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20 Financial Planning Questions That You Need an Answer To!


Answering financial planning questions is something that I am passionate about and absolutely love to do. Although when I think about what’s important in my business, it is not so much answering those questions (because lots of times people don’t understand, remember, or get around to it), it’s really about getting to the heart of the important issues and knowing the right questions to ask. Most of the questions I hear are usually about something they need to do right away or they are reacting to recent news events. As we head into the holiday mayhem, take a few minutes to reflect on what you’re concerned about.  

Here’s my top 20 list for you to determine what’s most important in your life right now:

  1. Do you know how much you save or spend each year?
  2. What is my current net worth?
  3. What are the ten most important things I want to accomplish while you’re on this Earth?
  4. Am I borrowing money the most efficiently?
  5. How much am I investing in my own human capital or that of my children and grandchildren so they can earn the most during their working years?
  6. Do I have the proper choices in my retirement or 401(k) plan and is it enough to allow me to retire when I intend to?
  7. Do I have the proper amount in an emergency fund?
  8. If something were to happen to me, will my family be able to put everything together?
  9. Do I have the proper amount of insurance so my family will be taken care of if I die, become disabled or am sued?
  10. Does long term care make sense for me?
  11. Is my estate plan up to date and do I have a will, a durable power of attorney, a healthcare proxy, or a trust?
  12. Is there anything else I can do to reduce my income taxes that I’m not doing now?
  13. What is my risk tolerance and how much risk am I taking right now?
  14. What is my current asset allocation with all the things I own?
  15. Have I named the proper beneficiaries of my insurance and retirement accounts?
  16. What has been my rate of return over the years and is it competitive to the respective benchmarks?
  17. Am I up to date on the latest investments like Exchange-Traded Funds and Alternative Investments that may be negatively correlated to the stock market?
  18. If I only had 5 years to live, what would I change in my life?
  19. If money were no object, what would I be doing right now?
  20. If I found out I was going to die tomorrow, what do I regret not doing?

I’ll admit that I think my last three questions are my favorites. They were developed by the financial planning star named George Kinder, of the Kinder Institute, who wrote the book The Seven Stages of Money Maturity. It’s essential to make sure that you answer the questions that are important in your life and that they align with your finances. In fact, the motto of our firm is to help you “connect your money with your life.” 

The 19th century writer Marcel Proust had some really powerful questions that you might want to ask yourself as well. Below are a few of them that a journalism professor, client and friend of mine used to help aspiring writers develop plots. I think these might inspire you and get you thinking for a while:

  1. What is your most marked characteristic?
  2. When were you the happiest?
  3. What is your greatest fear?
  4. What is your greatest extravagance?
  5. Which talent would you most like to have?
  6. What is your motto?

I’m sure there are a number of important questions that I didn’t include on this list. I’d love to hear yours so that I can write about them in my future blogs. In fact, I guess I have 20 blogs lined up in case I have writers block next month! Happy holidays and happy hunting for your questions and answers in life! 

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC .

Asset allocation does not ensure a profit or protect against a loss.

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA


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I’m in My 30s: What Amount Should I be Saving – Part II


This blog will continue the theme of how much should you be saving each year in order to meet the future goals that you have for yourself and your family.

In the previous blog, I used an individual who was in the 20 to 30 age bracket. This blog will focus on the next decade of ages – the 30 to 40 age bracket. If you have waited until this time to start being serious about saving for the future, you have lost about 10 years of your lifetime to build the wealth you want for your later years.

Two things have occurred in those ten years that have passed you by. The first is the annual amount you did not save and the second is the value of the 10 years of compounding that would have occurred for the amount saved. We can’t create a solution for these two lost opportunities, but we can compensate for them as we move forward.

Again, I will assume that you are single and living on the one income you have. I will look at different income levels today and I will take out the impact of the various federal and state taxes that you pay since these will not be part of your lifestyle when you reach retirement age in the future.

If you are earning about $20,000 today, you have about $16,600 to meet your expenses of housing, food, clothing, etc. Going forward, I will assume the 3% annual inflation for your income and for expenses. Your expectation may be that you will gain promotions and more education that will increase your pay faster than the 3% inflation, but I will not consider that in this section of the blog. I am also not considering any decreases in your income that might occur as you get older or should you happen to become unemployed for any period of your working career.

So let’s see what social security would provide as a benefit if your earnings were in this bracket today and increased each year until you reach retirement. In this scenario, your benefit would be about $23,355 annually if you retired at age 62. If you delayed the start of this benefit until your full retirement age (67), the benefit would increase to about $35,436 annually for you and to $44,639 if you waited until age 70 to start your social security benefits.

