Who Wants to be a Millionaire?

If you didn’t start saving for retirement yesterday, you should do it today. You may be surprised to learn how little you need to put away to be a millionaire at retirement.

For those of us starting out in our careers, being a millionaire may seem like a goal that’s so far away it may as well not exist. Fortunately, we don’t need to be John Carpenter and cruise through difficult questions on Who Wants to be a Millionaire to attain that goal.

We also don’t need to be making six figures or placing bets on Dogecoin in hopes that Elon Musk’s tweets will send it to the moon.

The two not-so-secret ingredients to achieving that milestone? Time and discipline.

Compound vs. Simple Interest

In order to better understand how time and discipline are our best friends when it comes to maximizing our investment growth, we need to understand how our money earns more money.

There are two types of interest: simple and compound. Simple interest is the type of interest we pay on a mortgage, where the interest rate is only applied to the principal balance of the account. This is why interest payments are much higher in the early years of a conventional mortgage, as the principal balance is much larger than the later years.

On the other hand, compound interest earns interest on top of the accrued interest (hence the “compounding” nature of the term). Savings accounts and investments in our work 401(k), Roth IRAs and brokerage accounts earn compound interest, where the growth of our money stacks on top continuously, “compounding” the amount of earnings we can achieve.

There’s a reason Albert Einstein called compound interest the eighth wonder of the world!

The “Time” Factor: Start Early & Don’t Look Back

How can we use compound interest to our advantage? Start saving early.

If we saved just $10 per day (equivalent to $300 per month), and earned a modest 4% inflation-adjusted return, how much money would we have at age 67 when we retire? The following graph shows what happens the longer we delay our savings.

This is where we see the time factor start to play a major role in getting us to our millionaire goal. Unsurprisingly, the effects of compound interest (as noted by the gold bars in the graph) get increasingly larger the earlier we start to save.

The “Discipline” Factor: Consistency Is Your Friend

Of course, time only works to our benefit if we are disciplined with our saving. Discipline is often considered one of the most important traits needed to build wealth, and our compound interest graph above shows why.

But just how much discipline would it take to ultimately achieve our millionaire goal? Using the same modest inflation-adjusted return projection of 4%, the illustration below shows varying dollar amounts we could save every single day to ultimately end up at $1,000,000, with the blue line indicating the number of years it would take to reach that milestone.

Here, we see the effects of compound interest most notably in the $5 per day scenario: it requires the least amount of initial investment and has the most compound growth, at the expense of taking almost 78 years to reach $1 million.

However, if we can stretch our savings to $25 per day, we can become a millionaire in 42 years. In today’s day and age, this is a pretty standard working career and will definitely require more discipline, but is absolutely achievable.

Slow & Steady Wins the Race

If there’s one lesson that you should learn from this, it’s just that: slow and steady wins in the long run. It’s not flashy and doesn’t make for very eclectic conversations around the Thanksgiving table, but that’s okay. Last time I checked, the tortoise won the race!

Human beings are creatures of habit and the sooner we can develop positive, easily repeatable habits with our finances the better off we’ll be in the long run. The graphics above are an attempt to illustrate this idea: we give up the opportunity to hit a home run in the short term to avoid striking out in the long term.

Regardless which savings path we choose to embark on, it’s just important to pick one and get started. Remember that the choice is not between $25 or $0 today: even if we save $10 per day, using the graphics above, we now know what that will look like over the course of our lives. The simpler we keep our financial lives the better off we’ll be!

In an age of infinite information at our fingertips, it can be very easy to become overwhelmed when you’re trying to make an informed decision. When this decision concerns who you want to entrust your finances with, it’s paramount you make the right choice. I’m going to boil down all the information regarding this decision into 3 important traits you should have in your financial advisor.

On the surface, it may seem like all financial advisors are the same: “They just manage my money right? They have stock picking expertise and can maximize my returns?” Not exactly.

There are really two “worlds” in the financial advisory industry that clients can live in: the broker-dealer world and the independent world. The broker-dealer world is characterized by firms like Merrill Lynch, Morgan Stanley, UBS, Ameriprise, and Edward Jones. The independent world consists of Registered Investment Advisors (RIAs) that follow the guidelines of the state they have a main office in (< $100 million in assets under management) or the guidelines of the Securities and Exchange Commission (SEC; >$100 million in assets under management).

