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May Newsletter

  1. 1. Company or DBA Name Street Address City, State, Zip Phone number Fax number Rep Name Email addressMAY 2011 Compliments of Matthew Cunningham “In this information-saturated era, we expect no surprises, yet we are constantly surprised. We have huge amounts of data, so we assume that risks can be calculated and avoided. But we also have exceedingly complex systems.” L. Gordon Crovitz, “Tsunamis of Information,” Wall Street Journal, March 21, 2011. Tsunami hazard sign.Which Stones Will Make BigRipples? In This Issue…If you hear the following phrases (or something like them), be on your guard: “We should have seen this coming.” Which Stones Will Make Big “In light of these facts, there is only one reasonable conclusion.” Ripples? Page 1 One is a statement about the past, the other about the future. Both statements embodythe belief that cause-and-effect relationships are at work in the universe, and that thosewho understand these relationships can both accurately discern the past and confidently Two Overlookedpredict the future. Principles That Can Theoretically, this paradigm is correct. But practical application of it is almost Cause (or Prevent)impossible. Why? Because there are so many inter related causes and effects. In alaboratory, scientists can isolate one or two factors, conduct focused research, and derive Big Ripples Page 3concrete conclusions that are both observable and repeatable. But while this informationmay give insight into the functions of a particular system or its interaction with a specificnumber of variables, the results may or may not have practical use in the “real world.” Estate Planning: For example, lab research may show a directcorrelation between cigarette smoking and the A Pebble Thatincidence of cancer. Further field studies may indicate Can Ripple forthat smokers do in fact have a higher incidence of Generations Page 3cancer than the general population. However, researchcannot explain why some smokers do not succumb tocancer. Why? Because there must be other cause-and- Life Insuranceeffect factors in play as well. in Estate Planning Perhaps there are genetic patterns or lifestyle Page 4choices that offset the negative effects of tobacco. Maybe age and gender make adifference, or geography plays a part in either contracting or resisting the disease. Asmuch as we know about the harmful effects of smoking, cancer and other related diseases, College-Loan Debt:no one can say with absolute certainty that abstaining from tobacco is guaranteed to keep A Millstone on ayou from getting cancer. Even with the benefit of hindsight, there is often no way to Graduate’s Futuredetermine which decisions, which environmental components and which genetic factors Page 5ultimately “cause” the events that come to pass. Economics is another field in which we encounter overwhelming complexity and alimited ability to determine which factors lead to success or failure. Ask 100 economists © Copyright 2011 The Bulfinch Group Page 1
  2. 2. to determine the causes of the real-estate bubble, or how to reduce the national debt, and you will get 100 different answers – withsupporting research. These differences of opinion aren’t because today’s world is more complex; the same divergence of opinionhas applied to assessments of previous economic events as well (after 80 years of debate, there is still no consensus over the causesof the Great Depression). This inability to adequately understand and respond to the general financial principles. These principles are statementscause-and-effect events that impact our lives can be of economic reality that are generally true; and if followed,disheartening. On one hand, we know our decisions will they will bring about positive outcomes, under almost allimpact our future. On the other hand, we don’t know circumstances. For example:precisely what the impact will be, good or bad, from thosedecisions. As we consider the future, each decision is like a • Save consistentlypebble dropped in a pond, and we are constantly asking, • Reduce debt“What ripples will come from this decision, and will the • Avoid financial losseseffects be good or bad?” • Maintain flexibility in your financial programs.Dealing with complexity: This is not new information and it is not complex. ButBetter Models or Basic Principles? can anyone dispute the validity of these In general, there are only two statements? Can anyone say, “You know,approaches to financial decision-making what’s killing you right now is that you keepthat stand any chance of succeeding. One saving money.” No. They might take issueapproach is idealistic and should be with where the money is accumulatingcontinually studied; the other is pragmatic (under your mattress as opposed to theand should be used in the real world. bank), but not with saving money. Likewise, The idealistic approach to financial can you imagine someone telling you, “Ifdecision-making is to develop ever-more only you had more debt, you’d be bettercomplex models to explain and predict off?”