SuperMoney Interviews – David John Marotta of Marotta Wealth Management About Investing, Saving & Budgeting At Every Stage of Life

David John Marotta, CFP®, AIF®, AAMS® is the president of Marotta Wealth Management, a fee-only comprehensive financial planning practice in Charlottesville, Virginia. We had a chance to speak with David about topics ranging from retirement planning to savings to budgeting.

Since you’ve founded a successful wealth management firm, could you tell us why you decided to start a blog?

We have no secret ingredient at Marotta Wealth Management. Instead, we openly and publicly publish our strategies as articles on our website.

We strive to provide the necessary resources for anyone to prepare their own investment plan and meet their financial objectives. We actively encourage the do-it-yourself people of financial planning to subscribe to our newsletter and provide themselves with comprehensive wealth management.

For people who don’t want to do it alone, we encourage them to read our articles to get a fuller understanding of how our services work to see if we are a good fit for them. We have found that giving away as much free information as possible is the best way to attract clients who want our help doing all the things that we write about!

What are the advantages of working with a fee-only wealth management firm?

Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.

The National Association of Personal Financial Advisors (NAPFA) is the leading professional association of fee-only financial advisors. NAPFA is distinguished both by the competence of its advisors and their method of compensation. Part of the annual fiduciary oath NAPFA members sign reads, “The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.” Fee-only advisors help reduce the conflicts of interest inherent in how they get paid and what they recommend.

Most commission-based agents and brokers are no doubt sincere people trying to do honest work for their clients. But I also believe human nature is bent, and good intentions often succumb to repeated temptation. One of my favorite Stephen Crane poems reads, “A man feared that he might find an assassin; Another that he might find a victim. One was more wise than the other.”

My parents started their financial planning firm in the early days of NAPFA. They were attracted to the ideal of sitting on the client’s side of the table and acting in their best interests. I appreciate NAPFA’s model because it more easily allows my head, heart, words, and actions to align. It would be too difficult to run a business if its success pulled us away from working for our clients. Because we are getting paid to do whatever our clients would do if they had our time and expertise, we are free to do just that without as much concern about how we get paid for the service.

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NAPFA members are often annoyingly fanatical proponents of the fee-only model. I’m no exception. I would rather see consumers handling their finances on their own than wondering if the products they have been sold are really the best option for meeting their goals. And this is partly why we recommend competing NAPFA firms when our services are not the best match for a prospective client. It is also why we give away as much do-it-yourself information as we can. We want consumers to be as informed as possible about good wealth management techniques.

What are some of the biggest mistakes that people are making when it comes to retirement savings?

One of the most common financial mistakes is to forget about inflation. My grandmother, Florence Mortlock, was born in 1904. At the time, you could buy a dozen eggs for a quarter and a week’s worth of groceries for a few dollars. Had you told her that she would need hundreds of thousands of dollars in order to fund her retirement, she would not have believed you. She would have thought that if she managed to save $5,000, it would be a princely sum of money.

A second mistake involves calculating safe spending rates in retirement. Many investors do a back of the napkin calculation and assume that if they can live off 5% of their income, they are set for life. They wrongly assume that they are conservatively living off the income and not touching the principal. The mistake is that the purchasing power of their principal is going down by inflation every year and they are impoverishing their future. Investing mostly in bonds means a much lower lifestyle in retirement.

Finally, most investors fail to bother having an asset allocation done, let alone periodically rebalancing back to the appropriate percentages. Buy and rebalancing beats buy and hold by about 1.6% annually, but it is uncomfortable. Rebalancing involves selling what you are so glad you have invested in because it has gone up only to buy what you are sorry you own because it has gone down. It is a very contrarian discipline, but it is the correct practice.

Morningstar did a study and found that the average mutual fund investor underperformed the very mutual funds they were invested in by -1.4%. They bought a mutual fund after it had already gone up only to sell after it had already gone down. We call this behavior “buy and chase returns.” The behavior gap between what investors should do (buy and rebalance) and what investors actually do (buy and chase returns) costs the average investor about 3.0% annually.

