All Things Financial Planning Blog

1 Comment

Planning for Uncertainty

For many of my clients – as well as for me – uncertainty is one of the most frustrating pieces of the current economic and financial environment. Planning for retirement and other goals has become just that much more difficult. In some respects, it seems that a little bit of the bedrock of our financial foundation has been eroded. A little insight about the future sure would be welcome.

Truth is, we can’t know the future. With the exception of certain undeniable forecasts, like the one about death and taxes, I cannot tell you what will happen later today, let alone what the future holds. No one can. Yet, to some degree, we long for at least a little sense of certainty to help us make plans. That may be why it’s so easy to make assumptions about the future based on the past. We really want the past to be prologue, even when we know it most likely will not be. Frustrating!

So what can we do with this frustration? We can plan for the future. Wait a minute, isn’t that contradictory? Not really. The planning we do is based on what we know about life, and especially, what we know about the financial world in which we live.

I have been reading a marvelous book by Doug Lennick, CFP®, titled Financial Intelligence (2010, FPA Press, Denver). The sub-title is How to Make Smart, Values-Based Decisions with Your Money and Your Life. In Chapter 3, Doug provides guidance to help plan for uncertainty. He sets up two categories: What can’t you know, and what can you do about what you can’t know? Let me summarize Doug’s thoughts.

What Can’t You Know?

  • You can’t know when your life or that of a family member will be significantly changed.
  • You can’t know what’s going to happen with the overall economy.
  • You can’t know what’s going to happen in the real estate market.
  • You can’t know what’s going to happen to the stock market.
  • You can’t know when your employment will be disrupted.

What Can You do About What You Can’t Know

In this section Doug introduces his Smart Money Philosophy. He encourages us to embrace the truth of uncertainty as a motivator for creating financial security and independence. In the Smart Money Philosophy, your plan helps you prepare for life, through all its mountains and valleys.

Here are three key financial points:

  • Recognize that you must save money.
  • Put your investments in a variety of financial instruments.
  • Use insurance to transfer some of the risks of uncertainty to someone else.

So how can you go about making your own Smart Money Plan? First, figure out how much money you really need. What lifestyle do you want? What are your goals and dreams? What can you live without, and what would really hurt if it was missing? This is a good time to revisit your life goals and make sure they still are your life goals.

Recognize that life will have difficult times as well as good times…and plan for both. Planning for the good times seems easy. The economy is strong, the financial markets are in full bull mode. You are healthy and life is good.

Planning for difficult times is, well, difficult. However, doing so is even more important than planning for the good times. As part of this process, consider death – both the financial and personal implications. At the least, make sure your family will have the financial footing to be able to keep going.

Think about what might happen while you are alive, but maybe not as healthy as you want. It’s one thing if you are unhealthy, but can still work. However, this is not always the case. Think through what might happen if you were no longer able to work. While you are at it, what would happen if you are unhealthy enough to not be able to care for yourself? Considering these things will go a long way towards helping you and your family weather the difficulties life may present.

This brief review barely scratches the surface of the good stuff in Finanicial Intelligence. I recommend getting the book and reading it by yourself and with those you love. In the meantime, think through the recommendations about planning for uncertainty, and take steps to begin your own Smart Money Plan.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO

1 Comment

Emergency, Emergency!

No, we’re not talking about the state of the global economic environment, although that might be appropriate, too.

Instead, I want to take a look at a key financial planning concept. In my experience, most people have little trouble understanding the advisability of saving for a goal, such as retirement.

To a lesser degree, most people understand the need for various types of insurance. The mortgage company helps us to recognize the need for homeowners insurance, since we cannot get a mortgage without it. The state and the bank help us to have the same understanding regarding auto insurance.

While we may not like to pay the premiums (and who does?), we usually can recognize the need for life, health, disability, and other basic types of coverage.

What I want to consider is at least as important as having adequate insurance coverage. Let’s look at a foundational human psychology concept to lead us into this fundamental financial need.

Maslow’s Hierarchy

Dr. Abraham Maslow was a psychologist who identified what has become known as Maslow’s hierarchy. Maslow’s research showed that most humans must focus on meeting foundational needs before they are able to grow to the full level of self-actualization. In his hierarchy, Maslow placed physiological (food, water, shelter, etc.) and security needs at the core of human requirements.

Financial planning actually uses a similar construct. It is recognized that foundational security needs must be met before it is wise for an individual to work on meeting most higher-level needs. Security needs include adequate current income, insurance, and emergency funds. That last item is what I want to look at.

