MONEY Financial Planning

Why Financial Planning Needs More Religion

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Acknowledging faith and spirituality helps people better understand their financial goals — and stick to them.

As part of my getting-to-know you interview with new clients, I ask about their faith. Most are caught off guard. “Why do YOU care?” was one client’s response.

Such a reply comes with good reason; my clients hired me to talk about money, not religion. But there are many advantages to discussing spirituality with clients before we address their finances.

Know Thyself

Spiritual thinkers from Socrates to John Calvin advocated the importance of introspective familiarity in the pursuit of wisdom. Certainly, in the financial realm, the client who understands why he behaves the way he does will be more successful in achieving goals. Asking him to articulate the spiritual beliefs that drive him is a great exercise for him as well, even in cases where those beliefs are simply, “I don’t practice any sort of spirituality.”

If you don’t practice your own spirituality, or you simply don’t want to talk about spirituality with clients, a discussion of values can be an effective start to the relationship. Everyone has values, regardless of their stated faith or religion. Even old Ebenezer Scrooge valued wealth, frugality and financial independence. My clients receive a list of 140 common values from which they select the most important. I then have them narrow the list down to 20, then 10 as they look at themselves in a completely new way.

Integrating Faith into Financial Plans

As many advisers have learned by experience, it is the long term that will make or break a client’s financial goals. When our assets serve a larger purpose, we experience a deep inspiration and motivation over the long haul. By incorporating the big picture into our planning, we have better success with helping clients implement behavior changes. Rather than saying, “You need to spend less next month, and every month thereafter,” we can include a client’s faith to motivate a greater level of intentionality: “I know you want to be able to provide XYZ for ABC. That will be much easier if you spend less in the short term.”

Putting money in its place

Maybe money shouldn’t be the key ingredient in our financial decisions. Where strong values are present, ideally our financial life will reflect them. When your money is in service to your values, it becomes a supporting cast member of a show where your values play the leads.

In a fast-paced, credit-loving society, it is easy to let money guide our decisions. We make risky investments in hopes of large payoffs with money we can’t afford to lose. We take jobs that pay well but require such dedication of time that we begin to lose touch with the people we love. We constantly seek “more” without taking the time to be grateful for what we have.

But when values take the lead in our decision-making, our behavior finally changes for good. Investments no longer cause insomnia, jobs support a worker’s lifestyle, and gratitude becomes a regular part of life. Clients will appreciate an adviser who cares for the whole person and advocates that kind of wellness.

I have one client who took a different view of money; she hated it. Despite tremendous earning potential, she considered wealth the cause of greed in this world. In what she deemed acts of faith, she continually put herself in positions to earn very modest amounts. Is she wrong? That’s not my place to determine, but I do have a responsibility to help her understand her default reactions so she can evaluate whether or not they reflect her core beliefs.

I knew she was a Christian, and her upbringing took place in a notoriously upper class town. I suggested she examine her religious teachings for more detail on the topic of wealth. She eventually decided that her attitudes don’t reflect the actual teachings of her faith. She read of biblical figures who used the power of their wealth to serve God and in so doing, mightily improve the lives of others.

My client’s entire financial plan changed once she acknowledged her attitudes toward money were more reflective of her teenage response to her home town than they were an outcropping of her faith. She has accepted a new mantle; while avoiding monetary entrapments, she wants to make more money so she can use it to improve the lives God brings into her path.

It’s About Our Roots

I liken our spirituality to the root system of a tree: It gathers nutrients and supports the weight of the tree. In nature, what we see above ground only partially represents the root structure we can’t see. Everyone has roots, and ignoring those root systems can lead to ineffective attempts to grow.

As much as we hate this fact, we grow in leaps and bounds when we suffer. For those who dedicate their lives to a higher purpose, even life’s pitfalls present growth opportunities; we learn to grapple gracefully and walk out of those pits with our soul intact. I frequently mention to my clients my own financial struggles due to two chronically ill family members. While I wouldn’t want to relive those life setbacks, their spiritual benefit seriously outpaces the dollar signs. Where the prudent financial plan would create such stability that you never find yourself in a financially precarious position, there still is beauty in those down times, and they serve to forward our purposes for being in this world.

Certainly, knowing your client’s faith is not a shortcut; there are as many varieties of beliefs among denominations as there are types of trees and root structures. But it helps you know the right questions to ask. Perhaps you are wondering why there is a disconnect with a longtime client of yours. When you look at her, could there be something underground that will give you a better understanding of the whole person? How much more effective could you be if you brought your advice under the umbrella of her faith and spirituality?

