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Lauren's Blog

Lauren’s blog covers topics that impact your finances, your family, and your future. Is there a topic you’d like Lauren to tackle? We’d love your suggestions and feedback.

There’s no such thing as an unexpected expense!

There’s no such thing as an unexpected expense!

When I met Carolyn for the first time in January, she was distraught. What finally got her to pick up the phone and get financial help was this year’s extreme rainy season—and a big financial surprise. “I didn’t even realize how old my roof was, or that it needed repair, until the water started coming in!” And come in it did. Carolyn had been out of town on business when the leaks opened up, and her home was a mess by the time she found it three days later. Her homeowner's insurance was covering the interior damage (minus a hefty deductible), but she was told she needed a whole new roof. The cost: $22,000. A high-earning corporate executive, Carolyn had lots of credit, but her emergency fund was non-existent, and a new roof was one thing she couldn’t put on a credit card and pay off over the next few months. She needed cash, and she needed it now. “I thought I was in great shape financially,” she told me. “Who knew I’d need so much cash with no notice?”

The answer? I knew. Or at least I could have provided a pretty close estimate, even though I’d never met Carolyn until she walked through my office door that afternoon. I’m no psychic (if I were, there’d be no need for financial planning!). How did I know Carolyn would need that much cash for a home repair? It’s all in the numbers. It’s all in the budget. I repeat: There’s no such thing as an unexpected expense!

All I needed to know was this: Carolyn owns a home in Newport Beach. If her home is worth anything close to the median price of about $2M, a 1-percent rule tells me that her home maintenance will average about 1% of the purchase price of her home—or $20,000—per year. Suddenly $22,000 doesn’t sound that surprising at all! But without a budget, every expense was unexpected. Without a budget, Carolyn didn’t have a clue.

The 1-percent “rule” means that when you purchase a large, illiquid, expensive-to-own asset like a personal residence, almost everything will have to be repaired or replaced eventually. I guide people to set aside a replacement fund of 1% of the purchase price each year for these very predictable costs. The work may not occur each year. It could be a roof, a kitchen, a driveway, plumbing… but it will be something. It always is.

The new roof is just a drop in the bucket (pun intended) when it comes to Carolyn’s money challenges. She was earning a substantial income but wasn’t setting aside cash for irregular discretionary expenses. She had no revolving debt, and she was saving for retirement. But her cash flow planning was a non-starter. In hindsight, maybe her leaking roof was a good thing; it was just the wake-up call she needed to get her to take action.

We began by finding the cash she needed to fix her roof (thank goodness for her good credit and a good chunk of home equity!). But we didn’t stop there. Next, we worked together to create a budget so she knows what she earns, what she spends, and what she can afford. She began to use eMoney (my favorite personal financial management software) to be sure she stays on track. She’s now building an emergency fund rather than relying on credit cards, and she’s earmarking cash reserves for those not-so-surprising expenses such as car replacements, home repairs, annual vacations, and even a planned future nip-and-tuck. The next time a large expense hits her, I have no doubt she’ll have the funds in place to cover the bill.

What Carolyn has discovered is that cash planning is the foundation for a solid financial plan. A cash budget creates a wonderful sense of financial freedom. “I always thought budgeting was like dieting—that I’d always feel deprived—so I just didn't look at how I was spending,” she told me. “Now, I feel the exact opposite. Because I know how much I have and where I want to use it, I don’t get stressed about an expensive dinner that I know is in the budget. Even better, I know I’ll never have surprises, and I don’t worry when I see my credit card statement arrive!” She’s also building a “freedom fund” to be sure she has the funds to support her dreams down the road, whatever they may be. (Read my blog Celebrate Retirement Planning Week: Create a “freedom fund” to learn more!)

Like many of my clients, Carolyn has discovered one of the great financial secrets: cash planning is empowering. Remember, there’s no such thing as an unexpected expense! Making intentional, conscious choices about when, where, and how to spend your hard-earned dollars is key. Align what you want with what you need and (finally!) relax about your finances.

