This video features Kevin discussing the importance of organizing your financial records and determining which documents are keepers and for just how long. In fact, we find this process so important to one’s financial well-being that we dedicate the final meeting of our consultative discovery process to organizing the paperwork our new clients receive.
This article originally appeared in the Santa Barbara Independent online on February 10, 2009. To see the PDF of the article, click here.
Is It Good Money After Bad-or Not?
By Kevin Bourke
Tuesday, February 10, 2009
Mike from Santa Barbara asks whether he should continue contributing to his 401(k) at work. After all, it seems like he keeps adding money, yet the balance keeps going down. His question is extremely important because what we’re really discussing is a quality of life issue. Will Mike have enough money to retire comfortably, and how does his 401(k) fit into the plan?
I can see where Mike’s coming from, since it may seem like he’s “throwing good money after bad.” But let’s dig a little deeper and see what’s really happening. Is his money really disappearing into a void? Or is there some benefit to him continuing to contribute to his employer’s retirement plan?
What Mike should do is back away from the economic news today, set his latest statement aside, and look at the big picture. Why is he in the retirement plan, what were his original thoughts when he started, is this long-term money, and should he reassess his risk tolerance?
Since the ultimate goal is to accumulate monies to supplement retirement income, should market fluctuations impact whether a person contributes or not?
The answer lies in an investment term called Dollar Cost Averaging (DCA). DCA refers to the process of investing a set amount of money on a systematic basis, come rain or shine. A 401(k) is a classic example of DCA since it involves investing a set amount regularly every paycheck.
What is the benefit of DCA? Since the dollar amount invested regularly stays the same, it allows a person to accumulate more shares when investment prices are lower, and less shares when prices are higher. The market goes down? You get to buy more shares with the same amount of money. The market goes up? No problem, you purchase less shares at a higher price.
When you just add up the numbers, it doesn’t seem to matter much. For example, if the price of an investment went from $10 to $9 to $11, the average price is $10, right? Not exactly. When investing, the math works a little differently. It looks something like this:
- $100 invested when the investment unit price is $10 buys 10 units
- $100 invested when the investment unit price is $9 buys 11.11 units
- $100 invested when the investment unit price is $11 buys 9.09 units
- Totals: $300 invested equals 30.2 units purchased
- $300 purchased 30.2 units. Average cost? $9.93
Surprised? Can you see why Mike might be better off continuing to invest even when investments go south for a period of time? In some cases, market volatility can actually work in favor of employees contributing a fixed amount to their 401(k) plans. Note that such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities. Investors should consider their ability to continue purchasing through periods of low price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
So should Mike discontinue his retirement plan contribution? I don’t know Mike’s situation, so it’s hard for me to give a definite answer, but it doesn’t seem to make sense for him to stop now. In fact, investing now might fit the definition of “buy low.” If anything, Mike might consider raising his contribution percentage to take advantage of current market conditions.
There are some caveats, of course. If Mike were losing sleep, if he were close to retirement, if market volatility was causing family friction, or if he realized he just can’t live with the level of risk he’s taking, these might be some of the reasons for him to rethink his strategy.
The lesson? Don’t get caught up in the heat of the moment, not when it comes to investing.
This article originally appeared in the Santa Barbara Independent online on July 7, 2009. To see the PDF of the article, click here.
Strange Things Can Happen If You’re Not Careful
By Kevin Bourke
Tuesday, July 7, 2009
When Kari Kennedy’s father died, no doubt she was crushed emotionally.
When Kari found out that her dad’s ex-wife Liv, from whom he had been divorced for many years, inherited over $400,000, the entire balance of her dad’s retirement plan, she must have been speechless. Particularly when Kari had a copy of the divorce decree, signed by Liv, stating that Liv waived all rights to the plan.
Kari must have been even more bewildered when the U.S. Supreme Court, on January 26, 2009, upheld the decision to let Liv keep the money.
Beneficiary planning seems so simple. When you begin a life insurance policy, retirement plan, IRA, annuity, or other account that requires a beneficiary, you simply state who you want to inherit your assets should you die. Easy. Unfortunately, this arena is loaded with landmines and pitfalls. As Kari’s case well illustrates.
