New and Improved Me and You

Over a century after the invention of the electric washing machine, why do marketers still put “New and Improved” on laundry detergent?  Because…. it still sells laundry detergent.  Which says what about us as consumers?  We like New and Improved.  In our innovative culture, we do not just like it.  We expect it.  When something actually is New and Improved, our world gets better.

Do we expect the same of ourselves?  Becoming New and Improved?

Looking for this answer myself in 2012, I asked, “What seems to bring the most happiness in my job?”  and resolved to do more of that.  From time to time, people tell me they sleep better, or have fewer arguments about money, because of some simple reminders about the plans we have developed together.  To get feedback like that makes my whole year.

It seems that people appreciate reminders to not let emotions hijack a well-laid program.  Despite our best preparation and planning, we all have moments of doubt, where we irrationally fear that we are missing something in our financial plans.  At those times, we are at risk of doing something we will regret.  Not immune from emotions, I have those moments, too.  To get through them, I take a few minutes to run my fears through a program that constantly tests new assumptions. You could call it the “rational wringer.”

Occasionally after a big news story about the economy, I receive an email, a phone call, or a question expressing doubt, fear, or outright panic.  We run the fear through the wringer program, remembering that emotion, not the markets, is the biggest risk to the well-laid plan.

However, even though I know fear, doubt, and panic are normal and human, I feel like I have missed something when I get that phone call.  Maybe there is a way to create “constant coaching,” so those moments might not happen as much.  Perhaps, the coaching could be more accessible, more frequently.  In 2012, I’ll be looking for and creating New and Improved formats for clients, newsletter and blog readers, and even people whom I may never meet.  Hopefully everyone can use them and sleep better, too.

New and Improved Holly P. Thomas, LLC:  Now with scrubbing reminder bubbles!  Coming to a website near you….

What could you do in 2012 that would reinvent your life, or, perhaps recharge your batteries?  I would love to hear from you.

What’s in Your Notebook

For many families, especially those in Florida who move from elsewhere, the holidays are the only time every one or two years when adult kids, parents, grandkids, and grandparents get to see each other. That time together is ideal to let your family members know where you keep “the Notebook.”

The Notebook is my term for a central place you keep information “in case something happens to you.” I find many people have some kind of a notebook or desk drawer, but often have a few items missing.

What do you keep in your Notebook that you want your family members to know? Write me with your ideas at holly@hollypthomas.com and I will compile them for a blog post and for the next newsletter. Let me know in your email if it is ok for me to use your name and your city.

Common and essential items in the notebook include:

* Your five basic estate planning documents: original will (drafted by an attorney in the state where you now reside), living will, health care surrogate, durable power of attorney, and HIPAA designations;

* Advanced estate planning documents if you have them: trusts, partnership agreements, business buy/sell agreements, shareholder agreements, etc.

* Insurance policies. ALL of them: life, long term care, health, property, car, boat, liability, and any others.

* Contact information for all professional advisers: attorneys, bankers, accountants, investment advisers, insurance agents, and of course your personal CFO or financial planner.

* For each adviser, make a note about what document or issue they helped you with.

* Also, if your adviser has an assistant or paralegal who knows you and your situation, write down their contact information and a little note to that effect. (“Sharon is the assistant and she runs the whole place.”).

* All of your health care providers – doctors, dentist, optometrist, veterinarian (who is going to take care of Fluffy?). Put similar information by each one – what they helped you with and if any office or nursing staff know you and your history.

* Directions on how to find your financial stuff: online user ids and passwords, bank statements, investment statements, real estate deeds and mortgages.

Not-as-essential items some people include:
* An “ethical will” outlining your values. When they are having trouble deciding what you would have wanted, they can refer to your ethical will for guidance. (www.yourethicalwill.com or www.personallegacyadvisors.com)

* An end-of-life health care management booklet like Five Wishes (http://www.agingwithdignity.org/forms/5wishes.PDF).

Think of your Notebook as a trail of bread crumbs to help your loved ones work backward in your footsteps. A investment of time to leave an easy-to-follow “trail” is one of the best holiday gifts you can give.

