What Your 20s Are Worth

Constant reminders by parents and grandparents to save for a rainy day and the future are met with skepticism or ignored by those just starting their career. You know the different scenarios: Finally out of college and earning a regular pay check, many will be tempted to make up for lean years and spend everything. For those in their later twenties marriage, kids, and a mortgage can limit the potential to save money.

Have you every wondered how much you could potentially save over 5, 10, or 15 years? Or how much you would need to have even $50,000 of income in retirement? Here are some numbers to consider from my financial planning software:

   Starting age: 25

   Retirement age: 65

   Savings: $5,500 annually

   Rate of Return: 8% annually

   Total at age 65: $1,424,811

          Alternative: Wait 10 years to start saving

   Starting age: 35

   All other numbers stay the same.

   Total at age 65: $623,058

The potential loss is over $800,000 by waiting just 10 years and out of pocket savings of $55,000. This is great example of how compounding interest works for you and the opportunity cost of not saving.

Once you get to retirement, how much should you have saved to earn $50,000 every year in today's dollars? A ball park figure of $850,000 if you continue to earn 4% a year in retirement. Remember, this is in today's dollars and doesn't take into account inflation. 

Now, assume inflation is 3% per year from age 25 until age 65.

   At age 65 $50,000 = $163,000

Withdrawing $163,000 starting at age 65 until age 94, earning 4% a year and inflating the withdraw 3% a year will require you to accumulate approximately $4,000,000 of wealth.

Now you can see the wisdom of your parents and grandparents suggesting you save. Max out your IRA accounts, enroll in your company 401k and at least get the company match. Let your money work for you. Make your 20s even better while building a strong financial foundation.

Locked Up

When deciding whether or not to contribute to a retirement account, some people decide not to because they don't want their money tied up. They know the money can't be withdrawn without paying hefty penalties and taxes and are more comfortable having that cash sitting in their bank account available at any time earning next to nothing in interest.

For those same people, when it comes to spending money on a trip, clothes, home project, or going out to dinner they have no problem locking up their money. When they are 65 and want to retire how are they going to get money from the all the restaurant meals they ate, from all the clothes they bought and all the credit card interest they paid over the last 30 years? When I look in my closet I see clothes and shoes but I also see a bunch of spent dollars, not growing in value and no way to get that money back.

It is important to be good stewards of our money, prioritize how and where it is spent and be prepared for when we don't want or can't work any more.

Credentials You Should Care About

Talk about confusing, there are hundreds of financial designations those in finance can put after their name. How do these letters help or hurt the consumer? Unfortunately, many designations lack high standards of knowledge, experience and on-going requirements. In fact, some designations only require a few hours of study over the weekend and then a quick exam.

Below are the top designations for each category in the finance industry: Accountant, Financial Planner, Investment Analyst. Use this guide to help you evaluate finance professionals and how the credential can help your particular situation. 

Certified Financial Planner (CFP): They provide complete advice in all areas of personal finances. From insurance and taxes to investments and estate plans, they have extensive knowledge to help you better manage your finances. 

• Education: CFP practitioners develop theoretical and practical financial planning knowledge by completing a comprehensive course of study at a college or university offering a financial planning curriculum registered with the Certified Financial Planner Board of Standards.

• Examination: CFP practitioners must pass a comprehensive two-day, 10-hour CFP Certification Examination that tests their ability to apply their financial planning knowledge in an integrated format. Based on regularly updated research of what planners do, the CFP Board's exam covers the general principles of financial planning, insurance planning and risk management, employee benefits planning, investment planning, income tax planning, retirement planning and estate planning.

• Experience: CFP practitioners must have a minimum of three years' experience working in the financial planning process prior to earning the CFP mark. As a result, CFP practitioners have demonstrated a working knowledge of counseling skills in addition to their financial planning knowledge.

• Ethics: As a final step to certification, CFP practitioners must pass an ethics review and agree to abide by the CFP Board's Financial Planning Practice Standards and a strict code of professional conduct, known as the CFP Board's Code of Ethics and Professional Responsibility. The Code of Ethics states that CFP practitioners are to act with integrity, offering professional services that are objective and based on client needs.

• Re-certification: It is also necessary for every CFP certificant, once certified, to complete a re-certification every two years. Those seeking to maintain their certification must attain a minimum of 30 hours of continuing education in order to stay current with developments in the financial planning profession and to better serve their clients. Two of these hours must be spent studying the CFP Board's Code of Ethics and Professional Responsibility or Financial Planning Practice Standards.

