Posts filed under 'Financial Planning'
August 26th, 2008
Grant W. Moore, CRPC
As a young financial planner, I tend to hear the same thought repeatedly from people in their 20s. “When I get older, then I’ll start saving for retirement.” “I don’t have any extra money that I can save.” “How could a couple thousand dollars make any difference for retirement anyway?” There are numerous excuses that people can (and do) make for delaying their retirement savings.
Consider the following example. Person 1 begins contributing the maximum ($5,000) to an IRA or Roth IRA starting at age 22. They contribute this amount until age 31 and then stop altogether. Upon retirement at age 65, Person 1’s nest egg would be worth just shy of $1,000,000 assuming a relatively conservative 8% rate of return. Not bad for just 10 years of savings! Person 2, however, waits until age 31 to begin saving for retirement. In order to make up for lost time, they save the same $5,000 per year, but continue these savings until retirement at age 65. Despite an additional 25 years of savings (accounting for $125,000 additional savings than Person 1) their nest egg would have grown to just under $800,000. This example illustrates a very important lesson: compounding interest works! While I’m the first to admit that investing in your 20s is a difficult challenge, here are a few helpful tips that have worked for me in the past.
- Put “bonus” money into an investment account. My idea of bonus money is anything you receive beyond your traditional paycheck. The $600 economic stimulus check many taxpayers received this year is a great example of bonus money. Whether it’s a birthday check, an annual bonus at work, or proceeds from filing your tax return in April, this money is usually not necessary for supporting your current standard of living.
- Don’t lose out on free money! The vast majority of companies offer an employer-sponsored retirement account such as a 401(k) plan. In an effort to incentivize their employees, there is usually a matching percentage tied to these plans. For example, a company will contribute 50 cents for every $1 the employee invests into this plan, up to 6% of that employee’s salary. Said differently, if an employee contributes 6% of their salary to their company 401(k) plan, the employer will automatically contribute 3% to their account. This is a guaranteed 50% rate of return!
- Pay yourself first. It’s an old adage, but it works. Prepare a budget and determine what level of discretionary spending you are able to give up. Open an investment account with a low cost provider such as Vanguard, and invest in a broadly diversified mutual fund(s). Make arrangements so that every month a set amount is taken from your checking account and placed into this investment account. As the saying goes, “If you can’t see it, you can’t spend it!”
August 14th, 2008
Brent A. Lindell, CTFA
This is an interesting question that tends to come up more often when the market is experiencing volatility such as we’ve seen this year and the fourth quarter of 2007.
We are all probably familiar with FDIC (Federal Deposit Insurance Corporation), which insures all depositors of a member bank against loss up to a certain dollar amount. The FDIC’s approach to making depositors entirely whole makes sense in the risk-averse bank account world, but what about the world of the stock market where volatility is part of the equation?
SIPC (Securities Investor Protection Corporation) was formed by Congress in 1970 as a way to help individuals whose money, stocks or other securities are stolen by a broker or put at risk when a brokerage fails for other reasons – SIPC does not bail out investors when the value of their stock, bonds, or other investments fall or fail for any reason (ie. the volatility of the stock market).
SIPC usually gets involved when a brokerage fails and assets are missing from customer accounts. SIPC steps in by replacing these missing stocks and other securities by calculating the financial worth (e.g. the number of shares of a certain stock) of a customer’s account as of the “filing date”. SIPC first looks to see if the actual securities owned by the customers can be replaced in the right accounts. If they cannot, SIPC’s reserve funds will be used, if necessary, to purchase replacement securities up to a ceiling of $500,000 per customer held in separate capacity (e.g. joint tenant or sole owner), including a maximum of $100,000 for cash claims. Quite a few broker/dealers or custodians will purchase additional insurance. Savant actually uses a custodian that provides additional brokerage insurance (underwritten by Lloyd’s of London) in the event that SIPC limits are exhausted. This coverage provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a trustee, SIPC, and Lloyd’s of $150 million, including cash of up to $1 million.
By the way, there are some assets that are ineligible for SIPC. These include commodity futures contracts, currency, and investment contracts like limited partnership that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
August 11th, 2008
Brent A. Lindell, CTFA
As you might have noticed in the news recently, there is a proliferation of discussion pertaining to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were both set up by the Federal Government - Fannie in 1938 and Freddie in 1970. Neither deals directly with homeowners. Just to give you a little history on how these two entities fit into the big picture, the following is a brief description of the Subprime debacle.
