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

May, the fifth month in our "12 for ’12" financial planning series, marks the season of warming, growing and greening. The month is named after Maia, the goddess of spring, whose name comes from the Latin word for “larger.” And May is also the month for mothers, the traditional nurturers and protectors of young lives.

"Increasing" and "protecting" are essentially what personal financial planning is all about. People often make the mistake of thinking that financial planning is just about getting rich, maximizing returns and growing wealth. But it's just as important to protect our finances – or indeed anything we value – from loss. Without taking steps to minimize the risks to our financial security, all the wealth we spend so much time planning for and building can be quickly eliminated by one of life’s inevitable but unexpected disasters.

It’s time then to think about life’s “Mayday!” events that can sink our financial ships and prevent us from achieving our goals. What can we do to address them?

There are three basic strategies for managing financial risk: risk avoidance, risk mitigation and risk transfer.

Avoiding risk is generally the simplest, cheapest approach, but can also be impractical, inconvenient, even ill advised. Never drive a car and you don’t have to worry about the risk of a car accident and its resulting repair and injury expenses. Similarly, you can avoid the risk of another 40 percent drop in the stock market by staying out of equities altogether. The problem with this approach, however, is that you not only prevent the downside but you may give up a lot of upside. For instance, if you don’t invest in stocks, you cannot benefit from the overall trend of stock market gains over long periods of time.

Risk mitigation involves reducing (though not eliminating) the probability of financial loss and/or lowering the financial costs of this loss. Obtaining good medical care or installing smoke detectors are good examples of this strategy, as is getting an attorney to review your business agreements and contracts to prevent lawsuits, or diversification of your 401(k) or investment portfolio. Having an emergency fund is also a form of risk mitigation. If an unexpected expense arises, or you lose your job, the financial implications of these events can be crushing if you do not have resources to see you through. The costs and long-term consequences of drawing money from a reserve account are considerably less than resorting to credit cards or simply letting expenses go unpaid.

Finally, there is the strategy of transferring risk to a third party, for a price that is less than the financial costs that would be incurred if a negative event were to happen. This transfer is more commonly known as buying insurance, and is often one of the first recommendations made by financial planners to their clients. For anyone who provides support to another individual; must work for a living; or has a home, a car or valuable property, getting the appropriate insurance coverage is usually a necessary part of building financial security.

Insurance is never a fun purchase to make: you are in essence paying to bet against an insurance company, but hoping the insurance company wins! People often avoid buying insurance because they don’t want to think about what is at stake – death, disability, need for nursing care. Or they decide they cannot afford the cost of insurance, particularly the more expensive kinds like disability, health care or long-term care.

But here are the cardinal rules for the prudent use of insurance:

• Insure only what you cannot afford to lose. If you cannot survive without your paycheck, or your spouse's, make sure you both purchase life and disability income insurance. If the cost of a nursing home would impoverish you or your loved ones, consider long-term care insurance. If catastrophic medical costs would drive you into bankruptcy – as they would for many people – you need health care insurance.


• Recognize that emotional loss is not the same as financial loss. Only use insurance for the latter. Insuring the life of a child, for example, rarely makes sense. While the death of a child is devastating, the reality is that it may not result in a significant financial loss and insurance may not be necessary. Insurance for children should be considered in certain cases, but may not be suitable for most.


• Keep your focus on the loss protection of any given insurance coverage, rather than other, often extraneous benefits. Insurance is first and foremost to protect assets, not to grow them.


• Keep the costs of insurance down by employing the other risk management tools. For example, risk mitigation measures such as wearing a seatbelt or installing a home security system can cut your auto and homeowners insurance premiums. So too, in many cases, will improving your credit score! And eliminating cigarettes entirely from your life – a risk avoidance strategy – can get you better life insurance rates after a specified period of being nicotine-free.


