Rick Kahler's Financial Awakenings

“I’ve never seen money passed from one generation to another in a manner that actually benefited the recipient.” When a psychologist said this to me several years ago, I was dumbfounded.

Many parents scrimp, save, and sacrifice so they can “leave something to the kids” with the intention of doing them good. It’s hard to accept that inheritances may actually do harm instead. Most of us have money scripts that don’t support this idea.

Typically, I used to hold several money scripts around inheritances. One was that leaving money to your children is a loving thing to do. Another was that parents should always leave their money to their children. A third was that anyone who received an inheritance would invest it wisely, using only the earnings to improve their lives.

Today I know those money scripts were not universal truths. I have more understanding of the problems involved in giving money away in a manner that is beneficial to the receiver. It isn’t as easy as I once thought.

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“You need to protect yourself and your family with life insurance that you won’t outlive.”

This is one of the common selling points for whole life or universal life rather than term life insurance. At first glance, it seems to make a lot of sense. Of course you don’t want to outlive your life insurance. Having it pay benefits upon your death is the reason you buy it.

This statement, however, misses one essential fact. Many people don’t need to worry about outliving their life insurance, because they outlive their need for life insurance.

We don’t all need life insurance throughout our entire lives, any more than we do auto or homeowners’ insurance. If you no longer drive a car, you don’t need auto insurance. If you no longer own a home, you don’t need homeowners’ insurance.

In circumstances like the following, you may no longer need life insurance: First, when you and your spouse have accumulated enough assets and income streams to independently care for yourselves. Second, when your children are self-sufficient adults. Third, when your estate is too small to owe estate taxes or liquid enough to pay the estate taxes.

The primary purpose of life insurance is to replace the future income of a primary breadwinner. Two groups most likely to need it are middle-aged couples saving for retirement and parents of minor children. Ideally, most young families should have over $1 million in life insurance to provide for the children if either parent should die prematurely. Yet many of them are unable to afford the higher premiums for this much “permanent” insurance. Their choices are to underfund their needs with a smaller permanent policy or purchase an affordable 30-year term policy.

As we age, the probability of dying becomes greater. Therefore, a $1 million life policy costs much less for a 25-year-old than a 75-year-old. It doesn’t matter if the policy is cash value, whole life, universal life, or level term, the cost of providing the life insurance component increases every year.

Yet most human brains have a psychological aversion to price increases. In order to please their customers with life insurance premiums that didn’t increase every year, insurance companies came out with level term policies. Essentially, the premiums are averaged out by overcharging in the early years of the policy and undercharging in the later years.

Whole life and universal life insurance policies don’t have that same averaging. To be “permanent,” the premiums must be much higher in order to fund a savings account that grows over time and is often used to offset a significant portion of the death benefit in the later years of the insured’s life. Usually, if the insured cancels the policy, a portion of the premiums will be refunded.

A cash value policy may occasionally be a good estate planning tool, generally for those with substantial wealth. It might be used to fund an irrevocable life insurance trust upon the second spouse’s death, perhaps to pay taxes on an illiquid estate like a family farm or other property. It also can be used for those wanting to leave the bulk of an estate to charity and still provide income to their children. These strategies rarely apply to those whose primary goal is basic income replacement for their families.

One of the ironies of insurance in general is that we all know it’s essential and we all hope never to need it. For most people, life insurance is not really an exception to this. Its primary purpose is not to provide us with investment income, but to provide our families with income if we aren’t there.

Okay, I did it again in a recent column. And I got into trouble again. That’s what I get for using the F-word.

“Fiduciary.”

My most recent transgression was to point out the simple fact that insurance agents are compensated by commissions on the products they sell. They have no fiduciary duty to legally act in the best interests of their customers.

Every time I remind readers that sellers of financial products do not have a fiduciary duty to their customers, I get indignant responses from financial salespeople who seem to think I have accused them of being unethical.

