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Why don’t more people go to financial planners?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Bob Clark, in a recent AdvisorOne article, says the answer is “fear.” Many people are afraid of:

• Being embarrassed by their current financial condition

• learning their financial situation is much worse than they realized

• of getting beat up for not saving more

• of being told to do things they don’t want to do, such as going on a budget, saving more, or buying more insurance.

He’s probably right.  The old adage WIIFM (What’s in it for me) maybe best answers what people really want:  How to get their financial house in order and keep it that way forever; how to achieve their goals with peace of mind; how to minimize risk; how to feel good about what their future!

Jim

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The Independent Financial GroupJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights lettersfor individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen

How To Calculate Retirement Needs

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

A Sample Case Study

While there is an abundance of software available to help planners and advisors in projecting financial needs for clients, the fact is few do an adequate job in this area.   It pays to know what’s “under the hood” of your software – or maybe better – to be able to do some meaningful calculations yourself, if only to demonstrate you actually do have a prudent process.  Anyone with a financial calculator (HP12-C or HP10B-II, for example) can perform these calculations.  Remember, however, even with these, there’s still some ambiguity.

 A Simplified Hypothetical Case Study Problem

Carl is 50 years old and has $500,000 in his 401(k).  He wants to retire in 13 years with $50,000 a year, in addition to Social Security, and wants his money to last 30 years (he isn’t worried about leaving money to his children).   He believes inflation over that period will average 3.5%.   He feels a long-term target of 6% is a realistic annual target return.   With that target in mind, is his $500,000 enough or how much more will he have to put away?    Note:  Let’s assume Carl is in the 40% (combined state and federal) marginal tax bracket.

Answer:

There are three steps:

  1. Calculate the first-year need ($50,000) in inflated future dollars to protect purchasing power.
  2. Calculate the present value of the total needed for 30 years in retirement, beginning in the fist year, at the assumed investment rate adjusted for inflation and taxes, if additional is to be saved outside a tax-deferred vehicle.
  3. Calculate the annual amount to be saved by the end of each year and convert to a monthly amount.

Step #1.  The First Year Need.

                  $50,000    = PV

                  3.5%  = I

                  13   =  n

                  (solve) FV=  $78,197 This is the amount needed for the 1st year.

Step #2.  Calculate the Present Value of total need at beginning of retirement for 30-year period with earnings discounted for inflation: 

                  Compute after-tax yield:             6% * (1-.40) =    3.6%

                  Compute PV of total need for retirement discounted with inflation-adjusted returns. 

                  (BEGIN mode)

                  [((1.036/1.035)-1) x 100]    =        0.0966 =  i  (Inflation-adjusted tax-deferred rate would be 2.41%)

                  $78,197     =      PMT

                  30   =    n

                  (solve) PV =  $2,313,376  Present value of required amount at retirement.

Step #3.  Calculate the amount to be saved by the end of each year to reach the goal:

                  (END mode)

                  $2,313,376  =    FV

                  – $500,000  =   PV  (HP12-C and HP10-B-II conventions require (-) sign

                  3.6   =  i  (note:  if post-retirement tax-bracket is different, adjust this figure)

                  13  =   n

                  (solve) PMT =  $93,838  (divide by 12 for monthly amount to be saved)

Can Carl really save over $90,000 a year?  Even if the annual amount inside tax-deferred vehicles dropped the annual requirement to $66,036, it would appear some adjustments might have to be made.  This is when prioritization and goal-based planning can be important.

Have You Had Your ‘Stress Test’ Done?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

No, I’m not talking about getting on the treadmill; I’m talking about a financial stress-test!

Most people – okay, just the smart ones – get a routine annual physical every year simply to make sure if anything is wrong, they can catch it in time!  But, if you’re like most people, you haven’t taken a financial stress-test in years… even though many suffered the consequences of this neglect back in 2008.

During the Great Depression, market investors saw a 23% hit in one year followed by a 21% slide the year after!  While everyone would like to have a “bullet-proof” retirement strategy, the one most likely to help people realize their life goals during uncertain times – when have the times ever been certain? – may simply be the common sense approach most of us can easily accept as an intuitive truth:

It begins with this basic 4-prong philosophy:

  1. It’s not about managing investments; it’s about achieving goals.
  2. Managing risk is more important than reaching for higher returns
  3. You can’t control markets or interest rates; but you can control tax exposure and investment costs
  4. Monitor everything, revise as needed, and keep your plan current.

Did you notice #4?  It begins with a plan.  Your plan for financial health begins just like a plan for physical health:  It begins with a ‘physical’ – an assessment of your current situation and an understanding of the lifestyle you envision in the future.  You also have to take into consideration your limitations, whether physical, financial, and/or emotional.

But, don’t be like the person who buys the gym membership and never uses the facilities.  A financial physical, whether annual or semi-annual, can keep your plan ‘on track’ and, even better, prepare you for those not unexpected detours you’ll surely find along the way.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Individual Investors Gravitating To RIAs

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Just as many brokers (registered representatives of broker-dealers) have been moving from their brokerage houses to become independent registered investment advisors over recent years, it appears many individual investors seeking advice are learning who these people are and are following them.

According to TD Ameritrade’s latest RIA survey, trust and customer service are the most important reasons why clients opt to work with registered investment advisors (RIAs) instead of commissioned brokers.

TD Ameritrade’s quarterly query of 502 RIAs, appearing in this month’s issue of Financial Planning,  found that 29% of clients using RIAs said that the RIA’s  fiduciary responsibility to work in the best interest of clients was the No. 1 reason they got their business.    Placing second at 21% was more personalized service and a competitive fee structure, just ahead of dissatisfaction with their current or former full commission broker (19%).

Tom Bradley, president of TD Ameritrade Institutional, said in the report, “The survey results support what we believe is a long term trend of investors gravitating to the fiduciary model… Investors may increasingly seek the confidence that can come from working with independent RIAs who sit on the same side of the table and are required by law to put their clients’ interests first.”

According to the survey, 55% of new business coming to RIAs are coming from traditional full-commission firms.  Not much of a surprise, since that’s where most RIAs came from themselves, including yours truly.

It appears the trend is due to the fact that responsible practitioners want the same thing their seem to desire:  A high level of professionalism characterized by a `client-first’ fiduciary standard coupled with a non-conflicted environment.  

Frankly, it was the reason I began my journey to independence back in 1992; and, it’s gratifying to see that individual investors are finally catching on.

Should You Buy or Lease Your Next Car?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

This is a question people often ask.  If you’re one of them, I hope this will help simplify your decision making.

First, it’s important to understand just how leasing differs from buying – Now, I’m going to ‘make up’ my own numbers here, just for the sake of illustration.  You can get your own.

Let’s suppose a car could be purchased for $35,000.   If buy the car, you would be buying 100% of the equity… all $35,000 worth.  It doesn’t matter if you pay cash or finance it; you’re still buying ownership – all $35,000 worth of equity.  If you’re financing, you would be financing that equity over a certain period of time.

For example, If you have great credit and can get a low rate, say 2.9%, and financed the car over five years, you would be making payments of $625.83 monthly, assuming no down payment.

But a lease is different.  You’re not buying the equity.  You’re simply paying for the ‘use’ of the car. 

Translation:  You are financing the depreciation.  Once the price of the car is determined (the ‘cap cost’), which we’ve stated to be $35,000, then the assumed value at the end of the lease period becomes important, because it’s the depreciation you’re paying for, not the equity.  The same car leased would likely have monthly payments around $375 simply because you’re not buying any of the equity.  At the end of the lease, you have no car and nothing to show for your money.

You can find leasing calculators all over the internet.  You’ll find that auto dealers use a ‘lease factor’.  Those who are more forthcoming will tell you what theirs is – it differs from dealer to dealer.  Just remember this formula:  Lease Factor x 2400 = the interest rate you’re being charged.  By the same token, the interest rate divided by 2400 will tell you the lease factor.

But, should you buy or lease?  It depends.

My opinion:  If you plan to change cars every three or four years, you’re probably better off leasing.  But, if you plan to keep your car five years or longer, you’re probably better off buying.  

If you’re driving a paid-for car now, what’s your rush?  Here in California, we’re in a car culture.  People are often viewed in the light of the car they drive.  Yeah, it’s stupid.  If you can fight-off trying to keep up appearances, put the monthly payments into an index fund and dollar-cost average for five years.  The market may likely buy part of your car for you!

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

October 11, 2011 at 8:10 am

How To Handle Uncertainty

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Markets hate uncertainty.

You’ve heard that a thousand times.  We all have.  And, it doesn’t matter which decade you’re in.  The 1970s, 80s, 90s, and the last ten years have all been periods of uncertainty.   Whether the questions were about inflation, interest rates, tax laws, or increased market volatility, there’s been one constant:

Markets never have been, and never will be, certain of anything.   I remember people back in 1991 wanting to wait until they would `know what the market was going to do’.  They’re still waiting, I think.

Name a time you’ve ever heard anyone say, “Well, at last we have certainty in the markets!”  I’ve never seen it; and I don’t know anyone who has, either.

Warren Buffett, someone everyone loves to quote, is famous for saying he never met anyone who could predict the stock market.  He knows more people than I do.  All I know is when I begin getting market advice from my dry cleaner, it does send me a message; but I digress.

Right now, everyone’s worried about congress and whether they’ll raise the debt ceiling[1].  The Democrats are doing their best to scare everyone regarding the consequences of failure, claiming the U.S. will default.  The Republicans are claiming our biggest problem is the spending and borrowing more won’t help – I guess we all remember our younger days using our first credit card, so we can relate to that.

History has been filled with uncertainty and unpredictability:

  • Pearl Harbor
  • The Korean War
  • The Cuban Missile Crisis
  • The Vietnam War
  • The rise of the Japanese manufacturing
  • Mid-East Oil Crisis
  • Skyrocketing inflation and interest rates
  • Plunging interest rates
  • The Iranian Hostage Crisis
  • President Reagan walking out of the peace talks with Soviet Premier Gorbachev
  • The fall of the Soviet Union

That’s enough; I’m sure you can add many more to the list, including the first Iraq war, etc. 

Uncertainty is not new.  It’s normal.

Predicting the future worse than futile – it borders on the idiotic

And so, it should go without saying that reacting to events is not smart.  It’s counter-productive.

Don’t fall for the line, “This time it’s different.”  It isnt’.

The answer isn’t simplistic; but, it is simple:   Those who succeed are generally those with a plan. 

Your plan is like a lighthouse in a storm:  No one pays much attention during fair weather; but, when the skies turn dark and storms are raging and your boat is being tossed around – when it’s hard to see through the dense fog – the lighthouse shows you the way. 

It’s the one thing that isn’t moving.  It’s what you depend on to get you through the uncertainty.  It’s tangible.

Your plan should be tangible, too.  If your financial plan is `in your head’, face it:  You don’t have one.  It must be tangible.  It must be something you and your spouse can both see, touch, feel, and refer to when the uncertainty is all around you.

And, it always is.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any secrity or the services of any person or organization


[1] Just for the record, most are confusing two issues.  There is a difference between meeting debt obligations – bond payments to Treasury investors – and funding spending programs.  Failing to raise the debt ceiling will not result in debt default simply because Treasury revenue from current taxes is sufficient to meet those current obligations.  The real issue is not credit default, but the funding of the spending programs.  Without increase ability to borrow more, the government will be forced to prioritize their spending, which means cutting back on some programs which help get some politicians re-elected.  Naturally, if forced to prioritize, especially during an election season, many politicians will love to see programs cut for the largest voting constituency first – pain generates letters to representatives to change their vote.

 

Understanding Your Pension

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

So, you received your pension statement stating that you can expect $50,000 a year for life when you retire in twenty years.   Is that good?

It depends.   You knew I was going to say that, didn’t you?

Count  yourself as lucky.  Not too many people even have pension plans anymore.   But, will that pension be enough to meet your needs? 

Of course, you may continue to get raises which could raise your pension amount; maybe you’ll even get $75,000 a year!   But, what will that money actually buy?

That depends on your outlook for inflation, of course, and my outlook may be different from yours.  My chief economist, who does the shopping for our family, tells me a different story from what I’m hearing from Washington.  Food and energy, which are not counted in the government’s figures, are two things we spend a lot on – and they’ve been going up dramatically!  Housing prices are down, true, but we’re in our house and not moving – meanwhile, the cost to heat and cool the house has also increased.

My personal CPI (cost of living index), which I’ll call my PCPI, is different from the CPI I hear about on tv.  While some advisors are now using 3.5% in their projections, I think the number going forward will be closer to 4.5% – especially as, I suspect, the government will print money to reduce debt even as the economy, sooner or later, begins to actually find its way to a real recovery.

But, even if you achieve a $75,000 pension – and even if inflation is only 3.5% –  just what will your money buy 20 years from now?  According to my trusty HP10BII, your pension will be worth $37,692 in today’s purchasing power.  You’ll probably receive Social Security, too; but both will be subject to income taxation, and what those rates will be in 20 years is anyone’s guess – I know I have mine.   Could you live in retirement  today on $37,692 + Social Security before taxes?  What will your car cost?   How often will you need one?

Inflation doesn’t end when you retire!   Every pension I know of, except from the government, doesn’t include cost of living adjustments (COLA).    In another ten years, your pension will be worth only $26,721; and only $18,943 ten years after that!   That’s right:  You’re losing purchasing power to inflation every year… and by your third decade of retirement, you might even be a pauper!   And, that’s using the $75,000, 3.5% inflation scenario!

Planning ahead is important.   The cliché’ is true:  If you fail to plan, you are planning to fail.  The sooner you know your situation, the sooner you can not only create a plan – you can actually ACT to change your future.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.