Category: financial guidance

Will Retiring Force Cutbacks in Your Lifestyle?

For most people, retiring means the end of a paycheck.  When you retire, how will your lifestyle be affected?  If you don’t know the answer to that, don’t you want to find out before it’s too late?  There are so many things to take into consideration, including:

Retirement age – Modern retirees face lots of choices that their parents did not have.  There is no longer a mandatory retirement age, so the question of “when should I retire?” gets more complicated.

Social Security – The age at which you apply for Social Security benefits has a big effect on your retirement income.  Apply early and you reduce your monthly benefits by 25% – 30% depending on your age.  Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year) depending on your age.  If you are married the decisions get even more complicated.

Pension – If you are entitled to a pension, the amount you receive usually depends on your length of service.  The formula used to calculate pension benefits can get quite complicated.  Those who work for employers with questionable or shaky financials may want to consider whether they will get the benefits they are promised.  If you are married, you will need to decide how much of your pension will go to your spouse if you die first.

Second career – An increasing number of people are going back to work after initially retiring.  Quite a few people don’t really want to stop working, but instead want to do something different or less stressful in their retirement.  Others use their skills to become consultants, or turn a hobby into a business.  A “second career” makes a big difference in your retirement lifestyle and how much income you will have in retirement.

Investment accounts – These are the funds you have saved for retirement in: IRAs, 401(k)s, 403(b)s, 457s, and individual accounts.  These funds are under your control.  Most retirees use them to supplement their Social Security and pension income.  They play a very large role in determining how well people live in retirement.

To find out whether you will be forced to cut back after you retire, you need a plan that allows you to take all these factors into consideration.  A plan allows you to gauge your progress and make corrections before it’s too late.

If you have questions, or if you would like to create a retirement plan, contact us.

Planning to Retire Someday? Start Planning Today!

A recent survey showed that most Americans don’t want to do their own financial planning, but they don’t know where to go for help.  60% of adults say that managing their finances is a chore and many of them lack the skills or time to do a proper job.

The need for financial planning has never been greater.  For most of history, retirement was a dream that few lived long enough to achieve.  In a pre-industrial society where most families lived on farms, people relied on their family for support.  Financial planning meant having enough children so that if you were fortunate enough to reach old age and could no longer work, you could live with them.

The industrial revolution took people away from the farm and into cities.  Life expectancy increased.  In the beginning of the 20th century, life expectancy at birth was about 48 years.  Government and industry began offering pensions to their employees.  Social Security, which was signed into law in 1935, was not designed to provide a full post-retirement income but to increase income for those over 65.  (Interestingly enough, the average life expectancy for someone born in 1935 was 61 years.)

For decades afterwards, retirement planning for many Americans meant getting a lifetime job with one company so that you could retire with a pension.  The responsibility to adequately fund the pension fell on the employer.  Over time, as more benefits were added, many companies incurred pension and retirement benefit obligations that became unsustainable.  General Motors went bankrupt partially because of the amount of money it owed to retired workers via pension benefits and healthcare obligations.

As a result, companies are abandoning traditional pension plans (known as “defined benefit plans”) in favor of 401(k) plans (known as “defined contribution plans.”)  This shifts the burden of post-retirement income from the employer to the worker.  Instead of knowing what your pension income will be at a certain age and after so many years with a company, now employees are responsible for saving and investing their money wisely so that they will have enough saved to adequately supplement Social Security and allow them to retire.

In years past, people who invested some of their money in stocks, bonds and mutual funds viewed this as extra savings for their retirement years.  With the end of defined benefit pension plans, investing for retirement has become much more serious.  The kind of lifestyle people will have in retirement depends entirely on how well they manage their 401(k) plans, their IRAs and their other investments.

Fortunately, the people who are beginning their careers now are recognizing that there will probably not be pensions for them when they retire.  Even public employees like teachers, municipal and state employees are going to get squeezed.  Stockton, California declared bankruptcy over it’s pension obligations.  The State of Illinois’ pension obligations are only 24% funded.  Other states are facing a similar problem.

In fact, many younger adults that we talk with question whether Social Security will even be there for them.  They also realize that they need help planning.  Traditional brokerage firms provide some guidance, but the average stock broker may not have the training, skills or tools to create an unbiased financial plan; many are only after your investment accounts or using the plan to persuade you to buy an insurance product.  Mutual fund organizations can offer some guidance, but getting personal financial guidance via an 800 number is not the kind of personal relationship that most people want.

