For most financial planners, the focus of college planning advice is accumulation based. After all, it seems that almost by definition, "planning" for college means acting in advance by saving up money ahead of time so that the costs can be funded when the child is ready to matriculate. If you just pay as you go when the tuition bills show up, you may be funding college, but that doesn't really constitute "planning" does it? Yet the reality is that many actions can be taken in the final high school years leading up to college beyond just long-term accumulation planning; however, most planners seem to skip these client conversations about so-called "late stage college funding planning" opportunities, despite the potential for a high impact on the actual client costs to fund college. For the most part, it seems this is by no means willful negligence, but simply a lack of awareness about the strategies that really do exist. We've just never had much opportunity for training about how to do this effectively. Until now.
Although so many financial and economic models take as a fundamental assumption the idea that we are all rational human beings, the emerging research from the field of behavioral finance clearly illustrates this is a false assumption. In reality, we have some pretty strange financial behaviors, that do not appear to be at all consistent with a purely rational decision-making process. Fortunately, the world of behavioral finance is showing us that at least some of our irrational behavior occurs in a consistent manner that we can predict, so while our actions may not be rational at least they can be anticipated. But that in turn begs a fundamental question: when faced with a client making an irrational financial decision, is the rational (for the planner) solution to try to change the client to be more rational as well, or to change the recommendation to fit the client's irrational behavior? Read More...
Almost by definition for many, the essence of financial planning is that it's comprehensive. Financial planners don't just look at a particular problem or product; they account for everything holistically to arrive at a recommendation and solution that fits in with the big picture. In other words, they don't just plan for a slice of the pie; they plan for the whole pie. Yet it seems that for many planners, the "whole pie" is the client's balance sheet; we plan for all the different assets (and liabilities?) that the client has, not just a particular account. What about the OTHER pie, though? Not the asset one; the INCOME pie.Read More...
As financial planners, we have a responsibility to give people the best advice to guide them towards achieving their goals. In most cases, it's very straightforward to develop these recommendations, by applying the technical rules and looking at "the numbers" to calculate what path/route/option is best. Yet ultimately, the solutions don't count unless they're implemented correctly, and if you want to take that next step, you have to deal with real world behaviors. Which leads to a fundamental problem: what happens if the "best" solution is one that's not conducive to human behavior? How do you navigate the intersection between behavior and the numbers? How do you develop rational financial planning recommendations in a world where people don't always behave rationally?Read More...
It is a common financial planning challenge: just how much time and effort should be spent trying to make the numbers in your financial planning projections as precise as possible? How much research should you put into refining the growth rate assumption for each asset in the portfolio? And its volatility? And its correlation? What about client spending? Should we build a detailed cash flow for retirement, year by year, or is it sufficient to just provide a rough guesstimate of how much money will go towards retirement outflows? Many planners have a strong tendency to fine-tune these numbers and make them as precise as possible, but that in turn begs the question... in a world where the future itself is so uncertain, are the results really more accurate, or is an effort for greater precision just an exercise in futility?
The personal finance space has no shortage of tips to managing your spending, from bag lunches in lieu of eating out at work to home-brewed coffee instead of the morning Starbucks routine. Yet the reality seems to be that in so many situations, we dig ourselves a tremendous spending hole because of our big purchases, and then worry tremendously about the small stuff trying to make up the difference. If you really want to change your financial reality for the better, though, it's the big stuff you really need to focus on - where you live, and what you drive.
As sayings go, money can't buy love, and the love of money is the root of all evil. They also say that money can't buy happiness, but some interesting recent research shows that actually, financial wealth levels really do affect happiness. However, it only helps if you spend it on the "right" things, and act up front to head off your irrationality.
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Any form of long-term projection is built on the back of assumptions. In the case of a retirement plan, there are several key factors, including portfolio composition (and assumed growth rates), inflation rates, savings, retirement spending, time horizon until retirement, and the duration of retirement. Yet the reality is that not all of these assumptions have equal impact; some are far more dramatic drivers of plan results than others, and which are most important varies by the client situation. In other words, there are assumptions, and there are ASSUMPTIONS! Have you ever examined the sensitivity of your client's financial plan to the assumptions they're using, so you can determine which factors are the most important to focus upon?
In today's skeptical and cynical world, we believe little that we read or are told until we have a chance to try it for ourselves. The car looks great in the magazine, but we have to take it for a test drive. The TV is supposed to be great, but we want to see how the image looks on the screen in the store before we buy. Yet as planners when we deliver financial plans to our clients, we don't just fail to give them a test drive; we actually make it onerous to even try!
The President's Economic Recovery Advisory Board (PERAB) recently released its recommendations on how to simplify the tax code and improve the implementation of tax policy. Embedded within the report are numerous recommendations that would impact our so-called "retirement crisis" in the U.S., and a few of the report's solutions highlight a surprisingly simple yet important reality: we're not always very rational about the decisions we make regarding retirement.