If your annual lifestyle expenses of $16,600 increased by 3% annually going forward, the annual cost to live at those various retirement ages would be about $42,900 at age 62 and $54,300 at age 70 . So social security is going to meet between 54% and 82% of what you need to live a comparable lifestyle in retirement. The rest will have to come from what you save. If you saved $1,000 each year for the rest of your working career until you reach age 67, and you earned 7% annually all those years, your money would last you until about age 84. If you increased the savings rate to $2,000 each year, the money would last you until age 100 and you would have some money to leave to heirs. If you made only 6% on your investments, your investments would run out at about age 96.

Today you are in a higher wage category than the $20,000 in the above example. So let’s look at someone who is making $45,000 today. After taxes, you would have about $35,000 to cover your lifestyle, a little more than twice what the previous example had even though you are making 2 ¼ times that example on a gross income basis. Again this is because you have a higher tax bill to pay for that higher income.

Assuming the same assumptions as the first example for inflation, etc., you need to save $4,000 each year and earn 7.5% annually in order to reach age 100 and live the same type of lifestyle that your $45,000 provides today. At this income level, the social security benefit at age 67 will provide about 56% of your estimated living expenses and the balance will be from what you save.

If you save less than the $4,000 per year and earn less than that 7.5% return, your savings will run out sooner. At 6% return and $3,000 saved each year, the money runs out at about age 77.

Should you decide you want to retire at age 62 in this scenario, your social security benefit would cover only 43%. This means you need to save more now or have a part-time job then in order to cover the shortfall.

Due to your ability to get promotions and the type of industry you work in, your pay is higher than the two previous examples. So what if you are earning about $71,000 per year today? You might be able to save $6,000 each year and earn that 7.5% return. In that case your money would get you to age 94 and your social security benefit at the full retirement age would cover about 50% of your lifestyle. If your return on investments was only 7%, you would need to increase your annual savings rate to $8,000 in order to support your lifestyle until age 100.

If you wanted to retire at age 62 in any of these scenarios, obviously you would need to save more each year going forward in order to cover the lower social security benefit you would be receiving. At the other end of the spectrum, you could delay the start of your social security benefit until age 70 and receive a higher monthly benefit for the rest of your life. The challenge in this case is you would have to be able to work additional years at a level of pay that would cover your lifestyle or save more money each year going forward to be able to live off your savings to make up what is lost from not getting the social security benefit.

If you compared the numbers in this blog to the earlier blog that was looking at your peers who are 10 years younger than you, you will see that the amount you have to save now is much higher than if you had started 10 years earlier. You may also realize that you need to make more money today if you want to have the same lifestyle as that younger person. This may mean that you need to work at a second job or volunteer for more overtime, if available, at your present job with the idea that the extra money goes to savings rather than being spent on current lifestyle items.

So what can you do today if you are older and have not started a consistent savings plan for our future goals:

  1. If you are looking at a job change for any reason, be sure to consider how the new employer’s benefit program will help you toward reaching your retirement type goals. Does the employer provide a match if you put money into their tax-deferred program? If you get a raise in that new job, look at putting that raise into your retirement savings pool.
  2. Be sure to review what the Social Security Administration has as your wage history by asking for your benefit statement and review its accuracy. Your work history is what determines your final benefits, so if it is not correct your benefit will not be correct. Have them correct the information on your work history.
  3. When you get that social security statement, be sure to also review what they say will be your benefits at different retirement ages. What you need to also understand are the limitations of this information – no increases in future benefits are included and, more importantly, the calculations assume you will be making the same wages each year for the balance of your working career. This is probably not what will happen to you, so the amounts reflected as your monthly benefits in retirement are too low.
  4. If you have been investing, review what the annual return has been for the asset allocation you have been using. Maybe you will see that you have been too conservative in what you are invested in and you might need to take on more investment risk in your portfolio to help grow those investments.
  5. Maybe you need to increase the amount you are saving each pay period. Start by putting that new raise or extra overtime pay into savings rather than spending it on a new toy of some kind.
  6. If you are in this age group and have not started to save or are not saving enough, this may be a good time to engage a financial planner who can help you with all the calculations and can provide you with a more focused roadmap that will fit your life and circumstances.

In my next blog, I will provide some data on the age group that you will be moving into in about 10 years – the 40 to 50 year olds. Hopefully when that happens you will be far along on your trip through life and you will have taken care of many of the issues that will be facing you then.

