How to Plan for an Inheritance
If you have recently received or expect to receive an inheritance of any size, the question of how to plan for that inheritance should be of paramount importance to you. An inheritance can improve your financial future, but unfortunately too many people don’t plan adequately, reject the advice of professionals, and end up making tragic mistakes that they cannot repair. If you plan appropriately for your inheritance, you can ensure that you maximize its value to you and the people you care most about, thereby honoring the loved one who left it to you. The right decisions not only leave you with peace of mind and freedom from regret about your financial choices, it lets the giver make the lasting impact on future generations that motivated the bequest.
1. Take the Time to Understand Your Emotions about the Inheritance
For many, grief from the loss of a loved one overshadows any opportunities that an inheritance creates. If you find yourself debilitated by grief, you may not want to look at account statements, and making responsible choices with the inheritance might feel opportunistic. For others, the grieving process leads them to make destructive choices like over-spending an inheritance that really ought to be saved and invested. Still others have deeply seated beliefs that money should be hard-earned, and an inheritance can lead to inexplicable depression and financial paralysis. If you take the time to grieve appropriately and allow the strong emotions to pass, you can separate these debilitating beliefs from your thoughts about the money you’ve received, and to allow the gift of the inheritance to bring lasting value to your life.
2. Understand the Impact of the Inheritance on Your Financial Goals
How much money do you need in order to retire? Can the inheritance, if invested appropriately, help you get there? Your inheritance may move you closer to your retirement goals, but maybe only if you don’t spend lavishly or even at all. You may choose to do these calculations on your own, or you may choose to hire a financial planner, but do not skip this part of the process. In business, you absolutely must know your revenue and sales numbers, in weight loss, you absolutely must know your caloric intake, and in financial planning, you absolutely must know where you are now, where you want to go, and how fast you’re getting there.
3. Make a Plan
I strongly encourage to hire a financial advisor to partner with you on this work, don’t go this on your own. My experience is that people who receive lump sums of money and don’t already have a trusted relationship with a financial professional often regard the industry with distrust and believe they can manage the inheritance on their own. It breaks my heart when people come to see me after they’ve already squandered most, if not all of the inheritance… the nature of a one-time financial windfall is that it cannot be recovered and won’t be repeated. The fees good advisors charge are justified by the value provided to clients whose financial futures we secure with proper planning and professional investing
4. Implement Your Plan
It isn’t until this phase of the process that you will know how much, if any, of your inheritance you can spend and still achieve your financial goals. For many, when we think of receiving sums of money, the process is just two steps—receive and spend. I strongly encourage you not to skip the interim steps I’ve detailed here that will maximize your opportunity to achieve your financial goals. Ultimately, money is just one resource that can help you live the life you want to live, and handling it responsibly can help you achieve everything that is important to you.
If you would like to discuss your personal situation, with no obligation, I’m happy to talk with you and offer my insight.
Happy Anniversary Black Monday – What’s Happened Since?
by Craig Martin, MSFS, CFP®, CLU, ChFC
Today is my 67th birthday. True! But no, I didn’t think that momentous occasion had enough universal appeal to force you to read about it. Today is the Silver Anniversary of Black Monday: October 19, 1987, the day of the largest ever one-day stock market decline.
To remind you…
Black Monday, By the Numbers
- Dow Jones Opening Value: 2248
- Dow Jones Closing Value: 1738
- Loss in Market Value: $500 Billion
- Market Decline: 22.6%, which still ranks as the largest percentage drop in one day
- Cause of Black Monday? Unknown
A closing thought about the “disaster” of Black Monday from someone with almost 40 years in the financial planning industry:
I bet you probably don’t remember the details I listed above describing what happened on Black Monday. Take heart, it really doesn’t matter that you may not remember, because…
The Dow Jones closed on December 31, 1987 at 1939. But do you know what it is today?
13,343.
Which represents nearly a 6x return on a dollar invested the morning of Black Monday.
Yes, the markets have recovered fully since then, and as I think about it, this is the story of EVERY market movement.
As for me, all is well in spite of my age. For sure, I am very grateful for my health and all the people in my life, including Peggy who is my wife, my family, friends and acquaintances, and especially our family business.
Silicon Valley Gets a New Area Code
For those of you located in Silicon Valley, we’ll be getting a new area code this November. In practical terms, though, what this means to you is–enjoy it while you can–only one more week of 7-digit dialing.
(As in, where you can pick up the phone and call your friendly neighborhood financial planner at 453-2220).
After October 20, 2012, you’ll have to dial all 11 digits for all calls (as in, 1-408-453-2220).
We’ll be making room for a new area code in our same geographical region. The new area code, 669, will be issued to customers beginning in November 2012.
The 408 area code is predominantly in Santa Clara County, including the cities of Campbell, Cupertino, Gilroy, Los Gatos, Milpitas, Monte Sereno, Morgan Hill, Santa Clara, Saratoga, Sunnyvale and part of Palo Alto.
Here are some reminders to make sure you’re prepared for the change:
1. Begin dialing 1 + area code + telephone number for all calls.
2. Update numbers in your cell phone’s memory with the 11-digit protocol.
3. Notify alarm service providers.
4. Reprogram automatic dialers, speed-dial, call forwarding, modems for computer or internet dial-up access, etc.
5. Ensure your security door and gate systems are reprogrammed to deal 1 + area code + telephone number.
6. Update items such as stationery, checks, business cards, promotional items, brochures, Internet web pages and catalogs to reflect the change.
Are Equities Really Dead?
Reading the financial media these days can feel a bit like reading the obituaries, as pundits like PIMCO founder Bill Gross rush to eulogize the stock market.
You almost expect to read something like, “Dow Jones had a long and profitable life. Like all mortals, though, his time eventually passed and now investors everywhere will have to face the future without him.”
So, are equities really dead?
Actually, fortunately for investors everywhere, though, Dow Jones and his family of equities are still alive and well.
The basic argument for the death of equities is that the stock market cannot long outpace the economy because the math just doesn’t work.
For example, the doomsayers claim that if the economy is only growing at 6% a year (real growth – the headline number – plus inflation), the stock market cannot continue its 10% historical average return for very much longer, because the overall size of the stock market is, logically, reigned in by the overall size of the economy.
So, they claim, because stock returns have outpaced the economy for more than a century (somehow), we who have been living on borrowed time must now suck it up and face dismal returns for the remainder of our investing lifetimes.
Uh oh. Sounds bad.
But will someone please tell the pundits (especially the ones running billion dollar bond funds!) that they fail Finance 101? They’ve left out the balancing effect of the debt market completely!
It’s the total value of corporations (enterprise value)—not the stock market alone—that is logically constrained by the growth of the economy.
Enterprise value is the sum of the stock market and the corporate debt market. And because corporate debt offers returns below the rate of economic growth, stocks must logically return more than the economic growth rate.
In fact, as long as corporations continue to issue debt, we can and should expect the stock market to continue to return its historical 10% over the long run.
Here is an example:
Suppose the entire U.S. economy is now embodied in just one firm: TED. And TED produced $100 of goods and services in 2011 (that’s GDP).
Let’s say that TED’s equity value is $100 on January 1, 2012 (that’s the stock market in our example). And TED also has $100 worth of debt on January 1, 2012. TED starts 2012 with a $200 enterprise value that is twice the firm’s output.
Now, let’s say that TED’s output grows 6% in 2012 to 106. And, of course in our example economy this means GDP grows 6%. In a perfectly balanced system, what happens to TED’s stock market value? And remember, TED is the entire economy so the question is really, what happens to the stock market when the economy grows 6%?
Because TED’s output grew 6%, to 106, we will assume that TED’s enterprise value also grows 6%, to 212. What happens to the value of TED stock depends crucially on TED debt. Suppose TED’s debt is paying 2% – debt does, after all, offer a much lower return than equity: just check what you’re making on your bank deposits these days! – then the value of the debt rises 2% to 102.
Because TED’s enterprise value rose to 212 and enterprise value is, by definition, the value of TED’s debt plus TED’s equity, TED’s stock market value must rise to $110. That’s a 10% return on 6% growth! And what’s true for TED is true for the economy as a whole.
Because the economy is supported by both the stock market and the debt market, the pundits heralding the death of equities are using faulty logic, and are, in fact, flat wrong (and, surprise, they’ve claimed this before and been wrong).