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Candice McGarvey, CFP, is the Chief Story Changer of Her Dollars Financial Coaching. By working with women to increase their financial wellness, she brings clients through financial transitions. Via conversations that feel more like a coffee date than a meeting, her process improves a client’s financial strength and peace.

MONEY financial advisers

Why Financial Advisers Should Discuss Their Own Money Problems

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Talking about medical bills, divorces, college funds, and past money mistakes can help an adviser and client connect.

Recently, a prospective client of financial adviser Robert Wyrick Jr. wanted to know exactly how Wyrick handles his own finances.

Wyrick, of MFA Capital Advisors in Houston, wasn’t fazed; he had plenty to say. Seven years after spending more than $1 million for his wife’s costly and ultimately losing battle against ovarian cancer, he still had managed to start his own company and make sure his two kids had enough money for college. He felt confident he could share the bad and the good, so he answered the prospect’s questions, even sharing screenshot of his investments. And Wyrick won the client’s business.

“I say, ‘Why not?'” said Wyrick. “If a person is sitting there with their life savings, and they’re interested in talking with an adviser, everything should be on the table,” he added.

It can be tricky for an adviser to introduce his or her own point of view and experiences into the conversation — after all, the focus needs to remain on the client — but advisers say dropping a veil or two goes a long way to building trust and the client relationship.

The key is making the conversation about the client, and picking up on cues. Some clients may want to know everything, down to the last mutual fund sale, while others may just want to hear that they are understood.

David Edwards, of Heron Financial in New York, lets prospects and clients know that he went through a divorce, and that he has kids in college. He said it helps to establish commonality.

“People feel very vulnerable,” he said. “They are in their underwear. And anything I can do to get into my underwear with them goes such a long way to easing the conversation.”

Of course, it’s easier to share financial successes, such as fully funded college accounts, than it is financial missteps, but Rick Kahler of Kahler Financial Group in Rapid City, S.D., has learned to be open even about those. He often emphasizes to his clients that most millionaires have more financial failures than less wealthy people.

“I tell my clients, ‘My job is to make every mistake I can possibly make, so you don’t have to,'” he said. Kahler, who’s 59 and been in the business over 30 years, said he used to think it would be bad to admit missteps to clients, but he’s changed his mind. “Now I’ve done a 360. It comes with the gray hair.”

Emily Sanders, a managing director at United Capital in Atlanta, has also found that sometimes, sharing a personal story can help a client avoid a misstep.

When she was married to her ex-husband, for example, Sanders contributed less to her 401(k) than her husband did to his, because she of course did not guess the marriage wouldn’t last. When she sees women making the same mistake, she gently refers to her own experience and suggests a more practical course. Relating her own experience makes it a friendly conversation, not a scold, Sanders said.

“It comes down to being a genuine person,” Sanders said. “Even though I’m a financial adviser, I’m not perfect.”

MONEY financial advice

Why Won’t Advisers Disclose Their Investment Performance?

Prospective clients want to know how good a financial adviser is at investing, but information about returns can be incomplete and misleading.

Some financial advisers don’t mind sharing information about the performance returns they have pulled in for clients. Those numbers, nonetheless, may come with a caveat.

Clients of Jim Winkelmann, an adviser in St. Louis, Mo., can request a free performance report through his website. It lists details about six model portfolios including their ten-year annual returns, and year-to-date returns.

But a warning in bold, red letters reminds clients that little to nothing can be learned from past performance. “Do not base decisions on this information,” it says.

Winkelmann, who oversees $130 million in assets, is among a minority of advisers who share their investment track records. Yet some financial services professionals believe the practice should be more common because it can help prospective clients determine if an adviser will do a good job.

Some advisers, nonetheless, say they are skittish because of a maze of rules and guidance from the Securities and Exchange Commission and state regulators that make advertising tricky. The Financial Industry Regulatory Authority, Wall Street’s industry-funded watchdog, also warns on its website against advisers boasting “above-average account performance.”

Regulators typically prefer, but do not require, that advisers who advertise returns follow the Global Investment Performance Standards, the king of performance guidelines, say securities industry experts. This set of principles helps advisers calculate and report results. The group that developed the GIPS standards also recommends that advisers hire a reputable, independent firm to verify those figures.

While using GIPS is optional, advisers who do not use it may soon be at a disadvantage because it will be harder to distinguish themselves from competitors, said Michael Kitces, an adviser in Washington and industry blogger.

But the steep price tag — roughly $5,000 to $10,000 to put a system in place and hire staff — is keeping some advisers away, Kitces said.