Bank Fees Going Up

As reported in the Wall St. Journal on September 30, Bank of America and many other large banks will begin charging a monthly fee to use a debit card. Why? Congress has put pressure on banks to make their fees more transparent, which is a good thing. So, the Federal Reserve made a new rule in June that banks with over $10 billion in assets cannot charge a merchant more than 24 cents per debit card transaction. Currently, the average charge is 44 cents. Since the banks can no longer collect the fees from merchants, they will begin collecting from customers.

Does this matter to you? It depends. If you keep a healthy balance with a large bank, chances are you will be exempted from the fee. If you keep all of your money with small banks or credit unions, who are not subject to the rule, then they might copycat the large banks and charge you anyway, but probably not. If you have an “extra” checking account with a small balance at a large bank, it may give you an incentive to close that account, or at least close the debit card linked to it.

In the bigger picture, though, is an irony. The rule was prompted and encouraged by Democrats, known as champions of the little guy. Now, the little guys with the small accounts at the large banks will be eating the fees that the middle class and rich guys used to bear whenever they bought from a merchant. More than likely, little guys will switch to credit unions and small banks, and the big banks will be left with the big balance accounts. So who did it really help?

As a fiduciary, I am all in favor of disclosing, in plain sight and in plain English, every cost and every fee that financial consumers, borrowers, businesses, and investors are about to incur before every transaction. But this rule goes beyond disclosure and forces a needless shuffling-around of accounts and costs. It would have been better for everyone to have merchants and banks disclose the cost of a debit card transaction to their customers, and let them decide on their own what to do.

Battle Strategies for Rational Behavior

Our brain’s limbic system is emotional; focused on now; and fears loss.  Our brain’s rational cortex system is logical and does not put emotions on time frames. Therefore, successful strategies to overcome our limbic system’s emotional influence on decisions where we need to be rational do one of two things:  1) change the rewards and penalties in future decisions; and/or  2) change the number of “decision points.”

Giving Ourselves Rewards and Penalties

What kinds of rewards might we set up for future decisions?  They don’t have to be financial. More success comes from social rewards.  Charities tend to use this fact. For example, most fundraising events revolve around the social rewards of belonging to a group, and supporting a good cause.  So before heading out to the event, we can write our check in advance for the amount we wish to give.   In another realm of behavior and choices, rather than attempt a diet solo, we can agree with a group of friends to commit to a weight-loss plan.

What kinds of penalties can we set up for ourselves?  In the financial world, we can make funds unavailable. Christmas club accounts; requesting excess tax withholdings; and pensions accomplish this.  We can choose products with actual penalties, like CD’s and annuities.  We can choose investments with high costs to buy and sell, like real estate, or a business.

Other penalties we want to avoid are “felt losses.”  We feel a loss when we have to pay to work out or take a yoga class.  To increase the likelihood of doing the desired behavior, we can prepay for “painful” behavior changes.

Professionals who charge by the hour could change to flat-fee arrangements to avoid making their client incur a “felt loss” every time they meet with them.

Decision Points

Another way to trick ourselves is to manage “decision points.”  We should increase decision points for options that are hard to resist, and decrease decision points for options that are hard to do.   Here are some examples:

• In one study of the “hard to resist” kind, people ate less than half the number of cookies when they had to individually unwrap each one.  The act of unwrapping added a decision point to the process of eating the cookie.
• In the “hard to do” category, successful savings and investment programs are often automated, eliminating the decision point of manually making a transfer from a spending account.
• Debtors can request a credit freeze through reporting agencies, forcing them to go through a “thaw request” in order to get more credit.
• During the 2008 stock market meltdown, Dan Ariely, a Duke psychologist who studies behavioral finance decisions, knew he might be tempted to do something rash in his investment account.  So, he purposely input the wrong password three times so that he would be locked out.  This kept him from selling into the downturn.

Think you’re above your limbic system?  Studies find that the cortex consistently overestimates its abilities.  In fact, winning the cortex/limbic battle isn’t about willpower.    It’s about acknowledging our emotions and fears, and planning around them.

Our Dual Selves in Financial Decisionmaking

Neuroscience finds there are two players in every decision we make: 1) Our patient self (in our cortex); and 2) Our immediate gratification self (in our limbic system).