...or “Losing money is going to makeevents. Today’s computers make it possible you rich!” Please.for data to be assembled, sifted, and While these general principles alwaysanalyzed to a degree that was unthinkable even 20 years ago. work, notice they don’t quantify the extent to which theyAs a result, there are “new and improved” economic models should be applied, or guarantee the magnitude of benefits thatfor all sorts of issues. In theory, these historically-accurate, will follow. For example, the general principle to saveprobability-factoring, multi-scenario financial calculators consistently doesn’t say that if you save at least 10 percent ofpromise to deliver a better retirement, build a bullet-proof your annual income for 30 years at a 5 percent annual rate ofinvestment portfolio, determine whether it’s better to buy or return you will be guaranteed a comfortable retirement. It justlease, and inject “certainty” into your financial affairs. says that all other things being equal, saving money is always Some day, in a perfect world, the breadth and depth of a good thing to do, and saving money is always a betterour knowledge may finally match the complexity of our decision than not saving. And this is the key: Regardless ofworld, and when it does, we will unravel the mysteries, the details, deciding to do these things always moves youanticipate the unforeseen, and master the universe. This is a forward. It’s like dropping small pebbles in the pond, andnoble pursuit, and anything that adds to our financial knowing that every little ripple that hits the bank, no matterknowledge is worthwhile. However… how large or small, is going to be a good one. Even in their most advanced forms, these models are With the advent of complex financial models, all sorts oflargely dependent on human factors. Someone has to decide people have touted new “discoveries” and “secrets.” Some ofwhich data is relevant, and someone has to interpret it. these claims are pure marketing from people looking to makeInevitably, some of these human decisions will turn out to be a buck. Others come from intelligent, well-intentioned peoplefaulty, which means progress toward a perfect financial who really believe they have found the magic bullet formodel is going to be a long history of trial and error. financial profitability and security. Then remember thatKnowing these limitations, do you want your decisions tied meteorologists have a hard time explaining or predicting theto financial models that might prove to be in error tomorrow? natural phenomena that influence the weather. Financial Further, even with increased knowledge, understanding issues are impacted by at least as many factors – includingthe past and predicting the future are two different things. the often irrational actions of human beings. In the face ofAssuming a financial model could get the history right, there this much complexity, relying on a model to guide youris still no way to account for future events that might add decisions is a risky proposition. Better to stay with whatnew variables into the decision-making equation. Thus, while works than chase an ideal that cannot be found. Remember,better analysis and more complex financial models may make the results from principle-based decisions might not alwaysus more knowledgeable, these programs still aren’t smart make big waves, but the ripples are always positive. Overenough to predict the future and guarantee financial success. time, these positive decisions, no matter how small, have a Instead of futilely seeking perfect information on which cumulative make a perfect decision, the pragmatic view is to recognize WHAT PRINCIPLES GUIDE YOUR FINANCIALthat you can’t know or control all the variables. It is a more DECISION-MAKING?productive approach to recognize and consistently apply © Copyright 2011 The Bulfinch Group Page 2
  3. 3. ARE YOU RELYING ON FINANCIAL MODELS THAT effect. If there is something you can do today to improveCAN’T DELIVER? your financial situation, do it! 2. It is better to insure against loss than believeIF YOU ARE READY TO TAKE YOUR APPLICATION you can avoid it. Insurance can be a financiallyOF TIME-TESTED FINANCIAL PRINCIPLES TO THE exasperating issue, because every time you pay a premiumNEXT LEVEL, IT IS TIME TO SCHEDULE AN and don’t make a claim, it seems like money down the drain.APPOINTMENT. When your health, home, and automobile are still intact, the only thing that’s changed is the balance is lower in yourP.S. There is a Place for Complex checkbook. And with so many other aspects of your financialFinancial Technology life needing attention (like retirement, saving for college, etc.), the temptation may be to cut corners on insurance. Even though financial models of increasing complexity After all, maybe you will get lucky. Maybe you willmay fall short as predictive aids, there are many ways to continue to be healthy, your home will not be damaged, andeffectively apply technology in your financial programs. The no one will be involved in an auto accident. Maybe you canfirst is organizational, the second is accounting. even find statistics to prove the odds are on your side, andComprehensive on-line programs can consolidate, condense, justify dropping coverage, decreasing benefits or loweringand organize your financial data into an accessible and premiums. Maybe.manageable format. Once assembled, all sorts of accounting But in doing so, you have increased risk and addedinformation can be produced, like annualized total returns, uncertainty to your financial life. And many of these risks areallocation percentages, etc. Financial technology may not be not only things beyond your control, but financiallyable to tell you what to do, but it can do a great job of telling catastrophic if they occur. One unprotected event has theyou what you have, and how well it’s working. potential to undo a lifetime of financial progress. Many financial institutions have great on-line tools to Obvious examples of financial devastation might involvehelp you organize and assess your financial situation. Take disability