We are now more than a decade into the era of the Pension Protection Act of 2006 (PPA), which ushered in a range of new ways to encourage retirement savings in defined contribution plans, including automatic enrollment, automatic escalation, and qualified default investment alternatives (QDIAs). This is a long enough period to begin drawing some conclusions about the utilization, success, and shortcomings of new and existing tools for participants. At CAPTRUST, our experience working with more than 2,000 defined contribution plans provides insights into plan sponsor challenges and successes that we can learn from and share. Synthesizing these insights has led to a set of best practices that help plan sponsors optimize the effectiveness of their defined contribution plan.
Impact on the Employer
A successful retirement savings program has the potential to improve participant outcomes, but also impact company performance. Employees who are confident about their retirement savings are likely to be more productive and have better attendance than those who are concerned about their finances. These employees are also less likely to have to delay retirement due to inadequate savings, which can help employers with workforce management.
Lowering the need for employees to keep working beyond their targeted retirement age can also avoid the negative financial impact on the company of assuming higher healthcare and benefits packages for older workers. A study by Prudential showed an incremental cost of over $50,000 for an individual who delays retirement by one year and an estimated incremental cost of between 1 and 1.5 percent across an entire workforce. Prudential also found that more than 50 percent of employers believe a significant portion of their workforce will have to delay retirement due to inadequate saving.
These risks should give plan sponsors ample motivation to do what is necessary to turn retirement savings from a potential liability into an asset.
What constitutes an optimized defined contribution plan will vary by employer and will often be based on employee demographics and needs. To make the most of their defined contribution plans, plan sponsors should focus on four key elements:
- getting employees into the plan;
- getting them to save an adequate amount of money toward their retirement goals;
- getting them invested appropriately based upon their specific circumstances; and
- getting plan participants engaged in the saving, investing, and, ultimately, retirement planning process.
Many tools are available to improve outcomes in these areas. This article focuses on helping plan sponsors best utilize these tools and monitor success across these four key elements.
What Is Success and How Do You Measure It?
To optimize their defined contribution plans, plan sponsors need to promote the success of plan participants. The four key elements of plan optimization—what we call the “road map”—are a helpful guide in assessing employee success and can be measured by:
- Participation rates—How much of your workforce is in the plan?
- Deferral rates—Are participants deferring enough of their compensation?
- Diversification—To what extent are participants utilizing diversified investment options such as target date funds, risk-based funds, managed accounts, or models?
- Engagement—Are participants engaged, as measured by their usage of websites, call centers, and in-person employee events and meetings?
The Road Map
1. Getting Employees into the Plan
Of course, employees cannot use the plan to save for retirement unless they are enrolled and setting aside a portion of their earnings. The more traditional multichannel approach to driving plan participation through print communications, web tools, and (possibly) in-person meetings got plan sponsors only so far. Since the effective date of the PPA, however, these traditional tactics have been overshadowed by employers adding an automatic enrollment feature, which has proven to be a key driver of increased participation; plans with automatic enrollment consistently show higher participation rates than those without this feature.
For all industries, the average retirement plan participation rate has risen 18 percent in the past decade, primarily due to the rising popularity of automatic enrollment. As Figure One illustrates, the growth and the use of automatic enrollment features is on an upward trend.
Figure One: Growth of Automatic Enrollment (2006-2016)
Source: 60th Annual Survey of Profit Sharing and 401(k) Plans; Vanguard “How America Saves 2017”
2. Getting Employees to Save Enough
Once participants are enrolled in the plan, the focus shifts to adequacy of savings, commonly termed retirement readiness. Plan sponsors can help participants gauge if they’re on track for retirement with readiness tools. These tools forecast retirement income and savings adequacy by calculating the total amount of assets needed in retirement or by showing the percentage of monthly income that a participant is on track to replace in retirement.
The first step to saving enough is maximizing the percentage of pre-tax compensation an employee contributes to his or her plan, known as deferral rate. Once again, automatic features have proven to be key catalysts in improving outcomes, starting with higher default percentages for automatic enrollment. Three percent has been the most common starting percentage, but we are now seeing a shift toward higher default rates. In fact, more than 40 percent of CAPTRUST plan clients offering automatic enrollment now start at a default rate of 4 percent or higher. Further, adoption of automatic escalation, where a participant’s deferral rate increases annually—typically by 1 percent each year—can lead to substantially higher deferral rates over time.
We see a direct correlation between plan size and plan designs that include automatic features. Companies with more than 5,000 employees are much more likely to offer them than smaller firms, as shown in Figure Two. One thing we have observed is that innovations that take root with larger plans often work their way into smaller plans, so we may see higher adoption of automatic features among smaller plans over time.
Figure Two: Adoption of Automatic Features by Plan Size
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Source: CAPTRUST 2017 Plan Design Benchmark
3. Getting Employees Invested Appropriately
Once enrollment and deferrals are in place, the next step to retirement readiness is ensuring participants are appropriately invested. Most plan sponsors accomplish this by adding diversified asset allocation funds that serve as the plan’s QDIA. Participants who do not make an investment election are defaulted to the plans QDIA. Among the investment options and solutions eligible for QDIA protection, target date funds are the most popular—with 89 percent of our defined contribution plan clients utilizing them.
Target date funds, along with other types of professionally managed options, benefit employees by reducing the likelihood of holding extreme or undiversified allocations. According to Vanguard’s “How America Saves” study, 0 percent of participants in a professionally managed investment option held either a 0 percent or 100 percent equity exposure. In comparison, 20 percent of investors not in a target date fund or similarly managed investment option held one of these extreme allocations. Target date funds provide meaningful benefits by promoting diversification and automatically lowering the risk of retirement portfolios over time.
Managed accounts are also gaining traction in defined contribution plans. While few plans use managed accounts as their QDIA, we see this changing as they gain further acceptance. Managed accounts consider a participant’s age when designing an asset allocation but can be further customized based on factors such as salary, deferral rate, account balance, and marital status. And because managed accounts are more customized to the individual, studies have shown increased participant engagement. According to Morningstar, investors who use a managed account service increase their deferral rates by an average of 2.19 percent.
Regardless of the type of professional help utilized by a plan—whether the plan uses target date funds or managed accounts—the benefits of offering help to plan participants can be meaningful. A multiyear study found that participants receiving professional help, which included those using target date funds, advice services, or managed accounts, had median annual returns more than 3 percent higher than those who did not receive help.
4. Getting Employees Engaged
The final optimization step is getting participants engaged. The first element of an integrated engagement program is print communications. To resonate with participants, print materials should be personalized and targeted to a specific audience. One method is to create content specific to each separate generation of participants. These groups have different views of retirement and are facing very different decisions based upon their life stages. Communications also need to be action oriented—for example, challenging participants to take advantage of their employers’ matching contributions.
Call centers are another important component in engagement that can deliver anything from fund information to tailored investment advice to participants, depending on the services engaged. When this service is utilized, it’s important that plan sponsors have the capability to monitor call activity—both why their participants are calling and what is being recommended to specific groups of employees on outbound calls.
Plan websites are another way to engage participants, and better technology has improved the effectiveness of these websites over the years. Sites now offer customized retirement readiness tools, personalized messages, monthly retirement income projections, and recommended next steps that participants can easily execute.
While technology provides convenience, personal meetings are a very effective way to drive individual engagement. Participants still generally feel most comfortable talking to an expert about retirement planning, and the ability to give employees one-on-one advice is a significant driver of long-term success. This advice should take a holistic approach that considers a participant’s complete financial picture rather than just retirement assets.
Each channel of engagement can impact employees to varying degrees, and plan sponsors should strive to measure each method to determine effectiveness and make necessary changes.
What Are the Roadblocks to Success?
The many behavioral biases that confound investors in general also have an impact on retirement investing. Individuals are inherently biased in ways that can interfere with their ability to adequately save for retirement. Status quo bias—or investor inertia—describes the tendency for employees to prefer their current state and delay decisions that they know are in their best interest. One such decision is starting to save for retirement as early as possible. Decisions that require action now, such as enrolling in a retirement plan or choosing the right investments, are often delayed.
To combat inertia, many plan sponsors have added automatic enrollment to their plan designs. Initiating that first step for participants and getting them into the plan makes it unlikely that they will opt out. In fact, the average participation rate of plans with automatic enrollment is about 87 percent—compared to 50 percent for plans without it.
Another major challenge to address is present bias, the tendency to place a greater value on the current benefits versus future benefits. Most employees would prefer to receive a higher paycheck now over accumulating more for their retirement later. To overcome present bias, plan sponsors have added automatic escalation features. Combining automatic escalation with automatic enrollment increases the likelihood of participants saving enough. Placing participants in diversified investment portfolios that serve as QDIAs can further neutralize inertia by automating the asset allocation and de-risking of portfolios over time.