The Need for an Emergency Fund

Just like you cannot purchase homeowners insurance to cover a house that is burning, you cannot plan for a financial emergency while you are in the middle of one. We don’t often like to think about the possibility of losing a job, or enduring a serious illness or other major expense. Yet, these are all potential realities for each of us. An emergency fund is one tool that can help us prepare for such, well, emergencies.

Most planners recommend keeping a fund of between three to six month’s worth of expenses in a very stable place. Stable, in this case, means passbook savings, money market, checking account, and short-term CDs. None of them will earn much, but that is not the purpose. Instead, these saving vehicles let you know that if you put in a dollar, you will have that dollar to withdraw when you need it.

Sadly, many of the people whose houses went into foreclosure as a result of the recession may have been able to keep them if they had the recommended amount of money in an emergency fund. Think of the fear and anxiety that could have been avoided if this planning principle had been incorporated.

I can hear the objection, though, and it’s valid. “We barely have enough money as it is, how can we afford to add what amounts to another bill?” A statement like this can as easily come from someone living on $50k a year as from the person with annual income of several hundred thousand dollars. There is often at least some tendency to spend all we make, and more (gotta love credit). Once you have those increased expenses, they remain until repaid, and that can take a very long time.

So if you are living month-to-month, how do you build an emergency fund? Slowly and methodically. It’s actually a pretty good idea to think of it as a bill. From each paycheck put 10% (or less is that’s too much) into your emergency fund. Keep at it until you have the desired amount – which could take a few years. Once you have the funds, leave them alone. That pile of money sitting in savings may look tempting – especially when you want a new TV or maybe to stay an extra day on vacation. Don’t give into the temptation, though. Consider your emergency fund to be off limits until you have a bona fide emergency. Then, reach for your checkbook or debit card and take care of the emergency…and smile. Your saving and discipline has just paid off.

The hope is that you never have to tap your emergency fund. However, if you do, there’s a tremendous peace of mind that comes from knowing it is there for you.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO

Leave a comment

Planning Ahead: A Survival Strategy

The death of a spouse is one of the most traumatic events most people ever have to face. The necessary and inevitable grieving period immediately following such a loss is not the time to deal with difficult and often irreversible financial decisions. However, unless those considerations have been mapped ahead of time, the surviving spouse not only has to scramble to make funeral arrangements, but also must try to make sense out of insurance policies, pension and social security benefits, mortgages, taxes, investments and many other financial issues.

During such a stressful time, the fewer unknowns the better. I cannot emphasize enough the importance of advance planning. Not only should plans be made prior to a loss, a couple should sit down and map out a financial strategy for the surviving spouse.

One of the most important elements of a “plan ahead” strategy is an accurate, complete filing system of all assets and estate planning related materials. The following information should be included in your files as a bare minimum:

  • Life insurance policies with agents names and how they be contacted
  • Any disability policies
  • Auto and home insurance policies
  • Any special liability policies
  • Employee benefits information
  • Copies of any wills or trusts
  • A list of all active credit cards
  • A list of all financial assets and their location (such as rental property, etc.)

Additionally, if a person owns a business, there should be advance planning about how to either dispose of that business upon the death of a spouse, or how to market the business before it begins to lose money. Deciding on buy/sell arrangements is also a good idea.

Assuming there is some advance knowledge of a terminal illness, a couple should meet with an estate planning attorney to review wills and trusts and make any necessary changes and additions to those documents. This is also a good time to discuss how property is owned, how bank accounts are titled (will the survivor have unencumbered access), and review life insurance policies to make sure they name the correct beneficiaries.

An attorney can also assist in executing a durable power of attorney and a medical durable power of attorney. The durable power of attorney gives someone the ability to deal with your financial assets prior to your death should you become unable to yourself. And a medical durable power of attorney allows you to select someone to make difficult medical care decisions for you should you become incapacitated, as in the case of a coma, etc. Living wills let you decide ahead of time if you want to use any extraordinary means to extend your life in a terminal situation.

Also, in the case of a long-term illness and an older spouse, you’ll want to consult with an advisor who specializes in elder care. Often the death and/or long term-illness of a spouse stretches financial assets to their limits. Don’t wait until you’re desperate to begin exploiting possible income sources. An advisor can help you explore financial options as well as outside care sources, such as hospice and home health care aides.

Couples coping with long-term illness should consider taking advantage of even small amounts of insurance (assuming the premiums are reasonable). Often all it takes is signing and returning a card to get a few thousand dollars worth of coverage from credit cards or credit unions. Even small amounts of insurance can come in handy when bills begin to accumulate. If, despite exploiting all other options, you find yourself in desperate need of money, it is sometimes possible to collect accelerated death benefits from a life insurance policy.

