularly in the NASDAQ. It dropped over 4% yesterday. And so there’s a lot of people asking a lot of questions of what should you do. You know, it’s almost like the deer in the headlights kind of scenario for a lot of folks.

00:33 DH: It’s because the market has done so well for so long, which is a couple of blips on the radar. We haven’t really seen a lot of panic selling and that sort of thing. We’ve only seen the market go up, which is definitely… But, you know, really the purpose of this whole sell-off correction thing is just the market jitters. I mean if you look at the globe right now and some of the unsettledness, as things going down with Saudi Arabia, and the killing of that reporter, you look what’s going on in China, tariff talks, all these things, currencies collapsing and hyperinflation in a lot of third world countries, on and on it goes.

01:13 DH: And so there’s a lot of uncertainty built into the market. And the market reacts to those types of things, reacts heavily on the news. And so when people ask me the question of what should I do, I go back to the process that I tell and that is fundamental financial planning principles to follow. And if we only have our eggs in the stock market basket, we don’t have a financial plan, we don’t have a road map or a blueprint for us to follow, then it’s always gonna be reactionary. There’s always gonna be panic in the short term, whether it’s the stock market going haywire or whether there is a major health issue or whether there’s a job loss or downturn in a business, it doesn’t matter if it’s not planned for, there’s always panic.

02:09 DH: But if you have a plan or a blueprint, then that allows you to make very conscious thoughtful decisions because you’ve already thought through those things. You’ve already worked through those scenarios. So today, I really wanna talk more about the financial planning process, retirement planning process, as opposed to hammer why the Dow is up, why the Dow is down, why the market’s doing what it’s doing because there’s way more to your financial life than whether the Dow is up or down.

02:39 DH: Way more, way more risk involved that are more catastrophic than about a 20% drop or a 30% drop and that comes in the way of long-term care issues, where people spend nearly over $100,000 a year for skilled nursing facility or a premature death and there’s a big loss of pension income or Social Security income from the spouse. You name it, a disability, a dentist breaking their hand or on and on and on it goes, and without really being prepared for those things. Yeah, we can feel like deer in the headlights and then it’s like, “Oh, what do we do? What do we do?”

03:19 DH: So let’s talk about the process that I developed called COAST, C-O-A-S-T. It’s an acronym and that’s our retirement planning process, our financial planning process. And the C stands for certainty of income. Without certainty of income, you have if-come and nobody wants to deal with uncertainty and the unpredictability of the fact that you don’t know when your next paycheck is coming.

03:45 DH: Sales professionals deal with this a lot. Business owners deal with this a lot. The unknown of when is that next sale gonna happen to keep my lights on, to keep my employees paid, to keep my family fed, and the whole nine yards. A wealthy mentor of mine taught me that if you have certainty in your business or your retirement life, certainty of income, that allows you to have an incredible amount of spontaneity. It allows you to pounce on opportunities that maybe other people aren’t prepared for. And it’s that whole being prepared for opportunity, right? And the more that you’re out there and the more you’re engaged, the luckier you’re gonna get.

04:27 DH: So, certainty of income is really the foundation of a business, foundation of a household, foundation of a retirement plan because that allows you the freedom to make smart financial choices in the rest of your financial life. The second thing, so you have C, then you have O, second thing is on-demand cash. That’s what the O stands for. It’s liquidity. It’s Dave Ramsey’s emergency fund. It’s having enough money to cover your expenses and the unexpected yet expected events.

04:56 DH: So I’ve got a 16-year-old and 18-year-old, they’re both on the road now. So at any given time, between my wife, myself, and my two children, I have 16 tires on the road to worry about, right? So whether it’s tires on the car, an air conditioner being replaced, it doesn’t really matter. At the end of the day, you have to have liquidity for those unexpected yet expected events.

