“Do ya feel lucky?” Investing after Retirement

It’s the third day of a NEW YEAR (2022) and over the past week or so I’ve wished a lot of people “good health and good fortune in the coming year.” While I have to leave the health part up to Dr. Fauci and his friends (whose predictions seem to be less guaranteed than any other bet you can make these days), I do know an expert who can help you with the fortune part.

In part two of our series, “Financial Planning for Your Retirement: How to Quit the Rat Race but Keep the Cheese,” I shared your questions about investing after retirement with Fred Dawson ChFC, CLU, Wealth Manager and President of Bassett, Dawson and Foy, Inc. in Wilmington, Delaware (see Part One here). With more than 30 years of comprehensive wealth management experience, Fred is dedicated to being a trusted advisor, especially to successful women.

Wondering how to keep your cheese and maybe even make it grow during the coming year? Read on …

NYD: After I’ve saved for retirement, how do I spend that money? Do I need to make a budget to know exactly what I will spend? Does the money go into my bank account?

FD: Even though a budget can be a chore, it certainly gives you peace of mind knowing that you have recognized all the anticipated expenses and you’re going to enjoy being retired, not worrying about money! You carefully spend that money on things you NEED first. You then have the “luxury” of considering purchasing “wants.” If you do not “control” your money, your money will end up “controlling you!” If you know you’ve met all your monthly expenses and have some left over, you can consider saving/investing more for future goals (special vacations, trips, gifts, supporting your favorite charity, etc.). My concern is that if you do not monitor your money carefully, any excess might get “frittered away.”

(Start budgeting and planning. Download your “Monthly Expense Sheet” here)

NYD: How do I know how to invest my retirement savings?

A good man always knows his limitations.

Dirty Harry

FD: Like my favorite movie actor’s character “Dirty Harry” (Clint Eastwood) said profoundly, “A good man always knows his limitations.” Investing money is not for the unexperienced, untrained, faint of heart person. There are so many things to invest in, with many things that could go wrong! Some are guaranteed with guarantees that are usually quite low, and some have no guarantees whatsoever but offer good returns (of course with higher risk)! Yes, you could even lose your principal very easily by investing without complete due diligence in understanding the good, the bad and the ugly! (Thanks again, Harry!)

I utilize a questionnaire not only to assess various risk parameters, but it offers an amazing opportunity to discuss “what is risk?” I find that people nearing retirement are not looking for the “thrill of victory nor the agony of defeat.” A professional financial advisor that focuses on your best interests should be part of your retirement team. There are many things that a competent financial advisor needs to know before any recommendations are made. This is definitely not the time to “go it alone!”

Of course, it is important to ask any advisor you are considering how they get paid, how much and how often! Also keep in mind that the “low-cost provider” may not be the best choice if their lone attribute is “we’re cheap!” (YIKES!) Last point, if you are sick, you go see a doctor. Most of us don’t try to diagnose and treat our own health conditions. Your financial health is just as important, don’t you think?

NYD: Can you explain annuities – what to know and watch out for?

FD: Annuities can be an excellent consideration, but like “all things in moderation,” I would not put all my eggs in any one basket. Most annuities (lump sums) are not liquid in the earlier years as the insurance company will trigger the “deferred contingent sales charge” if you remove more than the allotted monthly amount. Fixed annuities merely turn a lump sum into an income stream (aka pension) so that the lump sum is never available, just the monthly income. Some annuities have the ability to invest in stock and bond portfolios while offering you the ability to “capture” some of the upside of the market, but when the market goes down, the annuity guarantees that you will earn “0”….not say, lose -10% (or more?) should the market tumble from time to time. Those are called Indexed Annuities.

Selecting the right payout is also very important. For example, if you are not concerned about leaving income or assets to anyone else, then you can take the highest monthly payout for your life only. If you have a spouse and want to leave income for them, then you would select another option that would payout less, but would continue to pay some amount you select to your spouse.

The more I learn about annuities the more I realize they are very complex financial instruments. Just like there are carpenters out there that carry around a hammer as they see that everything is a “nail.” Some advisors are merely insurance salesman and the only thing they have to offer is life insurance products like annuities and are not licensed to even speak about other investment vehicles. One size does not fit all! Harry didn’t say that, I did!

NYD: What about taxes in retirement? Any tips?

FD: Everyone hates taxes except our government! Another member of your team could be your accountant/tax preparer. After a careful examination of your income sources and assets, your accountant would be better consulted on those issues. Even though one of our past presidents said he was going to make the tax system “fairer and simpler” it didn’t happen.

In some recent zoom meeting about pending tax legislation, it’s only going to get more complicated and with increasing debt, Uncle Sam will be looking for more ways to get into your pockets. Uncle wants everyone to pay their fair share, only nobody has shown me what defines fair. I’m reminded almost daily “it’s not what you make that is so important, it’s what you get to keep!”

NYD: Where can your money make money? At a certain age, risk versus reward needs to be considered. I believe we are now taxed 50% on our Social Security – will they be able to tax the other half? What do you think of diversifying banked money into silver, gold, etc?