• Consider self-insurance in combination with commercial insurance to reduce your overall insurance costs. By raising your policy deductibles or extending the time before which you can make a claim on a disability or long-term care policy, you may be able to lower your costs. Remember, use insurance for losses you truly cannot afford and not for those costs you’d just rather avoid.

Finding the right type of insurance for your needs and lifestyle, and determining the right amount, can be a complicated task. And remember, it’s just as possible to be over-insured as under-insured. It comes down to balancing your risk management strategies with your current financial situation and future goals. Talk to a CFP^® professional who will take a full 360-degree view of your financial resources, needs, and goals, to prepare a plan that can protect as well as grow your financial resources.

From CFP Board Ambassador Andrew Gardener, CFP^®

Most people think that estate planning is about reducing estate taxes. This may be a mistake because the great majority of Americans are never subject to estate taxes. The current estate exemption is $5,120,000.That means that a married couple has the ability to shelter $10,240,000 from any estate tax. The estate exemption is currently scheduled to drop down to just $1,000,000 per person on January 1, 2013. Even then, few estates are unlikely to be subject to estate tax.

Will Congress adjust that before January? No one knows. Many guess that a compromise at $3,500,000 will be enacted. I say “guess” because, well, no one knows for sure. That was the exemption amount in 2009, and in that year, only one out of every 400 estates owed any estate tax. So let’s focus instead on what estate planning steps we can say with a high degree of conviction that just about everyone should take.

1. Establish a Team
   Your CERTIFIED FINANCIAL PLANNER™ professional can assist you in building or completing your team of advisors. The team should include an estate planning attorney and tax advisor. In addition, you may require the services of an insurance advisor, trust officer and planned-giving advisor. If you have accounts at banks or investment firms, the professionals responsible for those accounts will need to be consulted as well.


2. Take Inventory
   Your CFP^® Professional can then help you inventory your assets and liabilities. What is important here is not just what is owned, but who or what owns them. Simply saying that “we” own an asset is, quite frankly, not enough. Is the asset owned outright? It is held by a trust? If owned jointly, is it joint owners with right of survivorship or tenants in common? Your bank and investment statements may not even indicate which type of joint accounts you have, but the answers must be found. Further, is the asset marital property, separate property or community property? Do you jointly own any assets with someone other than your spouse, like a parent or a child?
   
   The practical definition of each of these types of property or forms of ownership may differ from state to state. Your CFP^® professional or attorney can help you understand the laws of your state.
   
   Other than a home and automobiles, many families have few assets outside of their retirement plans. These plans, including annuities, are unusual in that they have “beneficiary designations.” These beneficiaries, selected by you, may trump the most detailed and well-thought out planning in wills and trusts. Your CFP^® professional and attorney can help you coordinate the most beneficial designations to meet your objectives.


3. Establish Goals
   Your CFP^® professional can then help you establish goals. To whom would you want your estate to go to should you die today? What about if you died 5 years from now? Your beneficiaries may be relatives, friends, charities or others. If some or all of your primary beneficiaries were to die with or before you, whom would you want as your contingent beneficiaries? Another important issue is one of governance. Do you intend the beneficiaries to have total control over their inheritance, or do you want to establish rules to protect them from themselves, their spouses or creditors? Do you intend a specific lump sum of cash to be paid to your beneficiaries at the time of your death, perhaps to pay for any taxes that may be due, or to equalize the shares to your beneficiaries? If so, life insurance may be a solution.


4. Protect Loved Ones
   Another consideration is minor children, elderly parents, disabled family members and even pets. Whom would you wish to take care of them if you were gone? And how will that care be paid for?


5. Write a Plan
   Everyone should have a written estate plan. For most, that means a will drafted by an experienced estate attorney. Some families may also benefit from utilizing a trust. Trusts may be useful to reduce probate costs, maintain privacy and/or to specify the rules for distribution under a variety of possible contingencies. For example, if you have young children, you may wish to have income only paid to their guardian up until they reach a certain age, after which the children would be allowed to take principal distributions. Would this distribution of principal be made all at once or incrementally over a number of years?


