Atlanta Planning Guys

I saw this attachment the other day and felt compelled to share…  If you had invested $10,000 in the US Stock Market (S&P 500 Index, which is unmanaged and cannot be directly into) in January of 1934 your investment would have been worth $18 million in December of 2007.  When I first read the statement, I wasn’t surprised.  As financial planners we are frequently presented with graphics showing the fruits of long-term investing.

“XYZ investment is the number one performing investment in ABC category of the last 10 years!  Check out this performance…..”

“Our investment strategy can handle the peaks and valleys.  Check out our performance during the last several bull and bear markets…..”

Those are just a few examples of the advertisements we see in the industry magazines and sales literature that floods our office.

When I was new to this business, facts and figures like that impressed me (although there are no guarantees).  Long term investing can be so powerful!  Wait till I tell Mr. and Mrs. Smith about this nugget of wisdom from the folks at ABC Investment.

The problem is, and always was, that Mr. and Mrs. Smith were bound to come up with a reason NOT to invest.  We can always come up with excuses to AVOID activities that we dread….

From cutting the grass, to washing the car, to doing our taxes, to deciding how to invest (and most importantly whose advice to take), it is all too common for us to avoid these types of activities and decisions.

This chart shows common excuses investors may have given to avoid investing, yearly, since 1934.

$10,000 to $18 Million!

In ten years what will history say was the excuse for 2008?

• Oil Crisis?

• Housing Crisis?

• Weak dollar?

• Rising commodities prices?

• Inflation fears?

I wonder if the reason will seem as harmless in 2018 as “Y2K” in 1999 does now.

This past month was certainly a sad one in the world of comedy.  Whether you liked or not, George Carlin turned stand-up comedy, along with much of society, on its ears for the better part of 40 years.  He is probably most known for his “Seven words you can’t say on television” act.  I’m inspired to translate that into something more related to Financial Planning.  Here are my list of seven common myths, rules and general thoughts that most likely need to be turned around and evaluated for their application in todays world:

1.  Subtract your Age from 100 and that is how much you should have in Bonds:  That rule of thumb was a great tool up until around 1985 or so.  The problem with conceivably making your money ’safer’ is that you have jeopardized the time it will last.  The retirement picture in America used to look like this:

• Retire at 65 with a Rolex and a fat pension
• Spend a little too much early in retirement and then you’re done traveling (since your family all lived with a stone’s throw of your home town)
• Social Security was strong and probably replaced a high percentage of your income
• You were dead at age 72

These days, there are no pensions, social security is a luxury and we are living well in to our 80’s.  That money has to last. 

2.  Cash Value Life Insurance is the best kind of life insurance to buy (especially if you’re young):  Believe me, I started in the industry with an insurance company.  They are pushing those products down our throats almost as much as your friend that just got in the business.  Building cash value is certainly advantageous.  However, with term insurance rates being very competitive, it is likely that your needs can be met with a very inexpensive term policy.

Most term contracts offer you a conversion feature that allows you to change over to a permanent contract when it may fit into your budget.  The cost of term allows you to obtain the face amount of coverage that will truly help protect your family or business from an unplanned death.  Talk to your financial planner today to get an evaluation done on your current life insurance portfolio.

3.  The Government will take care of me:  This may in fact be the case for some folks.  Ask yourself, do you really want to rely on Uncle Sam to take care of you in your later years?  Social Security is a mystery.  Medicare is NOT paying for any long term care needs.  Save your own money!

4.  My company will make sure I save enough and be there for me:  Pensions are almost extinct.  Benefits are being cut.  Most plans now make you save the money (like a 401k).  The company stock that was such a huge benefit is now down 40% and there is nothing you can do about it.  Remember Enron & Worldcom?  Be smarter than that. Max out your 401(k), (if eligible), get your spending under control and divest yourself from that single stock approach.

5.  My family will take care of me:  If they do, consider yourself lucky.  The geography of the family has changed in the last 20 years.   Your children will move away and I’m talking out of the state…maybe even the time zone.  The days of staying with your brother, sister or children when times get lean are a thing of the past.  Honestly, do you really want to lay that burden on them?  Consider buying some Long Term Care insurance, save some money & talk to a financial planner to make sure you are taking the right steps to be financial independent down the road.

6.  Pay off your house in planning towards financial security:  I’ll be the first to say that it would be nice to not have that monthly mortgage payment looming over my head in retirement.  We meet so many people that are just on the cusp of a comfortable retirement.  The one problem, they have 20-40% of their net worth tied up in a house.  There are limited ways to access that money (borrow against it, sell the house and other strategies).  I realize that some people are very emotional about that house payment.  You should visit with a financial planner to discuss the impact of paying it off versus carrying a mortgage into retirement.

7.  Super Size Me:  OK, this one is a little off the normal track…but I think it is immensely important.  With health insurance costs quickly moving to the top of the “retirement expense” chart, you can make a decision today that will have reap benefits far beyond the financial scope.  Eat healthy and exercise.  What we put in our bodies has become somewhat of a joke.  Obesity rates are skyrocketing.  Heart disease is at catastrophic levels.  Cancer is looming around every corner.

