Where What When: We are here today with financial
planner Eitan Schuchman to talk about the lifecycle of investment from a young
age all the way until old age and beyond. Thank you, Eitan, for joining us; we
hope this will be an informative discussion. First of all, what exactly do you
do and what is your background?
Eitan Schuchman: I was born and raised here in
beautiful Baltimore. We are old-school “Bal’more Hon,” a long-time
intergenerational TA and BY family. After marriage, my wife Ariella (from
Philly, the “other Bohm” family) and I chose to further strengthen that legacy
by sending our six children through the system.
Regarding my
career, after my BS, I went to the University of Maryland to earn my MBA and
started my career at the investment firm Bear Stearns in New York City. I am a
certified financial planner and a chartered financial consultant. I help
individuals, married couples, and companies achieve their financial dreams, or
at least get them to the next level in realizing their dreams. We do that by
planning. There are many aspects to it, and we bring the best experts in the
field together to make sure that my clients are in the best shape moving
forward.
WWW: Looking at it from the perspective of an
individual, is it fair to say that you deal with everything from insurance
planning to retirement planning to investment advice?
ES: There are many different types of
individuals, but, yes, insurance, and retirement planning are part of the consideration.
As a person moves through the lifecycle – going from being an individual to
building a family to the mid-stages of one’s career – in all the various stages
and ages, we aim to incorporate aspects of the planning process to make sure
that we’re mitigating risks and furthering that person’s goals for the future.
WWW: Let’s say a young married couple comes
into your office, and the husband and wife both have decent jobs. What should
they be thinking about?
ES: The first thing I do is to make sure that
both of them are on the same page. We often see families in which one partner
is trying to achieve a goal different from the other. This may create some
hostility in the relationship. Once everyone is on the same page – and we have
some form of marital agreement – I also make sure that they are on the same
page about debt. Debt is probably the snake pit of our society. Many people
think that debt is okay. Unfortunately, I’ve seen too many situations of people
in their 40s, 50s, and 60s who wake up and realize that what started as an
affordable payment on a $3,000 bathroom renovation or a new airline point
credit card has ballooned into a much larger payment – to the extent that it
has become prohibitive for them to continue.
Once we can
successfully agree that debt is a poor place from which to establish long-term
financial success, we move on to establishing their long-term goals, including
costs associated with raising a family, tuitions, college expenses, weddings,
retirement, and, ultimately, financial prosperity.
WWW: Other avoiding debt, what should this
young dual-income couple who are on a career path be thinking regarding their
finances?
ES: We encourage couples to set budgets and
meet regularly to stay on track. For the young working couple, just finished
with college or beginning their careers, we first discuss what their ideal life
would look like. There is no generic “life.” Obviously, only Hashem knows how
their life will unfold. But we try to picture what it will look like a few
years down the road. They want to build a family, im yirtzeh Hashem. If they want to buy a house, they need to start
a savings plan for a down payment. They need to commit to contributing to their
IRAs and 401ks. They need to define early on what is considered a luxury or
necessity. This may mean buying a Toyota instead of a Lexus – basically, just
trying to do a little bit more on the saving side now, while expenses are much
lower than they will be once they have children and start paying tuitions.
WWW: Would you say anything different to a
young kollel couple?
ES: Of course, there are also people in our
community who devote their time to learning, which is definitely a noble
approach. Young people in kollel should consult a qualified tax professional
instead of going on their own. These professionals do this all day, every day,
and know much more than what you will find yourself on the internet. Find
someone you know and trust who will help you maximize all the deductions, tax
credits, and government programs available to you. They will also help you stay
out of debt while you achieve your life goals.
WWW: On the dual earnings side, you mentioned
savings. Can you tell us about the power of savings at a young age, and what
the future outcome might be of putting money away in retirement accounts or
savings?
ES: At the young earning age, you may have an
option to invest in your employer-sponsored retirement plan. Many companies
offer simple IRAs, 401ks, government TSP (Thrift Savings Plan) programs, or the
like. Often, you are able to contribute on a tax-deferred basis in a
traditional IRA or in an account where earnings grow tax-free in a Roth IRA.
