Are You Making the Right Assumptions About Your Money?


Kelvin and Kesha are working with an architect to design their own home, and to do so, they must make certain assumptions. They plan to have children, so their floorplan includes two extra bedrooms. A two-car garage is also a priority, although they have only one car now. And a finished apartment above that garage is part of the plan, too, to accommodate the possibility that at least one set of parents will move in with them as they advance in age.

Read More

Making educated, well-informed assumptions — about having children, adding another car and having parents eventually moving into the household — is critical to designing a home, whether or not those assumptions ultimately prove to be accurate.


The same holds true when designing a financial “house.” As much we’ve heard the old bromide about the pitfalls of assuming things in life, any well-thought-out financial plan must necessarily incorporate certain assumptions, even if those assumptions may need to be revisited and revised as circumstances change.


In the context of financial planning, making assumptions “is the nature of the beast,” says Richard Colarossi, CFP®, of Colarossi & Williams Financial Advisory Group in Islandia, NY. “You can’t move forward without them. You just have to be sure you understand the basis of the assumption you’re making, that you have a rationale for making a particular assumption, and that you get as close to reality as possible with that assumption.”


Also be ready to adjust on the fly “because there are so many variables that can change the assumptions you make,” he says. “I recommend reviewing [financial plan] assumptions at least annually, so if things have changed, you can adjust accordingly.”


Here’s a look at five key assumptions that factor into the financial planning process and how each fits in the context of a broader financial blueprint.


  1. Life expectancy. Outliving one’s assets — running out of money, in other words — is perhaps the biggest fear people harbor about retirement, particularly with lifespans in the U.S. generally trending higher over recent decades (the slight declines of the past two years notwithstanding). This is what’s called longevity risk, and to account for it in in the context of a financial plan, an assumption about life expectancy is required, “so you know roughly what you’ll have [in terms of assets], at what age.” Today financial professionals recommend building a life expectancy of at least 90, and perhaps 95 or 100, into a financial plan, then modifying that number if necessary based on family history and other factors. Such an assumption merely recognizes the latest U.S. government data indicating that one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.


  1. Rate of return on investments. This assumption essentially projects how much the value of your assets will grow (or not grow) annually, on average, over time. It’s necessary to project with some level of accuracy how much your assets, including retirement account(s), investment portfolio, etc., will be worth at a certain point of time, such as at retirement. Like most assumptions used in financial planning, it’s important to project conservatively, because an overly aggressive assumption can undermine the integrity of a financial plan. So while a recent analysis by T. Rowe Price found that from 1928 to 2016, stocks grew annually by an average of 8.6 percent after inflation, financial professionals tend to prefer a lower growth rate assumption, such as 2% above inflation, for a balanced portfolio of stocks and bonds.
  2. Inflation. This is the rate at which the price of goods and services rises. The inflation rate directly impacts how far a person’s dollars will go, which is why it’s important to build an assumption about inflation into a financial plan. The higher the inflation rate, the lower a person’s purchasing power. That’s a particularly important consideration for people on a static income, such as retirees. Many financial professionals use a baseline inflation assumption of 3 to 4 percent (inflation in the U.S. has averaged slightly more than 3 percent over the past century), then adjust to fluctuations in the inflation rate as needed.
  3. Expenses/cost of living. If income and assets are the supply side of the financial planning equation, expenses are the demand side. That equation becomes especially important in the context of retirement planning, when it’s important to make an accurate assumption about expenses, including hard expenses (food, shelter, clothing, heath care, utilities, transportation, etc.), discretionary spending for travel and other leisure pursuits, and contingencies such as taking care of a parent, losing a job earlier than expected, etc. This projection of expenses informs (and dictates) other areas of a financial plan, such as how much to set aside toward goals like retirement or a child’s college education.


  1. Health care expenses. The tab for health and medical care can be steep for individuals and families of all ages. But the financial burden can be particularly heavy for retirees. Total projected lifetime health care premiums (including Medicare, supplemental insurance and dental insurance) for a healthy 65-year-old couple retiring in 2017 are expected to be about $322,000 in today’s dollars, according to a report from HealthView Services. With deductibles, copays, hearing, vision and dental cost sharing, that figure rises to $404,000. What’s more, the U.S. government projects health care costs will grow at a lofty rate of 6 percent annually for the next decade. Given those numbers, financial professionals recommend building a health care cost assumption into a retirement plan, along with measures (such as investing in some form of insurance that offers long-term care coverage) to protect assets from a potentially financially draining need for long-term care.


