Wednesday, August 27, 2014

Social Insecurity

I was a bit surprised in late July when the Social Security Trustees released their annual report.  The report itself wasn’t so much of a surprise as the fact that it was not mentioned by any of the news media.      

Such lack of attention rattled my mind like a car alarm.  These days, when most people hear an alarm, they simply think of it as an annoyance.  Many don’t even bother to turn their heads to see what, if anything, is going on.  In fact, I doubt many people stop to wonder if someone is actually trying to steal a car.

It seems to me that the same phenomenon is going on with Social Security .  The can has been kicked down the road so many times, I don’t think people even hear the aluminum can bouncing off the road and hitting a brick wall.

We’ve heard it bouncing and rattling for so long we’ve simply become accustomed to the noise.  Such complacency,

I fear it could prove to be a dangerous mistake.

Just over a year ago, I wrote an article about Social Security Disability.  I questioned whether or not all the recipients were really disabled.

Since I wrote that article, I’ve received a number of e-mails from various legal firms offering their services to help me qualify for Social Security Disability.  These aren’t occasional offers; they come on an almost daily basis.

The number of people receiving Social Security Disability Insurance (SSDI) recently reached a new high and now exceeds 11 million people as of this past May.  That represents an increase of eighteen percent since January 2009.

There are all sorts of arguments and debates as to the causes.  Is it the economy?  Is it political?  Is it changing demographics?  Are we getting sick or injured at an alarming rate?   Have the eligibility rules changed?  Quite likely, it’s some combination of these postulations.

But whatever the reason for the surge in disability claims, I think it’s time to stop ignoring the tin can clattering off the walls.  I say this because, according to the Social Security Trustee Report, the SSDI program will only be able to pay full benefits through 2016.  That’s not very far off.  After 2016, there would only be sufficient funds to pay just over 80 cents on the dollar.

As a financial advisor, I always come back to the math.  If the math indicates the numbers do not add up, it is likely a problem.  But problems can be solved.

According to the Social Security Trustee Report, the SSDI problem is just over a year away.  Even more alarming, the retirement portion of the Social Security program is in jeopardy not too many years later.

I’m puzzled as to why the trustees’ annual report receives such little press.  The mathematic realities of the entire program need to be dealt with now.

If they continue to be glossed over, the lead story in the news will soon be the announcement of a major Social Security crisis.  At that point, everyone will wonder how it happened and why we weren’t aware that a crisis was imminent.           

Within two years, some tough decisions need to be made, because borrowing more money to pay promised benefits is not a prudent mathematical decision.

Monday, August 18, 2014

How to save like a hero: Train yourself

Being a financial adviser isn’t just a job; I also consider it to be a lifestyle. It’s an occupation that requires one to be a technician and also to have the skills to interact with people. For me, it’s a badge I carry proudly and enjoy thoroughly.

I periodically attend education conferences that help me stay current with investment trends, economic forecasts, and the onslaught of new and constantly changing rules and regulations. There’s no question that the variety of classes is valuable, but what I find even more valuable is what I learn from my peers from other parts of the country and from the featured speakers from outside our profession.

My most recent seminar was in Nashville. It featured two outstanding speakers: Marcus Luttrell and Chesley “Sully” Sullenberger. Lutrell was a Navy Seal from Texas who survived Operation Red Wings on the slopes of Sawtalo Sar, a mountain in Afghanistan. He was the only survivor of the mission and his book, “Lone Survivor,” was made into a movie. His talk was intense and from the heart.

Sullenberger, the other featured speaker, was also quite newsworthy. He was the pilot who landed his passenger jet on the Hudson River when it lost all engines due to a bird strike shortly after takeoff. His ability to bring the aircraft down safely was truly incredible and witnessed as it happened on national television. Sully spoke with the eloquence of a college professor.

In many ways the speakers were complete opposites. Marcus was a fairly young man with young children. Sully, on the other hand, has grown children and was near the end of his career when he piloted the aircraft to a safe landing. They were total opposites in their backgrounds and education.

So why mention these guys in a financial column? Because of what they shared in common, something of value to all people, including investors. Years and years of training that helped them survive.

For Marcus, it was physical Navy Seal training that pushed his body to the limits. For Sully, it was the technical training of a pilot. Sully pointed out that flight simulators didn’t have water landings, but his many years of training simply kicked in during the time of crisis.