Certified Public Accountant (CPA): A CPA license is the accounting profession’s highest standard of competence, a symbol of achievement and assurance of quality.More than just income tax preparers, CPAs help business owners value their company, audit financial statements, devise strategies to lower taxes and provide general advice personal finances. 

The requirements, which are set by each state board of accountancy, include: 

• Degree: Most states require 150 semester hours of instruction – which is 30 hours beyond the typical four-year bachelor’s degree.

• Exam: The CPA exam consists of four separate exams, which are taken one at a time. Candidates may take the exams in any order; but once you pass the first exam, you must pass the other three within 18 months. Exam topics are Audit and Attestation; Financial Accounting and Reporting; Regulation; and Business Environment. 

• Experience: Most states still require 2 years of on the job audit and or tax experience.

• Continuing Education: Again, each state is different but most require at least 120 hours every 3 years with a minimum of 20 each year.

Chartered Financial Analyst (CFA): This credential is known for its rigorous focus on current investment knowledge, analytical skill, and ethical standards. Most jobs held by CFAs are portfolio managers for mutual funds or investment advisor firms. 

To become a CFA a person needs to:

• Hold a bachelor's degree from an accredited institution or have equivalent education or work experience. 

• Pass three CFA exam each of which is 6 hours long. 

• Have 48 months of acceptable professional work experience in investment decision making. 

• Provide professional reference statements. 

• Agree to adhere to and sign the Member's Agreement and the Professional Conduct Statement.

Password Management and Protection

Keeping our documents and information safe in the digital age can be a burden. With viruses, hacking, and lost/stolen devices our information is more susceptible than ever. To help protect our information we have to create passwords for websites, files, computers, bank accounts, debit cards, etc. It becomes nearly impossible to remember all the combinations of letters, numbers and characters to access the information we need.

Digital password management systems secured by a single ultra-strong password, something you can remember but nobody else would guess, are available to store your passwords and automatically recall them as needed. The best password managers also function as automated Web form fillers. These services encrypt your data, create strong passwords, and protect against unauthorized users.

I use Apple products including their Mac computers. Their Safari web browser has a "Key Chain" application that, once enabled, offers to save user names and passwords. There are similar functioning products for PCs. You simply enter the information one time and each time you return to the site it will automatically fill in the right information. A small problem I have experienced is with two different accounts for the same company/website. In those cases the program remembers info from the very first time you visited the site and doesn't allow you to choose a different user name. You do have to worry about other users of the computer logging in so it is best to set up different user accounts on the computer with password protection.

If you are on the go and need to access information on multiple computers, platforms, and locations look for web/cloud based applications. Your data is encrypted and stored securely online. Be aware, as additional security, if you forget your login information for the password manager, there are no password hints or others ways to access and recover your data. 

Password management applications with various features and services include Kaspersky, Last Pass, RoboForm, and Sticky Password. Currently, there are only a few premium services for mobile and tablet devices.

Old School Notebook/Binder: One non-digital way is to have a small notebook with all your account numbers, user names and passwords. Information can be crossed out or covered with white out and replaced with updated information. This is convenient and easily accessible when you are at home or on the road. You won't have to worry about a computer program or hacker accessing your information. The obvious problem is a notebook can be left behind, stolen, or destroyed. If you do keep your information written down it is best to hide it in a safe or drawer that can be locked.

We all have heard that using the same username/password for everything is a bad idea but few heed the warning. To help you protect your information and stop the cycle of "Password Resets" consider these ideas for managing your passwords.

Costco Your Investments

"How may I take your order?" I have family members who freeze up when they pull up to a drive-thru restaurant. Their eyes become overloaded with choices and they get tense and even upset when they can't decide in a quick moment. Adding shouts of orders from throughout the car multiplies the confusion.

Numerous academic studies and books about consumer choices have shown shoppers find it difficult to edit down the selection of everything from toothpaste, to jelly, and to cars. Researchers found that more sales were made when fewer choices were presented. Some companies realized this and gained market share by having fewer options compared to the competitor.

Many people are finding that the investment world offers too many choices leaving them to make bad choices or not investing at all.

According to Morningstar, there are 22,689 mutual funds and 1,457 ETFs. How is someone expected to decide which investments to use with their hard earned money? Cutting through all the marketing material, media pundits, and star ratings is a daunting and confusing task. This could be a reason why so few people are financially prepared for retirement.

When you do invest, some negative consequences can pop up from having too many choices. These include excessive trading, constantly changing allocation strategies, higher taxes, overlapping investments, and not enough or too much diversification.

With 401(k) plans, studies have shown that as more mutual funds are offered, fewer people participate. And, participation rates are highest among employers who automatically enroll associates in the company 401(k) rather than giving them the option to enroll.

