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 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.

Monday, June 30, 2014

Want to enjoy retirement? Don’t wing it; plan on it

Many readers are preparing to travel during the July 4th holiday. As people pull up to the pumps to fill their tanks, there will probably be a lot of grumbling over the price of a gallon of gasoline. Some will blame big oil for the rising cost; some will blame the never-ending crisis in the Middle East; and others will blame the government.

In recent years, it seems like one of the most popular words in our nation’s vocabulary is “blame.” Over the years, I have observed that blaming someone or something for a problem is much easier than trying to find a workable solution.

I have also concluded that, in most instances, including financial issues, making decisions during times of high stress seldom leads to viable long-term solutions.

Shortly after I graduated from high school in the 1970s, I heard quite a few politicians and business leaders talk about the need for a national energy policy. The need is certainly real, but the ability of politicians to make hard choices appears to be non-existent.

Here we are 40 years later and our nation still does not have any semblance of an energy policy. Essentially, there is nothing but a wild mishmash of federal and state rules and regulations without any coordinated goals or objectives. This is called winging it.

There are a lot of parallels that can be drawn between a national energy policy and retirement planning. I am certain that there are many individuals out there who entered the workforce between 40 and 50 years ago, and who have no real retirement plan today. What they might have are a few 401(k) programs, a couple of IRAs and a few dollars in the bank.

They likely have no stated income goal, nor, in all probability, any rhyme or reason as to how their investments are allocated. In other words, their retirement planning never had a plan. It just evolved into a nest egg that they hoped would carry them through their retirement years.

They, too, are winging it as they go. When they reach retirement, you are likely to hear a lot of blaming others for their financial issues. In their minds, their own lack of planning and goal setting had nothing to do with their dire straits. Unfortunately, this is exactly like us not having a national energy policy.

For years, famous oilman T. Boone Pickens has made appearances on a number of news shows preaching the importance of a national energy policy. He has spent a lot of his own money in order to spread the message.

A nation having a viable energy policy is similar to an individual having an intelligent financial plan. Both require diversification, risk management and stated, measurable goals and objectives. Insofar as establishing an energy policy, our politicians have failed to do so, in spite of the fact that they’ve been aware of the need since the oil crisis in the mid-’70s.

But there’s nothing keeping you from instituting a simple household financial plan. It’s far better than flying by the seat of your pants, and it helps to organize and achieve stated goals. Don’t let the lack of a plan lead to the blame game. If you have no plan, you know where the blame belongs.

Monday, June 23, 2014

Are your children ready for the financial future they’ll face?

Earlier this month, there were several ceremonies to commemorate the 70th anniversary of the D-Day landing in France.

I personally enjoyed the interviews with the WWII veterans who are now in their 90s. Former news anchor and author Tom Brokaw has referred to them as the greatest generation ever.

Every one of us owes them the respect they earned for their efforts in both Europe and the Pacific Rim. A common theme I kept hearing from the interviews of the D-Day veterans was the thorough training they received prior to the invasion.

But during the chaos of battle, things didn’t always go as planned. It was the quick thinking, leadership and heroics of those in the thick of the battle that turned potential failure into victory. Unfortunately, as time passes their story seems to be just another chapter in history books.

I bring this up because it’s easy to forget that these aging World War II veterans were in their late teens and early 20s when they saved and changed the world.

Fast-forward to today and it’s very apparent how significantly the nation has changed. From a financial perspective especially, it’s much different for someone in their late teens or early 20s.

Recently, there was an executive order regarding student loans. The modification this time impacted those who had loans prior to 2007. I won’t go into the details of the student loan program; it’s complex. But the new order caps the monthly repayment of loans based on the student’s current income.

Because it also calls for a maximum repayment of time period of 20 years, it’s mathematically possible that the entire balance will never be paid.

Healthcare is another constant in the news. By now everyone is aware that “children” can now stay on their parents’ healthcare policy till age 26. I know there are valid arguments why this is a good policy. But, speaking for myself, I would have been quite concerned if any of my sons expected me to pay for their health insurance when they were 26.

My point is that 70 years ago young adults saved the world, and today it appears we are reluctant to let them make adult decisions.

From a financial perspective, I believe we need to do a better job preparing our young people for their financial future.

For example, how many students are taught the mathematics of a loan? I think this would be a valuable tool for young adults as they are solicited for credit cards and contemplate loans for education, housing and transportation.

Yet, time and time again, people of all ages get buried in debt and have no idea how they got there. I am confident that better financial education could alleviate many such problems.

I don’t pretend to have all the answers, but 70 years ago it was the young adults who saved the world. Today many young adults are looking for work, living with their folks and trying to launch their careers.

Perhaps a better financial education will arm them with the knowledge they need to succeed in this complex and competitive world. With the right education and the opportunity, I’m confident that these young adults can change the world for the better. The future, after all, belongs to them.

Monday, June 16, 2014

My first Father’s Day without my father

A person who probably had a significant impact on your financial attitudes and outlook is your father.  If he was a part of your life, your dad likely played a major role in molding your views of the world, including finances.  He may have taught you directly or perhaps you learned indirectly, by following his example.

Just as with family values, financial values tend to be passed along. Dads have an inherent knack for teaching the importance of money, how to save it and how to spend it. 

For example, at one time or another, most of us heard our father say, “We can’t afford it.”  Whether it was the hard truth or just a teaching moment, it helped us learn the value of money.
Many fathers of the World War II generation never attended college.  But how many stories have you heard about dads who worked countless hours in order to save money to send their sons or daughters to college.  No sacrifice was too great for them to provide their children with the education they never had.

Think about it.  During the course of growing up, wasn’t it your dad’s views on money and finances that helped mold yours?  As a financial advisor, I believe the father’s role in teaching the kids finances is seldom discussed.  But it should be.

I was blessed with a dad that played a huge role in my life.  And I feel fortunate just for that, let alone all he taught me.  My father recently passed away, but I continue to carry his wisdom with me every day.

I know the world has changed significantly since my formative years. I’m aware the traditional role of the father has diminished.  But now that my father is gone, it’s become apparent to me that a positive father’s role is more important now than ever, and not just for teaching pocketbook issues.

Don’t misunderstand. I’m not diminishing the importance of other influences in life, particularly mothers, teachers and peers.  But sometimes I think society does minimize the importance of being a good father.

Keeping it personal, I’ve reached the stage in life where I’m attending a lot of weddings, most recently those of my niece and middle son.  It’s very rewarding to see young adults launch their lives together.

Yet I have little doubt that these young adults will have to deal with important financial issues in the years ahead.  There will be a lot of questions.  They may be about purchasing a first home, or refinancing a mortgage, or perhaps about establishing a child’s college fund or saving for retirement.  But there most certainly will be questions.

I’m hopeful that they’ll turn to dad to help with the answers, and equally hopeful that every dad out there can be as helpful to your kids as your dad was for you.

I may be biased, but I believe a good father can and should help his children with a lot of issues, including financially related ones.

I miss my father, and I will never forget him.  I urge everyone to take a moment, in thought or in person,  to thank your dad for all he’s done for you.  And I wish every dad a Happy Father’s Day.

Tuesday, June 10, 2014

Are you a part of this dangerous trend?

It wasn’t that many years ago that it seemed like every time you heard a radio advertisement it was about refinancing your home.  The idea, of course, was to get a lower interest rate and put your home equity to work.                                                                                                  

On many occasions in this column, I cautioned readers about the potential danger of this strategy.  I warned that using your home as a piggy bank for vacations, college savings and home remodeling could ultimately be a huge mistake. 
It wasn’t uncommon for people to refinance their home more than once, often putting as much as $10,000 or $20,000 in their pockets each time they did so.  After all, home values would continue to appreciate and you might as well get some benefit from your home equity.                                                              

By now, we all know how that strategy collapsed when home values plummeted during the recession of 2008.  Many homeowners found themselves upside down, meaning they owed more on their homes than they could ever possibly sell for in a depressed market.       Consequently, many families lost their homes when their paychecks were reduced or eliminated.  The recession was a difficult period for a lot of families.  And the problems were often exacerbated because of the large debt on the homeowners’ shoulders.              

So, for many, using their home as a piggybank was every bit as dangerous as I had warned.

Unfortunately, recent studies indicate that history is repeating itself, but with a slightly different flavor.  This time, instead of using their home equity as a piggy bank, studies are showing that far too many families are using their retirement savings.                                         

So, once again, I would like to put out the caution sign.

Pulling dollars out of your retirement nest egg today is just as risky as refinancing your home was a few years ago.  The long-term result is very likely to be a future financial disaster.

If you’ve read the rules of your retirement program, you’re aware that reaching the age of 59½ is significant.  With Individual Retirement Accounts, and 401(k) retirement programs, there’s a ten percent government penalty for withdrawals made prior to that magic age.

I was recently stunned by something I read in the well-respected Bloomberg News.  In 2011, the IRS collected an incredible $5.7 billion in penalties as a result of early withdrawals from 401(k) programs.     

Let me do the math for you.  That means $57 billion were taken out of retirement programs prior to the recipients’ retirement.  Clearly, the piggy bank mentality has moved from home equity to retirement programs.

As a financial advisor, I can’t emphasize enough that this strategy is dangerous.  Retirement programs are not intended to be piggy banks.

This trend is a major concern.  In an era when pensions are few and far between, and at a time when the current Social Security trustees express concern about the future of the program, people need to save more of their own money for retirement.

I’m pleased that a large segment of our population is setting dollars aside for retirement.  But I’m concerned that many are not keeping the dollars set aside for their retirement years.

This is an extremely dangerous trend and I strongly encourage my readers not to tap their retirement nest egg until they are truly retired.