Our Blog Has Moved

Please visit the new home for JoycePayne Partners' blog, right on our own website.  We appreciate your interest in our blog, and we continue to update several times a month.  Thanks for reading!

Student Credit Cards

As you help your child pack for College, should you be including a Credit Card?

As August rolls around and we enjoy the last few weeks of summer, we also start our Back to School shopping and preparations.  Mike and Jack will both be sending sons off to their first year of college in August.  My daughter Chelsey, who will be a junior in college this year, is heading to London for a semester abroad in September.  Many of our clients will be sending their children to college this fall as well, so student credit cards are something we should think about now.  

Image: FreeFoto.com

My daughter, who attends college in Boston, has had a credit card for the past two years.  She has been very responsible with her credit card.  I helped her get a card with a very low credit limit: $250.  I pay the bill so the statement comes to me, which I like because I get to see exactly what she is purchasing each month.  Since the card is in her name she is building credit, even though I’m paying the bill.  

This year we have a new issue: Chelsey will be in London and she needs a new credit card.  The one she has now charges Foreign Transaction Fees.  I started doing a search for student credit cards that do not charge Foreign Transaction Fees, and I found a possibility in Kiplinger’s Magazine.  Capital One offers credit cards that don’t charge Foreign Transaction Fees, and they have a Student Rewards Credit Card.   Capital One has a good reputation for student and ‘beginner’ credit cards.  Chelsey needs to apply for the card, so we haven’t used it yet and I can’t recommend it yet, but it offers 1% cash back on all purchases and looks like a good deal. 



Image: FreeDigitalPhotos.net



Choosing the right card is important, but there is a bigger issue here.  Is your child responsible and mature enough for a credit card?  Will you pay the bill or do you expect them to pay the credit card bill?  (Keep in mind that if they pay the bill they need to make sure it’s paid on time, or else their credit will be negatively affected.)  In my experience, I prefer my child have a credit card that I help them choose and that I monitor.  I have friends whose children signed up for credit cards at college and ran up huge credit card bills because their parents were not involved in the process. 

Regardless of whether you want your child to have a credit card or not, I do recommend you speak to your teen about credit cards.  Many credit card companies market and heavily promote to teens on college campuses.  It is way too easy for college-aged children to fall into the ‘buy now, pay later’ trap and run up excessive debt on non-essential items.  It is important that you educate your teen about the benefits and potential hazards of credit cards.

If you are looking for a Student Credit Card, there are websites you can visit that compare various credit cards so you can find one that fits your child’s situation.  Make sure you get a credit card that does not charge an annual fee and teach your child to pay their credit card in full each month so that they do not pay interest.  A credit card that offers rewards should be considered. 

If you have any questions about this topic, please contact your Financial Strategist.

Written By: Marilee A. Falco, CFP®, ChFC®

The Bank of Mom

I was away for the weekend recently and when I came home I brought gifts for each of my three kids. Josie (2) and Lila (4) each got sneakers (not as boring a gift as it sounds - they LOVE shoes). Gage (6) got a pack of erasers and a book. Gage pawed happily over his gifts, then gave me a guilty look and said, “The girls only got one thing and I got two things.” They have an inherent want for things to be equal, as most siblings do. I began to explain that the shoes cost more than the erasers, so I had extra money for the book, and I could see that he wasn’t getting it. I thought for a moment and said, “Would you rather have four quarters or a dollar?” “Silly,” he said. “They’re the same.” “Well, your erasers and book are the same as a pair of shoes.” Oh.

Age six seems to be the first that I can start teaching about money with any kind of real meaning.  Lila is still too young, her response to the dollar vs. quarter question would be: The quarters, naturally, because there are more of them.

Image: www.freedigitalphotos.net

I am a big fan of the envelope system, and Gage recently wanted to start an envelope for himself.  He has his eye on some sets of Legos, and he knows that (1) I won’t  just flat-out buy them for him and (2) he has to figure out a way to get the money to pay for the things he wants.  We sat down together and made a list of the sets he wants, then looked up the prices online.  We made graphs for each toy, broken down dollar-by-dollar.  Whenever he gets a dollar he carefully adds it to his envelope and fills in a little box on his graph.  When he has filled all the boxes for a particular toy he gives the money to me and together we buy the toy.  Then he starts working on saving for the next toy.

