Martin and Terry, trustees of a large family trust in Waco, Texas, recently became concerned after watching a nationally syndicated financial program because one of their investments was only up 15 percent! (Note: This is during a period where the 10-year U.S. Treasury is paying 2.85 percent, a five-year bank CD under 1 percent and checking accounts paying nearly nothing!).In Behavioral Finance, this is a red flag!
We asked Martin and Terry to schedule a sit-down session with each of the key financial decision-makers of their family legacy. In managing families’ wealth for nearly 30 years, we’ve seen this before. With “the wind at our backs, every financial move looks easy, but this is the time we need to express the greatest caution, looking forward!” What is the greatest enemy to good financial planning? It is not markets’ movements. It is not the economy. It is not missed opportunities. It is “ourselves!” We want our rewards “now.” We promise to demonstrate patience “later.” In short, these are investors behaving badly.
We discussed a five-point checklist, a “reality check,” to create during the holiday season, when the family is together, a financial guideline to start and monitor for 2014 and beyond.
1. Create an “Investment Policy Statement” for yourselves. Put in writing what your performance expectations are, what risks you are willing to take, how often you will monitor how you are doing and against what you will measure your success. This can help protect you from making emotional decisions such as selling low or buying high. This may reduce your investment goals from lofty expectations.
2. Complete a “Retirement Calculation.” Take into account your anticipated investment rate of return, your expected expenses, expected increase in costs due to inflation. Update this calculation at least every two years, even while in retirement.
Keep in mind that after age 70, fully 20 percent of your expenses may be traced to “health care” (Employee Benefit Research Institute).
3. Complete two “Insurance Calculations”: one for life insurance, and one for long-term care. Your life insurance is to cover lapses in income for a surviving spouse or pay off the mortgage.
As to long-term care insurance, we know we have a 60 percent chance of experiencing a long-term care issue during our lifetimes (Westland Financial). Insurance is nothing more than a free decision to assign financial risk to another by paying a premium.
4. Confirm that you have a “within five years” attorney created or attorney-reviewed “Estate Plan.” Living without a “Durable Power of Attorney” or dying without a will or trust is doing your heirs a terrible and costly disservice. Sit down and discuss with your closest heirs, how you see your plan playing out at least every five years. Also include a guide document for your executors, which in laymen’s terms provides important information about your finances and your wishes.
5. Create a “Savings & Giving” plan. From the goals set above, create a plan to save for specific lifestyle needs. And when unanticipated windfalls happen, like the investment year of ’13, make a contribution for those whom you would like to “recognize.” Any good savings plan should be accompanied by giving to those less fortunate.
Well, you can imagine how that meeting with Martin, Terry and the whole family went. Their behavior changed from greed to gainful engagement to generosity! What will the wind behind your back guide you to do this holiday season?
The opinions expressed are not intended to provide specific advice for any individual and do not constitute an endorsement by NPC.
As with any financial or legal matter, consult your qualified securities, tax or legal representative before action. Past performance is not a guarantee of future results.
CDs are FDIC insured and offer a fixed rate of return, whereas both principal and yield of investment securities do have risk and may fluctuate with changes in market conditions.
Allen Ostrofe, MBA, CFP, AIF is president of Ostrofe Financial Consultants, Inc., an S.E.C. fee-based registered investment advisor. Securities and advisory services offered through National Planning Corporation, member FINRA/SIPC, a registered investment advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit http://ostrofefinancial.com. Branch address: 565 Brunswick Road, Suite 15, Grass Valley.