All investors are not created equal. That’s why financial planners start their first client meetings with a discussion of money attitudes, goals and risk tolerance – the driver at the root of all investment decisions. Some planners do this by general conversation, others by detailed surveys they ask their clients to fill out.

The survey route can be a more valuable tool because it forces clients to face their money issues, perhaps for the first time. Despite the difficulty in facing up to such key issues, individuals get a better idea of where their money strengths and weaknesses really lie.  Often, the real difficulties lie in how money is spent.

The real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, your money viewpoints and current methods of handling it will inform every decision you make about it in the future.

The most important thing a questionnaire can reveal is your true money priorities and behaviors. Trained financial advisers, such as CERTIFIED FINANCIAL PLANNER™ professionals – use both conversation and surveys to reach some firm answers that might surprise you.

Are there particular money types? In reality, you’ll find quite a number of surveys out there that define money types in particular ways, but you’ll find personalities that are common on the scale from conservative to liberal. Deborah L. Price, a Financial Planning Association member and founder and CEO of the Money Coaching Institute, offers these scenarios in an article titled, “What’s Your Money Personality?”:

The Innocent: Price notes that innocents often live in denial, are easily overwhelmed by financial information and rely heavily on the advice and opinions of others. They tend to be the most trusting because they generally don’t see people or situations clearly – which leaves them open to bad decisions at best and fraud at worst.

The Victim: She notes that victims are people who tend to live in the past and blame their woes on outside factors and situations they claim they can’t control. These people may have been abused, betrayed, or have suffered some great financial loss, but they generally see life as a self-fulfilling prophecy that they can’t change.

The Warrior: Generally seen as a successful person in the business and financial worlds, they will listen to advisors, but they make their own decisions. They tend to be great caretakers.

The Martyr: These people generally put other people before their own financial health. They use their money to rescue others based on their high expectations for themselves and the people they’re rescuing, but these decisions may be costly in the long run.

The Fool: The Fool, explains Price, is a combination of the Innocent and the Warrior because they have no clue about what they’re doing but they’ll act fearlessly. They are financially adventurous and they act on impulse.

The Creator/Artist: These people often have a love/hate relationship with money. They’re constantly struggling to make their finances work, but they often feel that caring about money means something bad.

The Tyrant: price reports that this type hoards money and uses it to manipulate others. They may have everything they need, but they’re never comfortable with their lives because they fear losing control.

The Magician: Price defines the The Magician as the ideal money type. They’re aware of their circumstances and responsibilities and can see situations very clearly.

A financial planner tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:

1. How would you describe your financial status right now?
2. What’s important about money to you?
3. What’s your family history with money?
4. What do you do with your money?
5. If money wasn’t an issue, what would you do with your life?
6. Has the way you’ve made your money – through work, marriage or inheritance – affected the way you think about it in a particular way?
7. How much debt do you have and how do you feel about it?
8. Are you more concerned about maintaining the value of your initial investment or making a profit from it?
9. Are you willing to give up that stability for the chance at long-term growth?
10. What are you most likely to enjoy spending money on?
11. How would you feel if the value of your investment dropped for several months?
12. How would you feel if the value of your investment dropped for several years?
13. If you had to list three things you really wanted to do with your money, what would they be?
14. What does retirement mean to you? Does it mean quitting work entirely and doing whatever you want to do or working in a new career full- or part-time?
15. Do you want kids? Do you understand the financial commitment?
16. If you have kids, do you expect them to pay their own way through college or will you pay for all or part of it? What kind of shape are you in to afford their college education?
17. How’s your health and your health insurance coverage?
18. What kind of physical and financial shape are your parents in?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation might affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you!

March 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP , a local member of FPA

David Bly

Nobody Owes You Anything: From Gardener to Entrepreneur

The average Nicaraguan is born in a shack with a dirt floor. He earns less than $15 a week.

“E,” my gardener in Nicaragua, does much better than that. But he is still, by U.S. standards, poor. Since I am in daily contact with E when I’m there, I often think about how I can help him earn more money. He wants more material goods — and who can blame him, when he sees how “well” we gringos live (in person and on television)?

Several years ago, I was tempted to give him the few thousand dollars it would have taken to make his house one of the nicest in the hamlet where he lives. But I knew from experience that it would do him no good. It would go as quickly as it came. Given money always does.

Worse, it would reinforce the very bad idea that money comes from me to him, instead of from his own labor and ingenuity.

Because I wanted E to have a nicer house and because I wanted him to understand that money represents something of value (hard work, enterprise, etc.), I gave him the opportunity to do some extra work for me.

Since he was already being paid for gardening, I told him I’d pay him considerably more on a per-hour basis than what he was making on a salary — but to earn it, he had to work in his spare time and develop more valuable skills.

