By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/
If you have turned on the news, you probably have heard and re-heard reports on two events: the horrendous BP oil spill and the, newly passed, Financial Reform Bill. While I wish I had insight on how to fix the oil spill, I do have a few thoughts about the Reform Bill that was passed Thursday, July 15th.
So, what is in this Reform Bill?
Jill Schlesinger, author of "The Financial Decoder," and contributor to CBS' Moneywatch.com, wrote an article on June 25th, using with layman's terms, what the bill can and cannot do. She states, "the bill probably won't prevent the next crisis," but it will help consumers in some ways.
For example, there will be a new Consumer Financial Protection Bureau, which will help consumers by moderating the credit card and house mortgage industries. According to the Senate, the new Bureau will "finally [be] a watchdog to oversee financial products, giving Americans confidence that there is a system in place that works for them – not just big banks on Wall Street."
Schlesinger says in another article about the new Bureau, "The new rules will prohibit mortgage brokers from steering customers into more expensive loans for a commission and will ban no-documentation or "liar" loans. It will also make credit card statements more readable and transparent, allowing consumers to more easily compare products."
She also notes where the new Bureau will not protect consumers in all things, namely auto dealer supervision and addressing the fiduciary standard: "Although the new consumer rules are a step forward, there are some noticeable omissions. During negotiations, two important consumer measures were left out: the oversight of auto dealers and the fiduciary standard. I'm particularly upset about the later, which would have made it law for financial professionals to put their customers' interests first."
I agree with Schlesinger about these omissions, namely about the fiduciary standard. We work very hard at Stewart Financial Services to address our client's needs first. There are many planners and institutions out there who base their financial advice simply on what funds would give them the biggest commission, or return... regardless if it's a good fit for their client's financial goals or dreams.
The SEC has been delegated to take care of an umbrella fiduciary standard for all financial advisors. We hope to see progress on this front, hopefully, within 6 months from now.
If you have a question about what the fiduciary standard is, please click on the orange button below. Stewart Financial Services is proud to follow all these guidelines for our clients' financial well being.
Also, if you have further questions about the Financial Bill Reform, you can click here to view Senate.gov's complete copy of the bill, or, as always, feel free to ask me. I feel the Consumer Financial Protection Bureau is a good step in the right direction... let's just keep making these steps!
August 29, 2010
August 26, 2010
How Long Will My Money Last?
By Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/
Dear Bert: I have read in various publications that the safe withdrawal rate from an investment portfolio during retirement is around 4% if you want your money to last. Could you please comment?
=====================================================================================
While I recognize that the 4% withdrawal rate has become the standard wisdom in financial planning, I respectfully disagree. Keep in mind that most financial planners are actually investment managers, and so minimizing the withdrawal rate keeps more assets under management for them, and correspondingly higher fees.
It seems to me that a withdrawal rate must take into account the after-tax return to the client. This is highly individualized, so I don't think you can know this unless you are intimately knowledgeable about the client's tax situation. It also focuses attention on the actual tax efficiency of the portfolio. Because Functional Asset Allocation is very tax efficient, I am able to keep almost all my clients with under $3 million in their investment portfolio in a 15% marginal tax bracket. This obviously impacts their appropriate withdrawal rate.
Most financial planners figure that a balanced portfolio in retirement with 60% interest earning and 40% equities will earn ~7% over a 15-20 year period. This is historically true, and is the number I use. But then they assume an 'inflation rate' of 3% and in one way or another come to the 4% withdrawal number.
I disagree that the inflation rate is the driver in retirement. While inflation may occur in general, the overall rate has little relevance to the actual rate an individual client experiences. The CPI (Consumer Price Index) is heavily weighted by education, housing, and medical costs -- none of which are significant to most retired people (especially with health insurance which most of my clients have, even absent 'universal coverage'). CPI may be meaningful to individuals who live at a subsistence level, but most people who have a financial advisor are affluent to some degree. Just ask yourself: "When gas went to $4.00 a gallon, did that affect my living standard?"
The driver for most clients is not cost-of-living, but their "standard-of-living." During accumulation stages a client's standard-of-living generally increases at a higher rate than inflation, usually in tandem with increases in their earned income. So using CPI through the accumulation period grossly underestimates the amount a client actually spends. Upon retirement many financial planners say that clients only need 80% of their pre-retirement spending. I find that, at the beginning of retirement, clients need 100% of their pre-retirement spending.
