Social Security: Apparently, We’re All Doing It Wrong

A study was released last week that found that 96% of Americans choose the wrong time to start their Social Security benefits. With the option to begin guaranteed payments as early as 62, more retirees are electing this premature option than should, according to the study.  If someone elects to wait until age 70, for example, they would receive an annual benefit increase of 8% and that gain would be locked in as a guaranteed stream of income for the rest of their life.

The key takeaway from the study (that there is an optimal time for Social Security and most people do not choose it) is a worthy point to make, but I am always leery of financial decisions viewed in the aggregate.  This particular study looked at 2,000 households and ran over 1 billion scenarios to calculate the right time to make the Social Security decision.  The problem is that the math of retirement income is only part of the story when making these kinds of financial calls. It is a very personal decision that can have a lot of subjective factors, too.

Before we ever get to ideas about maximizing income here are a few ways to frame conversations around Social Security in your family:

  • Know what your income gap is and how best to fill it. Make sure you know what your expenses are in retirement before you think about drawing income. That way, if you do opt to delay Social Security you know how much you will have to draw from other savings to meet your expense needs.
  • Be mindful of how your other savings might be needed throughout the course of retirement. Social Security provides an income stream, but it does not provide lump sums that help with larger expenses like home improvements, car purchases, or the potential for larger health related bills at the end of life.  Be careful in spending down too much of your outside savings just for the purpose of maximizing Social Security.  There should be a balance between the right amount in savings and the right amount of income.
  • Consider the balance between other streams of income and Social Security. A couple with pensions, a single person with substantial retirement accounts, or a business owner who just sold the family business might be living similar lifestyles but their decisions about Social Security timing can be totally different because of how they will generate income in retirement.  Take the time to learn how income can be created from all of your assets and then approach the Social Security conversation from your unique position.

The reason people often lack confidence around their Social Security decisions is because of what they hear from friends or because of what they read in an article. I can’t count how many times I have heard, “my friend told me I need to do ______ for Social Security because that is what they did.” This is one of many financial decisions that you can’t make based on what someone else has done.  The exact right thing for your friend to do with their retirement income could be the exact wrong thing for you to do and the reasons are not always rooted in dollars and cents. If you feel ill-equipped to figure all of this out on your own, schedule an appointment with your local Social Security office and then meet with a Certified Financial PlannerÔ.  Our team takes a comprehensive view of your income AND expense situation, make sure someone does so for you. The financial industry does not do a great job of educating investors about these kinds of decisions, but if you do have a trusted advisor, he or she should make Social Security part of your meeting rhythm.

She Thought I Was Broke Until I Proposed: Money Conversations in Marriage

It is wedding season and couples are in the mindset of new possibilities and building on what they already know about each other’s hopes and dreams. As they progress toward common goals, every couple has a unique way of working together; A language and a rhythm unique to them.  Through dating we develop an insider’s perspective on what makes our significant other tick.  We know where they are coming from, where they are going, and who they are at a very deep level…on most topics. One area that is often overlooked, though, is learning the financial habits and behaviors that our partner brings to the relationship.  No wonder, then, that money issues so frequently add stress to marriages.

I know first-hand what it was like to not ask the right questions up front. When I proposed to my wife, we had yet to live in the same city, so we spent hours on the phone talking about everything.  Except money.

At the time, I was a First Lieutenant in the Army and my soon to be fiancé was a pharmaceutical sales rep.  She thought her income was well above mine, but in fact we made the same amount. She assumed that I made so little as a junior officer that she frequently offered to pay for dinners and dates.  With a standing offer to “Go Dutch”, you can see why I wasn’t too hasty to reveal that I was actually saving a good bit each month.  Little did she know, that savings was going into an account to buy her an engagement ring.

When I did pop the question, we spent the afternoon calling family and sharing the good news.  That night, though, the conversation took a very practical turn. We sat down after dinner and had our first financial conversation about how to save for the wedding and honeymoon. “How much do you make?” “How much do you have saved?” We did not even know the basics. The dinner bill ended up on my side of the table much more often after that.

In addition to assuming the facts about our situation, we also had assumptions about habits.  For example, my fiancé had seen me swiping a card for every purchase since she met me.  She asked, point blank, “How much credit card debt do you have since I see you using plastic for everything?”  “None”, I said, “I use a debit card, not a credit card.”  She was not familiar with the distinction and after talking it through was much more reassured about my financial responsibility.

We look back on that first night of being engaged as an important launching point for all of the financial conversations that have occurred since.  Here are some hard-earned observations for the newly married or those looking to spark the financial conversation in their relationship:

  • Start by putting all that you own and owe on one page. This personal balance sheet can provide clarity on where you are, before you talk about where you are going.
  • Talk about priorities that are very specific and big. Decisions on career, home ownership, and lifestyle are some of the biggest you will make as a couple.  Don’t wait until there is a job change, or a need to move before having conversations about what you value most.
  • Set goals that have small steps. This is how the elephant is eaten.  Set an emergency savings goal.  Prioritize the repayment of debt. Pay yourself first. Make sure you can see victories from time to time and celebrate them.  Small goals accomplished frequently will help you avoid complacency or the urge to reach for a “get rich quick” option.
  • Look for ways to build habits in common. It is fine to have a division of labor when it comes to money.  One of you might have a habit of managing the monthly budget while the other handles the investments. That is how our family works.  It works best when you each check in on a regular basis to update one another on progress in each of your roles.  Communication is the most important habit you can have.

I have worked with families that are in great need of getting their financial affairs in order and others who are super organized, but it is all run by one spouse.  In both cases, a common sense of the couple’s financial health needs to be built by having conversations about money.  The earlier in the relationship, the easier (maybe not on your engagement day), but it can be done at any time in your relationship. If the topic seems overwhelming, a good financial planner should serve as a listener and facilitator. Waiting to talk with a spouse about money can create stress and anxiety, while healthy dialogue about wealth can be part of the unique language and rhythm of a happy couple.

A Little Fear Goes a Long Way

In March, the actor Luke Perry passed away at the young age of 52 from a stroke.  Shortly after his death, I read an article in Forbes describing how Perry was prompted to draft a will just a few years ago after a cancer scare.  With a full slate of recent celebrity deaths that highlight poor estate planning (Tom Petty, Aretha Franklin, etc.), it was refreshing to think that this particular star had his affairs in order.  Why were they in order?  Because he had fear.   When the risk of cancer was presented, Luke Perry had to think about mortality and the impact on his family if his wishes were not clear.  We don’t know if absent that fear he would have taken the initiative to draft a will.

I would not recommend acting emotionally based on fear when managing your health and wealth, but it is such a strong motivator and can be used to make positive changes.  Here are some positive and negative outcomes that emerge from deciding based on fear:

Good decisions driven by fear:

  • Reviewing your estate plan. A brush with mortality or a bad family estate experience can cause us to schedule a meeting with the estate attorney that has been put off for too long.  Consulting with an attorney can help pinpoint the risks unique to your family situation and also make sure your wishes are documented in the event medical decisions need to be made for you.
  • Getting regular health screenings. Seeing a friend fight cancer can be a wake-up call to the health risks that come with aging.  The fear of not being there for our families can help to overcome our reluctance to get to the doctor’s office on a regular basis.
  • Finding the proper levels of insurance. Young families especially need to consider how to replace the earning potential of spouses and what the impact of passing at a young age would be on their financial plan.  The fear of your family not having enough money to support financial goals may be an incentive to add or increase coverage. (Caveat to Follow)

Bad decisions driven by fear:

  • Moving to cash when the stock market drops. It is natural to seek safety when the market is falling, but moving to cash is a sure way to lock in losses. Timing the market is impossible to do and trying to do so can cause performance to suffer
  • Focusing on one particular risk. Call this recency bias or our tendency to “fight the last war.” If we focus too much on the things that just happened, we can be blinded to other risks that are possible in the future.
  • Seeking too much safety. This is caveat to the insurance note above.  It is possible to pay too much in premiums for too much insurance coverage because of a fear of dying young.  Make sure you have a financial plan and know how much coverage you need and of what type before piling on policy after policy.

Our life experiences give us all different fears, but it can be constructive to take some of those fears and turn them into action.  A financial advisor should help you step back, address what scares you in a positive way, and help to monitor the risks that could be on the horizon.

Remembering Teddy

My family’s commitment to helping build the Reilly Children’s Hospital at Lehigh Valley Health Network was recently profiled in the hospital’s Generosity report for Winter 2019.  This project has given my wife, Gina, and I purpose and a way to remember an important member of our family: Our son, Teddy.  Here is the article as it recently appeared…

Gina and Dennis Morton’s second child, Teddy, arrived on schedule at Lehigh Valley Hospital-Cedar Crest on Dec. 15, 2008. But the couple and Teddy’s medical team immediately knew something was wrong.

Devastating Diagnosis

“Teddy was born with tiny black and blue marks all over his body,” Gina says. The next day, test results confirmed the worst possible news: Teddy, with a reddish tint to his wispy hair and blue eyes, had acute myeloid leukemia (AML), a type of blood and bone marrow cancer. The diagnosis was rare. Teddy was only the 31st case of congenital AML on record in the world.

Compounding matters, little Teddy had to be transferred to a hospital in central Pennsylvania for chemotherapy because Lehigh Valley Reilly Children’s Hospital didn’t yet exist. With no family close by, how would the Allentown couple take care of 2-year-old Charlie, Teddy’s older brother, with Teddy in the hospital in Hershey? At the time, both sets of grandparents were still working.

“Sometimes the hardest part is not the sick child but figuring out how to manage the rest of the family,” Gina says. Daily, Gina had to decide between visiting Teddy in the hospital or staying with toddler Charlie, while Dennis commuted after work from Allentown.

A Glimmer of Hope

After 10 days of struggling with the juggling, however, “we had a glimmer of hope,” Dennis says. Teddy was well enough to be transferred to his own room in the hospital’s main floor, and the family spent Christmas Day together. With Charlie playing in the room and little Teddy looking on, “we had a glimpse of what normalcy just might be,” Dennis says.

After two rounds of chemotherapy, however, Teddy’s cancer returned, along with a diagnosis of RSV, a respiratory infection. “Teddy was just fighting so many things,” Gina says.

Yet, the couple held out hope. After all, Teddy was smiling, gaining weight and showing hints of improving, so much so that Dennis decided to spend a Sunday night at home in Allentown so that he could be rested for work on Monday. But at 11:30 p.m. that night, the hospital called. “I raced across the state, hoping to see my son before he died,” Dennis says. Luckily, Dennis made it. At just 4 months old, Teddy passed away in Gina and Dennis’s arms the next day, April 21, 2009.

Quality Care Close to Home

It’s difficult to make sense of such a loss. But as a result of their experience with having to travel so Teddy could receive medical care, the Mortons came away knowing one thing: Having access to children’s hospital services right in the community would have made their heartbreaking experience better if not for the simple fact that both Dennis and Gina would have been able to spend time with Teddy.

Although Lehigh Valley Reilly Children’s Hospital is now available, the Mortons are sharing their story and raising awareness about the impact your support can have to ensure that children’s hospital services continue to be a vital resource for local children and their families.

The couple is also making a difference financially for the Lehigh Valley Reilly Children’s Hospital. In addition to a substantial individual gift, they have also committed to an aggressive fundraising goal. They have involved their family and friends, as well as hosted events and one-on-one meetings where they share their story and describe the benefits of having a children’s hospital in the community. Their family’s loss inspired a profoundly personal cause.

“We need to keep quality care close to home,” Dennis says.

Morton Brown featured in Family Business magazine

I had the opportunity to write for the most recent edition of Family Business magazine on how financial planning for each member of a family business can help bring clarity to strategic decisions. Clarity on the personal impact of decisions is critical for closely held businesses. I hope you enjoy…

Developing Confidence and Clarity in Family Business Decision Making

As published in Family Business, March/April 2019

Our family relationships and our feelings about money bear some interesting similarities. A lifetime of interactions with relatives, especially in a business environment can create complex relationships with a range of strong emotions. We have all heard siblings talk about their childhood in ways that would make us think that they were raised under separate roofs. Each individual is affected in unique ways by their interpretations of childhood events and the inevitable drama of youth.

Our relationship with money can also be influenced by what we witnessed growing up. The risks we saw others take and the impressions that our environment left on us can guide the way we make financial decisions. The desire for gains and the fear of losses when it comes to wealth often emerge under stressful situations. When we combine the emotions of financial success or failure with the close, complicated relationships indecision and confusion can be the result.

When making strategic decisions, family business owners need clarity around the overarching goals of the business, the values it represents, and the roles that each member plays in future success. Each decision maker, however, brings a unique set of traits and experiences to the table.  Outside of their common experience in the business, their family situations, personal priorities, and experiences with wealth can be quite different. Those differences can bring added stress when business decisions have very personal implications.

Personal financial planning can help provide clarity and confidence. That confidence can help diffuse some of the emotions that can arise when deciding to innovate, transition, or scale. Each family member should be able to understand how the levers pulled within the business affect their personal financial situation.

The family business can provide a sense of identity for individual family members as well as the family collectively. There is a strong sense of belonging to something greater than oneself, sharing values and accomplishments while also pursuing personal goals.  However, balancing what is best for the senior members of the business and those who are preparing to take the next step forward can be challenging. Each party will consider, “How does this work manifest as wealth for me and my beneficiaries?” Each generation’s judgement might be influenced by their personal relationship with money. 

In one family business we advised, a generational transfer was just about ready to proceed. The next generation was prepared to assume the mantle of leadership, and there was clarity on the strategic goals of the enterprise. Yet the current leader struggled to embrace his personal financial plan. The wealth created by the business was what he knew and trusted most. He believed the business was the safest part of his balance sheet.  Because of that perception of safety, the wealth that they managed outside of the business was invested in risky, illiquid assets.

That approach to risk management worked for him, but it hindered the transfer of the business to the next generation. The majority owner could not bring himself to leave the family business because he did not trust that he would be financially secure if he retired.  While the family had sufficient wealth to provide for security, the owner preferred to maintain the current balance of risks because they were what he knew.  

Family business and money are both personal and complex.  There is no silver bullet solution that will work for everyone. The best way to manage the process is to begin wealth management conversations early on, so there is understanding well before critical decisions like this. 

The goal is to have all business owners come to the table with the highest confidence in how they define financial success and what role the business will play in that success.

Establish priorities.

When the source of family wealth is being discussed, uncertainty feeds emotion. If the business has provided a sense of identity for a family over many years, the way each generation responds to change is likely to vary. A member of the business may have a clear sense of who they are as part of the larger organization and in the wealth picture of the family but may have less clarity on the opportunities and challenges that role creates for them. The priorities of the business must be clear to all involved in order to achieve alignment, but each individual would also benefit from identifying priorities for their own family and wealth plan. Income, wealth accumulation, and even status within the business community and social circles must be balanced delicately. 

It helps to create a framework of priorities that recognizes that business goals will be collective but financial goals are very personal. The common priorities could be broad and typically long-term, like passing on the family values through the business across multiple generations. A more personal priority might be to understand how different sources of income, both active and passive, are supporting a lifestyle. That way, if courses change or timelines are adjusted, the impact on the highest priority goals would be understood.

Know your individual biases.

Behavioral economics is a field that is quickly making its way into advisor’s day-to-day conversations with clients. Insights from the field can help us understand why we think the way we do and under what conditions we might be prone to failure. 

Family business owners are particularly subject to several types of bias. One is the “endowment effect,” the belief that what we already own is more valuable than all alternative options. This phenomenon was at play in the previous example of the business owner who was unwilling to relinquish the reins because of fear of the unknown.

By assigning a higher value to our current status, are we creating paralysis for the business? Each member of the business must understand the range of possibilities for both their wealth, their profession, and their family. Evaluating how each option would affect their unique circumstances will build confidence that they are making an informed decision.

Another behavioral economics concept is the “illusion of control,” the mistaken belief that we can influence the outcomes of situations that are actually not under our influence.

Consider a senior-generation  member who owns a stake in the family business, but also has real estate holdings, interests in other closely held businesses and brokerage accounts scattered about. The only unifying factor in this complex balance sheet is the hand of the owner coordinating it all. From the outside these holdings look disjointed, but the owner feels the assets are under control.

At some point – perhaps for the benefit of a surviving spouse or to achieve transition of the business to the next generation – the owner must shift focus away from control. Instead, the goal should be creating a unified purpose for all assets. What is the role of each asset in providing income, growth, or stability? If the owner were no longer around to manage it all, would the heirs be left in a chaotic situation?

A team that includes a financial advisor, an accountant, and an attorney can teach business owners how to understand and master their biases. 

Clarity about our circumstances allows us to calmly assess the changes and understand their impact. In the dynamic environment of a family business, an understanding of money and wealth can help alleviate the strain and emotions that can emerge when key decisions are on the table. Confidence in business strategy and personal financial clarity make generational transitions more comfortable.

Contact Dennis

Important Disclosures

How Life Took Me By Surprise

Planning for your future may feel abstract because no one truly knows what will happen and when. We do our best to prepare, or at least be aware, of the expected, but how well prepared are we for the unexpected? What happens when life throws you a curve ball?

 

Over the past year my family’s plan was put to the test in a very personal way. Many of my clients and friends know I enjoy living an active lifestyle. The majority of my Saturday mornings start with a 10+ mile run at 6am (sometimes 5am), with an amazing group of women who are just as crazy as I am. Last May one of my goals of qualifying for the Boston Marathon was achieved after completing the Run for the Red Pocono Marathon in 3 hours and 35 minutes. I was thrilled to qualify and promptly booked the trip for my family and I to head to Boston for the April, 2018 race. Registration in September confirmed my admittance. Everything was going according to plan… until October.

 

Less than a week after attending and supporting a Breast Cancer awareness event, where I learned that 1 in 8 women will be diagnosed with Breast Cancer, I found a lump. I was not overly concerned, I knew most lumps were harmless. But, after a litany of tests, on October 27th, I was diagnosed with Invasive Ductal Carcinoma: Breast Cancer. The month prior I celebrated my 38th birthday by cutting off 11 inches of my hair and donating it to Pantene’s Beautiful Lengths, a non-profit that makes wigs for women and children battling cancer. I had no idea at the time that I would be amongst the warriors.

 

Hearing the words of my diagnosis was surreal. It simply didn’t make sense. I live a healthy lifestyle, I’m young, and I have virtually no family history of any cancers. But all of that didn’t matter. Cancer was my sudden new reality and it was out of my control.

 

I was inundated with doctors’ appointments and gathering as much intelligence as possible.  Professionally, I prepared to be out of work for a few weeks after surgery, which was scheduled days after Thanksgiving. On top of it, I still had my pre-cancer busy life, the ever-present juggle of full-time work, full-time wife, and full-time mom to my 8 and 5 year-old children Caleb & Amelia. My husband, Deke, was incredibly supportive and did his best to put my mind at ease. We spent hours researching and discussing all the possible outcomes, treatments, surgical options, even communication. How and what were we going to tell Caleb & Amelia?

 

There were still a number of unknowns regarding my cancer. I knew I had an invasive form, which meant it could spread easily. The cancer was caught early and my team of doctors at Lehigh Valley Health Network was optimistic, but I wouldn’t know the extent of treatment until after my surgery.

 

Although I knew I likely would not need it, it gave me great peace-of-mind to know that I had plenty of life insurance. My family’s financial life would not be disrupted if, heaven forbid, something went awry. On more than one occasion during those first few weeks Deke and I reminded ourselves how fortunate we were to have quality health coverage, disability insurance, and life insurance in place. We shuffled things around to increase our emergency cash reserves, simply to make us feel more comfortable. We had proactively taken steps pre-cancer to ensure we had adequately addressed potential risks and had enough flexibility to adjust the pieces of the puzzle. Having a plan in place gave us the financial confidence we needed, to allow us the freedom to focus on getting me healthy and maintaining a happy and normal life for our children.

 

At Morton Brown Family Wealth, there are a few themes that consistently run through the many financial planning conversations we have. Understanding the potential risks that could derail a successful outcome and building in flexibility at each decision point, are two of the more common discussions I have with clients.

 

Risks can come in all shapes and sizes, both within and outside of our control. We all have a level of control over how much money we spend and what we spend it on. That being said, it can be a challenge to find the right balance between our needs and wants. Paying insurance premiums is not nearly as exciting as traveling on an extravagant vacation. But without the safety net of insurance in place, we may be placing ourselves or our families at risk. My husband and I couldn’t control my cancer, but we could control how we utilized our resources to prepare for the unknown. We didn’t know if and when we would need to draw upon emergency reserves, but we consciously maintained accounts that could be accessed quickly and easily.

 

It is important to talk through the risks that could impact your family’s goals with your advisory team to ensure steps are taken to build in appropriate protections. These are not always easy conversations. It may force families or individuals to face their fears or imperfections (which we all have). A good advisor is a good listener. He or she will serve as a guide to help you navigate through the uncertainty and provide clarity, so you can make good decisions.

 

It is our mission at Morton Brown to help others build their confident futures, so they are free to pursue their passions, vocations and opportunities. If I can pass along the same peace-of-mind that I had, knowing my family will be okay, we will be successful in our mission.

 

Now, after 3 surgeries to eradicate the cancer and restore my body back to “normal”, I am cancer free! Fortunately, it had not spread far and was fully removed without the need for chemotherapy or radiation. One of the MANY things I am grateful for. Even though I had to take breaks from physical activity to allow my body time to heal, I often reminded my team of doctors that Boston was on the calendar. For me, it was a great motivator. I am proud to report that I was able to train and compete in Boston’s 122nd Marathon on April 16th, less than six months after my diagnosis, and finished in under 4 hours, an achievement I will never forget.

Katie Brown

 

P.S. I am extraordinarily grateful for all of the support I have received over this past year. Many of you reading this have reached out with an open hand, a kind note, a shoulder to cry on, or a smile to lift my spirits. Thank you always.