He began by learning to paint and do a little carpentry. Then he learned how to do a bit of plumbing and electrical work.

About two years ago, we switched from hourly pay to job-related pay. This gave him the chance to learn how to estimate his time and write up bills and keep receipts and even to negotiate (with me!).

Today, he has the house I would have liked to give him years ago, but he got it with his own efforts. It wasn’t a gift, and he knows it.

He’s also used some of his extra earnings to build and stock a little store that sits in front of his house. His wife works there. It provides his family with a second income.

In his transformation from gardener to entrepreneur, E faced an obstacle that was greater than his lack of skills.

E went to grammar school (the only school they had) during the Sandinista years. The Sandinistas, to remind you, were Communists — so E was taught two very dumb ideas about wealth:

• Everyone is entitled to an equal share of it. (“To each according to his needs.”)
• Those who have more than others should give it up. (“From each according to his means.”)

These ideas move very quickly into thoughts like:

• “It is the responsibility of my government to take care of me.”
• “It is the responsibility of my boss and the business I work for to make me secure and financially successful.”

When E met me, the path to wealth was through Michael Masterson because Michael Masterson, his boss, had the money that E wanted. He didn’t want to have money like me. He wanted to have my money.

He saw money as a static thing. He believed that there was just so much of it in the world, and the only way to get some for himself was to get it from someone else. Since I was the only wealthy guy he knew, it made perfect sense for him to base his strategy for growing rich on “101 ways to talk Michael Masterson into giving me money.”

It is a very good feeling to know that E doesn’t feel like that anymore. I am still his biggest client, but he has done fix-it jobs for other homeowners in our community — and he has the extra income from his store.

Wrongheaded ideas about wealth are not unique to Communist countries. They exist in every country of the world, including the United States.

• Some people think they are entitled to be taken care of by the government. The result: They spend their time applying for government handouts.
• Others think that all the profits of a company should be distributed to its workers. The result: They’re never happy with what they earn.
• Still others think that no one is entitled to have more money than they have. The result: They keep trying to get people they know to give them some of theirs.

None of that will make you wealthy. In fact, it will make it harder for you to acquire wealth. Every minute you spend thinking about or asking for money you didn’t earn is a minute wasted and a bad habit reinforced.

Becoming wealthy in America s not difficult if you are willing to work for it. Anyone who is willing to do what E did can enjoy a much higher income and, eventually, financial independence.

It starts with recognizing that you are responsible for your own future. You must reject every idea that is about acquiring wealth for free. That includes blaming others for your situation — however bad it may be.

The next step, as E learned, is to acquire financially valuable skills. For him, that meant painting and carpentry at first — and later, the basics of owning a business. You probably already have a financially valuable skill — something you know how to do better than just about anyone else you know. You can build on that by acquiring marketing skills. And then management, negotiating, and the other skills that made E the successful entrepreneur he is today.

But to begin, you must overcome inertia. Inertia is the enemy of every worthwhile goal.

Inertia is the reason you can’t find the time to start developing the skills that will bring you financial independence. Or the reason you start, get busy… and then forget about it. Inertia is every excuse I have ever heard from people who return to ETR’s wealth-building bootcamps year after year and tell me why they haven’t yet started turning their dreams into reality.

Inertia is the problem, and there is only one way to overcome it. That way is to take action. Some significant, positive action that will get you going, even if you are not now sure exactly where you want to go.

The Internet abounds with self-help and wealth-building programs that can guide you along the way. (At ETR, we like to think that we offer some of the best.) If you have done nothing else so far, invest in one of these services today and get started on applying the lessons you learn.

And here is where the circle connects: Action is the key, but action won’t happen until you decide that you are responsible for your success.

So repeat after me:

“My parents owe me nothing.”

“My children owe me nothing.”

“My friends owe me nothing.”

“The world owes me nothing.”

“I — and no one else — am responsible for my success.”

By Ron Lieber

Annuities: The official retirement vehicle of the Obama administration.

As slogans go, it’s hardly “Keep Hope Alive,” or even “Change We Can Believe In.”

But there were annuities, in a report from the administration’s Middle Class Task Force that came out this week. They are among the tools the administration is promoting as it tries to give Americans a better shot at a more secure retirement.

At its simplest, which is how the White House seems to want to keep it, an annuity is something you buy with a large pile of cash in exchange for a monthly check for the rest of your life.

If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t. In effect, it allows you to buy the pension that your employer has probably stopped offering, and it can help pick up where Social Security leaves off.

President Obama did not discuss annuities in his State of the Union address on Wednesday night, probably figuring that viewers had enough problems staying awake. But the mere mention of them by the task force was enough to send executives at the insurance companies that sell the products into paroxysms of glee.