Retirement spending normally remains flat for the first 10-20 years of retirement, as the standard-of-living stabilizes. It is critical that planners monitor client spending during the first few years of retirement. If standard-of-living increases at the same rate as when they were working, they will certainly end up living beyond their means. However, there is a selection bias I've noted with financial planning clients. They tend to be savers rather than spenders. Most often I find that a client needs permission to spend because they are so accustomed to being frugal and are afraid that they will run out of money during retirement.
Interestingly, the actual expenses needed to support a client’s standard of living starts dropping around their late 70's and early 80's. They have 'been there, done that, have the T-shirt.' They don't need to buy new cars, or to keep up with fashion demands. If we exclude gifts to charities and children, the amount they need decreases year by year, regardless of what the CPI does or how their portfolio performs. Recent studies published in the Journal of Financial Planning have corroborated this phenomenon.
Two other points about estimating withdrawal rates…
Many financial planners use software that depicts an inflated future as a single estimated percentage increase of past expenses. As you well know, I consider financial planning to be a process, not an event. Clients are generally very capable at adjusting their behavior. If there is a lean year in the stock market, they put off an expense until times get better. The software projections don’t show how smart clients can be!
Another point is that investment managers define their value as “return on investment.” However, clients tend to view supporting their lifestyle in terms of liquidity, or simply “will I have the money?”
As you know, our approach (Functional Asset Allocation) uses 15 year bond ladders with US Treasuries to assure that a client's pension, social security, and cash flow from the bond ladder is sufficient to meet their living expenses, including income taxes. This approach requires that we manage a client’s living expenses, preferably for 5+ years before they retire so we can determine the amount needed from the bond ladder. Note that Treasuries are not included in a portfolio to generate yield, but rather to provide guaranteed cash flow. "Safety Trumps Yield" is our mantra for this portion of the portfolio. We stress liquidity, not performance.
The 15-year span enables the stock market to fully cycle, so that the bond ladder can be replenished during prosperous years. It gives clients assurance that they will not have to change their life style for 15 years, so they don't fret over stock market down cycles and resist capitulating during severe market drops. Even over the past 'lost decade' we were able to rebuild client's bond ladders during the up years of the market cycle, e.g. 2003-2004 and 2009.
Finally, we also factor in savings of 10% of a client's income each year, which is reinvested in their portfolio. Obviously if clients save 10% each year (which they are accustomed to during their working years), they will by definition continue living within their means. This eliminates the need to estimate their life expectancy and makes Monte Carlo theory, which calculates the probability of future investment returns, largely irrelevant because they will never run out of money.
In summary, 'withdrawal rates' that are based on combating inflation are much too simplistic to determine a client's real annual cash flow requirements. The driver for income in retirement is not a ‘withdrawal rate‘ that depends on the Consumer Price Index, but rather changes in expenses needed to support their personal standard-of-living.
Franklin, MI
http://www.bertwhitehead.com/
Dear Bert: I have read in various publications that the safe withdrawal rate from an investment portfolio during retirement is around 4% if you want your money to last. Could you please comment?
=====================================================================================
While I recognize that the 4% withdrawal rate has become the standard wisdom in financial planning, I respectfully disagree. Keep in mind that most financial planners are actually investment managers, and so minimizing the withdrawal rate keeps more assets under management for them, and correspondingly higher fees.
It seems to me that a withdrawal rate must take into account the after-tax return to the client. This is highly individualized, so I don't think you can know this unless you are intimately knowledgeable about the client's tax situation. It also focuses attention on the actual tax efficiency of the portfolio. Because Functional Asset Allocation is very tax efficient, I am able to keep almost all my clients with under $3 million in their investment portfolio in a 15% marginal tax bracket. This obviously impacts their appropriate withdrawal rate.
Most financial planners figure that a balanced portfolio in retirement with 60% interest earning and 40% equities will earn ~7% over a 15-20 year period. This is historically true, and is the number I use. But then they assume an 'inflation rate' of 3% and in one way or another come to the 4% withdrawal number.
I disagree that the inflation rate is the driver in retirement. While inflation may occur in general, the overall rate has little relevance to the actual rate an individual client experiences. The CPI (Consumer Price Index) is heavily weighted by education, housing, and medical costs -- none of which are significant to most retired people (especially with health insurance which most of my clients have, even absent 'universal coverage'). CPI may be meaningful to individuals who live at a subsistence level, but most people who have a financial advisor are affluent to some degree. Just ask yourself: "When gas went to $4.00 a gallon, did that affect my living standard?"
