From CFP Board's Consumer Advocate, Eleanor Blayney, CFP^®

Part II: Creating a preventive, proactive plan

You may think you know your elderly relative really well. After all, she has been in your life for a very long time. But your plan to protect her from financial exploitation requires you to get to know her even better – particularly when it comes to her financial circumstances, attitudes, and goals. Too often, money is the one subject we are reluctant to talk about with our parents or relatives, because we worry that we’ll be seen as looking for a handout or overly eager for an eventual inheritance.

Your financial abuse protection plan begins with conversation. Start where CFP^® professionals always begin when they do financial planning: with goals and hopes for the future. Ask your senior how he wants to spend his days, what he most enjoys. From there, perhaps in a subsequent conversation, you can broach the subject of the financial resources available to support his goals. Be sure to explore the what-if questions: “What if you are no longer able to make your own financial decisions?” “What if you need nursing care?”

Keeping the focus on what your elderly relative wants for his life may make these difficult discussions much easier, and assure him you are trying to help rather than interfere.

Talk, too, about the prevalence of financial fraud, and the special dangers of the Internet, unsolicited phone calls and exaggerated radio ads. Keep it simple and direct. Tell your senior never to send money in order to get money, never wire or send money overseas, and never give or invest money without first receiving the request in hardcopy print. Even then, it’s a good idea to ask a trusted third party to review it.

Consider engaging a CFP^® professional on behalf of your relative to help facilitate these discussions. This type of advisor is bound by his certification to put the interests of his clients ahead of his own, and to keep all discussions confidential. In this way, your relative can be assured that the advisor is looking out for her, and no one else, including you.

Make sure to get a Power of Attorney in place for your relative; so that in the event she can no longer make good decisions, someone can step in. This, too, is a subject that can be effectively addressed by a CFP^® professional and/or estate planning attorney, as a routine matter of financial management.

Finally, if you believe that your senior has been exposed or victimized by fraud, report it. One reason senior financial abuse is so prevalent is because it is so often unreported. There are several regulating and supervising agencies you can go to, depending on the nature of the complaint:

• The Financial Industry Regulatory Authority (FINRA) if it involves a financial security;
• The Securities and Exchange Commission or your state’s securities regulator if it involves investment advice;
• The Consumer Financial Protection Board if it involves financial products, particularly banking services or credit cards;
• Your state insurance commissioner if it involves an insurance product.

Financial Planning for Women

An Older Woman's 401(k) Strategy: Gradually Reduce Your Risk

Sixty-one year old Laurie Orr works for a musical instrument firm in New York City. She enrolled in the firm's 401(k) plan after she commenced the job two years ago. To ensure growth of her 401(k), Orr shifted half of her savings from a conservative fund into a flexible fund that invests 60 percent in U.S. and foreign stocks and the rest in bonds and other asset classes. Orr defers 11 percent of her salary and receives a 4 percent company match. Orr is on the right track, says CFP Board's Consumer Advocate Eleanor Blayney, CFP^®. Blayney says Orr should try to keep a healthy allocation in growth investments to hedge against inflation. However, Orr will need to adjust the investment risk downward as she nears her retirement date. By the time she retires, the blend should be closer to 60 percent in fixed income investments, such as high-quality corporate bonds, and 40 percent in U.S. and international stock-index funds. Additionally, Blayney says Orr should identify a specific goal and be willing to work longer to achieve it, rather than assume additional risk.

Money Matters: Financial Factors of a Stay-at-Home Mom

Being a stay-at-home mom has hidden financial benefits that many women may not realize. Medical bills are lower, for example, because when both spouses work and kids are in daycare, they tend to get sick more often. But by staying home they remain healthier and there are fewer trips to the doctor. There is also the obvious absence of the need to pay for childcare, and food expenses are lower because mom can cook most of the meals and there is less need for restaurants or take-out food. One less commute to work also brings down costs, with less spent on gas and other transportation-related costs. The more flexible schedule can also allow a mom to start a home-based business, which adds extra income. But the stay-at-home strategy still requires planning. “What’s our net money and how is that going to be affected by staying home?” says Jennifer Dever, CFP^®. She notes that after income deductions it often pays not to work. It is important to assign mom a value in terms of life insurance though, she adds. "If something happens to her we need to be sure there’s money available for the family," she says. Retirement planning is also an issue, as retirement income will be lower on just one salary, so it is important to examine family finances and plan accordingly.