Finally, consult with a trusted advisor about your particular situation. Some advisors specialize in geriatric care and they know what’s available as far as medical benefits and cash resources (both before and after the death of a spouse). A competent advisor can also work with you on allocating expenses, exploiting survivor benefits, and making investments for the surviving spouse. Older couples may also want to discuss living arrangements for a surviving spouse. Involving your advisor in all phases of this process is extremely helpful as he or she can guide you though the maze of options.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO


How to Disinherit Your (Step)Children

It’s really simple. Do nothing. That’s right. Do nothing and you will almost certainly ensure that none of your stepchildren will receive any benefit from your life insurance policies, your IRAs, your 401(k)s – nothing.

But, you say, I love my stepchildren. I would never want to disinherit them. How could that possibly happen?

It’s actually quite easy. Unless you legally adopt your stepchild, he or she normally has no legal right to any of your property. Most inheritance laws follow bloodlines, i.e., natural-born/biological children inherit. In the absence of specific guidelines, this is usually what will happen. If you want your stepchild to inherit, you have to make it so. Here’s how.

It is just as simple to ensure your stepchildren are in line for any inheritance as it is to lock them out. First, you could legally adopt them. Once adopted, that person  shares the same legal status as a biological child. However, maybe you do not want to adopt, or cannot adopt your stepchild. What do you do then?

Specifically, name your stepchildren as beneficiaries. That’s it. All you have to do is name names and identify the sharing arrangement. For example, on your life insurance policy, list Susie Stepchild as a beneficiary. Do the same thing with your retirement plans and be sure to include Susie in your will. Now, you don’t have to worry about inadvertently disinheriting Susie or her children (your step grandchildren).

Many parents use a common beneficiary designation, along the lines of: children share equally. That’s not much of a problem if there are no stepchildren. Add a stepchild and the situation changes . . . assuming you want to include that child as a  beneficiary. Legally, that unadopted stepchild isn’t counted among your children. This is why you must specifically name any stepchildren whom you want to receive an inheritance.

For life insurance policies and annuities, call your agent or insurance company. Ask  for a beneficiary change form. It may be available online, but you might have to print it, sign it, and mail it in. No beneficiary changes become active until officially received by the company (in whatever form the insurer requires). You might, for example, name your spouse as primary beneficiary, and then list each child – natural born, adopted and step – as contingent beneficiaries. You can have them share the proceeds equally or specifically identify a different sharing percentage for each one. Why would you want to change the sharing percentage? Maybe one of your children has special needs that might require extra care . . . and extra money to fund that care. There may be other reasons, too. The point is, you can specify the sharing percentages.

Do the same thing with your IRA, 401(k) and other retirement plans. Get the appropriate beneficiary form from your provider or your employer. This would be a good time to ensure you actually have named a beneficiary for these plans. You should. While you’re at it, include your children – step and biological – as named contingent beneficiaries (you will normally identify your spouse as the primary beneficiary).

For any assets where you cannot name a beneficiary, you will need to amend your will. Include your stepchildren by name, and identify their share of the inheritance. If you want to include step grandchildren, specifically identify them as well.

Sometimes a revocable living (inter vivos/family) trust is a good idea. Using such a trust allows you to have quite a bit of control over the disposition of your assets. It also may help shepherd those assets through the probate process, reduce any estate taxes and preserve family privacy. We won’t go into detail on this, but if you choose to use one, make sure to include your stepchildren in the same way as has already been identified. (To determine whether a revocable living trust makes sense for you, talk to your financial advisor and/or your estate planning attorney. Trusts and wills must be drafted by an attorney.)

So there you have it. If you have stepchildren – and with the frequency of divorces and second marriages, many people do – and you do not want to disinherit them, follow the guidelines we have discussed. It’s not hard to fix, but lots of people are not even aware of the potential problem. Now you know, and you can inform your children – all of them – that they will be taken care of in the event you are not there to do so personally.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO


Choosing a Financial Adviser

Let’s say that you have decided that you would be well served by working with a professional financial adviser (a good choice). Now you have to figure out the person(s) with whom you will work. So how do you go about that?

The FPA has some very good information to help you get started ( Things to ask include the planner’s background and education; their areas of expertise; how they approach financial planning and how they are compensated. You will want to learn about any potential conflicts of interest along with any regulatory issues on their record. Find out if they focus on selling investments or insurance, or whether their primary focus is doing analysis and providing advice. Do they help to manage your financial assets, or do they prefer to give you a roadmap so that you can manage your own financial assets?

