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CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
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Recession Redux: Another opportunity to get it right
June 2011 Column
Good things come in doubles. Think of a double-scoop ice cream cone, double beds or the 1950s Wrigley twins who advised us in a catchy jingle that we could “double our pleasure, double our fun” by chewing Doublemint gum.
But when it comes to economic cycles, there are not many people singing duets at the prospect of a double-dip recession. A looming fisticuffs battle over the deficit, a stubbornly sticky unemployment rate, slowing growth in China and debt woes in Europe –all have consumers ready to put their unhappy faces on again, after so recently having relearned how to smile. So pervasive seems the bad financial news that it is enough to drive the average consumer into hiding in his home. Oh wait a minute, that home isn’t technically his anymore, judging from his ever-more negative equity.
Are consumers ready for a double dose of no or negative economic growth? Interestingly, in a recent national opinion survey conducted by the CFP Board of Standards, 59 percent of consumers are indeed expecting another economic slowdown. More interesting still is the fact that a significant number apparently think that any dire effects of a re-recession are going to hit the other guy, and not themselves. Eighty-three percent of poll respondents believe their personal financial situation will improve or at least stay the same for the next year.
When it comes to the direction of the economy, consumer attitudes count for a lot, so maybe this whistling of a happy tune might be enough to put the monsters under the bed to rest. But the CFP Board survey finds another, better way to boost confidence: put a financial plan in place. Fifty-eight percent of those surveyed, who did not have a plan, admitted that they would feel more confident about their finances if they did.
However, there is one small problem. Too many consumers carry their financial "plan" in their heads, rather than putting it down on paper, or working with a Certified Financial Planner professional to define and evaluate specific strategies for preserving and growing their wealth.
Perhaps the prospect of another negative spell for the economy can be put in a positive light: it gives consumers another chance to learn the lessons of the 2008-2009 downturn and to get their financial planning right this time around. Accordingly, here are a few ideas from a CFP® professional on what a replay of the recession blues has to teach us:- Stick to the basics, in the right order. We learned in 2008 that too much debt is disastrous when the tide goes out; make it a priority to whittle down that debt. If jobs will still be scarce for the foreseeable future, they will be even scarcer to those with lousy credit scores.
- At the same time, build up your stockpile of cash, no matter how meager are the returns to cash or savings accounts. We learned in 2008 that high yields are so much pie in the sky when there is no liquidity in the system. The amount you should be holding in cash has very little to do with the yield curve or the returns to other investments. It does, however, have everything to do with your personal circumstances: your job security, your health and your living expenses. Cash will be your umbrella in the event of another rainstorm.
- You cannot just invest your way to wealth. The Great Recession woke us up to the fact that high rates of growth are ultimately unsustainable in the housing market, in our stock markets, in our economy as a whole. Consumers themselves need to do more of the work of building their wealth, through managing their spending, working longer and downsizing their homes and lifestyles. Sound financial planning is not a matter of simply choosing the “right” investment, but includes tax, retirement, education, insurance and estate management as well.
- In the downtimes, the value of a competent, ethical CFP® professional who puts your interests first can be worth his or her weight in gold. Recessions, especially in the form of double dips, can be pretty frightening, and for many consumers fear can get the upper hand of sound judgment. A CFP® professional is trained to manage the downside risk.
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Financial Planning for Your Life Now
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Despite Wall Street's Shenanigans, Small Investors Need to Stay in the Game
Digested from: When Wall Street Cheats, Do We Lose?
National Public Radio (05/13/11) Linton Weeks
Although there have been recent instances of trading fraud and manipulation, small investors should not avoid investing their money in stock or capital markets out of fear of losing to the big players, says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®. Blayney notes that small investors can be successful if they follow several steps. For example, small investors should invest most of their money in well-run, low-cost mutual funds that put their money into a large investment pool. Since Vanguard mutual funds are the benchmark for low costs, Blayney says, other mutual funds should be compared to their closest counterparts at Vanguard. However, investors should be sure to only compare funds that are the same as one another, Blayney says. She adds that it is also important to keep in mind that expense-management fees for international funds and small-cap funds are going to be higher than those for domestic large-cap funds, as well as the fact that index funds are less expensive than managed funds. Blayney also urges investors to focus on index investing, where returns are reflective of broad market movements rather than the performance or choices of one individual or manager, and to avoid investment strategies that are not transparent or understandable. Finally, Blayney says that investors should work with a CERTIFIED FINANCIAL PLANNER™ professional to develop an investment plan. Such financial planners are required to meet a fiduciary standard, Blayney says, and are able to save their clients money by getting favorable pricing from custodians and mutual funds.