Financial Planning for Your Life Now

Beware of These Red Flags When You File Your Tax Returns

The number of IRS audits is expected to rise this year, as the government looks for revenue. As such, there are a few red flags people should be aware of when preparing their tax return, according to CFP Board Ambassador Dan Forbes, CFP^®. The first item to watch for is unrealistic deductions – the IRS will be looking for people of similar incomes to have similar deductions and very large deductions will flag a return. Home offices, which are increasingly common, are the most difficult to quantify, so taxpayers should be meticulous when making sure everything on Schedule A qualifies. Another potential flag is a miscalculation. Filers should double-check all numbers and calculations and make sure all necessary documents are included. Also, know that hand-written returns may garner more scrutiny than those generated by computers. Another area to watch out for is the filing of a Schedule C, particularly if the filer has several years of losses. Expenses should be carefully documented to ensure they are similar to those of comparable businesses. Use of a personal car for business can be a flag, as tracking mileage and expenses is difficult. Finally, those reporting losses on rental property must file a Schedule E. Losses can be limited unless the filer is a real estate professional, thus a filer who maintains a lot of real estate business may consider becoming one or forming an LLC.

Tell-tale Signs You're Living Beyond Your Means

There are some tell-tale signs that you are living above your means. Sheryl Garrett, CFP^® advises that non-retirement savings — whether you call it a rainy day fund, an emergency fund, or something else — must be established and built up over time. "I've met very few people who enjoy saving money in their cash reserve account. It's not interesting, fascinating, or complicated. Yet, it's one of the most critical and fundamental concepts in personal finance," says Garrett. She recommends cash reserves enough to cover six months' worth of expenses. Second, Garrett says the ideal savings rate for retirement is at least 10 percent of your income starting from age 25 or earlier. Another way to know if you are living beyond your means is if your home — mortgage, rent, maintenance — eats up more than 35 percent of your income, says Rick Kahler, CFP^®. "It's a general rule of thumb that some lenders may say 30 percent and others 40 percent," he notes. Erin Baehr, CFP^® suggests another symptom of living beyond your means is if you are always looking for new cards to transfer the balance to "but never seem to get ahead." Finally, another indicator is if you pay an overdraft fee on your checking account every three to four months or more. "One-off overdraft situations aren't necessarily an indicator [of living beyond your means]. It's the ongoing, repetitive nature of overdraft fees that will signal a problem," says Mary Beth Storjohann, CFP^®.

Hiring a CERTIFIED FINANCIAL PLANNER™ Professional

A Good Financial Advisor Will Counsel You to Avoid the 'Herd Mentality'

Financial advisors from time to time will find themselves battling a "herd mentality," which is not always wrong but should be questioned, advises CFP Board Ambassador John Hauserman, CFP^®. Before the 2007 housing market collapse, Hauserman says he had at least 15 clients who wanted to buy expensive properties financed by withdrawals from their IRAs, as they had been swayed by brokers, television commentators, and word-of-mouth gossip that said real estate was a great investment. The idea did not sit well with him, though, partly because making early IRA withdrawals and taking a 35 percent loss due to taxes is almost never a good idea, but also because there were signs of a housing bubble ready to burst. Convincing a client that all of their received wisdom is wrong can be difficult, but in some cases it must be done. The best way is to avoid preaching — simply present information and allow the client to make their own decision. Hauserman shows his clients what past housing bubbles looked like and compares the data to the current market. He uses graphs and charts but also examples from the media, as well as stories from his own experience of past bubbles and how he helped clients avoid financial disaster. Some clients will say their broker is strongly advising them to buy, but Hauserman says it is important to explain the difference between a broker and an advisor – brokers are salesmen who benefit financially from selling products. The clincher, Hauserman says, is reminding them of their financial goals and that there is little to gain from buying into a trend but everything to lose.

