What Financial Lessons Are Your Children Learning From You?

Kids start learning financial lessons when they're very young.

Our children are learning financial lessons from us, whether we realize it or not, through our actions, behavior and words. Are they learning useful lessons? Is their learning a positive experience?

The best approach is a proactive one, where they learn lessons from our intentional conversations about personal finances. This starts with a foundation of values and priorities that precede economic decisions. Do they choose their friends by who has the biggest house or the best clothes or the most stuff? Or do they choose their friends by who is the most genuine, honest, humble and caring? Watch for "teachable moments."

A dose of financial reality may come with your child's first paycheck when they ask, "What's FICA?"
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Teaching Kids About Personal Finances

There is no predefined or perfect way to teach children about personal finances. It starts at a young age with simple discussions about self-esteem, personal values and relationships. It can include discussions around presents at birthday parties and at Christmas. It can progress to dealing with cash as they may get allowances or babysitting or lawn-mowing income. The first dose of financial reality may come with your child's first official paycheck when they ask, "What is FICA?"

As the years pass, they will reach the stage when they can have their own bank account with mom or dad, followed by an ATM card or credit/debit card and checkbook. Explain the difference between a debit and credit card. Teach them how to write a check, even if hardly anyone does that anymore. They should understand the principle.

Explain to them how mom and dad make financial decisions. Explain, without lecturing, the sacrifices or trade-offs that are made to achieve personal goals and priorities. There's no harm or guilt trip in dad saying that sending a child to summer camp was more important than buying a new set of golf clubs, if you present it nicely and factually.

Turning 16 opens the doors to financial responsibilities of a car, including insurance and gasoline and maintenance costs. Preparing to go to college will certainly open some discussions about savings, grants, scholarships and loans. Hopefully a foundation of understanding financial principles and the value of a dollar will have been achieved by this point. Early adulthood may introduce buying or leasing a car, renting or buying a house, and the biggest of all debts, a mortgage!

Financial Lessons to Last a Lifetime

Decide for yourself whether you want your children (and grandchildren) to learn about money and personal finances by observation or by using a proactive approach. Either way, these will be lessons that influence them for a lifetime.

In the Spirit of Giving, Consider Your Community Foundation

Charitable giving tends to go up at the end of the year.

As the holidays and end of year quickly approach, many people turn to thinking about charitable gifts. The Thanksgiving and Christmas season is a popular time for charitable giving, both for expressions of gratitude and giving as well as income tax deductions for the current calendar year.

The most universal guideline of how much to give to charity is the biblical principle of tithing 10% of your income.
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Develop a Charitable Giving Plan

Ideally, you should first develop a plan for how much to give and to what organizations or causes. Ideally, the amount you give will be commensurate with your income and assets, so the higher your income and assets, the higher your charitable gifts are as a percentage of your income and assets. The most universal guideline of how much of your income to give to charity is the biblical principle of tithing 10% of your income. As always, the best advice is to set a goal and have a plan.

Cash (in reality, money given via checks and credit cards) is the most common form of gifts. (We are addressing financial gifts here, but gifts of time and services are equally important.) If you have appreciated stocks or mutual funds, however, giving appreciated securities has an additional benefit: avoiding capital gains tax. If you give an appreciated investment to a tax-exempt charity, they can sell the investment and convert it to cash without paying any capital gains tax.

Giving appreciated stocks or mutual funds to charity can become administratively difficult if you give to multiple charities during the year. An attractive option is a donor-advised fund (DAF) at a community foundation, such as The Greater Cincinnati Foundation. Many communities have a community foundation. A DAF offers tremendous ease and flexibility. You can make one gift to your DAF at the community foundation and then request that grants be made to your list of charitable organizations. A DAF also allows you to separate the timing of gifts for tax purposes. For example, you can make a gift to your DAF this year for the income tax deduction, and either request grants to your favorite charities this year or in the future. A DAF also allows your stock or mutual fund to be sold and invested in a more diversified portfolio pending future distributions to charities.

Consider a Donor-Advised Fund

We are happy to help you learn more about a donor-advised fund at a community foundation. There are many uses and advantages of a donor-advised fund at a community foundation and we have only highlighted a few of them here. Most important, develop a goal and a plan for your charitable giving—it's the gift that keeps on giving.

