Monday, November 30, 2015

The financial ramifications of Paris and keeping your loved ones in the loop

In mid-November I felt the pendulum swing of emotion. Like so many people I was saddened and angered over the horrific attacks on innocent people in Paris. A few days later I was thrilled when our unpredictable Detroit Lions finally won a game in Green Bay.

By no means am I implying that the thrill cancelled out the sadness and anger. As we’re all aware, sports results are not matters of life and death.

To put the events into proper perspective, sports are really nothing more than a sort of escape from the realities of life, a vicarious diversion.

The events in Paris were beyond horrific and caused unimaginable grief for so many families. Grief that will never go away and will forever haunt those who lost loved ones.

It just goes to show you that in this crazy world anything can happen to anyone at anytime, regardless of age and circumstances.

As an adviser, though, I was pleased to see the world’s markets open and functioning normally after the Paris attacks. Not because I’m callous or insensitive to the victims of terrorism.

From my viewpoint, the markets — on Wall Street and throughout the world — represent order and civilization. By order, I mean that, even though prices fluctuate, at the end of the day they’re determined by the free markets. Not by having someone’s or some entity’s will forced upon the people.

I’ve often written that investors need an iron stomach and that they need to keep their emotions out of their investment choices. The events in Paris are the most recent example of why both attributes are necessary.

Again, I don’t want to sound callous, but in today’s world anticipating the unexpected and unimaginable is an integral part of financial planning. I don’t pretend to have an answer to all of the world’s issues and problems. But I believe the recent events in Europe should serve as a reminder why it’s so important to not only have your own financial house in order, but also to be involved in the financial order of your extended family.

I mention this because I’m an adviser to clients of various ages. And it’s fascinating to see how different age groups handle their financial transactions differently.

For example, I have many seasoned clients that continue to receive hard copies for all of their investment and bank statements. That means loved ones can easily access their pertinent data.
On the other hand, many of my younger clients opt out of paper statements and essentially do their banking from a smart phone. Which means all their financial data is digital.

Naturally, you want all of your online activities to be secure, but you also want your loves ones to know how to access your data in the event of illness or tragedy.

Financial technology may be convenient and secure, but if that’s how you handle your finances, it’s important to make certain that trusted family members know how to access this information if you’re no longer able to do so.

Unfortunately, the unexpected can happen at any time. Recent events should serve as a reminder to keep your financial house in order. And if you’re a “high tech” household, be sure to keep your loved ones in the loop.

Monday, November 23, 2015

Technology only takes you so far in investing

When my sons were young, our family went on a number of long road trips. Back then, my wife and I were big fans of the road atlas. Now that we’re empty nesters, we fly more often than drive.

After years of frustration with the airlines, however, we decided to drive on our most recent trip. With our trusty GPS, we just had to key the address into the touchscreen and follow the instructions.

The friendly voice would always tell us what to do. If we had an upcoming turn, a pleasant woman’s voice would instruct us to turn left in one-half mile. Even with the instructions I would occasionally make a mistake; but when I did, there was no criticism. The nice woman’s voice would say, “recalculate” and get us back on track without a trace of judgment.

I’m definitely impressed with the technology of the GPS. But on the return home, if I had followed its instructions, we would have gone through downtown Chicago at the peak of rush hour. Following the instructions would have been a mistake.

While the GPS could calculate the quickest route, it didn’t take into calculation the time of day I would pass through the Windy City. Nor did it know anything about me. For example, the GPS didn’t know if I had vision issues at night.

At that point it occurred to me that, as wonderful as the GPS technology may be, we should never ignore the human element and depend totally on technology.

I bring this up in a financial column because I fear that far too many investors are doing themselves a disservice by being overly dependent on technology when they plan the course of their investments. They’re overlooking the human element.

For example, there are a number of software programs that, if you input your birthdate and risk tolerance, answer a few questions and provide a financial goal, the program will lay out an entire financial strategy.

In other words, financial planning and investing is becoming eerily similar to my car’s GPS. Plug in what you want and technology will instruct you how to get to your destination.