As much as people may hesitate to make assumptions because of the risk they’ll turn out to be off the mark, it’s next to impossible to build a solid financial plan — or a home, for that matter — without making these and other important assumptions. For a financial plan to remain viable over the long term, the assumptions built into it must be relevant, well-supported and appropriately applied. They also must be revisited regularly and adjusted as needed. That’s where a financial professional can help. To find a CFP® professional in your area, visit the Financial Planning Association’s searchable database at www.PlannerSearch.org.

This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

A Baker’s Dozen for the Bottom Line: 13 Financial Hacks to Save Time, Money and Hassle


People are constantly looking for “hacks”: ways to improve their lives, to do more with less, to find new ways to gain and maintain an edge. It’s called progress, and it’s something human beings seemingly are wired to want and to seek.

Read More

That’s especially true in the context of our financial lives. People are always seeking ways to improve their financial standing, now and in the future. The 13 financial hacks listed below include bypasses, shortcuts and other straightforward money-related maneuvers that can make a lasting positive impact on the financial bottom line, while saving time and hassle in the process.

HACK #1: Use a tax-favored 529 plan to pay for private high school, or even private elementary or middle school. As a result of newly instituted federal tax policy, tax-favored 529 educational savings plans aren’t just for college anymore. In addition to covering college expenses, beginning in 2018, money from 529 plans can be used to pay for up to $10,000 of tuition expenses per year, per student, for enrollment at an elementary or high school, notes Marguerita M. Cheng, CFP® of Blue Ocean Global Wealth in Gaithersburg, MD.


HACK #2: Use a tuition payment plan to help pay for a college education. As fast as the cost of a college education is escalating — four years at an out-of-state public college now cost an average of about $102,000 — many institutions offer students and their families interest-free payment plans to relieve some of the financial pressure. To find out if an institution offers such a plan, and if so, what the terms and enrollment cost are, contact the school’s financial aid office.


HACK #3: If you like to travel, get creative to manage your travel costs. Here’s a four-in-one financial hack to make travelling less expensive.


  • Find ways to accumulate travel points or airline miles. There are ways to strategically and responsibly use a credit card to gain miles or points that defray the cost of air travel, lodging, rental cars and more. The important point here is to be sure to pay down card balances promptly. Otherwise the perks you stand to gain from using miles/points will be offset by higher interest charges on the credit card balances you’re carrying. Websites such as bankrate.com and www.nerdwallet.com offer comparisons and ratings of credit card rewards programs. They can also help you evaluate cards based not only on rewards but on the interest rate charged on purchases.
  • When you rent a car, instead of paying the extra cost for insurance once you reach the counter, take advantage of the insurance protection that’s built into many credit cards. Before renting a car, first confirm that your credit card offers insurance on car rentals, then find out details on the extent of that coverage. If the card you use to rent a car does come with adequate coverage, then consider declining the extra coverage offered by the rental car company.
  • Clear the cache of your Internet browser — Google Chrome, Firefox, Safari, etc. — when you’re shopping travel websites for a hotel, rental car or airfare. These sites have the ability to sift through the Internet search history stored in your browser’s cache, then adjust their prices higher, knowing you’re looking to make reservations for a certain destination on certain dates. They can’t do that, however, if your cache is empty. If you don’t know how to empty the cache associated with your browser, ask someone who’s tech savvy to show you how.
  • If you have a specific place you want to visit, or you just want to travel someplace interesting and you’re willing to offer your home in trade to someone who’s interested in traveling to where you live, then consider arranging a home swap through a house-exchange website. Instead of paying for a hotel or a rental property, you stay in someone else’s home while they’re not there. In exchange, they get to use your home while you’re not there. Sometimes, the exchange involves a car, too. The only cost the participants pay is the fee charged by the website brokering the exchange, typically $100 to $150 annually. If you’re intrigued by the concept, check out sites such as HomeExchange.com and www.HomeLink.org.


