Kahler Financial

by Rick Kahler

After a short period of saving more of their disposable income at the depths of the recent recession, Americans are returning to recent historical patterns of spending more and saving less.

Usually this trend indicates "happy days are here again" as the decline in savings means consumers' confidence is rising. That is not the case today. Consumer confidence is just half of what it was at the peak of the "good old days" of 2007. That year our national savings rate was 2.1%, just above its post-WWII low in 2005 of 1.5%.

As millions of jobs disappeared and consumers hunkered down during the 2008-2009 recession, our savings rate almost tripled. In 2008, it was 6.2%. This thriftiness didn't last long; by the fall of 2011, our savings rate was back to a paltry 3.6%.

We were not always such spenders. During the four years of WWII, we saved over 20% of disposable income annually. Between 1974 and 1992, the savings rate often bounced between 7% and 11%. Since 1992, the beginning of the unprecedented 18-year bull market in stocks, our personal savings rate reflected the good times in the economy and averaged just 4%.

One possible reason for the decline in the savings rate in the past three years may be that we're paying off all the consumer debt that got us into trouble in the first place. In 2000, our individual debt load (including student loans and mortgages) was $19,750 per person. In the fall of 2011, it was $36,420, 8.6% less than the 2008 high, but 85% higher than the 2000 amount.

While Americans are not substantially reducing their debt, their equity in home ownership plunged from $12.9 trillion in 2006 to $6.2 trillion in 2011. No wonder consumer confidence is so low.

It appears our return to low savings rates isn't the result of renewed optimism, paying down personal debt, or a surging economy, but rather that Americans are running out of money in the face of staggering personal debt and declining net worth. This leaves them incredibly vulnerable to another downturn in the economy.

Ironically, Americans' personal finances are a reflection of our government's fiscal woes. Washington also finds itself compromised to respond to a national emergency because of a debt that exceeds our national income.

There isn't much you and I can do about our government's over-debting and overspending except to vote for politicians that promise to end the insanity and hold them accountable. But we can take better care of our own affairs with a three-pronged approach.

1. Get out of debt. We may not be able to earn more or work harder, but I'll guarantee you that we can spend less.
   
   
2. Start saving for emergencies. You need one savings account for periodic expenses like medical deductibles and car repairs. A second is for bona fide emergencies like losing your job or the death of a spouse. It should represent six to 12 times your monthly expenses.
   
   
3. Start investing for financial independence. Ideally, you need to put aside 15% to 35% of your income for the time you no longer can or want to work.

The hardest part of this approach is becoming willing to downsize your lifestyle. Too many of us say we are willing to cut spending and economize until it actually comes time to do it. In the two decades before the recession, Americans got out of the habit of making hard decisions in our own best interests. However, as our historical patterns show, we've treated ourselves with "tough love" in the past. When we have to, we can do it again.

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!

by Rick Kahler

Most people with Individual Retirement Accounts open them with a bank or brokerage firm (the custodian) that limits what investments can go into the account. These custodians typically limit your investments to stocks, bonds, and mutual funds with whom they have distribution agreements.

A little-known option that allows owners of an IRA to have unlimited control of the investments they can hold is the self-directed IRA. Assets permitted in self-directed IRAs include real estate, promissory notes, mortgages, tax lien certificates, US gold coins, and private placement securities.

I have clients who use self-directed IRAs to hold promissory notes, mortgages, and contracts for deed. The IRA acts like a bank by making a loan (secured by real estate) to a non-related party. They can often earn 5% to 10% returns. Of course, there is also a significant risk of having to foreclose on the loan and losing a portion of the investment.

Before you jump into a self-directed IRA, you need to do some homework. When you make an investment in a self-directed account, you are on your own. The custodian does little more than be sure your documents are in order. It’s up to you to do your own due diligence on the merits of the investment.

Self-directed IRAs are proving to be such a magnet for unscrupulous promoters of dubious investment schemes that the SEC has issued an investor alert warning owners against fraudulent promoters. The best advice is the old axiom, "if it sounds too good to be true, it probably is."

