Unexpected wealth, unexpected challenges
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A financial windfall, when handled appropriately, can provide a financial support structure that can last for years to come. Sudden wealth can come from a variety of places, including:
* marriage or divorce
* sale of a business
* insurance settlement
* inheritance
* company stock options
* lottery
Wealthy and wise
New wealth brings major life changes, and the right guidance can make all the difference for the recipient's emotional and financial success. Here are some principles to keep in mind:
* recognize the emotional impact of the life change.
* understand your family's dynamics.
* partner with the right professionals who have processes for
working with clients in this situation.
Recognize the emotional impact
Those who become suddenly wealthy often:
* lack financial savvy. They don't know what to do with the
newfound money and have trouble weighing the
recommendations of others. They need to learn the
language of finance.
* feel guilty. Some feel they haven't "earned" the money and
don't deserve it. Others feel guilty because their friends
and family aren't wealthy so they don't enjoy their
new situation.
* experience relationship strain. Friends and family may
suddenly expect loans or gifts. This can damage or ruin
relationships.
Understand family dynamics
* understanding how new wealth changes a family's
dynamics in terms of communication and interaction can
go a long way toward easing stress.
* suddenly becoming the one responsible for a family's
financial support can be jarring.
You need to communicate with your family, listen to their feelings about the change, and work together to address concerns.
Partner with the right professionals
Professionals whom you may seek out include:
* an attorney: To handle estate planning, trust
implementation, and other legal matters relative to your
wealth
* a tax professional: To handle complex tax problems
* a financial advisor: To serve as the coordinator (i.e., the
"quarterback") of your wealth planning team - an advisor
who has successfully guided other suddenly wealthy clients
can provide financial education and prepare you to handle
the major transitions a windfall entails.
Chornyak & Associates has professionals on staff who can help you in all three of these areas - legal, tax, and financial advice.
Avoid roadblocks to planning
Once stress is under control, it's time to talk finances. You may face some common challenges, including:
* financial familiarity. It may not be easy to understand the
choices available to you or how they can impact you over
the long term. This could result in an unwillingness to
move ahead with a recommended course of action.
* risk aversion. You need to learn how much potential risk
(loss) to your existing assets you are willing to assume in
exchange for potential future gain.
* clear communication. You and your family must be on the
same page as your financial advisor, voicing questions and
concerns as they occur.
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Diversification explained
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Overview
You could probably break a wooden pencil in two without much strain. However, it would take a lot of effort to break a bunch of pencils. Now, imagine that lone pencil is the technology stock category. If you were invested entirely in technology stocks, the market snapped that lone pencil a while ago.
But what if, in addition to your tech stock pencil, you added to it a government bond pencil, a money market pencil, a precious metal pencil, a value investment pencil, a municipal bond investment pencil, and a few consumer stock pencils. Your tech stock pencil would bend, and perhaps still even break, but the band of pencils as a whole would remain strong and unbroken. Safety (and strength) in numbers - that's the power of diversification.
Why you need to diversify
Diversification is the spreading of investment risk by putting your assets in several categories of investments - stocks, bonds, money market instruments, precious metals, and the entire spectrum of mutual funds.
Think of the 17,000 Enron employees who invested their 401(k)s heavily in the company's stock, only to helplessly watch it all evaporate before their eyes as the company collapsed into bankruptcy toward the end of 2001. Those employees believed in their company, in themselves, and, not surprisingly, in their company's stock.
Protect yourself
Diversification protects you. It spreads your risk by putting your assets in several different categories of investments. The theory is that when one group goes down, not all of them go down; some may even go up.
You protect your savings; you protect yourself. If, for example, Enron employees had diversified their 401(k)s (no more than 10% invested in any one asset class, especially company stock), they would have possibly lost only a small portion of their retirement portfolio-instead of the whole thing. They would still possibly be able to make up those lost dollars-and still retire. They would still have a working foundation to continue to build from. They wouldn't have to start over again.
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Retirement readiness hampered by Americans' longer life spans
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This article is authored by Commonwealth Financial Network's John Peters, AIF�, CFP�.
"Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money."
- Jonathan Clements
Much has been written and discussed over the past few years regarding Americans' preparedness for retirement. The retirement services industry has devoted countless hours and uncountable resources to coax employees into participating in their company's defined contribution retirement plan. Despite these efforts, the results have been less than impressive.
According to the most recent Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute (EBRI), a sizable portion of workers reported that they have virtually no savings or investments. Of those responding to the survey, 29% stated that they have less than $1,000, while 56% reported that their total household savings and investments (excluding the value of their primary home and any defined benefit plans) is less than $25,000 - not anywhere near enough to support a comfortable retirement.
Why do Americans struggle to generate sufficient income for retirement?