As investors, we may not need the physical toughness of a Navy Seal, but we do need to have the mental training. For example, you can mentally train yourself to be a saver. And maintain that mindset regardless of the financial circumstances.

A person that deposits a dollar in a piggybank every day is a simple example. So is someone that contributes every payday into his or her retirement plan.

It’s easy to find a reason not to save. But with strong financial discipline and the ability to keep emotions in check, anyone can do it. You just have to train yourself to act that way.

If either Marcus or Sully had panicked in their situations, they would not have survived. I have written many times that investors need to keep their emotions at bay. In most instances, if you panic and make emotional decisions with your money, you lose.

As an investor, you need to be mentally tough and keep your emotions in check. All it takes is the proper training.

Monday, August 11, 2014

A day in the life of a financial planner

Early Monday morning I was at the gym when I crossed paths with a nice elderly gentleman who went out of his way to tell me how much he enjoys my column. He said that, even at his age, he picks up valuable and useful information.

I graciously accepted his kind words. One of the things I really enjoy about the financial services industry is that it requires me to stay current with the continuous barrage of rules, regulations and trends in this ever-changing world.

What I didn’t mention to the gentleman was that later in the week I would be attending an educational seminar for three days. Three days where I would get to listen and learn from some of the most respected financial people in the country.

Later that same morning, I learned that a dear friend died unexpectedly while on a camping trip. And finally, still on Monday, I met with some clients who proudly shared their child’s plans for college.

In a nutshell, that one Monday summarized why thorough financial planning is so important. First, statistics clearly show that people are living longer than ever before. The challenge is to make certain that retirees do not outlive their income.

But, sometimes you can be on the wrong side of statistics. The call I received later in the morning about a friend’s unexpected death is a reminder that no matter how thorough your retirement planning, your family’s world can change in a heartbeat. It may be difficult to discuss, but life insurance and estate planning are a critical part of the planning process.

Finally, planning for a son’s or daughter’s higher education should begin the day they’re born. Having the funds to pay for college isn’t something that just happens. It’s a goal that needs to be achieved. One that takes hard work and financial sacrifice on the part of mom and dad.

There’s no question that the world we live in is complex and there’s no one-size-fits-all solution. For example, years ago a retiree could live relatively comfortably on the interest he or she received from bank deposits. Now, interest rates are so low that retirees need to find additional sources to generate income.

As far as college education goes, I can still recall an auto executive telling me that, while in college, he could come home for the summer, walk into the plant and make enough money to pay all his college bills and then some.

In today’s world, college costs have skyrocketed and high paying summer jobs are few and far between. This national trend of higher costs and less income has resulted in a staggering amount of college debt that’s choking recent grads.

The one constant in the world is change and it’s changing faster than ever. Tax rates, interest rates and economic conditions change rapidly. Life situations can change faster than the blink of an eye.

Without planning, your chance of success is limited. In order to achieve your goals and objectives you have to take the time to plan. And you need to plan for the good (child’s education), the sad (sudden death), and the likely (long life).

That’s why I, along with most reputable financial advisers, study hard to help clients achieve their goals.

Tuesday, July 29, 2014

Do your aging parents need your help?

The primary goal of retirement planning is to make certain that your money lasts as long as you do. Some have often said, in a humorous manner of course, that perfect financial planning is when you’re out of breath and out of money on the same day.

In reality, as life expectancies have lengthened and interest rates remain at historic lows, it’s a real challenge to make certain that your income continues into old age and that the nest egg is not depleted.

As a financial adviser, I’ve been blessed with great clients, many of whom I know far more about than just their finances. They share stories about their spouses, their children, their friends, their grandchildren, and occasionally, even their great grandchildren.

When you work with people year in and year out, you really do get to know how they think and what they’re concerned about. That’s not just regarding financial goals, but also their personal goals and objectives.

In real life, it’s rare that everything goes as planned. Sometimes people become ill and sometimes their lives end way too soon. As an adviser, it’s my duty to help people and their families prepare for such life-changing events.

That brings to mind a circumstance that is seldom addressed in the financial planning world. In fact, it’s not often discussed among family members either.

I’m referring to the mental deterioration of an aging parent. Often times, aging parents have made good financial decisions over their lifetimes and have significant nest eggs. But now, unfortunately, they are vulnerable to financial predators.

