Don’t believe the media positioning of the 2018 tax reform – Not for a second

For those of you living over the top busy lives and only have time to read the headlines when it comes to the media coverage of the Trump 2018 Tax reform bill, you should consider hitting the pause button on your busy life and reading the following and clicking on the link at the end of this post for more detail in a very concise understandable form.

If many of you are like me and only have time to read the headline news, you might be thinking the 2018 tax code changes only benefit the “wealthy“.  For argument sake let’s use the top 20% of households as being “Wealthy”.  Seriously time to go below the headline and think again!  If you don’t you may end up paying significant fines when you file your 2018 tax returns resulting from under withholding or not paying enough in quarterly estimated taxes.  Not to mention the shock when your return is emailed to you, displays on the screen or prints and you’re paying double or triple what you paid last year.

Disclaimer:  I’m no tax expert.  Just an ordinary taxpayer who has read a bit below the headline and does his own tax returns!!

Yes, it’s certainly true that the corporate tax cuts set off two years of crazy equity appreciation in the stock market (some of which has been recently taken back).  Yes, it’s true only the wealthy benefit from this equity appreciation.  How positively this impacted your 2018 tax year is specific to your situation.  I don’t attempt to cover this here.

Let’s just look at a couple of the most meaningful changes that will certainly affect many if not all of you:

Property tax deduction:  Yikes!!

Previously, you could deduct the full amount of your property taxes paid for your primary residence and was vague on whether you could deduct property taxes on additional properties not considered rental properties.  At least one additional property, and more, depending on how you interpreted the deduction description.

Now, Property tax deductions fall in the category of SALT (state and local taxes) and are limited to $10K in qualifying deductions.  Any house in CA or any other high cost of living high tax state will likely be $1M plus in value and generate over $10K in property taxes alone.  And this does even consider the sales taxes and other local use taxes you used to deduct with no limit.  Take a quick look at your itemized deductions from last year and see what you deducted for this category, and I bet you’ll be shocked at the impact the difference between that number and $10K will be.  For many of you fortunate enough to own property worth more than $1M, this will hit hard.  Property taxes are going up and limits are coming down.  Not that hard for this number to be $50K and above.  If you deducted $50K in property taxes in 2017 you will pay $40K more in taxes for 2018.  Again, this only considers the property tax component of SALT.  It’s not exactly this simple but close enough for argument sake.

Personal exemptions, Gone!!  Used to be able to deduct $4K for each exemption.  Exemptions were for spouse and dependent kids.  Married with 3 kids in the house was $16K in deductions.  Bye bye!!  (Note; previously this did start to phase out for AGI above ~$300K, thus you may not have seen the full benefit)

Miscellaneous deductions.  If you pay a tax preparation service to do your taxes, Bye Bye!  No longer deductible.  Investment advisory fees.  That incredibly annoying fee you pay your wealth manager every year whether your account does well or not, bye bye!  No longer deductible.  Moving expenses, gone!  This can easily run into the $10’s of thousands in deductions gone.

I’m going to go out on a limb and assume those of you reading this are still alive, so I won’t cover the improved Estate (death) tax limit to $11M.

If you sold a home in 2018 there’s good news and bad news.  Good news is your gains on the sale exempt from Federal taxes remained the same, but the bad news is you had to have lived there longer to qualify for the exemption. Went from 2 years to 5 years.

Tax brackets:  For AGI (Adjusted Gross Income) of roughly $200K to $400K went from a rate of 33% to 35%.  $400K to $500K went from 39.6% to 35%.  Over $500K went from 39.6% to 37%.  You figure where you fall.  If you earned $300K you pay $6K more in taxes.

So, what should I do?  You may be asking.  Not a lot you can do other than make sure you’ve had enough withheld or have paid enough in estimated taxes so you don’t get hit with fines which can also add to $10’s of thousands depending on how much you underestimated the taxes you now owe.

See the following links for a really thorough and concise review:

https://www.magnifymoney.com/blog/news/tax-reform-2018-explained/

https://www.schwab.com/resource-center/insights/content/investment-expenses-whats-tax-deductible

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A couple random useful thoughts

I received quite a few responses to my last couple topics as well as requests for me to evaluate several additional topics.  Below I address the following in random order:

• Life Insurance – How much is enough?
• Balancing your checkbook
• Buying yourself a new car every 6 months by spending 3 hours of your time getting exercise and setting a good example for your kids.
• $1 saved v $1 earned
• Thinking about life from the book “Thinking Fast and Slow” chapter 38.  How satisfied are you with your life? Love this one!!

Let’s tackle the first 4 first, and then the tough one last…

Life Insurance – How much is enough?

I’m only going to talk about life insurance in the purest sense of the term.  True insurance against the death of the person insured.  In years gone by there were different types of Life Insurance and some people bought life insurance as a form of investment.  I don’t see that happening anymore.

As I’ve mentioned previously my family has chosen to “self insure” for Life Insurance.  In other words we don’t carry any life insurance other than what comes for free with our health insurance from the company I or my wife happen to work for at the time.  Many people do carry life insurance and the question is always how much insurance should we carry?  In my view the answer is two part; part one is do you want the insurance to fully compensate financially as if the deceased person was still living.  If not, what % would you be comfortable?  50%?  75%?  The second part of the answer links directly back to the Family Financial Plan in a previous Blog Post.  You need to evaluate the financial impact of the person in question (being considered for Life Insurance) on the family financial plan.  Consider both the cost impact as well as the income potential.  From here it gets pretty simple if you’ve developed your financial plan as described in the prior Blog Post.  You add up all the income from today forward that person would likely earn for you to reach your goals and subtract what they would be personally costing the family over that same period of time and you get your answer.  If that sum comes to say $4M and you want to insure for the full amount, you buy a $4M life insurance policy.  If you feel you can downsize your lifestyle or modify your financial goals by say 25% then you insure for $3M. and so on…

Balancing your checkbook.  

I have to say this one really shocked me as to how many people still do this.  I can think of 4 reasons people might still balance their checking account; first would be to make sure the bank has not made a mistake (in the bank’s favor), second, to make sure you don’t overdraw the account due to a check that was written but has not yet been cashed,  third, to make sure there is no fraudulent access to your account going on, and fourth, just because it’s emotionally gratifying in some way.  Let’s take these in order.  Can you recall the last time a bank made a mistake and didn’t catch it themselves?  If they do make a mistake there are numerous easy ways in this modern online access world to catch it without needing to balance your checkbook.  Risking overdraft can easily be handled by maintaining a larger balance or adding overdraft protection to the account so that no one outstanding check can send you into the red. You can also address this issue by setting alerts in your online account to alert you when the balance reaches a level you should be taking action.  The same alert setting solution applies to fraud protection.  In addition, in the US the bank is responsible for fraud so they will more likely catch it before you do by balancing your checkbook each month.  I’ll let you answer #4 yourself. Bottom line in my opinion, balancing your checkbook can take a lot of time and be very frustrating.  It’s not worth the time and frustration.

Buying yourself a new car every 6 months by spending 3 hours of your time getting exercise and setting a good example for your kids.

As my family will attest this is one of my favorites.  If you’re like me and in a white collar management sort of job where you spend all day managing people, thinking strategically and planning for the long term, you come home most nights and think back on the day and ask yourself “what did I really get completely done today?”.  In my case the answer is usually “nothing!”.  If you’re also like me you like driving a nice car.  By nice I mean one of top quality that runs like new, looks like new and even smells like new.  Well, there are two ways to accomplish this on an ongoing basis;  You can buy a new car (spending $50K or more) every 6 months or the alternative option is to spend 3 hours once every six months and restore it to “new” condition right in your own driveway, with water, car wash detergent, wheel wash soap, leather conditioner and so on.  In addition, it’s good exercise, it sets a good example for the kids but most of all when you’re done you can say to yourself you really got something done today.  Try it.  Also a good way to catch up with the neighbors.

$1 saved v $1 earned

This one may be completely obvious but I still think it’s worth mentioning.  When you complete your family financial plan and you conclude something has to be done to improve the situation, remember that money saved (not spent) is after tax money.  The IRS will not tax you for saving money.  If you’re in the 50% tax bracket (top bracket at least for now) that means for every dollar you can improve your financial situation by cutting an expense is worth $2 in incremental earnings.  In previous blog posts I’ve talked about many ways to save money by simply being a bit more efficient and aware of what things should really cost without giving up on any utility or sacrificing any quality of life.  I plan on digging into this much further in a future post.  Bottom line is you don’t just have to work longer or take more risk with your investments or buy more lottery tickets.

Thinking about life from the book “Thinking Fast and Slow” chapter 38.  How satisfied are you with your life?

If any of you have not read the Book “Thinking Fast and Slow” by Daniel Kahneman, and you have many analytical tendencies like I do you should definitely put it at the top of your list.  It’s best read electronically as it has many interesting links to related research.  One very interesting question it poses towards the end of the book (chapter 38) is “How satisfied are you with your life?”.  The same basic premise explored in the book generally also applies when answering this question.  In the book Kahneman developed this framework for thinking he simply labels “Level 1 and Level 2 thinking”.  Yes, not very creative for a book full of so many insights into how we think about things.  Level 1 thinking is your immediate gut reaction conclusion you reach when faced with a question or issue needing thought and needing an answer.  You reach this conclusion instinctively based on your immediate frame of reference.  Level 2 thinking is as I put it “doing the math”.  It involves taking a much more structured and in-depth analytical approach to reaching a conclusion.  It attempts to strip out the emotion from the decision and focus just on the facts.  The book gives 100’s of examples whereby using only level 1 thinking to reach conclusions yields the wrong answer most of the time.  The more important the decision the more you should extend to level 2 thinking to insure you reach the right answer.  The less important it is to get there right answer and the less time you have to analyze the situation the the more appropriate the use of Level 1 thinking is.

I leave it to you to read chapter 38 and think about how you go about answering the question “How satisfied are you with your life?”.  I would like to modify this question slightly to read “How satisfied are you with your current financial situation?”.  The Level 1 response is what most of us apply when we ask ourselves this question.  We might take a quick look at our investment portfolio, our bank account, the size of the home we live in and a few other things that require no serious time or in depth thought.  From this we conclude something like “Ah we’re fine” or “Oh S_ _ t, we’re in trouble”.  We reach this conclusion based on how we feel at that moment not from any scientific analytical process.  It could literally be determined by events of that day or the last week.  Maybe the stock markets had a good week.  Maybe you received your bonus for the year just yesterday.  Maybe your daughter’s volleyball team won the High School league championship, or a big Crew Regatta.  These are all recent events that would give you a good or bad frame of reference that impact Level 1 thinking as it relates to how you feel about your financial well being at that moment.  Simply being in a good mood or a bad mood will have a large impact on how you answer this question using Level 1 thinking.

The Level 2 thinking approach to answering this question is spelled out in my Blog on Financial Planning in the Modern Era.  Using Level 2 thinking you carefully evaluate the facts and make projections into the future.  You run numerous “what-if” scenarios and you develop an answer to this question that strips out the emotion and the most recent biases impacting your Level 1 frame of reference.  It looks at the situation holistically and over a lengthy period of time.  You can be much more confident in the conclusion you reach when it’s based on Level 2 analysis and therefor you will worry less about the answer you reach.  You will find yourself asking that question much less often.  If you only apply Level 1 thinking as soon as the recent events of the last week are now events of 6 weeks ago you will begin worrying again and asking the question all over again.  The question “How satisfied are you with your financial situation?” is far too important a question to be left to Level 1 thinking.  My guess is that most people don’t move beyond Level 1 when answering this question and it leads to a constant source of stress and anxiety.  Taking the time to do the analysis laid out in my previous post will set the right framework for answering this question properly.  Yes, the initial investment in time may be considerable when set against the backdrop of how much free time you may have, but when offset by the accompanying reduction in stress and worry my feeling is it’s a no brainer.  Do the work!  Take it to Level 2!!

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Wills, Trusts & Estate Planning

This is another one of those topics that has a major financial component to it as well as a significant emotional component.  In an attempt to overly simplify this topic I see three reasons for establishing Wills and Trusts:

1. Minimize tax liability when transferring an estate to heirs and beneficiaries.
2. Establish how you want your estate to be transferred to beneficiaries and heirs both while you’re still living as well as upon your death.
3. Squarely falls in the category of “getting your affairs in order”.

Don’t forget that once you’re gone the estate transfer process can be a huge benefit and positive experience for those receiving what you’ve worked your whole life to provide them, but it can also (if not handled properly) become a “family buster” if people feel cheated and relationships get strained as a result of poor planning or a lack of forethought.

Let’s start with the basic set of documents and instruments that need to be put in place:

1. Will for Spouse #1.  Determines what happens to Spouse #1 personal property upon death & Guardian assignments for the minor (under age of 18) kids
2. Will for Spouse #2.  Determines what happens to Spouse #2 personal property upon death & Guardian assignments for the minor (under age of 18)kids
3. Durable Power of Attorney for property management Spouse #1.  Legally empowers someone (often Spouse #2) to make legal decisions regarding Spouse #1 personal property upon death of Spouse #1,
4. Durable Power of Attorney for property management Spouse #2.  Legally empowers someone (often Spouse #1) to make legal decisions regarding Spouse #2 personal property upon death of Spouse #2,
5. Durable Power of Attorney for Health Care Spouse #1.  Same as 3 above but for Health Care decisions should Spouse #1 become in capacitated.  In California this is a standard form.
6. Durable Power of Attorney for Health Care Spouse #2.  Same as 4 above but for Health Care decisions should Spouse #1 become in capacitated.  In California this is a standard form.
7. Declaration for Natural Death Spouse #1.  States the wishes of Spouse #1 as to how they would like to die.  Primarily whether you would like a Do Not Resuscitate declaration.  In California this is a standard form and can be found here.
8. Declaration for Natural Death Spouse #2.  States the wishes of Spouse #2 as to how they would like to die.  Primarily whether you would like a Do Not Resuscitate declaration.
9. Family Living Trust.  This is where all your significant Family Assets should be held.  Used to avoid the costly and time consuming state probate process when spouse #1 dies.
10. Various other Trust funds can be set up for the kids, for grandma or anyone you like.  Used to transfer and hold assets for the benefit of certain individuals.
11. Charitable Trust.  Used to more efficiently gift assets to charities.  I have no real experience here so will only list as something many people do.