That said, Ed Slot, publisher of the IRA Advisor, has some tips for self-directed IRA owners.

1. Be sure the investment is allowed in an IRA. Life insurance, collectables, numismatic coins, and S-corporation stock are not allowed.
   
   
2. Don’t partner with or purchase anything from a "disqualified person,"—a spouse, child, grandchild, or someone acting in a fiduciary role for the IRA.
   
   
3. If you sell real estate held in a traditional IRA, gains will be taxed at ordinary income rates when the proceeds come out of the IRA instead of as long-term capital gains. Gains on real estate held in Roth IRAs, however, come out tax-free.
   
   
4. Don't think putting your business into an IRA could allow profits to grow tax-free. The Unrelated Business Income Tax is levied on a business owned by a tax-exempt entity like an IRA.
   
   
5. The IRS prohibits a "disqualified person" from running or occupying any business or investment owned by your IRA. You or your extended family cannot farm land owned by your IRA. You cannot occupy, even for a day, a property owned by your IRA. Doing so nullifies your IRA and makes it completely taxable.
   
   
6. Investment real estate in an IRA might be best owned free and clear of any financing. The Unrelated Debt-Financed Income tax applies to mortgage loans. Also, personally guaranteeing a loan is a prohibited transaction that nullifies your IRA.
   
   
7. You must value the assets of the IRA annually. This is a no-brainer for stocks, bonds, and mutual funds, but for real estate it may mean paying for costly annual appraisals.
   
   
8. Real estate owned in an IRA must generate enough cash flow to pay all its expenses. Writing a personal check for repairs or loaning money to the IRA are prohibited transactions that make the IRA fully taxable.
   
   
9. Holding illiquid investments in a self-directed IRA poses a problem when you reach 70½ and must begin taking distributions.

Self-directed IRAs can be a great tool to bolster retirement income, when used properly. Just be sure you consider all the pitfalls before taking the plunge.

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!

by Rick Kahler

If you had half a million dollars and invested it in mutual funds, chances are you would leave $25,000 a year of potential income on the table. Over 20 years, that underperformance could cost you over $1,000,000 when you include reinvestment.

This conclusion is based on a recent study by Dalbar, Inc. It found that mutual fund investors (individuals and investment advisors) consistently earn below-average rates of return. This group's average annual rate of return for 20 years underperformed the average by over 5%.

The study concluded most of this underperformance has little to do with sound investment strategy and everything to do with psychological factors. It outlined several behaviors that contribute to poor investment decisions such as badly-timed buying and selling.

Lack of Diversification – Many investors try to reduce risk through diversification, but very few do it properly. They try to diversify by having several advisors, many brokerage companies, or different mutual funds. Using these strategies creates a false sense of security that one’s portfolio is diversified. Real diversification is having investments in many different asset classes, i.e., stocks, bonds, real estate, cash, commodities, absolute return, and international equivalents.

Anchoring – This is relating something to a familiar experience that isn’t necessarily true. For example, a financial salesperson may compare investing in an equity mutual fund to growing a tomato plant. You put in a little seed and watch your plant grow and grow, until one day you have a bushel basket of luscious tomatoes. It's an appealing image, but it sets an unrealistic expectation of an equity mutual fund. Neither stocks nor tomato plants grow that steadily. Some don’t grow at all. Others grow overnight and then die just as suddenly. Some get wiped out by hail. And some thrive.

Media Reporting – Reacting to the financial news without a more in-depth examination can ruin the most sound investment strategy. Very few financial reporters have degrees in economics or finance. Most financial reporting is faddish, trendy, sensational, and shallow. Research suggests investors who shun or limit their intake of financial news do better than those who don’t.

Herding – This is the concept that the herd knows best. Few people want to be going east when the whole herd is heading west. This is especially true when the herd is panicking: selling out of fear that their investments are going to nothing or buying out of fear of being left behind. The most successful investors avoid stampedes.