6. Select Fiduciaries
   Who will make sure that your wishes are carried out after you are gone? In your written plan will you will want to assign specific responsibility to safeguard the estate assets and distribute them according to your wishes. In a will the person in charge is referred to as an “executor” (“executrix” for females). In a trust the person is referred to as the “trustee.” These are very important roles and should not be assigned lightly. The executor/trix has personal responsibility for following your wishes as well as the law, and is legally liable to do so. This is a high burden indeed.
   Note: If you die intestate (without written plan documents) your state will decide who or what will inherit your assets; and a local court will choose an administrator. Your estate will be liable to pay all of the legal fees of the administrator.


7. Don’t Wait. Start Now.
   Too many people put off creating their estate plan, thinking that there is plenty of time to get to it later. Some don’t like to think about death, and others simply cannot decide on exactly whom the right person would be to take responsibility for their assets or to serve as guardians for the children. Remember there is no “perfect” estate plan, but one thing is for sure: having no plan is absolutely certain to be very far from optimal.

Start now and talk to a CFP^® professional to get started. As your life and financial circumstances change, you can revise the plan to reflect your new realities. But should the unthinkable happen tomorrow, you need a plan in place to deal with your situation as it stands today.

From CFP Board Ambassador Don Grant, CFP^®

I loved watching M*A*S*H on TV when I was a kid. Corporal Radar O’Reilly would broadcast to the Camp when helicopters loaded with wounded soldiers came from the front. While unloading the wounded, the docs would perform a medical triage. They treated the life-threatening wounds first, and then took care of the minor cuts and bruises. In our lives there are ample occasions when we need to wheel our assets into the ER for a financial triage.

As a newly-licensed 16-year-old driver in northern California, I would load-up Mom’s Chevy station wagon with friends, throw the skis on the top of the car and hit highway 80 from Sacramento to Tahoe for a day of mogul-bumping. Inevitably, we would realize that the fuel gauge had dropped, and no manner of tapping the dash would bring it back up to ‘F’. So, we would perform a financial triage to raise enough cash to buy a few gallons that would get us back down the hill. It usually went something like this:

“We’re out of gas!”
“Who has a buck or some change?”
“How much gas will that buy at 63 cents per gallon?”
“Is that enough for us to get down the hill and buy a 7-Eleven microwave burrito?”

We dug into our pockets for change and tore up the bench seats in search of another quarter or nickel. And, we always kept a dime in case we needed to call Mom or Dad from a phone booth to rescue us.

Fast-forward a quarter-century. Now, it’s more serious. Families deal with multiple streams of incoming and outgoing cash. Any major disruption like a marriage, death, and birth or job loss can create enough of a wound that we need to be hoisted back onto the gurney and into the ER.

Are you prepared for the loss of a primary source of income?

The American economy is recovering, but Americans are still apprehensive about their job security. There is much to do when a job loss happens, but to soften the blow, we need to perform what I call a ‘priage’. This is preventative medicine; steps that you can take now for ‘if ‘you incur a loss of income.

Priage

• Determine your minimum monthly income needs. This is a budget of necessities like mortgage payments, utilities, food, medical… etc.


• Identify liquid assets. These are holdings that can be converted to cash in relatively short notice.


• If you don’t have substantial liquidity, it’s time to create a plan to build an emergency fund. Don’t put this off. Your target: six months of living expenses.


• Clean up you debt, and create lines of credit. It is a lot easier to get credit when you are working, than after you lose your job.


• Work to create multiple, independent streams of income. This can be income investments, consulting on the side, a small business or perhaps rental properties.


• Review your health, life, and liability insurances. Can you consolidate and save money? Are deductibles affecting premiums?


• Stay healthy and engaged in society. This may sound unlike anything you expect to hear from a financial planner, but maintaining your health is obvious. And, if you volunteer and/or socialize, your sphere of resources grows dramatically.