Instead some advisers use their own calculations. But those can mislead investors or land advisers in hot water with regulators. Some advisers, for example, may showcase only the years of their best results.

Clashing Viewpoints

Many advisers avoid performance advertising, but not because of the rules or GIPS expenses. Rather, they do not believe the figures are an accurate reflection of their client portfolios. That is especially true of advisers who offer financial planning services and who must often work with some assets clients already have, said John Clair, an adviser in Midlothian, Va.

Some types of assets that advisers can get stuck with include retirement plans that offer poor fund choices or mediocre employer stock the client wants to keep, Clair said. Those investments can skew returns, which would make them of little value to potential clients, Clair said.

Other factors that can also sway performance returns include the wide range of investment goals and risk tolerances among advisers’ clients, said Dave O’Brien, another adviser in Midlothian.

What’s more, overall performance numbers alone do not explain two important strategies that may be boosting returns: an adviser’s ability to reduce tax and transactions costs, O’Brien said.

Clair and O’Brien both have software that lets clients track real-time performance of their individual portfolios. But advertising historical track records is more suited to hawking a product, such as a mutual fund, instead of comprehensive advice, said O’Brien.

“We’re providing a service that’s unique to each client,” O’Brien said. To the layman they may seem the same, but they’re not.”

MONEY early retirement

It’s Time to Rename Retirement

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People change their minds — a lot — when it's time to stop working. Let's acknowledge how flexible retirement can be.

Some clients dream of retiring early. Others would like to work forever if they could. And a third set of clients…well, they’re on the fence.

Let me tell you about one of my clients who falls in that third category, and what my experience with him says about retirement.

When John and his wife (I’ll call them John and Jane) became clients of my firm two years ago, they were both in their early 50s. John, who had been retired for eight months, wanted us to evaluate whether he would be able to stay retired comfortably. Jane, who was still working, planned to stay at her job for another five years.

After crunching the numbers and running through several scenarios, we found that John — and Jane, too, if she wanted to — could retire immediately and most likely not have to work again.

The joy in the room was palpable as John described all the things he wanted to do with his time: Spend more time with his aging parents and his college-age daughter, spend more time fishing, and manage his real estate investment properties.

Fast-forward six months later. John called to let us know that he was going back to work for the same company from which he had retired. “One myth I’ve found out: You think you’re going to catch up on all those projects you’ve put off,” he told us. “You don’t.”

So we revisited John and Jane’s financial plan. Of course, more income made their situation look even better. John felt satisfied and happy to have his old routine back.

Ten months later, we got another phone call from John. He had changed his mind. Once again, he decided he was ready to retire. So we revisited the plan another time. Again, it was all systems go.

“Man, you just made my day,” said John. “No, I take that back. You just made my year!”

Sometimes, like John, we don’t know what we truly want. We grow up thinking we will work as hard as we can, so we can reach our golden years and retire to a life of vacationing, fishing, biking or fill-in-the-blank. And then, like John, we realize we’re not so sure.

For many retirees this is becoming more common. Having time to truly dissect your desires often helps to further clarify your true passions and what fulfills you on a deeper level. Walking through options can help provide peace of mind through these transitions. In today’s world we are seeing more and more of this type of trial-and-error decision-making about retirement. Retire for a while, only to go back to work, and then retire again so you can have control of your time and do things you truly enjoy.

Retiring these days is really just gaining the freedom to do what you want, when you want. It could be part-time work, volunteering, starting a business, or, in John’s case, going back to your old employer for a while.

Going forward, maybe retirement should be renamed “flexibility,” since that seems to be a more appropriate description for the way retirees are actually treating it. So right now, I think I will go spend some time planning my own “flexibility.”

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Smith is a certified financial planner, partner, and adviser with Financial Symmetry, a fee-only financial planning and invesment management firm in Raleigh, N.C. He enjoys helping people do more things they enjoy. His biggest priority is that of a husband and a dad to the three lovely ladies in his life. He is an active member of NAPFA, FPA and a proud graduate of North Carolina State University.

MONEY financial advisers

Why Financial Planners Have Such a Hard Time Explaining What They Do

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Everybody has a good idea of what a CPA or a DJ does, but what about a person who says, "I'm a CFP"?

We financial planners have all been there. At some point in a conversation — it could be at a cocktail party, a networking event, or an airport terminal — someone asks you, “So what do you do?”

You share your well-crafted 30-second infomercial explaining what you are and what you do. It’s just vague enough so that it elicits a follow-up question from the other person about your work. But when you say, “I’m a CFP — a certified financial planner,” chances are you get a puzzled look. Saying “CFP” doesn’t clear things up; it makes people more confused.