Do you believe that Mr. Kennedy deliberately set out to disinherit his daughter? I don’t. Kari’s dad made a very simple, very common mistake. He failed to change the beneficiary form on his retirement plan. He got busy and he promised himself he would do it “tomorrow.” Who knows why he didn’t do it; he probably just forgot. But according to ERISA, the law that governs qualified retirement plans, the plan document trumps the divorce decree. So Liv received a windfall, and his daughter Kari received nothing from the retirement plan. Even though Kari could prove, with both her dad’s and Liv’s signatures, that Liv and her father intended that Liv not get the money.
I see this sort of outcome frequently. Well-meaning individuals are not willing to spend the money to hire an estate-planning attorney, or they don’t follow up on the advice given by their financial planner to change their beneficiary forms, or they intend to follow through and just forget. The results can be disastrous.
Sometimes, they’ve done everything they were supposed to do, and it still doesn’t work out right. How can that be? What if a retirement plan participant mails in a change of beneficiary form, or an insurance policyholder mails in an updated beneficiary form, but the receiving entity never receives it? Or what if the form is never properly processed? What happens then? It’s not enough that the deceased intended to leave their money to this or that person or entity, the beneficiary form must state explicitly what their wishes are. The documents win out. You bear the responsibility to ensure that the documents are current.
At least once per year I recommend that everyone carefully review every asset they own. Each retirement plan, IRA, annuity, insurance policy, title to real estate, will, trust, and legal document needs to be reviewed regularly to ensure that it conforms to your current wishes.
Why? Because life happens; people die, spouses divorce, children are born, friendships fade, businesses are sold or disappear completely, the list is endless. Divorce is not the only time we need to review our beneficiary documents and title documents. With each change, our estate plan—designating the individuals or entities we wish to inherit our belongings or assets—changes.
Don’t put this off. Your family’s financial well-being may be at risk.
This article originally appeared in the Santa Barbara Independent online on May 31, 2010. To see the PDF of the article, click here.
Double-Check Before Sending Money
By Kevin Bourke
Monday, May 31, 2010
Fred held the phone close to his ear and listened carefully as the caller sobbed, “Grandpa, I need help!” Fred could barely understand the words spoken through the tears. “I … I … ” the caller went on, but the words were choked off as he took a breath.
“Who is this? Johnny? Is that you?” Fred’s only grandson, Johnny, lived nearby, with his parents, in Santa Barbara, California.
The voice on the phone replied, “Yes, Grandpa, it’s Johnny. I did something stupid. Please don’t tell my folks, they’d kill me!”
“Ok, slow down, slow down, tell me what happened.” And with those words, Fred was hooked.
Fred is in his early seventies, married, with two sons. His older son, Michael, has two children, a boy and a girl, both teenagers. Michael’s son is named John. They’ve called him “Johnny,” since the day he was born.
Johnny went on to explain, through the tears, that he had been instructed by his parents not to go out with his friends in Las Vegas where he was visiting. Instead of listening, he had gone out with a group of teenagers, one of them had been drinking and driving, they’d been in an accident, and now Johnny was in jail, needing cash for bail.
All Fred needed to do was send money via Western Union to pay the bail and get him out. Three thousand dollars would cover it.
Fred faced a dilemma. Call the parents? Or not? While many would automatically involve the parents, that isn’t true of all grandparents. Some would choose to help their grandchildren get out of this jam. Under stress, we all do unexpected things.
Johnny pushed hard for Fred to send money as soon as possible so that he could get out. But Fred wasn’t quite sure he shouldn’t get his son Michael involved. Fred felt he should talk to Michael first.
He told Johnny he would call him back, but of course Johnny didn’t have a phone number to give, so Johnny said he would call back in 10 minutes, and that he had to go because some thug in the jail wanted to use the phone and was threatening him. Then Johnny hung up. Fred didn’t even get to ask where to find Johnny if he needed him.
By now Fred was panicking, so he called his son.
“Michael, how is your day going?” Fred aimed to direct the conversation around to Johnny, see what he could learn. And he wanted to know as quickly as possible. Michael told his dad that he was enjoying a glorious sunny day packed with fun activities with his family.
“And what is Johnny up to today?” Fred asked. “Johnny? Oh, he’s outside loading the bicycles on the back of the truck,” Michael said breezily. But how could that be? Fred had just heard from Johnny himself in Las Vegas.
