As featured in The Florida Bar Family Law Section Commentator
Presented by Cary Stamp
At the 2013 Florida Bar Family Law Section Fall Retreat, Elisha Roy recommended that family lawyers “take care of themselves.” Then at the publications committee meeting, she suggested that the commentator focus on mental and physical well-being issues. Her remark prompted me to ask, “What about financial well-being?”
Over the past decade, I’ve had the privilege of working with a number of family lawyers on their own financial and estate plans. I also work with corporate executives, real estate developers, construction company owners and affluent divorced and widowed women. There is a common pattern … individuals who are accustomed to setting goals and working toward them quickly understand the financial planning process. They realize that working towards a goal, such as building a nest egg for retirement, is a marathon not a sprint.
But those unaccustomed to setting long-term goals, can get sidetracked by short-term events and gyrations in the stock and bond markets. Often, at the first sign of trouble, there is a tendency to jump ship and abandon a well conceived plan. Of course, the plan can only be abandoned if it was conceived and implemented in the first place.
Here is a quick test I ask prospective clients to take to determine if they have a plan: Can you produce a document that details what your financial goals are, what your life will look like in retirement and the steps you will take to get there? If you do not have such a document or your immediate thought was “it’s all in my head,” you do not have a sufficient plan to get you where you want to be.
Quite simply, a financial plan is a business plan for your life. It doesn’t need to be elaborate or full of charts and tables. One simple page will do if it captures what you want to accomplish and how you are going to get there.
Everyone has different goals, and everyone prioritizes them differently. The more specific they are in terms of time and money … the better. Simply saying you want to retire comfortably isn’t good enough. However, writing down that your goal, for example, is to retire at age 66 with an income equal to 85% of your current take-home pay is much more meaningful.
If retirement is the number-one goal, we’ll start by examining a client’s retirement plan. Many small firms have a retirement plan that was established years ago and may not allow them to maximize their tax deduction and save as much as possible for retirement.
For example, some practitioners do not know that even if they have a small office, they can establish a 401(k) plan for a minimal amount that would allow them to defer as much as $50,000 per year. And if their spouse works in the firm, they could potentially double that deduction. That means a husband making a $50,000 annual contribution to his 401(k), assuming a 6% annual return, could have $659,040 after 10 years. If his wife can do the same thing, they’d have $1,318,079 for their retirement.
Pension plans are another way to produce monthly retirement income. Pension plans can make sense for a sole practitioner or small firm with significant income. Pensions are determined by actuarial calculations and can be implemented to create tax deductions of over $100,000 and sometimes as much as $200,000.
Once the retirement planning issues have been addressed, it’s important to examine current tax status, and estate plan and potential liability issues. Issues may include: lack of a liability umbrella policy, a corporate structure that does not allow for maximum deductions, and trusts that have been established but not funded.
Clients often want to pay for grandchildren’s education. My question to them is: How much do you want to pay and for how long? There is a huge difference between two years at a local community college and six years at an Ivy League school on the other side of the country. Once I know those specifics, I can come up with the best way to fund that goal.
Another common concern is how to transition the family business or real estate holdings to the next generation with as little estate tax as possible. For instance a client might want to put a vacation home in a family trust and she wants to make sure the trust has enough assets so the house can be enjoyed by her family long after she is gone.
The most common misconception about working with a financial advisor is that they manage clients’ assets and make a good return. Returns are important, but they are only important if clients understand how having additional funds will help them accomplish their goals. I hold the belief that the investment management part of the relationship is a process that any advisor can create if they know the client’s goals.
We also have a bias toward using lower cost investment strategies that passively track an index. Numerous studies have shown that most managers who employ an “active” approach to their process usually cannot exceed the returns of a benchmark index.
The number-one benefit to a written plan that details goals is that it will help clients stay focused on the big picture when temporary distractions pop up. A good financial advisor will not be able to predict the markets, will not make every investment go up, and will not provide top quartile returns every year. The main challenge we have with our clients is to get them to look past short-term “noise” and volatility. If we have done a proper job of allocating their portfolio based on their risk tolerance level and time horizon, we believe that downturns in the markets simply present an opportunity to invest more at an opportune time.
I liken this to a family law case where the clients go to war over the rug in the living room when there are millions of dollars at stake. In the long run, whoever ends up with the rug isn’t going to realize much impact on his or her financial well-being. They have chosen to focus on a minor detail. And they could probably buy a few new rugs with the fees spent on the issue. Likewise, market volatility is a sometimes painful, but minor detail that is present in every investment portfolio. A good advisor will help you with the emotional turbulence and keep you focused on your goals.
We use software that allows us to track our clients’ goals and determine if we need to make adjustments along the way. We schedule each of our clients for a monthly coaching call. We focus on different issues each month (such as taxes, estate planning, charitable planning and retirement income). But the frequency of these short calls serves as constant reminder to review goals and assess progress. It is not enough to put a plan down on paper, clients need to take action and have some accountability to the process. All change takes time, but with an investment of as little as an hour a month, you can change the course of your financial future and provide a greater sense of security for your family.
View the whole July issue of the Florida Bar Family Law Commentator
Cary B. Stamp, CFP®, CDFA™ is an independent financial planner and Certified Divorce Financial Analyst based in Tequesta, Florida. He is a graduate of the University of Iowa and the DePaul University Financial Planning program. He has worked with individuals and families since 1990 and has offices in Chicago and Palm Beach County. His firm, Cary Stamp & Co., offers a concierge level service to women clients, entrepreneurs, real estate developers and family lawyers. Cary Stamp & Co. is licensed for securities or insurance services in over 20 states. For more information visit www.mypalmbeachdivorce.com or www.palmbeachfinancialplanner.com