Plan sponsors must also navigate several other roadblocks. These include the degree of financial literacy among plan participants, the financial cost of implementing programs that drive success, and addressing the needs of varying demographics within their employee base. Most defined contribution plans serve multiple generations of participants, all with different financial needs and communication preferences.
What’s Next?
Advancements in technology have been a huge driver in what’s next in helping plan sponsors engage their participant base and improve retirement readiness. Examples of these advancements include gamification, improved mobile access, and aggregation tools.
Gamification is the application of elements of game playing to areas meant to improve engagement. In the case of defined contribution, an employee could get points for achieving certain goals or passing different life stages. The higher the score, the more prepared they are for retirement. Benchmarking a participant against those in their own peer group has also proven effective.
More access to retirement accounts through mobile devices is also gaining traction among plan participants, particularly younger employees. Participants want access to their retirement accounts through mobile devices, along with the ability to transact and get help; technology among recordkeepers is quickly catching up to meet this demand.
Finally, account aggregation tools are a way for participants to be holistic and consider all their retirement assets, not just those accrued with their current employer, when making investment decisions. Account aggregation tools allow plan participants to add outside accounts when calculating retirement readiness or when making allocation decisions among investments. If managed accounts are utilized, the investment manager, with the help of the participants, can use an aggregation tool to consider these outside accounts when making investment decisions.
The Destination
The optimal defined contribution plan will be unique to the circumstances of each plan sponsor, yet each should focus on a few key priorities: getting employees into the plan, getting them saving enough, getting them invested appropriately, and getting them engaged in the process. To help support retirement readiness, plan sponsors should keep participants engaged and active throughout the savings process.
Plan sponsors can stack the odds of success in the favor of participants by implementing plan design features such as automatic enrollment and automatic escalation and combining them with qualified default investment options such as target date funds or managed accounts. These features can be enhanced with advice or financial wellness programs and targeted communications. All these things, along with technology enhancements, are moving the dial forward on participant retirement readiness, making it easier for plan sponsors to help participants reach their destinations.
Once the kids have flown the nest, or a family business has matured and changed hands, you might decide that a life insurance policy purchased years ago is no longer needed. As life circumstances change, the coverage may not seem worth the premiums.
Your first thought might be to surrender the policy back to the insurance company in exchange for whatever cash value it has. But if you do, you could be unwittingly leaving money on the table. A less well-known option—life settlement—could yield you a better price or a better financial outcome for your family.
With a life settlement, a company purchases your policy as an investment, taking over the premium payments and receiving the rights to the death benefit. “Say you had a $1 million policy that was meant to protect the children. You’ve reached retirement age and no longer need it, but are still paying premiums,” says Mike Molewski, a principal and financial advisor at CAPTRUST Financial Advisors in Allentown, Pennsylvania. A policy with a cash surrender value of, say, $100,000, could potentially be sold to a life settlement company for several times that amount.
But you have to know what to ask. Normally, “insurance companies will send you the surrender form and cash the policy in. They do not advise you that you can sell the policy,” says Molewski, who provides life insurance strategies and wealth planning services to high-net- worth individuals and families.
That means it’s up to policyholders or the financial advisors acting on their behalf to do the legwork in order to unlock any hidden value. A life settlement could yield a lump sum to defray the cost of long-term care, pay for a couple’s travel plans, help with a grandchild’s tuition—or any purpose at all.
Who Should Consider a Life Settlement?
Life settlements are suitable for people age 65 or older who have a permanent, cash-value life insurance policy and a life expectancy longer than two years. Term life policies are, in some cases, eligible for life settlements if they are convertible to a permanent policy.
If you’re 65 or older and considering dropping or reducing life insurance coverage, investigate the benefits of a life settlement before surrendering a policy, says Molewski, especially if there have been any changes to your health status since you purchased the policy.
From a financial standpoint, it’s not always obvious what’s best. It’s only by methodically working through the math, often with the guidance of a financial advisor, that the policyholder can navigate to the best decision, he says.
A life settlement differs from a viatical settlement, which is the sale of a life insurance policy by a person with a critical illness, typically with a life expectancy of two years or less.
Case Study: Large Policies, Unaffordable Premiums
Molewski helped an 82-year-old client navigate a life settlement for the $10 million universal life no-lapse guarantee policies she purchased 17 years earlier. Her husband had passed away, and the premiums—about $450,000 a year—had become a burden. Although she had paid several million dollars in premiums over the years, the surrender value of the policies was just $225,000. Molewski helped her shop the policies to licensed life settlement companies and received multiple offers. “If there are a number of policies, we try to sell the weaker policies and keep the stronger ones,” he says.
He advised her to sell a portion of the policies to raise enough money to pay off the premiums on the rest of the coverage. She didn’t receive cash in the sale. Instead, the proceeds were applied toward future premiums payments, so she was able to keep $3.6 million of coverage in place without having to pay any more premiums. This type of life settlement is called a retained death benefit supplement. Her family had no additional cash outlay and will eventually receive a tax-free life insurance payout 16 times greater than the present-day cash surrender value.
Side Benefit: Assess Your Unneeded Policy as an Investment
People who buy life insurance as protection for their families sometimes have trouble assessing their policies as investments—the same way they would a stock or bond. That’s why it’s useful to have your unneeded policy evaluated for a life settlement, even if you ultimately choose not to do one, says Brodie Barnes, a principal and financial advisor at CAPTRUST in Salt Lake City. Barnes is known as one of Utah’s top life insurance specialists and works primarily with ultra-high-net-worth clients and businesses.
The life settlement shopping process provides insight into how professional investors see your policy. “What I love about the life settlement marketplace is that it often helps my clients or their families decide to keep their life insurance policies and understand them for the great investments they are,” says Barnes. He says, when people receive high life settlement offers on their unneeded policies, they often start to feel it’s more worthwhile to keep paying those premiums.
Case Study: Attractive Offer, But No Thanks
One of Barnes’s clients is an 85-year-old woman with a $1.5 million policy that she purchased years earlier to provide funds for estate tax payment. When the federal estate tax exemption increased, she no longer needed the coverage. She and her family considered surrendering the policy for the cash value of approximately $45,000. But Barnes said, “Let’s look at this. There is potentially more value in a life settlement than in the surrender value.”
Based on health records, it was determined that the policyholder had a statistical life expectancy of four years. (Note: For planning purposes, it’s important to recognize that, by definition, a person could live for a shorter or longer period than the mathematical average life expectancy.) A life settlement company made an attractive life settlement offer of $700,000. After tax, the family would have had a net gain of $640,000, about 14 times the surrender value.
Even so, Barnes encouraged them to hold on to the policy. He calculated that even if they continued premium payments for six more years (two years past life expectancy), they could expect a return on investment of a bit over 10 percent a year once they ultimately received the tax-free death benefit. That high rate of return would be hard to beat with any other investment. Since the family could comfortably afford the annual premiums of $44,000 a year and had no urgent need for money, they decided to keep the policy.
In today’s market, Barnes says life settlement companies aim for a 12 to 14 percent return on capital—meaning their outlay for the life settlement and the premiums they expect to pay.
“What family doesn’t want that same kind of return?” says Barnes. He says it’s often more advantageous to hold on to your life insurance policy than sell it, unless the premiums become unaffordable. The family may decide it’s smarter to keep a policy as an investment once they hear how much an investor is willing to pay for it.
File #0576-2018
So much energy and passion come out of listening to live music that it’s hard to imagine how it could get any better than that. But add traveling to your favorite city or a city you’ve always wanted to visit, and you get a music vacation.
Ever wonder what it would be like to see your favorite artist in an iconic setting, like the Beacon Theatre in New York City? Or maybe listen to a show under a starlit night at the acoustically sublime Red Rocks Amphitheater? Or maybe travel to the birthplace of jazz to attend the New Orleans Jazz & Heritage Festival for an authentic immersion of music and culture? This practice of music tourism is becoming a popular trend among baby boomers. More financially secure, they’re now able to enjoy live music and travel as a whole new experience.
Marcela Curry heard rock and roll for the first time when she moved to the U.S. from Chile when she was 15 years old. She remembers thinking, “Wow, what’s going on here?” and has been hooked on rock and roll ever since. Curry loves the history behind rock music—how it’s derived from the blues and the way some lyrics can seem like the workingman’s poetry.