HACK #4: Take video of the contents of your home for insurance purposes. Leon C. LaBrecque, CFP® head of LJPR Financial Advisors in Troy, MI, urges homeowners to keep an up-to-date photo or video inventory depicting the contents of their home as a way to accurately document and value the things they own, a necessity for homeowner’s (or renter’s) insurance. Keep images of every room in your home, plus the contents of closets, drawers, etc., along with details on when you bought specific items and how much you paid for them. Also keep images of electronic equipment (computers, televisions, stereo equipment, etc.) and their serial numbers. And be sure to time-date all the images by putting a dated item in the picture — a magazine cover with the issue date clearly visible, for example. Don’t rely only on the date stamp that the photo/video app embeds on the pictures.


HACK #5: Pay bills automatically via your bank’s online bill-pay service. This saves time, money (postage) and potential aggravation from a missed payment. “As a student of behavioral economics, I like anything that reduces our reliance on, or eliminates, our biases,” says LaBrecque.

HACK #6: Use the automatic rebalance feature in your 401(k). This is a mechanism that periodically checks how assets in a 401(k) account are allocated, then adjusts that allocation if necessary, based on allocation parameters established by the account owner. Maintaining an appropriate allocation of assets is key to positioning assets for long-term growth.

HACK #7: Use the automatic increase feature in your workplace retirement plan and college savings plan. Most plans allow you to activate a mechanism that increases contributions by a specified percentage each year, on a specified date. “This will automatically help you save more for retirement in a way that is not at all painful,” says Kristin C. Sullivan, CFP® of Sullivan Financial Planning in Denver, CO.

HACK #8: Take advantage of the tax-favored catch-up provisions that Uncle Sam offers retirement savers. The IRS allows people age 50 and over to contribute an additional amount each year — as much as an extra $6,000 in some cases — to a qualified retirement plan [401(k), IRA, etc.] as a way to accelerate their retirement savings.

HACK #9: If possible, delay taking Social Security benefits. A person can opt to start drawing Social Security income as early as age 62. Another option is to wait until what the Social Security program calls “full retirement age” (the age at which a person becomes entitled to full or unreduced retirement benefits, usually 66 or 67), or even until age 70. Delaying allows a person to earn valuable “delayed retirement credits” that increase their monthly benefit when they do start taking payments. Those credits are equal to an annual 8% raise in benefits. All it takes is a glance at the numbers to understand the rationale for waiting. For example, a person who would get a benefit of $1,000 a month at age 62 would get at least $1,333 at age 66 and $1,760 at age 70, according to calculations by the Center for Retirement Research at Boston College.


HACK #10: Turn money in your 401(k) into a guaranteed retirement income stream. An increasing number of 401(k) retirement plan providers offer participants the option to convert a chunk of in-plan assets into a steady, annuity-like stream of income for retirement. This can be a viable option for people seeking an additional source of guaranteed income for a period of time, or for a lifetime, to supplement Social Security and other income streams.


HACK #11: Consider purchasing a life insurance policy that also covers the cost of long-term care or a critical/chronic illness. There are lots of reasons to like life insurance, for its ability to protect people financially and to transfer wealth tax-efficiently. Another potentially appealing aspect of certain types of permanent life insurance (whole life, universal life) are so-called “living benefits,” an optional feature that, for an extra cost, provides the policy owner with funds to help cover the cost of a long-term care need or the costs associated with a critical or chronic illness.


HACK #12: Use lower-cost investments. Led by the King of Investors himself, Warren Buffett, more investors are shifting money into index funds and exchange-traded funds (ETFs) because they generally charge lower fees to investors than do actively managed mutual funds, without sacrificing performance. Actively managed funds incur costs for research and trading in the name of outperforming the market, costs they pass on to investors. Passively managed funds like index funds don’t have these costs, mostly because they’re designed to track the market, not outperform it. Lower fees and costs allow a person to hold onto a larger share of the gains from their investments — gains that may compound upon themselves over time. And research by the fund company Vanguard suggests that passive investments may actually perform better than actively managed funds over time. Vanguard compared the 10-year records of the 25% of funds with the lowest expense ratios and the 25% with the highest expense ratios. The low-cost funds outperformed the high-cost funds in every single category.


For every actively managed mutual fund you own, there’s likely an index fund or ETF with a similar investment profile that you could use instead, whether as a stand-alone investment or inside a retirement account [401(k), IRA, etc.).