or an early or unexpected death. Lawsuits and riskyadvantage of these investments could cause similar financial distress as Unlikely to happen? Perhaps. But since you can’t guarantee these One unprotected event has the potential to undo a lifetime of financial progress.TwoOverlooked events will never happen to you, insurance is essential.Principles That Even financial professionals sometimes underplay the importance of insurance, so it pays to keep this principle inCan Cause (or Prevent) Big Ripples mind with every financial transaction. Is there insurance Most of us are familiar with basic financial principles like involved? Should it be part of this decision? As the old adagethe ones listed above. But here are a couple of basic concepts says, you never appreciate insurance until you really need it.that are perhaps not as well known, yet just as important, And if you really need it, nothing else is as valuable.with great practical value. 1. Good decisions and bad decisions aremagnified over time. Economists use terms like “presentvalue vs. future value,” or “opportunity costs” to quantify thedifference between deciding to do something today as Estate Planning: A Pebble That Canopposed to waiting until some time in the future. Strip awaythe fancy language, it comes down to this: The sooner you Ripple for Generationsstart to make good decisions – and stop making bad ones –the better off you will be. It is an indelicate question, one that almost seems An extra dollar saved today may be worth hundreds or impolite to ask…thousands of dollars in the future. Similarly, an extra dollar What will happen toof interest paid is not only a present expense, but creates a your stuff when you die?loss in your financial world that continues into the future.Even though many of these decisions may involve small As much as it might seemamounts of money, they determine whether time is on your crass or rude, this is aside or working against you. Think about it: What would be legitimate and critical questiondifferent today if you had saved an additional $100 each for spouses, children, creditors,month for the past 10 years? Or what if you had avoided business partners, charities,credit card debt? Consistently making good decisions on even the government. The“small” financial issues today has a tremendous cumulative resolution of assets and obligations at one’s death is a © Copyright 2011 The Bulfinch Group Page 3
  4. 4. matter of great importance for all interested parties. In some However, not all estate assets are subject to the probatecases, the impact of estate planning may reverberate through process. Property owned jointly with right of survivorshipseveral generations. (such as bank accounts, home, cars) is not usually probated. Because of the significance of these end-of-life decisions, Instead, these assets pass directly to the control of the spouse,the disposition of one’s estate has long been regulated by children, or business partner, etc. with whom the asset waslaw. (In an 1854 essay on the purpose of government, jointly owned. Assets with named beneficiaries (lifeAbraham Lincoln wrote that one of the legitimate purposes of insurance death benefits, retirement plan benefits, individualgovernment, along with law enforcement, public roads and retirement accounts, and annuities) also are typicallyhighways, was to administrate “the estates of the deceased.”) transferred outside the probate process. These legal parameters are meant to protect rightful heirs,repay creditors and discourage theft and fraud. In some A Trust. A trust is a legal method of transferring property toinstances, these regulations also include determining if the an artificial legal entity. The person creating the trust isestate should be taxed. In order to receive these legal known as the settlor, and the individuals benefiting from theprotections, estate plans must be made in accordance with the trust are the beneficiaries. A beneficiary may be a familylaw and, in the absence of a legally valid plan, the member, a friend, a charity, even a pet. The person orgovernment reserves the right to administer institution who oversees the property and carries out thean estate according to its own standards. instructions of the trust is the trustee. Conclusion: If you are going to establish There are two kinds of trusts, revocablean estate plan, you must make sure it is and irrevocable. If you (as settlor) namedone correctly. yourself as the sole Trustee of your Trust during your lifetime, you will be able toThe Purpose of an Estate Plan manage the Trust while you are alive. If the An estate plan serves as a legal road map trust is revocable the settlor can change it orfor the disposition of your assets and decide to take the property back any timeobligations at the time of your death. Done during his/her life. If the Trust is irrevocable,properly, an estate plan not only ensures that the settlor cannot change it once it has beenall property will be distributed according to established.your personal wishes, but also attempts to As an artificial legal entity, a trust neverdeliver the largest distributions possible with a minimum dies. This means assets held in trust do not have to undergoamount of delay to the appropriate parties. Besides providing probate, even when the settlor dies. Instead, the trustfinancial certainty for beneficiaries, estate planning continues to operate according to its instructions on behalf ofencourages individuals to settle other important end-of-life the beneficiaries. The avoidance of probate can be a majordecisions, such as guardians