You Passed Your Driving Test, But Can You Pass a Retirement Test?

Passing a retirement test may be more difficult than
passing your driving test.

The Wall Street Journal recently published a thought-provoking article on preparing for retirement. Below, we've highlighted a few of the questions from the quiz, so you can see how you would fare. You may find that passing this retirement test is harder than passing your driving test. You can take the quiz yourself online at The Wall Street Journal website.

"Passing a retirement test may be more difficult than passing your driving test."
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Take This Retirement Test

1. Research by Fidelity Investments recommends that workers should aim to save what multiple of their ending annual salary at age 67 in order to meet basic income needs in retirement?

Workers need to save eight times their final annual salary if they hope to meet their basic retirement income needs, according to the Fidelity study. This estimate assumes you start saving at age 25 and live to age 92. But some estimates are even higher. The Wall Street Journal also reports that an Aon Hewitt study concluded that a person would need a nest egg of 11 times their salary to retire at age 65.

What do these numbers mean for you? If your family has an annual income of $100,000, you would need a nest egg of between $800,000 and $1,100,000 to meet your living expenses in retirement.

2. What is the average age at which current retirees say they actually retired—and what is the expected retirement age among current workers?

As you know, what people want to do and what they actually do are two different things. While many reported that they expected to retire at age 66 (up from age 60 in 1996), the average retirement age among current retirees is 61, according to a Gallup poll published in May (that's up from age 57 in 1993).

People are beginning to see the impact of The Great Recession on their savings and investments as well as facing the reality of potentially longer life expectancies and uncertainty over health care expenses. There's one advantage to working longer, however (aside from being able to save more for retirement): The Gallup poll also found that people between the ages of 60 and 69 who work enjoy better emotional health than those who stop drawing a paycheck. Bottom line: Work provides important non-economic benefits.

3. What percentage of surveyed workers say they plan to continue working for pay in later life—and what percentage of current retirees say they have worked for pay?

Again, what people say they are going to do and what they do are often two entirely different things. While nearly 70% of people say they plan to work for pay in retirement, only one quarter of retirees actually do so, according to a study by the Employee Benefit Research Institute. That's a pretty big gap between expectations and reality. Granted, those results could be partly due to surveying people at different stages of their life (I'm not sure that they asked the same people both before they retired and after they actually retired). But if I had a nickel for every time someone said, "I'll just do some consulting in retirement...."

Perception vs. Reality

There is much to be learned about retirement and big differences between perception and reality. Contact us today for an appointment to start learning more about retirement and making your retirement dreams a reality!  

You Are Invited to Join the 1% Club!

Most people would be happy to join the 1% club.

At first blush, reading an invitation to join the 1% club probably makes you think about the top income earners who are so frequently referenced in public debate about wealth and income taxes. Who wouldn't want to join the 1% club?

"Better now than later, better safe than sorry. Good words to live by!"
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A Different 1% Club

We are recommending that you join a different 1% club; one that is more realistic and within reach for almost anyone. Join the club by increasing your retirement plan contribution 1% in 2014! You will be the big winner in the long run and you will be glad you did it.

There is so much written about the retirement savings shortfall in the U.S. that it can lead most people to despair. The general conclusion is that there is no hope, so why bother trying? But only one thing is for sure: Any negative financial situation only gets worse the longer it is ignored! Start nibbling away today and the long run results may surprise you.

How Much Are You Saving?

We generally recommend that people save 10% to 15% of their income, (for some high income earners, the number may be even higher). Most people save 3% to 6% to qualify for their employer's maximum matching contribution. Going from 3% to 15% overnight is understandably a very big jump to make and unrealistic for most people. But bumping up 1% a year each year will help you achieve your goal in the long run.

Is It Time to Change Your Money Mindset?

Are you a dreamer, procrastinator, perfectionist or a wanderer?

What is your financial mindset?

The 2013 Household Financial Planning Survey and Index, recently released by the Certified Financial Planner Board of Standards and the Consumer Federation of America, divides American consumers into four categories when it comes to their financial behavior.