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These days, what percentage of retirees’ expenses is being offset by Social Security payments on average? Is Medicare covering most or all of retirees’ health care costs?

The average Social Security payment is currently about $1,341 per month or about $16,092 per year. This covers about one-third of the average retiree’s lifestyle. The rules of Social Security are complex, and the difference between the best and worst possible way of taking benefits is often as much as a quarter of a million dollars. Unfortunately, a majority of Social Security recipients take Social Security the worst possible way.

The average retiree will spend about $130,000 on health care in retirement. (Couples will spend about $260,000.) About 42% of that cost is Medicare premiums, while 58% represents other services, including care facilities, medical providers and supplies, prescription drugs, dental, etc. Currently, the total out-of-pocket spending on services and premiums is about $5,000 per year.

At what point in a person’s life (or at what level of wealth) should a person start being concerned about asset allocation?

Since asset allocation and rebalancing back to that allocation boosts returns at every age, we recommend setting an allocation as soon as you start saving and investing.

We also recommend saving at least 15% of your take home pay at every age. Wealth is what you save and invest, not what you spend. Most millionaires are simply the prudent, frugal super-savers who live below their means and save and invest the difference.

Teenagers can fund their Roth IRAs while they are young and not paying taxes, and then have their savings grow tax-free during their entire lifetime. No matter what your age, saving and investing for the next seven years is more important than starting in the eighth year and saving for the rest of your life.

What are some of the benefits of a 529 College Savings plan?

529 College Savings Plans offer tax-free growth of assets with no tax owed on the capital gains when withdrawals are used for qualified higher education expenses. In some states, such as Virginia, contributions to one of the state’s 529 plans also qualify for a state tax deduction.

For parents with the choice of funding their own retirement or their children’s college education, it is better to fund your own retirement first. People will loan money to a young person who wants to go to college, but no one will loan you money to fund your retirement.

Most of the money we manage which is invested in 529 College Savings plans is owned by grandparents gifting to helping their grandchildren graduate from college debt-free. It is a wonderful gift to give to your grandchildren.

Do you have any budgeting tips for people who are planning to get married and/or have children?

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Many young people think they are doing well by living within their budget and not going into debt. But it is important to start saving and investing before you get married and start a family. After having children is the most difficult time to try to start saving. And if you would like to be able to have one parent stay home and raise a family, it is best to set your married lifestyle spending to fit within one paycheck while saving and investing the other.

The easiest way to save and invest is by automating your savings. Put your entire paycheck into your taxable brokerage account each month. Then have a smaller amount transferred to your checking account a few days later for your regular lifestyle spending. This separates your income from your lifestyle spending. When you get a raise, you will automatically leave more money behind in savings and not automatically increase your lifestyle spending.

We recommend you transfer just 65% of your take-home pay to fund your regular lifestyle spending. The other 35% is left behind for other purposes. Savings represents 15% of your take-home pay. Another 10% is left behind for “unknown unknowns.” At every stage of life, there will be unanticipated surprises that you need to spend money on. When you are young, your friends will be inviting you to their weddings and you will have the expense of travel and hotels. Later in life, the car will break down, the roof will leak, and the children will need orthodontia. As you age, additional large expenses may arise, such as a daughter getting married.

For the final 10%, we recommend having a budget for being generous and giving to others. A generous and grateful spirit enlarges your heart and is worth a great deal. If you have a budget for your generosity, you won’t be asking if you should be generous; you will only have to decide how to spend it.

Give us one tip on how to save money on our taxes that most people aren’t necessarily aware of.

The tax code and the accompanying rulings and interpretations are extremely complex, offering dozens of different types of tax-qualified accounts and techniques. With great complexity comes great opportunity to reduce your future tax burden.

The most common underutilized type of account is the Roth account. Nearly every taxpayer (with a few exceptions) should be putting as much money as possible in Roth IRAs, Roth 401ks, and 403bs, as well as doing regular Roth conversions to the top of their current or future tax bracket.

Putting money where it will never be taxed again is like the frictionless vacuum we studied in physics class. Without the headwind of capital gains taxes, growing wealth can be done without being overly burdened.