New Year Financial Tune Up

While you’re making your New Years’ resolutions, don’t forget to give your financial house an annual tune-up. As the old saying goes, an ounce of prevention is worth a pound of cure, and few adjustments now could save you thousands of dollars, not to mention some major headaches, in the months and years to come. The first step in any financial tune-up is to reassess your financial goals and make sure you’re on track to reach them. For instance, has your target date for retirement changed? Has a spouse had a career move that affects how much you have going into savings? Are you planning any major purchases this year, such as a kitchen remodel or buying a car? If you depend on your investments for income, perhaps your cost of living has increased and you need to find a way to increase your returns. Maybe you’ve downsized your home and your income needs have decreased. Whatever the case, now is the time to determine what your current needs are and how to adjust your investments to improve their ability to achieve your goals. The second step of your financial tune-up is to make sure your estate planning and insurance policies are up-to-date and in order. I know it’s not a lot of fun to do this, but believe me, if you could talk with folks like I have, who didn’t have their houses in order and are paying the price, you’d gladly take the time to do it now. And it’s not as bad as you think. Read over the estate documents you have, such as a will, living trust, powers of attorney, etc., and make sure they reflect your current wishes and situation. Don’t have the right documents in place? No time like the present to take care of it. Not sure what you need? Just ask me. Review your insurance policies, making sure to verify your liability coverage. For instance, most drivers don’t carry enough uninsured motorists coverage. And after all the hurricanes of 2005, make sure you know exactly what is covered in your homeowner’s policy. If you have questions, make an appointment with your insurance agent and know for certain. Don’t forget about reviewing your long-term care and disability policies as well. And if your needs for life insurance have changed, maybe it’s time to cancel some policies or up your coverage. If you’re still employed, talk with your human resources department and make sure you’re maximizing all available benefits. Max out your 401k and any matching contributions from your employer. See if there are ways to lower your health insurance costs. Some even offer tuition reimbursement. The last major step of your financial tune-up is a close inspection of your investments. If you have mutual funds, check out your funds at www.Morningstar.com. By entering each fund’s symbol, you can quickly measure your fund’s performance, rating, how they compare to similar funds, and whether your fund has had a recent management change that could affect performance. You want to be in funds that have consistently performed well over the long haul, not just one-year-wonders. If you happen to own some funds that are laggards, then fire them and replace them with higher-ranked ones. When determining what funds to have, don’t just look at performance, but also look at diversification. If you own several funds, but they’re all invested in large-cap companies, that’s not proper diversification. You should spread your eggs among several different categories, types and strategies. And don’t forget to make sure your company retirement account isn’t 100% in company stock. Make sure you’re not too over-weighted in any one category. For example, energy and international stocks did very well in 2005. If you have hefty gains in those holdings, you might want to rebalance some of those profits into other categories. An annual financial tune-up might only take a few hours, but its benefits could last a lifetime. If nothing else, you’ll gain the peace of mind that you’re on track to reach your financial goals and you have your estate in order. If you uncover some problem areas, you’ll be able to make changes now before you have to pay for costly mistakes. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

How Do You Like These Odds?