I suspect most of you have all or a subset of these already in place.  If you don’t you should.  My recommendation is the first time you do this you hire an experienced Wills, Trusts and Estate lawyer to prepare them.  Depending on how complicated your situation is this can cost as little as $2,500 and up to a big number if your situation is very complex.  I would guess most of you will fall in the range of $5,000 to $25,000 for a full set of first time instruments and documents.  Secondly I recommend you instruct the attorney to draft them in a way that you can easily edit the parts that will change over time so as your family situation changes over time you can edit them yourself without risking the legal integrity of the various documents.  We will cover more of the detail below.  For most of you there is no need to overly complicate this process or these documents.

My most important recommendation is that regardless of how many pages long the legal documents become,  that you maintain a written set of notes that accompany these documents in your own words that describe what you feel the intent is that should have been captured in the legal documents.  Most good Attorney’s will either interview you for this information or ask you to write this up anyway.  This is very important as most of these documents leave a great deal of latitude in judgement to the Trustee.  Once you’re gone if the Trustee is left with only the legal documents to go by in trying to carry out your wishes a lot can get lost in the translation to legal speak.  I suggest that at least every 2 years you update these notes and at least every 5 years you carefully review whether the legal documents still reflect your written wishes.  When your written notes and the legal documents are no longer in sync it’s time to update the legal documents.  If the initial set was prepared properly you can do this update yourself very easily not incurring any cost other than Notary costs to execute them.  This approach also avoids the time consuming back and forth with a lawyer trying to be sure the legal documents represent your  wishes.

Make sure all the above documents are properly executed in accordance with the requirements of the state you live in.  I’m shocked by how many times I hear of these documents being prepared but the final step of properly executing them was not taken.  Store the original executed versions of each of these documents in a fireproof safe or safe deposit box and note in your notes where the originals are stored.  Make sure the key people involved in the vehicles are also aware of where these documents are held and how to access them in the event of your death.  In particular make sure the designated Trustee knows they are the Trustee and where your written description of your wishes can be found.

What goes into each instrument/document:

Special disclaimer;  I make no representation that I have any Legal experience in this area nor do I consider myself a Tax professional.  I’m simply going by my own experience handling our own family situation recently as well as hearing from many others about their experiences.

Wills (one for each Spouse):

1. Remember any assets held in the Family Living Trust are dealt with in the Trust instrument and not in the Will.  The Will itself only considers the personal property not included in the Family Trust.  As stated earlier all bank accounts , all real estate and investment properties, anything of significant value (above $25,000) should be held in the name of the trust not in the name of the individual.  The only exception to this in my own experience was when we bought a condo in Australia.  We bought it in the name of the trust and as a result the Australian government levied additional taxes on the trust that we would not have had to pay if we bought it in our own names.
2. Named Executor.  Normally the first in line is your spouse, if there’s no surviving Spouse then you name a close friend or Family member.  You may have several in succession before finally naming a Bank that handles Estates, in the event all named Executors are no longer living or able to perform the duties.  The Executor basically executes your desires as spelled out in the Will.  Remember it’s important to have your own set of written instructions that can help make clear what is stated in the Will.
3. Named beneficiary (s).  In most cases where you have established a Family Trust you will name this trust the beneficiary.  If no Trust is established most often the surviving Spouse is named the beneficiary.  We’ll cover the case where there is no surviving spouse in the Trust section.  The same rules will apply to both the Will and the Trust.
4. Named Guardians of Minor Children (Children under the age of 18).  Normally the first choice is the surviving Spouse.  If there is no surviving spouse the next choice becomes more complicated.  This is obviously an important decision and one that warrants careful consideration and discussion amongst the family and the considered guardians.  Choosing a Guardian should not be thought of as bestowing an honor on someone.  Whoever you choose will certainly think of it as an honor that you would entrust your children to their care and judgement but this does not mean this should factor into your choice of who would be best to guard your minor children if you and your spouse are gone.  Nobody wants to think of this decision in terms of it really might happen but despite the low probability of both spouses dying simultaneously you must think of it in  “what if” terms.  When talking to potential guardians they must accept it might happen and would they really be in a position to handle it should it actually happen?  Don’t just list someone in your Will assuming it will not happen and neglect to even inform them of their designation.  Again, very important to have a set of written instructions that accompany the Will making sure the Guardian knows your wishes as they pertain to caring for your children.  Even though the named guardians only legally have guardianship over the minor children they should also be prepared to support the older children as well.  Make sure the Trust instrument makes appropriate financial support available to the new Guardians.
5. Execution.  In California the execution can be done in witness by two witness (each over 18 and not family members).  Other states may require Notary.

Durable Powers of Attorney (Property and Health), (One per Spouse):

1. These instruments legally empower your spouse or someone you designate to make legal decisions regarding your personal property and health care should you not be able to make these decisions yourself.
2. It is customary to appoint backup “attorneys in fact” should the primary appointee not be able to fulfill their duties.  You can appoint as many as you like with the final entity in the chain being a bank with this capability.  Normally you would designate 1 or 2 backups before the bank.  Remember you can always update this document over time.
3. In the state of California these documents require a Witness by a Notary to be properly executed.  Other states may vary.
4. Each Spouse should have one each for Property and Health Care.
5. If one Spouse or the other appoint someone other than the other Spouse be sure that person knows they have been appointed and has a copy of the document and knows where the original is kept and how to access it.

Declaration of Natural Death (One per Spouse):

1. This is the infamous DNR (Do Not Resuscitate) declaration.  Everyone loves thinking about this one…  This documents details the circumstances or conditions whereby you are unnaturally being kept alive and you would prefer to be allowed to die.
2. In California it requires two adult witnesses of your signature to be considered legal.
3. Make sure whoever you granted the Power of Attorney to for Health Care decisions has a copy of this document and knows where the original is kept and how to access it.
4. In California this is a standard form and can be found here.

Family Living Trust:

The primary purpose of this instrument is to avoid the state probate process when one spouse dies.  This avoids having to legally transfer all assets from one (the deceased) spouse, to the living (surviving ) Spouse through the state probate process.  Since both spouses are designated as Trustees of the Trust when one dies the other assumes full Trustee responsibility for the Trust and no probate process is required.  Saves time, money and stress.

