All Things Financial Planning Blog


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Do You Have Hope?


I was talking to someone about the forward thinking concept last week (I wrote about that concept in my May 23 blog, Forward Thinking). Pam works with low income people helping them accumulate assets. Several studies have shown that accumulating assets does more to get people out of poverty than other strategies alone (education, improving income, access to credit, etc.). She mentioned that to get people thinking long term, you have to give them hope.

Think about the people in your life. Do they give you hope or do they hold you back?

I have heard a few financial advisors who believe their job is to tell clients what is realistic. They think they are helping clients stay grounded in reality. Instead, they are holding their clients back.

Mark Zuckerberg and Sergey Brin did not build their firms by focusing on realistic goals. Young adults do not move out of poverty by having realistic goals. People do not write books, complete ironman triathlons or make it to the Olympics by having realistic goals. Yet a few people do each of these things. They have hope.

In Lighting the Torch, George Kinder and Susan Galvan suggest that your advisors should not help you to understand realistic goals. They believe that what is realistic for you might be holding me back, that my stretch goal might be your minimum standard. Kinder and Galvan recommend that you align yourself with advisors who will help you assess what will be needed to achieve your goal and then encourage you to take those steps that will get you there.

Do you surround yourself with people who help you understand that difficult goals will require effort and encourage you to make the effort? Does your entourage give you hope to achieve your wildest dreams?

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Forward Thinking


A few years ago I helped conduct a focus group. One of the conclusions was that those focus group members who had a longer term perspective seemed to be the wealthiest. Those wealthier participants were more forward thinking.

When you graduate from high school you will only go to college if you see the long term benefits. Certainly, most high school graduates make more money over the next four years than their college bound peers. Ten years from high school the balance has shifted to college graduates.

People who live paycheck to paycheck would be just fine if their expenses were the same each paycheck. The problem comes in when the car breaks down or their child becomes sick, expenses that were not in the budget and throw off their pattern. Someone with a longer term perspective might understand that the car will need work each year and the family will have some health expenses.

Small businesses that are structured to generate a profit, profit that will be used to grow, will not grow as fast as small businesses that create the infrastructure for growth on day one. Thinking forward to envision the business you want to create speeds the process of getting there.

Career growth will be sped by understanding where you are going. It is often stated that you should dress at work for the position you want, not the position you have. That is also true with education, experience and attitude. Get the education, get the experience and demonstrate the attitude you need to reach your career goals.

It is not easy to shift from a paycheck to paycheck focus to a financial independence focus. You can begin by shifting the focus from the next paycheck to the second one. If you already have a year-long focus, start to make a five year plan. If you have a five year plan, consider planning your legacy.

This forward thinking process can help you become wealthier but it can help you achieve other goals as well. Your vacation will be better planned, your hobbies more smoothly enjoyed, your retirement less fretful if you apply forward thinking to start sooner and consider the opportunities and potential obstacles more carefully.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Will You Teach One Financial Lesson?


I saw a survey many years ago that suggested only one in five parents felt competent to teach their children about personal finance. A recent article in Military Money, quoting a survey by Schwab, said only one in four parents are training their children “by giving them a lot of experience budgeting, spending and saving it.”

It is time for each of us to teach one person one financial lesson. The lesson could be about needs and wants. It could be about creating through a budget. It could be about the value of starting to save early. It could be about the cost of buying on credit.

Few of us have developed all the right financial habits. Most of us regret some purchase we made; or perhaps a purchase we did not make. Maybe we bought on credit planning for the money to be in hand before the bill came. Maybe we took a risk that did not pan out or took a pass on a risk that did pay off for a few brave souls. But few of us have no knowledge.

What can you pass along to young people in your family or at your work? What have you done well to make your financial situation just a little bit brighter?

It is Financial Literacy Month. Will you teach one financial lesson to help make the world a better, more prosperous, more generous place?

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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I’m Planning to Bounce My Last Check


Some people are interested in leaving a financial legacy for their families and some people want to spend every penny they have accumulated. The hard part of spending every penny—of making sure that the last check you write bounces—is that you do not know how long you will live. One way to make sure your last check bounces is to create an income stream that continues to pay you for your entire life. Most Americans have one of those—it is called Social Security. Many Americans that are currently retired have a second stream of lifetime income called a pension.

With the decline of pensions, many people, including the U.S. Treasury Department, are concerned about our ability to fund retirement. The U.S. Treasury Department is encouraging retirement plan sponsors to make it easy to annuitize distributions from retirement plans. They believe Americans have not saved enough for retirement and risk running out of money. Annuities, fixed immediate annuities, could replicate that stream of pension income.