Throughout this post I’m going to be discussing the 3 traits you should look for in a financial advisor and how they operate in each “world” so you can make a more informed decisions on who you want to hire.

• Ensure the advisor you hire is a fiduciary
  • Are there fiduciaries in the broker-dealer world?
  • Are there fiduciaries in the independent world?
• Ensure the advisor you hire is fee-only
  • How are broker-dealer advisors compensated?
  • How are independent advisors compensated?
• Ensure the advisor you hire has the CFP® credentials
  • Do broker-dealer advisors have the CFP® credentials?
  • Do independent advisors have the CFP® credentials?
• The Bottom Line

Trait #1: Ensure the advisor you hire is a fiduciary

Perhaps the most important characteristic in a financial advisor is whether or not they are a fiduciary. According to Investopedia, a fiduciary is defined as “a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust.”

Are there fiduciaries in the broker-dealer world?

There can be, but it is not a requirement. The firms named above are subject to the “suitability” standard as opposed to the fiduciary standard, where they have a requirement to ensure that an investment or particular course of action is “suitable” for someone in your situation.

Picture two investments: Fund A has an expected return of 10% and has $50 in fund expenses associated with it, while Fund B has an expected return of 10% with $100 in fund expenses, and a broker has determined that both of these funds are considered “suitable” investments for you. The broker bases this on factors like your age, time horizon, and risk tolerance.

Even though both funds are expected to return 10%, a broker may place your money in Fund B if he/she earns an extra commission off of it. This is an inherent conflict of interest that’s present in the suitability standard.

Are there fiduciaries in the independent world?

By definition, all RIA firms are required to adhere to the fiduciary standard. RIAs have an ethical and legal requirement to place client interests ahead of their own.

In the scenario above, a fiduciary would first have to consider more than just your age, time horizon and risk tolerance before making an investment recommendation. Things like debt or emergency savings should be considered first before allocating monies towards investments, and then things like life insurance or an umbrella liability policy would be considered.

Ultimately, if it is determined that investing is in the best interest of the client, a fiduciary would be obligated to develop an appropriate asset allocation (percentage of monies in stocks, bonds and cash) that fit within the “life portfolio” of the client at the lowest cost possible.

Trait #2: Ensure the advisor you hire is fee-only

Another important factor for people to consider when hiring a financial advisor is how that advisor is compensated. We all know the prices we pay at the grocery store and the gas pump, and it should be no different for the people managing our money.

The most common way financial advisors are compensated is based off a percentage of assets under management (AUM). Within this AUM structure, there are two ways financial advisors earn their money, which are called “fee-based” and “fee-only.” There are some firms that charge hourly rates, flat fees or even a retainer fee, but these are less common and will not be addressed in this post.

Fee-based financial advisors are paid directly by their clients and can also earn commissions off products they sell to those clients. Fee-only financial advisors are paid directly by their clients and do not receive other sources of compensation. Before engaging with a financial advisor, be sure to read their firms’ Form ADV which outlines their compensation structure along with other important firm information (here is Praetorian Guard’s Form ADV as an example).

How are broker-dealer advisors compensated?

Most brokers tend to fall under the fee-based model, which would be the broker in the suitability example above. A Morgan Stanley or Merrill Lynch advisor will often construct a portfolio with proprietary Morgan Stanley or Merrill Lynch funds that you’ll be paying commissions on, in addition to the AUM fee. These funds will be suitable for someone in your position, but they may not be in your best interest.

Broker-dealers are not required to disclose this information to you prior to engaging their services.

How are independent advisors compensated?

RIAs are most commonly fee-only, as they are also required to be fiduciaries, but some RIAs operate in the fee-based model. Most independent firms are compensated from their clients directly, and they do not receive commissions or other forms of compensation from financial product providers. If an independent firm recommends a specific type of investment for you, it’s because that investment is in your best interest and the firm is not getting paid anything additional for placing your money in it.

