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Archive for the ‘Independent Financial Planner’ Category

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.

Local Attorney Faces 5 Years In Prison

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

That’s the headline I saw in my local paper a few days ago; and, I have to admit I was surprised.

I didn’t know him, but he was half of a well-respected law partnership that has been in the area for (I think) over two decades.   Now he’s convicted of 34 felony counts and faces up to five years in prison for swindling the estate of an elderly client – in this case, a deceased client – for more than $500,000.

How did this happen?  According to the article, the attorney was executor for the estate and failed to initiate probate for a year after his client’s death and, in the meantime, systematically embezzled the money from his client’s accounts while concealing those assets from the probate court and subsequently filed false statements with the court.

What makes the case interesting is that the attorney had repaid everything he took prior to the filing; but, that didn’t matter, as it shouldn’t.

How do avoid this from happening to you?

Almost all embezzlement scams – Bernie Madoff comes to mind – usually have one thing in common:  The lack of an independent third-party cusotodial firm.  Now, in the Madoff case, checks were made out to Madoff and Madoff supplied all the reporting.

In this case, I don’t know if the investment accounts resided at an independent custodian firm or not.  The attorney may have had control over the accounts, for all I know; but, if there was an independent custodial firm, where was the ‘checks-and-balances’?

Was there a Registered Investment Advisor on the account who would have been receiving independent reporting directly from the custodian, which would have been made directly available to the deceased’s heirs?   Those withdrawals would have shown-up there, no matter what the attorney gave the court… and both the advisor and heirs would have been asking questions immediately – though, presumably, the attorney would have been smart enough not to attempt an embezzlement in the first place, knowing there are other people receiving true reporting.

My guess, and it’s only a guess, is there was likely no independent entity providing the reporting to anyone that could have provided a checks-and-balances. 

There’s a lesson there for all of us.

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.

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.

The Inflation Shell-Game

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

You watch the news.  And, you’ve seen them quote the Consumer Price Index (CPI) almost daily.  They tell you the CPI is currently below 2% and that the U.S. is enjoying one of the lowest inflation rates in the world!

Is that true?

Not according to my economist, who also happens to be in charge of purchasing for the Mr. and Mrs. Lorenzen household partnership.   She’s been telling  me for the past year how the prices we’re now paying at the checkout are far different from the CPI numbers she’s hearing on newscasts – and, she’s probably right.

DWS Investments recently conducted a study to find out what prices were going up and which ones were going down.  Using Morningstar data, they divided the prices into `wants’ (luxury items) and `needs’ (basic items).

They found the `needs’ included seven food items , two energy-related items, and one for delivery services.  The `wants’ category included 4 in recreation, 3 in housing-related luxuries, 2 food, and 1 in software and accessories.

Here’s the interesting part:  ALL of the `needs’ items have gone up in price; and ALL in double-digits!   The highest was butter (food category) at 21.88%.  The lowest increase was `uncooked other beef and veal, also in the food category, at +10.81%

How about the `wants’?  All of them were down in price.  The biggest drop was in televisions (recreation category) and the smallest drop was in lettuce (food category).

Now consider the following:

  • There are 7 food items and 2 energy items in the `needs’ category – all up in price double-digits.
  • There are 2 food items and 0 energy items in the `wants’ category  which went down in price
  • Food and energy are not included in the CPI numbers you see quoted on television.

 

My household economist is right.  Our personal CPI – let’s call it PCPI – is different from the news CPI; and both the DWS study and my economist appear to be in agreement – it’s by a large margin.

So, what inflation number should you be using in your planning?  That’s between you and your advisor; but it’s an excellent conversation to have.

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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.