Marcela and her husband, John, treat themselves to vacations around locales where the likes of U2, Bruce Springsteen, and the Foo Fighters have upcoming shows. They’ll pick a city they want to visit and then see who’s playing at the local venues.
Curry once went to multiple Tom Petty shows in one tour. Every show had the same set list and the same Tom Petty banter, but it was the last show in Boston that she felt was by far the best. According to Curry, this was due to the warmth and harmony of the crowd reacting to the music. Plus, there was the bonus of visiting Boston, one of her favorite cities.
Live music has a way of bringing people together and enhancing emotions. Hearing your favorite artist live can make you feel connected to the performer and the community around you.
A specific song can become significant to someone because they can relate to the meaning behind the lyrics.
A study conducted by digital communications company O2 and Patrick Fagan, an expert in behavioral science, revealed that experiencing just 20 minutes of live music resulted in an increase in feelings of well-being by 21 percent. Feelings of self-worth and closeness to others both went up 25 percent, and mental stimulation climbed up 75 percent.
The researchers claim that all these increases, experienced twice a month, could result in an additional nine years added to a person’s lifespan.
Mike Gray, a financial advisor at CAPTRUST, has always enjoyed taking in a live show. He especially loves the thrill of the find—when he discovers a new artist, seemingly obscure to the general public, to add to his playlist. Gray has transferred his love of music to his son, Roth, and daughter, Addison, both now in their 20s. He admits, “I’ve ruined the kids with classic rock.” His daughter lamented to him once that the Talking Heads follow her everywhere she goes.
Gray often takes his grown children on trips to exciting cities. The next show on their itinerary is to see As the Crow Flies, a new incarnation of The Black Crowes, in Lexington, Kentucky. Taking music mini-vacations is a way for Gray to continue to bond with his kids and perhaps retain an element of cool in their eyes.
For some, gone are the days of pinching pennies for concert tickets, waiting in long entry lines, and getting an elbow to the face while dancing in the pit. Those who grew up with the Grateful Dead and the rise of music festivals, such as Woodstock, are now older and potentially more financially stable, so they can look for new ways of enjoying live music.
And there is a whole world of VIP and platinum packages to pick from. Companies such as CID Entertainment offer fans of live music an array of services, including hotel packages, luxury bus rentals to and from the event, artist meet and greets, VIP viewing access, pre-show gatherings, and cocktail parties. Anything you can think of to aid in a hassle-free and premium experience is now available.
Then there’s the whole revamped festival experience. While there’s still the option of general admission camping—where you bring your own tent and brace yourself for a weekend of roughing it—organizers are now offering options to provide fans varying levels of accommodation, concert viewing, and hospitality services.
Those who have a passion for live music are happy to offer up their time and money to be part of its universe. John Martin, another financial advisor at CAPTRUST with this passion, said, “I don’t like music, I love it, and I spend a fool’s amount of money on it.”
Martin often jumps on a plane to see a show in New York City or Nashville to feed his live music addiction. And a couple years ago, he took a trip to Arrington, Virginia to attend the Lockn’ Festival. He and a couple friends decided to enhance their festival experience by renting an RV and purchasing VIP tickets. Their VIP package offered clean, air-conditioned bathrooms with showers and access to the VIP viewing area with complimentary food and non-alcoholic beverages.
For this year’s Lockn’ Festival, to be held in August, concertgoers can go even further by renting a “glamping” tent. This package includes a queen bed, complete with memory foam mattress—a far cry from a sleeping bag on the hard and unforgiving ground—table and chairs, mini-fridge, daily personal shopping service, bath products and towels, tent lighting, and a fan to keep cool. It sounds a lot like staying in a hotel, but having access to a VIP Glamping Lounge where there will be yard games, comfy furniture, snacks, coffee, and breakfast takes it to a new level.
Whether you’re a diehard U2 fan ready to travel near and far, or you love visiting Nashville and wandering into smaller venues to hear local bands, music travel is a way for people to take in new sights, have an adventure, and feel part of the live music community.
Margareta Magnusson gets right to the point: “Let me make your loved ones’ memories of you nice—instead of awful.” That’s how the Swedish artist turned author opens her recent book, The Gentle Art of Swedish Death Cleaning: How to Free Yourself and Your Family from a Lifetime of Clutter.
Yes, this is another book about the joys of de-cluttering—or The Life-Changing Magic of Tidying Up (the title of another such book, by the Japanese organizational maven, Marie Kondo).
But Magnusson, who reports that she is “somewhere between 80 and 100 years old,” has something more in mind. She is asking her fellow elders not just to pare down their excess possessions, but to face the truth: you are not going to live forever, and, when you die, someone else will have to clean up any remaining mess—and make decisions about every earring, painting, sweater, kitchen pan, and file folder you leave behind. If there are love letters in your attic, someone is going to find them. If there’s a broken garden gnome in your garage, someone else is going to have to figure out what to do with it.
“I have death cleaned so many times for others, I’ll be damned if someone else has to death clean after me,” Magnusson declares.
“But, cheer up,” she says, “a good death cleaning, or döstädning, as the Swedes say, does not have to be grim.”
Instead, she writes, it can be an invigorating opportunity to prepare for a new phase of life and to share memories with family members as they stop by to help (and, if you’re lucky, take a few things off your hands).
Our Overstuffed Lives
“If you can’t keep track of your things, you know you have too many,” Magnusson writes.
That would seem to describe a lot of Americans. In fact, when researchers asked a nationally representative group of more than 1,100 people over age 60 whether they had fewer things than they needed, more things than they needed, or the right amount, 60 percent said they had too much, says David Ekerdt, a professor of sociology and gerontology at the University of Kansas. At age 85 and beyond, more than half said they still had too many things.
“People are well aware that they have more than they need,” he says.
Just how much stuff do we have? Researchers who have attempted to answer that question have found the task overwhelming, Ekerdt says. In one case, a research team set out to count the objects in 32 American family homes. They counted 2,269 items in two bedrooms and a living room of the first house alone. While they were ultimately unable to account for every object, they did come up with some household averages for certain categories. They found, for example, an average of 438 books and magazines, 212 music CDs, 39 pairs of shoes, and an astonishing 52 objects affixed to the sides of refrigerators.
Ekerdt’s own research has looked at how hard people work to rid themselves of excess possessions as they age. One key finding: people in their 60s and 70s are less likely than people in their 50s to clean out, give away, donate, or sell household items. People in their 80s and beyond are even less likely to do anything to lighten their material loads. It’s possible, Ekerdt says, that people have finished all their cleaning before they reach their later years, but the fact that so many elders feel they still have too much argues against that interpretation.
Decluttering professionals say there’s no doubt that aging Americans are sitting on huge piles of unloved possessions.
“It’s a growing problem,” says Mary Kay Buysse, executive director of the National Association of Senior Move Managers. The group represents more than 1,000 small businesses that help seniors pare down their possessions so that they can move or—increasingly—age in place more comfortably.
The problem stems in part from the housing and borrowing booms of the past few decades, Buysse says. “The American dream was to get a house in the suburbs and fill it to the max.”
And while families do tend to get rid of some things as they pass through life’s stages—shedding the baby gear, the children’s toys, the outgrown clothes, and the outdated electronics of their former selves—at some point, stuff tends to pile up in attics, garages, and basements, in junk drawers, and in jam-packed kitchen cabinets.
And when it all gets to be literally too much? Many people throw up their hands and rent a storage unit, Buysee says, putting off the hard decisions indefinitely.
Why Death Cleaning Is Hard to Do
We have more than we need. And we know we can’t take it with us. What’s stopping us from paring down?
The sheer size of the job is daunting, of course. It requires physical and mental stamina, and declining health is one reason people may never get around to a good downsizing or death cleaning, Ekerdt says.
“There really is a point called ‘too late,’” he says.
Emotional readiness also can be a big factor. “We accumulate things because we have these roles in life. We are parents; we are householders, we have things that help us do our work,” Ekerdt says. “Giving up those things can be a stumbling block. If I give away the roasting pan, am I still the mother?”
Saying goodbye to objects that represent deep values—even if the objects themselves have little value—“can require a grieving process,” says Rosellina Ferraro, an associate professor of marketing at the University of Maryland.
Even things we have never used can hold emotional power, says Julie Morgenstern, an organization and time management consultant and author of Shed Your Stuff, Change Your Life. The cookbooks you never cracked open, despite your vows to eat better; the fashionable dress you never wore because the right party never came along; the still-shiny tool set; the abandoned sewing machine.
“Letting go of those things means accepting giving up on those goals,” Morgenstern says.
