Friday, July 15, 2005

Two Must-Have Documents

The story of Terri Schaivo:

Michael, Terri's husband, and Robert and Mary Schindler, Terri's parents, were good friends and saw eye-to-eye on most issues. But, when the chips were down and Terri was in the hospital with a terminal disease, they did not agree on a very important issue: the last wishes of a loved one. When Terri became incompetent, Michael believed Terri wanted to pass on, while her parents thought Terri would want to live and try and survive despite being kept alive by machines. There was a long-lasting debate that went to the Supreme Court of the United States that, ultimately, ended in her death two weeks after her feeding tube was removed.

What should we all learn from this experience? Despite the relationship between loved ones, despite how well you think you know your family, you should have two critical documents: an Advanced Medical Directive (also called a Living Will) and a Durable Power of Attorney for Healthcare.

With these documents in hand, your family will know your last wishes. More importantly doctors and other critical persons will have a legal obligation to carry out your demands. An Advanced Medical Directive, very simply, lets those around you know if you want to be kept alive if machines are all the medical profession can do, or pull the plug.

A Durable Power of Attorney for Healthcare officially appoints a person or persons (known as agents) to implement that decision and make other medical decisions for you while you are in a coma or have a terminal illness. In my opinion, you should only appoint one agent because there could be added confusion if there are two decision makers. It is always recommended that you ask your agent before he or she is appointed to ensure that this person is willing to execute your wishes.

These forms are only effective after you sign it. And signatures of two witnesses and a notary should be attained to make it iron clad. If you need to make changes to your wishes or appointed agents, Suze Orman, a financial advisor and national educational speaker, states, "Please know you can always make changes to these documents. Just create and sign new versions, with the more recent date clearly displayed. Then send the new versions to everyone who has a copy of the old documents and include a letter asking each person to destroy the earlier documents since they no longer represent your wishes."

To have these documents prepared, there are many Board Certified estate planning attorneys in the area. If you would like names and contact information, let me know. However, these two documents can be created for free at Suze Orman's website. Mrs. Orman states, "Each state has its own Advance Directive. But the truth is, almost any state's form will hold up in another state. The form on my site is the one attorneys consider the gold standard for both Durable Power of Attorney for Health Care and Advance Directive."

For more information, let me know.

Tuesday, June 28, 2005

Insurance for your Money

The Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) are the two main entities that protect your deposits in banks and investment accounts. Many people are concerned about the safety of their money, so we will discuss what each of these entities cover and their financial stability in the event of a bank or investment firm failure.

According to their website, "The FDIC was created in 1933 in response to the many bank failures in the 1920s. Since its inception, not one investor has lost a penny of insured funds as a result of a failure." FDIC covers up to $100,000 of cash deposits. This does not cover securities, such as mutual funds, stocks, or bonds. This limit is a little controversial. If a single person has two accounts, both of which are over $100,000, that person is only covered for the $100,000 limit. The FDIC limit relates to a "per person, per account." So, if a married couple has three accounts: Spouse A has $100,000, Spouse B has $100,000, and they have a joint account in the amount of $100,000, they are fully covered. If you have a particular question about limits, let me know.

The stability of FDIC is backed by insurance funds of more than $44 billion and they cover over $3 trillion of assets. These premiums are paid by more than 5,300 banks and institutions that are part of the FDIC network. It is important to note that even though FDIC has the word "federal" in its title, it is in no way, shape, or form backed by the U.S. Government. It is a fully independent agency of the federal government.

On the other side of the "coin," to protect securities at brokerage firms, congress created the SIPC in 1970. The protection limits for your investments are $500,000, including a $100,000 limit for cash. The "per account, per person" rationale is the same for SIPC as it is for FDIC. The SIPC does not cover for losses due to a decline in the market value, nor does it cover non-SEC registered investment vehicles. However, if your investment firm goes bankrupt, this entity will step-in and reimburse some or all of your funds.

According to the SIPC website, "Over the past thirty years, the SIPC has advanced over $587 million in order to make possible the recovery of $14 billion in assets for an estimated 628,000 investors." In reference to the stability of this entity, they have over $1 billion in insurance reserves to compensate future victims of investment firm failures. As a side note, major investment firms usually carry excess-SIPC insurance which will cover deposits in full.

If you want more information about FDIC and SIPC, you can ask me or visit their websites.

Friday, June 24, 2005

Communist Controlled Oil Production

This past week a Chinese oil company, CNOOC, Ltd., placed a bid to buy one of the oldest American oil producers, Unocal. This comes days after Chevron offered to purchase the California-based Unocal for $16.4 billion. Despite the fact that CNOOC, Ltd. offered over $2 billion more, Congress is urging President Bush to block this acquisition.