Fortunately there is another option.  The rapidly growing independent RIA (Registered Investment Advisor) industry offers personal guidance to help people create and execute a successful financial plan that will take them from work through retirement.  Many RIAs are run by Certified Financial Planner (CFP™) professionals.  Many are fiduciaries who put their clients’ interests ahead of their own.  And many, including us, offer financial plans for a fixed fee as a stand-alone line of business, meaning that we don’t push or require you to do anything else with us except create a plan that you’re happy with.  Contact us to find out more.

Questions to ask when interviewing a financial advisor

A previous post referred to an excellent article on CNBC about financial advisors .  You first have to consider what kind of financial advice you want or need.

Once you determine the kind of advice you’re looking for, here are some key questions to ask when interviewing the financial advisor.

  • What are the services I am hiring you to perform?

  • What are your conflicts of interest?

  • Identify for me all of the ways you or your firm are compensated by me or by any other party in connection with services rendered to me or my assets.

  • Do you have a fiduciary duty to act in my best interests?

  • Describe your insurance coverage.

We’ll add a few more of our own:

  • What is your investment philosophy?
  • Do you do your own investing or do you use outside firms?
  • What kind of experience do you have?
  • Are your other clients similar to me?

If you don’t get straight-forward answers to these questions, go on to your next candidate.

Who, exactly, are these financial advisors

There’s a really great article on the CNBC website that discusses the question of what financial advisors are.  There is a lot of confusion because people use the term “financial advisor” for a group of people who are really different.  There is less confusion in the medical field because we distinguish between various kinds of doctors.  When you have a medical problem you distinguish between a pediatrician, a heart surgeon, a dentist or a psychiatrist.   They’re all doctors but people know there’s a lot of difference between them.

The same thing is true of financial advisors.  They could be a stock broker, an insurance salesman, or a Registered Investment Advisor (RIA).

Here is one important difference between brokers (technically known as Registered Representatives) who work for investment firms like Merrill Lynch, Wells Fargo, UBS or other major firms and investment advisors.

Brokers can only offer you investment advice that is incidental to them buying or selling financial products, whereas investment advisors are professionals who are paid by you to give you advice — advice that is in your best interest. The latter is called a fiduciary responsibility.

Before engaging an advisor, Ask yourself these key questions:

  • Are you looking for advice on individual stocks or someone to manage a diversified portfolio for you?

  • Are you looking for a product to solve a problem or a long-term financial plan?

  • Are your assets straightforward, or will you need more coordination because of complex estate-planning issues?

  • Are you an employee of a company, or might you be dealing with potentially complex tax issues, like selling your business?

  • Are your issues acute and immediate, or will they be ongoing or recurring?

  • How much do you want to rely on the recommendations of your advisor, or do you want to be the ultimate arbiter of what’s best for you, whether to follow a recommendation or not?

  • Are you prepared to evaluate each recommendation to determine whether it’s aligned with your needs?

These questions will help you determine what kind of financial advisor you need.

Feel free to contact us to answer some of your questions.

Is your money going in the right direction?

An acquaintance recently asked me how his money should be invested.  With banks paying virtually zero on savings, it’s a question on everyone’s mind.  Should he invest in stocks or bonds? If it’s stocks, what kind: Growth, Value, Small Cap or Large Cap, U.S. or Foreign?  The same can be asked of bonds: government or corporate, high yield or AAA, taxable of tax free?  That’s a question that faces many people who have money to invest but are not sure of where.

It’s a dilemma because we can’t be sure what the future holds. Is this the time to put money into stocks or will the market go down? If we invest in bonds will interest rates go up … or down? How about investing in some of those Asian “Tigers” where economic growth has been higher than in more developed countries?

There is no perfect answer. We are not gifted with the ability to read the future. And what is this “future” anyway? Next week? Next year? Or 20 years from now when we will need the money for retirement?

We know that generally, people who own companies usually make more money that people put their money in the bank. Another word for “people who own companies” is “stockholders.” That’s why, over the long term, stockholders do better than bondholders. On the other hand, bonds produce income and are generally lower risk than stocks. So my first answer to the question I was asked is: invest in both stocks and bonds.

Choosing the right stocks and bonds is a job that is best left to professionals. That’s the benefit of mutual funds. Mutual funds pool the money of many investors to create professionally managed portfolios of stocks and bonds. They are an easy way of creating the kind of diversification that is important for reducing risk.

To circle back to the original question our friend asked: the answer is to create a well diversified portfolio. We know that some of the time stocks will do better than bonds, and vice versa. We know that some of the time foreign markets outperform the U.S. market. We know that some the time Growth stocks will do better than Value stocks. We just don’t know when. So we select the best funds in each category and measure the over-all result. With so many funds to choose from, the smart investor will get help from a Registered Investment Advisor like the folks at Korving & Company.

Call us for more details.

How a stock market slump affects retirees

Because retirees are no longer earning income, they view a decline in their investments with more concern than those who are still working.

