Tag: financial advisors

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.

How Advisors Can Help Surviving Spouses

Investopedia published an article we authored.

When the subject of death comes up, a term that’s often used to describe the feelings of those left behind is “loss.” But there is more to that loss than the loss of companionship. There’s also the loss of information, especially if the person who died also handled the family finances.
In my 30 years of experience advising families I have often had to help and council widows who depended on their husbands to manage the family finances. It’s fairly common for families to have several investment relationships. It’s quite rare to find that the spouse who managed the money actually did a good job keeping records and keeping his spouse “in the loop” when it comes to money management. And when her spouse dies, the widow has to deal with a host of organizations whose primary focus is on making sure that they don’t distribute money to anyone who is not entitled to it. The liability is too great. So we typically have a widow dealing with the death of a loved one, plus the Social Security Administration, the husband’s pension plan, and two, three or more brokerage firms who handled the couple’s investments. (For more, see: Estate Planning: 16 Things to Do Before You Die.)

Who Handles the Finances?

One of my earliest experiences was with a widow whose husband took care of all the family finances. He made the investment decisions, paid the bills and balanced the checkbook. He died suddenly and his wife did not know what to do. Childless and with no near relatives, she needed help. (For more, see: Estate Planning for a Surviving Spouse.)
While her husband’s will was up to date, during our first meeting she revealed that she knew nothing about her financial condition. She did not know how much she was worth, what her income sources were or what it cost her to live. It took a while to learn where all the investments were, what her income sources were and how much she needed to maintain her lifestyle. (For related reading, see: Advanced Estate Planning: Information for Caregivers and Survivors.)
Over the years I found that this situation was not uncommon. Balancing a checkbook, paying bills and making investment decisions does not appeal to a lot of people. They are happy to allow their partner to do that for them. The problem with this division of labor does not appear until the individual in charge of the finances disappears either through death or incapacitation.

Helping Manage the Transition

This is the point at which a trusted financial advisor can ride to the rescue. A good one is willing to go through records to see what it takes to run the household. He will be able to determine the survivor’s income. He will know how to identify the family’s investment and bank accounts even if the records are incomplete. Just as important, a financial advisor should be willing to provide more than simply financial advice to the surviving spouse. This is the point where questions arise about selling the extra car, upgrades around the home, moving to be nearer the children – or moving into a senior living facility. These may well be the questions a trusted advisor is able to answer. (For more, see: 6 Estate Planning Must-Haves.)
Advisors who are simply money managers will, at this point, probably find themselves replaced. According to PriceWaterhouseCoopers’ Global Private Banking/Wealth Management Survey, 2011, more than half (55%) of the survivors will fire their financial advisor following the death of a spouse. A lot of that will be due to the changing level of service that a surviving spouse needs. (For related reading, see: Why Do Widows Leave Their Advisors?)
But there is actually a better answer to the financial confusion that often follows a death. The best time to gather comprehensive information about family finances is when the couple is still alive.

Why a Will Might Not Be Enough

With due respect to the legal profession, will and trust documents are written to specify how assets are to be distributed at death. With few exceptions, they rarely get down to the kind of detail that allows the surviving spouse to take up where the deceased has left off.
What is needed is a specific book of instructions itemizing financial assets, their location and their ownership. Income will be vitally important to the surviving spouse. Realizing that income will change once one’s spouse dies, it’s important to know what the survivor’s income sources will be. Finally, the cost of maintaining the surviving spouse can be determined while both are still alive much more easily than after one has passed away. And since so many transactions now take place via password protected Internet portals, the survivor needs a list of those portals and passwords. (For further reading, see: The Importance of Estate and Contingency Planning.)
When someone dies, the surviving spouse will always have a period of grieving. But if a little though is given to preparing for the inevitable, grief does not have to be accompanied by fear of an unknown financial future.

To make it easy for couple who want to plan, purchase a copy of our book: BEFORE I GO and the BEFORE I GO WORKBOOK. 

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.

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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How Do I Start Saving and Making My Money Grow?

We contribute to several forums that provide advice to novice investors. One of the most popular questions goes like this:

• I’m 28 and will start a new job soon. I have accumulated $10,000 in a savings account and will be able to save an additional $1000/month when I start my new job. I need advice on how to start an investment plan.

It’s a good question. The person asking it usually has some money in the bank and has enough income to add to his or her savings. But because interest rates are so low the savings are not growing. There are three common reasons for not starting an investment program.
Not knowing where to start. The mechanics of opening an investment account can be complicated.
Fear of making a mistake. People work hard for their money and don’t want to lose if because they made some rookie error.
Not knowing who to trust. Who will provide good, honest advice for you?
Here’s how to begin an investment plan that works for people of all ages.

  • Find a Registered Investment Advisor (RIA) who is a fiduciary: who put their clients’ interests ahead of their own and provide unbiased investment guidance. They will help you through the process.
  • Find someone with experience. You don’t want to deal with someone who’s learning with your money.
  • Find someone who is accredited. A CFP™ (Certified Financial Planner) is trained to give advice on all aspects of financial planning.
  • Find someone who does not charge commissions. It eliminates conflicts of interest.
  • Find someone who has a good reputation in the community.

At Korving & Company, we’ve been helping people just like you make better decisions about their money and their lives for thirty years.

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.

4 Reasons Why You Need a Good Financial Advisor Now

A good financial advisor has a number of roles: planner, investment manager, educator who is willing to teach you about investing, and sounding board with whom you can share your fears and aspirations.

Why is a Registered Investment Advisor (RIA), a fiduciary who puts your interests ahead of his own, so important now? People often get over-confident during a Bull Market. It’s when the market gets scary that financial professionals really prove their worth.

We have all heard the old sayings about being diversified, buy low and sell high, and stay the course. That’s often harder to do than it looks, especially in trying times such as these, when investor psychology overtakes reason. A financial advisor’s job sometimes involves protecting investors from themselves. And to protect them from all the bad advice that’s out there and from the bad actors in the industry.

  1. The first thing that a fiduciary does is tell their clients that despite what you hear, no one can time the market. There may be some people who are exceptionally good at stock picking, but those rare individuals are not giving away their advice to you on TV, in Money Magazine, or in newsletters; I don’t care what they claim. If they exist at all, they are managing their own portfolios on an island in the Caribbean.
  2. The retail financial services industry has an incentive to sell you expensive products as often as possible. And they are very good at it. Don’t get caught in the frequent trading trap; it’s not to your benefit. A fee-only RIA does not have an incentive to sell you investments to earn a commission.
  3. Investors typically allow their portfolios to get too risky during the good times. When the stock market is going up, it’s too easy to get caught up in the excitement and ignore asset allocation guidelines. A good investment manager will rebalance your portfolio regularly to keep you from running into a Bear Market with a portfolio overloaded with risky stocks.
  4. 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.

During volatile markets, we focus on the important things that really matter, not the daily chatter. We keep open lines of communication with our clients, helping them make sense of what’s going on, providing perspective, and helping them distinguish between what’s just noise and what’s a genuine trend. We work hard to control risk and manage portfolios to help our clients maintain confidence in their financial future.

If you want to receive our weekly commentary, view our latest guides, or get a free download of the first three chapters of our book “Before I Go”, or just find out about us, visit us at www.korvingco.com.

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