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Webcast replay: How successful people achieve their financial goals

September 20, 2013

Replay and transcript from a recent Vanguard webcast

Sometimes, budgeting your money feels like going to the dentist. You know should do it but you keep putting it off. Yet having a full accounting of your money, setting financial goals, and devising a plan to get there is how successful people became … well, successful. In this live webcast aired September 10, 2013, Mary Ryan and Earl Harley of Vanguard Asset Management Services™, along with Chuck Riley of Vanguard Advice Services, discussed how to prioritize your financial goals, have a plan to achieve them, and perhaps most importantly, how to get started.

Watch the full replay »

Transcript

Rebecca Katz: Well, good evening and welcome to this live Vanguard webcast. I'm Rebecca Katz and whether you're joining us from your computer, from your smartphone, or from your tablet, we are thrilled you could be here with us tonight.

Today, we're going to be talking about that nasty "B" word, not that word. We're talking "budgeting" tonight. It's something we all dread. We don't like doing it. But frankly, disciplined financial planning and good budgeting is really how successful people become and stay successful.

So in this webcast, we hope that we can help you to prioritize your financial goals, to learn why it's important to have a plan in place, and importantly, to take that first step in getting your plan set. That can be the hardest thing of all.

Joining me tonight are three tenured Vanguard financial planners. We have Earl Harley, Mary Ryan, and Chuck Riley. Thanks for being here, you three.

Amy ChainRebecca Katz: This conversation will likely run the gamut from meeting your weekly expenses, creating an emergency fund, and then doing a longer-term financial plan. And I say we'll run the gamut because this is really all about you and your questions. Many of you submitted questions in advance, and you can continue to send questions our way. We are here to answer anything. You can either submit them through your desktop, or you can even tweet them to us using the #VGLive, and I will see them right here on my tablet.

Before we answer your questions, we have a question for you. On your screen, you should see our first polling question, and what we'd like to know is, "Which best describes your situation?" "I have set financial goals, and I have a plan to achieve them." Your second choice is, "I have set financial goals, but I don't have a plan." And third, "I haven't set any financial goals." Please respond now, and if you can't see the poll, just check and see if your browser is set at 100% for viewing and not some other setting making it bigger or smaller. So respond now. I'll come back with those results in just a few moments.

So gang, we have a lot of questions. People are really interested in this topic. We have questions that really span the financial planning world. So I think we should just jump right in if you don't mind.

So our first question here is from Colette in Los Angeles, California. Thanks, Colette. She says, "What is the single most important step a person can take to achieve their goals?" I'm going to go to Mary for this one.

Mary RyanMary Ryan: Well, thank you. Colette, that's a really wonderful question to kick us off tonight because I think that's the biggest thing that we look at is, "What do I need to do?" At this point, we're going to get into a lot of the nitty-gritty, I think, of how to do and what to do for financial planning and setting goals.

The single most important thing I really think is getting started. It's setting that goal and really looking at it and figuring out how am I going to get there? We all talk about retiring. We all talk about maybe sending our kids to college and things like that. But that's always something we put out there. We don't necessarily follow through to do it.

We always say, "Someday, I'm going to sit down and do my goals." But someday isn't a day of the week and we know that. We really got to put down and figure out what we want to do. I know that we all have our views on that. Do you have any thoughts?

Earl Harley: In all of my client discussions, everybody thinks they have a plan, but very few people have actually put pen to paper about it, and it's kind of like driving a car. You can jump in the seat and go somewhere, but you're not going to get to your destination until you actually have that.—you've got to know where you want to go before you can even think about trying to get there. And trying to actually quantify that—I think that's the really biggest hurdle people ever get to, and if they don't, they're really kind of just floundering around sometimes.

Mary Ryan: It's hard to do it without knowing. What is that number? What do I need to do?

Rebecca Katz: It's interesting, Earl, that you said people think they have a plan, and so we just got the responses back from our poll, and we asked, "Which of the following describes your situation?" Do you have a plan and you have goals? And 59% of our viewers said they have set financial goals and do have a plan to achieve them. About 30% said they have financial goals but no plan. Maybe this is they have a plan but they need a little more shaping of that plan.

Earl Harley

Earl Harley: Hopefully we can just tweak some of that but we found obviously from those numbers there a number of people who don't have a plan, and you definitely have to have something to start with and then we can build on that.

Rebecca Katz: Okay, that's great. Why don't we take our next question? Actually, let's ask our audience another question, and then we can answer more of their questions while we're waiting for those results.

Our second poll should pop up on your screen, and we'd like to know, especially for those of you who do have goals, "Which of the following are you currently saving for?" Are you saving for retirement, education, nonretirement goals like a second home, travel, something like that? All of the above or haven't been able to save? I mean we've been going through some tough times and that may not have been a priority. Respond now and we'll come right back to you.

To jump into more questions, our second question is from Anthony, and Anthony asks, "What are the basics that successful people do correctly to achieve their financial goals?" So Chuck, why don't you take that?

Chuck Riley

Chuck Riley: Sure. I think that getting started is the first thing in coming up with a plan and actually putting pen to paper and actually sitting down. And I think being intentional is very critical too. You're actually thinking about the things you're trying to achieve and then putting them down on some kind of document and spending some time, and if you have a spouse, kind of talking through those things with her.

When I talk to Vanguard clients all the time, I'm always amazed at—I'm not surprised by that poll result because I think Vanguard shareholders are very in-tune with what's going on financially. One of the reasons that they love coming here is because they're—and we're focused on low-cost and things like that.

I think that setting a budget, actually keeping track of your spending, knowing what's going on, how much is coming in, paying attention to how much you're saving in taxes, coming up with plans and strategies to be able to get started I think is key.

Earl Harley: I think also, with all of us, when we have clients—the first thing that happens when they come to the door, we make them fill out, whether it's electronically or in paper, some sort of questionnaire, and the questionnaire is almost as useful for us as it is for them, so they can start to visualize what's going on, what they have. They can take a look at what assets are at their disposal, whether it's just a 401(k) plan, or they've got another savings plan somewhere else, or a 529 plan. Who knows what the area is? Then we can work with that and get an idea of what their cash flow's looking like and where is your money going, where's it coming from and where's it going?