05:21 DH: So once we have income dialed in, that certainty of income, we have on-demand cash or liquid, then we take a look at asset protection. That’s what the A stands for. So C is for certainty of income, O is for on-demand cash, now we’re at A for asset protection. And this is where we’re protecting each other. This is where science comes into play in our financial planning process. What do I mean by science? Well, when we’re wanting to test something in science, we put pressure on it, right? We put pressure on whatever it is that we’re trying to see what the outlying effects are gonna be. So whether it’s changing the environment of something or whether common is just actually putting physical pressure on something or applying a certain amount of heat in situations, and that’s what we do.

06:10 DH: We put the pressure and we put the heat on a financial plan. And we say, “Okay, yeah, in a utopian world, if we earn our average 7% from now until the day we die, and there’s no interruptions whatsoever, we’re gonna live a great healthy life and plenty of money.” But that’s not what the world looks like. And we all know that. We’ve lived through the early 2000s. We lived through 2008. We know what it’s like to see a huge economic downturn and see economic devastation.

06:41 DH: And so when we put heat on it, what we mean by that is that we’re going to test a financial plan against major life circumstances that can happen. A premature death of a spouse. Maybe there’s loss of Social Security income or pension income or if we’re still working or we own a business, all these different things. What would happen if we prematurely lost a spouse?

07:02 DH: Another one would be what if we had an extended disability? So working, you might be a physician, you might be a dentist, you might be a business owner, and if you’re the key man and making everything going go smoothly and bringing in the dollars and bringing in the sales, what would happen if we had a temporary disability? What would happen if we are older, we’re in retirement and we have a long-term care issue, and we don’t have long-term care coverage, what does that do to our assets? We know the rising costs of home health care, long-term care facilities, and so on. So what if, what if, what if.

07:40 DH: And we look and see what that does, 10, 15, 20 years down the road, if one of those, a couple of those things happen along the way. And those are things that are going to happen inevitably, most likely. And so being able to plan those things and making sure that, okay, well, if we get derailed, what if there is an extended bear market, what if there’s ultra low interest rates like what we’re dealing with right now? What if, what if, what if. What if there’s extended downturn in the market that we’re relying for on income and so on and so forth.

08:14 DH: So, those are all things that we can test the financial plan against so that the end result is still a desired result. So we plan around those things. It’s not enough just to say, “Well, maybe I should get insurance. Well, maybe I should put together a trust. Well, maybe I should, maybe I should, maybe I should. I’ll grab some disability insurance. I’ll grab… ” How much? Everything has to do with solving for a mathematical equation and to transfer the risk in a certain area of your life in case something were to happen.

08:50 DH: So by reverse engineering and having a well-thought-out comprehensive financial plan for yourself, then you can go back and see where some of the holes are and know exactly how much you should buy, whether it’s an insurance product or some kind of protection that you’re trying to put in place, or if it’s just a matter of just simply putting together a plan.

09:07 DH: So we’re at certainty of income, that’s the C. O is on-demand cash, liquidity. A is asset protection. When we get back from the break, we’re gonna start talking about strategic growth. Strategic growth is that longer term money that we’re looking to build value and build growth over a long period of time.

09:25 DH: I’m Danny Howes for the Financial Pulse. Go ahead visit our website, eastcoasttaxandfinancial.com. That’s eastcoasttaxandfinancial.com. And also go ahead and give us a call, if you wanna sit down and have a review of your portfolio, things are kinda going haywire right now so people are looking for a second opinion so we’re happy to do that for you, 772-774-7970. Again, that’s 774-7970 or go visit our website, eastcoasttaxandfinancial.com. We’ll be back in just a bit.

00:00 Danny Howes: Good morning. Welcome back to the Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of East Coast Tax and Financial Planning. We’re talking about the fundamentals of a sound financial plan. And in our firm, I developed a process called COAST, C-O-A-S-T, and that’s the acronym that we follow and it’s very sound principles. The C stands for certainty of income. That’s basically the foundation of your financial life is income, having cash flow, and knowing that you can take care of all your basic and even desired expenses with that guaranteed income and predictability coming in.