There have been more than a few occasions where I’ve noticed a client not quite as mentally sharp and took it upon myself to contact the client’s adult child to voice my concern. I have also suggested to clients that perhaps they should have their son or daughter accompany them the next time we meet.

I’ve observed over the years that aging people are more vulnerable to making poor financial decisions. Quite often, it’s because they tend to be very big-hearted. I can still recall my wife’s aging grandmother, who had very few assets, yet was sending money to a television preacher who ultimately had a major personal scandal.

On occasion, a family member will hit grandma or grandpa up for a loan that will likely never be repaid. Or a son or daughter with good intentions will step in to “help” and undo the entire portfolio because they knew somebody who once read an online article and now considers themselves an expert at providing investment advice.

Those are the good guys. The bad guys are even more insidious and there are plenty of them out there. Real con artists who zero in on the aging because they know there’s a good chance they can get into their pocketbooks.

What can be done to prevent this happening? I don’t think more laws would help reduce potential issues. But I do believe that it is important for adult children to have a familiarity with their parents’ financial adviser.

A good financial adviser should be an entrusted lifelong member of the family team. A lifelong financial adviser that communicates with extended family members can certainly help minimize some financial problems that tend to find aging people with assets.

Monday, July 21, 2014

The benefits of education vs. the cost of education

It’s hard to believe that school starts up again in a matter of weeks. While I can’t overemphasize the importance of education, I believe today’s young adults face quite a juggling act in the years ahead.

Statistics demonstrate just how important education is to one’s lifetime earnings. On the other hand, graduating from college with large student loans can be devastating to one’s finances.

The juggling act of getting an education and minimizing debt is a major challenge. Nonetheless, I was astonished at the Washington Center for Equitable Growth’s report that there are 5.8 million young people that are either not enrolled in school or not working. I don’t know how they will ever become financially self sustaining.

For those aged 16 to 24, the unemployment rate is roughly double the national average. Narrowing the category to ages 16 to 19, unemployment is approaching 25 percent.

One ticket out of unemployment is education. According to the Bureau of Labor Statistics, if you have less than a high school education, unemployment is nearly 20 percent.

With a high school diploma the rate falls to fifteen percent. With some college, it goes down to roughly 12 percent, and with a Bachelors degree or higher, it drops dramatically to just over 5 percent.

Clearly, education reduces the likelihood of unemployment, but college debt still remains an obstacle. Without education there’s little work, but without work, how can you pay for an education? It’s indeed a major problem.

As a financial adviser, I believe it’s extremely important that people understand the mathematics of life. A borrower should understand how much it really costs to pay back a debt. A saver and investor should take the time to understand how much they need to save and invest to reach their financial goals.

Likewise, young adults need to understand that, if they want to get ahead in this competitive world, that they truly need to educate themselves. They need to learn to manage both money and debt, and develop a strong work ethic.

Over the years, I’ve found statistics can be misleading. People, especially politicians, tend to twist numbers to fit their agendas. I recently came across a statistic regarding young people living in their parents’ homes that I consider misleading.

The official census states that half of those under 25 live with their parents. That sounds like doom and gloom for young people.

But then the Census Bureau states, “It is important to note that the Census Population Survey counts students living in dormitories as living in their parents’ home.”

I think this is extremely important because the number of young adults in college has actually been increasing at a steady rate since the 1980s. In other words, what statistics show on the surface appears to be doom and gloom, but in reality, is good news.

Many young adults are not rotting away in their parents’ basement, but rather are crammed into dorm rooms trying to improve their lot in life. True, they might be in the dorms on mom and dad’s money, but they’re not in basements, as the statistics would lead you to believe.

The bottom line is to get a good, practical education and try to minimize debt. And enjoy your college years; the real world comes soon enough.

Monday, July 14, 2014

Don’t fall victim to this confidence game

I like to spend time in northern Michigan during the Fourth of July holiday. At every stop along the way, from the local hardware to the stores my wife wanders into, I enjoy making small talk. During the course of the conversations I like to ask the simple question, “How’s business?”

Invariably, the response has been anywhere from swamped to overwhelmed. In other words, it appears the economy has turned the corner and people are once again opening their wallets.

That being said, there’s an interesting dichotomy at play. The economy may be gaining steam, but when you look at the Consumer Confidence Index, the numbers show there isn’t a whole lot of confidence in the economy.

