Six Early New Year's Resolutions

In the spirit of the holiday season, here is a list of early New Year's resolutions and fun things to do in 2012!

1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should be saving 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate high, take steps to increase your employment income or reduce your expenses.
2. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Consider funding a Health Savings Account (HSA). If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
3. In 2011, we've seen renewed volatility in stock market prices. Investors are still bruised from the 2008 global financial crises and pessimism is pervasive. Remember that the stock market is a leading indicator and will turn up before business, consumer and investor attitudes improve. Bond interest rates remain low and pose a challenge for achieving reasonable long-term returns. Broad diversification will be well rewarded and realistic expectations for long-term returns (mid to high single digits) are a must.
4. Are there any family or personal changes that might prompt a review of your beneficiary designations on life insurance policies (both employer provided and individually owned), IRA accounts and employer retirement plans? Were there any changes in employer plans wherein correct beneficiary designations should be confirmed? How about a power of attorney, will or trust documents? Are there changes of address or telephone numbers for people listed in your healthcare power of attorney document?
5. Do your children or grandchildren have employment income that could be used for a Roth or traditional IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for your children or grandchildren?
6. Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself. Best wishes for a healthy and prosperous New Year in 2012!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What Is Your Life Expectancy?

Mortality tables will tell you the average life expectancy is in the low 80s. But for many of us, there is a reasonable probability of living to age 90 or 95. An informal scientific analysis may be informative.

One website that may be helpful is www.livingto100.com. It asks 40 quick multiple choice questions and should take about 10 minutes to complete. (Hint: it will be helpful to have your latest blood pressure and cholesterol test results.)

The website provides personalized feedback on all of your answers and a "to-do" list for you and your physician. For example, it may suggest that if you lose "x" pounds or exercise "x" times more a week, you could add "x" number of years to your life expectancy. We do not endorse this website for medical or financial planning advice, but consider it an interesting tool and kind of fun.

"What Is Your Life Expectancy?" could be the question that will make you the life of the party at your family Christmas gathering!

Let us know if you try it and what you learn! 

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Numbers to Know for 2012

Here are some short and sweet numbers to impress your friends with for 2012:

Now you know!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Reality Show for Investors: "Survivor" by Weston Wellington

Note from Bruce:
The best stock performer in 5 or 10 years will probably be a company we haven't heard of today. History is filled with icons that have crumbled. A broadly diversified, passively managed fund is the best way to capture new stocks and tomorrow's best performers.
-Bruce J. Berno, CFP®

Anyone studying the long-run history of American business cannot help but observe how many of the prominent firms of one era fail to make it to the next. Free-market economies are characterized not only by intense competition but also by disruptive change. Sometimes a company's toughest competitor turns out to be a firm it has never heard of selling a product or service that didn't exist until recently. The list of companies that once dominated their industry but have fallen on hard times is lengthy enough to give every thoughtful investor reason for sober reflection.

Among many possible examples, a number of firms come to mind that were once highly regarded but later encountered serious or even fatal problems.

• Bethlehem Steel pioneered the steel I-beam, which launched a skyscraper boom in cities across the country. Its engineering expertise supplied the steel sections for the Golden Gate Bridge. But growing competition and a changing marketplace eventually took their toll, and the firm filed for bankruptcy in 2001.
• In 1973, Eastman Kodak held a seemingly impregnable position in the lucrative market for photo film and chemicals, enjoyed a reputation for innovation and astute marketing, and boasted a market value even greater than oil giant Exxon. Kodak shareholders had been favored with an uninterrupted stream of dividends dating back to 1902. Today the company is struggling to reinvent itself as the film business shrivels, the dividend has been suspended, and the share price is limping along under $3.
• A Fortune article profiling Pfizer in mid-1998 praised it for having "one of the richest product pipelines in the Fortune 500." A Wall Street analyst enthused that "some of my clients refer to Pfizer as the best company in the S&P 500." In early 1999, a Forbes cover story sounded a similar note, crowning Pfizer "Company of the Year" and observing that "the people who brought us Viagra have more blockbusters on the way." Thirteen years later, the Viagra boom has subsided, patents are expiring on highly profitable products, and the gusher investors expected from the research pipeline has slowed to a trickle. The share price has slumped over 50% since year-end 1998 compared to a 3% loss for the S&P 500 Index.

