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The POWER of Three

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Rick Kahler MS CFP

By Rick Kahler MSFS CFP®

At a recent workshop sponsored by the Center for Action and Contemplation, I was introduced to a principle that could be a helpful way to frame and change hurtful money behaviors. It’s based on the work of Adrian Bejan, a professor of mechanical engineering at Duke University, whose Constructal Law describes the physics of life as a flow system.

Flow Systems

Flow systems consist of three interweaving forces: affirming (what moves or flows), denying (what opposes or resists), and reconciling (what brings the first two into a new relationship).

With a sailboat, for example, the affirming force is the wind. The denying force is the rudder. The reconciling force is the helmsman who figures out how to bring the two oppositional forces together. When the helmsman finds the right balance between the wind and the rudder, the boat sails forward. Without the helmsman there is no forward progress, and a sailboat floats aimlessly.

Law of Three

In human interaction, philosophers often refer to this principle as the Law of Three. One place we can see it is in the US government. We have an affirming force (a Democratic Senator, say) that proposes a bill and the denying force (perhaps a Republican House member) that opposes it. The result is gridlock unless the third reconciling force (perhaps moderate members of both parties) can merge mutually acceptable pieces of both the affirming and denying forces into new legislation.

It’s important to recognize that no force is inherently good or bad, and neither is the reconciliation always positive. For example, Hitler was the reconciling force of the two opposing forces in pre-WWII Germany.

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SIB flow chart

The key to transformation—creating a new system or behavior—is becoming aware of the two conflicting forces and finding a way forward

***

How can we apply the Law of Three to our finances?

Take the example of a chronic overspender who tried for years to reduce his spending and live within his means. The problem was his love for “big boy” toys. There wasn’t a boat, ATV, motorcycle, or power tool that didn’t call to him. Predictably, like a sailboat without a helmsman, his financial ship was blown about aimlessly and in danger of sinking deeper and deeper in debt.

When he learned about the Law of Three, he initially thought the affirming force was his desire for financial solvency and the resisting force was his penchant for the toys. Actually it was just the opposite. The affirming force was his unrestrained desire for the toys and the resisting force was the nagging reminder of financial insolvency. He came to recognize that the missing third force was a conscious relationship with the toys.

He had a long-time pattern of struggling with the desire, unsuccessfully trying to resist it, and feeling ashamed and guilty when he finally gave in and bought the new toy. His first step toward change was to notice what went on emotionally when he began craving another toy, and he identified a pattern of feeling empty, lonely, and anxious at those times. Focusing on the anticipation of buying the new toy pushed aside the difficult feelings. He also came to see that he found much of his identity as the guy with the newest toy.

Assessment

With financial therapy, he was able to reconcile the historical causes of those emotions with the desire for the toys and financial solvency. This shift allowed him to greatly reduce his spending on toys but still occasionally and consciously buy one. He was able to live within his budget and begin funding a retirement plan. Becoming able to apply the reconciling force allowed him to move forward with his financial goals. 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

 

Are You a One Percenter?

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Well … Are you Doctor?

Rick Kahler MS CFP

By Rick Kahler MSFS CFP

What would it take for you to become a one percenter? How much net worth would put you in the wealthiest one percent in the United States?

In a recent discussion with a colleague, I suggested this number was $1.2 million. He said $9 million. Turns out the real answer, which is surprisingly hard to find, probably falls somewhere in between $1.2 million and $9 million. I have read several articles that put it in the range of $3 to $5 million.

Joshua Kennon, author of The Complete Idiot’s Guide to Investing, 3rd Edition, discusses this topic in more detail in an article posted to his blog in September 2011. He cites several sources and points out the differing methods used by the Federal Reserve Board (which uses the $9 million figure) and the IRS (which favors $1.2 million) to arrive at their numbers.

Regardless of the net worth needed to enter the top 1%, the media usually focuses on the amount of a household’s annual income as what really determines what makes someone rich. We know the income of the rich is growing faster than the income of the poor and middle class. What isn’t reported as often is that the percentage of Americans considered “rich” is also increasing by leaps and bounds. This is different from the rich getting richer. This means an increasing number of Americans are joining the ranks of the rich and the upper middle class.

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In June 2016, Stephen J. Rose, a nationally recognized labor economist affiliated with the Income and Benefits Policy Center at the Urban Institute, published a report titled “The Growing Size and Incomes of the Upper Middle Class.” His research covered a 36-year period from 1979 through 2014. He found that the number of households earning $350,000 or more a year (adjusted for inflation) increased eighteen times, from 0.1% of the population in 1979 to 1.8% in 2014. The upper middle class, those households earning between $100,000 to $350,000, increased two and one-half times, from 12.9% to 29.4%.

With more people earning more money and moving into the rich and upper middle class categories, it would stand to reason that fewer people would be left in the categories of middle class, lower middle class, and poor. The middle class, households earning $50,000 to $100,000, shrank from 38.8% to 32.0%. The lower middle class, households earning from $30,000 to $50,000, declined from 23.9% to 17.1%. The poor, households earning under $30,000, contracted from 24.3% to 19.8%.

Good News?

That is really good news. It means that today, the average American is earning more money than was the case 36 years ago. Perhaps our economic system isn’t as broken as some would have us believe.

With so many political candidates and activists focused on issues like income inequality, it’s easy to assume that more and more Americans are sinking to the bottom economically. Before making such assumptions, it’s important to factor in real data like that cited in Rose’s report.

The plight of those who unfortunately remain on the bottom is a real concern that deserves attention. Yet it is only one part of the whole picture. Many others are able to move upward, an individual and societal accomplishment that is worth celebrating.

Assessment

Instead of taking more from those who do succeed, it would be more useful to focus on what we can do to help others emulate them. The middle and upper middle classes tend to receive less attention than either the poor or the rich, yet these categories make up the majority of Americans. There is always room for others to join them. 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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***

“Honey, we need to talk … about estate planning.”

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Rick Kahler MS CFP

By Rick Kahler MS CFP®

Supposedly, the most frightening words one spouse can hear from the other are, “Honey, we need to talk.” Even more frightening, however, is, “Honey, we need to talk about estate planning.”

What can you do if you want to get serious about estate planning, but your spouse doesn’t?

Here are a few suggestions:

  1. Consider ways to persuade a reluctant spouse to participate

First, give up nagging. In my years of financial planning, I’ve seen how ineffective it is from either an advisor or a spouse.

Instead, it might be worthwhile to do some research and show your spouse some of the specific consequences of not planning. Depending on the complexity of your circumstances, you may find it worthwhile to consult an attorney, accountant, or financial advisor. You can also find a great deal of helpful information, such as state probate and intestacy laws, online.

If you have no wills, find out how your state laws distribute assets when someone dies without a will. Show your spouse how that distribution would affect your family. In many cases, intestacy laws are still designed around a traditional one-marriage-with-children family structure. They may fail to provide for members of families that don’t fit that mold—for example, by disregarding stepchildren and step grandchildren.

If you have wills but made them years ago, take a close look at their provisions. Show your spouse—with numbers, if you can—exactly who would benefit and who would not. Your spouse may be persuaded to take action if he or she sees the specific ways that yesterday’s wills don’t provide for today’s family. Even if this accomplishes nothing beyond convincing your spouse to destroy an outdated will, it may be worthwhile. An outdated will, in some cases, can be worse than none at all.

It’s quite likely that neither of these approaches will succeed. This leaves you with the next-best option.

  1. Do what you can on your own

With your own separate property, you can do any estate planning you want, including executing a will and setting up a living trust. I would also strongly encourage you to execute powers of attorney for financial and health decisions.

However, you might be surprised at the limits on estate planning for assets you consider yours. One important provision is that married people cannot name anyone except each other as beneficiaries on retirement plans without the spouse’s permission. Suppose, for example, you would like to name your children from a previous marriage as beneficiaries on a retirement account as a way of providing fairly for them if your spouse died intestate. You would need your spouse’s consent to do so.

Also, a will executed by one spouse does not affect assets held jointly or in trust, annuities, retirement plans, or individually held bank or brokerage accounts that have a TOD (transfer on death) provision.

Assuming you cannot persuade your spouse to participate in estate planning, and assuming you have done whatever individual planning you can, there’s one more step you can take.

  1. Educate yourself.

Do your best to create and maintain a complete inventory of assets you and your spouse hold jointly, as well as your separate retirement accounts, insurance policies, and other individual assets. Include account locations, approximate balances, and access information. Having this information will be invaluable if you end up as the administrator of your spouse’s estate.

Ironically, the person who benefits most from your separate estate planning may be your non-planning spouse. Yet doing whatever you can-will also help you be prepared, just in case you need to deal with the consequences of your spouse’s lack of planning.

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death

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Assessment

Some basic; but important thoughts.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

On the DOL’s New Fiduciary Rule

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By Rick Kahler MSFS CFP®

Rick Kahler MS CFPThe Department of Labor’s groundbreaking new Fiduciary Rule may change the legal responsibilities of advisors who sell financial products for consumers’ retirement accounts.

Financial services industry pundits aren’t sure whether the new rule is a giant step in the right direction or a successful dodging of a bullet by Wall Street.

Original Intent

The original intent was to require those selling financial products for retirement plans to act as fiduciaries—advisors required to put clients’ interests ahead of their own.

One proposed provision was a “restricted asset list” which would have banned the sale of high-commission products like private REITs and annuities to IRAs and other retirement plans. Wall Street brokers were “expecting a punch in the face that would force a dramatic overhaul of how they dealt with their customers,” notes Joshua Brown, CEO of Ritholtz Wealth Management, in an April 6 article at Fortune.com.

As adopted, the final rule allows financial salespeople to still sell all the controversial illiquid high-commissioned products they currently sell, as long as the brokerage firm can document the product is in the client’s best interest. Brown says this amounts to a “love tap.”

The Pundits

Bob Veres, editor of Inside Information, sees the new Fiduciary Rule as still a big win for consumers and fiduciary advisors. In an April 8 column, he writes, “professional financial planners and advisors have achieved a victory, and the Wall Street and independent broker-dealer service models have been dealt a blow.”

Veres argues that the new fiduciary duty to act in the client’s best interest will by itself preclude financial salespeople from justifying the sale of high-commissioned products in IRAs. He also points out that salespeople will no longer be allowed to receive “fat commissions” for recommending annuities and non-traded REITS, and therefore are unlikely to recommend these products.

Financial planner and writer Michael Kitces [a friend of this ME-P and advocate of iMBA’s online Certified Medical Planner® fiduciary focused professional charter education certification program] suggests the DOL’s concession allowing the current questionable financial products to still be purchased by IRAs may be “a brilliantly executed strategy of conceding to the financial services industry the exact parts that didn’t actually matter in the long run . . . yet keeping the key components that mattered the most,” the fiduciary duty to the client.

MORE: http://www.CertifiedMedicalPlanner.org

Brown believes salespeople will continue recommending higher-cost products “so long as a justification can be made for their being recommended (quality, performance, etc.).”

He adds, “Advisors will still be able to sell the proprietary products of their own firm so long as they can enunciate the reason why these products are in their customers’ “best interests” – a hurdle whose height will probably be adjusted on a case-by-case basis as no one really knows what it means yet.”

Kitces contends the new law will ultimately give the consumer the power through the courts to define what is and isn’t in their best interests. He points out:

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PetreGloveimage-300x200

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“In other words, while the DOL fiduciary rule didn’t outright regulate what Wall Street can and cannot do, it did change the legal standard by which those actions will be judged and ensure that eventually the courts will have the opportunity to rule on these fiduciary conflicts.”

While the new rule only applies to retirement assets, Veres and Brown see it as a step toward requiring a fiduciary standard for all investment advice. I tend to agree.

Assessment

Since so many small investors hold retirement accounts, applying a fiduciary standard to those investments may help more consumers understand the difference between fiduciary advisors and product salespeople. As the industry moves toward full compliance with the rule by the April 2017 deadline, we may see an increase in consumer demand for financial advisors who put clients’ interests first.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Seeking the “Perfect” Investment

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If I only had a crystal ball

Rick Kahler MS CFP

By Rick Kahler MS CFP®  http://www.KahlerFinancial.com

“If I only had a crystal ball.” Every investor has probably made this wish from time to time; even physician-executives. We would all like a way to avoid the emotional pain and anxiety that are sure to come when our portfolios lose value due to inevitable market downturns.

The Pain – The Pain

Surely a perfect investment would spare us that pain. Suppose a mutual fund manager with a crystal ball knew which 10% of the 500 largest U. S. stocks would earn the highest returns for each upcoming five-year period. Investing only in those stocks should ensure gain with no pain.

According to an article by Bob Veres, editor of Inside Information, someone has looked back over more than 80 years to track such a hypothetical perfect fund. Alpha Architect, a research company, divided the 500 largest U.S. stocks into deciles and imagined a fund investing in only the 10% known to have the highest returns for the next five years. Beginning January 1, 1927, the hypothetical portfolio was adjusted every five years. If you could have purchased it then and held it to the end of 2009, you would have earned just under 29% a year. Lots of gain, no pain at all, right?

Enter the Bear

Except for the particularly bad bear market that started in 1929, when you would have seen your investment plummet 75.96%. Or the one-year period starting at the end of March 1937, when the fund would have fallen more than 44%.

Or, the nine more times over the years that the fund dropped by 20% or more. It lost 22% in 1974 when the S&P 500 was up 20%. In 2000-2001 you’d have watched it plummet 34% while the S&P 500 was only down 21%. Or how about the 20% drop from the end of September through the end of November 2002, at a time when the S&P 500 was sailing along with a 15% positive return.

Yes, the long-term returns in this “perfect” investment were amazing. The full ride, however, offered many opportunities for anxiety and even terror, when investors would have been strongly tempted to bail.

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brain

***

Alpha Architect

Alpha Architect concluded that even if God—who presumably doesn’t need a crystal ball to have perfect foresight—were running this mutual fund, He would have lost a lot of investors. During the rough patches, many would have lost faith in His management skill.

Investors who are ultimately successful learn to hang on through thick and thin, knowing that markets eventually recover. Yet even if we could choose a perfect investment, staying with it for the long term is a challenge.

Speed Demons

One of the reasons market declines are so frightening is that they happen much faster than market gains.

Ben Carlson, author of A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, looked at all the bear markets and bull markets going back to 1928. The bull market rallies averaged 57% returns, while bear markets averaged losses of 24%. The bull markets lasted an average of 474 days. The bear market drops were more intense, compressed into an average of just 232 days before the next upturn.

Even when, by percentage, the gains far outweigh the losses, the more gradual pace of the bull markets doesn’t attract our attention in the same way as the heart-stopping downturns of bear markets.

Assessment

Veres calls the Alpha Architect research “a lesson in humility and patience.” We can’t look into the future with a real crystal ball. However, looking back at market patterns with an imaginary one can help us protect ourselves from our own tendency to bail out in the face of adversity.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

Front Matter with Foreword by Jason Dyken MD MBA

***

Understanding Your Real Rate of Return [RROR]

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Some Modern ROR versus RORR Musings

Rick Kahler MS CFPBy Rick Kahler MS CFP®

http://www.KahlerFinancial.com

Is there anything more important than the overall rate of return you earn on your investment portfolio?

Yes, there is. It’s the real rate of return.

Past Half Decade

Over the past five years, even diversified portfolios have earned relatively low returns. Many investors are fearful that this has significantly reduced the income they can expect to receive upon retirement.

To see whether that fear is justified, let’s look at some numbers. Based on a model portfolio I follow that holds nine different asset classes, the average return for the past three years (after all fees and expenses) was 2.45%. The five-year return was a little better at 2.67%. However, the seven-year return was 5.62%.

If an expected long-term (10 years or more) overall return on the same portfolio was 5.00%, at first glance it appears the portfolio slightly exceeded its expectation for seven years, but fell considerably short the last three and five years.

Now – Take a Second Glance

But, if there is a first glance, you know there is a second glance coming. And that second glance highlights a seemingly obscure fact that changes the picture considerably. In every future return expectation, there is also another estimate that rarely is mentioned, but which is as important as the rate of return. This is the rate of inflation.

While the long-term expected overall return was 5.00%, the long-term expected rate of inflation was 3.00%. That means there was an expectation the investments would earn 2.00% above the rate of inflation.

This is known as the real rate of return (RROR) and it’s far more important than the overall rate of return.

For example, if the projected inflation rate was 4%, the expected real rate of return would have been 1%. At a projected inflation rate of 6%, the real rate of return would have actually been negative.

Most financial planners base their projections of a client’s retirement income on the real rate of return. A real rate of return of 2% is very common.

The Real Rate of Return

Taking into account the real rate of return, what has actually happened over the past three, five, and seven years? Overall expected returns have definitely been lower over the past three and five years. So has the rate of inflation. While the estimated inflation rate was 3.00%, the actual inflation rate was significantly lower, at 0.78% for the past three years and 1.03% for the past five. Subtracting these numbers from the overall rate of return (2.45% for three years and 2.67 for five years) gives us the real rates of return: 1.68% and 1.64% for the last three and five years. Compared with the estimated real return of 2.00%, this is slightly lower but still close to hitting the target.

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stock market

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Looking at the seven-year real rate of return, things go from “ok” to “phenomenal.” While the overall rate of return of 5.62% was higher than the expected return of 5.00%, the inflation rate was 1.03% instead of the expected 3.00%. This resulted in a real rate of return of 4.59%, more than double the expected real rate of return.

Bottom Line

The bottom line is that those investors who have been in the market for seven years will have more to spend in retirement than previously projected. In investment circles, this is called a home run.

For physician investors discouraged by recent overall return numbers, a second look might give you cause to cheer up. If you’ve invested in a diversified portfolio, rebalanced, and stayed the course during market crashes, things may be better than they seem.

Assessment

Thanks to one of the lowest inflation rates in modern history, you could be further ahead than you thought.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On Socially Responsible Investing

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Balancing profits, people and the planet

Rick Kahler MS CFP

By Rick Kahler MS CFP®  http://www.KahlerFinancial.com

Balancing profits, people, and the planet can be tricky. Many physicians and other investors prefer to put their funds into companies that not only make money, but that also reflect the investors’ values. Some take this concept, often described as “socially conscious” or “socially responsible” investing, very seriously. There are also financial advisors who specialize in this niche.