At a Financial Planning Association conference in May, Professor Russell James of Texas Tech University presented his findings from MRI images of people asked to make decisions.  In financial decisions, the cortex shows no difference in reward over different timeframes.  In contrast, the limbic system shows higher reaction to immediate reward, even when it is for less money now, rather than more money later.  This leads to a problem called hyperbolic discounting.

Would you rather have a) $100 now or b) $101 in a week? How about a) $100 in 52 weeks, or b) $101 in 53 weeks? In an oft-quoted study on hyperbolic discounting, more participants chose b) in the first question than in the second question, even though the return is the same – 1% over a one-week period, or approximately 52% on an annualized basis.

Here’s a Weight Watchers example. Given an unhealthy snack choice now or in one week, 70% chose the unhealthy snack now; 26% chose the unhealthy snack in a week.

The fact that our limbic system overrides our rational thinking is not surprising. But how can we change? Professor James has developed “pre-commitment strategies” that alter our future environment and/or our time preference.

When it comes to our future environment, time and effort spent appreciating future pleasures can evoke enough emotion to satisfy our limbic brain. To entice retirement savings, a financial planner might ask a client to envision a day in the next chapter of their life in great detail – immediate surroundings, who they are with, what they are doing, what they smell, what they feel (i.e. sand between their toes, or hugging a grandchild). Capturing that image as a financial goal can be more powerful for some clients than simply being obliged to save for a nebulous future.

In a 1998 survey of participants over 50, it was found that the longer the time horizon they were concerned about, the more wealth they had after eight years. This study shows that the “propensity to plan” – the more time you spend visualizing the future state – the more wealth you build.

Only the Best for Grandkids, But What About You?

I recently met with a couple who had two grandchildren.    When it came to deciding about saving for the grandchildren’s college, they told me they wanted enough so that all of their grandchildren could go to any Ivy League school they might get into.  This sounds on the surface like a very worthy goal.  A couple of things struck me funny about this goal, though.

First, the amount of money that would have to be set aside for this goal relative to the couple’s resources was rather large.  I wanted to make sure they could see this in black and white before committing to this goal.

Second, one of them had said something about paying their own way through college and having a hard time of it.  I appreciated that they did not want their grandchild to suffer in that way, and asked them to acknowledge their desire wasn’t coming with any “baggage.”

Third, many people do not consider the additional costs of college on top of tuition:  living arrangements, transportation to and from home if the college is distant, etc.  I wondered if they really meant they wanted to cover the whole kit-and-kaboodle as a free ride, or whether the goal was more aspirational than realistic.

So I asked them, “You said something in the past about putting yourself through school. Tell me more about that.”

The husband elaborated on how hard it had been on him to work his way through college.  When his son grew up, he partially helped his son through public school, but now he wanted the grandchildren to have no boundaries on where they could go.

Next I said, “Ok, that’s a very worthy goal.  When you say no boundaries, do you mean you want to cover only tuition, books, and board, or also computers, apartment rent, pizza and beer money, flights home, and additional costs like that?”

I guess this is the question that made a fantasy turn real.  They both looked as though they had not thought of this, and I was equally surprised at their response.  I suggested we look at a range of expenditures, and see what the effect would be on their plan.  They agreed.

In this case, their ability to have sufficient income for maintaining their lifestyle, plus travel, a second home, long term care insurance, and dining out three times a week would be affected by saving for a Harvard education vs. a public university one.  With the Harvard education for two grandchildren, the probability that they could live the life they wanted was about 70%.  This was not terrible, but if they chose the public university route, the probability went to 95%.  This was much better.

I did not like giving them the news that they might not be best served to promise their grandchildren an all-expenses-paid Ivy League education.  I asked, “This seems pretty important to you.   Are you sure you don’t want to make some adjustments to these other goals, so you can achieve this one?”

The wife spoke first.  “Absolutely not!  I want them to have a college education, but I want to have my life, too.”  The husband agreed, “Yes, it would have been nice, but, wow, I didn’t realize it would be that much.”  In the end, to my surprise, they decided to fund a public university education, and no additional expenses.

Looking back, the speed with which they gave up the Ivy League dream suggests that a little knowledge about how much things truly cost  can help make big decisions easier.  It can also have a big impact on how you feel about the life you choose to lead.