Components of the Trust instrument:

1. Included Assets.  Ideally this should include everything you own together (between spouses).  Practically speaking this should be limited to the big items like bank accounts, real estate, investments and large $ value purchases.  When you first set up the trust you need to transfer all these assets over to the name of the trust.  Once the trust is established you simply make the original purchase of large assets in the name of the trust.
2. Revocable.  This trust can be changed or cancelled at any time by both Trustees signing a new trust to replace the old one or agreeing to cancel it.
3. Trustees.  Normally the two spouses are designated as the initial Trustees.    Total control of the assets lies with the Trustees.  It gets a little more complicated if the initial Trustees and the Settlors are not one in the same.  Again, there is a  succession of Trustees if one can’t perform the duties then it passes to another and so on until it lands with a Bank.  Normally you should name at least 2 or three trustees to succeed yourselves (as original spouses) before it lands at the Bank.  Remember this is a changeable document and as time goes on and you feel a different order of Trustees makes more sense that can be changed.  It’s my personal feeling that you should not designate a Trustee that is also an ultimate beneficiary of the trust as the assets get divided upon your death.  This sets up a conflict of interest situation when the Trustee is required to make a “judgement” call on something.  I realize in many cases your most trusted people in your lives are the ones closest to you and so likely to be the beneficiaries of the trust distribution and therefor in some ways the most logical to name as the Trustee.  Tough call and many people chose Trustees that will ultimately be a beneficiary as well.  I think the risk of interest conflict and damaged relationships outweighs the argument in favor.  Just my feeling.
4. Settlors.  Normally the Trustees and the Settlors are one in the same but not always.  If you designate Trustees other than the primary Spouses of the estate then the Settlors would be the spouses of the estate and would be the beneficiaries of any income or principle distributed from the Trust while the Settlors are still living.  The trust document defines the rules by which this income or principle would be divided amongst the settlers while they’re still alive.
5. Division of Trust estate upon the death of the Settlors (the spouses).  This is the critical issue the Trust deals with.  When you and your spouse are both gone who gets what.  This is also where it is critical to write up in your own words your wishes in this regard.  Try to write up in the simplest terms you can.  As unambiguous as you can.  you want the Trustee at the time to know what you really intended to happen.  Most Trust documents are written with quite a bit of latitude for the Trustee to make judgement decisions.  you want these judgements to be as closely aligned to what you would have done had you been around to do it.  Some flexibility is needed as circumstances can change drastically once you are gone that you could not have foreseen.  You want  a Trustee you feel will make the same sort of judgements you would have made given the changed circumstances.  Give them that flexibility but at the same time make your wishes well known.  This division can be done very simply like half to Mary and half to Betty.  It can also get very complicated with the use of contingencies and percentages requiring a Math PhD to work out.  Your personal situation will dictate.  I’m not going to attempt to describe all the possibilities in between.
6. Generation skipping provision.  Can be very useful to allow the Trustee to skip a generation when dividing the assets to insure no double tax risk of generation one then later on to generation two.  This can be included in the Living Trust or set up as a separate trust from the beginning.

Various other Trust fund structures exist:

1. Grantor Trust fund often used to transfer assets to kids that are considered “under valued” at the time like equity in privately held companies that might one day go public at a much higher value than was originally paid.  With the emergence of the social media bubble maybe this form of Trust will become popular again.  It was commonly used in the last bubble.
2. Charitable Trusts.  Families can set up a trust fund to make charitable donations out of.  This structure allows you to transfer highly appreciated assets into  a Trust for Charitable donation purposes only and sell those assets not having to take on the tax liability.  Essentially it assumes the charitable gift status up front for tax purposes.

In conclusion I don’t know if the description above makes this whole area sound more complicated or less.  Regardless, it’s important everyone takes care of it.  This falls squarely under the category of “having your affairs in order”.  When your affairs are not in order it’s something you think about and worry about constantly again leading to another stress accelerator.  It’s your heirs that also benefit or are harmed by the degree to which you have your affairs in order.

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Financial planning in the Modern Era

Note of caution:  this is a complicated topic and may take me some time to get all the way through it.

In an attempt to limit the scope of this discussion I’m going to aim my analysis, conclusions and recommendations at the age demographic of 35 to 70.  Doesn’t really narrow it down much, but enough to keep this Post short of novel length.

Lets start with some background

Previous way of thinking about how you go about planning for and funding retirement:

1. Savings – Every month you try and put away some money into a safe vehicle called savings.  Typically you could expect a 5% to 6% risk free rate of return.  Slightly better than the current rate of inflation.
2. Your primary home – You would buy a house, take out a 70% or 80% mortgage and over 30 years would pay off the mortgage, the house would appreciate in value 5% to 10% every year and when it came time to retire and live in a smaller much less expensive house you would pocket the full value of the house.  In 1970 you would have purchased a house for say $100K and in 2000 you would have sold it for $750K.  With the mortgage paid off the full $750K (Minus selling costs)  would all go to add to your savings.
3. Social Security – You’ve been paying in all these years and you expect to paid back during your retirement years.
4. Other pensions – You’ve been paying in all these years and you expect to be paid back during retirement.
5. Possible windfall inheritance from older relatives.
6. Possible financial support from your kids was never really considered in this generation of folks planning for retirement.

Major assumptions in place prior to 2000 that underpinned the thinking above:

1. Stocks and Bonds would go up and down but over the long term would generate at least 9% annual returns.
2. If you wanted to go completely risk free you could expect an annual return of 5% or 6%.
3. House prices would always go up.  In a really bad year they might be flat.
4. There would always be future generations of workers to continue to fund Social Security to insure it would be solvent.  Same applies to state pension funds like Calstrs and Calpers (in CA).
5. Corporate pension funds were 100% secure and would always be funded.  After all that’s my money they’re just holding for me.
6. Federal bonds were as good as gold.  No risk of default!  Other Government backs bonds were a close second.
7. The fundamental belief in “the economic cycle” always worked in some form to get the country out of any recession it experienced.  The economic cycle theory essentially says when the economy gets into trouble (for whatever reason) it’s governments role to borrow money in today’s dollars, inject these dollars into the economy, rely on the recovered economy followed by inflation of those borrowed dollars to eventually pay back the debt borrowed in yesterdays dollars leaving the “inflation profit” to cover the real cost of rejuvenating the economy.  The only time this didn’t work was the great depression.  Fortunately for he economy World War II came along and bailed out that economy.

Okay, so what’s changed in the last 12 years since 2000?  Hmmm, let me think here for a moment…  Yes, you guessed it;  Everything!  Investing in the Equity markets has yielding nothing but many sleepless nights, the risk free rate of return is now 0% (maybe even negative), house prices have now fallen 5 years in a row, everyone now accepts Social Security will go bankrupt (the debate is only about when), Federal default on issued Bonds is a real possibility, no corporate pension fund is guaranteed to be there when you need it and the previously relied upon “Economic cycle” approach to fixing the economy has proven it won’t fix this one.

In fact if you now add up all the aggregate debt in the US alone (add Federal debt, state and municipal debt, private sector debt, unfunded entitlement programs, etc.) you get $56.6T, yes that’s Trillion!  See the following link for the details http://www.usdebtclock.org/ .  This is vs an economy that generates $15T in GDP annually.  That’s a debt to annual income of almost 4!  No economic cycle is going to bring this ratio back into a reasonable balance.  This problem will be with us for a long time.  Having said all this and clearly painted a pretty bleak picture I feel the solution is simple.  It’s the mirror image of what’s gotten us into this mess in the first place.  Again in my opinion, we collectively as a society have lived beyond our means increasingly ever since the end of World War II.  We’ve spent and spent, more and more, funded by borrowing against our homes, running up other debt on credit cards and student loans, all under the assumptions that house prices would continue rising, our income would rise and our savings would earn between 5% and 9% per year.  The mirror image of this is simply living within our means or below our means for a long time while we work our collective way out of this hole.  It’s that simple.  Our grandparents and great grandparents did why can’t we?

