Financial Planning with Mom

Since the dawn of time, all mothers have lived by a certain behavioral code that dictates their thought processes and speech patterns.

Today, in honor of the upcoming Mother’s Day weekend, we’ll be looking at some of those stereotypical statements that moms like to utter, and we’ll apply that wisdom to the financial world…

1) “Because I said so.”

This is one of the more frustrating debate points that your mom could throw at you, because there’s really not an adequate retort to it. You could state your case perfectly, point out all of the illogical aspects of her stance, and finish with a closing argument that would have any jury eating out of your hand.

But then she hits you with “because I said so” and you’re cooked. End of discussion.

Unfortunately, you’ll find some financial advisors who operate with this same “because I said so” mentality. They just want you to go along with what they say because they’re in a position of authority. But unlike Mom, that advisor hasn’t spent your entire life proving that he has your best interest in mind, so that mentality definitely doesn’t fly when it’s coming from him.

I’ve known advisors like this. Their entire business model is based on making clients out of the “low hanging fruit,” which would be the people who don’t ask many questions and just go along with whatever they say. They’re not prepared to truly answer your questions or adequately address any of your concerns. Their mission is to create as many “leads” as possible so that anytime someone poses any sort of intellectual challenge, they can just discard them as a “pain in the butt” and move on to the next person.

An encounter with an advisor like this is ok if you’re someone who does ask a lot of questions. You’ll quickly see that they don’t have the answers you need, and you’ll move on. My concern is for the people who never ask any questions and just go along with the “because I said so” mentality because they assume that they’re working with an authority.

Ask questions. Share concerns. Don’t be intimidated by an authoritative presence.

2) “If you want to act like a child, I’ll start treating you like one.”

Mom usually said this when you were whining about something silly. For instance, maybe you wanted to go on a 4-day road trip with some of your friends, but she wouldn’t let you because you just turned 16 and got your license three weeks ago. But you pitch a fit, so she says, “If you want to act like a child, I’ll start treating you like one and take the car away altogether!”

In the financial world, we see a lot of investors acting like someone of a much younger age. There’s a staggering number of portfolios out there that would be a pretty good fit for an investor in their early 30s. The only problem is that it’s owned by someone in their early 60s—a person who should have a very different risk profile.

The problem here is usually that the portfolio hasn’t been properly adjusted to fit that investor’s stage of life, and it’s often because of a lack of communication between investor and portfolio manager. You assume that your portfolio is being adjusted as you age, and your broker assumes that if you wanted less risk, you’d tell him.

In other words, if you want to act like a child (or a 30-year-old when you’re actually 60), your broker is happy to treat you like one!

3) “If all of your friends jumped off a bridge, would you do it too?”

Literally every mother has said this at some point. I defy you to find one who hasn’t.

Financially speaking, I’m constantly amazed by the number of people who jump off a financial bridge just because all of their friends are doing it.

“Everybody at work says I’m better off to take the bigger pension amount and just invest that extra money instead of taking a smaller amount with a spousal benefit.”

“My brother-in-law says he’s starting his Social Security at 62 because he wants to get his money before the whole system goes belly-up.”

“They say you need a million dollars before you can retire, so I’ll probably be working until I’m 80.”

The “consensus” idea of what’s best may not actually be best for you, so don’t just assume that the herd will lead you in the right direction.

Happy Mother’s Day to all of the moms out there. And remember, “as long as you’re living under her roof, you’ll live by her rules.”

The Financial Double Dribble

Never pick up your dribble without a plan.

In the game of basketball, picking up your dribble at the wrong time can be detrimental. You can’t just start dribbling again because, well, it’s against the rules. It’s called a double dribble. So if you pick up your dribble, you need to have a clear plan of what you’re doing next. You should either be planning to shoot, or you should know who you’re passing it to. Otherwise, you’re just asking for trouble.

A good defender is going to smell blood in the water if you pick up your dribble at the wrong time. He knows that you now have to stay in that same spot until you get rid of the ball, so he’ll take the opportunity to smother you, cut off your passing lanes, and make life difficult for you.