If you really are not ready to do that, then now is the time to “read those books, cook those meals, do those sewing patterns, and, by gosh, enjoy them,” Ekerdt says.
But if you are ready to let go of some things, you may face other obstacles. The biggest may be learning that no one else wants your old stuff. That includes your grown children. Today’s young adults are not very interested in mahogany furniture and fine china, Buysse says. “They have a more minimalist mindset,” she says. “They can go to Target and outfit a whole kitchen for $200.”
And with so many retirees now trying to downsize at once, even charities have become pickier, Buysse says. People who attempt to sell things online and at yard sales, auctions, and consignment shops often are disappointed as well, she says. “A lot of people are just crushed by the fact that their stuff is not worth anything.”
But once people accept those realities and get down to work, most can find a way forward, Buysse says.
“It can be an uplifting journey,” she adds. “It does not have to be about loss. It can be about the future.”
How to Get Started
“Before you touch anything, you want to get into your head a motivation,” Morgenstern says. “What are you making space for?” For one client, she says, the motivation for clearing out a “magnificent” four-bedroom Manhattan apartment was not just a move to a smaller place, but the time and freedom that would give her to play music and volunteer at her old music school.
Then, the experts agree, it’s time to do your research. Tell your children, grandchildren, and others what you are planning, and ask them to start thinking about what they would like to have. Find out which charities will take which things and whether there is any market for your artwork, silver, or fine furnishings—keeping your expectations for profit low.
Then Get Some Boxes and Trash Bags and…
Whatever you do, do not start with the photographs, Magnusson advises. They stir up too many emotions and take a lot of time to process, she says. (When you do get to the photos, be prepared for your children to insist on digital copies, Buysse says, and to pay someone to do the scanning and downloading for you, if that task seems overwhelming.)
The experts agree that it’s best to start with things that mean the least to you. “Start in a room or a part of your house that does not have much of an emotional attachment,” Buysse says. “Have your plan of attack so that you end up in the most emotional place.”
For some people, that may be a deceased spouse’s closet; for others it might be a garage workshop or maybe a kitchen.
Morgenstern’s advice is only slightly different: she suggests moving by category—books, clothes, furniture, whatever—and starting with the largest volume of items that you care about the least. That will give you the momentum to keep going, she says.
“If you go object by object, you will never get through it,” she says.
The beauty of death cleaning is that it will come to an end when you die, Magnusson writes. Until then, she says, opportunities should keep presenting themselves. What if you are invited for lunch? “Don’t buy the host flowers or a new present; give her one of your things.”
Of course, not everything is for sharing. Magnusson suggests that we do our descendants a favor by putting together a box of items—maybe some of those love letters or other souvenirs—that have meaning only for us. Write “throw away” on the outside of the box. If you feel less sentimental, good for you, she says. Gather up those potentially embarrassing letters, documents, or diaries and “make a bonfire or shove them into the hungry shredder.”
And remember, the experts say, your survivors may not feel all that sentimental if you leave them with a mess. They may never separate the treasure from the trash. Buysse warns, “Many families just call for a dumpster, and the kids start hauling things out in black Hefty bags.”
Don’t Skip Your Finances
They need death cleaning too.
When was the last time you updated your will? How about your funeral plan (you do have one, right)? And does anyone besides you know the passwords for all of your banking and investment accounts—or even how many banking and investment accounts you have?
If those questions make you break out in a sweat, it may be time for some “financial death cleaning”—an effort to put your affairs in order and help them make sense to others if you should die or become incapacitated tomorrow.
“We all want to think we are going to live forever or never become incapacitated,” but we can leave a financial mess behind if we do not prepare for the inevitable, says Carolyn Rosenblatt, an eldercare attorney and registered nurse. She and her husband, a psychologist, founded AgingParents.com and AgingInvestor.com to help families and financial professionals sort through such issues with aging adults.
Everyone over age 65 should be planning for the end and for the gray zone of incapacity that often precedes it, Rosenblatt says.
Here’s another suggestion from CAPTRUST Financial Advisor Danny Summerlin: you can simplify your financial information by keeping it all in an online portal, such as WealthView, the CAPTRUST application that keeps track of all your bank accounts, investments, and lines of credit and provides a digital vault for key documents, including insurance policies, passports, and deeds.
“It can be an invaluable resource should a loved one suddenly need to take charge of your affairs,” Summerlin says. You can and should allow account access to someone you trust, he says. Don’t wait for a crisis to set up that access, he advises: “When you are in an emotional crisis, that is not the time to be asking these questions.”
A midlife course correction can be triggered by a seminal moment—a deep pain or loss—or the realization that the current path is leading in unsatisfying directions. For veteran National Public Radio reporter Barbara Bradley Hagerty, it was both.
“I had just sent off a conciliatory email to a listener who was angry about my story that aired the previous day on NPR’s All Things Considered,” Hagerty recalled. “Suddenly, I felt a sharp pain in my chest. My breathing became clipped and shallow. Heat radiated up my back.”
She blacked out. Classic signs of a heart attack. But by the time Hagerty reached the hospital, she felt well enough to go home. A lifelong athlete, she couldn’t possibly have a bad heart, she explained to the nurse.
“You’re 53, right?” the nurse replied, as if that number were a medical condition. “I think we’d better keep you overnight.”
In an unimaginable plot twist, her 91-year-old father died during the night, leaving Hagerty contemplating mortality from two angles and confronting the disconnect between her “30-something self-image and 50-something reality.”
Those paired incidents would make anyone take stock. After 20 years covering religion, justice, and politics for NPR—traveling and working as many as 100 hours a week—it was time for a change.
With a book contract in hand and a leave of absence from NPR, Hagerty embarked on a journalist’s quest to answer the persistent questions of our 40s, 50s, and 60s. Is a midlife crisis inevitable? Is this a period of unavoidable decline, career languor, and personal stagnation? Can we flourish in the second half of life, and, if so, how?
For the next two years, Hagerty traveled the country uncovering troves of research and personal stories. She interviewed neurologists, psychologists, sociologists, geneticists, marriage therapists, athletes—in all, more than 400 researchers and ordinary people trying to figure out not just how to navigate midlife but thrive in it.
In the process, Hagerty found plenty of reason for optimism and the science to back it up. Her 2016 book, Life Reimagined: The Science, Art, and Opportunity of Midlife is a hopeful journey through empirical evidence, Hagerty’s midlife experience, and the stories of people who had “cracked the code” of a quality midlife.
“Science is confirming what we all suspected instinctively,” said Hagerty. “There is no such thing as an inevitable midlife crisis.” There is no compulsory slide in vitality, cognition, or fulfillment. In fact, midlife can be an energizing period of renewal and rediscovery. We just have to choose the right actions and attitudes.
Accept That Happiness Is a Variable Perception
“In the course of my reporting, I learned that while the stereotypical midlife crisis is a myth, virtually everyone suffers a slump in happiness in their late 40s,” said Hagerty. The concept of the “U-curve of happiness” postulates that in our 40s, we grapple with the reality that we will not achieve all our life’s aims. In our 50s and beyond, we have reconciled that, and our brains become happier.
“I was really grateful to read the science, because I knew the ascent of my career was not as easy as it had been in my 30s,” said Hagerty. If not a midlife crisis, it was perhaps a midlife ennui. “I felt like there was more friction. I had to run faster to get to the same place.
Everything was harder. It was a relief to know that if you just hold on, put one foot in front of the other, the science shows that you will find yourself swooping up the U-curve into a more contented, meaningful place.”
Pursue Purpose Rather Than Gratification
“Researchers are finding that ‘purpose in life’ will do more to make you thrive—physically, emotionally, and mentally—than almost anything else,” Hagerty said. “People who have a reason to get up in the morning do better in every way. They even have the mechanism to stave off Alzheimer’s, or if they develop the plaques and tangles of Alzheimer’s, they do not develop clinical signs. Purpose in life is not a magic bullet, but it’s awfully close.”
Hagerty defines two types of purpose. There are little purposes: hobbies, passions, and goals, such as learning Spanish, picking up the guitar after 20 years, or, in her case, training to qualify for the National Senior Games in cycling.
And there are bigger purposes, such as rearranging your life to apply your talents in ways that are meaningful to you. “We’re going to live until 90 or 95, so if you retire at 65, you have to think through what meaningful contributions you can make in the decades ahead,” said Hagerty.
Punctuate Your Life
“When you’re young, life has a lot of milestones and achievements,” Hagerty said. “You graduate from high school, from college, fall in love, get married, start a family, a career. But midlife can be like one run-on sentence. There aren’t many milestones. No commas, no periods, no semicolons.”
So create those milestones and memories. Inject your own punctuation.