"90% of Wanderers have no plan in place for specific savings goals."
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Four Categories of Financial Behavior

The four categories are defined by specific financial behaviors: comprehensive financial planning, basic financial planning and credit card debt management. The four categories are:

1. Basic Planners—The Dreamers: 38% of Americans
2. Limited Planners—The Procrastinators: 33% of Americans
3. Comprehensive Planners—The Perfectionists: 19% of Americans
4. Non-Planners—The Wanderers: 10% of Americans

The Dreamers are the largest category. They have some clear goals, but they just haven't worked out all the details. Two-thirds have a household budget but less than half of them write down their budget or store it electronically.

The Procrastinators are the second largest category. They put forth the bare minimum of effort and might get to the rest of planning later. While 31% of them plan for retirement, only 7% save for emergencies. Just 7% save for other goals.

The Perfectionists know the exact route to their financial goals. Two-thirds work with a CERTIFIED FINANCIAL PLANNER™ professional or Registered Investment Advisor. More than half have a household income greater than $100,000.

The Wanderers basically float from bill to bill without any strategic approach to money management. The report reveals that 90% of people in this group have no plan in place for specific savings goals. About 40% have significant credit card debt, but half of them have no plan to pay down that debt.

Planners Save More

Most important, the report concluded that planners exhibit more confidence in financial decision-making and save more money. Their confidence comes from understanding their financial situation. Regardless of income, planners achieved better financial outcomes than non-planners.

What is your financial mindset? While there may be little hope if you are a Wanderer, if you are a Procrastinator or Dreamer, now would be a great time to step up to the next level.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Passive vs. Active Investing: The Battle Rages On

In the active vs. passive investing fight, we’re firmly
on the side of passive investors.

Active versus passive management is a long-raging battle among investment managers. On one side are the active managers, who believe that through careful research and individual stock picking they can beat a stock market index portfolio over time. On the other side are the passive advocates who argue that an investor is best served by buying a low-cost, broadly diversified portfolio that tracks a market index. In case we have to tell you, Berno Financial Management has been in the passive camp for years.

"It may sound un-American not to try to be the winner, but when investing, capitalism favors a passive approach."
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Gauging a Fund's Performance

Standard & Poor's, publishers of the popular Standard & Poor's 500 Index of U.S. large company stocks, conducts extensive research on fund versus index management performance. S&P recently released its June 30, 2013, report, which is summarized below:

Percentage of U.S. Equity Funds Outperformed by Benchmarks 06/30/13

Fund Category	Comparison Index	One Year %	Three Year %	Five Year %
All Large-Cap Funds	S&P 500	59.58%	85.95%	79.46%
All Mid-Cap Funds	S&P MidCap 400	68.88%	85.78%	81.98%
All Small-Cap Funds	S&P SmallCap 600	64.27%	80.19%	77.88%
All Multi-Cap Funds	S&P Composite 1500	63.41%	84.31%	82.57%

Over five years, roughly 80% of actively managed funds underperform their benchmark. An individual investor has a much higher probability of earning the market return in a passively managed index. They have a great risk (about 80%) of under-performing in an actively managed fund. Why take that risk? Add to this debate that past performance is not a guarantee of future returns (one of the top 20% of funds today has a low probability of staying in the top 20% over the next five years), and you have a very sound argument for passive management.

It's a free country, but don't argue with the facts. It may sound un-American not to try to be the winner, but when investing, capitalism favors a passive approach. 

Starting School: The Smell of 529 Plans in the Air!

If you have kids, it’s better to start saving for college
sooner rather than later.

Schools seem to start earlier every year. I am of the mind that school shouldn't start until after Labor Day, but I lost that battle long ago! While starting school in August no longer has the scent of autumn in the air, it is a time to think about the future.

"It is never too early to start saving for college, and it can quickly become too late."
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It's Never Too Early to Start Thinking About College

School brings the thought of that ultimate education goal: college! How many times did your parents tell you, and do you tell your kids, "Get good grades so you can get in to college"? Yes, we turn into our parents in more ways than one!