This will essentially give 100 percent return on your money. For example, if
you want to contribute three percent of your paycheck into your
company-matching 401k plan, you’ll get 100 percent return on the money without
taking any risk. That could result in exponential growth. Albert Einstein once
quipped that one of the things he was never able to understand was the power of
compounding interest. That’s exactly what happens when someone invests while in
their 20s and 30s and does not touch that money for another 20, 30, possibly
even 40 years. Your 60-year-old self will thank you for the huge increase on
the dollars you invested in your 20s, which doubled many times.
WWW: As an aside, I would suggest that anyone
reading this go online and take a look at a compound interest calculator. You
can quickly enter your information and see what the potential results can be.
Let’s shift gears to a couple in their mid-30s and early-40s, at the height of
their earnings. How does the conversation differ, and what does that look like?
ES: This is the stage of life when most
people begin to think about moving to a larger home; they start shifting from
bar or bas mitzva ideas to looking into yeshivas, seminaries, and college
options for their children; and they also start thinking about what
pre-retirement as well as actual retirement will look like.
We begin by
looking at their current expenses and then estimate the rate of inflation in
retirement. There are two main factors to evaluate: The first is the CPI, the
consumer price index, which is a monthly measurement of prices for household
goods and services that go up on a regular basis. There is also the CPI-E,
specific to the elderly, whose expenses go up a lot higher than most average
expenses. For the elderly, the cost of living and of prescription drugs
increase a lot faster. You need to plan for and devote more assets towards that
now while you are still in your prime earning age. You also have to more firmly
articulate your long-term goals once you are in your 40s and 50s.
WWW: Can you share with us the impact that
tuition has on this analysis?
ES: Tuition, like many other expenses, is a
fact of life in our community, and it is something that we do need to prepare
for. The operating costs of our local institutions are exorbitant. It is
understood that everyone needs to keep the lights on and pay their bills in a
dignified manner, and tuition needs to be incorporated in every one of our
financial plans. That includes day school tuitions as well as yeshiva and
seminaries after that, and then moving into college. It’s ironic how some of
the counterparts not within our community freak out at the cost of tuition when
their children go to a four-year university, while we are already numb to
shelling out these sums of money.
WWW: How does paying tuition impact one’s
ability to save for retirement? Or, alternatively, what do you think about
using retirement funds or other savings to pay the tuition expense?
ES: Funds set aside for tuition payments
should be used for tuition payments, and savings set aside for retirement
should be used for retirement. A lot of people ask about using Roth or IRA
money to pay for college. Yes, the government does in fact give you the option
of using some of these funds for higher education purposes. But that should not
be the primary purpose of your Roth or IRA. Just because the government allows
you to do it does not mean you should do it. (That’s a general rule of thumb in
life, period.)
Tuition is
definitely a major expense (or investment) to the great lifestyle that we live.
People should consult with an accountant and an investment adviser to see if
there are any other ways to provide your children with the phenomenal education
they are receiving in the local institutions without jeopardizing your
retirement savings.
WWW: Without getting into too many specifics,
can you tell us about your investment approach to retirement planning?
ES: There is no cookie-cutter solution that
will work for each and every individual. Individuals have different risk
tolerance, investment behavior, and time horizon, and their own approach to
dealing with money. They should never be forced into a box, although that is
prevalent in the industry. Once someone approaches retirement, there really is
no rule of thumb. They need to be comfortable with their current investment mix
or investment style. The specific approach will be based on a retirement income
analysis, and portfolios will be diversified accordingly across many types of
stocks, bonds, mutual funds or exchange-traded funds in many industries and
sectors. The key is time-in – not timing.
As a case
scenario, many people can be in their 50s, yet each of them views retirement
differently. Keep in mind that your expenses will almost always be higher than
you anticipated. In addition, tax laws may change at the stroke of a pen, your
Social Security check may decrease if you earn too much income, your tax rate
can continue to go higher, and inflation adjustments can occur faster than you
anticipated. If you are trying to nail down a number as to how much you’re
going to need in retirement and create an investment mix based on that need,
you want to be as conservative as possible and even increase your target amount
by a few percentage points.
