Financial Planning

Disability Awareness Month: A Reminder to Protect Your Greatest Financial Asset

Many “causes” have a dedicated day, week, or month. This year I learned that Good Friday, before Easter, was also designated National Tartar Sauce Day due to the lobbying of the Frisch’s restaurant chain. No kidding, that is a Fun Fact! On a more serious note, May is Disability Awareness Month. One’s greatest financial asset is the ability to earn an income, so the ability to earn an income can and should be insured against an illness or injury that may prevent one from working. In many ways, disability insurance is more important than life insurance because one is still living and has expenses. People naturally think about life insurance to cover a premature death, but disability is actually more likely to happen. (Thank the actuaries for calculating the odds.) Disability insurance is less expensive when purchased at a younger age, so review it sooner rather than later. More information is available at disabilitycanhappen.org, and we are certainly happy to discuss this further.

While we are on the topic of insurance, do you know what “umbrella” liability insurance is and how much you need or have? Umbrella liability coverage is excess liability coverage in addition to your auto and home insurance. Umbrella liability insurance is important for high-net-worth individuals because most auto and home insurance policies have a liability limit of $250,000 to $500,000 that covers you, for example, if you have a traffic accident and injure someone and they sue you.

[Tweet "In many ways, disability insurance is more important than life insurance."]

We frequently speak about “stages of life,” and there are two stages when it is extremely important to have umbrella liability coverage. The first is when you have teenage or college-age drivers on your auto policy. The second stage is when you are at an older age and your alertness and reaction time may not be as fast, or cataracts or other issues develop that increase your risk of car accidents. We’ve all seen the older person who shouldn’t be driving. Of course, that’s the other guy, not us, but sometimes we all need to look in the mirror. Take note of the many advertisements from personal injury attorneys. In our increasingly litigious society, you should have auto/home/umbrella liability equal to or greater than your net worth. It costs a few hundred dollars per year per million dollars of coverage and can be a source of financial peace of mind.

New Feature: My Wealth

For our Personal Wealth Management clients, we are rolling out a new technology source to review your investment reports called “My Wealth.” Yes, we stole the name from the “My Charts” term commonly used in the medical profession. We encourage you to register for the program and “click around” to explore it.

My Wealth charts provide multiple levels of portfolio analysis by clicking on each section of a report to drill down to a further level of detail. As with all new technology, the best way to learn about it is explore or hit the “Next” button at the top.

As always, please contact us with any questions, news, or comments.

Elections Come and Go—Sound Financial Management Remains

I have the challenge of writing this one week from election day. Some of our clients have expressed concern about the impact of the election on the stock market. The attached chart confirms our perspective that we have had good and bad economies and stock markets under both political parties and that patient, long-term investors are rewarded. Regardless of the election, we will continue to manage your investments soundly. [Tweet "We can manage what’s within our control, or not. Which way do you vote?"]

The words “Financial Management” in our company name were not chosen by default. In personal financial management, we emphasize managing what is within our control.

We cannot manage the world economy or U.S. politics or legislative or judicial decisions beyond our control.

We can manage individual decisions and actions to plan for the future and be good stewards of our financial resources, whatever they may be.

We can manage to get a good education to enable productive employment.

We can manage to live within our means or beyond our means.

We can manage to be adequately insured for auto and property risk, liability, disability, health, life and long-term-care risks or choose to accept those risks without insurance.

We can manage our income and investments to minimize income taxes.

We can manage a strategically designed, broadly diversified, low-cost, tax-efficient investment portfolio, or we can assume unnecessary risks and taxes.

We can implement an estate plan to prepare for the potential inability to act or make decisions during our lifetime and to distribute our assets at our death to the people we want and when and how we want, or we can let the laws and courts decide.

We can identify short-term and long-term financial goals that are consistent with our lifestyle and values and priorities, or we can drift along an uncharted course.

We can manage what’s within our control, or not. Which way do you vote?

Remember, your financial peace of mind is always our primary goal.

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Source: Dimensional Fund Advisors.

As always, please contact us with any questions, news or comments.

October a Not-So-Scary Month for Markets

October turned out to be a strong month for global stocks and not “spooky” at all. The MSCI ACWI IMI index of global stocks (you know, our favorite stock market index that no one has ever heard of) was up 7.5% for the month, recovering most but not all of the losses of August and September. The index was down 3.3% over the last three months. No one likes losses, but this loss is relatively modest for three months. Year-to-date 10/30/15, the index stands relatively flat at a positive 0.3% return.

U.S. and large company stocks continued to fare better than foreign stocks and U.S. mid and small company stocks. In October the S&P 500 was up 8.4%, the S&P 400 MidCap index was up 5.6%, and the S&P 600 SmallCap index was up 6.1%.

One lesson learned in October 2015, as many times before, is that one can’t predict the short-term direction of the stock market. But that doesn’t keep people from wanting to do so or trying, and more importantly, it doesn’t keep the media from making forecasts headline news. Like most free advice, it is best ignored.

[Tweet "Like most free advice, media forecasts are best ignored."]