RIAs as fiduciaries also have an explicit requirement to be transparent about the fees they earn. They are required to disclose this information (along with any material conflicts of interest) to you prior to agreeing to provide any advisory services to you.

Trait #3: Ensure the advisor you hire has the CFP® certification

Regardless of what “world” you decide to entrust your money with, it is very important that the advisor you choose has the CERTIFIED FINANCIAL PLANNER™, or CFP®, certification. According to the CFP Board website, “CFP® professionals take a holistic, personalized approach to bring all the pieces of your financial life together. As part of the CFP® certification, CFP® professionals also have made a commitment to CFP Board to act as a fiduciary when providing financial advice to a client.”

Advisors who want to obtain the CFP® marks must have a bachelor’s degree in any discipline, complete Board certified coursework (12-18 months), pass a 170-question exam over the course of six hours (roughly 65% pass rate), and have 6,000 hours of professional experience before they are allowed to use the marks in a professional capacity. These rigorous requirements ensure advisors are qualified to provide holistic financial planning to a wide variety of clients.

Do broker-dealer advisors have the CFP® credential?

The short answer: some do, but not many. The long answer: having the CFP® credential in a broker-dealer environment is a bit of an oxy-moron, as the CFP® profession has a foundation in the fiduciary standard. In the financial advisory space, being a CFP® professional and being a fiduciary are practically interchangeable, so it’s a bit strange to be held to a fiduciary standard in a suitability model. Aside from the apparent conflicts of interest (and it being strange), the CFP Board does not bar broker-dealer advisors from being CFP® professionals.

Do independent advisors have the CFP® credential?

The short answer: some do. The long answer: independent firms and their employees are bound by the fiduciary standard, but this does not mean that they need to have the CFP® marks to be advisors. It is much more common to find CFP® professionals in an independent firm as opposed to a broker-dealer, as they both abide by the fiduciary standard and share similar values and approaches to financial advisory services.

According to the CFP Board website, as of March 1, 2023 there were 94,968 CFP® professionals nationally. The Bureau of Labor Statistics, as of May 2021, showed there were 330,300 financial advisors in the United States, which means that CFP® professionals make up about 28% of all advisors. This percentage is so low largely due to the stringent and time-consuming requirements needed to become a CFP® professional. The workload that is associated with holistic financial planning is also much greater than purely investment management, an approach that is more common in the broker-dealer world.

The Bottom Line

Everyone needs financial planning in their lives, at some capacity. This capacity will change for everyone depending on age, job prospects, or family and health situations as they go through life. It’s better to navigate these difficult situations with an experienced professional by your side, guiding you through the financial wilderness.

It’s imperative to ensure the advisor you select is sitting on the same side of the table as you are, whose interests are aligned with yours. It seems obvious a financial advisor should do what’s in your best interest but we know that is not always the case.

Choosing a financial advisor is not always straight forward and there are quite a few factors at play that need to be considered carefully before making a decision. Hopefully this post helped equip you with the knowledge you need to make sure you have a valiant advisor with you through that wilderness!

I’m going to attempt the improbable here and try to make a morbid topic light-hearted and enjoyable, so let’s just dive in.

Death. Along with paying taxes, it’s the only other guarantee in life. Father Time is undefeated and we all return home someday.

No one plans on dying tomorrow (unless you’re David Blaine or you fly in those wing suit things because it’s somehow fun to you). If you told me when you were going to die, we could solve a lot of financial problems for you and your family.

While the timing is unknown, the probability of it happening is known with absolute certainty.

When it’s my time to get called home, I’m going to leave a bunch of stuff behind to people I love: belongings, car, money, sentimental items, etc. Do I want them fighting over who gets it? Well, I don’t really care, because I’m dead, but I’m a non-confrontational person and care a lot while I’m alive, so I’d rather they didn’t.

This is one reason why it’s important to make these decisions today while I’m able to. Doesn’t do me any good to have second thoughts or regrets while I’m up there having dinner with Einstein and Ben Franklin. Or asking D.B. Cooper (if that’s even his real name) over a glass of wine if he really stole the plane.

Fortunately, our legal system allows us to craft binding documents that contain decisions like these and many others. Some of these documents come into force while we’re alive, others after we go home, but it’s important to have them all established and the proper family members notified before that day comes.