Gage has become very proactive in earning money.  We’ve made some deals, like if he ‘babysits’ his 2-year-old sister for ten minutes (so I can put laundry away or something) he gets a quarter.  He has a hard time sometimes, due to shyness of strangers, saying ‘excuse me’ when we’re in a crowded place.   I told him that if I heard him say ‘excuse me’ four times, he gets a quarter (just to get him over the shyness hump).  It worked too well, though, and I had to redefine this one when he started darting purposefully in front of strangers for a chance to excuse himself.  As an aside, Gage now knows the definition of the word ‘legitimate.’

Image: www.freedigitalphotos.net

A nice side effect of this saving is that he’s doing a lot more math, and he’s eager to do it because it means something to him. He has a small tin that he keeps his quarters in, and when he has four he brings them to me to cash in for a dollar. When he has five dollars he cashes them in for a five-dollar bill, etc. He is constantly telling me things like, “I have thirteen dollars saved for my Legos, so I only need seventeen more.” And “I have twelve quarters; can I trade them for thee dollars?"

The biggest thing that I’m happy to be encouraging now is delayed gratification. A lot of poor spending habits stem from “I want this, and I want it now!” Learning to wait, and to prioritize, is a hugely important lesson. 

Written By: Jen Pieson, RP

Rule of 72

The Rule of 72 is a great mental short cut that allows us to estimate the effect of any Expected Rate of Return (ERR) required to double an investment, estimate the time period it would take to double an investment, and approximate the impact of inflation on future dollars or the impact of a rising lifestyle expense.

Here is how it works….  To determine how long it would take to double your investment, divide 72 by your expected rate of return.  Assume your ERR is 6% (72 divided by 6 = 12 years).  Your investment would take approximately 12 years to double.

          Formula:    72     ÷        ERR  =       Years Until Doubled

          4% ERR:   72     ÷        4       =       24 Years

          12% ERR: 72     ÷        12     =       6 Years

What if you needed to double your money in 5 years in order to meet a specific funding goal? 72 ÷ 5 years = an ERR of 14.4%. Wow! That might be a tough return in this market! How about doubling my funds in 8 years?

          Formula:    72     ÷        # of Years   =       Required ERR

          8 Years:     72     ÷             8            =       9%

          10 Years:   72     ÷            10           =       7.2%

The Rule of 72 also works on an inverse basis. Assume that you receive a fixed annuity payment of $400.  What if you wanted to estimate the impact of 3% inflation, or purchasing power, on your current payment?  72 ÷ 3 = 24 years.  What this means is that in 24 years your fixed annuity payment, which has not risen with inflation, will be worth half of what it is worth today.  While you will still receive $400, in 24 years that $400 would only buy $200 worth of goods in today’s dollars.  This may explain why your Advisor is so concerned about making sure your investment resources maintain some aspect for growth.



Image: http://www.freedigitalphotos.net/



The formula also works well for estimating the future cost of goals such as education. Assume the average cost of higher education tuition today is $12,000. When will this figure double?  Tuition is expected to grow on average 5% annually. Assume your child is currently 4 years old. 72/5= 14.4 years. Therefore you can expect that tuition for your 18 year old college freshman will be in the neighborhood of $24,000 per year. (Look out for higher increases in Fees, Books, Room and Board. They are not as scrutinized as Tuition and also do not qualify, for the most part, for gifting).

The Rule of 114. Want to know how long it would take to triple your investments? Divide your ERR into 114. Given an ERR of 7%, it would take approximately 16.3 years to triple your investment, 114 ÷ 7 = 16.3. If I had an opportunity to earn a 6% ERR, it would take me 19 years to triple my investment.

The Rule of 144. How about a rule of thumb to estimate how long it would take to quadruple your investment? Divide your ERR into 144. Given an ERR of 7%, it would take approximately 20.6 years to quadruple your investment, 144 ÷ 7 = 20.57 years.

Compound interest is a very powerful tool, sometimes jokingly referred to as the eighth wonder of the world.  The Rule of 72 is a guideline that provides with the ability to project the impact of compounding; the results are not exact…but close. Generally, the higher the ERR is the more inaccurate the rule, but not by much.  Mathematically, the rule of 69.3 is actually the most accurate, but not as divisible as 72, and therefore not as popular. Same goes for the Rule of 114 and 144.

Written By: Tom Gates, CFP®

The Cost of Healthcare During Retirement

How much will healthcare cost me during retirement?  This is the million dollar question for many people contemplating retirement.  