Yet investing in companies whose values align with your own is not as simple as it may seem.

Business owners and corporate executives

In my experience with business owners and corporate executives, most of them take an interest in bettering the people who work with them, the planet, and their own lives. They run their companies with integrity. They don’t break the law. They respect their customers and don’t take advantage of them, but give them fair value in exchange for their money. They offer compensation and working conditions that will attract and retain good employees. Ultimately, they understand that ethical business practices are not only the right thing to do, but the best way to run profitable businesses.

But, how do you as an investor know whether a company is bettering  people and the planet while it is making a profit? One method is to choose companies in which to invest by using some type of socially responsible screening. Such screening looks to exclude companies producing products that harm people or the earth, or companies judged to have poor corporate cultures.

The challenges

One challenge with using such screens is that we don’t all have the same definitions of what may be socially or morally offensive. Investor A may not want to own stock in oil or mining companies. Investor B may be concerned about goods produced in unsafe working conditions. Investor C may not want to support companies that sell tobacco or alcohol.

A second challenge is that companies change. They may expand, diversify, or merge with other companies until it’s difficult to pinpoint their values, products, and company culture. A company may sell a lot of great products that do a lot of good for people, but have one division that produces a product some investors may find offensive. And it’s even harder to screen for companies that have good cultures—especially since there’s no clear definition of a “good” culture.

Choices

Investors can choose mutual funds that include only socially responsible companies, but any such fund is almost guaranteed to include companies that you would otherwise exclude.

If you are serious about investing only in companies that support your values, it’s essential to research them before you invest and monitor them regularly to ensure their practices or products don’t change. You also may find it necessary to give companies or SRI funds a little leeway—settling for perhaps 95% compliance with your values rather than insisting on 100%.

But sadly, even if you could invest your money in the shares of companies that totally support your values, doing so may not have much impact on that company, its people, or the planet. One reason for this is that your investment is likely to be a miniscule fraction of the company’s stock.

In addition, most often when we invest in stocks, we do not buy shares directly from the company. We buy shares, through a stock exchange, that are being sold by other investors. The profits or losses involved in trading those stocks accrue to the third-party buyers and sellers. They don’t directly affect the company’s bottom line.

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gv

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Assessment

For most small investors, making a difference through socially responsible investing may be an illusory goal. Its only real impact may be to help us feel better about ourselves.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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[WHERE LEARNING IS A plus+]

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Do You Have a “Stomach of Steel” in this Stock Market Environment?

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The Wall Street Journal Called

Rick Kahler MS CFP

By Rick Kahler CFP® CLU MS http://www.KahlerFinancial.com

[FOMC Holds Steady Today]

A few weeks ago, when the US markets started dropping dramatically, a reporter for The Wall Street Journal called. He asked me if I had received any calls from worried clients. I told him I had heard from 5% of my clients. “What changes in their portfolios are you making?” he asked.

“I’m not making any changes to my investment strategy.”

He expressed amazement that I was not “doing something.” Most investors and their advisors he was speaking with were making “adjustments” to their portfolios. He told me I must have a “stomach of steel.”

Hardly. My gut is certainly not immune to those fearful sinking feelings that go along with market plunges. What I do have is enough experience to trust my long-term investment strategy.

The time most investors and advisors decide an investment strategy doesn’t work is when their portfolios lose value, usually due to a decline in US stocks. This confuses me.

Here’s why:

First, I’m confused that so many investors believe it’s possible to move in and out of markets in such a way that their portfolios will rarely, if ever, suffer a negative return.

This is magical or delusional thinking. The only investor I’m aware of who consistently produced positive returns, year after year, was a fellow by the name of Bernie Madoff. If you have never heard of this investment wizard, he’s the one who is now serving a life sentence in a federal prison for propagating a Ponzi scheme that robbed billions of dollars from investors.

Short-term or moderate-term losses are inevitable in any portfolio that seeks to earn returns above those offered by a bank Certificate of Deposit. Usually, in the long run, markets recover and so does your portfolio.

Sadly, too many investors turn short-term losses into long-term losses by abandoning their investment strategy when the US markets turn down. This locks in their losses, never to be recovered.

If your portfolio is widely diversified among many markets—like bonds, emerging markets, commodities, real estate, TIPs, and various investment strategies—you will almost always have an asset class losing money. You will also almost always have an asset class making money. If not, you probably don’t have a diversified portfolio.

Here’s the second reason I’m confused.

Most investment strategies assume that the US market will decline, and they have a strategy in place for dealing with those declines. For a buy-and-hold investor, the strategy is to do absolutely nothing. For a strategic asset allocator like myself, it’s to rebalance frequently by selling appreciating asset classes and buying into those in decline. By not making changes to clients’ portfolios during a market decline, I am not “doing nothing;” I am simply continuing to follow an investment strategy.

Because most of my clients have learned over time to trust this strategy, relatively few of them make panicky calls to my office during downturns. Yet I have noticed a direct correlation between US stock market declines and my daily phone call volume. Many of the calls are from reporters wanting to know what I am doing and am telling clients. My response—that I’m not doing anything different—is the same thing I told them when the markets last declined in 2011 and before that in 2009, 2008, 2002, 2001, 2000, 1997, etc.

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untitled

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Assessment

This isn’t the response an anxious client or a concerned reporter wants to hear. When the emotional center of the brain is overcome with panic and fear, taking action helps relieve anxiety. If that short-term action is selling into volatile stock markets, however, it often turns out to be a long-term mistake.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

Front Matter with Foreword by Jason Dyken MD MBA

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***

Is Social Security a Rip-Off?

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 “WHERE DID THAT MONEY GO?”

Rick Kahler MS CFP

By Rick Kahler MS CFP http://www.KahlerFinancial.com

A reader recently forwarded me an email that began, “Who died before they collected Social Security?” It asked how many people only collected a small portion of what they paid into Social Security because they, or a spouse, died soon after retiring. Then it screamed in all caps, “WHERE DID THAT MONEY GO?”

Introduction

The rest of the piece, after calculations of how much an average person pays into Social Security, suggested the government is short-changing those who die before they receive back in benefits everything they paid in. It claimed that Social Security premiums were to have been put in a “locked box,” that instead they were loaned to the US Treasury, and that Social Security is therefore running out of money.

The many misstatements and errors in this piece highlight a common misunderstanding about the Social Security insurance program. It is not an income tax. Nor; is it actually insurance – or an investment!

Example:

If you earn a salary, you are familiar with the FICA (Federal Insurance Contributions Act) tax that, like federal income tax, is withheld from your paycheck. Everyone must pay it on their first $118,500 of earned income. The current rate for employees is 7.65% (6.2% for Social Security and 1.45% for Medicare), an amount matched by employers. The self-employed pay 15.3%.

FICA payments are not an income tax, but are insurance premiums used to fund the Social Security program. It is a direct transfer program, meaning the money coming into the plan is immediately paid out to retired or disabled participants. The proceeds are not directly deposited to the general account to be spent however Congress wishes.

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train station

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The Tipping Point?

However, in the past, because more money came into Social Security than was paid out in benefits, the program did loan the excess to the US Treasury Department (receiving bonds in return) to fund the operating expenses of the federal government. The program built up a significant investment in US Treasuries until 2010, when it began paying more out in benefits than it receives from participants. The program is now beginning to redeem the bonds. Officials project that in 2033 the program will have depleted the investment in bonds and will need to either adjust benefits, raise the payroll tax, or borrow from the US Treasury.

What it’s not?

  • Social Security isn’t insurance in the sense that insurance pays only when a person suffers a loss. With Social Security, everyone who has worked for more than 10 years will collect a monthly income upon retirement.
  • SS is also not a savings account or a retirement plan like an IRA or a 401(k). It is not set aside in a segregated account with your name on it. The money you pay in doesn’t accumulate or earn interest. If Social Security were designed as a retirement plan that would refund what participants pay in, plus some type of return, the payroll tax would far surpass 15.3%.

What it is?

So if Social Security isn’t an income tax, an insurance plan, or a retirement plan, what is it? It’s an annuity. Participants are guaranteed a monthly income for life; a lesser amount if they retire at age 62 or a higher amount if they wait until full retirement age or later.

Like any annuity, when you die the payments stop. The amount of the payroll tax/premium incorporates actuarial estimates of how many people will die before the average mortality age or live long past it. The money paid in by people who die early is not “missing.”

Assessment

If you have questions about Social Security, you can find detailed information at www.socialsecurity.gov. It’s a much more reliable source than anonymous forwarded emails.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™


“The medical education system is grueling and designed to produce excellence in medical knowledge and patient care. What it doesn’t prepare us for is the slings and arrows that come our way once we actually start practicing medicine. Successfully avoiding these land mines can make all the difference in the world when it comes to having a fulfilling practice. Given the importance of risk management and mitigation, you would think these subjects would be front and center in both medical school and residency – ‘they aren’t.’

Thankfully, the brain trust over at iMBA Inc., has compiled this comprehensive guide designed to help you navigate these mine fields so that you can focus on what really matters – patient care.”

 Dennis Bethel MD [Emergency Medicine Physician]

 

Can Physicians Achieve their Financial Independence [Day] Without Budgeting?

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A New Twist on an old Holiday Tradition

[By Rick Kahler CFP® MS ChFC CCIM]

Doctor – Here’s a new twist on an old Resolution: If you want to give yourself the security of financial independence, try budgeting the way many wealth accumulators do.

The secret? They don’t budget!

Your first reaction might be, “Of course these people don’t budget! They have so much money, they don’t need to.”

That may be true for some of those who have money today, but I’m referring to people who want to remain wealthy or those who are “wealth accumulators.” These are people who don’t start out with money, but who build up significant wealth over time.

Live on Less

Many successful wealth accumulators, and too few medical professionals, don’t follow a detailed budget in the traditional sense. Instead, they develop the habit of living on less than they make. They do this by setting clear priorities. Here is how it works:

The List

1. Out of every dollar earned, take taxes out first. If you receive a paycheck from an employer, this is done for you. On any earnings where taxes aren’t withheld, estimate the amount of tax you’ll owe and stick it into savings.

2. Take out 15% to 30% to invest for your future. When you’re just starting out, you may have to begin with a much lower percentage, but begin and be consistent. Research tells us if you have 30 years until retirement and you plan to live for 30 years after retirement, you need to save 17% of your salary to maintain the same standard of living upon retirement. When you get a raise, contribute two-thirds of it to your investments and use one-third for increasing your lifestyle. If you want to become financially independent, this step is essential.

3. Save another 10% to 20% for emergencies and short-term needs like vacations, Christmas, and replacing vehicles. Again, you may have to start with a lower percentage, but begin with whatever you can, and be consistent.

4. Take out 5% to 10% for giving.

5. Live on the rest. Pay the bills as they come in, and use what’s left over for discretionary lifestyle spending.

Sounds simple, right? Of course, “simple” isn’t necessarily the same as “easy.” By now, if you’ve done the math, you can see that following this plan means living on as little as one-half to even one-third of your gross earnings.

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Assessment

If you’re living from paycheck to paycheck, just barely managing to pay the bills, the idea of living on half of what you make goes beyond absurd. It probably seems impossible. It may, in the short term, be impossible.

Yet there are ways to live on less than you earn, even if to begin with it’s only a little less. Share a cheap apartment with a roommate. Drive an old car that you don’t have to make payments on. Eat at home. Buy used furniture and second-hand clothes. Get a temporary second job solely for the purpose of building up some savings.

What is most important is developing the pattern of living on less than you make. Fostering a frugal mindset is absolutely essential if you want to achieve financial independence. When you commit to saving first—even if you can only save a small amount—you have made one of the wisest financial decisions you can ever make.

This non-budgeting spending style takes away much of the pressure of trying to follow a rigid budget. There’s no need to keep track of envelopes or categories. You’ve made the hard decisions first, and you get to spend everything in the checkbook.

Budgeting without a budget can turn you into a wealth accumulator. It works because you take your future off the top.

The Author

Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, is the founder and president of Kahler Financial Group in Rapid City, South Dakota. In 2009 his firm was named by Wealth Manager as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is a co-founder of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Learn more at KahlerFinancial.com

Conclusion      

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

ME-P and Independence Day 2010

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“One needs to have the right words, and to use seemingly everyday terms in a way that economists and healthcare financial experts speak. Simply put, my suggestion is to refer to the Dictionary of Healthcare Economics and Finance frequently, and ‘reap'”.

Thomas E. Getzen, PhD Executive Director, International Health Economics Association (iHEA) Professor of Risk, Insurance and Healthcare Management The Fox School of Business-Temple University Philadelphia, Pennsylvania

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

On Hiring Home Contractors

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By Rick Kahler MS CFP http://www.KahlerFinancial.com

Rick Kahler MS CFP

Doctors Beware!

This time of year, half the homeowners in town are trying to hire landscapers. All of us check our phones even in the middle of meetings or medical appointments, because we desperately hope it might be the yard guy calling back.

As my wife and I work on our yard, however, I’m proceeding with caution. Several years ago I hired a landscaper and paid him $2,000 up-front as a down payment on the work. We never saw a single bush, tree, or shrub. We never saw him or the money again, either.

In response to my recent column about filing consumer complaints, I heard from a reader who is struggling to get recourse from an unethical building contractor. It’s a horror story about bullying, failed inspections, outrageous costs to fix shoddy work, and an expensive lawsuit.

Both this homeowner and I made the same mistake: we trusted someone who turned out not to be trustworthy, and we paid in advance.

Whether you’re hiring someone to redesign your yard, build or remodel a house, create a website for your business, or provide any other kind of service, you can’t afford to just assume that person is trustworthy. It’s your responsibility as the customer to protect your interests in the transaction.

The Hiring List

Here are some ways to increase your chances of finding ethical and competent contractors before you hire anyone:

  1. Be wary of anyone who seems to lack experience or qualifications. Even someone just starting a business should be able to show you related experience or training.
  2. Look for someone who is professional and businesslike. That includes putting estimates and quotes in writing, providing references, and focusing on helping you create what you want rather than telling you what you should want.
  3. Say “no, thanks,” immediately to any contractor who shows a cavalier attitude about requirements like licensing, permits, and inspections.
  4. Use caution with contractors who don’t apply in their own businesses the skills they are trying to sell to you. If you need a website, for example, don’t hire a developer whose own site is a mess.
  5. Get references, and contact them. Ask specific questions about the kind of work the contractor did for them and what the experience was like.
  6. Don’t hire out of desperation, as I did with my so-called landscaper. If you have trouble finding someone to do the work you want done, it’s all too easy to skip essentials like checking references when a candidate does show up. That oversight could cost you dearly.

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 home

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The Project List

Once you do hire a contractor, continue to protect yourself as the project proceeds:

  1. Never pay in advance. Reputable building contractors, for example, should have the resources to buy materials up front. For any services, don’t pay in full until the work is done to your satisfaction. If there is a problem, withholding payment is often your best leverage for getting it resolved.
  2. Pay attention throughout the work. Make sure you get copies of all permits and inspection reports. Insist on fixes for small problems, and follow up to make sure they’re taken care of. As the customer, you should never feel like a trespasser on your own project.
  3. Address serious problems promptly, in a serious way. If issues are not being resolved, don’t hesitate to file complaints with consumer protection agencies, contact professional associations, or involve an attorney.

Finally, when you do receive quality work or service, acknowledge it. Express your satisfaction, write references or positive reviews, and recommend the business to others.

Assessment

One way to discourage predatory or incompetent contractors is to support ethical, trustworthy professionals.

Channel Surfing

Have you visited our other topic channels? Established to facilitate idea exchange and link our community together, the value of these topics is dependent upon your input. Please take a minute to visit. And, to prevent that annoying spam, we ask that you register.

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Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

On Depressing Investments?

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OR … Boring is Good!

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler MS CFP“We are in both a depressing and boring investment environment.”

That not-so-cheery statement came from Cliff Asness, Ph.D., managing and founding principal of AQR Capital Management, LLC, in a recent address to investment advisors gathered at the University of Chicago’s Gleacher Center.

Personally, I can handle “boring” investment environments just fine. Actually, when it comes to my investments I much prefer boring to exciting. I had all the investing excitement I need for a lifetime in 2008-2009. It’s the “depressing” portion of Asness’s remarks that caught my attention.

He maintains that both bonds and stocks are expensive when judged by their historical means—bonds in the 97th and stocks in the 92nd percentile.

  • Does that mean stock and bond markets are in a bubble? Asness says not.
  • Is a stock or bond market crash likely?

According to Asness, it’s anybody’s guess, because, “We really don’t know what causes crashes. It’s folly to try and predict a crash.”

While Asness doesn’t believe markets are in a bubble or that a crash is impending, what he had to say about expectations for future portfolio returns was certainly depressing.

Historical Review

Over the past 115 years, according to Asness’s data, the real return on a 60/40 portfolio (one holding 60% stocks and 40% bonds) has ranged from as high as 11% to as low as 2.2%. A real return is net of inflation. So, for example, if the total return is 8% and inflation is 3%, the real return is 5%. If inflation is only 1% and the total return is 6%, then the real return is 5%.

Now; for the depressing part. The real return of bonds is currently 0% while that of stocks is 3.7%. Do the math and that’s a 2.2% real return for a 60/40 portfolio. That puts the current real returns from stocks in a historical 8th percentile and bonds in the 3rd percentile.

The bottom line is that if you want high odds that in retirement you will never run out of money, you will need to limit your withdrawals to the real return of 2.2%. This leaves the return that equals the inflation rate in the portfolio to preserve the purchasing power of the portfolio. That means for every $1 million you have in investments you can withdraw $22,000 a year in income on which to live.

That is depressing, especially when you consider the professional norm for withdrawal rates is around 4%. For many years I’ve conservatively advocated for 3% withdrawal rates, which if Asness is right could turn out to be aggressive.

So What’s a Physician or other Investor to Do?

Asness’s advice is a bit self-serving, as his company, AQR, is one of the leading mutual fund managers of alternative investment strategies. That said, what he recommends agrees largely with what I’ve written for 24 years: that investors diversify their portfolios among more asset classes than just stocks and bonds.

Additional asset classes that can bolster portfolio returns and lower volatility are commodities, real estate, TIPS bonds, and alternative investment strategies such as long/short, arbitrage, and managed futures mutual funds.