Skip ahead:

1. Last Will & Testament
   • Advantages of probate
   • Disadvantages of probate
2. Durable Power of Attorney
3. Living Will
   • The Terry Schiavo story
4. Durable Power of Attorney for Healthcare (DPoAH)
5. How Do I Get These Documents In Force?
6. Conclusions

Last Will & Testament

A last will and testament allows an individual to make their final wishes regarding their assets and children, if applicable. This is where we can decide who will receive our belongings, property, and/or prized possessions.

We can leave our assets to family members, friends, or even charities as long as those assets do not have a named beneficiary (more on this below). The probate court will help the executor of our will carry out our wishes, which has both advantages and disadvantages:

Advantages of probate

• Ensures the will is administered properly (court supervision)
• Inventory and valuation of all assets
• Paying of any bills and resolving pending credit issues

Disadvantages of probate

• Loss of privacy (probate is a public process)
• Must go to court and bear the accompanying expenses (lawyers, court fees, delays in process, etc)
• Possibility of a will contest (most states allow certain family members to contest the will if they are left out)

If we have things like life insurance policies, transfer on death (TOD) or payable on death (POD) accounts, or qualified accounts (401k, IRAs, etc), these are called “will substitutes” and pass on to the named beneficiaries we listed on those assets. They bypass the entire probate process and all the publicity, expenses, time, and effort associated with it, which is a major benefit to our heirs.

A will also allows us to name a guardian for minor children in the event something happens to us. This is extremely important for everyone who has minor children, but especially vital for young, new parents who may not even know this is something they need to do.

Durable Power of Attorney (DPoA)

A DPoA grants an individual the power to make financial decisions for you in the event you cannot make them yourself. These decisions can be tax (power to make gifts to family members, power to disclaim, power to sign tax returns) and non-tax (buy/sell assets, collect from debtors, engage in lawsuits) related. Once it’s our time to go home, the DPoA terminates with us.

Having a DPoA is beneficial because it allows us to appoint someone today, while we’re healthy and in a good frame of mind, to have legal standing and make important financial decisions for us if we become incapacitated. We can be assured that someone we know and trust will have our best interests in mind if we aren’t able to speak for ourselves.

Living Will

A living will directs our physician to either continue or discontinue life-sustaining procedures if we are in a terminal condition or permanently unconscious (also called a persistent vegetative state). Fortunately, this document gives us the ability to make that decision today. While it’s morbid and depressing, it’s actually really important to make this decision today while we’re in a good state of mind. Cue the Terry Schiavo story.

The Terry Schiavo story

I won’t go too in depth (I’ll link an article to the story here if you want all the details), but the basic gist is that Terry Schiavo, a 26-year-old Floridian woman, went into cardiac arrest and was left in a coma for over two months in 1998. At that point, she was deemed to be in an irreversible persistent vegetative state by her doctors.

Her husband, and legal guardian, knew she would not have wanted prolonged life support if the doctors did not think she would able to recover, so he elected to remove her from such support. Her parents were obviously distraught and argued for her to be kept on life support. Her husband and her parents ended up battling in court for over seven years, with the case being elevated all the way up to President Bush and the Supreme Court.

Moral of the story: a living will grants you the power to decide what you want today, but also can prevent family members from ending up in a situation with no good outcomes that can affect them for a long time.

Durable Power of Attorney for Healthcare (DPoAH)

Combined with a living will, a DPoAH creates an “advanced medical directive” that allows us to name an individual who can make medical decisions for us in the event of our incapacitation. This is very similar to a regular DPoA, but different in the following ways:

• It only concerns medical decisions
• It is what’s called a “springing” power, which means it “springs” into effect upon our incapacitation. If we are aware enough to make our own healthcare decisions, physicians will grant our wishes
• It is a separate document from the DPoA

The advanced medical directive covers all possible situations that could arise due to medical reasons and allows us to decide today what kind of treatment we do or do not want to receive, whether we’re able to say so ourselves at that time or not.

How Do I Get These Documents In Force?

