February 2011 - Posts - Kahler Financial
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Kahler Financial

February 2011 - Posts

  • What's Your Retirement Mindset?

     Do you need motivation to help you save for retirement? Here's a suggestion: try living for a month on nothing but your projected Social Security check.

    The reason this might work lies within the human brain. There's a big difference between what we know and what we do. Most of us intellectually "understand" that someday we'll be unable to work and will need to survive on an income based on what we "did" rather than what we "do."  Most of us "understand" that Social Security and welfare programs provide for only a Spartan existence.

    Yet, 68% of Americans say they haven't saved enough for retirement and struggle to change this self-destructive behavior. And that's just the ones willing to admit the truth.

    Researchers have long searched for a psychological explanation as to why humans often behave so irrationally. What we know is that saving for retirement is similar to exercising, dieting, or quitting smoking. All these activities offer future benefits rather than immediate gratification. Such a value proposition doesn’t sell well to the human brain, which is wired for "now."

    There is some evidence that humans act more rationally when decisions are in the future. One study gave participants the option to wait 100 days to receive $100 or wait 101 days and receive $101. Most participants would wait the one extra day for the extra buck, which actually represented an annualized return of 350%. But when given the option to take $100 now or wait until tomorrow and receive $101, the majority took the money now, clearly an irrational financial decision.

    The study of behavioral finance calls this "hyperbolic discounting," where people place a lower value on future benefits and overvalue the present. This tendency is exceptionally problematic when it comes to saving for future goals like retirement. We tend to over-consume and under-save until retirement becomes a present reality. By then, of course, it’s too late.

    In the past, finance professionals have criticized those who behave irrationally as being "lazy," "ignorant," or "undisciplined." While certainly a person who is not saving for retirement exhibits a lack of self-control, the reason may be in the construction and evolution of the human brain rather than a willful defiance of rationality.

    Our brain consists of an older brain, the limbic system, which is overlaid by a newer brain, the cerebral cortex. The limbic system is the source of emotional decision-making, while the newer brain processes reasoning and conceptual thinking.

    The emotional processing of the limbic system involves measuring and assessing risk. In a study called Pension Design and Structure, Mitchel and Utkus found two components of risk: "Dread risk," which is the potential for catastrophe, and "Uncertainty risk," which is a generalized fear of the unknown. When most people consider retirement, neither of these fears is likely to be strongly felt.

    Researchers tell us 80% of all decisions are made emotionally, in the limbic brain. In order for us to take action and save for retirement, both brains need to become involved in the decision process. We must crank up the limbic system's sense of risk by bringing the consequences of retiring without enough money from the future into the present.

    One way to do this is to make out a budget using only Social Security and any pension income. I find most people resist this exercise in the same manner they resist saving. Some researchers suggest actually living for one month on Social Security income. Experiencing life on an inadequate income could be enough to activate the limbic system’s fear response and convince our brains that saving for retirement is an action well worth taking.

    Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • Retirement

    A recent online article in Financial Advisor magazine pointed out some disturbing factors that don't quite support the "golden years" view of life after employment. The piece by Robert Laura, author of Naked Retirement, was titled "The Dark Side of Retirement."

    According to Laura, retirement for too many people is marred by what he calls a "hidden epidemic" of depression and addiction. He suggests financial planners can help clients avoid these pitfalls by paying attention to non-financial aspects of retirement.

    For me, of course, Laura was preaching to the choir. I've long since learned from my clients that making a successful transition from employment to retirement is about much more than money.

    One way to make yourself less vulnerable to retirement's potential dark side is to think about retiring early. This doesn't necessarily mean planning to quit your job at age 55. Nor am I suggesting that you start telling all your friends how you can't wait until you qualify for Medicare and senior citizen's discounts.

    Instead, start well before retirement to think about what you want your life after work to be like. As part of that process, take a hard look at what you actually get from your work.

    Most of us receive more than just a paycheck. A few of the intangible benefits our jobs may provide are social interaction and friendships, a sense of competence and accomplishment, mental stimulation, the satisfaction of doing something worthwhile, recognition, and respect.

    If work is the only place you get most of those things, however, retirement can leave you floundering. Instead of leaving a job or a career—which certainly can be challenging enough—it can feel like being torn away from the most significant part of your life.

    One way to prepare for retirement, then, is to focus on creating a life to retire “to,” long before you say that final goodbye to your boss.

    Make sure you have a social network outside of work. Stay actively involved with friends and family. Join an organization, or become more involved in one you already belong to. The key is to build a circle of friendships beyond your job or your career field.

    Think about some retirement activities that will give you a sense of competence and satisfaction. This might include hobbies, volunteering, taking classes or teaching them, mentoring, or consulting. You may not have time to participate in any of these activities now, but you can do some research and consider what you'd like to do.

    Consider how you will spend your days and weeks when your time is your own instead of your employer's. I use several worksheets and exercises to help clients clarify what an ideal week in retirement would be. If you don't make a plan for using your time, it's surprising how much of it will be used up by other people's priorities.

    If possible, explore options for working part-time for a while, rather than going suddenly from full-time work to waking up one fateful Monday morning with no place to go. If you can, take some extended vacation time and try out a few of the things you might want to do or places you might want to live after you retire. Do your best to make retirement a process of evolution rather than revolution.

    Perhaps the most important way to avoid retirement's dark side is to make sure your work is only one part of your life. If you have a satisfying life outside of your work now, chances are you will have a satisfying life after retirement. You'll retire "to" something rather than "from" something.

    Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • The Right Advisor for the Right Advise

     Three years ago I wrote a column critical of some investing advice offered by Dave Ramsey, the radio show host who specializes in helping people follow budgets and pay off debt. I have a great deal of respect for Ramsey and recommend his books, but on this particular issue I believed he was wrong, and I said so.

    You'd have thought I suggested Mother Teresa wore combat boots. I received comments attacking my intelligence, my judgment, my investment knowledge, and my ethics. (To be fair, I also received some comments agreeing with me.)

    The video of that column has over 44,000 views  on YouTube and is still attracting new comments. One person pointed out indignantly that Dave had recommended LONG TERM GROWTH (shouted in all caps for emphasis) funds, while I was falsely claiming bond funds were superior. Excuse me? The column was actually about real estate investment trusts (REITS) and never mentioned bond funds.

    And, just for the record, REITS long term returns are still beating those of “good growth stock mutual funds.” A recent study done by Francis and Ibbotson comparing the 30-year returns on stocks and REITs (from 1978 to 2008) found that stocks had an average annual return of 10.84% while REITs averaged 11.94%.

    Another poster wrote, "Are you just mad that he's making it big and no one even knows who you are? . . . So, sorry homie. Looks like he beat you again." Hmm. I hadn't realized Ramsey and I were in competition.

    The intensity and personal attacks in some of the responses to this piece puzzled me at first. Then I started thinking about some of the money scripts that might be behind them:
    "Someone who is famous certainly knows how to manage money."
    "A person who is famous must be wise and rich."
    "I will only take financial advice from people I perceive as wealthy and successful."
    "Someone whose advice has helped me can't be wrong about anything."
    "Someone who is well-known in one financial area must know everything about money."

    Apparently, many of those who posted strong negative comments were unable or unwilling to accept a simple financial fact because of their money scripts around their allegiance to a well-known personality. In other words, "My guru is my guru, and don't confuse me with the facts."

    It's certainly important to find a financial advisor you respect and can trust to act in your best interests, and then to follow that person's advice. You're on shaky ground, however, if you follow anyone's advice completely and blindly without using your own common sense or taking any responsibility for your own affairs.

    No advisor is an "expert" in every single financial area. As a fee-only financial planner, for example, one aspect of my work is tax planning. Yet I am not an accountant or a tax expert. If clients need detailed tax advice, I refer them to a CPA who has the necessary expertise. My job is to know enough to know when to make that referral.

    As a second example, you almost certainly wouldn't expect your family doctor to perform heart surgery. That wouldn't imply a lack of trust; it would simply acknowledge that her expertise was in family practice rather than cardiology.

    It's a great idea to consult and learn from financial experts. It's also a great idea not to assume any of those experts have the "one right answer" to every financial question. A "guru," after all, is a teacher, not an idol. Following any expert blindly can lead you toward financial disaster rather than financial enlightenment.  

     

    Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • Changes in How Health Care Will Be Delivered

     "The health care bill was primarily about insurance reform and coverage, not health care delivery reform." This statement was made by Jamie Orlikoff, of Orlikoff and Associates, a consulting firm that specializes in healthcare issues. He addressed a gathering of community leaders in Rapid City, South Dakota, in December.

    Regardless of what the Supreme Court or Congress may do to the current health care law, we can expect to see many changes in how health care will be delivered. Many things happening within Medicare and apart from the health care bill have bipartisan support and agreement, which aren't getting a lot of press coverage.

    One big area of agreement is that, in the future, medical providers will be penalized for actions they are rewarded for now. Orlikoff noted the current health care system rewards the wrong areas. The current volume-based system that pays providers more for doing more doesn’t make sense.

    He gave several examples where hospitals can actually profit from poor treatment, such as food poisoning, staph infections, or readmissions. As callous as it may seem, in each of these cases a patient needs more medical attention, which means there is a monetary bonus. "We must move away from fee for service," Orlikoff insisted.

    In the future, health care providers will be punished monetarily for such events. Instead of receiving reimbursement for each service, the hospital will receive one fixed "bundled payment" for a procedure that will include all pre-op and post-op services. Hospitals won’t be reimbursed by Medicare for readmissions at all, and actually will be penalized if their readmissions exceed a certain percentage. The intention is to give hospitals the incentive to "get it right" the first time.

    One downside I see to this is in cases where a readmission is unavoidable. Hospitals will have incentive to cut corners, as they won’t be receiving reimbursement.

    Orlikoff said that "It’s the patient's fault" will no longer be an accepted excuse. "Much of what goes on in health care is blamed on the patient, yet 50% of prescriptions are not filled because the patient doesn’t understand why the medication is necessary and 48% of patients could not tell you what their diagnosis was 15 seconds after leaving the physician’s office."

    He concluded the new reimbursement methods will require health care professionals to find new ways of delivering information and following up.

    Another area of agreement concerns transparency in cost and quality. Orlikoff emphasized how difficult it is to determine the cost of a procedure. "How much will this cost?" "I don’t know, but you will know at the end of the operation." He added the same is true in trying to find out the quality of care or success of a procedure.

    Health care providers' cost and quality information will soon be released to everyone. It will list the average mortality rates and costs for procedures for hospitals. Starting in 2012, the Department of Health and Human Services will track and release hospitals' harm rates, and hospitals in the bottom 25% will be penalized. In 2015 this tracking will be expanded to physicians, who will receive bonuses for high quality care and be penalized for low quality care.

    There is also broad agreement to move toward evidence based care, meaning if there is no scientific evidence a medication or procedure works, Medicare will not pay. Orlikoff asserted, "Fifty percent of what we do in health care is not based on science."

    Clearly, the health care reform bill didn't address all of the concerns over health care reform. Whether the law is amended, repealed, or kept intact, the debate over health care is only beginning.

    Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!
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