Nationwide Financial recently conducted a survey of 1,250 high-net-worth individuals aged 55 or older.  This survey revealed many interesting things, including:


Photo Credit: www.freedigitalphotos.net



·        Pre-retirees worry a lot about health care costs and the effect these costs will have on their financial plans



·        When they try to put a number on their future health care expenses, most of them under-estimate their expenses and over-estimate the percentage of these expenses that Medicare will pay (a dangerous combination)



·        Despite their concerns and uncertainty, most pre-retirees don’t discuss these worries with their advisors

Why not?  Some of them are “unsure as to whether their adviser is knowledgeable about the issue (1)."  The truth of the matter is: Most financial planners should have a good working knowledge of these issues, and if you come up with something we don’t know, we’re not afraid to say, “We’ll look into that and get back to you.”  We’d much rather know what is bothering you, help you find a solution, and put your mind at ease.  You haven’t been saving all these years for retirement so you can spend your time worrying.  Please, don’t be afraid to ask questions.

There are some tools out there that can help too.  Fidelity has a nice (and free) calculator available at: https://powertools.fidelity.com/healthcost/personalInfo.do.  Is it perfect?  No.  It does not factor in information about any medical conditions you may have, it assumes everyone pays the lowest premiums for Medicare Parts B and D, and it uses national averages rather than information specific to the state in which you live. 



But it does allow you to vary the life expectancy, change the medical inflation rate, and include or exclude long-term care.  Fidelity also does an excellent job of itemizing the assumptions they used, so you have some idea how they came up with the number they give you. 



Healthview Services Inc. has a calculator too.  Actually, they have two:  a free version and a subscription version.  You need to create an account to use it (providing your name and email address).  The free version is available at:   https://apps.hvsfinancial.com/demo/, but it is less flexible than the Fidelity version.  [The subscription version allowed you to put in an impressive number of variables (state, income level, a few select health conditions and lifestyle questions, choose which types of insurance you planned to have, etc), but it did not have the same clarity behind the assumptions used that Fidelity had, and I was left with some questions about the numbers it gave me.]

None of these calculators can give you a number that will be the definitive amount you will pay for healthcare over the remainder of your life.  There are too many questions we can’t answer, not the least of which are: 

·        What changes will the government make to the Medicare program in future years? 

·        And how long can the annual Medical Inflation Rate remain in the double-digits?

We can help you to approach these issues armed with more knowledge, and hopefully, more piece of mind.  The Nationwide Financial survey also found that, “Clients who have discussed retirement health care costs with an adviser have a better handle on actual expenses.”  So if healthcare is on your mind, talk to your advisor.  Let him or her help you to be better prepared and alleviate your worries. 

1. From the article, “Health Becoming New Focus of Wealth,” by Mary Beth Franklin, available online from Investment News at: http://www.investmentnews.com/article/20120513/REG/305139995# 
   

Written By: Sarah Caine, RP

10 Axioms of Personal Finance

An axiom is defined as “A self-evident or universally recognized truth.” The following 10 axioms of personal finance provide a foundation by which individuals, no matter where they are within their own financial life cycle, can measure the soundness and direction of their personal financial planning and lifestyle. 

Photo Credit: www.freedigitalphotos.net



1)   Knowledge is Power:  You do not have to understand every detail but it is important to have a familiarity with the key elements of your financial plan and investment strategy. Never forget that it is your money, resources and lifestyle. Because of that no financial advisor worth her or his salt should ever begrudge you the time in answering questions.

2)   Protect Yourself Against Major Catastrophes:  Everything in life involves risk and it is impossible to protect yourself from all dangers. However, there are things you can do to help protect your health, income, assets and family well-being.  Refrain from dangerous activities and spend precious premium dollars on the right type and amount of insurance.

3) Stuff Happens (or: the Importance of Liquidity):  Despite our best forecasting, the unexpected is always right around the corner.  According to whichever old wives tale you wish to subscribe, “Bad things happen in threes,” and “When it rains it pours,” so make sure you can access ready resources for an emergency whether it is in near cash reserves, or a line of credit. 

4)  Do Not Underestimate Future Requirements:  When it comes to saving for later versus spending today, it is always simple to rationalize that ‘I will not need as much to support my lifestyle when I retire.’ Increasingly retirees are finding that they have substantially understated the resources that they will require during their retirement years.  The reasons for this include higher healthcare costs, taxes, living expenses, travel, long-term care and additional support required by children.



Photo Credit: www.freedigitalphotos.net



5) The Importance of Time: Time is the single most important factor in the success of any investment plan. Time is the greatest cure all for periods of high volatility and low investment performance.