“I never thought I’d have the president as a wholesaler for us,” said Christopher O. Blunt, executive vice president of retirement income security at the New York Life Insurance Company. “This is awesome. I’m trying to see if I can get him to do a big broker meeting for us.”

He’s unlikely to turn up for such an event just yet. After all, the announcement from the White House did make it clear that the administration was looking to promote “annuities and other forms of guaranteed lifetime income.” That suggests the administration is open to other solutions, though there are not many others that are as simple as the basic fixed immediate annuity (also known as a single premium immediate annuity) that delivers a regular check for life.

Still, all of this attention from the president is a stunning turn of events for a rather unloved product. Many consumers reflexively run in fear when salesmen turn up pitching high-cost and complex variable annuities, which evolved from their simpler siblings decades ago. Today, the Securities and Exchange Commission maintains an extensive warning document on its Web site for investors considering the variable variety.

Meanwhile, almost all employees on the precipice of retirement who have access to annuities as a payout option steer clear when their companies offer them. While various surveys show that roughly 15 to 25 percent of corporations offer annuities to workers who are retiring, including big employers like I.B.M., a 2009 Hewitt Associates study reported that just 1 percent of workers actually bought one.

“I joke sometimes that we’re the best ice hockey players in Ecuador,” said Mr. Blunt of New York Life, which sells more fixed annuities than any other company, according to Limra, a research firm that tracks the industry.

So what are these soon-to-be retirees so afraid of? And what makes the White House so sure it can change their minds?

Let’s start with the fears. Early on, the knock on annuities was that once you died, the money was gone. So let’s say a 65-year-old man in Illinois turned over $100,000 in exchange for $632 a month for life, a recent quote from immediateannuities.com. If he died at 67, his heirs would get nothing while he would have collected only about $15,000. (On the other hand, it would take him until age 78 to get $100,000 back, but that doesn’t take inflation into account.)

The industry solved this by coming up with variations on the policy, allowing people to include a spouse in the annuity or guarantee that payouts to beneficiaries would last at least 10 or 20 years. This costs extra, of course, meaning your monthly payment is lower.

Others worried about inflation, so now there are annuities whose payments rise a few percentage points each year or are pegged to the Consumer Price Index. These cost extra, too (often a lot extra).

You see the pattern here. Every time someone had an objection — the need for a bunch of payments at once, a lump sum in an emergency or concern about rising interest rates — the industry created a rider to add to policies to make the concern go away (and make the monthly payment smaller).

Besides, people need to have saved enough to purchase a decent monthly annuity payout in the first place. But plenty of retirees haven’t been saving in a 401(k) or individual retirement account long enough to have a good-size lump sum.

There are also stockbrokers and financial planners standing in the way. Once money goes into an annuity, they can’t earn commissions from trading it anymore and may not be able to charge fees for managing it. Financial advisers have a charming term for this phenomenon — annuicide. You insure, and their revenue dies. So, many of them will try to talk you out of it.

One reasonable point they might make is that insurance companies can die, leaving your annuity worthless. State guaranty agencies exist, but they may cover only $100,000 to $500,000. I’ve linked to a list of the agencies in the Web version of this column so you can see what they insure.

Even if you get over all these mental hurdles, however, the hardest one may be the difficulty of seeing a big number suddenly turn small.

“It’s the wealth illusion, the sense that my 401(k) account balance is the largest wad of dollars I’ll ever see in my lifetime, and I feel pretty good about having that,” said J. Mark Iwry, senior adviser to the secretary and deputy assistant secretary for retirement and health policy for the Treasury Department. “Meanwhile, I feel pretty bad about the seemingly small amount of annuity income that large balance would purchase and about the prospect of handing it over to an entity that will keep it all if I’m hit by the proverbial bus after walking out of their office.” So how might the Obama administration solve this? It could get behind a Senate bill that would require retirement plan administrators to give account holders an annual estimate of what sort of annuity check their savings would buy. That way, people would get used to thinking about their lump sum as a monthly stream.

Tax incentives could help, too. A recent House bill called for waiving 50 percent of the taxes on the first $10,000 in annuity payouts each year. “If this is behavior that the administration is trying to inspire, then it’s not that long of a leap to think that maybe they’ll start to promote some version of these bills,” said Craig Hemke, president of BuyaPension.com, which sells basic annuities (and offers some good educational material for people who are trying to learn about the products).

Mr. Iwry, who is one of the intellectual architects of the administration’s examination of annuities, wouldn’t say much about what might happen next. But one paper he co-wrote two years ago suggests a clue.

As the treatise suggests, the administration could nudge employers into automatically depositing, say, half of new retirees’ lump sums into a basic annuity or other lifetime income product, unless they opt out. Then, they could test the thing out for two years and see how that monthly paycheck felt. If they liked it, they could keep the annuity. If not, they could cancel it without penalty and get the rest of their money back.

