Money management 101
Five local financial professionals break down hot topics on savings, retirement and more.
Financial planning. The mere mention of those words can make one’s head spin. And the more choices there are, the more confusing it gets. How much to save? How much to invest? What is the difference?
We’ve taken some of the most frequently asked questions to a respected panel of local experts to help navigate the sometimes muddy waters of wealth management.
What is long-term care insurance, and who should purchase it? According to Michael Hopper, assistant vice president of Trust Co. of Oklahoma, long-term care (LTC) insurance policies provide reimbursement for expenses stemming from the treatment of chronic illnesses, potentially lessening the cost of skilled nursing care, Alzheimer’s care or even home health care.
“While LTC insurance may be appropriate for a wide range of individuals, it is not appropriate for everyone,” Hopper says. “Those with insufficient savings should qualify for Medicare, whereas individuals with large estates should be able to self-insure.
“However, for everyone in between these extremes, the purchase of a qualified LTC policy from a reputable insurer may preserve retirement assets from the costs associated with a long-term care event.”
How can I bounce back from a “retirement derailer” — a specific circumstance that seriously impacted retirement plans or reduced retirement savings? “Life happens,” says Stephanie Ede, a Morgan Stanley financial advisor. “It’s not uncommon to experience serious events that can impact your savings and your estate.”
However, Ede says retirement accounts should be considered “sacred” money and the last place in the pecking order to get funds.
Robert McCormick, senior executive vice president of the Trust Co. of Oklahoma, recommends developing a sensible plan in advance to minimize the risk of serious loss.
“Set your retirement plan so that it will work for you in good times and bad,” he says. “That means don’t shoot for the moon when times are good unless you can truly afford losing most of your retirement in a crisis. Also, on the other hand, don’t be so conservative when times are tough that you miss out on reasonable opportunities.”
What are interest rates expected to do in 2014, and how will that impact me? “Interest rates are at a historic low and have been for some time,” says Thomas Bowen, a certified financial planner with Securian Advisors MidAmerica. “Most experts believe that it’s not if interest rates will rise, but when. If that is in 2014, then items like loan interest rates will rise and theoretically inflation will rise.”
Regardless of interest rate forecasts, Ede recommends keeping things diverse.
“For the average investor, it is wise to maintain a diversified portfolio of fixed income, equity and money market securities, and to not compromise on quality,” she says. “This time-tested strategy eliminates the guess work of trying to figure out the direction of interest rates.”
How much should I be saving for emergencies and retirement, and where is the best place to keep my money? “Emergency funds should equate to six months of living expenses and should be kept in a simple money market or savings account,” Bowen says. “It won’t get much interest, but it is safe, and it is liquid.”
For retirement, Bowen says the answer depends on several factors, and the amount to save is different for everyone.
One should definitely look at all their current assets, then do an analysis of their living expenses to decide what is needed for retirement, which should include the inflationary cost of living through retirement and expected growth of assets, he says.
“My experience is that is takes a lot more to retire on than people realize, and most people don’t save enough,” Bowen adds.
Harvie Roe, President of AmeriTrust Investment Advisors Inc., also recommends a home equity line of credit (HELOC).
“This allows assets to remain invested but provides a source of liquidity, should it be needed,” Roe says. “There is no perfect investment, but (what is needed is) an understanding of the relationship between balancing lifestyle with resources and the risks being assumed.”
Should I invest even if I am paying off debt? Are stocks or bonds generally best? McCormick suggests it is best to try and pay off debt while also investing.
“While it is important to keep debt at a manageable level, you should consider saving what you can for future emergencies and retirement,” he says. “You may not be able to save as much as you work down your debt, but it is important to have a portion of each available dollar allocated to both paying off debt and savings.”
“Both repaying debt and investing will increase a person’s net worth,” Roe says, adding, “The decision to pay off debt should be a function of the rate and time remaining, and investing in stocks and bonds should be tempered by the level of risk a person is willing to take to meet their long-term goal. The more in equities, the higher the risk and the return will be over the long term. A portfolio consisting of an allocation of both stocks and bonds is normally preferred, but the allocations should be designed with a purpose, and the percentage of one asset class over another will depend on other resources available.”
Don’t know the difference between a CFP, CLU or ChFC? No worries, we can help.
CFP: Certified Financial Planner. Probably the most widely recognized financial designation in the industry. The media has promoted this designation over most others for years, primarily because of its unbiased approach to teaching the financial planning process and the rigorous certification requirements that are administered by the CFP Board.
CLU: Chartered Life Underwriter. This is the highest designation in the life insurance industry.
ChFC: Chartered Financial Consultant. Similar to the CLU, this designation focuses more on the general principals of financial planning.
CFA: Chartered Financial Analyst. This designation is generally considered to be one of the most difficult and prestigious credentials in the financial industry, at least in terms of investment management.
CPA: Certified Public Accountant. The oldest financial credential in America. The CPA designation has long been widely recognized as the definitive credential of tax expertise.