Three Steps to Wealth & Financial Security

by Gary Laturno

  13. INSURANCE IS AN IMPORTANT PART OF YOUR PLAN

  “Don’t be caught empty handed; cover yourself with cash reserves and insurance”. Burton Malkiel, professor of economics, Princeton

  Most everyone needs protection against catastrophic financial events.

  Your mortgage company requires home owners insurance to protect its interests in your home. Do not let it lapse if you pay down the mortgage.

  An unforeseen illness or accident could ruin you financially. Medical insurance protects against potentially huge bills and financial disaster.

  Life insurance protects a family and spouse in the event of death. Term insurance is inexpensive and can be cheap if you are in good health. Whole life, which combines investing and insurance, is a great deal more expensive. Term insurance makes sense for most people. If you want more information, read “Whole Life or Term Insurance?” in the April 2, 2012, issue of Smart Money, a Wall Street Journal publication, wsj.com.

  Other insurance is appropriate as well:

  Disability insurance provides earned income in the event that a disability prevents you from working or doing your specific job. It provides paid sick leave, as well as short and long-term benefits. “In the US a disabling accident occurs on average once every second.” Wikipedia.com

  “Long-term care insurance covers for care generally not covered by health insurance, Medicare, or Medicaid. Individuals who require long-term care are generally not sick in the traditional sense but are unable to perform basic life activities such as dressing, bathing, eating, toileting, getting in and out of a bed or a chair, and walking. About 60 percent of people over sixty-five require some type of long-term care during their lifetime. About 40 percent of those receiving long-term care today are between eighteen and sixty-four.” Wikipedia.com; Recommended reading: “Beyond Long Term Care” by Kelly Greene, The Wall Street Journal, February 15, 2013, and “Can You Afford to Get Older?” by Ellen E. Schultz, The Wall Street Journal, March 8, 2013.

  Umbrella insurance refers to a liability policy that protects the assets and future income of the insured in addition to his/her primary policies. “For example, if the insured carries an auto insurance policy with liability limits of $500,000 and a homeowner’s insurance policy with a limit of $300,000, then with a million dollar umbrella, the insured’s limits become in effect, $1,500,000 on an auto liability claim and $1,300,000 on a homeowners liability claim.” Wikipedia.com

  Recommended reading: “Making Sense of Social Security and Medicare” by Jennifer Waters, Wall Street Journal, March 24, 2013.

  14. HIGH INCOME EARNERS - How Will You Spend Your Money?

  “We’re dealing with the top 2% of wealth in the country. . . .But their financial I.Q. doesn’t come close to their overall smarts level”. Dan Di Pietro, chairman, law firm group, Citi Private Bank, 40,000 lawyer clients, quoted in “Money Advice for Doctors and Lawyers” by Paul Sullivan, The New York Times, March 30, 2013

  High income earners - like everybody else - can be terrible money managers, often assuming their high earnings will go on forever. Those with earnings that go on for many years often live beyond their means. Larry King, for example, has reportedly filed for bankruptcy on three different occasions. It is not uncommon for famous, highly paid athletes to have debts greater than their assets and to file bankruptcy.

  Recommendation: Take advantage of high earnings to create wealth and financial security for yourself and your family. Invest 50 percent or more of your earnings each month through automatic deduction into an investment account. If you earn $300,000 a year, invest $150,000 and live on $150,000. Even better: invest $200,000 and live on $100,000.

  If both parties in a relationship earn a substantial salary, invest one salary and live on the other.

  Avoid luxury homes and luxury cars. Both will/may go down in value. Both, especially luxury homes, require substantial money to maintain. The least financially smart thing you can do is buy luxury homes and luxury cars that drain funds you could use to invest.

  Develop a financial plan. Diversify investments. Do not spend too much on financial advisers. Keep investment costs low. See Part 3, “Invest in Low Cost Index Funds” below.