HACK #13: Contribute to a health savings account (HSA). People who have a high-deductible health plan likely also have access to an HSA. Not only can an HSA provide a convenient way to pay for health care expenses, it also can serve as a powerful savings and investment tool. From a tax perspective, HSAs are a win-win-win: HSA contributions are tax-deductible; money saved in an HSA can grow tax-deferred; and, account holders are able to withdraw HSA funds tax-free to cover qualified medical/healthcare costs.


What’s more, many HSA providers now allow account owners to keep some of their HSA money in mutual funds, so instead of earning nothing or next to nothing in interest, that money has greater upside to grow (and greater downside risk, since it is invested in the stock market rather than in a fixed-interest account). The fact that money in an HSA can remain in the account from one year to the next makes that investment option extra appealing to some people. The HSA ultimately functions like an IRA for healthcare and medical costs.


This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Surviving the Sandwich: A Financial Balancing Act for People with Adult Kids, Aging Parents


If you’re feeling pressure to provide some kind of financial support to your aging parents as well as to your children while still trying to meet your own monetary goals and obligations, if you find yourself struggling to set your financial priorities because you feel pulled in multiple generational directions, you have company as a member of the Sandwich Generation.


Younger baby boomers and members of Generation X are most likely to find themselves “sandwiched.” A Pew Research Center study from 2015 found that in the United States, nearly half — 47% — of people in the 40-59 age range not only have one or two parents age 65 or older, they are also either raising a young child or have provided financial assistance to a grown child in the preceding 12 months.

In a perfect world, you would have enough money to meet your own financial needs and goals, while also offering financial assistance to an adult child and/or an aging parent if and when they need it. But many people don’t have that luxury. Instead, they’re faced with difficult either-or choices. And sometimes, given the emotions and family dynamics involved, those choices aren’t so clear-cut, says David Emery, a Certified Financial Planner with Marshall Financial Group in Doylestown, PA. “You have all these competing forces in play. It takes a lot of thought to sort out.”

Read More

Making sense of it all starts with gaining a clearer understanding of those competing forces:

  • You (and your spouse/partner). The highest financial priority for most individuals and couples, whether they’re sandwiched or not, should be to set aside enough for a secure retirement, where the nest egg provides a comfortable level of income for as long as it’s needed, according to Emery. For many people, saving enough for retirement, while also addressing current financial needs, is a formidable enough challenge that becomes even more daunting when providing financial support to an aging parent or adult child becomes a consideration.
  • Your aging parents. Close to 30% of adults who have a 65+ parent actually provided that parent with financial assistance in the preceding 12 months, according to the Pew study. Providing financial support to an aging parent or parents may take away from the ability to save for your own retirement.


There’s also the financial impact of taking the time to care for an aging parent. According to a separate study by the MetLife Mature Market Institute, nearly 10 million adult children over the age of 50 in the U.S. care for their aging parents. The average worker who does so sacrifices more than $300,000 in lost wages, workplace benefits and Social Security benefits, according to the MetLife analysis.


  • Your adult/college-age children: Some 61% of parents with adult children provided financial assistance to an adult child in the preceding 12 months, the Pew study found. That support may take the form of stopgap financial help (such as a loan or a monetary gift) to an adult child who’s struggling to make ends meet, for example, or payments to fund a child’s education (college, post-graduate work, etc.). Here’s another situation where helping an adult or college-age child financially can detract from one’s own retirement savings efforts. “This can be a big stress point, because you love your children and you want the best for them,” notes Emery.


How to avoid being squeezed financially in situations where you feel compelled to offer support to an aging parent, an adult or college-age child, or both? Here are some suggestions:

  1. When possible, pay yourself first. That is, make meeting your financial goals and obligations top priority. Emery’s recommendation: If at all possible, “keep on track with your retirement plan, because while you can’t borrow for retirement, you can borrow to help pay for a college education.” What’s more, the younger a person is, the more time they have to catch up with their retirement savings or to pay off a debt. But with retirement looming closer, you may not have the same margin for error.
  2. Balance emotional factors with financial practicalities. Financial decisions tend to be more clear-cut when emotions are removed from the equation. But because many sandwich situations involve emotionally sensitive family dynamics, those should not be overlooked or downplayed, says Emery. “It comes down to values. If someone really feels strongly about making a child’s college education a top financial priority, for example, then you should account for that.”
  3. Put it all out on the table for discussion. What type of support (financial and otherwise), and how much support, is the sandwiched individual or couple willing and able to provide? Who’s going to pay for what? Does it involve a loan or a gift? How much debt is each party willing and able to shoulder? In the case of a college education, how much aid is available, and in what form? Open communication with each of the involved parties is “very important” to getting everyone engaged and hopefully on the same page in finding answers to questions like these, asserts Emery. If possible, open the dialogue before there’s a financial crunch, to avoid having to make major decisions in the middle of a crisis.
  4. Make a formal plan. As you’re talking through the aforementioned issues, put the details down in writing, as part of a financial plan that you can refer to and update as circumstances dictate. If a loan between family members is involved, for example, be sure to put terms for paying back the loan in writing. This helps all relevant parties stay accountable to the decisions that were made, Emery says. Be sure to revisit the plan when life circumstances and needs change, as they almost certainly will.
  5. Enlist an objective third party for perspective and guidance. Emotions sometimes can derail family financial discussions and impede sound decision-making. A financial professional with expertise handling family finances can serve as a much-needed sounding board, voice of reason, intermediary and strategist in sandwich situations. To find a Certified Financial Planner™ in your area, search the Financial Planning Association’s national database of personal finance experts at PlannerSearch.org.This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.

    The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Best Financial Advice for 2017: Experts’ Top 15 Money Tips for the New Year


If you follow the Chinese zodiac, 2017 is the Year of the Rooster. But it might as well be the Year of the Question Mark for all the uncertainty surrounding financial markets, government policy and the global geopolitical landscape.


What does all the uncertainty mean for your money? What steps should you consider taking in the year ahead to provide yourself with a measure of much-needed financial clarity in the face of such a cloudy future? Read on as some of the country’s leading personal finance experts offer their suggestions for handling your money in 2017.


  1. Stick with a long-term financial plan and investment strategy. “Don’t let emotional reactions to short-term events, market volatility or the incoming Trump administration’s policies influence your decisions,” advises Dr. Robert Tucker, MD, MBA, AIF, vice president at Plancorp, LLC, in St. Louis, MO. “Stay with the basics of regular savings, diversification, periodic rebalancing and tax-loss harvesting if the opportunity presents.”
Read More
  1. Focus on things you can control in your financial life by paying attention to such things as mutual fund expense ratios (generally speaking, the lower the better), asset allocation strategy (diversification appropriate to age and other factors) and personal savings, suggests Certified Financial Planner™ Maureen M. Demers of Demers Financial, North Andover, MA. “Don’t make investment decisions [based] on the things which you have no control over,” such as the latest political controversy playing out on social media.


“Every couple days another industry or company is being mentioned by the new [Trump] administration as a potential target of inquiry,” echoes Ian M. Weinberg, a Certified Financial Planner™ who heads Family Wealth & Pension Management in Woodbury, NY. “Don’t let that noise shake your planning and your portfolio decisions.”


  1. Fund an individual retirement account (IRA) and/or a 401(k) type retirement plan — preferably to the maximum amount allowed by tax law. “If the option to fund an IRA or similar plan for 2016 exists, be sure to do so before the April 15 tax filing deadline,” Tucker recommends. “Don’t forget about funding an IRA or Roth IRA for children who had earned income in 2016. And make your 2017 IRA contributions early in the year to take advantage of tax-deferred growth.” Also keep an eye out, as retirement plan contribution limits may increase for 2017, according to Weinberg.


  1. Consider converting a traditional IRA to a Roth IRA. Personal federal income tax rates likely will drop in 2017, posits Weinberg, and that generally makes converting to a Roth IRA more attractive, he explains, because taxes associated with the conversion will tend to be lower. Roth IRA assets are good to include in a portfolio because they are not taxed when withdrawn (distributed), unlike distributions from a traditional IRA, which are taxed as ordinary income.


  1. “Make it automatic!” recommends Certified Financial Planner™ Christine Haviaris of TTR Wealth Partners in Pearl River, NY. That is, automate contributions to retirement accounts, savings accounts, college savings accounts and the like, and do the same with bill payments, to remove the guesswork and the temptation to forego a contribution or skip a payment.


