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.

Tuesday, June 3, 2014

Time is your friend; put it to work

Many people around our great state are thrilled that summer has finally arrived. Though it’s not official for a few weeks, evidence is everywhere. Joggers and bicyclists are out on the trails and paths. Ball players and golfers are swinging away in the warm weather. Boats are suddenly appearing on the water and outdoor music festivals are underway at the various venues throughout the area.

Before you know it, we will be talking about the Woodward Dream Cruise and then, just like that, summer will be winding down and everyone will be looking forward to football season.

I mention all this because time has a way of getting away from us. I believe we’ve all heard the expressions, “You’re wasting my time” and “Time is money.” There are a lot of things money can buy, but time is definitely not one of them. But even though we aren’t able to buy time, most of us can improve how we manage it. That’s significant because money management and time management go hand in hand.

People often ask me when they should start saving for their retirement. The fact is, it’s never too early, especially since time has a way of simply getting away from us.

For example, setting taxes aside and using a purely hypothetical growth rate of 6 percent, lets take a look at what could happen with two individuals, both aged 21.

Suppose one begins saving $100 per month. The other delays saving for 10 years and doesn’t begin saving until age 31. In other words, one has a 10-year head start.

Remarkably, the one who began saving at age 21 has nearly double the amount in his nest egg at age 65 than his buddy who waited 10 years. In other words, the disciplined one who began saving at age 21 used time to his advantage.

Mathematicians, economists, financial advisers and bankers all know the amazing value of compound interest. They understand how time tends to enhance the value of money.

The bond market can illustrate another example. A 10-year bond these days would pay you somewhere in the neighborhood of 2.5 percent. But if you could commit your investment to a 30-year bond, you’d get around 3 percent. That may not sound like much, but the difference is substantial.

There’s no such thing as saving too soon or too little. No matter the amount, if you can save on a regular basis, you will be rewarded. And the sooner you start, the sooner you can reap the benefits of two great allies. Compound interest and time.

Remember, time cannot be bought or replaced. Once it’s gone, it’s gone forever.

As life expectancies increase, it’s a challenge to make certain that your income lasts as long as you do. That’s why it’s so critical to do everything in your power to grow a sizeable nest egg. And a good path to achieving that goal is to start early, stay on course and manage prudently.

The earlier you start saving, the more you’re using time as an ally. Seasons go fast, so enjoy them to the fullest. Because once they’re gone, they’re gone forever. No amount of money can bring back time; but time can help you enjoy many more seasons as you go through life.