And that's the foundation for us to work with from there. Then we can fine-tune things, but we have to know—and again, it's just as important for us as them because oftentimes, our clients haven't really given a lot of consideration to that level of detail.

Rebecca Katz: A question actually for Mary. You mentioned, Chuck, you mentioned spouse. How often when you're talking to clients, is it just one partner in a relationship, or are you seeing an increasing trend of people coming together with their spouse to go through this?

Mary Ryan: I'm seeing a bit of an increase, but it's still—we call it the "silent spouse"—and I think it is really important to bring that spouse in because they want to be part of it. They need to know if they're budgeting and what they're looking for. It's amazing when I talk to people and I bring in the spouse, and they'll say, "No, we really are spending a lot more than that on whatever it is," or, "I know you're talking about this particular goal, but can we talk about that?" It's really having a deeper, better conversation if you can talk to both parties, and I don't know that both parties are always talking. I think that's very important.

Earl Harley: I found that to be the case, too, and I always like to encourage my client—because almost invariably—I'll say 90% of my clients, it's one or—it's either the husband or the wife but not both. I always like to have both people in our conversations because they have—they think they have the same goals. They think they have the same things in mind. That's not always the case. Also, it's good because if only one person is handling everything, what happens if that person can't for some reason? Now, somebody all of a sudden has got to step in and that can get ugly.

Rebecca Katz: I know we have some specific spousal questions. We'll get into a little marriage therapy tonight too. We'll hold off and address those in just a few minutes. We did get the polling results in, and the major thing that people in our audience tonight are saving for is retirement. Sixty six percent said "retirement," 20% of people said, "All of the above," so education, retirement, other nonretirement goals. Clearly, those folks have some competing priorities that we should probably talk about. I mean I would assume it's common.

Chuck Riley: Absolutely—I talk to clients and they—even now, as people have gotten older, people have started having families later in life. You have clients who are planning for college and planning for retirement and maybe starting retirement. How do you juggle those priorities? If you don't have a plan, if you haven't been looking at your situation all along, when you get to that point where you have to reach that crossroad, "What do I do next," it becomes that much tougher to make the decision. I think that's one of the critical things is when you get started and you start to plan it and go through the years and you get accustomed to having a plan and kind of following a plan, when you get to the point where you have to make those kinds of decisions, it's that much easier. It's not always easy but at least you have a basis to go on.

Earl Harley: I think nowadays, almost everybody has multiple things going on. It doesn't surprise me that most people say, "Retirement," because everybody wants to do that at some point. But it's a whole bunch of other things that go along with it. I think that might be part of the problem why a lot of people don't decide to go much further than the initial stage because it can be daunting. They say, "Well, I've got my kids going to school. Well, I want to save for retirement, and I also want to get out of this house and find a new one. Maybe I want a boat. I'd like to do a vacation." Then it gets overwhelming and they just throw their hands down and that's it.

Rebecca Katz: We actually have a question just in from Dwayne in Minneapolis. Thanks, Dwayne. He said, "Is having a plan to save and invest as much as possible during your working life enough?" You could interpret that a lot of different ways. Is it just thinking about investing and saving? Are there other things that you should be considering as you're putting together your financial plan, and how do you think about what happens after your working life?

Mary Ryan: I think a financial plan is a lot of different things. It isn't just saving "X" amount of dollars and the stocks and bonds and all of that. It's really looking at your estate plan, of looking and making sure that you—if something happens and you cannot act, who's going to take care of you? Who's going to be able to take care of your spouse? Who's going to take care of the kids?

There's a whole lot more that goes into financial planning than just the stocks and bonds—looking at your taxes. So it's a bigger picture, and I think that's something that's important too, to make sure you're always reviewing that, not just, "Here's my goal." Then when you retire, there's a whole other aspect of looking at what you need to think about, health care—things along those lines and how does that fit into your plan.

Earl Harley: There's a whole bunch of stuff out there whether we're talking about stocks, bonds, cash—which I wouldn't even consider an investment per se—but that's definitely something that everybody should think about because you're not going to want to tap into your 401(k) plan for something you need to pick up at the store next week. So you need to have some of those dollars available in addition to something for 10, 15, 20 years down the road as well which you'd probably invest quite a bit differently than for that purchase next week in the store.

Rebecca Katz: Well, speaking of stores and spending and as one of our Twitter followers, "Dreadlock," has noted. We started with the "B" word, "budgeting," and we have a question in from Eugene in New York, who says, "How important is a detailed budget for a financial plan?" I know I cannot stand doing it. I know. I work here. I know it's important to be tracking things on a monthly basis. I just can't do it. Do you have to start there with keeping track of every single thing you buy?

Chuck Riley: That's one of the common misperceptions, that you have to have it down to every penny, and that's one of the kind of the comforting things to me about financial planning is that you can deal in kind of ballpark estimates. What I tell clients is that, so number one, you have to come up with a method that is good for you. So whether it's putting pen to paper, whether it's using something like mint.com, if it's taking your receipts and putting them on top of the bureau at the end of the night and then putting it on a spreadsheet, whatever it is, you've got to at least put something into place. It doesn't have to necessarily—don't worry about it if you don't get every receipt, if you don't get every ATM card. Life gets in the way.

Just the process of going through that and starting to pay attention to what's going out, where that money is going, it's going to change, and you'll get a feel for when you're maybe spending a little bit more, when you can save a little bit more. Don't worry about having a spreadsheet. I'm sorry, all the engineers out there and scientists that love the spreadsheets, they're very helpful, and if that's the way that works for you, that's fantastic.

But for the rest of us, I'm not a spreadsheet guy. We use a checkbook register and Quicken, kind of a hybrid approach. It's really whatever works for you, and it doesn't have to be overly detailed.

Rebecca Katz: When you're talking to clients about their investment plan, which I think is probably our primary focus here at Vanguard, do you just ask them for things like their monthly spending? What kinds of questions do we ask around spending?

Earl Harley: I'll ask whatever level of detail they're willing to go—in some people's cases, they'll be very general about it. I'll work with that. We can work with that as long as we're within a reasonable ballpark. If you've got more detailed information, so much the better because the more detailed it is, the better information I can then plug into my system and we can—if we see there's a red flag that pops up—we can more easily identify, but we don't have to have extreme levels of detail. We can work with generalities quite nicely. But at least in your head, you probably ought to have a good idea of where the money's going, coming in and going out. It may not have to be to the dollar, but you should have a good idea.