Many savers in retirement also focus on a number that represents the peak value of their portfolio and view any decline from that value with concern.

Psychologists refer to this as the “anchoring effect.”

The unfortunate result of this is that it causes them to worry, leading to bad decisions. This includes selling some – or all – of their stock portfolio and raising cash. This makes it more difficult for their portfolios to regain its previous values, especially when the return on cash-equivalents like money market funds and CDs are at historic lows.

The answer to this dilemma is to create a well-balanced investment portfolio that can take advantage of growing markets and cushions the blow of declining markets.

This is often where an experienced financial advisor (RIA) can help. One who can create diversified portfolios and who can encourage the investor to stick with the plan in both up and down markets.

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This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.
However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.
IRA Contribution Month
To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.
Procrastination Penalty
At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

Are fees really the enemy?

The popular press puts a great deal of emphasis on the costs and expenses of mutual funds and investment advice. I am price conscious and shop around for many things. All things being equal, I prefer to pay less rather than more. However, all things are rarely equal. Hamburger is not steak. A Cadillac is not the same as a used Yugo.

The disadvantage facing most investors is that today’s investment market is not your father’s market. Those words are not even mine; they come from a doctor I was speaking to recently who uses an investment firm to manage his money. His portfolio represents his retirement, and it is very important to him. He knows his limitations and knows when to consult a professional. It’s not that he isn’t smart; it’s that he’s smart enough to realize that he doesn’t have the expertise or the time to do the job as well as an investment professional.

As Registered Investment Advisors, we are fiduciaries; we have the legal responsibility to abide by the prudence rule (as opposed to brokers, who only have to abide by a suitability rule). Some interpret our responsibility as meaning that we should choose investments that cost as little as possible, going for the cheapest option. But do you always purchase something exclusively on the lowest cost without taking features, quality, or your personal preferences into consideration?

As I drive to work each day, I pass an auto dealership featuring a new car with a price tag of $9,999 prominently displayed. I’m never tempted to stop in and buy this car, despite its low price. It does not meet my needs nor does it have the features that I’m looking for in a new car. Why would an investment be any different? Too many investors believe that there is no difference between various stocks, mutual funds or investment advisors. They focus exclusively on price and ignore risk, diversification, asset allocation and quality. People who go to great lengths to check out the features on the cars they buy often don’t know what’s in the mutual funds they own. Yet these are the things that often determine how well they will live in retirement. It’s this knowledge that professional investment managers bring to the table.

People who would never diagnose their own illness or write their own will are too often persuaded to roll the dice on their retirement. Don’t make that same mistake with your investments.

Avoid Self-Destructive Investor Behavior

Charles Munger is Vice Chairman of Berkshire Hathaway.  Munger and Warren Buffett are viewed by many as the best investment team in the country.  He provided some excellent investment insight:

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.  You need to keep raw emotions under control.”

Dalbar, Inc. has studied the returns of the average stock fund investor and compared it to the average stock fund.  Over the last 20 years investors sacrificed nearly half of their potential returns by making elementary mistakes such as:

  • Trying to time the market – thinking you can get out before a market decline and get back in when the market is down.  It never seems to work.
  • Chasing hot investments – from chasing internet stocks in the 1990s to real estate ten years later often leads to financial disaster.
  • Abandoning investment plans – if you have a strategy, and it’s sound, stick with it for the long term.
  • Avoiding out-of-favor areas – for some reason, people want bargains in the store but avoid them in the market.  Don’t be part of the herd.

Few amateur investors have the training or discipline that allows them to avoid these costly mistakes.  One of the most important services that a trusted investment manager can provide is to remain disciplined, stick with the plan, remember the goal and focus on the long term.

For more information about professional investment management visit Korving & Co.

Korving & Co. is a fee-only Registered Investment Advisor (RIA) offering unbiased investment advice.

Arie and Stephen Korving are CERTIFIED FINANCIAL PLANNER™ professionals.

Why roll your 401(k) over when you retire?

According to an article in 401(k) Specialist Magazine, 401(k) providers favor proprietary products. What does this mean to the typical worker? Here’s the bottom line:

“Mutual fund companies that are trustees of 401(k) plans must serve plan participants’ needs, but they also have an incentive to promote their own funds.
The analysis suggests that these trustees tend to favor their own funds, especially the poor-quality funds.”

The article goes on to say that these fund companies often make decisions that appear to have an adverse affect on employees’ retirement security.

The investment industry is, unfortunately, rife with conflicts of interest and bad apples. That is why a prudent investor should work with a trusted investment professional who is a fiduciary. A fiduciary has an obligation to place the client’s interests ahead of his own. As a rule of thumb, a fee-only, independent, Registered Investment Advisor, who does not work for one of the large investment firms that have to answer to public shareholders, and who has access to virtually all investment vehicles, has fewer conflicts.