“For me it was, can I get faster, can I qualify for the Senior Games, can I do a 50-mile cycle?” Hagerty said. “Suddenly, my life was filled with a series of little goals. I was so excited to have these little achievements to work toward as I worked toward the larger achievement, which was writing the book.”
That two-year sabbatical was also punctuated by a trip down the Blue Ridge Parkway in a rented motorhome with her husband Devin, their golden retriever, and another couple. The trip was at times a comedic trial of rain, a dormant electrical hookup, and getting flooded and stuck. Punctuation doesn’t have to be all exclamation points; it just has to shake up the mundane.
Nurture Friendships
Science also confirms the protective and restorative power of friendships. “The real surprise was how central this is to health and healing as we grow older,” Hagerty said. “Piles of studies show that those with a network of friends live longer, recover faster from cancer, and even preserve their memories better than those with few or no friends.”
Hagerty and a friend experienced this firsthand at the University of Virginia’s neuroscience laboratory in Charlottesville, Virginia. While in a brain scanner, Hagerty was exposed to the threat of electric shocks (and actual shocks) under three conditions: alone, holding the hand of a stranger, or holding the hand of her trusted friend.
“Omigosh, it hurt like hell; it was really painful,” Hagerty recalled of the shocks. The lesson learned? The threat parts of the brain go haywire when you’re alone or holding a stranger’s hand, but when you’re holding a friend’s hand, those parts of the brain go quieter.”
Is it an evolutionary thing, harking back to our hunter-gatherer days, when a trusted human at your side could save your life? That’s one theory. “The big shocker for me was that friends are incredibly important,” said Hagerty. “At midlife, we tend to shed our friends because we don’t have time, but that’s the wrong thing to do.”
Pivot Rather Than Reinvent
“People who make really smart midlife career changes generally don’t reinvent themselves,” Hagerty observed. It doesn’t usually work out that well when a doctor decides to become an organic farmer, or when the nuclear physicist decides to run a bed and breakfast. It may work out well if the accountant who wants to become a chef has a lifelong passion for cooking. If you’ve been doing something all along, it may not be such a leap to make that your second act.
It’s not about throwing away your talents and skills. It’s about pivoting on them.
It’s about working with your sosein, your innate essence. For example, a retired lawyer who once helped banks foreclose on families now runs a nonprofit that defends families at risk of foreclosure. An overscheduled physician’s assistant now runs a “slow medicine” clinic in Alaska. A woman who developed hospital technology now operates an orphanage in Honduras.
“If you follow what you really love to do—if you pivot so you’re using your skills and passions—you’ll excel because your heart is in it,” said Hagerty. That ardor will pave the way to unimagined opportunity. That’s what Hagerty discovered.
From NPR Reporter to Author
The act of writing the book was transformational. “I had always been afraid to shoot for Plan A,” said Hagerty. “It was safer to stay at NPR, to stay within a structure and write the assignments they wanted. When I got the book contract to write Life Reimagined, I got away from the daily stress—not just the stress of being on deadline, but the stress of not being in control of my life.”
She was now talking to people who had realigned their lives and thought, “Why not me?”
Hagerty knew her sosein. She knew from an early age that she was a storyteller; her sosein was in making people care about good ideas through narrative storytelling. So she pivoted from four-minute radio segments and 800-word articles to a 400-page book and deep investigative pieces for The Atlantic.
Yes, Hagerty is still a reporter, but her mission and work life now look quite different. Now there is the freedom to pursue the stories that haunt or entice her. To explore stories over weeks, months, and years. To potentially change lives by choosing stories that matter in personal ways.
Her Atlantic piece, “When Your Child Is a Psychopath,” went viral. That success enabled her to pitch a story on a decades-old murder case in Dallas. “I talked to DAs, former prosecutors, detectives, witnesses, jailhouse snitches,” Hagerty said. “I may have found new DNA evidence that almost certainly will show the wrong person has been in prison for 30 years and would be for the rest of his life. This is what I love doing, uncovering the injustice, the wrongful conviction stories. I’m doing it now, and it’s working out.”
That article led to a 90-minute podcast over three episodes on Radio Atlantic. “It has been one of the most exciting, fun things I’ve ever done,” said Hagerty, with a zeal one doesn’t associate with the fourth decade of an arduous career. “I reinvestigated a murder. That’s pretty darned interesting.”
Hagerty is developing more story ideas for The Atlantic. Her days aren’t driven by today’s on-air deadlines. This week she’ll schedule interviews for those new stories, write a speech for an upcoming writing festival, and pitch a six-part podcast series. Life is an ebb and flow of developing new ideas, then diving into the research, travel, and interviews to bring those stories to life.
“When I went for Plan A, other things that I never even imagined have opened up,” said Hagerty. “Just put one foot in front of the other, and the opportunities appear. Sometimes you actually have to get your feet wet before the seas part.” Hagerty has recently been named a contributing editor for The Atlantic.
“I gave up what is arguably one of the best jobs in the world and started my next chapter. My transition may not sound all that dramatic, but it certainly feels that way,” Hagerty says.
“After mom died, Dad quickly started dating someone new. He seemed so happy but I couldn’t help but wonder if his new girlfriend was interested in him—or his money?”
“My aunt seemed to be more forgetful than she was last year when I visited. I became really worried when I noticed a large stack of unopened bills piled up on the kitchen counter.”
“I told my mother several times to say no to telemarketers when they call and ask for money. But when I reviewed her bank statement I discovered multiple checks written out to an organization I had never heard of. It really scared me.”
If these concerns sound familiar, you are not alone. Adult children often worry about their parents’ or elderly relatives’ ability to make sound financial decisions as they age. For good reason, as one in five Americans 65 years of age or older are victims of financial exploitation to the tune of $2.9 billion in damages annually. Unfortunately, only one in 44 cases of abuse is actually reported.
This year the Financial Industry Regulatory Authority—otherwise known as FINRA—took steps to address this issue. On February 5, two new regulations became effective. The first allows wealth managers to put a 15-day hold on an account if they suspect a senior or vulnerable adult is a potential victim of financial fraud or abuse. The second enables them to reach out to a person previously designated as a “trusted contact” to illicit more information and, hopefully, rectify the situation.
Here is how it works. Wealth management firms are now required to ask clients to name a trusted contact and keep his or her email and phone numbers on file. If an advisor has a reasonable suspicion of financial exploitation or is concerned about a client’s cognitive abilities, he or she can reach out to the trusted contact and put a temporary hold on the account in question. This allows the advisor time to research the matter and for the trusted contact to provide data about the client’s whereabouts or well-being.
Similar to signing a HIPPA release form at your doctor’s office, putting a trusted contact form in your investment file protects you should you be unable to do so yourself. Trusted contacts can give your advisor information, but they can’t authorize financial transactions or conduct trades on your behalf. It is a safeguard should a situation arise where your advisor can’t reach you, suspects you may be suffering some memory loss, or has reason to believe you are being exploited by another person.
While no one likes to think about this happening, the statistics indicate that granting your advisor permission to contact a designee in these limited situations is a safe and sound thing to do.
As with any new rule, you may have questions about when and how to select a trusted contact and how best to communicate this information to family. Here are some things to consider.
It Is Never Too Early to Name a Trusted Contact
No matter what your age, it makes sense to take preventative steps for the future. It may be a hard reality to face, but aging is inevitable. By age 75, most people experience some degree of mental and physical decline that impacts their ability to effectively manage their investments and personal finances. Some people experience these challenges earlier. Therefore, being proactive and naming a trusted contact now is wise. If you have aging parents and relatives, encourage them to do the same.
Select a Trusted Contact Carefully
According to the regulation, a trusted contact must be 18 years of age or older, and it is possible to name more than one person to this role. Consider naming an adult child, grandchild, niece or nephew, or a family friend who is financially literate and involved in your life. This way, if your trusted contact is asked to provide insight about your physical or mental health—or any changes in your life situation—he or she will be equipped to answer.
Ask Permission First
Ask the person (or people) you would like to designate as your trusted contact if they are comfortable taking on this responsibility. Don’t be discouraged if someone declines as not everyone has the skills and aptitude for this role. Once permission is granted, make sure you have their most up-to-date email addresses and phone numbers. Also share your thoughts and expectations should your advisor reach out to this person in the future.
Communicate Your Wishes to Your Family
Naming a trusted contact is a great reason to engage the entire family in a money conversation. Start the dialogue by sharing the name of your trusted contact, your rationale for having one, and why you selected this person. Take time to answer any questions your family members might have about who you picked and why you have agreed to take advantage of this opportunity. By proactively engaging in this dialogue, you are sending your adult children and loved ones a clear signal that it is okay to discuss aging as a family. This is a gift that will serve you and your family well over time.