You don’t need to be 100% in agreement with my summary of the current situation to find value in the ideas that follow.  You only need to be partially in agreement.  If you think my summary assessment is all bunk and a few more QEs, interest rate twists, bailouts and tax hikes will solve everything then don’t bother to read on.  The framework I’m setting for the planning environment will be too far off from your own assumptions and frameworks for it to make sense.  If you do resonate with at least some of the framework established above read on.

Financial planning in the current reality:

As Einstein once said “make things as simple as possible, but no simpler”

It’s easy to over complicate financial planning but it’s also easy to over simplify it.  “What’s your number needed for retirement?” is way over simplifying it.  Giving up trying to figure it out yourself and going to “an expert” who will quickly explain to you how complicated it is and that only they can therefor manage it for you is the other end of the spectrum.  After trying all the available Retirement planning applications out there and determining they were all junk I recently decided to tackle this myself.  With the aid of Excel and a few other useful online tools I set off on the journey. The following is what I learned that I think the rest of you might find useful and interesting.

Start with the obvious:  Where are you now?

The first step is to build a simple high level current balance sheet for your family financial situation.  This is not hard but I continue to be amazed how many people have not done it and therefor really have very little sense for their current situation.  Don’t let the common excuses get in your way;  It takes too long, I really don’t want to know or I’m confident I’m just fine so why do the work to find out what I already know?  I contend that not truly knowing your current situation leads to vast amounts of hidden stress accelerators.  More on this later.  If you can’t generate at least the simplest balance sheet for your family financial situations you will never be confident enough in where you stand to put these stress accelerators to sleep for good.

The following are the steps to building your current balance sheet:

1. List all the things you own worth at least $25K each.  Not what they’re worth (we’ll get to that next), just list them individually by name.  All bank accounts with at least $25K in value.  Don’t need to list the assets in the account just the account name.  401K accounts you might have left behind at various prior employers not yet rolled over.  Don’t include pension plans that pay out in the future over time.  These will be factored in later.  All real estate.  Cars, boats, anything that you can drive.  Collections; Art, wine, coins, etc.  Any loans you’ve made to friends or family directly that you expect them to pay it back.  Private investments you might have made directly in a business.  Think carefully.  Have you stored anything away in remote storage?  Is someone else using something that you own and have forgotten about?  Have you inherited anything you have forgotten about?  Don’t include anything you think you will inherit in the future (we’ll deal with that later as well).  Lastly, include the “other” assets which is anything else that falls below the $25K threshold.  Obviously, the number of items on this list is dependent on your family situation but it should not be a big long list.  Nor is accuracy down to the pennies important.  Just think of the “big” things.  If you need to move the $25K threshold up or down go ahead and do it to match your situation.  As a rule of thumb for deciding what threshold to use I suggest taking .002% of what you would roughly estimate your net worth to be without any analysis.  The point of the $25K threshold is to make this a high level process and save you bunches of time.  Trade off a little accuracy for lots of time saving.  Note if you lease anything you don’t actually own it so don’t list it.
2. Next, next to each item estimate its value.  Bank accounts with assets priced to market this is easy.  Don’t worry about the individual assets in the account just list the value of the account next to the account name.  Estimate the value of each real estate holding.  Be realistic here.  We want the value of what you think someone would pay if you sold it today.  Use Zillow if you like but just for a frame of reference.  Don’t use what you paid for it.  Don’t use what you think it might be worth when you plan on selling it.  Don’t use what you wish it was worth.  Use what you really think someone would likely pay for it today!  Same goes for cars, boats, Pianos, etc.  Collections may be a bit trickier.  Make your best guess.  Don’t go look up every piece of art at Christies auction house.  Don’t look up every coin at Numismatic.  Don’t look up every bottle of wine at Celartracker.com.  Make your best guess but be realistic.
3. Add it all up and see what you get.  This is the “Gross” value of all assets you own.
4. Next, list all debt outstanding.  All mortgages, car loans, credit card debt, student loans, personal loans you might have with family members where you borrowed money from them and plan on paying it back.
5. Now list the principal balance of each loan next to the name of the loan and add it all up.  This is your “Gross” liability total.
6. Now list all your estimated transaction costs to sell each asset.  For real estate use 6% of the estimated value.  For collections use what you would estimate the sales commission to be if you sold through auction or however is considered the standard way of liquidating the type of collection you have.  Same goes for debt.  List any prepayment penalties you would incur if you paid off the loan today.
7. Lastly, list any tax obligations you would expect to owe on appreciated assets.  This is very specific to your situation so I’m not going to try and give you a one size fits all formula.  Be realistic here.  This can have a very large impact on the final calculation.  If you’re carrying large accumulated loss carry forwards from previous tax filings apply them here to get a net tax figure.  Use current tax rates to figure this out.  Where tax rates are heading in the future we will deal with later.
8. Now do the math.  Excel helps here.  Take the Gross Assets minus the Gross Liabilities, minus the transaction costs, minus the tax obligation (might be zero if you have enough accumulated loss carry forward credits, but can’t be negative).  See what you get.  This is your net worth as of this minute today.

Now it’s time to go on and do the analysis needed for you to know whether to feel good about this number or concerned about this number.  If you don’t plan on doing the following analysis don’t bother doing the former.  The emotional reaction or feeling you have when you see the results of your net worth analysis can be very dangerous if the following context is not added to it.  As I am, all of you are faced with almost daily decisions as to “can I afford X?”  The answer to this question is often wrought with emotion because we really don’t know the answer definitively.  The answer is usually “well I don’t really know” or “it depends”.  Conflict between family members arrises most often when one person has one emotional feeling towards the answer to this question and another family member feels very differently.  Neither feeling is based on any math, just emotion.  Just a gut feeling so to speak.  One family member may be saying to themselves “look at the life style we lead, of course we can afford to donate $5,000 to the school fund raiser”  and the other family member can easily be saying to themselves “if you only knew what I know about the future economy, the likelihood our kids will find jobs, etc.”.  With no real scenario analysis to fall back to this discussion becomes emotionally charged very quickly and leads to another major stress accelerator.  When considering bigger issues like buying a new house, can we afford private college?, loaning someone money, etc. the level of emotional charge ramps up even more and can lead to big problems.

There are three basic technical approaches you can take when preparing your balance sheet;  Paper, pencil and calculator, Excel or Mint.  Mint is a free online service offered by Intuit (they bought the company a few years ago) which allows you to enter in manually all your assets and liabilities or allows you to enter the login and password information for all your accounts and it will automatically retrieve the needed information consolidate it all and give you a balance sheet report.  In most cases a combination of login and password info to your online accounts plus some annual entry of other assets you hold will be required.  Mint can be found at  https://www.mint.com/ .  I was able to completely replicate my Excel method in Mint with about 3 hours of work.  Yes, only I would take the time to do both.  In fact both will be needed to complete the process as the Mint retirement planner is no better than any other one out there.  Useless.

