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  • Equal Inheritances Not Always Fair

    by Rick Kahler

    In estate planning, "equal" isn't necessarily the same as "fair." I rarely see an estate plan that does not treat children equally. When I do see inequality, it's usually because a parent is estranged from one child and leaves him or her nothing.

    Many experts on the psychology of estate planning recommend that parents divide their estates equally among children. The main reason is to help enhance sibling relationships after the parents' deaths. The goal is to eliminate the potential for hurt feelings and perceived injustice if parents favor one sibling over another financially.

    Dividing an estate into equal shares for each child might seem to be the obvious way to treat children fairly. However, that usually only works if you've treated them equally during your lifetime. If you have given more to one child during life, it's usually smart to level the playing field at death.

    I was reminded of this principle late last year in a post by a blogger who goes by the name Financial Samurai, who tells this story:

    He perceived that his parents couldn't afford to send him to a private college. To help them financially, he chose to go to a public university. His younger sister chose a private university costing eight times as much. After graduating, he worked hard to save enough to repay his parents. When he offered them the money, ten years after graduation, he was shocked when they declined it. Only then did he learn they had saved equal amounts for his and his sister's educations. When he chose the less expensive school, they transferred what they saved on his tuition to help pay for his sister's more expensive private education.

    While he tries his best in the balance of the article to take the high road, assuring readers this injustice really doesn't bother him, it's clear that it does, a lot.

    The amazing thing about this story is that this family never discussed the financial aspects of college. The parents never told their son they were saving for his college education or communicated their intent to pay for it. He never asked, assuming that paying for college was his responsibility. The unspoken "no-talk" rule around money that so many families follow was rigidly in place.

    College funding is far from the only way parents treat children differently. Another common one is bailing out one child who has financial struggles, either self-inflicted or caused by outside circumstances. Parents may also loan or give one child money to start a business. Or they may feel they owe more to a child who has been the one to take care of them in old age.

    Many of these inequalities can be compensated for in estate planning. One strategy is to subtract any excess paid to one child from his or her portion of the inheritance. It's important here to provide for inflation, such as adjusting the amount paid to the child upward by the cumulative increase in the Consumer Price Index (CPI) from the date of the payment to the date of death.

    If parents feel it's fair to leave more to a child who has cared for them, it's best to establish that amount carefully, based both on tangible factors like the market value of the care and on intangibles like the relationships among the siblings.

    No matter what adjustments you make in your estate plan to equalize what children may have received during your lifetime, it's crucial to talk about those adjustments. Clear communication about what is "fair" goes a long way to maintain strong sibling relationships long beyond the parents' lives.

    Rick Kahler, Certified Financial Planner®, 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 High Cost of Marriage

    by Rick Kahler

    "Two can live as cheaply as one." This old saying is mostly true. However, when it comes to death, divorce, and taxes, two are probably better off financially if they don't marry. Intentionally or not, many federal and state laws reward couples who choose to live together without marriage.

    Laws relating to Worker's Compensation insurance are one example of this. Someone whose spouse has died in a work-related accident may be eligible to receive a monthly benefit, paid for the rest of his or her life. However, most state laws provide that the benefits end if the recipient remarries.

    This puts a real cost to remarrying. Consider as an example a woman who at age 50 loses her husband to a work-related accident and receives a settlement of $2,000 a month for life. Assuming she will live another 35 years and could invest the proceeds in a 3% bond, the present value of that income stream is $520,000. That means a person would need $520,000, invested at 3%, to give a monthly income of $2,000 for 35 years.

    Therefore, if this woman fell in love and wanted to remarry two years into receiving the payments, the remaining 33 years of monthly payments she would forfeit has a value of $502,000. This puts a rather quantifiable cost on one's social, emotional, and religious values.

    The tax code also encourages couples to remain unmarried. Take a couple who both earn high incomes. Suppose each has taxable income of around $400,000, which is the breakpoint where the 39.6% tax bracket begins. As two singles, as long as their taxable income is $400,000 or less, they both remain in the 35% tax bracket. However, if they marry, their joint income goes to $800,000 while the 35% tax bracket only expands to $450,000 for couples. That means they now pay an additional 4.6% in federal income taxes on the excess of $350,000, or $12,600. Some may be quick to dismiss that amount as trivial, given their income level, but the point is still that marriage for them brings a tangible cost in higher taxes.