First, set aside the arguments about:

• The high cost of college
• Whether or not attending college increases career earnings
• Whether private schools are worth it or not
• The likelihood of receiving scholarships
• The perils of excessive student loan debt

If college is an ultimate goal for your children or grandchildren, it is prudent to start saving today. Better to have started yesterday, but don't wait until tomorrow. Get it?

Ohio's College 529 Plan

College 529 plans [named after Internal Revenue Code section 529, similar to 401(k) plans, which got their numeric designation the same way] are an attractive tool for college savings.

Why? College 529 plans are sponsored by state governments, so I'll focus on Ohio's plan.

1. State income tax deduction for contributions, with a limitation
2. Tax-free growth and withdrawal of earnings for qualified expenses
3. Low-cost, diversified investment options (Vanguard)
4. Ability to change beneficiaries, which is very nice if you have multiple children or grandchildren

Start saving now, even with only small deposits. Time flies between kindergarten and college. Learn more about Ohio's plan at www.collegeadvantage.com. Contact us if you have questions or need advice. Your children and grandchildren will thank you someday!

Try a Financial Fire Drill: With Your Spouse ... and Your Parents!

Staging a financial fire drill will help you
be prepared for an emergency.

Here's a scary thought. Your spouse suddenly has a stroke or a serious traffic accident and is in a coma. Among a thousand other things to think about, he or she is the one who pays the bills. What do you do?

Pick up the checkbook and start writing checks? That's so old school!

"Stage a financial fire drill and let your spouse pay the bills for a month."
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Could You Manage the Family Finances on Your Own?

Chances are your bills are delivered electronically via email. Do you know your spouse's email password?

• Your spouse may use your bank website to pay bills. Do you know your bank account username, password and security question answers?
• Some bills may be paid automatically by bank draft or bank bill pay or credit card. Do you know which ones?
• It is no longer realistic to pick up the checkbook and simply start watching the mail.

Stage a financial fire drill and let your spouse pay the bills for a month. Or a week, if that is all you can handle. If nothing else, you should earn more appreciation for a time consuming, thankless job!

Use a Password Management Program

This is where password management programs that we have written about previously can be extraordinarily helpful. At the very least, you should have a list of bank accounts, credit cards, websites and access instructions and the right people should know where to find your list.

But don't stop there. What about your parents? For those of you who are designated as their power of attorney, this is even more important! The same process applies.

Don't wait to smell the smoke. Prepare yourself for an eye-opening experience!

How America Saves 2013

Only 11% of people are contributing the maximum amount to their 401(k).

How does America save for retirement? How does your retirement saving compare?

Defined contribution plans such as 401(k)s are the foundation for retirement savings in America. The private sector (excluding government employees) retirement system covers over 80 million Americans and has total assets in excess of $4 trillion.

The Vanguard Group is one of the leaders in the defined contribution marketplace with more than $500 billion in assets and full-service plans covering 1,600 employers and over 3 million employees. Every year, The Vanguard Group publishes a report entitled "How America Saves" that summarizes participation in the plans they manage.

"7% is the average employee retirement contribution rate as a percentage of pay."
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Survey: 25% People Don't Contribute to Workplace Retirement Plans

Here are some highlights:

• 76% of eligible participants actually contribute to their 401(k)
• 24% of eligible participants contribute 0% (guess when they will retire)
• 7% is the average employee contribution rate as a percentage of pay
• 22% contribute more than 10% of pay
• 11% contribute the maximum dollar amount allowed ($17,000 in 2012)
• 10.5% is average total contribution rate (employee and employer)
• $8,050 is average annual employee and employer contribution total

How Much You Save Matters More than Investment Returns

The amount that you and your employer contribute to your retirement plan is a far more important factor in your retirement security than the investment returns.

Your "savings rate" is one number you should know and grow!

How Does Your Financial Capability Compare?

A recent nationwide study revealed some disturbing
information about the state of people's finances.

The 2012 National Financial Capability Study, sponsored by the FINRA Investor Education Foundation, provides some humbling results that should make you feel a whole lot better about your personal finances. But it should also make us all a lot more worried about the state of our country. 

