Archives For Financial Planning

This is a guest post from my friend, Richard Rosso.

Rosso Article 1

“Mom is gone and I don’t want to deal with all this!”

It was an ongoing conversation between a mom and adult daughter and me (in the middle). Moving slowly to what I call the “legacy awareness,” stage where we begin to explore mom’s legacy, a loving daughter’s inheritance expectations (or lack of) and possible living benefits (my carefully-chosen words for gifting valuables) for both.
The dialogue flowed innocent enough, until one simple, direct question left my lips:

“Carol, if mom dies what would you do with the house?”

I do these things on purpose. It got real quiet. Then.

Carol: “Well, I don’t want that!”

Mom: “It’s a great house; it was our house, mine and your father’s. You lived there too didn’t you like it?”

Carol: “Of course, but I have my own place, and all that ____,” I mean stuff.” But the word had slipped out. The “J” word.

Junk? That’s not junk. It’s my entire life!!

Most likely that 3,000 square-foot albatross with shingles is not a cherished heirloom in the eyes of your kids. In fact, they would prefer you deal with the house and its contents as soon as possible – I mean while you’re alive and well enough to handle daunting tasks that come with downsizing into a more humble abode.

Want to see the kids reduce to the behavior of a two-year old, flailing arms and legs tantrum style? Die and leave them to deal with your dwelling and its dusty contents.

Deep attachment to a house is understandable – plenty of wonderful moments were created within those walls; most likely you’ve accumulated plenty of items through the decades and haven’t parted with much in a very long time.

Parents are still storing their parent’s stuff too. There’s multigenerational hoarding going on everywhere. And I don’t see many families doing anything about this affliction.

Frankly, many retirees would rather stay put; moving is stressful. I don’t care how old you are. It’s less trouble to remain in a place that’s outgrown you and choose to live in what I call “the house within the house,” which usually is reduced to two rooms and a bath.

To make it worse, it feels wrong to upset contents that have settled deep into memories. It feels right to leave everything as is – let the next generation handle it. But do they truly want to?

Your kids are busy with their kids, careers, and still coping with the financial distress that comes with a mediocre economic recovery. A majority of households are dealing with too much debt, skyrocketing college costs, underemployment, and now this? Do the kids want an inheritance? Sure. Do they want the house? No.

As we age, memories start to weigh a hell of a lot more than brass antiques or hardly used bedroom suites. An elderly widow was ashamed to tell me she hadn’t used her fireplace since 1987 – the year her husband passed away in a chair in front of it. The old lounger hadn’t been utilized either except recently by Tiger her new tabby cat.

In 1993, my father passed away in his home. Nineteen years later, I still find myself using Google Maps to cyber-visit the location to see how it’s changed and praying nothing hadn’t. I was the kid who wanted desperately to hold on to the house. I was so afraid I’d forget or disrespect his memory if it didn’t stay in the family. It was a sacred place to me. A real-life example of how housing can get messy. Unlike other purchases, a house gets deeply imbedded in the threads of our emotions.

A close friend said holding on to the death house was “creepy,” and my thinking macabre. Why? After all, he was my dad. I found nothing weird about the situation. In fact, wasn’t it actually normal to feel this way? Eventually, I did drop the idea. When my head cleared, I realized it wasn’t bricks and stucco I was after. I longed for flesh and blood (dad) back.

Currently, retirees are ravaged by the Federal Reserve’s ongoing decision to transform safe money into dead money by cementing short-term interest rates at zero and artificially suppressing intermediate-term yields. The result is a dismal level of income generated (after inflation/taxes many yields are negative) and little hope for a respectable income from high-quality bond investments. Those in the “golden years” are ravaged by austerity even though they will ostensibly live more years than their parents and should be more active doing it too. Oh the joy of longevity.

Since low (no) rates on money markets, certificates of deposit, savings accounts and corporate and government bonds will be around for a longer period than any of us originally anticipated, (thus the word cementing) retirees must think creatively about the utilization of additional resources available to them like the house.

Rosso Article 2

Don’t be scared. Free the cash!

I know this may sound taboo, but desperate times call for some “out of the box,” thinking – Why not consider squeezing your greatest illiquid asset? I’m referring to – you know: The albatross with the bay windows. If you play your cards right, the house your kids don’t want can be a boost to retirement cash flow. Would this be so wrong to consider if done responsibly?

