What Is a True Financial Coach and How Do They Differ from and Adviser?

Many people confuse financial coaches with a financial adviser. These are two very different animals that need distinguishing.

Financial Coach:  A true financial coach focuses on your knowledge, your habits, and your ability to make wise decisions.  They don’t superimpose their feelings upon you.  A true financial coach knows that each person is unique with different goals, different attitudes about money, different challenges with math, and different strengths/weaknesses.  A true financial coach will know how to strengthen your where you are weak.

Financial Planner or Adviser:  This person is most often selling a product.  A financial adviser wants to profit on the money you have already accumulated.  The problem is that this is not what most people actually need.  Most people need and want to know how to create the money in the first place and then how to manage it wisely, perhaps with the help of a financial adviser, once they acquire it.

Think about how a salesman wishes to make money.  They sign up with an institution and then submit to their training.  What kind of training will that be?  Will it be training on five other competitor products so they can sell for them as well?  Absurd, not ever!  This employer wants to train you on his or her own products.  In the Time and Moneycase of a financial adviser, who are truly not a lot more than sales representative, they are encouraged to acquire knowledge and even
seek degrees like Certified Financial Adviser, to show the public that they are knowledgeable.  All of this effort by the sales representative can be helpful to you with a small part of the puzzle, but they very rarely have all the answers to every part of your financial life.  Have you ever thought about asking a financial adviser about what to do about your overspending? Of course not, they wouldn’t be likely to have much information about how to help you with this, and even if they did, this is not what they’re paid to do. What about how to get out of debt, or to create a passive income from better managing  your own money? They wouldn’t know the first place to start helping you with these important matters.  Where they can sometimes help is in what to do with extra money you have created, but that’s really where their “advising” ends.    

Here is the real difference between a coach and an adviser.  A coach helps you with problems you are having with managing your money and your emotions. People have lots of emotions surrounding money. The products financial advisers sell have very little to do with how to manage emotions and get in control on a grassroots level. They don’t teach you principles of financial management, they only sell tools that can help you once you have money to manage. A coach, on the other hand, offers solutions on how to control spending, get out of all debt, save for retirement, and pay the right amount of taxes. If you don’t have someone who can teach you how to do all of these things (at the same time) then you aren’t getting advice from the right place.

Here is a test question to ask a sales representative to determine if they are an adviser or a coach: “What do you recommend I do?”  Then listen carefully as to how fast they go directly to a product that they think you need.  If they make a specific recommendation they are a financial adviser.  If they say, “Tell me more about what you are trying to accomplish, today and in the near future?”  Then they search out your true feelings and even coach you along these lines before identifying options.  A true coach will strengthen you until you are making good decisions. Once you are making better financial decisions, then you can talk about what to do with your money from there.  

There are huge differences between a coach and an adviser, but it will take some time interviewing and asking questions of these people before you will see  how they approach helping you.  Most likely you will find 1 out of 25 advisers that will serve you like a true coach will.  For true financial coaching without the pushing of products, visit www.moneymastery.com

Fixed Indexed Annuities Are a Good Tool If You’re Getting Close to Retirement

When you see an investment report on a 401(k), for example, it most often shows the average rate of return on funds over the last 40 years.  Averages do not show the impact on retirement of periodic drops in value.  Reports give averages over a long-range period of time, but fund managers never want you to focus on the big drops that happen during the shorter periods in between. For example, in 2000 the S&P 500 dipped by -10.14%, then again in 2001 by -13.04%, and then again in 2002 by -23.37%.  That is a total of 46.55% drop in values in three years.  If you took the average gain per year for just those three years it was negative, at -15.5% each year!  So what does that mean to you? Well, if you’ve got a lot of time to make up those losses, then maybe not too much. But it would take eight years at an 8% gain just to get back to where you were three years earlier. If you don’t have 40 years to make up these big dips in the market, then frankly you’re getting bamboozled.

This is a lot of math, but my point is that most people don’t know how to calculate the math.  They just look at a report showing a 40-year average and say, “Not bad.”  Not bad if you have lots of time, but what if you’re getting within 10 years of retirement?