  15. SMART MOVE – Delay Taking Social Security Benefits

  “Choosing when to take Social Security is a complicated decision and should not be taken without consulting a competent adviser”. Larry Branton, Esq., certified specialist – taxation law, State Bar of CA

  “It makes sense for women, married couples and those with good health to wait longer for a bigger paycheck”. David Blanchett, head of retirement research for financial research firm Morningstar

  The longer you wait to take social security, the greater your monthly benefit when you receive payments: If you wait to age sixty-six, payments go up by 33 percent.

  If you wait until seventy, benefits go up by at least 75 percent.

  So, waiting is the easiest way to obtain more coverage. Few take advantage of these options: Currently, 46 percent begin claiming benefits at sixty-two, the first year they are eligible.

  Less than 5 percent delay past the age of sixty-six.

  When you approach retirement age, factors to consider in your decision to collect social security include your health, family longevity, employment, and financial situation.

  Recommended reading: “Bolstering Your Benefits” by Kelly Green, Wall Street Journal, March 15, 2013

  16. WHAT CAN WE LEARN FROM SOCIAL SECURITY?

  “The system is not intended as a substitute for private savings, pension plans, and insurance protection”. President Dwight D. Eisenhower, January 14, 1954

  Social Security may be the most popular and successful government program in American history. What can we learn from it?

  Social Security is mandatory. If you are employed in the private sector, you must participate. Each payday, $113,700 of your income is subject to a 6.2% payroll tax which is automatically withheld from you paycheck. At retirement, you receive a monthly annuity intended to cover basic necessities – not a luxury lifestyle.

  Do you want to enjoy more than the Spartan existence that Social Security provides? You can! Emulate Social Security; adopt the following guidelines.

  1.)Pay yourself first. Via auto deduction, put a % of your income into a diversified your investment portfolio each payday. The more you can put into your investment account each month the better.

  2.)Leave the money alone. Let it grow and compound. Do not take withdrawals until you retire.

  Sounds simple! It is! Few, however, save and invest. Many spend more than they earn and then rely on Social Security, finding they live a Spartan existence in their golden years. As Cicero said, “We are our own worst enemy”.

  For a guidelines and recommendations on how to invest, see Part 3 below.

  Recommended reading: “Social Security, Present & Future”, The Editorial Board, The New York Times, March 30, 2013; “It’s Never Too Soon To Start Planning Your Retirement”, Tom Lauricella, Wall Street Journal, May 27, 2013.

  17. DO NOT SABOTAGE YOUR RETIREMENT PLANS

  “The greatest single source of wealth is between your ears”. Brian Tracy, speaker who addresses more than 250,000 people each year

  Most retirees are concerned that an event beyond their control will derail their retirement plan, for example, a stock market crash or a major medical issue.

  The truth is “we are our own worst enemy” and may cause damage our own plans. For example, we make expensive renovations to our homes, buy second homes, “loan” money to our kids or contribute large amounts to charities.

  When you think about doing anything that departs from your retirement plan, first consult a trusted fiduciary to review your plan and advise you accordingly.

  You have the ability to make the plan work well or poorly. Think long and hard before you make major changes in the plan except to increase monthly contributions.

  18. HOW TO MAKE MORE MONEY

  “Even if money
can’t buy happiness, it’s a pretty good start”. David Weidner, Wall Street Journal

  Graduate from college! “In 2012, the typical full-time worker with a bachelor’s degree earned 79 percent more than a similar full-time worker with no more than a high school diploma. For comparison, 20 years earlier the premium was 73 percent, and 30 years earlier it was 48 percent”. Catherine Rampell, New York Times.

  Ms. Rampell: Students who borrow to attend college graduate with an average debt of $27,000, but their return on investment is high. According to the Hamilton Project of the Brookings Institution, the benefits of a four-year degree were equivalent to an investment that returns 15.2 percent per year, factoring in earnings students forgo while in school.