As this simple example shows, in an economy with corporate debt, or any relatively safe security offering low yields, on average the stock market will, over the long haul, return more than the economic growth rate.
While there can be long periods where the stock market underperforms, that doesn’t change the basic math.
Debt paying less on average means the stock market pays more in the long run, and can keep doing so forever.
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Contributions to this article were made by Robert J. Hendershott, PhD, Professor in the Finance Department at Santa Clara University’s Leavey School of Business, located in Silicon Valley, Ca. Robert researches, writes about, and teaches venture capital and private equity along with various topics in entrepreneurship. Robert is also a founding partner of BH Equity Research, a private investment consulting firm.
The Benefits of Health Savings Accounts & Is It Time to Refinance?
Hi there, two quick (but important) things for you this week.
Today’s tips are about Health Savings Accounts and whether you should refinance your home mortgage.
First, check out my guest post which was recently published on Top Finance Blog about Health Savings Accounts (click on the underlined link).
These accounts offer people with high deductible health insurance coverage the opportunity to pay for medical expenses with pre-tax dollars AND earn tax-free compound investment returns. You own the account, not your employer, and unused balances at the end of the year carry forward, unlike other types of accounts like FSA’s (seriously, a pretty great deal).
Second, I was recently asked by a client if he should refinance. I don’t recommend you refinance and extend the life of your loan simply to lower your monthly payment, especially if you have been paying on your principal for several years.
However, when I did the math and calculated the total cost of financing savings over the life of the loan, I was shocked! Even though this person had been paying on their mortgage for nearly five years (at a 5.875% interest rate), the total cost of the refinanced loan was significantly lower (to the tune of nearly $100,000).
In order to calculate whether you should refinance or not, comparing the total remaining payments won’t do the trick. You’ll need a financial calculator to determine where you are in your amortization period to figure out total remaining interest obligation owed.
Clients, if you’d like me to run these numbers for you, let me know. I can also recommend a good mortgage lender that we trust if you’d like a referral.
A few years ago we were saying that rates were low, and now they’re even lower–I don’t know how long they’ll stay in the 3′s, but they’re probably not getting much lower than this! So act now or forever hold your principal and interest.
The 401(k): A failed experiment?
Ever wonder how the people who give us our financial news actually invest? Do you assume they have a secret sauce that propels their 401(k) balance to the top? Today’s article, written by Weston Wellington, a Vice President with Dimensional Fund Advisors, contains an insider’s admission of folly, and points out (again) the glaring problem even the most prudent of investors face: the need for expert advice when it comes to picking your 401(k) investments.
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Joe Nocera is a bright guy. Over the course of a lengthy career, the former Fortune executive editor has won numerous awards for excellence in business journalism and recently co-authored a penetrating analysis of the financial crisis (All the Devils Are Here: The Hidden History of the Financial Crisis). He now hangs his hat at the New York Times, covering a wide range of business-related topics.
Mr. Nocera also stands out for his willingness to discuss the sorry state of his personal finances, a startling admission for a world-class financial journalist. With his sixtieth birthday approaching, he recently revealed to readers that his 401(k) is “in tatters.”
Some of the culprits are familiar: A concentrated strategy during the technology boom put a big dent in his portfolio, and a divorce several years later inflicted similar damage. A third source of difficulty is harder to fathom—the decision to raid his 401(k) to fund a home remodeling project. Such behavior strikes us as the sort of short-term thinking journalists are so quick to condemn in the executive suite.
Mr. Nocera acknowledges that good financial advisors provide sound advice regarding discipline and diversification, but he doesn’t appear to have consulted one.
Mr. Nocera found a sympathetic ear in Teresa Ghilarducci, a behavioral economist at The New School. She was not the least bit surprised by his experience—most humans, in her view, have neither the skill nor the emotional stability to be successful investors. She finds the entire concept of a participant-driven 401(k) a “failed experiment.”
Prompted by this tale of woe, I dug out twenty-three years’ worth of 401(k) statements and surveyed the results for the first time. When I opened my first 401(k) statement in March 1990, it showed a whopping balance of $195.26 from investments in three Putnam Equity mutual funds—two US and one global. (Mr. Nocera says he began putting retirement money away in the late 1970s, so he had at least a ten-year head start.)
After joining Dimensional in early 1995, I liquidated the Putnam funds and placed the rollover balance in Dimensional’s 401(k). I don’t recall what my thinking was at the time, but with seven equity funds in my account rather than three, it seems plausible that I devoted more than three minutes to the portfolio construction decision. Maybe six.
Over the last twenty-three years, I have occasionally been tempted to fiddle with the allocation scheme, usually after some big move in the markets up or down. But I am skeptical of my capacity for self-discipline. What if a tactical decision to underweight small stocks or overweight emerging markets turned out to be right? Would I be tempted to make an even bigger bet the next time? I could find myself on a slippery slope leading to a one-fund portfolio.
My preferred strategy, as a result, is to do nothing. Some might argue I have taken this slothful approach to an extreme, having never added a new fund to the lineup (no Emerging Markets Value?!), never tweaked the portfolio weights, and never rebalanced. Call it the Rip Van Winkle strategy—when you get the urge to do something, take a nap.
From a humble beginning, my account has grown to a generous sum over the past twenty-three years, although it hasn’t always been smooth sailing. It took a bruising during the technology stock meltdown (March 31, 2000—September 30, 2002) and suffered a thumping loss during the financial crisis (September 30, 2007—March 31, 2009) despite a stream of fresh contributions.
But the subsequent recovery was dramatic as well, and the current balance exceeds the 2007 high water mark by a comfortable margin. This is not an exercise in self-congratulation, just an example of what anyone could have done by harnessing the forces of competitive markets to work on their behalf.
Perhaps the 401(k), in its current form, is indeed a “failed experiment” for a substantial fraction of the workforce. Another interpretation is that the 401(k) was never intended as a centerpiece for retirement funding, and the enrollment process cries out for improvement. Participant outcomes might be greatly enhanced if choices were presented in a way that acknowledges persistent behavioral traits leading to poor decisions.
And when it comes to charting one’s financial future, it appears even journalists skillful enough to unravel complicated financial puzzles can benefit from an objective second opinion.
Life Insurance: Give the Gift of Care and Love to Your Family
By Peggy D. Martin, MSFS, ChFC, CASL, CLU
My financial services and life insurance career began 43 years ago at age 13 when my father was hired by Equitable Life to be on their sales team. I assisted in mailings and obtaining contact information for possible prospects.
I don’t remember the exact year in the mid-seventies when this event occurred, but I do remember the day. It was December 23rd—my sister’s birthday. Later there would be a party.
My dad was excited. He was about to close one of his big cases. He had received underwriting approval from Equitable to issue $200,000 of whole life insurance coverage on a prospective client. The purpose of the insurance was to provide income replacement for heirs, and then later to provide estate plan funding.
The paperwork was ready for signature and an initial premium required. My dad was on his way to place the policy inforce. Upon arriving at his client’s home, holiday festivities were taking place. The client, with his spouse present, requested that my dad come back right after Christmas. The paperwork would be signed, the client said, the check would be written.
Reluctantly, my dad agreed to come back. Before leaving he stressed the fact that coverage would be in place today if the paperwork were signed and the initial premium payment provided. The client insisted, after Christmas.
A day later, on Christmas Eve, my dad received a phone call from his client’s spouse; his client had been killed in a motorcycle accident. The paperwork was still on the desk with a note to sign and write out the check. She lamented to my dad, “Why didn’t we take your advice? My life and my children’s lives will not be the same.” She was emotionally and financially devastated.
I still get a chill when I think about this family.
All these years later, I have seen the power of life insurance. Today, over $25,000,000 of death benefit has been paid out to beneficiaries because of the income replacement, business continuity, and estate planning my partners and I have implemented.
Families have been able to grieve and move forward, businesses have been able to replace that very key person and continue to employ and produce their product or service.
Life Insurance is the gift of care and love.
I close with: “The economic value of a human life arises out of its relations to other lives. Whenever continuance of a life is financially valuable to others, either to family dependents, business associates, or educational and philanthropic situations, the necessity for life insurance is present.” Solomon S. Huebner, Founder and first President of The American College, 1927.
