CINCINNATI BUSINESS COURIER
February 11-17, 1991
Investments
By Charles D. Vaughan
Winning is half the game; staying a winner is the other
I WON, NOW WHAT?
I don’t mean the lottery, I mean financial independence. That is the elusive goal to which most people aspire. Some call it worry free retirement. For others it means having the knowledge that they work only because they want to, not out of necessity.
In the sports laden jargon of the day, we could say such people have “won the game.” The big difference is that in life there is more than one way to keep score. Unlike a game, life goes on and the “score” continues to change. Many of those who have accumulated enough to feel they have won discontinue planning. Having “enough” money always assures freedom. This is especially true when the fortune is only on paper; the families of many apparent winners find that out too late.
There are three major hazards to maintaining financial freedom once you have it:
Unhedged risks: There are three types of risk that can destroy large amounts of wealth in short order. The first is residual business risk. A number of people who sold businesses accepted stock and/ or debt securities from the buyer. In many cases there were not marketable securities. As aggressive leveraged buyouts have unraveled, so have some large paper fortunes.
This also has happened to many whose investments were primarily in company stock positions acquired over many years. Reversal of the company fortunes has resulted in virtual wipeout. Those who also accepted large amounts of deferred compensation for tax reasons have suffered doubly.
The second unhedged risk is potential liability. It is common knowledge that as your wealth increases so does your desirability as a target defendant. Few people expect that a big lawsuit will ever come their way. So little preparation is done in this area. For those who get caught in this trap, the results can be costly even if they do not lose.
The third unhedged risk is longterm health care costs. Surveys have shown that most people believe they are covered for such costs under company plans or Medicare. In fact, Medicare covers only about 2 percent of these costs. Most company provided group medical plans cover none.
The average cost of custodial nursing home care is more than $2,000 per month. Better quality care or more intensive care costs more than $5,000 per month. This is enough to wipe out thousands of families of above average means every year. Even those of substantial paper wealth may find such a burden to be a strain of liquidity.
Loss of control: For most people financial independence is synonymous with control. If you have enough money, you can control your own destiny. Unfortunately, that only works while you are in full command of your faculties. The worst consequences of not making a proper estate plan have nothing to do with taxes. Rather they deal with how well a person can control his or her finances. The test of this control comes under adverse circumstances. When disaster strikes, it is usually too late to plan.
Sometimes the most powerful are reluctant to grant anyone else control. Therefore, they fail to empower others to act if they cannot. This is a tragic mistake for anyone with complicated finances. In the event of a disability, even a spouse may be unable to access any cash. Worse yet, complex dealings often call for constant management. Awaiting court approval to make necessary transactions can cause a catastrophe.
Bad investment management: The news is replete with stories of celebrities being ripped off. Big name agents with fancy offices offer little protection. In many cases investors have done themselves in by assuming their skills in accumulating wealth in one field were transferable to the broader markets. This has been especially true for corporate retirees who left with large pension plan balances. Whether by ineptitude or fraud, the result is equally painful.
Most people who have acquired enough material wealth to be considered financially independent have done it by working hard at their chosen profession. Their wealth is compensation for concentration. Many of them have had little time to devote to other financial matters. Unfortunately, financial independence is frequently more easily acquired than held.
The challenge is not so much to win as it is to stay a winner.