When we’re young and our lives are not overly complicated, a simple and effective way to get these four documents is through DIY platforms like LegalZoom, Nolo or Rocket Lawyer. While this is not legal advice, it’d be wise to do some research to see which service would best suit your needs. Obtaining basic documents on these platforms most likely will cost less than $500 and shouldn’t take more than an hour or two to complete.

Once we have the documents completed, we need to get them notarized so they hold legal standing. Completing the documents online is not enough for the documents to be in force. Once they’re notarized, it would be wise to digitize copies of the signed originals in addition to keeping the originals in a safe place so you can ensure you, or someone you trust, always have access to them.

Then when we make it big in our careers and we have 4 kids, 5 cars, 3 houses, a yacht and a plane (sarcasm, but you get my point, hopefully), it will probably be in our best interest to see an estate attorney at that point and get new documents drafted to go along with a revocable living trust. That will be a different post at a different time, but the gist is that as our lives continue to grow in complexity, so too will our estate plans.

Conclusions

These four basic documents provide a solid foundation to an estate plan for younger folks. They allow us to cover our bases (will, guardianship for kids, general last wishes) and head off potential Terry Schiavo situations (durable power of attorney’s) in the future. None of it is fun to think about or write down, but it ensures our wishes are carried out and reduces the chances of grievances occurring amongst family members.

Another key point is that having these basic documents allows us to keep our wishes and belongings in the private confines of our families. A few interesting facts to know are that people like Aretha Franklin, Stan Lee, Chadwick Boseman, Prince, and Bob Marley all passed away without a will, known as “intestate.” These are multimillion dollar estates that had dozens of claimants after their deaths, claiming a portion of the estate belonged to them. And all of the court documents regarding these estates are public knowledge.

Moral of the story: we should bite the bullet and face some of the hard questions and decisions in life today so we ensure our wishes are honored and our estates are handled privately. Our family will thank us one day!

When we look at a dollar bill, there doesn’t seem to be anything special about it. It just seems like a piece of paper we might be able to buy a stick of gum with.

But in the world of personal finance, not all dollar bills are equal. Some are special and have tax advantages while others don’t. We’d be wise to employ as many special dollar bills in our personal situations as possible.

This is where Roth dollars come into play.

I referenced Roth IRAs in this blog post as a great vehicle for young professionals to utilize as we get started on our retirement savings path. But what exactly are Roth accounts and why are they so great?

The 3 reasons:

1. Access to contributions, tax-free withdrawals
   • We have to pay taxes, but we can decide when
2. Eliminate Uncle Sam from our future
   • Reduce taxable retirement income
   • Reduce chances of paying higher premiums for Medicare Part B
   • Reduce chances of paying more taxes on Social Security benefits
3. Tax advantages to future beneficiaries

Access to contributions, tax-free withdrawals

Whenever you see the word “Roth” in the finance world, think “taxed today, mine in the future.” A Roth account has after-tax contributions in it, enjoys tax-free growth while it’s invested and, if certain rules are met, all the contributions and the growth come out tax-free.

So what do we get in compensation today for paying taxes up front? Something rare in the qualified accounts world: access to the money.

We have to pay taxes, but we can decide when

The dollars we contribute to most retirement accounts (think Traditional IRA, Regular 401(k) or a pension) are not taxed today because we get a tax deduction for taking care of our future selves. This is a great incentive for us to save for retirement, but it comes at the expense of not having access to those savings today (unless stringent criteria for limited exceptions are met).

However, since we’ve already paid taxes on the money we put into a Roth IRA, Uncle Sam no longer cares what we do with that money. If I contribute $2,000, I can always access that $2,000 until the end of time. However, just because we can access it doesn’t necessarily mean we should: we want to avoid taking contributions out too soon as we will not get the opportunity to put them back into the Roth to realize further tax-free growth.

The Roth IRA is a game changer for young professionals as we get started in our careers (go here to learn about the income and contribution limits for a Roth IRA and other accounts like it). Once we turn age 59.5 and the account has been open for five years, then we have access to every single penny in the account…completely tax-free!

Eliminate Uncle Sam from our future

There’s century-old arguments about the merits of Uncle Sam and the reach of his powers, but I think we can all agree that we tend to not like him very much when he reaches his hands into our paychecks.