The driver for most clients is not cost-of-living, but their "standard-of-living." During accumulation stages a client's standard-of-living generally increases at a higher rate than inflation, usually in tandem with increases in their earned income. So using CPI through the accumulation period grossly underestimates the amount a client actually spends. Upon retirement many financial planners say that clients only need 80% of their pre-retirement spending. I find that, at the beginning of retirement, clients need 100% of their pre-retirement spending.
Retirement spending normally remains flat for the first 10-20 years of retirement, as the standard-of-living stabilizes. It is critical that planners monitor client spending during the first few years of retirement. If standard-of-living increases at the same rate as when they were working, they will certainly end up living beyond their means. However, there is a selection bias I've noted with financial planning clients. They tend to be savers rather than spenders. Most often I find that a client needs permission to spend because they are so accustomed to being frugal and are afraid that they will run out of money during retirement.
Interestingly, the actual expenses needed to support a client’s standard of living starts dropping around their late 70's and early 80's. They have 'been there, done that, have the T-shirt.' They don't need to buy new cars, or to keep up with fashion demands. If we exclude gifts to charities and children, the amount they need decreases year by year, regardless of what the CPI does or how their portfolio performs. Recent studies published in the Journal of Financial Planning have corroborated this phenomenon.
Two other points about estimating withdrawal rates…
Many financial planners use software that depicts an inflated future as a single estimated percentage increase of past expenses. As you well know, I consider financial planning to be a process, not an event. Clients are generally very capable at adjusting their behavior. If there is a lean year in the stock market, they put off an expense until times get better. The software projections don’t show how smart clients can be!
Another point is that investment managers define their value as “return on investment.” However, clients tend to view supporting their lifestyle in terms of liquidity, or simply “will I have the money?”
As you know, our approach (Functional Asset Allocation) uses 15 year bond ladders with US Treasuries to assure that a client's pension, social security, and cash flow from the bond ladder is sufficient to meet their living expenses, including income taxes. This approach requires that we manage a client’s living expenses, preferably for 5+ years before they retire so we can determine the amount needed from the bond ladder. Note that Treasuries are not included in a portfolio to generate yield, but rather to provide guaranteed cash flow. "Safety Trumps Yield" is our mantra for this portion of the portfolio. We stress liquidity, not performance.
The 15-year span enables the stock market to fully cycle, so that the bond ladder can be replenished during prosperous years. It gives clients assurance that they will not have to change their life style for 15 years, so they don't fret over stock market down cycles and resist capitulating during severe market drops. Even over the past 'lost decade' we were able to rebuild client's bond ladders during the up years of the market cycle, e.g. 2003-2004 and 2009.
Finally, we also factor in savings of 10% of a client's income each year, which is reinvested in their portfolio. Obviously if clients save 10% each year (which they are accustomed to during their working years), they will by definition continue living within their means. This eliminates the need to estimate their life expectancy and makes Monte Carlo theory, which calculates the probability of future investment returns, largely irrelevant because they will never run out of money.
In summary, 'withdrawal rates' that are based on combating inflation are much too simplistic to determine a client's real annual cash flow requirements. The driver for income in retirement is not a ‘withdrawal rate‘ that depends on the Consumer Price Index, but rather changes in expenses needed to support their personal standard-of-living.
August 22, 2010
Your Financial Life Taking Off
By Robert Schmansky, CFP®
Franklin, TN
http://www.nfa1040.com/
Originally published as 'Financial Beginnings - Taking Off' on 8/9/2010 at the Financial Planning Association's All Things Financial Planning blog.
This is the 3rd installation in a 3-part series.
This is the third and final blog in a series for those in the beginning stages their financial lives, and the pitfalls, learning, and strategies at each stage of starting out. Previously, I observed the potential for a lost generation of investors that I see mostly in those who have made it past the first few stages of their financial lives; mainly, those who have begun to amass significant savings, but do not have the fundamentals in place to maintain solid financial behaviors. It is this stage that my blog covers today.
This stage is when your financial life starts to get interesting! The fluctuations in accounts are more than you are able to save. Previously, the activity of saving muted the decline brought on by down markets. Now, a daily shift can feel like a week’s worth of pay has come or gone!
Planning and making the right moves becomes critical. In this time of rapid accumulation, it is important that your plan goes beyond the basics and incorporates your taxes, insurances, and estate plan. In order to continue to develop, you will have to be smart about how you save and invest, as well as ignore the pitfalls that can come with accumulated savings:
Pitfall #1 – Investing vs. Gambling vs. Speculating. These are three distinct concepts, though we often think of them in the same light. Investing is placing money into strategies where the long-run returns and risks are relatively knowable. Gambling on the other hand involves almost no chance for gain and the losses are total. Speculation is short-term gambling based on knowledge. Investing offers the only real opportunity over the long-run to build true wealth.