Ready to get started? Check out 7 Steps to a Budget Made Easyor use NAPFA’s find an advisor guideto find a fee-only financial advisor near you.

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Climate, weather, and your money

Climate, weather, and your money

If, like I do, you happen to live—or at least spend time—in Southern California, you know that there are two topics on everyone’s lips at the moment: Donald Trump, and the torrential rain. Depending on who you happen to be talking to at the moment, either topic is sure to elicit one of two responses: optimism… or sheer panic. In both cases, taking a look at the differences between climate and weather can help quell the storm.

Here in Southern California, we live in a desert. Despite our earnest efforts to pretend we live in a climate that can support lush lawns and the greenest gardens, our Mediterranean climate is dry in the summer, nearly every summer. Our winters can be wet, but not always. And while shifts in the atmosphere may bring short-term changes to the weather, our physical location on the planet is what drives our climate—which, if it changes at all, changes extremely slowly over thousands of years. (To be clear, I do believe we humans play a critical role in climate change, and that it is changing, just not as quickly as the weather!) The recent rains have lessened the severity of our five-year drought, but because of our climate, there will always be a shortage of water. To survive, we will always need to plan for that reality.

The same is true when it comes to investing. Bull markets and bear markets battle it out based on changes in the economic weather, but our climate, which is rooted in capitalism, remains steady. The markets are always (always!) rising, which is why investors wisely choose to place their money on Wall Street rather than tucking their hard-earned dollars under the mattress each month. History shows us that the climate for investors in the US is favorable, and that reality doesn’t change, regardless of the current weather pattern.

I had lunch with Maggie this weekend. In her 90s, she still has substantial assets, but for obvious reasons, we’ve allocated a meaningful part of her portfolio to bonds. While she understands that that bonds provide stability in her portfolio, Maggie can’t help but wish her portfolio was busy taking even more advantage of the recent surge in equities. Instead of mirroring the DOW’s 16.6% increase since November 1, she’s watched her portfolio fall by 1% in the same time period. It’s not much of a drop, but when the headlines are filled with record-breaking highs in the equities space, it’s hard to sit on the sidelines. She’s never doubted our plan, but looking up from her coffee, she asked timidly, “Should we change course?”

I replied without an ounce of hesitation. “We shouldn’t change a thing.” As I said to Maggie, and what I believe with absolute certainty, is that while the weather has shifted, the climate remains the same.

You don’t need to take my word for it. Warren Buffett just published his always-anticipated Berkshire Hathaway (BRK.A, BRK.B) shareholder letter (you can read the full 29-page missive here). As usual, his thoughts are straight to the point, as well as pointed, and even humorous. This excerpt reiterates my thinking well:

“Early Americans… were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it. This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.”

He goes on to say this:

“American business—and consequently a basket of stocks—is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that… During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

Maggie isn’t the first person to ask me if it makes sense to steer in a new direction in light of the recent market weather. After all, the current bull market is already well past the average length of a typical bull market. But so is California’s rainfall for the year. Is the market overheating? No one knows for sure. Not even Warren Buffett. What we do know is that the weather is unusual. But though we may want to break out an umbrella every now and then, the climate itself hasn’t changed. Only the weather has shifted. That’s true when looking at the White House as well, which can impact the forecast for the economy and, ultimately, the market. Heed Warren Buffett’s words and trust that “our nation’s wealth remains intact” and “As Gertrude Stein put it, “Money is always there, but the pockets change.”” The key is to continue to make wise, rational investment decisions to help ensure the money in your own pockets stays where it belongs—even during the fiercest of storms.

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How to Win Big in Retirement (and Life)

How to Win Big in Retirement (and Life)

Picture this: a group of a dozen women and men; most are retired or semi-retired, diving together for seven full days in a tropical paradise. Every person in this “older crowd” is not only healthy enough to get themselves to the Gulf of Mexico to enjoy an activity they love, but they’ve also achieved a level of financial security that, while it may not have them swimming in money, at least has them swimming with the fish. No matter what challenges they have faced in the past, these are people who are truly succeeding at retirement.