The analysis of how your finical life may play out:

Income side of the equation:

1. Step 1 – Future salary income.  By the time you have reached this age demographic you have a pretty good sense for your potential to earn money going forward.  When you’re 21 you have no idea.  But when you’re between 35 and 70 you have a pretty good idea of your earning potential.  Using Excel, simply estimate between you and your spouse how much you expect to earn for the remaining years you expect to work.  If you expect to retire but remain active and collecting some income, taper it off over some number of years as you hit the “retirement” age.  Focus on Gross earnings.  We’ll deal with taxes later.  Include all sources of earned income.  You may have a primary job and some consulting on the side or board positions on the side.  Include these all in your summary.  Use big round numbers.  don’t get caught up in trying to be really precise each year.  If the final analysis does not yield the outcome you might be dreaming of you will come back here and extend the retirement date or in some cases maybe move it up (this didn’t happen to me).
2. Step 2 – Other sources of income/gain.  Estimate the other sources of income/gain each year looking out until you turn 90 (or whatever age you feel you will live to).  This includes any source not related to your job.  These are sources that are presumed to continue  past your retirement point.  These can include investment income (Bond coupon payments or Stock dividends), investment appreciation (I would caution against using any assumption more than a few % points here), rental profits, etc.  We’ll treat anticipated inheritance proceeds later.
3. Step 3 – Social security and other pension income.  You get these reports every year.  They tell you exactly what you can expect in annual payments based on when you retire. Plug the numbers in.  We’ll deal with the “discount factor ” later.  The “Discount ” factor is the likelihood you’ll actually receive all or some portion of this money.

Taxes on Ordinary income

1. Lets just assume 50%.  In the highest tax bracket that’s a pretty good assumption for now when you add federal, state and local income taxes.  Might be a little big but not by much depending on what state and city you live in.  Your guess is as good as mine where this rate will go in the future.  I can tell you with great confidence it’s not going down anytime soon.
2. As you will see I assume little to no income from traditional capital gains sources so no need to distinguish between ordinary and capital gains rates.  I hope this is not the case and we do start to see ways to make money from investments held over the long term but lets leave that as upside to our planning process.

Ordinary Expense side of the equation:

1. Credit Card expenses.
2. Primary Checking account expenses – These of course include electronic checks and other forms of ePayments.  I hope by now none of you are writing more than a couple actual physical checks each month.
3. Expenses paid out of other bank accounts – Maybe some direct debit mortgage payments.  Hopefully most things you actually pay for are done through either the credit card (s) or primary checking account.  You may not keep a big balance in your primary checking account and may make large payments out of a separate account.  Maybe tuition payments, car purchase etc.  I would suggest in the future you minimize this approach and make all payments out of either the Credit card or one single checking account.  You can easily transfer funds instantly between accounts so this approach does not sacrifice any interest potential or create any unnecessary risk.  This makes life much easier when it comes to really understanding how much you’re spending.
4. Add them all up making sure you don’t double count any checks written to pay off the credit card balance each month or funds transferred from one account to another.  All major banks allow you to easily do this online.  Don’t get into the bottom up detail of what you spent money on just work with the totals for now.  Try and do this for the last couple years so you factor out some “onetime” unusual type expenditures that may bias your ability to extrapolate into the future.
5. Now that steps #1 to #4 have given you good sense for your expense rate currently it’s now time to estimate it going forward.  Don’t get into the minutia.  Stay high level.  Depending on where you land in the 35 to 70 age range you will either be ramping this up then flat then down or you may be running flat for a while then down or you may be ramping it down as we speak.  I have no real specific guidance here.  age 52 is the midpoint between 35 and 70.  I’m 53 and my wife is 49.  Our kids are 21, 18, 16, 13 so we’re still looking at running flat to slightly up for a few more years before any ramp down begins.  Think about your own situation and apply growth percentages from the top down.  Don’t try and get into each specific expense line item and ramp it up or down.  Look at the big ones.  Look at the family payroll (the kids) particularly education expense.  If you have financial responsibility for other relatives factor that situation in at the high level.  Look at your costliest major hobbies.  Are they flat, ramping up, ramping down?

Extraordinary Income and Expense items:

1. On the income side.  Do you expect any windfall inheritance income?  When and how much (after any applicable taxes).  (Special note:  I plan on covering wills trusts and estate planning in a separate post next week).  do you expect any other income not covered by the ordinary income section above?  Any known gifts coming in?  Do you expect to win the lottery?
2. On the expense side.  Do you plan on any regular or one time gifts to relatives or friends?  Between you and your spouse you can gift $26K each year to each or your children (or anyone else for that matter) tax free.  do you do this?  do you plan on doing it?  For how long?  Do you plan on helping your kids with their first house, car or wedding?  anything else you are planning on that will cost you significant money that is not considered in the ordinary expense category?

Completing the Income statement:

Now you just combine your income minus taxes, minus your expenses (both ordinary and Extraordinary) looking out until you retire, and  then to when you turn 90 (or whatever age you care to insert) and you will see how much cash you will generate between now and then or how much you will burn.  Add or subtract this to your current net worth balance sheet amount and you can see roughly where you will stand at retirement and 90 years old.  I urge you not to initially make it any more complicated than this.  Remember the Einstein quote.  Being the anal perfectionist and self proclaimed master of “finishing” things, I’ve taken it much further and built a spreadsheet that allows me to vary all sorts of assumptions about investment return, rates of inflation, probability of kids living at home post college graduation, grand kids needing some help, major unexpected illness in family, family business bankruptcy, etc, etc.  It works for me.  It’s an ugly spreadsheet requiring a lot of manual entry to keep it working but it works for me.  I’ve also extended the cash flow concept to planning for when we will sell certain assets and buy others and how this impacts real cash flow.  I’ve added a mechanism for varying tax rates and distinguishing capital gains from ordinary income.  Again, a level of detail not many of you will likely have the patience or time for doing.

Back to the simple version.  Just take your current net worth (liquid and illiquid) add or subtract your annual net income (income minus expenses) each year until you reach your target age and see where your net worth would stand then.  Obviously you make a bunch of assumptions along the way but none the less you get a pretty good  practical picture of where your heading.  Then you can decide with some real analysis behind it how you feel about it.  Should you be making any changes and if so how can they effect the goal.

The following are some questions I found myself asking  along the way:

1. How much is really enough when I reach 90?  Why?
2. What sort of lifestyle do we really want to have once the kids are on their own?
3. What sort of reserve do we need to be truly comfortable we’ve got the major “unknowns” covered.  Here I’m talking about the unexpected medical expense or other financial tragedy that strikes unexpectedly
4. What or who do I want to provide for with my residual estate?  Money left when I’m gone.
5. What causes do I care about that we might want to devote significant financial resources to while we’re still around?
6. To improve my financial picture would I rather work longer or live at a lower standard of living?  Whatever you do don’t go down the road of making riskier investments hoping for the free ride.  Don’t bet on winning the lottery.
7. What range of “doomsday” scenarios would I be able to survive?  How would I define “survive” in the doomsday outcome?  I try not to think about this one much.

So what’s the bottom line to all this in summary?  In my opinion, not having an analytical framework to help answer the question “Am I comfortable with my financial future?” leaves one to go entirely on gut instinct and emotion.  For those of you who have been reading Thinking Fast and Slow  this is all System 1 based thinking.  On any given day based on how you feel that day you’re answer to this question will swing all over the map.  This leads to increased and unnecessary anxiety, stress and relationship tensions.  I’m not saying it’s “wrong” to have gut feelings about one’s financial condition but it must be followed up with System 2 level thinking to maintain perspective and sanity.  This is  particularly important in today’s rapidly changing and complex world.  Yes, I’ve gone to an extreme many of you think is nuts but some form of this analysis is needed by everyone.