Mary Ryan: Not to be depressing, Rebecca, looking at things—but I do think that at some point, whether it's every six months, quarterly, really going through and looking to see where the money goes. It's funny, you go out and hit the ATM machine and you get $100 and the next thing you know, the $100 is gone, where'd it go? And I just recently with my own family, I went through and did the budget of where we were. The amount of money we're spending on food—we should all be as big as houses. I mean we are spending so much money on food. So I cleaned out the freezer.

Rebecca Katz: Unfortunately, Vanguard's headquarters are located next to a wonderful supermarket, so when you run in for milk after work, you walk out with a $100 bag of groceries.

Mary Ryan: It's amazing, isn't it?

Earl Harley: But it's true.

Rebecca Katz: It is true, isn't it? Our next question is from Chris in Houston, and Chris says, "What are some of the common mistakes that you see people make in their attempts to achieve their financial goals?" Are there maybe one from each of you that seems to be very common? Do you have one Earl?

Earl Harley: I think one of the biggest ones, and I've kind of alluded to it before, is they start to get intimidated but they have the greatest intentions, but then they get sidetracked, and they figure, "I'll just get back to that later on," and put it off to the side, and it may be years before they ever get back to that again. But getting sidetracked and putting it off is, I think, one of the biggest hurdles people face.

Rebecca Katz: So what's your tip for coping with that? Do you set up once a year around Christmastime or is there some trick?

Earl Harley: With my clients, we have an annual review at least, and we go over everything from soup to nuts—to the level of detail they're interested in. If they tell me, "Earl, I really don't want to go through this. Nothing has changed from last year," then that's all good and well. But, otherwise, we'll be more than glad to go over line item and take a look at every level of detail that they want to go into.

Rebecca Katz: What's a mistake that you see often, Mary?

Mary Ryan: When it comes down to prioritizing your goals and what you're looking for, so when you look at that, sometimes you'll say, "Well, my child's getting ready to go to school in a couple of years, going away to college. I've got to get on the stick here and start saving some money." And all of a sudden, they stop saving for retirement. They don't look at it and realize, "Okay, maybe there's another way. Maybe I haven't been diligent enough saving for college. Golly, do I really want to take away those good years of saving for myself, and maybe I could borrow for college, have another plan." So it's really getting that priority down. You want everything and it's just very difficult.

Chuck Riley: What do you say no to?

Rebecca Katz: What's one that you see often?

Chuck Riley: I think not preparing for the unexpected. This gets to an emergency fund. Folks, they don't like to keep a lot of cash around or something, but from my perspective, cash is invaluable, and to your point, Earl, it's not an investment. I tell clients it's an insurance policy, having six months, three months of emergency reserve for expenses—if you lose your job, you get sick, if you need to put a new roof on. I once talked to a client who—he was in risk management. This is what he did for a living. He said, "Let me tell you—whatever you think can't happen, can happen and often does." I think knowing that and planning for that, so that way when an emergency comes, you're not putting it on a credit card. You're not using your home equity. You're not going into debt to fund that, which can really set you back, and then you're paying more interest. I think really emphasizing having an emergency fund—I think that that's something that's critical.

Rebecca Katz: So between three and six months is—

Chuck Riley: Yeah.

Mary Ryan: They say that—there was just a study that came out that because of the economy and all that, people have been out of work a lot longer than they expected and people think, well, I'll just put it on a credit card because it won't be for very long and all of that. The next thing you know, you're running up some incredible debt, certainly at a time that you can't afford it.

Earl Harley: I've even seen numbers as high as two years depending on how conservative the individual is or what their prospects may be. But definitely have some kind of cash on hand. Six months, I think, is a real good starting point, and if it doesn't cause any other problems, then maybe even longer than that, but definitely six months is a good starting point.

Rebecca Katz: We have another Twitter question in from "wheresnat." I love saying these handles, these Twitter handles. "Besides your 401(k) and IRA, what else should be considered for long or short-term savings?" You know, we talked a little bit about emergency fund and cash or a money market might be appropriate. What are some other things outside—401(k)s and IRAs are both retirement accounts that you really shouldn't be tapping until you're 59½ or you'll get penalized—so where else should you look?

Earl Harley: They're great, and especially the 401(k) plan, at least up to whatever your employer is willing to match. But you don't want to have all of your money tied up in something that the government's going to limit how often you can access it. It's always good to also have some monies—after-tax monies—available as well. You can't completely neglect that. Maybe the bulk might be in these other plans because the retirement plan is great and the contributions from your employer are great too. But that should not be exclusively it because you need to have something that you can tap into prior to 59½ without a penalty, and that's likely going to be it—that after-tax money.

Mary Ryan: And I think that setting up, just like in a 401(k), you have money that goes in automatically. There's no reason you can't set up a taxable account that's going to be going into, perhaps mutual funds, things like that that's set up just like a 401(k) is, but it's an automatic. And for those, going back to that ugly "B" word, that those that don't really like budgeting, there's no reason you can't sort of say, "Here's my goal. This is how much it's going to cost. This is what I need to do," and set up an automatic savings plan, and then after you've satisfied that, everything else is yours.

Rebecca Katz: So you're paying yourself first, I think we say.

Mary Ryan: Exactly. Exactly. Then you can spend what's yours, so that's also a little less painful.

"The biggest thing I can say to somebody is to just start. Sit down, promise yourself maybe this weekend you're going to sit down, you're going to write down and prioritize those goals, how much do you think you're going to need. Get a time frame on it—again back to that vision thing—see it, imagine what that goal is, but do it. That's really, really the key."

Earl Harley: One caveat I'd like to throw in there—if you are going to be investing like your 401(k), you have to keep in mind—this is one of the things that we do with planners here—you want to be tax-efficient about it because some of those investments that are well-suited for a tax-deferred account are not necessarily well-suited to an after-tax type of account. So you do want to be conscious about tax-efficiency as well.

Rebecca Katz: What types of funds tend to be more tax-efficient? Again, IRA, 401(k)—they're just different, really different types of accounting method that make them tax-deferred, but you can invest in mutual funds and in a taxable account, you can invest in mutual funds. But what types of mutual funds would be more tax-efficient for that non-401(k) or non-IRA?