• Pay it forward. I don’t want to get all metaphysical here, but I have learned that when I help others with networking, developing a strategy for independent income or basic financial planning; the favor is returned when I need help. Plus, it feels good to help someone when there is no expectation of reciprocation or reward.

If a financial bomb is dropped, and you have performed the priage, you are more prepared for the fallout. The triage is much less severe. It’s still going to be tough because you will need to forgo a lot of the discretionary spending that you and your family enjoy. Now you can focus on the steps to get beyond the financial disaster.

Don’t be ashamed to tell your family.

Many of us are very private about our finances. If you are hit with sudden debt or a loss of income, it is important to share your travails with immediate family. Your family is your team. Each teammate needs to know the game plan, so that they can do their part to get to the finals. Small children can be shielded from the details of the challenge; but they need to know the problem so that they can participate in the recovery effort.

As with many things in life, preparation and planning are essential to success. Just as we cannot predict the day-to-day movement of the markets, we can do nothing more than prepare for a financial disaster. Sit down with a CERTIFIED FINANCIAL PLANNER™ professional who is qualified to help you create that plan.

Financial Planning for Women

Women, Your CERTIFIED FINANCIAL PLANNER™ Professional Should Make Sure You Are Happy With Their Services

It is important for financial advisers to ensure that their female clients are happy, as women are more likely to provide referrals if they are happy with the services they receive, wealth psychology expert Kathleen Burns Kingsbury says. Financial advisers should also try to build strong relationships with their female clients because women are creating and controlling a growing amount of wealth, says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP^®. Kingsbury says that financial advisers who want to ensure their female clients are satisfied need to remember that women value relationships. To that end, financial advisers should follow the elements of the TRUST acronym. That includes transparency about fees, biases, and investment processes; being reliable by following through on what is promised; being understandable by speaking in plain English rather than using investment lingo; being sensitive to the needs and emotions of female clients; and being thoughtful by paying attention to details and following up on conversations. There are also some things that financial advisers should be sure not to do, including speaking to women condescendingly. For example, advisers should not simply tell female clients not to worry if they call in because they are upset about declines in the market. Advisers should be sure to focus less on returns from investments and more on how those returns impact what the client feels is important.

Women, Your CERTIFIED FINANCIAL PLANNER™ Professional Should Take Steps to Engage Your Interest

Women and men communicate differently and financial advisers need to learn these differences to retain female clients. Some advisers say their female clients are not engaged and are not interested in finance because they do not say much in meetings, but Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP^® says a woman’s silence does not necessarily mean disinterest and it may say more about the adviser’s inability to engage the client than it does about the woman herself. Advisers are increasingly looking for ways to attract and keep female clients because they are now responsible for 80 percent of household purchasing decisions, but it has been difficult for financial firms to reach women. Traditionally the wealth management industry has been run by men and aimed at male clients who tended to have the money, but things have changed and the industry needs to change along with it. Advisers should speak in plain language when dealing with prospective female clients, and not overwhelm them with jargon. They should also be willing to admit when they do not know the answer to a question--women see this differently than men and often see it as a strength. Little touches like preparing staff to greet the female client by name can also be helpful, as can sitting down in order to make eye contact. When dealing with a couple, the adviser should try to get the woman’s feedback as well as the man’s, because even if she is silent during the meeting she is likely telling her husband how she feels on the ride home.

Financial Planning for Your Life Now

You and Your Spouse May Want to Consider Having Both Separate and Joint Bank Accounts

One of the financial decisions that a couple needs to make after getting married is whether or not to have joint or separate bank accounts. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP^® says that some couples opt to have both, using joint accounts to save money and pay for household expenses and separate accounts for discretionary spending. The advantage to having separate accounts for discretionary spending, Blayney says, is that it gives spouses more freedom to do what they want with their own money. Having separate accounts also makes it less likely that one or both spouses will feel the need to open a secret account, Blayney says. However, Blayney notes that couples should remember that they have a shared life and shared goals that they are not keeping separate, even though they may have separate bank accounts.

