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Monday, January 30, 2017

Holistic Financial Planning is Pleasant !

The title of this post is a possibility, that holistic financial planning can be fun!  But in my experience that is almost, without exception, a myth.  Because holistic planning involves frank discussions of the following not-so-fun topics:

  1. Death- I ask my clients to complete a Life Expectancy calculator.  Approximate longevity is essential for Social Security timing as well as for accumulation spend-down of retirement funds.  Plus, using the calculator saves them the embarrassing questions about their health, habits and genes.
  2. Disability- Unless you luck out and leave this world in a sudden manner, old age & sickness are pretty well guaranteed.  Long term care risk is high, as are the costs.  Losing one's job or occupation due to disability is a risk.  And the underwriting gaunlet and high premiums reflect the degree of risk.
  3. Divorce- titleing of property, income disparity and beneficiary designations need to be structured so as not to be devastating to the lower earning spouse in case divorce occurs.
  4. Politics- Usually considered off-limits, if something political is going on that may affect a client's plans, I bring it back on the table.  A great example is our current mentally and morally unfit President.  What will happen if he succeeds in repealing the Affordable Care Act, in the absence of a viable alternative solution (as opposed to alternative facts)?  What if he meddles in Social Security, as he most likely will?  What if his retaliations against our trade partners is reciprocated and you lose your job?  We need to anticipate and minimize the risk of these near certainties.
  5. Religious Beliefs- Also a forbidden topic between most professionals and their clients, religious beliefs may have to be considered.  Some folks believe they don't need to plan, or change their plans, because God wouldn't think of allowing them to go broke.  Ahem.  Just look at all the bad things that are allowed to happen to good people.  Why would you be immune?  I tell of the early Christian Coastal Native Americans saying, "Trust in God but row away from the rocks."
  6. Rotten Children-  A plan I have never, ever, in 36 years seen succeed is attempting to buy the love of your rotten children.  Forget about how they got that way and whose fault it is.  You owe it to each other to dig in your heels and protect your retirement assets.  Model for them good self care.  Their unemployability, bad marriages, serial relationships, illegitimate children, drug addictions, perpetual student-hood and disrespect for you and your future are not your problems.  You gave them life and a head start.  Your job is done.
This may be one of the harshest posts in a long time.  But I deal in reality.  Because I want the best possible outcomes for my clients.  Nothing is off the table.

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Tuesday, January 24, 2017


This post heading is NOT a myth, for once.

Think about common risks in your life and the tactics you use to minimize or avoid them.

  • If you're trying to lose weight then you burn more calories (read: Exercise) and consume fewer or at least better calories (quality proteins, greens, fruits & oils versus sugars, carbs & artificial or saturated fats).
  • If you're taking a trip and worried about your car breaking down, you can take it in for service, check the tire pressure, top up the tank and other fluids.
  • If you're worried about passing a class then you can burn the midnight oil, get help from your teacher and fellow students, search for tips and tricks online.
And so on.  We counterbalance risk with compensatory actions and strategies.

In my practice, most of my clients are concerned about two possibilities:
  1. Outliving their income and assets
  2. Inflation ballooning their living costs to unmanageable levels.
How can we compensate for these two very real risks in retirement?  We have two great tools (and I have Tom Hegna to thank for these concise ideas:
  1. Risk pooling
  2. Longevity credits
Let's review Longevity credits first.  I don't know if this is a true story or not but there were five elderly women who like to travel together in the Summer.  On New Year's day they would each put $100 in a box and save it for fun money on their trip.  One year, before their trip, one of them passed away.  The surviving four then had $125 each to spend on their trip.  They each received a 25% longevity credit.  
Is this a way to counteract inflation?  Of course!  (To be sure, in real life much larger groups are formed, but to similar effect.)

Cojoined with Longevity Credits- and making longevity credits possible, is Risk Pooling.  We've all seen schools of fish, flocks of birds, herds of wild animals.  There is great survival value in pooling the risk of predators.  By gathering together, more of them are likely to survive.  It's the same with house insurance.  If the risk were 1 in 1200 that a house would burn down in your neighborhood each year, you could band together with your neighbors to create a fund sufficient to replace that house every year.  (Ideally, it wouldn't be the same house.)  So instead of having to come up with, say, $500,000 to replace your house if it burned down, you would only have to pay 1/1200 of that each year, or $416, otherwise known as a Homeowner's Insurance Premium.

Aside from being a perfect hedge against outliving one's income (we'll get to that) Risk Pooling is a relection of our better nature, like the Amish coming together to build a barn for a neighbor.  Unfortunately, Risk Pooling is an insurance process and must be conducted by insurance companies under most state and federal laws.  I say "unfortunately" because insurance companies get a (mostly) undeserved bad rap.

Social Security is the best current example of both these concepts.  Millions of people participate and the law of large numbers, the larger the Risk Pool, means the system works more predictably the greater the number of participants.  Social Security is an insurance program, it is not a federal entitlement.  But wait, you say, how is that so many beneficiaries will take more in income out of the system than they put in?  The answer is Longevity Credits from the funds of those who die prematurely.

Much maligned annuities are similar tools for privately pooling risk and receiving longevity credits.  And they are much more flexible than Social Security:  you can design cash flow just about any way you like, level, increasing with inflation, for certain period of years,just for your lifetime or for the lifetimes of you and your spouse.  Annuities are like the vacation box.  And that's how we account for a lot of the "too good to be true" features they provide.  For example, let's take a couple with $250,000, he's 68 and she's 62.  The cash flow they desire is joint, lifetime income beginning in 10 years to give them an inflation bump up.  Their lifetime payout at that time would be over $25,000/yr.  no matter how long the last surviving person lives.  And in the meantime, unlike with Social Security, they have access to their principal if they need it.

So.  The two financial pillars for 2017, the year of unpredictability (to say the least) are:
  • Risk Pooling and
  • Longevity Credits

Your Constructive Comments are Welcome!