Earl Harley: We wouldn't be Vanguard if we didn't talk about index funds.

Rebecca Katz: Funny you should ask.

Earl Harley: Stock indexes tend to be more tax-efficient than bond funds because bond funds, with the exception of municipal bonds, it's all taxable income. At least with a stock index fund, the turnover's low so the capital gains tend to be fairly low, and that's at a preference rate anyway. Currently, at least, under the tax law, the dividends are at a more preferred rate as well. That's a good starting point. Index stock funds are a great investment for a taxable account.

Rebecca Katz: If stocks are what you should be investing in based on your risk—

Earl Harley: If that's what you need to have in your investment. And in the tax-deferred accounts you can use some more tax-inefficient investments like these bonds we were talking about or maybe some actively managed stock funds or any number of other possibilities. That's just a starting point.

Chuck Riley: We're getting into the types of accounts—that gets into a financial plan. When we go through financial plans with clients, it's one of the things that we're focusing on. So if you're planning, right, and if you've never had a financial plan done, or if you've never had somebody look at your portfolio and be able to analyze it and say, "Do you have the right investments in the right accounts? Are there ways that you can be increasing your tax-efficiency?"

That's part of the planning process, right. It's not budgeting but it's coming up with a financial plan. It's still planning. It's how investors are successful, is having an idea. I would say, I would find that clients don't always understand that having stocks in taxable accounts is the way to go. "Why wouldn't I have it in my 401(k)? That's what I want to grow for the long term?" There really is a strong tax benefit to having stock index funds, and a financial plan can reveal that.

Rebecca Katz: Well, I think most of us tend to think about these things as separate things. I have my 401(k) plan through my employer, and I have the money that I'm saving on my own, and those two things—maybe I know I have to be 80% in stocks, but I'm 80% in that account, I'm 80% in this account, so all is well. You are looking at it more holistically.

Earl Harley: Much more holistically.

Chuck Riley: Right.

Earl Harley: And make the best use of the limited "shelf space" that you have. If you've only got so much that's tax-deferred, then utilize that space the best you can versus the taxable dollars or vice versa. Try to take the best advantage out of whatever type of investment vehicle that's available to you.

Chuck Riley: There's a lot of efficiencies that can be gained whether you're paying lower taxes or lower costs. And that's what I like to talk to clients about is maximizing the efficiency of the portfolio—the investments—making sure every dollar—you're not paying more in taxes than you should be, you're not paying more in investment costs than you should be. That takes planning, and it takes understanding what you're doing and why.

Rebecca Katz: Okay, great. Dawn from Houston—I'm just going to bring it up a little bit—and asks, "Can you describe the key elements of a good financial plan?" We have touched on a lot of things. We've touched on taxes, and we've touched on investments. Generally, what are the main pillars of a good financial plan? If you're talking to an advisor, what should you be looking for? Mary?

Mary Ryan: So when the pillars of a financial plan, and we did touch on this a little bit of looking at not only the stocks and bonds but also looking at the estate piece, your taxes, things like that. But if you're looking at a goal, and you're looking at hitting that goal, and what you need to do, and building your financial plan around that piece, you do need to realize, when is this goal going to happen? When do I need this money? What do I need and how much, and to be realistic with that number. I think when talking to a financial planner you need to be honest and I think that's huge—

Earl Harley: It's surprising that you have to say that, but that's true.

Mary Ryan: It's a really big deal because the better the information you give to that financial planner, the better guidance they can give you.

Rebecca Katz: What are people dishonest about normally?

Earl Harley: Expenses.

Mary Ryan: Yeah, their expenses, outside assets that maybe they don't share so that when you're building a plan, they have other monies elsewhere, and we don't know about it. If they've got debt, and they're not sharing their debt information with us, things like that. So the more honest people are, the better it is in building that financial plan. But you need to make sure that your investments are appropriate for your goals, that you are saving appropriately, and that, of course, as we were just saying, that you're being as efficient as possible.

Chuck Riley: I think it's not as much dishonesty; it's just not being aware. It really comes down to not always thinking about what you have and how it all works together. I think like you were talking about, they look at different parts of the portfolio in different ways which can work. Your emergency fund, you want that to be in cash. That's a separate bucket that you have for near-term spending and emergencies. But then looking at the rest of the plan and looking at it all together holistically and really—that's the thing—if they have a lot of assets elsewhere, if it's not all here at Vanguard, then they might have lots of paperwork they have to deal with. And then you get to the intimidation factor, "You know what? Just forget it. I don't want to deal with it. Let me just keep on going the way I'm going." It's overcoming that inertia.

Earl Harley: I think also, we've talked about the priorities and the goals and no one plan is going to be right for everybody because everybody's goals are different. Even if you do have, let's say the three major goals are similar for two people; their priorities on those goals may be completely different.

Everybody's going to be quite a bit—there's going to be some nuanced advice for everybody. But incorporating all these things that you mentioned is really crucial. But we have to focus in on that particular person, so what I tell Client one is not going to be the same thing as I'd tell Client two who may look in paper to be like the same people, but in fact, they're not.

Rebecca Katz: We started talking about spouses earlier, and we know how important it is to have your spouse at the table. We have a question from Jennifer in Kearney, Nebraska, and she sent this one in advance and I remembered it. She says, "How do you get a spend-y spouse on board with saving for financial goals?" Not that I have a spend-y spouse, but I'm sure this resonates with a lot of people. They have one spouse who's a saver, one's a spender, and you're not going to meet your goals if you can't agree on that. What do you tell them?

Earl Harley: I've got a client in Texas—I won't mention any names—but this individual is regularly calling me up and says she wants something else. How he reins that in—and it doesn't always have to be him versus her per se. Sometimes he's the spender, and I've got other clients like that.

Rebecca Katz: Sometimes it's a male.

Earl Harley: Exactly right. Trying to rein somebody in is a lot more than financial planning, I think. But if you can, if you—we like to show people in illustrated ways, the effect of going overboard and spending or even the effect that modest changes in your spending habits—the positive effect that a modest change can make. I think oftentimes people think, if I've got to make a change, it's got to be a big change. I've got to cut 10%, 50% out of my budget or something like that, and that will hurt.