FD: When a married couple files a joint return, if they exceed $32,000 modified adjusted gross income (MAGI), then 50% of Social Security will be included in your taxable income. If you exceed $44,000 MAGI then 85% of your Social Security will be included in your taxable income. It’s different if you are single. Will they be able to tax the other half is anyone’s guess. We are taxed at the “pleasure” of the IRS.

Most people need some amount of prudent risk in their portfolios. I’m not a big proponent of investing in silver and gold as they are not good long-term investments. They will sometimes respond favorably to inflation or a crisis somewhere in the world, and spike accordingly and usually briefly. What some folks ignore is if you invest in gold, how do you spend it? Do you take your gold bars to the store with hack saw? Or do you take your gold coins to the “automat?” It sounds good but not very practical.

I believe there are opportunities to invest in the stock market as long as you are not attempting to do it yourself! There are quality mutual funds and private portfolio money managers out there that should be considered as they each have strategies, philosophies, disciplines that the “do it yourselfer” usually does not have. That said, the “do it yourselfer” will get lucky occasionally. So then you need to ask yourself; do you feel lucky or smart?

President of Bassett, Dawson & Foy, Inc., Fred Dawson entered the world of financial planning in 1980. He has earned the professional designations Chartered Financial Consultant (ChFC) and Chartered Life Underwriter (CLU). A frequent columnist for the “Ask the Experts” section of The News Journal (Delaware) and other local, national and international publications, Fred can often be heard on both radio and national television.

Amaze Your Children and Grandchildren When You Explain Blockchain Technology and Bitcoin to Them!

Have you heard the word “Bitcoin”? I’m sure you have. And while it might be confirmation bias (and by “confirmation bias” I mean a Google algorithm) that makes the word show up every day in my news feed, I doubt that can explain why it’s always on ‘World News Tonight with David Muir” or the lead article in my neighborhood newspaper.

As much as I was perfectly willing to audit conversations about Bitcoin (and its bestie, “blockchain”), write about its related scams (“Online Scams (or “How I (Almost) Met An American Hero”), and even listen to friends’ advice about investing in it, I didn’t have a clue what Bitcoin really was, how it works, where it comes from, if it’s legal, if it’s taxable, if it’s capitalized (in both senses!). NOTHING.

Which is like throwing down the gauntlet. If there’s a concept that’s this ubiquitous, Amazon Prime one-day delivery on books, and an entire Internet from which to learn about it …? Well, challenge accepted.

I dove headfirst down that wormhole. I read, “Blockchain for Dummies,” I devoured online articles, and I unabashedly reached out to experts all over the world (at this age, I clearly have no shame left at all). And here’s what I found out: cryptocurrency and blockchain technology are INCREDIBLY hard to explain – mainly because once you learn one tiny fact, you’re compelled to understand hundreds more.

And then I found Anders Brownworth, Maggie Hsu, and Adil Haris – experts who had not only published straight-forward explanations of Bitcoin and blockchain technology, but who offered to answer any questions I might have, so that those of us who are “not yet dead” can get a basic understanding – at least enough to know what all those news stories are all about and to think before investing our hard-earned retirement funds in it.

Adil, a Manager for the Financial Services Innovation team at Ernst and Young, received his Master of Science in Product Management at Carnegie Mellon’s School of Computer Science and Tepper School of Business and wrote, “Blockchain — A Short and Simple Explanation with Pictures” (pictures!). Anders, a Principal Architect in Applied Research at the Federal Reserve Bank of Boston and co-taught the first blockchain class at MIT, spoke on the subject extensively from which he created a visual demo of blockchain technology (more pictures! And they move!). Maggie, who leads global business development for Amazon Managed Blockchain and is co-founder of Gold House, sent me a link to this video in which she not only provided me the first understandable explanation of the blockchain and bitcoin, she also illustrated the value of the blockchain technology.

So, here’s a (hopefully) very simple explanation, just to give you a head start. If you want to join me in the wormhole, be sure to click on the links provided by Anders, Maggie, and Adil.

Let’s start with the blockchain

Super simple explanation: Imagine a box (block) filled with information or transactions (data). Kinda like your checkbook ledger, except that it not only shows a record of your transactions, but it can also show a record of the transactions that your payee makes with the payment they receive, and so on, and so on, and so on. Just a big ol’ history of the provenance of that item of value (in this example, dollar) and all of the travels it makes through time.

Now imagine a bunch of computers (nodes) spread out all over the world who verify that the information in that box is accurate (mining) and add their seal of verification (hash). They get paid for this work (verifying that data) in native tokens (bitcoins in the case of the Bitcoin blockchain. Other blockchains may offer other coins or tokens).

Okay, now let’s say a new box of transactions comes along that needs verification (each block can contain a certain amount of information). This new box of data also contains the seal of verification (hash) from the previous box. Once this new box of transactions is verified and is given its own unique seal of verification (hash), it is chained to the previous box (block / chain) so that there’s a running history of verified transactions. The process continues as more and more boxes of data are added and verified. And because all the computers (nodes) running the blockchain have the same list of blocks and transactions and can transparently see these new blocks being filled with new transactions, no one can cheat the system.