6) The Risk / Return Paradigm:  Risk and return have an inverse relationship. If we expect a higher return, we need to be prepared to expect a higher risk posture. If we want a lower risk posture, we need to expect a lower investment return. Investors who have tried to flaunt this rule have paid a high price (for example, clients of Bernie Madoff). Remember, if it sounds too good to be true, it is!

7) All Risk is Not Equal:  All investments carry risk but not all risk is the same. Market or systematic risk cannot be totally avoided by all investors. Unsystematic risk, which is exclusive to a specific holding, can be avoided by limiting your holding in a single investment and diversifying your assets. 

8)   Diversification Reduces Risk:  By investing in a broad spectrum of loosely- or non-correlated asset classes, (cash, bonds, equities, real assets, commodities) investors can often reduce their overall risk posture. 

9)  Taxes Affect Decisions:  Unlike most institutional investors where pre-tax rates of return are the priority, the after-tax return is critical to the success of an individual investor’s financial plan. Investing strategies that utilize high-turnover trading strategies often generate higher rates of return initially, but when taxes are due the after-tax return is much lower.  Asset location in either taxable or tax-deferred accounts can make a huge after-tax difference over time.

10) Have a Plan, but Be Flexible:  More often than not, the greatest impediment to a successful financial plan is…us! We get busy, we get emotional, we get scared of not being in the pack, we panic, our emotions change our worldview. All of these things can cause us to go off plan and make hasty and ill judged decisions.  Sometimes it will be necessary to stray from the plan, but it should be in a thoughtful way as opposed to a knee-jerk way.  Financial Plans are not static documents but they are a useful tool in reminding us what our goals and priorities are. 

Written By: Tom Gates, CFP®

Social Security Updates: 2012

In April the trustees of the Social Security and Medicare trust funds issued key updates about the solvency of the programs.  Some of the more crucial points follow:


Photo Credit: www.freedigitalphotos.net



·        The Social Security Disability Insurance trust fund will exhaust its reserves in 2016, two years earlier than projected one year ago.

·        The Social Security trust fund that goes mainly to retirees will be exhausted in 2036, two years earlier than projected last year.

·        If the funds are combined, they would be exhausted in 2033, three years earlier than projected last year.

·        In 2011, 44.8 million received benefits from Social Security’s trust fund for retirees, compared with 43.8 million in 2010.

·        In 2011, 48.7 million people were covered by Medicare, up from 47.5 million in 2010. That means the program is covering on net an additional 100,000 Americans every month.

·        The trustees said the worsening picture for the Social Security trust funds was due to “updated economic data and assumptions.”

·        The ratio of workers paying taxes per Social Security beneficiary continued to fall. It will hit 2.8 workers per beneficiary in 2012, down from 3.4 in 2000.

This problem has been years in the making.  In 1965 the ratio of workers to Social Security beneficiaries was about 4 to 1. By 2035 it is projected to be a ratio of 2 workers for every beneficiary. 

“Until now a politically gridlocked Washington seems to have been unable to see that Social Security, like the ‘unsinkable’ Titanic of 100 years ago, is heading for an iceberg.” [1] 

Our legislators in Washington DC seem to be paralyzed when it comes to this issue.  And there’s a conflict of interest there, because their jobs are up for re-election every 2, 4 or 6 years.  Legislators risk votes and re-election if they recommend cutting Social Security. 

So what does this mean for you?  For now, it depends on your age.  The consensus seems to be that it would be unfair to make significant cuts to current retirees because they have planned around the current rules and don’t have time to rebuild their nest eggs.  However, if nothing is done and the trust fund is exhausted in 2033, all benefits would then be cut by approximately 25%...for anyone collecting at that time.  

At JoycePayne Partners, as part of our Financial Planning for clients, we show estimated Social Security benefits as a component of our clients’ retirement income projections.  Depending on a client’s age we often recommend projecting a reduced amount of Social Security.  We do this in order to provide a conservative and more realistic retirement income plan.  Based on the latest news we should continue to reduce estimated Social Security Income in our projections by 25% beginning in 2033.

Medicare is also in trouble.  The Medicare fund that pays for hospital benefits is on target to be exhausted by 2024.  Obviously something has to be done.  Proposals include changing the program to give more support to low-income seniors and less to wealthier Americans and raising the eligibility age from 65 by one month per year beginning in 2022.