But if you can show people the numbers and show them that even a modest change can make a big difference over the course of 20, 30, 40 years, that is very helpful. We talked in the beginning about bringing both spouses to the table so I can talk to both people and share that information with everybody, I think that's helpful.

Rebecca Katz: Are there questions that you find helpful when you're talking to spouses to try to draw that out and make sure everyone's on the same page?

Mary Ryan: We do—I do and I do try to talk to them. And again, the numbers are helpful, but I think a lot of times the silent spouse, the reason they're silent on this is they really don't care about the numbers. But I think painting the picture for that silent spouse, a painting what the future can be and where things are and how a simple change can make a big difference—that's something I found to be very helpful. And I have a situation with a client as well who, she is, I mean, talk about keeping those numbers, boy she is really good at it. And he's, "Yeah, that's great," but he doesn't want to stop going to get his sandwich every day, he doesn't want to bring his lunch and all of that. But we've all started talking, and I realized what his hot button was; he wants to retire early. Great. Let's paint the picture of retiring early. What does it look like? What does that mean to you, and how are we going to do this together? And that has made a huge difference in him coming on board with us and being willing to give her the receipts so that she can put it on the spreadsheet and keep track of everything.

Chuck Riley: I think it's a great point. It's really finding out where that client is at and what their hot button is. You know, I would not recommend saying—if you're the nonspend-y spouse—saying, that's it, you're cut off, you know, and not just from a relationship standpoint, but because it just doesn't work. There's a reason behind—and one thing I love about money is that it ties into our behavior; it's a vehicle that we use for what we would like to do. And whether it's freedom or security, there's a reason that client is spending the way they do. Maybe when they were growing up they didn't have a lot. So now they have money, and so it's like, why would they restrict themselves?

But when you customize it to what is that client's really—what's their priority? And you start to focus in on that, all of sudden the light bulb goes on, and you start to get that buy-in. If you're that spouse, you had insight into your spouse that there's no way that we're going to have. And that's where you can really use us to leverage, to talk about the numbers. I love numbers because numbers don't, they don't lie; they tell the truth. They tell cold hard truth a lot of times, but if you can kind of couch it in a way and get it to where the other spouse comes on board more gently, you know, it can be a great success.

Rebecca Katz: So it's about finding the proper motivation and trying to get people on board. Well we have another tweet in from Becky who asks you if you have any special planning ideas for the self-employed. Thanks, Becky, for that question.

Earl Harley: Well, there are a number of different types of retirement plans that can be used. But again, the same thing applies; we don't want to put every dollar of your money in a qualified retirement plan. Certainly they want to talk to their accountant or tax professional about what type of plan and how much is suitable for this person. But that's definitely a start to look into those sorts of plans. But then also look at things non-company-related. Again, we have to talk about a savings account; you have to have that cash that we've been talking about, which is not going to be part of the SEP-IRA or whatever type of retirement plan that the company is going to be setting up. So virtually all of what we said applies. But in this case, now she's going to want to bring into the picture her accountant too.

Chuck Riley: I would argue that actually self-employed people are very equipped to be able to put together a plan because they've had to put together a plan for their business—a business plan—and you know, maybe that's what they do in their work, and they think, well I don't need to do that for my personal life, but really the same concepts apply: How much is going out? Where you going? What's the vision of your business? It's kind of the same thing; it's a lot of the same principles that you use in business. It sounds kind of dry, but it doesn't have to be, but when applying those things and those skills to your life and to your personal side of your finances, I think is a good way to go.

Rebecca Katz: I think it's great that Becky is asking this question because having some self-employed people in the family, they tend to put the business first. It's all about investing the business and growing the business, and you put yourself last, and before you know it, you're 60.

Mary Ryan: And you don't take anything out of the business. Everything's rolling into the business, and there's very little that comes back to the family or to you into the savings part. Self-employed people have some benefits that they can take advantage of for retirement planning, and savings, and things, but they—

Chuck Riley: You can save a lot more as a self-employed. Through a SEP-IRA, the contribution limits are higher, things like that. You can catch up if you're building your business and you didn't get the chance to save early on. Once your business starts to really thrive, you can catch up pretty quickly.

Mary Ryan: But it really is getting a good accountant to do that.

Earl Harley: Then one would think the person who is qualified to run that self-employed business already has a leg up on other people because they've exhibited this sort of self-discipline that is necessary to get this done over the long haul. So they're probably—she's probably well on track to be able to do it, but she does want to talk to somebody about that because there are some advantages that she might be able to take advantage of.

Rebecca Katz: Is it just your accountant, or are you using an accountant and a financial planner together? What's the best practice around that?

Mary Ryan: I would recommend doing both because I think that it's always good; one sort of always checks the other too, with ideas and thoughts, and they can sort of share those ideas, and, again, I often say to my clients, I'm not an accountant. I have a CFP®, I have the accounting piece, but that's not what I do every day. I do more of the big financial planning and looking at the investment piece and bring in somebody; estate planning and CPAs and all of that.

Earl Harley: Yeah and in our area, we've got the experience of other individuals here at Vanguard that we can tap into, so it's amazing. All of them—all the people that we work with are very intelligent people, but these individuals who specialize in certain things can really bring a wealth of information that you wouldn't necessarily even think is an opportunity. But when they're looking at those things, a really qualified CPA or a very qualified financial planner can see opportunities that the average person looking at the same thing would never imagine.

Chuck Riley: And an accountant can really look at their individual situation and go through. They have the tax history. If they've been working with the business, they can really get a very good sense of what their individual situation is. I think here at Vanguard, the scope of our service, we do tend to take more of a holistic look, but when it comes to the specifics related to taxes or estate planning, things like that, it really is to the client's benefit to find somebody who can take a more detailed look at that specific area of their lives.

Rebecca Katz: Okay, great. Well, you would be surprised but it's—we've been talking for 30 minutes so we're going to try to go through some of these questions more—a little bit more rapid fire. We have a question from Allison who says, "What is the most important thing I could be doing to plan for my financial future? Pay down my student debt or invest?" And I know student debt is a ballooning issue for our clients, for their children. So what do you do first? Is debt always a bad thing?