When consulting with pre and current retirees about income planning, I notice how reluctant they are to consider the house as a future source of cash flow. I’m always the one who initiates the idea. And the faces I get when I do! The topic is horribly taboo. Why? My job is, at the right moment, to bring up sensitive topics. Part of what I do is to place myself in less-than-desirable circumstances as a first step to awareness.

Admittedly it’s an uncomfortable conversation in the beginning, however when you consider how tough (impossible) it is to earn interest on conservative investments and how challenging it is to save for retirement, strategically utilizing home equity may be the only choice available for those looking to eke out some sort of comfortable existence in retirement.

Those close to retirement are afraid of misusing home equity. We’ve all read about or knew homeowners who considered their houses as never-ending money fountains splashing cash for new televisions, cars or expensive vacations. Even seniors or retirees willing to investigate the option of utilizing home equity have been reluctant due to declining or stagnant house values and the unattractive fees associated with reverse mortgage products.

Retirees appear to be more receptive to home equity extraction later in life, especially for long-term care expenses, when instead they could mindfully draw from equity along with other income sources starting earlier and thereby enjoy a more fulfilling lifestyle.

Instead, many have resorted to re-entering the work force (if 55 or older, it appears you’re working more years than originally anticipated, too) and remaining vigilant about cutting household expenses. But how much cost cutting can you do before you need to hit the big stuff?

Rosso Article 3

The “living in a Code Red Moment,” face.

I call seriously considering the big stuff “Code Red Moments.” “And they ain’t fun,” as I’ve been told repeatedly. Let me be clear: Code Red is and never will be “fun.” These moments are accompanied by the stark realization that drastic measures must be taken to survive financially.

At the least, thinking outside the box (or the house) a discussion with family, and a strategy session with a qualified financial professional on how to go about taking the right steps is warranted.

According to a July 2012 Center for Retirement Research at Boston College Report with information from the Federal Reserve’s Survey of Consumer Finances, the average balance of a household with head (of household) age 55-64 in 401(k) & IRAs was $42,000 in 2010 which was lower than the $45,000 held in retirement plans back in 2004.
Thank goodness for Social Security otherwise most of us would be sunk. A select few are still eligible for defined benefit (pension) plans; the number of workers lucky enough to know what pensions are continues to decrease markedly since the early 1980’s.

Household Wealth

At $82,000 the primary house represents an asset with cash-flow potential. And don’t feel guilty: The kids prefer you consider your needs first.

Isn’t that right?

Kids: The key to motivating parents to take action begins with you.

1). Spark a Dialogue. Granted – sounds obvious enough. In practice though, not easy. Conversations about legacies, estate plans, inheritances are difficult. Don’t be afraid to enlist a “fire starter,” like your financial advisor if he or she is objective enough and possesses a semblance of EQ or emotional intelligence. Empathy and respect are important here.

At the least, kids should be willing to assist parents with the overwhelming tasks that go with the relocation process. Families just don’t talk enough (or at all), about inheritance matters until forced to or a life event triggers it. It’s time for this conversation to begin as soon as possible. If only so the parents are aware of your preferences.

Grandchildren are surprisingly effective at easing the pain of regret even if their intent is limited to the excitement of spending time in a different environment or rolling toy trucks over carpet in a new location.

Recently, a grandmother of three shared with me how she decided to sell her large home and move to a more modest apartment in a suburban retirement community. She was remorseful even though the children were very communicative and supportive of the move. When her grandson’s face lit up at the feel of new carpet and a balcony and shared how excited overall he was about the new place, her remorse turned to joy. She was instantly relieved and satisfied with her decision.

2). Outright downsizing is an effective method to lower living costs. Why continue to remain in the smaller “house within the house,” situation especially if the children are willing to help?

On occasion, the death of a spouse or other life-changing episode can jump start actions. It’s best to contemplate “going smaller”, before forced to hit the code-red button.

So, sell the big house. Let it go. Based on recent reports, it appears to be an opportune time. Use the cash to purchase a smaller place in full (no mortgage if possible). Release the shackles of the material goods you haven’t dusted in years and get them to a consignment shop. Better yet, open the door to gifting cherished items to the children while you’re still alive.

Think seriously about renting. Why not? Yes, rental rates have increased in several markets so you should examine the tradeoff between buying and selling on a case-by-case basis. First, you’ll need to gather information about the area you’re looking to reside. For example, gaining a handle on annual home price changes vs. annual percentage of rent increases or decreases would be important. From there, one of the best calculators on the internet is available for free from the New York Times.

