Six Things You Need to Know to Make You a Better Investor

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Click the following links to view Harold R. Evenskys, CFP®, AIF® Six Things You Need to Know to Make You a Better Investor presentation that was held at the Coral Gables Art Cinema on Tuesday, June 12th, 2018.

To view the entire seminar: Click Here

To view in segments click the following:

Part 1: Squaring the Curve

Part 2: Returns (No Control)

Part 3: Volatility Risk & Luck

Part 4: Real People

Part 5: Market Timing

Part 6: Knowing Where the Buck Stops

 

Feel free to contact Harold Evensky with any questions by phone 1.800.448.5435 or email: Harold@Evensky.com

For more information on financial planning visit our website at www.EK-FF.com

The Value of a Financial Planner

John_Salter2012

John R. Salter, CFP®, AIFA®, PhD Wealth Manager, Principal

Financial planning is the process of determining how you can meet your financial goals by managing your financial resources. Probably you have already thought about your own financial planning. Maybe you have thought about working, or already work, with a professional financial planner. Whatever your situation, we wanted to discuss the value of working with a financial planner.

Financial planners provide advice on how to achieve financial goals. The quality of the advice should be measured by whether you attain those goals. The value of financial planning lies in the development of a plan specific to your goals, but just as important is the guidance you get along the way.

Below are just a few ways financial planners provide value to clients.

Creating a Financial Plan

One well-documented fact about our lives is we are likely to spend more time planning a vacation than planning for our retirement. And why not? The vacation seems much more fun! However, the vacation is a one-time event, whereas issues related to your financial life have a lasting impact on your future (and your ability to take vacations, for that matter!) A financial plan maps out the steps you need to take in the areas of spending, saving, investing, managing risks, and handling bequests in order to attain your financial goals.

A financial planner provides the analysis and can outline the steps needed to meet your current and future financial goals.

Being a Sounding Board

Should you pay off your mortgage? Should you buy or lease your car? What about buying a rental property? Were you pitched an annuity at a free dinner? A financial planner can help you answer all these questions and more, either through an analysis and/or by providing the details you need to make an informed decision yourself. You can probably think back to times you have contemplated a decision, seemingly to no avail, when an objective opinion could have saved you time.

A financial planner is there to help.

Optimal Investing

Investing should be boring. We should focus not only on achieving returns, but also evaluate the risk we are willing to accept to reach those returns. This “risk” refers to how much your portfolio might drop in a short-term bear market, but also the risk that you might not be able to meet your future financial goals. Our investments should be diversified; we should not have all our eggs in one basket. The best portfolio should arise out of the overlap between your risk tolerance, your financial capacity to take risk, and the risk and return needed to meet your future goals.

A financial planner helps determine your optimal portfolio.

Staying Disciplined

Long term, we are likely to be our own worst enemy in terms of keeping our financial plan on track, both in terms of performing the financial planning tasks we need to undertake and sticking with the investment plan. One notable example is estate planning, which seems to be the last item on everyone’s to-do list. Sometimes we need simple “nudges” to make sure these tasks are completed. Financial planners also help stay on track with our investments. When the market’s down, you want to adjust and make it more conservative, and then get back in when it is up. This is the easiest way to lose money long term. Ongoing management includes rebalancing or bringing the investment mix back to target. In general, this is selling the winners and buying more of what hasn’t done as well recently, and of course assumes long-term investment values will rise. Does short-term market volatility get you worried? Why not have your financial planner help you stay disciplined through the ups and downs of the market cycle, which are inevitable, simply by reaching out to you during rough markets?

A financial planner helps you stay disciplined through the financial planning process.

Managing Behavior

We are human, and therefore we are hard-wired to make terrible financial decisions. We want to be in the market when things are going well, and out when things look bad. We should do the opposite. We focus too much on the short term; we want to make decisions based on short-term noise rather than long-term analysis. We want to be in the winners and out of the losers, whereas being spread across winners and losers (being diversified) is the best long-term strategy. We want our investments to be exciting and sexy, but they should be dull and boring. We want to chase the investments that did well in the too-recent past, but they are likely those that will falter in the short-term future. We make decisions based on simple rules of thumb because we cannot perform complex math in our head. Our behavior, based on the emotions tied to our money, prevents us from reaching our future financial goals.

A financial planner helps manage your behavior and separate emotion from your money.

Tax and Cost Efficiency

In a world of lower return expectations, and given that we cannot control the markets, the ability to control and take into consideration tax and cost efficiency becomes even more important. Many financial planners have access to the universe of financial products. This means they also have access to the range of costs of products and may be able to implement a plan more cost effectively compared to a retail solution. If a financial planner can access a mutual fund for 0.5% less, that is 0.5% more staying in your portfolio. Tax savings produce similar benefits. A financial planner can not only make long-term tax-efficient recommendations but can also strategically position your individual investments in certain accounts to minimize current taxable income. A solution which decreases the tax you pay also results in more money accumulated or available.

Keep on Track

A financial plan is important to meeting goals, and maintaining and monitoring the plan are the check-ups required for progress. Annual meetings with your financial planner provide the opportunity to review your goals and see progress toward meeting them. Of course, we all know life can change at any moment, so updating and monitoring financial plans takes account of the ebbs and flows of life.

So, what is the quantifiable value of a financial planner? Many studies have addressed this question. These examples include many of the topics above, such as the financial planning process, portfolio construction and investment selection, rebalancing, and tax efficiency. The answer? Studies have concluded the value of a financial planner and the financial planning process can add an upwards of 3% in returns per year.

Below are links to a few of these studies.

https://www.fidelity.com/viewpoints/investing-ideas/financial-advisor-cost

http://www.envestnet.com/sites/default/files/documents/ENV-WP-CS-0516-FullVersion.pdf

https://www.vanguard.com/pdf/ISGQVAA.pdf

https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf

No matter how you might value a financial planner, the true value comes from the benefits listed above and from following and keeping on track with the financial planning process. Value goes beyond simple products or investment choices and returns. A financial planner is your partner in meeting your future financial goals.