Why Money Can’t Solve Our Problems

“I don’t know who I am or what I want. I just know I want to make more money and then I’ll figure it out and be happy.”  Ever felt this way?  At one time in my life, I sure did.

If you are reading this, most likely, you have a full tummy most of the time, shoes to protect your feet, a closet full of clothes, and an apartment or a house to keep you dry and comfy.   You were taught to read.  You have several years, maybe close to two decades, of education.  You may have participated in sports or music or arts or outdoor activities.  You may have experienced love in one or several different forms – from your parents, friends, siblings, a pet,  a spouse, or from a child.  To most of us, these are just the basics.   Take away any of these “basics,” though – our physical needs, our literacy, our leisure, and our love -  and we become seriously unhappy.

In contrast, how much did your happiness increase when you got your last new car? How about your last new outfit?  Your last new set of towels?  Your last bag of groceries?  How long did the happiness last? Think about each of these things as if you had never had one before.  How would the change in your happiness level compare then to just replacing an old one?

Once we reach a certain level of wealth, each additional dollar brings us a diminishing unit of additional happiness.  Economists call this a “diminishing marginal return.”

Even though we have scientific studies confirming money’s diminishing marginal return to happiness, we still seem to think, “If I had more money, I could do or have that,” or “I can’t do or have that, I can’t afford it,” or simply, “I would be happier if I had more money.”   Is this really true?

Money does give us choices.   We like having a choice between Lexus and Toyota.  We like latte and cappuccino.  We like menus.  We like variety.  We like Sam’s Club.

Before thinking more money was the answer to a problem, though, I think about whether there was anything else I could give up to get what I want?  If it didn’t involve giving up the “basics,” then I could afford it.  I just didn’t choose to.

If we want our money to work for us, it has to be efficient.  It can’t be wasted on unimportant things.    If we cannot be clear about what’s unimportant, though, we are likely to find ourselves perpetually wanting “more,” which is a prescription for perpetual unhappiness.

In The Seven Habits of Highly Effective People,  Stephen Covey wrote about the “Abundance Mentality.”  Having an Abundance Mentality means living as if there are plenty of resources and money to go around for everybody.   Ironically, once we precisely define what we want in our life, the world does appear far more abundant.  Life is no longer  a game of scarcity and competition.

By doing the hard work of figuring out everything we don’t need, voila’, the important stuff becomes much more “affordable.”  Money isn’t the answer to our problems.   We are.

Beginning a Lifestyle Plan: 10 Key Questions

Did you know that there is a peer-reviewed, academic Journal of Happiness Studies?  Or have you heard of the field of behavioral economics?  In 2002, the Nobel Prize in Economics was awarded to a psychologist, Dr. Daniel Kahneman, who researched the economic concept of utility.  Utility is an academic word for happiness.  You won’t be surprised to know that Dr. Kahneman’s research has found that it’s not what we have, or even how much money we have, it’s who we spend time with, and how we spend our time, on a regular basis, that determines how happy we are.

The implication is that we should be asking ourselves what our money is for, before we start trying to give it any kind of direction.  The following 10 questions are based upon the general principles found in What Color is Your Parachute?  For Retirement, by John Nelson and Richard Bolles, and are designed to cover, in broad strokes, the beginning of a lifestyle plan (not just a plan for Retirement). There are three main parts:  Happiness, Health, and Home.

HAPPINESS

1)  WHO:  In whose presence are you consistently happy?  Who do you like being around because they give you joy?  Who fills up your emotional tank?  Write down as many or as few names as you want.  Don’t forget yourself.  Busy people need alone time, too.

2) WHAT:  What activities give you a sense of happiness and are consistently, frequently repeatable in your life?  Perhaps it’s walking your dog, going for a swim, or having your morning coffee on the porch.  One professor arranged his life so he could walk home from work and wrote about how much his happiness improved when he didn’t drive.  What are the little things that make your day?

3) WHAT GROUPS:  Think of the phrase “network of information and opportunities.”  What circles, or networks, or groups do you spend time in that you would consider to be a network of information and opportunity for you? It does not have to be a business or career opportunity.  It could be a group where you experience a personal growth opportunity, or the opportunity to get to know someone you would not have otherwise known.  It also does not have to be a formal group.  It can be the neighbors you always see when you walk your dog or visit your favorite restaurant.