Keep the extra cash you would have used to purchase a residence (or at the least as a down payment) liquid in a low-cost, no-load mutual fund that invests in ultra-short bonds which will generate a small monthly addition to cash flow. And think about splurging on a nice vacation. After all, you’re liquid now.

3). Consider a Home Equity Conversion Mortgage Saver. I understand the concerns about the closing costs and fees that go along with reverse mortgages, but hear me out.

Data released by the National Reverse Mortgage Lenders Association (NRMLA) shows senior home equity increased by $30 billion in the fourth quarter of 2011. Seniors have $3.22 trillion in home equity available according to the most recent NRMLA/Risk Span Reverse Mortgage Market Index (RMMI) report. That’s unlocked potential you can’t ignore if tapped strategically. Remember, you must be 62 years old to consider any reverse mortgage option.

Although you’re limited by the amount you can borrow, the HECM Saver is more cost effective than a standard reverse mortgage option. For example, the HECM Saver has an upfront premium (cost) of .01 percent of your property’s value compared to two percent for a standard reverse mortgage. Also, those who utilize the HECM Saver are limited to borrow roughly 10 to 18 percent less than for the Standard reverse mortgage.

Instead of withdrawing in the form of a lump-sum cash payout, it’s best to retain a line of credit that can be used only when necessary. Work with a knowledgeable financial adviser who can assist you with establishing clear rules to trigger and monitor credit line usage. The decision should be based on a thorough examination of cash-flow needs, your overall portfolio mix and current market conditions. The goal is to have a readily available source of funds to draw from when warranted.

The debt associated with a reverse mortgage (or HECM Saver) must be paid in full when the borrower dies, moves out permanently, or elects to pay it off voluntarily. Any equity remaining belongs to the borrower or the borrower’s estate. If the debt exceeds the property value, the FHA (Federal Housing Association) bears the loss, not the borrower or the borrower’s estate.

One of my favorite websites designed to educate mortgage and reverse mortgage borrowers is The Mortgage Professor, operated by Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. You can access, free of charge, a series of articles about reverse mortgages including Using a HECM to Strengthen Retirement Plans.

Use the recent, positive news about housing to get the thought process rolling.

It’s ok parents, really – the kids don’t need your house. Have faith that the memories within will always be worth a small fortune to them no matter what.

And that is exactly what the kids want.

About the author: Richard Rosso has helped 165 families manage $230 million in a fee-based advised service for Charles Schwab, Inc. He appears extensively in various radio, television and print media in Houston, Tex. He’s been quoted in national publications such as USA Today, The Wall Street Journal, New York Magazine, The New York Times and Smart Money. He has contributed articles and written commentary to websites and periodicals including Yahoo! Finance, Houston Business Journal, Retirement Weekly, Gather.com, MarketWatch and CNBC.com.
He is the author of the upcoming book “Random Thoughts of a Money Muse,” a cutting-edge, pop-culture and sometimes funny look at money and the real story behind financial dogma.

This kind of stuff saddens me: How did Vince Young end up broke?

A 20-year-old model embarking on an NFL career is doomed to fail if he does not have the right people around him. Family is not the right people, no matter how good or loving or well-intentioned they are.

Further…

I once asked former NFL coach Bill Parcells what his advice to players was regarding money. He was always meddling in their business, calling them into his office and giving advice too few listened to. What he told them was to bank that signing bonus for a year, live on only one game check, then after a year live on the interest from the bonus.

He said few players listened.

So many of these young kids have no financial sense and then are given these massive contracts and they simply don’t know how to handle themselves. Add to that the fact that there are lots of “experts” out there willing to “help” these young kids for a fee. It’s all a game, people.

All that work, sacrifice, beating the odds to make it to the professional level, and then you lose it all because of bad decisions.

I read this article about protecting your vital documents way back in June and just remembered it last night when I was going through my saved WSJ articles. I think it offers some helpful advice on backing up documents digitally.

Their advice:

1. Take inventory of all vital documents.

In one group, include crucial items such as car titles, wills, powers of attorney, life-insurance policies, medical directives, deeds, licenses, and pension and retirement-plan documents.

In another group, include items you probably will never need but might want to archive, such as old tax returns, brokerage statements and records of when you established individual retirement accounts.

