Personal Finance

The Consumer Webinar Series is for everyone – no matter how in tune you are with personal financial issues.  Some topics are basic in order to give you an overview of a specific topic while others are slightly more advanced to dig a little deeper into a topic.

Understanding Taxes

April 1st, 2011 Noon to 1:00 pm CT

Instructor Bernie Kiely, CFP®, CPA

NAPFA-Registered Financial Advisor

Past member of the NAPFA National Board of Directors

Tax time is a stressful time in every American household.  What you don’t understand about taxes, and how they impact your short and long-term financial plan, may come back to haunt you later.  This session, purposefully planned right before taxes are due, will explore important personal tax issues and how you can address them in a prudent manner.

Financial Planning for the New Family

May 6th, 2011 Noon to 1:00 pm CT

Instructor Peg Downey, CFP®

NAPFA-Registered Financial Advisor

Starting a family raises many concerns and issues.  From increased health care costs and childcare to the increased daily expenses, the financial ramifications of having kids are many.  This session will cover how couples can create a financial plan that addresses these financial concerns and many others.

Deciphering Financial Acronyms

June 3rd, 2011 Noon to 1:00 pm CT

Instructor Lauren Locker, CFP®, CSA

NAPFA-Registered Financial Advisor

Chair of the Northeast/mid-Atlantic Region Board of Directors

CFP, CFA, CMFC, UGMA, UTMA, IRA, ETF.  The financial world is full of confusing acronyms.  Talk to any financial advisor and you will hear these and hundreds of others thrown around in conversation.  But what are they?  What do they mean?  This session will attempt to decipher those acronyms you are likely to hear and what they mean to you and your financial plan.

Debt and Saving

July 8th, 2011 Noon to 1:00 pm CT

Instructor Cheryl Costa, CFP®

NAPFA-Registered Financial Advisor

Past member of the NAPFA National Board of Directors

You hear all the time that there is good debt and bad debt.  But which debt is good and which is bad?  More importantly, how do you address those forms of debt while trying to save for those important life milestones like a child’s education or retirement?  This session will delve into how you can manage debt issues wisely while still being able to put money away for those things in life that are truly important.

Determining Your Investment Approach

August 5th, 2011 Noon to 1:00 pm CT

Instructor John Ritter, CFP®, CFS

NAPFA-Registered Financial Advisor

NAPFA National Board of Directors MemberNo two investors are alike and how you approach your investments must be unique to you and your needs.  This session will lay out how you can best approach investing based on risk tolerance, time horizon, and other factors.

RSVP here: http://www.napfa.org/consumer/UpcomingSessions.asp

Here are the typical events which trigger portfolio rebalancing of a passively managed portfolio:

1. Implementation of asset allocation recommendations from the financial plan
2. Rebalancing at annual review
3. Rebalancing required by cash infusion from such events such as:
   • Annual IRA or Roth IRA contribution
   • Rollover from a 401k, pension, IRA, etc.
   • Conversion to a Roth IRA
   • Transfer/consolidation from other accounts (savings, brokerage, etc.)
   • Gift or inheritance
   • Liquidation of cash value life insurance
   • Equity pulled out of home from a refinance
   • Sale of home
   • Etc.
4. Rebalancing required by cash withdrawal from such events such as:
   • Emergency
   • Major purchase (auto, new home, etc.)
   • Retirement
   • Unemployment
   • Child begins college
   • Wedding
   • Etc.

By Bert Whitehead,

1.  Timeshares. This preposterous “investment” is based on the doubtful proposition that a $117,000 condo is really worth $585,000 because 50 chumps can be convinced to rent it one week a year for the rest of their natural lives, and pay most of the rent (totaling $11,700) in advance and the rest annually disguised as maintenance fees. These are always sold by very friendly people, usually named Joe, who cannot begin a sentence without grasping your forearms and saying, “Let me be honest with you.” In addition to a very fuzzy explanation of the investment potential, you will find out how you could get AIDS from hotel sheets (presumably not a danger at Vacation Ownership Resorts because they don’t have maid service).
a. A hint: If after reading this, you still can’t help yourself and simply must buy a timeshare, buy it on a the secondary market (i.e., look in the classified ads and buy one from some dummy who spent his kid’s college money for it last year and now is trying to dump it at half price). This is still twice what it is worth.
b. A better hint: Put your $11,700 in a well-balanced investment portfolio. Each year use the accrued earnings to rent a timeshare anywhere in the world. Then go job hunting while you’re there and write it off!

