Tag: wealth

Would You Prefer to Have $1 Million Cash Right Now or a Penny that Doubles Every Day for 30 Days?

Albert Einstein is credited with saying “compound interest is the eighth wonder of the world.”

To get back to the original question, would you prefer to have $1 million today or one cent that will double every day for 30 days?  If you chose the million dollars, you would leave millions on the table.

If you chose the penny and passed up the million dollars, on the second day your penny would be worth two cents, on day three it would be four cents, on the fourth day it would be 8 cents.  By day 18 the penny will have grown to $1,310.72.  By day 28 it will be worth over a million dollars:  $1,342,177.  On the 30th day it would be worth an astounding $5,368,709!

If the penny were to be allowed to double for another 30 days, the penny would grow to over $5 quadrillion (five thousand trillion!) dollars.

One of the things this illustrates is that compound growth takes time to make a dramatic difference.  For the person who wants to have enough money to retire in comfort, starting early is the key to success, even if the starting amount is small.

8 Common Reasons for Retirement Failure

1. Overspending.

-You won’t spend less in retirement.  The old saw that retirees only spend 80% of their pre-retirement income is a myth.

2. Elder Fraud.

-Seniors are becoming the favored victims of swindlers.

3. Health care.

-As we age the cost of medical care goes up.  Medicare is covering less and premiums are going up.

4. Starting a business.

-Investing capital in a business that fails can devastate retirement finances.

5. Adult children.

-Helping your children through a “rough patch” can become is one of the most common ways of ending up broke.

6. Second homes.

-The cost of maintaining that vacation home when you’re no longer working can drain your resources when your income drops.

7. Divorce.

-Couples sometimes wait until the children leave home to divorce.  When assets are split 50/50, retirement becomes a problem for both parties.

8. Investment mistakes.

-Making poor investment choices is one of the most common ways of ruining your retirement lifestyle.

If you are nearing retirement, don’t enter into it without a plan.

Are You an "Affluent Worker?"

Forbes magazine recently had an article about some of our favorite clients. They call them the “High Net Worker.” These are people who are successful mid-level executives in major businesses. They range in age from 40 to the early 60s. They earn from $200,000 per year and often more than $500,000. They work long hours and are good at their jobs.

According to the Forbes article, many have no plans to retire. Our experience is different; retirement is definitely an objective. But many have valuable skills and plan to begin a second career or consult after retiring from their current company.

At this time in their lives they have accumulated a fair amount of wealth, own a nice home in a good neighborhood, and may be getting stock options or deferred bonuses. That means that at this critical time in their lives, when they are focused on career and have little time for anything else, they have not done much in the way of financial planning.

When it comes to investing, most view themselves as conservative. But because of their compensation their investments are actually much riskier than they think. It is not unusual for executives of large corporations to have well over 50% of their net worth tied to their company’s stock. Few people realize the risks they are taking until something bad happens. For example, the industrial giant General Electric’s stock lost over 90% of its value over a nine year period ending in 2009. The stock of financial giant UBS dropped nearly 90% between May 2007 and February 2009. These companies survived. There are many household names, like General Motors and K-Mart whose shareholders lost everything.

The affluent worker’s family usually includes one or more children who are expected to go to college. Many of these families have a 529 college savings plan for their children. Most have IRAs and contribute to their company’s 401k plan, but because many don’t have a financial planner they do not have a well thought out strategy for this part of their portfolio.

At a time when many less affluent families are downsizing, many families in this category are either looking to upgrade their homes, buy a bigger home, or buy a second – vacation – home. They may even help their adult children with down-payments.

If you are an Affluent Worker, give us a call and see what we can do for you. If you already have a financial advisor, it may be time to get a second opinion.

Finding financial guidance for the middle aged executive

Let’s imagine that you’re now firmly on your career track. You’re an expert in your field and have a team of experts to manage some of the complexities of life outside of work.

  • You doctor gives you regular medical check-ups.
  • Your attorney to reviews your estate plans regularly.
  • Your CPA prepares your taxes and suggests ways to reduce them.
  • But there’s something missing ….

You are putting away some serious money and you are getting nervous about market risk so you want to find a good financial advisor. You don’t want a broker who will call you to sell stocks and bonds on commission. You want someone who will create a plan and give you unbiased financial advice. Someone who will manage your portfolio for you – commission free – so that your retirement plans won’t blow up just as you get ready to enjoy independence.

But there’s a dilemma. Just as you feel more comfortable knowing that the pilot on your next flight has spent thousands of hours flying your plane, you want to find a seasoned financial pro who has experience in all kinds of markets. But those years of experience could well mean that he’ll retire before you do! What’s the solution?

Recognizing that continuity is important in a relationship as personal as financial guidance, many advisors have set up teams.

Korving & Company is a good example. Arie Korving has nearly 30 years of experience as a financial advisor. A Certified Financial Planner, he is the author of numerous articles and books on finance and estate planning, he has experience that includes both Bull and Bear markets. He’s seen the investment world from both sides and knows that honesty and experience is what people want in their advisor.

