Financial Planning Must Be Inspired by the Heart

With February comes the celebration of St. Valentine's Day, which leads us to highlight a financial planning belief that isn't commonly considered: Successful financial planning must be inspired by the heart. Financial planning takes time and effort and requires the sacrifice of today's pleasures for tomorrow's. Why would we do this? We do it because of our heartfelt desire for financial peace of mind for ourselves and because of our love for those most near and dear to us. Have you ever thought of financial planning this way?

What Does Your Heart Want?

There are many things we "should" do or "want" to do but, in reality, we only get done what we truly commit our hearts to accomplish. Think of the priority you assign to:

• Your relationship with your spouse or significant other
• Your relationship with your family
• Your relationship with your friends
• Your mental well-being
• Your physical well-being
• Your spiritual well-being
• Your career or avocation
• Your financial well-being

It's OK to Ask for Help

Some people can accomplish all they want on their own. Most cannot, due to limitations in expertise or time. Most people need some help from other people.

For example, some people enhance their physical well-being with the benefit of a coach or trainer or by being on a team for support. Since personal financial planning is confidential by nature, it is hard to achieve in a group setting. You can do financial planning on your own, but most people don't have the time or expertise. There are also behavioral finance obstacles that are best managed with help from another person's perspective. In other words, you may need another person's insight before you can see how you need to change your behavior.

A CERTIFIED FINANCIAL PLANNER^TM professional is best qualified to serve your comprehensive personal financial planning needs.

Put your heart into it today. Your financial peace of mind will be greatly improved.

"Successful financial planning must be inspired by the heart."
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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.

High-Income Individuals Must Save Beyond Contribution Caps

Do you let the government set your goals?

It seems that when it comes to retirement savings, many people do.

Many individuals save 3% of their income for retirement because that's what the government recommends to employers as a "safe harbor" contribution. Yet it's important to know that the contribution level considered "safe" for the employer is not necessarily safe for the employee.

Other people save 6% of their income for retirement because that's what their employer will match. This percentage, however, more likely reflects what's required of the employer to remain competitive and attract qualified employees rather than reflecting the actual needs of their employees. So what does 3% or 6% have to do with your retirement security?

Evaluating Your Yearly Retirement Savings

The amount you should contribute toward your retirement every year is influenced by many factors:

• Age when you start saving for retirement
• Amount of debt you have
• Stability and predictability of your income
• Future growth in income
• Current marginal income tax bracket
• Standard of living, both now and in retirement
• Total income level (which can be capped)

Limits on Defined Contribution Plans

Congress sets total dollar limits on the amount you can save in tax-deferred qualified retirement plans. For defined contribution plans, in general, these limits in 2013 are:

• $17,500
• $5,500 extra "catch-up" contribution if you are age 50 or older
• $51,000 defined contribution limit for employee and employer total

Here's the kicker: The maximum compensation for defined contributions plans, in general, is $255,000 in 2013. Therefore, if your income is over $255,000, the contribution limits have even less merit as a guideline for adequate retirement savings.

One lesson rings clear: If your income is over $255,000, additional savings and investments beyond the contribution limit of a traditional profit-sharing 401(k) plan may be needed to provide you with a retirement that is in line with your accustomed manner of living.

The time to plan for achieving a comfortable retirement is now.

"A contribution level considered 'safe' for the employer is not necessarily the same for the employee."
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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.

Computer Passwords: Heard Any Good Ones Lately?

Computer passwords are no laughing matter.

Add "getting serious about my computer passwords" to your list of 2013 new year's resolutions.

Everyone knows you should floss your teeth often, and a lot of people do.

Everyone also knows you should have complicated passwords (and more than a handful), but few people do.

The Worst Passwords Ever

According to Jennifer Waters in The Wall Street Journal, "The annual compilations of 'worst passwords ever' are numerous but remarkably similar in their results. Moreover, the top 25 or so passwords are held by an alarmingly large number of people." Wondering what some of the worst passwords are? If your password is "password," "football," "qwerty," "11111" or any other common combination of letters or numbers, you should think about changing it.

"Computer hackers don't just sit around typing in passwords to websites at night." [Tweet this]

They have computer software programs that do it 24/7. If they hack passwords from a retailer, for example, they barrage major bank websites like Bank of America, Chase Bank, Citigroup and Wells Fargo to see what their "phishing" can catch.

Think of a Story

The best way to remember large numbers of passwords, according to Markus Jakobsson, a security research expert and advisor to the newly formed Council for Identity Protection, is to think of a story. Then come up with three words to describe the story. Customize it for different websites by adding a different color to the end, like red, white or blue.

Group Your Passwords

Identify different groups for your passwords list (for example, financial accounts, social media and retailers). Use different stories for different groups of accounts. Customize each story with a different ending so no two websites have the same password.

Software to the Rescue

Fight fire with fire. Consider using a password management software program. Popular programs include RoboForm Everywhere, Sticky Password, Kappersky Password Manager, DataVault and Handy Password Manager.

Imagine a few memorable stories and start your new year off right with new passwords!

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.

Personal vs. Web-Based Financial Advice

Technology is a wonderful thing. It has dramatically improved our access to information. But is it a double-edged sword?

Is information the same as advice? Can the web be a substitute for, or a supplement to, personal advice?

Ask yourself the following:

• Would you see a doctor for medical advice or do a web search?
• Would you consult an architect to design your house or pick a blueprint from a website?
• Would you consult an accountant for a tax question or rely on the IRS website?

While you could rely on the web for any of the above, should you?

We live in a complicated world, but we are fortunate to have experienced, knowledgeable professionals in many specialties. The web can supplement, but not replace, personalized professional financial advice.

At Berno Financial Management, our goal is to give you the advice that you need, tailored to your specific situation, or to refer you to a specialist when needed and then coordinate implementation of that advice.

Personal, professional advice should always put your interests first. Can you trust the web for 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.

Inflation: What Difference Does a Few Pounds Make?

Inflation is a major threat to retirees and a risk to long-term investors of any age. What difference does inflation make?

• A 3% inflation rate will cause prices to double in 24 years or by the time a 65-year-old reaches age 89.
• A 4% inflation rate will cause prices to double in 18 years or by the time a 65-year-old reaches age 83.
  

Put another way, inflation will cut your standard in living in half over either of those time periods. Ouch!

On a more personal level, gaining three pounds a year may not seem like much, but 10 years later you are 30 pounds heavier. Has anyone read that America has an obesity problem?

Who hasn't had grandpa tell them that when he was growing up, movies were a quarter and a candy bar was a nickel? Who remembers buying a Volkswagen Beetle for $3,000?

Since 1913, inflation has averaged just over 3%. At its ugliest, it ranged from 10% to 13% a year in 1979, 1980 and 1981.

Understand and remember the importance of inflation. It is significant in the long run. Like 30 pounds ago!

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/.