FrancisStOnge

Francis St. Onge, CFP®
President
Total Financial Planning, LLC
Brighton, MI


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Harry Potter and the Deathly Hallows of Finance


Okay, unless you have been living under a rock, you’ve heard of Harry Potter and the final installment in the movie series. As I write this on the eve of opening weekend, I’ll go out on a limb and wager that by the time you are reading this the movie will be the blockbuster hit of the summer. (I’m a big risk taker, right?) Anyway, aside from the fact that J. K. Rowling is a billionaire, what does Harry Potter have to do with finances? Honestly, I’m not real sure but let’s dive in anyway.

Let me start by saying that I am not a Harry Potter aficionado. My Sherpa on this journey through Hogwarts School of Witchcraft and Wizardry is in fact my ten year old daughter Janae, who read every book as soon as she could get her little hands on it. My first question to her was, “what in the heck is a deathly hallow?” Now that I’m a little more educated on the subject, I’ll tell you that they are magical objects that hold different powers. There is the elder wand, the cloak of invisibility and the resurrection stone. Through out the series Harry comes in contact with all of these objects at some point or another. Of course the major villain, Lord Voldemort, can’t wait to get his hands on some of the goods as well. In true fantasy world style there’s a big battle at the end and the good guy prevails but not with out a lot of angst.

Voldemort manages to get inside of Harry’s head and make him see things that aren’t really there. Harry has to learn and train to keep Voldemort out of his head. Tell me, is there a financial Voldemort trying to get inside of your head? Perhaps it is that friend who always wants to go shopping and by the latest designer handbag as soon as it comes out. Maybe, it is your buddy who seems bound and determined to play every golf course east of the Mississippi. Or maybe it’s those dang late night infomercials selling everything from egg scramblers to light clappers. If spending is after you, perhaps you can use the elder wand of budgeting to keep you on the right path. Using the wand at first is rarely easy, but with a little practice you eventually get the hang of it.

How many times have you seen a magazine at the check out counter that shouted the merits of “The Five Best Stocks” only to see the same magazine extolling the virtues of “The Ten Best Investments You Can’t Afford Not to Buy” a month later? Maybe it was your cousin who told you about a can’t miss opportunity over Thanksgiving dinner. If these type of incident causes you trouble, you should seek out the twin cloaks of invisibility, asset allocation and diversification. Take the time to develop a solid investment portfolio based on sound research and professional help if you need it. This will help you shroud your investments from spells cast upon you by well meaning family and friends.

Study after study points to the fact that the biggest fear of those in or nearing retirement, is the possibility of running out of money before running out of breath. The best antidote for this evil spell is the resurrection stone of income distribution planning. While not perfect, the stone has tremendous reliability when used properly and with care. Taking the time to assess your living expenses during retirement and matching them up properly with the right mix of “guaranteed” sources of income like pensions and social security (no jokes from the peanut gallery!) with a well protected portfolio as discussed earlier greatly increases the likelihood that your money will outlast your breathing. There may even be a little something left to pass on to future generations. 

Hogwarts, I mean life, can be scary at times. But using the right tools can make things a little easier to manage. See you at the movies!

leeBaker

Lee Baker, CFP®
President
Apex Financial Services
Tucker, GA


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Should I Sell Stocks to Pay Off the Mortgage?


When stock markets are choppy, this is a question that often arises. With the market acting like a see-saw, investors are wondering: Why do I have money invested and earning ‘nothing’ when I pay 4% interest for my mortgage?

On its face, this seems like a reasonable question. But there is more to it than a simple pay off of debt. It is a total change in strategy that has financial costs, and is often a change based on two things I don’t recommend as key drivers to financial decisions: 1) an emotional reaction to the markets, and 2) short-term results.

Whether or not to pay off the mortgage is the topic of many personal finance blogs. We won’t discuss that today, though the ideas are important to understand before settling on a new approach.

The shift is more about changing how your assets are allocated than paying off a debt. You are decreasing your financial or investment assets, and increasing your ownership in a real asset, the value of your equity in your home.

This change often involves locking in market losses, and selling assets that many do not consider. Likewise, major shifts in asset allocation can be a gamble going forward, just as selling a diversified stock basket and placing all of your eggs in one basket is a gamble.

To illustrate these two points, the last time I heard from investors about paying off the mortgage with stocks was the period of 2008 into 2009 when the stock market lost over half of its value. Investors were frightened, and many did sell at or near market bottoms in order to pay down the mortgage.

Their timing couldn’t have been worse. After a market bottom, the S&P 500 returned 26.5% in 2009 and 15.1% in 2010. Investors could feel comfort in that they no longer had a mortgage, but they missed an opportunity to recover the market losses from 2008. 