for minor children, healthcare advantage in estate planning, and is one of the principlepreferences, and funeral arrangements. reasons many estate plans will include a trust. Considering the wide range of topics that impact thedisposition of an estate, a typical estate plan will often Other Issuesrequire consultation with a number of professionals, Except for Federal estate taxes, most estate settlementincluding lawyers, financial counselors, accountants and life issues fall under the jurisdictions of the individual representatives. Estate planning is not a do-it- Some states impose additional estate taxes at the state level,yourself project. others do not. Definitions for the survivorship rights of spouses may differ substantially in each state. TheseBasic Estate Planning Instruments ownership issues can be further complicated when Each estate plan is unique, and the legal and financial individuals own property or have business partnerships ininstruments that comprise the plan will depend on the size of different states. It is essential that the individual and his/herthe estate, the number of beneficiaries, and the purpose of financial and legal professionals are aware of thesedistributions. However, most estate plans will probably differences and have planned accordingly.include some form of the following: Besides an awareness of the estate issues unique to their state(s), individuals and their advisors must also stay abreastA Will. The most common estate-planning instrument is the of the constant fluctuation in federal estate legislation. In thewill. A will sets forth who will inherit an individual’s past decade, the estate tax has been a political football, withproperty at their death. Additionally, wills often appoint several drastic changes as the result. After failing to agree onguardians for minor children, name financial representatives, a long-term tax policy, Congress recently established newspecify funeral arrangements, and may enumerate other end- estate guidelines, but these are set to lapse after 2012. Withof-life details. each change in legislation, estate plans need a thorough To ensure that all of an individual’s assets and incidents review. Kelly Greene of the Wall Street Journal explained inof ownership are properly transferred, wills pass through a an April 16-17 “Personal Finance” report,legal process known as probate. Depending on the nature ofthe assets and the parties involved, probate may be lengthy All this means that families need to be preparedand expensive. This may result in considerable delays for for any contingency. The way many estate plansbeneficiaries receiving distributions, and possibly diminish are currently worded could cause them tothe amounts. backfire, either by triggering estate taxes or even accidentally disinheriting a surviving spouse. © Copyright 2011 The Bulfinch Group Page 4
  5. 5. • The proceeds are paid to the executor of theSIMPLE QUESTION #1: DO YOU HAVE AN ESTATE decedent estate. sPLAN? • The decedent at death possessed an incident ofSIMPLE QUESTION ownership in the policy.#2: IS THIS PLAN • There is a transfer of ownership by the InsuredCURRENT? within three years of death (three-year rule must beYOUR observed).PREPARATIONS WILL To avoid adding life insurance proceeds to the estate, theAFFECT FUTURE policy may be owned by children of the insured, or placedGENERATIONS. within an irrevocable trust under specifically delineated terms. Each of these options, along with several others,Life Insurance in Estate Planning should only be undertaken with input from competent legal and insurance experts. A life insurance policy is often a vital instrument in an Because of the financial leverage of life insurance (theestate plan, because a life insurance benefit delivers a ability to reserve a large amount of money for the future withspecific amount of cash upon the death of the insured. For the a small premium), it is an ideal financial instrument to protectbeneficiaries of an estate, life insurance can provide: the best assets in an estate and maximize distributions to beneficiaries. • ongoing income for living expenses, • educational funding, • liquidity to pay death taxes, “A millstone around your neck” • payments to settle outstanding obligations, Definition: a problem or responsibility that you • funding for business buy-sell agreements, have all the time which prevents you from • completion for retirement plans. doing what you want. Under good management instructions, in combinationwith other assets, life insurance can allow the estate to satisfy IF YOU ALREADY HAVE LIFE INSURANCE, NOWthe claims of beneficiaries, retain ownership of its most WOULD BE A GOOD TIME TO FIND OUT IF YOURvaluable assets, and buy time so other assets don’t have to be CURRENT COVERAGE CAN SERVE YOUR ESTATEliquidated at a discount. PLANS AS WELL. However, to be most effective in an estate plan, the lifeinsurance must be properly established regarding the designof the policy/ies and legal considerations. Some examples: College-Loan Debt: Policy Design. Because some estate plans will not A Millstone on a Graduate’s Futurebecome effective until the death of the second spouse, afinancial professional may recommend a second-to-die, or Want to give your children a financial advantage for thesurvivorship life insurance policy. This policy, which insures rest of their lives? Then help them graduate from collegeboth husband and wife, does not pay a claim until both without any debt, particularly student loan debt.spouses have passed. Because the claim is not paid until the As Tamara Lewin reported