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Frequently Asked Questions


Why Should We Focus on Setting Goals?

Many business coaches and books tell the story of a famous study of 1979 Harvard graduates (or 1953 Yale graduates). Ten years after graduation, the 3% who had written goals were earning ten times the average income of their peers who had no goals. The story is an urban myth, but verifiable research at Dominican University has confirmed the power of putting your goals into writing. You have now joined the fabled 3%. You have SMART Goals in writing. SMART stands for Specific Measurable Achievable Results in Time.

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Believe It, You Can Do It. Does It Really Work?

Your beliefs determine your behavior. Therefore it is extremely important that you believe this plan is achievable. Achievable is the “A” in SMART goals. What you achieve is primarily mental. “Whether you think you can or can’t, you’re right.”(Henry Ford). Only human beings have the ability to create the future in their minds first. Remember the building illustration. Every human accomplishment, from the invention of the plow to smashing the atom and putting a man on the moon, was first a thought in the human brain before it became a reality.

Every one of us has this amazing ability. We just may not be aware of its potential power in all areas of life. If you can plan a vacation, build a home or plan your day, you can plan and achieve financial independence. It’s 99% mental. The levers above give you choices. You can change your beliefs about what is possible for you or you can change the levers until the goals match your current beliefs.

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What's The Difference Between Achievement And Fulfillment When It Comes To Financial Planning?

What is the difference between achievement and fulfillment? Nigerians (#1) rank much higher than Americans in global studies measuring happiness. Surveys indicate one-half to two-thirds of those currently retired and not working are unhappy. Actuaries have discovered an incredible spike in the mortality rate in the first three years after retiring. Emerging research suggests that not working may be related to loss of meaning and significance.

Most Americans know what they want to have, but they have no idea of what they want to be. There are two types of life values: ends and means. Money, family and things are means values. Happiness, love, freedom and growth are examples of ends values. The only way we can ever feel happy and fulfilled in the long term is to understand our deepest ends values and live them. If we don’t, we will experience pain. What do you value most in life?

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What Should I Take Into Consideration When Creating A Savings Plan Strategy?

  1. Percentage savings is the simplest and easiest of all budgets. If you are saving 10% of your income, by definition you are living within your means.
  2. Saving 10% of your income is evidence of your ability to defer gratification. According to psychologists the ability to defer gratification is an indicator of emotional intelligence and perhaps the most powerful predictor of success for young toddlers.
  3. Nobel Laureate, Robert William Fogel, has calculated that if the average couple with one spouse working part time, saved 14.7% of their income from the day both spouses entered the work force, the couple could retire at age 55 with a retirement income that placed them among the top 20% of all US households.1 (Fogel, The Fourth Great Awakening, p. 196.)
  4. The higher your income, the lower the replacement ratio of your social security benefit. Social Security was meant to be a safety net for the elderly poor, not a universal retirement plan. When Social Security started there were 40 workers contributing for every single beneficiary. Today the ratio of workers to beneficiaries is 3/1 and soon it will be 2/1. There is no doubt that social security benefits will have to be reduced even more for the program to remain solvent.
  5. Saving 10% of your income provides a cash flow cushion which allows you to take more risk in your portfolio. During an emergency, you can reduce your savings rate instead of tapping your investments.
  6. Saving 10% of your income even after you retire provides some inflation protection during the withdrawal years. In practice this means that when you retire, your taxes and living expenses should be about 90% of your total income.
  7. Saving 10% of your income even during retirement reduces the impact of portfolio losses during the withdrawal years. The key to retirement is spending. By never spending more than 90% of your gross income, you continue to fund your future first and greatly reduce the odds that you will outlive your money.
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What Are Some Creative Ways To Save For A Child’s Education?

No one knows what methods of paying for college will be available years from now. We have only to look at the recent changes to understand the challenges of financial planning for college. Twenty years ago Education IRA’s and state-run Section 529 plans did not exist. Twenty years ago there were no provisions to borrow from your 401(k) plan or to make penalty free withdrawals from your IRA to pay for children’s college. There were no education tax credits. The concept of using home equity to pay for college was not an accepted practice. Liquidation rules for US Savings bonds did not allow an exemption from federal and state taxes if the bonds were used for qualified college expenses. Many of the federally subsidized loan programs were not available twenty years ago.