  1. Calculate and track your net worth. “This is a great way to keep score and lets you know if you are winning or losing,” says Todd W. Minear, a Certified Financial Planner™ with Open Road Wealth Management in Kansas City, MO


  1. Treat your household finances like a business. Practice fiscal responsibility like a well-run business would, suggests Certified Financial Planner™ Kris Garlewicz, who heads Prosperifi in Rosemont, IL. Create financial statements for yourself and allocate capital accordingly, making purchases only when they align with your overall objectives. “Be deliberate and thoughtful to everything you do, and take good care of those around you.”


  1. Consider becoming your own boss or launching a small business in 2017. Corporate income tax rates are likely to decrease this year, perhaps to as low as 15%, significantly less than the 25-35% ordinary income tax rates many employees currently pay. “That 20-point [tax rate] spread is reason to consider becoming an independent contractor or going into business for yourself,” says Weinberg.


  1. If you have an adjustable-rate mortgage (ARM), consider refinancing it, Weinberg suggests. Current trends indicate interest rates will continue to creep up in 2017, so now may be a good time to refinance from an ARM to a fixed-rate mortgage.


  1. Review your overall financial plan. “The new year is a great time to refine your goals, review last year’s spending, refine insurance coverage and be sure estate documents are in order, including health care directives and powers of attorney,” observes Tucker.


  1. Get a second opinion on your financial standing and your financial plan, if you have one. “Often, two sets of eyes are better than one,” Minear explains. “Do you really need the high premiums of that whole life policy? What about that annuity? Does it still make sense? You may own some financial products that were purchased years prior. As we all know, things change, so if your situation has changed, it may make sense to change the tools used to implement your plan.”


  1. Give back. “Whether you donate money or time, the act of giving can have a profound impact on your life as well as the lives of others,” says Minear.


  1. Hit the pause button with regard to major changes in your estate plan. “Speculation abounds with regard to potential changes in the tax code and wealth transfer regulations,” notes Tucker. “It may be best to defer any major rewrites until the picture becomes clearer.”


  1. Share your knowledge and wisdom with others. “Most children need financial education. Figure out a way to deliver this,” recommends Minear. Talk informally with kids and grandkids about a financial mistake you’ve made and what you learned from it, for example. Show them bank statements and other financial statements and explain what they mean. Give them a glimpse of an investment statement to provide a context for a discussion about the time-value of money and the merits of a long-term investment strategy.


  1. Pick up a book about behavioral finance, Minear suggests. “Knowing why and how you make financial decisions will help you in the future.” Two of his recommended reads: Thinking, Fast and Slow by

Daniel Kahneman and The Little Book of Behavioral Investing: How Not to be Your Own Worst Enemy by James Montier.

This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Retirement Investing: Finding the Right Balance Between Growth, Protection


What’s the first thing people look at when they open their investment account statement? Usually their eyes go right to the bottom line, to see how much their shares of stock, or their mutual fund portfolio, or their retirement plan assets, have lost or gained in value.


That’s not surprising, given the inclination of so many people to prioritize higher returns on their investments in the quest to build a larger nest egg for retirement. But there comes a time when the proximity of retirement may dictate a shift in mindset, whereby protecting nest egg assets becomes just as important as growing them.

Read More

“When people shoot for [investment] yield,” explains Certified Financial Planner™ Jon Swanburg of Tristar Advisors in Houston, Texas, “what often happens in doing so is they sacrifice surety and liquidity because they are so focused on return” on their investment. Surety is the assurance or guarantee associated with the value of one’s assets — the surety that an investment will not lose its original value, or principal, for example. Liquidity is the extent to which an investor has ready access to the cash value of an investment position. An ATM card provides the cardholder with instant access to liquid cash in a bank account, for example.


Investors regardless of their age or stage of life need to strike an appropriate balance between growth, surety and liquidity, according to Swanburg. But with retirement looming, the dynamic between the three might need adjusting to reflect the financial realities that often accompany the next phase of life: transitioning from the working world to a fixed income, switching from building to drawing down retirement assets, passing assets to heirs, etc.


“If an investor wants something with yield and liquidity, they are going to sacrifice surety,” says Swanburg. “If they are looking for something with surety and liquidity, they must give up yield. Retirement investing is finding the right balance between these elements so that an investor isn’t taking excess risks in one of these areas.”


