Most everyone has some sort of a desire to get from point A to B; point A being where they are now financially, and B where they want to go. More often than not B is somewhere above A because usually people who have money and financial success don't desire to lose it. So the average person that enters the world get's out of college and usually their B is retirement. They really aren't sure how to get there, but they know it's up to them, so they find themselves a nice secure job and start contributing to a 401(k) or some similar retirement account. For the majority of people that is the extent of their plan.
It's like to get to point B from point A you must build. Since the average person knows they have to build they build the only way they know how; straight up. When someone is relying entirely on their 401(k)it's like they are building a narrow column. Yes they may gain height very quickly, but the higher they go the less stable the column becomes. Eventually they will not be able to build any higher without the serious risk of collapse. However, many people don't recognize these risks, and if they haven't reached point B they will likely continue to build. Few people with this kind of retirement plan reach point B with the circumstances they had desired.
The older you are the more likely you are to realize that there are many unforeseen events in life. Things happen. Few of us make it through life without a little bad luck. Some of us end up having a lot of bad luck. To prepare for that you have to build right. Start with a solid foundation and well engineered parts. The ancient Egyptians learned that the wider the foundation the taller and stronger they could build. They knew for a fact that the pyramids would not fall down. In fact they built them to last thousands of years.
Everyone starts at a different point A and tries for a different point B. Whatever your point A, a good first step to build a foundation is a 6 month emergency fund. That is enough cash to live off of for 6 months if you lost all other sources of income. Next is some protection. If you use proper life, health, disability, and long-term care insurance you can build an excellent foundation. You will know that no matter what happens to your building you will still be able to take care of yourself and your family.
Unfortunately there are more people selling insurance than I can count, and some of them are not very good. I have a friend that teaches classes to insurance agents and it is very apparent that there are many agents that have been in the industry for years and still are not very familiar with their products. I would recommend meeting with as many agents as you can handle until you find someone that you really like. From there everyone's building is different, just like their end goal. For anyone that will be in the SLC area, I am more than happy to meet with you and talk to you about your Point A and Point B. If outside of the SLC area feel free to email me at ben@bowmanventures.biz. I will answer you questions the best I can and if appropriate we can have a webinar.
Thursday, March 25, 2010
Wednesday, March 17, 2010
Whole Life VS Term
I'm going to step away from the Financial Planning dissection and write something that has been on my mind, because if I can't say what's on my mind what's the point of having a blog? I live my life to help people. I've always been good with money and I love helping people, so it's natural that I enjoy helping people with their money. Everything I recommend to my clients is something that I truly believe is best for them. That being said, I come from a securities trading background. I studied portfolio theory in school. I was the Vice President of the Investment Banking Club. I follow the markets like most people follow sports. If anyone was for the strategy of "buy term and invest the difference" it was me. Buy term and invest the difference is the strategy of getting term life insurance instead of whole life insurance, and investing the difference of the premiums usually in the stock market.
Originally I planned on going into investment banking. Then the crash of 2008 happened and the entire industry was turned upside down. I had to start looking for other options. I did research in other parts of the financial field. I went to some career fairs at universities and met a man from a company called McPartland Group Financial Services. They had a pretty balanced approach at investment and retirement planning, so I applied and got the job. When I started my training they started talking about Whole Life Insurance. I was skeptical because I felt I had better things with my money, but I was open to learn.
I wouldn't be surprised if there are more strategies for financial planning than there are financial planners. There are dozens of reasons for this, but I think the main reason is ERISA. ERISA transferred the responsibility of retirement accounts from companies and professional to individuals. Essentially it turned millions of people into investors, good and bad. Though many people do reach retirement with enough money to retire, most of the typical financial planning strategies are naturally flawed and fail. Again, there are many reasons for this. I think the biggest reason is a failure to save. Another big reason is the fact that most of these strategies encourage risk without building a foundation first.
Building your retirement is like building a really tall tower. Let's say a couple thousand of years ago someone wanted to build the tallest tower they could with limited time. They could build a really skinny structure. It would gain height very quickly, but as soon as it started gaining significant height it would be come unstable. You could only build so high without compromising the structural integrity of the tower. If you tried to build higher the tower would fall over. As the ancient Egyptians knew very well, if you wanted to build an extremely tall structure it would require an equally wide foundation.
Most financial planning, and even our culture, encourages people to start building upward without building outward. Everyone knows they need to save for retirement. With many people this knowledge is limited to a 401k. However, your retirement does not solely depend on your 401(k), and a 401(k) is not a solo instrument. Whether or not you will be able to retire successfully depends on your entire financial picture. That includes your house, insurance, car and many other things. When I talk about building up instead of out, I'm talking about your entire financial picture. You have to build a foundation for your entire financial picture.
Life insurance is part of that foundation. Not only is it a very important part of your protection, but participating whole life can be used very well as part of your savings and short-term investments. Yes you can save in a high interest savings account, but it will never beat the return on participating life insurance. And yes you can have other short-term investments that pay out just as good, but they will never be as secure. Not only that but for anyone that has life insurance for at least 5 years, because of the cash value growth it is less expensive for them to have participating whole life rather than term.
So why do so many people get term rather than whole life? Mainly because they don't know how whole life works, and all they see is the "price" difference, not the cost. So if you are going to get life insurance or have it for another five years, please consider talking to me. I will help teach you the differences and help you make an educated decisions. Then I will be fine with whatever your decision. As I have learned with many of my clients and by observing others, you can lead a horse to water, but you can't make it drink.