Longevity. With all the scientific and medical advances of the past 20 years, people are simply living longer. According to the U.S. Census Bureau, the projected percentage increase in the 65-and-older population between 2000 and 2050 is 147%. By comparison, the population as a whole is expected to increase only 49% during the same period. Undoubtedly, most people would consider this increased life span a good thing, but from a retirement savings perspective, it poses a serious problem.
Dr. Shlomo Berartzi, a behavioral finance expert and professor at UCLA, explains the problem this way:
"To illustrate the unique financial complexities facing retirees, consider 10 high-school friends who decide to retire at age 65. Now, guess when the first of these friends will die. As it turns out, the first death is likely to occur only four years into retirement at age 69. . . . Next, try guessing when the last person will die. The answer is 34 years into retirement, at age 99!"1
The first retiree in the above example probably had accumulated sufficient savings to last his lifetime - which ended just four years after he retired. But the last to die probably ran out of money; after all, it's difficult to accumulate enough money over a working career to support a 34-year, prepaid retirement. And, of course, it's impossible to determine where on that friend continuum you might fall. But longevity isn't the only headwind retirees face.
Markets, economy, and confidence.
Concerns over volatile financial markets, an unsteady economic picture, and their own employment status have eroded American workers' belief that they will be able to afford a comfortable retirement. In this year's RCS, the percentage of workers not at all confident about having ample savings for a comfortable retirement grew from 22% in 2010 to 27 percent in 2011, the highest level measured in the 21 years of the RCS.
At the same time, the ranks of very confident workers shrank to a low of 13%. These changes can largely be attributed to a loss of confidence among those who have less than $100,000 in savings. Unfortunately, the workers who need to save the most also feel the least confident, leading to a sense of hopelessness.
1 Behavioral Finance and the Post-Retirement Crisis, prepared by Shlomo Bernartzi, UCLA, and filed by Allianz in response to the Department of Treasury/Department of Labor Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans (April 29, 2010).
Click here to read the entire article. |
What's happening now
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More people headed to stores and websites over the Thanksgiving holiday weekend, and average spending per person rose 9.1 % over last year. Click here to read the article.
In conjunction with cable companies, an FCC program brings low-cost Web access to low-income families - at no cost to taxpayers. Click here.
A respected economist has predicted broad changes in the behavior of consumers, companies, and governments. Read his behavioral predictions for 2012 by clicking here.
Because of used-car shortages and new-car incentives, the price gap between new and used cars has sharply narrowed over the past year. Two-to-five-year-old vehicles jumped 10% in value since a year ago. Click here.
What does your teenager want for Christmas? According to a new research study, an Apple product (11%), but this was after money (22%) and clothes (15%). Click here.The Conference Board reported this week that consumer confidence index rose 15 points in November, the largest increase since 2003. Click here. Has flying become unbearable? Passenger forced to stand during a seven-hour flight. Click here. |
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This communication is strictly intended for individuals residing in the States of: AL, AR, AZ, CA, CO, CT, FL, GA, IA, IL, IN, KY, LA, MA, ME, MI, MT, NC, NY, OH, PA, SC, TX, VA WI, WV. No offers may be made or accepted from any resident outside these States due to various state requirements and registration requirements regarding investment products and services. Securities and Advisory Services Offered Through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser Fixed - insurance products and services offered by Chornyak & Associates, LTD are separate and unrelated to Commonwealth. This informational e-mail is an advertisement. To opt out of receiving future messages, follow the Unsubscribe instructions below. |
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December 2011
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Some of us are fortunate enough to have a financial windfall from a source we didn't expect. Our lead article this month deals with the emotional impact as well as the financial- planning implications of such an occurrence. It could happen to you, so be prepared.In our dealings with clients, we often speak of "diversification." I've provided a simple discussion of what diversification means in terms of your investments. The definition is fairly basic, so if you have any specific questions, be sure to call me at 614-888-2121 or 800-389-2121. Finally, our independent broker dealer, Commonwealth Financial Network, provides us with another perspective on retirement in the 21st century. If you worry about having insufficient funds to maintain the lifestyle you'd like in your Golden Years, you're not alone. The article maintains that, "despite their low usage rate, employer-sponsored retirement savings plans may be among the most effective vehicles available for helping Americans save for retirement." All of us at Chornyak & Associates wish you and your family a joyous holiday season.  Please contact me at 614-888-2121 (or toll free 877-389-2121), e-mail: Sincerely, Joe
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Market Update
| Markets post record gains
October saw most global markets bounce sharply off their annual lows, and although domestic equities traded dramatically lower on the first trading day of the month, they ultimately rallied to close in positive territory year-to-date.
