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A Little of This and a Little of That

These tried and true practices will help ensure your clients' financial well-being.

By Thomas John Wolff, CLU, ChFC

Even in February, it’s not too late to review the past year and plan for what’s ahead. With this in mind, here are a few things to consider when thinking about the wellbeing of your clients, their future and their loved ones.

Smoking and compound interest
My grandson Keith has a 25-year-old associate who smokes a pack a day. Keith has been trying to help him give up smoking. He came up with an idea that illustrates the cost of smoking and the power of compound interest. If the individual quits smoking and invests the savings at 8 percent, he will have $500,000 at age 65.

Stay the course
A portfolio consisting of 80 percent stocks and 20 percent bonds turned in a negative rate of return 22 times between 1926 and 2002. Yet the average rate of return was 10 percent. Studies indicate that investors who have tried to “time the market” by selling in the beginning of down years and buying at the beginning of up years have been unsuccessful. The moral of the story is to stay the course.

Beware of inflation
Although the rate of inflation has been mild in recent years, it has been with us every year but one since 1960. The average rate has been 4.5 percent. Let’s assume we faithfully set aside $2,000 per year for 40 years. If the funds earn a net rate of 8 percent, the account will have a balance of slightly over $500,000. However, assuming a 4 percent inflation rate, the real value of the investment, in today’s dollars, will only be about $110,000.

Save first
To keep pace with inflation we must be sure our clients increase the amount they save each year. This brings us back to a theme that has been a frequent subject on the “Back Page.” It is critical that we do a need analysis for people. When we do this, we create clients, not policyholders. Once we have made a client, it becomes our obligation to conduct an annual review of that person’s affairs. By doing so, we can help them increase the amount of their insurance and savings every year. And yes, as the legendary John Savage taught us, the only way to accomplish this is by paying ourselves first.

How long will our money last?
When I developed Capital Need Analysis, it was in response to two problems we all face. The first is inflation and the second is extended life expectancy. When a person dies or retires, either the beneficiaries or the individual is at significant financial risk unless these problems are planned for. When planning is based on the liquidation of capital, you have to be able to calculate how long someone is going to live. This is, of course, impossible.

Let’s examine just how devastating the use of capital can be. If the rate of return on assets is 8 percent, but individuals require 12 percent to “remain in their own world,” it will take only 14 years for them to exhaust all funds. That’s right. In just 14 years, the principal is gone, the interest is gone and people are broke!

That is why Capital Need Analysis recommends enough capital be provided to live on the return the capital provides.

Life expectancy
Life expectancy is rising every year. The statistics are staggering. If a couple is age 65, there is a 45 percent chance that one of them will live to age 90. For most of these people, chances are they will run out of money before they run out of time.

There is no data to prove the foregoing statement. However, after 50 years in the financial planning business, I have extensive anecdotal evidence that convinces me that this assessment is correct.

A happy retirement
The two most important factors for a happy retirement are good health and financial security. Unfortunately, the longer we wait to plan for these, the more difficult they are to attain. The message is clear: First, we must take care of ourselves so we have the best possible chance of being healthy when we get older. Second, we should purchase adequate life insurance and save as much as we can so that we, together with our loved ones, will have adequate resources to “remain in our own world” when our earned income stops. Once we do this, it will be a lot easier to convince our clients to do the same.

Allow me to take this opportunity to wish each of you a happy New Year and to express a sincere wish that 2004 surpasses your fondest hopes and expectations.

Thomas John Wolff, CLU, ChFC, served as 1979-1980 president of NALU (NAIFA). A member of MDRT since 1958, he is a recipient of the John Newton Russell Award. He is a member of Hartford AIFA (Conn.). His address is PO Box H, Vernon CT 06066.

 


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