in an April 11, 2011, Newsecond death, premiums may be lower than if the spouses York Times article, “Student loan debt outpaced credit cardheld two individual policies. debt for the first time last year and is likely to top a trillion If the primary emphasis of life insurance in the estate plan dollars this year as more students go to college and a growingis to provide proceeds at death as opposed to liquid cash share borrow money to do so.”during one’s lifetime, some insurance professionals may also There are plenty of statistics supporting the long-termrecommend blended policies (i.e., a combination of term and economic benefits that coincide with a college education. Butcash value life insurance) which emphasize a guaranteed these benefits can be blunted by heavy debt burdens.death benefit, with minimal cash value accumulation. Consider the following statistics cited by Ms. Lewin: Ownership. Proceeds from life insurance that are • Two-thirds of bachelor’s degree recipients graduatedreceived by the beneficiaries upon the death of the insured with debt in 2008, compared with less than half inare generally income tax-free. However, while not incurring 1993.income tax to the beneficiaries and avoiding probate, these • Last year, graduates who took out loans left collegeproceeds may also become part of the deceased’s estate; a $1 • s with an average of $24,000 in debt.million insurance benefit could add $1 million to the value ofthe estate, and in doing so, incur additional taxation. And then, there’s this personal anecdote:According to Cathy Pareto, a Certified Financial Plannerwriting for, the inclusion of life insurance During the 2008 presidential campaign, Barack andin an estate occurs if: Michelle Obama spoke about how their loan payments after graduating from Harvard Law School were more than their mortgage payments. At that time, Mr. Obama said: © Copyright 2011 The Bulfinch Group Page 5
  6. 6. We left school with a mountain of debt. From a personal fulfillment and employment Michelle, I know, had at least $60,000. I had at perspective, a college education may provide an entrée least $60,000. So when we got together we had a to a long and satisfying career. But if obtaining a degree lot of loans to pay. In fact, we did not finish also means that other material aspirations will have to paying them off until, probably, we’d been be postponed or eliminated, the financial advantage is married for at least eight years, maybe nine. diminished. If you have children (of any age) who will want to attend college, these realities should prompt Ms. Lewin adds that Mrs. Obama said it took the royalties some serious discussions about tough alternatives. Forfrom her husband’s best-selling books to help pay off their example:loans. Beginning a career with significant debt obligations is • Is community college a better financial alternative,like entering a race with a grand piano tied around your particularly for obtaining undergraduate credits?waist. The dead weight of debt not only makes it harder to • Is a program of part-time school and part-timeget started, but also means it will take longer to reach employment a good idea, even if it takes longer tomilestones. And most college graduates will not be able to graduate?write a book to pay off the debt. In the NYT article, Lauren • Should military service be considered because of theAsher, president of the Institute for College Access and tuition assistance programs?Success, summarized the impact as follows: • Would your children rather have an inheritance or a If you have a lot of people finishing or leaving college fund? school with a lot of debt, their choices may be • Can any current financial assets be rearranged to very different than the generation before them. qualify for greater financial aid? Things like buying a home, starting a family, And…if your child’s college education is a priority, you starting a business, saving for their own kids’ should be thinking of ways to save for these upcoming education may not be options for people who are expenses. You should also be educating your child about the paying off a lot of student debt. financial ramifications of debt, helping him/her to understand the value of a debt-free start on his/her working life. And for many graduates, the dilemma of student-loan Like several other topics in this issue, small decisionsdebt is not going to be resolved after a few years of working. made today can make a huge difference in the future, both forIn the current environment, student loans are becoming more you and your children. The sooner you start preparing, thelong-term in their impact. Mark Kantrowitz, publisher of more resources you’ll have, as well as better options and, who has compiled the allowing your children to graduate debt-free.estimates of student debt, added this sobering thought: In the coming years, a lot of people will be paying off their student loans when it’s time for their kids to go to college. ! " # # ! " $ # ! " # % !" #$ %& & " % ()* " & & # $% % + , +-. / +( / . /+ Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS) 140 Kendrick Street, Needham, MA 02494, (781) 449-4402. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor. Field Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. The Bulfinch Group is not an affiliate or subsidiary of PAS or Guardian. Life insurance offered through The Bulfinch Group Insurance Agency, LLC, an affiliate of The Bulfinch Group, LLC. The Bulfinch Group, LLC is not licensed to sell insurance. PAS is a member FINRA, SIPC. © Copyright 2011 The Bulfinch Group Page 6