Another option is to increase what you are saving for retirement and reduce your withdrawal rate expectations to something less than the traditional 4%.

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Photo of hands of businesspeople during discussing

Stock Market

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Marketing Timing?

Whatever you do, there is one thing Asness and I agree you should not consider. Don’t try to time the market. Selling out stocks and bonds, going to cash, and buying back into the market when the time is “right” almost guarantees a depressing future.

Assessment

Instead, rely on the boring strategy of investing for the long term with asset class diversification. It’s an effective investing anti-depressant.

Channel Surfing

Have you visited our other topic channels? Established to facilitate idea exchange and link our community together, the value of these topics is dependent upon your input. Please take a minute to visit. And, to prevent that annoying spam, we ask that you register.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Do Commisson-Based Fiduciary Financial Advisors EVEN Exist?

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Sometimes the Case?

By Rick Kahler MS CFP http://www.KahlerFinancial.com

Rick Kahler MS CFPCan a financial advisor represent your best interests and still earn a commission? Surprisingly, this can sometimes be the case.

But … It’s up to you to find out.

Fiduciary

Being required to put the consumer’s interest first, which means representing a client rather than selling products and services to a customer is called having a fiduciary duty. While fee-only planners are inherently fiduciaries, they don’t exclusively own the fiduciary domain. The definition of a fiduciary duty does not inherently ban receiving commissions. Numerous statutes and applications of common law can require someone receiving a commission from selling a financial product to act in a fiduciary capacity.

One such circumstance was discussed in a blog post at http://www.kitces.com by Duane Thompson, president of Potomac Strategies, LLC, a legislative and public relations consulting firm.

Registered Investment Advisor

Those registered with the SEC as Registered Investment Advisors (RIA) under the Investment Advisers Act of 1940 are required to uphold a fiduciary standard of care. Advisors must register as RIAs if they, “for compensation, engage in the business of advising others” about investing in securities and as a central part of the business.

The 1940 Act has almost nothing to say about linking compensation to fiduciary responsibility. While large firms selling financial products can argue whether they must register as RIAs, it is clear that anyone registered as an RIA is held to a fiduciary standard, regardless of their compensation structure.

That said, the chances are an advisor who is compensated 100% by commissions is not an RIA and not held to a fiduciary standard. Of the 11,475 adviser firms registered with the SEC, only four are commission only, according to Thompson. Of the remainder, those that receive  a commission also charge some type of fee.

The Odds

The overwhelming odds are that, if you don’t pay a fee to a company giving investment advice or selling a financial product, they are not legally required to look after your best interests.

Even though an RIA who is totally or in part compensated by commissions has a legal obligation to put your interests first, they may still have a conflict of interest, which the SEC requires them to disclose. The size of that conflict of interest depends on the percentage of an adviser’s revenue derived from selling financial products.

Example:

For example, a RIA receiving 90% of their revenue from the sale of financial products has a large conflict of interest. The sustainability of the company and advisers’ careers depends upon sales. Arguably it’s going to be very difficult for an adviser to remain unbiased, especially if what may be in the client’s best interest is a no-load, low cost index mutual fund or variable annuity; which pay no commission.

Conversely, an advisor receiving 99% of their revenue from fees and 1% from commissions on the sale of low-cost term life insurance has almost no conflict. The sale of the insurance is most likely a convenience for clients and has an insignificant financial impact to the adviser.

face-off

[Fiduciary Advisor versus Sales Man/Woman] 

In order to find out the likelihood of advisers upholding a fiduciary standard, first ask whether they are a RIA with the SEC. If not, they owe you no fiduciary responsibility. You are a customer.

Assessment

If an adviser is an RIA, however, don’t assume there is no conflict of interest that may taint the fiduciary relationship. Ask how much of the firm’s gross revenue comes from commissions on the sale of financial products and how much comes from fees paid directly by clients. The higher the percentage of revenue that comes from fees, the lower the conflict of interest and the greater the chance you will receive unbiased, client-centered advice.

Conclusion

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Women Retirement Confidence

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Financial Preparation

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler MS CFPWhen it comes to being financially prepared for retirement, Chinese women are the most confident women in the world. In fact, they are almost twice as confident as their US counterparts.

The Survery

This conclusion comes from a 2014 global survey, the Aegon Retirement Readiness Index. It found that the percentage of women saying they are very confident or extremely confident about retirement is 42% in China, 35% in India, 29% in Brazil, 22% in the US, and 18% in Canada.

The survey included responses from 16,000 employees and retirees in 15 countries, half of whom were women. About 62% of the women were married, 52% had some higher education, and 80% took an active role in managing the household finances.

The Insights

Several aspects of this survey really caught my attention:

  • I was puzzled that only two developed countries—the US and Canada—made the top five. The first three—China, India, and Brazil—were  emerging markets with little or no social safety nets in place.
  • Even more notable is that, in the US and Canada, the number of women who do not feel prepared to retire (38% in the US and 36% in Canada) is almost twice as high as the number that are confident about retirement.
  • And more notable yet is that the bottom five includes three developed countries with strong social safety nets. In France, Japan, and Spain, less than 6% of women reported retirement confidence, while 60% or higher said they had no confidence.

It seems puzzling that the countries with large social safety nets spawned less retirement confidence than did developed countries with little or no safety net. Why isn’t it the opposite? Why aren’t women in countries where government plays a big part in retirement income more confident?

The Answer?

Therein may lay the answer. Possibly because of the lack of government retirement programs, people in the emerging market countries like China, India, and Brazil realize they cannot count on anyone but themselves in retirement. They know they must begin saving a significant amount of their income, starting early in life, to be able to sustain themselves in retirement. A failure to do so will result in them literally being “thrown out onto the street” or into the “poor house.” As harsh as that may sound to our Western ears, the reality must be a powerful motivator.

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Depression

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The Reality

This reality was brought home to me by two people I met on visits to China and India. One Chinese woman in her 20’s told me she saved a third of her income. She said, “People in America don’t need to save. China doesn’t have the social safety nets you have.” Part of surviving in their society is to learn money skills and how to save early in life for emergencies and retirement. A man I met in India told me much the same story; he had his retirement fully funded by age 45.

In the US and most other developed countries, government programs like Social Security have become the retirement plan of the masses. Yet the majority of women in developed countries don’t seem to find comfort in those programs.

However, neither do they save like their emerging market counterparts. In fact, 56% of Americans live hand to mouth, according to a 2005 survey of retirement savings for baby boomers and others, by Sharon A. Devaney and Sophia T. Chiremba, reported at the US Bureau of Labor Statistics [USBLS].

Assessment

What might motivate women globally to gain confidence in their retirement preparedness? I don’t know. But based on the results of this survey, the answer won’t be found in more government programs.

Conclusion

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Investment Adviser v. Mutual Fund Manager

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“What’s the difference … and why pay fees to both?”

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler MS CFPQuestions – from doctors – like these remind me that the workings of the financial services industry which I tend to take for granted but can be confusing to people outside the field.

The following analogy may help to explain.

Orchestra Analogy

Think of an orchestra. The investment adviser is the equivalent of the director/conductor and the money managers are the instrumentalists. Each one is a specialist who plays a particular type of instrument, and it takes a variety of these specialists to make up the orchestra.

Specialists

The broad specialties are the types of instruments, such as strings, brass, winds, and percussion. These are the equivalent of fund managers who specialize in asset classes like equities, bonds, real estate, commodities, and absolute returns.

Sub-Specialists

Within each specialty are a variety of subspecialists. Winds, for example, include clarinets, oboes, and saxophones—which are further divided into alto, soprano, tenor, and bass. The brass section has French horns, trumpets, and trombones. The divisions and sub-divisions go on and on. Similarly, within the various asset classes are a great many mutual fund managers who specialize in narrower subcategories.

Conductor

The task of the orchestra conductor-director is to pick, not just the best musicians, but the best mix of musicians. A group with only trumpets or every subspecialty of percussion, no matter how skilled, isn’t an orchestra. Before auditioning a single musician, the director’s first task is to clarify the purpose of the ensemble being created. A different mix of instruments will be required for a symphony, a marching band, an intimate chamber group, or a dance band. It all depends on what the audience wants.

The conductor-director needs to weigh the various musicians’ abilities against their cost and their specific specialties against the needs of the orchestra. When the right mix of players has been chosen, the director needs to pick the appropriate music, assemble the group, and rehearse. The director’s talent, experience, and leadership skills all serve to help the right players produce the right sound for their audiences.

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globe

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It takes similar coordination and skill to put together the right mix of asset classes and mutual fund managers to produce the best results for various clients, especially since there are some 17,000 mutual funds to choose from.

Fees

Just as both the orchestra director and the musicians are paid based on their skills and their work, both mutual fund managers and investment advisers are paid based on the assets they manage. Mutual fund managers earn 0.05% to 3.0%. Financial advisers earn 0.30% to 3.0%. An informed consumer could pay as low as 0.35% while an uninformed consumer could pay up to 6% a year, which would eat up most of the investment returns.

One essential responsibility for an adviser, then, is to choose mutual fund managers whose fees are low.

However, the cost of the mutual fund manager isn’t the be-all and end-all. One must also weigh performance, just as an orchestra director might pay more to get an outstanding musician who would add significant value to the performances.

Example:

For example, my firm’s overall average fee for mutual fund managers is 0.5%. We could get that as low as 0.1%, which might be impressive at first glance.

However, we would give up 0.25% to 1.00% of net return in some areas, resulting in poorer outcomes for the clients.

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INV_03_15_XMIT.indd

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Assessment

Skilled direction of an orchestra is obviously more art than science. Skilled coordination of mutual fund managers is the same. Both require knowledge, integrity, and commitment to the quality of the final product.

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Getting the Most from College 529 Plans

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A List of Suggestions

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler CFPWhen it comes to 529 college savings plans, the best strategy is to start early and start big. Don’t wait to set up an account until your teenager is starting to wonder which schools might offer skateboarding scholarships.

These accounts are excellent vehicles to save for college, in large part because of the tax-free growth they offer. Here are some suggestions for getting the most benefit from a 529 plan.

The List

1. Start as early as possible. The best time to start a 529 plan is at birth. Well, maybe a few weeks later; you do need to wait until the kid gets a Social Security number. The earlier an account is established, the more years of growth it will provide. Ideally, the plan and the child will grow together.

2. In the early years, invest more aggressively. It would be a shame to open a plan for a two-year-old and put everything in a money market fund or bonds; the goal in early years is growth. It’s a good idea to invest heavily in equities for about the first 10 years, then gradually move to bonds and other low-risk options. Many plans have an age-based option that does this automatically.

3. Fund the plan as much as you can when the child is young. Obviously, this can be a challenge for young families. If you can, however, it’s good to start with higher monthly amounts even if you need to taper off your contributions as the child gets older. The goal is to get as much into the plan as you can.

4. Consider using the five-year option. If someone has the ability to put a large amount into a child’s 529 plan all at once, it’s possible to contribute as much as $70,000 that is considered a contribution in advance for the following five years. The five-year period is to minimize federal gift tax purposes. This option might be most applicable for grandparents as part of their own estate planning.

5. Pay attention to fees and performance. Many 529 plans are sold through investment firms, and the commissions paid to those firms vary. Some offer mutual funds with relatively high annual fees. Fees are required to be clearly disclosed. It’s also a good idea to look at the performance of the fund managers. As an example of how to find this information, the South Dakota 529 plan has a FAQ section on its website with details on fees, performance, and funds.

6. Compare several state plans. While some states do offer tax breaks for residents who use their 529 plans, you aren’t limited to the plan from your own state. You can open new accounts in or move existing accounts to other states.

7. The more plans, the better. One child can be the beneficiary of several plans, perhaps set up by parents and both sets of grandparents. Or grandparents, say, could contribute to accounts opened by parents. The potential disadvantage here is that the money then belongs to the owner of the account.

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college

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One Last Point

Don’t get so excited by the idea of maximizing a 529 plan that you forget one essential guideline: Parents should fund their own retirement accounts ahead of funding college accounts for the kids.

Assessment

There are many places to find a little extra money for kids’ 529 plans. A few possibilities are cash gifts from relatives, contributions from grandparents, tax refunds, or bonuses. But the worst place to find that money is your own retirement fund. It isn’t wise to sacrifice a healthy retirement plan in order to create a healthy 529 plan.

More: Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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The Dating and Money Conversation for Medical Students

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Honey, We Need to Talk … About Finances!

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler CFPWe are al aware of the student debt load crisis in this country.

But, one of the challenges at the beginning of a romantic relationship is having “the conversation” about an equally important issue for any couple: money.

Even more so for medical students, interns, residents, nurses, young doctors and medical professionals!

For example:

  1. What is okay to ask a potential partner about money, and when?
  2. How do you bring the subject up without seeming like a braggart, a coldhearted miser, or someone looking for a meal ticket?

There really ought to be some rules of etiquette for exploring this essential topic; something like, “by the sixth date, it’s appropriate to start undressing financially.” Unfortunately, we don’t have such guidelines.

The Money Minefield

Money is a topic fraught with emotional richness. In other words, it’s a minefield. Money is one of the top sources of conflict for couples, so if you’re dating, it’s crucial to learn a potential partner’s earnings, net worth, money habits, and financial beliefs. At the same time, talking specifically about money is so forbidden in our culture that we have no idea how to initiate a conversation about it.

Here are a few suggestions that might help:

1. Figure out your own money beliefs first. Before you even sign up with a dating site or accept your friend’s offer to set you up with her brother-in-law’s second cousin, think about what you want and need financially from a partner. Do you care if someone’s net worth is much higher or lower than yours? Is a certain level of debt a deal-breaker? What lifestyle are you comfortable with?

2. Tell before you ask. Begin with appropriate self-disclosure, in small steps, about your earnings, your long-term financial goals, or your beliefs about debt or spending. See how potential partners react. If they don’t disclose in turn, seem very uncomfortable with the conversation, or have beliefs or money habits much different from yours, you may be seeing red flags.

3. Observe. Watch how people handle money. Are there any patterns around spending or the use of credit cards that seem to indicate either overspending or excessive frugality? Do they throw cash around, or do they leave restaurant tips that Ebenezer Scrooge would be proud of?

Does someone’s home show signs of hoarding or stinginess? (A candlelight dinner of takeout Chinese at a card table is one thing for college students, but quite another for middle-aged professionals.) Do their cars or houses seem poorly maintained? Does their lifestyle seem more lavish than the typical earnings in their career field would support?

4. Listen. Despite the taboo on talking directly about money, we indirectly reveal a lot about our money beliefs by what we say. Notice how dates talk about saving or spending. Do they seem worried about money or reluctant to spend it even on basic needs? Do they seem angry about money or resentful of successful people? Do they boast about financial successes, things they own, or get-rich-quick schemes?

5. Ask. Even if everything else is all moonlight and roses. When you meet someone who seems like “the one,” don’t set aside everything that matters to you about money. Instead, remember how important this issue is to the long-term health of a relationship. Even if you can’t do it gracefully, ask the money questions. Talk frankly about debt, spending, saving for retirement, and each other’s expectations around lifestyles and careers.

Dating Currency

Assessment

Being the one to initiate that difficult money conversation doesn’t mean you’re coldhearted, unromantic, or greedy. It simply means you recognize that money is too important a topic to ignore. When we enter into a romantic relationship, it’s tempting to think that love means not having to talk about money. In truth, love means having the courage to talk about money.

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On Parents’ Inheritance Excuses

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An Estate Planning Follow-Up Discussion

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPPreviously on this ME-P, we explored three fears that stop adult children from talking with parents about their estate plans, even though such conversations could greatly benefit both generations.

These are: “It’s none of my business,” “I don’t want them to think I am greedy,” and, “It will ruin our relationship.”

Parents Fear, Too!

Children aren’t alone in their fear of approaching this topic. Most parents are just as reluctant—and for the same basic reasons. In my experience, parents’ biggest reasons for not talking with kids about legacy intentions are: “It’s none of their business,” “If I share financial information, they will take advantage of me,” and “Talking about money will hurt our relationship.”

Let’s look at each of these:

“It’s none of their business.” This is certainly true, unless you’ve made it their business. If you name a child as an executor of a will, a successor trustee of a trust, or an agent in a Durable Power of Attorney, you have made it that child’s business to know your business.

Shared Decision Making  

To throw a child into suddenly having to make financial decisions in your best interest without knowing what they must manage, where assets are held, and what your wishes are is unfair to both you and your child. Any time you put someone in a position of authority in any of your estate documents, it’s essential to carefully go through the document with them and to disclose details of the assets they will make decisions on. Start with showing them your financial statements, the contact information of your trusted advisors, and a listing of where you hold all your accounts.

If you feel you can’t trust a child with such information today, then why do you feel you can trust them as your agent or executor tomorrow? If you don’t trust a child, you’re better off to name a bank trust office or trust company to these positions.

Bank

“If I share financial information, they will take advantage of me.” This fear may be justified if your child has a history of taking advantage of you. If not, they probably aren’t going to start now. Preparing a child for an inheritance is not only prudent, it’s also a loving act of kindness you can give your child.

Sudden Money

I have worked with several families where children had no idea of their parents’ net worth. In every case, it was much higher than the kids ever imagined. Suddenly, they learned they were about to inherit hundreds of thousands or millions of dollars in various investments they knew nothing about. I witnessed these heirs try to cope with a plethora of emotions and money scripts, in addition to needing to learn the mechanics of managing a portfolio of investments. Without proper preparation, it’s not uncommon for what parents intended as a loving gift of wealth to turn into a destructive force of misery.

“Talking about money will hurt our relationship.” Parents are just as terrified to have money conversations with their kids as kids are afraid to talk with them. And no wonder—it’s parents who teach kids the no-talk rule in the first place.

Parental Wisdom

As parents, you can exercise the wisdom of age and begin the family money conversations. It may be helpful to have the first meeting with your financial planner or estate attorney, or engage the help of a financial therapist. You might be amazed to find that talking with your kids about money in a straightforward and healthy way can actually help your relationships.

Assessment

Do your kids a favor and break the no-talk rule. It’s a gift to both generations.

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On Our Financial Comfort Zones

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Exploring the Range

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPTry to imagine the enormous range of possible financial conditions in which human beings can live. At the lowest end is bare subsistence—the minimum food and shelter possible to sustain life. At the highest end is unlimited wealth—multi-billionaires with more than they, their children, and their grandchildren could possibly spend.