Other professionals, such as CPAs, attorneys, and even DJs, can simply state their profession. Period. The people they’re with then assume they’re qualified to address any topic related to law, taxes, or music.

It would be great if the CFP mark inspired such instant faith in our expertise, but it doesn’t. And why? Part of the problem, I think, is that we ourselves are creating confusion.

While some of us might hold the CFP mark, we also call ourselves “financial advisers,” “wealth managers,” “investment managers,” “certified retirement specialists,” or maybe even “college specialists.” The list goes on and on. End result: Confusion.

From a marketing position, it might be considered brilliant to keep what we do sufficiently vague in order to elicit more interest. Once someone expresses interest in gaining a better understanding of our work, we can dive right into determining if the person’s needs are in line with what we have to offer.

But that strategy, I believe, does very little to build the profession. In most people’s minds, a profession’s title should clearly convey exactly what the person does, even if that professional has a specific area of expertise. As a practicing CFP professional, I often inform individuals that I am a “CFP” followed by “certified financial planning professional,” followed by my area of expertise. By the time I’m at 32 seconds, the person receiving my infomercial is still asking, “So what is it you actually do?” Clearly I need to work on my 30-second delivery.

But if I were to start by informing individuals that as a CFP, I help people organize their finances by following a six-step process, which involves first establishing their goals and the scope of our engagement; next gathering all of their financial documents…well, you get the point: The cocktail party would be over before I could even get around to talking about my obligation to act in clients’ best interest.

Without a doubt it will be a challenge to educate the public on what we as CFP professionals do, and to be consistent enough that people have a greater understanding of the profession. This will happen, but it will take a lot longer than a 30-second infomercial.

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Frank Paré is a certified financial planner in private practice in Oakland, California. He and his firm, PF Wealth Management Group, specialize in serving professional women in transition. Frank is currently on the board of the Financial Planning Association and was a recipient of the FPA’s 2011 Heart of Financial Planning award.

MONEY

Why People Love Risky Investments

Shark Tank production still
As Shark Tank viewers know, an individual company can make for a compelling story. But investing in that story has its risks. Michael Ansell—ABC

Some of the safest-looking places for putting your money are more hazardous than they appear. Here's why that's true.

Which investment involves lower risk: Putting your money in one company? Or buying shares in an S&P 500 index fund?

Nearly all financial advisers and many clients know that the index fund is much more diversified and therefore has less risk. Yet it is easy for clients to forget this basic fact when the chance to invest in a particular company presents itself.

When clients ask me to evaluate opportunities to invest in a private company, the stories are often compelling at first. Clients have brought me opportunities ranging from a marketing company looking to lower its costs by buying in bulk to a niche social media company looking to grow its user base. Almost all of the investments come from a trusted source, such as a long-time friend. But once I dig deeper into a company, I usually find major red flags.

Most of the time, I convince clients to pass on individual company investments. Occasionally, we agree that a small investment is acceptable. And sometimes a client will choose, despite the risks, to invest more in a small company than I would recommend.

Why does this happen?

Why Clients are Tempted to Invest in Private Companies

I see a few reasons why concentrated investments in private companies may tempt clients — even those who fully understand the importance of diversification. A personal connection is powerful. If you believe someone to be a good person overall, you’re more likely to trust him and assume that he’ll make a successful business partner too. While viscerally reassuring, this familiarity may make investors overconfident in a company’s prospects. Even with good intentions, skill, and an attractive market, unforeseen problems can still ruin individual company investments.

Clients can also get a skewed perception of the success rate of individual-company investing for the same reason that it seems like your Facebook friends are always on vacation or eating great meals: It’s fun to talk about your winners. You can see this tendency on display in the TV show Shark Tank. After a wealthy “shark” invests in a company, the producers provide updates that highlight the successes but don’t mention the failures.

Financial advisers can sometimes share the blame for clients’ interest in individual company investing. We know that it’s important to focus on the big things in clients’ lives, such as how much they save and their overall asset allocation. As a result, we spend so much time talking about markets in the abstract that we sometimes forget to emphasize that markets and indices are composites of many individual companies. We talk about the forest, but clients don’t see any of the trees.

Refocusing on a Diversified Portfolio

If people are inclined to believe that the market as a whole is overvalued, it can be hard to convince them to invest broadly without telling a good story, with identifiable characters. Even if you allocate to broad index funds, that doesn’t mean there’s no story to discuss. Individual companies like Apple, Exxon or Procter & Gamble are large components of the S&P 500 that can easily make the investing story relatable for clients. While one company’s impact on a portfolio is likely negligible, discussing it in more detail can improve clients’ understanding of their investments and remove the false impression that private companies are the only ones that prosper.