Originally I planned on going into investment banking. Then the crash of 2008 happened and the entire industry was turned upside down. I had to start looking for other options. I did research in other parts of the financial field. I went to some career fairs at universities and met a man from a company called McPartland Group Financial Services. They had a pretty balanced approach at investment and retirement planning, so I applied and got the job. When I started my training they started talking about Whole Life Insurance. I was skeptical because I felt I had better things with my money, but I was open to learn.
I wouldn't be surprised if there are more strategies for financial planning than there are financial planners. There are dozens of reasons for this, but I think the main reason is ERISA. ERISA transferred the responsibility of retirement accounts from companies and professional to individuals. Essentially it turned millions of people into investors, good and bad. Though many people do reach retirement with enough money to retire, most of the typical financial planning strategies are naturally flawed and fail. Again, there are many reasons for this. I think the biggest reason is a failure to save. Another big reason is the fact that most of these strategies encourage risk without building a foundation first.
Building your retirement is like building a really tall tower. Let's say a couple thousand of years ago someone wanted to build the tallest tower they could with limited time. They could build a really skinny structure. It would gain height very quickly, but as soon as it started gaining significant height it would be come unstable. You could only build so high without compromising the structural integrity of the tower. If you tried to build higher the tower would fall over. As the ancient Egyptians knew very well, if you wanted to build an extremely tall structure it would require an equally wide foundation.
Most financial planning, and even our culture, encourages people to start building upward without building outward. Everyone knows they need to save for retirement. With many people this knowledge is limited to a 401k. However, your retirement does not solely depend on your 401(k), and a 401(k) is not a solo instrument. Whether or not you will be able to retire successfully depends on your entire financial picture. That includes your house, insurance, car and many other things. When I talk about building up instead of out, I'm talking about your entire financial picture. You have to build a foundation for your entire financial picture.
Life insurance is part of that foundation. Not only is it a very important part of your protection, but participating whole life can be used very well as part of your savings and short-term investments. Yes you can save in a high interest savings account, but it will never beat the return on participating life insurance. And yes you can have other short-term investments that pay out just as good, but they will never be as secure. Not only that but for anyone that has life insurance for at least 5 years, because of the cash value growth it is less expensive for them to have participating whole life rather than term.
So why do so many people get term rather than whole life? Mainly because they don't know how whole life works, and all they see is the "price" difference, not the cost. So if you are going to get life insurance or have it for another five years, please consider talking to me. I will help teach you the differences and help you make an educated decisions. Then I will be fine with whatever your decision. As I have learned with many of my clients and by observing others, you can lead a horse to water, but you can't make it drink.
Monday, March 8, 2010
Risk Promotion
Whenever someone is setting a goal for retirement it will be estimation. Estimations are inherently inaccurate. The fact there are so many estimations involved in needs based planning is not a problem by itself. What makes it a problem is when people mistake the estimations for fact. As long as you remember that needs based planning is estimation you can use it as a tool to help you create a plan and a goal for retirement. However, one estimation used in needs based planning encourages risk, and can cause recklessness or complete failure. The reason this is because theoretically the higher Rate of Return someone chooses as their goal, the less they need to save. For example, if I give you the following three options in order to reach retirement which would you choose.
Option 1: Earn 8% ROR and save $400/month
Option 2: Earn 10% ROR and save $225/month
Option 3: Earn 12% ROR and save $120/month
When given the option of needing to save $400 or $120 per month, most people would choose to only have to save $120, because they think about all the other things they could do with that extra $280. They would rather have the gratification of spending their money now, and Option 3 says that they can. We already know that their ROR (rate of return) is likely not going to be a consistent 12%, but someone looking at this doesn’t know that, and the financial advisor giving them these options probably hasn’t thought enough about it. Hopefully the planner does know that this is not a promise. A 12% annualized return is a goal. And only if they reach that goal will saving $120 per month get their client to their targeted retirement amount.
The only way that they attempt an annualized 12% return is by choosing riskier investments. In some cases you can get a greater return with less risk, but in this case higher returns imply greater risk and greater variation from the targeted return. Looking back at the example of the man that retired in 1998, we can see that 10% was not manageable in that case. Those were real returns from the S&P 500. If shooting for 12% increases risk and variation, what do you think the success rate is for that scenario? If I want to gamble I will go to Las Vegas, but when it comes to the financial future of me and my family I don’t mess around. This would be unacceptable. Later I will discuss way to avoid unnecessary risk by using efficient tax strategies, controlled spending, and balanced finances.
Option 1: Earn 8% ROR and save $400/month
Option 2: Earn 10% ROR and save $225/month
Option 3: Earn 12% ROR and save $120/month
When given the option of needing to save $400 or $120 per month, most people would choose to only have to save $120, because they think about all the other things they could do with that extra $280. They would rather have the gratification of spending their money now, and Option 3 says that they can. We already know that their ROR (rate of return) is likely not going to be a consistent 12%, but someone looking at this doesn’t know that, and the financial advisor giving them these options probably hasn’t thought enough about it. Hopefully the planner does know that this is not a promise. A 12% annualized return is a goal. And only if they reach that goal will saving $120 per month get their client to their targeted retirement amount.
The only way that they attempt an annualized 12% return is by choosing riskier investments. In some cases you can get a greater return with less risk, but in this case higher returns imply greater risk and greater variation from the targeted return. Looking back at the example of the man that retired in 1998, we can see that 10% was not manageable in that case. Those were real returns from the S&P 500. If shooting for 12% increases risk and variation, what do you think the success rate is for that scenario? If I want to gamble I will go to Las Vegas, but when it comes to the financial future of me and my family I don’t mess around. This would be unacceptable. Later I will discuss way to avoid unnecessary risk by using efficient tax strategies, controlled spending, and balanced finances.
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