The Dow Jones Industrial Average experienced its best month since October 2002, gaining more than 1,000 points or 9.72 percent; year-to-date the Dow is now up 5.45 percent. The S&P 500 Index gained 10.93 percent in October, its best monthly performance in almost 20 years, leaving it 1.3 percent higher for the year.
Markets pushed higher despite initial uncertainty surrounding the European debt situation. Investors finally received much needed clarity when European leaders announced details of a comprehensive plan to help relieve debt pressures and protect Europe's banking system. Gains in domestic economic output also helped drive markets up.
From a technical standpoint, it seems that markets rallied off an oversold situation at the end of September and were able to break above key technical resistance levels during October. But now that markets have gained momentum, some traders are speculating that they may be overbought, which could cause some pressure to sell. The wide range of opinions expressed by commentators and analysts makes reading the tea leaves extremely difficult. One thing is clear: market volatility remains elevated.
International markets up sharply
Despite turmoil in Europe, international markets posted robust gains during October. The MSCI EAFE Index climbed 9.64 percent, although it is still down 6.78 percent year-to-date. The riskier MSCI Emerging Markets Index gained 13.08 percent, but it too is down, 13.53 percent, for the year.
Gains in the emerging markets index were particularly indicative of what has continued to be a risk-on/risk-off period for markets (see chart). October's risk-on trade was also evident in most other risk asset classes. Still, despite the strong rebound in October, investors may be anticipating additional downside risk.
Fixed income continues to anchor portfolios
Core fixed income investments held onto gains in October, while riskier fixed income assets posted strong returns. Both the high-yield and bank loan sectors had traded sharply lower in August and September, as the risk-off trade prevailed. These asset classes have tended to be fairly sensitive to the business cycle and were negatively impacted in the face of recessionary fears. As recessionary concerns subsided during October, investors took advantage of attractive price levels and bought back in. Consequently, the Barclays Capital High Yield Bond Index gained 5.35 percent for the month, though it is still down 2.99 percent for the year. Core fixed income, as measured by the Barclays Capital Aggregate Bond Index, gained a modest 0.11 percent for the month. With the index up 6.76 percent year-to-date, the asset class has continued to provide diversification benefits for portfolios and has helped reduce portfolio volatility.
Better economic news
Equity market volatility over the past few months caused many investors, pundits, and even economists to worry that recession was imminent. Consumer confidence plummeted, and doom-and-gloom headlines dominated newspapers. Given this backdrop, it may have come as a surprise to some that the U.S. economy grew at a faster clip in the third quarter of 2011 than it had in either the second or the first. Personal consumption, business investment, and exports all helped gross domestic product (GDP) grow at a 2.5-percent annualized rate during the three-month period ending September 30.
Consumer spending has proven surprisingly resilient, as demand for automobiles seems to have rebounded after slowing in the wake of the Japan earthquake last March. In addition, retail sales have proven fairly robust. Unfortunately, this spending has come at the cost of a declining savings rate, which has fallen to an average 3.6 percent of disposable income.
With the unemployment rate remaining stubbornly high at 9.1 percent and with little in the way of wage inflation, additional spending must come at the cost of saving. Spending helps short-term growth, but a declining savings rate would be a worrisome trend over the medium to long term. Let's hope that businesses eventually decide to add to the workforce, which would allow spending to grow without a proportionate drop in savings.
Manufacturing has seen a small rebound, with ISM manufacturing indicating slow expansion and industrial production continuing to grow. Housing, on the other hand, is still lagging. A few months ago, it had appeared that home prices might be rising, but additional data revisions have shown that prices continue to fall nationwide, albeit at a slow pace.
Greece, austerity, debt, and yet another plan
The European debt situation continues to cause market volatility. Early in the month, stories were leaked that the European Central Bank (ECB), with the tacit approval of Germany and France, was looking at a long-term solution to the Greek debt situation. A proposed resolution was announced at month-end, causing global markets to rally sharply. The plan called for banks to write down Greek debt by 50 percent, a measure that banks had initially resisted. In return, the ECB pledged €1 trillion ($1.4 trillion) to the European Financial Stability Fund to help stabilize European financial institutions.
Investors initially reacted very positively, seeing this as a workable long-term solution. But skepticism quickly returned, as Greece's prime minister proposed a referendum on the bailout plan. The vote may occur in December or January and could cause market jitters in the interim.
Expect volatility to persist
Markets have been unpredictable, and there is little to suggest that volatility will subside anytime soon. This is especially the case given the political landscape in both Europe and the United States. Until we see less dramatic headline risk and more evidence that the economy can stand on its own two feet, markets could continue to fluctuate. As a result, investors would do well to focus their attention on their long-term goals rather than on the daily newsbeat.
Authored by Simon Heslop, CFA�, director of asset management, at Commonwealth Financial Network. |
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