4) WHAT ELSE: What activities that you haven’t written down yet are you committed to either now or in the future for your own growth purposes?  Hobbies, volunteer activities, or going back to school, for example?

HEALTH

5)  PHYSICAL ACTIVITY:  How will you stay healthy and active throughout your life?  What activities do you enjoy?

6)  HEALTH RESOURCES:  What kind of health resources would you like to always have around you?  Perhaps you just love your G.P. or your internist.  Or you have to get massages, or acupuncture, or go to yoga class, or it’s important for you to have access to a health food store or a compounding pharmacy.  What do you need so you are able to take care of your health in the way you are most comfortable?

7)  MENTAL FITNESS:  How do you keep your mind healthy?  Meditation, crossword puzzles, chess, or public speaking are all good ways to stay sharp.  Write down any of those kinds of activities that you enjoy.

HOME

8)  6 USES FOR A HOME:   Home can be a Job; a Project; a Museum; a Community Center; a Base of Operations; or a Retreat.  How is your home used now?  How would you like it to be used in the future?

9)  HOW MANY HOMES: How many homes would you like?  If you have in your mind your idea for another home, put it down. But remember, happiness depends upon having access to the answers in questions 1 through 7 – people, groups, and health resources.  If you may make a commitment to a beautiful location with none of the resources there that you need, you may find you don’t use it very much.

10) OTHER PLACES:   If you have a desire to travel, where would you go, how would you travel, how often, and who with?

Going through a process like this provides a blueprint, or foundation, for defining the minimum that’s acceptable for you to live a happy, healthy life.  Plus, it provides a financial, legal, or accounting professional a much better idea of who you are and how they can help you.  (If your professional doesn’t seem interested or care about these topics, find a new professional.)

Ultimately, this blueprint may make clear what you are willing to sacrifice for.  It may inspire you to sacrifice a little now so you can have more of something later, or it may help you realize that now is the time you’ve got to enjoy the people or activities that are most important in your life.

For more information on lifestyle planning, email me at holly@hollypthomas.com, or Comment on the blog.

401K Decisions by Age Decade – 20s, 30s, 40s, 50s, 60s

Shortly after the 2008 financial crisis, I saved a Money magazine article on the topic of 401K investing, curious to see if I would change their advice two to three years later.  Following is a synopsis of the magazine’s advice at that time.  For the 20s, 30s, 40s, and 50s, not much has changed.  But for the 60s, the article leaned toward armageddon, contingency planning, and worst case scenarios.  There was nothing in the article about staying the course.  It’s interesting to reflect back on the mood at that time.

[The following are both direct quotes and paraphrasing of the main ideas of the article.  The sources listed are attributable to Money magazine.]

In Your 20s

In your 20s, the challenge is that retirement isn’t even on your radar.  Debt is accumulating instead, and most 20-somethings can’t see past the goal of getting out of debt first.  According to the Project on Student Debt, 2007 graduates on average who took out student loans left college owing $20,000.  Nevertheless, 20-somethings should pay off high-interest debt like credit card bills and start funding a 401(K).

Nearly half of all twentysomethings with a 401(k) plan turn down the company match by not contributing the full qualifying amount – essentially free, tax-deferred money.

What can you do?  Start brown-bagging lunch.  For someone making $30,000 a year, setting aside $35 a week is all it takes to sock away 6% of salary.

An additional pitfall at this stage is job-hopping.  When switching employers, many are tempted to pull out their 401(k) savings.  But, while $5000 may not seem like a whole lot of money, if invested, that amount will be substantial by the time you retire.

[Note on rollovers and aggressive saving:  When my employer merged with a new one in 1991 I was 25 years old and eligible to take my retirement savings of $11,000 out.  Instead, I rolled it over and 15 years later, it had grown, with no additional contributions on my part, to $50,000.  Together with funds from my full-match participation in my new employer’s retirement plan for 15 more years, I had sufficient funds by the time I was 40 to fully meet my retirement goals.]