Loss Aversion – This is placing more emphasis on avoiding loss than on the possibility of gain. It results in investors wanting their cake and eating it too by searching for an investment with a high return and low or no risk. Such investments don’t exist. When they discover this, many investors don’t invest at all. Others go into an investment expecting it won’t go down, then sell out at precisely the wrong time when it does.

Delusion – This is an attitude that "bad things only happen to others, but not me." A deluded investor is one who holds onto an investment even when it’s apparent that it’s never coming back.

Narrow Framing – This is making a quick decision without gathering or being aware of all the facts and considering the implications. Usually, the investor doesn’t uncover "the rest of the story" until it’s too late and the financial damage is done.

No one wants to leave a sizeable amount of potential retirement income on the table. The best tool for getting more of that income into your pocket isn't necessarily studying investment philosophy. It may be more important to learn more about your own behavior.

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!

by Rick Kahler

Does everyone have the potential to be rich? Theoretically, yes. Will most people become rich? Unfortunately not.

Like mastering any profession, building wealth requires focus, passion, and a certain set of skills. It’s not for everyone. Still, in America, more people have the opportunity to build wealth than to become major league sports players, movie stars, or Broadway actors.

Knowing when you've reached your goal is obvious in sports or acting. It's less clear if your goal is becoming rich.

I would not consider a retired couple who have saved all their lives and have a net worth of around two million dollars as rich. What I would consider them is wise, hard-working, or frugal. They have built up enough net worth to take care of themselves so they won't be a burden on their children or their fellow taxpayers.

Others might suggest just having the ability to pay your own way without government assistance qualifies you as rich. They would see financial independence (defined as being able, not just to do what you want, but to easily shoulder the responsibility of taking care of yourself) as being rich.

Whatever you choose for your definition of rich, achieving financial independence seems to me to be the socially conscious thing to do. While being financially independent is a good thing for the individual, I would suggests it pays even greater rewards to your community and nation as a whole. Every person who is financially self-sufficient is one more person sending revenue to the government rather than depending on government support.

To become financially independent, there are two skills you will need to master: living on less than you earn and learning how to save, invest, and prudently use the resources you do have.

What isn't necessary for financial independence (though it can certainly help) is earning a high income. I know one person who has earned $1 million a year for decades and only has a large home with a large mortgage to show for it. Conversely, I know many people who’ve never earned more than $100,000 a year and who have acquired a net worth of two to four million dollars.

Income, careers, and investment choices have less to do with building wealth than most people realize. Here are a few ways to look at the potentially rich.

• High earners who are spending more than they earn are "should be rich but aren't."
  
  
• Those with little education or resources, working two low-wage jobs, are "unlikely to be rich" but could potentially be.
  
  
• Those with inherited wealth are "born rich." They aren't necessarily guaranteed to stay that way.
  
  
• Those who have limited financial resources but have ability and education are "potentially rich."
  
  
• Those who own businesses and make a middle-class living, but the business is worth several million dollars if they sell it, are "future rich."
  
  
• Those with middle-class incomes who are saving for retirement are "future financially independent."

Part of defining wealth is whether it supports your lifestyle. A net worth tied up in a ranch or other business isn't necessarily wealth in terms of supporting a richer lifestyle or increasing your cash flow. Accessing the wealth would require selling the business, which may be your passion. Selling it too early could also result in prematurely killing the goose before it gets a chance to lay enough golden eggs.

The bottom line is that, individually and as a nation, we would do well to reject attempts by politicians or anyone else to lump "the rich" into one category. Like assuming major league baseball players are interchangeable with Broadway starlets, it just doesn't work.

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!

by Rick Kahler

It's been years since I took dance lessons, but as I remember it, an evening of dancing has an overall rhythm that's separate from each individual song. A good band will vary the tempo of the dance by playing a variety of music. Too many slow songs, and dancers get bored doing one foxtrot or two-step after another. Too many polkas or fast jitterbugs, and half the crowd might end up a bit too literally "on the floor."