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You Can Afford to Travel This Summer, Despite High Fuel Costs
Digested from: Tips for Traveling Cheap as Fuel Prices Rise
International Business Times (05/11/11)
There are a number of things consumers can do to help offset the higher cost of traveling to their summer vacation destinations, according to Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®. For instance, consumers should plan out each day of their vacation as much as possible. This includes planning where to eat, what to do, and what to buy. Doing so can help consumers budget their money better. Another tip that Blayney offered was to include everyone in the family, even children, in the task of budgeting for the trip. Some children can be given the job of handling the budget for snacks and bottled water while others can be responsible for handling meal or sightseeing expenses. Consumers may also want to consider trading homes with someone who lives in the area where they will be vacationing, though they should be sure to exercise caution when doing this. Finally, consumers may be able to save money by revisiting a place they have already seen, since they will have a better idea of what their expenses will be, and by staying at a hotel close to home and being tourists in their own cities.
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College Grads: Budget, Save, and Take Action to Create a Sound Financial Future
Digested from: Budgets, Borrowing, Spending, and Saving All Affect Your Financial Future
Associated Press (05/18/11) David Pitt
Recent college graduates are facing hard choices about lifestyle, timely bill payment, debt reduction, and reserving money for emergencies and retirement. New grads should save some of their income, and it is valuable to remember the benefits of saving for retirement early, such as compounding interest. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, notes that a new grad needs a vehicle, a place of residence, and a plan to lower whatever credit card or student loan debt has been amassed. "You'll need a reserve fund to support you if you lose your job, or have to relocate for a new one," she says. "In short, you need cash in the bank before you need shares of Apple or Google." Another tip for recent grads is recognizing the value of living on a budget; there are tools such as Quicken to make such budgetary lifestyles easier. Budgeting helps remove the worry of wondering whether one has sufficient funds and makes reaching one's goals more likely. Recent grads also should consider devising a debt strategy, and think twice about additional loans. The best reason to borrow is to pay for something that appreciates, rather than for something that depreciates.
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Two CERTIFIED FINANCIAL PLANNER™ Professionals Suggest Things to Do to Prepare Financially for Natural Disasters
Digested from: How to Prep Your Money for Natural Disasters
Mainstreet (05/23/11) Jeanine Skowronski
Consumers should do several things to prepare financially for natural disasters. For instance, consumers should use a cloud-based storage system to store copies of vital financial documents, since safe-deposit boxes that are kept at banks may be inaccessible following a catastrophe, says Jim Heitman, CFP®. However, consumers who do choose to utilize safe-deposit boxes should use them to store copies of their driver's licenses, passports, and credit and debit cards, says Katherine Holden, CFP®. She adds that consumers should have enough money in savings to cover three to six months of expenses following a natural disaster. Finally, consumers should turn to the Red Cross and family and friends for help if they need it, Heitman says.
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Keep Your Financial Cool in the Midst of Crisis and Reap the Rewards
Digested from: Investing: Stay Cool When News Gets Scary
Money Magazine (05/24/11) Paul J. Lim
When markets fall, some people tend to panic and sell out, but that is a mistake. For every action there is an equal and opposite reaction, and today the S&P 500 index is 3 percent higher than it was before the financial crisis, with much money having been transferred from the panicked who got out during the crash to the even-keeled who stuck it out. "The worst thing you can do is hit the panic button when something like this pops up, because you'll inevitably get the timing wrong," says financial expert Mark Luschini. There are five steps that will help an investor make decisions with a more rational mind. The first is to know history, which teaches us that external events and crises rarely have a lasting effect on the stock market, according to financial expert James Stack. Most disasters hit one country, and blue-chip companies earn from dozens of countries on five continents. The second step is to know one’s portfolio, and do a stress test to determine how much would be left if each asset category had a repeat of its worst month. If the numbers fall too low, it means the portfolio is likely too aggressive from the start and should be adjusted. The third step is to create and sign a “crisis contract,” which is a promise to oneself or to a financial adviser about how you will behave in a crisis. It is not a legally binding document, but revisiting it during a crisis may calm the itch to sell based on panic. And the final step is to invest in an all-in-one fund that offers a combination of stocks and bonds which will remove the stress of decision-making.