Not only that, but a balanced investor not only sold stocks from the portfolio, but also bonds. During 2008 many bond indices achieved returns of 7-10%, not enough to keep most portfolios from losing, but many investors were not running from bond returns… it was the stock market they sought safety from.

We don’t always have a great sense of what our portfolios have returned over time. We hear about ‘lost decades’ and do not realize that many balanced approaches over that decade returned positive results. We set high watermarks whenever our portfolios reach new heights, and forget that as investor Benjamin Graham taught us the market in the short-run is a voting machine, but in the long-run is a weighing machine.

Many who are trying to ‘do the right thing’ and pay off a mortgage with investments are generally practicing the investing sin of marketing timing.

Is there a better approach? I would recommend anyone convinced they need to sell from their portfolio do it over time rather than trying to time the decision. You may find that when the markets are less volatile that an all or nothing approach to the mortgage is rarely the best move, as I wrote about earlier in the year.

Having an understanding of a long-term strategy, and making incremental moves when appropriate is an often recommended strategy in managing your portfolio. It should be considered as well in managing your real estate equity assets.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


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Spring Cleaning Your Financial Plan with a SWOT Analysis


I’m sure the first thing you think when you see this title is that I spelled SWOT wrong (as in SWAT team). For financial planning purposes, I actually got it right as it stands for Strengths, Weaknesses, Opportunities, and Threats. Whenever I meet someone who needs  financial  planning help, I compose my SWOT analysis to get a one page summary on what they  need to focus on. My preference is to just have bullet points to come back to, not a lot of specific details. The hard part begins when I ask people to prioritize what they think are the most important items to start on. I use these 6 categories to put things in perspective:

  1. Debt management-how much money are you borrowing based on your income and your net worth?
  2. Savings plan-are you saving enough in order to accomplish your goals?
  3. Risk management-how much insurance do you need when catastrophes hit (i.e. life insurance, disability, auto, health, liability, homeowner’s insurance) to make sure that they don’t bankrupt you or your family?
  4. Estate planning-you need to have a will if you die, a durable power of attorney if you’re out of the country or  incapacitated, a living will or health care proxy to make life or death decisions. More complicated strategies include gifting assets or even setting up trusts.
  5. Tax planning-is there a way that I can pay Uncle Sam less?
  6. Investment planning and asset allocation-do you know if you are diversified enough and do you have a systematic way to determine when to buy and sell your investments?

A very simple way of prioritizing your SWOT analysis is to take the six items above and rank them from 1-6 in terms of what you need to work on most. I call this the six-pack approach; where your thirst is already quenched versus where you need to partake more in.

If you want a little bit more in-depth analysis, then a typical SWOT would look like this:

Strengths

  • you have a solid income by earning over $120,000 a year jointly  
  • your job security looks solid as you have been working with the organization for 20 years
  • your only debt is in your home and you own 60% of the equity in your house
  • you have adequate life insurance so if something happened to you, your family would be well taken care of

Weaknesses

  • you don’t have  disability insurance if you were to get hurt on the job
  • your liquid net worth is less than $40,000
  • you’re only putting 3% into your 401(k) plan
  • you have three children, but no estate plan or will
  • your investment portfolio only has three mutual funds with similar styles

Opportunities

  • you can refinance your mortgage payments and save money because of your high current interest-rate
  • if you took one year evening studies, you could increase your income by $10,000 a year
  • if your spouse takes that job at a university, you may be able to have your children’s education totally paid for
  • if you take the recent job offer and move, you would earn more money and the cost of living would be dramatically smaller
  • by getting a better quote on your life insurance, you can use the savings to purchase disability insurance

Threats

  • if you don’t start saving soon for college, your children will have to take on a very large debt burden
  • you are running a small business, but have not consulted an accountant to see if your deductions are proper
  • you have no investment discipline or policies to determine your investment strategy
  • you have very little liability insurance on your car and home if something happened and you were  sued
  • you do not have a will or durable power of attorney for health care proxy

What I am going to list for you next is my favorite checklist to get a comprehensive SWOT list put together. I use this same checklist when I first sit down with people. If you want to give yourself a step up on your spring cleaning, then print this out and use it yourself or give it to a friend who needs to get their financial act together.

