Most of us expect that as we age, our capacity for making complex financial decisions diminishes. A professor at Texas Tech, Michael Finke, has compiled research that supports this supposition. From my own experience working with elderly relatives and clients, I believe this to be the case. Most of the “old old” that I’ve dealt with haven’t had the capacity or perhaps the interest in these complicated matters. For many, they simply don’t want to tackle these issues. They are more likely to want to visit with family and friends or pursue their passionate interests or merely handle the tasks of getting through the day. It’s important that we prepare for this stage by designating a trusted relative, friend or professional to step in and handle these matters when we no longer are capable of doing so at the level we were in our peak years. A decline in skills may be combined with more difficult issues such as the onset of early stage dementia, paranoia or other cognitive impairment. There is no way to sugar coat the difficulty of living through or taking care of someone who is afflicted. But at least if we prepare for the typical decline or even worse issues we can prevent needless financial devastation as well.
Tag Archives: Personal Finance
The Three Dangerous Times
The three particularly dangerous times for investors: when markets go up, when they go down and when they are flat.
For the last two years, U.S. markets have been in a narrow trading range. Some days the market is up a lot, some days it’s down big. But overall, for two years the broad market is close to flat — up 3 percent a year — a third of the long-term average.
During a long flat period, investors get bored and are often up to mischief, searching for alternatives that promise much and mask danger.
In bear markets — the market often plunges quickly –and investors are prone to panic and do things that imperil their finances for many years.
When the market is doing well — bull markets — people get exuberant and overconfident and may take on greater risks and obligations than they intend. This sets them up for failure in the next cycle.
Given this bleak picture, what should investors do to improve their odds of success? Investors need to be patient, avoid emotional decisions and think long-term.
None of this is easy but it’s important for a successful investment experience.
In a month, personal income taxes are due. You still have time to fund a Regular IRA or a Roth IRA for calendar year 2015.
IRAs are a good way to save for retirement and everyone who can afford to fund an IRA, should consider doing it. There are different eligibility rules for each and which one you should use depends on many factors.
Among the key factors for picking between an IRA and a Roth are your current and future tax rates, when you’ll need the money and where it’s going.
If your tax rate is low now and may be higher in retirement, you might be more inclined to fund a Roth. If your tax rates are the reverse — high now, and low later — you’d be more likely to do an IRA.
Except for higher income people, contributions to an IRA are deductible but taxable on withdrawal. Roth contributions get no deduction but aren’t taxable if taken out after the account has been open for five years and the holder is over age 59 1/2.
If some of your money might go to a charity, a Regular IRA would be good since you won’t owe tax on the distribution (up to $100,000) if you are older than 70 1/2.
If you are younger than 50, you can contribute $5,500 to an IRA or Roth as can your spouse. Those older than 50 can contribute an extra $1,000 annually.
The younger you are, the more time your investments have to work for you. Regular contributions to IRAs or Roths can be a key part of your retirement savings.
For years I’ve felt like a lonely optimist in a dark and dangerous world.
In 2007, the U.S. economy was booming. House prices soared, unemployment was rare and anything seemed possible.
Then came the Great Recession, stock market collapse and the world financial system’s near failure. No one knew what to do.
Since that scary winter of 2009, the U.S. economy has rebounded. Car sales have doubled and housing starts quadrupled. The unemployment rate is half the recession peak.
Anecdotally, the pickup is dramatic. Help wanted signs have sprouted in store windows, trucks clog highways and realtors occasionally smile. The stock market has nearly tripled. For the first time in years, U.S. energy independence is possible.
Yet most Americans believe the country is on the wrong path. Only a month ago, the stock market plunged amid a weakening economy and troubles in China.
While problems never disappear, perspective is in order. U.S. GDP is up $3 trillion from the recession low to $17.4 trillion. The number of people with jobs in the U.S. is up by 10 million from 2009 to 148 million now.
Is everything perfect? No. But gloom and doom are overstated. After a scary drop in late August and September, the stock market rebounded and is flat for the year.
An investor must be an optimist and it’s possible they are at least partly right.
We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.
Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.
Many of these people are do it yourselfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away?
What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like?
What happens to a couple who are living together for many years when the storms finally roll in?
Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?
I told him the question is wrong. We know the market always goes up and down.
