Objective information about financial planning, investments, and retirement plans

Time for a Mid-Year Financial Review

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It’s hard to believe that the first half of the year has come and gone already.  We enjoyed having all three of our adult children home over the holiday weekend.

Financial Review

Mid-year is always a good time for a financial review and 2014 is no exception.  So far in 2014:

  • Various stock market indexes are at or near record high levels. The Bull Market in stocks celebrated its fifth anniversary earlier this year and through June 30 the S&P 500 Index is up 190% since the March 2009 lows.
  • Bond funds and ETFs have surprised us by posting some pretty decent returns.  This is contrary to what many expected, especially in the wake of weak performance in 2013.
  • After largely not participating in the in the strong equity markets of 2013 REITS have been a top performing asset class YTD through the second quarter.
  • Emerging markets equity lost money as an asset class in 2013 and has also staged a nice recovery YTD through the first half of 2014.
  • Small cap stocks have underperformed so far in 2014 after a very outstanding 2013. 

In just about any year at the midpoint there will be asset classes that outperformed and some that have underperformed expectations.  That’s completely normal.  As far as your mid-year financial review here are a few things to consider.  These apply whether you do this yourself or if you are working with a financial advisor.

Review your financial plan 

Whether you do this now or at some other point in the year you should review your financial plan at least annually.  Given the robust stock market gains of the past five years this is a particularity opportune time for this review.

  • How are you tracking towards your financial goals?
  • Have your investment gains put you further ahead than anticipated?
  • Is it time to rethink the level of investment risk in your portfolio? 

Adjust your 401(k) deferral

If you aren’t on track to defer the maximum amount of your salary allowed ($17,500 or $23,000 if you are 50 or over at any point in 2014) try to up the percentage of your salary being deferred to the extent that you can.  Every little bit helps when saving for retirement.

Rebalance your portfolio 

This should be a standard in your financial playbook.  Different types of investments will perform differently at different times which can cause your overall portfolio to be out of balance with your target.  Too much money allocated to stocks can, for example, cause you to assume more risk than you had anticipated.

While it is a good idea to review your asset allocation at regular intervals, you don’t want to overdo rebalancing either.  I generally suggest that 401(k) participants whose plan offers auto rebalancing set the frequency to every six months.  More frequent rebalancing might be appropriate if market conditions have caused your portfolio to be severely misallocated.

Note some investment strategies call for a more tactical approach which is fine.  If you are using such a tactical approach (perhaps via an ETF strategist) you will still want to monitor what this manager is doing and that their strategy fits your plan and tolerance for risk.

Review your individual investments 

Certainly you will not want to make decisions about any investment holdings based upon short-term results but here are a few things to take into account during your mid-year financial review:

  • If you hold individual stocks where are they in relation to your target sell price?
  • Have there been key personnel changes in the management of your actively managed mutual funds?
  • Are any of your mutual funds suffering from asset bloat due to solid performance or perhaps just the greed of the mutual fund company?
  • Are the expense ratios of your index mutual funds and ETFs among the lowest available to you?
  • Has your company retirement plan added or removed any investment options?
  • Is the Target Date Fund option in your 401(k) plan really the best place for your retirement contributions? 

Review your company benefits 

I know its July but your annual Open Enrollment for employee benefits at most employers is coming up in the fall.  This is the time where you can adjust your various benefits such as health insurance, dental, etc.  Take a look at your benefits usage and your family situation as part of your financial review to see if you might need to consider adjustments in the fall.

Review your career status 

How are things going in your current job?  Are you on a solid career path?  Is it time for a change either internally or with a new employer?

A key question to ask yourself is whether you feel in danger of losing your job.  Often companies will time their layoffs for the second half of the year.  Ask yourself if approached with a buyout offer to leave would you take it.

For most of us our job is our major source of income and the vehicle that allows us to save and invest to meet financial goals such as retirement and sending our kids to college.

Start a self-employed retirement plan 

If you are self-employed you need to think about starting a retirement plan for yourself.  The SEP-IRA and the Solo 401(k) are two of the most common self-employed retirement plans, but there are other alternatives as well.