Pitfall #2 – Cutting back. As your income increases, don’t stall out on savings. Base your savings on a percentage of your income, not an absolute number, and continue to increase your savings to a target of 20%.
Pitfall #3 – It’s the whole that counts, not just the parts. Your individual investments will vary, but that doesn’t mean you should jump from winner to winner, or judge the success of your portfolio based on the performance of individual accounts. Having pieces of your portfolio that decline while others rise is what it means to be diversified!
It is also at this stage where planning becomes essential. Bad ideas are magnified, and if left unchanged can result in not efficiently moving toward your goals.
Develop personal and financial goals. If you haven’t done so seriously yet, now is the time to start to plan out longer-term goals. Start 5 years out. If everything went the way you would plan, what would your life look like? Consider the longer-term. What is it you want to be doing in 10 or 20 years? Is it what you are doing today? If not, what are the small steps that would move you forward to this end to start to consider today? Write your goals and the action steps out and revisit them periodically.
Have a plan. Having a financial plan that includes a plan for taxes and maximizing advantaged accounts like your 401(k) or 403(b), as well as IRAs and Roth IRAs, is crucial. Developing a long-term game plan to meet your goals will keep you focused, and on track.
Ignore the short-term. I speak with many today weighing the value of long-term retirement savings versus putting their money in 2% savings accounts or paying off a 5% mortgage. In their minds, the short-run guarantees are worth more than investing for the long-run in a diversified portfolio. However, this is investing based on yesterday’s returns, and ignores what may happen tomorrow, and what has happened through most time horizons.
To summarize and bring this series of blogs back to the starting point of potentially losing a generation of investors, this weekend, I spent time reading issues of Kiplinger’s from the early 1970s. While many of our challenges today are different, it was incredible to read the same economic catch phrases and concerns from a different time period. The market crash of 1973-1974 was devastating to those that lived through it. For those with a 5, 15, and 25 year time horizon, it was one of the best times in nominal terms to be an investor, and stocks gave the only liquid way to maintain the purchasing power of your savings. It is just as critical today understand the pitfalls and strategies at any stage to start out and stay on a prosperous track.
Franklin, TN
http://www.nfa1040.com/
Originally published as 'Financial Beginnings - Taking Off' on 8/9/2010 at the Financial Planning Association's All Things Financial Planning blog.
This is the 3rd installation in a 3-part series.
This is the third and final blog in a series for those in the beginning stages their financial lives, and the pitfalls, learning, and strategies at each stage of starting out. Previously, I observed the potential for a lost generation of investors that I see mostly in those who have made it past the first few stages of their financial lives; mainly, those who have begun to amass significant savings, but do not have the fundamentals in place to maintain solid financial behaviors. It is this stage that my blog covers today.
This stage is when your financial life starts to get interesting! The fluctuations in accounts are more than you are able to save. Previously, the activity of saving muted the decline brought on by down markets. Now, a daily shift can feel like a week’s worth of pay has come or gone!
Planning and making the right moves becomes critical. In this time of rapid accumulation, it is important that your plan goes beyond the basics and incorporates your taxes, insurances, and estate plan. In order to continue to develop, you will have to be smart about how you save and invest, as well as ignore the pitfalls that can come with accumulated savings:
Pitfall #1 – Investing vs. Gambling vs. Speculating. These are three distinct concepts, though we often think of them in the same light. Investing is placing money into strategies where the long-run returns and risks are relatively knowable. Gambling on the other hand involves almost no chance for gain and the losses are total. Speculation is short-term gambling based on knowledge. Investing offers the only real opportunity over the long-run to build true wealth.
Pitfall #2 – Cutting back. As your income increases, don’t stall out on savings. Base your savings on a percentage of your income, not an absolute number, and continue to increase your savings to a target of 20%.
Pitfall #3 – It’s the whole that counts, not just the parts. Your individual investments will vary, but that doesn’t mean you should jump from winner to winner, or judge the success of your portfolio based on the performance of individual accounts. Having pieces of your portfolio that decline while others rise is what it means to be diversified!
It is also at this stage where planning becomes essential. Bad ideas are magnified, and if left unchanged can result in not efficiently moving toward your goals.
Develop personal and financial goals. If you haven’t done so seriously yet, now is the time to start to plan out longer-term goals. Start 5 years out. If everything went the way you would plan, what would your life look like? Consider the longer-term. What is it you want to be doing in 10 or 20 years? Is it what you are doing today? If not, what are the small steps that would move you forward to this end to start to consider today? Write your goals and the action steps out and revisit them periodically.