Feel free to contact John Salter with any questions by phone 1.806.747.7995 or email: JSalter@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Intergenerational Planning: Time to Start Planting Seeds

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

It takes the average recipient of an inheritance 19 days until they buy a new car.1

                Over the past several years, some of our clients have participated in client advisory boards in which they tell us what they want and what keeps them awake at night. One of the biggest challenges is bringing up finances and financial planning with their children. They are not alone. Intergenerational planning, in which families look at long-term financial needs together, is sorely missing. But to the surprise of many, it’s not just the parents who want this connection—it’s the kids as well. A study from MFS Investment Management reports that more than one-third of those in the “sandwich generation” (people ages 40 to 64) worry about aging parents’ financial issues in addition to their adult children’s financial issues.2 It’s about time to get everyone involved.

                According to the same study, less than half of the sandwich generation has prepared a list of assets, created a durable power of attorney or living will, purchased long-term care insurance, or established a trust. Further, even if they have checked off the boxes for these basic estate-planning tools, many have not communicated this information to their children.

Given that the older generation has been reluctant to have needed discussions, should we be surprised that the sandwich generation is concerned about their parents’ finances, yet hasn’t done anything to prepare their own children for what’s to come? All too often, the burden of managing a parent’s deteriorating health or financial situation falls to an adult child, who must step into a parent’s shoes at the last minute and try to cobble together information to form a basic plan. If a parent doesn’t discuss their specific assets with their adult children, and if no one knows they exist, those assets may not be used for their care. Assets may wind up being claimed by the state or federal government, adding to the more than $58 billion in abandoned property. Recent statistics suggest that 70% of families lose control of their assets when an estate is transferred to the next generation and 90% of the wealth is spent by the third generation. Why? About two-thirds of high-net-worth individuals have disclosed little about their wealth to their children, with the most common reason being that they do not feel that the next generation is financially responsible enough to handle an inheritance. Parents can head off this asset transfer problem, while at the same time avoiding divisive and costly family feuds, by taking the lead in these transformative conversations.

                The good news is that many of our clients have become more organized while working with us, and a lot of this information is in one place. But unless this information is disseminated to adult children, it remains stressful for everyone involved. Parents should suggest a family meeting with all their children at the same time to help ensure that their message is received uniformly. Having these conversations one-on-one may cause family members to fight, harbor grudges, or get confused, with the result that the discussion has the opposite of the intended effect.

For instance, parents may choose to leave money to their children in a trust, much to the dismay of the children, who may believe that this is being done to prevent them from having unfettered access. But perhaps the parent is trying to protect the children from creditors, due to having litigious jobs. Another reason could be a desire to protect money from a child’s former spouse. There could be estate or income tax reasons to form the trust in a certain way. Or it could be as simple as wanting to make sure that their frivolous-spending children do not run out of money within the first few years of receiving the inheritance. Parents may think that they are encouraging hard work by not disclosing their financial situation to their children, but they may in fact be fostering ignorance and anger.

These joint meetings may help a parent spell out their reasoning for how they are dividing their assets (including the house and personal belongings) and how they have decided who will be the estate’s executor, have durable power of attorney, or be the primary caregiver for minors. It’s much easier to understand what a parent wants to accomplish with their estate plan if they’re still around to explain it to their family. This doesn’t mean that specific numbers have to be included and that full disclosure be given, but it’s up to the parents to start the conversation and share what they are comfortable sharing.

In other cases, the parent is more interested in handing down values than money. Perhaps all that’s needed is a simple conversation about the importance of having a financial team—consisting of a financial planner, estate attorney, and accountant—establishing a financial plan, saving and investing money, and giving back to charity. So often we hear from clients that a discussion early in their childhood about money formed the foundation for their lifelong financial habits. If the situation is more complex, a family facilitator might need to be hired, someone who can broach difficult, personal, and possibly painful subjects, with the end result being a unified family that is more aware of each other’s feelings and goals. These conversations can be done at the 30,000-foot level if not everyone is comfortable sharing information, or they can be very specific. No one wants a child to feel entitled to expect a large inheritance, but as a parent, do you want your children completely left out of the loop?

                Our firm can help parents review their long-term financial plan with their children, discuss where accounts and important documents are located, and provide contact information for the parents’ financial team. The family should review the will/trust and communicate their wishes about health care preferences to avoid squabbles (who will ever forget the Terry Schiavo situation?). Getting everyone in the same place keeps the message consistent and unequivocally removes any doubts that may have been building. It’s not going to be the easiest of conversations, and all parties may start off anxious, but reticence about the subject will surely backfire. If parents are concerned about their children and children are concerned about their parents, doesn’t it make sense to get everyone together in a room to talk?

1 The source for cited statistics is a Time article, available at: http://time.com/money/3925308/rich-families-lose-wealth/

 

2 The source for cited statistics is an MFS study available at: http://www.mfs.com/about/news/press_080296.html

 

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Thoughts before Funding a 529 Plan

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

The new tax law was amended to allow tax-free distributions of up to $10,000 per year from a 529 plan for elementary and high school costs starting in 2018. This is an added benefit and can be an advantageous tax break for parents starting to save for their young child’s education.

College costs have outpaced inflation. According to The College Board®, the average 2014-2015 tuition increase was 3.7 percent at private colleges and 2.9 percent at public universities. However, looking back at the last decade, the 10-year historical rate of increase has been approximately 5 percent.

529 Basics — Opening a regular savings account/custodial account for your child is an option, but this comes without the benefits of a 529 plan such as the tax-free growth on earnings if the funds are used for qualified college expenses. Deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion (for 2018). You can also front-load your investment in a 529 plan with $75,000 ($150,000 if joint with your spouse) and use this toward your gift tax exemption for five years providing there have been no other gifts to that child — this is not possible for a regular savings/custodial account for your child (you would only be able to gift $30K jointly). By adding a large amount up front, you allow the lump sum to grow over a longer time horizon vs. making smaller contributions over time. Contributions to a 529 plan do not have to be reported on your federal tax return.

Contributions to a 529 plan are not tax deductible (although some states do offer tax benefits), but the earnings grow tax free and are not taxed if used to pay for education. Another advantage compared to a custodial account is control; the named beneficiary has no legal rights to the funds, so you can ensure the money will be used for education.

A 529 account owned by someone other than the parent (such as a grandparent) is not considered an asset for financial aid purposes. Also, the value of a 529 account is removed from your taxable estate, yet you retain full control over the account.

How to choose a 529 plan? Research the underlying expenses of the mutual funds and review the investment options available compared to other plans. The age-based models may be the easiest to manage as the plan shifts to more conservative investments as the student gets closer to college age. You can choose any state plan no matter where you live, but if you reside in a state that provides tax breaks for using your state plan, you would likely want to start there. For example, New York residents get tax benefits for using their state plan. Keep in mind that you have the ability to move your 529 to another provider, but only one rollover is permitted per twelve-month period.

