10 Money Lessons for Your Children

Sep 01 2015

Published by under Investments

Parents sometimes ask me about money lessons they and others can share with children. To be honest, the combination of children and money isn’t my specialty.

“Youth is wasted on the young.”
George Bernard Shaw/Oscar Wilde

I once had clients, a married couple, whose college-aged legally adult daughter came into $50,000 from a court award. The parents called me in to talk some money sense to their daughter before something bad (“bad” as defined by parents) happened to the money.

I gave it my best. I explored her thoughts about the money. I brought my valuable money lessons, projections for what the money could become, ideas for future uses of the money, investment ideas, and I even shaved off a chunk for immediate fun money. All explained in ways a college student might better understand (at the time, my oldest daughter was in college and my youngest daughter was right behind her). I wanted to build a plan together so she would have ownership in the plan. I felt good about it.

The result was she bought two cars. Not a part of any plan. While I wasn’t so naïve to think I would win the war (remember I have two daughters), I at least thought I would win a battle or two. Nope. Not happening.

For those of you with college-age children, I have conducted money classes for college students. (Side note: In my distant past I was a ROTC instructor at a university. Three years teaching two classes per semester. I have experience with college students.) Don’t feel bad if you are having a difficult time getting through to them.

It’s not an intelligence thing. Many just don’t have enough life experience with money to grasp the more complex applications of the information given their current life. It’s difficult for them to wrap their heads around life as 60 year olds or investment concepts; unless they sincerely want to learn about money.

So if you’ve read this far and think I’m a cop-out, don’t give up. MOAA employs a number of recent college grads. I asked these younger staff members what they wish they would have known about money back in the day and of course I added my spin. Here are some tips.

  • Keep the topics and lessons age specific. What are they dealing with financially at that point in their life? Where are they getting their money? What are they spending it on? If they get just enough allowance to live on between pay periods, the lessons are pretty limited.
  • At some point teach them “A part of all you make is yours to keep.” (from ‘The Richest Man in Babylon’). If they don’t keep some for themselves, they are just giving away all their money to others. Spending the money is fun but 5, 10 years from now there will be nothing to show for all their hard work. Show them how shaving off a small portion of pay (say 10%) doesn’t impact their spending that much. Save 10%…you earned it; it’s yours! Over time, they will have something in savings for an important need. As the saving grow, split it between short- and long-term goals. A piece for retirement (even as abstract as that is for young people) is a good idea.
  • If they are working, putting a small portion in an IRA might be a good idea. Maybe as parents, you can offer a match amount (as long as you don’t exceed the child’s earnings). Maybe they save 5% in a liquid savings and 5% in the IRA. It’s important to teach the lesson that putting aside some income now allows them to fund a retirement later. Or put another way…the earlier they invest now, the sooner they can stop working later.
  • Show them the power of compounded money. At first, it seems it will take forever to build some wealth. But like a snow ball rolling down the mountainside, once it hits a critical mass it gets large quickly. Tell them it’s similar to a video going viral on the internet. Getting to the critical mass is the initial challenge and that just requires some discipline.

Start at age 25, $200 mo, to age 65 equals $700,000
(@8% annual average return)
Start at age 35, $200 mo, to age 65 equals $300,000 (same return)
What a whooping difference 10 years makes in the snowball! And they will be socking away more than $200 a month.

  • Build a credit record. Building a credit record and learning how serious credit management is go hand and glove. If your child doesn’t have a credit record early, someone will have to co-sign for them later and they could be behind the credit record power curve as young adults. Pull a credit record at www.annualcreditreport.com. Get a credit card, use it sparingly and pay it off regularly. Make sure the child pays it off; not you. This reinforces the lesson for them to live within their means. So…
  • They need to learn to live within their means. Credit is not a substitute for income or spending beyond their income. As long as the debt exists, their income does not belong to them it belongs to the debt. Without debt, all their income is theirs to build value and wealth. This goes for housing also. Whether in college or afterwards, rent amounts should be managed to stay within a reasonable ratio of income. Don’t be house poor. By saving 10% of their pay off the top (paying themselves first), they can live off the other 90% with a clear conscience.

Other places to cut costs are cable TV, transportation, eating and drinking out, entertainment, haggling on purchases, and buying pre-owned goods online.

  • Don’t go overboard with college loans. Technically speaking spending for college is no different than buying a car or boat. If a $200,000 Bentley or a $300,000 yacht is too much for your budget, how can college expenses at those levels be justified?

Keep a cap on college expenses by finding alternatives to maintain a realistic budget. If your child is unsure of a major, why spend on high college costs as they keep changing majors and extending their graduation date? Spend less at the community college for two years figuring things out and taking core classes. Transfer to the selected university in the final two years when plans are more solid. This can also help a student get into the selected university if they are having a hard time with entrance as a freshman.