Some companies almost single-handedly create new industries but still find it difficult to turn innovation into a permanent advantage. Pan Am (air travel), Kmart (discount retailing), Polaroid (instant photography), and Wang Laboratories (word processing) all had impressive initial success and provided handsome rewards for their investors. Alas, neither Pan Am nor Polaroid survives today, and Kmart shareholders were wiped out when the firm emerged from bankruptcy in 2003. (Kmart, Polaroid, and Wang Laboratories were all cited as examples of "excellent" companies in the 1982 bestseller In Search of Excellence.)

Evidence of this "creative destruction" appears all around us. For example, the Wall Street Journal reported that shares of Minnesota-based Best Buy Co. slumped Wednesday (9/14) to their lowest level since 2008 after reporting a 30% drop in quarterly profits. For most of its life, Best Buy has been the toughest kid on the block, vanquishing rivals such as Highland Superstores and Circuit City on its way to becoming the nation's leading electronics retailer.

Will Best Buy fall victim to even tougher competitors such as Amazon.com or Walmart? Or is this current downturn just a speed bump on the road to even greater success? No one can say. For every riches-to-rags story, we can find another tale of decline followed by dramatic recovery. According to some accounts, for example, Apple was only a few months from bankruptcy when Steve Jobs returned to the company in 1997. Now it vies with ExxonMobil for the number one spot in a ranking by market cap. And who would have imagined that a floundering New England textile firm with a low-margin business that sells suit-lining fabric would one day become a financial colossus known as Berkshire Hathaway?

The thrill of owning a great growth company during its most lucrative phase is a powerful incentive to search for the Next Big Thing. But almost every company with a highly profitable position is under constant attack from competitors seeking to garner a portion of those hefty profits for themselves.

As a result, the search for firms destined to generate greater-than-expected profits for many years into the future is fraught with peril and likely to end in frustration. Most investors will be far better off harnessing the forces of competitive markets and putting them to work on their behalf by holding a diversified portfolio. As Nobel laureate Merton Miller once observed, "Above-normal profits always carry with them the seeds of their own decay."

Miguel Bustillo and Matt Jarzemsky, "Best Buy Gets Squeezed" Wall Street Journal, September 14, 2011.

David Stipp, "Why Pfizer Is So Hot," Fortune, May 11, 1998.

"Pfizer: Company of the Year," Forbes, January 11, 1999.

Standard & Poor's Stock Guide, 1974.

Thomas Peters and Robert Waterman, In Search of Excellence (HarperCollins, 1982).

Merton Miller, "Is American Corporate Governance Fatally Flawed?" Journal of Applied Corporate Finance, Vol. 6, No. 4, Winter 1994.


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About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What's the Probablity

The future is always uncertain. I am not a gambling man, but many times decisions are made by asking the question, “What are the chances that this is going to be successful?”

When it comes to investing, the probability is in our favor in the strategic decisions that we have made. It is also important to understand that no strategy works successfully 100% of the time, so what is the probability of:

A. U.S. large-company stocks beating one-month Treasury bills?

We may be in one of the minority periods now, but given that one-month Treasury bills are at 0% now, the chances of stocks doing better in the future are pretty good.

B. U.S. large-value-style stocks beating the S&P 500?

C. U.S. small stocks beating U.S. large stocks?

More importantly, add to these questions how stocks perform coming out of a recession, which is certainly a fair way to describe our current environment:

A. How have U.S. large- and small-company stocks performed after recessions since 1953?

B. How have value-style stocks performed after recessions since 1970?

Value-style stocks significantly outperformed growth-style stocks after recessions for both large- and small-company stocks for all time periods referenced above.