    Those with previous marriages may find another disincentive to marriage in the challenge of passing on assets to children upon your death or if the new marriage should end in divorce. If leaving assets to children is a priority, you will probably need to negotiate a prenuptial agreement with your finance. This is especially important for couples with unequal assets. A prenup is a real romance killer. It highlights the reality that every marriage is a business deal, with the added emotional weight of negotiating the divorce settlement before there is a wedding. Some couples find it easier to live together without marriage and keep their assets largely separate.

    For couples that decide not to marry, the potential tax planning is ripe with opportunity. Such couples can do anything that the tax code or state statutes prohibit married or related parties from doing. This provides some great tax savings and asset protection opportunities. For example, spouses cannot be the trustees of each other's irrevocable or asset protection trusts, but unmarried partners absolutely can.

    Choosing not to marry is becoming especially popular with older couples. This is because many older people with previous marriages have accumulated two things: assets and children. They find marriage less compelling when they and their new partner won't have children together.

    Younger couples who do plan to have children still recognize that marriage is important. For many reasons, marriage isn't going out of style any time soon. Few of those reasons, however, are financial ones.

    Rick Kahler, Certified Financial Planner®, 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!

  • Either IRA or 401(k) a Good Choice for Retirement Saving

    by Rick Kahler

    Which is the better choice for retirement saving, an IRA or a 401(k)? And what's the difference between the two?

    Either an IRA (Individual Retirement Account/Arrangement) or a 401(k) plan is a great place to start investing for retirement. They are more alike than different, and which one to choose depends on your particular circumstances. Here are some of the basics you need to know.

    1. Who can use these plans?

    You can open an IRA if you or your spouse has income earned from working. This includes wages, commissions, and self-employment income but not income from sources like rental property or pensions.

    Since 401(k)s are only offered through employers, these plans are not available to everyone. IRAs can only be opened by individuals and are never available through employers.

    2. How much can you contribute?

    For 2014, the maximum annual contribution for an IRA is $5,500, or $6,500 if you're 50 or older. The maximum annual contribution for a 401(k) is $17,500, or $23,000 if you're 50 or older. Spouses eligible to participate in their own plans can each contribute the maximum.

    3. Is there employer matching?

    With an IRA, no. But many employers match part of employees' contributions to 401(k) accounts. This is why a 401(k), if available, is often the best place to start your retirement saving. Part of the money you put into the account is doubled even before it earns any kinds of investment return.

    4. What about taxes?

    With a traditional IRA or 401(k), all or part of the contributions you make are usually tax-deductible but you pay taxes on the money you withdraw at retirement. The money you contribute to a 401(k) is not taxed; it is taken out of your paycheck before tax withholding is figured. Any matching 401k contribution from your employer is not taxed, either. You do pay taxes on the money you withdraw.

    If you choose a Roth IRA or 401(k), your contributions are not tax-deductible. However, the money you withdraw after retirement is not taxed.

    With both traditional IRAs and 401(k)s, if you withdraw funds from the account before age 59 1/2, you generally have to pay taxes on that money, plus a penalty of 10% of the amount withdrawn.

    5. What if you leave a job and have money in a 401(k)?

    Any money you have contributed, plus its earnings, is yours. Usually you have to stay with a company for several years before the employer match is fully vested, meaning it's yours to keep even if you change jobs. You can roll over the amount in your account to an IRA or to a new employer's 401(k) without paying penalties. This rollover amount doesn't count toward your annual contribution limit.

    6. Is a 401(k) or an IRA a better investment?

    This is something that confuses a lot of people. Neither IRAs nor 401(k)s are investments in themselves. Instead, they are accounts, serving as containers to put investments in. A 401(k) plan will usually have several different investment options to choose from. IRAs typically have many more investment options. My advice is to pick mutual funds that include the greatest variety of asset classes like US stocks, international stocks, US bonds, international bonds, real estate, and natural resources. In either an IRA or a 401(k), it's wise to diversify your retirement funds among as many asset classes as you can.

