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The Short Stories We Tell Ourselves About Everyday Spending

The Short Stories We Tell Ourselves About Everyday Spending

I love a good story. In fact, I used to tell myself at least one new story every time I opened my credit card statement. “Oh,” I’d say to myself, “I was so busy last month, it makes perfect sense that I ate out a dozen times. I’ll just eat out less next month.”

Other months, I’d invent a fantastic story about why I thought it was a good idea to spend so much on new bike gear. “Man, I really needed a new jersey,” I’d say. “The other 10 were in the laundry, and I had a ride the next morning.”

Whatever story I told, they all had one thing in common: They were fiction.

All by themselves, numbers tell a simple, straightforward story. We spent X on Y. Our credit card statements are a work of nonfiction. But we have a habit of spinning them into wonderfully complex short stories.

We can’t help ourselves. For some reason, we feel the urge to embellish. We didn’t just spend $28.32 on lunch one day. We were helping out a friend who was having a bad week. That’s a great story, but it doesn’t change the numbers. We still spent $28.32 on a single lunch.

The big purchases often come with the biggest stories. Imagine the story we tell ourselves (and our spouses) about the $4,274 charge for a motorcycle. Of course, we really needed it. Besides, a motorcycle is far cheaper than the sports car our neighbor bought for his mid-life crisis.

So why all the storytelling? Our narratives provide a comforting counterweight to a hard truth.

The numbers are the numbers. What we spent and when we spent it are historical facts. However, depending on the wisdom of those buying decisions, the numbers can lead to feelings of shame and guilt. To make ourselves feel better, we come up with a story that blurs the numbers. These stories might be considered harmless, except for one, not-so-small problem: They’re not true. And with every story we tell, we slip into a never-ending cycle that increases the gap between our actions and our values.

First, we feel bad when we see certain numbers. (We didn’t mean to spend that much on our last shopping trip.) So we add a layer of fiction to make ourselves feel better. (There was an amazing sale, so we really saved money by buying when we did.) Then, we forget the pain, but only until the next statement because we didn’t make any changes to help avoid more, uncomfortable numbers.

If we stop telling stories, we can avoid this cycle completely. Start by sticking with the simple, nonfiction truths that credit card statements tell so well. Using those facts, and only those facts, we can close the gap and create alignment between our values and actions.

Shame, guilt, and the stories we tell won’t help us make better financial decisions. But the numbers will. Keep that in mind this month when you look at your next statement. What happens if you leave the short stories sitting on the shelf?

This commentary originally appeared June 29 on NYTimes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2018, Lifeguard Wealth
As always, if you have any questions please contact Lifeguard Wealth.
An Integrated Investment Plan Is Key

An Integrated Investment Plan Is Key

By Larry Swedroe

Earlier this week, we looked at the importance of incorporating different types of risk—specifically, human capital risk—into an overall financial plan. Today I will focus on mortality and longevity risk, and using “tax alpha” strategies to improve the odds of achieving your financial goals.

Mortality Risk

For those families whose human capital makes up a substantial portion of their total assets, protecting that capital via the purchase of life insurance should be part of the overall financial plan. Life insurance is the perfect hedge for mortality risk because its return is 100% negatively correlated with the human capital asset.

The younger the investor (the higher the human capital), the greater the need for life insurance. The amount of insurance required can be determined through what’s called a “needs analysis.” It can also be related to bequeathal motivations.

It’s important to note that life insurance can be used for purposes other than to hedge mortality risk. For example, it may be the most effective way to pay estate taxes. It can also be useful in terms of business continuity risks. Thus, while the individual’s need for insurance to hedge the risks of human capital falls as he or she ages, the need for life insurance might actually increase.

Longevity Risk

Longevity risk is the risk that you will outlive the ability of your portfolio to support your desired lifestyle. This risk has increased for much of the population with the decline of defined benefit plans (which, like social security, pay out for a lifetime) in favor of defined contribution plans. Also, advances in medical science continue to expand life expectancy. Longevity risk can be addressed by the purchase of lifetime payout annuities.