California Representative Richard Pombo states, "The United States should be shoring up our reserves, not divesting them to global competitors seeking to fuel their own tremendous economic growth."

All of this news was shortly followed by oil topping $60 per barrel for the first time in United States history. The question should be raised, "Do we want the Chinese, a Communist state, owning and having control of America's biggest asset with the idea of locking up oil reserves in a global emergency?"

According to reports from CNN, "If CNOOC does succeed, it would be the biggest-ever overseas acquisition by a Chinese firm, reflecting China's broad energy strategy of buying overseas oil and gas reserves to feed its fast-growing economy for years."

Since we live in an environment where the threat of global terror is at an all-time high, many people believe we should be weary of these types of acquisitions. Not only would the Chinese control a large portion of oil production, but much of Unocal's high tech equipment has military applications - more specifically, nuclear. Are the Chinese using this purchase to get their hands on American technology? Maybe.

Unocal is a publicly traded company and has a fiduciary responsibility to do what is best for its shareholders. That doesn't necessarily mean profits. I think that safety and control of this asset is more important that dollars in the pocket. It would be a great patriotic act, in my opinion, if Unocal accepts the lower bid from Chevron to keep the company out of the hands of a Communist state.

Tuesday, June 07, 2005

Which Retirement Vehicles Give the Best Ride?

Putting money aside today so you can live better tomorrow is a basic financial principle. We all understand that our productivity decreases as time progresses and ultimately ends with retirement. When that time comes, you must have money set aside to fund your living expenses. Do not count on social security, a company pension plan, or Medicare to help because these systems are diminishing daily. Once you have that concept in mind and you dedicate fifteen percent of your budget to long-term savings goals, what type of account should you put these funds into?

Let's start first with some common themes of investing. The ultimate assumption with investing is that one can earn more money in stocks and bonds as compared to cash in the bank or under the mattress. Historically this is proven to be the case, and even more so if you factor for inflation. However, investing in stocks and bonds are more complex than cash because you have to consider costs and taxes. It usually does not cost anything to have a money market account and the taxes are minimal because you have minimal gains. So, lets dig deep into these main differences and then we will discuss which vehicles are more advantageous to use for long-term money.

Stocks, bonds, and mutual funds all have costs and each are very different. Commission on stocks usually cost about four percent each time a transaction is made. For example, if you buy $100 of Microsoft, you will need $104. When you want to get out of the stock, you will need another four percent to sell. Buying and selling bonds are generally the same in nature, but the costs are a bit lower - around two percent. The problems with stocks and bonds is lack of diversification, which I will discuss in the next posting. If you own Microsoft stock, you are susceptible to much more risk than if you owned a thousand different stocks. Think back to the Enron scandal and how employees had all of their retirement nest eggs in one stock and lost in all in a matter of days. Diversify, diversify, diversify!

Because of this risk, most investors choose mutual funds as their investment for long-term goals. With mutual funds, you own a share of a particular mutual fund and the fund actually owns fifty or more stocks and bonds, giving you instant diversification.

You have different options when buying mutual funds in reference to the costs. Some fund companies, like Fidelity and USAA, have no-load mutual funds. This simply means that there is no money due up front, or no commission. A "load" is an up-front cost. Secondly, you have "A-share" mutual funds. This means that there is a up-front costs and it can range from three to five percent. Lastly, there is a "C-share," which means you pay a level amount each year, typically one percent. All funds have on-going management fees to transact business, make trades of stocks and bonds, and to make sure you stay happy. Most people's eyes start to glaze over when talking about different mutual fund shares and pricing, but for financial savvy investors, it is very important to understand how much you are paying and what you are paying for.

Almost as important is the taxation of your investments. Since you are used to making less than one percent in your money market account, you do not concern yourself with taxes. However, now that you are a changed person that saves fifteen percent per paycheck and invests wisely, taxes need to be addressed.

Simply put, everytime you sell an investment, there will be tax consequences. If you buy $100 worth of Microsoft and you sell it one week later for $150, then you will be taxed on the $50 short-term gain. The gain will be taxed at your ordinary income tax rates. If there is a loss, you have some tax advantages and credits that you can use on your next tax return.

However, if you hold an investment longer than one year without selling, the government rewards you by lowering the tax rate to a flat fifteen percent. This is called a "long-term capital gain." This is merely scratching the surface, but will suffice to nail down the main topic of this posting, "Which Retirement Vehicles Give the Best Ride?"