Annuities won’t be right for everyone (people in poor health should probably steer clear). And they’re not right for everything because it rarely makes sense to put all of your money in a single product or investment.

You could, for instance, use an annuity to cover the basic expenses that your Social Security check doesn’t cover. You might also use the money to buy long-term care insurance, which would keep nursing home bills from becoming a budget-destroyer.

But the president has one thing right: The basic annuity is almost certainly underused. Sure, you may be able to arrange a better income stream on your own, but not without a lot of help from a financial planner or a lot of time managing it yourself. Then there’s the possibility, however small, that you’ll spend too much in spite of yourself or run into a once-in-a-generation market event that will cause you to run out of money sooner than you expected.

All of that makes basic annuities the ultimate test of risk aversion. If you buy some, you and your heirs may have less money than if you’d kept your retirement savings in investments. Then again, if you guarantee enough of your retirement income, you — and those same heirs — won’t have to worry about how you’re going to meet your basic needs.

Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.
A version of this article appeared in print on January 30, 2010, on page B1 of the New York edition.

One of the reasons parents give children allowances is to help them learn how to manage money.

But for it to be a truly effective teaching tool, parents need to spell out what the allowance will cover, how it can be spent, the consequences of overspending, and how much should be saved or given to charity.

Here are some guidelines:

1. Encourage planning. When deciding how much the stipend should be, consider giving enough to encourage saving or charitable giving. But be careful not to give too much. If the kids can buy anything they want, the allowance fails to teach them how to prioritize and set goals.

Though grandparents are among the millions who have taken a big hit to their portfolios in recent years, careful planning can ensure a healthy contribution to the education and financial future of their grandchildren.

The first step involves a talk between grandchildren and their adult children. According to 2008 research from The Hartford Financial Services Group, 65 percent of grandparents surveyed reported that they plan to contribute financially to their grandchildren’s college education, but that less than one third of all survey participants talked with their adult children about those plans.

Statistics show the amount of money that changes hands between grandparents and their grandchildren is substantial even before the kids head off to college. Hartford reports that more than 40 percent of grandparents spend more than $2,000 annually on their grandchildren before they reach 18 years old. And once it’s time for the kids to head off to school, over half of grandparents who plan to contribute will give more than $10,000, with a quarter of those planning to give more than $30,000.

A visit to a CERTIFIED FINANCIAL PLANNER™ professional can help grandparents and their adult children coordinate a gifting strategy that makes sense. In the meantime, there are several options to consider:

Talk: Adult children and their parents might find it difficult to talk about money issues in general, but discussing a positive goal like funding a child’s future can pave the way to make discussions later about the grandparents’ estate issues and end-of-life care a little easier to handle. But initially, these discussions will hopefully deliver a reality check. The Hartford survey points out that 60 percent of the grandparents surveyed believe that financial aid will be the most likely way their grandchildren will pay for college in an era where federal aid is declining and grants and scholarship cover only an estimated 15 percent of total college costs.

Start early: While many families don’t turn to relatives for help until there’s an immediate need, earlier planning almost always produces better results. Grandparents already know that saving for a child’s college education is easier if it starts at birth. The same is true for the next generation, so grandparents or adult children need to set a plan in place as early as possible for maximum benefit.

Coordinate college support with overall estate planning: Grandparents should look at their support for their adult children and grandchildren as an overall part of their estate strategy. A CFP® professional, in concert with estate and tax experts, can help grandparents and their adult children settle a series of estate issues at one time, saving time, money and worry later.

Consider the 529 plan option: A 529 college savings plan is an investment vehicle operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Service Code, which created these plans in 1996. If parents have set up a 529 plan for their child, grandparents can contribute to that plan or they can set up their own 529 plan account with their grandchild as the beneficiary.

Watch the fees: No matter what savings or investment options you choose, make sure you’re not overpaying fees. A stock mutual fund may charge in excess of 1 percent of assets; you can certainly find quality mutual funds that charge less. Two good resources: Morningstar.com can provide you a general review of most mutual funds you might be considering. The second is the Security and Exchange Commission’s online Mutual Fund Cost Calculator () which can help you determine how the fees and other costs associated with the fund will add up over time.

Offer some investing training wheels: Grandparents have a unique relationship with their grandchildren. They can teach without “lecturing” like their parents, and for that reason, they might consider setting up an investment account with a small balance that the kids can monitor and discuss under the supervision of the grandparent.

Make the grandkids beneficiaries: Naming your grandchild as the beneficiary of a retirement account or insurance policy can be a tax-smart way to provide financial support for college or possibly a first home.

October 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP, ALU, AEP, a local member of FPA.