Are you a gambler? Do you like to play the odds? Here are some real-life odds for you to consider: 90% of people become incompetent before they die! Of course, your spouse might not think you’re of sound mind right now, but that’s beside the point! If you don’t take action, you could needlessly cost your spouse thousands of dollars and countless headaches in order for them to make decisions on your behalf. Competence refers to the ability to make rational decisions about your affairs. For instance, if you develop Alzheimer’s or dementia as you age, you’ll become incompetent. Two critical areas are affected by incompetence—your ability to make your own financial decisions and your ability to make your own medical decisions. Unless you give someone the ability to make these decisions for you prior to becoming incompetent, it will be left up to a court to decide who should make these very personal decisions for you. The person the court appoints may not know you very well and, as a result, the decisions they make may not reflect your desires. There’s a simple way to protect you and your spouse. You can legally name someone you would want to make these decisions for you ahead of time. Then, should you become incompetent, that person you named can step in and make decisions for you without the involvement of the courts. You choose them. You can also make them aware of your wishes to better insure they are carried out. If you are single, this is even more important! The legal document that accomplishes this is called a Power of Attorney. I recommend each person have one Power of Attorney that covers financial decisions and a separate Power of Attorney that is used solely for medical decisions. That way, you can name someone who is financially minded to handle your money matters and someone more compassionate to handle your medical decisions. There are two types of Powers of Attorney (POA)—General and Durable. The General POA gives someone the ability to make decisions for you while you are competent. The Durable POA is only active while you are incompetent. Many of my Private Wealth Management clients are concerned about keeping control as long as possible, therefore, most of them rely on the Durable POA. By the way, most Durable POA only spring into action based on letters from 2 physicians attesting to your incompetence. Some people think their children will be able to make medical decisions for them should they become incompetent, they can’t without a POA. Spouses can make medical decisions for each other but that’s it. One spouse cannot make financial decisions for the other spouse. For example, if I were to become incompetent my wife, Julie, would not be able to give any instructions or effect any transactions within my retirement account unless she had a POA (she does). One of my newer clients now wishes he heard this several years ago. Chuck and his wife have been married forever and are in their early 80’s. About 3 years ago Chuck noticed that his wife was becoming a little forgetful. Dementia had begun and she slowly lost her mental capacity. Like most couples, the real estate they own is in both of their names. That way it will automatically go to the other spouse should one pass away. Unfortunately, Chuck does not have a Power of Attorney over his wife. No one does. Therefore, he can’t sell any of the real estate to use the money to help pay for her care. He doesn’t have the authority to sign on her behalf and since she is no longer competent, she doesn’t have the legal capacity to sign for herself! To correct this, Chuck will have to go before a court to become her conservator—a long drawn-out process that is humiliating and cost thousands and thousands of dollars. He will then have to appear before the court each year for the rest of her life to account for his actions. Don’t gamble like Chuck. Your attorney can inexpensively draft Powers of Attorney for you and prevent countless headaches. Do it now, before it’s too late. Your spouse and children will be glad you did! Go to www.guardingyourwealth.com to learn more. Mr. Voudrie is a Certified Financial Planner and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. Contact him at jeff@guardingyourwealth.com.

Don’t Be Left Holding The Bag

Ned almost lost the farm that had been in his family for 8 generations! We’ve all heard that ‘The Devil is in the details.’ It is especially true when it comes to estate planning. Make sure you don’t make the same mistake Ned did. Ned and Nellie Mae were in their early 80’s. Even though they had been happily married for over 30 years, they each had children from a previous marriage. About 10 years ago they became concerned about the amount of estate taxes that would be due on the family farm when they died. They’d heard the nightmare stories about losing the farm to Uncle Sam and they wanted to make sure it wouldn’t happen to them! So Ned went to see his local attorney. He told the attorney about their estate tax concerns and also that he wanted to make sure the farm went to his children—stayed in his family—instead of going to his stepchildren when he died. Well, the attorney told Ned what to do and, obediently, Ned and Nellie Mae implemented that plan over the next 9 years. That’s when I got involved. The attorney’s advice sounded good, but the Devil is in the details! And the attorney missed a few details that left Ned holding the bag. The result was that if Ned had passed away, his share of the farm could have gone to his stepchildren instead of his daughters—the very thing he was trying to prevent! The attorney’s plan was also supposed to reduce the amount of estate taxes that would have to be paid, but because the attorney missed one small detail it would be as if the plan had never happened, leaving a $750,000 tax bill! They followed a plan for 9 years and were right back where they started! Fortunately, I was able to help Ned and Nellie Mae get the chaos that had become their estate plan quickly and easily sorted out. With the help of a competent attorney, Ned and Nellie Mae now have the peace of mind that what they want to happen, will happen. Their estate taxes have been drastically reduced, possibly even eliminated. Just as important, Nellie Mae’s children will get her portion of the estate and Ned’s children his. The farm that has been in his family for 8 generations will stay that way for a few generations more. To their credit, Ned and Nellie Mae did everything they were supposed to. They were proactive in recognizing that they needed to take action to reduce their estate taxes. They knew they needed legal documents in place to dispose of their estate according to their wishes, minimizing any conflict between the children. They sought out an attorney to help them. They followed the attorney’s advice and did what they were supposed to. So what went wrong and how can you avoid making the same mistake? The only mistake Ned and Nellie Mae made was not working with an attorney that specialized in handling complex estates. Their attorney was a generalist. Being in a small town he did a little bit of everything, legally speaking. Just like in medicine, it is hard for any attorney to be an expert in all areas of the law. You may have a family doctor, but if you need a heart transplant they will refer you to a cardiac specialist. If you have severe foot problems they will refer you to a podiatrist. If you have hemorrhoids…well, never mind, you get the picture! Ned and Nellie Mae’s attorney knew in general what they should do, but since he wasn’t an expert in the area of estate planning he missed a crucial detail. It’s the same way when it comes to handling all of your financial affairs. For all but the simplest cases, you should be working with someone who specializes in the areas you need help. For instance, I specialize in Estate Planning, Insurance and Investments for affluent seniors, retirees and near-retirees. Others specialize in company retirement programs, etc. Work with a competent professional that specializes in your situation. Don’t be left holding the bag! Go to www.guardingyourwealth.com. While there, be sure to tell us your story. Maybe others can keep from making the same mistakes. Mr. Voudrie is a Certified Financial Planner and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com