WWW: Let’s take as a case study a 65-year-old
frum couple in Baltimore who are both government employees. Their combined
income was $250,000 annually over the course of their careers. What would be an
optimal target retirement number for them?
ES: In that scenario, we should focus on the
income needs of these individuals. A couple that both worked for the federal
government, which is common in this community, should have well-funded TSP
plans and the government retirement pension plan. Most government employees who
were hired by the U.S. government after December 31, 1983, can generally
collect their pensions and Social Security simultaneously. Those lucky enough
to have saved during these times, may have as much income in retirement as they
had during their working years and are now able to use their time to drive
their grandchildren’s carpools instead of continuing to work.
WWW: What about someone who ran a business and
is now looking to retire at age 65? Let’s assume they earned $200,000 annually,
they sold their business for a half million dollars, and they did put money
into retirement funds. What is a rough estimate of how much they should have
saved for retirement?
ES: As part of the planning process, we look
at the expectations of each of the spouses and how much they need to maintain
their standard of living up to and through retirement. This includes the later
years, which can get more costly if they need extra help or nursing care.
Factored in this is whether they have long-term-care insurance or not. In this
type of scenario, if they maximized their retirement contributions throughout
their career, their investment income should be able to provide half to
two-thirds of their pre-retirement income needs. Add to that supplemental
Social Security and other sources of income, and they should be somewhat close
to where they were before. I can say, generally, that most people end up at two-thirds
to three-quarters of their pre-retirement income if they have all their ducks
in a row and if they put away savings as often as they could throughout their
career.
WWW: Rolling past age 65, what should people
be thinking about?
ES: First, it is especially important that
they have the right team. Whether it means hiring a financial planner as a
quarterback or an accountant or an estate planning attorney, someone needs to
take the reins and set up the proper medical directives and proper power-of-attorneys.
What else?
Obviously, a will and a financial plan to ensure that their beneficiaries are
correctly noted and that they are making the most of any and all possible tax
considerations. These are all things they should have already set up in their late
60s and early 70s, if not before. In fact, people really need to think of these
things when they are in their 40s, 50s, and 60s. But once in their 70s, for
sure, they need to maintain that vision and have all their papers and documents
in order.
WWW: Can you tell us about some more
traditional, safer investment opportunities for people in that 40 to 50 age
range? In general, what types of things are available for people interested in
investing?
ES: I would encourage our readers to start
with their employer, who can often contribute to their 401k or
employer-sponsored plan and possibly match their contributions. No investment
house is ever going to give you a 100 percent return on your money, whereas
your employer may, up to a certain percentage. At the same time, this will
reduce your current income tax because every dollar you put in is pre-tax and
won’t show on your W-2.
Above and beyond
that, look to hire a qualified investment advisor. There are many, many
qualified people in our locale. Many types of investments are out there,
including mutual funds, stocks, and exchange traded funds, which have become a
lot more popular than they were five to ten years ago. There is a conversation
in the industry now as to whether you should use an actively managed portfolio
versus a passively managed portfolio. This is something that each individual
should discuss with his or her investment person.
WWW: I think that’s all the questions I have
for now. Anything else you would like to add?
ES: Thank you for the opportunity to discuss
financial planning. (I think I haven’t said anything explosive yet.) The
message I would like to leave with people is to find someone within the
industry who will look out for your best interests, who considers himself a
fiduciary, looking out for the client and not for himself.
WWW: Thank you very much. Where can people
reach you?
ES: My ad is on page 91.
WWW: Perfect. Thank you.
Judah Katz
is a Baltimore native and a partner with the law firm of Neuman & Katz,
LLC. He focuses on corporate law and estate planning. He can be reached at
jkatz@neumankatz.com.
The opinions
voiced in this interview are for general information only and are not intended
to provide specific advice or recommendations for any individual. All investing
involves risk, including loss of principal.