The CCI now stands near 85. By contrast, it climbed as high as 144.7 during the dot.com boom. So, while the economy may be improving, people continue to lack confidence that it’s the real deal.

Although things are improving, it’s a far cry from where the economy stood back in 2009. From an investor’s perspective, the market hit bottom in March 2009, just over 5 years ago. And though it appears to be gaining momentum, the pocket book scars from recent years are still prevalent.

In order to survive, many households had to dip into their cash reserves and retirement savings just to get by. Even worse, many families lost their homes and were forced to reboot their entire financial life. For some, the hit was so severe they still haven’t recovered.

I bring this up because the current bull market is now over five years old. While a substantial number of households have seen their investment account values increase dramatically over those years, I suspect that many have not reaped the financial benefits of this bull market. And, quite likely, it’s because they just couldn’t afford to participate in the rebound.

My concern is that many households that have the financial resources simply choose to sit on the sidelines while the investment world continues to move ahead. I can certainly understand such fears; after all, the market plunge was the worst since the Great Depression.

So now, more than five years later, many investors have been rewarded with incredible growth in their investment accounts, while others sat idly on the sidelines and saw little or no growth.

They may have had the resources, but they didn’t have the iron stomach I continually point out that investors need. The bottom line is that they missed out on the entire journey, and I consider that to be very unfortunate.

Although they are strongly linked, the economy and the stock market do not necessarily move in tandem. The past five years are a good illustration. The economy was sluggish, but the market moved up. Some people invested and profited; some people didn’t have the iron stomach to invest and lost out.

Today, I believe there’s still a lack of confidence, even as the investment world continues to flirt with new highs and methodically surprises more and more people every day.

Nobody knows what the future will bring in the investment world. But I can say that the last five years have certainly surprised a lot of people and those that sat on the sidelines missed out on some significant gains.

Monday, July 7, 2014

What’s next for the markets and the world?

As we wrap up the Fourth of July festivities, and as someone who appreciates American history, I cannot recall a more divided nation since my youth in the 1960s.

All around the world there are hot spots that could ignite into major violence at any moment. Here at home, it’s difficult to have much confidence in our government. There’s been a never-ending parade of scandals, incompetence and what appears to me as arrogance from our elected officials when they’re questioned about such issues.

In conversations with friends and clients, I continue to hear people wonder what happened to our country, and express serious concern as to what lies ahead. It’s clear to me that people are both worried and skeptical about the direction in which our nation is headed.

Meanwhile, the investment world appears to be cautiously watching the overseas conflicts without too much reaction. While sentiment hasn’t sent it in a downward direction, investors seem to be reluctant to put new money into the stock market. This is supported by the influx of scared money coming into America from overseas and finding its way into the relative safety and security of real estate and U.S. Government bonds.

Domestically, although the stock market remains high, the volume of trading on Wall Street is down significantly. In other words, if stock trading were a game, only a few are showing up to play. So, while the big players may still be active, the moms and pops throughout the country appear to be content to just stand on the sidelines.

Is this the calm before the storm? Or will the investment world continue to move up quietly and leave a lot of people behind? It’s not easy to predict the future, but right now confidence is definitely lacking throughout the world.

With all that’s happening overseas and scandals dominating our domestic news, it was easy to miss a recent U.S. Supreme Court decision that could impact not only my readers, but also everyone that owns an Individual Retirement Account.

On June 12, the Supreme Court ruled that inherited IRA accounts do not qualify as retirement funds and, as such, do not receive creditor protection.

Before panic sets in, keep in mind that this ruling pertains only to inherited IRA accounts. Your existing IRA accounts, those to which you make contributions, are still protected from creditors, as is your Social Security.

In most instances, inherited IRA accounts are those that are passed down to someone other than a spouse. The Supreme Court ruling was based on their interpretation that “retirement funds are funds set aside for the day an individual stops working.”

In fact, that’s the very reason why IRA funds are protected from creditors. However, the Supreme Court stated that inherited IRAs “represent an opportunity for current consumption, not a fund for retirement savings.”

In non-legal terms, this means that when your son or daughter or grandchild inherits your IRA after you and your loved one are gone, they still maintain control, but the funds are no longer considered sacred, and therefore not protected from creditors.

Ultimately, there will likely be plenty of scrambling by estate planning attorneys to modify various documents. An already confusing and complex financial world just became a bit more so.