Impersonal Finance

I figured I would start this series with one of the more famous athlete/bankruptcy case. For those who don’t know, Jack Clark was a Major League Baseball player who had a nice, but relatively obscured careers.  Three times in his career, he was listed as one of the highest paid players in the game.

In August of 1992, he stunned the baseball world by filing for bankruptcy. Why was it so stunning? He was in the 2nd year of a three year contract guaranteed to pay him $2.9m each year. In the filing, he listed assets of approximately $4.8m and debts of about $11.5m. Some of his assets included 18 luxury cars. Yes, you heard that correctly. 18 cars!

That astounding number of cars was just part of Clark’s problem. He had major credit card debts, multiple houses and even a six figure federal tax bill. Supposedly he even blamed his wife for their financial issues. How many of those 18 cars were hers, do you think?

Even in the 80s and early 90s players were making good money and they can definitely use that money for whatever they want. That being said, they shouldn’t be able to abuse the system and file some papers and get out from all that debt. He made 10s of millions over his whole career and the entire fault for his financial issues rest with him.

Jack Clark is exhibit A why everyone needs a financial planner/advisor. Just like you would never operate on yourself or represent yourself in court, why do people think they can do financial planning themselves? If multi-millionaires need help, what makes you think you don’t? People are conditioned to answer calls with “I’m all set” or “I’m working with someone” even if they aren’t. I am sure Jack Clark said that to someone at some point. Look at him now. If you answer an advisor’s call like that, I hope you never end up in same situation as Clark. If he had a business manager or advisor, that person would make sure he could never spend in a lifetime, the money he made in just a few years.

One thing I should mention is that I am not against 529s per se. Actually, I like them a lot for grandparents, rich uncles, generous family friends and the like. If these people actually think to contribute to your child’s education, by all means let them. It probably means they have the disposable income to do so and I would absolutely not turn them down.

That being said, the point of this article is:

How Best to Fund Your Child’s Education

If you’ve gotten this far, you are at least curious as to where this is going. The fact is that very few people can afford what college will likely cost in the next 10-15 years. I’ve seen a fairly consistent number of 8% inflation on education costs. When I ran a college funding scenario for a friend of mine, we came up with $600,000 as how much a four year education at a top notch institution would cost in 15 years. Look at your own life. How many people do you know who can sock away enough money to have that much money in the next 15 years? One person? Maybe two? The point is that how we fund it and what vehicles we use is infinitely more important than the dollar amount being invested.

There is only one solution in my opinion. That one solution is…Wait for it…

Life Insurance

It seriously bothers me how little value some “experts” give to the amazing uses of cash value life insurance. They think it’s the boogeyman of financial planning almost universally refuse to consider it under almost any circumstance. Here is the rub. Please tell me what is wrong with a product where you can pour unlimited amount of funds in to, will grow tax deferred, and upon need, the money (both the principal and growth) may be accessed tax free. Oh, it also doesn’t matter how much you make since everyone is eligible. The Roth IRA? Nope, there is a hard limit and eligibility requirement and it can only be accessed upon reaching the age of 59 1/2. Brokerage account? I don’t think so! Where is the tax deferral? What about capital gains? Savings account? Same problem as brokerage. Taxes are due on the interest.

This is definitely “outside the box” stuff, so digest this. Really think about it before you thumb your noses. The main objection I hear most is the expense. It comes in different forms: it’s too expensive, there are too many expenses, expenses are too high, buy term and invest the difference, etc.

I don’t get it. Why are people so afraid of expenses? My old boss loved using an analogy of a candy bar. When you buy a candy bar, you also get a wrapper. Part of the money you pay goes towards the making of the wrapper. You don’t care what the wrapper looks like. You just want the candy bar inside. This is exactly the same thing. You want the tax deferral. You want the tax free growth. You want the flexibility to do use the money towards education, since that’s the ultimate goal, but at the same time to use the money elsewhere should education funding not be necessary. Life insurance is the only vehicle available that gives you everything you could possibly want in a plan, with the small price being added expenses in the form of “cost of insurance” charges.

It doesn’t really matter what time of life insurance you choose to use. I will detail the various permanent life insurance options in the next post or two, but the basic choice is conservative growth (whole life or universal life) or aggressive, market based growth (variable). I am a believer in being more aggressive the less time you have to fund education and more conservative if you’re starting at a young age. Either way is fine, so long as you are willing to keep funding the program. I guess that is the one other negative. You have to fund the policy on a regular basis, whether that’s once a month or once a year. A 529 or brokerage account can be funded at your leisure and on your time frame.

As I wrap this up, I wanted to illustrate one example and show the dual use that exists in the product. I will use a one year old boy as our insured for a conservative whole life policy. If the parents deposit $500 per month for ten years, they will have deposited $60,000 by the age of 11. The policy at this point will be completely paid up. The child will never have to put in another dime. At the age of 18, there will be $100,000 in the child’s account. If your child must wait until he’s 55 to touch the money, that $60,000 investment will yield over $1,000,000 dollars tax free. If he waits even longer, say age 65, how does $1,800,000 sound?

I will dig deep in to the “buy term and invest the difference” fallacy at a later date, but I want to mention something about it here. First, you can’t buy term on a one year old. But, if we wrote the same ten year pay policy on a 30 year old parent and assumed a pre-tax portfolio growth of 7%, buying term and investing difference would do well in the early years, but just about the time the 30 year old is retiring, the investing the difference would get creamed. At age 73, the whole life policy would outperform the other strategy by over $100,000. It also assumes that you will invest the difference each month which is a huge assumption.

To quote Eric Cartman, “No…no, God no!”

What if I told you that every dollar you put in to your 401(k) would still be yours, but you could only access it if you moved to Florida or California? How many of you would still invest in such a plan?

Since no one would enter in to such a plan, I really can not comprehend the fascination people have with 529s and Coverdell IRAs. So, rather than start with any premise at all, let us start from the beginning. To do this well, I will break up the discussion in to two posts: whether to fund education or not and if so, how best to do it.

To fund or not fund a child’s education

What is more likely, that your child can get a scholarship of some kind or that the government will subsidize the retirement of your dreams? It amazes me how often people undervalue how much money they will need in retirement to maintain their current lifestyle. Since this is not a retirement tutorial, let us just assume that you will need a lot of money in retirement. Some people, even maxing out a 401(k) and Roth IRA, may come up short in what they will need to maintain the same standard of living in retirement as they did when they working. We can also assume that most people are not maxing out both vehicles.

Obviously, it is more likely that a child will get scholarships either need or academic based. There are literally 100s of scholarships available and often the money goes unclaimed. The money is there; it just needs to be found. On the other hand, you only get a small window of time to accumulate assets to retire. Once that window is closed, you better have enough or your lifestyle will be changing drastically.

The bottom line is that there are ways to fund a child’s education with dual use options. The idea being that if the money is needed for your retirement, you can access it for that and if it’s not, you have some great tools set up to help with the educational needs of your children. Either way, there is no need to use these governmental programs when other (and better) scenarios exist.

Stay tuned for Part II and “How Best to Fund Your Child’s Education”.

You may have noticed my break from the blog (even this early in its existance). My entire family goes away together every year for ten days, usually in March/April. Approximately 40 of us travel. Like most family dynamics, I’m guessing, the trip is great for the first few days, decent for the next few, and by the end, I am counting the minutes till I can leave.

Every year we go to a different hotel, even if it’s in the same general locale. This was our 11th year going away and here is the geographic breakdown:

Puerto Rico - 4 years

Florida - 3 years

Arizona - 2 years

Las Vegas - 1 year

California - 1 year

Funny thing is that the best and worst trips both took place in Arizona.

This year’s trip was to the Gran Melia in Rio Grande, Puerto Rico. The past three PR trips had been to the El Conquistador and twice to the Ritz Carlton San Juan. Four generations of our family travel and only the two oldest generations have a say of where we go. Father Expert is among the family leaders and usually has a large voice in the decision. This has its good points and its bad. The bad is that Mother Expert needs a beach (even though she steps foot in it like once or twice) and Father needs a large hotel room, even though all he does is sleep there. I believe it to be a status thing since there really is no other reason. The good is that he uses Trip Advisor well and the hotel and weather are usually perfect.

Our family is fairly well off and with that we expect things done certain ways, specifically our way. We can be very demanding, to the point of embarassment. Rude comments and actions are extremely common on these vacations.

So now that I’ve explained all that, all you need to see is the Trip Advisor review of the hotel to know that this had the potential to be bad:
Gran Melia

Three star average review is not something the family is accustomed to, especially where most of the negative comments involved service. I am going to follow this article with a Trip Advisor primer since I will use the site regularly in my travel reviews.

Since this is supposed to be a review of the trip and the hotel, let’s detail the good and the bad in bullet points:

Good:

Grounds are gorgeous and well maintained
Pools were great - large one for kids and parents, smaller secluded one for adults only
Rooms were large and each one had it’s own deck
Massage was one of the best I have ever had
Spa facilities weren’t very large, but nice and very clean

Bad:

Hotel is so spread out that you have to walk far to get anywhere
Housekeeping is abysmal (see Trip Advisor reviews)
The airport is about 45 minutes away from the facility
Close proximity to the rainforest does not leave for ideal weather (too humid, too hot or too rainy)
The Beach is tiny, rocky and full of kelp. There is literally nowhere to swim
Service in general - call for anything and you may have to call two or three times

You could not possibly get me to recommend this place. It is not by any means the worst place I have ever stayed at, but for the prices you pay, you can definitely do better elsewhere. In Puerto Rico, I would highly suggest the El Conquistador, specifically the Las Casitas section. Otherwise, skip PR and look for other destinations.

I really didn’t like this movie much the first time I saw it. Maybe it was because I dd not understand a lot of what was going on, or maybe it is just one of those movies which aged really well. The history of movies is littered with movies that garnered very little fanfare or interest in the original showing, but over time has gained popularity or cult status. Two examples off the top of my head would be “Rocky Horror Picture Show” and “Shawshank Redemption”. Even though Shawshank received some Academy Award recognition, the ticket sales were extremely mediocre.

After seeing “Other People’s Money” again, I realized the genius of this movie. The cast was brilliantly chosen and the acting was dead on. That being said, you can read a review of this movie at www.rottentomatoes.com. The general critical reviews were pretty unfavorable, but I would rather focus on the economic and financial aspects of the film.

The movie involves a professional corporate raider named “Larry the Liquidator” (played by Danny Devito) who buys up stock in smaller, profitable companies for the purpose of taking over the board of directors and liquidating the company for cash. The company then ceases to exist and most if not all employees are out of a job.

The gist of the movie is that Larry wants this small family run business, but to install his own board and take over the company he must beat a gorgeous attorney (played by Penelope Ann Miller) that he also wants to see romantically. He beats her and wins control of the company. In the end, however, he wants her too much and agrees to sell the company back to the employees at a very nice profit. Incidentially, in the unproduced version, he gets the girl and has a child with her, the owner of the company dies two years after the takeover and Larry’s own company is about to be taken over by an even bigger fish.

The romantic scenes are typical Hollywood. No way in hell could someone who looks like DeVito get someone who looks like Miller outside of Hollywood. It’s the whole fat guy/hot wife theme that is repeated in shows like “King of Queens” and “Grounded for Life”.

The best scenes of the movie are the actual financial scenes. The hostile takeover scenes are filled with great drama and great speeches. One side arguing against greed and the other side arguing for thinning out the herd and prioritizing profit over people. A reviewer from Amazon.com suggested fast forwarding to the scenes at the proxy meeting where two spectacular speeches are given. I think they are the highlight of the movie, but the movie should be seen as a whole. The inner workings of a takeover as well what is involved in a shareholder meeting are done well and in a way that is not dry or boring.

There is no true moral conclusion to the quandry. The shareholders choose money over people, but Larry chooses love (and a tidy profit) over principle and needing to control the company. It is hard to say who wins and loses because the movie ends so ambigiously. You want to believe that he took the money and got the girl, but then again, negotiations do not always end the way you would want them to.

I am not going to do any kind of star or thumbs up kind of rating system. Rather, I will say that its a very solid movie and worth seeing at least once.

In the financial services industry, look at any agent/advisor’s business card. You might see acronyms following their name such as: CLU, CFP, CFA, JD, MBA, LUTCF and ChFC. This list is by no means exhaustive. There are dozens of designations one can get from various institutions and organizations. I plan on breaking down a few of the more common ones and should people clamor for specific explanations, I will be happy to oblige. The five I will focus on are: CFP, CLU, LUTCF, JD and MBA. I see these most often and they give a nice cross-section of the various educational requirements necessary to achieve designations.

LUTCF (Life Underwriter Training Council Fellow) - To be honest, I have no idea what any of that means. I even took a poll of people in my office with that designation and most had no idea what the acronym stood for. So why do people get it? It’s an extremely easy designation to get and any designation on your business card and letterhead looks good. Agents get this for the sole purpose of inflating their reputation to present and future clients.

CLU (Chartered Life Underwriter) - The American College is the primary institution giving out designations. They claim this is the most respected designation in the insurance industry. I will say this. Most agents who have this designation at least know what it stands for, so I guess that is something. Another reputation builder, no one I talked to could tell me how they planned to use the letters. Most people just banged out one course after another, studying just enough to pass, but nowhere near enough to retain any of the knowledge. Are clients really supposed to be impressed by three unfamiliar letters after your name? American College uses stats to show why it’s a great designation to have and how agents with it do remarkably better. I bet they do since most agents flame out long before they have a chance to take this exam. Agents that achieve this designation are usually successful enough to take the time to pass the courses necessary. It is not a terribly hard designation to get and people should be wary when they see someone with this designation. I would ask said agent what CLU meant and how long did it take to achieve. Probe further and you may see it for what it truly is: three letters and nothing more.

Now, we’ll get to the three designations that have some teeth. We still should not be fooled, but at least there is something behind them.

CFP (Certified Financial Planner) - I know quite a few people, smart people, who took this exam and did not pass. It is tough and comprehensive and requires extensive knowledge in many areas of financial planning. Furthermore, you must be in the industry for a certain length of time and have taken numerous exams prior to sitting for the CFP exam. Here is the problem, as I see it. It is still just an exam. Just because someone scored high on the SATs does not make them smarter than those who didn’t score as high. Some people are great test takers and others are not. I think this is a legitimate designation, but mostly because high net worth people have made it so. It is a designation familiar to many people and as such is almost a necessity if you want to work with wealthy people. Like with anything, I know a few CFPs I would never take advice from in a million years.

JD (Juris Doctor) - A fancy way of saying, “I graduated from law school”. You could finish last in your class and you would still have your JD. In terms of the financial services industry, it only looks impressive to clients who know what a JD is. Otherwise, when you explain what it is, you may get questions about why you aren’t a lawyer or what good is that degree in your field. It does show you went through three years of graduate school, but nothing about your field of study or retained knowledge. Putting this on your business card seems like definite resume padding since most financial advisors are precluded from offering legal advice anyway.

MBA (Masters of Business Administration) - This one baffles me the most. You don’t see people putting BA or BS after their name, so why an extra two years of school make such an acronym appropriate business card material. It’s a shorter and usually easier graduate program than a JD, so if a JD is silly, all the more reason that an MBA after your name is even sillier. If someone has an MBA after their name, what on Earth would make a client think that they have this heightened ability to provide sound financial advice. That’s like going to a Ph.D in Psychology for heart surgery. Yes, they are both doctors, but only one is competent enough to operate on you. If one advisor has an MBA and the other one doesn’t, would you not still go to the one that seems the best, regardless of what comes after his name?

I am not saying designations are bad, per se. I think taking the time to do extra work and furthering ones education are noble goals worth achieving. However, I want you to realize that most designations are done just for resume padding and nothing loftier. Education does not equal knowledge and letters do not equal proficiency.

Another segment I plan on adding is travel reviews. I don’t travel that often. Usually, an annual Vegas trip in August with a bunch of guys and a family trip in April (to a different destination every year). With Baby Expert coming in the next couple of months, the chance of traveling, other than the two annual events, is remote. I am still trying to work on a “couples only” trip for either November or February, but with so many friends having young children, I feel most won’t be able to travel or afford the trip.

This past February, I went to Las Vegas outside of my annual trip. It was for a bachelor party. In my younger days, when going to Vegas, I didn’t care where I stayed. I wanted somewhere decent and on the strip, but other than that, what did it matter? The first time I went, I spent 11 hours in my room over three days. Expensive hotels are a waste of money. For the bachelor party, I decided to change my thinking a bit. I shopped around for deals and found a great one at USAirways Vacations (see end of post for link). I was able to stay at the Bellagio for about $100/night.

The Bellagio is supposedly one of the fanciest hotels on the strip. In fact, it’s “5 Star” status makes it one of the nicest hotels in the country. I found it grossly overrated. The hotel is very nice and the grounds are beautiful. The restaurants are stellar, albeit extremely expensive. Where I found the hotel lacking were the rooms. They were nice and clean, but about half the size as rooms at the Rio, where I stayed on a previous trip. For the normal price of $400/night, I expect a lot more and was thankful I didn’t pay full price.

I would never recommend this hotel to anyone and have told people about my experiences when I get the chance. From other people I’ve talked to, TheHotel at Mandalay Bay and Venetian/Palazzo are on the same level in terms of quality, but give you much more bang for your buck.

I haven’t yet decided if I will have a generic “links” section to my site, but until I decide, here are a few travel links I highly recommend.

Trip Advisor - My father, Father Expert, uses this as his travel Bible and I happily followed his lead. I won’t make any plans without consulting this site first.

www.kayak.com - If you are looking for a hotel or flight unbundled, there is no site out there better. It scans almost every major airline and hotel chain, along with many of the travel sites like Orbitz and Priceline.

www.usairwaysvacations.com - I am not a shill for USAirways, and I know they have customer service issues, but if you need a flight/hotel package deal and you are traveling to one of the cities they list on their site (the list is huge, but not comprehensive), then I highly suggest starting here. You won’t be sorry.

I thought it might be fun to have a few recurring segments. Not ones that run every day or every week even, but just when I’m in the mood. These are the three I will start with, but I reserve the right to add or subtract from the list over time.

Celebrity Profiles - Some celebrities make millions of dollars in various vocations whether they be actors, musicians, athletes, etc. Some of these celebrities do very well for themselves. They save and invest well and can turn their income earned in to vast financial empires. Others leave trails of disaster and waste. Turning their huge incomes in to debt and bankruptcy. I plan on profile a cross-section of successes and failures in any and all fields of entertainment.

Book Reviews - Just do an Amazon.com search of financial or economic books and literally 100s of titles show up. I will try to help sift through and make recommendations on which ones are good and which ones should never leave the warehouse. I don’t read much for fun, but if I come across an off-topic novel worth your time, I may review that book as well.

Movie Reviews - I am a HUGE movie buff. Numerous movies with finance or money as a general theme like “Other People’s Money”, “Wall Street” and “Trading Places” exist. My reviews will focus solely on the economic aspects of the movie and explain whether those scenes are practical or accurate.

I have a list of celebrities, books and movies I plan on featuring, but I will gladly take suggestions should people have them.

If the 401(k) and Roth contributions are all you can contribute, then you can stop here. However, we will assume that if you continue reading, you have more money you want to allocate towards retirement. That’s great, between these two vehicles and what I am about to explain, you will be well on your way to retiring early and comfortably.

