Monday, June 29, 2015

I've looked at jobs from both sides now: pay summer hire

The summer months have finally arrived. No more school, plenty of sunshine and thousands of young people looking to earn a few dollars and maybe get some job experience for their resumes.

In years past, it was often as easy as knocking on a door and asking if the homeowner wanted their grass cut. Today, professional landscaping firms have made that impossible for vacationing students.

Picking up a newspaper route is unlikely too. Not many newspapers are published every day, and many are delivered in the middle of the night.

For young adults who have been away at college, the days of working in the factory all summer to earn enough for next fall’s tuition are also gone forever.

Clearly, it’s extremely difficult for young persons to make a few dollars in the summer. Finding a meaningful summer job that lets you save even a few dollars can be a challenge in this day and age.

But have you ever considered the other side of the coin? Hiring someone for the summer can be a bit difficult as well.

Until a few years ago I had never heard of an unpaid internship. Then suddenly, it seemed like scores of students were vying for the same internship. In years past, my firm hired young people for the summer, and yes, we paid them.

Recently, a Bloomfield Hills based attorney I know, John Below, brought the Fair Labor Standards Act (FLSA) to my attention. It made me realize that being a nice person and providing a young student an opportunity is more complex and regulated than I imagined.

There appears to be a fine line between internship and “employment” in the for-profit or private sector of the working world. According to the FLSA, anyone who is employed must be compensated. The Department of Labor, however, views private sector interns as employees. So in reality, there’s no such thing as an intern working simply to gain experience and doing so without any kind of wages.

Ah, but things are different in the public sector. It appears the public sector can offer unpaid internships that provide young persons experience to put on their resumes without putting a penny in their pockets. Not so in the for-profit world.

But, what if you were to hire someone as a trainee instead of an intern? Does that change things? Well, there does appear to be a fine line between an intern and a trainee. A line so fine that it would take several columns to explain.

Evidently there are special provisions for trainees. But several cases have actually gone to court to determine if a trainee is an intern or vice-versa. As I said, it’s complicated.

Summer interns must — and should — be paid, because legally, they are employees. And while it appears you can legally take on a trainee just for the experience and without pay, you might be taking a risk.

The lines are blurred and the regulators are watching. That’s why employers need to classify their workforce properly. I strongly recommend you seek an attorney’s advice to make sure you’re doing the right thing.

Being big hearted is nice, but it’s equally important to be smart when adding summer help. You can be both by paying whomever you hire for the summer.

Monday, June 15, 2015

Retirees: You’ve earned the right to spend

In a recent meeting with a client, we were reviewing the various sources of income available to her when she calls it quits in a few months. Although all of our mathematical projections indicated she would be just fine in her golden years, my experience and instincts lead me to believe her transition to retirement won’t be smooth.

I can see a problem developing that’s a common issue with many retirees. I’ve never touched on the subject in this column before and I can’t recall reading about it in any of my various professional journals.

The problem is simply that after years and years of being in the mindset of accumulation, many retirees find it extremely difficult to switch to the distribution phase of life. It’s sort of a psychological issue. Changing a lifelong mindset is a challenge for many people.

As young boys and girls, many of us had piggy banks. It wasn’t uncommon to hear the old Ben Franklin phrase, “A penny saved is a penny earned.” Consequently, many learned the importance of saving at a young age.

During the piggy bank years, many were also taught by mom and dad to set aside a little of everything they earned. So, from babysitting to lawn cutting and snow shoveling, a few dollars were saved here and there.

After high school, it was much more difficult to save anything during the college years. Speaking for myself, I worked throughout college and tried to save. But what little I was able to put aside didn’t last very long. Before I knew it, a new semester would arrive, and with it the tuition that took all my savings and more.

So, for most, the college years are neither accumulation nor distribution years. They’re simply the years you hope you get through without amassing significant debt.

The working years are when saving begins in earnest. For many, that’s a thirty or forty-year timeframe and many do put aside a portion of their paycheck.

Month after month and year after year people receive statements that show their savings and investment accounts are growing. And for most, the satisfaction of seeing that growth becomes habit forming.

The accumulation stage of life began with a piggy bank and continued for a thirty or more year working career. Then, suddenly, at retirement, the accumulation stage ends.

Many struggle when the accumulation years end, not so much financially as psychologically. It’s difficult to seeing their savings or retirement accounts decrease in value.