2. Lottery Tickets. Lotteries were designed by scheming Republicans as a patriotic way to entice poor people into voluntarily returning their welfare checks to the state coffers. They sort of work like variations of the old 50/50 church raffle except the church doesn’t tax your 50 percent and then pay you over 20 years. Assuming a tax bracket of 33 percent, and an annual present value of money at 8 percent instead of a return of 50 cents for every dollar bet, you actually “win” slightly less than 17 cents. This is not attractive, even compared to roulette tables in Las Vegas where they pay 95 cents for each dollar bet. Plus you get free drinks.
a.Hint: If you could borrow $7.7 million at 8 percent over 20 years and buy every single number on the Michigan lottery, you would be a sure winner if the jackpot was $22 million or more. (If you don’t have to split the pot with some bloke on the dole.)

3. Life Insurance Investments. These quaint arrangements were popular and considered by some to be relatively competitive in the Fabulous ‘50s. Then your only alternatives were U.S. Savings Bonds (which your elders still called “war bonds”), paying 4 percent, and savings accounts which aggressively paid 4.5 percent. Pseudo-tycoons had Christmas Club accounts, a scam whereby you gave money to the bank every week and then they gave it back to you at the end of the year. No interest, but no service charge either. Now, bank savings accounts pay virtually no interest which is dwarfed by service charges if you don’t have very much money and just let it sit there. The service charge compensates the tellers who take your money out for a walk every month until it all evaporates. But we digress: back to life investments. They are variously called whole life, variable life, universal life, permanent life, etc. They sport many supposed advantages none of which are exclusive to this investment vehicle. Despite reams of projections and lengthy enthusiastic explanations, these investments are bereft of S.E.C. scrutiny, and the investor thus usually is at the mercy of inscrutable policy language as explained by a hyperkinetic salesperson with a snappy patter but no prospectus to evaluate risk or disclose the sales commission. Moreover, these are inevitably touted as “Long-term Investments”. Long Term Investments in financial lingo refers to generally inferior investments that are impossible to fully understand on which salespeople earn very large commissions.
a. Hint: Continue to ask your insurance person A) exactly how much commission is paid for selling this to you and B) exactly how much of your money you get back if you bail out after two years. If you can get a straight answer, you will be amazed that the amount of money you will lose under B is uncannily close to the amount disclosed under A. If still in doubt, we will demonstrate how much better you will be buying term insurance and investing the difference in the S&P 500 Index mutual fund. NOTE: This does not mean you should cancel or cash-in existing policies.

4. Any Investment Sold Over the Phone. Legitimate investments are never sold over the phone. Period. If their investment was as good as they say it is, and then they wouldn’t be spending their time talking to strangers like you on the telephone. Actually we encourage clients to never buy anything over the phone because of the increased exposure to fraud. And also because it only encourages even more unsolicited telephone intrusions.

5. Any Investment Someone Comes to your House to Sell You. If you think it through: anytime someone comes out to see you , at your convenience, in the comfort of your own home, and you are under no obligation, you are going to get a very high pressure sales pitch for something you probably never before considered buying, at an outrageous price. The sales commission on these arrangements is usually 25-50 percent of your investment. This makes shopping at home very expensive.