A massive debt at graduation means your child can’t afford the payments and will live at home or on your dime. Or you’ll own the debt and your ability to fund your own retirement and needs may be hindered.

  • Have a budget or create a money flow chart; money in, money out. Bottom line is to ensure the money coming in is more than the money going out. Measure the money going into disposable goods versus going into necessities or assets. To build wealth, more should flow into assets than liabilities. Online budget tools include Mint.com or LearnVest.com among others. Need a rough idea how to split things?

Percentage of gross income
Investment in you: 10% minimum (short- and long-term)
Total housing and consumer debt: 40%
* Housing 25-30%, rest consumer debt (not to mean you must have consumer debt)
* What you don’t use in consumer debt (zero being the goal), you have for extra savings/investment or living expenses
Living expenses: 50% (the requirements: food, utilities, insurance, maintenance…)

  • How should you pay off your debts? Generally make consumer debt a priority. Mortgage and student loan debt is not quite as bad as consumer debt. Two plans; one based on psychology and the other math.

Some people need a quick victory. If this is you, pay off the smaller debts first. Of course, you have to make at least minimum payments on all debts but put an extra amount towards the smallest debt first. When the first debt is gone, add the extra amount from this first debt to the minimum amount of the next debt. Continue this snowball of increasing payment amounts as each debt in eliminated.

The interest rate on the debt represents a negative return of your money—you are losing money. Stack the debts with the highest interest rate on top decreasing rates until the lowest rate is on the bottom. Apply the snowballing payment system from the paragraph above.

  • Final idea is for the child. You can do this yourself. Mom and dad don’t have to do this for you. The MOAA financial site has all you need to learn and do. We offer you unbiased advice. We’ve been in the investment business and now provide you the tools to succeed with our financial sector experience.

Thanks to my fellow MOAA staffers for their ideas.

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Boring Investing is Better

Aug 26 2015

One of the most dangerous investment attitudes (along with “this time it’s different”) is the complaint that “my investment isn’t doing anything.” The observation says more about the speaker than it does the alleged short-comings of the investment.

Of course this isn’t about lack of activity at all. Last week the market was really active – actively tanking. I’m pretty sure this isn’t the activity those people had in mind. If the alternative is being trapped in a nose-diving market, “doing nothing” can seem pretty attractive.

When people say the investment isn’t doing anything what they mean is “it isn’t making enough money.” There’s an old Wall Street sales pitch: “Your money isn’t working hard enough for you so hire me and I’ll fix that.” When I was a stockbroker, hearing that phrase always made me imagine the speaker physically whipping the client’s portfolio to make it pick up the pace like some poor galley slave in a Cecil B. DeMille movie.

I remember a revealing cartoon of a broker telling his client “Yes, your money was working for you but it quit and now it’s working for me.”

Investing isn’t supposed to be exciting. Any stock that can rocket to the moon today can crash and burn tomorrow. Slow and steady is what you should want. Boring is better.

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Military ID Cards at Age 65

Aug 14 2015

Should you get a new military ID card at age 65? Yes you should. Technically, it’s not required but it will save you from some grief down the line.

ID cards for retired military members have an “indefinite” expiration date on the front of the card. On the back of the card is an expiration date for medical benefits that expires the month prior to you turning age 65. While your entitlement to medical benefits does not end after the expiration date, your entitlement changes to Tricare for Life (TFL) at age 65. If you haven’t made the change to enroll in TFL, you lose your Tricare coverage until you enroll in TFL. The back of the card indicates your status in TFL at age 65.

The reason is that Tricare Standard and Prime end at age 65 by law. You must be enrolled in TFL for continued Tricare coverage at age 65 and beyond. TFL enrollment simply means that you are enrolled in Medicare Parts A & B. Once you enroll in Medicare A & B and get your Medicare ID card, go get a new ID Card. The ID card office will remove the medical expiration date on the back after they verify your Medicare A & B status and know you’re eligible for TFL.  Now medical providers know you are officially in TFL.

We recently received an email from a member who told us of his trip to the base pharmacy. He still used his original retired ID card with an expired medical date on the back. His card was confiscated by the pharmacy. Turns out, the base hospital implemented a local policy to confiscate cards in an effort to get cards updated for those over 65 years old.

In this fast paced, ever changing world, military ID cards have undergone several updates over the years, photos get old, and some service providers won’t understand the date on the back doesn’t render the card expired. Many bases are now installing electronic scanning devices at the front gates and new ID cards have bar codes for that purpose.

People aren’t ID card experts. An expired date means one thing to most; game over. Save yourself the potential grief and get a new card.