Mary Ryan: It's a hot topic these days. Everybody's talking about the student debt that's out there and how do young people deal with that. And I think that, again, it comes down to prioritizing, that you want to make sure that yes, you need to pay down your debt, but you also need to have that emergency fund; you also need, if you can take advantage, if you're working, and you can take advantage of having, putting some money away, perhaps into a 401(k). There is good debt and there is bad debt. There's no question about it. We look at interest rates, we look at like mortgages are maybe not a bad debt because you sort of get a write-off there and you're building equity. Credit cards are not a good debt. But it's prioritizing where you are. You don't want to sacrifice everything to pay off that one debt because then you're not going to be able to have that emergency fund.

Rebecca Katz: But isn't there an issue with student debt where that is not forgivable if God forbid you had to go through bankruptcy; you still have to pay off your student debt?

Mary Ryan: Yeah so again, it comes back to having that emergency fund though still that if something does happen to make sure you are prioritizing because you do need to pay it off. But you just need to—

Chuck Riley: Yeah I mean, I would say, when I talk to young folks, an emergency fund is key, and when you're young and starting out, maybe you don't need three to six months of expenses, so maybe make it $1,000 just so that when your car breaks down or you know, you have the money there, right. And actually, I don't like debt. I think when I talk to clients who don't have debt who are in retirement, they are a lot more—they have a lot more peace of mind than folks who do. And student loan isn't like a pet you keep around just cause they say, "Well you only have to pay this certain amount a month for 20 years." It doesn't mean you have to stick to that schedule. My thought is, pay it off; focus on it, get a plan together, and figure out how you're going to pay it, and whatever it is, set a time frame, say, 5 years, 10 years, don't let it go to the 20 years. But to get to that—to pay it off sooner—you're going to have to have a plan so you've got to come up with something. How are you going to do that?

Earl Harley: And then also I think it's important to know—we look at numbers. Of course, behavioral finance comes into this too. We look at interest rates versus potential returns in the markets and such, and then there are going to be those who just really feel so uncomfortable about debt that they just can't—this applies to student loans, this applies to mortgages, car, whatever. There is a value to having debt or having no debt that we really can't put a number on, and that's different for everybody. And if she's one who loses sleep over it, then maybe she wants to focus more on that than perhaps some of these other things; that's certainly up to her. There's no crime in not having any debt at all. No debt is great.

But then there's also those people who would live the Spartan lifestyle and their bound and determined to eventually, they're going to break free because if they can't even go out and buy their cup of coffee because they're so strapped to the budget, eventually they're going to fall off the wagon, if you will, and then they're doomed to fail that way too.

Rebecca Katz: Well, in keeping with this theme, we have another question and this is from Jessica who's in Philadelphia, and she says, "In general, is it better to pay off a mortgage? Is that a good financial idea, or is it better to make mortgage payments and invest that money elsewhere." And I don't know if interest rates play a role in this because we're in a fairly low-interest-rate environment right now, so it's not free money, but it's much lower than when I had my mortgage.

Earl Harley: Absolutely.

Chuck Riley: We were talking about this. We thought that this might come up, and I think it was one of the questions. And I'm going to argue anytime that you have a mortgage, anytime you take a loan, the thing that folks say, "Well interest rates are so low, the stock market can easily beat 3%," right. But they don't always take into account the risk. Sure, the stock market can beat 3%, but there are plenty of times when it goes down a lot more than that.

Rebecca Katz: Is that the decision between what you're paying in interest and what you might make in the stock market?

Chuck Riley: That's what I think clients tend to look at, and a lot of financial planners and accountants will say, you don't want to lose that tax benefit. I'm a big believer in—it's an art as well as a science—if you're uncomfortable with that, I don't care what the interest rate is; pay it off. The sooner that you get it paid off, the better you're going to feel and that's going to lead to better financial decisions down the road. If you're not uncomfortable with risk, and you want to keep a mortgage but want to put money into the market, that's not an unreasonable thing to do. But there's no guarantee that just, hey, because interest rates are so low that the no-brainer decision is to put more money into your investments and you're going to be better off.

Mary Ryan: And I think you're right. There's no guarantee to that, but we also still have to keep focused on all our goals, and so that's again that prioritizing of making sure, yes, I want to pay my mortgage off if that's where you're comfortable. But you still want to retire, and you can't live off your chimney. You need to have money to retire so it's sort of that balance.

Chuck Riley: That's true. It's a balance, yeah.

Mary Ryan: You know, of where you're comfortable.

Chuck Riley: It's an art as well as a science. That's one of the amazing things to me about financial planning is that there—I always used to think that it was more clear-cut. But there really is a lot of—you customize a plan. You can have the same investment portfolio, but customize it to your situation. That's how you customize. You can use the same funds. The way you customize it is through your own situation.

Rebecca Katz: Sounds like that conversation is really important to really understand your goals, your mental state, and who you are.

Earl Harley: Everybody's different that way, so there are those people who can sleep extremely well at night just looking at the numbers and saying, "My portfolio is doing better than what I would be paying for the next 30 years on my mortgage." That's great. But there are those people who know they've got hundreds of thousands of dollars in a mortgage hanging over their head, and that just kills them at night. There's no crime in not having debt either. So neither are bad options. The bad option is just going out and spending the money on something else. So as long as it's one of those two options—invest or pay down the mortgage—neither is a bad situation. We look at numbers here, but there are certainly other things than just numbers to be looked at.

Rebecca Katz: Well, in terms of rules of thumb, we have another question on Twitter from Christine. She says she's 23 years old with her first salary-paying job. So congratulations! It's good to be employed. What should I do as a beginner of her life savings? How can she—what are the first steps she should take as she is a newly salary-earning employee?

Chuck Riley: Emergency fund.

Rebecca Katz: Emergency fund?

Chuck Riley: Sure. Yeah. Yeah. A thousand bucks.

Earl Harley: I was thinking two-fold—the same day she needs to set up both things. She gets a savings account set up and she looks into what the retirement plan is at work, and get something happening automatically. Direct deposit to the bank, direct deposit to your 401(k) plan, or whatever the retirement may be, up to whatever her budget can afford, and probably it's tight at this point, but still get both of those started probably even the same day.

Chuck Riley: It doesn't even matter how much. Whatever that amount is, get into that habit, and you'll be surprised at how little that you miss it just putting some money away.

Rebecca Katz: Well, isn't a good rule of thumb is—we talked about this a little bit earlier—if your company offers a plan, like a 401(k) plan or a 403(b) plan, often they offer a match, which is essentially free money from your company. So isn't that a good—if you're nervous about starting—save up to that match.