Think: Abraham Maslow’s hierarchy of needs.

The Rest of Us

Most of us, including doctors of course, live in relatively narrow bands somewhere in between these extremes. In Wired for Wealth, we describe these bands as “financial comfort zones.”  People who share a financial comfort zone tend to have similar incomes, lifestyles, spending and savings habits, and beliefs about money.

For those growing up in wealthy families, “normal” may include private schools, international travel, live-in household help, and expectations of an Ivy-League education followed by a lucrative career.

Those growing up in families with limited incomes will inhabit a much lower financial comfort zone. Their “normal” might include shopping at thrift stores, squeaking by from month to month, and having little or no expectation of higher education.

In both cases, the expectations people grow up with tend to keep them in their financial comfort zones. These zones are artificial financial boundaries that we impose on ourselves, and they are not necessarily defined by what we can or cannot afford. Yet we become uncomfortable if we move too far outside them.

Expanding the Zone

Certainly, people can and do expand their financial comfort zones. Children who grow up in low-income families, for example, may be able to get an education and go on to careers that bring them financial success far beyond that of their parents.

The real problems arise when circumstances unexpectedly push people out of their financial comfort zones.

Out of the Zone

I once had a client couple inherit several million dollars. They had no idea Mom had that much money. All at once, they had the means to move into a much higher financial comfort zone. Yet their reaction was depression. They came into my office asking, “What is wrong with us?” We spent some time exploring their money beliefs and discovered their number-one money script was “Money we didn’t earn isn’t worth having.” Moving slowly out of their financial comfort zone thru their-own efforts would have been fine. Being shoved out of it by an unearned inheritance was a challenge.

It’s no wonder that many people, coming into unexpected wealth, unconsciously feel a need to get rid of it. It’s one way to get back into the familiar zone where they know how things work, they are comfortable, and they belong.

Solo Doc

The Higher Zone

The same thing can happen to those in higher financial comfort zones. Suppose a high-earning medical or professional couple, who are accustomed to an affluent lifestyle, lose nearly half their net worth in an economic downturn. Then; one of them is laid off. They aren’t going to starve. In fact, they could scale back their spending a great deal and still live perfectly comfortably.

Yet this may not seem like an option to them. Changing their financial circumstances would move them out of the place they belong. It’s possible they may go into debt or spend down the assets they do have left, jeopardizing their financial future, in order to maintain a lifestyle that keeps them in their financial comfort zone.

Assessment

Ironically, this couple would have a better chance of returning to their financial comfort zone if they were willing to live below it until their financial circumstances improved. Choosing to live at the low end of your financial comfort zone so you can invest for the future is one of the most important ways to build long-term financial independence and lasting financial comfort.

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Got Cash Money in the Bank?

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Is it Really a Long-Term Investment?

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPGot money in the bank? Of course, that’s a good thing.

But, more than a fourth of Americans think the best long-term investment strategy is money in the bank. However, that may be a bad thing!

So, what about medical professionals; and what is a doctor to do?

The Bankrate Survey

Here is the rather discouraging result of a July survey by Bankrate. One of its questions was, “For money you wouldn’t need for more than 10 years, which one of the following do you think would be the best way to invest the money?”

Cash was the top choice at 26%, followed by real estate at 23%. Sixteen percent of the respondents chose precious metals such as gold. Only 14% would put their long-term investment into the stock market, and just 8% thought bonds were the best choice.

Head-on-Desk Syndrome

Doh! That thumping sound you hear is me banging my head on my desk.

I assume those who opted for cash did so because keeping money in the bank seemed to be the safest choice. For long-term investing, however, that safety is an illusion. The best and safest place to put your nest egg for the future is not in the bank, but in a well-diversified portfolio with a variety of asset classes.

Here’s why:

Savings accounts and CDs are safe places to store relatively small amounts of cash that you expect to need within the next few months or years. The funds are protected by insurance. You know exactly where your money is, and you can get your hands on it anytime you want.

Short Term Stability

This short-term safety does not make the bank a good place for money you will need for retirement or other needs ten years or so into the future. It may seem like safe investing because the amount in your account never goes down. You’re always earning interest. Yet, over time, that interest isn’t enough to keep pace with inflation. The purchasing power of your money decreases, which means you’re actually losing money. It just doesn’t feel like a loss because you don’t see the loss in value.

Stock Markets Fluctuate

In contrast, the stock market fluctuates. The media reports constantly that “the DOW is up” or “NASDAQ is down,” as if those day-to-day numbers matter. This fosters a perception that investing in the stock market is risky. Combine that with the scarcity of education about finances and economics, and it’s no wonder that so many people are afraid of the stock market and view investing almost as a form of gambling.

Wise long-term investing in the stock market is anything but gambling. Instead of trying to buy and sell a few stocks as their prices go up and down, wise investors neutralize the impact of market fluctuations by owning a vast assortment of assets.

A Dual Strategy

This is accomplished with a two-part strategy.

1. The first is to invest in mutual funds rather than individual stocks. With just one mutual fund that invests in an index of stocks, you might own thousands of different companies. Your hard-earned fortune isn’t dependent on the fortunes of just a few companies.

2. The second component is asset class diversification. An asset class is a type of investment, such as U. S. and International stocks, U. S. and International bonds, real estate investment trusts, commodities, market neutral funds, Treasury Inflation-Protected Securities, and junk bonds. Ideally, a diversified portfolio should include nine or more asset classes.

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MD Retirement planning

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Assessment

By holding small amounts of a great many different companies and asset classes, you spread your risk so broadly that the inevitable fluctuations are small ripples rather than steep gains or losses. As some types of investments decline in value, other types will be gaining value. Over the long term, the entire portfolio grows.

And, in the long term and for most medical professionals, investing this way is usually safer than money in the bank.

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The Doctor’s Path to Wealth?

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And … for us all

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPAfter three decades as a financial planner, working with successful wealth-builders, you’d think I would have a clear idea of the right path for creating wealth.

Instead, what I’ve learned is that there is no such thing. Here are just a few of the paths that aren’t the sure routes to wealth they might seem to be:

Several Paths

1. Education and career choices. Going into a field like law or medicine might seem to guarantee financial success. Not necessarily. I’ve seen many physicians, for example, who have accumulated significant wealth. I’ve seen just as many who live paycheck to paycheck.

2. High earnings. Again, this isn’t the reliable predictor of wealth it would seem to be. True, someone who spends decades in low-wage jobs is unlikely to be able to accumulate much financial security. But a person earning $1 million a year will not necessarily have a larger net worth than someone earning $75,000. I’ve seen people who worked as janitors, nurses, and mechanics become millionaires. I’ve worked with others, earning a hundred times more in careers like sales or entertainment, who reach retirement age with absolutely nothing.

3. Owning your own business. Many hard-working, creative entrepreneurs build successful businesses that provide wealth, not just for themselves, but for their children and grandchildren. Others might see a business or even a series of businesses fail. Still others might work hard all their lives but never achieve more than the equivalent of an average salary in their field.

4. Investment choices. Some people have had great success investing in various types of real estate, businesses, and commodities. Others have lost everything they ever owned investing in those same vehicles.

Some Commonalities

So, sorry, I can’t give you a simple list of the top ways to build wealth. There’s little commonality in how my successful clients have made their money. What I can suggest are a few ways to help you find your own path to accumulating wealth.

1. Define “wealth” in your own way. Maybe you’re willing to live frugally in order to accumulate enough money to feel secure that your needs will be met even if you live to be 100. Maybe wealth to you is living a lavish lifestyle and being willing to work hard to pay for it. You might see wealth as the satisfaction and responsibility of having your own business. Maybe it means being able to give generously. Or perhaps you define wealth as the freedom of owning little and traveling around the world on a bicycle.

2. Know what you are willing to sacrifice—and what you are not—in order to accumulate wealth. There’s nothing wrong with earning a high salary doing work you hate for a time, as part of an overall strategy to get you to doing something you love. But doing so for a lifetime is hardly the road to either happiness or wealth.

3. Think long term. The most reliable way to build lifetime wealth, with the lowest risk, is through a long-term commitment to diversified investing. Yet even those who are successful on riskier paths to wealth take the long view. Business owners may fail more than once before they succeed. And those who have made fortunes in high-risk investments have also lost fortunes. They understand that success is about taking calculated risks.

4. Learn to make conscious financial decisions. I’ve seen many intelligent, capable people stuck in financial chaos and poverty because of emotional pain and dysfunction. Emotional health may not be essential for building financial wealth. It is, however, essential if you want to use that wealth to support a rich and satisfying life.

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On the “Selling Points” for Whole-Life and Universal-Life Insurance

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De-Bunking Conventional Sale Wisdom

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFP“You need to protect yourself and your family with life insurance that you won’t outlive.”

This is one of the common selling points for whole life or universal life rather than term life insurance. At first glance, it seems to make a lot of sense. Of course you don’t want to outlive your life insurance. Having it pay benefits upon your death is the reason you buy it.

This statement, however, misses one essential fact. Many people don’t need to worry about outliving their life insurance, because they outlive their need for life insurance.

Outliving the Need

We don’t all need life insurance throughout our entire lives, any more than we do auto or homeowners’ insurance. If you no longer drive a car, you don’t need auto insurance. If you no longer own a home, you don’t need homeowners’ insurance.

For example, in circumstances like the following, you may no longer need life insurance:

  • First;  when you and your spouse have accumulated enough assets and income streams to independently care for yourselves.
  • Second;  when your children are self-sufficient adults.
  • Third;  when your estate is too small to owe estate taxes or liquid enough to pay the estate taxes.

Primary Purpose

The primary purpose of life insurance is to replace the future income of a primary breadwinner. Two groups most likely to need it are middle-aged couples saving for retirement and parents of minor children. Ideally, most young families should have over $-1 million in life insurance to provide for the children if either parent should die prematurely.

Yet many of them are unable to afford the higher premiums for this much “permanent” insurance. Their choices are to underfund their needs with a smaller permanent policy or purchase an affordable 30-year term policy.

As we age, the probability of dying becomes greater. Therefore, a $1 million life policy costs much less for a 25-year-old than a 75-year-old. It doesn’t matter if the policy is cash value, whole life, universal life, or level term, the cost of providing the life insurance component increases every year.

Psychological Aversions

Yet most human brains have a psychological aversion to price increases. In order to please their customers with life insurance premiums that didn’t increase every year, insurance companies came out with level term policies. Essentially, the premiums are averaged out by overcharging in the early years of the policy and undercharging in the later years.

insurance

Higher  Premiums

Whole life and universal life insurance policies don’t have that same averaging. To be “permanent,” the premiums must be much higher in order to fund a savings account that grows over time and is often used to offset a significant portion of the death benefit in the later years of the insured’s life. Usually, if the insured cancels the policy, a portion of the premiums will be refunded.

Cash Value

A cash value policy may occasionally be a good estate planning tool, generally for those with substantial wealth. It might be used to fund an irrevocable life insurance trust upon the second spouse’s death, perhaps to pay taxes on an illiquid estate like a family farm or other property. It also can be used for those wanting to leave the bulk of an estate to charity and still provide income to their children. These strategies rarely apply to those whose primary goal is basic income replacement for their families.

Assessment

One of the ironies of insurance in general is that we all know it’s essential and we all hope never to need it. For most people, life insurance is not really an exception to this. Its primary purpose is not to provide us with investment income, but to provide our families with income if we aren’t there.

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Physician-Investors and the “F” Word

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“Fiduciary”

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFPOkay, I did it again in a recent column. And, I got into trouble again. That’s what I get for using the F-word.

Mea Culpa

My most recent transgression was to point out the simple fact that insurance agents are compensated by commissions on the products they sell. They have no fiduciary duty to legally act in the best interests of their customers.

Every time I remind readers that sellers of financial products do not have a fiduciary duty to their customers, I get indignant responses from financial salespeople who seem to think I have accused them of being unethical.

Ethics

Not so. Someone who sells financial products may well operate with integrity. In fact, their licenses typically require that they be “fair” and “honest.” These salespeople may care about their customers and be committed to selling only products that they believe will meet their customers’ needs.

But being a fair, honest, and ethical salesperson is not the same thing as having a legal fiduciary duty to the consumer. The word “fiduciary” has a specific meaning in our legal system. It describes those in positions of trust or authority who are required by law to act in the best interests of those they represent. A fiduciary is an advocate for the consumer, who is legally termed a “client.”

Of Doctors and Attorneys

Doctors and attorneys have fiduciary relationships with their patients and clients. The executor of an estate is a fiduciary. So is a trustee, someone acting under a power of attorney, or an agent hired to represent you. Real estate agents can be fiduciaries if they are engaged to represent either buyers or sellers.

Financial planners can also be fiduciaries. Yet those who offer financial advice and services in conjunction with the sale of a financial product are not fiduciaries.

Fiuduciary

Follow the Money

How can you generally tell whether a financial professional is required by law to act in your best interests? Simple. You follow the money. Wherever the professional’s compensation comes from is most likely where the fiduciary responsibility goes.

If you hire a fee-only financial planner, you are directly paying that person for professional advice and services. The planner receives his or her income from you and others like you. You are clients, not customers, and the planner is legally obligated to act on your behalf.

This is not the case if you buy financial investment products or receive financial advice from someone who is compensated by commissions. It doesn’t matter whether this person’s business card says “financial consultant,” “financial planner,” “investment advisor,” or “broker.” Anyone can use those terms.

Commission Sales

But, if someone is paid by commissions from financial companies, he or she is a sales representative whose fiduciary responsibility is to those companies. They may call you their “client,” but in the legal sense, you are not. You are a customer who buys products from a salesperson. Just like those who sell cars, groceries, or shoes, these salespeople owe their primary loyalty to their employers. They are obliged to operate in the best interests of themselves and their companies.

This relationship has a built-in conflict of interest. Because financial salespeople make most of their money from commissions, their recommendations to customers are usually biased toward investments that will be the most profitable for themselves. Their legal responsibilities are to act fairly and honestly. Most either don’t or won’t disclose the amounts and sources of their commissions

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Assessment

A financial salesperson who is not a fiduciary certainly can act with integrity. I know many who do. That means they are honest people who want to thrive in business by selling legitimate products in a responsible and ethical way. It does not, however, make them fiduciaries.

Conclusion

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Are Doctors NOW Members of the Middle Class?

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  • By Dr. David Edward Marcinko MBA CMP®
  • By Rick Kahler MS CFP® ChFC CCIM

Rick Kahler CFPThe middle class Marketers target it. Politicians champion it. Economists talk about it. Most of us consider ourselves part of it. FAs want to serve it.

Yet, when I’ve asked for a clear definition, I have not found anybody yet that really can tell me what “middle class” is.

Definition

I recently posted on Twitter that $90,000 was a middle-class household income and that it would take a nest egg of $3 million to generate that income in retirement.

A couple of my colleagues responded that my figures were way too high and accused me of being out of touch. As a lifelong South Dakotan, I’m used to being seen as “out of touch,” but the idea that $90,000 was beyond a middle-class income intrigued me.

I figured a few minutes with Google would point me to a definition of “middle class.” It wasn’t that simple. I soon discovered that neither politicians, nor economists, sociologists, nor financial advisors can agree on what makes someone middle class. It is a little easier to define a middle class income.

USA Today

I did find an excellent article in USA Today by Dan Horn of the Cincinnati Inquirer. He cited three surveys that attempted to define the middle class by income. The Pew Charitable Trust describes it as the middle 20%, an income range from $32,900 to $64,000. The U.S. Census Bureau disagrees.

They say a middle class income is the middle 60%, an income range of $20,600 to $102,000. The U.S. Department of Commerce begs to differ with both and says an income between $50,800 and $122,000 puts you in the middle class. Combining the income range of the three studies ($20,600 to $122,000) puts two-thirds of all income earners in the middle class.

My Personal POV

For me, defining middle class with such a broad income range just raises more questions than it answers.

First of all, the same income that will provide a comfortable middle-class lifestyle in a place like the Black Hills of South Dakota won’t necessarily do the same in San Francisco or Boston.

Second, if you want to assure yourself of a middle-class income throughout your lifetime, you apparently have to get rich.

Concept of expensive education - dollars and diploma

Case Model

Let’s assume a young couple, both allied healthcare professionals, earn $45,000 each for a household income of $90,000. Let’s assume they want to save enough to provide a similar income in retirement without counting on Social Security. To generate that income, with a 99% certainty they will never run out of money, how much will they need to save?

While financial advisors’ responses will vary, most will agree this couple would need between $2 million and $4 million in today’s dollars. Let’s settle on $3 million. If they each saved $1,000 monthly to 401k’s (about 25% of their salaries), our young couple could save $6,600,000 million ($3 million in today’s dollars adjusted for inflation) by the time they reached age 65.

However, while a couple needs $3 million to produce a middle-class income, someone with a net worth of $3 million is in the financial top 2% of Americans. That’s hardly middle class.

And to complicate things further, Gallup polls have shown that most Americans think anyone with a net worth of $1 million is rich. Yet having $1 million when you retire will generate a secure lifetime income of $30,000. So the net worth that we define as wealthy provides an income that we define as barely middle class.

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Assessment

Confused yet? I certainly am. There’s just one thing I’m still sure of. If you want a middle-class lifestyle after you retire, what you’d better do now is live a modest middle-class lifestyle so you can save enough to qualify as rich.

Conclusion

And so, are doctors members of the middle class – in potential retirement income under this model? Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Finding Emotional Freedom [Access the Truth Your Brain Already Knows]

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By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFP“It’s not about the money.” This saying has become almost a cliché among financial planners and therapists who help clients address the emotional aspects of their relationships with money.

We keep using this phrase because it is so true. Overspending, taking unreasonable risks, money conflicts that strain marriages, failing to learn from money mistakes, and a host of other problematic money patterns are not about money. They are about emotions. And since brain researchers tell us that 90% of all decisions are made emotionally, it literally “pays” to pay attention to your emotions.

Because money affects so many aspects of our lives, it’s only natural that destructive behavior around money is one of the ways people try to cope with emotional pain. Money dysfunction is really no different from other destructive behaviors like addiction or codependency. Like them, it can have high physical, emotional, relationship, and financial costs.