"The 2012 National Financial Capability Study found that 19% of respondents spend more than they make."
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What the Survey Says
In summary, of the respondents to the survey:

• 19% spend more than they make
• 36% break even
• 41% spend less than they make, thus actually saving money for the future
• 26% have medical debt, with people between 18 and 34 having the most medical debt
• 40% have a rainy day fund to buffer against unexpected financial shocks
• 30% have engaged in non-bank borrowing within the last five years, such as through an auto title loan, tax refund loan, pawn shop or rent-to-own store
• 49% pay their credit cards in full every month
• 34% only pay credit card minimum balance due
• 14% have an underwater mortgage, which means their house is worth less than the mortgage balance
• Among 18-to-34-year-olds with a mortgage, 25% are underwater

Overall, only 39% got four or more questions right on a very basic financial literacy quiz.

You can take the quiz yourself at www.usfinancialcapability.org. 

The Need for Financial Literacy
Clearly, the survey results are reflective of the national economy over the past five years and the dramatic effect of unemployment and underemployment.

The study also demonstrates the need for basic financial literacy in our country.

As with many issues, the best and easiest place to start may be at home. Our "call to action" should be sure to spend some time with our children and grandchildren talking about basic finances, daily money management and the importance of saving for the future. What a great summer project!

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.

Psst... What's Your Password?

Too many people use insecure passwords
for their financial accounts.

I last wrote about computer passwords in January. 

While I don't hold myself out as a computer expert or software consultant, I am in a position to see how people use passwords for financial websites and it is scary.

"Don't let "Fido" be your only password."
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Password Advice from the Pros
Here's the password advice from the pros:

• Use long passwords
• Use passwords with digits and punctuation marks
• Use passwords with no recognizable words
• Use a different password for every website
• Change your password every 30 days

Who do these pros think that we are? What are they smoking?

The reality is many people have one very simple password that they use for everything. That's a bad practice, but one that's easy to change.

Software to the Rescue
I'm not a computer expert, but I know some software programs that can help you better manage your passwords. 

First of all, most Mac and Windows web browsers offer to memorize passwords for you. But the web browsers only work on one machine and aren't password protected.

There are dedicated password memorization programs. They provide one program that stores your passwords and secures them with one password, which you can make the most complicated password you can remember. These programs work on desktops, tablets and phones. (One caveat, no program works in the built-in browser on the iPhone, due to Apple's rules).

Popular dedicated password memorization programs include Dashlane, KeyPass, LastPass, Roboform and 1Password. Check them out, choose one and start using it. Don't let "Fido" be your only password.

People often say, "There has to be a better way..." Well, when it comes to protecting your passwords, there is.

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.

Disability Awareness: What You Don’t Know Can Cost You

Disability is more common than many people realize.

May was "Disability Awareness Month." In case you missed it, here are a few noteworthy facts, courtesy of "The 2012 Council for Disability Awareness Long-Term Disability Claims Review," which is a survey of disability claims at major insurance companies.

Key Facts About Disability
Here are some key facts about disability that you may not know:

• Three out of 10 workers will have a disability that lasts 90 days or more.
• Fifty-seven percent of disability claims were made by women.
• Forty-five percent of new claims were for people under age 50.
• Over 20% of claims were for people under 40.
• Thirty-five percent of claims were for people age 50 to 59—peak career-earning years and critical years for saving for retirement.
• More than 95% of disability claims were not work-related; therefore, fewer than 5% of disability cases were eligible for worker’s compensation benefits.
• Only 69% of individuals receiving group long-term disability benefits also qualified for Social Security disability benefits.
• Social Security disability benefit qualification is difficult. Only 36% of new Social Security claims resulted in benefit payments awarded.
• Nearly all Social Security disability benefit payments are less than $1,500 per month.

"Three out of 10 workers will have a disability that lasts 90 days or more."
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Top Disability Causes 
Here is a list of the top causes of disability, based on existing claim diagnosis categories:

1. Musculoskeletal/connectivity tissue: 30%
2. Nervous system-related: 14%
3. Cardiovascular/circulatory: 12%
4. Cancer and neoplasms: 9%
5. Mental disorders: 8%
6. Injury and poisoning: 8% 

Protect Yourself with Disability Insurance
Individual disability policies remain in force when you change jobs or get laid off, as long as you continue to pay premiums.

Disability insurance is much less expensive at a young age. Future increase options are critical.