00:39 DH: The O stands for on-demand cash, liquidity for those expected yet unexpected events. Asset protection is protecting each other, if you’re married or protecting your estate from the IRS. Primarily we’re talking about IRAs and 401ks. People forget that there’s a huge tax lien on all those accounts because if they’re tax deferred and you haven’t paid taxes on that money yet, I’m talking about qualified retirement plans like 401ks, 457s, 403bs, IRAs, Keogh plans and the like, all those are tax deferred. And so when I mean by an IRS lien, it means that if you die, that money doesn’t pass tax-free onto your kids. If you haven’t put together a strategic plan, literally up to 70% or more of that IRA or 401k money could be gone due to taxation because taxes haven’t been paid on it yet.

01:35 DH: And when these brokerage firms or banks settle a death claim, if you have a beneficiary, your children and whoever, and they go and they cash that IRA again because they’re the beneficiary, they’re taking the death certificate and their proof of identity and they had a check and find this mandatory federal withholding and it’s over with. There’s nothing you can do about it.

01:56 DH: So if you have those type of accounts, one thing you definitely gotta do is look into a multi-generational or stretch IRA. I kinda digress a little bit, but when we’re talking about estate planning, that’s one of the biggest fouls that people make on accident is not planning what to do with their IRAs or 401ks or tax deferred accounts once they pass. And so the IRS is just licking their chops knowing how many billions upon billions, hundreds of billions of dollars sitting in these accounts and people unknowingly unnecessarily leaving so much to the IRS.

02:31 DH: So certainty of income, on-demand cash just like liquidity, A stands for asset protection, and then we could move on to strategic growth. And there’s a method to the actual badness of the sequence that we put this in. You’ll get an income dialed in first, making sure that we’re liquid, then protecting ourselves and our estate, then we go to growth, long-term growth, stock market type of decisions, investment real estate, whatever your long-term growth objectives are, the tools you wanna use to get there, we have to first solve the other equations first, so we can have the freedom to invest and know that whatever decisions we’re making, we can feel confident in what those investments are capable of doing.

03:22 DH: So this is I think that’s on the forefront of most people’s minds right now, at this very moment, because of what the stock market is doing. I’m thinking about growth. I’m thinking about risk. Is this the right time to double down? Is this the right time to get out? What should we do? And really those decisions should be made on the frontend when you start to invest anyway. It’s beginning with the end in mind, and already planning for those expected things. And what’s expected about the stock market? The only thing that’s certain, the only thing that’s 100% predictable about the stock market is that it’s unpredictable. And that none of us have control over it.

04:01 DH: And so if you know that, then you have to test yourself and develop an investment policy statement that helps you make decisions clearly when you’re up against some challenges like what, maybe what we’re dealing with right now. An investment policy statement contains a couple of key elements. First is how much risk are you willing to take for the reward that you’re expecting? How much risk are you willing to take for the reward that you’re expecting?

04:32 DH: So what does that look like? Well, the risk versus reward question looks like this. We talked about this last week. If you invest money with somebody and they make you 30% in the first year, do you change your lifestyle at all? Or you’re gonna go out and spend a lot of money and do a lot of things that you never thought you would do before because all of a sudden your advisor made you 30%? Most people would say, “No. We’d just be happy that we had more money.” That’s the common answer that I get when we’re talking about a high rate of return like that.

05:06 DH: But did the question begs, especially if you’re almost retired or you’re already retired, you go in and they’ve lost you 30%. What does that feel like? Well, I’d be really upset. I’d probably have a couple of sleepless nights. If you’re retired, you might say to yourself, “Well, we’d actually cut back. We probably wouldn’t take as many trips or we wouldn’t do this or that. We’d go on a lifestyle diet. It would make us really worried.” So right there, you’re starting to have a risk versus reward question with yourself.