I am also reminded of a friend who rented a motorboat while on vacation, but the motor wouldn’t start properly and he had to leave the motor idling when not in motion. When he made this fact known to the marina owner, he got a nice southern drawl answer of, “Well, nothing’s perfect…” Truly memorable words to live by.

Clearly, we want you to understand that no investment strategy works 100% of the time. U.S. value-style stocks, both large and small, and U.S. small-company stocks have underperformed in July and August 2011, after having generally outperformed in the first half of the year. Using our “let’s look forward, not back” theme, the probability of stocks beating bonds and value-style and small company stocks providing superior performance coming out of recession is pretty good. In today’s age, having reasons to be hopeful should provide much appreciated financial peace of mind.


About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

All That Twitters Is Not Gold

The most common question we have heard from our clients lately is, "Should we buy gold?" There is a long list of reasons why the answer is "No!"

1. Gold investors made absolutely no money for 25 years from 1980 to 2005, according to Ibbotson Associates.
2. The price of gold actually declined about 50% from 1980 to 2000. Even the most disciplined of investors would have given up during that time, since traditional stocks and bonds were performing well above average during that same period.
3. Gold, like all commodities, does not pay any interest or dividends.
4. Only about 11% of gold has an industrial use. It is not sold and consumed like oil or natural gas.
5. The actual replacement cost of gold is about half of the current value. According to Dan Denbow, co-manager of the USAA Precious Metals and Minerals Fund, it costs about $600 to produce an ounce of gold, but that rises to about $1,000 per ounce when all of the costs of mining are factored in.
6. As of this writing, gold recently spiked above $1,900 an ounce.
7. Gold was up about 16% for the month through August 22, 2011, therefore heading for its best monthly performance since September 1999.
8. Gold has increased in value in value for 11 years, the longest winning streak since at least 1920.
9. Exchange Traded Funds (ETFs) have made it very easy for individual investors to buy gold. But if selling is triggered, heaven-forbid panic selling, then the price swing could be swift and sharp.

In our opinion, buying gold today is like buying tech stocks in the late 1990s. It may continue to go higher in the short-term, but the long-term trend is screaming "buy high," to be followed, of course, by "sell low!" Let's not do that!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What Does Your “Next Five” Hold?

Financial planners are well known for counseling their clients to think long-term. While it is important to think 10, 20 and 30 years down the road, that can be hard to do. We frequently counsel clients to manage what we can control and not worry about what we can’t control. Just like tackling a big project is sometimes best handled by starting with baby steps, try looking at your future in smaller steps.

What do your next five years look like? A few issues may immediately come to mind. Better yet, let’s break that into smaller pieces. What does your next year look like? Next three years? Next five years? Of course, being financial planners, we focus on events that will have financial implications or need financial planning. That’s not to say that personal goals, like strengthening friendships or improving your golf handicap, aren’t important, but they are beyond the scope of this article.

Allow me to use the Berno family as an example. In the next year we will be making a college decision for my second oldest child. Obviously, this has huge financial implications. He is very smart, so he may get a generous scholarship or he may go to a top-tier school that is very expensive. Did I forget to mention he just announced he is interested in the Air Force Academy? We’ll definitely have to take a wait and see on this one as it is very hard to plan for. Let’s take the fact that my wife wants to remodel the kitchen as an additional swing factor here.

In May 2012, my daughter will be graduating from college. She has chosen teaching as a profession so a job may not be firmed up until August. The across-the-board layoffs in the teaching profession are certainly on my radar screen. She may consider a volunteer position in social service for one year. The only thing I am reasonably sure of is that her tuition payments will be over!

Within three years I have one term life insurance policy that expires. I am comfortable that I can stick with my original plan of letting it lapse. I plan on keeping my other life insurance in force and do not see the need for more disability insurance. My youngest son turns 16 in October 2012 so that will affect our car “fleet,” as I call it, which currently has four vehicles. Should we shift my second son’s car down to my youngest and buy the then 19-year-old son a different car? Assuming that the 2002 Toyota hasn’t died from mechanical failure or an accident, this sounds like a plan.

Within five years my second child will hopefully be out of undergraduate school. (Did I mention he just told us he may be interested in medical school? This makes the Air Force Academy sound even better!) My third child will be off to college and we will be empty nesters. We are frankly not looking forward to that as my wife and I really enjoy having the kids around. Based on the fact that my one and only daughter will be 26 in five years, should we plan on a wedding? God only knows. But it is important to sketch this list out. 

Over the next five years we should be able to get by with only one, or maybe two, car replacements. We have no major home improvements planned other than the aforementioned kitchen remodel. My wife and I will have our 25-year wedding anniversary, so does that call for a special trip? 

Having started this “next five” exercise myself, I know that it can be exhausting, but a lot of it is due to our stage of life and it is certainly easier than thinking 25 or 30 years out. At the end of the day, a little thinking and planning is better than none. What’s in your next five?  

Everything You Wanted to Know about Disability Insurance (But Were Afraid to Ask)

May is Disability Awareness Month. While most people know about life insurance, fewer people consider the importance of disability insurance. Here are some noteworthy facts about disability from credible, third-party sources, compliments of Bob Gertie of Advisor Insurance Resource.

Causes of Disability

Many people think of disability as something that only happens to a manual laborer or

blue collar worker. But a disability can happen to anyone. Consider these facts:

• While many people think that disabilities are typically caused by freak accidents, the majority of long-term absences from work are actually due to illnesses, such as cancer and heart disease. (Life and Health Insurance Foundation for Education, November 2005)
• Stroke is a leading cause of serious long-term disability. (Centers for Disease Control and Prevention, 2007)
• Common causes of individual disability insurance claims are:
  
  
• Over 85% of disabling accidents and illnesses are not work related, and are therefore not covered by worker’s compensation. (National Safety Council^®, Injury Facts^® 2008 Ed.) 

 Need for Protection

 A disability can happen to anyone, at any time.

• At age 40, the average worker faces only a 14% chance of dying before age 65 but a 21% chance of being disabled for 90 days or more. (Insurance Information Institute, www.iii.org, November 2005)
•  In 2007, 12.8% of people ages 21–64 surveyed had a disabling illness. (U.S. Census Bureau, American Community Survey, 2007)
•  In the U.S., a disabling injury occurs every second, and a fatal injury occurs every 4 minutes. (National Safety Council^®, Injury Facts^® 2008 Ed.)
•   In the home, a fatal injury occurs every 12 minutes and a disabling injury every three seconds. (National Safety Council^®, Injury Facts^® 2008 Ed.)
• There is a death caused by a motor vehicle crash every 12 minutes and there is a disabling injury every 13 seconds. (National Safety Council^®, Injury Facts^® 2008 Ed.)
• Almost 3 in 10 workers entering the workforce today will become disabled before retirement. (Social Security Administration, Fact Sheet, January 31, 2007)
•  In 2007, the employment rate of working-age people with disabilities in the U.S. was 36.9%. (U.S. Census Bureau, American Community Survey, 2007)
•  Forty-three percent of all 40-year-olds will have a long-term disability event prior to age 65. (JHA Disability Fact Book, 2006)

Disability Duration

The average disability lasts longer than you think.

• The average duration of a long-term disability is 30 months. (JHA Disability Fact Book, 2006)
• Nearly 1 in 5 Americans will become disabled for one year or more before the age of 65. (Life and Health Insurance Foundation for Education, November 2005)
• Three out of 10 workers between the ages of 25 and 65 will experience an accident or illness that keeps them out of work for three months or longer. (Social Security Administration, Fact Sheet, January 31, 2007)

Social Security Misconceptions

People have many misconceptions about the Social Security benefits they may receive if they become disabled. For example:

•  More than 1 in 5 adults believe that unemployment or Social Security will cover them if they become disabled. (Disability Literacy: How Consumers Rate Today, April 2005, The Hartford)
• Less than half―39%―of the 2.1 million workers who applied for Social Security Disability Insurance (SSDI) benefits in 2005 were approved. (Social Security Administration, Office of Disability and Income Security Programs)
• The average monthly SSDI benefit is $1,004. (Social Security Administration, Fact Sheet 2008)
•  In 2007, the percentage of working-age people with disabilities receiving SSDI payments in the U.S. was 17.1%. (U.S. Census Bureau, American Community Survey, 2007)

The Bottom Line

Disability is a major risk both in terms of probability and financial impact. Social Security is not a viable solution in many cases. Employer plans have limits―and you won’t work for your employer forever. Individual disability insurance coverage is often needed to supplement employer coverage, plus it is portable when you change jobs. Simply compare the cost of disability to life insurance and you can see the probability risk and financial risk of disability. Disability insurance is expensive but important!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Where Does Your Money Go?

Are you saving more money than you want to or planned? Probably not. Does it seem that even when your income goes up you can’t save more money?

Where does your money go? How much money are you saving? If you have a hard time answering these questions―and most people do―there are some easy solutions.

First, try a manual or “back of the envelope” approach. Start by identifying your annual income from your W-2 tax wage statement or year-end payroll stub. Then identify how much you contributed to investment accounts like your 401(k), IRA or 529 college savings plans. Next, calculate how much cash you accumulated or depleted by comparing your bank account balances from the beginning of the year to your balances at the end of the year. If your bank account balances were higher at the end of the year than at the beginning, you accumulated cash. If they were lower, you depleted some cash.

To calculate the percentage of your income that you saved, divide the amount you contributed to investment accounts plus any cash that you accumulated minus any cash that you depleted by your annual income total. For example, if your annual income was $100,000 and you contributed $15,000 to your 401(k) and accumulated $5,000 in your bank accounts, you invested or saved $20,000 or 20% of your income. That is very good and you may be able to stop here, unless you want to learn more about where you are spending your money so that you can try to save even more.

If your income was $50,000 and you contributed $1,500 to your 401(k) and $500 to a 529 college savings plan and your bank balances remained about the same, then you saved 4% of your income. Obviously, the higher your income, the greater percentage you should be able to save. However, it doesn’t always work out that way, as people tend to ratchet up their lifestyle spending as their income increases. As a general rule, you should try to save 10% to 25% of your income. Saving 5% is better than nothing, but it’s probably not enough to accumulate a retirement nest egg in the long run.

What technological resources are available to help you boost your savings? You have a wide range of options to choose from. Your bank website may have a resource to help classify and summarize expenses. Your credit card company may provide an annual statement that shows you how much you spent in certain categories. Check out the “restaurant” or “entertainment” categories and you may be shocked how the discretionary expenses add up. 

Two popular software packages that can help you track your spending and saving are Quicken and Mint.com. Quicken is a PC-based software and Mint.com is web-based. They are both owned by the same parent company, Intuit.

Mint.com is free and automatically collects your transactions from your bank and credit card accounts. It assigns an expense category based on the merchant code that is tracked when you swipe your credit card or debit card. For example, if you swipe your card at Kroger’s it will be classified as groceries and if you fill up your tank at Speedway it will show as gasoline. You can manually edit any entries in Mint.com and you do have to manually categorize any checks your write and any cash transactions.

Quicken is similar to Mint.com, but you have to manually download your transactions. Credit card transactions are automatically categorized, just as they are with Mint.com. Quicken has a much wider range of reporting capabilities and more flexibility in choosing historic time periods for reporting. Quicken also has an “Easy Answer” function to answer the questions “How much did I pay to…”  or “How much did I spend on…” for a wide range of time periods that you can select. Quicken also offers bill pay and check writing capability to further simplify your cash management. Different versions of Quicken are available that cost between $60 and $90 before rebates and discounts.  

Whether you use manual or software methods to track your income, expenses and savings, the process is enlightening and well worth your effort!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What Is Long-Term Care Insurance and Is It Right for Me?

We often find there is confusion regarding long-term-care insurance. Who should purchase it? When it should be purchased? Here is our four-point mantra on long-term-care insurance: 

1. Age 50 to 65 is the ideal time frame to consider long-term-care insurance; the earlier the better. 
2. Invest time to learn about long-term-care insurance, understand it, and decide if it is right for you.
3. Apply to see if you qualify medically. If you don’t, your decision is made for you!
4. Buy it or don’t buy it, but make an informed decision that you won’t look back on and question or regret.

But what is long-term-care insurance? It is not just nursing home insurance. You qualify for benefits if you cannot perform a number of “activities of daily living” such as getting out of bed, dressing yourself, feeding yourself, using the bathroom and bathing yourself.  

Long-term-care insurance can therefore provide benefits at any age, whether a stroke, traffic accident or other event puts you in a situation where you cannot perform some of the activities of daily living.

Long-term-care insurance can cover services at home, in an assisted living center or a nursing home.

Here’s a real-life example: My step-father is in an assisted living center because we do not want him living at home alone―he needs help taking his medications on a regular schedule, and we want him to have some supervision, social opportunities and good meals. But he can perform most of the activities of daily living, so he would not qualify for benefits if he had a long-term-care insurance policy.  

Consider your personal circumstances when thinking about purchasing long-term-care insurance:  

• Are you married? If so, what is the age difference between you and your spouse? If you are both close in age, what would happen if you both needed care? If there is an age spread, could caring for the older spouse leave the younger spouse with fewer assets for their life?
• How many children do you have, where do they live and how able would they be to help care for you? Would you want to move in with them?
• Do you own a home that could be sold to pay for your long-term care?
• Is the idea of needing care in the future and paying for it something that you worry about?
• What is your family health history? Did both your mother and father die before age 75 or did they live past 90? What about your other relatives?
• How is your current health? Are you an obese smoker with multiple health issues? Ironically, the healthier you are, the more likely you are to need long-term care insurance!
• Are you comfortable relying on government plans or would you rather have individual coverage that may afford you more choices and flexibility?
• Would you prefer to self-insure and rely on your savings and investments?
• How important is it to you to leave an inheritance for spouse or children? 

Remember, no one wants to live in a nursing home. No one wants to be infirmed or unable to take care of herself. No one wants their house to burn down, to be in a traffic accident, to get sick or to die prematurely, but that is why we buy home and auto insurance and health insurance and life insurance. The same principle applies to long-term care. 

Your financial peace of mind will be well served by learning about long-term-care insurance and deciding if it is right for you.

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

A “Total Portfolio Approach” and Why It Is Important

Most investors have more than one investment account. They may have an employer’s 401(k), an IRA rollover, a Roth IRA, a joint taxable account and a college 529 plan. Some accounts, such as retirement accounts, all have the same goal, while other accounts, such as a joint taxable account or a college 529 plan, may have different goals. Cash flows, or deposits or withdrawals, from various accounts may be different too.

 

For those with multiple investment accounts, a “Total Portfolio Approach” will help establish an asset allocation as well as an asset location strategy. 

• Asset allocation influences long-term expected returns and volatility.
• Asset location influences liquidity and income tax efficiency.

For example, an investor may determine that an asset allocation of 70% stocks, 25% bonds and 5% money market funds is ideal for long-term expected returns and volatility.