Mary Ryan: And then every year because I'm sure she's going be very successful when she gets her increase in salary to make sure she also increases her retirement plan contributions as well. And then starting to look at other goals that she may have, you know, she's got her emergency fund now, and then looking at maybe buying a house, putting some away there, things like that. But making sure she does review it every year.

Rebecca Katz: All right. Our next question is from Janet in Fredericksburg, Virginia. This is a good question. She says, "How many financial goals are too many? If you think about it, you're saving for retirement, college, down payment for a house, a new car, next year's vacation. How on earth would you prioritize all of those?" So is there a—

Mary Ryan: This goes back to Earl with her being overwhelmed.

Earl Harley: Everybody's got lots of goals; however, they all don't have to be competing goals. I mean you could have a savings for short-term things. You don't have to necessarily break out everything that you're going to have a separate savings vehicle for vacation, a separate one for the car, a separate one for this. You can have kind of more general things than that: the things that I'm going to spend in the next five years, the things I'm going to spend in the next ten, etc. You can simplify it out that way if you like. I think that's one way to handle it. I'm sure there are other ways to do it, but when you start looking at each one, that's when you get overwhelmed and you throw your hands in the air.

Mary Ryan: And there's certain ones that you really need to accomplish. I mean we all want to retire one day, and we'd like to send our children to school and things like that. The vacation, yeah we want to go on vacation, but maybe that's one that we sort of say okay maybe it's not the really big vacation; maybe it's a smaller vacation. So there's looking at which ones do I have to do and which ones, you know, we'll see, and then putting the money aside accordingly once you start looking at it that way. But not getting overwhelmed and not doing anything is probably a very big piece to that.

Chuck Riley: Yeah. And it's a matter of balance of really—I think that there are times where you say—you don't want to always deny yourself a vacation. You have to take that into account because doing those things actually help you feel better about what you're doing now, because if you're always just looking towards the future and being intimidated about how much I have to save for retirement, how much I have to save for college, it can be intimidating and derail you. So—

Mary Ryan: You're not having any fun.

Chuck Riley: You're not having any fun. That's right, and that's why we have money anyway. We want to have fun. We want to live the lives we want to live.

Rebecca Katz: That's great. So we've talked a lot about the importance of this conversation, the importance of getting started. Pete from Woodstock, Georgia, says, "Can you give me some advice on hiring a financial planner?" Obviously, we would love it if he would hire us, but if you're out there and you are looking for a financial planner, what are some key things to be asking, to be looking for, certifications?

Earl Harley: I think we've got a vested interest here. We're all Certified Financial Planners™, and I think that's key. You want to make sure they are qualified, and the designation tells you that they have at least met some minimum standards, some very high minimum standards. So that's a good start. And the personality has to work too. So you can interview multiple people before you decide on one. You can speak to several people, and the one that feels good that you have a good rapport with. Ours is something of a relationship business. If you feel that you're not going to be able to have that relationship, that connection there, then perhaps the next person, you might do better with that person. But definitely you have to feel some kind of relation because you're going to be divulging a lot of information that you may not have divulged to anybody else. So you ought to feel comfortable about the person that you're going to be doing that with.

Rebecca Katz: What about fees? Are there things you should look for there?

Mary Ryan: I was just going to say there's a lot about the comfort and feeling good about it, but at the end of the day the cost—I mean, again, the Vanguard thing—but I mean the cost is so important because I'm sure they're maybe doing a great job, but right off the bat if they're charging you 1%, 2%, right there you're going to be behind just what the market's doing, and that's a really, really important question and for people not to be afraid to ask that question. I think sometimes it's a little uncomfortable to say, "So how much do you charge?" But don't be afraid to ask that question.

Rebecca Katz: And there are different ways of charging—you just said 1% or 2%. That's on whatever you're bringing to them, so if you have $100,000 they take 1% off of that. What are other methods?

Mary Ryan: And then you look at the funds, if they have mutual funds, how much are they charging on their mutual funds. If they're trading stocks, are there extra fees on trading stocks, things like that. So they may start off with sort of a "we charge 1% overall for what assets you have here." But ask, are there other charges, and for example, on your funds, on your stocks? Really look at it, be very specific, and ask them to break it down. I think that's really, really important and people will come in to us and say, "I didn't know that. I didn't know I was being charged not only the 1% but then also maybe—"

Earl Harley: The front-end load, the back-end load.

Rebecca Katz: Loads are commissions on certain types of mutual funds.

Mary Ryan: Yeah. So make sure that you're—don't be afraid to ask that question.

Chuck Riley: Yeah, it's important, and again that relates to in terms of how—I think you want to have a sense that they have your interests at heart, right? So in the questions that they ask, and that's the fees so they're not pushing products. They're really looking out for your best interests, and that, to me, I think is the most critical thing. They'll ask questions about, "Well, do you have a plan?" Learn about your goals, who you are, and then they'll start to match what they offer to what your goals are. I think that's key and then the fees tie in there because if they're after their own interests, then they're going to be pushing certain things that are going to benefit them and not you.

Rebecca Katz: We have another question from Twitter. I'm not quite sure how to interpret this one, but it's from "moshek258," thanks. "Does it make financial sense to dip into an equity line to invest in an IRA?" I'm assuming it's like an equity line of credit. What do you think?

Earl Harley: I wouldn't recommend my clients do that just because—let's say we're talking about home equity line—I don't want to put my home on the table at the expense of my IRA. My rate can go down in value. Hopefully in the long run it'll go up. But I don't want to put my home in jeopardy because of an investment. I'm not a big fan of that.

Mary Ryan: Yeah. It goes back to what you were saying that right now home equity lines of credit are generally very low, so again, I think people are looking at this and saying, "Oh well I have an equity line of credit, and they're only charging me 2%, 3%. And then I'm also getting a small tax deduction, perhaps, because it's an equity line. So if I do that and I invest it, I can get more money in the market." And it's like robbing Peter to pay Paul. You're not making, you're borrowing, which again, to your point Chuck, I know you're just like, "Oh don't do that."

Rebecca Katz: Chuck does not like debt if you haven't noticed.

Mary Ryan: Yeah, Chuck does not like debt, so don't do that.