Enlist Your Advisor’s Assistance
Advisors spend their careers helping people save, invest, and plan for their financial futures. They want to help you plan for all the contingencies in life, including unfortunate ones such as being a victim of fraud. Ask your advisor questions about these regulations and ways you can safeguard your assets over your lifetime. When appropriate, include your family in these conversations so they understand your needs and wishes as you age.
But increasingly, Todd and Ellen are in the minority in living out a worry-free retirement. A household survey conducted by the Federal Reserve shows that, in 2010, only 31 percent of households were covered by a defined benefit pension plan like the one Todd and Ellen have. And that percent is declining. As of 2013, although 78 percent of workers in the public sector have pensions, only 18 percent of those in the private sector are covered by defined benefit plans. That’s down from 35 percent just two decades earlier. Many companies have switched to defined contribution plans—such as 401(k)s—in recent years, so greater numbers of future retirees won’t have the security of a monthly paycheck for life from a pension.
These statistics tell us that finances for many may be more challenging than for some in retirement now, like Todd and Ellen. How can couples successfully negotiate money in their retirement years
Spender and Savers
According to researchers at the University of Michigan, University of Pennsylvania, and Northwestern University, opposites really do attract, and that includes money matters: spenders really are attracted to savers.1 Jeff Motske, author of The Couple’s Guide to Financial Compatibility, says that spender-saver conflicts over money can escalate in retirement; once a spender is retired, there’s more time for leisure activities, and many cost money.
CAPTRUST Financial Advisor Catherine M. Seeber, CFP®, CeFT®, says most of the couples she works with embody the spender-saver dynamic. For example, Lynn, a golf lover who’s retired from her work in human resources, has been spending quite a few days on the greens and organizes women’s getaway golf weekends with friends. Husband John isn’t a golfer; he’s noticed that her outings have added a considerable amount to regular credit card expenses and worries that Lynn’s pastime has eroded their budget over the past year. Seeber has answers for this dilemma that, if left untended, could lead to major disagreements.
Analyze Income and Expenses
Seeber says to help couples get a handle on resolving the spender-saver conflict, first tackle the big picture: How much income and how much outflow are there? always runs the numbers to provide couples with how much income they’re bringing in from all sources and then subtracts from that all of the expense and liability information that they’ve shared. She then asks them this question: “Is there any money left over at the end of the year?” If the numbers show that they should have had $20,000 left over at the year’s end but have nothing to show for it, such as reinvesting it or purchasing a new car, a deeper dive into where it was spent may be in order. Most likely, there are expenses unaccounted for, and they can begin sharing what those are, with no judgment attached.
In Lynn and John’s case, Lynn agreed to cut back golf to two days a week. Redirecting that expenditure, Lynn and John agreed to spend that money on more getaways to improve the quality of their together time. Seeber emphasized to John, who’s the saver, that it’s important to be willing to spend money on a treat like this so that the couple enjoys retirement together.
Set a Discretionary Limit
Each couple should have some discretionary money within the monthly budget, says Seeber—the maximum amount could be from $100 to $1,000 or several thousand, depending on the couple’s resources. That way, the spender knows he or she can spend the discretionary money, but there is a ceiling. Couples usually compromise on what’s realistic once they see where they are financially. Having discretionary spending limits helps both spender and saver experience freedom with boundaries.
Compromise and Negotiate
Compromise and negotiation are the golden rules for a happy retirement. Many couples have very different ideas about their retirement lifestyle but come to a compromise on their own once they know what they can afford. For example, Kathy and Art lived in the Chicago suburbs raising their children, but Art always wanted to live someplace warmer, while Kathy wanted to be near the grandchildren in retirement. She was happy staying in the same town to be close to their grandchildren but wanted a smaller house with less maintenance. Art explored condos in Florida but wasn’t sure it was wise to purchase, considering condo fees and rising prices. While researching real estate, Art found a great community with monthly rentals.
Kathy, knowing Art loves warm weather and the beach, agreed to vacation in Florida during the winter months. The couple now ends up spending three months each year there, escaping winter’s snow and salt. They enjoy biking and going to the beach without the expense of a large initial outlay and then having to maintain two residences. Art and Kathy say they have the best of both worlds. This arrangement enables them to stay close to their grandchildren for much of the year, while enjoying their Florida getaway during Chicago winters. Compromise on both Kathy’s and Art’s part enabled this happy ending.
Helping Adult Children
Helping retired couples navigate the amount and type of aid to give to adult children and grandchildren is another common issue Seeber handles in her role as financial advisor. Unfortunately, “it’s very unusual to be on same page on how much assistance to give a child,” says Seeber, noting that this is a tough issue but one that can be resolved. She has the couple first talk through their expectation for that child in the privacy of their home, even listing the various options—“if we provide this much support, then we expect this to happen.” Often one spouse wants to step in significantly, and one doesn’t.
If it’s a question of an adult child moving back home, “you can reach a compromise with stipulations,” says Seeber. Have your child show proof that it’s not meant to be a permanent move-in by signing a lease or contract along with other provisions related to steps to producing enough income to be able to move out. When appropriate, Seeber can provide resources to the adult child such as ways to consolidate debt and tips on job hunting.
It’s All about Planning
Seeber recommends making an appointment with your financial advisor for the next year during your current meeting. That way, you don’t forget this important checkup. Your advisor helps you set a target for withdrawals for the year, and unless circumstances change drastically, following the plan provides a roadmap. This way, spenders are automatically reined in by the data. And savers are reassured that they aren’t breaking the budget in taking that vacation to Italy once they’ve priced it out and see that it fits within the amount they’ve budgeted for the year.
1Kiplinger. Older couples face money battles.
It’s not a new way to invest—endowments, foundations, and large pension plans have been investing their consciences for decades—but there has been a lot of buzz about environmental, social, and governance (ESG) investing in recent years. In fact, assets in ESG equity and fixed income strategies have ballooned over the past ten years. According to the US SIF Foundation, of the $40.3 trillion of assets under management in the U.S. in 2016, $8.1 trillion was invested in ESG portfolios. That growth represents a 30 percent increase from $6.57 trillion in 2014.
If you read ten articles on the topic, you’ll likely come away with at least seven descriptions of what it is. So what exactly is ESG investing? No uniform definition exists, but at its heart, ESG investing is an investment methodology that allows an investor to apply a set of criteria that aligns portfolio investments with the investor’s ethical considerations or values. Many investors use environmental, social, or governance factors to evaluate potential investments. And since ESG criteria are based upon corporate attributes, they apply to both stocks and bonds issued by a company.
Digging a Little Deeper
ESG investing originated in the 1960s and was then known as socially responsible investing. At the time, many institutional investors were looking to exclude specific companies or entire industries—such as companies involved in cigarette production or doing business with the South African apartheid regime—from their portfolios. Some investors use other terms, such as sustainable investing, impact investing, and mission-related investing, which are used either as synonyms or represent specific flavors of ESG investing. Regardless of the nomenclature, a common theme is their focus on generating both financial and nonfinancial returns.
Let’s take a closer look at environmental, social, and governance criteria:
Environmental. Environmental criteria examine how a company performs as a steward of natural resources and the environment. This may include, among others, the following factors:
- Carbon intensity
- Fossil fuel reserve ownership
- Water usage intensity
- Pollution
- Alternative energy utilization
- Green buildings
- Energy efficiency
Social. Social criteria screen based upon how a company manages its relationships with employees, suppliers, customers, and the communities where it operates. Examples include:
- Labor practices
- Human rights
- Animal welfare
- Data protection and privacy
- Diversity
- Business involvement in practices such as major disease treatment, education, firearms, and predatory lending
Governance. Governance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights. Examples of governance factors include:
- Board of directors’ independence
- Frequency of director elections
- Common equity voter protections
- Compensation policies
- Accounting controls
- Risk oversight
- Shareholder engagement
- Management structure
What constitutes an acceptable set of ESG criteria for an investor varies and depends on that investor’s beliefs and ethics—whether the investor is an organization, such as a nonprofit, or an individual. Some focus on a short list of specific issues like carbon emissions and energy efficiency, while others take a broader view that incorporates factors from all three sets of criteria.
Several organizations have created guidelines for what constitutes ESG best practices. One such organization is the Sustainability Accounting Standards Board (SASB). This nonprofit has developed accounting standards and disclosures for public corporations to release materially important ESG information for investors. In addition, index and data providers like MSCI and Morningstar now provide investors with ESG portfolio scoring and benchmarks. And several service providers have created proprietary scoring systems that rate companies on their exposure or commitment to ESG-related factors.