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Financial Planning for Your Children
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Consider Giving Your New College Grad a Mutual Fund Gift
Digested from: Mutual Funds: 7 Tips for Making a Graduation Gift
Associated Press (05/23/11) Mark Jewell
As a college graduation gift, mutual fund investments make more sense if the giver's goal is to provide something that will appreciate in value and instill savvy about saving money. When considering giving a fund investment as a gift, it pays to know the shape of the grad's finances. Settling debt and fixing a low credit score can be critical to realizing post-college goals. "[Grads] have to start living in the real world: Find a job, a home or an apartment, a car," notes Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®. Investment givers also must familiarize themselves with account options, such as a traditional Individual Retirement Account or a Roth IRA, which permits account holders to reserve after-tax income. Givers also are advised to start small, which is frequently possible if investors commit to making regular contributions for a few months. Avoid mutual funds that assess upfront sales charges as well as those charging higher than average investment fees. Also avoid funds that use complex or atypically risky investing strategies.
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To Protect Your Special-Needs Child, Plan for Their Future Now
Digested from: Parents of Special-Needs Kids Must Plan for Current, Future Financial Demands
Sacramento Bee (05/24/11) Niesha Lofing
Families with children who are autistic have special financial needs to consider when planning for the future. Parents may have expenses for the child’s entire lifetime, and medical costs for an autistic person are nearly double the average $317,000 a person pays in direct medical costs in a lifetime. Planning is essential if a family wants to avoid long probate court battles and inflicting emotional pain on surviving family members. It can feel overwhelming to start, but it is important to remember that not all bills are due at once and there is time to save—the more time, the better, so it is good to start early. It will take a team of people to take care of the autistic child’s needs once a parent is gone, including a guardian, financial planner, special-needs planner, or estate planning attorney. It is important to find those that have experience with special-needs families, often as members of the Academy of Special Needs Planners. The prospective planners should be interviewed about their qualifications, education, and experience, salary and fees or commission, and their planning philosophy. When choosing a guardian, one is needed for the child and for the estate, and depending on how severe the child’s disability is, a conservator may be needed after age 18. At that age it often means an institutional caregiver, which is expensive and needs planning. If the family home will be passed to the special-needs child, there should be a living trust, a special-needs trust, and a designated trustee. If assets pass to the special-needs child it may interfere with government benefits the child receives, because even owning a few thousand dollars in assets could disqualify them. The special-needs trust protects against that and limits what can be done with the inherited assets. The process of planning may feel overwhelming at the start, but the peace of mind it brings is priceless.
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Financial Planning for Your Retirement
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How to Cope When Your Retirement Is Not a Choice: A CERTIFIED FINANCIAL PLANNER™ Professional Offers Some Advice
Digested from: How to Cope With a Forced Retirement
U.S. News & World Report (05/23/11) Emily Brandon
Workers on the cusp of retirement can take several steps to cope with a forced retirement caused by factors such as an illness, disability, job loss, or the need to care for a family member. For starters, workers should look at all of their savings and sources of income to determine whether they have enough money to pay their bills. Those that do not have enough money will have to find a way to lower their expenses or to work longer, says Tim Maurer, CFP®. Workers can obtain additional income in several ways, including signing up for Social Security if they are at least 62. However, workers will be able to maximize their Social Security payments if they do not begin receiving benefits until age 70. Those who have lost their jobs can also look for new work, though doing so can be difficult for older workers, who tend to be unemployed for longer periods of time than their younger counterparts. Other steps that can be taken to cope with a forced retirement include drawing down retirement savings at a slower rate and spending money from taxable accounts first, if possible. Finally, those who live in expensive areas should consider moving to lower-cost areas.