Have a plan. Having a financial plan that includes a plan for taxes and maximizing advantaged accounts like your 401(k) or 403(b), as well as IRAs and Roth IRAs, is crucial. Developing a long-term game plan to meet your goals will keep you focused, and on track.
Ignore the short-term. I speak with many today weighing the value of long-term retirement savings versus putting their money in 2% savings accounts or paying off a 5% mortgage. In their minds, the short-run guarantees are worth more than investing for the long-run in a diversified portfolio. However, this is investing based on yesterday’s returns, and ignores what may happen tomorrow, and what has happened through most time horizons.
To summarize and bring this series of blogs back to the starting point of potentially losing a generation of investors, this weekend, I spent time reading issues of Kiplinger’s from the early 1970s. While many of our challenges today are different, it was incredible to read the same economic catch phrases and concerns from a different time period. The market crash of 1973-1974 was devastating to those that lived through it. For those with a 5, 15, and 25 year time horizon, it was one of the best times in nominal terms to be an investor, and stocks gave the only liquid way to maintain the purchasing power of your savings. It is just as critical today understand the pitfalls and strategies at any stage to start out and stay on a prosperous track.
August 18, 2010
Building Your Financial Foundation: Watch Out for Money Complacency
By Robert Schmansky, CFP®
Franklin, TN
http://www.nfa1040.com/
Originally published 7/27/2010 at the Financial Planning Association's All Things Financial Planning blog.
This is the second of a three part blog on the early stages of the Financial Life Cycle.
In my last blog post, I introduced the concept of the Financial Life Cycle. This week’s blog is all about the strategies and pitfalls in the first adult stage, and next week I will look at strategies and pitfalls for those who have navigated the first stage successfully.
The first adult stage of our financial life is all about self-sufficiency. Sure, you’ve got stuff (e.g., car, computer, nice clothes), but what you don’t have are the things that provide safety over the long-term. Your net worth is less than your annual income, or it may even be negative.
If you’re just starting out or starting over, this is right where you are supposed to be. But, for many, it is easy to become a little too comfortable and linger in this stage. If you are one in that category, you would have to admit a disaster would set you back substantially, and you aren’t quite sure how you would cope. For now, though, it’s not an issue.
This is an interesting stage for many, because while you have ample time to make up for any losses and mistakes, you may be tempted to take risks. Why not splurge a little?
The problem comes when people do just that every time they appear to be getting ahead and accumulate some money.
To move forward from here, below are some prerequisites to advance in your financial maturity:
Save. Some people say it’s not critical to save, that the opportunity to spend while you are young is worth more than saving for a goal decades away. But at this stage you probably couldn’t handle multiple setbacks like having to replace your car, losing your job, or a health emergency. Your short-term goal for saving at this stage should be at least 10% of your pay. Once you’ve achieved that, I suggest an additional 1 to 2% per year.
Pay off consumer debt. For more information on saving and debt, see my blog on the topic. Debt can drag down your best efforts to get ahead, making your life less enjoyable and unnecessarily stressful.
Track income and expenses. Start by writing down all of your expenses as they come up for at least three months, rounding to the nearest dollar. Get up close and personal to your spending and raise your awareness of where your money goes. After a few months, consider dropping the pencil and paper for software like Mint.com or Quicken, but however your do the tracking, continue to monitor changes in your expenses each month.
Develop your worth in the marketplace. Diversify your skills. Take courses that give you an edge in your career. For example, does your job involve work with spreadsheets? Take a class and become the expert in your office. Find a niche where you can add value, whether it enhances your income or makes you more employable.
Buy adequate protection. Your insurance may have gaps, such as not enough disability coverage. Or you may not want to pay for renters’ insurance, but likely it’s too risky to go without it. I recommend higher deductibles both to get the correct amount of coverage and to discourage claims that can cost you your coverage.
All the items I’ve just listed aren’t easy to contemplate or act on when life seems trouble free. However, like trying to get into physical shape (or stay that way), establishing good financial habits only gets harder over time.
In the next financial life stage, you will begin to have some discretionary income and learn how to put your money to work for you. Our litmus test to discern if clients are on their way is to monitor their net worth and make sure it approaches an amount equal to their annual income. In my next blog I’ll cover more strategies and pitfalls at the first stages of accumulation.
Franklin, TN
http://www.nfa1040.com/
Originally published 7/27/2010 at the Financial Planning Association's All Things Financial Planning blog.
This is the second of a three part blog on the early stages of the Financial Life Cycle.