Yes, much of the technology is extremely helpful, but as with a car’s GPS, computers lack the very important human element that advisers can bring to the table. By that, I mean the professional relationship between you and your financial adviser.

A good adviser will be aware of the human side of the planning process. For example, is there a child or grandchild with special needs? Are you worried about one of your children blowing through their inheritance? Are you or your spouse facing a large medical bill or is senior housing on the horizon?
Whenever the situation dictates, I believe a human can relate to your loved ones much better than a computer program. And from a purely investment standpoint, study after study shows that investors who work with an adviser tend to have better investment performance. Probably because advisers help investors keep their emotions out of their investments and keep them calm in difficult times.
Technology is great, but it shouldn’t replace the human element. Otherwise you might find your investments stuck in the Chicago rush hour traffic with your GPS muttering an apology.

Monday, November 16, 2015

Why long-term financial planning is out of control

We’re in a day and age where long-term financial planning is more important than ever in order to achieve your financial goals. My experience tells me that financial independence is rarely just a matter of luck.

I’ve observed that, in most instances, it’s a result of a lifetime of disciplined investing and simply living within your means. Among the major hurdles that make long-term planning so difficult are the circumstances over which we have no control. We can only react to them.

A few years ago, I had a retired client who decided to re-enter the workforce. He wanted to discuss all of his new retirement plan options and how they could fit into his existing investments.

He mentioned that he wouldn’t be eligible for any of his new company’s benefits until he was employed for six months. Rather than discussing his options immediately, I suggested we wait until it was closer to his six-month anniversary.

When we ultimately sat down, the entire investment platform offered by his new employer had changed completely from when he was hired six months prior. This is not an uncommon occurrence.
It’s also quite difficult to make long-term plans regarding income taxes. Last year was a good example. There was a new income tax rate for higher wage earners and numerous new taxes instituted in order to help fund the Affordable Care Act.

Another hot topic for many of my clients is Social Security planning. It seems to me that I get a solicitation in the mail almost weekly to attend a lunch or dinner seminar that explains the various strategies available for collecting benefits.

More than likely, such seminars are educational and informative, but as is so often the case in our nation, Uncle Sam just changed the rules. In the recent budget agreement, it was decided that the very popular Social Security strategy of file and suspend would soon be eliminated. So if you were a few years away from retirement, you’d be wasting time to learn about something that’s not going to be available.

You also have no control over the benefit package your employer provides. Other than by voting, you can’t control the tax codes and we certainly have no control or input over government-sponsored programs such as Social Security.

The point is that the items over which you have no input or control make long-term financial planning very difficult. During the planning process, I generally like to look deep into the future with a very cautious and conservative eye. Using Social Security as an example, I never like to project the maximum income a couple might possibly receive. I think it’s far more prudent to project less than anticipated, especially since the new Social Security statements say that Congress can make changes at any time and that there will eventually only be enough to pay 77 percent of projected benefits.

You can only control so much in life. I applaud those that take the time to learn in detail what they should do in the future. Unfortunately, the details that you can’t control keep changing.

That’s why long-term planning in today’s world requires frequent review. As you plan for the long term, make sure you keep an eye out for short-term glitches along the way.

Monday, November 9, 2015

New healthcare plan? Make sure your family plans with care

It’s that time of year again. Families across Michigan and throughout the entire country have to re-evaluate and select their healthcare insurance program for 2016. Like so much else in our society these days, healthcare plan options are far more complex than in years past.
Most employer-sponsored plans offer a number of choices, running the gamut from low deductibles with high premiums to high deductibles with low premiums. Additionally, many employers also offer payroll deductible Flexible Savings Accounts.
With an FSA, the dollars deposited can be used for various healthcare-related items such as insurance deductibles and other medically related expenses not covered by health insurance.
In other words, selecting the proper healthcare package for your family requires a fair amount of research. And that includes a projection of how your family’s health will fare in the year ahead.
For those not covered by insurance, it’s back to selecting their favorite color. Bronze, silver, gold and platinum will again be the available choices. And, of course, the higher the deductible, the lower the premium.
People who have Individual plans can also open a Health Savings Account (HSA), similar to the FSA, to cover deductibles and other non-covered medical expenses. If you’re on Medicare, the big decision is selecting the Medicare supplement that best fits your needs and budget.
Regardless of age, whether you have an individual plan, group plan or a Medicare supplement plan, it looks like a lot of households are staring at significant increases in their healthcare premiums.
I’ve already received several snide comments stating the Affordable Care Act is not very affordable. And I have to admit, I’m not aware of anybody’s premium decreasing as healthcare advocates projected while the law was being debated.
But, politics aside, healthcare premiums are taking a significantly larger bite out of the family budget, so households need to adjust their annual budgets accordingly.
On numerous occasions, I’ve had clients comment that their adult children are facing a more difficult journey than they did. When I ask why they feel that way, the inevitable response is the lack of pensions and the high cost of health insurance.