To spur retirement savings, our government has created accounts that benefit investors for the long-term. These accounts, also called "qualified accounts," have great tax advantages that everyone should take advantage of as soon as possible. The most common retirement accounts include, Traditional IRAs, Roth IRAs, and 401(k) Plans. These are your first line of defense when tucking away your fifteen percent long-term savings. The reasoning behind tucking money away in these qualified accounts is threefold. First, you defer the taxation of investments. You can buy and sell daily and not incur one penny of taxation within these accounts. An investor will have to pay commissions, but no taxes. Secondly, for most savvy investors, money deposited in these "qualified accounts" will be before taxes (exception: Roth IRA). If you understand compounding interest and investing money before the government gets its greedy hands on it, this is the best thing since sliced bread. Lastly, for company-sponsored plans, your employer will usually match a certain percentage of your salary (usually three percent) and deposit that into your retirement account. This is known as "free money" and everyone should take full advantage.

These accounts are so beneficial, the government puts limitations on how much money you can put in. For IRAs, most people can put $4,000 per year in these accounts and investors over the age of fifty can put in $4,500. These numbers index higher each year. The limits for 401(k) and other company sponsored plans allow investors to deposit up to $46,000 per year.

Another limitation is when you can take money out of these accounts. Investors must take withdrawals starting at age 70, but they can take money out starting at age 59. If you withdrawal funds before age 59, you will be subject to a ten percent penalty unless the funds are used for higher education or purchasing a first home. (exception: Roth IRA) Therefore, these qualified accounts are a great, but be sure it is used for long-term money.

Now that you are signed up for your company retirement plan and have established an IRA account, you may have some more budgeted for savings but the government will not let you invest it in a "qualified" manner. Therefore, you must open up a regular investment account, which will have no contribution or withdrawal limitations because it provides no tax advantages.

Now that you know how much to save (15% of your gross income) and where to save (IRAs, company sponsored retirement plans, then regular investment accounts), you need to know how to diversify your investments to help buffer the volatility of the financial markets.

To understand the volatility of the market and how to diversify to reduce that risk, read next week's posting.

Thursday, June 02, 2005

Living Big on a Small Paycheck

Many Americans live paycheck to paycheck and do not realize the wonderful and prosperous lifestyle that could be attained. In the book, "The Millionaire Next Door," written by Thomas Stanley, we find that many wealthy families live a enjoyable life without living in a country club home with a luxury car and taking exotic vacations. In fact, the exact opposite is true for intelligent families that plan and budget properly.

To live big on a small paycheck, you must only change one aspect of your financial picture: take the time to set up a budget so you can monitor your spending. Creating a budget is very easy, but it should be done with two principles in mind: pay yourself first and live below your means.

As I have mentioned in previous postings, paying yourself first should be your mindset every time you cash your paycheck. Do not focus on all of your debtors without thinking about yourself first. In fact, you should adopt the mindset of, "If the Government can take twenty or thirty percent from me, I can take at least fifteen percent."

When talking about savings, it is important to have some money readily available for emergencies. Because we know inflation has historically been at three percent, one should only have two to three months of an emergency fund in a money market at the bank. Once you have that fully funded, you can start contributing towards long-term goals in an IRA. The investments in your IRA or other tax-deferred vehicle should be properly diversified among different asset styles, asset classes, and asset managers. Diversification for the novice investor is the topic of the next posting.

Once you have the mindset of paying yourself first, one should focus on living below your means. We have all failed in this area by buying a luxury item, such as a home or a car that exceeds our lifestyle, but that should be a learning opportunity. You do not need these things to make you happy. In fact, it will devastate your finances in the long run. Realize the fact that you do not have to keep up with the Jones' family who has the Jaguar sitting outside their $500,000 home and you are on your way to financial prosperity.

Now that you have the mindset, you can create a budget from the past in the present for the future. For financial planners, this is a exhilarating task that gives us a grin from ear to ear. For most, it is an accomplishment if you remember to save a receipt from WalMart. Whichever the case, this is the most important thing and is the first step to living a lifestyle without monetary burdens.

To create a budget, think about all of the expenditures that you have each month. Some areas might include: savings, charitable giving, mortgage, taxes, insurance (home, auto, and life), utilities, and groceries. Did you notice what came first?

The easiest way to create and maintain a budget is using a spreadsheet, such as Microsoft Excel. Think of all your past expenditures and estimate a monthly dollar amount for each. Also think of your income sources and estimate these as well. Hopefully your total outflows are not higher than your inflows!

Now that we have thought about past expenses and income, next is the analysis of the present. What can you change to live below your means? The number one thing, in my opinion, Americans spend too much money on is eating out. Limit yourself to a two times a week and you will see a significant rise in potential savings. Other questions you might ask yourself are, "Can I refinance my car at a lower rate?" "Can I shop around and get a better deal on home or auto insurance?" "Am I spending too much on clothing?"