Photo Credit: www.freedigitalphotos.net



Retirees must also be prepared to spend more of their income on health expenses.  Recent data from Fidelity Investments reports that you and your spouse may spend $240,000 during retirement on health expenses.  That does not include assisted-living or nursing-home costs.  The estimate assumes that a couple retires when both spouses are 65 years old and that they qualify for Medicare but have no retiree-health coverage through an employer.  It uses a life expectancy of 17 additional years for men (age 82) and 20 years for women (age 85). 

A 65-year-old couple retiring this year with $75,000 of household income, including $29,970 in Social Security, should expect that 35% of that Social Security amount, about $10,000 (per year), could be needed to pay health-care costs.  By 2027, their portion of Social Security covering health costs may reach 61% of a $41,000 Social Security benefit, or about $25,000 per year. 

What all this means is that Americans may be working longer and will need to be saving more to be able to fund a secure retirement.  How you can act now: if you are currently contributing to a 401(k) or another employer-sponsored retirement plan, consider increasing your contribution.  You can also set up regular monthly contributions to an IRA, or make a one-time transfer (at any time).  Contact your Financial Adviser if you have any questions.

Written By: Marilee A. Falco, CFP®, ChFC®

[1] http://humanresourceslegislation.wordpress.com/2012/05/09/social-security-broke-in-2033/

Information for this article was collected from the following sources:

Stress Rises on Social Security

The Retiree Health Cost Price Spiral

Fidelity® Estimates Couples Retiring In 2012....

Freeing Baby Boomers From Social Security Cuts Blows Up Math

Trustees Warn About Social Security Fiscal Picture

Why Fee-Only?

 

Photo Credit: www.freedigitalphotos.net

 When selecting a Financial Advisor, there are many factors you should take into account.  These factors include the advisor’s educational background, professional designations, experience and references.  One of the most important considerations when choosing an advisor is how the advisor is compensated for his or her services.


Advisors and their firms can be compensated in myriad ways.  The following is a brief description of some of the most common advisory compensation schemes:

• Fee-Only:  Clients are charged an hourly rate, flat fee, or asset management fee for comprehensive financial services.  Fee-Only Advisors never collect commissions or referral fees paid by other product or service providers.
• Commission Only:  The advisor charges a commission on transactions and/or securities, insurance, and other products that a client purchases through the Advisor’s firm.
• Fee and Commissions:  Also known as “fee-based,” the advisor charges a fee (as defined above for Fee-Only) on some products and services, and also collects a commission on other transactions and products. 

Fee-Only Advisory relationships can provide significant benefits to the client compared to the other common compensation models.  One of the benefits of Fee-Only advice is that it often results in lower out-of-pocket expenses for the client.  Fee-Only Advisors use only no-load and low-load products as well as a host of discounted services.  In contrast, advisors who are not Fee-Only often utilize products that have significant upfront sales loads (sometimes to the tune of 5% or more) as well as annual and deferred sales charges.


Photo Credit: www.freedigitalphotos.net


Another issue with commission-based advisors is that many of the charges a client pays are fairly well hidden.  It's not unusual for a client to be paying much more in sales and related charges than they realize they are paying because much of the overall cost is hidden in fine print.

Perhaps the most important benefit from working with a Fee-Only Advisor is objectivity.  When an advisor charges a commission for products or services, a conflict of interest is introduced into the relationship.  That conflict may impact the quality of advice that the client receives.  In contrast, the Fee-Only Advisor is able to choose from a host of products and services and choose the ones that are best for the client, without regard to personal gain that may come from making a certain recommendation.  The Fee-Only Advisor is not beholden to insurance companies, particular investments or other financial companies.

The following are some examples of conflicts of interest introduced by the commission model of advisor compensation:

*  A commissioned advisor might be incentivized to advise a client to make investments so that the advisor may collect a commission, when in actuality holding cash may be a more suitable recommendation at the time. 
*  A commissioned advisor may be tempted to unnecessarily buy and sell securities (known as “churning”) to generate commissions.
*  A commissioned advisor might be motivated to recommend that a client convert non-cash assets such as real estate and collectibles to cash that can be reinvested so that the advisor can collect commissions.
*  A commissioned advisor may be tempted to make recommendations that pay higher commissions when a less expensive and/or more suitable alternative is available.

Photo Credit: www.freedigitalphotos.net

In conclusion, clients should strongly consider a firm's method of collecting compensation for its products and services when choosing a Financial Advisor.  Fee-Only compensation schemes often result in lower out-of-pocket costs for clients, as well as more objective advice.  Here at JoycePayne Partners we are proud of our Fee-Only structure, and we are happy to be able to focus fully on what is best for each and every client. 

Written By: Lisa M. DeStein, MBA, CFP®