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Plan On Bad Stuff PDF Print E-mail
Written by John D. Buerger, CFP®   
Monday, 01 March 2010 22:02
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John Buerger

This week we're going to look at some basic rules of planning - creating strategies to navigate the ups and downs in life, business and money.

RULE - PLAN ON WHAT IS LIKELY TO HAPPEN

It is better to plan around high-probability events than hope for the long-shot.  The best strategies focus the most attention on the most likely events.  There are no higher-probability events in life than death and taxes.  Both are less than desirable yet both are certain. 

Comparatively speaking, all other outcomes are wishful thinking.

And yet most people (and - sadly - most financial advisors) pay very little attention to either of life's certainties and instead focus time, energy and resources on things over which we have very little control ... especially investment returns.

Most Don't Plan on Dying

A survey done in 2007 found that more than half (55%) of Americans do not even have a will, much less an estate plan with a living trust, powers of attorney or medical directives (the percentages are even worse for African Americans and Hispanics).

Healthcare Directives are more popular today thanks to the Terry Shivo case, but still only 40% of Americans have these documents.   So while a great many people are in denial about dying, at least some people are starting to realize they might actually get sick (yes, you did sense some sarcasm there).

When it comes to the creation of a Living Trust, the estimates are that fewer than 20% of American home owners have one ... and yet being a homeowner almost guarantees an estate large enough to generate probate fees (the cost of closing out an estate that does not have a properly executed living trust) that will be many times the original cost of creating that living trust document in the first place.

Compared to Investing

We spend hundreds of billions of dollars on investment advice and services to help us with something (the markets) over which we have little to no control.  How did the market do?  It's on the news every day.  People talk about it at parties and over the water cooler.

When was the last time you talked about your estate plan with anybody ... even family?

But the chances of your making it to retirement are considerably lower than your chances of dying.  Fully a third of us will never live to our retirement years.  We'll be killed in an accident or succumb to cancer or some other disease long before we get there.  Only 5% of Americans will ever be "financially free" - wealthy enough to live off the income of their wealth.

Some day in the future you may or may not be rich ... but we will certainly all be dead.

Taxes Are Huge (and Growing)

The other certainty in life is taxes.  Even if you don't pay income taxes (and most people reading this blog DO pay), between sales tax, property tax and fuel surcharge taxes, you already fork over a serious chunk of change to Uncle Sam (interestingly enough - these taxes are highly regressive - punishing the poor more than the rich).

One of the best investments you can make is in some good tax planning.  This means making choices throughout the year with the express purpose of limiting how much money you pay in taxes over your lifetime.  This does NOT mean simply taking your data to a professional to fill out your tax forms after the fact.  There isn't a whole lot that can be done after December 31 other than putting money into your IRA. 

Good tax planning actually means creating a strategy and executing it.

If you save $1000 in taxes this year and can manage to save that money (rather than spend it), it will grow to over $10,000 in 30 years at a reasonable 8% growth rate.  If you manage to save $1000 per year for each of 30 years, you will end up with over $100,000.

Focus Your Efforts

Death and Taxes - they're both "bad stuff" ... but you cannot ignore them.  They are going to happen.  They are both the highest probability events in life (100% certain).

I think it is completely irresponsible for anyone giving financial advice to create a strategy that is ignorant of the two things in life that will definitely happen - yet that is what investment brokers and even many people who call themselves financial planners do.  They ignore the "bad stuff."  You don't want to think about it.  They don't know how to get paid to talk about it so they don't even go there.

That's just plain wrong.

Don't mistake my message - the "fun stuff" is important.  Spending money feels good.  It's how we humans are hard-wired.  Investing, insurance, paying for education, eating well, getting exercise, connecting with other human beings and living life - these are all critical parts of the modern human experience and important pieces to your planning puzzle.

It's just that a good financial advisor will create a strategy around ALL the possibilities - the "bad stuff" as well as the "fun stuff."  It is only then that the strategy has any chance of generating the results that you want.

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Last Updated on Tuesday, 02 March 2010 06:07