The more I learn about the relationship between our emotions and our money choices, the more I understand why financial knowledge alone isn’t enough to help people change unhelpful behaviors that keep them stuck. I am convinced of the value of financial therapy and other forms of counseling to help people create financial and emotional balance in their lives. It’s clear to me that psychotherapy offers clear financial benefits as well as emotional ones.

The Book

A new book by Dave Jetson, Finding Emotional Freedom: Access the Truth Your Brain Already Knows, addresses these issues in one of the more clear and succinct manners I’ve encountered.

Dave is one of the few counselors in the nation who understands and practices financial therapy. In his practice and workshops, he uses experiential therapy techniques that access both the conscious and unconscious parts of the brain to help people recover from any type of abuse and trauma, including financial. I’ve seen first-hand how effective this work is.

I also know that Dave is one of those rare guides who’s actually done and succeeded at what he teaches. He is one of those who walks the walk. Now he has written a book describing that walk.

Finding Emotional Freedom includes a clear, readable description of how our brains process emotions. This is useful, even critical information for anyone who wants to make wiser money choices.

Finding Emotional Freedom: Access the Truth Your Brain Already

Co-Dependency

Dave also describes how codependency develops and some of the patterns it takes. Many of these patterns—from addictions, to shopping as “retail therapy,” to excessive taking care of others—have financial as well as emotional costs.

Even though Dave offers financial therapy and has created a workshop on Financial Recovery, he doesn’t specifically discuss financial codependency in this book. This doesn’t mean the issue is not important. In fact, it serves to underscore the principle that that many money issues really are not about the money.

Assessment

Finally, this book explains how experiential therapy works and the deep changes it can make. Finding Emotional Freedom shows the possibilities for not only healing emotional wounds, but for increasing your emotional intelligence. It’s a powerful book, and I highly recommend it.

When I was starting out as a financial planner 30 years ago, I wouldn’t necessarily have even picked up a book like this, much less have felt comfortable recommending it to clients. Now I know better.

What I have learned over those years is that real financial planning is about much more than just the money. Providing investment advice that helps people achieve financial health is certainly important. But the larger role of a financial planner is to help clients prosper. Real prosperity includes not only financial health, but also emotional health and happiness.

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Value Focused Frugality for Medical Professionals

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Authentic versus Misguided Frugality?

By Rick Kahler MS CFP® ChFC CCIM

http://www.KahlerFinancial.com

Rick Kahler CFPMedical professionals and those who successfully build wealth have one trait in common: they understand the art of frugality.

The Millionaires Next Door

These unassuming millionaires know how to live on much less than they make, and they know how to save money. But those behaviors alone aren’t enough. Why? Because not spending money today does not always result in having more money tomorrow!

On Frugal Types

Frugality for its own sake can result in doing without things that matter to you, failing to take care of basic needs like your health, and living with a sense of deprivation. It can also lead to spending more money, not less, in the long run.

Frugality for the sake of enhancing your life, on the other hand, features an eye for value. Most people who build wealth are masters at the art of getting value.

Thinking Savings        

There are many ways we might think we are saving money, but actually the opposite is true. We end up spending more money in the long term. Here are a few of the ways we can fail to get value:

1. Not spending the money to have legal documents drawn. A poorly-worded agreement—or even worse, no written agreement at all—can cost you a bundle in future legal fees or even result in your losing a business or other asset.

2. Doing your own taxes. Unless your finances are so simple you can file the 1040-EZ, you’re better off to pay a professional who will find deductions you’re likely to miss.

3. Buying a new car to save money on repairs. An occasional repair bill for a few hundred dollars is still a lot cheaper than a monthly payment.

4. “Saving” money by spending on bargains you don’t need or want. This includes settling for what’s cheapest instead of looking for the best price on what you really want.

5. Going without insurance. At a minimum, you should have homeowner’s or renter’s insurance, car insurance with maximum liability amounts, and a high-deductible health insurance policy. A loss or liability that isn’t covered can cost you everything you have.

6. Not getting regular medical checkups. “An ounce of prevention is worth a pound of cure” is a cliché because it’s so true.

7. Looking only at the initial price tag without comparing long-term costs. A more expensive but higher-quality item, whether it’s a car or a pair of shoes, might last much longer and be a better value than something cheaper.

8. Not focusing on value for services when purchasing investments. A discount broker, for example, isn’t always a better deal than a full-service broker. For “A” shares of mutual funds, you may pay the same in commissions without getting any personalized help. If you use a discount broker, be sure to purchase “no-load” funds, which don’t have commissions.

9. Paying hidden costs for financial advice. Writing a check to a fee-only planner may seem too expensive. Yet Bob Veres, editor of Inside Information, says that investors who don’t pay directly for the financial advice they get often pay two times more in hidden costs for the “free” advice. If you buy investments products from a financial salesperson, keep asking questions until you know exactly what you’re paying in commissions and fees.

10. Paying off a low-interest loan instead of putting the money into a retirement account. If you can earn more than you pay in interest, it may be wiser to keep making loan payments.

Fiscal Cliff

Assessment

Frugality that focuses on value is an essential wealth-building tool. Those who use it well do more than just save money. They know how to get the most value for the money they do spend. Do you, doctor?

Conclusion

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More on Money Psychology

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By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFPAnyone who sent a check to the IRS this month certainly doesn’t need to be convinced that there is a relationship between money and feelings. I can personally attest that paying a hefty tax brings up a great deal of painful emotion.

Unification

The case for the union of money and psychology is overwhelming. Almost everyone experiences fear, sadness, grief, anger, or happiness around money events. Large life events like divorce, death, bankruptcy, losing a job, and selling a home clearly involve money and evoke emotions.

We may be less likely to notice the psychological aspects of smaller money events. Yet even acts like paying monthly bills, buying birthday gifts, or shopping for groceries have an emotional component.

The Research

Researchers like psychologist Daniel Kahneman PhD (who won the Nobel prize in economics) find that 90% of all financial decisions are made emotionally, not logically. Even the seemingly cold and calculating world of investing is driven by emotions. Economic theory is being set on its head as economist are slowly coming to realize that, regarding money, consumers often don’t make rational decisions that are in their best interests.

Yet 18 years after a small group of pioneering financial planners and therapists first met to explore the relationship of emotions and money, the field of financial psychology is still in its infancy. It’s really no wonder.

The Money Side

On the money side of the equation, we have institutions like large brokerage houses, insurance companies, and banks. Like all businesses, they need to be profitable. Any concern these institutions may have about the union of finance and psychology is likely to focus on ways to manipulate customers’ emotions in order to sell more of their goods and services.

The Emotional Side

On the emotional side, psychologists and therapists rarely mention money issues. When they do talk about money, it’s often in the context of their own fees. Their training doesn’t address the idea that both they and their clients may have emotional issues or beliefs around money that could be destructive.

Tax

The Gap

This leaves a big gap. In the middle of it are consumers who don’t know how to develop healthier patterns of behavior around money. They may overspend to relieve stress, feel overwhelmed by credit card debt, be unreasonably fearful about financial security, be overly trusting or overly suspicious, or give or lend too much to family members.

Some of these consumers have at least some idea that their destructive financial patterns are psychological. They may realize they need more than financial facts to change those patterns. Yet they may have no idea where to find the help they need.

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The Financial Planners

The one group of professionals that is moving to fill that need is client-focused financial planners. Unlike advisors who sell financial products, client-focused financial planners receive no commissions but charge fees for their advice. By law, they must act as fiduciaries and advocates for their clients.

Historically, financial planners have not embraced the notion of money psychology. Obtaining the Certified Financial Planner® designation still requires no formal training even in client communications or conflict resolution. Yet a small but growing group of client-centered financial planners is seeking out training in psychology and communication. A few even partner with financial therapists.

Assessment

The challenge for consumers is how to find these professionals. One source is the Financial Therapy Association, which has a list on its website at http://www.financialtherapyassociation.org.

Gradually, more consumers as well as professionals are realizing that it’s possible to combine financial knowledge and psychology to create more balanced relationships with money. This awareness is sure to increase the demand for financial psychology services. It will be exciting to watch this infant profession as it grows.

Conclusion

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A New IRA Withdrawal Limit Proposal

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Capping Tax-Advantaged Retirement Plans?

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFP“Max out your retirement plans every year” has long been standard advice I’ve given to working adults, and all medical professionals, who want to secure a reliable income when they retire.

Individual Retirement Accounts (IRAs), along with 401(k), 403(b), and profit sharing plans offered by some employers, are among the most accessible ways for middle-class workers to provide for retirement and build wealth.

If a proposal in President Obama’s budget plan is approved by Congress, however, retirement plans may no longer be the first and best stop along the road to financial independence.

The New Proposal

The proposal would limit a person’s total withdrawals from all tax-advantaged retirement plans to the amount it would cost to purchase an immediate annuity paying $205,000 a year. And, it appears to not be indexed for inflation. The articles I’ve read and my own calculations suggest this would mean capping retirement accounts at around $3 million.

From the sketchy details available so far, the proposal appears to target traditional IRAs and other tax-deferred retirement plans. Contributions to these accounts are made with pre-tax dollars, and the earnings in the account are not taxed until they are withdrawn.

Since 58% of Americans don’t have any retirement plan, my guess is they will pay little attention to this proposal. Saving $3 million dollars seems well out of reach. While that may be true in today’s dollars, it most likely will not be true in future dollars.

If inflation over the next 40 years matches that of the past 40, a $3,000,000 IRA in 2053 will be equal to $575,000 today. If today’s 25-year-old, retiring then, wanted to be sure the money would last another 40 years, the IRA would provide an income equivalent to about $1,500 a month.

Tax-Advantaged Retirement Plans

Even in today’s dollars, the $3 million maximum isn’t as unreachable as it may seem. Employees can currently contribute a maximum of $5,500 per year ($6,500 for those 50 and older) to Roth or traditional IRAs. Small business owners and the self-employed may have SIMPLE (savings incentive match plan for employees) or SEP (simplified employee pension) IRAs. The maximum annual contribution is currently $17,000 for a SIMPLE and $51,000 for a SEP. A self-employed plumber, business owner, or doctor who was a conscientious saver with a diversified portfolio could certainly accumulate $3 million over a lifetime.

Or, suppose the wife of a small business owner, or doctor, was a self-employed counselor with her own SEP plan. If he died at age 58 and she inherited his IRA, the combined totals could easily put her over the $3 million cap.

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MD Retirement planning

Unclear Options

It isn’t clear how the proposal would equate the withdrawal rate with the cap. One possibility would be to raise the required minimum distribution amount, which would erode the value of an IRA more quickly.

Another option would be to penalize excess accumulations with a hefty tax of 40% or more. Of course, the President could follow in Argentina’s footsteps and just confiscate any amount over the cap.

Any of these would add to the diminution of retirement plans as a vehicle for income during retirement.

The Caveat

The proposal includes this statement:

“But, under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”

Assessment

Apparently we, as individual citizens, are not considered capable of defining “reasonable levels” of retirement saving for ourselves. The real goal of this plan appears to be wealth distribution, instead of encouraging more Americans to save and provide for their own retirement.

More:

If this proposal is passed, retirement plans will play a much smaller role in many middle class Americans’ golden years.

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Be Your Own Banker?

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BYOB—or not

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPDoctors – I’m not inviting you to a “bring your own beverage” party. I’m warning you away from a get-rich scheme called “Be Your Own Banker.”

This idea has floated around the Internet and late-night television for a while now. One of the latest versions is touted on a website that I’m not going to name because I don’t want anyone getting sucked into what is essentially one step from being a scam.

Once you drill down past the initial layers of ambiguity, the basic concept seems simple enough. You buy a large whole-life insurance policy. After you pay into it for several years, it will accumulate a cash value. Then, any time you make a major purchase like a new car, you can borrow against your insurance policy instead of going to a bank.

Paying Your Self

According to the people selling this concept, you are the big winner here because you’re paying interest to yourself, not the bank.

The BYOB salespeople are incredible marketers. This must be where political campaign managers ply their trade in between elections. They blast our financial system, banks and bankers, mutual fund managers, and financial advisors. They profess to care about the customers they call “clients.”

The half-truths and misstatements from these sellers are enough to elevate the blood pressure of any fee-only financial planner. They use terms like “depositing cash into a life insurance policy” and “having control of your own banking system.”

Amid all this unbelievable double-talk, they forget to mention one little detail. All that money that you “invest” in your whole life insurance policy is paid in the form of premiums. You aren’t paying it to yourself. You’re paying it to large life insurance companies—which, by the way, are an integral part of the financial system they blast.

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good news

A Closer Look

Let’s look at some actual numbers. You pay $12,500 a year in premiums for a $125,000 whole life insurance policy. In four years, after paying in a total of $50,000, you would have $46,110 dollars in your account. Yes, this is less than you put in, as the fees and premiums add up to be more than the growth rate. You can borrow up to 90% of the net value, or $41,500.

You will pay the company 5% for borrowing your own money. Supposedly, the interest is paid to yourself and adds to the cash value of the policy. But a deeper look shows that the interest you pay yourself must be over and above the interest paid to the company, which is just another name for “premium.” The insurance company charges you interest regardless of the “interest” you pay yourself.

What happens if you don’t pay back the loan? The interest keeps compounding, adding to the amount of the loan and eating up the cash value of the policy. This could eventually leave you facing some nasty tax consequences, potentially including having to pay income taxes on phantom income.

Instead of paying that $12,500 a year in premiums, you could put it into a deductible 401(k) plan and invest the funds in a diversified portfolio. You’d even be better off to put it into a taxable account. Then if you needed a new car or water heater, you’d have cash and wouldn’t have to borrow from yourself or anyone else.

Assessment

After spending hours researching “being your own banker,” my staff and I understand what BYOB really means. It stands for “Bring Your Own Bottle”—of pain reliever. You’ll need it for the headache of trying to understand this slick advertising scheme. It makes no sense for anyone except those selling the life insurance policy.

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Understanding Vacation Time Shares

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Including Participatory Vacation Exchanges

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFPFor residents of places like the Black Hills, where the first day of spring usually brings a snowstorm, timeshares for resorts in Florida or Mexico can have a lot of appeal. They seem like a fun idea for a vacation in the sunshine as well as a good deal financially.

My Research

Over the past 30 years I’ve researched hundreds of timeshare offers. I’ve never bought one. When you take a close look at the numbers and the restrictions, they simply don’t add up to a good value.

One of the biggest problems with timeshares in general is that they can lock you into a specific vacation. Spending a week at that resort in Mexico in February, exploring the local area and relaxing by the pool, might be wonderful for a year or even several years. But eventually you may get tired of going to the same location, doing the same things, and seeing the same people. After a while, even a rut person like me might want to do something different.

PVEs

Some timeshares mitigate this problem by participating in vacation exchanges [PVEs] like RCI, Interval International, and others. These services will add on a fee.

Not Liquid

You might think that, if you get tired of a timeshare, you can just sublease or sell it. These aren’t necessarily easy to do. There may be restrictions on subleasing, which is another good reason to read the fine print before you sign any timeshare contract. Selling is often difficult, and you certainly aren’t likely to get back your original purchase price. Meanwhile, you’re  paying annual fees whether you use the timeshare or not.

Total Costs

In figuring the cost of a timeshare, those annual fees are what really get you. You’re told up front what the fees are at the time you buy a timeshare. Yet you have no control over what the fees may be in five or ten years. The only thing you can count on is that they will increase.

Examples:

To illustrate these points, I recently investigated a resale site that listed a timeshare in a property in Boston, MA. It originally sold for $20,000 and was priced at $1,000. I passed on the opportunity because of the high fees.

In another example, I once took a serious look at a timeshare in a luxury apartment complex in London. It seemed like a possibility for fulfilling one of my dreams, living part of the year in Europe.

It wasn’t. As the salesperson told me, comparing the cost to buy a timeshare versus the cost to stay as a non-member, it would take around 30 years to recoup the purchase price. Then I—or more likely, my heirs—would have ten more years to stay for “free.” Free, that is, except for the annual fees.

Dr. Marcinko at Johns Hopkins University

[ME-P Editor-in-Chief in a Spring Fever Garden] 

Investment in Lifestyle

The sales rep was quite clear that a membership at this complex wasn’t intended as a good financial investment. She described it as an “investment in lifestyle.”

So, when it comes to timeshares; that’s the bottom line. If the lifestyle being sold truly fits for you, and you believe it will continue to fit for the long term, then it’s possible that a timeshare may make sense.

Assessment

For most doctors and folks like us however, my conclusion is that most timeshares are too expensive even if someone gives you one. The annual fees alone will keep it from being a good value. I’ve never found one that was cheaper than getting a nice hotel or resort for a couple of weeks. Paying for a hotel stay will cost less in the long run, and you can enjoy relaxing vacations with no long-term commitment.

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About Domestic Asset Protection Trusts

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Is There Stronger Protection in DAPTs?

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFPMost financial advisors and attorneys who specialize in asset protection trusts have probably never visited South Dakota. Yet it’s one of their favorite places. A change made by the legislature this year has made them like it even more.

The reason asset protection experts are so fond of our state is that South Dakota is one of a few states (Nevada, Delaware, and Alaska are the others) to offer some of the strongest protections available for Domestic Asset Protection Trusts (About Domestic Asset Protection Trusts).

House Bill 1056

House Bill 1056, passed by the legislature and signed into law by Governor Dennis Daugaard, includes a small change in wording that makes DAPTs even stronger. The relevant section amends South Dakota Codified Law 55-16-15 by adding the five words shown here in all caps:

“Notwithstanding the provisions of §§ 55-16-9 to 55-16-14, inclusive, this chapter does not apply in any respect to any person to whom AT THE TIME OF TRANSFER the transferor is indebted on account of an agreement or order of court for the payment of support or alimony in favor of the transferor’s spouse, former spouse, or children, or for a division or distribution of property in favor of the transferor’s spouse or former spouse, to the extent of the debt.”

This change is not intended to allow divorcing spouses to hide assets from one another, cheat ex-spouses out of alimony, or avoid paying child support. Someone who owes alimony or child support to a former spouse cannot get out of that obligation by contributing assets to a DAPT. Any amounts owed at the time the trust is established must be paid. Attempting to avoid legitimate obligations through a DAPT would be fraud.