Stephen Korving received his degree in finance from Virginia Tech with a focus on risk management. After graduation he joined Cambridge Associates, one of the country’s leading investment management consulting firms. Cambridge provides guidance to major institutions and the super-rich. A Certified Financial Planner, he teamed up with Arie ten years ago and in 2010 they founded Korving & Company, a boutique RIA (Registered Investment Advisor) focused on providing holistic financial guidance to executives and retirees.

Together they provide decades of experience and a plan to continue to do so for decades into the future.  Check them out.

What Rich People Need to Know

I ran across an article at Market Watch titled “Ten things rich people know that you don’t.”  It listed the usual things:

  • Start saving early
  • Automate your savings
  • Maximize contributions to 401(k)s
  • Don’t carry credit card debt
  • Live below your means
  • Educate yourself about investing
  • Diversify
  • Hire a qualified financial advisor

All of that is something to take to heart when you’re young and just starting in life.  But what do people who are already rich need to know?

Lots of people get rich without following the rules.  They may start a successful business, enter a highly compensated profession, climb the corporate ladder, win the lottery, become a sports star or inherit a fortune.   Once you are rich, the number one objective for most people is to stay rich.  One very successful financial advisor with just 28 very wealthy clients said

“People don’t come to me to get rich, they come to me to stay rich.”

That’s the role of a good financial advisor.   Their job is to  do more than manage their client’s portfolios, it’s to take care that all of the other boxes are checked off:  to diversify the client portfolio, to educate the client about investing, to see to it that they live within their means.  In many cases they take care of family issues, lifestyle issues; the kinds of things that family offices do.

It’s what we do.  It’s what our clients expect.

Have a wealth maintenance question?   Contact us.

It’s about making people’s lives better

It’s not just about money.

In most people’s minds the term “financial advisor” has all the emphasis on “financial” and very little about “advisor.” We disagree. We think of ourselves as advisors to the family, helping guide families with a whole range of issues. Some don’t have anything to do with investing.

We have gone car shopping for a client who didn’t want to deal with car salesmen. We have helped people choose the right retirement community.  We help educate young people about investing to make sure they get a good start in life.  We explore vacation destinations for our clients. We review our clients’ estate plans and beneficiary designations to make sure that they are in line with their wishes. We wrote a book designed to help people provide critical information to their heirs before they pass on (Before I Go).

And, of course, we have provided peace of mind to clients who worried about running out of money in their retirement years. This allowed them to do the things they wanted such as travel, spend time with their grandchildren or just relax with a good book.

We do more than manage portfolios. We assist the people who come to us for advice with the deeply personal things in their lives. Making people’s lives better is our goal.

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Financial tips for corporate executives

The December 2014 issue of Financial Planning magazine had an article about “Strategies for Wealthy Execs.” It begins:

Just because your clients are successful executives doesn’t mean they understand their own finances.

And that’s true. Successful executives are good at running businesses or giant corporations. But that does not make them experts in personal finance.

One of the ways executives are compensated is with stock options. But options must be exercised or they will expire. Yet 11% of in-the-money stock options are allowed to expire each year. That’s usually because they don’t pay attention to their stock option statements.

Executives usually end up with concentrated positions in their company’s stock. Prudence requires that everyone, especially including corporate executives, have to be properly diversified. Their shares may be restricted and can only be sold under the SEC’s Rule 144. To prevent charges of insider trading, many executives sell their company stock under Rule 10b5-1.

An additional consideration for executives is charitable giving. Higher income and capital gains tax rates make it beneficial for richer executives to set up donor-advised funds, charitable lead trusts, charitable remainder trusts, or family foundations.

For more information on these strategies, consult a knowledgeable financial planner.

Family Business Financial Planning

A family business is one of the ways that individuals build something of value for themselves and their family. Suffolk is a great example of a community where family owned restaurants, hardware stores, gift shops, bike shops, jewelry, sporting goods, clothing and furniture stores line the streets. Suffolk has its national chains, but its most recognizable businesses – in the pork and peanut industry – began as family businesses.

These family shops often provide a comfortable living as well as job opportunities for family members of the founders. Whether they stay small and local or grow into large businesses, there are challenges that everyone running a business has to face.

The first is competition. For every business there is a better financed competitor. The supermarket doomed the family-run grocery store. Wal Mart is a feared competitor for anyone selling groceries, clothing, furniture, electronics, toys, eyeglasses; and now it’s even getting into banking.

The second challenge is a bad economy. Many communities have seen their downtowns shuttered when local industry left. The businesses depending on housing have still not fully recovered from the crash of 2008.

Finally, most small businesses are very dependent on one or a few key people. If the children don’t want to get into the business when the parents are ready to retire, the business often closes. There is no guarantee that a business can be sold when they owner is ready to retire. Unless the owner has prepared for this, the financial results can be devastating.

For all these reasons, the family business owner has to make sure that they have prepared themselves financially for life after the business. Succession planning is critically important and should be part of the business plan from the moment the business is started. If a business is a partnership, buy-sell agreements should be in place to avoid complications from the death of a partner. If a business is going to be passed along to children, the owners should be clear about the division of assets. Otherwise there is likely to be wrangling – or even lawsuits – over who is entitled to what.