You work too hard not to save for your retirement.  If you don’t have plan in place for yourself it is time to take action.

Mid-year is a great time for a financial review.  Take some time and take stock of your situation.  Failing to plan your financial future is a plan to fail financially.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

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401(k) Loans by the Numbers

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The topic of borrowing from one’s 401(k) account is always a bit controversial.  Regardless of your view, the folks at TIAA-CREF have compiled some interesting data on 401(k) loans.

Key findings about 401(k) loans 

In their study of 401(k) loans TIAA-CREF found:

  • Getting Out of Debt – Paying off debt was cited as the top reason for taking out a loan from retirement plan savings (46 percent), yet only 26 percent of respondents said it was a good reason to take out a loan.
  • Paying for the Unexpected – The No. 2 reason overall for taking a loan was to pay for an emergency expenditure (35 percent).
  • Borrowing Against Their Savings – Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent. 

Moreover, they found that nearly One-Third of Americans Have Taken Out A Loan From Their Retirement Plan Savings and that 43 percent of those who have taken loans have taken two or more. 

401(k) loans – some statistics 

The TIAA-CREF study offered some interesting numbers regarding 401(k) loans:

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 “Women were more likely than men (52 percent vs. 41 percent) to take out a loan to pay off debt; however, men were more likely (40 percent vs. 29 percent) to take out a loan to pay for an emergency expenditure. 

Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent. 

In addition to borrowing funds from retirement savings plans, many Americans are also contributing less to their plans while they are paying back the loan. More than half of respondents (57 percent) who took out loans decreased their contribution rate during the payback period. Those age 18-34 were the most likely to decrease their contribution amount (81 percent). Forty-eight percent of women kept the same contribution rate while paying back the loan, compared to only 39 percent of men.”

Questions to ask before taking a 401(k) loan 

Morningstar’s director of personal finance Christine Benz recently wrote an excellent piece 4 Key Questions to Ask When Considering a 401(k) Loan.  Christine suggested answering these four questions before deciding to take a loan from your 401(k) account:

  • Does my intended use of funds promise a higher rate of return than leaving the money be?
  • Is my job secure?
  • Can I realistically pay this back?
  • Is my retirement plan on track? 

Is a 401(k) loan right for you?

I’m generally not a fan of using your 401(k) as a piggy bank but the reality is that there can be situations where the money is needed.  Things like a medical situation, a job loss, or other dire situations might necessitate a 401(k) loan. 

In the words of TIAA-CREF Executive Vice President Teresa Hassara: 

“Too many people have struggled since the 2008 financial crisis and have looked at loans from their retirement plans as a way to ease financial stress. However, individuals should weigh all of their options carefully before borrowing from their plan savings or reducing their contributions. Loans can undermine retirement savings and cause investors to miss out on earnings from rising markets. It’s important to evaluate the benefits of taking a loan now against the need for those earnings to build long-term retirement security. Working with a financial advisor can help people make the best decision for their life stage and retirement goals.”

I couldn’t agree more.  Make sure you consider all factors in your financial situation before going the 401(k) loan route.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

  

What I’m Reading – Triple Crown Edition

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The Belmont Stakes offers the chance for California Chrome to become horse racing’s first Triple Crown winner since 1978.  Win or lose he is destined for nice life after racing as he will surely command enormous stud fees that will enrich his owner’s.  We will certainly be watching and rooting for him.

Kentucky Derby 2014-0186

Here are some financial articles that I’ve read lately that you might find interesting and useful. 

Stan Haithcock offers some great insights for annuity holders in How to evaluate your annuity contract at Market Watch.

There is a new king in terms of 401(k) assets as reported in Vanguard Passes Fidelity to Become Number One in 401(k) Assets at Bloomberg.

Jim Blankenship shares Mechanics of 401(k) Plans – Loans  shedding light on this often misunderstood aspect of 401(k) plans at Getting Your Financial Ducks in a Row.

Scott Holsopple explains What to Do With ‘Orphaned’ 401(k)s at US News.

Russ Thornton discusses The Lifestyle Cost Of High Investment Expenses at Wealthcare for Women.

Michael Zhuang declares Variable Annuity: Bad Investment! at Investment Scientist.