While the right balance differs from person to person, based on a range of factors, including age, health, assets, lifestyle preferences and more, a few basic guidelines apply in positioning assets to last throughout retirement, however long it lasts:


For protection, maintain an adequate liquid cash reserve. To generate income in retirement, many people sell off equity assets such as stock market holdings. But when the value of the stocks in a person’s portfolio drops, so does the income-producing capability of those stocks. What’s more, selling shares of stock when their value has plummeted is hardly optimal. One alternative, Swanburg explains, is to maintain a cash reserve from which to draw when stock values drop — as a cushion to make up for that income deficit, and to keep from having to sell off more stocks (or some other asset) when their value is down. Financial professionals recommend building a cash reserve substantial enough to accommodate retirement income needs for a year or more. Those reserves can be stashed in an account that provides maximum surety (but in today’s low-interest-rate environment, an extremely modest return), such as an FDIC-insured money market account, high-yield checking or bank CD.


For protection, build a diverse asset portfolio. “You need assets that move in different directions from one another,” says Swanburg. That’s especially true with retirement approaching, when generally speaking there’s less time for assets inside a nest egg to recover from a sharp loss of value. A well-diversified portfolio of stocks, bonds and other conservative types of investments (for surety), perhaps real estate and/or alternative investments, and cash, should help mitigate volatility while still preserving upside potential, so the lows aren’t as low, the highs aren’t as high, but the opportunity for growth is still there. Asset allocation percentages will vary according to the individual, and they likely will change over time, as a person’s circumstances and needs change. As for the traditional 60% stocks/40% bonds rule of thumb, that diversification model may work for some, but it’s by no means ideal for many.


For growth (yield), stay invested in equities such as stocks. Based on historical data, few asset classes can match the long-term growth potential of stock market investments, according to Swanburg. And because it’s important to maintain a nest egg’s growth potential, it makes sense for many people to maintain a well-diversified exposure to equities. Their approach with those equity investments may need to change, however, Swanburg notes. “You may need to shift away from the high-flying [riskier] investments, in favor of equity investments that provide more consistent returns and limit volatility.”


For protection, consider shifting assets into a vehicle that provides guaranteed income. If the idea of securing an income source you can’t outlast is appealing to supplement other sources such as Social Security, retirement plan distributions, IRAs, a pension and/or systematic drawdowns from a stock portfolio, it may make sense to use some nest egg assets to purchase an annuity that provides a guaranteed income stream, either for a period of time or for a lifetime. Fixed annuities also provide surety, as the principal inside the contract is protected from loss.


Seek protection from inflation. Inflation — the rate at which the price of goods and services increases from year to year — erodes a person’s purchasing power, a particularly important consideration when on a fixed retirement income. What’s more, the cost of goods and services retirees tend to rely upon more than other age groups, such as healthcare and nursing home care, have been rising much faster than the overall inflation rate. So people who are approaching or already in retirement need a nest egg that addresses inflation risk. Stock market investments provide good inflation protection because they tend to track with inflation, meaning when inflation increases, the stock market tends to keep up pretty well. Certain types of bonds, such as Treasury Inflation Protected Securities or TIPS for short, come with an inflation-protection feature built in. So-called inflation riders are also available with some annuities, where annuity income increases either by a flat rate each year or at a varying rate that’s usually pegged to something like the consumer price index.

For growth, look beyond just stocks and bonds. Investors are turning to real estate and so-called “alternative” investments, not just to diversify their nest eggs (and thus dampen volatility) but to grow them. Vehicles such as managed futures funds, long-short funds, hedge funds (and funds of hedge funds) as well as hedge fund replication strategies and commodities are just some of the varieties that fall into the alternative category. These types of investments do come with risks, so be sure to work with a financial professional to evaluate if they’re right for you, and if so, to determine which types of alternatives may be most suitable.


For protection, look to insurance. Oftentimes it makes sense, particularly for pre-retirees and retirees, to protect their nest egg assets from risk by investing in some form of insurance. For example, some type of long-term care insurance can help protect against a financially catastrophic need for extended care due to a serious health issue. Also, maintaining some form of health insurance after age 65 to backstop Medicare can help protect a retirement nest egg and income stream from potentially steep healthcare costs. According to a recent estimate from HealthView Services, a healthy couple age 55 today retiring in 10 years, at age 65, would pay a total of $466,000 in health care expenses from age 65, on. Meanwhile, for people in their 40s and 50s, it’s worth considering short-term and long-term disability insurance, which can replace their income if they’re unable to work to earn money, so they don’t have to tap into their nest egg before it’s time.

This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.