On Definitions and Meanings

What the new wording means is that, once a divorce settlement has been agreed upon, former spouses cannot come back later and make new claims against an ex-wife or ex-husband’s protected assets.

For many people, this change is irrelevant. Many divorcing couples, probably the majority, don’t have many financial assets and have never heard of a DAPT. They work out a financial settlement, go their separate ways, and that’s that.

Yet there are cases where this new law could make a huge difference.

Retirement vault

Here are just two examples: 

Suppose that at the time a couple divorce, the husband had just started a construction company. It had more debt than assets and wasn’t making any money yet. Several years later, business is booming and he is well on his way to becoming wealthy. Even though his ex-wife was not involved in building the company, she might try to benefit from his post-divorce success by suing for a share of his assets. He could protect those assets by contributing them to a DAPT.

Or suppose a divorce settlement required the wife to pay her husband a one-time cash amount in exchange for his share of their house and acreage. Several years after the divorce, he isn’t doing so well financially. She’s still living in the house, however, and the value of the property has increased significantly. He might sue to amend the original agreement in an effort to claim part of the real estate. His attempt to change the agreement after the fact couldn’t touch that property if she had contributed it to a DAPT.

Assessment

Until now, Nevada was the only state whose DAPT laws did not make an exception for former spouses. This change in the South Dakota law makes the two states very comparable in their DAPT provisions. It’s one more reason for asset protection professionals to find South Dakota a great place to do business. 

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Paying for College

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Maybe Not!

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPDo you want to give your children the best possible chance to do well in college, earn higher salaries, and save more for their retirement? Then, don’t pay for their college education.

One of the most popular money scripts I encounter is the notion that being a good parent means paying for your child’s college. Many parents do this at the expense of taking care of themselves in retirement, which is a very high price to pay.

The most popular reason I hear from clients for funding children’s’ education is empowerment. They want to spare kids the burden of repaying school loans after graduation. They also want them to be able to focus on their studies without the distraction of having to work to put themselves through college. For most parents, allowing students to concentrate on classes so they can perform well, make better grades, and obtain better jobs, is a sacrifice worth making.

The Myth

There’s just one problem with this scenario. It’s a myth.

In most cases, parents who fund their kid’s’ college education are insuring they will actually do worse in school than those who have to pay their own way. This is the finding of new research conducted by Laura T. Hamilton, published January 7, 2012, by The American Sociological Review under the title “More Is More or More Is Less?” Her study shows that students whose education is funded by parents or through student loans actually have lower GPA’s than students who in some way must work to put themselves through school.

Hamilton found that students who have to “do something” requiring them to take personal responsibility for obtaining the funds for their education do best and carry higher GPA’s. This includes those who receive grants, scholarships, or veteran’s benefits, or who participate in work-study programs.

Parental funds or borrowing “provide the time, money, and proximity (i.e., living on or near campus) necessary to delve deeply into college peer cultures,” Hamilton notes. The gift of time that student loans and parental funding provide isn’t usually poured into studies. Instead, students tend to focus that extra time on increasing their social life. The average college student receiving money from loans or parents spends less time on studies in college than in high school. Even though they spend about 28 hours a week attending class and studying, the research found they devote a full 41 hours a week to social and recreational endeavors.

Put more succinctly, students who have to work to pay their way through college spend slightly more time studying and significantly less time partying.

The Results 

The net result in this is a big personal and societal lose-lose. Those of you who have sacrificed your retirement to help your children through college have potentially done harm to both your children and yourselves. Your kids have probably done worse in college, thus obtaining lower paying jobs. This loss of potential income has downsides for both children and parents. Previous research has shown that parents who don’t fully fund their own retirement years will actually end up costing their children five times as much as the kids would have spent by funding their own college education.

Understandably, a few of you are now choking on your last sip of coffee as you read the last paragraph. This is not at all the outcome you intended.

Money

Assessment

The evidence is clear. Parents who take care of fully funding their own retirement instead of sacrificing to pay for their kids’ education are not being selfish. Instead, they give their children something far more valuable than the cost of tuition: the gift of success and achievement.

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Understanding the New “Inflation Tax”

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More on the CPI

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPWith all the talk recently, about tax rates and the fiscal cliff, hardly anyone has mentioned what is probably the most effective and least understood tax in the federal arsenal: inflation.

Wait a minute. Isn’t it confusing to call inflation a tax? It is. That confusion is exactly why inflation is the ultimate stealth tax.

The CPI Formula

One of the few deficit-reducing measures that had the support of both parties and President Obama is a change in the way the government measures inflation. Our lawmakers have agreed on another in a series of adjustments to the way they calculate the consumer price index (CPI). The proposed changes will understate the future CPI even more than the current formula already does.

This maneuver is a brilliant way for deficit-reducing lawmakers to both cut spending and increase taxes, without calling their action either a spending cut or a tax increase.

The “Chained” CPI

How is this possible? First, here’s a brief explanation of the proposed change, which is called the chained Consumer Price Index. According to an AP article published in the Rapid City Journal on December 5th, 2012, “the chained CPI assumes that as prices rise, consumers turn to lower-cost alternatives, reducing the amount of inflation they experience.”

The assumption is that, if the price of pork rises while chicken doesn’t, people will buy more chicken. Yet they’re still buying protein. Therefore, presto—no inflation has happened. This argument is like saying if the price of gasoline goes up and the cost of walking doesn’t, people will just walk more, so there’s no problem.

A Spending Cut

The chained CPI is a spending cut because many entitlement programs are indexed to the CPI. These include Social Security, government pensions, veterans benefits, and the interest on some of the national debt. The lower the increase in the CPI; the less benefits will rise.

The AP estimates that once the new CPI is fully phased in, a 65-year old on Social Security will receive $136 a year less. At age 75 the reduction will be $560 annually, and at 85 it will be $984 less.

In addition, as wages increase at the real inflation rate, entitlement programs won’t keep pace. Gradually, fewer people will be eligible for programs like food stamps, Medicaid, heating allowances, and Head Start.

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cpi

A Tax Increase

The chained CPI is a tax increase for much the same reason. Many income tax brackets and deductions are indexed to inflation. Smaller annual adjustments to the brackets because of the lower CPI will push more people into higher tax brackets.

Tweaking the CPI is nothing new. Politicians from both parties have done so for years to give the illusion of a lower CPI than that calculated by previous methods.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980s. According to that methodology, the unemployment rate (U-6) is 15% and the CPI is 9%. Yet the government has tweaked the CPI so much that today the official CPI is 2.5%. Under this newest proposal, inflation would be 2.2%.

The Results

You may think understating the current CPI by 0.3% isn’t any big deal, but it is. The decrease represents a 12% drop in the inflation rate, which understates the increase in our cost of living. If your employer reduced your wages by 12%, you’d probably see it as a big deal.

Assessment

Proponents figure the newest CPI adjustment will save $200 billion in spending increases and raise $65 billion in new taxes over ten years. It doesn’t matter whether you call it inflation, chained CPI, or plain old gimmickry. A tax increase by any other name is still a tax increase.

Macro-Economics and What the ‘Chained CPI’ Could Mean for Social Security?

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A Value Investing Metaphor for Doctors

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Via a Cats and Dogs Allegory

By Rick MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFP“I’d really like a Maine Coon cat, but they cost around $800. I’m not going to pay that much for a cat.”

The man who said this paid $500 for his purebred Lab. Obviously, he’s willing to spend money on things he enjoys, like hunting dogs. Yet when it comes to paying cold hard cash for a cat, he draws the line.

So, apparently, do a lot of other people. I have quite a few clients who are happy to spend hundreds of dollars for a particular breed of dog. I don’t know of a single client who has ever spent that much for a particular breed of cat.

Utility

Except my wife. Marcia has just begun breeding and selling Balinese cats, worth $1,000 each. She asked me why people are so much more willing to write checks for purebred dogs than they are for cats.

She didn’t buy my argument that dogs are inherently more intelligent, friendly, and worthwhile than cats.

If that isn’t the explanation, what is? Maybe it’s because the basic reason people buy purebred dogs or cats is to get specific looks and personality traits. Most dog breeds are quite distinct; anyone can tell a Great Dane from a Bichon Frise. Yet the only cat many people even recognize as a separate breed is probably the Siamese.

Maybe dogs are seen as more useful. I don’t know of any hunting cats, Seeing Eye cats, or watch cats. Still, that doesn’t explain all those Chihuahuas and tiny terriers that sell for hundreds of bucks a pound.

Value?

The point here is that whether a given commodity is seen as valuable depends on a variety of factors. Utility is one. In early Deadwood, Dakota Territory, an enterprising freighter brought in a load of cats and sold them at a premium to pioneers desperate for mouse and rat control. In that case, cats were more valuable than dogs.

Supply and Demand Economics

Supply and demand is another factor. A house that’s worth $150,000 in Box Elder, South Dakota, might be worth $600,000 in San Francisco, where unarguably more people would like to live. When there’s an over-abundance of cheap goods in the form of unwanted kittens flooding the market, people may be less likely to pay real cash for even purebred cats.

Commodity

Another reason people value one commodity over another is that they have been persuaded to see it as worth more. In Biblical times, frankincense and myrrh were highly prized and worth their weight in gold. Today, one pound of frankincense and myrrh goes for $13.95 on Amazon, while one pound of gold sells for around $24,000.

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gold bars

Gold

Fifteen times more gold is mined each year than platinum, the rarest of all precious metals, yet gold sells for more per ounce. Why? Gold has a long history of being perceived as the world’s most precious metal.

Designer Clothes

For much the same reason, people will pay a hundred bucks or more for a pair of designer blue jeans when they could get essentially the same thing for $19.99 at a discount store. The brand name jeans are seen as more valuable.

Marketing and Perceived Value

The simple reason for this is marketing.

When it comes to perceived value, dogs have benefitted from better marketing than cats. Just think of heroic military dogs, hard-working Seeing Eye dogs, and screen stars like Lassie rescuing people from burning buildings. Even the Taco Bell Chihuahua gets to advertise fast food. Cats get to advertise kitty litter and cat food.

Assessment

Cats just need to find a better advertising agency. They have some work to do if they want to come up with a slogan to top “Man’s Best Friend.”

Conclusion

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Another Property-Casualty Insurance Claims Experience

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A Personal Scenario

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPHurricane Sandy attacked the East Coast, did her worst, and disappeared. Yet cleaning up the mess she left behind will take months and even years. And, even dealing with damage from much smaller disasters can take a long time.

As an example, in July 2011 a severe storm with baseball-sized hail moved through southern Rapid City. It only took nature a few minutes to flatten gardens, beat up vehicles, and damage buildings. It will probably take until the second anniversary of the storm to repair all the damage to our house.

Such a delay isn’t unusual. The most common reasons are finding a contractor and negotiating with your insurance company.

Reporting Claims

Moving quickly to report a claim after a disaster is important. In fact, you should probably call a contractor even before you call your insurance agent. Insurance companies are fast to respond to disasters and easily move adjusters in from other areas. Local, credible contractors, on the other hand, fill their schedules fast. We spent hours on the phone to get bids from beleaguered roofers, painters, and carpenters.

These bids were worth our time, because they showed us that the initial repair estimates from our insurance company were low—usually by 50% to 66%.

For example, our roof had cedar shake shingles. The company’s replacement estimate was for much cheaper asphalt shingles. Estimates to repair our siding and deck were also low. It took us 15 months to come to an agreement on the cost of replacing the deck. The work probably won’t be done until summer of 2013.

Switching Companies?

Does this difficulty in getting a full settlement mean it’s time to switch insurance companies?  Certainly, I thought so more than once during the negotiating process. However, that isn’t necessarily the case. It’s important to remember that getting compensation from an insurance company is just business. And good business means not necessarily accepting the first offer. Negotiating will take time and effort, but it eventually should get you full compensation.

When you file a claim, you and your insurance company have competing interests. The company is not your advocate. You want as much money as possible from them for repairs, while they want to repair your damage for the lowest cost. There’s nothing out of place with either motivation.

Once I understood that the insurance company and I were natural adversaries, not friends, it helped me feel less victimized and more empowered. While getting the money we needed to make the repairs certainly took time and perseverance, the company readily acquiesced when we presented the facts. After all, their best interest also included keeping us as customers. We did not have to threaten a lawsuit or go to court.

Certainly, when it’s time to renew my home insurance I will ask my agent to investigate other companies. That’s just business. However, I won’t change companies just because I had to argue with this one.

policy insurance

The [Doctor’s] Claimant Role

Understanding your role in negotiating an insurance claim helps bring a healthy perspective to your relationship with any service provider. Unless they are a fiduciary to you (like an attorney, a doctor, or a fee-only financial planner), they have no responsibility to look out for you. Someone selling you something has no duty to put your interests before theirs. Protecting your interests is your duty and yours alone.

Assessment

When a natural disaster strikes, whether it’s a hail storm or a hurricane, we are certainly victims of nature’s whims. When it’s time to clean up the mess, though, we’re not victims. We’re our own advocates, with the responsibility and ability to look out for our own best interests.

Related: Dr. Marcinko Invites Mr. Wilson [CEO Allstate] to Debate

Related: As an Ex Agent – Why I’m Still Protesting My Open Allstate Home Owner’s Insurance Claim

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What the Presidential Election Means to [Physician] Investors

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Understanding the Fiscal Cliff

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Whether you’re pleased or disappointed with the outcome of the Presidential election, the question to ask now is, “What does this mean to me?” It’s an especially important question if you own a business, are a medical professional, or are investing for retirement.

Wealth Implications Not Good

If you have wealth, the implications are not good. Keeping the current tax code would take some type of lame duck session compromise in Congress, which Speaker Boehner has said is improbable. It’s wise to expect a reversion to the old tax code on January 1, 2013, which means higher taxes on income, capital gains, and dividends.

Tax Code

Even if Congress revises the tax code, the changes will probably not include lowering taxes for “the rich.” This is the first Presidential election I remember where both candidates promised not to taxes on “the rich,” defined by the current administration as individuals with an adjusted gross income of over $200,000 and couples with $250,000.

Small Businesses [Medical Practices]

If you are a small business person, like a doctor with a private practice, with retained earnings held in a C corporation, you need to move now to take dividends in 2012 and pay the 15% tax. Waiting until next year may mean you pay up to triple that amount, based on comments made by the President. You also need to consider accelerating profit-taking into 2012 to take advantage of the 15% capital gains rate that is sure to increase in 2013 and will possibly double. The large market drop right after Election Day was probably a result of investors harvesting gains.

A Sea Change Regarding Wealth

The fact that a sitting President overcame so many negative economic issues to win reelection is almost unprecedented. It’s a sign of a fundamental change in this country. There is a growing disdain for people who have wealth and a notion that they “owe” society for their success. If you have wealth, you don’t want to appear as if you do. Now is a good time to get serious about good asset protection planning to provide a firewall against those who feel they deserve your wealth more than you.

More Regulations

We can also expect the President and Congress to continue on the path of creating more regulations for all business owners. Not only does this make it harder for those wanting to pursue the old American dream of starting new businesses, it will drive up costs on everything while it drives productivity down.

More regulations will affect your pocketbook in many ways.

For example, while investors and their independent financial advisors need a healthier, more business-friendly regulatory environment, they are not going to get it anytime soon. One study suggests that proposed legislation aimed at independent advisors would raise our costs over $50,000 a year to comply with a plethora of new regulations. Some of those restrictions would even make it illegal for me to publish a blog.

Investing Fundamentals

When it comes to investments, it’s time to rely on the fundamentals we’ve preached forever: you must be globally diversified in many asset classes. You do not want a majority of your assets to be invested disproportionately in any one country, including the US. If more than half of your assets are in US securities, you need to consider better diversification sooner rather than later.

Assessment

This election made it very clear that our movement toward a more government controlled economy will not abate anytime soon. Rather than bemoaning this new economic climate, free-market proponents and capitalists will be wiser to focus on working within it. This includes taking appropriate action to protect themselves, their families, and their investments.

As always, wise physician investors will avoid knee-jerk responses to political and economic shifts, remembering to focus on the long term.

Conclusion

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Understanding the Domestic Unemployment Numbers

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How Can Unemployment Be Going Down?

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

In an economy that isn’t exactly robust, how can unemployment be going down? The recent drop in the unemployment rate from 8.1% to 7.8% caught almost everyone, including me, by surprise. The GDP grew by only 1.5% in the first quarter, and its growth was under 2% for the last 12 years. To get the economy moving again we will need growth of 3% a year.

It isn’t surprising that many pundits were questioning the timing within minutes after the latest unemployment numbers were announced. After all, unemployment is one of the major issues in the Presidential election. Former General Electric CEO Jack Welch and several Fox News commentators even suggested the administration was cooking the books.

The BLS

I don’t believe the Bureau of Labor Statistics is manipulating unemployment data. The process of computing the data is straightforward and transparent. Two surveys go into projecting the unemployment rate, one covering 400,000 businesses and the other questioning 60,000 households. The surveys ask about the number of full-time and part-time employees, whether the part-time employees really want full-time employment, and whether those without a job have looked for a job within the last month.

Cooked Books?

But that doesn’t mean the books aren’t cooked. They are.

“The way the government derives the unemployment numbers has changed significantly over the last 30 years,” writes John Mauldin, editor of the economic newsletter Thoughts from the Frontline, in the October 8, 2012, issue. “Whatever administration is involved, the new equations for determining unemployment result in a lower unemployment rate than they would have if the 1980’s methodology were still in place.”

The Changes

One of the more bizarre changes in the unemployment rate calculation is that people are not considered unemployed unless they have looked for a job in the last 30 days, even if they currently receive unemployment benefits. Mauldin says there are probably many people who haven’t looked for a job in the last 30 days and that most, if not all, of them would consider themselves unemployed. “If you’re not disabled and you’re receiving unemployment or welfare benefits I think you should be counted as unemployed,” he says. He estimates our actual unemployment rate is well over 12%, which doesn’t take into account the 50% of college graduates who are underemployed.

Don’t Blame Obama

Before you blame the Obama administration for the dumbing down of the unemployment rate, this is the same way the Bush administration calculated unemployment.

It’s the same story with the Consumer Price Index, which the government has continually tweaked to give the illusion of a lower CPI than if the 1980’s formula was used.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980’s. According to that methodology, Williams calculates the unemployment rate (U-6) is 15% and the CPI is 9%.