I had to search YouTube for a long time to find a good case study, but here’s an obscure example of somebody picking up his dribble without a plan (with a riveting explanation from the narrator): https://www.youtube.com/watch?v=1D277wPYlps

And without narration, another example of picking up your dribble without knowing what’s coming next: https://www.youtube.com/watch?v=_Fcwm2u_ITg

So what does all of this have to do with your financial planning? Well, there are several financial equivalents to picking up your dribble without a plan…

1) Social Security

Way too often, people flip the switch and start their Social Security without a plan. In some cases, it’s because they’ve reached the age of 62 and they’re now eligible for Social Security, so they say, “Why not? Let’s do this!” And then a few years down the road it becomes clear that they should have waited to start taking it at a later age. But it’s too late. They already picked up their dribble a few years ago and there’s no undoing it now.

2) Cancelling life insurance

Sometimes your needs for life insurance change. It could be that you now need more life insurance coverage than you previously had. Or maybe you need less, but you do still need some coverage. Or maybe you’ve just determined that your current policy is too expensive or just not the right fit and you need to get a different policy with a different company.

Suppose you have $500,000 in coverage, but this was a life insurance policy that you got when your kids were still living at home. Now the kids are grown and out of the house and you decide that you now only need $200,000 (maybe to pay off the mortgage for your spouse if something happens to you).

In this case, it’s important to get the $200,000 life insurance policy in place before you cancel the $500,000 policy. If you cancel the old policy and then apply for a new one, what happens if your health exam doesn’t go well and they determine that you have some medical condition that’s going to render you unable to get coverage, or maybe the coverage will be more expensive than you care to pay?

Well, you already picked up your dribble when you cancelled the old policy, and now you have nobody to pass the ball to. And now you’re stuck without any coverage at all.

3) Quitting your job

Sometimes you’ve had all you can take at the office and you’re ready to walk away. Take this job and shove it, Mr. Foreman.

Well, hold on just a minute. Let’s not pick up that dribble until you know what happens next.

Sure, there are some people who have quit their job to “bet on themselves” and then gone out and found their next career (or started their own business) within a few days. But those stories aren’t nearly as common as the people who quit their job without a plan, thinking they’ll be back to work somewhere else in a few weeks, only to end up “between jobs” for an extended period of time.

Most people pick up their metaphorical dribble, get swarmed by the defense and dig a financial hole for themselves.

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So whatever financial decision you’re about to make, take some time to think things through in advance. Is this a decision that’s equivalent to picking up my dribble? If so, do I know what happens next? Do I have someone to pass the ball to? Do I have a shot to take? If I get in a pinch, do we have any timeouts left?

If you answer those questions before you pick up your dribble, you can save yourself from unnecessarily throwing the ball away.

Retirement Planning at the Winter Olympics

Subjectively-judged events at the Olympics can always be problematic. It’s true of gymnastics, diving, and synchronized swimming at the summer games, and it’s true of figure skating and snowboarding in the wintertime.

Think about the difference between speed skating and figure skating. They both involve a sheet of ice and blades that you wear on your feet, but they’re wildly different activities.

In speed skating, finely-tuned athletes with monstrous quadriceps step away from their rigorous training routine to don a sleek, aerodynamic outfit and race round a track. The winner is determined by a clock.

In figure skating, a dude with poofy hair steps away from his rigorous routine of getting his feelings hurt about the political beliefs of Mike Pence and dons a fabulous glitter outfit while he dances to the musical stylings of Liza Minnelli. The winner is determined by a collection of judges from Belgium, Slovenia, and Finland.

In speed skating, there’s no debating the winner. Unless he commits an infraction of some kind, the guy who goes the fastest gets the gold medal.

In figure skating, one competitor might be more technically sound while another might perform with superior grace and fluidity. So it’s completely possible for two people to watch the same competition and have a different feeling about who won.

Choosing a financial advisor is a lot more similar to figure skating than speed skating. It’s very difficult to use strictly objective measures to decide who should help you with your retirement planning. Instead you normally have to use more subjective feelings to make your choice.

But if your only choice is subjective judgments, it’s important to at least be sure that you’re basing your choice on the right criteria.

Appropriate things on which to base your judgments would include…

Does this advisor listen well? Does he ask a lot of questions or just talk a lot?

Does he seem trustworthy? Does my gut feel ok with him?

Am I able to understand what he’s talking about or does he talk over my head?

Does it seem like he’s giving advice or just selling products?

Am I comfortable asking him questions without feeling like I’ll look dumb?