If a client is insistent on a more concentrated portfolio, adding a small stake in a private equity fund might be an attractive alternative to directly investing in a private company. Although these funds are riskier than mutual funds, they still incorporate professional management and some diversification.

If a client wants to pursue individual company investments because they’ve gotten wrapped up in a compelling story, remind them that the most interesting investing stories can often result in expensive lessons. Discuss the specific investment’s risks, mention the biases that may be influencing their behavior, and — if all else fails — consider telling a better story.

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Benjamin Sullivan is a manager at Palisades Hudson Financial Group, where he helps the firm’s high-net-worth clients with their personal financial planning, investment and tax planning needs. He is a certified financial planner certificant, an IRS enrolled agent, and a member of the New York chapter of the Financial Planning Association.

MONEY Financial Planning

Why Financial Planners Should Be More Like Hairdressers

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Valentine—Getty Images

If cosmetologists have to be licensed, why not financial planners?

In Massachusetts, where I work, if you want to be a cosmetologist, you need a license. To get that license, you need two years of supervised work experience, and you need to take a practical exam.

No special license exists, however, for financial planning as a separate profession.

Recently, I and some of my colleagues from the Financial Planning Association visited Capitol Hill in Washington, D.C. and the State House in Massachusetts to advocate for better recognition of holistic financial planning as a profession.

In meetings with legislators and aides, we talked about how the financial planning profession as a separate discipline isn’t well defined. We spoke about how individuals who perform such services are overseen by a number of regulatory bodies. We explained that the public often doesn’t understand that planners aren’t specifically licensed as such.

The legislators were surprised to hear this. And when I’ve raised the subject with some of my clients, they’ve been just as surprised.

People assume that financial planning — in its most comprehensive form, helping clients manage all elements of their financial lives, from budgeting to retirement and estate planning —is governed by formal professional standards in the same way that CPAs and attorneys are.

To be clear, many elements of the financial planning process have notable regulatory oversight. Activities such as providing investment advice or selling insurance or investment products are all regulated.

And on the surface, having a Certified Financial Planner credential would seem to signify that a financial professional is practicing a specific profession, “financial planning.” Most of us in the financial industry, however, know that holding the CFP mark doesn’t necessarily mean that an individual is providing truly comprehensive financial planning for a client. That would require inclusion of all elements of the financial planning process, from goal-setting to implementation to tracking a plan’s progress.

Providing only one or two elements of the financial planning process — say, just recommending investments — doesn’t qualify as full-scale financial planning, even if you have the CFP credential.

I happen to be a financial planner who also is licensed to sell certain kinds of financial products. These are two separate parts of my job. When I’m working with clients, I make clear what “hat” I’m wearing at any given time, whether it is as their financial planner or as their broker. These are not the same thing.

I can imagine this isn’t always easy for my clients to follow what this really means to them. Most people think their financial professional is acting in their best interests. And really, when you are trusting what is sometimes your life savings to another person, why wouldn’t you expect that level of care? I know most of my clients have a high level of trust in me to do the right thing for them.

But being trusted may not be enough; what may be more necessary is to be trustworthy. It means trusting that I will take their best interests first, over my own. I would prefer to be specifically licensed as a financial planner, so when I’m providing comprehensive financial planning my clients understand the differences even better.

So the conversations are getting out there about what can be done to bring better recognition and perhaps regulation of the profession of holistic financial planning. The end goal is to help the public better understand distinctions among financial professionals and empower them to make the choices that best suit their needs.

This is all a work in progress, and I suspect will never get 100% agreement on what’s best for the public. But we have to keep trying so that our clients are well served by a profession they understand to be one.

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Stuart Armstrong, CFP, is a member of the Financial Planning Association Board of Directors.

 

MONEY Divorce

Alimony Is Broken — But Let’s Not Fix It

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Jeffrey Hamilton—Getty Images

A financial adviser explains what's wrong with alimony now — and why proposals to reform it could make things even worse.

After years of working as a financial adviser to divorced and divorcing clients, I’ve concluded that the institution of alimony is a mess. But some of the proposed fixes for it are even worse.

Alimony, or spousal maintenance, is the legal obligation of a person to provide financial support to his or her spouse before or after marital separation or divorce. Once upon a time, alimony was the right of the wronged spouse in a divorce; now, under no-fault divorce laws available in all 50 states, it as become conditional based on numerous statutory factors and case law.