Mike Piper of Oblivious Investor always does an excellent job of explaining complex topics in easy to understand terms, so consider checking out his latest book.

If you are new to The Chicago Financial Planner here are our three most popular posts over the past 30 days:

Financial Advisors to Follow on Social Media

Life Insurance as a Retirement Savings Vehicle – A Good Idea? 

Peyton Manning and Investment Success

I hope you enjoy some of these articles and hope you have a great weekend.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

  

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Photo credit:  Flickr

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Six 401(k) Investing Mistakes to Avoid

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For many of us trying to save for retirement, our 401(k) plan is our main retirement savings vehicle.  Much has been written about the pros and cons of 401(k) plans, but the truth is that if utilized correctly the 401(k) is a powerful retirement savings tool.  Here are six 401(k) investing mistakes to avoid.

Not contributing enough 

Many plans will set a default salary deferral level for plan participants who don’t specify a salary deferral amount.  Often this is in the 1%-3% range.  While this is better than not contributing at all it is clearly not enough for most of us to build the retirement nest egg we will need.

A standard piece of advice is to be sure to defer a sufficient percentage of your salary to receive the maximum match from your employer.  While I concur with this advice, this doesn’t mean this amount is sufficient to accumulate the retirement nest egg you will need either.

Ignoring outside investments 

If you are early in your career your 401(k) might be your only investment account.  However if you are in mid-career or older you may have a number of accounts including your spouse’s retirement account, several old 401(k) accounts and IRA, or other investments in taxable accounts.  It is important that you view your current 401(k) as a part of your overall investment portfolio and not invest your 401(k) in a vacuum. 

Not investing appropriately for your situation 

This can take many forms.  I’ve seen numerous instances of younger investors in their 20s putting all of their contributions into their plan’s money market or stable value options.  Clearly these participants are not taking advantage of their long time frame until retirement.  It is doubtful that the returns on these investments will allow them to accumulate enough for retirement.

On the other side of the coin there were many stories of plan participants in their 50s who were too heavily invested in equities and who suffered devastating losses in 2008-2009.

The bottom line is that 401(k) investors should invest in a fashion consistent with their financial stage in life, in line with their goals and risk tolerance, in short in a fashion that is consistent with their overall financial plan. 

Over investing in company stock 

No matter how wonderful your company’s stock is investing an excessive percentage of your 401(k) dollars in company stock is risky.  Your livelihood is derived from your job so if the company has problems conceivably you could find yourself unemployed and holding a major portion of your 401(k) in the devalued stock of your now former employer.

As with any investment, having an inordinate percentage of your portfolio in any one holding is risky.  While there is no hard and fast rule, many financial advisors suggest keeping company stock to 10% or less of your overall portfolio. 

Using Target Date Funds incorrectly 

Target Date Funds are the default investing option QDIA) in many 401(k) plans for participants who don’t make an election as to how their salary deferrals are to be invested.  They are also growing in popularity by leaps and bounds as a vehicle for those participants who are uncomfortable allocating their accounts from among the other investment options offered by their plan.

TDFs can be a reasonable alternative if used correctly.  Target Date Funds are designed to be “one stop shops” so to speak.  In other words these funds are designed to be a participant’s only investment in the plan.  The idea here is that the fund will allocate your money in accordance with their glide path to and through the target date.

401(k) investors who use a Target Date Fund in conjunction with several of the other investment options in the plan run the risk of being too heavily invested in one sector or another.  If this is the path that you are choosing make sure you understand the overall allocation of your account that will result and that this is in accordance with your best interests.

Additionally investors considering Target Date Funds need to understand how the funds in the family invest and to understand that the fund with the target date nearest their anticipated retirement age may or may not be the best choice for them. 

Ignoring your 401(k) account when leaving your job 

By the time you are in your 40s you will likely have worked for several employers.  It is critical that when you leave a job that you don’t ignore your 401(k) balance.  It may make sense to leave your money in your old employer’s plan if the plan offers a menu of low cost, solid investment options.  Likewise it might make sense to roll your balance to your new employer’s plan if allowed assuming they offer a solid, low cost investment menu.  The other option to consider is rolling your account to an IRA.  This route will often allow a greater number of investment alternatives and can be a good way to consolidate this money with an existing IRA or to consolidate all of those retirement accounts you might have.