Here are some good reasons in order of preference:

1. Fund your QRP before your IRA for the following benefits:
   1. Employer match (free money).
   2. Limited penalty free access through loan feature.
   3. ERISA protections against creditors.
   4. Penalty free access at separation from service at age 55 vs 59.
   5. Higher contribution limits.
2. You can consider funding your IRA before your QRP if:
   1. Benefits1-a through 1-e are not important or not applicable.
   2. QRP has high expenses and limited investment choices.
   3. You have captured the employer match and are in the 0% tax bracket.
3. Fund a deductible IRA before a Roth IRA.
   1. If think your future (retirement) tax bracket will be the same or lower than now because you will no longer be working.
   2. If your wealth is behind your age on the Cambridge Financial Life Cycle.
   3. If the deductible IRA creates opportunity for a Roth conversion.
4. Fund a Roth IRA before a NON deductible IRA.
5. Fund a non-deductible traditional IRA before funding a taxable  brokerage account because:
   1. All gains are tax deferred.
   2. The after tax contribution can be strategically converted to Roth IRA at no cost because taxes have already been paid.
   3. Tax deferred gains can also be strategically converted to Roth IRA.
   4. Long after you retire and can no longer contribute to any IRA, you can still continue to do Roth conversions.
   5. By always contributing to a Traditional IRA during your eligible years and converting to a Roth IRA over your lifetime, you end up with a bigger pot of money growing tax free in the Roth IRA.
   6. IRAs usually have some federal or state protection against creditors.

I suggest assuming a zero rate of inflation in retirement calculators.  While at first glance this may seem surprising here are 5 reasons for this assumption.

1. Social security and many private pensions are already inflation adjusted.
2. The CPI calculation most likely overstates inflation, as admitted by the government.  Moreover, it is heavily weighted in areas that do not reflect the living expenses of retirees (e.g. housing, education).
3. Clients can and will tighten their belts in hard times (which could be inflationary times).
4. Static inflation number ignores consumer behaviors such as “substitution.”  E.g., when price of coffee or beef increases, consumers buy more tea or chicken.
5. Inflation is a relatively minor exogenous factor for most retirees.  Retiree finances will be much more affected by endogenous factors such as health, death of spouse, family support network, and community resources for the aging, etc.)

The above reasons apply to many retirement calculators.  The following reasons are relevant only to clients who use The Cambridge Retirement calculator: 

1. Interest rates rise in inflationary environments; short-term interest earning investments quickly reflect these increases and increase the client’s income almost immediately; when bond ladders get replenished in high interest rate environments, the new bonds have higher interest rates, increasing income down the road.  So if you adjust expenses for inflation, you should also adjust the yield on investments an equivalent amount.
2. The 1^st fundamental of The Five Fundamentals of Fiscal Fitness© requires all clients, including retirees, to continue saving 10% of their gross income.   This 10% savings factor is built into the calculator and serves as an “automatic regulator” by dampening the impact of market volatility during the withdrawal stage.  During down years, withdrawals are smaller.  During up years “contributions” are larger.  Economists call this “consumption smoothing.”  The key to retirement is spending, not portfolio returns or inflation. 
3. Cambridge Life Cycle assumes that retirement living expenses will be same as current living expenses.  Most retirement calculators assume retirees start out spending 80% of current income.
4. As retirees age, their living expenses typically decline.  Activity decreases with loss of mobility.  They no longer need to replace durable goods.  This decrease in expenses contradicts the results of most retirement calculators which show highest living expense ever during last years in life.
5. Retirement planning in the Cambridge System is assumed to be a process, not an event.  Clients and advisors review the situation every year.  Since this is a dynamic process, assuming a static, average inflation rate over a long period of time is a great tactic if you are selling insurance or annuities with incentive to overestimate how much people need to retire.

Imagine going to the doctor for headaches that have been increasing in pain and frequency for the past 2 years.  What would you expect in terms of your treatment and how the doctor is paid?

PAYMENT – The first doctors were travelling medicine men who sold magical elixirs out of the back of a wagon.  The first dentists were barbers.  The first financial planners were life insurance agents and stock brokers.  Like doctors, dentists and lawyers, we believe professional financial planners should be paid for their expertise and their services, not for the financial products they sell.  They should be paid by so they are loyal to you, and not to the insurance or investment company by whom they are employed.