Sudden downturns in the investment world are a bit more painful. A withdrawal from a savings account entails a lot of agonizing thoughts. As a financial adviser, I can’t tell you how many times clients have complained because of mandated annual withdrawals from their retirement accounts once they reach age 70.

From experience, I know many retirees struggle with the thought of tapping their retirement savings. But, remember, one of the reasons you save is to have sources of income when you retire. It’s okay to tap your savings.

It can be difficult to change mindsets from accumulation of money to distribution. But, with proper planning, the transition from accumulation to distribution becomes clearer and anxiety free. A financial adviser can ease that transition by helping you develop reliable, predictable income streams.

Monday, June 8, 2015

Hatching a plan to protect your nest egg

In this economic environment of low interest rates, there have recently been a number of articles published about how much retirees can annually withdraw from their investment portfolio without depleting their nest egg. Opinions vary among financial professionals, but the general consensus appears to be 4 percent.

In other words, retirees with $100,000 in their nest egg could withdraw $4,000 (4 percent) without worrying too much about depleting their nest egg. Of course, this is an oversimplified method of determining your annual investment income, but it is a useful guideline.

That being said, while I consider withdrawing four percent to be a helpful benchmark, I believe that strictly following this method could possibly turn out to be a mistake.

For example, what if a retiree’s entire nest egg was in a safe, but low-yielding bank account? In that case, withdrawing 4 percent from a $100,000 account would more than likely put the value in year two below the initial $100,000.

Then, in year two, a 4 percent withdrawal from $96,000 would result in income of less than $4,000. Continuing to follow this method will result in decreasing annual income until or unless interest rates suddenly spiked up.

In a similar fashion, if a retiree had his or her nest egg invested strictly for growth, the market’s performance in recent years should have created an increase in the value of the nest egg. The result of that, of course, would also be a slight increase in the amount of annual income withdrawn, utilizing the 4 percent strategy.

Again, I feel that the 4 percent withdrawal strategy is a helpful guideline. Nonetheless, as a financial adviser, I think simply focusing on how much you can withdraw every year might cause you to overlook a very important factor.

Before I explain, let’s set the table. As I’ve written many times, most retirees would be best served by maintaining a diversified, well-balanced portfolio. What I’m concerned about for my readers and clients more than the 4 percent withdrawal rule is the sequence of investment returns.

Looking at historical data from 1989 through 2008, the unmanaged Standard and Poor’s 500 Index had an average rate of return of 10.36 percent. Back then, interest rates were also higher, so for example purposes, instead of withdrawing four percent annually, let’s withdraw 5 percent.

One of the best years in this 20-year cycle was a positive annual return of 31.6 percent. The worst year saw a negative annual return of 37 percent. If the negative 37 percent were in the first year, a retiree would run out of money in year nineteen.

If, on the other hand, the negative 37 percent were in year twenty of the mathematical cycle, the retiree would still have a significant nest egg.

In other words, it’s the early years of retirement income that are the most critical. It’s crucial for a retiree to avoid an immediate downturn to his or her nest egg. It’s crucial to keep a close eye on your returns, and adjust your withdrawal percentage accordingly.

The debate over what the proper amount a retiree can withdraw may continue indefinitely. In my mind, however, based on history, what’s far more important is the sequence of returns and avoiding an early tumble in your nest egg.

Monday, June 1, 2015

Compound interest: Simple math, complicated problem

One of my favorite quotes comes from American icon Albert Einstein, who, although German born, became an American citizen in 1940. Albert observed that, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

I believe this quote is especially applicable in this day and age where households, college students and government agencies are being overwhelmed by debt. Evidently, not enough people paid attention to Einstein.

It’s interesting that so many disregard the math by living beyond their means and borrowing too much money. Even our lawmakers — at virtually every level — continue to try legislating the impossible. At the end of the day, no matter how you try to alter math equations, real math ultimately becomes the reality.

Our neighbors across Lake Michigan in Rockford, Illinois, serve as a good example. The city recently tried to alter their pension commitments. As we all know, it happened here in Detroit. Many city retirees were forced to take reductions in their pension payouts.

But things went differently in Illinois. The state Supreme Court ruled that such a move violated the state constitution. As a result, Moody’s, the credit rating service, immediately downgraded Illinois’ debt to junk status. In simple terms, the state of Illinois has severe pension issues and it doesn’t have any viable financial solutions.

Chicago is in an especially dire situation. The city’s pension obligations are underfunded by some $20 billion. How can such a situation be solved? Well, you can raise taxes, cut the amount pensioners receive or increase the amount they pay in. Good luck with trying to make any of those options happen.

Sadly, this situation is occurring at the city and state level all over America. It appears that Illinois and California are the two states with the most insurmountable financial issues, in both cases caused primarily by underfunded pensions liabilities.

In our own beloved Michigan, I’m a bit concerned how some government agencies are tackling their underfunded pension problems. Looking back, the city of Detroit under Kwame Kirkpatrick borrowed over $1 billion to “solve” the pension problem. We all know how that ended.

But both Oakland County and, just recently, Macomb County also borrowed money to meet some of their obligations. Macomb County recently floated 24-year bonds at 3.5 percent. Mathematically, this means they need to invest the funds at a rate greater than 3.5 percent to come out ahead.

Is that an attainable goal? Possibly. In fact, it may even be probable that the outcome is favorable. But by no means is it a risk-free scenario.

Pensions are a great example of the impossibility of outsmarting the math. When most pensions were established, life expectancies were a lot less. Social Security is a good example of how increased life expectancies can impact finances.

Dartmouth University recently concluded that Social Security will likely have final issues much sooner than the official projection date of 2033. And that’s because people are living just over one year longer than government projections.

Albert Einstein understood the importance of mathematics and compound interest. At the end of the day, two plus two will always equal four no matter how much any individual or legislative body attempts to alter the equation.

Tuesday, May 26, 2015

Enjoy your freedoms responsibly this Memorial Day

Earlier this month I took my mom to a public park with a beautiful, peaceful river setting. It was a special place for mom because she and my late father spent a lot of time there together.

When we arrived and pulled into the busy parking lot, I was fortunate to find a parking spot just a stone’s throw away from a bench with a breathtaking view.

When I turned the engine off, my mother became upset because she forgot her handicapped-parking permit. Since the car was parked next to the bench, I wasn’t overly concerned. We were close enough to the spot that I would see any law enforcement, and I couldn’t imagine them writing a ticket, seeing my mom with her walker.

Fortunately, my mother enjoyed her short stay at the park, which I’m certain rekindled memories of my father, who was a veteran. We eventually left without incident.

I bring this up because it’s Memorial Day weekend. Households throughout the nation are sharing memories of their loved ones. Sometimes we forget about those that gave their lives for our nation. Their dedication and commitment is the backbone of our culture today.

The dedication of military personnel is the reason we have the freedom to elect the officials that make and enforce our laws. The freedoms that many died for and continue to defend, including our financial freedom.

By that I simply mean the ability to make our own financial decisions. As with all other aspects of freedom, there is responsibility, and that includes fiscal responsibility.

What exactly does fiscal responsibility encompass? Each and every day you’re faced with countless decisions that impact your financial well being. Responsibility means being prudent with every paycheck and understanding its boundaries. It begins when you jump out of bed in the morning and leave for work.

For many, the first financial decision of the day is whether to brew your coffee at home or make an expensive stop at the coffee shop. Do you bring your lunch or spend a few dollars every day at a nearby restaurant or fast food place?

While at work, do you ever find time to check your benefits? In other words, how much time do you allocate to your retirement plan? Are you taking full advantage of any employer match? And don’t forget to see if your employer offers a menu of other benefits, including healthcare choices and supplemental life insurance.

As you go through your daily routine, are dollars falling from your pocketbook just because of that routine? Again, being smart and prudent is a choice; a freedom that should not be taken for granted. Credit cards might make it easy and tempting for impulsive spending, but fiscal independence puts the responsibility to avoid overspending squarely on your shoulders. The stress of outstanding credit card debt has ruined many lives. Don’t let yours be one of them.

As we salute our military and those that have previously served, keep in mind that they are the ones that have maintained the entire foundation that allows us to live the lifestyle we enjoy. It’s too easy to take our freedoms, including financial freedom, for granted. You are free to choose how to save or invest or spend or spend your money. Please do so responsibly.

Monday, May 18, 2015

May your launch be successful, college graduates

This is the time of year when many of life’s transitions are launched. There are a lot of young adults graduating from high school who will soon be leaving home for the very first time. Similarly, there are a lot of young men and women who are graduating from college, ready to step out into the world and hoping to become self sufficient.

In a perfect world, all of them would either be launching their professional careers or continuing their education in a specialized program such as medical or law school.

But the world isn’t perfect. Yes, the economy may be improving, but far too many young adults will be returning home to mom and dad, still seeking their destiny.

May is also what I refer to as the beginning of the wedding season. In fact, it was exactly one year ago that one of my sons got married. And whether or not the bride and groom have matriculated through college, they too, are making a major transition.

So, we have high school grads, college grads and newlyweds, each of them embarking on lifelong journeys and all beginning in and around the month of May.

To all those young men and women graduating from high school or college or beginning their lives together with a significant other,

I offer a tip of my hat — and some advice.

At many graduation ceremonies the speaker encourages the graduates to change the world in a positive manner. I agree that this is a wonderful and compelling message, but I offer something more specific. I want to encourage all young adults to be fiscally responsible.

What exactly do I mean by fiscally responsible? First and foremost, keep your debt under control. If you borrowed money to get through college, simply pay it back.

Unfortunately there has never been more college debt than there is today, but loans should be repaid. You can always rationalize why repaying your debt should be put on the back burner. But, at the end of the day, your debt is your responsibility, not your fellow taxpayers.

Another piece of advice is simply to live within your means. In this world you can quickly run up sizeable debt with a visit to Amazon and a few clicks. I’m not suggesting that you don’t spend, but, just as with investments, balance is the key.

Finally, develop good savings habits. Don’t just save what’s left over, but rather become a disciplined saver. For example, start saving $50 per month and stick with it no matter what. A year later, increase the amount to $100. This is just an example, but making savings a habit is important.

I include newlyweds in the ‘major transition’ equation because, in financial terms, marriage is somewhat of a financial merger. You might be marrying into a large college debt or marrying someone who can’t save a nickel.

Unfortunately, money disagreements are often cited as a reason why marriages don’t succeed. My suggestion is talk about money prior to tying the knot. Both parties should be aware of the circumstances.

I believe it’s important to develop proper money skills and habits. Over the years, I’ve observed that those who have a grasp of their finances turn out to be more responsible, generous and confident in their future.

Monday, May 11, 2015

Annual report: We need to pay attention to Generation Y

Every year in late April, I attend a conference with some of the most respected financial advisers from around the country. In many ways, the conference reminds me of my college years. That’s because I continue to learn a great deal in the conference’s classroom. And the interaction, thoughts and ideas from my peers are just as valuable as the items on the conference agenda.

One focus of the agenda was Generation Y, often referred to as the Millennials; those born between 1977 and 1995. Keep in mind, for the first time in our nation’s history, there are actually four generations in the workforce. In addition to Generation Y, there’s Generation X (1965-1976); my generation, commonly called the Baby Boomers (1946-1964); and the Traditionalists (pre-1946).

Virtually every day, you can come across someone from each of the various age groups in the workplace. The crowded demographics make it easy to see why it’s so difficult for high school age kids to find summer employment.

The financial services industry needs to pay more attention to Generation Y. After all, there are 80 million people in Generation Y, virtually the same number as the Baby Boomers. Like the Boomers, Generation Y is going to need financial advisers to guide them through the complexities of the investment world.

Every generation has a defining moment. For Baby Boomers, it was the assassination of JFK. It appears that 9/11 will be the defining moment for Generation Y. And while Generation Y will have more college graduates than any generation, they will also have more college debt. Far more.

The financial services field is a graying field. It’s in need of Generation Y advisers to help their peers with the financial decisions they need to make throughout their lifetimes. As Baby Boomer advisers, my generation needs to train, educate and eventually pass the torch on to the younger advisers. It’s beginning to happen and I’m confident that Generation Y will understand the importance of financial issues. I’m somewhat embarrassed, nonetheless, that they’ll need to tackle some financial issues that Baby Boomers are currently kicking down the road.

Finally, I have to say that our keynote speaker, Condoleezza Rice, is one of the brightest people I’ve ever encountered. From her tenure as Secretary of State she has a great understanding of the many hot spots throughout the world.

Today, besides teaching, she also serves on the NCAA college football playoff selection committee where she was in charge of evaluating our own Big Ten Conference. Whatever your politics may be, there’s no questioning her considerable knowledge. Her comments and opinions were always respectful; a rare trait in today’s political environment.

Summarizing, the classroom information was great and I think perhaps this should be the “discussion of or with my peers.” Our featured speaker spent years trying to make the world a safer place, and we spent a fair amount of time trying to get our arms around Generation Y and their finances.

Our world will always need quality people like Condoleezza Rice. People who try to make the world a better place for the generations to come, each of which will need some sort of financial advice. I believe that Generation Y is no exception and I have every confidence that they are up to the challenges that lie ahead.