If you are retiring dealing with your old 401(k) is critical as well.  You will want to position your money in line with your needs including continued growth and any withdrawals you will be making from these funds.  If you have company stock as part of your plan don’t neglect to consider the NUA option as well.

Your 401(k) plan can be a great tool in winning the retirement gamble.  Like any investment you need to manage it to your best advantage.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

  

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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What I’m Reading – Memorial Day Edition

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The Memorial Day weekend is looking like a good one in terms of the weather here in the Chicago area.  It should be a great weekend for family fun and for any activities that you may have planned.  Let’s not forget what Memorial Day is all about though and give thanks to our current and former members of the military for all they have sacrificed for us.

Here are some financial articles that I’ve read lately that you might find interesting and useful.  

Josh Brown offers his unique insights into the thought process behind brokers who sell non-traded REITS to clients as only he can in Scenes from an Independent Brokerage Firm at The Reformed Broker.

Wade Slome discusses the Rise of the Robo-Advisors: Paying to Do-It-Yourself at Investing Caffine.

Jim Blankenship shares Mechanics of 401(k) Plan – Vesting shedding light on this often misunderstood aspect of 401(k) plans at Getting Your Financial Ducks in a Row.

Ryan Guina offers the AAFES Coupon Guide – How to Save Big at the Exchanges a guide to savings for eligible shoppers at the Army Air Force Exchange service at The Military Wallet.

Emily Guy Birken discusses What You Need to Know About Disability Insurance for the Self-Employed at PT Money.

Mitch Tuchman tells us that Advice seekers retire with 79% more money at Market Watch.  Food for thought for retirement investors.

Russ Kinnel tells us to Lower Your Fees, Boost Your Returns at Morningstar.  Always good advice for mutual fund investors. 

If you are new to The Chicago Financial Planner here are our three most popular posts over the past 30 days:

Life Insurance as a Retirement Savings Vehicle – A Good Idea? 

Financial Advisors to Follow on Social Media

Peyton Manning and Investment Success

I hope you enjoy some of these articles and have a great holiday weekend.

Looking for a good read this weekend, check out Still Standing by Major (ret) Steve Hirst. Steve was a year behind me in high school and was severely injured in an auto accident while serving in Alaska in the mid 1990s. The book is well written and provides an inspriational account of his long road back and some of the obstacles Steve faced along the way.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

 

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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Retirement Investors: Poor Timing and Short Memories?

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A recent Wall Street Journal article Retirement Investors Flock Back to Stocks (not behind their paywall as I write this) discussed how retirement savers are putting more money into stocks.  Nothing like waiting for the stock market rally to pass its fifth anniversary, with many of the major market averages in record territory, to get retail investors interested in the stock market.  Two excerpts from this article:

“Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March, according to the most-recent data from Aon Hewitt, which tracks 401(k) data for 1.3 million people at large corporations.” 

What cash I have, I’m going to use to buy more if the market dips,” said Roy Chastain, a 68-year-old retiree in Sacramento, Calif., who put an extra 10% of his retirement account into stocks in September, bringing his total stock allocation to 80%.  Mr. Chastain, who had put all his retirement assets into cash in May 2008, has gradually rebuilt his stockholdings.” 

If I understand Mr. Chastain’s situation, he sold out about half way through the market decline, he likely missed a good part of the ensuing market run-up, and now he’s bulking up on stocks 5+ years into the market rally.  I sincerely hope this all works out for him.

 What’s wrong with this picture? 

Part of the rational cited in this article and elsewhere is that stocks appear to be the only game in town.  At one level it’s hard to argue.  Bonds appear to have run their course and with interest rates at record low levels there is seemingly nowhere for bond prices to go but down.

Alternatives, the new darling of the mutual fund industry have merit, but it is hard for most individual investors (and for many advisors) to separate the wheat from the chafe here.

But a 68 year old retiree with 80% of his retirement investments in stocks is this really a good idea?

