Monday, July 27, 2015

Your Uncle is no longer rich

For as long as I can remember, I have enjoyed the Fourth of July festivities with my family in northern Michigan.  But this year was different.  This year, my family packed our suitcases and we were off to Greece for a vacation that concluded with our attending a real Greek wedding.

Months ago when planning for the trip, I was keenly aware of Greece’s precarious financial situation with the Eurozone.  As the travel dates approached, it became apparent that we would be in Greece during the height of their financial crisis.

As a financial advisor, I’ve been through numerous financial downturns and crises, including the recent near meltdown of the U.S. banking system in 2009.  But until my recent trip to Greece, I have never had firsthand experience of a nation defaulting on their financial obligations and ultimately closing their banks.

I take a fair amount of good-natured ribbing from friends because I have never used an ATM.  For most of the younger generation, financial transactions are executed primarily with plastic cards.  And on those rare occasions when cash is actually needed, they usually find an ATM for the ever-popular plastic in and cash out transaction.  Some have probably never been inside a bank.

While in Greece, it was quite a rude awakening for one of my family members when the plastic card went in and no cash came out.  At the time, ATMs were totally shut down.  Eventually, they began working, but there was a daily limit of $60 Euros per day.

The European newscasts, which were quite critical regarding the reasons why Greece was in such poor financial shape, sounded very familiar.  The criticism centered on the contention that Greece was overspending and had an enormous amount of unfunded pension obligations.

Listening to the newscasts critical of Greece, it occurred to me that they could have just as easily been talking about the good old USA.  After all, Greece’s problems sounded eerily similar to the financial issues we’re facing right here at home.  I say this because we have an $18 trillion national debt that continues to grow and across the nation we have a serious problem with underfunded pension obligations.

I don’t want to be a purveyor of Doom and Gloom, but our government needs to become just as fiscally responsible with our finances as you are with your household budgets.  If you aren’t responsible, bad things can happen.  The same holds true for Uncle Sam.

Most of us have never experienced a bank holiday where we could not get our hands on our own savings.  I’m not suggesting that the U.S. will follow Greece’s lead, but in this world anything is possible.

Households, businesses and nations all have to be fiscally responsible.  Overspending ultimately leads to financial issues.  As I have stated before, politicians cannot alter mathematics.

Overall, my trip to Greece was an enjoyable, once in a lifetime experience.  The history is incredible and the scenery is breathtaking.  But, no matter where your travels take you, there is never a vacation from money issues and concerns.

I am pleased to share that I will be one of the speakers at the Healthy, Wealthy and Wise program sponsored by the Society for Lifetime Planning on August 18th.  For details, please call 248-952-1744.

Monday, July 20, 2015

Are you all set for maximum investment returns?

A very common phrase in the American culture is “I’m all set.” For instance, it’s a frequent response to a salesperson when you’re casually out shopping in a retail store.

It’s almost a given that, before you leave the store, someone is going to ask if there’s anything else they can do for you. And it’s not just the department store; it’s the oil change place, the restaurant, even the bank.

So I shouldn’t be surprised that the phrase pops up in my part of the financial world. Often times, when I’m out socially, people will approach and ask me a financially related question. I usually answer the question, but I also offer to meet the person to go into more detail. More often than not, the response is “I’m all set.”

In our day-to-day lives, people like to get into a comfortable routine, especially regarding their finances. But, I suggest that it’s risky for anyone to conclude that they’re “all set” with their finances. Certainly not forever.

Let’s take a look at a few examples. Many are still feeling the economic scars of the near meltdown of 2008-09. Far too many households did what I refer to as “knee-jerk” financial planning. In other words, they totally abandoned their investment strategies and fled to the low-interest-rate banks, intending never to return to the investment world again.

Another example of the “I’m all set” mentality gone wrong often falls on the shoulders of a surviving spouse. Not to pick on General Motors, but I know that there were quite a few retired auto executives who were overly concentrated in GM stock.

It was their mindset that the stock would be a winner throughout their retirement years. Frankly, there’s nothing wrong with having confidence in your company. Unfortunately, a few surviving spouses learned the hard way that they were not “all set” by holding onto GM stock forever.

The lesson here is clear. No matter how good an individual stock may appear, there is inherent danger in putting all of your retirement nest egg into one basket. I have certainly written about diversification before.

Retirees and widows also used to be able to supplement their nest egg with the interest from their bank deposits. When interest rates were near 5 percent, a $100,000 bank deposit would generate $5,000 of income. Today, you’re lucky if that $100,000 earned $1,000.

The good news is that many of those that are dependent on bank interest are finally aware that they’re not “all set.” The questionable news is that far too many of them are seeking alternatives with higher interest rates.

Questionable because I think they have no idea what they’re buying in order to get higher rates and I fear they don’t comprehend the risk inherent in the investments they make with money withdrawn from the bank.

On another note, I’m pleased to share that I will be one of the speakers at a series of Healthy, Wealthy and Wise Workshops in the comings months. These workshops will be hosted by the Society for Lifetime Planning and I am confident that anyone who attends will benefit. For further details, please call 248-952-1744 or e-mail

Tuesday, July 14, 2015

How your health affects the health of your nest egg

In previous articles I have mentioned that the financial services and health care industries are becoming more and more intertwined. As medical technology continues to improve, people spend more on medicine and healthcare services such as long-term care.

One of the consequences of improved medical technology is that people are living much longer than previous generations. Not surprisingly, medical advances have also resulted in increased costs.

As a financial adviser, I believe it’s extremely important to build enough into the retirement nest egg that’s dedicated to future health care costs. Keep in mind, Medicare is not free, and monthly premiums need to be budgeted for in retirement.

The amount of your monthly premium is determined by your income. But, Medicare does not pay all of your medically related needs in retirement. There are the obvious costs like co-payments on prescriptions and deductibles, but in addition to that, there is much more that people need to prepare for.

For example, I’ve recently had a number of clients incur significant bills for dental related expenses. And as we grow older, there are often vision and hearing issues that need to be dealt with. I’m not a medical professional, but I can’t imagine anyone ignoring their dental, vision and hearing needs if they had an adequate nest egg.

And then there’s the elephant in the room, long-term care. I can easily see the necessity to have at least $250,000 in your nest egg earmarked for long-term care and medical expenses. If you’re currently employed and you meet the eligibility requirements, Health Savings Accounts are a great way to build this health care bucket for retirement.

To carry an insurance license in Michigan, the state requires 30 hours of continuing education every two years. In addition, in order to discuss long-term care insurance, Michigan mandates an eight-hour continuing education class to keep practitioners current with requirements. Since the financial services industries are growing closer and closer, I thought it important to become properly registered.

The thing that’s different about retirement planning is that you’re planning for the unknown. With goal related planning like college funding, when your adult child walks across the stage and receives their diploma, you know if you saved enough to meet the objective.

With retirement planning, when all is said and done and you enter the pearly gates, it’s often your heirs who determine whether or not you had a sufficient nest egg.

Since long-term care policies are so extremely expensive, the financial services industry is developing programs that meet both financial and health care needs.

For example, there are now life insurance policies that will allow death benefits to be paid while the insured is living for critical care expenses. There are also annuities designed for long-term care expenses.

I bring these to your attention because the trend appears to be to get your dollar to do the double duty of investment and protection. The bad news is the complexity of the programs. They’re innovative, but they’ll require more research, possibly even involving a prospectus.

At the end of the day, as you build your nest egg, keep in mind that a large piece of the pie will probably be spent on health related expenses. That’s why it’s imperative that health care expenses be included in your long-term planning.

Monday, July 6, 2015

Happy birthday, USA: Thanks to those who make our freedoms possible

Independence Day, aka the Fourth of July, is a national holiday commemorating our Declaration of Independence from Great Britain. I often question how much American History is actually taught in our schools and wonder how many people really understand how much strife and hard work it took to gain independence and form a functioning government.

Whether or not you agree with our elected officials, the good news is that the trajectory of their actions can eventually be changed at the ballot box.

During the next election cycle, I suspect there will be much discussion about the shrinking middle class. Without question, it has become more difficult for middle class America, and the debate over how to fix the issue will likely become quite heated.

There’s a lot of discussion about how much household demographics have changed, but since our nation was established, the government has also changed significantly.

Today the government is involved in almost every aspect of our lives and it seems to have a program for everything.

The Affordable Care Act is a recent example. Health care information is carefully monitored and actually reported on our annual income tax returns.

Under the guidance of President Teddy Roosevelt, the National Park Service was established and federal lands were set aside for all to enjoy. Today, there are an abundance of federal laws and regulations pertaining to the environment.

Under President Franklin Roosevelt, Social Security was established to make certain the elderly could stay out of poverty and live out their lives with dignity. The majority of us contribute into this program but, somehow, instead of it being considered an earned benefit, it’s often called an entitlement.

Over the years, Social Security has expanded to cover other items, such as disability. I’ve already warned that, in the not- too-distant future, the part of the program that covers disability won’t have enough money to pay current benefits.

I’m certain some politicians that will call for the wealthy to pay more to save the program, but I doubt any will mention that a recent study by the agency’s inspector general pointed out that Social Security has overpaid nearly $17 billion in benefits.

I could go on and on, but the point is that our nation was established by rebels who became its Founding Fathers. A key issue that ignited the Revolution was taxation without representation, the root cause of the infamous Boston Tea Party.

As a financial adviser who works with a lot of hardworking people, I have yet to hear anyone say that they pay too little in taxes.

In fact, over the years, I’ve seen many choose to retire in another state because the tax rate is lower than Michigan’s. In other words, in addition to the ballot box, you can also vote with your feet.

At the end of the day, we live in a great nation. Some think government is the solution to problems and issues. Others believe it’s the problem. No matter how you think, remember that we can only have these discussions thanks to the efforts of our Founding Fathers.

We should all be thankful for our freedoms including the ability to work towards financial freedom, and especially for those who gave their lives to make it possible.

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.