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Heed the Flaw That Can Distort Your Retirement Calculations
Digested from: Beware of Rate Distortions in Retirement Calculations
Tacoma News Tribune (WA) (06/01/11) Gary Brooks
There is a flaw in the use of online calculators that can distort projections of retirement investment growth, writes Gary Brooks, CFP®. He notes that any investment projection requires the use of an assumed investment return, and points out that "most retirement planning calculators compound the same average annual return repeatedly to project investment growth. But clearly, markets post returns that are anything but consistent." It is valuable to realize that averages are the outcome of a mathematical collection of experiences that seldom occur in an average way, Brooks says. Once withdrawals start supplementing retirement income, if there are negative returns in the first few years but otherwise the anticipated long-term average is reached, the probability of running out of money climbs substantially. Withdrawn funds no longer have the ability to rebound from the loss, Brooks writes. He emphasizes that the diversity of potential outcomes makes it useful for the investor to stress test his or her portfolio's ability to provide needed income irrespective of variance in returns. "With this information, you can then make better decisions about how to adjust your savings, spending, or investment strategy to maintain a margin of safety around your goals," Brooks asserts. "Then, you can have more peace of mind even as market returns rise and fall with no particular closeness to the long-term averages."
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Do You Need a Mid-Retirement Financial Checkup?
Digested from: Time for a Mid-Retirement Checkup?
SmartMoney (05/27/11) Tom Lauricella
Because it is much harder to correct one’s financial course in retirement, it is a good idea to step back at about the midpoint of retirement to review one’s history of saving and spending and determine if any changes should be made. Many people live much longer than they planned for, and it is better to make changes sooner, particularly if big changes like selling a house are necessary. Life expectancy calculators such as the one at livingto100.com can be helpful in planning, and once that figure is determined, one should review savings and spending habits along with investment returns to determine if one is keeping up with inflation and longer life expectancy. A CERTIFIED FINANCIAL PLANNER™ professional can be a great help, and there are online resources that can help determine how long savings will last. If it looks like there will not be enough money, changes must be made, such as becoming more aggressive. This does not mean lots of risky investments, though, and could be as easy as adding Treasury inflation-protected securities. It could also mean selling the house and getting a smaller one, or taking a reverse mortgage to convert the home’s equity to cash and then placing some of the money in an immediate fixed annuity. The mix should not go below 20 percent in stocks, says financial expert Rande Spiegelman. "You want to have some growth component.” And finally, spending habits should be reviewed and potentially curbed, as most people have a better idea of how much they can afford to spend when they are about 10 years into retirement. Whatever action is taken, it is better to act sooner than later.
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Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
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If You Meet This Profile, It's Time to Hire a CERTIFIED FINANCIAL PLANNER™ Professional
Digested from: Three Reasons to Hire a Financial Advisor
Mansfield Patch (05/23/2011) Steve Davis
Most people hire someone to cut their lawn because they are too busy, do not have the proper skills or tools, or they would simply rather be doing something else, and these are the same reasons people should hire a financial adviser, writes Steve Davis, CFP®. Financial planning is not above most people’s heads, he says, especially because there are plenty of sources of advice and financial tools online and through other media, but most people do not have the time or interest to do it themselves. He shares three signs that it is time to hire an adviser: when a person is procrastinating on funding an IRA, buying life insurance, or opening a 529 college plan; when a person is bored by financial matters and does not care about the difference between a Roth or traditional IRA; and when a person values their time too much to spend it crunching numbers. The consequences of not acting may be minimal for lawn-mowing, but for one’s financial future it is imperative to get the work done, either on one’s own or with the help of a professional.
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Financial Planning for Women
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Don't Outlive Your Savings. Take Steps Now to Secure Your Financial Future
Digested from: 7 Tips to Improve Women's Retirement Prospects
Associated Press (05/13/11) Dave Carpenter
There are several things women can do to prepare for retirement. For instance, women should begin to invest more aggressively. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, says most women do not invest enough of their money in stocks, which are one of the main ingredients in a growing portfolio. Blayney also notes that women should look into how they can use community resources and social networks as support in the event they are living alone during retirement. Another important thing for women to do to prepare for retirement is to begin saving earlier and to increase the amount that is put into savings. Online retirement calculators and financial advisers can be helpful in determining how much needs to be saved for retirement. Finally, a woman may want to consider investing in her own IRA or other type of retirement account, since her husband's 401(k) will not likely be enough to support her in retirement.
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