With our Roth IRA, because we use after-tax dollars up front to save for retirement, we can take these dollars out in retirement and they are not taxed again. This is beneficial if tax rates are higher in our retirement years, since we would pay the lower tax rate today. And at $31 trillion in debt, I strongly doubt U.S. tax rates will be lower in 40 years.

Reduce retirement income for tax purposes

With most qualified accounts like the aforementioned Traditional IRA and Regular 401(k), the government mandates us to take a Required Minimum Distribution (RMD) once we reach a certain age (age 73 in 2023), whether we want to or not. Since Uncle Sam hasn’t gotten his tax revenue on these accounts yet, he makes us take money out every year after age 73 so he can tax it. These distributions are considered ordinary income, getting taxed at our marginal rates.

But with a Roth IRA, there are no RMD’s. Uncle Sam already got his tax revenue up front so he doesn’t get any on the back end. And when we take money out of the account in retirement, it is not considered income. Theoretically, we could take out $1 million from our Roth IRA at age 73 and recognize $0 of income and pay $0 in taxes!

Roth IRA distributions not being considered income has a domino effect on other aspects of our financial lives, as well. These aspects are not something we tend to think about in our 20s or 30s but if we take advantage of Roth dollars when we’re just getting started, we’ll really be thanking ourselves down the road.

Reduce chances of paying more for Medicare in retirement

When we turn 65 we become eligible for government healthcare, called Medicare.

While Medicare is primarily funded by the U.S. government, individuals also pay premiums for specific portions of the coverage, namely Part B (doctor visits) and Part D (prescription drugs). The base premiums are based off our Modified Adjusted Gross Income (MAGI) and surcharges are added if the MAGI reaches certain thresholds.

These surcharges are called Income Related Monthly Adjustment Amounts (IRMAA). Hopefully the first two words in the acronym tell you where I’m going with this.

If we have a Traditional IRA, a Regular 401k or a pension in retirement that we’re drawing from, then that increases our MAGI. These distributions could bump us into higher IRMAA thresholds which can increase our monthly Medicare premiums by up to $472/month in 2023.

The bottom line: The more income we have in retirement, the more we’ll pay for healthcare coverage. Roth IRAs help to avoid this.

Reduce the tax on your Social Security income

The story with Social Security rhymes with the Medicare story.

When we file for Social Security in retirement and begin receiving benefits the government uses the following formulas to determine if our monthly check will be subject to taxation:

As you can see, the more income we have while we’re collecting Social Security, the higher percentage of our benefits will be taxed. Again, Roth IRAs help to avoid this potential tax hit in retirement.

Tax advantages to future beneficiaries

The “income in retirement” problem doesn’t stop with us: it can affect our beneficiaries too.

We discussed that while we’re alive, we do not have to take RMDs from our Roth IRA because Uncle Sam has already collected his tax revenue. But when we die, the rules change a bit.

The rules are very complicated and beyond the scope of this post, but the important thing to know is that our beneficiaries who inherit our Roth IRA must take distributions. But because we’ve already paid taxes (and the account has been open for five years) our beneficiaries enjoy the same tax-free withdrawals that we do!

This means that our heirs (likely family members) can avoid the income problem related to Medicare and Social Security for themselves as well. In special cases, if our heirs have special needs and they inherit a non-Roth account with RMDs, this could seriously affect their ability to receive government benefits (read more about this here), making the Roth dollars that much more valuable.

The Big Takeaway

Roth this, income that…I get that it’s a lot of fancy Congressional financial jabber. But it’s really important to understand the basics today so that we can make good decisions that will benefit both our present selves, our future selves, and our future inheritors.

“A bird in the hand is worth two in the bush” is the old saying and I think it applies nicely here: if we act on the knowns today (tax rates), we eliminate the unknowns in the future (tax rates). In other words, the big takeaway is this: we pay a known tax today to invest in a Roth IRA and we avoid Uncle Sam’s tax hands in retirement. This gives us maximum flexibility today (access to the money) and in the future (tax-free withdrawals) that allows us to adhere to the seventh ingredient in a healthy financial plan…Keep It Simple, Stupid!