Thinking Long Term

Keeping What You Make

We've all heard stories about lottery winners taking home prizes of millions of dollars and years later having nothing to show for it.

It happens with professional athletes, with people who inherit money or get big packages when they are downsized.

These dramatic situations highlight a common problem.  Some people don't understand personal finance. 

People may obsess about individual investments and fail to  think about the important questions that will determine whether they can accumulate enough money for retirement or bequests or their other goals.

People don't understand the logic of the financial markets and they don't think about what they are trying to accomplish.

They concentrate on the short term and squander one of the greatest assets any investor has: time. With time, your money, if pointed in the right direction, can accomplish wondrous things.

Optimism, too, is in short supply now. After the Great Recession, most people are pessimistic about their financial futures and their actions make that pessimism likely to be justified.

With trillions of dollars earning close to zero interest -- some invested at negative yields -- their investment rewards will indeed by bleak. As it likely will be for people darting in and out of the market at record speeds.

But for those who maintain their optimism and keep to the time-tested basics of proper asset allocations, broad diversification, attention to costs and sensitivity to taxes, there's no reason to fear the future.

Not Such Bad Shape

Will I Ever Be Able to Retire?

Many Baby Boomers are intimidated about the prospect of ever being able to retire. Having lived through the Great Recession, they have lost faith in the future.

They read about the large sums of money required for decades of retirement and the prospect of accumulating that seems daunting.

What they don't think to do is add up their assets and look at how those match up against their retirement needs.

Many boomers own a home. Most will qualify for Social Security, often with a spouse. Often they have a pension, a 401-K, an IRA. Some have a small business, a valuable collection, some investments. They also might plan to transition into retirement with a part-time job.

Next they have to figure out where they will live in retirement and what kind of lifestyle they'd like. Most people have reasonable expectations and often these are achievable, perhaps with some modest tradeoffs.

While many people are in bad shape, most Americans  are better prepared for retirement than we generally believe. Nothing pleases us more than showing people that their fears are overdone and that they can look forward to a good retirement.

Patience

One Size Fits All?

Often I’m asked about our investment results for the last year. It’s a reasonable question on the surface but betrays a misunderstanding of investing and personal finance. Unless results are disastrous or too good to be true, you can’t tell much in a year or even a few years.

Each of our clients has a different portfolio and thus different results. Would you outfit all of your friends with size 8 black shoes regardless of their foot size, taste and budget?

For most people, a home is one of their biggest investments. They may live in the house for 20 years or more. Over that time generally --- until the recent unpleasantness – house prices rose. Sometimes prices rose quickly but more often they rose in fits and starts with occasional drops. Long-time homeowners accumulate wealth patiently and while using the house for their family’s daily life, only dimly aware of market fluctuations.

But with the stock market, where prices change continually, people focus on quick results. That impatience isn’t benign; it causes much misery.  Inspect the soup ingredients and the recipe but let it simmer. Don’t yank it off the stove at the first pleasant whiff.

Secure Retirement Planning

The Right Choices

Recently I talked to someone nearing retirement. The timing wasn’t totally his choice and he was nervous. As he talked I realized he didn’t grasp what critical choices he has to make now or understand the options. He didn’t see where he needed to put the most thought and energy.

Often we sweat the small stuff and don’t grasp the big picture. He couldn’t tell whether he was in good financial shape or not and he didn’t have a way to measure it.

Eventually, I identified the most important choice that he will have to make soon. That choice could determine the comfort and security of his wife for decades if he dies first. Statistically, that is likely to be the case. And yet many people don’t think of this as a real choice or anything important. Or even whether to involve her.

This item is couched in technical language and not flagged in big or bold type. It’s easy to gloss over and down the road you may even forget you had a choice. But its impact could be profound.

Those are the things I like to help people with. Get the big things right and the rest generally falls into place.

Easy and Simple?

The “Simple” Social Security Formula

I was excited to read that Prof. Laurence Kotlikoff had put together a simple formula for deciding when to claim Social Security retirement benefits. Prof. Kotlikoff is one of the country’s top experts on consumer finance and I thought he had found the Holy Grail for one of the most difficult problems in retirement planning. It was disappointing to finally see his “simple formula.” After making some simplifying assumptions, he boils his formula down to 9 variables.

               B(a) = PIA(a) x (1 – e(n)) x (1 + d(n)) x Z(a) + max((.5 x PIA*(a) – PIA(a) x (1+d(n))) x E(a), 0) x (1- u(a,q,n,m)) x D(a)

Here’s the link to the complete article in a recent edition of Forbes Magazine:

http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should-i-take-social-security-a-simple-formula/

http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should-i-take-social-security-a-simple-formula/ 

Frequently I run across people who think that personal finance is easy and simple and that reading a few magazines or newsletters and catching an occasional cable television show on the markets will give them all the information they need. I don’t claim to have all the answers but if you’d like to tackle that formula together, give me a call.

A Workable Plan

Hope and Reality

Frequently I meet with people whose finances have been devastated by the recent recession and stock market crash or who are elderly and nurturing a tiny nest egg. Sometimes I can’t do much. The seeds of this distress were usually planted years if not decades ago. People often ignore basic tenets of financial affairs like proper diversification. They often invest haphazardly or simply don’t pay attention or lack financial knowledge. But with most people steps are available that can put them on an improving path. Many people actually have enough assets and just don’t know it. They may only need to put their records together and come to a new understanding of their position. Often, though, I wish that I could have met with them in their 20s, 30s or 40s. At that point, it’s much easier to develop a workable plan and help people to understand how to achieve their goals. No matter what your predicament or situation, it doesn’t pay to sink into despair. The view of an objective professional who is trained in finance can outline the tradeoffs and opportunities and bring hope and reality back into the equation.