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First in the Series – Insurance

If most of you are like me you do a fairly detailed evaluation of Medical Insurance when you join a new employer and all other types of insurance when you change brokers.  From then on you check back in fairly infrequently if at all.  You just pay the premium each year or 6 months as it’s billed.  I remember the feeling each time I received the premium notice wondering is this a fair price?  Did it increase from last year?  What am I really getting?  am I properly insured? Am I able to recall the details of each policy?  am I utilizing the insurance optimally?  I would then start to dig through the paper files and quickly sigh a big groan and give up due to more pressing issues needing my attention.  I would then just pay the premium and move on.

Lets start with Health care Insurance.  If you joined your current employer 5 or 10 years ago and if your insurer is Blue Shield of California (as mine is) they’ve probably changed plans on you at least 3 or 4 times.  They seem to be randomly experimenting with new plans each year and terminating old plans that don’t meet their profitability hurdles and introducing new plans that better meet their interests (not yours).  The general type plan (HMO v PPO) may still be the same but the details have changed considerably.  Are you in touch with these changes?  I doubt it.  I wasn’t.  In the 5 to 10 years since you joined your employer and last looked at the details of your plan, your family needs have likely changed considerably.  Heck you and each member of your family is 5 to 10 years older.  When you and your spouse are in your 20’s and 30’s you’re most likely active and healthy.  Not on many if any prescription drugs.  Not yet having knees scoped and rotator cuffs repaired.  The kids are young and only needing the odd antibiotic for ear infections and regular pediatrician visits.  Now that you’re in your 40’s and 50’s the knees are wearing out, the shoulders are freezing up, the kids are all in braces and there are lots of prescription drugs now being taken regularly by all members of the family.

The key question to ask first is whether or not your current plan really matches your current needs?  As one example, prescription drug costs are a big deal as you get into your 40’s and 50’s and the kids into their late teens and early 20’s.  If you’re like me 10 years ago I never even paid attention to the Prescription drug aspect of the plan I chose.  Now I scrutinize it carefully.  I make much more use of Generic drugs than in the past.  If there is a generic alternative it can save you 70%.  I now make full use of the Blue Shield Mail order pharmacy which saves you another 33% to 50% and after getting over the start-up hassles is much more convenient.  The retail cost of all the prescription drugs we use annually in our family is well over $12,000.  We’ve now got that cost to us down to around $2,500/year.  You will be surprised how quickly it adds up.

Another aspect of Health Care insurance is more philosophical.  Do you view it as protection only against major unexpected medical expenditures or do you view it as an overall protection against all types of medical expenses.  It’s kind of like the “sleep at night factor” v “I’m willing to pay a predictable $X amount of money each year to cover all medical costs”.  Where you fall in this spectrum will dictate what sort of plan best suits your needs.  If you just want to protect against the big expenses.  The big $100K emergency surgery then a plan with a high deductible but lower premiums would suit you better.  You won’t get reimbursed for the small stuff as you may not even hit your deductible level in an average year but you’re protected against the big one.  On the other hand if you view health care as your god given right and you expect insurance to cover essentially all of it then you will be looking at a differently structured plan and will certainly pay more for it.  Going this way you can rest assured that all your expenses will be covered by the plan and your cost will predominantly be the cost of the insurance.

This may be obvious to all of you but the list below details the really important aspects to pay attention to when selecting and using your health insurance:

1. Annual deductible.  These can range from $0 to $5K or $10K per family.  This is the amount of medical expenses covered under the plan that you must pay out of your pocket (or a Health Savings Account pocket) before insurance kicks in and starts paying.  Even though you know you’re still short of your deductible make sure all medical expenses are still processed through your insurer so you get the proper credit towards the deductible.  May seem obvious but you would be shocked how many people overlook this aspect.  Particularly when you have teenagers handling their own medical affairs.
2. % coverage or co-pays.  Once the deductible is reached your insurance will then cover a percentage of the cost of the medical service you receive or you will pay a fixed $ co-pay with each treatment or drug purchased.  These percentages and co-pay amounts vary by type of service or drug being purchased.  These will also vary by in network or out of network.  Brand or generic drug.  Type of medical treatment.  Etc.  Pay special attention to this area.  Can get very complicated.  In my opinion Insurance companies deliberately make it complicated to confuse the consumer.
3. Limitations.  All policies have limitations as to what they will cover per year.  Read the fine print.  There are $ limitations, number of treatment limitations, etc.  When you unexpectedly hit these limitations as I did following shoulder surgery with the limitation of Physical Therapy sessions it can get very costly.  Cost me $2,500 out of my own pocket before I learned I had gone over the PT session limit.  With the lag in time it takes insurance companies to process claims and the fact the medical care service provider is not incentivized to notify you when you reach the limit, you can go well past the limit before you realize it.  You must know the limitations in the policy you choose.  Also keep track of when you have more to go towards the end of the year on a category limitation and if possible take advantage of the $$s left and take a treatment in the current year rather than postponing to the next year.  Having old tooth crowns replaced is a good example.
4. Dental and Vision.  Don’t forget about these components.  Most Medical plans offer or include Dental and Vision.  If you have not reviewed the details of your current plan you might be surprised to find out the new coverages now included.  10 years ago it was unusual to find Orthodontist or contact lens being covered.  Now it’s pretty common to cover some ortho and some contact lens purchases.  Many vision plans will also cover Lasik up to tight limits.  I neglected to spot this change and went 3 years not claiming any of these benefits.  Cost to me was over $5,000.

Now lets turn our attention to the other types of insurance.  Home, Auto, Life, Umbrella Liability, specialty (i.e Earthquake).  I’m going to skip small business since I truly know nothing about it.  Personally I’ve now concluded it is both economical and obviously more convenient to bundle all these together with one carrier.  I use State Farm (despite  their insistence this Internet thing never really happened.  they are far and away the most backward company when it comes to using technology!).  I know people who use different carriers for different types of insurance and find it works out better but my analysis has consistently shown the bundled approach to be superior.

The same philosophical issue I talked about with regards Medical applies here.  Are you trying to protect against the BIG $$ unexpected expenses or are you trying to buy insurance against all insurable expenses.  I’m much more in the former category.  I carry large deductibles on both home owner and Auto and pay lower rates and rarely file any claims.  We view our cars as very utilitarian.  As long as the safety of the car or the operability of the car is not effected we don’t worry about it.  They’re not pretty but we don’t worry about it.  We also pretty much “use up” the cars we buy.  We’re definitely long term buy and hold Car buyers.  Same pretty much goes for homeowners insurance.  We only protect against the big expense item.  Fire burns down the house, major flooding damage or major theft.  The smaller stuff we essentially self insure through lower rates.  We have also chosen to self insure for life (death) insurance through savings.  What we would have paid in for life insurance payments we simply put away each year into savings.  I’m no expert on life insurance but it seems to me the days of using life insurance as an investment vehicle are long gone.  Umbrella liability insurance is in the category “sleep at night”.  It’s relatively inexpensive (obviously because it’s rarely needed) and in my opinion is worth having.  The range is from $1M to $10M on average.  If bundled with Car insurance it is very affordable.  It’s primary purpose is to cover liability resulting from auto accidents that exceed the auto insurance limitations for liability.  Also covers liability for accidents in your home and elsewhere but in my understanding the primary application is Auto.