PROCESS – You would expect the doctor to ask questions and perhaps conduct tests to determine the cause of your headaches.  After the diagnosis, you would expect a plan of treatment.  You would expect the recommendations to depend on the diagnosis and range from stress management to chemotherapy.  In the 21^st century, you should expect the same kind of professional standards for treating your financial issues.  The Certified Financial Planner® Board of Standards has defined a six-step process for giving financial and investment advice.

The 6-step process for creating your financial plan is similar to the process for creating a medical plan of treatment for your headache.  Dispensing investment or financial advice without a process and plan is like writing a prescription without a diagnosis and plan of treatment.

Here is the Six Step Process as defined by the CFP® Board of Standards:

Goals are a “destination”.  A Financial Plan is a “roadmap”.  Creating a roadmap requires you to identify your starting point as well as your ending point.

Many business coaches and books tell the story of a famous study of 1979 Harvard graduates (or 1953 Yale graduates).  Ten years after graduation, the 3% who had written goals were earning ten times the average income of their peers who had no goals.  The story is an urban myth, but verifiable research at Dominican University has confirmed the power of putting your goals into writing.  Develop a Financial Plan, have SMART Goals in writing (SMART stands for Specific Measurable Achievable Results in Time) and join the fabled 3%.

This is a critical step.  The difference between dreams and goals is a written plan.  Look at the four walls around you.  The building first existed as an idea in someone’s mind.  The blueprint was a key step for converting the dream into the solid structure you can see and touch.  There’s an old saying that people don’t plan to fail, they just fail to plan.

After creating the blueprint, the next step for turning dreams into reality is massive action.  Are you ready to act on your plan?

Your beliefs determine your behavior.  Therefore it is extremely important that you believe your plan is achievable.  Achievable is the “A” in SMART goals.  What you achieve is primarily mental.  “Whether you think you can or can’t, you’re right.”(Henry Ford).  Only human beings have the ability to create the future in their minds first.  Remember the building illustration.  Every human accomplishment, from the invention of the plow to smashing the atom and putting a man on the moon, was first a thought in the human brain before it became a reality.

Every one of us has this amazing ability.  We just don’t use it.  If you can plan a vacation, build a home or plan your day, you can plan and achieve financial independence.  It’s 99% mental.

The final step of the financial planning process is to monitor the plan.  Monitor how your net worth grows by recording your income, savings, portfolio, real estate, and amortization over time.

Unemployed will have specific list of actionable steps for:

1. Short term damage control
2. Regaining long term employment
3. Overcoming dysfunctional emotions of guilt, depression and procrastination

 What Causes Unemployment? 

Technology causes unemployment.  150 years before the Great Depression over 90% of all Americans worked on small farms, ranches or large plantations.  Today less than 3% of Americans work in agriculture.  Engine power replaced manpower and horsepower.  During the Great Depression we experienced 25% unemployment as technology destroyed old jobs faster than new ones were being created.  The Great Depression marks the transition of the United States from the Agricultural Age to the Industrial Age.

Today we are experiencing the highest unemployment since the Great Depression as the forces of creative destruction accelerate their work.  From May 2008 to October 2009, technology destroyed a net 250,000 jobs per month faster than it created new ones.  The Great Recession made the transition of the US from the Industrial Age into the new Age of Information & Communication.

What Should Do To Limit the Economic Damage of Unemployment?

Implement the following check list for the unemployed

• Create a cash flow projection or budget for the next 12 months and always keep it up to date.
• Increase liquidity.
• Apply for unemployment insurance.
• Review insurance needs and use COBRA to keep your existing health insurance until the new Obama health care legislation takes effect.
• Pay off debts.
• Rollover your Qualified Retirement Plan (e.g., 401k) to an IRA.
• Create a tax plan and verify any opportunities for tax free Roth Conversion during low income years.
• Plan for worst case scenario.

What Should You Do To Regain Employment in the New Information-Communication Age? 