Annuities seem to be in the news a lot lately. In some discussions, it is not clear just what kind of annuity is being discussed. To reduce that confusion, this piece is about immediate fixed annuities. With this type of annuity, you would exchange a lump sum of money for a stream of income. I will also make one reference to an inflation-adjusted fixed annuity.

If you have limited resources as you are accumulating assets for retirement, in some respects, you want to save as little as possible. Those resources that are needed for retirement are saved; those that are not needed for retirement can be allocated to another goal or spent. If money is scarce and you save $1 more than needed for retirement, you have deprived yourself of some other pleasure from the use of that money. 

If an insurance company is providing lifetime income to several thousand people, they have the law of large numbers on their side. They will only have to pay for the average life expectancy of the group and with large numbers that will be about the life expectancy of the population. Current life expectancy for a single person at age 65 according to IRS tables is 86.

If an individual is providing lifetime income to himself or herself (self-insuring their risk of a long life) they do not have the benefit of the law of large numbers. To be assured that the money is available, an individual has to have enough resources to pay to the maximum life expectancy. According to Isaac Asimov, the maximum life expectancy is age 115; however, most financial planners will plan for a 30 year life expectancy or plan to a specific age between 90 and 100.

If an insurance company has to plan for payments until you reach 86 and self-insuring your retirement requires you to plan for payments until you reach 90 (or 100), you would have to allocate more to retirement if you self insure than if you use an insurance company. In other words, it costs more because those assets cannot be allocated to another purpose. This difference in cost is reduced (but not eliminated) because insurance companies assume lower investment earnings than investment professionals generally use for their clients (insurance companies have more conservative investments).

Of course, the other benefit of insuring your retirement through an annuity is that you may live longer than you planned. If you plan to live to 90 but live to 100 you have not accumulated the funds for the last ten years. If you have an annuity, the insurance company is responsible for payments during the extra ten years. In fact, using a fixed annuity allows you to eliminate two specific risks (transfer the risks to the insurance company): living longer than planned and earning less from your investments than planned. You can buy an inflation-adjusted annuity to reduce the inflation risk but it does not eliminate the risk. An investment pool, on the other hand, has kept up with inflation historically—so it mostly eliminates inflation risk. An investment pool also eliminates the risk of dying too young.

Dying too young is a risk that keeps many from buying an annuity. Although a teenager is invincible and will live forever, our senior citizens expect to die tomorrow afternoon. If I buy an annuity that will pay me until I am 95 but die at 66, I will not get value from the annuity. 

There are a few ways to moderate this risk. You could only annuitize part of your income stream or you could delay the annuity until you had already reached an advanced age. If you need $60,000 to live each year and receive $15,000 from Social Security, you could annuitize just $15,000 or $20,000 and fund the rest with investment income. Living to an extended old age might mean a reduced income level in your 90s but it would provide a base level of support.

You could also purchase an annuity at age 65 that will pay you a benefit from 85 until your death. That benefit could fully fund your retirement lifestyle after age 85 or it might be a lesser amount. You still have to fund your retirement from age 65 until 85 with investment money but the dollars to purchase the annuity would be minimized. Your life expectancy at age 85 is only 7 ½ years, plus the money would be invested for 20 years before you received the first payment.

When making decisions about retirement distributions, you should consider multiple risks and try not to spend too much energy eliminating one risk while ignoring your exposure to another risk. Some retirees want to reduce investment volatility but take on more inflation risk than necessary to reduce that volatility. Some retirees are so concerned about dying young that they take on too much risk of living a long life. 

If you want to leave a legacy for your children, fund that legacy separately from your retirement money and consider reducing your longevity risks through annuities. With your legacy funded you can make sure you spend all your retirement money on yourself. With your retirement fund set up this way, you can sleep well assured you have a well-funded retirement and that your last check bounces.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Are You All Set?


Several years ago I was asked to give a retirement seminar to my family at a reunion. This was a little strange for me because, as the second youngest of six children, I was not often asked to share my wisdom. It seemed to go pretty smoothly though and my family actually seemed interested in what I had to say. Perhaps surprisingly, I do not remember any heckling.

One comment I do remember came from the older generation. They were in their seventies and had been retired for several years. They were done planning for retirement and had made all the adjustments they needed. Their pension payments had been determined. They had their Social Security. Their savings were invested appropriately for their situation. Their wills were in place. I later learned that my father even had purchased some long term care insurance. They were all set.