New college graduates, take note!

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.

Human Capital: The Foundation of Your Economic Value

Your human capital is one of your greatest assets.

Allow us to offer a few short and sweet thoughts to consider about "human capital."

Economic value and wealth are created using labor, land and capital.

Human capital is one’s ability to apply your labor (physical and/or mental capability) to create value and wealth. This is usually reflected in the form of compensation or a pay check, but it can also be volunteer work or service that provides intangible benefits beyond compensation.

"Economic value and wealth are created using labor, land and capital."
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Don’t Squander Your Greatest Asset
Human capital is your greatest asset!

Develop, nurture, maintain and increase it!

Never stop learning.

Resist the temptation to "coast" in the final years of your career. It may set you up for an early lay off or job elimination.

Resist the temptation to "vegetate" in retirement, lest you become a vegetable!

Continue learning well beyond your formal retirement date. It will keep your mind sharp and your body healthy.

What did you learn today?

Celebrate and enjoy!

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.

Betting Against the House

Stocks of homebuilding firms performed well in 2012.

It's New Year's Day 2012. In addition to overdosing on televised college football, you're spending part of the holiday working on the family finances. Armed with a laptop and various online financial tools, you're on the hunt for appealing stock market opportunities. To prune the list of candidates to a manageable size, you decide to focus on firms that are leaders in their respective industries and exhibit above-average scores on various measures of financial strength. As you work your way through the alphabet, you come to the "P" stocks, and another candidate appears. It's a prominent player in a major industry (good), but operates in a notoriously cyclical industry (not so good), pays no dividend, and has a junk-bond credit rating of BB-minus. Next! You push the "delete" key and move on.

Congratulations. You just passed up the best-performing stock in the entire S&P 500 Index for 2012.

Stock Prices Are Forward-Looking

Shares of Pulte Group, a Michigan-based homebuilder with a 60-year history, jumped 187.8% last year amid strong performance for the entire industry. For the year ending December 31, 2012, all 13 homebuilding firms listed on the New York Stock Exchange outperformed the S&P 500 Index by a wide margin, with total returns ranging from 34.1% for NVR to 382.8% for Hovnanian Enterprises. The Standard & Poor's Super Composite Homebuilding Sub-Index rose 84.1% in 2012 compared to 13.4% for the S&P 500 Index.

The point? For those seeking to outperform the market through stock selection, underweighting the market's biggest winners can be just as painful as overweighting the biggest losers. Investors are often caught flat-footed by stocks that do much better or much worse than the broad market, and the problem is not limited to individuals. Not one of the 10 seasoned professionals participating in Barron's annual Roundtable stock-picking panel in early January 2012 mentioned homebuilding stocks or any housing-related firms.

The recent surge in housing shares also serves as a reminder that stock prices are forward-looking and tend to rise or fall well in advance of clear changes in company fundamentals.

"There is an easy way to own the best performing stocks in the S&P 500. Own all of them!"
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Waiting for Evidence of Healthy Profits Can Lead to Frustration

Investors who insist on waiting for evidence of healthy profits before investing are often frustrated to find that a firm's stock price has appreciated dramatically by the time the firm begins to report cherry financial results. Shares of Hovnanian Enterprises, for example, rose 580% between October 7, 2011, and December 31, 2012, even though the firm continued to report losses. Similarly, it is not unusual for a firm's stock price to decline long before signs of trouble become obvious.

Many observers in recent years predicated that a recovery in the housing industry would be agonizingly slow, and they were right. Many investors in recent years have avoided housing stocks as a consequence, and they've been wrong: Housing stocks have outperformed the broad U.S. stock market by a healthy margin from the market low in March 2009 to the present day.

BOTTOM LINE: Markets have 101 ways to remind us of Nobel laureate Merton Miller's observation—diversification is the investor's best friend.

Source: DFA Fund Advisors

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 Your Retirement Number? A Simpler Solution

Do you really know how much
money you need to retire?

A national financial services firm has featured "What’s Your Number?" in an advertising program. People are shown with figures like $812,000 or $1,260,000 or $1,925,000 floating over them. These numbers represent a lump-sum figure the person should have accumulated before they can comfortably retire.