In Your 30s

By this decade, just being enrolled in the retirement plan isn’t enough.  How the money is invested begins to take on more importance.  According to a survey by investment advisor Financial Engines, 40% of all 401(k) participants make investing mistakes that impede their portfolios’ growth.  The two most common mistakes are: 1)  investing too conservatively in cash, therefore not beating inflation; 2) investing too narrowly in a single stock (typically, the employer’s).

To catch up, learn to diversify according to “asset allocation.”  Embrace both stocks and bonds.  Combining the two will bring a cushion against market drops.

If your 401(k) has a Roth feature, and you believe your income taxes will be higher in retirement, use that feature to invest after-tax dollars now for tax-free withdrawals later.

Once you have your portfolio fine-tuned, revisit it on a regular basis but no more frequently than quarterly to “rebalance” to your original mix.  If you start managing your investments early,  you can reap rewards down the line.

In Your 40s

Too many claims on the paycheck becomes a common problem for fortysomethings.  Even though you are entering your peak earning years, major expenses like college tuition loom.  When the AARP recently asked workers why they didn’t save more for retirement, 33% of 45-to-49 year olds said they were saving for a child’s education instead.

Only 10% of 401(k) participants in their 40s are saving the full amount allowed under the pretax IRS or plan ceiling, and that’s the highest proportion of all age groups.  Now is the time to max out your contributions to $16,500.

What about the kids?  As Fidelity’s Mike Doshier says, “You can get student loans, you can get car loans, but you can’t get retirement loans.”  Don’t dip into your 401(k) for tuition expenses.  Save as much as you can, ideally, 10% of your income.

In Your 50s

When the stock market falls at this age, your nest egg begins to look cracked.  The market will probably rebound before you retire, but how do you make sure you’re protected against another downturn?

Seemingly seasoned investors still make rookie mistakes.  Given the option, 40% of 401(k) participants in their 50s keep more than 20% of their savings in unrestricted company stock, a perilously risky proposition, no matter how healthy your employer is, especially for those nearing retirement.

50-somethings are allowed to make catchup contributions.  You can put an additional $5500 in your 401(k) every years.  Fewer than 20% of eligible participants take advantage of that option, according to Vanguard.

In case the stock market takes a dive just in the year you want to retire, that is the time to create a cash cushion by shifting 5% to 10% of your balance into short-term bonds or cash, generally two years ahead of time.  In the decade before retirement, it’s more important than ever to make sure you’re controlling for risk and positioning your portfolio to ride out rough patches.

In Your 60s

In a down market, the dilemma facing the ready-to-retire set is:  retire later or retire on less?  When savings shrink drastically late in the game, prepare to adjust your expectations and your game plan.

More than half of workers over 60 say they will probably postpone retirement, according to an AARP survey.  68% of fifty-somethings and 70% of forty-somethings said they were likely to work longer than they had planned due to the 2008 market meltdown.

If you can stay on the job, working a few extra years can vastly improve your long-term financial prospects.  You can cover expenses, add to savings, and give your portfolio time to rebound.

Your pre-2008 expectations are gone, so if you’ve already retired, rethink your budget.  Look for ways to postpone withdrawals, or consider starting Social Security early.  You’re eligible at age 62.   Finally, plan for longevity and inflation.  That means keeping a portion of your portfolio in equities even after retirement.

For the 60-somethings who did not panic and sell out their 401K balances, there may be a sigh of relief.  Don’t forget life expectancies are lengthening, and money market returns won’t help the money last into our 80s and 90s.  Although once-in-a-lifetime market plunges are difficult to stomach, it’s important to remember that some percentage in a diversified stock portfolio is necessary to maintain our lifestyle for decades to come.

Mythical Nirvanas by Mitch Anthony

Mythical Nirvanas. In this article from Financial Advisor magazine, Mitch Anthony explains why so many people rapidly tire of “retirement,” and what it means to maintain fulfillment after 50.  Stagnation, emptiness, and boredom are looming for those who do not stay engaged and connected.  Some authors, such as John Nelson and Richard Bolles, have rejected the conventional life-cycle model of School-Work-Leisure and replaced it with a First Age – Second Age – Third Age – Fourth Age model, in which each age is comprised of differing amounts of all three – lifetime learning, work, and leisure.  Anthony’s article poignantly discusses the impact of expecting 100% leisure time for 15 or 30 years to lead to any kind of lasting happiness.