    In sum, either a 401(k) or an IRA is a good retirement savings choice. Some taxpayers can contribute to both. What matters most, though, is choosing to make regular contributions to a retirement account in order to provide for your future.

    Rick Kahler, Certified Financial Planner®, 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!

  • Baby Boomer Retirement Crisis Not a Sudden Event

    by Rick Kahler

    "The world braces for retirement crisis." This headline caught my attention because of its tone of near-panic. It implied that the pending retirement crises was like a hurricane or other natural disaster, striking with little warning and beyond our control. Not so. Financial columnists like me have warned for the past two decades that Baby Boomers are woefully unprepared for retirement.

    The article itself, an AP piece published at the end of 2013, was actually quite a good summary of the problems looming as Boomers retire worldwide. It quotes a survey done by the Center for Strategic and International Studies as concluding, "Most countries are not ready to meet what is sure to be one of the defining challenges of the 21st century."

    Instead of limiting their lifestyles and saving for retirement like their parents did, Boomers around the world outsourced their retirement to government. Not only did the Boomers not save, they fostered an entire culture of spending more than they earned, a trend evident not only in their personal finances, but also in all levels of government.

    The financial press often blames the Great Recession of 2008 for the coming retirement crisis. Few reporters ever suggest that the personal and public overindulgences of the Boomers in the decade prior to 2008 were largely the cause of the crash. Neither the Boomers nor most of their governments have the cash to support them in retirement. Retirees need a nest egg of 25 times their desired annual income. Most Boomers don't have more than three or four times that income saved in retirement plans.

    According to a 2010 Gallup poll, Americans are concerned about the Social Security system but unwilling to make sacrifices in order to fix it. A majority of respondents favored raising taxes on high earners and limiting benefits to the wealthy. Otherwise, they didn't want to limit benefits, raise retirement ages, or increase taxes for all workers. Given a choice between raising taxes or reducing benefits, however, more respondents (49% to 40%) would opt for higher taxes.

    The problem with this is two-fold. First, in many developed countries facing this problem, including the US, tax rates already exceed 50% on upper income earners, leaving little room for extra revenues. Secondly, the AP articles notes that birth rates in most developed countries are declining "just as the bulge of people born in developed countries after World War II retires." This means the younger taxpayers just will not be able to foot the bill.

    One possible solution has three components:

    1. Lower taxes to spur economic activity, thus creating more jobs and ultimately increasing revenues to government.

    2. Increase the Social Security retirement age. When Social Security was created, average Americans lived only a few years beyond age 65. Now we live into our 80s. Increasing the retirement age to 75 or 80 would be keeping with the original intent of the program.

    3. Create incentives for young Americans to save. Australia is already doing this. Allow taxpayers to save up to $75,000 a year, tax-free, and allow distributions to be tax-free.

    For now, if you are a Boomer who has woefully underfunded your retirement plan, putting more money away now won't make much difference unless you can save 30% to 50% of your income. Declining birth rates, however, mean fewer available skilled workers, so many Boomers will be able to work longer.

    The best retirement plan, then, might be to invest in improving your workplace skills, shedding weight, starting an exercise program, and eating healthier. The biggest assets Boomers may have for retirement are the skills and health to stay in the workforce.

    Rick Kahler, Certified Financial Planner®, 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!

  • Small Claims Get Results with Big Companies

    by Rick Kahler

    Every business, no matter how good, will now and then find itself in a position of failing to deliver on a promise. Conscientious companies will quickly admit to the failure and do whatever is reasonable to make things right with the customer. Sometimes such actions even result in strengthening the customer's faith in and loyalty to the company.

    Not all companies, or their employees, are this sensitive to customer service. If the company is small with plenty of competition, customers can easily express dissatisfaction by voting with their feet and their mouths. That is, they can take their business elsewhere and tell others (typically around 200 people) about their bad experience. If a business makes a habit of offending customers, it will eventually fail.