There Are Many Ways to Calculate Your Retirement Number

Other firms tout similar approaches by calculating a factor of your final income before retirement. For example, AON Hewitt, a major employee benefits provider, suggests that 11 times your final salary is a good lump-sum target. So if your final salary is $75,000, you should have a retirement portfolio of $825,000.

Fidelity Investments uses the same approach to come up with a number of eight times your final salary, with the following benchmarks along the way:

• 1 times your salary at age 35
• 3 times your salary at age 45
• 5 times your salary at age 55

Fidelity says that this can be achieved by a 25-year-old who starts saving 6% of his income and increasing his savings rate 1% per year for six years, and then maintains a 12% savings rate thereafter. Procrastinate between the ages of 25 and 45 and The Center for Retirement Research at Boston College reports that you would need to start saving about 33% of your income. Ouch! Calculating such a lump sum requires a complicated series of steps and the results are highly sensitive to many assumptions. Therefore, the majority of people never try to answer the question, "What's your number?" Not to mention that calculating a huge lump-sum number discourages many people and makes them feel like retirement planning is a futile exercise.

"Calculating a huge lump-sum number makes many people feel like retirement planning is futile."
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A 15-Minute Retirement Planning Solution

But there is a simpler solution! What percentage of your income did you save last year? This is a much simpler calculation that can be done in 15 minutes or less.

Step 1. Calculate your total taxable employment income using your W-2 wage form or income tax return.

Step 2. Add up the dollars you contributed to your retirement plan, including employer contributions, from your December 31 retirement plan statement. Do not include Roth 401(k) or Roth 403(b) contributions since they are included in Step 1.

Step 3. Add up the dollars you added to or withdrew from other savings and investment accounts or accumulated in or depleted from your bank accounts during the year (the change in your bank account balances from beginning of year to end of year, up or down). This sum may be a positive or negative number.

Step 4. Add Step 1 and 2. This is your total income including employee and employer retirement plan contributions.

Step 5. Add Step 2 and 3. This is your total net contributions to savings.

Step 6. Divide Step 5 by Step 4. This is your savings ratio!

This is much simpler than estimating future income and expenses to calculate a lump sum number as a retirement goal. Your savings ratio should be 10% to 25%. It should be at the higher end of that range if you are older and if you are a high-income person.

Don't despair if it is less than 10%. Get on track for a successful retirement by increasing your savings rate as best as you can, even if only slowly and steadily.

Calculate Your Savings Ratio and Create Peace of Mind

Calculate your savings ratio today and every year and give yourself the peace of mind of knowing you are on the right path to a secure and comfortable retirement!

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 Penny Saved Is a Penny Earned, and More!

A Penny Saved

Benjamin Franklin coined (no pun intended, really) the expression, "A penny saved is a penny earned." But a penny saved is really more than a penny earned, if you think about it. Why?

Ben Franklin came up with his enduring aphorism before we had a federal income tax system. And Social Security and Medicare taxes. And state income taxes. And local income taxes. See where I'm going here?

How Much Is a Penny Really Worth?

You can earn your penny from employment or investments. Let's focus on employment. Employment earnings are subject to federal, state, local and FICA (Social Security and Medicare taxes). Let's say your marginal income tax rates (the rate at which you are taxed on an additional penny of income) are 28% federal, 5% state, 2% local and 7.65% FICA. That's a total of 42.65%. So a penny earned is really 1 cent minus your marginal income tax rate of 42.65%. In other words, your penny is actually worth 57.35% of one cent, or $0.005735 after income taxes.

To spend one penny you have to earn 1.74 cents because 1.74 cents after taxes of 42.65% is one penny (1.74 x 42.65% = 74 cents of taxes, leaving you with 1 cent).

Put another way, to spend $100 you have to earn $174 dollars of employment income. To spend $1,000, you have to earn $1,742. To spend $10,000, you have to earn $17,420. Pretty soon you're talking serious money.

"To spend a penny, you have to earn more than a penny. "
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Spending Costs More Than You May Think

You get the picture. It costs a lot more to spend money than meets the eye, when you consider what you have to do to earn it.

A penny saved is more than a penny earned. You heard it here first!

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.