Regaining Jobs?

The economy has currently regained about half of the jobs lost in the Great Recession of 2008-2009. According to the Liscio Report, it will take another 40 months to reach the level of employment we had prior to the recession. That is if we don’t have another recession, which is doubtful. If all the tax increases slated for January 1 go into effect, the Congressional Budget Office says GDP will shrink 2.9%, which guarantees a recession.

Assessment

So, what was behind the fall in the unemployment rate this month? According to Mauldin, the entire drop came from an increase in part-time workers. He says, “That such significant numbers of people can only find part-time work is not a sign of a strong and growing economy.”

When we look a little deeper, maybe the latest unemployment numbers aren’t such a surprise after all.

Conclusion

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Gold as an Investment Option for Medical Professionals?

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Gold in That There IRA

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Here in the Black Hills, home of the historic Homestake Mine, we know a gold rush when we see one. The last few years have tempted investors to take part in a modern gold rush. The precious metal is thought of as a safe harbor for investment capital during times of economic and political unrest and chaos.

Holding Gold

There are many ways to own gold, including holding an interest in it via a financial medium like a mutual fund or an Exchange Traded Fund (ETF). Those who want gold as protection against political or economic turmoil, though, probably are thinking of owning physical gold.

Since Americans’ savings and investing rates are so low, most folks don’t have any extra funds to put into gold. Their only investment vehicle may be an IRA. Yet IRAs are specifically excluded from owning collectibles, metals, and coins.

There are exceptions, however: U.S. gold coins minted by the U.S. Treasury, or bullion bars or coins of a fineness of 995 parts per 1,000. Several non-U.S. minted gold coins meet that standard. The key here is that the coins or bars must be in the physical possession of a qualified trustee. That means gold you stash in a safe or bury in the back yard does not qualify.

Most banks, brokerage firms, or mutual fund companies are not interested in holding physical gold, so finding a qualified trustee can be difficult. You must do a reasonable amount of due diligence to be sure the trustee you find is really trustworthy.

The Trustee 

A trustee needs to arrange for the shipping, handling, and storage of your gold. For this reason, you will certainly pay much higher fees than you would for normal stock, bond, and cash investments. The fees can amount to hundreds or thousands of dollars annually.

Even if you are willing to pay the high fees, first ask yourself, “What’s the point?” The reason most folks want to own physical gold or silver is to have “real” money available in case of an economic crisis or political uprising. How does owning physical gold in an unknown location that may be thousands of miles from you fulfill that requirement? Wouldn’t owning an ETF like GLD actually accomplish the same thing, only without the high costs? Yes, it would.

If you want to own gold, my strong suggestion is to own the GLD ETF and avoid all the high fees. The total cost of purchasing GLD is probably about $10.

Other Options 

Other options are mutual funds that purchase gold mining stocks, which is probably a better way to participate in the gold market. This is because of the leverage factor. In a rising market, the cost of mining gold is much lower relative to the market value of the gold. So if a mining company pays $1,000 to mine an ounce of gold and can sell it for $1,500, the company—and you, as an owner of its stock—make $500 per ounce. Gold could stay at that same price for a year and your company would continue to make a 33% gross profit.

However, if you owned the physical gold and it stayed at the same price for a year, your profit would be 0%. You would only make that same $500 profit if the gold appreciated from $1,500 to $2,000 an ounce.

Assessment 

Of course, the reverse is also true. If gold turns downward, you will stand to lose much more owning the mining company than the physical gold. That’s why I recommend owning gold, like any other asset, only as part of a diversified portfolio of investments.

Conclusion

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On Vacation Cruises for Doctors

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Something for Everyone

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

My family and I recently took our 20th cruise-ship vacation. Obviously, we’ve found that cruising offers something for each of us. Perhaps more medical professionals can too?

First Time

I was reluctant to go on my first cruise, both because I’m prone to motion sickness and because I couldn’t see why anyone would want to spend a vacation cooped up on a boat. I quickly learned two things that changed my mind. First, a number of drugs, patches, and shots are available to prevent or cure seasickness. Second, if you get bored on a cruise ship, it’s only because you choose to.

Benefits

A major asset of cruising is the 18 hours a day of tailor-made, supervised activities available for kids of various ages, even when the ship is in port. This allows parents plenty of time to tour ports of call unencumbered by cranky kids who couldn’t care less about museums or ancient ruins. Our kids are now old enough that they enjoy most of the shore excursions, but this still leaves them the option to opt out of any port that doesn’t call to them.

Bargains

Most people assume cruising with a family must be prohibitively expensive. We’ve found it to be a highly affordable way to vacation if you follow a few rules.

You can get some incredible cruising bargains, but it does take a little legwork. You will want to get on the email lists of the major cruise lines; my top picks are Cunard, Celebrity, Holland America, and Princess. They send out sales and last-minute offers continuously.

One of the best places to shop and compare deals is Cruise.com. However, when I’ve run into issues like an incorrect booking or an issue with the cruise company, Cruise.com wasn’t much help. I was left pretty much on my own to resolve the problems. I’ve found it’s better to shop the deals online with sites like Cruise.com or Cruisecritic.com, but to place the order with my local travel agent or directly with the cruise company.

Food

It will come as no surprise that one of the main features I look for in a ship is really good food. Many of the newer ships offer alternative dining rooms, where for an additional $25 to $40 per person, you can dine in true gourmet fashion. Some of the best specialty dining is found on Cunard and Celebrity.

Cost Balance

To balance the cost of my specialty dining habit, I select the least expensive stateroom, typically an inside cabin. It’s the same size as 80% of the cabins on the ship; it just doesn’t have a window. You can enjoy the same view—water and sky—from a lounge on deck while you relax with a cool drink. And the cheaper cabin leaves several hundred extra dollars to spend on food and shore excursions. For our latest 12-day cruise, our inside cabin cost $800 per person.

Rates

You typically get the best rates by booking the cruise as far in advance as possible. A small deposit is due upon booking but is totally refundable until about 60 days prior to the cruise date. Often, the prices rise the closer you get to that 60-day deadline, when the cruise must be paid in full and your deposit becomes non-refundable. If you are flexible, another great time to shop for cruises is about 30 to 60 days prior to sailing.

Assessment

A cruise isn’t what we typically think of as a middle-class family vacation. Yet when you figure in lodging, food, and admission fees for visiting major US vacation destinations, cruising can be just as affordable and just as much fun.

Conclusion

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Selling into a House Poor Market

When the Local Real-Estate Market is Challenging

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By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

An exciting new medical practice opportunity in another state …. Health problems that make one-level living an urgent necessity …. The need to downsize quickly because of a hospitalist job loss ….

These are just a few of the reasons medical professionals might need to sell a home sooner rather than later. The real problem arises when the local real estate market is a challenging one. Here are a few suggestions for anyone looking to sell a house under difficult conditions.

1. Evaluate the urgency of your situation. If you can wait a few months without harming your career, your finances, or your health, that may be the wiser choice. If you can’t make payments, or you need to relocate right away and can’t buy a new house until you sell the current one, waiting to sell is usually a losing proposition.

2. Take a hard look at the costs of waiting. You often can cut your overall housing costs significantly by biting the bullet and selling, rather than paying for two homes until you get the price you want. In addition to mortgage payments, add up expenses like property taxes, maintenance, utilities, and commuting costs.

Example:

For example, suppose you paid $400,000 for a house that’s worth $300,000 in the current market. Selling it now would mean a loss of $100,000, but holding onto it costs $3000 a month. Suppose the market improves by 33% in three years, which of course is not something you can count on. You sell the house then for $400,000. In the meantime, keeping it has cost you $108,000. If you keep the house on the market for a year, then give up and sell at $300,000, you’ve added $10,800 to the original $100,000 loss. You’re often better off to cut your losses and sell.

3. Grit your teeth, hold your nose, and be realistic about the market value of the home you are selling. Your original purchase price has NOTHING to do with current reality. The market is the market, and buyers couldn’t care less about what you paid for the home. They only care about the competition and getting the most home for their money, just as you did when you bought the property.

You need to research the housing market in your area or hire competent help (like an appraiser) to help you determine the market value of your property. Real estate agents can help with pricing, but you must proceed carefully. Some agents practice a technique of “tell them what they want to hear, get the house listed, and then work on getting them to reduce the price.”

4. Think like a buyer as well as a seller. Many sellers forget that the pain of selling at a loss is eased if the replacement home they buy is also valued less than it was several years ago. The loss in the home being sold can often be offset by the bargain price of the home being purchased.

5. Do your best to negotiate with your lender. If your mortgage is more than the sale price of the house, you’ll owe money to the lender at closing. Depending on the circumstances, it may be possible to get the lender to accept a lower payoff. Before the closing date, find out exactly how much you’ll need to pay and know where you’re going to get it.

Assessment

Our reluctance to sell a property for less than the amount we’ve put into it is described as “sunk cost fallacy.” Holding on until we get our money back sometimes works. More often, though, all it does is sink us deeper into a financial hole.

Conclusion

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Why the Government is Not-Like Medical Professionals

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An Endless Supply of US Dollars

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Is the United States in danger of bankruptcy? Contrary to what you may read in the media or hear from many politicians, no, it isn’t. The US Treasury will never run out of dollars. Unlike doctors and medical professionals, it’s impossible.

Reasons Why?

The reason is relatively simple. The US government owns a printing press. As long as goods, services, or obligations are priced in US dollars, the supply of dollars to our government to buy those goods and services is unlimited. This is not true of individual physicians, corporations, cities, states, and countries that don’t issue their own currency.

For most people, this is a hard concept to grasp, with good reason. The capacity of our government to create an unconstrained supply of dollars is a relatively new phenomenon.

The Gold Standard

Until 1971, all US currency was theoretically redeemable in gold. This was known as the gold standard. In the early decades of the 20th century, you could actually go to a bank and change your dollars for gold. That ability was terminated in 1933, but the dollar’s value was still tied to gold. This basically meant the only way the US government could create new dollars was by obtaining more gold, the supply of which only increases by the new amount of gold mined.

Nixon

In 1971 we had a paradigm change in monetary policy that many still don’t understand. President Nixon decoupled the dollar from the gold standard [Nixon also wanted to flood the country with MDs, and drive down physician income, by opening up medical school admissions]. It became a fiat currency, which is used as a medium of exchange but has no intrinsic value. Suddenly, the US government was no longer constrained by solvency issues and could never run out of money. It could create as many dollars as it wished ie; inflation].

Constraints

This didn’t mean it had no constraints. The major constraint to an issuer of fiat currency is inflation. However, creating money does not guarantee inflation if the newly created money is not spent. Japan, for example, is still fighting deflation even though they’ve been pumping money into reserves like crazy for 20 years.

What should have caused a massive rethinking and reeducating of the financial sector went relatively unnoticed. Text books, professors, economists, and politicians largely continued to follow many pre-1971 monetary principles that became irrelevant overnight.

Unlike the federal government, US states, cities, and other government entities cannot print money. They have to get it the old-fashioned way—from taxes, fees, or borrowing. It’s entirely possible for these entities to go bankrupt, just like individuals and corporations, if their outflow exceeds their inflow.

Europe

Interestingly, the same is true for member countries of the European Union. When in 1999 they adopted the Euro and gave up their sovereign right to print their own money, they took on the same status as states. Therefore, a country like Greece, which is a user of currency as a member of the European Union, can involuntarily default on its obligations.

This is a significant difference between the United States and Greece. While Greece can (and most likely will) go bankrupt because it doesn’t have an unlimited supply of Euros, the US can’t go bankrupt because it does have an unlimited supply of dollars.

The major threat that sovereign countries face is not running out of money, but devaluing their currency through inflation. A devalued currency is one that loses its purchasing power and often results in a lower standard of living.

Assessment

Just because the US can’t involuntarily default on its obligations doesn’t mean we can keep on over spending and pretend we don’t have any money worries. As a nation, we still need to acknowledge and deal with our serious financial problems. So should our doctors, financial planners and financial advisors.

Conclusion

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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Physicians as “Dr. Money Waster”

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Paging … Doctor Money Waster?

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

Be frugal. Live on less than you make. Save for the future. It’s my message, and I’m sticking to it.

Just in case you’re getting tired of that message, though, let’s take a look at thrift from a slightly different perspective.

And so, for any medical professional who wants to throw cash around, here are some effective ways to waste your money:

How to Waste Money on Travel:

  • Buy package vacation deals.
  • Buy a vacation home.
  • Get an RV and only use it one or two weeks a year.
  • Buy a timeshare unit.
  • Pay for hotel Internet packages.
  • Eat at hotel restaurants.
  • Use room service.
  • Over-pack and pay checked airline baggage fees.
  • Don’t bother to use a travel credit card that gives you frequent flyer credits.
  • Stay at full-service hotels with amenities you don’t use.

How to Waste Money on Big-Ticket Items:

  • Buy a new car every three years.
  • Buy hybrid cars.
  • Pay for extended warranties.
  • Fail to compare prices and check product reviews.
  • Pay full price for furniture.

How to Waste Money on Insurance:

  • Get a cancer or accidental death policy.
  • Buy credit life insurance.
  • Buy variable universal life insurance.
  • Have life insurance if you don’t need it.
  • Keep your deductibles low.
  • Purchase the cruise line’s trip insurance.
  • Purchase car rental insurance.

How to Waste Money on Investing:

  • Don’t take advantage of a retirement plan with employer matching that doubles your money.
  • Invest outside of a retirement plan instead of fully funding the plan first.
  • Buy variable and fixed annuities that charge you big commissions and high fees.
  • Buy load mutual funds and trade them often.
  • Cash in your 401(k) or 403(b) plan when you leave your job instead of rolling it to an IRA.
  • Cash in your IRA when money gets tight.

How to Waste Money on Health and Fitness:

  • Buy home fitness equipment and use it to hang clothes on.
  • Pay for a fitness center membership but rarely or never use it.
  • Be a sucker for the latest “cure-all de jour” supplement or multi-level marketing product.
  • Pay more for specialized brand-name vitamins even though store brands are just as good.
  • Buy junk food instead of stuff that’s good for you.
  • Skip those regular visits to the doctor and the dentist.

How to Waste Money with Your Everyday Habits:

  • Drive across town to save two or three cents on gas.
  • Buy grocery name brands instead of cheaper store brands.
  • Pay full retail price for clothes, furnishings, or other items instead of waiting for sales.
  • Buy bottled water.
  • Disregard ATM fees.
  • Pay hefty overdraft fees because you don’t bother to keep track of your bank balance.
  • Forget to change your furnace filter.
  • Don’t bother to maintain your car or house.
  • Be disorganized about taking care of bills on time, so you pay late fees.
  • Pay for premium cable TV packages with channels you rarely watch.
  • If you can’t afford something now, pull out the plastic. When you don’t pay a credit card bill in full at the end of the month, high interest rates can quickly double or triple the price of anything you buy.
  • Gamble. Online gambling, slot machines, gaming  tables, and lottery tickets are all good ways to get rid of extra cash.
  • Speed. This is a three-for-one deal. You’ll use extra gas, pay $100 or more for a speeding ticket, and end up with higher car  insurance premiums.

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Assessment

Even practicing a few of these overspending habits will give you more financial stress and less financial security. Just observing half of them will give you an interesting life full of financial chaos.

Follow more than half and you, too, can qualify as a first-class Dr. Money Waster.

Conclusion

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On the Emotional and Financial Returns of Paying Off the Mortgage

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The ROI of Sudden Money

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Suppose you’ve come into some extra cash, doctor. You decide to use it prudently in one of three ways: keeping it in cash, putting it into your retirement plan, or paying off your home mortgage. Which is the better option?

A Personal Decision

I usually find the answer, for most medical professioanls, isn’t just about the money. Paul Thorstenson, an accountant with Ketel Thorstenson, agrees. He calls paying off a home loan “as much a personal decision as an investment one.”

Factors for Doctors to Consider

The first factor to consider is investment return. Thorstenson suggests you think of paying off debt as a risk-free investment. “Because the interest is fully deductible if you itemize, your paydown of the debt is exactly equivalent to making a risk-free investment (like a CD) that pays you a taxable yield equivalent to your interest rate.”

If your interest rate is 4.5%, that’s the return you will earn on the money you invest in paying off your mortgage. If this is difficult to visualize, think of it this way. When you pay off your debt, you are actually buying your loan from your bank much like banks sell loans to one another. You continue to make payments, only now the payments go to you instead of the bank. The money you invested in “buying” (paying off) the mortgage is now earning 4.5% for you instead of your bank.

Paying down (investing) your own debt – for most medical professionals – is usually much better than keeping your funds in a money market, savings account, or certificate of deposit where they earn .5% to 2%.

Invest or Pay Off Debt?

A trickier decision is whether to invest the funds rather than pay debt. While investing always carries some risk, a diversified portfolio with 60% stocks and alternative investments (real estate, commodities, managed futures) and 40% bonds will typically return 6% to 8% over ten or more years.

If you can use your extra cash to maximize a contribution to a retirement account like an IRA or 401(k) or 403(b), you will earn 6% to 8% tax deferred (or tax free with a Roth IRA) which is better than paying off a debt yielding 4.5%. The younger you are, the more sense it makes to contribute the funds to a retirement account.

Non-Retirement Accounts

If the investments are not in a retirement account, then you must compare the after-tax return to get an equivalent comparison. For example, if you are in a 25% tax bracket and will earn 6% on your investment, your after-tax return is 4.5%, exactly equal to what you would earn in our example of paying down the debt. In this case, I would usually take the “guaranteed” investment of paying down the debt.

Mortgage Reduction Tax Benefits

In deciding whether to pay off a home mortgage, there are some additional tax and emotional considerations. Thorstenson notes that there are currently no limitations on the deductibility of loan interest, even by high income taxpayers. The “phaseouts” which expired two years ago will come back again in 2013 when (and if) the Bush tax cuts expire. “With the phaseout you will lose 3% of every dollar of deduction for every dollar of income that exceeds about $150,000.” For most taxpayers, this won’t be a major factor.

Emotional Benefits

Probably more important than the investment and tax considerations are the emotional benefits of paying off home mortgage debt. Thorstenson says, “It gives one a sense of freedom in that you are not handcuffed to a mortgage. I’ve never once seen a client  -or doctor- who had a paid off house leverage it back up and buy a mutual fund.”