Last month we wrote about low inflation, and the news carried forward in October with announcements that there will be no cost of living adjustment increase in monthly Social Security checks in 2016. Likewise, the retirement plan contribution limits for IRAs, 401(k)s and other retirement plans will remain the same in 2016 as 2015—$18,000 for 401(k) contributions, $24,000 if you are age 50 or older.

Medicare premiums could have potentially increased for select individuals under this no Social Security cost of living increase scenario, but such an impact was negated by H.R. 1314, the Bipartisan Budget Act of 2015.

The Bipartisan Budget Act of 2015 (don’t you love the name?) also made important changes to Social Security benefit claiming strategies for individuals near Social Security retirement age. Rather than try to summarize the changes here (and, quite frankly, we are still learning about them ourselves since it was just signed Monday), we will be reviewing the changes and their specific impact one on one with our clients. Believe me; you don’t want to read a long explanation! But if you have any immediate concerns or questions, feel free to contact us directly.

Thanksgiving is one of my favorite holidays, and I think the spirit of gratitude is so important. So enjoy the season of Thanksgiving, and we sincerely thank you for the opportunity to serve you and for your confidence and trust in us. Happy Thanksgiving!

As always, please contact us with any questions, news or comments.

Ignoring the Siren Song of Daily Market Pricing

Rather than trying to make investing decisions based on the day's headlines, stick to your investing plan.

A Penny Saved Is a Penny Earned, and More!

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. "
[Tweet This]

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.

Beware of Buying Individual Stocks: You May End Up Owning Something Else

My stepfather, who will be 90 years old this summer, owns some JPMorgan Chase & Co. common stock. The JPMorgan Chase stock dividend was cut in the 2008 global financial crises and the share price was recently battered by international trading scandals. Is this a good stock for an 89-year-old?

Do You Really Know What's In Your Portfolio?

My stepfather never bought JPMorgan Chase common stock. He didn't inherit it or receive it as a gift. How did he come to own it today?

More than 30 years ago, my stepfather bought some stock in The Farmer's Savings and Trust Co., a local savings bank in his hometown of Mansfield, Ohio. The Farmer's Savings and Trust Co. only had offices in Mansfield and only made local loans. He knew the bank's president and many of the people on the board of directors. It was a simple, safe, local investment.

But then The Farmer's Savings and Trust Co. was bought by Bank One, a larger Ohio bank. Bank One started to expand regionally. In the 1980s and 1990s, regional bank stocks did very well, so his original investment accumulated quite a capital gain. Such a large capital gain became an obstacle to selling the stock.

"When you buy an individual stock, your original investment may grow into something completely different." [Tweet This]

Corporate Mergers Can Affect Your Investments

I've lost track of the corporate mergers, but I think Bank One bought Continental Bank in Chicago. Then JPMorgan & Co. merged with Chase Manhattan to become JPMorgan Chase & Co. Then Bank One merged with JPMorgan Chase. There may have been some other mergers along the way.

JPMorgan Chase common stock recently got pummeled by international trading strategies. But the bank that my stepfather originally bought stock in never did international stock trading. Many smaller, local banks in many communities were able to maintain and not cut their dividends during the 2008 global financial crises. But my stepfather's stock had "morphed" in to a much different bank than he invested in.

There are many similar stories of other companies in many industries. Some corporate changes have turned out well, some not so well.

Be Careful When You Buy Individual Stocks

One thing is for sure. Beware of buying individual stocks to buy and hold forever. Or be willing to sell and pay a capital gains tax, which most people won't do. When you buy an individual stock, your original investment may very well grow into a completely different animal.

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.

Financial Fire Drill: Quick, What's The Password?

I have a confession to make. I don't know how to run our washing machine. I knew how to run the old one, but not the new one. Truth be told, we've had the "new" washing machine for at least five years now. Sad excuse. Fortunately, I have a loving wife who does laundry for me. As a double bonus, my college and high school age children know how to run it. I'm on easy street, it seems. But I would be up the creek if I had to do laundry myself. Heaven help me.

Schedule a Financial Fire Drill

We're in a similar situation when it comes to our home banking and bill-paying. I do it all. I am as high-tech and paperless in our banking and bill-paying as possible. My dear wife, God bless her, is out of the loop. I have told her the master password to our accounts, but we've never had the equivalent of a fire drill to see if she remembers it and would know what to do if I became seriously ill or died. I need to put that on the "should do" list.

In the old days, if a spouse or child had to take over banking for their spouse or parent, they just picked up the checkbook and started writing checks.

The days of just picking up the checkbook and writing checks are over.

So stage a fire drill. There is no gender bias here. If the spouse who pays the bills had a stroke, would the other spouse be able to pay the bills? If your single mom or dad had a stroke, would you be able to pay their bills?

It's better to be safe than sorry.

"If your single mom or dad had a stroke, would you be able to pay their bills?" [Tweet This]

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.

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 PLANNERTM 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."
[Tweet This]

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."
[Tweet This]

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.

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/.