How much to fund? The amount to contribute to a 529 plan depends on several assumptions such as whether your child will attend a public college or a private college, the returns during the investment time horizon, and future college inflation. Funding varies widely depending on what you would like to achieve and the assumptions involved — and of course there is no right answer. If the beneficiary does not go to college, you can transfer the 529 plan to a sibling in the future or to another family member such as a cousin or grandchild. If you don’t have any eligible family members, the worst-case scenario is that you would have to pay tax and a 10% penalty on the earnings to take the money out for another purpose. Withdrawals from a 529 plan that are not used for the beneficiary’s qualified education expenses are taxed and penalized (subject to a 10 percent federal penalty and taxed at the income tax rate of the person who receives the withdrawal). If the beneficiary gets a scholarship, then the penalty is waived.

Avoid overfunding the 529 if possible as “qualified education expenses” do not cover all expenses related to college. Qualified expenses include tuition, on-campus room and board, books and supplies, computers, and related equipment. It may also make sense to save otherwise for expenses such as travel, cars/transportation costs, insurance, sports or club dues, and off-campus housing, etc., which are not considered qualified expenses but can easily add up.

Considerations if you have more than one child — If you have several children, it may make sense to fully fund the first plan for the oldest child and if the funds are not used, they can be transferred to the next child in line. You probably want to avoid fully funding all the plans in the event one child does not end up going to college, gets a scholarship, or starts a business. Some schools and some trade schools/programs do not qualify for 529 funds (for example, if a grandchild wants to go to a specific acting or cooking school). You can find out if your school qualifies by using this link: http://www.savingforcollege.com/eligible_institutions/.

http://www.savingforcollege.com/tutorial101/the_real_cost_of_higher_education.php

https://www.npr.org/sections/ed/2018/01/08/575167214/congress-changed-529-college-savings-plans-and-now-states-are-nervous

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@EK-FF.com

 

What Constitutes the Art of Practicing Financial Planning?

The below chapter is from “The Art of Practicing and the Art of Communication in Financial Planning” (Click here to purchase the book.)

Matt McGrath

Matthew McGrath, CFP® Managing Partner Wealth Manager

Why would one use the word “art” when describing the practice of financial planning?  The most highly qualified planners have gone through rigorous education and testing in order to acquire licenses and certifications.  They use a methodical process to establish the client-planner relationship.  This process includes gathering data, analyzing and evaluating the client’s status, developing and presenting recommendations; as well as implementing and monitoring those recommendations.  They use sophisticated software to run complicated analyses and they stay abreast of laws and regulations affecting a wide array of financial issues.  Where is the art?

The art of practicing financial planning can be found when professionals deploy a fundamentally sound process while injecting experience and judgment to develop advice in the best interest of the client.  Financial planning involves altering human behavior which presents unique challenges each and every single time.  It includes navigating an ever-changing body of knowledge and applying it to individual circumstances in order to arrive at a recommendation appropriate at that point in time.

Let’s start with the people.  At its core, financial planning is a “people” business.  Clients are looking to planners to guide them on some of the most important decisions of their lives.  Establishing trust and maintaining effective communication are crucial to the successful execution of the financial planning process.  Being technically proficient (i.e. “book smart”) does not necessarily translate to successful advice.  The ability to communicate the relevant details to clients in a way they understand and embrace is the key to effective planning.  Successful financial planners channel their inner teacher to convey facts, figures and details in a way that is easy to comprehend.  Many clients are intimidated by financial matters, and it takes skill to break through those emotional barriers and establish a level of comfort.

Of course, before attempting to communicate any advice, a good planner needs to start by listening to their client.  Understanding what is truly important to a client is crucial to establishing trust and rapport.  The last thing a client wants to hear is generic advice regurgitated from a book; they can find the information in countless places using any internet connected device.  What they want is someone who understands their personal concerns and goals and develops recommendations specific to them.  If a planner is doing all the talking in client meetings, then I would argue that they are not engaging in true financial planning.  Listening must always come first.  Meetings should involve meaningful two-way conversations, not a one-way presentation.

Keep in mind, when working with people, every situation is unique and emotions play a big part in the process.  People do not always behave in a rational manner.  It is not unusual for a client to come to tears during a meeting.  Money, finances and the future can be very emotional topics.  Therefore, the right advice on an issue may not necessarily be the one with the maximum financial outcome.  Client biases, fears and preconceptions can all have an influence on the ultimate advice.  A good planner will try to guide the client to a rational decision, but also has to acknowledge that a client needs to be able to live with the outcome.  Empathy is critical, as is the ability to interpret and understand the motivations of each client in order to develop advice appropriate for them.  The “people” side of financial planning can be very complicated and the ability to interact with others is a necessary ingredient in the art of practicing financial planning.

It is also essential to understand that financial planning is a journey, not a destination.  Changes occur every day.  Planners deal with a wide array of issues such as marriage, divorce, recessions, market crashes, retirement and, sadly, death.  Successful planning keeps up with these changes by adapting to the new circumstances in a way that keeps the client on the path to accomplish their goals.  Success is not measured by dollars or annual rates of return; nor is it defined by the creation of a beautiful comprehensive financial plan that goes in a drawer never to be seen again.  Rather, it is defined by the ongoing achievement of goals throughout one’s life.  It is an organic process that, for each client, takes on a life of its own.

The planning process often involves evaluating questions that have more than one potential answer.  Part of the art of financial planning involves evaluating those answers and helping someone choose the best one for their personal situation.  At the end of the day, the planner’s objective is to enable clients to make informed decisions.  I once had a client ask me if he should take his kids out of private school and I told him that’s not my call.  I can walk through his financial plan with him and help him understand the consequences of different decisions.  But in the end, the clients need to take ownership of their decisions and their lives.  Planners who cross this line are doing a disservice to their clients and robbing them of their true financial freedom.  A planner’s role is not to tell someone what they should do; it is to empower them to make appropriate decisions within the context of their unique lives.

The art of practicing financial planning exists in the less tangible aspects of the process.  This involves listening, assessing, analyzing, communicating and ultimately recommending a course of action.  Experience, judgment, trust and communication are crucial to the successful implementation of a financial plan.  Information is everywhere, but knowing what to do with it to help an individual achieve their specific goals is absolutely a form of art.  Like other forms of art, it is predicated on an underlying body of knowledge that must be successfully interpreted and executed under specific circumstances.  And like good artists, good planners will be greatly appreciated by their clients.