What if you are working at age 65? What are your options. Read this article to find out more.

44 responses so far

The Challenges of Managing Retirement Savings

Aug 04 2015

You have retirement savings. It’s enough to last a while but you’re not sure about it lasting your life time. How do you manage it to provide current income and not run out too soon? This is a big challenge for money managers. If you are working with a financial adviser, thinking about working with an adviser or you’re a do-it-yourselfer, this article is for you as you prepare to navigate the rough waters ahead. If I were speaking as your adviser, here are some of the issues we would discuss.

Your Strategy. Your portfolio requires a balance between the proper mix of savings and investments to create income and growth. Your money will require fairly regular oversight and management. It will probably require the use of multiple savings and investment vehicles. The ‘savings’ aspect will generally include products that protect principal and provide some return usually in the form of interest payments. The ‘investment’ aspect will involve fluctuations in the principal amount as we try to capture some growth to increase the portfolio’s longevity. There may even be an insurance aspect to the portfolio mix.

Just knowing what I describe above, you have to ask yourself if you are up to the task or will need help. You need to know what savings, investments and insurance choices are available, why they are used, how they are used, and when to use them.

You will need to monitor the results in your portfolio and the economic environment (public and private sectors) to know when to make necessary changes. Since no one has a crystal ball to glimpse into the future, historical and current knowledge of markets will have to do.

We’ve covered the easy part. Now let’s get into the meat of the matter. What is the proper portfolio balance? How do you determine your balance? How do you achieve the balance?

Portfolio Balance. The perfect portfolio balance would allow you comfortable current income while simultaneously growing the portfolio so you never run out of money. It’s so much easier said than done. For many it comes down to living on less than you wish or running out of money. If you invested well over your working life, your job is easier. As your adviser, I would rather be safe (manage to last a lifetime) than sorry (you go broke).

I can almost guarantee that my definition of ‘safe’ and yours are different. That means we have to come to an agreement on a definition or we’ll be at each other’s throats at some point in our working relationship and you’ll fire me. ‘Safe’ for you probably involves some form of principal protection. ‘Safe’ for me is maximizing the longevity of the portfolio since going broke isn’t an option in my mind. Principal protection as the primary strategy is a dog that won’t hunt in my plans.

Determining Your Balance. Let me start by providing a measuring stick. The following spectrum will help define our portfolio balance situation.

100%  —————————————————100%
Principal Protection                                                 Principal Loss

For illustration, 100% principal protection is a guaranteed savings vehicle like a FDIC insured savings account or CD. 100% principal loss is gambling or over spending.

The potential rub between us is that ‘safe’ for most people usually implies a form of principal protection and as a result people seeking safety prefer the far left side of the line above. When people aren’t sure whether they have enough money to last a retirement, they want to protect the money thinking that will help it last–our minds fear the potential loss more than we crave the potential gains. But the truth about the line above is that both the far left and the far right of the line result in the same outcome; you go broke during your lifetime.

On the left side of the line, you’ll use your principal to live on and burn through it much faster than it can grow to offset your usage rate. This is the classic scenario of outliving your savings. On the right side, you’ll throw your principal away before you die. So essentially an FDIC insured account is the same as gambling when you consider the ultimate long-term outcomes.

For me, safety is somewhere between the dots and that’s where the challenge is between us. I have to coax you to go out onto the line between the dots and that can be a scary place for some retirees. Then I have to determine how far out on the line I need to go with you. I can’t be too safe and I can’t be too aggressive (risky). Three huge factors in this consideration are: how much money do you have, how long I have to make it last, and how much income you need now—not to say there aren’t plenty of other factors.

Achieving the Balance. This is where the recipe gets complicated and can’t be comprehensively explained in this article. However, I want to get you pointed in the right directions in case you want do more research. The balance is a mix of the right savings, investments and insurance products that allow you to withdraw a reasonable amount of income each year and at the same time grow the portfolio to last a lifetime. Here’s where you have to know what the products are, why you use them, how you use them, and when to use them. Having knowledge of the economy and markets is a big plus.

What. The choice of savings or investment products span the cosmos—savings accounts, CDs, bonds, stocks, mutual funds, options, convertible stocks or bonds, closed-end funds, Exchange Traded Funds (ETF), Unit Investment Trusts (UIT), private money managers, annuities, life insurance products, long-term care insurance… This only skims the tops of the trees since each of the items listed have many (hundreds or thousands) branches below the tree top.
Why. Some of the choices above provide for a stable principal, some are for income, some are for growth, and some provide a combination of outcomes. Whatever the expected results are for each of these choices, you can be certain that how each choice delivers its result will involve a pro and a con in relationship with the rest of your portfolio. You should know the pro and con for each choice to offset and balance the results with the other holdings in your portfolio.