- Lenders and banks drastically relaxed their underwriting standards in response to the euphoria associated with rapidly rising home prices during 2000-2006. They approved loans that could not possibly be repaid without continually rising home prices.
- Bank regulators ignored the weak underwriting practices until it was too late to take action.
- In the meantime, mortgage brokers and loan officers encouraged borrowers to buy more house than they could afford using devices like interest-only mortgages that the borrowers probably did not truly understand.
- Of course, the borrowers allowed themselves to be seduced into buying houses they couldn’t afford. There was also buying of second or third homes and, last but not least, taking equity out of the properties to up the all-important lifestyle.
- As the housing market slowed and home prices dropped, this house of cards also fell, and a wave of foreclosures began.
Fannie Mae and Freddie Mac fit into this picture because they buy mortgages away from the banks or lending companies that already hold them. They then bundle these loans together and sell them as mortgage-backed securities that pay a guaranteed rate of return. They also buy and hold these bundles for their own portfolio. Fannie Mae and Freddie Mac have both made very sound investments in the bundled loans they have bought – the only subprime loans they have are the very top tier. The problem that is being created with Fannie and Freddie is that the investing public is running scared - subprime and the public and the bond market is selling instead of buying these mortgage-backed securities – this creates a cash flow problem for Fannie and Freddie as the perception is that all mortgage-backed securities are to be avoided.
The thing is, most of the bundled mortgages that Fannie and Freddie hold are “good” mortgages – I personally have a 15 year fixed mortgage with only 1/3 of the value of my home left to be paid off. There are a lot of people like myself that actually have cash invested in their home. People with subprime mortgages don’t have money in their homes and they have walked away when they’ve gotten “under water”.
This is the reason it is critical to the US economy that the government supports Fannie and Freddie – all those “good” loans have got to be financed to keep the economy robust. What if you had great credit, weren’t overbuying on a house, and you still couldn’t get a mortgage? It is imperative that even if Fannie and Freddie are in a cash flow crunch caused by people wanting to avoid all mortgage-backed issues, we’ve got to give them cash until the stress settles and they’re cash flowing on their own again. Anything else would have hugely negative consequences on the entire financial system.
By the way, the next question you have to ask: Is this a buying opportunity in the mortgage-backed market? There is more than a 2% spread (yield) over like treasuries.
July 16th, 2008
Jody J. Jungerberg, MBA, CFS, ChFC, CFP®
The author Tracy Gary in her book “Inspired Philanthropy” defines Inspired Legacy Planning as “financial planning that goes beyond mere prudence to be responsive to what is highest and best in us.”
This type of Estate Planning includes a prudent financial plan but then moves on to taking into account family values, virtues, vision, and what we want to for others.
First of all, you will want to make sure that a true practical financial plan has been completed so that you have “enough” - whatever that term means to you. Enough to retire, enough to leave to your kids, enough to take care of your health care long term, etc.
With that in place, where do you go from there? First of all, discuss some of your thoughts and ideas with other family members. This can accomplish two goals: 1) The beginning of a discussion regarding family values and how they might be passed on through other generations. 2) Help focus in on those causes that really mean something to you and your family.
This is not as easy as it sounds. Different generations may have conflicting visions of how to make the world a better place. For instance, Grandma and Grandpa may want to continue supporting their church and the arts. Younger people may want to “save the rain forest.” So this process may take several “family meetings” but you will find the exercise enlightening. A trusted advisor can be very helpful in participating with you in this process. And they can help you do the “due-diligence” regarding the myriad of charitable organizations out there to help you fulfill your mission.
Finding an advisor who can “vision” with you will be extremely worthwhile. They know you well, they know your family, passions, assets, and goals. And even more than that, they will know the right “tools” to utilize to fulfill these goals. From a family foundation to charitable remainder trust to donor advised funds there are many ways to “give” besides writing a check. Some of these vehicles are complex, but your advisor can simplify the process so you can concentrate on how you want to make your mark on the world.
July 2nd, 2008
Theresa A. Harezlak, CFP®
Health care—it’s on everyone’s mind these days. Even the presidential candidates have moved health care to the top of their platforms. As we struggle to find the best ways to insure all Americans, most of us still have to address the rising costs of healthcare and rising costs of healthcare premiums.