 

Does this mean every account will have the same asset allocation? Maybe not. First, the employer 401(k) plan may have a Stable Value Fund, which is attractive but not available in the other accounts. The 401(k) plan may not have a good U.S. small company fund or international fund choice. The Roth IRA may be the last asset to tap into and possibly leave as an inheritance, so more aggressive investments may be appropriate. An investor may need a large cash balance in the joint account to pay for a lump-sum expense within the next year, such as a new car or wedding. The beneficiary of the college 529 plan may be in high school now and the investor doesn’t want to risk a 20% drop in the stock market when the student is a senior in high school.

 

Implementing the target asset allocation in this case may mean:

• A higher allocation to bonds in the 401(k) to take advantage of the Stable Value Fund
• A larger allocation to stocks in the rollover IRA, including U.S. small company or international funds that are better than the 401(k) choices
• A more aggressive long-term Roth IRA strategy that is more than 75% in stocks
• More than 5% cash in the joint account to cover the new car or wedding
• A higher bond or cash allocation in the college 529 plan to minimize stock market risk

Using this asset location strategy will improve liquidity because there will be more money market funds in the joint account and college 529 plan, and it will be possible to withdraw from these for short-term needs.

 

Asset location can also optimize tax efficiency by having high-income or tax-inefficient investments (such as real estate, commodity or inflation-protected bond funds) in a tax-deferred account such as the IRA rollover or Roth IRA.

 

Investors should focus on what they can control. Investors cannot control the short-term direction of the stock market or interest rates, but they can control their asset allocation and asset location. A Total Portfolio Approach increases the likelihood that an investor will achieve their personal financial planning goals.

 

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Your Path to Financial Peace of Mind

What does financial peace of mind mean to you? For some people, it may simply mean being able to pay all their bills every month. For others, it may mean having “x” dollars in savings and investments.

What would have to happen for you to experience financial peace of mind? Everyone has a “to-do” list. Maybe you’ve been meaning to review your 401(k) plan, consolidate your investments or have a Last Will and Testament written. Maybe you have questions about using a Health Savings Account or funding a Roth IRA for a grandchild. If you have questions, you need answers. Where do you get them?

The easiest way to achieve financial peace of mind is to understand what you can control and what you cannot control.

You cannot control: 

• The stock market
• Interest rates
• Healthcare reform policies
• Real estate prices
• The economy

You can control: 

• How much you spend and save
• Strategies to minimize income taxes
• Being properly insured
• Diversifying your investments and minimizing investment costs
• Having an estate plan for incapacity or death

Recognize that wishing for higher income or more assets will not provide you with financial peace of mind, nor will waiting to earn a higher income or accumulate more assets. The best you can do today is focus on being financially secure with the income and assets that you have. A recent survey by Merrill Lynch revealed that investors with a minimum of $1 million of investable assets believed they needed $7 million, on average, to be “financially secure.” Do you want to be the hamster racing on the wheel?

Financial peace of mind cannot be achieved alone. You must include the significant people in your life, whether that be a spouse and children, parents or grandchildren, siblings or other relatives, or significant others. Communication is critical and takes time and energy. Financial peace of mind is a great personal value to instill in your children.

Financial peace of mind comes from having goals and reasonable expectations. Have you thought about your goals and formalized them in any way? As the old saying goes, “If you don’t know where you are going, you’ll never know when you get there.” If your expectations aren’t reasonable and realistic, you will never achieve peace of mind.

So what has to happen for you to achieve financial peace of mind? The first step is to clarify your top three money concerns. In other words, what keeps you up at night? Then establish how you are going to address these concerns along with a time frame and deadline for each issue.

You may wish to break the issues that bother you most into categories, such as:

• Income and expenses (paying the bills and saving and investing)
• Insurance coverage
• Income tax strategies
• Education funding
• Retirement planning
• Charitable gift planning
• Estate planning

Can you do it alone? While you can take control of your finances on your own, most people find they don’t have the time or knowledge and experience to manage their personal finances effectively. If you fall into this category, it may make sense for you to seek professional advice. The Choosing the Right Financial Advisor worksheet on our website can help you find the appropriate advisor to help you take the steps you need to reach financial peace of mind.

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.