Feel free to contact Matt McGrath with any questions by phone 305.448.8882 ext. 206 or email: MMcGrath@EK-FF.com

Lagniappe: Some Final Takeaways

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

I couldn’t resist using one of my favorite words—lagniappe. It means a little something extra, given at no cost, somewhat like the thirteenth doughnut in a baker’s dozen. Because there are so many topics and issues I could not cover in the previous chapters, here’s my lagniappe.

Small and Ugly May Be Beautiful. If you need more returns. One possible strategy, supported by decades of research, is to overweight a few market factors in your portfolio. Based on the original research of two well-known academics, Gene Fama and Ken French, you allocate some of your stock holdings to small companies and value stock. Over the long-term, you’re likely to be rewarded with a few extra percentage points of returns.

Maximize Quality of Life, Not Returns. It’s confusing, but after having designed many hundreds of retirement plans, it’s obvious that if you’re near or in retirement and depending on your portfolio to provide cash flow for your lifestyle, a higher allocation to bonds is likely to increase your likelihood of success at the cost of reducing the likelihood of making more money.

Hot Stocks Pay. If you’re an active trader in hot stocks, the activity will pay your broker but not you. Remember two old jokes: 1) Broker to a new client pointing out the window of his beautiful office overlooking the bay. “See that yacht; that’s my partner’s. The one next to it is Mark’s—he’s the broker next door—and the one next to that is mine.” The wise prospect asks, “Where are the clients’ yachts?” 2) How do I make a $1,000,000 in the market? Start with $2,000,000.

Safety versus Certainty. My friend Nick Murray shakes his head when he hears people talking about safe investments. He says (and he’s right): investors confuse safety with certainty. Putting your nest egg into insured CDs may offer the certainty that when they mature, you get your principal back with the promised interest; however, assuming you’re like most of us and find your expenses going up with inflation, over time your safe investment is likely to buy you less and less of the goods and services you need. This is called purchasing power erosion and it’s one of the biggest risks retirees face. The solution is to plan on a safe portfolio—one with bonds and stocks—and avoid the certainty of losing purchasing power with a safe investment.

It Doesn’t Cost You Anything Don’t You Believe It. Unless you’re the kind of person who believes in fairy tales. No professional can afford to work for free. Good investment advice is valuable, and people providing advice deserve and expect to be compensated. So it really angers me when an investor says they were told a service shouldn’t cost them anything.

 Two prime examples are bonds and variable annuities. When purchasing a bond, it’s true that you’re not charged a commission. That doesn’t mean you’re not paying compensation. Bonds are sold based on something called a spread. You might be offered a $10,000 bond at 102.5. That means your cost would be $10,250. The broker may have been told by his bond department: “This bond is available at 100.5. How much do you want to add?” To which the broker responds, “Two.” And the trader says, “Fine. Done at 102.5.” The result: you’re purchasing a bond with a 2 percent markup. The markup is the fee to the broker and brokerage firm. Again, there’s nothing wrong with paying a markup, but make sure you’re told how much it is. The good news is that you can check by going to  http://finramarkets.morningstar.com/MarketData/Default.jsp , a website that provides the details of most bond trades.

A Variable Annuity (VA) is another investment product that, unfortunately, a small minority of unscrupulous brokers use to take advantage of clients. The line is: “Don’t worry. It doesn’t cost you anything. The insurance company pays me.” Although factually true, it’s massively misleading because it ignores the reality of where the insurance company gets the money to pay the broker. The money comes from you, the annuity purchaser. The practice is particularly egregious because VAs typically pay relatively high commissions to brokers and they have no break points, unlike mutual funds. On mutual funds the commission drops as the purchase size gets larger. The broker gets the same percentage on a VA no matter how big the purchase.

Duration, Shmuration. Who Cares? You should. You probably know, or at least have heard (especially if you read Chapter 7, “Getting Your Money Back”), that bonds are subject to interest rate risk. That’s the risk of being stuck with a poor investment if after having purchased a bond, interest rates rise.

Consider John, new owner of a $10,000 ten-year bond purchased when it was paying 4 percent. Five years later, interest rates are up and a new five-year bond of the same quality now pays 7 percent. If John wishes to sell his bond, he would be offering his now five-year bond paying 4 percent. There is no way someone will pay him $10,000 for a bond paying 4 percent when the buyer can purchase a similar quality bond paying 7 percent. So if the owner, John, wants to sell, he’d have to sell at a discount.

That discount is interest rate risk. Most investors equate this risk with maturity—they assume a ten-year bond has significantly greater risk than a five-year bond. Sounds reasonable but it’s not necessarily true. The problem is that focusing only on maturity leaves out an important factor—the coupon, which is how much the bond issuer pays annually. The higher the coupon, the sooner the investor has some funds back to reinvest at the new, higher rate so a high-coupon bond might have less interest rate risk than a shorter-maturity, low-coupon bond. For an approximate guide to the level of interest rate risk a bond has, ask about the bond’s duration. That number will provide a very rough guide to the potential loss in value if rates rise. The measure is 1 percent for every year of duration. So a bond with a five-year duration might be expected to lose 5 percent if rates go up 1 percent or 10 percent if rates rise 2 percent. Not a perfect measure but far better than maturity.

I’ll Keep an Eye on It. When I caution clients about the risk of a heavy concentration in a single investment, they often respond, “Harold, I understand, but I keep a careful eye on it.” That sounds wise. Unfortunately, as Professor Sharpe taught us about the unrewarded diversifiable risk, that’s false confidence. It’s a risk that can blindside you.

Think about the fact that many years ago a crazy person who put poison in some Tylenol bottles threatened the business of Johnson & Johnson or consider the Gulf oil disaster that almost buried BP. Years ago, I used to use as the example of a company building a major manufacturing facility over what turned out to be a toxic waste dump. Well, one day, using that story to persuade my clients to reduce their exposure to the stock they held in the company where they had both spent their careers.

Their mouths dropped open and they said, “Good Lord! You’re right! We’ll sell out.” It turned out that just a few years earlier their company had, in fact, developed a major research facility over what later turned out to be a toxic dump and it almost bankrupted the firm.