I like to shop Costco for its selection and value. I like that they carry one or a couple of items in each category. The inventory at a Costco is around 4,000 different products where a typical Wal-Mart has 125,000. We trust that Costco has done the research and is providing the best product in the category and is selling it to us for a fair or discounted price. They have done the editing allowing us to save time, money and frustration.

Working with a Certified Financial Planner can be the Costco to your investments. Our expertise and knowledge allows us to evaluate investment choices, select ones that are appropriate for our clients and manage a financial plan for a low fee. I have helped clients go from 20+ funds down to nine or 10 and at the same time provide more diversification. There are others who had no idea what they owned or that they were paying up to 4% a year in fees. I created transparent investment plans and cut their costs by using low cost index funds.

There are many other areas of personal finance besides investments that a financial planner, like myself, can help simplify such as insurance, estate plans, taxes and retirement. I will do the research, edit the choices, select the ones that are in your best interest and manage it all for a fair fee. This will help you decide to save and be financially prepared now and in the future.

Election: What Now?

We now know the political landscape for the next two years in Congress and four years for the Presidency. What are the expectations for our finances and investments? Here is a quick run down:

• Fiscal Cliff: Mass spending cuts and tax increases will take effect in January if the President and Congress can’t agree to stop it. That could mean a tax hike for some 90% of Americans, and perhaps another economic recession in the first half of 2013. Spending cuts are concentrated on national defense but also include some other areas including Medicare reimbursements. Compromise will probably not come easy or fast. Strategy: either way taxes are going up and spending will come down. Bad for stocks and other "risky" assets.
  
  
• Taxes Go Up: Taxes on capital gains, dividends, and income taxes are scheduled to go up on January 1st. Rates are supposed to reset to pre-2001 levels with the highest rate on income and dividends shooting up to 39.6%. We have already started to see special dividend distributions by corporations to get ahead of the higher dividend tax. Expect to see more before the end of 2012. Additionally, if you will receive less money from an investment it is worth less. Dividend stocks should fall in value to reflect the higher tax. Strategy: use a comprehensive asset location strategy. Shift income producing investments such as dividend stocks and treasury/corporate bonds to tax protected accounts like your 401k, IRA, etc. In taxable accounts use municipal bonds. Max out retirement contributions.

• New Taxes: A new 3.8% Medicare tax on regular income above specified levels and "unearned income" begins in 2013. The tax is applied to income above $200,000 for single filers and $250,000 for married couples. What is considered unearned income? Unearned income is very broad and includes: taxable interest, dividends, net capital gains, annuities, rents (non-trade/business), and royalties. Strategy: Contribute or convert to Roth IRA/401k accounts. Distributions, required and otherwise, from traditional IRA/401k's are figured into adjusted gross income and subject to the new Medicare tax.

• Growth will be harder: With higher taxes, more regulations and slower economic growth corporate earnings and revenues corporations will suffer. Companies will cut costs to stay profitable leading to layoffs and creating more efficient ways to do business through technology. Higher unemployment will put a strain on household finances. Strategy: Lower your expectations, save more, review your asset allocation to stocks.

Investing is Not Financial Planning

Do you know there is a difference between financial planning and investing? For most people, an inordinate amount of time and focus is on their investments and the returns they produce. Financial planning places equal importance on all areas of your finances including taxes, insurance, estate, retirement, and investments.

Taking planning a step further, fee-only financial planning is goal oriented and unique to the client. The focus is on determining individual financial goals and why those goals are important.

Say your goal is to accumulate $2,000,000 in 10 years. Is it more important what your rate of return is or that you accumulate $2,000,000? Financial planning says the latter is more important. What does it matter if you earned 10% on $200,000 of investments if you are spending an extra $20,000 each year? Financial planning will help you prioritize and delay gratification.

Financial planning will consider how much life insurance you need and what type of policy is in your best interest. It will consider the tax consequences of selling an investment (stocks, rental property, or business). It will look at the long-term consequences of buying a $300,000 house versus a $600,000 house.

If investing and rate of return are the singular focus then buy and sell decisions become influenced by emotions. And emotions are the biggest obstacle to achieving long-term financial success.

Personal finances is more complicated than ever. That is why it's important to have an expert team in place to help you develop, execute, and achieve your financial goals. This team should include a CPA, an estate attorney, and a fee-only Certified Financial Planner. Get them to coordinate your plan so they are all working to achieve your financial goals.

Ignore the inconsistent results of investment returns. Focus on your goals and why they are important.

Social Security: Now or Later?

Deciding when to start taking social security benefits can be hard to determine. We have to decide the value of waiting versus the value of taking the money now, are expected years, if we are still working, etc.