The best way to save for college is to put money in the most effective place to build wealth. The best way to pay for college expenses is to take money from the most effective place to conserve wealth. Planning under uncertainty requires planning with flexibility. Saving for retirement is the best way to save for children’s college. Money saved inside an IRA or QRP does not reduce eligibility for financial aid because it is an “exempt asset” when calculating the Expected Family Contribution (EFC) on the federal FAFSA form. You can borrow from your 401k to pay for children’s college. Money inside an IRA can be used to pay for college without penalty. Saving for college inside a 401k or IRA is planning with flexibility.

Paying for your children’s college is a great act of love. But building your wealth so you don’t become a financial burden to your children in your old age may be an even greater act of love. The “sandwich generation” refers to the growing number of families who find themselves ”squeezed” by the need to care for children and aging parents at the same time. Funding your own retirement and long term care in old age has higher priority than funding a child’s college education. Saving for your own retirement is an act of love for both your child and your fellow citizens. Social Security, Medicare and Medicaid are going broke because people are not saving enough for their own retirement and long term care. You can get loans for college education, but you cannot get loans for retirement or long term care.

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What Are Some Helpful Budgeting Resources?

If you want to manage your spending with a budget we recommend one of the FREE online services which help you track your cash flows, account balances and net worth automatically. The most comprehensive is Yodlee Money Center at www.yodlee.com. The easiest to use is Mint at www.mint.com. A relatively new service is Quizzle at www.quizzle.com

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What Are Some Of The Top Tax Planning Tips?

We want to balance your present needs with your future needs, between saving too little or too much. If you are on track we generally recommend saving no less than 10% and no more than 20% from your income. You may have to save more than 20% if you are behind or want to retire before your Social Security full retirement age.

Why does Fundamental #3 (Tax Planning) encourage you to MAXIMIZE your contributions to QRPs (Qualified Retirement Plans) and IRAs (Individual Retirement Accounts)? Whenever the IRS puts a limit on something that means it’s probably “too good” for the taxpayer. You should usually get as close as you can to the IRS limit. The benefits from an employer plan are so great, that you cannot deposit money directly as you can to a bank checking or savings account. You can only put money into an employer plan by deferring some of your income. While you cannot just write out a check for $16,500 and put it into your QRP, if you have some cash or assets that can be converted to cash, we will show you a strategy for moving it into your QRP “indirectly”.

As a minimum, everyone should put 10% savings into an employer plan or IRA. After the minimum 10% savings rate, people differ in the benefits they will receive from maximizing their contributions to their qualified tax shelters. They will also differ in their ability to “harvest” those benefits. Let’s talk about the benefits first.

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Are There Any Sources Of “Free Money” When Planning For Retirement?

People also differ in their ability to harvest this free money from the government. A family which earns $20,000/year and needs all that income to pay for food and shelter has limited ability to defer income into their QRP or IRA. On the other hand, a couple making $31,000/year with $20,000 in CDs and a piece of vacant land in Arizona worth $30,000 can “harvest” a big return by deferring most, if not all, of their income into their QRP or IRA. If each spouse earns $15,500 or ½ of their $31,000/year income, they could each defer their entire income of $15,500 into their respective 401(k) plan for a total deferral of $31,000. But what would they use to pay living expenses? They could live off the cash in their CDs. And when the cash is used up they could sell the land for another $30,000. It’s an “indirect” method for getting your cash or the value of your vacant land into your QRP.

Why is it so important to maximize your qualified tax shelters? There’s even more free money than you might think. By maximizing contributions to your QRPs and tax-deductible IRAs, you can sometimes reduce your taxable income to the 0% tax bracket. This creates an extraordinary and rare opportunity to convert a tax deferred IRA to a tax-free ROTH IRA at a 0-15% federal marginal tax rate, depending on how much you convert. The Roth IRA does not give you a tax deduction now, but it gives you the opportunity for tax free growth if you wait until age 59 and ½ before taking the money out! And you can take some money out before age 59 and ½ because your contribution cost basis can be withdrawn anytime. Conversion cost basis can be withdrawn without penalty 5 years after the conversion. The value of tax free growth is so great, that people with an Adjusted Gross Income of more than $160,000 cannot contribute to a ROTH IRA. The ability to convert a tax-deferred IRA to a tax-free Roth IRA had even stricter limits. Normally people with an Adjusted Gross Income of more than $100,000 have not been eligible. That law has been changed in 2010.