Here’s where the mess comes in. Most of the time, divorcing spouses aren’t equal, economically speaking; they have different earnings and earnings potential. Family courts have to decide when and how to measure economic inequality following the termination of marriage — and how to rectify it.

But alimony awards are highly discretionary. Unlike the case with child support, there is no general standard or formula for setting the amount and duration of alimony. Cases with similar facts can have wildly different outcomes.

Plus, alimony is one of the most contentious issues that tend to prolong divorce litigation; nearly 80% of divorce cases involve a request for modification of alimony.

Here are two examples I’ve seen first-hand of disparate alimony award obligations.

Exhibit A:

  • Mr. & Mrs. Smith, married for 32 years, divorce at ages 57 and 55, respectively. He’s a lawyer making over $300,000 a year; she has always been a homemaker.
  • Mrs. Smith is awarded lifetime alimony of $110,000 a year.
  • Mr. Smith, taking early retirement at age 62, files to terminate alimony.

Exhibit B:

  • Mr. and Mrs. Jones, married 25 years, divorce at ages 52 and 53, respectively. He’s an investment banker making $1.2 million annually; she, a former sales consultant, has raised the children and stayed home for 20 years.
  • Mrs. Jones is awarded $300,000 alimony for 10 years.
  • Mr. Jones quits his job five years after the divorce to become a schoolteacher, lowering his salary to $50,000. He files to reduce his alimony.

From a distance, the facts were roughly similar. But the outcomes weren’t.

The judge in the Smith case reduced alimony only slightly, and kept it in force for her lifetime. Meanwhile, Mrs. Jones’s alimony was cut more than 90%, to $25,000 annually. She ended up having to sell her home, cut lifestyle expenses, and re-enter the workforce.

Many believe that alimony needs to be fixed because of the extraordinary degree of variance among rules of law applied in various decisions. The easy answer to this complicated problem: create uniform standards and formulas for calculating alimony awards. Formulas allow for objective quantification of an outcome, given a set of measurable circumstances — predominantly the length of a marriage.

More and more states are taking a hard look at alimony and are experimenting with adoption of alimony guidelines or a formula for temporary alimony that offers judges a framework for determining permanent awards. A few states have gone further to abolish the need for alimony all together.

But formulas can be too simplistic in their application, placing at risk numerous deviation factors that provide a greater chance of the result fitting the facts of the case. Marriages differ by type, socio-economic status, and too many different and divergent fact patterns. Judges may feel compelled to calculate alimony based on a simple formula using years and percentages, rather than the full merit of a nonworking spouse’s worth.

Proposed new laws are written in gender-neutral terminology and suggest potential for drastic changes, some even retroactively. The effects of new laws will affect substantially women, who represent 97% of the people seeking and requiring alimony.

If alimony duration is predetermined by length of marriage, women who are victims of domestic abuse will face an impossible choice. They will be pressured out of fear of homelessness to stay in an abusive relationship until they meet a target cutoff date for lengthening their support. At the same time, men who want to get out of a marriage cheaply can run to divorce court on the eve of the next cut-off period.

Rather than zealously reform alimony laws, I suggest that alimony has evolved already to mirror many socio-economic developments in institution of marriage and “partnering.” In fact, there are now six variations on alimony, each applicable to a different family situation:

  • Temporary — Ordered when parties separate prior to divorce.
  • Rehabilitative — Given to the lesser-earning spouse for the time necessary to acquire paying work and become self-sufficient.
  • Permanent — Paid to the lesser-earning spouse until the death of the payor or recipient, or upon remarriage of the recipient.
  • Reimbursement — Given as reimbursement for expenses incurred by a spouse during the marriage, such as for education.
  • Durational — Limited in time and not paid for more than the length of the marriage.
  • Lump Sum — A specific, unmodifiable amount paid at once or in installments.

Given the variety of marital relationships, spouses in modern marriages are unlikely to find a single-formula solution to be equitable. Sweeping reforms may not represent progress at all, but a hindrance to fundamental public policy.

We should focus instead on how to encourage equal economic allocations and financial control during marriage. Some financial strategies are to mandate high schools to educate young adults about finances; to require institutions to secure informed consent from all owners for activity in joint financial accounts; to suggest to remarrying couples the use of more prenuptial and postnuptial agreements to allocate and quantify marital economic equality; and to prepare thorough estate plans that provide for trustees and third-party administrators of wealth.

Strengthening the economic partnership in marriage promotes a more predictable and measureable outcome in divorce.

