Better Understand Your Financial Statements

Well, hello and welcome back in to Mr. Stillman's Opus. I am Ben George. He's John Stillman over at Rosewood Wealth Management.

I got a good show for you today. We are near the end of the year, John, and I know you have a lot on your plate typically this time of year, just working through some things with clients, knocking off some checklists, going through some end of year tasks. But one thing that also comes around quite often this time are all those financial statements. And I know I get them all the time. And to be honest with you and to be quite frank, I don't know how many actually open.

Well, I think that would make you pretty normal. There are people who only look at their statements when they get the actual statement every month. They don't ever go online and look at anything. There are some people that if they know that the market is bad, they don't even look at their statements. They say, well, it would just be better if I didn't look at this.

Right. Well, you know, the thing, too, is that I think at least I think for me, if I knew exactly what I was looking at and understood the importance of everything that was on there and I could sort through because there's just so much fine print, right, that you're kind of looking through and trying to identify the area of the financial statement that actually is relevant to you is part of the problem. So today, that's what we're going to try to do is kind of help you understand your financial statements a little bit more, what you're looking for, kind of breaking down what's on that, some of the terms that you might see that are maybe applicable to you as well.

And hopefully by the time you're done with this, you won't be like me and you won't throw them in the trash directly. You'll go through and sort it out and see what is important to you and make sure you're all up to date and understand everything on your financial statements. So first thing, John, as we go through these that come in income projections, you'll often see this on your statements. So when you do first off, how accurate are these income projections when you see, especially on your 401k statements?

Well, so you have to understand what's happening with those projections. And in most cases, what they're doing is looking at how much money you have. And then they're just assuming a withdrawal rate of, you know, maybe 4% would probably be the most common withdrawal rate that's being looked at there. And then they're just multiplying what you have by 4% and saying, here's how much income you could expect. I mean, sometimes there's not a lot more nuance to it than that. Other times they're doing something that I think is actually particularly dangerous.

Now, if you read the fine print, you would understand what's going on, but who's actually doing that? What they'll often do is do a little more sophisticated analysis where they're looking at your income and then assuming what your social security benefit is going to be based on that income that you have, which, you know, they're not actually looking at your whole earning history and knowing what your social security benefit is. They're just kind of projecting based on your current income, which certainly can give you an idea, but is not going to be a full picture of what your social security is.

But in any event, let's even pretend that it was accurate. They might say something like, hey, you could count on $4,000 a month in income. And if you're just thinking, oh, wow, okay, so this 401k, what I've saved up in here is going to give me $4,000 a month and you're not looking at the fine print that tells you $1,800 a month of that is from your social security and you're really projecting $2,200 a month from your 401k.

Well, that would be important information to know, not thinking, okay, the 401k by itself is going to give me $4,000 a month. So you just have to be careful, know exactly what you're looking at with that number. And then even understanding all that, realize that it's not really a number that you can hang your hat on for retirement planning purposes. Is it even like a kind of a general, like, can you generally apply it to your situation or should you just ignore it altogether?

It's a fine place to start a conversation. So if your 401k statement says, you can count on $5,000 a month and you say, wow, I'm looking at only spending $3,000 a month when I retire because my house has paid off and I never go anywhere and I don't ever do anything. Okay, well that's probably a sign that you're in pretty good shape. But if you currently spend $10,000 a month and your 401k says you can count on $1,000 a month from this, well now either hopefully you have a lot of other money in different places that is not in that 401k or it's a sign that you have your work cut out for you.

Okay, very good. What about asset allocation summary? I know when I open it up with the pie chart, pie chart always catches your attention right away. And I know mine has been heavily allocated in one sector or another. So I've kind of see it, not as many slices of pie probably as I need to be seeing on this pie chart.

But I guess what do we need to be looking at with this? How are we looking at the percentage of allocation we're allocated in and how often do people actually even understand what they're looking at? Yeah, so like the nice pretty colors and if people see three, four, five different colors in their pie chart, they say, all right, well, I'm pretty well diversified. And it really depends on exactly how that particular company is breaking down different asset classes. So for instance, you might have somebody who comes in with four different colors on their pie chart. They have a little bit in bonds, maybe 10% of their 401k is in bonds. And then they have, you know what?

I'm just going to pick this up right here because I have a client statement from her 401k sitting in front of me right now. Oh, perfect. So let's just look at this. So I'm using real life numbers. All right, I see five colors on here.

That sounds so good. That's a good start. So it looks pretty diversified. You have the smallest color has about 13% and the biggest color has 23%. So we've got five different colors ranging between 13 to 23% of the total account, right?

So that looks diversified, but let's look at what these five colors represent. One of them is an S&P 500 index fund, okay? One of them is company stock, Duke Energy in this case. One of them is a 2035 target date retirement fund. One of them is a small and mid cap US equity fund. And then one is an international equity blend. All right, that sounds like a lot of different stuff, right?

Right, yeah. At the end of the day, it's all just stocks. I mean, you have different types of companies represented in those stocks, but she's got a little bit of bonds in the 2035 fund. But for the most part, we're probably looking at in the high 80%, probably close to 90% is in some kind of stock in this account, which would probably be jarring to you to find out if you look at this nice wheel of colors and say, oh, I look pretty diversified. Well, probably not as diversified as you think because you don't really have that many asset classes represented.