In my last blog post, I introduced the concept of the Financial Life Cycle. This week’s blog is all about the strategies and pitfalls in the first adult stage, and next week I will look at strategies and pitfalls for those who have navigated the first stage successfully.
The first adult stage of our financial life is all about self-sufficiency. Sure, you’ve got stuff (e.g., car, computer, nice clothes), but what you don’t have are the things that provide safety over the long-term. Your net worth is less than your annual income, or it may even be negative.
If you’re just starting out or starting over, this is right where you are supposed to be. But, for many, it is easy to become a little too comfortable and linger in this stage. If you are one in that category, you would have to admit a disaster would set you back substantially, and you aren’t quite sure how you would cope. For now, though, it’s not an issue.
This is an interesting stage for many, because while you have ample time to make up for any losses and mistakes, you may be tempted to take risks. Why not splurge a little?
The problem comes when people do just that every time they appear to be getting ahead and accumulate some money.
To move forward from here, below are some prerequisites to advance in your financial maturity:
Save. Some people say it’s not critical to save, that the opportunity to spend while you are young is worth more than saving for a goal decades away. But at this stage you probably couldn’t handle multiple setbacks like having to replace your car, losing your job, or a health emergency. Your short-term goal for saving at this stage should be at least 10% of your pay. Once you’ve achieved that, I suggest an additional 1 to 2% per year.
Pay off consumer debt. For more information on saving and debt, see my blog on the topic. Debt can drag down your best efforts to get ahead, making your life less enjoyable and unnecessarily stressful.
Track income and expenses. Start by writing down all of your expenses as they come up for at least three months, rounding to the nearest dollar. Get up close and personal to your spending and raise your awareness of where your money goes. After a few months, consider dropping the pencil and paper for software like Mint.com or Quicken, but however your do the tracking, continue to monitor changes in your expenses each month.
Develop your worth in the marketplace. Diversify your skills. Take courses that give you an edge in your career. For example, does your job involve work with spreadsheets? Take a class and become the expert in your office. Find a niche where you can add value, whether it enhances your income or makes you more employable.
Buy adequate protection. Your insurance may have gaps, such as not enough disability coverage. Or you may not want to pay for renters’ insurance, but likely it’s too risky to go without it. I recommend higher deductibles both to get the correct amount of coverage and to discourage claims that can cost you your coverage.
All the items I’ve just listed aren’t easy to contemplate or act on when life seems trouble free. However, like trying to get into physical shape (or stay that way), establishing good financial habits only gets harder over time.
In the next financial life stage, you will begin to have some discretionary income and learn how to put your money to work for you. Our litmus test to discern if clients are on their way is to monitor their net worth and make sure it approaches an amount equal to their annual income. In my next blog I’ll cover more strategies and pitfalls at the first stages of accumulation.
August 14, 2010
Unsure of What to Do Next? Know Where You Stand in the Financial Life Cycle
By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Originally published 7/12/10 at the Financial Planning Association's All Things Financial Planning Blog.
Market volatility has led to concerns we may experience a lost generation of investors; a current Depression-era style generation that avoids the risks and long-term benefits of equity market investing.
I too hear that concern with prospective clients, however I find these individuals fit into more particular groups than just young people. Many who are swearing off the markets are not young at all.
This group tends to be individuals that have accumulated wealth in excess of 1-5x their annual income, placing them just past the first adult stage of their ‘Financial Life Cycle.’ As wealth takes shape, volatility becomes more noticeable, especially for those prone to certain ‘money scripts’ (more on below). Market swings of hundreds of dollars a day were one thing; in excess of several thousand dollars for many can become a nerve wracking event.
The Financial Life Cycle is an idea we use to measure the progress of our clientele, and show the path toward financial maturity. Like our biological or career cycles, the ideas in a stage are ever changing; the actions and strategies never stagnate.
Our Financial Life Cycle can tell us where we are on life’s roadmap in terms of our finances, and measure progression. The stages are not based on age, but rather we judge primarily based on one’s overall wealth or net worth relative to income.
Over the next few blogs, I will speak more about the life cycle as a roadmap to the strategies and pitfalls to watch out for during each stage.
While age does not determine where we are along the cycle, we do all start at the same place. From birth to adulthood, we become very familiar with certain money truths:
Personal finance is not often taught in our schools, and certainly not the degree of the different life cycle stages. It is easy for many to stop developing at various stages and miss out on habits that lead to true wealth. Becoming aware of both your money scripts and the life cycle are critical to maturing past financial infancy in an effective way.