05:38 DH: And then that brings into the effect of, “Well, how would your investments perform in a market similar to say 2008 or similar to 2000? Right? Or early 2000?” So with these major corrections, if you had the exact same holdings, how would those holdings reacted during those times of pressure? Remember I talked about science, putting pressure, how do these investments hold up during these times of pressure and strain?

06:12 DH: So once you figure that out, then you know, “Okay, so this is the amount of risk I’m willing to take. I’m okay, I can live with up to 10% down for the opportunity to maybe make 15% on the upside.” So what is my threshold on the downside where I’m just like, “Okay, I can’t handle this anymore emotionally, that’s just too much money to be lost”? And then on the upside, how much reward are you looking to get?

06:37 DH: And so then you can find the sweet spot to where, “Okay, during a turbulent market time, like we’re in right now, am I okay within my comfort zone? Nobody likes to lose money or be down, but am I still in my comfort zone to be able to ride it out?” And so then you have this already pre-determined rules for yourself that you’ve come up with for yourself. Nobody else has come up with these things but you come up with your investment policy statement. And then when you have those difficult conversations with your broker or just with yourself or your spouse of like, “Okay, you know, the market is not doing what we really wanted it to do or we’ve had a good run, and now here we are, is this within our threshold, our comfort zone of what’s going on right now?”

07:21 DH: And then that allows you to have the freedom of, “You know what? Yeah, we’re still good. So we’re gonna keep on tracking and just see what happens.” Or, “No, I need to make some adjustments.” But most of the time, if you built the portfolio around your investment policy statement, it’s gonna be somewhat of a comfortable ride all the way through because you’re already operating within that comfort but there’s always outliers, there’s always things that can happen, that can derail, that aren’t typical. If you look at the housing crash, who in the world would have imagined that we would have a real estate bubble in this country in the magnitude that we had it, that would actually even take down banks all over the world, right?

08:00 DH: So who would have thought that their house would be worth half as much as it was worth two or three months prior. That’s just something that just happens and we have to try to be prepared for those type of what I call black swan events where just everything goes wrong, and that’s one of those times. But when you’re making those investment decisions, those need to be really made and thought well out ahead of time, and then that’s what I mean about keeping an eye on your money and understanding what’s going on and constantly educating yourself about what you have, how it works, and how it affects you. Because then when things start to ruffle or start to get a little bit uncomfortable, there’s a little bit of turbulence, then you know how to react, you know a little bit of the predictability of what you’re gonna do next, as opposed to making last-minute panicky type of decisions.

08:49 DH: And then last but not least. So we have certainty of income, we have on-demand cash for the O, for the A we have asset protection, for the S we have strategic growth, and then for the T, last but not least, is taxation. Making sure that you’re not unknowingly or unnecessarily overpaying in taxes. And this is a huge one. I don’t care how much money you make, how complicated your life is, business-wise, or how simple your life is, if you’re just retired, collecting Social Security pension, and some IRA money. Most people that I come across have inefficiencies in their tax life. They’re overpaying unnecessarily and unknowingly, and it’s just a common thing.

09:25 DH: The tax code is a very complex thing. We’re getting ready to go, but we’re actually already in 2018. And if you look at the tax overhaul that happened at the end of last year, that counts for 2018. So your business could be up for a huge tax savings. Individuals on average are seeing a pretty significant tax savings as well. Even W-2 wage earners with tax federal withholding have been able to reduce those.

09:56 DH: So we’re out of time again. I’m Danny Howes for East Coast Tax and Financial Planning. Go to eastcoasttaxandfinancial.com. Again, that’s eastcoasttaxandfinancial.com. For the Financial Pulse, I’m Danny Howes. Make sure you protect that money, folks, but most importantly, make sure you know who, what you’re protecting it from. Every single Thursday, right here in your WAXE radio dial 11:30 AM.