For many current retirees, their employer paid virtually all their monthly premiums during their working careers. Today, the employee’s portion of the monthly premium takes a big bite out of the paycheck.
I don’t pretend to have a quick fix for the high cost of healthcare, but I do know that, at every stage of the financial planning process, I project that the cost of healthcare will increase at a rate steeper than other areas of the economy.
I suggest you do the same. During your working career, expect that healthcare premiums will increase every year. When you retire, plan on allocating $250,000 of your nest egg for healthcare related costs, keeping in mind that Medicare supplement plans are part of the equation.
Selecting the appropriate health care program every year is a complex but necessary endeavor. A young family needs not only to select the best healthcare option, but also to save for their kids’ education and set money aside for retirement. Not to mention the mortgage and other monthly bills.
Life not only is complex, it can also be stressful. Good financial planning can mitigate that stress.

Monday, November 2, 2015

The riskiest gamble you can take is to not plan

As a financial adviser I continually like to remind investors that there’s no such thing as a sure thing. You can look to the past to see how an investment has performed, but as the cautionary disclaimer often warns, past performance is no guarantee of future results.
Over the years, we’ve heard many fallacies about sure things. In the investment world, some recent examples of certainty claims that didn’t quite pan out are: real estate can only go up in value; day trading tech stocks will make you so much money you’ll be able to buy your own private island; gold can only skyrocket in value; and most recently, oil can only increase in value.
At one time or another, most of us have seen commercials implying the above statements are fact. They are not. Just as it is with life in general, there are definitely no sure things in the world of investments.
Locally, we recently witnessed the near impossible. A couple of weeks ago Michigan State made an unbelievable comeback against Michigan in the last 10 seconds of the game. According to the statistical firm Massey-Peabody Analytics, the probability of Michigan State winning the game was .02 percent.

Said another way, the likelihood of Michigan winning with only 10 seconds remaining was 99.98 percent. But whether you’re a Wolverine or Spartan fan, you are now certainly aware that more than a 99 percent probability does not mean 100 percent certainty.
That being said, regular readers of this column know that I’m a strong proponent of using math and statistics to enhance your investment results.
Statistically, would you rather have a high probability for achieving your financial goals, or hope to reach those same goals by hoping for a statistically improbable event to occur?
The practice of making consistent contributions into your retirement plan is a good example of improving your probability for a successful retirement. For example, by saving $500 every pay period and taking advantage of compound interest, you can amass a sizeable retirement nest egg over a 30-year work career.
Statistically speaking, I’m pretty confident that the person in the example above will have a much, much larger retirement nest egg than someone that gambles $500 at the local casino every pay period for 30 years.
One of the things that concerns me is that far too many people are counting on a miracle win for a successful retirement. Don’t be swayed by the Spartans near impossible victory. The actual statistics for anyone getting a financial windfall are nearly impossible to determine. And yet too many still reach for the highly improbable by purchasing lottery tickets or squandering paychecks at the casino.
In other words, gaming is well beyond entertainment for some. They’re grasping for a nearly impossible result in order to achieve their retirement dreams.
What we all saw on the football field in Ann Arbor was about as improbable as you’ll ever see in sports. True, there are no real guarantees in the world of investing either. But rather than hoping or gambling on the near impossible, it’s wiser to put statistics in your favor.
It may not always work out as planned, but the alternative of counting on a near miracle is no way to achieve your financial dreams.