These, and other questions, are all necessary parts of the vetting process. However, I would suggest that they are not the most important parts. In my opinion, and according to more than a little third-party research, two of the most important factors in choosing a financial adviser are trust and compatibility.

Ask yourself, “can I trust this person with my financial future?” How can you know? Part of the process should definitely include identifying prior problems. Also, you will want to know whether the adviser adheres to an ethical code. All CFP® professionals must agree to abide by CFP Board’s Standards of Professional Conduct. Additionally, FPA members agree to abide by FPA’s Standard of Care.

These external factors can help  you narrow down the list of advisers. There is never a time when you should feel you have to settle for working with an adviser who does not willingly adhere to high ethical and professional standards.

Still, codes of ethics and clean regulatory histories only go so far. To wisely choose a financial adviser, it’s likely that you will have to move beyond these things into the realm of your feelings. Specifically, ask yourself how you feel about this person. Do you feel you can trust them? Are you comfortable being around them? Do they hold to the same broad world view as you do? This is the second key area of choosing an adviser: Are you compatible?

Let’s think about this for a minute. As you work with a financial adviser, you will need to  disclose a lot of personal information. In fact, it may be that this individual will know more about you – your life goals, dreams, and financial condition – than does anyone else. Doesn’t it make sense that you should feel comfortable with this person?

One of our boys has had more than his share of medical issues. As a result, he has worked with many doctors and therapists. Coming home one day after visiting with one of the therapists he announced that he wanted to work with someone else. When quizzed to learn why, his response boiled down to, “I’m not comfortable with him.” So after making a change, he was able to make more progress.

It can work that way with financial advisers. If you are not particularly comfortable with someone, it’s pretty likely you will not develop a good working relationship. Why sabotage your financial future that way?

As you consider working with an adviser, ask yourself these questions:

  • Do you feel comfortable sharing your dreams, your concerns, your financial details?
  • Does your adviser really listen to you?
  • Is your adviser supportive or does he or she intimidate you, relegating your goals and concerns to the background?
  • Do you get the sense of transparency from the adviser (meaning, do you believe him or her to be open and truthful)?
  • Do you communicate well?
  • Does the adviser respect you ?
  • Do you get the sense that what matters most to your adviser is what matters most to you?

Overall, trust your gut. You absolutely need to make sure of the adviser’s professional qualifications, background, education, and expertise. You should check to see whether there have been ethical/regulatory problems in the past. Once past those points, look inside to see how you feel about working with this person. Don’t be afraid to interview several advisers. Doing so might lead you to an advisory relationship that will make a real, long-term, positive difference in your life.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO

1 Comment

Of Medicare and Medicaid…and a Bit of Social Security, Too

I was not surprised to see how widely Representative Paul Ryan’s budget proposal has been applauded. I have to admire his attempt. Few politicians have been willing to tackle such thorny measures. And the measures are thorny. Three in particular make those who are impacted downright bristly: Medicare, Medicaid and Social Security (MM&S).

The Problem with Entitlements

According to the Congressional Budget Office and others, entitlements – such as MM&S – along with interest payments on the debt, will totally consume the federal budget by about 2025.

Here’s the problem. I cannot find anyone who wants their Social Security benefits cut, nor can I find folks who prefer to increase their health care costs in retirement. In fact, the opposite is true. Many people nearing, or in retirement, are worried about running out of money. For better or worse, most people today include a heavy dose of Social Security and Medicare benefits as part of their retirement funding scenario.

No matter how you look at it, too many people are nearing retirement significantly underfunded. When you add the anticipated cost of health care, the outlook is not pretty.

Representative Ryan’s budget proposal has a major focus of cutting entitlements, and he’s right in saying that something has to be done with these huge drains on federal budget resources. However, his privatization proposal can be translated as saying, “You will get fewer federally-funded benefits and you will sustain greater health care costs”.

What to do

I will be the first to admit that I do not have a fool-proof solution to the budgetary problems facing our nation. A good start would be to open up all the books and really eliminate wasteful spending…but that’s just not likely to happen. I agree with those who are saying that cuts must be made, and that some of those cuts will likely be painful.

So if I’m not going to present a solution to our budget problems, why am I writing this? Reasonable question, and here’s why. I don’t hold out much hope of the government actually addressing our fiscal issues effectively and efficiently. As a result, we have some personal financial planning to do.

One way or the other, it seems likely that at least some MM&S benefits will be diminished. If this is true, and we do not want to live in retirement that much closer to the poverty-line, we need to increase our personal funding objectives. I am suggesting that we save more money. Actually, quite a bit more (and yes, I do understand how difficult that can be given the current state of our personal, and our nation’s, economy).