Generally, people say they will wait until full retirement but most start benefits early. In 2009, about 42% started social security at the earliest age possible, 62. Many feel that they have been paying into the system for so long and they just want to get some of their money back. The drawback to taking social security early is benefits are reduced. A benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.

Taxes: If you are working and receive benefits before full retirement, $1 of benefits will be deducted for every $2 earned above $14,640. Taking money from IRAs and 401k's between 62 and full retirement can ensure you receive 100% of your benefits and potentially lower your future taxes. With lower account values after age 70 1/2 you will be required to take less in IRS required minimum distributions each year. The less income you receive the lower your potential tax bracket.

Waiting past full retirement offers greater benefits adding thousands of dollars to your benefits each year. For each full year you wait past your full retirement age until age 70, you receive bonus "delayed retirement credits"which increases your annual payments 8%. This strategy is referred to as file and suspend. This can be enacted at full retirement age even when you started receiving benefits early but later decide you don't want to. Credits will accumulate on the reduced benefit you were receiving.

Strategies for spousal benefits can also be enacted to maximize benefits. One person can file and suspend while the other draws on spousal benefits. This allows you to earn the 8% retirement credits while still bringing in some income to pay bills and decrease withdrawals from IRA accounts.

The take away is social security benefits can be tailored to your circumstances to maximize benefits and potential taxes.

Speed Up Contributions

If you are making your IRA or 401k contributions throughout the year you may want to consider pulling them forward to the beginning of the year. The longer you have your money invested the longer it has to grow, earn dividends, and compound.

Yes, market timing could be a consideration but that assumes you know the exact day when prices are low for you to make your deposits. That's not happening.

Example 1:

   Deposit: $5,000 into IRA

   Beginning of Year

   Average Return: 7%

   20 years

   Total: $219,325

Example 2:


   Deposit: $5,000 into IRA

   End of Year

   Average Return: 7%

   20 years

   Total: $204,977

Making deposits at the end of the year versus the beginning of the year is an illustration of an economic term called "opportunity cost." The opportunity cost here is $14,348. To get to the same $219,325 with end of year deposits would require earning an additional .6% each year or saving $350 more each year. Start planning now for 2013.

Roth IRA Conversion

If you want to contribute to a Roth IRA but think your income is too high, there is another back door option. Here is what you do: Open a Traditional IRA; Make a nondeductible contribution; Convert the contribution to a Roth IRA.

Why go through the trouble of converting money into a Roth IRA? They are an amazing deal, especially for younger, long-term planners who want to hedge against higher tax rates in the future. With a Roth IRA you don’t ever have to take money out, and when you do start taking money out, it’s all income-tax-free, including the earnings. By contrast, with a traditional IRA, earnings grow tax-deferred, you have to start taking required mandatory distributions the year after you turn 70.5, and distributions count as income. A Roth can help minimize your tax bill come April.

Contributions are still limited to $5,000 (or $6,000 if you’re 50 and older) each year that grows in the Roth IRA income tax free. That’s $10,000 (or $12,000 for 50 and older) a year for a married couple. Income restrictions on conversions were lifted on Jan. 1, 2010, so anyone—regardless of income—can convert a traditional IRA to a Roth. Once your modified adjusted gross income is $183,000 for a couple filing jointly or $125,000 for singles, no Roth IRA contributions are allowed.

Other benefits to having Roth IRA money: 

• Medicare premiums are based on income. By regulating how much money comes from retirement accounts the lower your Medicare premium can be.
• Leaving a Roth to a child, he or she will have to take a minimum amount out each year, but the withdrawal is income tax free.

One thing to thoroughly consider before making a conversion is the pro rata rule. When you calculate the taxes due on a conversion, you have to take into account all your IRA assets, not just the new $5,000 nondeductible IRA. 

College Funding Choices

In a previous article, I wrote about how much it might cost us to send our three girls to college. Now, we will consider the funding choices and types of accounts available to save for college.

529 Plan: Back in 2001, Congress passed a bill that gave all 529 plans tax relief. 529s do not create federal capital gains, dividend, or interest taxes. This tax break gives them a big advantage over other college savings strategies. All 50 states offer 529 plans, although, each one is unique. For financial aid purposes, parents should open the account in their name and make the child or children beneficiary. You are allowed to change the beneficiary at any time to pay for qualified college expenses. 

You are allowed to put up to the $13,000 gift tax limit per year ($26,000 for a married couple) per beneficiary. Or, you have the option of front loading up to 5 years of contributions for a total of $65,000 ($130,000 for married couples). Although, no other gifts can be given for the next 4 years. Each plan has maximum amounts that can be accumulated in each individual 529 account. So, if you have two kids you may need to open two accounts instead of just having one 529 account and changing the beneficiary.

Contributions go into an investment account offered by financial institutions like Vanguard, American Funds, etc. They offer age-based choices that get more conservative as the beneficiary gets closer to college or you can pick the investments on your own. There are limits and rules including allowing just one investment change per year. The Vanguard 529 plan offers low cost funds and a variety of fund choices.

Depending on the state you live in, you may be able to deduct contributions from your state income tax return as long as you contribute to the state 529 plan.

Prepaid College Plans: Prepaid tuition plans are accounts that allow you to pay for your child's future college tuition at today's prices. If you have enough money now, you could pay for a complete four-year degree that your child won't use for another 18 years. Or, you can break payments down into more manageable monthly payments.

Some plans allow you to purchase individual tuition credits. Others let you buy a semester's or year's worth of tuition. Prepaid tuition plans are actually a variation on 529 plans, but with lower risk. What you lose is the potential to earn more by investing that money in a college investment plan described above. The money you put in is guaranteed by the state administering the plan. Most prepaid plans can only be redeemed at public colleges and universities in that state. In many cases, you or the student beneficiary of the account must also live in that state. 

If the child goes to a private or out-of-state university most prepaid plans will pay the average cost of a public university in the year the child is attending college. In most cases, this amount will not cover all costs and the gap will have to be covered by other funds. About 250 private schools have come together to form their own prepaid tuition plan called the Independent 529 Plan, which began in 2003. The tuition plan consortium includes Princeton, Stanford, MIT, Notre Dame, and many other private universities.

If you purchase this plan, your child can use the tuition credits at any participating school. If your child decides not to go to one of these schools, the plan will give you a full refund with interest. The minimal amount of interest isn't taxed as long as you spend the money on higher education.

Coverdell: These have an annual contribution limit of $2,000. Also, the tax break for using Coverdell funds to pay for K-12 tuition is scheduled to expire at the end of 2012.

Taxable Accounts: The choices here are quite varied and include joint accounts, accounts for minors, and savings accounts. The biggest difference is the tax treatment. Interest, dividends, and capital gains are all taxed either at the parents tax rate or the child's. You also have to worry about disqualifying the child from financial aid depending on who's account it is and how much is in it. Accounts for minor such as UTMA or UGMA by law have to be handed over to the minor on the account at age 18 or 21 depending on the state. This means the money could be used for things other than college.

The Greater Good

Just as physicians, lawyers, and CPAs perform an essential role in society, so do Certified Financial Planners.

When I ask myself why I am a financial planner, I have come to discover my over arching goal is for the greater good. I have experienced the positives of saving/investing along with the negatives of spending too much. I devote myself to helping client's discover what is important, how we can accomplish their goals, and avoid or lessen financially difficult times.

My desire to serve the greater good is realized through my desire to gain specialized knowledge and experience and continually improve my skills and business practices. After four years at university, I earned a bachelors degree in business administration/finance. I spent over three years studying to pass the 10-hour Certified Financial Planner exam. I broke away from a company that put shareholders and management interests first to start a Registered Investment Advisor firm that puts the client's interests first.

The service I provide gives clients a sense of fulfillment and happiness knowing they were wise with money.  I want us to be independent in all stages of life and less dependent on others including government. These are values intended to improve each family, strengthen their self-image and improve our country. By helping people save and invest they will experience less stress financially and mentally. Citizens who manage their finances effectively are in better positions to support others like aging parents, pay for children's college, and contributing to charities. They can invest in new or expand businesses that employ people and support agencies to those in need.

Occasionally we hear comments that financial planners only help "rich" people with millions of dollars to invest. This just isn't true. There are groups of planners who have free financial workshops in low-income areas. Some concentrate their practices on middle-income earners while others only work with professionals just starting their careers. Most of us are called to this profession because we want to help people. I am a financial planner because I want to serve the greater good.

Holmes on Finance - Financial Renovations

From time to time I watch the television program Holmes on Homes on one of the home improvement channels. The show is hosted by general contractor Mike Holmes who helps homeowners who need help with renovations gone bad. Mr. Holmes comes in and solves the problems and mistakes made by incompetent or con artist contractors. Its amazing to see what he finds wrong and the level of deception by some contractors.

Sadly, I see similar mistakes and improper actions by financial sales people. Some problems may show up immediately while others can become issues in the future. Managing personal finances is complex and it is easy for bad people to take advantage of unsuspecting individuals.