I struggle with the idea of being all set. So many things can change. In this case, it was not even the most discussed change that concerned my parents. The retirement seminar took place before 2008 so you might think their investment strategy changed, but no. My father must have a cast iron stomach, as they used to say. He was invested for future generations so he was all in on equities and the market turmoil did not disturb him. His main complaint about his investment advisor is that they sold so many securities and did not reinvest the proceeds quickly enough. He kept his faith that the market would continue its long-term trend of growth and he was invested for the long term.

For my family, the change that upset their well-laid plans came from their health. I well remember my father canoeing with us in the Boundary Waters at the tender age of 75. We hiked several portages and canoed across many lakes. Although my brother and I discouraged it, my dad even carried a canoe over one of those portages. (Part of the reason the trip stands out for me was that a woman from my local church could not come to church for a one-hour meeting “because she was 75 years old.” The same age my dad carried a canoe several hundred yards through the woods.) By 80 years old, he was starting to slow down. By 85 years old, he was looking for help managing his affairs and, shortly after that, moved to a nursing home.

If you are all set, you do not have to review your financial arrangements because everything is in place. Unfortunately, my dad started to have trouble communicating even though his mental capabilities are still in place. Perhaps with an annual review we could have changed his springing powers of attorney to effective powers with his consent. Now, I am afraid he cannot give his consent. Now his investments are being spent down to pay the portion of his nursing home stay not covered by long term care insurance. His investments are no longer invested solely for future generations.

Changes continue in your life no matter your age. Some of those changes may come from the economic environment. Some may come from changes in your family situation. Some may come from changes in your health or personal situation. Your financial plan needs to be reviewed periodically to respond to those changes.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Finding Support to Keep Your Resolutions


Last night during strength training class, our leader, Lori, wanted us to know that she would whip us into shape. “No breaks,” she said. “I can see your stomach sagging, suck it up.” When she was sure we were struggling to continue she would announce, “Just 25 more.” The more experienced participants knew that just 25 more meant we would be finished after 4 or 5 more.

When Lori announced, “no breaks,” Gina, the co-leader with Lori, muttered sarcastically that the leaders’ job was to scare us away from the class. As she circulated among the attendees and led the second half of class, Gina told us how well we were doing. “That is great form.” “Looking good; keep it up.”

Gina’s comment about scaring the class, in particular, pointed out that Lori and Gina have different motivational styles. Which style would help you achieve your goals? 

Perhaps you have set resolutions or goals for this year. One important step to help you achieve those goals is to tell people about them and seek support in your efforts. For some of us, not just any support will do. Some of us respond better to Lori’s toughness and some of us to Gina’s nurturing support.

When it comes to running, I am pretty self-motivated. Most of the time, I will get up and run on my own. If I get busy and skip running for a period, I can get myself back out.

When it comes to strength training, I respond better to structure and classes to create the routine. Having an instructor that is interesting helps to keep me interested and involved.

Although I am self-motivated with running, I need more support for strength training. When you consider your resolutions and goals for this year, think about the level of support that you will need to keep on track with each of your goals. Perhaps some of your goals can be achieved with your individual effort, perhaps others will only be achieved with support. If so, what kind of support will be needed?

As you think about individuals or groups that can help you achieve your goals, take a look at your overall environment as well. Pay attention to the conversations you are having with friends and colleagues. Pay attention to how the news media either helps you achieve your goals or gets in your way.

If you need support with employment or financial goals, you may not want to follow the mainstream media very closely. It is probably good that bad news is more newsworthy than good news—that suggests that good news is the norm—but even when the news is good it is reported as unlikely to last. 

While I do not suggest that you only listen to positive news and news that supports your views, I do recommend that you not spend too much time dwelling on negative news. Seek out reports that the country will return to its entrepreneurial greatness despite the efforts of both political parties in Washington.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Time for Your Free Upgrade


It is time for a new phone. 

It is? I have not learned to use many of the features my current phone. This phone still works fine. I will have to spend time learning the features and operations of a new phone — that is time I could spend with my family or reading a good book or catching up on social media.

You mean if I get the new I-Phone 4S it will be free? No.

You mean I can get rid of my BlackBerry and stop having the cool kids laugh at me? Humm…. (Actually, the cool kids would still laugh at me; they would just have one fewer thing to point out when they laugh at me.)

So it is time to get a new telephone because the telephone company will provide a discount on an upgrade. But I am not ready for a new phone.

I see how it is difficult to stay within a budget. In fact, I am not particularly good at budgeting per se. I am cheap in some areas of my finances and generous in other areas without a strictly rational basis for the behaviors. Most of my good behaviors come from avoiding things that get me in trouble; for instance, I never look at whether I have a discount for a new phone until I think I need it. (Unfortunately, some family members look for me.) Another example from early in my adulthood, was putting more money in 401(k) plans than savings accounts because I tended to withdraw and spend the money in a savings account but I could not get to the 401(k) money.

How can you create obstacles to avoid your financial foibles? Perhaps you could avoid impulse purchases if you left your credit cards at home. Maybe you could substitute a walk in the woods for a walk at the mall. Maybe you could visit the library instead of the bookstore.

When I wanted to quit smoking, one of my techniques was to tell myself over and over that it was a vile and disgusting habit. After 20 years of smoking, I had to convince myself that not smoking was better than smoking. Maybe buying a new car every two years is a vile and disgusting habit for you. Maybe going into debt for your family vacation is your vile and disgusting habit. I succeeded in quitting smoking and I bet you can quit going into debt.

It may be that you want more positive approaches to encourage you to control your finances. Visualize your goal in exquisite detail and spend time in your mind’s eye living that goal. The goal may be starting a business or going to college or achieving financial independence. Think about exactly how things will be better once your goal is met. Explore a day in the life in detail so you can visualize it again and again for motivation. Go over the details each morning for a month to implant those ideas firmly in your mind.

Another way to control your finances is to reduce the amount of your fixed expenses. If your rent consumes 50% of your monthly income and you have an unexpected expense, it is hard to recover. If your rent is 20% of your monthly income and you have an unexpected expense, it is easier to get back on track. When you are making major changes to your lifestyle, think about how much you commit to your fixed expenses. (Generally, a guideline for rent or mortgage payments is 25% of your monthly income.)

I think I have managed to avoid learning a new phone for little while. My son lost his and we are going to use my upgrade to get him a new one.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Get Your Questions Answered


Saturday we had Financial Planning Day in the Twin Cities. Nationally, there will be Financial Planning Days in 31 cities during the month of October (19 sessions are scheduled throughout the rest of the month). The day is an opportunity for consumers to get their questions answered by financial planners and other financial professionals—for free and with no obligation. For more information about a Financial Planning Day near you, check out the website:  www.financialplanningdays.org.

In the Twin Cities, we doubled our participation from our inaugural event last year. As I talked to the financial planners, I learned they were impressed by the preparation done by participants. If they had a question about their progress, they came with information about debts and investments. If they had a question about a product, they brought information about the product. That kind of preparation is not necessary, but it can help participants to get a more accurate, more helpful answer.

Participants ranged in age from their twenties to their seventies. I was particularly happy to see as many thirty-year-old participants in the retirement planning seminar as I saw fifty-year-olds. We all know the old saying about starting early. I reinforce that message by pointing out that if you have ten years to your goal and can earn 7% on your money, you have to contribute 75% of the goal and earnings provide the other 25%. If you have forty years to your goal and can earn 7% on your money, you only have to contribute 20% and earnings provide the other 80%. Whatever your goal, if you start saving sooner you will have to contribute less.

The most popular topics for questions were investment planning and retirement followed by budgeting and taxes. Health insurance and long term care planning were the areas of most concern among people planning for retirement. Realistic investment options were concerns of young people who had begun to save and wanted more effective places to put their money.

What are your financial concerns? Come to Financial Planning Days in your community or Ask a Planner on this website. Financial planners stand ready to help you plan to meet your goals.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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A New, More Powerful Engine


Like many of you this summer, my wife’s family had a reunion at the lake last month. We had hamburgers and hot dogs and, since it was in Wisconsin, we also had brats. The weather mostly cooperative, although we had exciting gusts of wind along with rain for a few minutes. It added a topic of conversation for a group that did not see each other as often as they would like.

The most popular water sport was tubing. Pete brought the boat and talked about going tubing as a child. It seems he and his brother used to “try to kill each other”: gunning the boat, taking sharp turns, slamming the tube into the wake. The boat had a 50-horse engine and the brothers would push it to its limits trying to throw each other from the tube. It was all great fun.

One day, their father got a new boat with a 150-horse engine. This one had more than enough power to throw them from their tube. Peter and his brother realized they might be able to kill each other with this boat and the boys quickly learned that the rules had to change. They were no longer testing the limits of the engine, but the limits of their bodies.

Some of us have realized that the engines available for our personal finances are more powerful than the old engines also. Passbook savings accounts are not as powerful as money market funds. Cash transactions are not as powerful as credit transactions. In many ways, defined benefit plans are not as powerful as 401(k) plans. These engines will allow us to accomplish much more than previous generations and provide the potential for us to get in much more trouble.

Unlike Pete and his brother, we are not changing the rules very quickly. Some are calling for new rules in the form of financial regulations; others are calling for more education; still others see the difficulties individuals face as a character flaw of one form or another.