It doesn’t matter how blue the blue chip is, the risk is there. Many years ago I warned a trustee that a portfolio allocation to AT&T stock representing about half the portfolio value was a significant risk. Unfortunately, I wasn’t very persuasive and the trustee scoffed at my warning—after all, it was AT&T. About a year later the value dropped over 50 percent. The drop had nothing to do with my having a crystal ball; it might just as well have doubled in price. The point is that the risk is real.

Counting on Gurus to Predict the Future May Be Hazardous to Your Wealth. No question about it: when doing investment planning, you need to have some opinion about future market returns. In my office, I have all of the important elements, including extensive databases, sophisticated analytical software, an expensive crystal ball, and a Ouija board. The future is mighty cloudy and surprises even the best of us.

The moral? It’s not Buy and hold, it’s Buy and Manage. Make your best estimates about the future and be prepared to change. Just don’t put too much faith in any guru’s ability to tell you where the market’s going, no matter how confident he or she may be.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Special Needs Planning: Resources and Issues to Consider

Brian Fischer

Brian Fischer, CFA, CFP® Financial Analyst

Special needs planning is often narrowly thought of as simply creating a special needs trust. However, depending on the individual’s situation and needs, it may require much more. This article will focus on the resources and strategies available to those with special needs and their families who care for them.

Childhood

Federal legislation requires local governments to provide children with disabilities education and other related services that are designed to meet their needs. These resources include Early Intervention (EI) services for children younger than age three and special education that is directed by an Individualized Education Plan (IEP) for children up to age 21 (26 in Michigan). Taking full advantage of what is available to your child not only can help him or her reach full potential, but can also help conserve your resources and identify things to consider while planning for your child’s life after school.

It’s important to note that eligibility for special education benefits is not affected by income and asset ownership. EI services and special education vary by state; more information about each may be found at Autism Speaks1 and the Center for Parent Information & Resources.2

 Government Benefits

Government benefits are subject to strict eligibility rules. Although income and assets do not affect eligibility for special education benefits, they do affect eligibility for Social Security and Medicaid. Consequently, an important aspect of special needs planning involves protecting eligibility to receive government benefits.

While a child may not utilize these benefits prior to the age of 18, planning to preserve eligibility well in advance may be prudent. Even if monetary assistance isn’t needed, remaining eligible may be necessary to obtain services such as life skills training.

Social Security

Social Security Income (SSI) and Social Security Disability Income (SSDI) both provide income to those who meet Social Security’s disability eligibility requirements.3 SSI is a needs-based program available to those with minimal income and resources, while SSDI is an entitlement program for individuals, and possibly their dependents, who have paid into Social Security. Some information about each is outlined below.

 SSI

Assets are limited to $2,000 for an individual or child under the age 18 living at home with one parent, and $3,000 per couple or a child living at home with both parents. Some assets not counted include your primary residence, a vehicle, and household goods.

  • Monthly benefits for 2017 are $735 per individual and $1,103 per couple. These payouts are offset by income. Social Security’s calculation to measure income against these limits is rather complex and can be viewed here.4
  • Also, as an added benefit, some states provide a supplement to SSI.

SSDI

  • Benefits received are based on work history and family size.
  • There is a monthly earned income limit of $1,170. There are no unearned income or asset limits.
  • The 2017 maximum benefit per individual is $2,687 with a total family benefit somewhere in the range of 150-180 percent of that number.

Medicaid

Similar to SSI, Medicaid is a need-based program. However, Medicaid is administered on the state level. As a result, benefits and eligibility vary by state. Typically, if an individual qualifies for Social Security, he or she will qualify for Medicaid as well.

Children’s Health Insurance Program (CHIP)

This program provides health insurance to children under the age of 19 in families that are ineligible for Medicaid because their income is too high. Income eligibility varies by state.

Home and Community-Based Services

Provided through Medicaid, these services help individuals continue living at home or in the community instead of at another residence or in an institution. Services provided vary by state.

Life Insurance

Although a stay-at-home caretaker may not have income, the care he or she provides has value. Replacing the loss of this care can be expensive. As a result, it may be prudent to consider purchasing life insurance on all primary caretakers, regardless of income. The amount and type of life insurance will depend on your family’s needs. Some broad questions to ask that may help in determining what kind (term, permanent, second-to-die), if any, life insurance is to be purchased:

  • How long is the insurance needed?
  • How much can be afforded?

Keep in mind, to preserve eligibility for government benefits, it may make sense to name a trust or someone other than the special needs individual as the beneficiary of life insurance proceeds.

Special Needs Trust

A special needs trust can be an integral part of special needs planning. Generally, it can be used to preserve eligibility for government benefits and provide supplemental resources to the beneficiary. Additionally, it can set clear expectations for the use of funds. For example, giving a special needs individual’s inheritance to a sibling to manage may create confusion and the possibility of the special needs individual not getting the resources he or she needs.

There are many rules regarding the creation and use of special needs trusts, and these rules vary by state. Consider consulting a lawyer if a trust is needed. An attorney familiar with special needs trusts may be found at Special Needs Answers5 or Special Needs Alliance.6

There are two kinds of special needs trusts: first- and third-party. A first-party trust is funded by the individual with special needs or, in other words, the beneficiary. It generally is created when the beneficiary receives an inheritance or a legal settlement. A third-party trust, on the other hand, is funded by anyone other than the beneficiary. Aside from the source of funding, these trusts differ in what happens to the assets after the beneficiary dies. A first-party trust’s remaining assets pay back Medicaid, whereas a third-party trust’s remaining assets may be distributed to named heirs. (First-party trusts are also known as Medicaid payback trusts.)

If costs or limited resources make the use of a trust prohibitive, a pooled trust may be a viable alternative. Pooled trusts maintain assets for the benefit of a group of individuals under the umbrella of a single trust, thus potentially reducing costs. Funds are distributed to the beneficiaries in proportion to what they contributed.

 ABLE Plans

As mentioned earlier, keeping income and assets to a minimum to preserve eligibility for government benefits is an ongoing issue. The enactment of the Achieving a Better Life Experience (ABLE) Act in 2014 created a savings option that may provide some relief in keeping assets to a minimum to preserve eligibility for government benefits.