In the absence of a clear cut solution, High Deductible Health Plans (HDHP) with Health Savings Accounts (HSAs) are gaining in popularity. Some frequently asked questions:
What is a Health Savings Account?
An HSA is like a 401(k) for healthcare. It is a tax-advantaged personal savings or investment account that individuals can use to save and pay for qualified health expenses now or in the future. These accounts exist in conjunction with High Deductible Health Plans.
However, unlike other financial saving vehicles such as an IRA or 401(k), an HSA has the unique potential to offer triple tax savings.
- Contributions to an HSA account are tax-deductible. They are considered “above the line” deductions and thus can be taken even if you do not itemize.
- Any HSA funds not used each year remain in the account, and earn interest tax-free.
- Distributions are tax free when they are used for qualified medical expenses. You do not need to get an approval from the HSA administrator and you do not need to submit receipts, although you should save them just as you keep receipts for other items that are deducted from your taxes.
How much can I contribute to an HSA account?
Individuals can contribute up to $2,900 each year or $5,800 for a family. If you are between the ages of 55 and 65, you can make an additional annual “catch up” contribution of up to $900. These are the 2008 contributions and the contribution levels are indexed annually.
Who is eligible for an HSA?
Any individual covered by a High Deductible Health Plan and not covered by any other health insurance can set up an HSA. You cannot be enrolled in Medicare or be claimed as a dependent on someone else’s tax return. There are no income limits and no earned income requirements to be eligible to contribute to an HSA.
What is a High Deductible Health Plan?
A High Deductible Health Plan is a type of insurance plan that typically has a high deductible. Because of the high deductible, the premiums you pay for that insurance coverage are usually lower than other insurance programs. To qualify as an HDHP, the health insurance plan must have an annual deductible of at least $1,100 for individuals and at least $2,200 for families. The annual out of pocket expenses (deductibles, co-payments and other expenses) can not exceed $5,600 for individual plans or $11,200 for family plans.
For more information on HSA accounts, visit www.treas.gov and search HSA.
June 30th, 2008
Theresa A. Harezlak, CFP®
My sister Lynette was diagnosed with breast cancer three weeks after discovering she was pregnant. I remember the uncertainty of the time and the sheer panic within my entire family at having to confront cancer and mortality with someone so young. My sister was 34 years old.
She was given a very slim chance at long-term survival by 6 of the 8 medical opinions she sought. Those 6 physicians told her she’d be lucky if she survived three years.
But my sister kept searching because her instincts told her to seek out a place that truly believed in and practiced integrative health care–one where the entire person–physical, mental and spiritual—is treated under one roof. She found that place and concentrated on creating the optimal environment to regain her health through cancer treatment, diet, exercise and many other lifestyle changes.
This year, 2008, is one where our family is celebrating her 10th year of survival and her son’s 10th birthday. We believe that the integrative approach that she found has been the key to her survival.
I tell you this story because the integrative approach works. It also works when talking about your financial wealth. It’s called Integrative Wealth Management (IWM).
This philosophy recognizes that your total “wealth” extends beyond financial issues and is also made up of human, intellectual, and social factors. IWM is comprehensive in nature and incorporates your financial plan, estate plan, life plan, vision, and investment strategy.
Integrative Wealth Management (IWM) emphasizes the importance of addressing both your personal and financial needs. There are four main components of IWM all working in concert.
PLANNING: Includes financial planning, estate planning, cash flow planning, philanthropic planning, retirement planning, educational planning, risk management (insurance), and tax planning.
INVESTMENTS: Creating an ideal portfolio based on an individual or family’s asset allocation. Integrating the proper blend of stocks (domestic and international), bonds, REITs, and commodities.
TAX MANAGEMENT: Arranging your investment planning strategies as to minimize the present value of the future tax liability over your life or in some cases multiple generations.
PERSONAL CFO: Coordinating and managing your team of advisors so your strategies are implemented effectively, simply, and efficiently. Your team of advisors often includes: bankers, accountants, attorneys, insurance providers, investment advisors, and other professionals.
Integrative healthcare and Integrative Wealth Management are not too terribly different in their philosophies. Both are customer-centered. Both understand that the customer brings to every situation a unique set of circumstances that must be addressed through individualized planning and both focus on agreed upon goals, dreams and desires of the client.