5. Permanent life insurance is an under utilized, misunderstood, yet spectacular option for retirement savings. I really do not care what Suze Orman or her ilk say about insurance. Truth is that they really have no idea what they are talking about. Their job is to speak in generalities without learning about the pros and cons of each product and each company. Here is what they won’t tell you. Life insurance works exactly like a Roth IRA with three distinct advantages: 1) it can be accessed pre-591/2 years of age and 2) there are no contribution or 3) adjusted gross income limits. We call a permanent life insurance policy a Roth on roids. It acts like a Roth, only potentially much more powerful.

Think about this for a minute. You max out your 401(k) match and you still have $10,000 that you want to contribute. Take $5,000 and max out your Roth. Ask most advisors what they recommend for the remaining $5,000. The likely response would be to go back to the 401(k) and it’s future tax implications (we will get to that in the next couple of entries). Why wouldn’t you want to pay the tax now and have every cent you earn come out tax free? To quote John Shibley of Lenox Financial, “It’s the biggest no brainer in the history of Earth.”

6. So, you’ve decided to follow my advice and look in to a life insurance vehicle for retirement savings. We are obviously dealing with someone open minded and intelligent so I’m a happy man. The next logical question should be: What kind of life insurance policy should I be looking at? That is a great question and fortunately I have a great answer. It absolutely depends.

Now, now. Please don’t swear at me or log off the site. I am about to elaborate. There are three basic types of permanent life insurance and almost all company specific products fall in to these categories:

Whole Life (WL) - Conservative, but consistant. Cash value will grow slowly and steady, and premiums will never increase

Universal Life (UL) - A bit more risky. Interest rates may slip to the point where the cost of insurance is canibalizing the cash value to keep the policy in force. This can be alleviated by dumping more money in to the policy. Premiums are more flexible than whole life. You can add more or add less depending on your cash flow in a given month or year.

Variable Universal Life (VUL) - In layman’s terms, this is investment grade life insurance. Whereas the cash value in a UL is invested by the insurance company, you control the VUL investment options with “subaccounts” which kind of act like mutual funds. You can be as aggressive or conservativeas you want. The upside is potentially staggering, but the downside is that there is no guaranteed cash value at the end of the road.

7. Thankfully, you are done. At least in terms of retirement contributions. Pat yourself on the back for a job well done.

401(k)s are marvelous investment tools if used correctly. Now that you know how to do that, I truly believe you will be better off than those who use the 401(k) like so many talking heads suggest.

Also, at some point I will probably do a life insurance primer, but for now I just wanted to cover the basics. You can do more research on your own or email me if you have specific questions. I will elaborate on some of the minutiae of the topics covered . Stay tuned for that.

I need to get this out in my first real post. My biggest retirement pet peeve in the world is when people who are Roth IRA eligible, max out their 401(k) instead of contributing something to their Roth. It boggles my mind that people do this and it is a travesty that advisors recommend it (and they definitely do). Let’s take a step by step approach to this fallacy and how to efficiently manage your retirement portfolio. For the purposes of this discussion, we will assume that your adjusted gross income (AGI) is within the Roth eligibility requirements.

1. If your employer has a match, take the match entirely. No investment offered anywhere can beat free money. If the match is 3%, contribute 3%. It really is that simple.

2. Do NOT contribute more than the match. If you truly need the deduction, then take it. I won’t argue with you, but I still think you’re better off without the deduction.

3. Open an Roth IRA. I personally like American Funds, but if you’re comfortable with another Roth option, that’s fine too.

4. If you had enough money to max out your 401(k), presumably you have enough to max out your Roth. The maximum contribution in 2008 is $5,000. If you are married, you should be maximizing your spouse’s Roth as well.

You might be thinking that at this point, if you still have disposable income, that you should contribute the remaining amount towards your 401(k). No! No! No! Seriously, you will need to break this “401(k)s are the greatest retirement vehicle in the world” habit. Contribute up to the max. No more and no less.

To be continued…(post was a little too long)