I’m not advocating that anyone sell everything and go to cash or even that stocks aren’t a good place for a portion of your money.  What I am saying is that with the markets where they are investors need to be conscious of risk and at the very least invest in a fashion that is appropriate for their situation.

Can you say risk? 

With the stock market flirting with all-time highs and in year six of a torrid Bull Market I’m guessing things are a bit riskier than they were on March 9, 2009 when the S&P 500 bottomed out.

Let’s say an investor had a $500,000 portfolio with 80% in stocks and the rest in cash.  If stocks were to drop 57% as the S&P 500 did from October 9, 2007 through March 9, 2009 this would reduce the size of his portfolio to 272,000.

Not devastating if this investor is 45 years old with 15-20 years until retirement.  However if this investor is 68 and counting on this money to fund his retirement this could be a total game changer.  Let’s further assume this occurred just as this investor was starting retirement.

Using the classic 4% annual rule of thumb for retirement withdrawals (for discussion only retirees should not rely on this or any rule of thumb), this investor could have reasonably withdrawn $20,000 annually from his nest egg prior to this market decline.  After the 57% loss on the equity portion this amount would have declined to $10,880 a drop of 45.6%.

Assuming this retiree had other sources of income such as Social Security and perhaps a pension the damage is somewhat mitigated.  Still this type of loss in a retiree’s portfolio would be a disaster that could have been partially avoided.

Am I saying that the stock market will suffer another 57% decline?  While my crystal ball hasn’t been working well of late I’m guessing (hoping) this isn’t in the cards, but then again after the S&P 500 suffered a 49% drop from May 24, 2000 through October 9, 2002 many folks (myself included) felt like another market decline of this magnitude wasn’t going to happen anytime soon.

Diversification still matters 

I agree with those who say investing in bonds will likely not result in gains over the next few years.  But given their low correlation to stocks and relatively lower volatility than stocks, bonds (or bond mutual funds) can still be a key diversifying tool in building a portfolio.

When I read an article like the Wall Street Journal piece referenced above or hear “experts” advocating the same thing on the cable financial news shows I just have to wonder if investor’s memories are really this short.

Individual investors are historically notorious for their bad market timing.  Is this another case of bad timing fueled by greed and a short memory?  Are you willing to bet your retirement that the markets will keep going up?  Or perhaps you think that you might be able to get out before the big market correction.

Perhaps you should consider doing some financial planning to include an appropriate investment allocation for your stage of life and your real risk tolerance.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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What I’m Reading – March Madness Edition

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It’s a bit of a lazy Sunday here and I am half surfing the web and half watching the NCAA Men’s basketball tournament.  I’m not the college basketball fan that I once was, but I still love March Madness and watch every game that I can.

In 1939, H.V. Porter of the IHSA coined the te...

Here are some financial articles that I’ve read lately that you might find interesting and useful:

The Ultimate Guide to Understanding Your 401(k) A great piece loaded with information for those who might be new to 401(k) investing or who just want to learn a bit more by Harry Campbell on his blog Your Personal Finance Pro.

Five strategies to get the most Social Security another excellent and informative piece by Robert Powell at Market Watch.

And You Thought Just Tuition Was Expensive a nice piece on the Morningstar site that discusses how college expenses other than tuition can really put a strain on parents and students trying to pay for college.

Are You Paying Too Much For Mutual Funds?  Dana Anspach does a good job of addressing this important question at U.S. News.

The IRS Releases Their “Dirty Dozen” Tax Scams for 2014 was featured on Jim Blankenship’s excellent blog Getting Your Financial Ducks in a Row.

Americans and Retirement: 3 Worrying New Findings discusses EBRI’s most recent Retirement Confidence survey on Wall Street Cheat Sheet.

If you are new to The Chicago Financial Planner here are the three most popular posts over the past 30 days:

Your 401(k) is not Free

Life Insurance as a Retirement Savings Vehicle – A Good Idea?

7 Retirement Investing Tips

Well that’s it I hope you enjoy some of these articles and the rest of your Sunday.  I’ve watched a couple of good tournament games so far with hopefully more to follow.  Cool and sunny here today, but none the less good grilling weather, chicken is on the menu for tonight.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

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