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Can One Live as Cheaply as Two?

Years ago, as a newlywed I remember learning that because we were married my boyfriend and I would now pay higher taxes than we did before although our incomes were exactly the same. That was my introduction to the marriage penalty inherent in our progressive tax code, where a married couple pays taxes at a higher rate than if they were two singles earning the same wages. I complained to an older married friend that this seemed really unfair. Her view was that married people get other breaks so maybe paying slightly higher taxes was OK.

Recently I recalled that long-ago conversation. Newly single, I realize how expensive it is for two people who used to live as one household to live separately. When I lived with my husband in one household we had to make the mortgage payment monthly, pay utility bills, grocery bills, property taxes, insurance and other such incidental expenses. Now we are in two separate households and the expenses have doubled. Instead of one mortgage payment, our incomes support the same mortgage payment plus an apartment rental. The grocery bills in my single household seem exactly the same as before, utility bills are no different, neither is landscaping, insurance and various other expenses. The only difference is that these expenses are being replicated across town in my ex's household.

Across the gap of 20+years, I recall that half-forgotten conversation; now I get it and can see for myself the breaks that marrieds get and why net income drops for both parties after divorce.

Veena Kutler

More Thoughts on Madoff

The Madoff affair has stirred up a buzz within the financial press and among financial advisors. Some advisors had client assets with Madoff and were caught in the fallout. Most advisors had no exposure and of these some are now congratulating themselves in the press for having the prescience to dodge the bullet. I find the extent of back-patting going on to be interesting and wonder how many of us advisors were lucky rather than insightful.

I remember a very smart, experienced analyst telling me once that even the best analysis can’t protect against fraud perpetuated by a determined person, because finding fraud requires detective work rather than analysis. Given that, what can be done going forward to protect assets from a fraud like this? Just as a good diet and exercise help us stay healthy there are basic investment rules that we can follow to help keep our portfolio sound. But just as diet and exercise alone can’t prevent every disease, the basic rules won’t always keep you out of the crazy pitfalls of the markets.

Transparency – It’s helpful to have securities that are priced daily and even if it is a fund to have regular reporting so the securities held by the fund are known and valued. This policy rules out using hedge funds that aren’t required by law to report their holdings, and until hedge funds are transparent we don’t believe in investing in them.

Show Me the Money – Having an independent custodian that hold the assets and is independent of the money manager introduces a good check-and-balance. Madoff’s investors sent their money to Madoff. Even large mutual funds use outside custodians (such as State Street Bank) to custody assets and don’t hold the money themselves. Separation of the money manager and the custodian is a good thing.

Diversification – Diversifying among managers, styles and asset classes is still the best and no-brainer way to reduce if not avoid risk. Keep in mind that the biggest losers in the Madoff fraud are those who had all their assets with the Madoff firm.

If it Smells Like a Free Lunch… – I’m not convinced that all Madoff investors were being greedy. My guess is that some felt that the returns of 8% - 10% a year that Madoff was targeting indicated a conservative strategy. Not being market professionals, they didn’t know that target requires a swing-for-the-fences mentality. Think about it – there’s no way 8% - 10% can be achieved consistently in down markets by using low-risk strategies.

Veena Kutler

The Making of a Financial Planner

What makes someone want to become a financial planner? In my case you might call it a series of unfortunate events.

My father died from pancreatic and liver cancer almost 15 years ago. In the last year of his life he suffered terribly not only from the ravages of his disease but because his financial life began to unravel at the same time.

For most of his life he had been a successful businessman. He and his brother sat atop a small empire of retail stores and a variety of investments in local businesses in my Midwestern home town--a family business my grandfather built after emigrating from the Ukraine. We lived very comfortably in our small community while I was growing up; in fact I'd say my brothers and I were pretty spoiled, never wanting for anything. I saw my dad as a savvy businessman and a person of the highest integrity.

Our fortunes first began to turn when my dad and uncle decided to open a new store halfway across the country in Nevada. Until then I had been unaware that dad was unhappy with his life, but he was restless and looking for a big change. Boy, did he get it! Our family voted (four to one -- I was the only one opposed) to relocate so that dad could manage the new venture. Soon after moving the family he left my mom and filed for divorce.

Not surprisingly, my mom chose to leave Nevada and headed back to the east coast where she had grown up. During her marriage mom had paid the bills, but dad really managed all other aspects of the family's finances. Every element of money management was new to her -- living on a budget, buying a house on her own and making big financial decisions -- and she was ill-equipped to deal with any of it. Over the years she was victimized by salesmen and brokers who won her trust and sold her inappropriate products with no regard for what she really needed.

Meanwhile my dad fell in love and remarried. While his love life was flourishing, changes in the IRS rules created massive tax liabilities for the family business. It was a financial blow dad never really recovered from, but he hid it from the rest of us even cooking the books to keep his brother in the dark. I think he believed his fortunes would turn and he would make it all right, but he got sick and ran out of time.

