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Fear of Fire

 

Speaking of things that frighten people…money has been doing a pretty good job of it lately. Remember back when people used to casually discuss various investment strategies with their friends, families and neighbors? Back then, conversations focused on which investment plans might earn a person the best return on their money; now people just worry about the money.

Back in April I wrote about people being so nervous that they might literally take their settlements in cash and stuff them into a mattress or bury them in their back yards. My counsel at the time was to assist such people by helping them understand that settlement planning was not about having to do “…the ONE right thing with the money, but perhaps just A right thing - with part of it.”

That is still good advice. And yet, as unbelievable as it sounds, people seem even more frightened now than before. People without jobs wonder if a job will ever come and how they are supposed to make it until it does; people with jobs wonder how long their jobs will last and what they will do if they lose them.

For still others, a numbing paralysis seems to have set in. These people no longer worry about doing “the” right thing or even “a” right thing with their money. Many of them can’t seem to actually do “any-thing” with their money.

Some amount of fear is understandable. “Investing” is by definition something you do with extra money, not the money you need to pay your monthly bills. Given the recent volatility in the financial markets, people aren’t sure just how much money they even have. Indeed, none of it may seem very “extra” to many.

But some people are becoming overly emotional and they just can’t seem to regain their composure. There is no denying that managing money can make a person nervous from time to time. But surrendering to abject fear seriously degrades the quality of one’s decision-making and that can create problems of its own.

When I was seven years old, I burned my left hand severely. A few months later, when presented with a birthday cake, I started to back away from it in fear. My mother gently stopped me to point out that, while I was hastily retreating away from a few little fires on my cake I was, unwittingly, now backing straight into a much bigger fire on the gas burner of our stove! I learned a valuable lesson that day: you have to keep your wits about you - especially when you are afraid.

Some peoples’ money fears are as vivid to them now as those candles were to me then. In the last few years, people’s natural response to uncertainty in the financial markets was to simply take everything in cash and sock it away “someplace safe”.

But now something curious is happening: people don’t even want cash anymore because they don’t know where to put it. Money market funds are paying one tenth of a percent and 6-month “jumbo” CDs just four tenths.1 Inflation-adjusted U S Treasury bonds (so-called “TIPS”) have paid negative interest and some large commercial banks are actually charging their corporate clients to hold large cash deposits! Thank goodness relief is in sight over at the Federal Reserve Bank – whoops – they just announced an intention to keep lending money to banks at zero percent interest for the next two years.

But now for the good news part of this story (yes, there actually is one): some of our claimants have figured out a settlement strategy that feels better than cash. When others hear of it, they seem to like it too. Their logic goes like this: if there is nothing good to be accomplished by receiving a pile of cash now, better to defer it out a few years. That way the money starts to flow when their investment choices may be somewhat improved.

For many people, settlement still represents a remarkable second chance to get their financial houses in order and not every element of one’s financial plan involves cash or is interest rate-dependent. So, first things first: we advise them to take out enough cash to pay off all their credit cards and to establish an emergency fund equal to nine months’ worth of living expenses. Then we ask them how far out into the future they think it will take until money management opportunities will improve. Whatever the timeframe they feel is best (many choose 3-5 years), that becomes the natural time to start a guaranteed and non-taxable income stream, instead of a single whopping lump sum.

People feel comforted by this strategy. Not only does it relieve them of the immediate panic about what to do with a single large cash amount, it also gives them the chance to reinvest those funds at a time when things may have returned a bit to “normal”. With the desire for bedrock financial security growing increasingly more urgent, the idea of having secured a guaranteed lifetime income from which they can never be fired or laid off holds tremendous appeal to many people these days.

Structured settlements continue to offer physically injured plaintiffs a remarkable and unique financial planning opportunity that the rest of us can only wonder at. The more uncertain times become, the more apparent these advantages become.

Would you like help crafting a settlement plan that is more attractive than cash?
Call Frank C. Kilcoyne, CSSC at 800-544-5533, I am here to help.

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1The Wall Street Journal, August 22, 2011, http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html