Invest in yourself.  To find and keep employment in the new age requires more thinking than in the past.  In the Information Age it is your ability to think that will bring wealth and job security.  Unless you have unique physical skills that cannot be automated (plumber, waitress, professional athlete, etc.) the muscle in your head is the key to job security.  Only your brain can process and manipulate information to create wealth.  You begin that process now with your search for employment.

• Understand the job market.  In the United States there are three automobiles for every household while in China there are 30 households for one automobile.  What does this information tell you about searching for work in the manufacturing or construction industries?  Many manufacturing and construction jobs have gone the way of the blacksmith and farmer.
  • The same technology that destroys old jobs also creates new ones.  What are the new jobs that are being created?  Will clean energy replace the automobile industry?  Do you think there might be a growing demand for career counselors and other people who gather, analyze, manage and provide information about the job market?
  • The US Department of Labor project job growth for every industry and career in the county.
  • The internet is another source of information about the job market.
• Could you qualify for the new jobs created by technology?  Are some of your skills transferable?  Farmers who used their hands to repair equipment, learned how to assemble or repair automobiles.  Blacksmiths became tool and die makers.  You have skills and values that are marketable and may require minimal training to apply in a different field.  Do an inventory of your skills.  Read books like What Color Is Your Parachute? by William Bolles.  Use the internet and Google to find other resources.
• Contact a nearby College, University, technical or community college.  All offer classes on Career Planning and Development.

As a general rule of thumb, you need a portfolio that is 10-15x your unfunded living expenses in order to stop working.  Factors that impact the ratio are: your life expectancy at retirement, your income replacement ratio from non-portfolio sources and your tax bracket.  The younger you are when you retire, the longer the time the portfolio must support you and the larger it must be. 

Assume for a moment that your living expenses are the same as your income.  If your pre-retirement income was $20,000/year, you can expect Social Security to replace 69% of your income, so you may need a portfolio of $62,000 to $93,000. 

If your pre-retirement income was $90,000/year you can expect Social Security to replace only 36% of your income, so you may need a portfolio of $576,000 to $864,000. 

That’s a significant difference.  The difference in income is 4.5X.  The difference in required retirement portfolio is almost 10X.  To compound the challenge, the higher your required retirement income, the larger your portfolio must be to pay the additional taxes.

There are two sources of personal financial wealth.

1)      Existing wealth is either transferred to us, or

2)      We create and accumulate new wealth that never existed before.

Existing wealth is transferred to us by gifts, inheritance, government programs, marriage, etc.  We create or produce new wealth with our bodies (physical labor) and/or our minds (ideas, innovation, etc.).

Human capital is a measure of an individual’s potential for creating new wealth by calculating the net present value of their lifetime earnings.  Assuming your current earnings of $22,000 and a working life of 40 years, the value of your human capital can be estimated as $509,000.

You may have heard that the United States is leaving the Industrial Age and entering the Information Age.  As we transition from a manufacturing to a knowledge economy, those who create more wealth with their mind (knowledge) will have a significant advantage over those who create wealth with their body (physical labor), unless they have a specialty such as professional athlete or washing the windows of skyscrapers.  By investing in your health to prolong your working life, and investing in your mind to increase your earning power, you increase your individual human capital.

Gross Domestic Product (GDP) is a measure of a nation’s produced or created wealth.  In 2008 the US economy produced $14.4 trillion dollars of wealth or Gross Domestic Product (GDP).  Our GDP per person or per capita was $47,440.  Our GDP per household was $129,540.  In other words, even after the market crash in 2008, the average US household created $129,540 in new wealth.

After 40 years of working (age 25 to 65), the average US household will create $5,181,600 in new wealth.  We are the largest economy in the world and the US worker is the sixth most productive in the world.  Yet, in an aging America 80% of all households have a net worth LESS than $250,000!  How can so many produce so much and have so little to show for it?

We propose two simple answers:

1)      BEHAVIOR – Individually, we are CONSUMING more wealth than we CREATE.

2)      BELIEFS – Most likely we have beliefs which

1. trigger consumption instead of investing
2. block the unlimited human capital in our minds

A Financial Plan addresses both issues and accelerates the journey to Financial Independence.