Analyze your spending habits is part of "The Present" step. How can I modify my spending habits to generate more wealth? Take your time on this and dig deep to find potential savings before you move to the final step, "The Future."

Once you have created a budget from past expenses and analyzed spending habits presently, you need to constantly monitor your spending in the future. Every two weeks, sit down and see if you are spending too much, too little, or are right on track. It seems old-fashioned to say this, but the best way to start out is to train yourself to spend a certain amount and once it is depleted you cannot spend anymore. To help you adapt to this strict financial environment, if you set aside $200 for groceries per month, withdraw the cash from your bank and put it in an envelope labeled "groceries." Even though this may seem rudimentary, do this for each applicable category for the first couple months.

Budgeting is a habit everyone should practice, not just those families who are living small with a small paycheck. In fact, the more you make, the more time you should spend on planning. You should never get so lax with your finances that you are not tracking spending habits, monitoring your savings, and adapting to changes in your lifestyle. Budget from the past in the present for the future is all you must do to live big on a small paycheck.

If you want to know where to save for long-term goals, read next week's posting.

Friday, May 27, 2005

Planning Early for an Early Retirement

It is everyone's fantasy to get away from the pressures of employment. It doesn't matter whether you are twenty years old or sixty years old, our ultimate desire is to do the things we love the most. For most of us, that is not spending eight hours in an office five days a week.

I want to discuss three topics: social security, inflation, and savings.

For most people these are dirty words that are spraypainted on restroom walls. For financial advisors, they are the lifeblood of financial security. If we do not plan for these three main topics, you can assure yourself a wonderful view of a computer in an office until you have a wonderful view of the dirt in the ground!

Social Security

For months now, our President has been pushing economic reform focusing on the Social Security system which was adopted in 1935. As we know it takes income to pay for services. Due to many economic and demographic trends, our current social security system will not be able to pay its obligations in 2019. This fact should send a wake-up call to Americans because the majority of us rely upon that as a sole source of income.

What can be done to fix this problem? Change. Early change. The government has had many ideas which include privatizing the system. This means that instead of the social security fund being invested in government bonds earning a low interest rate, it would be invested in a diversified portfolio of stocks and bonds earning a much higher rate. This would generate much more income and would provide adequate benefits for Americans. The system can also increase funding by raising the retirement age, decreasing benefits, or increasing the amount workers must put into the system.

All of this to show that there is much uncertainty and for retirement planning purposes, do not count on it! Most of the plans I draft do not count factor it in unless a client is fifty-five years of age or older.


The second aspect to proper planning is the invisible three percent tax: inflation. Inflation is a general rise in prices of goods in an economy. An example is that a gallon of unleaded gas costs two dollars per gallon in 2005, while thirty years ago it was ten cents.

What causes inflation? Simply put, the amount of demand in the economy. Let's take our gas example. With a growing population and industrial output, the demand for gas has risen exponentially over the years. This, along with the fact that supply cannot keep up with demand, causes prices to rise. This increase is generally seen with all goods and services, therefore, proper planning is necessary to cope with it.

How does this affect planning for retirement? If a client says he and his wife can live comfortably on $5,000 per month during retirement, thirty years from now when he stops working it would cost over $12,000 per month for that same need! That is an astronomial increase that should raise some eyebrows and will hopefully show the need for saving early. And as a sidebar, saving does not mean putting money in the bank that earns 2%. Because with inflation at 3%, a thinking man knows that he is actually losing 1%.


According to Forbes magazine, "In 1999, the national savings rate dipped below 3% for the first time since 1959, according to the U.S. Commerce Department. It has been declining durther since then, and in 2004 it was at a mere 1%."

This is a discouraging fact, especially since we face the shortfall of a social security system and the rising costs of goods and services. People need to be saving and financial planners have been preaching this fact for years and years. However, 28,000,000 U.S. households still do not own any type of retirement plan! I hope they are not counting on social security or the lottery to bail them out when they want to retire.

Now that we have discussed all of the facts, a person can save properly by paying himself first and spending prudently. Every month when we get our paychecks, we think of all the people and things we must pay for: mortgage, taxes, insurance, car note, groceries, utilities, and the list goes on and on. However, we overlook the most important person: YOU. Pay yourself first! I cannot stress this fact enough. As a general rule, a family should save 15% of their gross annual income. Build your budget around that goal and you should be on your way to a early retirement.

If you want to know how to budget and spend prudently, read next week's posting.