If you’re comparing potential investments, it’s important to note that the specific factors vary from group to group, so understanding the underlying methodology is critical.
Implementing ESG Strategies
To the extent an investor wishes to incorporate ESG factors into his or her portfolio, it can be accomplished in several ways. Three of the most common methods can be used to address different goals.
Exclusionary screening is the predominant form of ESG investing and, as the name suggests, is an approach that excludes companies with undesirable ESG characteristics from an investment manager’s opportunity set. This approach is typically best suited for investors primarily concerned about not supporting companies with operations or values that are antithetical to their missions or priorities. For example, a church-linked nonprofit foundation may use exclusionary screening to avoid companies engaged in gambling, tobacco, or other activities against their values. Exclusionary screening can be used by investors that employ a zero-tolerance approach to specific factors such as coal extraction and weapons manufacturing.
Often, exclusionary mandates are implemented in separate accounts, where an investment manager builds a customized portfolio for an ESG investor. While separate accounts provide the flexibility and customization necessary, they can be relatively expensive at low asset levels and are primarily used by institutional investors.
Thematic investing strategies pool the assets of multiple, like-minded investors to create leverage that can be used to influence the corporate policy related to ESG issues. Thematic investing can be accomplished by mutual fund and exchange-traded fund asset managers. Common themes for ESG fund managers include specific factors like religious values, gender diversity, and low carbon emissions, as well as the three ESG themes more broadly. These funds can be cost-effective solutions for investors whose ethical considerations or missions align with these funds.
ESG integration includes ESG factors alongside traditional financial and risk management measures to create portfolios. ESG integration is a recent advancement and is causing many asset managers to build out research capabilities to support it. Investors should expect major investment firms to tout these capabilities as they are refined in the future.
Investment Challenges
Investors should always weigh the potential benefits of an investment strategy against the risks and considerations. And ESG investing carries with it a few additional considerations or challenges that require study. For example, investors should consider:
- Performance. In addition to the risk that an investment manager will underperform, ESG investing’s focus on or aversion to specific companies or industries can create performance differentials relative to benchmarks or peer groups. For example, an ESG fund focused on low carbon emissions may underperform during a period of rising energy prices because of its lack of exposure to oil companies.
- Corporate behavior. Corporations—especially large, global companies—are complex organizations and may possess both positive and negative characteristics, so getting a clear read on corporate behavior can be challenging. And while corporations may create ESG-friendly policies, they may not follow through in practice, and shareholder advocacy may be ineffective.
- Fees. Research on ESG criteria can increase research costs, so investment management fees for ESG strategies tend to be higher than those for their non-ESG peers. According to Morningstar, the average expense ratio for an ESG equity mutual fund is 0.85 percent, compared to the average of 0.57 percent paid by investors in all equity mutual funds.
- Diversification. Because ESG criteria limit available investment options, some asset classes may lack diversification. That may mean they are not viable investment options for some investors or may be subject to an unacceptable level of tracking error, even relative to an ESG benchmark. For example, environmentally focused investors are hard pressed to adequately diversify a high yield bond portfolio with industrial and utility companies comprising 90.86 percent of the Bloomberg Barclays U.S. High Yield Index.
- ERISA compliance. Qualified retirement plan sponsors face the additional challenge of complying with the Department of Labor’s evolving guidance on use of ESG. Bottom line: the DOL no longer prohibits investment managers who use ESG criteria but suggests that plan sponsors not use ESG criteria to promote social, environmental, or other causes at the expense of plan participants’ financial interests—in the form of lower return expectations or greater risk.
The current state of the art for ESG investing provides a range of approaches for implementing strategies tailored to an investor’s very specific goals. Despite the inherent complexities and a number of practical challenges, ESG investing is growing dramatically as more institutional and individual investors look for ways to align their portfolios with their values. If you’re interested in learning more about ESG investing and how it can play a role for your organization, please contact your CAPTRUST financial advisor.
In 2012, Sara Kushwara, a 36-year-old teacher from Connecticut, moved to Istanbul, Turkey, to teach English. She found herself living in a hectic city where she heard the call to prayer five times a day mixed with the sound of cars, boats, protestors, and pedestrians pushing carts down ancient cobblestone streets. She realized she needed to find composure in the chaos around her. It was this realization that led her to meditation.
Kushwara hadn’t lived in Istanbul long before some new friends invited her to join a meditation group. This was a life-changing experience for her and the answer to quieting the chaos. After most meditation sessions she felt calm, cleansed, and grounded. Sitting in a chair with her eyes closed for 45 minutes a day while concentrating on her posture and breathing allowed her to become more focused. It made it easier to deal with the excitement and obligations that were now part of her daily routine.
Kushwara moved back to the U.S. a couple years ago and continues to meditate every day. While the frenzy of living in a foreign city may not exist for her anymore, she is now married with a one-year-old son. And despite never having enough hours in the day, she still makes meditation a priority. She sometimes uses an app on her phone to connect with fellow meditators. For as long as it works for her as a tool to escape the stresses life creates, she will continue to meditate.
Medical and Mental Benefits
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For many, the thought of meditation conjures up ideas of spirituality. And, in fact, many who meditate believe they are enriching their souls. But what about the medical benefits a person can gain from meditation?
Ram Ramabhadran, a retired molecular biologist living in Raleigh, North Carolina, joined a meditation group hoping it would help with his feelings of irritation and anxiety. Since he began his journey into meditation, he has been able to find patience through mindfulness meditation. He now sleeps better and lives a more peaceful life.
As a man of science, he feels the cause and effect of daily, guided meditation sessions. He suggests that, to experience all meditation has to offer, one needs to make it part of a daily routine.
Medical professionals continue to study how the brain benefits by simply giving it a rest. According to Dr. Gayatri Devi, neurologist and author of A Calm Brain, while it doesn’t work for everyone, meditation can be a bottom-up alternative to prescription drugs for treating a number of illnesses. In fact, she believes drugs have not solved the problem of depression, and more people than ever are complaining of insomnia and anxiety.
Studies at the University of Wisconsin show that experienced meditators have much higher levels of activity in the section of the brain that processes positive emotions and less activity in the areas associated with anxiety, depression, and other negative emotions.
In addition to helping people with anxiety, depression, and insomnia, a study published in the journal Perceptual Motor Skills found meditators exhibited a higher IQ and improved academic performance, more accurate perception, improved creativity and problem solving, improved focus and memory, improved job satisfaction and job performance, and improved athletic performance due to faster reaction time, increased energy, and endurance.
Those who meditate daily usually have a sacred spot in their home they turn to for respite. It is often a quiet spot where there is little likelihood of being interrupted. Avoiding work spaces that can draw focus to unfinished tasks or items requiring attention is also a way to distance oneself from possible disruptions.
But, as beneficial as daily meditation can be, sometimes people feel the need for more of an immersion. In today’s world, there are endless distractions vying for our attention and, at times, they can seem impossible to tune out. Whether it is the constant buzz of electronics, politics, work, or family, meditation retreats are becoming a popular way for people to learn to live in the moment and assist in blocking out the noise.
Getting Away from It All
Determining how you want to learn—or continue your progress in the art of meditation if you are already an experienced meditator—is the first step in the journey to self-discovery. There are so many options when it comes to selecting the right retreat, it is beneficial to break the options down.
Those who are looking for a complete escape with a touch of adventure might attend retreats that offer outdoor activities in addition to guided group meditation sessions. Exploring nature through physical exercise combined with meditation can be just what some people need to release tension and experience a deeper calm.
One such retreat is The Esalen Institute in Big Sur, California. This quintessential meditation retreat, complete with 120 acres of land, sits between mountain and ocean, with a cascading canyon stream and hot mineral springs. It is an environment seemingly made for a spiritual awakening. The Esalen runs as a nonprofit organization, offering meditation workshops for beginners as well as experienced meditators. While not meditating, guests can take nature hikes, surf or kayak in the ocean, or enjoy breathtaking views while running along the Pacific Coast Highway.
Packages range from a weekend stay in a communal lodge for $420 to seven days in a premium single room for $3,555.
Where Silence Is Golden
Seekers of a deeper self-awareness and more intimate meditation sessions might want to look for a retreat that offers what is called noble silence. Places with a silence policy believe that, by avoiding the chatter, you increase awareness and simplify life. At most retreats of this kind, guided sessions where talking is encouraged are conducted, so it is not as though participants must remain quiet their entire visit. These retreats put a strong emphasis on personal transformation.