All of the information on the blockchain (boxes of data, verified and chained together) is called an “immutable shared public ledger.” An important benefit of this system is that no one can change any of the data or transactions that have occurred (immutable) without affecting the seal of verification (hash) in their blockchain. If they do, it is immediately evident that their hash is different from all of the others who have the same blockchain on their computers, and that their data is not valid. Then the offending (minority) chain is dropped – the nodes simply choose not to talk to the offending node anymore and they carry on maintaining consensus without that node/copy of the blockchain.

And what is Bitcoin?

Bitcoin (BTC) is perhaps the most well-known of more than 6,700 cryptocurrencies in the marketplace (“crypto”). Cryptocurrencies, often called “tokens,” can be used as an online payment for certain goods and services. It’s important to note “online” here, as bitcoin is a digital asset and can only be used digitally.

Cryptocurrency got its name from “cryptography.” Cryptography keeps information secure by using a series of mathematical proofs to both hide (encode and decode) and authenticate (hash/sign) data. These proofs guarantee the security of the transactions or data, the security of the participants, the independence from central authority (like a bank … or a government), and the protection from double spending (ensuring that, like a physical dollar bill, you can only spend it once).

You can purchase bitcoin and other cryptocurrencies via a cryptocurrency exchange. You can also obtain it as a payment for goods and services. And you can “mine” it.

Mining is the process of solving a complex mathematical equation (proofs) first. Then, once your solution is verified by everyone else, you are paid in cryptocurrency. While anyone could ostensibly mine bitcoin by downloading the necessary software on a computer capable of running it, the cost of the computing resources necessary to do so makes mining much less tempting than simply purchasing it on an exchange.

Bitcoin and other cryptocurrencies have “value” in that there is a limited amount out there – just like there’s a limited amount of gold. The price fluctuates depending on media attention, rumors, speculation, and availability. That’s the cart-and-horse nature of cryptocurrencies – until they are accepted worldwide as valuable currencies, the volatility will likely continue. And until the volatility as a payment mechanism settles, it is unlikely to gain worldwide acceptance.

What does a blockchain have to do with Bitcoin?

This one is easier to answer. The Bitcoin network relies on blockchain technology to operate because the blockchain technology is what is providing the security, immutability, and historical ledger to the transactions. This organized collective of computers (nodes) is called a peer-to-peer network in that it allows each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

How might blockchain technology be used in the future?

Blockchains are decentralized ledgers that can keep track of essentially any data, transaction, asset, etc. If you imagine that every asset can be given a digital identity, then you can imagine how, in the future, all of those assets will be made trackable and unalterable via blockchain technology.

With blockchain technology, there will no longer be a need for third party involvement in many types of transactions. Instead, all of the data will be on the blockchain and accessible to the parties directly involved. Medical records, global financial products, banking, land ownership and real estate transactions, insurance, ID systems, intellectual property, program management within organizations, authentication and tracking can all be put on a blockchain system, one that will be secure, private, and immutable.

Lesson 1: Complete

Despite how confusing it got at times, learning about cryptocurrencies and blockchains was a fun exercise. And while there’s still a debate as to whether “brain training” activities have any effect on dementia, I guarantee you that you’ll know a little bit more the next time you hear someone say “Bitcoin.”

Associated lingo

Cryptography – the field of science that is involved with the authentication and hiding of data using mathematics.

Hash – a unique, fixed-length string of random numbers that is the digital fingerprint of some data. Hashes are produced when a hashing algorithm runs a complex calculation on any data and generates a hash as the result of the calculation. For a great, visual explanation, see Anders Brownworth’s video here.

Miners (not minors) – the computers running the hashing algorithm who are paid in tokens (Bitcoins, for example) for their work.

Peer-to-Peer (P2P) – computers that are connected on the Internet via networks, rather than a central server, so that files can be shared directly.

Private keys and public keys – A private key is produced by a complicated mathematical algorithm that allows you to decrypt data. A public key is created from the private key the same way, so that whatever is encrypted with the public key requires the related private key for decryption and vice versa. The public key is made available to everyone that needs it (it is recorded on the blockchain) while the private key is confidential and only shared with its owner. It is nearly impossible to reverse the process of key generation, such that one could generate a private key from someone’s public key.

Consider this example from Adil Haris’s “BlockchainA Short and Simple Explanation with Pictures”: The public key is like your mailbox which everyone knows about, and can drop you messages. The private key, on the other hand, is like the key to that mailbox. Only you own it, and only you can read the messages inside.

Signature – a cryptographic way to prove ownership. You would use your private key to sign something and then the resulting signature could be verified by everyone against your public key.

Wallet – where you keep all your money – in this case, Bitcoin and other cryptocurrencies.

Photo by Pascal Bernardon on Unsplash