The long-term trend for a century has been up but we know the market will go down and we need to plan for that.
We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy.
We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.
The Sun Doesn’t Always Shine
We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.
Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.
Many of these people are do it your selfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away.
What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like. What happens to a couple who are living together for many years when the storms finally roll in?
Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?
I told him the question is wrong. We know the market always goes up and down. The long-term trend for a century has been up but we know the market will go down and we need to plan for that.
We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy. We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.
An Important Move
My friend Bob has an important rule that comes out of the school of hard knocks. He says that if you can do a transaction that is life-changing, you must do it. It’s not optional; it’s mandatory.
Most of us never have a chance to grasp the brass ring. How tragic is it for someone to have the opportunity and let it slip away.
With the economy in lousy shape for the last five years, most of us didn’t have to worry about what happens if fortune smiles on us. But a select few do and even for them, success is not assured.
Recently, Terrell Owens, the great football star, filed for bankruptcy despite earning $80,000,000 in his professional football career. Ok, you say, pro athletes have difficulty adapting to sudden riches. But this happens in all walks of life.
Donald Trump was saved from bankruptcy in the early 1990s because he owed the banks so much that it would have cost them more to put him out of business. Owe a little and you are a borrower. Owe a lot and you are a partner.
If you have made a fortune, protect those paper profits. You owe it to yourself to get a good advisor and work out a good plan.
If there were a bond bubble, this is what it would look like: trillions of dollars of Eurobonds going for negative interest rates, the 10 year German bund yielding pennies and Mexico promising to pay back bonds in 100 years with an interest rate of 4 percent. More than half of the world’s government bonds are yielding less than one percent. We don’t have any experience with this kind of a world. We know it won’t last forever but we don’t know when and how it will end. We do know that we should be careful in buying bonds. None of this means that we shouldn’t buy bonds or that everyone will lose money. A good guess is that many, if not most, of these bond buyers haven’t thought through the end game and if trouble comes, it will be unexpected. There are many reasons why interest rates are so low. One is that the Great Recession was so terrifying that people still haven’t recovered. They aren’t willing to sign up for risky assets and as a consequence they have made a once safe asset one of the riskiest. As the saying goes, buyer beware.
Diminished Ability to Handle Personal Finances
As people age, they gradually lose their ability to handle their own finances. Often, this process is so gradual that the person himself and those around him are unaware of what’s happening until something serious happens. The elderly control the most assets and are the most susceptible to financial scams and poor choices. As people get older, their financial affairs often get more complex. They must deal with complex choices on healthcare, long-term care, taxes, life insurance, pensions, Social Security and estate planning. Often just handling the routine chores of daily financial affairs become beyond reach. Recently The New York Times had an article discussing the research behind the loss of cognitive skills needed for personal finance. Steps to mitigate these inevitable problems include striving to simplify your financial affairs — consolidating your holdings in a small number of financial institutions, trimming your actual number of holdings, avoiding complex or exotic instruments. Another common solution is to use automatic bill paying where possible. People should also find trusted family members, friends or professionals who can step in when needed. Appropriate advanced directives such as powers of attorney and health care proxies also need to be in place. Planning for the inevitable will help avoid many of the worst potential pitfalls.
Protecting Against Financial Scams
Financial scams are getting much more sophisticated and are a growing problem. It’s easy for anyone to momentarily let down their guard and get nailed. It’s especially easy for the elderly. So much has changed in recent years and the elderly often have a tough time sorting out the legitimate advances from the smooth talking con artists. A recent study showed that the elderly who have been working with a financial advisor or some other trusted advisor are much less likely to fall victim to scams. Financial products have gotten much more complicated over the years. With the advent of cheap computing power it became possible to add many more features to products. Now consumers have choice about everything but it’s much more difficult to sort out what is really important to them, what they need and what they are paying for. As we age, our brains become less agile and can get overwhelmed with this growing complexity. Nowadays, everything comes with an inch thick instruction manual. While there’s no sure way to ward off all scams, the one good rule is that if something sounds too good to be true, be especially wary. Recently, Financial Planning Magazine ran an article on protecting against scams: http://www.financial-planning.com/30-days-30-ways/protecting-elderly-clients-more-scams-2692756-1.html?utm_campaign=30%20days%2030%20ways-may%202%202015&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae4297713%3A1591a%3A&st=email