If You Are a Widow or Widower Contemplating Marriage, Consider This Financial Advice

Widows and widowers should consider several issues as they ponder remarriage. If a person has children from a previous marriage who are in college and receiving financial aid, the new spouse's assets may be factored into the expected family contribution and alter the student's aid eligibility. Kathleen Hasting, CFP^® recommends that remarrying couples discuss this and other financial matters ahead of time with their adult children, who may also be concerned about their inheritance or change in overall family structure. Estate lawyers frequently set up a Qualified Terminable Interest Property (QTIP) trust with clients that looks out for a surviving spouse and also provides coverage for adult children from a previous marriage. A remarriage may also impact a person's ability to continue collecting a late spouse's pension, Social Security, or veterans' benefits. Hasting says the terms vary among private pensions. "Some traditional pensions will not continue to give survivor's benefits if you remarry," says Hasting, while accounts that offer a traditional pension/401(k) combination may be more flexible. Advisers urge clients to consider long-term-care insurance policies well in advance of when they might be needed so that the spouse with fewer assets can be cared for should the wealthier spouse pass away. Couples should also discuss the status of their new home, and if the property should be jointly titled or if the home will go to the owner's family once the owner dies. One option is to use a life estate, in which the surviving partner remains in the home for his or her life span and the property is given to the owner's family after the surviving spouse's death.

You Need to Develop a Plan

Many retail investors who pulled their money out of the markets because of the stock market declines of 2008 and 2009 are now ready to reinvest again, now that the Dow Jones Industrial Average has surpassed the 13,000 mark. Such investors are simply chasing returns, resulting in them selling low and buying high, writes Charles Failla, CFP^®. Instead of acting based on what the markets are doing now, Failla says, investors should develop an investment plan and stick to it. The process of developing such a plan begins by determining what the goal of the plan is, such as saving up to purchase a house or paying for college. Investors then need to determine when they will need the money, since this can help them determine where they invest their money. Investors who need their money in a year or two should put their funds in conservative investments, while those who need their money in five to 10 years can take a more aggressive approach. Investors should then determine how much they have available to invest, and invest an amount that will help them achieve their goals. The amount that is invested should be reviewed at least once a year. Failla notes that following this approach will help investors create a plan that will allow them to meet their goals within their desired timeframe.

Financial Planning for Your Retirement

Should Retirees Move Everything to Fixed-Income?

Automatically moving all your investments to more conservative choices may not be the best option for retirees who want their money to last, according to Jeff Rose, CFP^®. With less risky investments and products generally having lower interest yields, Rose says retirees should make sure to have some growth in their portfolio as well. By including some stock market exposure in their retirement portfolio, retirees will have a better chance of keeping their money growing and increasing their chances of having enough money to meet unexpected financial challenges during retirement.

Consult a CERTIFIED FINANCIAL PLANNER™ Professional Before You Purchase Long-Term Care Insurance

Buying a combination long-term care/life insurance policy may not be the best decision for those whose main assets are their homes and their individual retirement accounts, according to Kevin Young, CFP^®. Young says that combination policies are too expensive and are not a wise choice for couples because they do not allow them to share long-term care benefits. In addition, long-term care benefits can be limited under a combination policy, and the benefits that are paid out may not keep pace with increases in the cost of long-term care, Young says. Another drawback of combination policies is that there may be limitations on where the policyholder can receive care, Young says, as well as a limited number of available features that will fit the policyholder's budget and expected needs. Young says that comprehensive policies are better choices than combination policies. He notes that those who are concerned about paying for long-term care should consult a financial planner rather than an insurance agent, since a financial planner is more objective and has a greater understanding of the individual or couple's entire financial picture.

Do You Want to Lock in Higher Rates on Your Low-Risk Investments?