As we mentioned in a recent article:

A fee-only RIA works for you. Stockbrokers, insurance agents, even mutual fund managers, work for the companies that pay them. They are legally required to work in the best interest of their employers, not their clients. Some of them do try to work in their clients’ best interests, but there can be large financial incentives to do otherwise. A fee-only RIA works only for you. We act in your best interest and use our expertise to allow you to take advantage of opportunities in good markets and weather the bad ones.

This gets back to the original question. Rolling your 401(k) into an IRA with someone who isn’t trying to get you to invest in “poor quality funds,” does not have a conflict of interest, and is legally obligated to put your interests ahead of his own is a good reason to roll your 401(k) into an IRA.

A Client Asks: What’s the Benefit of Inflation?

One of our retired clients sent us the following question recently:

“I can’t understand the FED condoning and promoting any inflation rate. To me inflation means that the value of money is simply depreciating at the inflation rate. Further, any investment paying less than the inflation rate is losing money. A quick review of CD rates and government bonds show it is a rare one that even approaches the promoted 2.25% rate. It seems to me to be a de-facto admission of wanting to screw conservative investors and forcing them into riskier investments… Where is there any benefit to the financial well-being of the ordinary citizens?”

I suspect that there are a lot of people who feel the same way. It’s a good question. Who wants ever rising prices?

Here’s how I addressed his question:

Let me answer your inflation question first. My personal opinion is that 0% inflation is ideal, and I suspect that you agree. However, lots of people see “modest” rates of inflation (say 2%) as healthy because it indicates a growing economy. Here’s a quote from an article you may want to read:

Rising prices reflect a growing economy. Prices typically rise for one of two reasons: either there’s a sudden shortage of supply, or demand goes up. Supply shocks—like a disruption in the flow of oil from Libya—are usually bad news, because prices rise with no corresponding increase in economic activity. That’s like a tax that takes money out of people’s pockets without providing any benefit in return. But when prices rise because demand increases, that means consumers are spending more money, economic activity is picking up, and hiring is likely to increase.

A case can be made that in a dynamic economy you can never get perfect stability (e.g. perfectly stable prices), so it’s better for there to be more demand than supply – driving prices up – rather than less demand than supply – causing prices to fall (deflation). Of course we have to realize that “prices” here includes the price of labor as well as goods and services. That’s why people can command raises in a growing economy – because employers have to bid up for a limited supply of labor. On the other hand, wages grow stagnant or even decline when there are more workers available than jobs available.

But for retirees on a fixed income, inflation is mostly a negative. Your pension is fixed. Social Security is indexed for inflation, but those “official” inflation numbers don’t take food and fuel costs into consideration, and those tend to go up faster than the “official” rate. The stock market also benefits from modest inflation.

Which gets us to the Federal Reserve, which has kept interest rates near zero for quite a while. It’s doing this to encourage business borrowing, which in turn is supposed to lead to economic expansion.  However, the actual effect has been muted because other government policies have been detrimental to private enterprise. In effect you have seen the results of two government policies in conflict. It’s really a testimony to the resilience of private industry that the economy is doing as well as it is.

The effect on conservative investors (the ones who prefer CDs or government bonds to stocks) has been negative. It’s absolutely true that after inflation and taxes the saver is losing purchasing power in today’s low interest rate environment. The FED is not doing this to intentionally hurt conservative investors, but that’s been part of the collateral damage. The artificially low rates will not last forever and the Fed has indicated they want to raise rates. They key question is when, and by how much?

Rent or Buy?

Should you rent or buy a house?  That’s a question often asked by young couples, those in the military, and people who are undergoing life changes.  The main reason that people want to buy rather than rent is because they view renting as throwing money away and not building equity.  Additionally, buying a home provides a feeling of stability.

However, there are downsides to buying.  Buying a house locks you into a situation.  If your life changes, you lose your job, or wish to move, selling a home can be difficult and expensive.  Owning a home means that you have upkeep and maintenance costs.  If you rent those costs are borne by the landlord.  The cost of rent is often less than the costs associated with home ownership; mortgage payments, real estate taxes, insurance, maintenance and all the other costs that a home owner faces.

Over the long term, owning a home has been a good investment for many families.  But more recent history has clearly shown that the assumption that a home will always go up in value is not true.  Just ask the people whose homes went on the market as “short sales.”

If you are an individual who is contemplating whether to rent or buy, keep these issues in mind.  If you’re not sure, get the advice of a financial planner who can run the numbers for you and help you make the right decision.

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