Part three — The Final Recommendations for a Parent Left alone — the Moneywise Family Plan

Part one on June 14, 2014 and June 21, 2014 can be found on The Royal Gazette website under the links at the bottom of this article.

Our composite client, a widower, has asked us to provide him with the best investment options for his $200,000 savings, currently held in a very low interest rate certificate of deposit. He is focused on getting a high return, in order to make ends meet, given that he is now the sole parent and breadwinner in the family.

We meet with our widower, and deliver the plan recommendations to him.

It is always a challenge as a planner to present a plan that is palatable, doable, and understandable to a client.

The planning tradition of the past was to provide a lengthy detailed document that laboured on dramatically about risk quotients, indexes, interest rates, and so on.

Clients find these reports cumbersome, tedious, hard to decipher (unless the client is a planner, too, and in that case why would an outside planner be needed?)

What clients want to know is:

• How am I doing?

• What action do I need to take to reach my goals?

• How much will it cost?

• Will the plan work?

That’s it.

However, qualified planners need to assure that certain guidelines and structures are met by our composite client, in order for him to limit his risk of loss. Essentially, our composite case widower (or it could just as easily be a widow) cannot afford to lose any of his savings. The Poor economic environment, both within the family for current job prospects, and without in the general Bermuda recessionary environment. The future remains very uncertain, to say the least.

What is paramount for the client, in spite of his education goals, is that he is able to maintain his very minimal lifestyle. If he invests his only savings, and the loss is great, the residual financial condition will devastate his ability to keep his home and consider retiring, if at all.

Further, his chances of long-term market appreciation are lower than someone twenty years younger. The pressure to generate outsize returns is such that in the event of a market collapse that he may revert to investor behaviour patterns, selling out at the low values. At age 56, with only eleven years to retirement, he may never recoup those losses

Before he considers investing, these Structures need to be in place:

• a three-year, at least, cash cushion for family support ($150,000) — kept in a little to no risk account;

• a term life insurance policy to cover living and education expenses for his children;

• he needs a will, one that assigns a guardian for his younger child, and provides for disposal and guidance as to his property and distributes his assets correctly to his children;

• retirement pension beneficiary needs to be changed to his children;

• he can start contributing an additional small amount to his retirement voluntary portion of his National Pension Scheme account;

• he must find additional work to augment his part-time job;

• Finally, he cannot continue on his current path without an eventual breakdown. He is using his savings faster than anticipated. Thus, a serious frank family financial talk needs to be had with both children to inform them that his economic household budget is broken.

Their educations may be delayed. They will have to help financially as best they can. The older child (now adult) can work intermittently, between education courses. Additional scholarships can be sought.

Loans can be obtained. Success stories abound of thousands, no millions of people, who never had access to the normal educative track, persevering through years of night school, and related career-type options to obtain degrees.

What about that generous return? Investment Capital Market indexes in the US continue (through last Wednesday) into new record setting market highs this week. Europe, and Asia, both were reflective of US market conditions.

The client insists on receiving some investment options. While he wants a high rate of return, his financial profile deceives him as he cannot accept high risk. Often suggested: Build your own portfolio with individual securities, such as preferred shares that pay dividends in the six to none percent range. Contrary to what clients have told me over the years, preferred shares are not guaranteed, represent a risk concentration and can see a loss to a zero (for those of you who remember Lehman). He could consider exchange-traded shares for further diversification, but the client finally said that he does not really understand investments, could not manage them, and is just too tired coping as the Dad to learn.

He is a possible candidate for what are often call mini-portfolios, mutual funds that are heavily diversified and marketed by type of risk profile. The lower the rate of return, generally, the lower risk incurred. Readers will recognise them by their names: conservative, moderate, balanced, aggressive and so on. A generic mutual fund balanced portfolio (estimated 60 percent invested in stocks, 40 percent in bonds) over a ten-year time frame, has returned an average annual return around seven percent, or a bit higher. An average is just that, representing good investing years, and sometimes, very bad years with significant unrealised losses. Our composite client should consider one of two scenarios.

1. Leave the full certificate of deposit to mature.

2. Focus on obtaining additional work. Use those earnings to start an investing over time plan into a balanced mutual fund. A number of Bermuda banks, and investment firms offer this type of service where a minimum amount can be invested over time.

Alternative plan.

1. Keep $150,000 intact as an absolute cash safety net for the next three years.

2. Carefully place increments of the $50,000 freed up into a balanced mutual fund over time, a year is not unrealistic. You don’t want to invest $50,000 next week, only to experience an capital market downturn shortly thereafter.

Always do your homework first. This means learning about investments before you buy. You know how to shop.

Final thoughts. In reality, as a licensed qualified financial planner, and a conservative one as well, I cannot justify breaking that certificate of deposit for an investment reason for this struggling family. However, it is always the client’s decision.

This week, Bermuda banks just received another discouraging downgrade opinion on the credit quality of mortgage loans as non-performing mortgages continue to generate higher credit losses. Standard & Poors, the international credit rating agency projected that it will take, at least, another two years through 2016 to see a stabilisation in credit losses. Non-performing loan situations are generated by the inability of individuals and companies to meet their debt repayment obligations.

Bermuda remains in a prolonged economic downturn. Employers will continue to monitor projected revenues, while maintaining very, very lean overhead costs so that budget expenditures are not compromised.

Typically, bare bones operations do not invite significant employment opportunities in the near future. Individuals and their families close to the budget breaking line will continue to save (and hoard) every penny until more prosperous times return. Investing outside of their mandated Bermuda pension plan, if they are currently employed, is just not in the cards. The future of today is just still too uncertain.

Comments are invited. Keep in mind that space constraints never permit me to explore and define these ideas in any depth. Additionally, this article is for information purposes only. I am not your personal advisor, and any advice presented is not to be used for your personal financial planning. Please see a licensed qualified financial representative for additional help. Learn about investments. Knowledge is financial power for you.

Reference the prior articles.

Part 1 — June 14, 2014 A parent left alone — a Moneywise family plan

http://www.royalgazette.com/article/20140614/COLUMN07/140619829

Part 2 — June 21, 2014 A family financial plan for the education of children.

http://www.royalgazette.com/article/20140621/BUSINESS08/140629951

Martha Harris Myron CPA CFP Masters of Law: International Tax and Financial Services

Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland

President: The Pondstraddler* Life™ Consultancy providing international financial planning for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle.

Specific focus for residents of Bermuda, the premier international finance centre. www.marthamyron.com

Contact: martha@pondstraddler.com

* Pondstraddler. A person with one foot on each shore whose heart resides in both countries*