A dance band might play mostly country-western music, have a big band sound, or focus on oldies rock and roll. But no matter what type of music it plays, in order to be successful, it needs to have a diversified repertoire.

And no band would be invited back if it played nothing but novelty dances like the hokey pokey or the chicken dance. These might be fun for a few minutes, but nobody—except possibly a three-year-old on a sugar high—wants to do them over and over and over.

Unfortunately, some investors use what we might call the "hokey pokey" method of investing. They follow the latest get-rich-quick guru or the ups and downs of the market just like dancers following the directions of the song. They "put their right foot in," and then the minute the market goes down, they sell and "put their right foot out."

Those least likely to enjoy this type of dance are the ones who "put their whole self in" by investing everything they have in one company's stock or one asset class. When the value of that investment goes down, as it's bound to do sooner or later, they get scared and pull their "whole self out." Usually this is just at the wrong time, about when the market is starting up again.

The investment class where most investors go "all in" is U.S. stocks. The majority of portfolios I see are heavily overweighed here. U.S. stocks are just one out of ten different asset classes. If everything you have, or most of it, is in this asset class, you are certainly putting your investment eggs all in one basket.

If a young person went "all in" just in stocks and never got out, they would probably be okay. Unfortunately, most investors can’t leave well enough alone. The downturns are usually too much to bear emotionally, so they try to time the market by attempting to sell when stocks are high and buy when they are low. That almost never works. By trying to time the U.S. stock market by going all in and then all out, you compound your anxiety and depress your investment returns.

It's even worse if inexperienced investors fall prey to scam artists and "put their whole self in" by speculating in dubious schemes that are more hocus-pocus than hokey pokey. Some of these scams are multi-level marketing programs, dubious limited partnerships investing in the scam de jour, and even going into what could be good investments like business or real estate. Whenever you go "all in" to an investment, there's a high probability you’ve set yourself up for a nasty fall.

Diversified investing is like pacing your dancing. When you have a mix of tempos and a variety of steps, you can enjoy the music for the whole evening. Once in a while, a galloping polka might make you a little dizzy, or you might get out of breath doing the twist. But the next slow two-step will give you a chance to recover. With a variety of music, you'll still be having fun at the end of the night.

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!

by Rick Kahler

Few occasions in life are more joyous than a wedding. It's typically filled with celebration, romance, and the promise of spending a lifetime together.

Conversely, there are few things as painful as the ending of a marriage that began with such promise. The unfortunate reality is there's a 50-50 chance that what started out in wedded bliss will end bitterly in a court of law.

If you are heading into a divorce, here are a few tips that may make the transition a little easier financially.

While I’ve seen many divorces start out "amicably," I’ve seen very few end that way. While your divorce may be the exception, I would suggest you plan for things to get contentious.

A divorce is more than the termination of a marriage. It’s also a major financial event that can have repercussions for many, many years to come. Think of it as the dissolution of a business. This is not something you want to go about casually or do on a handshake. You need to get competent advice—sooner rather than later.

The type of advisors you will need depends greatly on your situation. The more assets you have and the longer you’ve been married, the more advisors you may need.

A young couple married only a short time, with very few assets or liabilities and no children, may very well be able to use one attorney or a mediator to settle things quickly and fairly. A couple married 15 or 20 years, who have children and who have accumulated assets and liabilities, will certainly each need an attorney. They would also do well to each engage a therapist for themselves and their children. They could also benefit from consulting with an accountant, financial planner, and an appraiser if they own real estate.

If you’ve been a "stay at home" spouse and sacrificed your career to raise children, you would greatly benefit from getting some career counseling. While you may receive child support or some alimony from your former spouse, the chances are it won’t be for as much or as long as you would like. There is also the risk that your former spouse may pay erratically or not pay at all.

Unless you can live exclusively off the earnings of assets received from the divorce, you will need to become employed. For anyone who has been out of the workforce for a long time, this may mean heading back to school and obtaining several years of education. If you can’t find or afford a career counselor, a great book with a lot of helpful exercises is Career Ownership by Janine Moon.