After his condition was diagnosed, dad began to count on a large life insurance policy he had purchased to keep the business afloat and to provide an inheritance for his wife and three adult children. The plan was in place and might have worked as dad hoped, but less than a month before his death my step-mother convinced him to transfer ownership of his life insurance policy to her. She promptly made herself the sole beneficiary and received the entire death benefit when he died.

That sounds like the end and enough to motivate me to want to learn more about financial planning, doesn't it? But there's more!

Dad's life insurance policy was what's known as key-man insurance, intended to carry his business partner--his brother--through several months during which he would find someone to fill dad's shoes and keep the business (which my dad had thrust deeply into debt) afloat. So it wasn't really dad's policy to leave to his children or his new wife, and it certainly wasn't his to transfer to a new owner. It's probably not too surprising that my uncle sued my step-mother and after months of very ugly back-and-forth they came to a settlement. She bought him out; over time she paid off and negotiated down the remaining debts. She owns and runs my dad's business to this day.

While all of this was happening I began taking CFP courses. I wanted to learn how to spare others from the mistakes my family had made.

Initially, I saw my step-mother as the villain who stole my inheritance. When my uncle sued her and won, he joined the bad-guy team. But as I learned more about personal finance I realized that my dad and my uncle had an agreement and dad had broken it first by changing the beneficiaries of his life insurance policy and then by giving it to his wife. So my uncle was a victim too. Even my "evil" step-mother was going to be stuck with credit card bills my dad had hidden. I could eventually see that she was doing what she needed to just to keep his wreckless acts from dragging her down financially. She wanted to save her house and the assets she had built up over a lifetime. I can understand why she did what she did.

My dad blew it by failing to plan, by denying the reality of his financial limitations, and of course by lying to everyone along the way. I'm even willing to see him as a victim -- a victim of unfair tax laws and even more a victim of love! He was so eager to please his second wife he didn't want to confess his failings; he wanted to give her everything.

And in the end, I don't really see myself and my brothers as victims at all. We were clearly last in line for the insurance money. We didn't receive any inheritance at the time of his death, but my dad put us all through top-notch colleges and instilled a work ethic that has allowed each of us to survive and flourish on our own. And his missteps brought me to a profession I love--that's a pretty good silver lining in my book.

Annette Simon

Copyright 2009 Garnet Group LLC

Budgeting -- Unpopular, but oh so Important!

In recent years the idea of living on a budget has fallen out of favor. Baby-boomers, we are told, don't care for budgets. They prefer a spending plan -- it fits more with their mindset.

Call it a budget or a spending plan or whatever you like, successfully managing your financial life starts with getting control of your cash flow. In the simplest terms, when spending exceeds income, you're in for trouble. This is true whether you make a lot of money or almost none at all.

That's the big idea, but most people are looking for more guidance than that. They're wondering, for example, how much they can reasonably spend on housing, or how much they should be saving for retirement. Here are a few benchmarks to start with, established by the Foundation for Financial Planning.

First some definitions:

• Disposable Income - This is your total income from all sources minus federal and local income taxes and your own contributions to your retirement plan(s). Taxes are not optional and we recommend treating retirement savings (at least 10% of your total income) the same way -- as though you have no choice about it.


• Living Expenses - Includes rent or mortgage (principal, interest, taxes and insurance) food, utilities, medical, transportation -- required expenses, none of the fun stuff.


• Discretionary Income - Subtract your total living expenses and debt payments (non-mortgage debt) from Disposable income to reach this number.

Using these concepts, here are some ratios that can help you determine whether your lifestyle is reasonable based upon your savings and income:

• Basic Liquidity Ratio - Divide your total savings (money in bank accounts and liquid or readily salable investments) by your monthly living expenses. The result is the number of months you can survive without an income, or your Basic Liquidity Ratio. This ratio should be greater than or equal to six, meaning that you could survive on your savings for six months if you were suddenly unable to work and earn an income.


• Debt Ratio - Find your Debt Ratio by dividing your monthly debt payments (excluding mortgage payments) by your total monthly income. A Debt Ratio greater than 10% is a red flag indicating that the interest on your credit cards or other loans is eating up too much of your income.


• Housing Ratio - This is your rent or mortgage payment (principal, interest, taxes and insurance) divided by your total monthly income. If your housing ratio exceeds 30% you are house poor -- spending too much of your income on housing, which leaves you with too little for retirement savings and other living expenses.

Use these ratios to take a good hard look at your lifestyle. If your ratios are out of line -- you are living with excessive risk and building a financial house of cards that will probably fall apart with the first strong wind.

Annette Simon

Copyright 2009 Garnet Group LLC

Five Financial Resolutions for 2009

I like New Year's resolutions -- even though they're often futile and left by the wayside within days, sometimes hours. Because once in a while a resolution sticks and we succeed in making real change. Here are some financial resolutions for 2009 you're welcome to adopt:

1. Procrastinate in a productive way. We're all great at procrastinating-- I do it constantly when it comes to tedious work, household chores, doctor's appointments and other less than exciting activities. Try taking that natural ability to procrastinate and using it to postpone and maybe avoid unproductive habits, like impulsive spending. Put off buying those great new shoes for a few day; wait another month to shop for a new rug. It's likely you'll forget about the items that seemed so essential and move on. This sometimes works for binge eating too (admittedly not a financial issue). Wait an hour to eat the cookie that is calling your name (I hear one now). The craving may pass and you'll be glad you waited.