1. Debt Management:                           Date Reviewed: ____________

  1. Mortgage term, rate, amount:
  2. 2nd Mortgage term, rate, amount:
  3. Equity Line term, rate, amount:
  4. Education loan term, rate, amount:
  5. Car loan term, rate, amount:
  6. Credit Card term, rate, amount:
  7. Other:
  8. Other: 

 2. Savings Plan:                                       Date Reviewed: ____________

  1. Amount contributing to employer retirement plan:
  2. Employer matching contribution:
  3. Other employer sponsored plans:
  4. Amount of additional savings:
  5. Education Savings:
  6. Contributions to IRA & ROTH IRAs:
  7. Savings towards specific goals:
  8. Amount in Emergency Fund:
  9. Gifting Strategy:
  10. Current Income:
  11. Amount of Social Security:
  12. Total Expenses:

3. Risk Management                             Date Reviewed: ____________

  1. Whole Life Policies:
  2. Term Policies:
  3. VA Life Policies:
  4. Amount of Disability Insurance:
  5. Amount of Long Term Care:
  6. Do you have aHomestead election on home:
  7. Do you have access to equity line:
  8. Homeowners Insurance-Do you have Umbrella policy:
  9. Travel Insurance:
  10. Buy Sell Agreement on business:

 4. Estate Planning                                 Date Reviewed: ____________

  1. Will last updated:
  2. Durable Power of Attorney:
  3. Health Care Proxy:
  4. Do you have Trusts/are they properly funded:
  5. Current gifting Strategy:
  6. Is your estate tax efficient:
  7. Are assets titled correctly:
  8. Beneficiary Review last completed:

5. Tax Planning                                        Date Reviewed: ____________

  1. Tax Return last reviewed:
  2. Any expected changes in tax status:
  3. Is all cost basis updated:
  4. Your current marginal tax bracket:
  5. Your current average tax bracket:

 6: Investment Planning                   Date Reviewed: ____________

  1. Last time Employer Retirement Plans reviewed:
  2. Last time annuities reviewed:
  3. Last time 529 plans reviewed:
  4. Last time your personal portfolio was reviewed:
  5. Do you have an Investment Policy Statement?

As you can see, there are a lot of working parts when it comes to spring cleaning your financial plan. This checklist is a great place to start, as hopefully spring’s optimism and energy will take over your winter hibernation and start cleaning out the cobwebs of your financial plan. Most of the things I talked about are big picture plans in making sure that you have all the right pieces in all the right places. Now it’s up to you to get the list prioritized and completed!

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Securities offered through LPL Financial – Member FINRA/SIPC

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA


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All-or-Nothing is Never the Right Move


I have a difficult time forecasting my preference for meals. At times (many times), it’s pizza; other times, it’s something a little healthier. This indecision about what I’ll want tomorrow causes me to not stock up on much, and I rarely shop too far out.

Just as what you may want for dinner today may not be what you crave tomorrow, so it generally is with our preferences for investments.  

The volatility in the markets, combined with the rise in oil and commodity prices, and low-interest rates we all ‘know’ will be rising, have many wondering about products designed to protect us from any of those things.

You may recognize one of the two feelings I’ve identified from conversations with clients over the past few market rough patches as reasons to give up on traditional investment strategies such as asset allocation and diversification:

  1. “I need to protect my portfolio from inflation.”
  2. “I’ve had enough of this volatility, I need 100% stability.”

Generally, the thought behind the first idea is to get out of financial markets and buy gold; the idea behind the second is an annuity, Treasury or municipal bond portfolio, or simply to put the money in the bank.

Regarding the first, the need for assets to keep up with inflation is a worthy goal. But as seen in gold, home prices, commodities, and more, the limited scope of inflation protection in any asset, and the fact they are all also traded in markets, may not always work in your interest.

To the second group of investors who look at the stability of their dollars, I sometimes want to say that the first group has a point!

Ignoring the need for participation in capital markets and going all in on a ‘safety’ strategy may feel good today, but it may simply be deciding to delay the pain. Put into perspective, if you receive $25,000 on an annual basis from an annuity, what will you do in 10 years when it costs $35,000 to purchase the same amount of goods and services? Or $80,000 in 30 years? 

It often is a desire to avoid investments which have done poorly over recent periods for one that will provide safety, generally in terms of protecting principal, but also increasing with the costs of living.

I try to remind investors that two amazing features about our financial system and markets are their resiliency, and that over long periods of time that products tend to perform in a predictable manner. Don’t be too shortsighted with your portfolio to ignore the long-run track record of the markets.

Carefully consider any large changes in strategy before implementing, and try to avoid all-or-nothing approaches to your portfolio. Just as a balanced diet includes more than pizza, a diversified portfolio has many benefits over any all-or-nothing investing approach.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Sound Capital, LLC
Royal Oak, MI