The combination of the deductible and the max coverage limitations when taken together make up the bulk of what you will pay in premiums.  Applies to Home and Auto (along with boat, motorcycle, etc.) equally.  Think about your aggregate premiums over 10 years and weigh against what your insurance value is likely to be and decide what your comfortable losing.  Everyone sleeps at night better according to different rules.  You simply need to figure out where you fall on the spectrum of fully insured against everything v only insuring against the BIG one.  There’s some analysis needed to frame this but it really comes down to a risk comfort decision.  I would suggest reviewing your policies to remind yourself what’s in there annually and reviewing the premiums v alternatives every 2 or 3 years.  Keep your broker honest.  He feels you’re locked in as the switching cost to go to another broker/carrier is high.  Lots of paperwork and hassle to change.

Some small tips:  If you have teenage drivers in the house make sure you utilize the good student discount.  The bar is only a 3.0 GPA.  If they have an accident or get a ticket don’t file the claim for the accident and make sure they take the driving school (offered online now in CA.  Not sure where else it’s available) to have the ticket scrubbed off their record.  Kids getting in accidents or getting tickets really hurts!!  Pay particular attention to which driver you designate as the primary driver of each vehicle you have as this can have a significant impact on the overall premium.  If the child is away at college and not driving any of the cars much if at all be sure to change their status with your insurer as this will also bring down your rates. If  you’re looking into Earthquake insurance make sure you completely understand the policy you’re getting.    Note that if there’s an earthquake and a fire starts and burns down you house that’s one type of insurance needed.  If the earthquake causes a Tsunami and the flood wipes out your house that’s another type of insurance.  If the shaking from the Quake brings down your house that’s straight up Earthquake insurance.  Very complicated and worth understanding thoroughly if you live in earthquake country like we do here in the Bay Area.  If you are converting a house from your primary residence to a rental property as many of us have done who recently moved and could not sell our old house, be sure to note you will now need “renters” homeowners insurance which is a different policy from the one you had when you were occupying the house yourself.  It’s basically the same coverage as before but will cost you 25% more.  Why?  Because the insurance carriers can get away with it (in my opinion).  If you don’t make this change you might find you’re not insured should something happen while you’re renting the property.  (placeholder note here for a future blog on the advantages of converting your prior primary residence to a rental property for 3 years in these economic times)

One final category of insurance I’ll just mention here is Warranty and product recalls.  Do you know that the major insurance carriers that underwrite this category of insurance assume up to an 85% breakage.  That is to say they assume 85% of the potential claims against warranties are never filed.  A future blog will discuss this issue and what you can do about it.

All thoughts and additional ideas and experiences are welcome.

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Reducing STRESS in the busy complicated Life one step at a time

The last 30 years of my professional and personal life has been spent adding, building, complicating, growing, driving towards goals, always looking forward and rarely looking back.  I’ve spent 25 years working for High Technology start-ups (10 as CEO of two of them), 7 years as a Partner in a Venture Capital Firm, 9 years on the board of a private preK through 8th grade school (6 years as the Board President), served on 14 different private company boards and one public company board.   I’ve been married for 22 years and have 4 daughters ages 21, 18, 16, 13.  I try and stay in good physical shape by spending at least 2 hours/day in the gym or playing squash.  I try and get in at least 50 rounds of golf each year.  I’ve coached each of my daughters in at least two sports now collectively over 40 seasons.  My wife has now gone back to work teaching 5th grade locally here in the Lafayette Schools.  She has 30 kids in her class and just 4 hours of classroom assistance each week.  If you’re doing the math, you quickly see this all adds to much more than 30 years worth of time jammed into the aforementioned last  30 years.

6 months ago I cut back to just one job (VC Partner at Pond) and one coaching assignment (7th grade girls basketball team).  No other corporate boards, no more school boards, no golf (ugghh!), 2 daughters off to college (much less drama in the house).  Wow!  I now have so much time on my hands.

This blog is about what I’ve been using that time to do.  I’ve been systematically going over all aspects of our family life looking for ways to recover from years of neglect in two areas;  The first is economic.  Simply from neglect and lack of time and access to the right information I’ve found we are  systematically overpaying for almost everything.  Second is general life efficiency.  Finding ways to avoid time wasting tasks and make life’s mandatory mundane tasks much easier and less stressful to accomplish.

As I’ve been tackling each area of our life and talking to friends about my findings I’ve discovered I’m not alone!  In fact I think I’m more the norm than the exception.  All this would not be an issue except that it all seems to lead myself and just about everyone I talk to one major conclusion.  This overcharged lifestyle and the feeling of being continually out of control and  financially ripped off leads to massive amounts of STRESS and all sorts of resulting side effects.  I’ve realized this connection in my family’s life so I set out to tackle it piece by piece.

Over the next couple months I intend to publish through this blog my findings as I explore and to some extent solve each of these areas of life.  To give you a flavor of some of these areas I’ve already explored and will be writing about shortly please see the list below:

Financial planning:  Not in the investment sense but in the “retirement” sense.  Under varying scenarios am I secure financially.  What can I afford?  What am I worth?  Should I be concerned?  If I need to be concerned how big is the problem?

Insurance analysis:  Do I really understand the insurance coverage I currently have?  What insurance coverage do I need?  What is a fair price to pay?  am I utilizing all types of insurance properly?

Wills, Trusts & Estate:  Do I have a Will?  Do I have an appropriate living trust?  What other Trust vehicles do I have in place.  do I understand what they imply?  Are they current?  Do I have a written plan or set of instructions to the designated trustees should I not be around to explain my intentions?

Debt analysis:  Have I optimized my debt vehicles?  Should I be refinancing my mortgage loan?  Do I actually understand my mortgage loan?

Family records:  Important documents like SS cards, birth certificates, Passports, drivers licenses, etc.  Medical records, school records for the kids.  Do I have these all and are they organized so I can find them easily when needed?  Home property inventory including collectables like Wine collections and coin collections.  These are needed for insurance purposes along with net worth calculations.

Warranty and recall tracking:  did you know that up to 85% of all legitimate warranty claims go unclaimed by consumers?

Monthly money saving opportunities:  Cell phone service package, TV/Phone/Web service package, energy saving, maintenance savings.  Many others.

Security:  Home security, online security, emergency plans, identity theft protection, action plan when wallet stolen, credit score, etc.

Family scheduling:  Chores, to do lists, daily events, vacation planning.  All about efficiency.  No more needless spontaneous trips to school because you child forgot his lunch, anxious tense moments when you realize someone is double booked and neither can be cancelled or disappointment when an important event was missed.

Fix it:  Lets face it the more stuff you have the more stuff breaks.  Fixing things that break is wrought with waste and frustration.  Knowing how to fix the simple things and knowing who to contact to fix everything else is crucial to not spending all your time in this area.

The list goes on.  I think you get the point.  In the coming months I plan on publishing what I’ve discovered and what I’ve been doing about these and numerous other issues which has all lead to a greatly reduced level of stress.  I look forward to generating an active dialog on these topics with new ideas for how to address these issues leading to lower levels of STRESS!

All comments and new ideas are welcome!

Much more to come…

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