When I started my career, I applied for a credit card from my employer, a bank. They told me that I did not make enough to qualify. Years later, I started my own company and, as I opened a checking account for the company, the banker asked me if I wanted a credit card for the company. They gave my new company, with no income, a $5,000 credit line. The rules for credit card issuance had changed. Of course, I had earned a strong credit history over the years that helped me get the business credit card. However, I would contend that the college students being offered credit cards with little income do not have a similarly strong credit history. Today, individuals have the ability and the responsibility to control their own use of credit—the banks will give you enough financial power to throw you far from the tube.

A pension is a powerful source of lifetime income, but employees do not have much control over its value; a 401(k) provides a lot more control over contributions and a greater potential for growth. Contributing generously and early combined with taking some investment risk allows employees to accumulate a significant nest egg over their career. Postponing contributions, stingy contributions and stable investments could constrain your retirement lifestyle. With the 401(k), individuals have the ability and the responsibility to control their own retirement funds.

Education will be a key to managing these more powerful financial engines. Some of that education might come from parents, if they really know more than their children. Many parents grew up with cash transactions and were offered credit after their spending habits were ingrained. They may struggle to find life lessons that apply to young people who are given credit lines before they have income. Parents may not know just how valuable time is when you are saving for a goal.

Some say there may be a need for more regulation. There may be some need to improve the character of our citizenry as well. But I believe that it is not necessary to add a governor to our 150-horse financial engine. We do not have to prevent our financial engine from providing more than 50 horses of power. If we add that regulation we may prevent people who are able to save and those who know how to use credit responsibly from maximizing their wealth.

We need to prepare more people to save and use credit responsibly. We need to help people realize that some lessons have too high a price to learn from experience. If you travel too fast in a tube and are thrown, you could die.  If you take on too much debt, you may not be able to pay it off.  If you turn too quickly, at too high a speed, you can fly from the tube.  If you wait too long to save for your retirement, you can be tied to some form of income for much longer than you intended. You need to learn not to jump out of a speeding boat from instruction, not experience. You need to learn to start saving early and to stay out of debt from instruction, not experience.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN


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Your Flexibility Impacts Your Career Value


Yesterday, my son, Nathan, competed in an 800 meter running race for his track team. He earned his best time for the year 2:09 and qualified to be on his high school “Freshman Honor Roll;” he had the 8th best time of all freshman ever competing at his high school. His coach, commenting on his hard work to get to that point mentioned that Nathan was willing to try anything the coach suggested to improve his performance. The coach thought Nathan’s flexibility was an important contributor to his success.

Think about how your flexibility, or lack of flexibility, has contributed to your career. Your flexibility can be shown in a number of ways:

  • Willingness to put in the extra hours to complete a project
  • Willingness to accept a job your employer needs to fill
  • Willingness to relocate to take advantage of an opportunity
  • Willingness to consider an opportunity you had not previously considered
  • Willingness to take a step back in your career to enhance your spouse’s career

Flexibility can help your career tremendously and add to the value of your career as an asset. (Last month, my blog addressed a view of your career as an asset) However, flexibility needs to be balanced and complemented by other attributes and skills. For example, I used to work with someone who was willing to work long hours and adjust his schedule for coworkers and clients. Unfortunately, he was not very productive because he was overworked and jumped from task to task. Flexibility does not mean that you accept everything that comes your way.

Recently, a money manager friend was asked by a contact if he wanted to run a company. He had not planned to ever run a company, but was open to exploring the idea to see if it could work. His flexibility to consider an opportunity may pay dividends.

One of my career choices was to support international distribution of a product for a domestic company. Although traditional career advice would have most people seeking leadership positions in the largest product lines, this product line represented about 5% of the company’s business in a good year and was the only part of the business that had international exposure. The decision worked well for me because I was able to lead a team starting an offshore company and grow that product line 48% for each of the next 5 years. My flexibility to accept a role in a neglected part of the business provided some tremendous growth opportunities for me professionally.

Think about your flexibility. Balance your professional flexibility with your personal goals attempting to optimize the balance. Explore benefits and drawbacks to relocating in addition to the career impact. Perhaps you would enjoy learning about a new city or a new country and that, by itself, will outweigh any negatives from uprooting your family. Or perhaps not.

It is not easy to balance income potential, job satisfaction and family time over the course of your career. Michael Haubrich has created a website, Career Asset Management, to help you create that balance. He has valuable resources to share. 

Nathan was able to achieve a personal milestone that was important to him. He found the right balance to achieve his goal and was rewarded in many ways. The lessons from this experience will stay with him. Hopefully, one of those lessons will be achieving balance as well as maintaining flexibility.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN

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