There’s another reason for Fundamental #3. If you ever get in debt or someone sues you, the Employee Retirement Income Security Act of 1974 (ERISA) protects money in your QRP and money rolled from an employer plan into IRA against creditors. Even though OJ Simpson was convicted of murder in civil court, the victims’ families were not able to collect much of the damage award because most of OJ’s money was in his NFL retirement plan protected by ERISA. Many states have laws which protect IRA contributions against bankruptcy creditors. You should learn the limits of the asset protection (bankruptcy) laws in your state. One popular resource is http://www.assetprotectionbook.com

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Are There Other Creative Uses For An IRA?

Money in an IRA can be used to pay for college education, to purchase a new home and pay health insurance premiums during unemployment. Money in 401(k) plans can be used for loans, certain emergencies and early retirement at age 55. The cost basis or after-tax contributions to a Roth IRA can be withdrawn anytime without penalty because you have already paid the taxes. A traditional IRA can be converted to a Roth IRA. The best way to save for a child’s college or down payment for a new home is to save for your own retirement. These are just a few of the MANY reasons to maximize your contributions to QRPs and IRAs. See Internal Revenue Code 72(t) for details about the exceptions to the 10% penalty for early withdrawals.

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Why Is The “First 10%” Important When It Comes To Saving For Retirement?

The first level of deferrals and contributions should always come from your income and be true savings of 10% of income. Everything above the first 10% of income can be either savings from income or repositioning of assets (tax efficient liquidation of capital assets or pulling equity out of home). It is important to calculate how much of this “maximization activity” is simple repositioning of assets, and how much is actual savings from income. The free money can be viewed as “payment” from the government for both saving of income and for changing the location of your money.

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Should You Use Insurance For Retirement Planning?

In most states it’s illegal to sell cash value life insurance as a retirement vehicle or savings plan. Unfortunately the laws are not enforced. Because of the high expenses and commissions to the agent, it’s usually a terrible investment. It’s also an expensive tax shelter that usually does more harm than good for middle income Americans. There is no additional tax benefit from using an annuity inside an IRA. There are additional expenses. The SEC has posted two consumer publications with useful warnings and questions that should be asked before purchasing variable insurance products for the benefit of the tax shelter: http://www.sec.gov/investor/pubs/varaquestions.htm

Most people should not be putting money into cash value life insurance or annuities until they are maximizing their contributions to the QRPs and IRAs and are in a very high tax bracket. Premiums paid into cash value life insurance or annuities are NOT tax deductible. Investments in cash value life insurance and annuities are not protected from creditors by ERISA. Investment gains in cash value life insurance and annuities are subject to higher income tax rates instead of lower capital gains rates.

Some agents believe that term insurance is too risky because your health may change and you may need the insurance longer than expected. For example, you may be diagnosed with terminal cancer one month before your term insurance policy expires.

We do not accept that argument because most good term insurance includes the legal right to convert to a permanent policy anytime before the lapse date. In other words, if you are diagnosed with cancer one month before the policy terminates, the insurance company is legally obligated to let you convert to a permanent policy at healthy rates for someone your age. We ask, “if you’re uninsurable but the insurance company has to sell you a permanent insurance at healthy rates for your age, isn’t that a good deal? If you have a choice between a $100,000 permanent cash value policy or a $500,000 10-year year level term policy with the right to convert to up to permanent insurance at any time, which would you prefer assuming they both cost the same?

Government uses the same rules for Social Security survivor benefits. Social Security survivor benefits for spouse raising a dependent child end when child turns 16. Social Security survivor benefits for the dependent child end when child turns 19 or is no longer in high school.

In most cases, life insurance above 60-80% of income replacement ratio or for a longer period of time than beneficiary dependency is a discretionary expenditure to be balanced against other important and competing needs such as disability insurance and saving for retirement.

Low cost term insurance can be purchased online at www.insure.com or www.vanguard.com, www.tiaa-cref.com, or www.llis.com.

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What Is The Importance Of Diversification And Investment Strategy?

Until the 1960’s the term asset allocation did not exist in our vocabulary. Diversification was achieved by owning more than one stock. But all that changed as the world became familiar with the 1956 doctoral thesis of Harry Markowitz. Markowitz’s paper eventually won a Nobel Prize in 1990 and he became the “Father of Modern Portfolio Theory” by demonstrating how risk and return could be more precisely managed by what is known today as “asset allocation.”

Harry Markowitz won the Nobel Prize because he gave investors a mathematical formula to measure and manage risk. He is called the father of Modern Portfolio Theory because he was the first to quantify both the probability and the degree of a loss by measuring the variability in returns.