One of the best ways to fight this issue is with diet.  The tangible benefits of a solid diet plan are easy to see.  It’s those benefits down the road that are why this has made it into my top 7.  How much money do you think you will save by not having that heart attack at age 67?  Ask your parents how much they spend every month on prescriptions.

I have made a personal commitment to myself and my family to maintain a healthy lifestyle and I urge you to do the same.

In a recent ‘boys trip’ to Biloxi for gambling, I had an experience that related directly to the market…and thought it appropriate to share my experience. My hope is that this article will at the very least spark some commentary from you or get you thinking the way Cass and I hope you will.

My game of choice is Blackjack. It’s the game I could play for hours and just keep playing. I never hit a table without two items (not counting money of course): My good luck charm (a Silver Dollar from the year I was born and my cheat card that shows what to do with every possible hand dealt to me). The card always gets a good laugh from the dealer and pit boss. I’d like to focus today’s discussion on that card.

This card has basically established the absolute rules for what to do when dealt any combination of cards versus whatever the dealer’s up card shows. There are several things that you are ALWAYS supposed to do regardless of what the dealer shows. Splitting Aces and splitting 8’s are two of those absolutes. I have no problem splitting my aces…it just feels good knowing that you are going to possibly get 21 twice. However, the emotion behind splitting those 8’s has always just torn my stomach in two…especially against a dealer’s 10 or face card. The idea of doubling my bet against a possible loser just rips me up. This card was developed after running millions of simulations through a super computer. Statistically, over the long haul, I’m going to win more than I lose. Does any of this sound familiar when it comes to the management of your money?

The emotion surrounding one’s money is no different. Here you sit, looking at your 401k online and while watching some TV show about investing. You sit there and want to make an irrational decision about what to do in the face of some bad news (much like that dealer showing a 10 against your 8’s). You want to just take a hit. You don’t want to invest more money in a loser. You want to make the ‘emotionally comfortable’ decision.

Now here comes the fun part. Let’s say that you take that hit on 17 and win. You have just beaten the system…congratulations. But what did you ultimately accomplish? You have just conditioned yourself to make another wrong decision when it may matter most. You sacrificed long term satisfaction for short term gratification. Investment strategy is no different. You develop a plan (much like sticking to the cheat card). The minute you deviate from that strategy, you probably have thrown logic, reason, and the hopes of meeting your long term goals into a tailspin.

Casinos have it figured out. Get people to make irrational decisions when their money is on the line and the casino will win most of the time. They don’t build multi-million dollar hotels in the middle of the desert for nothing. Please remember that emotion drives the majority of our poor decisions. To the contrary, it is rational and calculated planning that brings out most of our incredible decisions. Allow a professional to help you create a game plan that is custom built to your needs….and stick with it. It’s the best defense against poor decision making.

The statistics are alarming, but then again…that is what statistics are designed to be. I rarely meet someone that doesn’t have life insurance and yet we are nearly 6 times more likely to become disabled before age 65 than die. For most folks in the corporate world, disability insurance is usually a given. Your employer pays for some benefit. However, what are you truly getting? How can it curtail the onset of a disability that incapacitates you in the short/long term?

There are several things to consider when analyzing your disability insurance. I want to spend a few moments going through each of those:

What is protected? Traditional group plans typically protect between 50 & 60% of your salary. In some cases bonuses/commissions can be covered but it is rare. If the bulk of your compensation comes from bonuses or commissions, you should be aware that it is most likely not covered by your disability plan.

How long am I covered? Most plans will cover you to age 65 with some extended coverage if you are still working. However, you should plan on benefits stopping when most people traditionally stop working. There are plans that have shortened benefit periods (2,3,4,5 Year Benefit Periods). These are usually reserved for the individual marketplace.

Are the benefits tax free? Usually no! Most employers pay the premium for you and take a deduction for premiums paid. That ultimately means that the benefits are a taxable benefit to you. This is an important concept to understand. If the benefit is taxable and they are only covering 60% of your salary, we are now in a situation where potentially less than 40% of your income is actually going to paid out to you. Obviously, if you are paying taxes on the premiums paid toward your disability insurance…the benefit is tax free.

What is the definition of disability? This will vary with the insurance carrier. However most of the language is the same. The trigger comes when you can’t perform the ‘duties and material obligations of your occupation’ (also called your Own Occupation). You usually have OwnOcc coverage for a 2 or 3 year period of time. After that, you must seek a job to which you are educated and capable.

Does my insurance go up with my income? Yes, in one of two ways. The first, if your benefit is calculated as a fixed percentage your salary…then as your salary increases so does the benefit. The other way is if your benefit is a flat $ amount…there are two types of riders that allow you to increase coverage:

- Benefit Increase Provision: Allows you to increase your benefit every year based on inflation. You typically pay for this increase

- Cost of Living Adjustment (COLA): This benefit will start increasing the monthly benefit once you become disabled

• * This benefit is expensive and typically not worth it
• * It could be 10+ years between buying the policy and actually becoming disabled. At that point, your benefit is so far behind inflation, you’ve paid for something you didn’t use.