There is no greater threat to your net worth than a divorce. Unless you are very wealthy, it’s a financial game changer. The reality is your lifestyle will almost certainly decline. It’s critical to actively plan for that new lifestyle as part of the divorce process. Creating a spending plan is very important. Is this difficult? Yes, for most folks it is. It's hard enough to create a spending plan in good times, much less in the chaos of your world being ripped apart. Yet this will give you vital information to help you evaluate and intelligently respond to settlement proposals.

Finally, resist taking the attitude, "I don’t care what it costs me, I just want to be done with it!" Avoiding the discomfort of negotiating and dealing with conflict may seem easier now. Yet chances are great that you'll regret it later. A divorce is financially and emotionally devastating enough. Don't make it worse by allowing your own beliefs to sabotage 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!

by Rick Kahler

Maybe Warren Buffett, the second richest man on the planet, doesn't care how much he pays in taxes. For the rest of us, what our investments earn after taxes is much more important than what they earn before taxes. Federal and state income taxes, capital gains taxes, and alternative minimum taxes can reduce your investment earnings by up to 50%.

It doesn’t take much to substantially reduce your nest egg. If you earned an average of 8% and were taxed at 28%, your after-tax rate of return is 5.76%. A $50,000 investment earning 5.76% grows to $87,536 in 10 years. If that same $50,000 investment isn’t subject to taxes, it grows to $107,946. The higher tax bracket you are in, the more important it is for you to seek out ways to lower your tax bill.

One of the best tax maneuvers is to invest your money where it will grow tax-free, meaning you will never pay any taxes on the income or accumulation. One way to do this is via a Roth IRA or a Roth 401k plan. All earnings compound tax-free and are not subject to tax or penalties when you take them out of the Roth after age 59½. The downside is that your contribution is not deductible from current earnings.

Another tax-free investment is interest from municipal bonds. The higher income bracket a person is in, the more an investment in municipal bonds makes sense. For someone in the 33% tax bracket, a 5% interest rate on a municipal bond is equivalent to a 7.46% rate on a taxable bond. But for someone in the 15% tax bracket, it’s only equivalent to a taxable rate of 5.88%. Don’t make the mistake of investing in municipal bonds only because they have tax free income. Be sure the investment makes sense for you.

After tax-free investing comes tax-deferred investing. This includes traditional retirement vehicles like IRA's, 401k's, 403b's, pension plans, and annuities. Contributions to these plans are pre-tax, while contributions to annuities are after-tax. The earnings are not taxed until taken out, usually after retirement when you may be in a lower tax bracket.

If you anticipate your overall tax rate (the average percentage of income taxes you pay for the year) in retirement to be over 15%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally are taxed at your ordinary income tax rate, which may be higher than your capitals gains tax rate (currently 15%).

Look for advice from investment advisors who manage investments in ways that can help reduce the taxable distributions. Investment managers can employ a combination of tactics, such as investing in stocks that don’t pay dividends, counterbalancing the sale of stocks with gains against those with losses, tax harvesting, and minimizing portfolio turnover. As important as minimizing tax is, be careful not to let the tax tail wag the dog. A poor investment doesn't become a good one just because it's tax-free.

Finally, keep good records of purchases, sales, and distributions so you can accurately calculate the tax basis of your investments. Not keeping good records could mean paying more tax than you should when you eventually sell.

While you can’t control the direction of the economy and markets, you can have a lot of control over where you invest your retirement funds, the taxes you will pay, and the costs. The tax consequences of investment choices matter to the rich. They matter even more to small investors.

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!

by Rick Kahler

At the heart of America’s overspending are two popular entitlement programs, Social Security and Medicare. Most Americans count on Social Security for a significant portion of their retirement income and on Medicare for all their retirement health care needs.