Assume both Stock A and Stock B return 10%.

  • Which stock is “riskier”?
  • Is the assumption of 10% return for both realistic?

In his paper Markowitz showed us how we can both reduce risk and increase return at the same time by selecting non-correlated asset classes.

Portfolio #1 is very volatile because the two investments are 100% positively correlated. Portfolio #1 illustrates why you do not want to have a portfolio where everything goes up at the same time. Portfolio #2 has ZERO volatility, because the two investments are 100% non-correlated. Portfolio #2 illustrates why you want a portfolio with one investment going down while another goes up at the same time. Since there are very few perfectly non-correlated investments, Portfolio #3 is a picture of how diversification reduces volatility in most actual portfolios.



Asset allocation models seek to control the means variance characteristics of a portfolio to improve their investment results in two ways.

First, investors can improve the efficiency of their portfolio by changing their asset allocation. Having an efficient portfolio means you get the most return for the least risk. The curved line represents “the efficient frontier” of all possible portfolios underneath the line.

The graph below illustrates how a standard 40/60 portfolio can be made more efficient by simply changing the asset allocation. Each successive portfolio is slightly more efficient than the previous version. Version #1 reduces risk by 100 basis points. Version #2 increases both return and risk. Version #3 increases the return some more. The final version gets the most return for the least amount of risk. The original and final portfolios are both 40/60, but the final portfolio is clearly more efficient.




Second, investors can improve the suitability of their portfolio by changing their asset allocation and moving it along the efficient frontier. Having a suitable portfolio means that the risk/reward characteristics of your portfolio match your financial needs and goals. Many efficient portfolios are possible. You want the one that matches your needs and goals.

Test your understanding of Modern Portfolio Theory and Asset Allocation. Which efficient portfolio is most suitable for a young investor in the accumulation stage and with a high risk tolerance? Which efficient portfolio is the most suitable for a 50-year old employee getting ready to retire? And which efficient portfolio is the most suitable for a 70-year old investor who can’t afford any losses?

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Stocks, Bonds And Modern Portfolio Theory. What’s It Really Mean?

What is the difference between a “stock” and a “bond”? A stock is a title or deed of ownership. A bond is an I.O.U or promise to repay with a specified rate of interest.

Entrepreneurs like Sam Walton need money or capital to build stores. Suppose you are an investor with $10,000 looking for an opportunity. You and Sam Walton can meet in one of the two capital markets where he is shopping for money and you are shopping for investment opportunities. You can do business in either:
1. The bond market, or
2. The stock market
Mr. Walton can borrow your money in the bond market or he can sell shares of his company in the stock market.

A mutual fund is a basket of stocks or bonds or both.

Modern Portfolio Theory, on which most asset allocation theories are based, focuses on diversification across asset classes to reduce the volatility (risk) of the portfolio. Usually asset managers identify six to twelve different asset classes, and then use computer models to ascertain the "efficient frontier". The efficient frontier is presumably the exact mix of investments in each asset class which has historically provided the highest return for a given amount of risk. While this approach may be suitable for managing large pension funds, most middle income people don't have enough zeros in their portfolio for this approach to be practical.

We call our strategy "Functional Asset Allocation" because, when working with families and individuals, each category serves an important function, or purpose, beyond simple diversification. For example, while Real Estate is recognized as a separate asset class by most money managers, the value of your personal residence is more than a financial calculation. A great deal of your home's value is in your own enjoyment. Likewise, Functional Asset Allocation takes into account the reality that taxes are a driving force in Middle America.

While Modern Portfolio Theory seeks to optimize statistical returns on a passive, static investment portfolio relative to risk based on historical performance, Functional Asset Allocation uses a different paradigm. It is based on optimizing value in the utilization of assets in a household, and on the psychological needs and life goals of real people in a dynamic society. Interestingly, our experience and comparative analysis have demonstrated that Functional Asset Allocation not only provides most of the diversification benefits of Modern Portfolio Theory, but also yields a better after-tax return with less risk for Middle America.

The analogy of the farmer is useful for understanding the separate functions of the three major asset classes. The interest earning asset class is what the farmer puts in the root cellar to feed the family during a bad winter or reseed his fields after a drought. The real estate asset class which is primarily your home is the equivalent of the farmer’s garden. The garden provides food to eat and flowers for enjoyment. The equity asset class is the equivalent of the farmer’s fields. The fields are the farmer’s engine for growing wealth. The larger the fields and the more productive the crops, the faster his wealth grows.