Here are some of the things I have seen that need to be torn down and renovated:

• Products sold to client because the broker received more revenue.
• Client put in high fee broker account program because of account minimums.
• Using actively traded funds when historical results have shown the majority of indexes beat active managers. In 2011, 79% of large cap active managers didn't beat the S&P 500 according to Morningstar. 
• Paying a combined annual fee of 4% split between the advisor and fund manager. 
• "A" share mutual funds with up front commissions of 5.75%, they also hit investors with annual management fees.
• Guidance from brokers and 401(k) plans putting too much money in stocks right before retirement.
• Having the majority of client assets in individual junk bonds and calling it diversified and low risk.
• Selling structured notes to clients inside a fee-based account. This means the client pays a 2% commission up front and an annual fee on top of that.
• Annuities!
• Realistic expectations of investing
• The risks associated with buying individual stocks
• Being too conservative with the asset allocation which then guarantees the client won't reach their retirement goals.

So how do you find a reputable financial planner/advisor? Follow the same steps that you would a home contractor:

• Ask Friends for Referrals - People you respect can lead you to some different choices

• Look for Credentials - Certified Financial Planner (CFP), works for Registered Investment Advisor firm

• Interview Candidates - Meet with 2 or 3 planners; find someone who listens; gives advice and doesn't sell products

• History/Experience - Being a CFP requires 3 years of working experience. 

A quality financial planner will take the time to understand your vision, offer advice that is in your best interest and help you construct a solid, well built plan to last a lifetime.

Advisor's Orders

Why don't people follow the doctors orders when they get sick or go through medical procedure. I just don't understand this mentality. A recent study by Quest found that over 60% of Americans don't follow the doctor's prescription medicine orders. Patients will cut the amount in half, skip a day, or stop taking the meds completely. I have many family members who completely ignore what the doctor tells them. Doctors are highly knowledgeable, trained experts, trying to help the patient heal and get better. Why do so many blatantly disregard advice that will help them?

I ask myself the same question about financial advice. Unfortunately, the majority of Americans either don't follow or seek out advice from qualified financial planners. In 2010, only 28% of Americans used a financial planner*. As finances and laws have become more complex there is greater need to work with someone to help individuals meet their personal financial goals. These do-it-yourself investors have plenty of information available either through financial planning websites, publications, books and free online tools through brokerage websites. The numbers show that the average working person in their 60's has only $144,000 in their 401k**.

Of the 28% who do use a financial planner, I bet there is large portion of clients who don't follow the directions of their financial planner. I have experienced it and have heard other colleagues complain about the lack of follow through by some clients. Clients will ignore financial plan reports, requests for more information, and issues that need immediate attention.

Just as a doctor may say you need to stop smoking or start eating better, a financial planner may have to tell someone they are spending too much or need to make certain adjustments if they want to retire. For better financial health, actively participate with a Certified Financial Planner and follow their advice.


*http://www.cfp.net/media/release.asp?id=253
**http://www.ebri.org/pdf/briefspdf/EBRI_IB_011-2010_No350_401k_Update-092.pdf

Investment Club Gamblers

Recently, I went to an Investment Club at the local library just to see what goes on. I have never been to one of these meetings and going in I thought a small group of people got together to talk about broad topics to help each other manage their personal finances. What I experienced was something quite different.

When I walked in the large darkened room I immediately saw two iPads and a projector screen with a stock chart. Two older men were sitting at a table running the iPads and three other people at least 20 years my senior were sitting at a separate table staring up at the chart. I couldn't tell if they were in awe or if they were confused by all the crossing lines, bars and numbers. My hope turned to skepticism.

I introduced myself and said I was there to learn more about personal finances and hopefully clarify some questions I had. Everyone was nice and appreciated that a young person was attending their weekly session. We went around the room, with each person giving their thoughts on the stock market and what they did in their accounts in the last week.

The only lady in the group said she had read an article on a blog site about how the financial system was going to collapse. She said that everyone will lose their money in a digital meltdown because everything gets aggregated in one account at a broker and there are no physical documents to confirm or substantiate claims on their money. She wanted to know how she could get stock certificates to put in her fire safe. I immediately thought of the movie "Fight Club" and their goal of wiping the debts of society clean by blowing up all the servers and computers inside financial buildings. This lady was completely convinced that she was going to lose all her money so she sold all her investments and was "waiting for the right time to buy." The other members told her to go buy real gold coins or bars and store it in a safe. One person added not to put her safe in the closet because burglars know to search there first.

After the lady had her turn, the next four people talked about how they traded in and out of stocks like IBM or GE trying to earn fifty-cents or a dollar on each share. One person believed the market was going up and then the next person said the market was going down. They would look at 50-day moving average indicators, momentum, share volume, or consult a Taro reader. Kidding on the last point!

