When Your Money Manager is a Robot

robothead.jpgThey’re everywhere, automated tools that tell you how much to save, and how often, using various mutual funds that might be suitable to accomplish your goals.  However, disruptive life events or complex tax situations may require human rather than machine oversight of financial decisions.

When heading to a financial crossroads, many newbie investors head for the easy calculators found on any consumer friendly websites. Type in your income, desired savings rate, and hopeful rate of return, and get a projection of how much money you may have saved in a defined number of years.

For low risk goals this approach may be fine.  Calculators found on for instance can help you decide how much to save at any given rate of return to come up with the down payment necessary for a car payment. The calculators can even show how much you may end up paying for a car with a given set of financing terms.

A goal that is 3 to 5 years away may require less due diligence because the standard deviation of error is less pronounced and rates of return more predictable for a shorter time horizon.  This is especially true for cash investing, where you plan to use the principal and just want some modest interest on the amount saved.

When a goal is further away, such as a goal to fund a child’s college fund or to finance retirement 20 years later, then the risk of using automated tools becomes heightened. Disruptive events could complicate this analysis further. For instance, illness, or the death or divorce of a spouse may introduce new variables requiring attention.  A fully automated projection tool may not adjust for these changes. And of course the tool itself may not remind you to make adjustments in any planning assumptions, to recalibrate your investment decisions going forward. Don’t forget that you, not the machine, need to make the funding transfers to keep the plan to track.

Now don’t get me wrong. Financial planners do use software supported planning tools to make the job of forecasting investment outcomes a little easier. But the tools are just that, tools.  Keeping people on the track they have chosen for a goal is another matter.

Couples particularly have a hard time staying on the same page to realize goals over a long period. Many couples don’t like to discuss finances and keep information about their retirement plan balances and investment choices as private matters.  Worse yet, spouses neglect to share passwords to their various online accounts. If one spouse is no longer able to access an account, due to forgetfulness or illness, the other spouse may not realize that valuable data or account information is no longer being communicated.

Automated tools and accounts can be a godsend until such a lockout occurs. Many spouses assume that banks or other online providers will provide access to their spouse’s account information upon proof of death. This may not be the case.  Entitlements for account access can be shared and passwords communicated, or not. If they are not shared, the surviving spouse may not be able to access information for an online only account until an attorney writes a letter on his or her behalf.

During tax season, this problem can be quite troublesome if 1099 reports, for instance, are sent only by email or online.  The inability of one spouse to access the online account due to loss of memory, illness, or death, may cause the other spouse great inconvenience and possibly late penalties for a tax filing.

Some of the online advice websites will aggregate access to credit card, banking, and brokerage accounts as well as reporting for a 401K or other employer plan.  The concentration of information can place the user at risk for identity theft if the website is hacked. Use of such an aggregation site, coupled with online only access to the various interconnected accounts, makes  estate settlement more difficult in the event of untimely death if no passwords are left for the spouse, or executor or successor trustee to use.

Pros

–online advice can provide useful advice to the small balance investor who wants to get pointed in the right direction.

–using an online site may establish a discipline of financial monitoring that can carry over to budget and plan for longer periods of time.

–regular visits to such as website may heighten awareness of the need to save, along with the choices that go along with investments.

–risk tolerance conversations about marital assets like employer matched 401K plans might be prompted if couples share responsibility in the monitoring.

Cons

–The websites won’t know about life changes unless the user, you, revises the starting data.

–The websites may not remind clients, you,  of the need to update starting assumptions, beneficiary information, and savings rates as tax brackets, life relationships and salary compensation change.

–The websites cannot factor in assumptions around complex tax reporting that may affect your investment decisions. 

–The websites are usually limited to assumptions based on mutual fund and ETF investing, rather than actual stocks, bonds, insurance products, or closed end funds.  They also do not consider how to best manage real estate or tax situations arising from its disposition.

–The websites alone cannot weigh the relative importance to each client of the various measures of risk, including liquidity risk, security risk, inflation risk, or market risk as measured by volatility.

Not sure which way to go? All the more reason to check in with a professional.  Someone who knows your situation will be more proactive in calibrating your investments to stay on the right track, no matter changes in circumstances.

A certified financial planner such as myself is held to a fiduciary standard when deciding upon the best recommendations for each client, after consideration of immediate as well as contingent factors. These can include assumptions about family security, or continued family income under a variety of circumstances.  Tax and legal professionals can also be useful in advising you about the tax consequences of various types of investing alternatives, or the proper titling in which to hold assets. Even beneficiary designations for account can create tax and legal headaches. Careful updating and review is always necessary.

Kathleen Nemetz, MBA, CFP®

www.life-as-planned.com

415.472.1445 x 306

Predictable income from corporate securities

stackedcoinsPortfolios are like cows, we must learn to milk them for yield……

During an accumulation phase of building resources for retirement, many investors overweight on stocks and stock funds, rather than bonds, looking for growth rather than current income.  Investors transitioning into retirement need to take a hard look at income, as well as capital preservation, that is, preserving hard earned capital that may not easily be replaced.

coins1. Definitions

While there are many types of bonds, corporate bonds and securities particularly should be considered to help provide predictable income for financing retirement. Investment grade corporate bonds typically have less standard deviation, that is, less variance in their valuations during a holding period, than do stocks.  They typically pay interest twice yearly at a stated coupon rate. If longer maturities, 15 years or more, are selected, coupons for investment grade bonds can exceed 4%.

