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Financial Stress in Times of Transition

Financial Stress Adaptation

By Rick Kahler CFP®

Stress is what happens when something you care about is at stake. This definition comes from Susan Bradley, CFP, author of Sudden Money and a specialist in the financial aspect of life transitions.

The stress around these transitions is a common reason that people seek out financial advice. We tend to be driven to consult advisors as a result of stressful changes in our lives, such as a divorce, a sudden money event like an inheritance or insurance settlement, an investment or job loss, retirement, or the death of a loved one.

While all these life events certainly have financial components, it’s almost always the emotional components of the change—how we respond to them—that are the cause of the stress.

Any change includes three stages: an ending, a period of passage while we relate and adapt to the change, and a new beginning. This period of transition can be fraught with emotion and behaviors that can trip us up in many ways, including financially.

Susan identifies nine such emotions and behaviors that she sees commonly in people in transition.

1. Lack of identity. If the transition results in the loss of a familiar role—spouse or employee, for example—you may struggle with “Who am I now? “There is often confusion and ambivalence about the future, and an inability to make decisions.

2. Confusion/Overwhelm/Fog. There is a sense of defeat by everything. You may physically slump, have a glazed-over look, and ask others to repeat a lot. It’s hard to understand, be present, respond, focus, or move forward.

3. Hopelessness. You may have a sense of having given up, not being in control of your fate, or being a victim. It may seem that there is nothing you can do to change yourself or the outcome. Financial decision-making is very difficult.

4. Invincibility. This can happen with a big positive change in your finances. You may think everything is going to turn out fine. You may feel euphoric, confident, and smarter than your advisors. You may spend more and take greater investment risks.

5. Mental and Physical Fatigue. Change can be exhausting, and the exhaustion can go undetected by others and even yourself. You may have difficulty following an agenda and tasks.

6. Numb/Withdrawn. You may feel ambivalent about and indifferent to exploring the changes in your life, what you want, and what the future may hold. You don’t give much feedback and are withdrawn and non-expressive. You may miss or not return phone calls or emails. The planning process often comes to a standstill.

7. Narrow or Fractured Focus. You may either be preoccupied with one area that excludes everything else or have an inability to focus on anything. In either case, focusing on what’s important becomes difficult or impossible.

8. Inconsistent Behavior. This is the inability to hold to one position. Instead, you may change your mind repeatedly or switch between opposite positions. You are uncertain and often embrace opposites in your wants and desires in the same breath. Making decisions become impossible.

9. Combative. You may hold on to feelings of anger, resentment, victimization, and rage regardless of the facts. You are outwardly emotionally expressive and challenging. You don’t respond well to logic and practicality. A combative person doesn’t have problems making decisions, but does have difficulty making good decisions that are in their best interests.

Assessment

Emotions and behaviors like these are generally temporary. Financial decisions made in the midst of transition-based stress, though, can have lasting negative consequences. The support of trustworthy advisors can be invaluable in navigating through both painful and joyful life changes.

***

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 Inherited Money

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The “money scripts” of inheritances

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

Rick Kahler CFP“I’ve never seen money passed from one generation to another in a manner that actually benefited the recipient.”

When a psychologist said this to me several years ago, I was dumbfounded.

Many parents, like some doctors, scrimp, save, and sacrifice so they can “leave something to the kids” with the intention of doing them good. It’s hard to accept that inheritances may actually do harm instead. Most of us have money scripts that don’t support this idea.

Money Scripts

Typically, I used to hold several money scripts around inheritances. One was that leaving money to your children is a loving thing to do. Another was that parents should always leave their money to their children. A third was that anyone who received an inheritance would invest it wisely, using only the earnings to improve their lives.

Today I know those money scripts were not universal truths. I have more understanding of the problems involved in giving money away in a manner that is beneficial to the receiver. It isn’t as easy as I once thought.

Seed Money?

Many parents envision inheritances for their kids as “seed money” that will be used for the health, education, and welfare of their offspring for many generations. Research shows that is rarely the case; instead, inherited wealth does not last long. Missy Sullivan summarizes some of the research in “Lost Inheritances,” a Wall Street Journal article published online March 7, 2013. According to this article, 70 percent of those who receive an inheritance of any size spend it all in their lifetimes.

http://online.wsj.com/article/SB10001424127887324662404578334663271139552.html

For the 30 percent that do have something left to pass on, 70 percent of their kids also blow everything they get. That means by the end of the third generation, 90% of the money originally passed down is gone.

While it’s easy to understand how an inheritance of $10,000 may evaporate, it’s difficult to understand that inheritances in the hundreds of millions evaporate just as quickly. How is that possible? Is the average American just incompetent at managing money?

The Research

According to Sullivan, a study done by the Williams Group found that poor investment decisions were not the culprit. About 60 percent of large inheritances disappeared because of a lack of trust and communication between family members. Another 25 percent of the time, money evaporated because the parents failed to prepare the next generation to handle their impending inheritance. Poor investment advice and high fees were the cause in less than 15% of cases.

###

Money

Options

If more high net worth parents knew that only 10% of their hard-earned estates would be around at the end of their grandchildren’s lives, I wonder if they might do a few things differently.

One option would be to address the two biggest issues—lack of communication and preparation for heirs—head-on during their lives. Parents wanting their money to benefit their kids could engage the services of a financial therapist who could help the family address their communication and trust issues long before they pass on their wealth. Preparing their children to manage wealth and use it wisely would be the best way to increase the odds of making an inheritance a blessing rather than a burden.

Another option would be to secure their own retirement, then forget all the scrimping and saving and just have fun blowing the money on themselves.

Still another option would be to give their wealth to worthy causes during their lifetimes or upon their deaths.

Assessment

This would leave the kids to make their money by ingenuity, hard work, wise money management, frugality, and a little bit of luck. The same way, in fact, their parents did. Are medical professionals any different?

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What to do with a $25,000 Windfall?

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What Do … You Do?

Doctor – Suddenly you receive a check for a large sum of money?

This infographic has some suggestions on what to do with that extra cash that will have a positive effect on your finances in the long-run.

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mint-windfall-25kkf-copy

Assessment

Now, suppose the windfall was $250,000 or $2,500,000 or even more! What to do?

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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