If you are like many that are considering reacting to today’s economy based on your emotional scripts, consider spending time for introspection and learning before making drastic changes to your plan. While it is said that “money can not buy happiness,” having a sound relationship with your money based on understanding your tendencies and how you are progressing will lead to a more content life. In my next blog I will cover the first adult life cycle stage of self-sufficiency, where we need to begin to understand and work with our money beliefs in order to move toward a sound financial future.
Franklin, MI
http://www.nfa1040.com/
Originally published 7/12/10 at the Financial Planning Association's All Things Financial Planning Blog.
Market volatility has led to concerns we may experience a lost generation of investors; a current Depression-era style generation that avoids the risks and long-term benefits of equity market investing.
I too hear that concern with prospective clients, however I find these individuals fit into more particular groups than just young people. Many who are swearing off the markets are not young at all.
This group tends to be individuals that have accumulated wealth in excess of 1-5x their annual income, placing them just past the first adult stage of their ‘Financial Life Cycle.’ As wealth takes shape, volatility becomes more noticeable, especially for those prone to certain ‘money scripts’ (more on below). Market swings of hundreds of dollars a day were one thing; in excess of several thousand dollars for many can become a nerve wracking event.
The Financial Life Cycle is an idea we use to measure the progress of our clientele, and show the path toward financial maturity. Like our biological or career cycles, the ideas in a stage are ever changing; the actions and strategies never stagnate.
Our Financial Life Cycle can tell us where we are on life’s roadmap in terms of our finances, and measure progression. The stages are not based on age, but rather we judge primarily based on one’s overall wealth or net worth relative to income.
Over the next few blogs, I will speak more about the life cycle as a roadmap to the strategies and pitfalls to watch out for during each stage.
While age does not determine where we are along the cycle, we do all start at the same place. From birth to adulthood, we become very familiar with certain money truths:
- Though it is only paper, money should not be thrown out (money has value)
- Your labor can be exchanged for money (earned income)
- We can exchange money for things we want (money is a tool to achieve our goals)
- Our time preference for using our money can lead to interest earned, or paid (budgeting and saving)
Personal finance is not often taught in our schools, and certainly not the degree of the different life cycle stages. It is easy for many to stop developing at various stages and miss out on habits that lead to true wealth. Becoming aware of both your money scripts and the life cycle are critical to maturing past financial infancy in an effective way.
If you are like many that are considering reacting to today’s economy based on your emotional scripts, consider spending time for introspection and learning before making drastic changes to your plan. While it is said that “money can not buy happiness,” having a sound relationship with your money based on understanding your tendencies and how you are progressing will lead to a more content life. In my next blog I will cover the first adult life cycle stage of self-sufficiency, where we need to begin to understand and work with our money beliefs in order to move toward a sound financial future.
August 11, 2010
Why Stay in the Market
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
After a couple weeks of difficult market returns, investor fears are creeping up. As investor fears increase, so do the number of questions I receive regarding the market. Most of the questions revolve around the concept of exiting the market, essentially market timing. Should I sell everything to cash? Why should I be in the market during these volatile times? Should I move all my investments to bonds?
Just a couple years ago we were staring at a portfolio-killing time bomb waiting to detonate. The downturn of 2008-2009 really hurt, but, as with all downturns, it has become a memory. We all remember and still relate to the pain, but what did we learn? For those out there who exited the market, did you reenter the market at the right time? For those that stayed true to their investment strategies, did it pay off?
For most folks getting out of the market during rocky times is not difficult, but returning to the market is extremely precarious. Getting out is not what hurts the investor; consequently, it is not getting back in at the right time that is damaging. During Oct 2008, the stock market had wild swings. If an investor moved all their equities to cash, they would have missed out on a huge one-day run on Oct 13, 2008. All three major indexes (S&P 500, Dow Jones Industrial Average, and the NASDAQ) were all up over 11% in one day. The investors sitting on the sidelines in cash were rethinking their strategy after Oct 13, 2008. Being out of the market can be extremely costly.
What do we do?
Staying in the market is the right thing to do but only if you have a plan. An investment strategy based on factors associated with your life and risk profile is imperative. Positioning a portfolio to handle prosperous times while protecting against inflation and deflation creates a portfolio that promotes sleep at night. Blindly investing is risky in any market environment. Another important element of an investment plan should include dollar cost averaging. Consistently buying shares will reduce the total cost basis and increase return, so, while the market is down, buy the shares at a reduced price. Continuing to buy while the market is down is like buying your favorite product on sale. It makes sense, but most of us don’t follow through. I heard a wise investor once say the only thing American consumers don’t like to buy on sale is the stock market. It’s true!