How did they achieve the Holy Grail and “win big” in retirement? That’s what I found myself asking as I enjoyed my days with this great group in Cozumel last week. As a financial advisor, this type of winning is my goal for all of my clients, and I wanted to understand how this group had gotten where they are today. So I listened to their stories.

My friend Chantal (my travel companion and dive buddy for this trip) told me that, for her, “retirement is freedom.” After years or hard work, she wanted to be free to enjoy life on her terms. To make it happen, she decided to retire but to continue to do some part-time work as an expert witness (she has a Ph.D. in Pharmacology). The rest of her time is her own. Chantal looks at the world as an opportunity, and even when things go a bit sideways, she has a way of always looking at the sunny side of the situation. (It’s no wonder I love having her by my side as a fellow traveler!)

When Ken, our travel leader in Cozumel, was ready to leave the corporate world, he started thinking about what would make him happiest. He had been the leader of his dive club for years, and diving was and is his passion. He decided to semi-retire and turn his passion into a business. Channel Island Dive Adventures was born, and Ken (and all the rest of us) couldn’t be happier!

Chantal, Ken, and others I chatted with on the trip have something other than diving in common. (While it may sound like an easy fix, I don’t think diving is the key to a successful retirement!) Interestingly, what they share seemed to jump straight from the pages of the book I was reading during the trip: How to Fail at Almost Everything and Still Win Big (Kind of the Story of my Life) by Dilbert cartoonist Scott Adams. This semi-memoir isn’t a great piece of literature, but it’s a fun, inspiring read, and it drove home everything I was seeing and hearing during my weeklong adventure. What I realized is that nearly everyone in our group followed what Adams lays out as his steps for “winning big.” They worked for Adams, who opened—and soon closed—two restaurants, was fired from multiple jobs, and who managed to leverage his failures into fame and fortune as a successful cartoonist. And they worked for my fellow divers, all of whom seem to be living their retirement dreams—on their terms. Here are the three common keys to success: 

  1. Make fitness and sleep a priority. No matter how much money we have to spend in retirement, none of that will do any good unless we’re healthy enough to enjoy life! Keep your body moving. Walk. Do yoga. Lift weights. Do whatever you can to keep your body fit and active. And while there are never enough hours in the day, most people need to spend about 8 hours sleeping to function at their best. According to this article in AgingCare.com by the National Institutes of Health (NIH), “older adults need about the same amount of sleep as younger adults—seven to nine hours of sleep per night.” Not getting enough? The article also offers tips to help make it happen.
     
  2. Reduce stress. Easier said than done, I know, but the impacts of stress on your body and your mind are many. It’s one reason I began a dedicated meditation routine last year. And while there are many approaches to help reduce stress, remember that stress is caused by the things you don’t do. Take care of the things that increase your stress levels first.
     
  3. Have a positive attitude. Scott Adams’ stories about his life are great examples of turning lemons into lemonade. Corny as it is, that kind of positive attitude can change how you see the world—and how the world sees you in return. According to this great article in the Huffington Post, “positive thinking” is no longer a fluffy term that is easy to dismiss. In fact, research shows that “positive thoughts can create real value in your life and help you build skills that last much longer than a smile.”

How can you win big in retirement? Start with these three steps. Of course, getting your financial ducks in a row is also key. Work with an advisor you trust, and be sure to look at every aspect of your financial life—including your retirement goals. Stress really is caused by the things you don’t do. By planning well for your future, you can reduce stress, increase happiness and, indeed, win big in retirement. 

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Caveat Emptor: It’s your money. It’s your responsibility.

Caveat Emptor: It’s your money. It’s your responsibility.

When Linda and Bill came into my office, I could sense their hesitancy right away. And when they told me their story, I could understand why they were so apprehensive about meeting with a financial advisor. They had, quite simply, learned not to trust.