You just have different types of stock. Yeah, very interesting because when you read through it, if you don't know exactly what you're looking at, you can easily be confused and think you're in a much better position than you are. So again, while you have someone assess this, especially as we hear the end of the year, good time to be looking through your allocation and seeing where you might need to make adjustments. Another thing we're going to find on these statements are the fees, John. And I think this is obviously one we need to pay attention to because we need to be aware of what we're paying. But is there anything, though, that we won't see on here fee related or is everything listed clearly? Depends on the company, depends on the statement. So like with our statements, for example, we have our management fee. You will see that fee deducted from your account. Now, a lot of times our fee looks like it's higher than anywhere else because it's also easily and clearly disclosed. The reality is our fee is not particularly higher than most other places you might invest.

It just seems that way because we don't try to hide it. Depending on the type of account you have, the fees could be worked into the investments themselves. Like in a lot of 401ks, you're not going to see any fees coming out of it. You might see an annual admin charge or something like that, but it might be $75 a year or something. Well, that's because the cost of your investments is built into the funds themselves. And so, yes, there is a cost for you.

It's just not obvious and evident. There are times where there are fees that maybe come out once a year. But if you just look at like a monthly or a quarterly statement and you don't see that fee on there because it only comes out in December, well, you might have an idea that your fees are lower than they actually are. So, it's one of those things where you need to understand all the ways that fees can come out. It can be just a straight deduction of the account value and a fee-based arrangement like what I have.

It could be commission-based where you're losing money every time you make a transaction and every time you have a broker who buys or sells something, they're making money on the purchase or the sale. That's not really going to show up on your statement in any way. And then you have the internal expense related to the investment itself. So, more often than not, all of your costs and fees are not going to appear on the statement. Well, that's never a comforting feeling to know, but something we need to be aware of for sure when you're looking at these financial statements. And you talked about disclosing things accurately and transparently. Well, there's a lot of disclosures on these financial statements, plenty of fine print.

So, is there anything that is important? I know, I guess in theory is all important, but is there anything that we need to really be looking for in this fine print instead of just quickly ignoring it and skipping on to the next section? There's not a lot, honestly, that really matters in most of the fine print that you're going to see on your statements. A lot of it is just kind of compliance language where attorneys are requiring people to put this on their statements.

A lot of it is not particularly relevant to you. The exceptions might be something like what I was talking about earlier, where are they including an estimated social security estimation into your income projection? But that's not going to be like the fine print at the back.

That should be probably in fine print somewhere close to that income projection that you're looking at. So, yes, there might be things. Anytime you see an asterisk or something like that, yeah, let's look and see what that's referencing. But if you have a couple of different pages of just massive amounts of text, there's a good chance that probably none of that is relevant to you. Yeah. All right. Well, these are some of the bigger things that we know you need to kind of be paying attention for and want to make sure you understood on your financial statements.

But what are some of the other things, Jon, you might find on these statements that are worth paying attention to? Well, let's suppose you have a 401k and you see something called the vested account balance. Maybe you have a couple hundred thousand dollars in there and it says 160,000 of that is your vested amount. What that means is you haven't been at the company long enough for you to be able to leave the company and still keep all of that money that the company has put in for you in that account. So most of these plans have a vesting schedule and usually it's around five years, maybe less in some cases. In some companies, you're just immediately vested. But that would be something to know that if you leave the company, you're not going to necessarily keep all of the money in your 401k depending on the vesting balance. You might see like beginning balance versus ending balance. Well, that's talking about the period that you're in. So if it's a monthly statement or a quarterly statement or whatever, that's going to show you not where you were when you started that account. Like I had somebody in the other day who was saying, I've had this account with you for two years and it doesn't look like it's grown very much in those two years. And I feel like, yes, we've had a bad year in the market, but last year was a good year. Shouldn't it have grown more than this?

And the answer is, well, it actually has grown a lot. The beginning balance that you're looking at there was the beginning of September and the ending balance is the end of September, not where the account started when we first took it over. So yeah, there are little things like that. Beneficiaries sometimes are listed on your statements, but often are not listed on there. So that's one of those things where you need to be aware.

If you're wanting to make changes to those beneficiaries, you probably need to be checking online and seeing what your beneficiaries are because it may not be on your statement to remind you, hey, is this still accurate or not? So a couple of other little things you can be paying attention to. Yeah, I feel like this year 2022 is going to be one in which we don't want to pay as much attention to the ending balance and that personal rate of return probably, but all important to know as you're looking through your financial statements. So as you get them this year, if you need someone to look them over, I'm guessing, Jon, you probably help people with this too, right? As financial statements come in, just kind of help them sort through their different accounts and kind of where they stand on things.

Understand what's important, what's not, and what kind of decisions you should be making moving forward with that knowledge at hand. Very good. Well, if you have questions for Jon, you can always give him a call or text 800-545-2991 for Rosewood Wealth Management. Jon, as always, great to talk to you. I know financial statements don't get us excited, but it is important to know what we're looking at and understand those things thoroughly. And you've helped us do that today.

Appreciate it. Well, you speak for yourself on what does or does not get us excited. Well, you want to go ahead and be on record to say that you get excited about financial statements before we get out of here?

I mean, there are times where they can be fun. Fair enough. Fair enough. Well, either way, we hope that you do reach out. If you have questions about anything on your financial statements and need more clarity or just want to get your planning started, you can do that today. For Jon Stillman over at Rosewood Wealth Management, I am Ben George. Thanks for listening to Mr. Stillman's Opus. I'll talk to you next time. Take care.