Certification Gives CERTIFIED FINANCIAL PLANNER™ Professionals In-Depth Knowledge

While there are many different certifications and designations for professionals who work in finance, the CERTIFIED FINANCIAL PLANNER™ professional designation is the most important to look for when seeking help planning one’s finances, instructs Laura M. Rowley, CFP^®. "Knowing [an] advisor is a [CERTIFIED FINANCIAL PLANNER™ professional] tells you that they take their craft seriously, they are educated in their field of expertise, and they are dedicated,” she says. "[People] can take comfort in knowing that a [CERTIFIED FINANCIAL PLANNER™ professional] is also held to a higher standard than many other advisors with other credentials alone." Indeed, the Certified Financial Planner Board of Standards gives an intense two-day certification exam that planners must pass in order to be licensed, which Rowley says has only a 50 percent pass rate and covers insurance, investments, taxation, employee benefits, retirement, and estate planning. The CFP Board also requires at least a bachelor’s degree that includes financial planning coursework, five years of related work experience, and a strict code of ethics that planners must follow. The average layperson may have difficulty negotiating changes in the economy, laws, and tax codes, and a CERTIFIED FINANCIAL PLANNER™ professional can offer personalized help, she adds. "Many people immediately think of investing in securities, but a planner who is certified is capable of guiding clients through all financial decisions by examining their personal situation and finances," she says. Rowley shares that the CFP Board’s website also has information on what to look for in a planner.

Follow This Advice to Choose Your CERTIFIED FINANCIAL PLANNER™ Professional

Suze Orman, CFP^® may be a media darling but she also gives good financial advice, writes Eve Kaplan, CFP^®. Some of Orman’s best guidance involves how to pick a financial planner — find someone who does not sell products. She could have made a lot of money becoming a spokesperson for an insurance or brokerage company, but instead she shows integrity by warning about such conflicts of interest in a financial planner. She further adds that one should always visit the office of the prospective advisor in order to see how organized they are, because their own organization is an indication of how well they will organize their client’s financial life. The planner should have questions about the client's health, relationships, liabilities, and other life questions rather than simply how much money they make. Orman also recommends that people look only for advisors with a CERTIFIED FINANCIAL PLANNER™ professional designation, because this requires coursework in financial planning, planning work experience, and an intensive two-day exam. Finally, Orman maintains that finding out how the advisor is paid is vital – a flat or hourly rate is best, because a fee-only advisor has no financial stake in what investment vehicles a client chooses. Meanwhile, Kaplan adds that people should know that "fee-only" is not the same as "fee-based," which means the advisor also sells products. Client account information should be accessible at any time, she says, adding that prospective clients should investigate an advisor’s credentials and any history of misconduct on websites like CFP.net.

Szymanski: Advisor is Critical to Financial Plan

Eleanore Szymanski, CFP^® suggests that before using the services of a professional advisor, it is important to examine the qualifications he or she has in terms of education, experience, and credentials. Advisors need to be knowledgeable in various areas and have access to all the necessary tools to guide their client. Financial advisors can be generalists who are knowledgeable about various areas of finance but also tap specialists, such as an attorney to draw up estate-planning documents. Financial advisors sometimes specialize in areas such as accountancy, investment, or insurance. Some specialists may work in more than one area, such as an accountant who also advises on investments. A good starting point is to find a CERTIFIED FINANCIAL PLANNER™ professional who has been formally educated and is experienced in developing such plans. The CFP Board licenses and governs CERTIFIED FINANCIAL PLANNER™ professionals. Their website at CFP.net offers descriptive information, such as "A Consumer Guide to Financial Planning," and details on what it takes to become a CERTIFIED FINANCIAL PLANNER™ professional.