Seriously, these people were not investing or trying to create a strategic plan for their finances. They didn't have any serious data or information to back up their reasoning for why it was going go one way or the other. It was just hunches or feelings. All they were doing was gambling their money with stocks. No one knows what stocks are going to today, or in the next hour, or next minute. The chances of winning in a single day are the same as flipping a coin. But, if you spread the time out over ten years the chances of winning, historically, have increased to 89%.

What I believe is buy and hold is more important than ever, trying to time the market doesn't work, spend a great deal of time on asset allocation, rebalance and use low cost index funds. Also, remember investments is just one part of our personal finances. Risk management, estate planning, taxes, and retirement goals should be thought about and planned just as thoroughly as our investments.

Money Guide Pro: Great Financial Planning Tool

Three months ago I started using the leading financial planning software for independent financial planners. Money Guide Pro (MGP) is the originator and leader of goal focused financial planning. This specialized software provides great detail and insights for planners and individual clients when planning for any future financial need, especially retirement. Although it is a great tool, it is expensive, and is only available through advisors. We are happy we can offer this service to our clients.

With input from the client, I am able to easily run multiple scenarios and tweak factors such as how much to save, the year of retirement, and asset allocation to gauge the financial affect. MGP really does a nice job of addressing client fears about the affect of investment losses, inflation, longevity, and health care.

The information used in the program includes:

• Desired retirement income
• Goal Builder
• Social Security estimator and maximizer
• Aggregates all assets including investments, bank accounts, property, business ownership/equity, stock options, pensions, etc.
• The impact of receiving lump sums or periodic payments
• Net Worth calculator
• What if scenarios
• Budgeting
• Customized asset allocation models

MGP runs 10,000 simulations for each scenario to give a probability of success. If the score is less than 75% then important changes are recommended. But, if the score is 90% or higher, current spending or retirement income can increase or we can add other goals such as funding college for grandchildren, charitable giving, etc.

Risk management is important feature of MGP. I can quickly examine if a family or an individual is likely to meet their retirement goals with a lower risk portfolio. They also have a fully integrated module for analyzing life insurance, disability and long term care.

The client reports are great to read because they highlight what is important and give clear directions on any recommended changes. They use bright color graphics and pictures to engage clients and helps make the process more enjoyable.

It really is amazing all the features and calculations they have inside of the MGP program. They have made it much simpler and more enjoyable for financial planners and their clients to execute the complex task of creating personalized financial plans.

What!? It Will Cost How Much for College?

My wife and I have three kids and as a financial planner I am always running numbers and scenarios of what we need to accomplish our goals. Recently, I wanted to figure out what we would have to save in order to pay for our kids to go to college. First, we must fully fund our retirement needs then we can add to our daughter's college savings plan. This will give them a huge financial advantage to save for their own future.  Here are the staggering results:

Current average cost for in-state, public university: $17,100
Average national average college cost inflation: 6%
Year they start college: 2027 and 2031
Years in College: 4

Projected costs of college for each year:

    2027: $40,891 (times 2)
    2028: $43,440 (times 2)
    2029: $46,046 (times 2)
    2030: $48,809 (times 3)
    2031: $51,738
    2032: $54,842
    2033: $58,133

The projected total cost of college for all three children is $525,848.

If we invest their college savings and earn 8% a year for the next 15 years, we will have to put away $1,509 a month in order to put them through college. That's like paying another mortgage each month!

So, if you would like to pay for all or a portion of your child's college costs, as with any other financial goal, the earlier you can start saving the better.

Average cost and inflation projections from: http://www.archimedes.com/vanguard/collcost.phtml

No More Mediocrity

I am tired of seeing the U.S. and our citizens be mediocre. Sure, there are some that are creating and performing great in these tough times but, the overwhelming sense I have is we are accepting being bullied around.

After today's depressingly low job's number for the month of June, I found myself wondering why no one seems to be getting mad. Are we getting so numb to the constant negativity that we are accepting this "recovery?" When did we stop striving and demanding that positive changes be made so the economy improve? The improvement I am talking about is not 1% or 2%. What we need and what we have experienced after all other recessions is 5% or more growth. What is getting in the way this time?

This is the third summer in a row where we economic, job stock market growth has slowed! Each slow down has coincided with changes in taxes and regulations in the next 3 to 6 months. In 2010 it was tax increases set for the beginning of the next year, in 2011 it was increases to government borrowing or debt ceiling. Now, it is prospect that onerous taxes on income, capital gains, dividends, medicare, etc. will jump tremendously starting in 2013. The first two were given temporary patches pushing the problems into future years. The tax increases set for 2013 will have an enormous negative impact on economic, job and stock market growth.