Assessment

Like finishing medical school, paying off a home is a great emotional accomplishment. And, that sense of accomplishment may be the most important investment return you can have.

Conclusion

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Will Retirement Be a Bust for [Doctor] Boomers?

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Are Doctors Different?

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

If you’re a lay or medical professional Baby Boomer, or your parents are, here’s a ray of sunshine to brighten your day: Boomers have so severely underfunded their retirements that Congress may turn to their children to bail them out.

Dr. Basu Speaks

This is the gist of an article in the April issue of Financial Advisor magazine, by ME-P “thought-leader” Dr. Somnath Basu PhD, professor of finance at California Lutheran University. He notes, “The problem could be as big, if not bigger, than the 2008 financial crisis.”

The Study

A new study by the Center For Retirement Research, Boston College, detailed on CNBC.com, finds the retirement years for Boomers will be much leaner than for their parents. An estimated 51% of them will be unable to maintain their current lifestyles in retirement.

Ironically, one major contributor to this bleak picture is the Boomer generation’s own optimism and positive thinking. Raised in a society of abundance with expectations of prosperity, Boomers have over-spent and under-saved for decades. Many of them assume they will receive ample inheritances. They see increased life expectancy as a wonderful thing, forgetting to factor in the higher medical costs that will come with it. They expect to work well into their 70′s, disregarding statistics that show many of them will be forced to retire sooner due to health problems or job layoffs.

The Numbers

Let’s look at some decidedly pessimistic numbers from the Center For Retirement Research study. The median 401(k) and IRA balance for Boomers nearing retirement is $78,000. Only around half can expect to inherit from their parents, with the median inheritance amount $40,000. That adds up to a total nest egg of $118,000, which at a 4% withdrawal rate provides less than $400 a month for life. Combining that with the average Social Security check of $1,077 means retiring on an income just above the poverty level.

What’s the Solution?

Many Boomers say they plan to never quit working. Unfortunately, this is delusional. According to a new survey by the Society of Actuaries, “The 2011 Risks and Process of Retirement Survey,” over one-third of Boomers think they will never retire and only 10% say they will retire by 60. Statistics show, however, that 50% have actually retired before age 60. The main reasons are health and downsizing, which boomers discount. Well over 90% of them maintain they have a healthy lifestyle and won’t get sick. Boomers are so out of touch with reality I wonder how many, if asked, “Will you ever die?” would answer, “No,” or “Maybe.”

Sadly, only one-third of Boomers have a plan for financing their retirement, other than planning to work until the day they die. What’s the solution for the remaining two-thirds who are unprepared?

Unfortunately, for many older Boomers it is already too late. Their lack of planning for their retirement years may mean forcing their children and grandchildren to decide whether taxpayers can afford to pick up the tab.

Assessment

Younger Boomers can take control of their retirement by radically downsizing their lifestyles and increasing their income. This means selling expensive homes, cars, and toys and living as frugally as possible. The resulting savings should first go to pay off high-interest debt, then to fund to the max every available retirement plan. Another possibility is to consider various employment options, including government jobs which offer pension plans unavailable in most private sector jobs.

Conclusion

Wise Boomers will also encourage their own children to emulate the frugality and money skills of their grandparents. The kids will need those skills for their own futures—especially if they have to help their Boomer parents pay the bills.

But, are doctors the same as the rest of us – or do they differ on this issue?

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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How to Avoid Whitney Houston’s Estate Planning Mistakes

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Look at Money Scripts

By Rick Kahler MS CFP® ChFC CCIM

Since the death of singer Whitney Houston, I’ve seen several articles from attorneys and financial advisors about the errors in her estate planning. They have summarized three areas where it was badly flawed:

1. Lack of privacy. Ms. Houston had a simple will that was subject to public probate, rather than a living trust that would have kept her affairs private. Anyone with thumbs and access to the Internet can see a copy of her will.

2. Lack of protection from claims, con artists, and circumstances. The estate, estimated to be worth over 20 million dollars, was left to Ms. Houston’s daughter, Bobbi Kristina Brown. A vulnerable young woman just barely of legal age will receive three huge payouts over the next decade and become a multi-millionaire by the time she’s 30. A trust could have given her some limits and structure, as well as providing for advisors to help her learn how to manage her wealth and protect herself from predators.

3. Lack of tax planning. The federal estate tax of 35% on anything over $5,120,000 will apply to the estate, so Uncle Sam will take around a third of it off the top.

Estate Planning – How Time Flys By

Unfortunately, this lack of skilled estate planning isn’t all that rare among wealthy people; or even some medical professionals. So, here are a few of the money beliefs that may be behind inadequate estate planning:

  1. “Complicated estate planning is for rich people, and I’m not rich.” This may especially apply to owners of small businesses – like some doctors – who don’t have a particularly high income or lifestyle but whose land or businesses may be worth several million dollars. Yet good estate planning advice is especially important for them, because their heirs aren’t necessarily aware of or prepared for a substantial inheritance.
  2. “The financial advice that was good enough when I was just starting out is good enough now that I’m successful.” A tax preparer, accountant, or financial advisor who is highly competent with small individual or business matters may not have the knowledge necessary for more complex estate planning. Seeking out different financial advisors as your income and net worth grow is no different from consulting a specialist rather than a general practitioner if you have specific medical needs.
  3. “When you can afford the best, you’ll get the best.” Trying to save money by hiring bargain-basement financial advisors is almost always a mistake. It can also be a mistake to assume that someone who charges top-tier fees will always have top-tier skills and integrity. Even if a financial planner or other professional has a reputation as an advisor to the wealthy, it’s still essential to verify that the person or firm is right for you. Ask for references and be willing to ask hard questions about compensation, investment philosophy, and services. Make sure you are a client, not a customer. Work only with financial advisors who, like accountants or attorneys, have a fiduciary duty to put your interests first.
  4. “I know how to make money, so of course I know how to manage money.” Many highly educated and skilled professionals are high earners but don’t necessarily have the knowledge to manage their earnings well. In order to know whether the advisors you hire are competent, it’s important to learn the basics of investing and money management. Look for advisors who don’t set themselves up as “gurus” but are willing to teach and to work in partnership with you.

Assessment

When it comes to financial advice, it isn’t enough to find someone who will “make you feel like a million dollar bill.” It’s more important to find advisors who will help you take good care of all your dollars.

Conclusion

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Physician Advisors: www.CertifiedMedicalPlanner.org

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Some Physicians are Tenants, Too!

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Tenant Improvements Can Be Good Investment

By Rick Kahler MS, CFP®, ChFC, CCIM

Recently I read a news story about a physician [small business owner] whose landlord was not renewing her lease. A chain restaurant was buying the building and intended to raze it. The doctor [business owner] was distraught, as she had recently spent $30,000 to remodel the property.

Dual Perspectives

One common reaction to stories like this is anger at a landlord for unfairly selling a building out from under a tenant.

Another is, “Why would tenants spend so much money remodeling a building they didn’t own?”

Neither response sees the whole story.

I empathized with this doctor’s loss as a result of a bad business decision. The bad decision wasn’t spending $30,000 to remodel a space she didn’t own. Business owners make such “tenant improvements” all the time. Every tenant or doctor’s office you see in a mall has poured thousands of dollars into fixing up and customizing their space. Tenant improvements can range from repainting a space to building a fast food restaurant on leased land.

Poor Decisions

The poor business decision this owner made was not being sure the lease term ran for long enough to recoup the cost of the tenant improvements. The cost of any tenant improvement is a pure expense that needs to be factored in as part of rent and amortized over the life of the lease. This is because when the lease expires, both parties have the right to not renegotiate a new lease. Any tenant improvements become the property of the owner. Landlords who choose to use property for something different when a lease expires aren’t abusing or taking advantage of tenants—they are simply exercising the contractual rights agreed to by both parties.

Mall Shells – Not Sea Shells

Most new strip centers or malls lease relatively unimproved spaces, sometimes called shells. Tenants get four walls, a cement floor, and bare girders above. It’s the tenants’ responsibility to finish the spaces in the manner they want. This makes a lot of sense, as usually each retailer is very specific about the floor plan, colors, and building materials they use in their spaces. At the end of the lease the relinquished tenant improvements, with years of wear and tear, are typically worth very little. New tenants will rip them out and finish the space according to their needs.

Example

Let’s take an example of a 5,000-square-foot shell that rents for $8 a square foot annually. Let’s say it will cost $100 a square foot for the retailer to finish the space. If the lease extends for 20 years, the annual cost of the tenant improvements is $5 a square foot ($100 divided by 20 years). This brings the total cost for the leased space to $13 a square foot ($8 shell rent plus $5 for improvements).

With a four-year lease, however, the amortized cost would be $27 a square foot. A one-year lease would cost $108 a square foot. Either one would make the space too expensive. A doctor business owner unable to get a longer term would either substantially reduce the cost of the tenant office improvements, or look elsewhere.

Sometimes a tenant needs to spend a lot to improve a space, but doesn’t want to commit to a long-term lease. In this case the tenant’s best strategy is to get the landlord to improve the space so the tenant isn’t left losing a substantial amount of money if either party doesn’t renew the lease.

Assessment

Medical provides who are business owners need to understand their rights and responsibilities as tenants. They also need to be sure the costs of rent and tenant improvements are reasonable over the life of the lease. It’s a good idea to consult both an attorney and an accountant before signing any lease.

Conclusion

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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What Type of Automobile Should Future Physician Millionaires Drive?

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Re-Thinking Previously Owned [Used] Vehicles

By Rick Kahler CFP® MS ChFC CCIM

www.KahlerFinancial.com

Have you ever seen a Super Bowl ad touting how much money you could save if you bought something second-hand? Of course not! There’s not a lot of encouragement in our culture to buy used stuff. Even the one exception, a used home, is described as “existing.”

Badge of Honor

Buying used just isn’t cool—that is, unless you’re a wealth builder. Many of them look upon buying used as more of a badge of honor than an embarrassment. Certainly, there are many items that are best purchased new. Toothbrushes, toilet paper, and underwear come to mind. Yet there’s one thing that’s almost always better to buy used—a vehicle.

The Myths

Let’s look at a few common myths around buying a new [previously owned] car.

  • “Buying a used car is just buying someone else’s problem.” That can certainly be true if you don’t do your homework. When shopping for a used car, be sure you research the model’s repair record. The best place for this is Consumer Reports. An inexpensive online subscription will give you loads of detailed information about every year, make, and model. Narrowing your search to the top used car values will significantly increase your odds of buying a great used car. Before writing a check for even a top-rated used car, take it to a trusted mechanic for an evaluation. The money you spend will be well worth the future headaches you save.
  • “Never own a car that is out of warranty.” This is a good idea only if your heart is set on owning one of the many cars ranked as the least reliable. The warranty will come in handy because the car will spend a significant amount of time in the shop. Also, the value of a new car drops rapidly in the first few years. If instead you buy a used vehicle with a high reliability rating the warranty become less important, especially when you consider you’ll be getting a third to half off the sticker price. If you buy a low-mileage, late model car, your savings will be enough to more than pay for the few times you may need to take it into the shop.
  • “When a car hits 80,000 miles it’s time to get a new one because it will start costing an arm and a leg to maintain.” Once again, a top-rated used car will often run reliably for well over 120,000 miles if it’s maintained. Yes, the maintenance will increase, but the rapid depreciation of a new car will cost much more than maintaining an older car. Wealth builders routinely buy late model cars with low mileage and own them for 10 years or more.
  • “I can get a lower interest rate and longer term loan on a new car.” Here’s my rule of thumb: If you need a loan to buy a new car you are probably buying too much car. Those who manage money well create a savings account for replacing their vehicles. That way they can pay cash for a car and drive the best deal. If you must get a loan, borrow as little as possible and pay off the loan quickly. A higher interest rate on a shorter term loan on a used car is still a much better deal than what you would lose in depreciation on a new vehicle.

Assessment

Americans, especially doctors, have a love affair with their cars. Still, for most of us a new car is a luxury, a big splurge best purchased after we’ve attained financial independence. The best way to travel the road to that financial independence is in a used car.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Public Misconceptions of Private Equity

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A Political Season Review

By Rick Kahler CFP® MS ChFC CCIM

www.kahlerfinancial.com

During tax time and this very political season, some of the attacks on Mitt Romney as a Presidential candidate have focused on his tenure with the private equity firm Bain Capital. Critics and rivals have denounced Romney as “profiteering off the backs of fired workers,” and running a “vulture capital” rather than a “venture capital” fund. A PAC supporting Newt Gingrich even produced a documentary about Bain which tries hard to leave viewers with the idea that capitalism isn’t evil, but private equity firms are.

The Negative Impressions

Some of this negativity may come from a lack of understanding as to what “private equity” really means. Here’s my explanation.

First, equity just means “common stock.” Whether equity is public or private depends on whether the company lists its shares on a public exchange, like the New York Stock Exchange or the NASDAQ, or is privately held.  When you purchase a share of common stock, either directly or through a mutual fund, you buy it from a public stock exchange where anyone can buy or sell shares of stock. Private equity shares, however, are bought and sold privately, just like houses or small businesses.

One of the benefits of a public exchange is that it makes owning a slice of a company exceedingly affordable. For example, for about $600 you can own a share of Apple, the largest company in the U.S. If Apple were privately held, you would need $500 billion to buy it. If you were a little short on cash but still wanted a piece of Apple, you and 999 of your closest friends could pool your resources. You’d only need $500 million each.

That is exactly what a private equity company does. It brings together substantial investors, usually institutions, pooling their money to purchase companies not available on public exchanges. This requires raising or borrowing amounts that may be in the billions of dollars. The minimum to invest in a public equity company is often one million to 25 million dollars or more, putting it out of reach of most Americans.

An Asset Class

However, that doesn’t mean John Q. Public doesn’t own a slice of the private equity pie. Public pension funds, like the South Dakota Retirement System, have invested over $200 billion in private equity funds. The SDRS invests over 10% of its $7.8 billion fund in private equity. Many investment officers and committees feel this is such an important asset class that not holding a portion of their portfolio in private equity would violate their fiduciary duty to the fund.

Why Invest Privately?

Why invest in companies that are privately held? They often are purchased for lower prices than their publicly traded cousins, which makes owning them more profitable. In other cases a private equity firm will purchase a company that is failing or purchase a public firm and make it private.

In most every case, the private equity company’s aim is to try and improve the profitability of the company in the hope of reselling it at a profit or taking it public. Sometimes this is successful; sometimes it isn’t.

Goals of Private Equity Firms

What is the goal of a private equity company? Why, to produce a return for its investors, of course. Like any other business, its ultimate goal is not to create jobs. While more jobs may be a byproduct of creating better profitability, that isn’t always the case. Nor should it be.

Assessment

Failing to turn around a struggling company or laying off a division that is sucking a company dry in order to save the company isn’t evil. It is a natural and crucial component of a competitive free market system, a system that has given the U.S. one of the highest standards of living the world has ever known.

Conclusion

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Rethinking the Reverse Mortgage Paradigm

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Option of Last Resort  -OR- Something Else?

By Rick Kahler CFP® MS ChFC CCIM

www.KahlerFinancial.com

Like most financial planners, I generally recommend not thinking of your home as a part of an investment portfolio or a source of retirement income. One possible exception to this rule, for medical professionals to consider, is a reverse mortgage.

Lenders

Lenders which are FHA-approved can offer Home Equity Conversion Mortgages, or HECM’s. These are insured by the U.S. government and allow homeowners age 62 and older to borrow against the equity in their homes. When the homeowner dies or moves out, the property is sold to repay the loan. Any equity left over belongs to the owners or their heirs. Any outstanding loan balance must be forgiven by the lender.

Reverse mortgages may be useful for elderly people in good health who have limited income or assets but who are living in paid-for homes.

Until now, I have viewed them as options of last resort. But, a new report by financial planner Michael Kitces CFP® has given me some cause to re-evaluate that position.

Link: http://www.kitces.com/index.php

Disadvantages

  1. One major disadvantage of reverse mortgages is that the income uses up the equity in the house. Seniors who take out reverse mortgages too early risk spending most of their home equity to cover living expenses. As long as they can stay in the house, that’s no problem. If they have to move, however, they will have to pay rent or long-term care costs. Without income from the sale of their house, they may be left with little except Social Security to pay their bills.
  2. A second disadvantage has been high upfront fees. A new option described by Kitces, however, significantly lowers those costs. The HECM Saver option eliminates the upfront mortgage insurance premium of 2%. This would drop the costs of a reverse mortgage on a $500,000 home from $17,000 to $7,000. The tradeoff is a lower lump-sum or monthly payment.

Typical Uses

  1. The most typical use of a reverse mortgage is to tap into home equity to pay the bills when all other means of support become exhausted. Instead of selling or refinancing, the homeowners can choose to stay in the home and receive monthly payments for life. They don’t have to sell the property until they can no longer continue to live in it.
  2. Another way to use a reverse mortgage is to refinance an existing mortgage. This can not only eliminate the monthly payment, but if there is enough equity in the home it can also provide a monthly income or a lump sum payment.

Example

Kitces uses the example of a 70-year old couple paying $1000 a month for a $175,000 traditional mortgage on a $450,000 property. A $175,000 reverse mortgage would eliminate the $1,000 payment. Assuming the net principal limit for the borrower was $250,000 on the property, they could use the reverse mortgage to extract an additional $75,000 of equity. They could receive this in a lump sum payment, create a $75,000 line of credit, or receive lifetime monthly payments based on the $75,000.

Let’s assume this couple’s monthly expenses, including the mortgage payment, are $5,000. They receive $1,500 a month from Social Security and withdraw $3,500 a month from their $600,000 investments. The total $42,000 annual withdrawal is an unsustainably high 7% of their portfolio.

The reverse mortgage would eliminate the $1,000 mortgage payment and reduce the investment withdrawal to $2,500 a month. This totals $30,000 annually, a more sustainable withdrawal rate of 5%. Investing the $75,000 of excess proceeds would produce additional monthly income and reduce the withdrawal rate even further. Using a reverse mortgage in this way makes sense if the lost home equity is offset by an increase in investment assets.

Assessment

We’ll look at some other reverse mortgage options another time, so stay tuned to this ME-P, and subscribe today!

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