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The middle class. Marketers target it. Politicians champion it. Economists talk about it. Most of us consider ourselves part of it.

Yet, when I’ve asked for a clear definition, I have not found anybody yet that really can tell me what “middle class” is.

I recently posted on Twitter that $90,000 was a middle-class household income and that it would take a nest egg of $3 million to generate that income in retirement.

A couple of my colleagues responded that my figures were way too high and accused me of being out of touch. As a lifelong South Dakotan, I’m used to being seen as “out of touch,” but the idea that $90,000 was beyond a middle-class income intrigued me.

I figured a few minutes with Google would point me to a definition of “middle class.” Continue Reading »

“It’s not about the money.” This saying has become almost a cliché among financial planners and therapists who help clients address the emotional aspects of their relationships with money.

We keep using this phrase because it is so true. Overspending, taking unreasonable risks, money conflicts that strain marriages, failing to learn from money mistakes, and a host of other problematic money patterns are not about money. They are about emotions. And since brain researchers tell us that 90% of all decisions are made emotionally, it literally “pays” to pay attention to your emotions. Continue Reading »

For a financial planner, there’s nothing like being featured in The Wall Street Journal. Unless, maybe, the featured story is about one of your long-ago investment mistakes.

Rick’s cautionary tale about buying a tax-lien certificate opens an article about using self-directed IRA’s to buy unusual investments. The piece by James Sterngold, “A Nervy Approach to Retirement Saving,” was published in the online edition on May 17, 2013.

To learn more about self-directed IRA’s, or just to find out how Rick bought a house that wasn’t there, you can read the entire article here.

Eat your Ramen noodles when you’re young, and you won’t have to eat them after you retire. That’s the short version of the advice Rick offers in an article by Leslie Geary published May 15 at FoxBusiness.com. He is one of the financial advisors cited in ”Five Excuses Why People Don’t Save for Retirement.”

The article includes some excellent advice for anyone who hasn’t yet started saving for retirement. You can read it here.

“I’m not sure what’s wrong or what kind of surgery you need, but we have to operate right now.”

If you heard this from your doctor, you’d jump off the examination table and run for the door. Yet that’s essentially the approach the President and Congress used three years ago to pass a bill, optimistically called the Affordable Care Act, that was the largest transformation of the U.S. health care system in our lifetime.

During the frenzied debate our elected leaders made many promises as to the amazing benefits this legislation would bestow on Americans. After listening to speeches from President Obama, Speaker of the House Nancy Pelosi, and President of the Senate Harry Reid, I recounted those promises in this blog on March 21, 2010.

Let’s revisit those promises.
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It’s impossible for a financial columnist to please all of the readers all of the time. My recent column criticizing the Be Your Own Banker (BYOB) scheme drew the ire of several fans of whole life insurance. Two of them in particular, in a letter to the editor and a guest editorial in the Rapid City Journal, disparaged my integrity, my professional qualifications, and my math skills.

Part of the problem is that these readers interpreted my warning about BYOB, which I called “one step from being a scam,” as an attack on whole life insurance in general. That was not the case.

Admittedly, I’m not a fan of whole life as an investment. The purpose of life insurance, in my view, is not to provide retirement income or cash value, but to replace income when someone dies. For most people, the best and cheapest way to do this is through term life insurance. Obviously, someone who sells insurance will have a different opinion.

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People who successfully build wealth have one trait in common: they understand the art of frugality.

These unassuming millionaires know how to live on much less than they make, and they know how to save money.  But those behaviors alone aren’t enough.  Not spending money today does not always result in having more money tomorrow.

Frugality for its own sake can result in doing without things that matter to you, failing to take care of basic needs like your health, and living with a sense of deprivation.  It can also lead to spending more money, not less, in the long run.

Frugality for the sake of enhancing your life, on the other hand, features an eye for value.  Most people who build wealth are masters at the art of getting value.

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