While the academic literature demonstrates that many investors would benefit greatly from the purchase of immediate annuities or deferred income annuities (because of “mortality credits” built into the product—in effect, people who die earlier than expected subsidize those who live longer than expected), very few are purchased.

The main reason seems to be that people are risk averse, in the sense that they don’t want to risk giving up their assets and then dying soon. The fear is that the assets would no longer be available for their heirs. But this is only true if they live a shorter-than-average life span. By definition, half will live longer. And for them, buying a payout annuity preserves any remaining assets for the estate.

The academic literature suggests that deferred income annuities are superior to immediate annuities for the purpose of protecting against longevity risk. Deferred income annuities can be purchased in an investor’s mid-60’s, with income beginning at age 85. Investors should begin to consider purchasing immediate annuities during their mid-70’s and buy them before they reach age 85.

Since the payouts from annuities are dependent on the level of interest rates (among other things), a recommended strategy is to diversify the interest rate risk by purchasing various annuity contracts over time instead of all at once. This strategy also preserves liquidity for some period. Monte Carlo simulations help analyze the benefits of annuitization. It’s also important to understand that delaying social security benefits as long as possible provides longevity insurance.

Another risk is also related to longevity. As we age, the risk of needing some form of long-term health care increases. It’s estimated that at least 60% of people over age 65 will require some long-term care services at some point in their lives. And contrary to what many people believe, Medicare and private health insurance programs do not pay for the majority of long-term care services most people need—help with activities of daily living, such as dressing or using the bathroom.

Thus, when investors develop an overall financial plan, they should consider the purchase of long-term care insurance. Again, the use of Monte Carlo simulations can help analyze how the purchase of long-term health insurance impacts the odds of achieving one’s goals.

These examples demonstrate why having a well-developed investment plan isn’t sufficient for financial planning purposes. Other important risks also exist. We need to consider another broad category called wealth protection.

Wealth Protection Insurance

Financial plans can fail in several ways because we don’t have sufficient insurance. A well-developed plan covers not only longevity and mortality risks, but disability.

Sufficient coverage should also be in place for all types of property and casualty risks, as well as the all-too-often overlooked personal liability risks covered by umbrella policies that protect against claims from lawsuits. Because needs change over time, incorporating a regular, thorough review of your overall insurance needs is an important part of the financial planning process.

In addition to integrating into an overall financial plan the management of the risks we have discussed, integration of strategies that add “tax alpha” can significantly improve the odds of achieving your financial goals.

Tax Alpha

Tax Alpha refers to the additional performance benefit gained from your investments through tax savings. Following are just two ways tax alpha can improve results:

1. You can take advantage of a lower tax bracket between retirement and the time that required minimum distributions (RMD) start to reduce the size of IRAs. Taking income at a low bracket early can lead to avoiding paying tax at a higher bracket later.

2. You can achieve proper asset location, holding lower returning assets (such as bonds) in a traditional IRA while holding higher returning assets (such as stocks) in a Roth IRA to keep future RMDs as low as possible.

Summary

Having a well-thought-out investment plan is a critical part of the financial planning process. However, it’s only the necessary condition for likely success. The sufficient condition is to integrate the investment plan into an overall financial plan that also addresses the risk management issues discussed above. Even then, other issues may need to be considered.

For example, for those with charitable intent, there are more, and less, efficient ways to make donations. The same is true for the transfer of wealth, whether through lifetime gifts, leaving a legacy or both. A well-thought-out financial plan helps to ensure that transfers to loved ones or to charity are made in the most tax-efficient manner, in a way that maintains the donors’ financial independence during their lifetime and meets their nonmonetary objectives.

If your planning doesn’t address each of these issues, I hope this serves as a wakeup call. It’s not too late to act—until it is.