Rolling Meadows in Brooks, Maine, is located off a dirt road in a restored 1840s New England farmhouse. Quaint as it may be, it sits on a vast property of 100 acres, 15 miles from the coastal town of Belfast. The eponymous rolling meadows create the perfect environment to help one discover balance.
This retreat not only prescribes to noble silence, it also prohibits technology, which Surya-Chandra Das—one of Rolling Meadows’ teachers—believes has become an addiction. Its goal in having no-speaking and no-technology policies is to remove external stimulation and distractions to help participants slow down while nurturing them through a contemplative healing process that rejuvenates their minds, bodies, and spirits. After all, the quieter you become, the more you can hear.
Packages range from two to six nights and start at $495 per person and go up to $1,250.
Pampering Your Mind and Body
Meditators wanting to feel rejuvenated with a certain level of pampering may want to explore a spa-meditation experience at a retreat that includes such amenities as massages, yoga, and facials.
The Mii amo in Sedona, Arizona, is a destination spa whose red rock backdrop will inspire all who attend. Mii amo curates its retreats to help guests find balance and inner harmony. The resort offers services ranging from massages, body wraps, and skincare to fitness, yoga, and meditation classes. The retreat’s unique location and services are sure to suit anyone seeking ways to renew body and mind.
All-inclusive packages for three, four, and seven nights start at $2,454 and go up to $10,620. Spa treatments are included in each option.
While retreats vary, most use the beauty and peace of their natural landscape as a means of establishing the beauty and peace within. They also place an emphasis on healthy nutrition; many include farm-to-table, vegetarian, vegan, and organic meal options in their packages.
Regardless of how you practice meditation—at home in a quiet spot or at a posh resort—the medical and spiritual benefits can be powerful. Remember what Buddha said: “A disciplined mind brings happiness.”
Falling in love and getting married is a wonderful experience. When we are young and optimistic about our futures, we are often naïve about what
spending the rest of our lives with another person entails. Many couples don’t realize the financial challenges they will face. But the second time you decide to tie the knot, you are wiser. And often your financial situation is more complex. You realize that money can be a source of marital conflict and a contributor to divorce. You want to avoid making the same money mistakes from your first marriage. But how do you initiate these conversations, and what topics should you address?
Jon faced this dilemma when he decided to propose to Charlene. The couple met when they were both volunteering for a church organization that builds houses for families in need. Jon, an accomplished surgeon, made over $1 million a year and recently divorced. Charlene came from a middle-class background and had never been married. Once they got engaged, she sensed that Jon’s four adult children were skeptical of their relationship. Because she didn’t want to be seen as a gold digger, Charlene avoided talking about money and encouraged Jon to leave all his assets to his children. Jon reluctantly agreed with this plan without fully realizing the impact on her long-term financial well-being.
Lucky for Jon, CAPTRUST Financial Advisor Catherine M. Seeber, CFP®, CeFT®, was his trusted advisor. She helped the couple engage in a series of premarital money conversations and develop a plan for Jon to take care of his children and his new wife upon his death. According to Seeber, “The couple decided that philanthropy was important and that they wanted their resources to go to Jon’s children to support their lives now. I helped the couple create a family foundation where the entire family could get involved and use their wealth to support the causes they all believed in.” In the end, this shared philanthropic activity strengthened the bonds between Jon, Charlene, and the next generation.
While your situation may be different than Jon and Charlene’s, the need for an open and honest dialogue about money is paramount for setting the stage for a healthy relationship. This will allow you and your partner to be clear about your expectations and help both of you communicate your plans to the next generation.
Share Your Money Mindsets
Every person has automatic thoughts and beliefs about money and wealth—called money mindsets—and these attitudes impact saving, spending, investing, and gifting behaviors. A great way to start a financial dialogue with your partner is to ask about his or her money mindset. Questions to get the conversation rolling include:
- What did your parents teach you about money and wealth?
- How would you describe your money personality?
- When do you think it makes sense to save money versus spend it?
The discussion that ensues will help you uncover each other’s mindsets and understand the rationale behind your financial habits.
When discussing money mindsets, it is vital to listen more than you talk. Fight the urge to interject your ideas until your partner is done answering each question. Then, once he or she has had a chance to share, you can share yours.
The goal of this conversation is to identify similarities and differences in your perspectives. When Jon and Charlene shared their money mindsets, they identified the shared value of charitable giving and their differing attitudes toward wealth. They could then use these insights to work with their advisor to develop a financial and estate plan that honored their individual and joint mindsets.
Consider a Prenuptial Agreement
The odds of a couple splitting up are high in the U.S., with 50 percent of first marriages and 67 percent of second marriages ending in divorce. When you remarry, you don’t anticipate another breakup, but the statistics are not on your side. Therefore, signing a prenuptial agreement often makes good financial sense.
A prenuptial agreement is a document that summarizes how you will handle your finances during your marriage and in the event of a divorce. (A postnuptial agreement is a very similar document that is signed after a couple gets legally married.) If you have children from a previous marriage or have significant assets or family wealth, prenuptial agreements protect your children and your wealth should your marriage end prior to your death. They are drafted with the guidance of an attorney, often with input from a financial advisor.
Many people buy into the myth that if a couple has a prenuptial agreement, the marriage is destined to fail. The truth is that disclosing your financial history and assets to your future spouse is valuable, and the dialogues that result are worthwhile.
Robert, a business owner and divorcee, found that his relationship with his second wife benefited greatly from this experience. “We had the hard discussions. We didn’t sweep money and finances under the rug. Through the process, we educated each other about how we thought and felt about money, and I feel far better to have had the experience than not,” he says.
Review Your Estate Plan![](/nothing.jpg)
One of the trickiest issues a couple faces when blending families is estate planning. How will each partner’s assets be transferred to the children from previous marriages? Will it be similar or different than how the wealth is transferred to any offspring from the new marriage? Will the surviving partner from the second marriage inherit the family home, or will other provisions be made to ensure his or her financial stability?
These are not easy questions, but they are important issues for couples to discuss and think through carefully. Since state and tax laws vary, it is important to consult with an estate attorney and a financial advisor to run different scenarios so you can make the best decision for your family.
CAPTRUST Financial Advisor Mike Molewski, CFP®, ChFC®, works with couples in collaboration with an estate attorney to determine the best vehicles to use to accomplish a couple’s goals. It may involve setting up a trust, retitling assets, or using insurance proceeds to pass on wealth. His recommendation is to “focus the estate planning discussion on the transfer of assets, and avoid making it personal.”
When Warren and Betsy planned to marry, they both had children from a previous marriage. Warren wanted to make sure Betsy was taken care of in the event of his death but didn’t want to rewrite his trust. The solution was to take out a life insurance policy with Betsy as the sole beneficiary. This created a future income stream for his new spouse and allowed his adult children to keep their inheritances intact.
Decide How to Manage Your Money
It is important to take time to talk with your future partner about the when, where, how, and why of your financial life together. For example, if you have children from a previous marriage, how does your new spouse feel about paying for expenses related to their care? If you own several real estate properties, will you jointly cover the property taxes, or will you pay this expense individually?
There are no right or wrong ways to manage money in your marriage—only the method that works for both of you. The key to success is being proactive and thinking through how to cover day-to-day expenses before they become a source of conflict.
When Justine married her second husband, Sean, she owned several rental properties and a primary residence. While Sean was willing to split the household expenses for the home they would share together, he was reluctant to take on the burden associated with her rental properties. After discussing the matter, the couple agreed that Justine would retain sole ownership of her rental properties and realize the income and incur the expenses associated with this real estate. They signed a prenuptial agreement that clearly spelled out this arrangement and how the assets would remain in Justine’s possession should their marriage end in a divorce.
Review Your Plan Annually
The decisions you make initially may change over time. You may be still hurting from the breakup of your first marriage or uncertain how your new blended family will gel. As CAPTRUST Financial Advisor Donn A. Johnston Jr., CFP®, said, “What is right at the beginning of the partnership isn’t necessarily right five years after the marriage.” Therefore, making a pact with your second spouse to review your initial financial and estate planning decisions annually, or at least every few years, makes sense.
Getting married again is a leap of faith that involves many decisions, especially if you and your second spouse are blending two homes into one. It is important to acknowledge the complicated family dynamics, thoughtfully discuss money matters, and realize that everyone is going through a transition. Be wise and consult with your financial advisor, estate attorney, and the members of your family. Taking action today will help you live happily ever after tomorrow.
These stories should not be construed as an endorsement, reference, or comment from any client regarding the quality of investment advisory services CAPTRUST provides.