Bonds are rated for credit quality by ratings agencies, including Standard & Poors, Moodys, and Fitch.  Advisors work with their clients to help them understand what these ratings mean in judging how the bonds may perform over time.

While bond funds and ETFs are another investment option, the dividends paid from these instruments may not approach those paid by actual bonds. A careful review of the choices available is prudent, when planning for the annual income necessary to finance household budgets.  

To read more, click here.  Securing predictable income

This information is not intended to be individualized investment advice, nor is it a solicitation to buy or sell any securities. Always consult a qualified financial professional before investing.  Securities involve risk and are not FDIC insured, bank guaranteed, and may lose money.

 

The cost of living in the SF Bay Area is up to 53% higher than the average for the US.

18Budget-challenged? In Marin, you may need to cut back on other expenses to finance your cost of housing. 

It’s not your imagination. Every items often do cost more here, and it pays to shop around. Especially if your housing cost is typical, that is, exceeding national cost of living averages by as much as by 50%.

Syndicated newspaper columnists publishing personal finance columns often advise would-be savers to cut back on various categories of purchases, to accumulate money for goals.

What makes interesting reading, to glean useful advice for your own situation, is to discern how  the amounts spent on various monthly budget line items compare to your actual costs here in California, north of San Francisco.

The cost of living index for San Francisco is about 53% higher than the US average.  Oakland is judged to be 45% higher, and Sacramento is estimated to be 12% higher. Higher housing costs explain much of this spread.

For people trying to manage their finances, issues arise when higher costs for one category force elimination of or reduced expenditures in another category. As an example, a recent article in theWall Street Journal focused on budget- challenged estimated local housing cost in North Carolina for a family of 3 to be $1,300.  The rental of a two bedroom apartment in Marin County possibly accommodating a family of three, by comparison, would run $2,500 a month or more.

The 30-something couple discussed in the Journal article were grossing $140K a year but have not been able to save for a house because of their rate of pay down of outstanding student loans. Additionally, the spouses are making healthy deferrals into their 401K plans. The same couple here would have may not be able to afford the higher retirement savings rate, if the couple was also paying for higher rental costs and wished to simultaneously accumulate a house down payment.

If the situation were flipped, the situation can become net positive in a big way for a couple already accustomed to frugal living. That is if a Marin couple relocated from here to North Carolina and already was accommodating higher housing costs, this couple might suddenly feel  liberated in their new state. The transplants would have extra disposable income and could splurge on a some luxuries, for a change.

These disparities in lifestyle spending draw focus to the impact on budgeting. Creating a budget is work, a hard but necessary task to sustain a family for eventual and continuing prosperity. The challenge in creating these financial documents is to learn one’s own spending habits, to discover what costs may be out of whack relative to one’s home town or county, and what changes may be needed to make to bring costs back into line. The alternative is to live paycheck to paycheck with next to nothing in cash reserves or savings, which is a dance with chance, and a dangerous one.

With housing occupying such a big part of many local budgets, other categories of spend effectively may need to be crimped, or foregone. The question is which, and how much to trim or eliminate.

I advise my clients to acquire some perspective on these issues by comparing their own costs against those typical for their cities or states. Anyone interested can check out the various websites publishing cost of living indexes by city and state. Being knowledgeable about cost of living figures may also make folks more effective in negotiating increases in salaries to cover their living cost – or make them more aware of the need to move on to a better paying job.

Following is a listing of the more useful cost of living index websites that I have found, and use, in my financial planning practice:

www.numbeo.com/cost-of-living
http://money.cnn.com/calculator/pf/cost-of-living
http://www.usa.com/94903-ca-income-and-careers.htm

Getting back to the couple that I described from North Carolina, some of the more obvious areas for the spouses to cut back centered on car payments – $468 monthly, as well as ongoing spending on dining out – $400 monthly.  Additionally, the spouses were spending on monthly vet and grooming bills for the family dog, at the rate of $200 a month. Cutting back on child care costs – $750 monthly – doesn’t seem to be an option for them.  Both spouses work.

These spending rates are not unusual.  Some Marin couples reviewing their monthly costs with me have indicated they are spending $500 or more for pet grooming monthly. The area of pet expense seems like a red flag for anyone to examine. If taking care of Fido means charging this or other expenses on cards at 18 percent yearly interest, the expense is not justifiable or sustainable.

High rates of interest on monthly credit card payments impose an ongoing strain on relationships, not to mention monthly savings.  People who carry a balance should shop around for the lowest interest rate. Many zero interest balance transfer programs can be found at www.bankrate.com.   Getting the balance down may mean resorting to the cookie jar method of budgeting, to bring awareness to the actual costs of the monthly food shopping bill. The cookie jar method entails putting a given sum into the kitchen cookie jar. Food purchases are made from this sum until it is gone.  The discipline is to balance and pace food spending with the amount of money actually still in the jar.

More preferable are the decisions resulting in’ big wins.’ The ‘one and done.’  Accomplishing savings goals requires analysis and foresight. Comparison shopping or lifestyle changes may be in order to ensure that any couple so desiring can put some green into their own accounts before they hand the rest over to the companies whose products and services support their lifestyle.

Deciding upon a percentage or amount to save monthly should derive from the goals that a couple sets. The choices of how long to work and when to retire, for instance, are accompanied by the realities of saving to finance this long term goal.  Returns on investments play a part in determining how much must be accumulated over any specified period of time. Having a reality check discussion with a financial advisor can ensure that anyone, including you, are saving enough for the timeline you have in mind. I am happy to help.

To figure out how to save, click here.