Chuck Riley: No, I agree, because you're really not saving, you're not. You're using leverage to fund your retirement, and if that's just me, if you're thinking—a lot of folks look at their home as an ATM machine or something. There are plenty of examples certainly that prove that it's riskier than you might think.

Rebecca Katz: We have another question. This is more specific about Vanguard. It's Adam from Encino, California, who says, "Is there a way to have Vanguard look at my choices and give me some advice on how to optimize my investments or fix any problems that you see as professionals?" So without this sounding like a Vanguard advertisement, what do we offer for our clients?

Earl Harley: Well, we've got a number of different options. There's online options available. The first thing, check our website out. We've got a lot of great tools, no cost to that, but also there are individuals like us that you can work with on an ongoing basis or on a more point-in-time sort of basis, do a checkup, if you will, or to manage it ongoing. There are things in between too, so there's certainly something out there for everybody.

Chuck Riley: I would look at Portfolio Watch on their accounts that they have. If they're online, if they're registered on vanguard.com, there is a tool. It's probably one of the least-known tools out there. It seems like whenever I talk to a shareholder, they aren't aware of it, but it's called Portfolio Watch or Portfolio Tester. It gives you an X-ray vision of your portfolio, right. I'll let you in on a secret. This is the tool that I use when clients come to me and they don't have a financial plan or a document, that's the tool that I use to analyze their portfolio. So they can do it on their own, and it will tell them are they overweight in large-cap stocks, mid-cap? Do they have enough international? Do they have the right bonds? It's a totally free service, totally free tool. In a lot of cases, there's a tool where you can test changes. If you're thinking about putting money into a certain fund, how will that adjust your allocation? That's a great tool. It's the same one that we use, but you still need the value of a planner—

Rebecca Katz: I was going to say, but just to be clear, that's just looking at what's in your account, that you don't have that conversation about goals if you're using an online tool.

Chuck Riley: Exactly. You don't get the human element that the planners bring to the table.

Rebecca Katz: And it's also not going to look at assets that aren't at Vanguard.

Chuck Riley: That's true. It can though. It can if you add your outside investments in the Balances and holdings page, it can look at everything together. So, yeah, it's a fantastic tool.

Rebecca Katz: Great. We have either aspiring business owners or self-employed folks. We have another question saying, "I'd like to start my own business one day. Are there practical first steps to prepare financially?"

Earl Harley: Even more than the average person, you've got to have some kind of plan and probably a Plan B and maybe a Plan C too. Make sure you've got some emergency cash on hand, certainly something because there will be dry spells, and you don't want the business to fall apart when you hit a dry spell. You want to be prepared for that sort of thing, especially as a small-business owner. If you're on your own, you need to be prepared for those dry spells as they come, the downturns in the market. So have a long-term plan and some short-term things as well ready.

Mary Ryan: The good thing with being a small-business owner, you're taking on more risk, but you also have a greater chance of more success. So it's like anything in life. If you take on more risks, chances are you could also reap the benefits from it. But when taking on more risk, just as you were saying, you need to be prepared. So besides the business plan, it is planning for "what ifs" because they do happen.

Chuck Riley: I think in starting slow, so come out where you don't think that you necessarily need to buy the storefront. Now, if you're in a business where you need a lot of equipment or things like that, to do that you're going to need resources. But there are plenty of small businesses that started out on a card table in a living room, and I think looking at your situation, how can you start it cost-effectively? And run your idea by lots of different people, so you don't want to get confirmation by us where you think it's a great idea. You really want to run it by lots of different people to see what tests the merits of your business idea and what kind of growth potential there is.

Rebecca Katz: Great. Well, you're not going to believe this, but we are almost out of time. So we have a ton of questions that are still coming in, and we obviously didn't get to all of those, but hopefully we can address them on our Facebook page. But I would ask, maybe before we leave, each of you if could share one tip, one thing that you hope that viewers will take away about the importance of a financial plan, something they can do right now, something like that. Chuck, you want to start?

Chuck Riley: Yeah. I'll say this applies to whether you're in retirement or whether you're saving for retirement, but I think keeping track of what you're doing, of what you're spending. Again, not that you have to have a detailed list of expenditures, but I was recently talking to a client who wasn't aware of all they were spending. And they were all of the sudden off track, and it was a surprise to them because they had never really looked at what they were doing. So I think it doesn't have to be a formal type of thing, but find out what's a good fit for you, and just have an idea of what's going out so that you can really make good decisions when it comes to those spending decisions.

Mary Ryan: I'm going to circle all the way back to Colette, our very first question that we had. The biggest thing I can say to somebody is to just start. Sit down, promise yourself maybe this weekend you're going to sit down, you're going to write down and prioritize those goals, how much do you think you're going to need. Get a time frame on it—again back to that vision thing—see it, imagine what that goal is, but do it. That's really, really the key. So going all the way back to that very first question.

Earl Harley: I think they have to look at it not so much as a chore, as you mentioned, I believe it was, you're paying yourself. You're paying for what you want to do 10 years, 20 years, 30 years down the road. You're doing that right now. So do that. Now it may not be comfortable right up front, but we're not talking about making major change right away. But make some kind of change. Take that first step and it will definitely—the dividends will be down the road. It won't be today, but it definitely will help pave the way for 10, 20, 30 years down the road, if that's what we're looking for.

Rebecca Katz: Okay, great. Well, this has been a pleasure. I think I know what I'm doing this weekend. I'm looking at how much I spend at that supermarket. I really appreciate you sharing your insights, and I hope we'll have you back soon.

Earl Harley: Thank you very much. Appreciate it.

Mary Ryan: Thank you.

Chuck Riley: Thank you.

Rebecca Katz: So from all of us here at Vanguard to all of you watching, thanks so much for tuning in and for all of those great questions and great tweets. We will be sending out a replay of the webcast and excerpts from this webcast in just a couple of weeks. When you go to shut down your browser, you should see survey pop up. Again if you don't see it or if you are having some problems see if your browser is at 100% visibility, zoom, and we would really appreciate your insights, your thoughts about tonight's webcast, and also any ideas you have for future topics. So once again thanks for joining us and we will see you next time.

Disclosures

All investments are subject to risk, including the possible loss of the money you invest.

For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.

When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

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Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

© 2014 The Vanguard Group, Inc. All rights reserved.

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