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What Does It Mean To “Properly Balance” Your Investments?

If you have too much in cash reserves you incur the “opportunity cost” of what that money could be earning if invested elsewhere. If you have too little in cash reserves you incur the “cost of financial distress”. One example of the cost of financial distress is when you have to pay 18% interest on a credit card because you did not have enough cash to pay your electric bill.

Most people just don’t seem to comprehend the risk they are taking. The average life expectancy of a company is 12.5 years. A full one-third of the companies listed in the 1970 Fortune 500 had vanished by 1983. The life expectancy of small companies is even shorter. Do you remember the media stories of employees of Enron, MCI, Worldcom and small hi-tech companies who were devastated by the tech crash of 2000 because they had everything in employer stock? Did the warning make a difference? Apparently not. The same thing happened in 2008. Employees of Lehman Brothers, Countrywide, AIG, etc lost both their jobs and retirement portfolios heavily invested in company stock. If you think it is foolish for others to invest so much of their portfolio in one stock shouldn’t you apply the same standard to yourself?

Everyone agrees with “Don’t put all your eggs in one basket”. Even more hazardous is to put both your present and future financial well-being into one egg.

Having too much wealth in employer stock is a very common problem. Selling and diversifying is usually the best solution. But that’s not always possible. There are many other ways to hedge this risk, such as the use of collars, puts, short selling, risk exchange pools, etc. You should talk to a qualified advisor who specializes in hedging employee stock ownership for your particular company.

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Why Do People Think Real Estate Is A Better Investment Than Stocks?

Real estate has created more millionaires than any other investment and it has caused more bankruptcies than any other investment. The explanation for the two extremes is LEVERAGE. The ability to borrow large sums of money with a small down payment creates leverage. Without the ability to leverage most Americans would never be able to own a home. A $20,000 down payment enables the investor to purchase a $100,000 asset. If the home appreciates 4%/year (the historical average) it will increase $4,000 in the first year. That $4,000 gain is a 20% Return On Investment (ROI). How is that possible? While the asset is worth $100,000, your investment in the home is only $20,000. The ability to borrow money “leveraged” the 4% gain on your investment into a $20% gain by a factor of five (5x). A smaller 10% down payment on a $100,000 home would have created greater leverage of 10x. In that case, a 4% gain would have been leveraged into a 40% return on investment (ROI).

But leverage can also work against you. A 4% decline in the home value becomes a 20% or 40% loss, depending on the degree of leverage, 5x or 10x. It’s the leverage, not the real estate that creates the millionaires and the bankruptcies.

Because leverage can work both ways, it’s important to not have too much or too little. Calculating the right amount of leverage and then hedging the downside are two factors in being a “savvy” real estate investor.

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What Is The Fallacy Of Traditional “Asset Allocation Models”?

Below are three reasons traditional asset allocation models do not work well for individuals:

  1. The models do not differentiate between risk tolerance, risk capacity, and risk required.
    • Risk Tolerance (Psychological) – How much risk you prefer to take
    • Risk Capacity (Financial) – How much risk you can afford to take
    • Risk Required (Financial) – How much risk you need to take
  2. The models ignore human biases and irrational decision making processes recently identified by behavioral economists.
  3. The models ignore the economic concepts of consumption smoothing and diminishing marginal utility. In plain English, most models ignore the human capacity to adjust to circumstances.
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So Many Stocks – So Many Options. What Are My Investing Options?

There are about 8,500 publicly traded companies in the United States. Over 2,300 of them cannot be purchased by either the individual or institutional investor for various reasons.

Of the remaining 6,200, the largest 3,000 represent 98% of the total value of all publicly traded companies. In other words, the remaining 3,200 are so small that they represent only 2% of the total market value of US publicly traded companies. These smallest 3,200 are called micro caps. For all practical purposes they are not available to the investing public either. The companies are so small that a mutual fund would have to purchase the entire company to have even minimal impact on the portfolio return. This is unfortunate because the long term average return of the micro cap asset class/category has been about 15%/year which is about 5% more than the large cap average of 10%/year.

Since there are only about 3,000 companies available to the investing public, and 500 of them make up 85% of the market value, most mutual funds are trading the same large cap stocks. The manager of one of your mutual funds is selling the “overpriced” stock to a manager who is buying it for his fund because he believes it is “underpriced”. For every seller, there is a buyer and vice versa.

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