Financial Planning for Your Retirement

Confident Retirees Have Adopted These Seven Habits

The majority of current retirees polled for a recent BlackRock research report feel confident about having enough money for the rest of their retirement. However, 75 percent of employees planning for retirement do not feel very confident at all. Erik Carter, CFP^® writes that there is a lot to learn from the report's "Seven Habits of Highly Confident Retirees," as well as what retirees believe are their biggest mistakes. Habit #1 is "making the most" of savings plans, cited by 87 percent of retirees as a key to their confidence. Habit #2 is increasing contributions to savings plans when possible, cited by 90 percent of confident retirees. A dramatic increase in retirement plan contributions overnight may not feel comfortable, but you could contribute just an extra 1 percent and raise the amount by about 1 percent more each year. Habit #3 is estimating retirement income, cited by 84 percent of confident retirees. Habit #4 is reviewing strategy on a regular basis (83 percent of confident retirees); Habit #5 is changing the investing mix as you age (79 percent of confident retirees); Habit #6 is enrolling in an employer's retirement plan early (77 percent of confident retirees); and Habit #7 is saving the maximum allowed by law (73 percent of confident retirees).

Inflation a Factor in Long-Term Care Plans

Ashleigh Brooker, CFP^® notes that long-term care (LTC) insurance can be used to protect the assets of seniors in the event they require support for their day-to-day activities. Ideally, seniors will never have to use their LTC policy, but if they do, they need to be aware that the cost of care will be quite different years from now than at present. This makes it important to select a policy where the benefit increases to offset the rising cost of care, also known as cost of living adjustments. Under one approach, the benefit is increased by a set percentage annually, such as 3 percent, while another approach raises the policy according to the consumer price index. However, healthcare costs often increase at a faster rate than other goods, so even the best policy might not offset all ongoing LTC expenses. Another important aspect of LTC policies is that they have a waiting period, which is the amount of time that seniors agree to bear the cost of care before the insurance company pays a benefit. Generally, the longer the waiting period, the lower the premium. Prior to selecting a policy, it is essential for seniors to ask a CERTIFIED FINANCIAL PLANNER™ professional how long they can afford to self-insure before needing to draw a benefit. A difference of 60 days or 120 days can decrease a premium significantly and make it more affordable over time.

Questions to Ask to Determine if You are Retirement Ready

Many people hope to spend their retirement years relaxing at the beach, playing golf, or traveling, but all of this takes money. Appropriate budgeting can help such plans become a reality, experts say. "Retiring isn't the hard part, staying retired is," asserts Scott Halliwell, CFP^®. He says successful retirements require having a plan. Experts say anyone contemplating retirement needs to examine such things as their financial health. "The gauge is do you have enough money to sustain your standard of living without withdrawing [more than] 4 percent of your retirement portfolio," says Halliwell. This involves determining the desired lifestyle after retirement and the costs associated with it. Certified public accountant David Bendix notes that the Centers for Disease Control and Prevention estimates an American's average life expectancy to be 78.7 years, so it is important for seniors to project their finances through age 100 because it is possible they may live longer. He also suggests that as seniors form a cash flow of expenses and income, they should increase their expenses by 3 percent annually to account for inflation. "In 20 years, your needs will double and you have to factor this into your projection," adds Bendix. "Some companies have a phase-in where you can get part of your pension and come back to the company as a consultant and work 20 hours per week."

Financial Planning for Your Children

Ask Questions to Determine the Value of an Advisor-sold 529 College Investment Account Plan

Financial planning experts recommend parents ask several questions to assess the value of an advisor-sold 529 college investment account plan. Parents should ask about plan maintenance fees, program management fees, and mutual fund fees for the specific plan and investments they are considering, instructs Chadderdon O'Brien, CFP^®. Parents investing less than $50 a month must make sure the annual fee price does not outpace account earnings. Before signing up for a plan, parents should also know who will be answering their questions, be it the investment management company that selects the investments, or the parents' personally selected financial advisor.

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