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Vasileff received the Association of Divorce Financial Planners’ 2013 Pioneering Award for her public advocacy and leadership in the field of divorce financial planning. Vasileff is president emeritus of the ADFP and is a member of NAPFA, FPA, and IACP. She is president and founder of Divorce and Money Matters, serving clients nationwide from Greenwich, Conn. Her website is www.divorcematters.com.

MONEY Pensions

How To Be a Millionaire — and Not Even Know It

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iStock

A financial adviser explains to two teachers why they don't need a lot of money in the bank to be rich.

Mr. and Mrs. Rodrigues, 65 and 66 years old, were in my office. Their plan was to retire later this year. But they were worried.

“Our friends are retiring with Social Security, lump sum rollovers, and large investment accounts,” said Mr. Rodrigues, a school teacher from the North Shore of Boston. “All my wife and I will get is a lousy pension.”

Mr. Rodrigues continued: “A teacher’s pay is mediocre compared to what our friends earn in the private sector. We know that when we start our career. But with retirement staring us in the face, and no more regular paycheck, I’m worried.”

Public school teachers are among the worst-paid professionals in America – if you look at their paycheck alone. But when it comes to retirement packages, they have some of the best financial security in the country.

For private sector employees, the responsibility of managing retirement income sits largely on their shoulders. Sure, Social Security will provide a portion of many people’s retirement income, but for most, it is up to the retiree to figure out how to pull money from IRAs, 401(k)s, investment accounts, and/or bank accounts to support their lifestyle each year. Throughout retirement, many worry about running out of money or the possibility of their investments’ losing value.

Teachers, on the other hand, have a much larger safety net.

Both of the Rodrigueses worked as high school teachers for more than 30 years. Each was due a life-only pension of $60,000 upon retirement. That totaled a guaranteed lifetime income of $10,000 per month, or $120,000 per year. When one of them dies, the decedent’s pension will end, but the survivor will continue receiving his or her own $60,000 income.

The Rodrigueses told me they needed about $85,000 a year.

Surely their pension would cover their income needs.* And since the two both teach and live in Massachusetts, their pension will be exempt from state tax.

As for their balance sheet, they had no mortgage, no credit card debts, and no car payments. They had a $350,000 home, $18,000 cash in the bank, and a $134,000 investment account.

But as far as the Rodrigueses were concerned, they hadn’t saved enough.

“All my friends boast about the size of the 401(k)s they rolled over to IRAs,” Mr. Rodrigues said. “Some of them say they have more than $1 million for retirement.”

It was time to show the couple that their retirement situation wasn’t so gloomy – especially considering what their private-sector friends would need in assets to create the same income stream.

“What if I told you that your financial situation is better than most Americans?” I asked.

They thought I was joking.

Their friends, I explained, would need about $1.7 million to match their $120,000 pension income for life.

To explain my case, I pulled out a report on annuities that addressed the question of how much money a person would need at age 65 to generate a certain number of dollars in annual income.

Here’s an abbreviated version of the answer:

Annual Pension Lump Sum Needed
$48,000 $700,539
$60,000 $876,886
$75,000 $1,100,736

If you work in the private sector, are you a little jealous? If you’re a teacher, do you feel a little richer?

The Rodrigues were shocked. Soon Mr. Rodrigues calmed down and Mrs. Rodrigues smiled. Their jealousy was replaced with a renewed appreciation for the decades of service they provided to the local community.

Whether your pension is $30,000, $60,000 or $90,000, consider the amount of money that’s needed to guarantee your income. It’s probably far more than you think. And it’s not impacted by the stock market, interest rates, and world economic issues.

With a guaranteed income and the likelihood of state tax exemption on their pension, Mr. and Mrs. Rodrigues felt like royalty. After all, they had just learned that they were millionaires.

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* The survivor’s $60,000 pension, of course, would be less than the $85,000 annual income the two of them say they’ll need. A few strategies to address this: (1) Expect a reduced spending need in a one-person household. (2) Draw income from the couple’s other assets. (3) Downsize and use the net proceeds from the house’s sale to supplement spending needs. (4) Select the survivor option for their pensions, rather than the life-only option. They would have a reduced monthly income check while they are both living, yet upon one of their deaths the survivor would receive a reduced survivor monthly pension benefit along with his or her own pension.
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Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY Kids and Money

The Best Thing You Can Do Now for Your Kid’s Financial Future

CAN'T BUY ME LOVE, from left: Patrick Dempsey, Amanda Peterson, 1987.
Your teens summer earnings can't buy love, but they can buy a bit of retirement security. Buena Vista Pictures—Courtesy Everett Collection

Open a Roth IRA for your child's summer earnings, and talk her through the decisions on how to invest that money, suggests financial planner Kevin McKinley.