Features/Benefits

  • Funds in the account may be used for any “…expense related to the designated beneficiary as a result of living a life with disabilities.”7 Expenses may include basic living expenses, housing, transportation, and health care.
  • Investment earnings are not taxed if funds are used for qualifying expenses. If funds are used for unqualified expenses, taxes and a 10% penalty on earnings may apply.
  • Depending on the state, there may be a tax deduction for contributions.
  • They can potentially be a relatively inexpensive and more flexible alternative to a special needs trust.
  • If desired it can be managed/controlled by the beneficiary. This independence can be a source of pride for the beneficiary.
  • You can use any state’s plan.

 Rules/Limitations

  • The beneficiary must have been diagnosed with a disability before age 26.
  • Plan limits vary by state. However, there is a $100,000 account limit to maintain eligibility for government benefits. If the account’s balance exceeds $100,000, the individual will stop receiving Social Security benefits until the account balance is reduced to $100,000. Medicaid eligibility is unaffected.
  • There is a $14k annual contribution limit from all sources.
  • Only one account may be used per individual.

The National Down Syndrome Society has aggregated website links to the various state plans here.8

Letter of Intent (LOI)

A letter of intent is a set of instructions. Although not legally binding, it provides future caregivers the information needed to properly administer care. Information included may vary. It may be limited to medical care and financial information, or may be much more thorough with instructions describing the individual’s daily routine, for example, details describing what works and what doesn’t work for the individual while bathing or preparing for bed.

 Concluding Thoughts

There certainly is a lot to consider while planning for an individual with special needs. A few general observations that may be helpful to keep in mind throughout the planning process are:

  • Don’t wait until a crisis to act. Creating a plan now avoids needing someone to create a plan when you can’t. Without a plan, that someone whom steps into your shoes may be left guessing as to what is needed and most appropriate.
  • It can be challenging to identify and obtain available resources. Having confidence while going through this process along with being persistent and patient can go a long way.
  • Communicate your planning desires and wishes with those who are a part of the special needs individual’s life. Don’t assume the people you select to be a trustee, executor, or guardian are willing and able to perform the responsibilities that come along with those jobs.

 

Feel free to contact Brian Fischer with any questions by phone 305.448.8882 ext. 235 or email: BFischer@EK-FF.com.

 

Advocacy Groups and Other Resources 

There are numerous advocacy and charitable organizations that are focused on providing help to the special needs community. A few that may be of interest are listed below.

Early Intervention Services by State – State websites aggregated by Autism Speaks.

Resources for those with Disabilities by State – State websites aggregated by Center for Parent Information & Resources.

The Arc – The Arc promotes and protects the human rights of people with intellectual and developmental disabilities and actively supports their full inclusion and participation in the community throughout their lifetimes.9

Special Needs Alliance – The Special Needs Alliance (SNA) is a national organization composed of attorneys dedicated to the practice of disability and public benefits law. Individuals with disabilities, their families, and their advisors rely on the SNA to connect them with nearby attorneys who focus their practices in the disability law arena.10

Easterseals – For nearly 100 years, Easterseals has been the indispensable resource for people and families living with disabilities.11

Autism Speaks – Autism Speaks is dedicated to promoting solutions across the spectrum and throughout the life for the needs of individuals with autism and their families through advocacy and support, increasing understanding and acceptance of people with autism spectrum disorder, and advancing research into causes and better interventions for autism spectrum disorder and related conditions.12

Special Needs Answers – The Academy of Special Needs Planners consists of special needs planning professionals such as attorneys, financial planners, and trust officers that assists them in providing the highest quality service and advice to persons with special needs and to their families.13

Other Professionals

Find a Certified Public Accountant (CPA) – The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 418,000 members in 143 countries and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting.15

  1. https://www.autismspeaks.org/early-access-care/ei-state-info
  2. http://www.parentcenterhub.org/find-your-center/
  3. https://www.ssa.gov/disability/determination.htm
  4. https://www.ssa.gov/ssi/text-income-ussi.htm
  5. http://specialneedsanswers.com/
  6. https://www.specialneedsalliance.org/
  7. http://www.ablenrc.org/about/what-are-able-accounts
  8. http://www.ndss.org/ableprograms
  9. http://www.thearc.org/
  10. https://www.specialneedsalliance.org/
  11. http://www.easterseals.com/
  12. https://www.autismspeaks.org/
  13. http://specialneedsanswers.com/
  14. http://www.letsmakeaplan.org/choose-a-cfp-professional/find-a-cfp-professional?gclid=CjwKEAiA9om3BRDpzvihsdGnhTwSJAAkSewLIgB1GH95lrTy3VJcGVIZSW8HPzAjHhIrZIMoPLldXRoCt3Pw_wcB
  15. https://www.aicpa.org/ForThePublic/FindACPA/Pages/FindACPA.aspx

Advisors: Who’s Who Anyway?

HRE PR Pic 2013

If you decide you’d like to get some professional advice, it would probably be nice to have some idea where to begin.

 

John Smith (JS): Hello, Harold.

Harold Evensky (HE): Hi, and who am I speaking with?

JS: I’m John Smith, a reporter with the Florida Times Journal Gazette. I need a sentence or two on who provides investment advice to consumers.

HE: A sentence or two? This is a pretty big topic. It’s often confusing even to us professionals.

JS: Maybe you can give me the gist of it.

HE: Well, I guess we could start with professionals known as money managers. They’re the people who know all about picking stocks and bonds. They may not know what kinds of stocks or bonds you should be buying or even if you should be invested in stocks or bonds at all, but if you need to make those investments, money managers are the experts to hire.

JS: Okay. Where would you go to find these people?

HE: For most investors, the best place to find an experienced money manager is a mutual fund.

JS: A what?

HE: If you’re a financial reporter, you must have heard of them. They’re portfolios of stocks or bonds or international stocks or sometimes other assets, sometimes in combination, managed by some of the world’s best money managers. They might not know a thing about you, the actual investor, but the better ones sure know about their portfolio.

JS: Okay, so I hire one of those—

HE: You don’t want just one. You need to diversify sectors and styles. The good news is you can hire lots of these managers, each one a specialist in a different area of the economy: one for big U.S. companies, another to pick stocks in small U.S. companies, a third to find you the best foreign stocks, and then others who specialize in government bonds, or municipal bonds, or different flavors of corporate bonds. When you check out those managers, keep an eye out for a CFA designation. That stands for Chartered Financial Analyst and is an internationally respected credential for money managers.

JS: I see. Okay. I want to thank you—

HE: Wait. That’s only one of many types of professionals you may need.

JS: What else could I want?