    Unfortunately, it isn't this simple when a large company has a near monopoly on the service you need. The most obvious examples include governmental agencies, public transportation, or public utility companies. Less obvious examples are phone companies, airlines, cable TV companies, or Internet service providers. Even with two or three from which to choose, I frequently find my specific needs limit me to dealing with only one.

    In this instance, corporations can easily develop a culture of "you need us more than we need you." I find few experiences more frustrating than dealing with an unconcerned, uncaring, impotent employee of such a company. They often deny any wrongdoing, refuse to make things right, and imply you are the real problem.

    What can you do if you've appealed to every level of customer service with no resolution—and the bottom line is that you do need their service more than they need you? I've found myself in this situation a handful of times. In every case I received satisfaction by filing a small claims action against the company.

    A small claim is a lawsuit for just what the name implies, small-dollar disagreements. In Pennington County, SD, the maximum claim amount is $12,000. Filing a small claim is easy and inexpensive. You don't need a lawyer. The employees at the office of the Clerk of Courts will walk you through filling out the simple form, calculating the fee (usually under $100), and contacting the defendant. All you need is a written statement of what happened and some written proof of your loss. When your day in court comes, the judge will guide you through the informal hearing. You just need to tell your story and produce paperwork supporting your claim.

    However, when you file a small claim against a large company, chances are you won't ever get to a hearing. The point in filing such a claim really isn't to have your day in court; it's to get your grievance switched from the ineffective customer service department to the much more responsive legal department. Since they don't want to pay a local attorney to show up at a small claim hearing, it's likely they will negotiate a satisfactory settlement with you.

    If they don't settle with you, be sure to show up at the hearing. I once sued an airline that denied my claim but never made an effort to settle. On the day of the hearing, it was just the judge and me, as a representative for the airline never showed up. The judge ruled in my favor. Within a month, I received a check for the full amount of my claim.

    When all else fails, try a small claim. It's an easy, fast, and often-effective way to make sure you are compensated fairly for a loss. Even more, it's a way to have your grievance heard.

    Rick Kahler, Certified Financial Planner®, 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!

  • What's the Backup Plan if You Don't Die Broke?

    by Rick Kahler

    In a recent column I reported on a survey done by the financial services company HBSC that found only 59% of US parents intend to leave their children an inheritance, the lowest of the 15 nations in the survey. The fact the US is last came as no surprise to me. What did surprise me was that 59% seemed high.

    My average client is someone who has saved over one million dollars. I am guessing that less than 2% of them have any intention or goal of constraining their current lifestyle in order to maximize their kids' inheritance. Consuming their last penny of savings about the time they take that last breath is their spending plan of choice. There is even a name for these folks: "Die Brokers."

    If they did a good job of planning for retirement, however, most Die Brokers will leave something behind. Almost all of these I work with intend to divide what remains equally among their children. The point is that leaving an inheritance just isn’t a priority or a goal that constrains their current spending. As a side note, I rarely see any intention to leave any significant portion of their estate to charity.

    Why did the survey find such a high number of parents who intend on leaving their kids an inheritance, as compared to my observations that almost none intend to? My experience is that most people have a money script of, "Good parents should leave something to their children." It is similar to another money script of, "Good parents should pay for their children’s college education." These are seen as things "good" parents do. My hunch is that when most respondents answered the survey question, they let their money script do the talking, rather than their true intention.

    Still, this does not explain why US parents intend to leave their children less than parents in any other country. One reason could be that more parents in other countries have money scripts that it's necessary to leave their kids an inheritance.

    One of the most common themes among my affluent clients is a desire to see their children "make it on their own." Over 90 percent of these clients are first-generation wealth builders, meaning they didn’t inherit their money but accumulated it from saving, investing, or building a business. They value hard work and frugality and feel leaving a large inheritance to a child is more hurtful than helpful.