"Death puts" offer retirees and soon-to-be retirees a way to lock in higher rates on their low-risk investments. "People don't know they exist," Jonathan Kurtz, CFP^® says about the little-known strategy that was first introduced on certain corporate bonds in the 1990s. Death puts, formally known as estate-feature puts, guarantee that when the owner of the bond or CD dies, their heirs can redeem it at face value, and the fees usually amount to about 0.125 percent a year, and come out of the interest payments. A typical investment-grade 10-year corporate bond currently yields about 3.5 percent, roughly double the yield of a similar five-year bond, and a 10-year CD yields about 2.85 percent, more than a percentage point better than a five-year CD; those yields are much better than a yield of only about 2 percent from a 10-year Treasury note. Companies are offering death puts on their debt as a way to access retail investors who otherwise would be shut out of buying bonds because their orders would not be big enough. "It's just a little thing that sweetens [the offering] a bit because they need to borrow a lot of money, and they need to figure out how to get that done," says Gary Cotter, CFP^®. The biggest risk is that the issuer defaults on the payments, and another risk is that some bonds and CDs are "callable." About $12 billion in notes with debt puts have been issued annually in the past three years, and issuance is on pace to increase about 10 percent in 2012.

Hiring a CERTIFIED FINANCIAL PLANNER™ Professional

Ask the Experts: How to Select a Financial Planner

When working with a financial planner, it is important for the client to ask a lot of questions and challenge the advice being given, writes Kevin Young, CFP^®. He recalls one of his prospective clients who visited his office because she was unhappy with her current broker, who charged a 5.5 percent front load and a 1.5 percent annual expense ratio, but gave no comprehensive planning, estate planning, risk management review, personal goal review, nor analysis of her tax situation or retirement needs. Further, fees were not disclosed. This is an all too common problem, and people should be more aggressive and not simply trust the person who sells them a product, Young says. Broker-dealers are not held to a fiduciary standard, as financial advisers are, and instead must meet only a suitability obligation. Young recommends prospective clients look for someone who has the CERTIFIED FINANCIAL PLANNER™ professional designation, who understands modern portfolio theory, and who will develop a comprehensive financial plan.

Financial Planning for Your Children

Parents, You Also Must Avoid Taking on Too Much Student Loan Debt

Student loan debt has reached $1 trillion in the United States, tightening the finances of both college students and parents. In the past five years, rising college costs and the recession have prompted parents to increase their borrowing by about 33 percent through federal Parent PLUS loans. This past school year, the average single-year federal Parent PLUS loan was $12,000, compared with $9,850 in 2007, with interest rates at 7.9 percent. "It’s an emotional time for parents," says Cheryl Krueger, CFP^®. "But they should figure out what they can afford rather than concluding, 'This will just work out.'" Krueger recommends that parents and their children do a budget to determine what schools are more affordable and how much they need for education. Families should make sure they know exactly what the college offers and what they expect to be paid. Parents can even call the director of financial aid and ask for an explanation. Parents should also remember that costs could go up 5 percent or more each year, and that financial aid can always change. Online calculators can help families determine how much they will need. Families should spend only 50 percent of their income a month on necessities, including projected college loan payments.

Get the 'Best Bang for Your Buck' When Paying for Your Children's School

Wes Moss, CFP^® urges parents who want to send their children to prestigious private schools to take a "best bang for your buck" approach, as opposed to "at any cost." He suggests first going to the Great Schools Web site, which has reviews from former students and parents. Talk to parents in the neighborhood and see what they think about their children's schools. Take school tours, but also interview teachers to ensure the educators are of high quality. Get involved early in school life by joining the PTA and other organizations to develop relationships in the school and get an inside look at any shortcomings. Finally, Moss encourages parents to be open to public schools if the ones in the area are good. This may mean paying higher home prices and property taxes, but these costs may pale in comparison to the expense of a private school education.

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