Would you give out plumbing advice?Submitted by Financial Planning Solutions, LLC on January 17th, 2019
Last week, I got a call from a woman that was referred to me by a client. The conversation went like this.
Emily - "Hi, you were referred to me by Susan Harris*. My name is Emily Latella* and I was wondering if I could ask you some questions regarding my finances and investments. I told Susan the whole story and she thought it best if I spoke to you."
Rick - "Sure, I'm happy to answer any questions you have but bear in mind, I probably can't give you too much detail without knowing your entire financial picture"
Emily -"I understand. Well, let me give you a little background and we can go from there. I was divorced a few years ago when I was 44. I received the house in the divorce as well as a larger IRA that was my husband's. The IRA currently has a little over a million dollars in it although it was more before the market went down last year.
Emily - I really don't manage the IRA and have pretty much just left it alone since the divorce. I'm in a new relationship and my boyfriend seems to be much more knowledgeable in the investments than I am"
Rick – "Can I ask what business or field your boyfriend is in?"
Emily – "He's a general contractor"
Rick – "Okay, go on".
Emily – "So, he is telling me I should make some changes. That I'm invested too conservatively and there are other opportunities out there that I should be putting my money into. He also thinks I should sell the house and buy a condo."
Rick – "Did he mention what types of opportunities?"
Emily – "Well, he is working on a big development near Worcester** that he says it going to make a lot of money. He thinks if I invest $200,000, I can make about $50,000 profit when the units all sell"
Rick – "Hmmm"
Emily – "So, I know you probably can’t give me an answer if this is a good idea until you know more but I thought maybe you had a general sense."
Rick – "Okay. Well, I see a few issues here that we can talk about. You mentioned you were in your 40's. Do you have any other money available other than your IRA?"
Emily – "Not really. Just a few thousand in my checking account."
Rick – "Okay. Since you are in your 40's, if you took money out of your IRA you would be subject to a 10% penalty plus taxes on what you take out. So let's say you took $200,000 out of your IRA, depending on your tax bracket, you could be left with about $125,000 or so. So, you would need to take out much more to get the $200,000."
Emily – "I didn't realize that. I did plan on putting this money back into my IRA after all of the units sold"
Rick – "Well, there are limitations on putting money back into an IRA and we can talk more about that at a later time. I think a bigger concern I have is whether the real estate investment is a sound option. Your boyfriend may be a great contractor and have good intentions, however, as someone whose calling is to help women make sure their financial lives are sound, I'm usually wary of such endeavors. I could tell you a few stories where things went terribly wrong."
Rick – "As far as whether you should be investing your money less conservatively, that decision is based on a few factors. One of which is what your tolerance for risk is. The only way to know that is to talk more about it and complete some type of risk assessment. I'm not sure what your boyfriend is basing his advice on. I'm also not sure selling your house makes sense unless you had a comprehensive financial plan that took a holistic view of everything including your goals and desires."
This conversation went on a bit longer but I think you get the general sense. Taking financial advice from a non-professional is a bit like a kindergarten teacher giving extensive plumbing advice.
Licensed plumbers spend years learning their trade and working in that industry every day. I'm pretty handy and have even remodeled kitchens and bathrooms but I always brought in the experts i.e. the licensed plumber or electrician to do their part.
Financial planning and investing is no different. For over 25 odd years, Lyman and I have seen all sorts of stuff. You don't see this in a book or an online article, or a YouTube clip.
Before making any major financial decisions, it is always best to speak with a Certified Financial Planner® practitioner.
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
*Not her real name
**Not the name of the town
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