Like many people, they’d realized they needed to stop being “do-it-yourselfers” and begin working with a financial professional. What they didn’t know was how to find a good advisor whose advice was based on their needs—not the advisor’s pockets. Unfortunately, it took them many years to understand the difference. “When I retired, our advisor gave me all the reasons why I should roll over my retirement savings into an IRA, and it seemed like a good idea,” said Linda. “But what I didn’t understand was that it was probably more of a good idea for him than for me.” That understanding came when a friend pointed out the fees she’d paid—and how much her advisor had earned in commissions from the transaction. Linda handed me the article her friend had shared with her that called out the practice of advisors receiving big perks (“say, a six-day, five-night resort vacation in Maui”) for selling a particular product. Ouch. Then Bill chimed in: “When I was 68 and had been collecting Social Security for two years already, someone told me I should have waited to claim until I was 70…that it would have added 30% to my monthly check,” he said. “When I asked our advisor why he hadn’t advised me on this, he said I’d never asked. I hadn’t, but I didn’t know what I didn’t know!”

The conversation got me thinking: with news about Trump signing an executive order delaying the DOL Fiduciary Rule—and even potentially doing away with the Dodd-Frank Wall Street Reform and Consumer Protection Act, investors need more education than ever. And if these regulations do fall away in the wake of the new administration, caveat emptor—or “let the buyer beware”—should be the phrase on everyone’s lips, and it should be driving every financial decision you make, from how and where to invest your hard-earned savings to whom you choose to work with to help guide your financial decisions.

The good news for consumers is that many of the anticipated benefits of the DOL Fiduciary Rule have already taken root. The media attention on the rule brought the idea of “fiduciary responsibility” into the mainstream, shining light on the difference between a fiduciary who is legally bound to act in the best interest of his or her client and ensure no conflict of interest, and a non-fiduciary advisor who is typically compensated by commission and is held only to a suitability obligation. (For more on this topic, see my blog When did it become ok to be financially illiterate?) But even with that knowledge, how do you choose an advisor who is not only working in your best interest, but is also a good fit for you?

The first step is to do your research. Get referrals from investors and other financial professionals, and be sure the advisor is a fiduciary who is, indeed, working in your best interest. When you meet face to face, here are five questions to ask to help you get the information you need to make a smart, informed choice:

  • What are your credentials? The most trusted in the industry are Certified Financial Planner® (CFP®), Personal Financial Specialist (CPA/PFS), and Chartered Financial Consultant (ChFC). This article talks about the benefits of each.
     
  • How are you compensated? Fee-only advisors minimize conflict of interest by receiving compensation only from the client. Fee-only advisors receive no commissions or other perks for the products they recommend. Other compensation models include fee-based, which is a combination of fees and commissions, and commissions only. If the advisor does earn commissions, ask if they come from product sales, from securities trading, or both, as well as specifically how much that commission is. (Yes, it’s okay to ask!)
     
  • May I see your ADV? Every Registered Investment Advisor is required to file a Form ADV with the SEC. The ADV outlines the details of the practice, including compensation, experience, service offerings, and any disciplinary history. Consider the ADV your advisor’s resume.
     
  • What services do you offer? Know what you want and, even more importantly, what you need. Investment management may be at the top of your list, but what about financial and retirement planning? Do you need a Social Security claiming strategy? Do you have the right type of insurance and the right level of coverage? What about estate planning? Understand what your advisor offers and if she has a network of trusted professionals to support the needs she doesn’t provide in-house.
     
  • How can you help me simplify and improve my personal finances? Like Linda and Bill, you may not know what you don’t know. This question can help you uncover unexpected ways the advisor can help you make changes that can lead to greater financial confidence and a better long-term financial outlook. After all, your financial success—today and far into the future—is the ultimate goal.

In our own Investment Policy Statement (and no matter who you choose to work with, be sure you receive and review this contract carefully!), we break down the roles and responsibilities of the three key partners in the road to financial wellness: the custodian (whose job it is to hold and protect your assets), the advisor (whose job it is to design and implement a financial and investment plan based on your needs and goals, and to regularly monitor the performance of that plan), and the investor—that’s you!—who has three key responsibilities: 1) to oversee your advisor, 2) to understand what you want to achieve and communicate those goals to your advisor even as they change over time, and 3) to carefully review your statements and be sure you understand how your money is being invested, how you are being charged, and if your plan is fulfilling your needs. If you’re clear about those roles and responsibilities and do your part, a well-chosen advisor should serve you well.