Fred tried to sound nonchalant as he asked, “Really, I thought he was out of town?”
“What? Johnny? No, I just sent him out to get the gear ready five minutes ago.”
It took Fred a few seconds to process this. How could Johnny be at home in Santa Barbara, when he had just received the phone call from Las Vegas? Then the truth hit him forcefully, and Fred got angry. Angry with the scammer, and angry with himself for buying into the story he had been told. Fred certainly hadn’t been expecting to be the prey in a con game.
Would Johnny call back? Sure enough, within just a few minutes of Fred hanging up with his son Michael, the phone rang. “Johnny” was calling back as promised. This time, Fred was determined to give him a piece of his mind, but Johnny hung up the instant he heard the tone in Fred’s voice.
Many of my clients have been approached over the years with this particular scam. A con artist can sit down with a phone book and dial numbers all day long, telling the same story over and over, collecting an untold amount of cash. How many dozens of innocent people can a thief call in the course of a day? And how many need to fall for the scam for the thief to collect thousands of dollars in a day? It’s shocking how much money a con artist can make tax free, sitting in the comfort of his own living room, talking on the phone.
In Fred’s case, the caller asked for $3,000. Transferred electronically. Untraceable. Disappearing into thin air.
Have you been scammed?
There are innumerable cons out there, and new ones are concocted every day. Unsolicited phone calls, strangers at the door, that nice person you met at the grocery store—the old saying, “You can’t be too careful” has never been truer.
This article originally appeared in the Santa Barbara Independent online on February 24, 2009. To see the PDF of the article, click here.
Love Money, Don’t Waste It
By Kevin Bourke
Tuesday, February 24, 2009
“People don’t like money.” This from a wealthy man who has been a client for over fifteen years. At first I laughed, thinking he was setting me up for the punchline. But his demeanor showed that he was dead serious.
What? Who doesn’t like money? Everybody I know likes money, the more, the better.
“People don’t like money,” he said again, “and you can tell because as soon as they get some, they trade it away for stuff as quickly as possible. Cars, TVs, gadgets–people get rid of their money and get other stuff.”
Having observed the way people handle money, I could immediately understand the truth of his statement. The investors I’ve had the privilege to work with over the last two decades have a common characteristic. They like their money, and they don’t trade it readily. They think carefully, they ponder, they weigh out the circumstances carefully and compare the purchase to their internal values before trading their money away.
When financially successful folks do trade their money for other items, they typically trade it for items that appreciate in value. While life does demand that we own certain depreciating assets (like cars, computers, and televisions) these items don’t garner much attention from the savvy investors I’ve met.
Rather they focus their attention on purchasing items that appreciate in value (real estate, stocks, education, and so forth), then use the income from those items to upgrade the items that depreciate in value.
For example, many people desire an expensive automobile. And they might decide that they can afford one because they can afford a large monthly payment.
The wise investor takes a different position. If a wise investor discerns that there is room in their budget for a large monthly expenditure, they find a way to purchase an appreciating asset which will, in time, generate the income to purchase that same vehicle. Thus, they have the vehicle they want, and they get to keep their money, or net worth.
Their desire is delayed for a time, but eventually they get everything they’ve ever wanted, and a great deal more. In contrast, the average consumer is stuck on an endless treadmill, always making payments, always a debtor, never an owner.
As the philosopher said, the chief cause of failure and unhappiness is trading what we want most for what we want at the moment. We want a car today, so we trade our long term goal of financial security for the immediate pleasure of that new car smell.
In my opinion, we are witnessing a seismic shift in the way the average American views money. Prior to the baby boomer generation, which comprises those born between 1946 and 1964, Americans spent their money differently. Baby boomers created a generation of free spenders, using debt in ever more creative ways to finance lifestyles their parents could not have imagined in their own youth.
Now, baby boomers are staring down the barrel of a long retirement (thanks to increased life expectancy) and realizing that they are going to need much more money to finance their lifestyles than they had imagined. At the same time, they are seeing their net worth decline dramatically.
I believe we are going to see more and more consumers adjust to a new philosophy, saving more and spending less, and carefully considering how they spend their cash.
My advice? Get off the consumer treadmill, stop spending frivolously, and start saving and investing like never before.