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It's time to rethink financial wisdom

By Dave Copeland
Globe Correspondent / May 24, 2009
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Earlier this month, Larry Glazer, managing partner of Boston-based Mayflower Advisors, gave a presentation to 100 public school teachers who teach personal finance classes in New Hampshire. Glazer spent most of the session telling the instructors they needed to stop teaching things that have long been considered conventional financial wisdom.

"The whole idea is what we've been teaching people for decades, no longer applies," Glazer said. "We don't want to throw out all of the advice, but we do need to adjust the way we think about these things."

Indeed, dictates like "mortgage debt is good debt" and "always have six months worth of living expenses in a rainy day fund" are thrown around so frequently that some people start to mistake them as ironclad rules. But some financial advisers say because of the current economic downturn, some of the old rules no longer apply, while others are just not practical for many people struggling with job losses, wage cuts, and major hits to their retirement savings.

Asset allocation One popular theory suggests that the percentage of equities in someone's portfolio should be equal to 100 minus their age - in other words, the older you get, the less money you should have in stocks. And some advisers recommend clients move completely out of equities once they stop working.

Glazer, however, says that theory no longer works for one simple reason: "People are living longer."

"That nest egg needs to continue to grow after you retire. You need more in equities during retirement than you may be comfortable with, or else you're going to spend through it," he said.

The reality is there may be no set formula for asset allocation. A variety of factors must be considered when figuring what mix of stocks and other investments to include in a portfolio.

"I believe that a person's asset allocation is people-specific, based upon their risk tolerance and their long- and short-term goals, and is a constant in any market," said Arthur Arsenault, an accountant who runs Baril & Smith in Lynnfield. "A person's asset allocation is also not static and should be adjusted in order to meet a person's mission for their investments."

Mortgage debt is good debt Experts disagree on this, with those still backing the directive noting that interest payments on mortgage debt are tax deductible, and with rates currently as low as 3 percent, investment returns will usually outpace the interest paid.

Still, Glazer pushes clients to retire mortgage debt as soon as possible by doubling payments when possible. He also steers them away from taking the biggest loan for which they qualify.

"Over the past two decades, 'good debt' became a buzzword, and if you could get debt, you took it," he said. "That is part of what got us into trouble. Maybe 'no debt in retirement' is the new standard for 'good debt.' "

Create a rainy day fund The reality is many people struggle to save, and money tied up in savings could be used to pay down debt.

"Having six months of living expenses is unrealistic for most people. Most people don't have six months of disposable savings and are deep in credit card debt and mortgage debt and are always catching up or living paycheck to paycheck," said Arsenault. "Most people have refinanced their mortgages to pay off their credit card debt and then continue to use their credit cards."

That doesn't mean people should forgo savings altogether, or that people should tie up all of their savings in long-term vehicles such as 401(k) plans and individual retirement accounts.

But emergency funds can often go untouched for years, and there may be ways to get bigger returns from the money being set aside. Glazer recommends that clients split savings between tax-free retirement accounts and taxable accounts which can be used to generate long-term growth but still allow the flexibility for quick, penalty-free withdrawals.

Save for college Adam Bold, author of "The Bold Truth About Investing: Ten Commandments for Building Personal Wealth," said people who do this do so at their own peril. Many people sock money away in a 529 college savings account before fully funding their own retirement with contributions to 401(k) and IRA plans.

Bold pushes clients to maximize IRA and 401(k) contributions and then set aside savings for college if there is money left over. The reason to prioritize retirement, he said, is that there are far more options to pay for college than for retirement expenses.

"There are lots of different ways to pay for college. People can take out loans, people can pay for it out of their monthly budget, and people can get scholarships," Bold said. "But there are no scholarships for retirement."