While the questions continue, we should revisit those dark hours during 2008 and early 2009 when we thought the sky was falling. We should learn from our past experiences. Those who stuck it out and where positioned properly weathered the storm just fine. The next time the question about exiting the market pops up in your head ask yourself how did during 2008-2009. If you weather the storm, then you have your answer. If you didn’t, you either pulled out of the market or you had a poor investment plan. If you are currently without an investment plan, I highly suggest speaking with a fee-only advisor. Here are two websites to find a fee-only advisor in your area:
ACA
NAPFA
Nashville, TN
http://www.vhfinancialmanagement.com/
After a couple weeks of difficult market returns, investor fears are creeping up. As investor fears increase, so do the number of questions I receive regarding the market. Most of the questions revolve around the concept of exiting the market, essentially market timing. Should I sell everything to cash? Why should I be in the market during these volatile times? Should I move all my investments to bonds?
Just a couple years ago we were staring at a portfolio-killing time bomb waiting to detonate. The downturn of 2008-2009 really hurt, but, as with all downturns, it has become a memory. We all remember and still relate to the pain, but what did we learn? For those out there who exited the market, did you reenter the market at the right time? For those that stayed true to their investment strategies, did it pay off?
For most folks getting out of the market during rocky times is not difficult, but returning to the market is extremely precarious. Getting out is not what hurts the investor; consequently, it is not getting back in at the right time that is damaging. During Oct 2008, the stock market had wild swings. If an investor moved all their equities to cash, they would have missed out on a huge one-day run on Oct 13, 2008. All three major indexes (S&P 500, Dow Jones Industrial Average, and the NASDAQ) were all up over 11% in one day. The investors sitting on the sidelines in cash were rethinking their strategy after Oct 13, 2008. Being out of the market can be extremely costly.
What do we do?
Staying in the market is the right thing to do but only if you have a plan. An investment strategy based on factors associated with your life and risk profile is imperative. Positioning a portfolio to handle prosperous times while protecting against inflation and deflation creates a portfolio that promotes sleep at night. Blindly investing is risky in any market environment. Another important element of an investment plan should include dollar cost averaging. Consistently buying shares will reduce the total cost basis and increase return, so, while the market is down, buy the shares at a reduced price. Continuing to buy while the market is down is like buying your favorite product on sale. It makes sense, but most of us don’t follow through. I heard a wise investor once say the only thing American consumers don’t like to buy on sale is the stock market. It’s true!
While the questions continue, we should revisit those dark hours during 2008 and early 2009 when we thought the sky was falling. We should learn from our past experiences. Those who stuck it out and where positioned properly weathered the storm just fine. The next time the question about exiting the market pops up in your head ask yourself how did during 2008-2009. If you weather the storm, then you have your answer. If you didn’t, you either pulled out of the market or you had a poor investment plan. If you are currently without an investment plan, I highly suggest speaking with a fee-only advisor. Here are two websites to find a fee-only advisor in your area:
ACA
NAPFA
August 1, 2010
Feel Like Un-Retiring? Here's How to Prepare
By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Last October, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016. At the same time, MetLife reported that many American workers plan to stay on the job “at least” until age 69.
The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working. The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.
Add all these factors together and you have one of the most interesting labor situations for older Americans ever. That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues. It makes sense to meet with a financial advisor such as a CERTIFIED FINANCIAL PLANNER™ professional.
Here are some critical points to address:
How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining. If there’s a way to get an employer to pay, do it. But if you have to pay for your own education, you really need to weigh whether your earnings will justify it.
Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place. You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.
Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.
Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial planner.
Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances. Most retirees realize that it doesn’t take much income to knock them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.
Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.
Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions. Keep an eye out for these programs and see if they work for you.
Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.
June 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Schmansky, a local member of FPA.
Franklin, MI
http://www.nfa1040.com/
Last October, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016. At the same time, MetLife reported that many American workers plan to stay on the job “at least” until age 69.
The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working. The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.
Add all these factors together and you have one of the most interesting labor situations for older Americans ever. That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues. It makes sense to meet with a financial advisor such as a CERTIFIED FINANCIAL PLANNER™ professional.
Here are some critical points to address:
How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining. If there’s a way to get an employer to pay, do it. But if you have to pay for your own education, you really need to weigh whether your earnings will justify it.
Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place. You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.
Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.
Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial planner.
Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances. Most retirees realize that it doesn’t take much income to knock them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.
Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.
Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions. Keep an eye out for these programs and see if they work for you.
Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.
June 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Schmansky, a local member of FPA.
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