  The Hamilton Project: “This is more than double the average return of stock market investments since 1950 and more than five times the returns of corporate bonds, gold, longterm government bonds, or homeownership”. See “College Graduates Fare Well in Jobs Market”, New York Times, May 3, 2013, Catherine Rampell.

  Exercise! Workers who exercise regularly earn nine percent more than those who do not. Wall Street Journal, June 2012 Walk, run, dance, lift weights, swim, ride a bike, work with a personal trainer. Result? Earn more money!

  Why? Endorphins flow from exercise. Exercise makes us more effective in everything we do. Our mood improves. Our mind focuses better. We feel good about ourselves; we get sick less often. The quality of our life goes up.

  What else can you do to increase your earnings? Work multiple jobs. Go to graduate school. Get additional vocational training to enhance your skill set.

  But be careful: Borrowing substantial sums to prepare for a job in a low-paying vocation or profession may be financially unwise. Some young people today have student loans in excess of $200,000 after leaving graduate or law school. After graduation, many tragically learn they are unable to find work. So, be careful about where you go to school and what you study.

  Recommended reading: “A Smart Investor Would Skip the M. B. A.” Dale Stephens, Wall Street Journal, March 1, 2013

  19. STAY HEALTHY – Minimize Health Care Costs

  “Life is a one- time gift”. Author unknown

  “Good health means more retirement money”.

  Henry Hebler, Wall Street Journal

  “One of the best things you can do for retirement is to keep yourself in good health. Medical bills will be a great deal less, you’ll take fewer trips to the emergency room, and most importantly, you’ll feel better.” Henry Hebler, Market Watch, Wall Street Journal, December 6, 2012

  “Fidelity, one of the largest holders of retirement accounts, estimates that a couple retiring at age 65 will spend $240,000 in 2012 dollars for health expenses the rest of their lives. This includes premiums and uninsured medical costs but does not include over-the-counter drugs, dental costs, and long-term care. Such numbers aren’t in Fidelity’s $240,000.” Henry Hebler

  How does one maintain good health? Answer: Take care of health problems early, eat well, exercise, and lose weight. “Easier said than done”, you say. It starts in the kitchen. Do you want to avoid degenerative disease, lose weight, and keep your weight down? Eat a plant-based diet. Focus on vegetables, fruit, beans, seeds, and nuts. A plant-based diet is high in micronutrients and low in calories. You will lose weight, keep weight off, feel better, save money, and enjoy life a great deal more. Plus, there is no need to count calories. It works! Read “Eat to Live” by Joel Fuhrman, MD, and “Eating on the Wild Side” by Jo Robinson, both available at Amazon.com.

  20. MARRIED COUPLE DISCUSS FINANCIAL PLANNING & MONEY MANAGEMENT

  “Articulate your financial goals. Track monthly income and expenses. Do not carry credit card balances. Pay cash for modest vehicles. Dump your luxury home. Save and invest each month”. Michael & Andrea

  Gary met Michael, an attorney, in approximately 2003–2004, in San Diego and they stayed in touch.

  Several years later Michael met Andrea, a civil engineer, and the couple married. Both are bright, well educated, and have good paying jobs.

  Shortly after getting married they purchased a luxury home in San Diego for $800,000. We were surprised. Why did they buy such an expensive home? Would they be able to save and invest after paying their mortgage each month?

  In early 2012, the couple contacted us and said they wanted to sell their luxury home and downsize. They explained that they had high-stress jobs and did not want to work forever. They had a goal—retire and move to Hawaii in ten years. They were frugal, invested every month, but realized that given their present situation, they would be unable to reach their goal.

  How could they retire early? They started by using a spreadsheet to track their monthly income and expenses. The spreadsheet made them see the obvious. That is, they needed to sell their home and downsize.

  “The key is getting people to realize where they are versus where they think they are. This is sometimes best illustrated by creating the spreadsheet.” Andrea

  They moved quickly, listing and selling the home, and buying a modest condo not far from their old neighborhood in San Diego.