2. Make copies of everything.

The most practical way to duplicate files nowadays is to scan them. It takes little more time than making photocopies, and will save you from ever needing to make or mail a copy again.

We bought a new HP printer less than a year ago. I have to say that the new technology makes scanning MUCH quicker than it used to be. Our printer (HP Officejet Pro 8600 Premium) was pricey but I’m sure there are cheaper printers that would do just as good of a job. The process is relatively pain-free.

3. Store electronically.

The author recommends storing documents on a cloud server via a service like Dropbox, Microsoft’s SkyDrive, Google’s Google Drive, or Apple’s iCloud. They recommend password-protecting files, which can be a pain. One other option is VaultWorthy, which uses encryption to store files. The service costs $12.95 a month and lets users store up to 50 documents on their servers. Kind of pricey but might be worth it.

Something to think about.

What Percent Are You?

August 24, 2012

Click on the graphic, which will take you to a WSJ landing page where you can enter your income and see where you rank in the whole “1%er scheme of things.” My wife and I have a long way to go before we are 1%ers.

What Percent Are You?

I received the following email the other day:

I read a blog post a few weeks ago at Mint.com about using your Roth IRA as an Emergency Fund. Here’s the blog post: Does Using a Roth IRA as an Emergency Fund a Good Idea?

I’ve been following your blog for several years now (you even wrote a blogpost about a question I wrote to you in 2009).

Anyway, I used to contribute to my Roth IRA regularly, but then stopped amid job transitions. I have a decent sized emergency fund set up, and recently decided to target 6 months expenses. I understand not having the entirety of an emergency fund set up in a Roth, since the value can actually go down when you might need it. I was just wondering what your take is on the blog post linked above?

Thanks,

Robby

Here are my thoughts:

First I would focus on getting 3 months’ worth of expenses socked away in a cash account for the bulk of the emergency fund. Then, I would invest through a Roth IRA and use it as a backup if necessary. So, I think the strategy has some merit. Yes, there is some risk involved due to volatility but if you already have 3 months saved up in cash, you may never need to take from the Roth.

The most important thing regarding emergency funds is to make sure you use it just for real emergencies (like the air conditioner goes out or for an insurance deductible). Too many people think new shoes are an emergency.

Quote of the Day – Annuities

September 23, 2011

I would like to get into the habit of posting a quote of the day every day but for now I’ll post them when I come across them.

Today’s (rather long) quote comes to us from the pages of The Ultimate Financial Plan: Balancing Your Money and Life* by Tim Maurer and Jim Stovall in the chapter on annuities:

In the realm of personal finance, no word has been dragged through the mud more times than the A-word—Annuities. Yet annuities survive and even thrive. How they do is not a mystery.

There is not an outcry on the part of consumers demanding annuity products. The reason for the continued vibrancy of annuity sales is that they pay a big honkin’ commission to the selling broker or agent. And, as most of the financial sales tactics exposed in this book, I’m especially qualified to make such a statement, because I have sold them myself. I wasn’t a bad person in those days, conniving to separate people from their hard-earned money for my own selfish benefit. Conversely, every time in years past when I sold an investment product to a client for a commission, I did so thinking it was in their best interest. My recommendations met all the legal requirements of suitability required of a broker, but I acknowledge to you now that in hindsight there is no question my judgment was partly influenced by the amount of money I could make (or not make) on the sale.

And how could it not be? Let’s say you, as a salesperson, had three different products to sell with the following characteristics: one would pay you one percent for every year that the investment continued to be held by the client, one would pay you 5.75 percent up front followed by .25 percent each additional year, and another would pay you 12 percent—all up front. Which one would you be likely to pick, all things being considered equal?…

He goes on to say that the, “…sale of annuities is justified entirely too often because of the massive commissions going ot the broker or agent selling the product.”

I couldn’t agree more. It’s almost like, “Sell first, justify later.”

My belief is that if high cost annuities (variable and the like) were that great for customers, they would have the same payout as a traditional mutual fund.

*Affiliate Link

I just found this on YouTube this morning and have been working my way through the videos. This is very well done except that it’s hard to hear the questions from the audience. Regardless, if you want to give your kids something that will have a positive impact on their lives, have them watch this series. I have listed them all here to make it easy for you. The financial planner’s name is Marnie Aznar and her firm is Aznar Advisors (UPDATE: Her link doesn’t appear to work at this time).

Personal Finance from Rothman Institute on Vimeo.