In my last column, I extolled the virtues of opening—and perhaps even contributing to—a Roth IRA for a working teenager. In short, a little bit of money saved now can make a big difference over a long time, and give your child a nice cushion upon which to build a solid nest egg.

Besides underscoring the importance of saving for retirement early and regularly, opening a Roth IRA can help your child become a savvy investor (a skill many people learn the hard way).

Here’s how:

Make the Initial Contribution

Your child needs to earn money if he or you are going to contribute to an IRA on his behalf. For the 2014 tax year, the limit for a Roth IRA contribution for those under age 50 is the lesser of the worker’s earnings, or $5,500.

The deadline for making the contribution is April 15, 2015. But you can start sooner, even if your teen hasn’t yet earned the money on which you will be basing the IRA contribution. (If the kid doesn’t earn enough to justify your contributions, you can withdraw the excess with relatively little in the way of paperwork or penalties.)

For a minor child, you will have to open a “custodial” Roth IRA on her behalf, using her Social Security number. Not every brokerage or mutual fund company that will open a Roth IRA for an adult will do so for a minor, but many of the larger ones will, including Vanguard, Schwab, and TD Ameritrade.

As the custodian, you make the decisions on investment choices—as well as decisions on if, why, and when the money might be withdrawn—until she reaches “adulthood,” defined by age (usually between 18 and 21, depending on your state of residence). Once she ages out, the account will then need to be re-registered in her name.

Depending on which provider you choose, you may be able to make systematic, automated contributions to the IRA (for example, $200 per month) from a checking or savings account. To encourage your teen to participate, you might offer to match every dollar he puts in.

Have the “Risk vs. Reward” Talk

How an adult should invest an IRA depends upon the person’s goals and risk tolerance—the same is true for a teen. You can help set those parameters by pointing out to your child that, since he’s unlikely to retire until his 60s this is likely to be a decades-long investment, and enduring short-term downturns is the price for enjoying higher potential long-term gains.

You might also show him the difference between depositing $1,000 now and earning, say, 3% annually vs. 7% annually over the next 50 years—that is, a balance of $4,400 vs. a balance of $29,600. Ask your child: Which would you rather?

No doubt, your kid will choose the bigger number.

But you also want this to be a lesson in the risks involved in investing. You might talk about what a severe one-year decline of 40% or more might do to his investment and explain that bigger drops are more likely in investments that have the potential for bigger growth. Now how do you feel about that 7%?

Some teenagers will be perfectly fine accepting the risk. Others may be more skittish.

You also might explain that there are options that will not decline in value at all—such as CDs and money market accounts. But should he choose those safer options, he’ll be trading off high reward for that benefit of low risk. In fact, while his money will grow, it will likely not keep up with the rate at which prices grow (“inflation,” in adult terms). So his money will actually be worth less by the time he’s ready to retire.

Some risk, therefore, will likely be necessary in order to grow his money in a meaningful way.

Choose Investments Together

Assuming he can tolerate some fluctuation, a stock-based mutual fund is probably the most appropriate and profitable strategy—especially since a fund can theoretically offer him a ownership in hundreds of different securities even though he may only be investing a few thousand dollars. You might explain that this diversification protects against some of the risks of decline since some stocks will rise when others fall.

A particularly-suitable option might be a “target date” or “life cycle” fund. These offerings are geared toward a specific year in the future—for instance, one near the time at which your child might retire.

Target date funds are usually a portfolio comprised of several different funds. The portfolio allocation starts out fairly aggressive, with a majority of the money invested in stock-based funds, and much smaller portion in bond funds or money market accounts.

As time goes by—and your child’s prospective retirement draws nearer—the allocation of the overall fund gradually becomes more conservative.

The value of the account can still rise and fall in the years nearing retirement, but with likely less volatility than what could be experienced in the early years.

One low-cost example of this type of investment is the Vanguard Retirement 2060 Fund (VTTSX).

Of course, if you choose a brokerage account for your child’s Roth IRA, you have the option of purchasing shares in a company that might be of particular interest to your kid. Choosing a company that is familiar to your child may not only inspire her to watch the stock and learn more about it, but eventually profit from the money she is spending on “her” company’s products.

If you’re going to go this route, you should include a discussion on the increased volatility (for better or worse) of owning one or two stocks, rather than the diversification offered by the aforementioned mutual fund.

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley:

 

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