    Many of these first-generation millionaires also feel accumulating wealth in the US is very attainable with hard work, discipline, and frugality. This is not the case worldwide. In many countries, it doesn’t matter how hard you work or how frugal you are, confiscatory taxes and oppressive regulations insure that those people not fortunate enough to be born into money will never have a chance to become affluent. The only way to have a comfortable net worth in many countries is to either inherit it or work for the government.

    Sadly, the US is closer to adopting a model that makes accumulating wealth increasingly difficult. I can’t name a politician currently campaigning who advocates lowering income taxes on wealth builders. Yet I can name scores who are running on increasing taxes on "the rich."

    Affluent parents in the US may soon begin to feel that, without an inheritance, their children may never have the means to get ahead. If more US parents begin believing this, we will probably see increasing numbers intending to leave money to their kids. The money script of "Good parents should leave something to their children" might become the truth.

    Rick Kahler, Certified Financial Planner®, 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!

  • Opt In To Retirement Account With Educated Choices

    by Rick Kahler

    How hard is it to do things we know are good for us? Like exercising more. Or saving for retirement.

    This time of year, with broken New Year's resolutions piling up like snowbanks, it's clear that the answer is "very hard." Most of us have good intentions, but we aren't so good at taking consistent action to turn those intentions into reality.

    One of the areas where many people don't do what's best for themselves is participating in company retirement plans. If your employer offers a 401(k) plan, it's ridiculous not to participate in it. For one thing, it's an easy way to put money away for retirement before you see it—and before you pay taxes on it. Even better, the employer's matching contributions give an extra boost to your savings that's almost like found money.

    Yet studies have shown that only 67% of eligible employees participate in these plans if they have to choose to sign up. When employees are automatically enrolled in the plans and have to actively choose to opt out, however, the level of participation increases to 77%.

    For this reason, the US government in recent years is encouraging large employers to offer automatic-enrollment retirement plans.

    Yet a recent article in US News points out a downside to this well-intentioned attempt to save procrastinating non-savers from themselves. Plans with automatic enrollment may have higher participation, but that doesn't necessarily mean greater benefits for employees.

    When more employees participate in a 401(k) plan, the employer has higher costs in the form of increased matching contributions. A study last fall by the Center for Retirement Research at Boston College found that companies with automatic enrollment tend to compensate for those higher costs with smaller matches. The average amount—3.2%, compared with 3.5% for plans that don't have automatic enrollment—may seem insignificant. Yet over time it can make a big difference in the amount of money an employee has available at retirement.

    More importantly, the study also found that the default contribution rate (the amount invested out of each paycheck) in some automatic-enrollment plans resulted in employees saving less than had they chosen that amount themselves. The default contribution rates are likely to be less than the rate required to receive the employer's maximum matching contribution. The default investment options also tend to have underperforming investment choices compared to those chosen independently by participants.

    One rather obvious conclusion of the study is that automatic enrollment means more retirement savings for employees who otherwise would not have signed up for a 401(k). At the same time, because of the lower employer matches, employees who would have chosen to sign up anyway are likely to end up with less retirement savings than they would have in a non-automatic plan.

    Does this mean automatic-enrollment 401(k) plans are not a good option for retirement saving? Not at all. If you passively participate in an automatic plan and leave your contributions at the default contribution rates and investment choices, you'll still be better off than if you don't participate at all.

    Yet the research suggests that settling for the employer defaults, a one-size-fits-most option, is probably not your best choice. You can choose instead to educate yourself about the investment choices in a plan, contribute the maximum amount you can, and take full advantage of the employer match. The more you learn about the available options, the better choices you'll be able to make.

    Ultimately, no employer or plan manager will ever care more about your investments than you do. The most successful retirement savers are still those who take responsibility for their own future.

    Rick Kahler, Certified Financial Planner®, 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!

  • Childhood Whole Life Insurance a Thin Security Blanket

    by Rick Kahler

    When Susan came into the world in 1974, of course her parents wanted the best for her. At that time, one of the loving things many parents did for their children was to purchase life insurance policies on them.

    Parents had two reasons for these policies. The first was to pay for the funeral if a child were to die prematurely. The second was to build a little nest egg that the child might use later in life for college or a down payment on a home.