One question I’m often asked is, "Will Social Security be there for me when I retire?" That’s a fair concern when you consider the staggering size of our national debt, which is small compared to the "off balance sheet" liability represented by the unfunded obligations of Social Security and Medicare. Most lawmakers agree off-record that the only way these programs will continue to exist is if we make cuts in benefits and broadly raise income taxes on all taxpayers, not just the rich. Such a scenario probably includes a European-style national VAT (value added tax).

The good news is that when you take politics out of the equation, saving Social Security could be fairly simple. There are a number of easy fixes that can guarantee its solvency, such as extending the retirement age to 70 and increasing the Social Security tax. I have little worry that seniors currently receiving Social Security will see any reduction in benefits. For those not yet retired, my best guess is the program will "be there" in some shape or form.

To qualify for Social Security benefits, you need to have worked at least part-time for a cumulative total of at least 10 years. These don't need to be consecutive. There are a lot of myths about how the Social Security Administration computes your benefit. It is computed on your average lifetime earnings of the past 35 years, adjusted for inflation. While having a high salary the last few years of employment will help raise your average, it won’t increase it significantly.

In their current form, when compared to other similar immediate annuities, Social Security and Medicare are a great deal. They represent a complete security net of retirement, disability, and health insurance benefits that are indexed to inflation. The only little flaw in the formula is that the benefits are so good, we are having to borrow money to deliver them. Only time will tell if Congress increases taxes enough to retain the current benefits or whether we will see some decrease in benefits.

Currently, while Medicare benefits begin at age 65, the qualifying age for receiving full Social Security benefits is being gradually increased. It tops out at 67 for those born in 1960 or later. Some retirees, however, elect to start receiving reduced benefits (only 70% of the full amount) at age 62. The typical thought is that "a bird in hand is worth two in the bush" and that the present value of saving the five years of reduced benefits offsets waiting until 67 for the higher amount.

That reasoning is absolutely correct—if the person dies a premature death. There is no easy "rule of thumb" to apply to your specific situation. Generally speaking, even if you retire at age 62, if you are in good health and don’t have a genetic history of cancer or heart disease, you are probably best off waiting until 67 to take your Social Security.

Of course, if you are still working at age 62, it probably makes sense to wait until age 67 to take your benefit. Any earnings above the $14,160 limit will reduce your Social Security benefit.

You can estimate what your Social Security benefits will be at www.ssa.gov/estimator/. To receive a written copy of your earnings history and benefits estimate, go to www.ssa.gov/mystatement/. You can also visit a local Social Security office or call (800) SSA-1213.

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!

by Rick Kahler

The latest bubble forming on the horizon isn’t in real estate or stocks. It’s the cost of a college education, up four times the rate of inflation since 1985—twice as much as health care costs.

What’s driving this stratospheric rise? Just like the housing crisis, easy credit and poor government policy.

For decades governments have championed making a college education affordable for all, just as they did home ownership. Since some segments of society couldn’t afford an education or a house, the answer was to encourage lenders to make loans they wouldn't normally have made. This was done by guaranteeing lenders that if the loans went bad, the government would take them over.

There were two results of this seemingly noble policy. First, with easy credit available, almost any jobless teenager could borrow up to $250,000 for a college degree without a worry in the world of paying it back until graduation.

Easy credit drives up prices, as the increased demand exceeds supply. Colleges increased tuition at a dizzying rate, simply because they could easily fill classes with students who could easily pay the tuition by painless borrowing. Normal market forces were thwarted, and prices rose exponentially and consistently. Four years of tuition that cost $50,000 in 1985 costs $200,000 today.

The second result is a replay of the housing crisis. According to an article by Malcolm Harris in the September/October 2011 issue of Utne Reader, students now owe more than $800 billion in outstanding student debt, of which only 40% is in active repayment. The majority of student loans are in default or deferment. Since these debts are guaranteed to the lenders, U.S. taxpayers are on the hook for them.

The government's artificially gaming markets to give credit to those the market would normally deny, while well intended, causes unintended consequences. The distortions create a new set of problems, sometimes as bad as or worse than those that inspired the attempted fix in the first place. More often than not, most of the parties to the transaction ultimately lose.