When seeking care or advice in any arena, I would encourage anyone to partner with the team that is going to consider the whole person, not just that person’s investments or in the case of my sister, her breast only.
Congratulations Lynn on 10 years!
June 25th, 2008
Brian P. Conroy, CFP®
Fixed income (bond) strategies alone can be a disaster in a rising cost world. Here is a quick quiz: pick one:
A) Your money will outlive you
B) You will outlive your money
C) There is no C Plan on A or you might inadvertently find yourself defaulting to B, and B stinks!
When determining your retirement nest-egg investment strategy the most critical choice of investment allocation is typically a choice between growth and preservation. Said differently, it’s often a choice between bond oriented strategies, and stock oriented strategies.
I work with retirees and I can attest to the fact that many retirees do not believe they will live as long as they are actually likely to live. The result is that many choose a very conservative “sleep better” preservation oriented bond strategy, and avoid the “eat better” growth oriented stock strategy. The result is a great and very real risk of depleting the portfolio before the end of the rainbow. They avoid the volatility of stocks, but accept the very real risk that bond returns alone will result in their running out of money if they only live an average life expectancy. Remember that 50% of retirees will live longer than the “average.” Most retirees need to balance growth and preservation due to the inevitability of inflation. This means that assets staying ahead of inflation must be part of the plan, and this means stocks will be part of the plan. Don’t shoot the messenger! You will VERY likely need to invest for both growth and preservation, and own both stocks and bonds. Yellow bananas=bonds, green bananas=stocks.
Consider adding a few years to the average life expectancy when you do your long term planning. Follow the link for a fun little illustrated calculator that will give you some perspective about your personal potential longevity.http://www.nmfn.com/tn/learnctr–lifeevents–longevity_game
June 20th, 2008
Brian J. Knabe, MD
Why include a series about health and wellness in a financial publication? With close examination of any retirement plan, the connection is apparent. Healthcare expenses consume an increasing portion of a retiree’s savings. One reason is the double-digit yearly rise in the overall cost of healthcare in the
US. Additionally, longer life expectancies increase the length of time that an individual will need to pay for the care.
An examination of healthcare for retirees often begins with Medicare. Dire warnings about the impending insolvency of the system continue to be an annual occurrence on Capital Hill. Currently it is estimated that Medicare will be broke as of 2018 or 2019 if the current system is kept in place. Medicare continues to act as a “safety net” for those over 65 years old. But the cost to the individual beneficiary continues to rise as well. Yearly premium increases charged to retirees has been in the double digits as of late. Medicare expenses for the government are rising just as large numbers of Baby Boomers are poised to retire over the next couple of decades when they will stop contributing to the system.
Should an investor planning for retirement count on Medicare being available and providing for healthcare needs? The answer is yes and no. There are only a couple options the government has to rectify the shortfall – decrease benefits or increase premiums and co-pays. The solution will probably be a combination of these. Premiums will undoubtedly continue to rise, and benefits for the individual will decrease, either in the form of less treatment options or the exclusion of wealthier individuals from the system altogether. One good option to help make up for this shortfall is a Health Savings Account, or HSA. The contribution limit for 2008 is $2,900 for an individual and $5,800 for families. Those over 55 can also make a catch-up contribution. Making the maximum contribution each year will help you build a medical retirement fund that can be used to pay future medical expenses, tax-free. Ask your financial advisor if an HSA is a good option for your individual situation. Whether through the use of an HSA or another savings vehicle, it is prudent to include healthcare expenditures in the retirement planning process.
June 17th, 2008
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
You have probably heard of folks who looked like the paragon of fitness…you know the type, they run in marathons, work out every day, have a treadmill with a remote hooked up to the TV with earphones so they can run, watch TV, talk on the phone, and sip cappuccinos all at the same time. They look fit and have endurance that everyone envies.
To make it more challenging, they go to the doctor for regular yearly exams and are often told that ”everything looks good…keep up the good work.”