This commentary originally appeared April 14 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2018, Lifeguard Wealth
As always, if you have any questions please contact Lifeguard Wealth.
Cybersecurity Insights: Protect Your Child’s Identity

Cybersecurity Insights: Protect Your Child’s Identity

By Jared Hoffman

Protect the young person you love.

Many under the age of 16 don’t have much money, a line of credit or even a job. Cybercriminals don’t care. They have made this group of youth their No. 1 target for identity theft. In this video, cybersecurity specialist for the BAM ALLIANCE Jared Hoffman explains why children are targeted, offers some warning signs that a child’s identity has been compromised, and shares preventative steps to keep this from happening to a young person you love.

To view original article click here.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2018, Lifeguard Wealth
As always, if you have any questions please contact Lifeguard Wealth.
Why 17 Dead in a Duck Boat Accident Should Be an Estate Planning Gut Check for Us All

Why 17 Dead in a Duck Boat Accident Should Be an Estate Planning Gut Check for Us All

By Joe Delaney

I just returned from a week’s vacation that culminated with my participating in the Trans Tahoe Relay swim across Lake Tahoe. This is my 16th year making the 12-mile swim.

As I swam, I was awestruck by how blue the water was. With a cloudless sky above, the sun was shining rays of light all around me. It was a breathtaking sight.

I also found myself reflecting on how tragedy can strike at any time, as it did recently in Branson, Missouri. 17 people died when an amphibious duck boat sank in a sudden, severe thunderstorm on July 18th.

They were enjoying their vacation, just as I was. How prepared were they for what would happen to their families in the event of their death? How prepared am I?

What about you? Do you have a plan for your estate before tragedy strikes?

A GOOD PLAN IS DRAFTED, EXECUTED, FUNDED AND TESTED

DRAFTED …

Frequently, I have clients come to me with an estate plan drafted in beautiful binders (this also applies to business succession planning, a topic for another day). I make sure they know that’s a great start, because drafting a plan is the first step.

EXECUTED …

After I congratulate them on having a written plan, I sometimes have to criticize them about the dust that has settled on the binder. Ideas are not enough. You must execute the necessary estate planning documents.

  • Create a will. Each state has intestacy laws that determine how your estate will be distributed after your death if you don’t make those decisions first. Don’t leave it up to the state.
  • Create a living will. If you are incapacitated but still alive, to what extent do you want to be kept alive by artificial means?
  • Execute a power of attorney. If you cannot make your own healthcare decisions beyond what you outlined in the living will, who do you trust to make those decisions?
  • Establish a living trust. You will have control of your estate during your lifetime, but who will be the successor trustee upon your incapacity or death? This document provides the framework, but you must also fund the trust. More on that below.

FUNDED …

Many people fail to fund their trusts. You must place your assets (home(s), investments, etc.) in the trust. You can have a wonderful estate plan, but if it is not funded properly, you may end up in probate.

In California, probate is an expensive and public proposition, as well as a hassle for your beneficiaries. You have the power to save them from unnecessary headache in the midst of their grief. Be sure your trust is not only established, but empowered with sufficient funds to accomplish its purpose.

TESTED.

Finally, it’s best to give the plan a good stress test periodically. Go through the motions of your death. Does your executor/trustee understand what will happen, and what is expected of him or her? Will your assets go to the appropriate beneficiaries, and in the right proportions?

ARE YOU PREPARED?

I didn’t want to think about my death as I was basking in nature, on vacation, a time when I was supposed to be escaping the stresses of life. But neither did the 17 who died while on vacation in Branson.

Like it or not, we must think about these things. Are you going to do it periodically as a part of a lifelong practice of estate planning readiness?

Or are you going to wait for the next tragedy?

I wouldn’t advise waiting, because the next tragedy could be yours. Make an appointment with your attorney and your trusted financial advisor today to determine how prepared you are.

As always, if you have questions, Lifeguard Wealth is here to help.

By clicking on any of the links mentioned above, you acknowledge that they are solely for your convenience, not required to click. They do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2018, Lifeguard Wealth
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