Most people in business choose to convert from individual proprietorships to limited liability companies. This protects the business owners’ personal assets in case of a lawsuit against the business. Some convert to “Chapter C” corporations for tax purposes. If a company wants to grow even larger, it may want to raise cash by “going public” and selling shares to the general public.

One of the most common mistakes that business owners make is to invest too much of their money in the business. It’s a fact that a family business is a high-risk enterprise. Competition, the economy – even a change in traffic patterns – can bring a business to its knees. Building an investment portfolio should go hand-in-hand with building a business. When most of your money is tied up in your business you are making the same mistake as the investor who owns only one stock. Diversification reduces risk and provides a safety net. Factors that are out of your control could end up severely damaging your business value, thereby crippling your total savings and your future goals and ambitions.

In addition to the traditional savings and investment accounts, the tax code provides many ways for business owners to put money aside in a variety of tax-deferred accounts such as SEP-IRAs, 401(k) plans, and SIMPLE-IRA plans. As a business owner you can even set up a “Defined Benefit Plan” which works much like a traditional pension.

There are a great many things that running a business entails beyond offering customers a great product or service. People who start a business are usually focused on this aspect of the business. But to insure that the business – and the family – survives and thrives, business owners should seek the assistance and guidance of a team consisting of an attorney, an accountant and a financial planner. They may be in the background, but they are critical for the financial success of the family business.

Benchmarking Inverts the Basics of Investing

The problem with “benchmarking”  – that is measuring your investment performance against market indexes (known as “benchmarks”) – is that it often leads to buying into asset bubbles.

During the tech boom of the last 20th century, billions of dollars went into internet stocks whose values became wildly inflated.  People who participated in this as a way of reaching for high rates of return, found that no one rang a bell when the party was over.  Many lost their retirement savings and saw their 401(k)s devastated.

Certain stocks become wildly popular, industries become wildly popular and investing styles become wildly popular, all of which leads to wildly inflated values.  This almost inevitably leads to financial pain.

But this does not only happen in the stock market.  In the first decade of the 21st century, real estate seemed to be a way of making outsized profits.  Of course, when the housing bubble collapsed, many not only lost money, but their homes.

The focus of serious investors is to align your portfolio with your personal objectives.  The focus should be on long-term – multi-year – performance.  The only benchmark that should concern you is the one you set for yourself.

At Korving & Company we keep our clients grounded and work with them to meet their personal benchmarks.  Contact us to do the same for you.

Investing like Bill Gates

Bill Gates’ fortune has ballooned to $82 billion according to the Wall Street Journal. It puts him at the top of the Forbes 500 list of the world’s richest people. And it’s not due to the price of Microsoft stock.

Over the years, Bill Gates has done what any savvy investor does, he’s diversified. He has sold about $40 billion of his Microsoft shares and has given $30 billion to charity. So what’s he done to get even richer? He has hired a money manager. The man’s name is Michael Larson and Gates has given him his “complete trust and faith.”

Gates gave a party in Larson’s honor, toasting him by saying that “Melinda [Gates wife] and I are free to pursue our vision of a healthier and better-educated world because of what Michael has done.”

The way Bill Gates has managed his fortune is a lesson for every investor. There are three distinct things that are worth noting.

1. Diversification. The first rule of risk control – making sure you don’t lose your money –  is diversification. This issue has been beaten to death, yet we still see people with portfolios which are concentrated in one or two stocks. This is often the case of an employee who has bought his company’s stock over many years. Small business owners are even guiltier. Often their single biggest asset is their business. It’s even more important for the owner of a chain of dry cleaners, fast food outlets or a real estate developer to build an investment portfolio that will be there if their business declines. Only about 15% of Gates’ fortune is invested in Microsoft stock. If Microsoft were to close up shop tomorrow, Gates lifestyle would not be affected. He would still be immensely wealthy. Many business owners can’t say the same thing.

2. Hire an investment professional to manage your money. Gates knows computers and computer software. He’s smart, savvy and knows that he lacks investment expertise. Gates hired Larson in 1994, realizing that if he was going to diversify he had to hire someone who was an expert investor to manage his money. The Gates fortune grew from $5 billion when he hired Larson to $82 billion today. Larson has autonomy to buy and sell investments as he sees fit. His portfolio includes stocks, bonds and real estate. He has a staff of about 100 people to help him do the hard work of managing the Gates fortune.

3. Focus on what you enjoy and do best. Because they have someone they can trust managing their money, Gates and his wife can pursue their vision. Most people’s interests revolve around their family, their work or hobbies. Managing the family investments is a distraction from what people want to do. Besides, few people are investment professionals. That’s why Gates example is worth following. Unless you have Gates’ wealth you can’t afford your own dedicated, private, investment manager. But there are investment managers – like Larson – who manage the assets of multiple families.  They can take care of your investments while you focus on the things that are important to you.

Gates gets an update on his investments every two months. Not every investment has been successful, but they are good enough to have returned Gates to the top of the wealth list.

If you are still managing your own money, or have an account with a broker who calls you with investment ideas from time to time, isn’t it time to think about the way the richest man in the world handles his money? Call Korving & Company and let us show you what we can do for you.

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