Indexed annuities can be a great way to overcome market dips. When you invest in indexed annuities, you get only the gains and no downs — you are “sharing” the ups but not having to experience the downs.  Don’t know what an indexed annuity is? Contact me for more info: peter@moneymastery.com.

Do not confuse indexed annuities with variable annuities. Variable means you are in the market and must therefore be subject to the full ups and downs. Even if you placed your money in a strong New York Life variable annuity, remember, your money is in the market, not invested in New York Life, so it is subject to market ups and downs. Many people have made the mistake of assuming they were safe because of the financial strength of New York Life. But in my experience variable annuities can experience drops in value and then you still can’t get your money out during a bad drop because annuities aren’t all that liquid.

Now indexed annuities are even less liquid than variable annuities, so there is some disadvantage there. They may not work for you because they are not liquid enough for your needs.  But indexed annuities are guaranteed not to lose money and to share in the increases of the market.  And that’s a good thing.  If you are close to retirement and want a safe rate of return, and no downside risk in the market, these are great tools to use.

As a final note, there is one way to overcome to some degree the liquidity problem with indexed annuities and that’s by “laddering” them. You have probably heard about laddering CD’s and it works the same for indexed annuities. For example with a CD, let’s say you had $100,000 and wanted a good 5-year rate of interest on your safe money. You could split up the $100,000 into five $20,000 CDs.  Schedule each CD to mature one year apart, so $20,000 for a one-year CD until it matures, then place the next $20,000 in a CD that matures in two years, and so forth. Then in one year, the first CD matures, which if you need the money, you take it. But if not, it rolls over into a 5-year CD. In this manner, you have $20,000 maturing each year and in five years you will  have a five-year CD providing a top rate of return. To get the same impact for indexed annuities, you can “ladder” these annuities and provide better liquidity while getting the best possible rate of return.  

Contact me for more information on better ways to fund retirement than just dumping money into a 401(k) and hoping for the best: peter@moneymastery.com.

Why 529 Plans Aren’t the Best Way to Save for College Education

Here is an explanation of 529 plans to fund college educations  taken from a well-respected college planning firm.  Review this accurate treatment, then allow me to add my perspective:   

Offered by states and some educational institutions, 529 plans let you save up to $14,000 per year for college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.
 
While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.
 
In addition, grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.  Keep in mind, 529 plans are counted as available assets on the FAFSA [Free Application for Federal Student Aid] and can affect eligibility for student aid and loans.

Here are my observations about these plans:

Point 1:  The more money you have in a 529 plan, the more it will diminish the chance of receiving any FAFSA funds that may otherwise be available.  This is free money, or “aid” money.  Most likely your student will  not be eligible for student aid if you hvae a 529 savings plan. All 529 plans are required to be disclosed when applying for aid.

Point 2:  Why not use the proposed 529 savings money to purchase a cash-rich-savings life insurance policy on yourself, so that when your child/grandchild decides to go to college they can use the money from there?  There is no tax on this cash value build up, if structured correctly, and it’s not hard to set up. And if you die before the college money is needed, the death benefit will pay into your living trust a multiple of five to 10 times more than any money you could have saved in a 529 Plan.  So you will have the same  cash available plus no taxes due on growth, AND you will have the enhanced death benefit to pay for a lot more than just one college education — think two, three or four educations!  This is a no brainer

Point 3:  If your child/grandchild does not go to college, then if you have set up a cash-rich-savings life insurance policy instead of putting the money into a 529, you still have all the cash to redirect or you can just leave it inside of your living trust so upon your death it can bless other family members as you choose.  This is also a no brainer.

Point 4:  Why not have the options to pay for rent, food, or other necessities for your college student and not be “required” to pay for only tuition, as the 529 forces? There are many expenses outside tuition and books.  And if your student gets a scholarship, then you won’t be able to use the money inside of the 529 plan anyway.  Things change over time, but 529 plans are rigid.

Point 5:  Although the explanation above notes that the 529 plan money can be used at colleges out of the state, most states do not allow the tax deferral you get on the 529 to be transferred, so this induces the student to attend school in their geographic location and may deter them from applying to a college across country. Rules vary, but why place your money into a restricted environment when it isn’t necessary?

Point 6:  And what if your student wants to attend college outside the country? Unfortunately, the 529 plans don’t provide the tax deferral when a child goes out of the country.

Summary:  I hope you can see nothing but limitation using a 529 plan to pay for a college education.  They sound good and upon comparison can look good, but no one knows what will happen in the future so why even risk so much for such a little tax deferral benefit?  This again is a no-brainer.

For more information about how to structure other college saving options, including a cash-rich-savings life insurance policy, contact me: peter@moneymastery.com.

Stretch Yourself Emotionally Today for a Better Financial Life Tomorrow…

The famed writer, Andre Gide wrote:

“One doesn’t discover new lands without consenting to lose sight of the shore, for a very long time.” 

I love this quote, it is full of pathos but also a lot of hope. To see what I mean, first take a look at the lives of the families who were left behind when their loved ones set sail back in the day on those horrifically risky voyages out on the open ocean. There was no way of knowing if the ship would return. There was no way of knowing what was happening to the people on board the ship during its absence. The amount of stress and worry for these people must have been almost overwhelming. Look at the courage the Pilgrims exhibited to sail across the Atlantic to the Americas. I cannot imagine what it would have been like to bring my wife and children along for this journey not knowing what the end result would be.

Now let’s apply this example of Pilgrim courage in taking some risks to discover a new life by consenting to leave the shore in terms of how you manage your money. 

  • First, you must try new things if you want to handle your money well and most importantly, if you want to keep it. If you’re not willing to get educated and look at new options for spending, paying down debt, and saving, then it’s like staying on the shore and not going anywhere. You will be safe (maybe) in what you do know, but you won’t be able to find any new options that might bring you much better success.
  • Second, if you leave the “port” so to speak for a long time, by learning how to control spending for an extended period of time, paying the price to get out of ALL debt in a short amount of time, and understanding what it takes to save over the long-term, you will find that you can create your own passive income. This will allow you the wonderful opportunity to not only retire wealthy, but have the means to help others as well. When we have passive income we are truly free! The more options that come into play, the more excitement comes to our lives.
  • Third, financially you can set sail by holding yourself accountable weekly as to how you are spending the money you have earned.  This is hard to do, at least emotionally, much as it would be to leave home and family to sail to the New World, but it opens up all kinds of new options you have never dreamt of before. This is the hard part of “losing sight of the shore, for a very long time.”   As you build a spending plan, examining the last 12 months of how you spent money, then share this detail with your spouse, you will be amazed at what you learn about yourself… what you value, what your real priorities are, and what you want to change NOW!  You will become totally transparent to yourself and your partner and this of course will make you very vulnerable. However, with the vulnerability comes opportunities financially that are not possible when you are closed off to your true self when it comes to spending, borrowing, and saving money. Remember, as long as the ship is in the port, it is safe, but as they say, that is not what ships were built for.

Building a spending plan, a debt plan, and a retirement/savings plan with yourself and/or your partner is the best way I know of to test your ability to discover “new lands” financially that are not possible playing it safe on the shore. But because they are plans, it is also the safest way I know of to make emotional changes that will positively affect your finances without costing you any more money out of pocket and without risking your family and relationships in the process.

Here’s how to start this process of “leaving the shore to discover new financial lands”:

  1. Create a 12-month history of the way you have spent money.
  2. Divide this spending into categories so you can see what you really value. Will you be surprised at how important eating out has become to you, or that you spent $1,000 in one year on spa treatments?  Maybe that’s important to you, but if you really didn’t want to spend all that money at McDonalds then it’s time to make change. WOW! This can be so hard as you face the future knowing how inefficient you have been with your money.
  3. Make a spending plan for how you want and need to spend money over the next 12 months. This is where the voyage gets more exciting and feels less risky.
  4. Track how you spend money so you can stay on track. Compare how you actually spent with how you planned to spend and make adjustments.

The Pilgrims left England not knowing what would become of them.  The result of their courage is what you and I enjoy today.  We enjoy the freedoms and liberties to travel as we wish, with one currency, along with the rule of law and order.  Amazing is the sacrifice of our forefathers so we could have it easy.  Don’t blow all that opportunity by refusing to stretch yourself emotionally when it comes to proper financial management.  I ask you to stretch yourself today, do the hard things today so you and your family will be far better off in the future.

Cost of Medical Care After Age 65 Will Bury the Nation… and Probably You As Well

National statistics report that healthcare costs for retired persons average $250,000 from age 65 through the remainder of life.  How can a retired person (or anyone for that matter) afford this expense?  Statistics show that 91 percent of those retired are totally dependent upon Social Security benefits for their monthly income.  How can any retired person take their Social Security income and carve out an extra $250,000 to pay for health care?  This is an impossible task!  If anything is done to curtail Social Security benefits it will totally destroy the senior class.  Medicare is soon running out of money and Medicaid is broke.  I predict healthcare costs will be the largest hammer to come down on our financial world in the next five years. 

As you read this article, take inventory and ask how you will pay for healthcare costs in retirement?  If you do not have an answer, then you will probably be in this same group of people in the U.S. who are currently incurring $250,000 in medical/nursing home expenses that eat up all their retirement and life savings because they were not prepared.  If you are not saving adequate money for retirement, then healthcare costs will eat up what little you have saved and destroy you right along with our nation. 

I suggest 91 percent of the population needs to cut all expenses and not buy new homes, new gadgets, new cars, or go on expensive vacations until they  have saved, saved, saved!  Times are troubled and only promise to get worse for those who are in debt and have not established passive income they cannot outlive. If you are counting on Social Security and a risky 401(k) plan, you have no chance of survival.

Gloom and doom you say? It is what it is.  The real magnitude of the situation just hasn’t hit the fan in your own living room yet, so you don’t see it but it’s coming.  Plan on making changes now, while you still can.  My word of caution is take action today! For more ideas on how to do this, contact me for a no cost consultation: peter@moneymastery.com.

More Ideas on What to Do with “Old” 401(k) Money…

As noted in my last post, “How Old 401(k) Funds Can Get You Out of Debt Quicker,” many people change employment and still have money sitting in an “old” 401(k) they set up with their previous employer.  In my last post, I noted that this money can be used to pay off high-interest-rate debt, such as credit cards.

Here are some additional options to think about in terms of how to use this money instead of leaving it behind where is doing very little to benefit you today:

Option 1:  Roll this 401(k) money over into an IRA that you control.  Put it where you might get a good rate of return and have little or no risk.  Make sure you keep control of this account and can take the money out as needed.  Of course there will be a 10 percent penalty to pay if you do withdraw from an IRA before age 59.5, but that does not apply to the 72(t) tax rule. This ruling allows you to retire this plan (meaning you no longer contribute to it and only take the earnings from it over your life expectancy, usually age 84) without incurring a penalty. 

So, for example, if are say age 44 and have $100,000 in an account you retire, you will receive $3,365 per year without any penalty. CAUTION:  Once you select this option, you cannot change it  until age 59.5.  This example is simplified, so check with your tax adviser on how this best fits your circumstances.  There are places to put the $3,365 each year that can make you around 4 percent interest per year. Contact me for more details:  peter@moneymastery.com. So for this example, this means that when you reach age 59.5, all the money you started the account is still there, as you only took the earnings when you took the 72(t) option.

Option 2:  Roll the 401(k) money over into your own IRA that you control, then convert some portion of this amount once a year to a Roth IRA.  After five years, the principal amount you placed into the Roth IRA can be taken out without a penalty.  Check with your tax adviser first before taking this option to make sure you know all the rules associated with it, but in general this is another great way to get money out of an old 401(k) without paying a 10 percent penalty.

Option 3:  Roll the 401(k) money over into your own “self-directed” IRA.  There are extra fees you pay to the trustee of these kind of plans, but they allow you flexibility on where to invest and manage your money.

These ideas are for the purpose of giving your alternatives to leaving your money in an old 401(k) or IRA.  By being creative you can double the amount of money you might otherwise have if you just leave it where it is. For more information on these options feel free to email me: peter@moneymastery.com.

How “Old” 401(k) Funds Can Get You Out of Debt Quicker…

Are you one of those people who has changed employment and still has money sitting in an “old” 401(k)?  I want to give you options to think about in terms of how to use this money rather than just leaving it sitting there doing very little to benefit you. 

Take a look at the following illustration. It shows an employee putting money into a 401(k) “vault” of sorts:

The reason I call the 401(k) a vault is because money in this type of account is sort of locked up. It’s not liquid and can’t be used very easily. Basically you have very little control over this money. As you examine this illustration further, you’ll see that there are cracks in the vault, which represent the expenses of keeping your money in the 401(k) vault.  The vault does not offer protection from losing the money, as it is most likely invested in the market or mutual funds, which have volatility.  And notice when you retire and start drawing down on this 401(k) Uncle Sam is there, positioned to take a share of everything that you’ve put into the fund, plus any amount it has grown.

Now take a look at a couple I’ll call Mark and Joyce and their “Get Out of Debt” report, which is based onPower Down principles of quick debt elimination:

If Mark and Joyce will control spending so as not to keep getting into debt, they can have all debts paid off in less than 10 years.   It demonstrates how Powering Down your debt will get you debt-free in about 9 years, including your mortgage.

Now combine these two concepts of how the 401(k) locks up your money with the Power Down principle of getting out of ALL debt in less than 10 years. If Mark and Joyce were to consider taking all the money in an old 401(k) to pay off debts with higher interest rates, this could jump start their debt elimination considerably. Now of course, if they are younger than age 59.5 then they will have to pay a 10 percent penalty on top of the income tax due, but I don’t think you should be afraid of the 10 percent penalty because it’s less than those  high-interest rate debts you would use the 401(k) money to pay off.

Here’s how it could work:  

  1. Roll your 401(k) money into an IRA, so you have control.  Consider a credit union’s IRA savings account and remember earning interest is not the point. 
  2. Early in the year, like January or February, consider taking out a large chunk (in this example, I’ll use $10,000) and pay off credit card debt.  Taxes and penalty on this collapse of the 401(k) money are not due until April of the NEXT year. 
  3. Using this example, you would pay off $10,000 worth of high-interest debt (I’ll use a 22 percent credit card) and save that 22 percent for one year, which would equal $2,200.

Viola! You have just paid off a high-priced debt AND you are saving a ton of interest you would have had to pay to the credit card company. This suggestion would save you from paying interest of $6,500 on the credit card if you were to pay it off over a 5-year period, or much, much more if you never paid off the card at all!

So if you have an OLD 401(k) consider “using” it.  It does not have to stay in the “vault.” As it sits in the “vault” fees are being assessed, the market can decline, and in the meantime you owe $10,000 with a 22 percent interest expense on credit card debt — you’re basically going around and around in circles instead of getting on the road to total debt elimination.

While this is a great idea, I want to CAUTION you.  If you do not control your spending and therefore cannot save the monthly credit card payment of $275, in this example, you had better not touch the 401(k).  It makes no sense to pay off debt in this way where you will pay a bit of a price to do so if you are just going to get into more debt.  

Contact me with your debt information and I will prepare a Power Down report for you at no cost that will show you when you will be completely out of debt: peter@moneymastery.com.

Hoping to Die Now Because You Won’t Have Enough Money in the Future Isn’t a Very Good Financial Plan

Okay, so this joke is funny, I guess, but it’s also pretty tragic since it defines a good portion of Americans today…

If this describes you, what can you do to turn the joke around? I urge you to do a trial calculation to determine what “might” happen to you in the future financially and forecast an amount of money you need to get started on the road to taking care of yourself as a new goal in the new year.  As they say, “It is better to shoot for the stars and hit the moon, than aim for the moon and hit a rock.”

Here’s how to do a little trial calculating:  

  1. Take you parents and grandparents and average their age upon death.  Add 10 years to this number and then subtract the age you plan to retire.  This answer is what you can use to plan for how long you will need income.  I will use the example of a person I’ll call Mark Jones throughout this post. For him, he will need 18 years of income.
  2. Calculate how much money you will need to last until this estimated age of death. Assume you will earn 3 percent each year on any investments or savings, and that you need $1,000 a month for the next 18 years. This additional need will be on top of what you will receive from Social Security benefits, from any savings you already have put away for retirement, and any perpetual income you can count on like income from a rental property, for example.  Using Mark Jones’s numbers, the total amount he will need to save by retirement age will be $166,743.  If earnings drop to 1%, say, then he will need $197,600.  But maybe he will be lucky and achieve a 7% growth on savings/investments. In that case,  he will need $122,623.  Figure out your own numbers using these scenarios.
  3. Now you know what goal to shoot for and can divide this amount into years and months and find out exactly what you need to be doing each month to at least get started preparing for the future.

Okay, so it may not be perfect, you may lose money along the way. You must consider what will happen if you were to run out of money at age 78 for example. Or perhaps consider that everything goes as planned but unfortunately you live 23 years longer than you had expected. What happens then? But with an idea of what you need to get started preparing for retirement by running these calculations you will get motivated to at least get begin actually saving this money and I can assure you, this motivation will lead you to even greater desires to make more happen with your money, exploring lots of options that will provide a more predictable retirement that  you cannot outlive. Contact me today for a no obligation discussion about your future and what you can do to jump start your desire to work on it a little more seriously:  peter@moneymastery.com.

Don’t Ignore What Economists Are Predicting for the Economy

Economists with the best prediction track records have recently spoken out about what the future economy holds.  Here are quotes from these economists from last year for you to review and decide what you might do better or differently with your personal finances.  Take notes and put them somewhere you can recall them in the near future and see for yourself how accurate their predictions are:

David Stockman: “It’s one of the scariest moments in our history…No central bank has ever printed this much money this long, kept interest rates at zero, and fueled so much speculation…they’ve [feds] painted themselves in a corner, they’re playing it day by day, and they’re going to make a HUGE mistake!”

Harry Dent: “The only way to correct this is to let this bubble burst…the next crash is going to be worse than the last one.” And, “They brought in the foxes — like Goldman Sachs — to look over the hen house!”

Stockman: “All the cheap money has stayed in the canyons of Wall Street where the speculators can access it day after day… that’s called arbitrage.”

Dent: “Nobody is going to protect you, and nobody is going to stop this bubble from bursting because every single bubble in history has burst. And this is one of the biggest.”

Economy and Market Daily Opines: “Harry Dent’s concern is that the government’s unprecedented intervention through Quantitative Easing and other measures is creating the worst case scenario. Considering that Dent is known worldwide for his uncanny boom and bust calls over the last 30 years, one should pay careful attention to his new warnings that the stock market will collapse by 70 percent, real estate will plunge by 40 percent, and that unemployment will spike up to 15 percent (24.7 percent U6).”

To summarize, these economists agree with one another.  You decide if you agree with them, then make decisions accordingly.  But as time goes by each of us need to reflect and see how well we have done with this information.  Remember you are the captain of your own financial ship.

What the Future Holds for Tax-deferred Accounts

Don’t you think it is better to have one bird in the hand, than two birds you can see in the bush?  Of course! Then why do so many people defer their taxes by using 401(k) plans, or others like it, when the future and the markets are so uncertain?  We all know the federal government is overspending.  We all know the feds cannot possibly pay out the Social Security and Medicare benefits it has already committed to.  Do you think taxes just might go UP?  Wouldn’t it be better to pay taxes now, and then never again? 

Since the average person reaching age 65 has less than $60,000 of total assets, why would you consider to deferring taxes until the worst possible time in your life, when you can least afford to pay them?

Consider this: When you start drawing money from these tax-deferred plans it can easily force your Social Security benefits to be included for income tax purposes also, meaning you will pay at a higher tax bracket.  So knowing this in advance, it’s time NOW to reconsider how you really want to fund retirement and how you want to pay your taxes. Don’t just go with what everyone else is doing, consider that there might be many other viable options for creating a predictable retirement you cannot outlive than throwing money into a 401(k). Contact me for these ideas:  peter@moneymastery.com.