The Solution To The ‘Investment Roller Coaster’

Does investing put you on an emotional roller coaster? If so, you are not alone. The fluctuations of the market are hard for most investors to stomach, and many suffer from financial ‘motion sickness’ as a result. But making investment decisions under these circumstances is a recipe for disaster. Read on to find out how you can get off the emotional roller coaster of investing. If you feel that you are on the investment roller coaster—if you lie awake at night worrying about your investments or get a knot in your stomach when you hear the markets have fallen—then you most likely have not allocated your portfolio so that it matches your emotional risk tolerance. Changing the allocation of your portfolio should alleviate this problem. Investors find themselves on an investment roller coaster when their ‘intellectual’ risk tolerance doesn’t match their ‘emotional’ risk tolerance. This creates a ‘fear/greed’ cycle that causes many investors to constantly adjust their portfolio based on short-term circumstances instead of a long-term strategy. For instance, an investor intellectually agrees with the benefits of equity investing and he decides to put a significant percentage of his money into stock market-based investments. But when the market starts going down, fear grips him and he can’t take it. He wants out. Once the market recovers, his fear turns to greed. The market went up, so why didn’t his account? He blames his advisor for not telling him to buy, when in fact the investor didn’t act because of fear. Don’t get me wrong. There is nothing wrong with tactically reducing the amount you have invested in equities to protect your money. That’s exactly what my proprietary money management system is designed to do. But in this case, I am talking about rapidly changing the long-term strategy based on normal market fluctuations. The problem isn’t necessarily that the investor panics and sells, but that fear then keeps them from getting back into the market when they should. Instead of buying when everyone else is afraid, they wait until the market recovers and it’s too late. They sell low and buy high. Let me give you a real-life example. After meeting together countless times, one of my clients agreed that having approximately 40% of his portfolio allocated to high-quality equities was the best way to help him achieve his goals. We talked extensively about the implications, did extensive research on each investment used, and invested the money. Within a couple of months, this client was beside himself because he had lost $20,000! But let’s put this loss in perspective. Although the market was down several percentage points, his account was down less than 1%. If you can’t tolerate a fluctuation of 1% then you shouldn’t be in equities. We reduced his equity percentage down to 7% so he could sleep at night. By the end of that year, the market was up 8%. Most of that gain (as it usually does), came very quickly in a short period of time. And it started (as it usually does) right when nobody thought it could go up. This client allowed the fear over a 1% loss to prevent him from achieving an 8% gain. You will only know your true emotional risk tolerance after it has been tested. When tested, we learned that this client’s emotional risk tolerance was much lower then expected. Only then were we able to achieve the appropriate portfolio allocation. That’s why it is so important that you have the ability to easily make changes to your portfolio without significant cost. That’s why I so adamantly oppose investments that have surrender charges—they cause you to lose your flexibility. Also, your comfort with investment risk will change over time based on your experience and your situation. This client is becoming more comfortable with normal market fluctuations. We are increasing the percentage he has allocated to equities, but we are doing it slowly. Recognize that your emotional risk tolerance is probably much less then your intellectual risk tolerance. Start slowly. Build up over time. Be flexible. And work with an advisor who understands and is able to help guide you along the way. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.