*Note from the HWF Team:
Today’s post is part of a national Life Insurance Awareness Movement. More than 115 bloggers and financial advisors are collaborating TODAY to flood the Internet with good information about a subject that can be tough to think about—nobody likes to think about their mortality—but is really a financial necessity for any responsible person with financial dependents.
Also, as Peggy mentions in the article, life insurance can be used to plan for estate liquidity (to pay for the estate tax so your heirs don’t have to sell your assets).
Previously, you may recall, Healthy Wealthy Families participated in a national Roth IRA Awareness Movement. To find more articles related to the Life Insurance Movement, search for the hashtag #LifeAware on Twitter. A special thanks to Jeff Rose at www.goodfinancialcents.com for organizing the movement.
From our family to yours, we wish you health and wealth.
Top Financial Mistakes Families Make When Applying for Financial Aid
Hello from your Healthy Wealthy Families Team!
This is us last weekend at the UC Santa Cruz campus where we attended a financial planning industry Mastermind event. From left to right, Alyssa Hause (we’re a true family business—Hilary’s sister, Alyssa [Martin] Hause has joined the team as a Paraplanner and is studying for the CFP® exam!), Craig Martin, Hilary Martin and Peggy Martin!
From our family to yours, we wish you abundance in health and wealth.
This week’s blog post was co-written by Alyssa (Martin) Hause and Hilary Martin, MBA, CFP®
Top Financial Mistakes Families Make When Applying for Financial Aid
Filing the Free Application for Federal Student Aid (FAFSA) is your family’s only ticket to federal, state and institutional aid, student loans and also merit-based and athletic scholarships, yet many make the mistake of not applying for financial aid correctly or not filing correctly.
In this article, we’re going to help you avoid some of the most common financially disastrous mistakes families make when applying for financial aid. This is in no way a complete review of the topic of strategically planning for college funding, however, so you’ll need to do your research. Also, if you’d like a referral to a college funding expert who can add customized expert advice through the application process, please shoot us an email and we’ll be happy to make an introduction.
The gist of the FAFSA college cost calculation is this:
Cost of Attendance (COA) – Expected Family Contribution (EFC) = Need
*Need is the number schools pay attention to, and will attempt to fund either with loans, grants or scholarships). So you can see that it behooves you to minimize your EFC strategically, if you can.
Top Mistakes Families Make on the FAFSA:
- Aggregating savings in the parents’ names
Grandparents and other family members who want to contribute to a child’s 529 account can be a blessing to their family; however, when a 529 account is in the parent’s name, its balance is added to the EFC calculation. 529 plans owned by other family members, with the student as beneficiary, will not be included in the financial aid process and will not reduce the amount of financial aid available. Also, UGMA and UTMA accounts in the child’s name will be added to the EFC. Add to this the fact that in the vast majority of cases it’s very inappropriate to save large amounts of money in a minor’s name, and you probably shouldn’t be leaning on the UGMA or UTMA account for savings very heavily at all.
- Providing too much information
When information is not asked for, don’t offer it up! For example, the FAFSA form does not ask for retirement account balances, so don’t include them in your assets. Small mistakes can mean big dollars.
- Missing a deadline
In California, the priority deadline is March 2, but aid awards begin January. Fill out and return the forms as close to the beginning of January as possible. You can estimate prior year income and tax information, and then file an amended application when you file your tax returns.
- Providing the wrong parents’ financials
For divorced or separated families, the FAFSA form only requires income and asset information for the parent who the student has lived with most of the year. Don’t make the mistake of including the other parent’s income or assets as this will change the expected family contribution.
- Not filing the FAFSA form
Many families assume that they won’t get financial aid because they have income and assets, but your student will not be eligible for merit or academic scholarships without filing the FAFSA. Every family needs to complete the FAFSA.
- Assuming private schools are more expensive than state colleges
Sure, the posted tuition may be higher at private schools, but your key consideration should be how the school helps families with unfunded need. The vast majority of state schools will require families to take out private loans or just leave the need unfunded. Well-endowed private schools will often fund need with grants, vastly decreasing the total cost of attendance to your family.In many cases, the cost of attending a private school is actually lower than the cost of attending a state school. Do the research on colleges, understand how much of their financial aid is met with scholarships, grants and work study. A great site for researching colleges and financial aid is http://www.collegeboard.org/.
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