No matter how you feel about what role the government should play when it comes to protecting consumers, ultimately, you alone are responsible for managing your money. Trusting your advisor is important, but the person you really need to trust is yourself. Keep in mind the definition of caveat emptor: “the principle that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made.” And remember, it’s your money. It’s your responsibility.

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Rising above the noise to find the truth (and a little bit of sanity)

Rising above the noise to find the truth (and a little bit of sanity)

“And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. 'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past.’”

– George Orwell, 1984


I read a fascinating article in New York magazine about what happens when a lie hits your brain. It wasn’t new information—Harvard University psychologist Daniel Gilbert presented his findings more than 20 years ago—but it was new to me. And it just may be more important now than ever.

What Gilbert proposed was that our brains are forced to do some stunning acrobatics whenever we hear a lie. First, the lie is told. And when that happens, our brains have to accept that information as true to understand and make sense of it. That means that even if we know something is a lie, in that first critical moment, our brains tells us the information is true. Thankfully, we’re usually able to take the next step, which is to certify mentally whether the information is true—or not. According to Gilbert, the challenge is that the first step of mental processing is easy and effortless. The second? Not so much. It takes time and energy. Which means if we become distracted or overloaded, it’s all too easy for us to never take that second step. Suddenly, something we knew to be a lie begins to sound more and more reasonable. In fact, in a more recent study, researchers tested this hypothesis, asking people to repeat the phrase “The Atlantic Ocean is the largest ocean on Earth.” After repeating it enough times, the participants started to believe the statement to be true. Why? Their brains just took the easier route to closing the loop on processing new information. Scary, but true.

I’m embarrassed to say that I can think of too many examples in my own life when I’ve done the same thing. You probably can too. Every one of us is guilty. But in our defense, it’s not our fault. As humans, we all have a limit to our “cognitive load”—or how much our brains can process at one time. When we’re hit with a constant stream of information, our brains reach that limit, and we’re no longer able to take that important second step of mental certification. And, boy, is that cognitive load being challenged lately! Every day we’re inundated with noise on every topic. Television. Radio. Newspapers. Magazines. Facebook. Twitter. Every outlet is screaming for us to pay attention, and whether it’s the media or our friends flooding our brains with information, we’re spending an incredible amount of time trying to discern facts from “alternative truths.” The result: our brains are overloaded… and downright exhausted.

As an advisor, my mission is to help my clients rise above the noise to make careful, thoughtful financial decisions. In this environment, it isn’t easy! The media and everyone’s well-meaning friends are overflowing with information. Unfortunately, some of that information can be misleading. For example, the media has focused on the market indices for years. As a result, so do investors—even if they know that the fact that the Dow hit 20,000 yesterday has nothing to do with their long-term financial outlook. But for the media, this magic number is an easy target. They can report on it. They can speculate on it. They can create headline-grabbing sound bites about it. The result: a whole lot of noise that carries about as much importance as reporting on the path of a rollercoaster when all that matters (really!) is where the ride ends.

What’s the solution? We need to lessen our cognitive load. We need to slow down the noise, slow down our brains, and regain our mental strength. For me, that means turning off the television and the radio. I’m able to slow down and think more clearly when I read written information rather than listening to “talking heads.” This is true in finance and every aspect of my life. And when that doesn’t work? I meditate. (For more on how our brains can inhibit or ensure our own happiness, check out Daniel Gilbert’s bestseller, Stumbling on Happiness.)

Whenever I feel challenged by the noisy world around me, I remember Viktor Frankl’s famous quote: “Everything can be taken from a man but one thing: the last of human freedoms—to choose one’s attitude in any given circumstances, to choose one’s own way.” Perhaps by taking the time to slow down and rise above the noise, we can each make that choice and, indeed, choose our own way.


Comments? Please email me. I’d love to hear your thoughts!

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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >