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.