    When Susan was six months old, her parents bought a $2,500 whole life policy on her. That amount would actually have purchased two funerals in 1974. The premium was $38 a year. If we adjust these numbers for inflation, they are comparable to a current policy with a death benefit of $12,000 and an annual premium of about $180.

    The agent explained they could purchase term insurance on Susan for $12 a year, but this would not accumulate anything to help Susan with a down payment on a home or college tuition. For an additional investment of $26 a year, Susan’s policy would grow and accumulate dividends, giving her the cash she would need for that down payment.

    Susan never did tap her policy for college or her first home. Instead she let it grow and accumulate, doing nothing but toss her annual statements into a file folder. Even so, Susan’s parents dutifully paid the premiums every year.

    This year, Susan became curious about her policy and dug out her most recent annual statement. She learned that if she died today her death benefit would be $2,945.90. This was the original $2,500 face value of the policy, plus dividends of $445.90 that had accumulated over 39 years. If she wanted to cancel the policy, the company would send her a check for the “surrender value” of $1,120.45.

    Susan grabbed a calculator and figured that the total premiums paid were $1,482. At first glance, it would appear the policy may not have been a great investment, since the cash value in the policy was less than the sum of the payments. But to make a fair comparison, she needed to subtract the cost of providing the insurance ($12 a year, or a total of $468) from the total premiums. Only $26 a year, or a total of $1014, had gone toward accumulating the cash value. It was actually the $1,014 that grew to $1,120.45, which represented an annual return of about 0.25%.

    Susan was curious what the $26 a year might have grown to if her parents had purchased only the term insurance and invested the difference in a stock mutual fund. She did some research and found there was a reasonable chance stocks might have returned 8% annually, meaning she would have $6,212 today. That would make a down payment on a small house and might pay for one semester of tuition at a state school. The death benefit of almost $3,000 from the term life policy would pay about half the cost of a proper funeral.

    Susan realized cancelling the policy and adding the money to her investment portfolio would be the best financial decision. She was surprised at how difficult it was to carry out that decision. The policy had "always been there." Cancelling it felt like rejecting a loving gift from her parents, especially since her father had died a few years earlier. The policy was part of her security. Giving it up was an emotional as well as a financial decision. Susan said, "It was like saying goodbye to an old friend."

    Rick Kahler, Certified Financial Planner®, 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!

  • New Rules to Prevent Misuse of CFP® Designation Have Unintended Consequences

    by Rick Kahler

    You've decided it's time to engage a financial planner, but you don't know any financial planners. How do you know whom to trust?

    For years, I have recommended that you start by finding a professional with the CFP® designation. It's become recognized internationally as the standard for financial planning. The CFP® designation is conferred in the United States by the CFP® Board and by 22 other organizations affiliated with them.

    To earn the CFP® designation, one must hold a bachelor's degree, pass six semester courses on a broad spectrum of financial topics, pass a 10-hour exam, and complete three years of experience. To keep it, designees must pay the CFP® Board an annual fee of $325, complete 30 hours of continuing education every two years, and abide by a code of ethics. The cornerstone of the code of ethics is the duty to act as a fiduciary, or in the consumer's best interest.

    Within that code of ethics, CFP®s may be compensated for their work in three ways: commissions, fees (fee-only), and both fees and commissions (fee-based). The duty to act as a fiduciary is difficult to carry out when a majority of the compensation comes from selling the consumer a product. In fact, many other countries, like Australia and the UK, do not allow individuals who give financial advice to also sell products and receive commissions.

    Still, I know many excellent "fee and commission" CFP®s who do put their client's interests first. Typically, only a small portion of their compensation comes from commissions. Some of them sell their clients term life insurance, which has a low commission, instead of sending them to a life insurance salesperson who may be tempted to upsell them more expensive and commission-laden products. Other planners establish a set annual fee and offset any commissions received against the fee. If you're shopping for a fiduciary planner, it's hard to know without doing an extensive interview if a "fee-based" planner's compensation is largely fees or largely commission.

