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.

Monday, June 1, 2015

Compound interest: Simple math, complicated problem

One of my favorite quotes comes from American icon Albert Einstein, who, although German born, became an American citizen in 1940. Albert observed that, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

I believe this quote is especially applicable in this day and age where households, college students and government agencies are being overwhelmed by debt. Evidently, not enough people paid attention to Einstein.

It’s interesting that so many disregard the math by living beyond their means and borrowing too much money. Even our lawmakers — at virtually every level — continue to try legislating the impossible. At the end of the day, no matter how you try to alter math equations, real math ultimately becomes the reality.

Our neighbors across Lake Michigan in Rockford, Illinois, serve as a good example. The city recently tried to alter their pension commitments. As we all know, it happened here in Detroit. Many city retirees were forced to take reductions in their pension payouts.

But things went differently in Illinois. The state Supreme Court ruled that such a move violated the state constitution. As a result, Moody’s, the credit rating service, immediately downgraded Illinois’ debt to junk status. In simple terms, the state of Illinois has severe pension issues and it doesn’t have any viable financial solutions.

Chicago is in an especially dire situation. The city’s pension obligations are underfunded by some $20 billion. How can such a situation be solved? Well, you can raise taxes, cut the amount pensioners receive or increase the amount they pay in. Good luck with trying to make any of those options happen.

Sadly, this situation is occurring at the city and state level all over America. It appears that Illinois and California are the two states with the most insurmountable financial issues, in both cases caused primarily by underfunded pensions liabilities.

In our own beloved Michigan, I’m a bit concerned how some government agencies are tackling their underfunded pension problems. Looking back, the city of Detroit under Kwame Kirkpatrick borrowed over $1 billion to “solve” the pension problem. We all know how that ended.

But both Oakland County and, just recently, Macomb County also borrowed money to meet some of their obligations. Macomb County recently floated 24-year bonds at 3.5 percent. Mathematically, this means they need to invest the funds at a rate greater than 3.5 percent to come out ahead.

Is that an attainable goal? Possibly. In fact, it may even be probable that the outcome is favorable. But by no means is it a risk-free scenario.

Pensions are a great example of the impossibility of outsmarting the math. When most pensions were established, life expectancies were a lot less. Social Security is a good example of how increased life expectancies can impact finances.

Dartmouth University recently concluded that Social Security will likely have final issues much sooner than the official projection date of 2033. And that’s because people are living just over one year longer than government projections.

Albert Einstein understood the importance of mathematics and compound interest. At the end of the day, two plus two will always equal four no matter how much any individual or legislative body attempts to alter the equation.