2. Save and invest regardless of market conditions. This is important for a couple of reasons. First, saving and investing consistently is by far the best way to build wealth over your lifetime. Stopping because of market conditions (or because you have increased your spending) puts you at risk of dropping a good habit. Moreover, investing when the market is beaten up, as it is now, is like buying everything on sale. Many advisors and economists think that we are in for higher than average growth in the markets over the next few years as a result of the dramatic declines that occurred in 2008. There's no guarantee this will happen, but it's a good bet that this is a bad time to stay completely out of the equity markets.


3. Start a family conversation about money issues. This might be with your parents, your children, your siblings or your spouse. Money is one of the last taboos -- most people would rather talk about their sex lives than discuss money with their family. Do you know if your parents have adequate resources to support themselves through their lifetimes? Have they prepared wills, durable powers of attorney and any other appropriate estate planning documents? If you explaing why, even young children can understand that saving for the future is an important family value and we can't buy everything we want just because we want it. It's much easier to learn and keep good habits when you are young than it is to change bad habits as an adult. Are you and your spouse on the same page when it comes to spending, saving and charitable giving? Opening the lines of communication with your family about financial matters a good way to avoid hurt feelings and potentially unwelcome surprises down the line.


4. Have your estate planning documents reviewed. If your documents are more than five years old or you have had significant changes in your life or family structure (e.g. birth or death of an immediate family member, divorce, all children now over 21) it's likely you'll need to update your estate plan. There have been changes in estate planning laws in many states that make it important to update the language in any wills or trusts as well. And if you don't have, at a minimum, a will, a general, durable power-of-attorney, and a medical power-of-attorney you need to see an attorney who specializes in estate planning to draft and execute these basic documents. Estate planning documents that are clear and properly drafted are especially important for unmarried partners who are not protected by most states' laws.


5. Diversify, diversify, diversify! Yes, every asset class was hit this year, but some more than others. No one can consistently predict the future (even the smartest guys in the room) and successful investing is more often than not the result of diversifying as broadly as possible and keeping your emotions out of your investments. Falling in love with a stock or a piece of property (we saw a lot of this in recent years with real estate investments) will almost inevitably break your heart and your bank.

Here's to a better year. Cheers!

Annette Simon

Copyright 2009 Garnet Group LLC

A Lesson Learned from Madoff

“Those with the biggest financial gains generally had their money managed by Madoff. It was an honor having him handle your fortune. He didn’t take just anybody. He turned down all kinds of people, and that made you want to give the man even more of your money. When he took your fortune, he told you that he would tell you nothing about how he achieved his returns.”-Laurence Leamer, a Palm Beach based journalist, writing in the New York Post, December 13.

Reading this reminded me of past meetings with clients -- during which a client has told us she or he wonders if we should be putting some money into a can't miss investment recommended by a brother, a friend, a son.... It's a hedge fund managed by a brilliant guy with a Midas touch, or stock in a new company started by a genius who has never failed to turn pennies into millions. It's a special version of the American Dream -- that we will invest in the next McDonalds, the next Microsoft, the next Google. It's sexy and exciting and so hard to resist.

But the truth is, picking the next megasuccess is the longest of long shots. Are there indicators that help us identify companies that will be wildly profitable? None that are a sure thing. It's like an ugly twist on the old fairy tale -- where the princess kisses a frog and he turns into her prince. In investing (and often in dating I'm told) you're likely to kiss hundreds, even thousands of frogs before you ever find a prince. Chasing after can't-miss investments is a terrific way to fritter away your money leaving yourself with little to show for it in the end.

Bernie Madoff's investors believed he was different because he didn't promise extraordinary returns. His promise was guaranteed returns of 8-9% each year. The victims convinced themselves that they were not being greedy, just seeking safe, steady returns. But anyone who has been investing in the past 10 or more years knows that there is no way to achieve a guaranteed return that high year after year. Madoff pulled it off while the market was strong, but as soon as returns dropped off he was forced to borrow from Peter to pay Paul. When the bottom dropped out of the market last fall his entire house of cards came crashing down. The cost of Madoff's crimes is truly terrible. We can measure the dollars, but we can't put a number on the loss of trust he has triggered in millions of people around the world who were not his clients but believed something like this could not happen in the American financial system.

Successful investing, like success in other areas of life is the result of keeping at it, putting money away year after year, spreading your risk as broadly as possible by using diversified, publicly traded mutual funds that hold liquid publicly traded securities. Fortunes are not built overnight and you cannot expect to get something for nothing. This is just common sense, but too often we convince ourselves that our own case is special, or a particular opportunity is a once-in-a-lifetime chance, too good to pass up.

If any good can come from this, I hope it is that people learn, once and for all, that when something sounds too good to be true, it almost certainly is not true. It's time we stopped believing in fairy tales.

Annette Simon

Copyright 2009 Garnet Group LLC