HE: Knowing how to pick stocks and bonds is terrific, but for individuals the most important question is how you decide how much to invest in stocks versus bonds.

JS: The money manager won’t help me with that?

HE: That’s the job of the expert known as the financial planner. That’s a professional who is educated and experienced in helping individuals—such as your readers—make good financial decisions.

JS: Let me write this down. This is good stuff. So how does this financial planner decide if I should be in whatever those international or small things were?

HE: Financial planners follow a six-step process to help advice their clients. A credentialing body called the CFP Board of Standards—which I chaired some years back—defines this process. Basically it means that the financial planner gathers your personal and financial data, helps you define your goals, and analyzes where you are today financially. Only then will this person make recommendations and give you alternatives. When do you want to retire? What kind of lifestyle do you want to be able to afford when you do?

JS: And then I hire the money manager?

HE: Again, it’s not manager but managers, and, yes, you could hire them on your own. However, with thousands of choices, most investors are better served letting a professional do the hiring for them. The financial planner will usually recommend a portfolio that will include several money managers in which he or she has confidence, in various investment sectors. Then the planner will monitor your progress toward your goals and watch over the money managers to make sure they’re doing the best possible job for you.

JS: I’m not totally sure I understand the difference.

HE: The money manager is an expert on portfolios, but doesn’t know a thing about you. For example, are you in a low or high tax bracket?

JS: I think I’m in a low one.

HE: Do you already have other investments that might overlap with the money manager’s stocks? Do you need current cash flow from the investments? Are you comfortable with market volatility?

JS: Even I don’t know the answer to these questions.

HE: The financial planner helps you understand and answer these questions. I could go on and on, but you get the point. It’s the financial planner—the expert on people’s financial needs—who will know all of that and much more about you.

JS: Do these financial planners also get the CFA designation?

HE: No, that’s the professional designation for a money manager. In my opinion, the certified financial planner (CFP®) credential represents financial planning’s highest standard. A professional holding the CFP mark has demonstrated not only knowledge of investments and planning but also an ability to apply that knowledge for your benefit.

JS: Does that mean that you’re a CFP planner?

HE: Yes. But in fairness, there are two other respected credentials in the profession: the insurance industry’s ChFC (chartered financial consultant) and the accounting profession’s PFS (personal financial specialist).

JS: I think I have more than my two sentences. If there’s anything else—

HE: There’s a lot else.

JS: [Sigh.]

HE: Tell me about it. It’s amazingly confusing for the poor consumer. Other types of designations reflect statutory registration or licensing requirements.

JS: Licensing? You mean like a licensed hair stylist?

HE: Some of these are actually sales licenses. Examples are the Series 7 licenses, which are required for advisors who earn commissions for selling investments, and the RIA (Registered Investment Advisor), a registration required of individuals who charge fees for providing investment advice. Depending on the business model used, a professional might be registered as an investment advisor as well as holding a securities license.

JS: I hope we’re finished. Please tell me we’re finished.

HE: Well, we haven’t actually talked about what kind of professional I happen to be.

JS: Sigh. Which is?

HE: A wealth manager. The term wealth manager, as we use it, was introduced in a book, by that same name that I wrote for other professionals in the late 1990s. I defined it as a financial planning professional whose business specializes in a client’s needs regarding investment and retirement planning.

JS: So that means you are—

HE: I’m a CFP licensee, and my firm is a financial planning firm specializing in what we call wealth management.

JS: I don’t think any sane person could keep track of all this.

HE: If you have to remember only one thing, then understand that current laws do not ensure that all professionals providing investment advice are looking out for your best interests.

JS: Don’t I want somebody serving my best interests? I don’t want to pay somebody to convince me to buy something that earns more for their company than it does for me.

HE: Now you’re getting it.

JS: So what do I do?

HE: If you want my best advice, no matter who you ultimately select to guide you, your best protection is to ask the advisor to sign a simple, “mom-and-pop” commitment acknowledging that they’re really looking out for your best interest.

JS: Can you send me a copy?

HE: I will. Be sure and use it for your own protection.

And I did. Below is the document I sent.

 

I believe in placing your best interests first. Therefore, I am proud to commit to the following five principles:

  1. I will always put your best interests first.
  2. I will act with prudence—with the skill, care, diligence, and good judgment of a professional.
  3. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.
  4. I will avoid conflicts of interest.
  5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

Advisor____________________________

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

How to Start Happily Ever After…

AnneBednarz_175x219

Your wedding day was beautiful, you married your one true love, and everything was perfect. You are back from your honeymoon, and reality is setting in. How do you proceed to finalize all the remaining details to start your lives together, things like name changes, employee benefits, and estate planning?

Name Change

Will you be changing your name? Traditionally, one spouse takes the last name of the other spouse; however, it is not required. When I got married a few years ago I used a checklist2 from theknot.com as a starting place for what I needed to do to change my name.

But whatever you decide, make sure that you follow the requirements for your state since each state’s laws differ. Most states require that you have your marriage license/certificate prior to any changes. It may take up to six weeks up from filing for your marriage license for you to receive it.

Places to change your name:

Employee Benefits

Employee benefits should be considered at this time. Marriage is a qualifying life event that allows you to have a special open enrollment period (normally 60 days) to add your spouse to your employer benefits for health insurance. Whether you are both employed and have benefits to look into, or one of you has benefits for the other to be added to, it’s a great time to review what is available. If you both have health benefits, you can have primary and secondary insurance if it makes financial sense or change over to your spouse’s plan.

Other employee benefits to consider reviewing if they are applicable:

  • Life and disability insurance (Do you have dependents to care for now?)
    • Review terms
    • Update beneficiaries for life insurance
  • Child and elder care benefits
  • Retirement plans – look to maximize benefits and update beneficiaries
  • Other available options through cafeteria plans

Estate Documents/Update Beneficiaries

Each major life event is an optimal time to review and update your estate plan. Review and update any beneficiaries on retirement plans, life insurance, or other investment accounts. Accounts that have beneficiaries listed do not go through probate, and your will does not determine who receives the assets unless you list your estate as the beneficiary.

If you do not have any estate documents such as a will or power of attorney, this maybe a good time to consider having them drafted and executed, especially when there are dependents involved. An attorney will help you answer the necessary questions and draft the documents for you.

Many couples also seek legal counsel for post-nuptial agreements as a precaution in case things don’t work out in the marriage, particularly if either spouse comes into the marriage with a significant amount of property or an uneven earning potential. If needed, ask your personal financial planner for a recommendation.