Among the losers are the students themselves. Few take the time to calculate the overt cost of obtaining their education with the corresponding salary it prepares them to earn. But Laurence Kotikoff, professor of economics at Boston University, describes the hidden costs in the September 2, 2011, InvestmentNews. These include the time spent learning rather than earning, plus the progressive income tax which taxes annual earnings rather than lifetime earnings. According to a recent study by economists Stacy Dale and Alan Krueger, going to more selective colleges and universities makes little difference to future income.

Kotikoff compares two students, neither of whom borrow for their education. One becomes a doctor and the other a plumber. The doctor spends 11 years of her life in school in order to earn $185,895 annually. The plumber spends two years and earns $71,685. The bottom line is that the plumber’s sustainable spending is equal to the doctor's.

If the government stopped guaranteeing college loans, the initial result would be significantly less demand for a college education. Tuition rates would plummet, eventually becoming affordable once again as the source of easy credit dries up.

Without easy borrowing as an option, parents and students would be encouraged to begin college saving early. Students would have new incentive to earn money for college and also do well in high school to qualify for scholarships. The result would be more students graduating without debt and feeling less pressure to take the first job available.

Then, the money that today’s grads apply to student loans could instead be invested in retirement plans.

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!

by Rick Kahler

What would it take for you to become financially independent? It's a common goal, and it means different things to different people. I define financial independence as maintaining a lifestyle that supports wellness without having to earn an income.

Happiness and wellness are not necessarily the same, but recent studies suggest an income of around $60,000 is optimum for producing happiness. This is an average, so the equivalent amount might be around $50,000 in areas like the Black Hills and $100,000 in places like New York City.

How much of a nest egg do you need to save to produce an annual income of $60,000? To maintain the purchasing power of your portfolio throughout your lifetime, you will want to limit your annual withdrawals to 3% of the principal. This assumes you’ve invested for the long term in a diversified portfolio with the majority in stocks and alternative investments. To throw off the needed income, you will need $2,000,000.

While two million bucks sounds like a lot of money, accumulating that amount can be done if you start saving early by living on less than you make. A couple who starts contributing $10,000 a year to their Roth IRAs at age 22 and who stop making those contributions at age 29, assuming they invest in equities with an average annual return of 8.5%, will have a reasonable chance of having $2,000,000 by age 65. Similarly, a couple who start saving $10,000 a year in their Roths at age 29 and continues to save until they are age 66 will also have $2,000,000.

So, how do you save money? The most common denominator among my clients who have accumulated wealth isn’t the career they chose or the investments they made. It’s their ability to understand, apply, and enjoy frugality.

I asked a friend of mine, a self-made multi-millionaire, how he would explain frugality. He responded, "How would you feel if someone paid you $180 an hour to walk?"

Then he told me this story:

"When I travel on short business trips I often leave my car parked at the airport. It’s more convenient and cheaper than the airport shuttle. I got used to parking in the short-term lot because it’s closer to the terminal than the long-term parking. The short-term parking costs $9 a day, while the long-term parking is $8. Many people might figure on short trips they could easily afford the extra $2 or $3 and reap the benefit of reducing their walk to the car.

However, a frugal person might wonder just how much that benefit would be. I figured out how long it took me to walk the extra steps from the long-term lot to the short-term lot, which was 30 seconds. Walking the same distance on my return makes my extra round-trip walking time 60 seconds. On a three-day trip, my total savings for this one-minute walk is $3, which adds up to $180 an hour.

To my brain, saving $3 seems trivial and meaningless, but being paid $180 an hour is significant enough to interest me. I’ll sign up for that in a heartbeat. Now, I park in the long-term lot."

For a successful businessman to care about saving a couple of bucks on parking might seem silly or even miserly. But my friend's story is an example of a frugal mindset. Frugality is choosing not to spend more than necessary on things that don't matter, so you can spend on things that do matter like saving for your future. Then someday, when you're financially independent, people can wonder why you think frugality matters.

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!