Inappropriate things to base your judgments on would include…

Does he have really nice clothes?

Does he have a really nice office?

Did he give me a lot of very professional-looking sales materials to go along with the product he recommended?

Does he have commercials on TV that I’ve seen before?

Did he mention his church/temple/synagogue/mosque/yoga studio during our visit?

Did his kids go to school with my kids?

On one hand, it seems absurd that you’d make a decision based on the answers to some of those questions. On the other hand, you’d be surprised how many people get sucked in by slick sales brochures, fancy offices, expensive suits, or the fact that they’ve seen someone at a PTA meeting before.

You’re the judge, so you get to pick which criteria is important to you. Just make sure you’re putting more emphasis on substance than style.

The Bon Jovi Approach

In keeping with the age-old, time-honored tradition that we’ve been observing for…at least three years now, it’s time to take a look at this year’s Rock and Roll Hall of Fame inductees and see what sort of retirement planning lessons we can learn from them.

We’ll start with 2018 inductee Bon Jovi.

As a band, these guys have always had a very unique relationship. Jon Bon Jovi is the only member who’s actually signed to the record label; the other members are considered his employees.

This is unusual in the recording industry, especially for a group that includes someone as well-known and influential as Richie Sambora. Sambora, after all, has also released three of his own solo albums, he was married to Heather Locklear for 13 years, and he’s been to rehab twice. So he’s a legit rocker.

But while most bands tend to make business decisions as a unit, somewhere along the way, Jon realized that this was a bad model.

The “one guy in charge” model has worked well for the group. The band has stayed remarkably stable since it was founded in 1983. They replaced their bass player in 1994, and then Sambora finally left in 2013. But other than that, there’s been relatively little drama in the group’s 35-year history.

The same should be true of your financial life. You’re the leader, everyone in your orbit is there to support you.

“But wait a minute,” you say. “Of course I’m in charge of my own financial life. Who else could possibly be considered to be in charge?”

Well, let’s take a look at some situations where you actually give up your position of leadership and let the band make decisions for you…

1) Too Much Debt

When you saddle yourself with debt, you’re giving up control of how you’ll spend a portion of your income.

Let’s suppose you have an annual salary of $120,000. If, before each month even begins, you know that you’re going to owe $1500 on your mortgage, $475 in car payments, $250 toward a home equity line for that kitchen remodel, and $500 to credit card payments, you’ve already given up more than 27% of your voting rights on how you’ll spend your money that month.

2) Tax Returns

Too many people allow someone else to prepare their taxes for them and then completely divorce themselves from the process.

It’s fine (and usually recommended) for you to have help with your taxes. But relinquishing complete control of the decision-making process is dangerous.

It’s one thing if you have an actual CPA preparing your taxes for you. Sure, there might be some concepts that you don’t completely understand, so you cede to their advice. But most good CPAs make it a consultative process where they’re walking you through the things you need to understand.

The area where I see people get in trouble is with services like H&R Block or Jackson Hewitt. All too often, it seems that their primary goal is not to be as accurate as possible, but instead to get you the biggest refund (or owe the smallest amount) possible.

And if that’s the primary goal, it sometimes means sacrificing some accuracy, or legality, along the way. I can’t tell you how many people I’ve seen who have ended up with a mess on their hands because they simply turned their taxes over to a service like this and then assumed that everything would be handled perfectly.

It’s still your tax return, and you’re still the one the IRS holds responsible. Don’t give up your position of leadership here.

3) Investment Decisions

Look, nobody expects you to be an expert on the investment world if you don’t wallow around in it every day. But at the same time, you need to take enough ownership of your situation to know if your general investment approach makes sense.

I’ve seen too many people who just assume that their advisor or broker is paying more attention to the details than he or she actually is.

The majority of advisors out there are primarily focused on growth and accumulation. As you get closer to retirement, your priorities need to shift to preservation and income. But unless you’re explicitly having that conversation with your advisor, don’t assume that those adjustments are being made. It’s more likely that they still have you in accumulation mode because you haven’t told them otherwise.

And yes, if you’re wondering, it should probably be considered malpractice for your advisor to not be proactively having those conversations with you. But that’s a soapbox for another day.

So proceed as if this is your band, take the bull by the horns, and be sure you’re making the best decisions you can make.