Common Law Property vs. Community Property

Most states are common law states, which in layman’s terms means that marital property remains separate unless you title it differently. However, there are nine states that are community property states (show in blue below — Alaska is an optional community property state1).

5.b After-Marriage_AB - Image file.

Community property means any property acquired during the marriage is owned jointly. This would include work income and investment earnings. Property owned prior to the marriage such as inherited assets or gifts received is generally considered separate property. It is a common practice for individuals in community property states to keep any separate property that was either obtained prior to the marriage or received as a gift/inheritance during the marriage in separate accounts in their individual name.

Misc.

Another topic to discuss, if you haven’t already, is the management of household expenses. Will the responsibility be split or will one spouse take on the majority of the responsibility? Will your accounts be comingled or separate?

Student loans are usually a topic of discussion in terms of the best way to pay them down. By consolidating the loans you would strip away necessary characteristics that could qualify the student loan for forgiveness later in life. Proceed cautiously when looking to combine debt, and consult with your financial planner as to the best way to reduce debt.

Also, in this day and age many, if not all, of our accounts have a way to access them online. It may be helpful to use a password management system to help keep access to your accounts available to each other. Especially if one of you does the management of household accounts or expenses on a frequent basis, you want to make sure your spouse has access just in case something happens to you and you are unable to access the accounts.

May you each learn to live with each other’s quirks and enjoy each day with one another. Who knows what this adventure will hold for you?

Disclosure: This list is not exhaustive, but a basic starting place to combine separate financial lives.

Feel free to contact Anne Bednarz, CFP® with any questions by phone 806.747.7995 or email: ABednarz@EK-FF.com

1 Bishop, S. (n.d.). Dividing Property in Alaska. Retrieved December 27, 2016, from http://www.divorcenet.com/resources/divorce/marital-property-division/alaska-divorce-dividing-proper#

2 Black, A. (n.d.). How to Change Your Last Name After the Wedding. Retrieved December 27, 2016, from https://www.theknot.com/content/name-change-101#ixzz1tAKgylOu

3 Change or Correct a Passport. (n.d.). Retrieved December 27, 2016, from https://travel.state.gov/content/passports/en/passports/services/correction.html#Changes

4 Change Your Name with the Texas DPS & DOT. (n.d.). Retrieved December 27, 2016, from https://www.dmv.org/tx-texas/changing-your-name.php

5 Perez, W. (n.d.). Community Property States. Retrieved December 27, 2016, from https://www.thebalance.com/community-property-states-3193432

6 Social Security. (n.d.). Retrieved December 27, 2016, from https://faq.ssa.gov/link/portal/34011/34019/article/3749/how-do-i-change-or-correct-my-name-on-my-social-security-number-card

You’re Engaged! Let the planning begin…

AnneBednarz_175x219

Anne Bednarz, CFP®, AIF® Financial Advisor

Congratulations on your upcoming marriage! It’s an exciting time in your life, with a new chapter to begin with your love and your lives together. Let the planning begin for the big day; it is also a good time to tackle a topic that will affect you long after your wedding day. This is an essential time to discuss your finances. Where are you currently? Where will you be after your wedding day? What are your long-term goals for the next five to ten years and beyond? By setting the tone prior to your wedding day and knowing what your goals are, you can work together as a team to accomplish them.

Where are you each currently?

How much do each of you bring to the marriage? Is it in a bank account, a retirement account, other assets, or debt? Bring it all to the table so each of you knows exactly what you’re stepping into. What are your spending habits? Do you live paycheck to paycheck, or are you a saver? Often opposites attract, so this could be an important discussion point for you.

Do you live in a common law state or a community property state? (Community property states are Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico and Wisconsin.) This is particularly important for those in community property states. Anything that you own prior to marriage will remain your own in a community property state, and anything that is earned, purchased, or comingled during the marriage could be considered joint property. Will you keep these assets separate or combine them?

If you bring debt to the table, what type of debt is it? Do you own your own business and have business debt that you are personally responsible for, or do you have consumer or student loan debt? If it is student loan debt, there are several ways to approach how to pay it off, and a personal financial planner can help you understand the best way for you and your spouse to approach it. Some types of student loans can lose their potential loan forgiveness characteristic if not treated properly. Tread carefully.

How to conquer everyday living

How will you approach your everyday living situation… will you divide and conquer, or will you both take it on jointly? This is also a good time to sit down and make a joint spending plan. What items are essential for each of you beyond basic living expenses?

There are several approaches when setting up your finances together:

  1. You can combine everything and have a joint account from which you both spend.
  2. You can keep separate accounts. Each of you is responsible for one-half of the bills, or depending on earnings, keep it proportional to the income you earn.
  3. A combination approach. Have a joint account to pay for the basic joint bills, utilities, rent/mortgage, insurance, etc. Then have your separate accounts to pay for any separate debt obligations, or separate spending money for what you consider essential.

It is also a good idea to set boundaries for what amounts are okay to spend without seeking your spouse’s consent versus making an expensive purchase without consulting your spouse and possibly damaging your financial trust. As many of us have read, the divorce rate in the US is roughly 40 to 50%,1 and a common issue is money. If one of you handles the money most of the time, then set aside a time each month to review what is happening so you both are in the loop.

Future Goals — Do a little dreaming…

What would you each like to accomplish in the future? Write down the goal, the amount it is expected to cost, and the estimated time horizon. Revisit your goals each year, and modify them as needed. Life happens, and the best laid plans get interrupted, but being able to adjust and move on is essential in life.

For example:

Year 1:

  1. Start retirement savings accounts.
  2. Maximize the amount that your employer contributes.
  3. Set up an adequate emergency fund.
    1. 3–6 times your monthly expenses
  4. Set up a debt reduction schedule.

Year 3: Pay off all your student loan(s) by your third anniversary.

Year 5: Purchase your first home for $X.

Year 10: Purchase a boat or recreational vehicle for $X.

As uncomfortable as it may be, it’s also a good time to discuss your current financial situation now, rather than later. You will both be able to have a better understanding of where you were coming from and where you are going in the future. Enjoy your engagement and prepare for your life together.

Feel free to contact Anne Bednarz, CFP® with any questions by phone 806.747.7995 or email: ABednarz@EK-FF.com

1 American Psychological Association: Marriage & Divorce, http://www.apa.org/topics/divorce/