It is time for us to take responsibility and realize we can't count on anyone but ourselves to define our lives and make them better. If you don't like the direction we are heading then stand up and make your voice and ideas heard. Spread your ideas, tell politicians, friends, and family what would benefit you and what hurts you.

When we do succeed make it known that you did it despite the extra regulations, burdensome taxes, and economic malaise. Let them know how your accomplishments would have been achieved so much faster if these obstacles were not in your way. Make it known you are part of the reason why the U.S. economy started to explode with growth.

What Is Truly Important?

Here are three questions to help identify what is truly important to you.

1. Imagine that you have enough money to take care of your needs, now and in the future. How would you live your life? Would you change anything?

2. Imagine that your doctor says you have only five to 10 years left to live. You won't feel sick, but you will never know when death will come. What will you do? Will you change your life? If so, how?

3. Now imagine that your doctor says you have only one day left to live. Ask yourself: What did I miss? What did I not get to be or do?

Roth 401k versus Traditional 401k

Deciding between the Traditional and Roth 401k depends on your current tax rate, estimating your future tax rate and your preference for having a tax deduction now or later. Here is a simple scenario comparing the tax treatment for both options. The scenarios assume the same tax rate throughout. Results can change if you move to a state that has higher or lower state income tax rates.

Scenario 1 - Traditional 401k

Start with $10,000 in IRA/401k

Tax Bracket 28% gives a $2,800 savings.

Assume that $2,800 savings is invested in a taxable account.

The $10,000 grows to $100,000.

The $2,800 grows by same multiplier of 10 to $28,000.

Assume all investments accounts are sold, withdrawn and put to taxable cash account.

When the $100,000 is withdrawn it is taxed at 28%.

This leaves $72,000 from 401k

The capital gain from $2,800 taxable account is $25,200 and taxed at capital gains rate of 15%.

This leaves $21,420 + initial $2,800 for a total of $24,220.

The total amount from both accounts is $96,220.

Scenario 2 - Roth 401k

Start with $10,000 in Roth 401k

No deduction. This causes you to take $2,800 from savings to pay taxes.

$10,000 grows to $100,000

All investments sold and withdrawn.

No tax on withdrawal.

Receive full $100,000

This all assumes the same tax rate throughout. A person would come out the same in both Scenarios if they invested the tax deduction savings in Scenario 1 into a Roth IRA. But that is only if the person qualifies for the Roth. They would be worse off if they used a Traditional IRA because the IRA contribution is not deducted if you participate in an employer sponsored retirement plan, income is above certain IRS limits and gains are taxed at the potentially higher income tax rate.

Retirement- The Right Brain Matters

In my March 2012 newsletter I wrote about using the left and right side of brains to make meaningful financial decisions. The importance of using both our emotional (right side) and analytical (left side) brain is to provide balance and give longevity to our financial decisions. An extension of this topic is how we use our brains to prepare for life in retirement.

Most forms of retirement planning are left brain oriented, crunching numbers, creating formulas and matching them to what we have saved. Just as important in the financial planning process is using the right side of our brains to creatively consider what we want to do daily in retirement and what will fulfill us in this stage of life.

In retirement we will have to discuss or think about where our identity will come from, how we will remain healthy and active, and how we plan to stay socially connected. Define on paper what we enjoy, our hobbies, where we want to live in relation to family, etc. I recently read about making a "curious list" which is a list of activities people are curious about and would like to learn more about in retirement. Curiosity can create motivation, leading to new experiences and knowledge that can be useful in increasing retirees' sense of belonging and maintaining physical and mental skills.

We have to be creative using the right side of our brain to dream about what we want to do when we wake up each morning and don't have to go to work. Maybe we want to learn a new hobby or we have a desire to teach others special skills we acquired in our career. Think about how this will fulfill you and make you happy. The trick will be to find something that will keep us energized for more than a week or a month. There have been many people who have retired only to be back in a full time job a month later not because they needed the money but because they didn't prepare for what they wanted to do in retirement.

It will also be important to identify friends and family who we can count on to support us mentally, physically, and spiritually. Who can we turn to when times get tough? Who can we call when we are having a bad day? Who can provide objective, thoughtful advice? Just as our savings provide financial support, our friends and family provide another level of human support.

Communicate with our loved ones and friends about how we see our lives in retirement. Talking it through can bring clarity to our thoughts and plans. Getting together groups of people to bounce ideas off of each other and gaining insights into how others are thinking about retirement. Let's use our creative emotional brain to prepare for what is supposed to be a wonderful, fulfilling phase of life.