    For these reasons, when I became a CFP® in 1983, I decided to remove any potential conflict of interest and only accept fees for my financial planning services. Accordingly, I hold myself out as a "fee-only" planner. Over the years, "fee-only" has become the easiest way to be reasonably assured the financial planner is a true fiduciary.

    However, a number of CFP®s have found a way to misuse this term, rearranging their compensation so they can brand themselves as "fee-only" without giving up lucrative commissions. Usually, they do this by owning two firms. One is a "fee-only" firm that charges consumers fees for planning advice. The other is a financial services company that earns commissions by selling the client financial products. The CFP® can take a salary or receive dividends from the financial services firm and thereby contend that he or she does not receive commissions. Slick.

    Too slick. To stop this abuse, the CFP® Board recently passed a new requirement. It specifies that if CFP®s, or any party related to them, own any interest in a financial services company, they cannot call themselves fee-only.

    On the surface, this would appear to solve the problem and make it easier for potential clients to find planners who are true fiduciaries. The problem is, like all regulations, there are unintended consequences.

    Those consequences have snared me, along with several other fee-only planners who are careful to carry out their fiduciary duty to clients. In order to maintain my professional integrity, I'm even considering giving up the CFP® designation I have maintained with pride for 30 years. Next week I'll tell you why.

    Rick Kahler, Certified Financial Planner®, 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!

  • A Wiser Way to Invest Social Security Benefits

    by Rick Kahler

    Once you hit age 62, what's an investment class that can give you a high guaranteed return with almost no risk? Bonds? Equities? Commodities?

    Nope. Social Security.

    There's just one catch. You can't actually get your hands on the money until you're 70.

    One of the most common issues for those approaching retirement age is determining the right time to file for Social Security. If you file at age 62, you will receive benefits longer. Yet your monthly benefit for the rest of your life will only be about 75% of the monthly amount you will receive if you file at your full retirement age of 66 to 67. If you wait even longer, the benefit amount is higher still.

    Those who are unable to work and don't have sufficient retirement savings may not have a choice about filing for Social Security early. Those who don't have a compelling need for early Social Security income may still consider early filing as an option, with the idea of investing the money for their later retirement.

    According to a recent article by Karen DeMasters in Financial Advisor magazine, this is not a good choice. She cites research done by William Meyer and William Reichenstein of Social Security Solutions Inc. (www.ssanalyzer.com) in Leawood, Kansas.

    One big drawback to investing your Social Security benefits is the penalty you pay if you are still working. If, between age 62 and your full retirement age, you earn more than $15,120 a year, your benefits are reduced. So you'd start with a smaller benefit amount, have it cut even further, and not be left with a whole lot to invest.

    Even more important, however, is a number that Meyer and Reichenstein emphasize: 8%. This is the amount that your Social Security benefit increases every year between age 62 and 70 that you delay filing. In essence, if you leave your Social Security benefits in the government's hands instead of investing them yourself, you are guaranteed an 8% annual return on that part of your retirement portfolio. This doesn't include cost-of-living increases.

    Taking early benefits and investing them is only a good idea if you are sure you can get more than an 8% return. Any investment likely to produce a return higher than 8% would come with risks that are unacceptably high for a retirement-age portfolio.

    There are only two real risks associated with letting your Social Security benefits accumulate until later than age 62. One is the possibility that Social Security won't be there when you do retire. Given that the delay is only a few years and that Social Security is now the retirement plan of most Americans, this is extremely unlikely.

    The second risk is that you won't live long enough to collect an amount equal to what you would get if you started benefits early. Unless you are facing a terminal illness, however, chances are that waiting until at least full retirement age is still the wisest option.

    If your health is good and you don't need retirement cash immediately, you are far better off to delay filing. Even if you are facing circumstances that might make early retirement a necessity, it's a good idea to look at all your options and try to find creative ways to put off filing as long as possible.

    Once you reach age 62, Social Security is always an option. It gives you a doorway out of the working world any time you really need to take it. But for every year you can delay walking through that door, you gain 8%. That's an investment return well worth waiting for.

    Rick Kahler, Certified Financial Planner®, 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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