When you shop for an adviser, it should be a part of your shopping list to ensure the adviser understands not just what the choices are but also why and how to use them. Know how many choices your adviser offers. Some advisers only offer a few choices. If an adviser offers only a few choices, they will make their choices work for you even if there are other choices in the cosmos that may work better for you.

Also consider all of your various accounts and how what you do in one account balances with what you do in other accounts. If you are working with an adviser, and the adviser is only working with one of your accounts, the adviser may duplicate another account or counteract another account since all accounts might not be visible to the adviser.

How. Once you understand why you use one choice over another (“I need income.”), how you use the choices are dependent on your specific needs and goals. In this case, our desired outcome is generating income, so we may purchase an immediate annuity to generate a steady flow of guaranteed income for life. Or we could purchase dividend paying stocks, or a closed-end fund, or a bond, or an income generating mutual fund or sell covered options…on and on.

If we purchase an immediate annuity, this allows us to consider alternate portfolio choices with your other accounts in the light of having established a guaranteed lifetime income stream with the annuity. Meaning, you may be able to move a little further out on the line with your other accounts to assume some potential for greater growth. Or you may be able to reach for greater income with more aggressive income investment vehicles like junk bonds or closed-end funds.

If you purchase a long-term bond mutual fund for income instead of an immediate annuity, things change for other portfolio choices. Realizing that interest rates are at all-time lows right now, the outlook for bond prices is down in the future. Here’s where the econ and market insights help. Expecting the value of your long-term bond fund to go down in the future (and your account value), how will we offset this issue with other portfolio choices? On the flip side, while your bond fund goes down in value, we can expect the income payments to increase. How does this change other choices in the portfolio? Maybe we don’t have to rely on the other choices to provide as much income so we can focus on making up the loss in value of the bond fund with other growth choices. Usually when bond prices decrease it leads to growth vehicles increasing in value. Maybe we don’t need to bulk up on growth options as much and can bulk up your income producers so you have more spendable income. Choices choices.

When. When to use one choice over another is tough because we can’t predict the future—not even the pros know the future. We can only read articles from respected people in the field, keep tabs on current economic events (not fads), and understand some history about economies and markets. However, don’t focus on current trends as the base line for your decisions. Trends are just that; fleeting events. Tomorrow they will be something else.

That’s why you have to follow the media with a healthy dose of suspicion. The media don’t mention anything until the investment has done something to create a newsflash worthy story, and by that time, it’s too late for investors. Besides all the sales people come out during the periods of euphoria in an investment to take advantage of your need for greed. Have you noticed how firms hustle gold to satisfy greed? Sales people also like periods of crisis because they can play on your fear. Have you noticed how firms hustle gold to alleviate your fear? One investment idea like gold can be spun to push either your greed or fear button. There is always an answer to greed or fear and sales people will find it when something is in the news.

View a bigger picture of society and the world. What are the big economic conditions? Housing in a slump or peeking? Interest rates up or down? Unemployment up or down? Construction on the rise? Consumers in a buying mood or a savings mood? Then remember that these events are temporary. Will the housing slump last forever? Is a down market something to fear or a temporary condition that will come back at some point and represents an opportunity to get on the ground floor of something good? How much time do you have to wait in your portfolio? How can you situate other portfolio choices to offset or balance the choices that will take time to rebound?

Can you prevent the need to deal with all these issues? Sure. If you are a ways from retirement, save and invest to have assets beyond your future needs. If you are close to retirement or retired, you could establish a retired living standard well below your means. You can plan to have no debts and very few other payments going into retirement. You could also choose to live in a lower-cost area. Or if you are retired, consider working at some level to subsidize your income thereby minimizing the need to pull from your assets.

Working in retirement accomplishes several good things. One is that it provides more options for how you manage your retirement assets. You can reduce the withdrawal amount from your assets which allows you to re-allocate your portfolio to capture more growth. Besides the money issue, working keeps you busy, works your mind and provides you a purpose in life. Finally, chances are the spouse could use a break from having you around all the time; no matter how charming you are.

We’ve just scratched the surface of money management and portfolio considerations. In some ways it would be great if the task of money management was a simple recipe that could be easily followed by all with success. That would solve a ton of problems. But in another way, the fact every person’s needs and goals are different and we have an assortment of choices to build a custom plan suited for each person is a good thing. Cookie cutter approaches only work for the people whose financial situations fall within the design of the cookie cutter.

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Kiplinger Magazine’s Social Security Strategies

Jul 29 2015

For those of you closing in on your eligibility for Social Security benefits, I found this article very helpful for determining your application strategy.

Best Strategies to Boost Your Social Security Benefits

I hope you find it helpful also.

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