Any Road Will Take You There
Since I’m on the leading edge of the Baby Boom generation, the Beatles have been an influence on my life for more than half a century. During their touring years, the least flamboyant of them was George Harrison, the lead guitarist and contributor of one song per album. After the band members went their separate ways, he became better known as a songwriter. This includes the first track on his posthumously released Brainwashed album from which the title of today’s article is drawn.
Most financial planners offer advice to individuals at any stage of life but our typical client tends to be older, turning to us as they near retirement. Naturally, we believe we have something to offer those folks but I believe the very best time to meet a planner is somewhat earlier, perhaps fall of the senior year of high school. How might we be of service to someone that young (and to her or his parents)? Well, a student’s assets at the time of filing the FAFSA are factored into the aid calculation and we might be able to suggest some sort of repositioning to increase his or her chances of receiving need-based aid.
We also like to help by offering information about post-secondary educational decisions not necessarily involving college. There’s a growing gap in qualified applicants for middle skilled jobs such as welders, electricians and mechanics. While it’s statistically true that college graduates have greater lifetime earnings, college represents a significant expense and delays entry into the workforce (and regular paychecks) for several years. We enjoy helping people try to find a balance as they make this choice.
For the many for whom college is appropriate, we naturally begin by looking at the student’s abilities and aptitudes but we suggest weighing those against the likelihood of a good job being available upon graduation. Indiana publishes a list of the hot 50 jobs of the future every year. While agreeing that pursuing a dream of studying (for example) art history could be very satisfying, we might be able to help a student select a major that will lead to a remunerative career and use electives, perhaps even a minor, for fields of special interest that may not be in demand in the workforce.
Many colleges now offer opportunities for the study of personal financial planning and we think this is a very positive development. We’re not in the least concerned about being put out of our jobs but instead are optimistic about a more aware group of clients in the future. A recent Wall Street Journal article debated the value of students being required to take personal financial planning courses in college. Even we think requiring such courses is probably a stretch but we do endorse students learning about the banking, credit, insurance and investment products and services they are likely to be purchasing throughout their adult lives. I believe in this concept to the extent that I’m planning on teaching three such (elective) courses at IUPUC this Fall.
Young adults who’ve completed their education and are entering the workforce may also have questions. Rent an apartment or buy a home (or live with parents)? Pay cash for a used car or finance a new one? Participate in a 401(K) plan and at what level? What to do about student loans? All of these are questions we’ve helped answer many times for other clients in their own specific situations.
For individuals or couples who have children, the dynamic changes significantly. We believe both insurance coverage and estate planning rise to the top, becoming critical topics for discussion. What plans do you have for your family, what hopes, what dreams? If any would be impeded by an untimely death or disability, what could be done right now to insure that they remain viable? We don’t have a list of pat answers but I assure you we can find one together as we work our way through the planning process.
As my mom used to say: sometimes you have to pick your battles, so I don’t always insist on clients having a will in their earlier years but I can get pretty demanding on the topic when there are children in the picture. While there may or may not be a lot of assets to deal with, it’s certain that parents have plans for their children and those plans are unlikely to be fulfilled without some proactive planning on someone’s part. At the very least, a document should specify who will become guardian of the children should a parental tragedy occur. I have heard stories of a ‘race to the courthouse’ to see who becomes caretaker and the winner may be the least suitable relative you can think of. We don’t allow this to be left to chance – all of our clients who have children also have wills. Life insurance, too, is important at this point. Even with the ideal guardian, kids are likely to be faced with a very narrow range of options without insurance proceeds available to fund them.
In middle age, people often focus on their children’s education, sometimes allowing their own retirement plan contributions to slip. Remember that 401(k) plan in which we suggested participation when you were just out of school? Middle age often marks the beginning of peak earning years and we like to see retirement plans receiving maximum contributions. But how about educating children, you ask? At the very least, we believe that a balance must be struck as regarding which goal receives funding. We, like all planners, have software that allows us to examine ‘what if’ scenarios. Sometimes, just seeing that delaying retirement contributions probably means delaying retirement itself is enough to help people refocus. Again, this is an area in which we’re very experienced and in which an outside eye can be of value.
In later middle age, when peak earning years probably have arrived, the obvious approach of over-funding retirement accounts is more and more often being short changed by adult children returning home. This trend rose sharply during the Great Recession and, according to Pew Research, continues to drift upwards across the globe. Of course, our clients’ children are among the nicest people in the world and living with any of them would probably be a pleasure but we work to help both generations see the value in the child’s launch into society. Naturally, parents want to help – mine certainly did – but putting children’s comfort ahead of parents’ retirement needs is usually not the best solution for either generation.
As working years come to an end and retirement draws near, planning becomes especially important. People’s first question is usually “can I (we) really afford to?” The answer, somewhat surprisingly, is easy. Here’s the formula: asset values plus an adjustment for future growth divided by yearly spending over a projected lifetime adjusted for inflation. Programs that automate this calculation are available almost everywhere. I just paused writing to search for “Retirement Calculator” on Google and learned that there are 22.3 million across the web to choose from. That said, I believe this is a case where simple is not necessarily better. As more and more websites offer automated robo-advisor systems I think the value of a human advisor becomes all the more obvious. Of what use are robotic responses without a person who knows you providing context? I guess we’ll find out over the next few years.
While we believe estate planning is important for anyone who has a partner and/or children, a will and the associated documents become more likely to be called-upon as people age. The will, of course, addresses the disposition of assets and, in Indiana, no one dies without one. Those who haven’t made their own arrangements will be using the ones provided by the state. It’s most unlikely that Indiana’s plan will be appropriate for your wishes, so we encourage our clients to prepare their own estate planning documents. Local attorneys can usually prepare these for a few hundred dollars.
In many cases, it’s those associated documents that first come into play. They include durable and medical powers of attorney and a living will. The durable PoA allows someone to make business decisions on your behalf. Should you be incapacitated, perhaps by a stroke, your designee can sell securities to raise cash or sign a contract with a rehab facility. In this case, durable means that the powers continue after your incapacity. The medical PoA names a health care representative for you. Like the business PoA, this person knows you well enough to make medical decisions when you are unable to. For generations, medical doctors were trained to extend life at any cost. Although times are changing, there are still many situations in which that’s the default option if for no other reason than liability protection. Preparing a living will (an advanced directive) allows you to make clear your own wishes about the application of heroic life-sustaining measures. Jalene and I have been offering to copy this group of documents to a business card-size CD which can be carried in a wallet or purse. We still do so, but with the advent of cloud-based technology, we now offer an on-line vault to which they can be uploaded and easily accessed via an internet connection whenever they’re needed.
In spite of all the ways a planner might be of help, most people don’t use one. A fair question might be – do I really need a plan? That’s a question that George Harrison answered for us in 1988: “if you don’t know where you’re going any road will take you there.”