Next, you hear that they ended up in the hospital with a heart attack or some dreaded disease…and upon check in to the hospital, the medical staff says: “we checked your cholesterol, triglycerides, HDL and LDL, looked at the HDL/LDL ratio, measured the homocysteines, lipoproteins, the apolipoprotein and the c-reactive protein. While we were testing your blood we also looked at your leptin and your adiponectin, your Alpha Fetoprotein and your Carcinoembryonic Antigens. Turns out that not one measure was out of range, however WHEN WE STACK THEM ALL TOGETHER, they indicate a strong tendency for a heart attack…and by gosh, you had a heart attack and look, NOW we can see it…you were headed for a heart attack all the time!”
Hindsight is pretty much useless. It’s kind of like saying “I’ll tell you what you did wrong just as soon as it shows up in the results!” I do not want to hear what I did that was wrong. I want someone to look at my health and my financial indicators and fast forward them into the future…then I can know what is wrong and make the necessary changes. Knowledge, in advance of a potential calamity, helps me. I can change. I want to know if something is missing. I want to know if my actions are wrong. Let me know if there are steps that I can take that will enhance my health or my finances. With just this little bit of knowledge, I have a chance to prevent the damage.
Forensic Financial Analysis is like that. Forensic Financial Analysis is like taking an X-Ray, a CAT scan, an MRI, and an exhaustive blood test, but it does this on your financial matters. If your financial goals and your financial actions work in harmony, the chances are high that you will meet your financial goals…like college funding, saving for weddings, or even your own financial autonomy (retirement).
Your plans are probably written down (they should be). You probably have also started an investment program (like 401(k) savings or IRAs). Using Forensic Financial Analysis, you can find out the difference between what steps you have taken and whether you are on track to meet the goals that you have set out for yourself. It is too often that we discover there is a disconnect between the goals that were set and the steps that were taken. These poor connections are called “Gaps.” A gap is a hole in your plan. Just like any other gap, it can be plugged. Plugging the gaps in your financial plan and your financial activities makes your investment actions more efficient and increases your chances of success.
Some people want to retire early, and everyone dislikes paying taxes. To meet their goals, (1) retire safely and 2) reduce taxes), they use Muni-bonds…looks smart because the interest is not taxable. Strangely, if they are in a mid-range tax bracket, they would actually be better off if they took taxable bonds and paid the tax…they would still have MORE after they paid the taxes than for using the Muni’s.
Or how about this, they put stock funds inside their IRA and tax-free bonds in their regular account. The problem is that gains on a stock fund are taxed at capital gains rates and the tax-free bond earns a lower interest rate. Instead they should consider putting regular bonds inside the IRA (you get a higher interest rate than with tax-free bonds, so the interest rate that you earn just went up) and the stock funds in your regular account (partially tax deferred and dividends taxed at capital gains rates). This increases the efficiency of your portfolio…all due to Forensic Financial Analysis and a simple re-arranging of your investments.
Forensic Financial Analysis should be done long before you can see the retirement event on the horizon. Since it is like an exhaustive physical, you can find out steps that can be taken to improve your financial environment long before something goes wrong or long before you find out that you’re going to end up short. Ending up short means that you’ll probably have to work a bit longer or take up more risk…possibly two undesirable activities.
Doing some Forensic Financial Analysis usually falls outside the parameters of regular financial planning, so you’ll have to do a little research to find financial advisors who can do this for you…it is well worth the asking. Look for an advisor that can help you with the intricacies of Forensic Financial Analysis.
Good luck and may all your financial endeavors be successful!
June 6th, 2008
Adam W. Larson, CFA
In a recent blog, I wrote about market timing and the cost of missing part of the recovery from a difficult market. I thought it was interesting that recent market events reinforce this lesson.
When the first quarter of 2008 ended, many investors worried that they should cash out before things could get any worse. The S&P 500 Index (U.S. Large Stocks) had fallen 9.9% since the beginning of the year, and persistent news stories about Bear Stearns, oil prices, and the economy suggested the trend might continue.
We know now that the end of the first quarter was a terrible time to cash out of the stock market. The S&P 500 Index rose 4.8% in the month of April – its best monthly percentage gain since December 2003. The market added another 1.1% in May and is now only down 4.6% for the year (as of May 30th).
Interestingly, a significant portion of April’s return came from a single day. The S&P 500 Index rose 3.6% on April 1st. Missing this one day would erase most of the gains for the entire month. Not only is it extremely difficult to predict the timing of future stock market returns, but being wrong by even one single day can be very costly.
Source: Historical daily prices of the S&P 500 Index from Yahoo.com
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Grant W. Moore, CRPC 