  “Here we are. We now save and invest 67 percent of our monthly income. It is “ours to keep forever”! It feels great!” Andrea

  Comment

  Few of us will be able to save 67 percent of our income each month, but we can learn from them. The first step: articulate your financial goals. Retirement at a certain age? College for the kids? Travel?

  The next step: track monthly income and expenses. What comes in? What goes out? Where can you cut back? What is a necessary expense? What is unnecessary? Where can you trim the fat?

  Next: Develop a monthly financial plan. What can you cut? What do you need to spend each month on necessities? On discretionary items? How much can you save each month? The 25-50-25 plan can work for you, but your plan may be different. Talk to your CPA or a fee-based financial adviser who can give you objective feedback. Review and monitor your plan on a regular basis to ensure you are on track.

  Andrea and Michael developed a financial plan that works for them. Develop a financial plan that works for you.

  Part 3

  Step 3:

  Invest in Low Cost Index Funds

  1. INTRODUCTORY COMMENTS

  “It is as normal for people to own stock in companies as it is for them to own homes and cars”. Margaret Thatcher, British Prime Minister

  As discussed in Parts 1 and 2 of this book, building wealth starts with financial planning and sound money management. Live modestly. Do not buy too much house. Save and invest each month. The 25–50–25 plan works.

  Everyone must master money management, financial planning, and wealth building. The subjects are required; they are not electives.

  Many find investing a big mystery, but investing in low cost index funds is not rocket science. In fact, it is really pretty simple. So, in the pages ahead we discuss what you need to know and do to build wealth by investing in index funds. We hope you enjoy the journey.

  For a definition and further comment about index funds and investing see the Appendices. Check out “Index Funds: Definition & Comments”, “Index Funds vs. Exchange Traded Funds (ETFs)”, and “Index Funds vs. Hedge Funds” and “Recom- mended Reading”.

  2. COMPARE AND CONTRAST INVESTMENT OPTIONS

  “If your home is your largest investment, you are in financial trouble”. Robert Kiyosaki, author, Rich Dad Poor Dad

  What investment offers the best opportunity to obtain returns in excess of inflation? What is the best investment long term? See http://www.econ.yale.edu/~shiller/data.htm.

  Few ask these questions when they make decisions about investing or spending money. Few compare and contrast asset classes, think about or understand the long-term returns of different investments.

  Gold and real estate: The long-term returns from gold, precious metals, and real estate over 100 years are about the same as inflation, that is, approximately 3.5 percent per year. Precious
metals do not pay dividends and are worth what a buyer is willing to pay for them. Recommended reading: “Gold, Long a Secure Investment, Loses its Luster”, Nathaniel Popper, The New York Times, April 10. 2013; “Gold’s Shine Fades as Metal Tumbles” by Christian Berthlesen, The Wall Street Journal, April 12, 2013

  Houses are boxes of consumer goods and not surprisingly track the consumer price index. That is, housing prices – over the years – generally track inflation. Investment real estate, unlike gold and silver, is both a hedge against inflation and an income-producing asset.

  Bonds: The long-term returns are approximately 5 percent per year. There were years when bonds declined by as much as 20 percent but such a decline is rare. Bonds are used both for income and as a hedge or anchor against the volatility of stocks.

  Cash: The asset class some think is the safest, that is, cash, is the riskiest long term. One hundred years from today, a $100 bill will still say $100. But as the years pass, the value of the bill will be continually eroded by inflation. See “Time Value of Money” econedlink.org/lessons and “What will $100.00 be worth in 10-20 years?” observationsandnotes.blogspot.com.

  Stocks: Most think that stocks are the riskiest asset class. The truth is that stocks, long term, have been shown to be the safest investment. Over the last one hundred years, total return for stocks including dividends, has been around 10 percent per year. So, $100 investment in stocks one hundred years ago would now be worth $1,378,000. For a discussion of historical returns, see http://observationsandnotes.blogspot.com/2009/03/average-annual-stock-market-return.html.