Currently, Social Security provides an average monthly benefit of around $1,200. Let’s assume that those benefits remain the same. The average retirement-age person has saved $100,000 or less. Assuming a 20-year life expectancy and average inflation and investment return, that will add around $500 or so to monthly income. Now we’re up to about $1,700 per month. However, we have not addressed health care expenses.

For the moment, let’s stay with the latest assumptions showing roughly $250,000 anticipated out-of-pocket health care expenses for the average retired couple. Using the same 20-year life expectancy (which really is too low, given current longevity statistics), these expenses would add about $12,500 to your annual budget. So you will be living on $1,700 per month, with about $1,000 of it going to fund health care expenses…and remember, these will almost certainly increase if some version of the current budget recommendations are enacted.

I cannot think of anyone who will be happy with the type of retirement this scenario offers. So we have a choice, increase savings now (which likely means adjusting our personal spending habits) or have a non-health care retirement budget of $700 per month or so.

For every $1,000 you can save by retirement, you can increase your monthly income by about $6. If you want an additional $60 per month, save $10,000 more. Want $600/mo. – save $100k. (Disclaimer: these calculations are most likely optimistic and understate the likely reality.)

Hard, but most likely true. Especially if the government is going to cut back on entitlement benefits, each of us will be even more responsible for our retirement security. The best way to accomplish this is to start now to do as much as we can for our own future.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO


Investing in the Stock Market…Or Not

I inherited a client who is investing for retirement. Let’s call her Sue. Sue is in her late 60s and is getting fairly close to the time when she wants to cut back on working. Unfortunately, she has not been able to save as much as she needs. As a result, about four years ago Sue invested a large portion of her assets in the stock market. From what I can tell, the idea was to take advantage of the fact that the markets always give the best possible returns. This would allow her to make up for lost time.

Unfortunately, that fact has been shown to be false. Oh sure, over time, for most non-institutional investors – those of us who are not mega-millionaires, having access to investment opportunities that have way too steep an entry price for the average person – global stock markets have a history of treating many investments reasonably well. The key part of that statement is over time, and that’s the problem with Sue.

Sue doesn’t see herself as having an overabundance of time. As a result, she checks the performance of her investments every day. Every day! It makes her very nervous. She gets really happy when her investments have a positive day. She gets pretty upset when her investments have a negative day . . . or don’t grow quite as fast as she wants them to. So she keeps checking every day, and it’s really doing a number on her well-being.

Sue second-guesses just about everything. She also beats herself up pretty regularly for doing what she did. For the record, I think things will turn out pretty well for Sue. However, it’s not going to happen tomorrow, and until it does, I have a suspicion she’s going to stay really familiar with the daily stock market reports.

When You Should Think Twice About Investing in the Stock Markets

There’s a rule of thumb or two about investing. One of those guidelines says that any money you will need within the next two to five years (give or take a year or so) should not be invested. Instead, that money should be saved. What’s the difference? Security. Savings go into money markets, savings accounts, CDs and similar vehicles. None of these offer much in the way of a return on your money. However, they all provide for the return of your money. When you will need access to funds in the short-run, just about the only place to consider putting it is in these types of savings vehicles. You might find some advisers who quibble with the exact number of years, but very few, if any, would disagree with the general principle.

Once you move beyond that shorter-term period, it may be time to consider investing in the stock market. I say may be, because there is something else to consider: your risk tolerance. I call it the, “Can you still sleep at night after putting your valuable dollars into the market?” guideline. This brings us back to Sue. Sue is not sleeping all that well these days. Her risk tolerance – her ability to ride out the inherent ups and downs of the stock market – is relatively low. It’s so low that I’m not altogether sure she should be in the market very much, if at all.

It’s true that most of us stand the greatest chance of getting the best long-term return from the stock market. However, the cost of doing so may be a little too high for people like Sue. For them, alternatives such as bonds, or maybe even some annuities, might make more sense. The returns will almost certainly be lower, but the sleep-at-night factor will probably be a whole lot better.

So how about you? How well are you sleeping these days? Does concern over how to save or invest your money keep you up at night? If so, it may be time to get a check-up. There are tools to help you determine just how much risk and volatility you truly are willing to endure. These risk tolerance tools range from ultra-short (and equally shallow) to quite in-depth. Exploring your risk tolerance in some depth makes sense for just about everyone. If Sue had done that (and been really honest with herself) prior to deciding to put it all in the market, I think she could have saved herself a lot of sleepless nights.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO