Make Sure That You’re Covered Long-Term

We’ve all heard the horror stories about the investor who did everything right, who had the right job, maxed out their 401k, diversified their portfolio until comfort in retirement was assured, only to have the rug swept out by a debilitating illness.  For this exact reason, insurance companies have created a product called long-term-care insurance.

 

Since Medicare doesn’t pay for most nursing home costs, and Medicaid doesn’t ante up until your assets are almost depleted, investors who have wealth that they want to pass on to loved ones need to protect it.  Long-term-care policies do just that, In fact, many insurance agents will tell you that as you near retirement age, long-term-care insurance becomes a real priority.  That priority was much easier to satisfy before the policies became losers for the insurance companies, leading insurers like Manulife Financial to ask state regulators for average rate increases of 40%, and other insurers like MetLife, to stop selling new policies entirely.

 

As baby boomers who already have long-term-care insurance get older and file more claims the premiums are bound to continue to rise, and if you get into a difficult financial spot and let your policy lapse you’ve lost your entire investment.  So, what are the options for someone who wants to protect themselves, but doesn’t want to get skinned doing it?

 

What are your options

First, it’s important to deal with an insurance agent who is knowledgeable in the products that he is selling, and is able to explain the options of different policies and the merits of each.  There is a huge price range across different providers, and agents who only sell one product aren’t going to be able to give you the benefits of that variety.

 

As the premiums for long-term-care climb, many providers are addressing the rise in cost by offering custom options.  For instance, instead of unlimited coverage, you can shave some money off your premiums by limiting care to three or four years.  According to the Centers for Disease Control and Prevention (www.cdc.gov/nchs/data/databriefs/db91.pdf) the median stay in a nursing home is 671 days.

 

So, cutting down on the stay that you’re allowed could be a smart option for limiting costs.  Some policies also allow you to reduce the annual inflation adjustment from 5 to 3 percent to cut those costs even more.

 

Options in insurance

Another option for investors who are unable to get long-term-care insurance, or find the costs too prohibitive, are the new, combo products being offered by insurers like Hartford Financial Services group, Prudential Financial, and MetLife.  These permanent life policies and annuities feature accelerated death benefits, or living benefit riders.

 

What this means to you is that the death benefit of these life insurance policies can be tapped in the event of a diagnosis of chronic illness, and used to pay for care.  Many investors like these policies because, unlike traditional long-term-care coverage, if you never need the care, the policy will pay your heirs just like a traditional life insurance policy.  The living benefits of the combo products are usually limited to the death benefit for the policy, though, whereas long-term-care policies will pay all qualified expenses for whatever duration of stay the policy covers.

The decision between these two flavors of insurance is a personal one, but for investors who want to feel safe in their retirement, and who want to make sure that the fruits of their hard work can be passed down to their loved ones, some type of coverage is important.  Talk to your financial advisor to see which one gets you closer to your retirement goals.

 

Image courtesy of www.brinfin.com

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The Ricks Report – July 23, 2012

The Ricks Report

July 23, 2012

The Markets

The man with his finger on the pulse says the U.S. economy faces two main risks. We have no control over one of those risks and the other, well, we do have some control, but whether our politicians will appropriately exercise that control is a big question.

Federal Reserve Chairman Ben Bernanke faced Congress last week and he delivered a rather subdued outlook in his semi-annual monetary policy report. He said our economy faces two major headwinds:

1. The Euro-area fiscal and banking crisis and its potential spillover effects on our economy.
2. The unsustainable path of the U.S. fiscal situation (e.g., the “fiscal cliff”).

Source: Federal Reserve

The U.S. has little control over the euro-area situation so we’re at the mercy of European leaders to make bold and tough decisions to get their houses in order. The second item, though, is clearly within our control.

The so-called fiscal cliff, in which a series of tax hikes and spending cuts will take effect in 2013 if Congress takes no further action, could throw the economy back into a recession. The Congressional Budget Office estimates if no policy changes are made, then our 2013 federal budget deficit will decline by about $600 billion. On the surface, that sounds great. However, such a huge shock to our system in a short period of time could be problematic.

So, will Congress agree to adjust the legislation for the benefit of the economy? We’ll see.

For his part, Bernanke said the Federal Reserve “is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” It’s good to know that the Fed is ready to help if needed.

Data as of 7/20/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.4%	8.4%	2.8%	12.7%	-2.3%	5.2%
DJ Global ex US (Foreign Stocks)	0.6	0.5	-16.9	3.3	-7.8	5.6
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.6	5.0	4.6
Gold (per ounce)	-1.2	0.1	-0.6	18.3	18.3	17.2
DJ-UBS Commodity Index	4.2	3.9	-11.1	6.3	-3.4	3.8
DJ Equity All REIT TR Index	-1.1	16.0	9.5	31.4	2.7	12.1

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

IT’S BEEN ALMOST A YEAR since August 5, 2011, the day the U.S. lost its coveted AAA credit rating from Standard and Poor’s. So, how have the financial markets responded in the year since? Quite well, actually.

It may not feel like it, but the broad U.S. stock market, as measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and last Friday, according to data from Yahoo! Finance. Despite all the angst from the credit downgrade, the threat of a double-dip recession and the turmoil in Europe, the stock market has hung in there.

The returns in the bond market are perhaps even more startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last Friday, the yield had dropped to 1.46 percent, according to Yahoo! Finance. Normally, you might expect interest rates to rise after a credit downgrade since the ratings agency is essentially saying your bonds are riskier than previously thought.

The U.S., though, is perhaps a “special” case. The day after the credit downgrade, none other than Warren Buffett went on Bloomberg television and said he thought the U.S. should be a “quadruple A” rating. And, to this day, the U.S. dollar remains the world’s leading reserve currency as more than 60 percent of the world’s foreign currency reserves are held in U.S. dollars, according to BusinessWeek.

We shouldn’t get overconfident, though. While the U.S. has tremendous assets, it might only take a few bad decisions from our leaders to undo what took decades to build.

Weekly Focus – Think About It…

“There is nothing wrong with America that the faith, love of freedom, intelligence, and energy of her citizens cannot cure.”

—Dwight D. Eisenhower, 34th president of the United States

Best regards,

Gregory Ricks

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The Ricks Report – July 16, 2012

The Ricks Report

July 16, 2012

The Markets

Should the Federal Reserve raise interest rates to fire up the economy?

For the past few years, the Fed has been on a mission to lower rates as much as possible. The thinking is lower rates will spur economic growth by making it less costly for businesses and consumers to borrow money.

Unfortunately, it hasn’t quite worked as planned.

Short-term interest rates are near zero and 30-year mortgages are at a record low, yet the economy is still just muddling along, according to Barron’s. Now, some investment managers are saying the Fed should reverse course and raise interest rates.

Last week, prominent money manager David Einhorn went on CNBC and said, “I think having very low zero rates is depressing to people. I think it deprives savers of reasonable incomes, the ability to forecast a reasonable income, and it cuts down on consumption.” He went on to say low rates drive up food and oil prices and lower standards of living.

Folks relying on a stream of income from their fixed investments can probably relate very well to what Einhorn is talking about. As recently as July 2007, $100,000 worth of 1-year Treasuries would have generated about $5,000 of annual income (a 5 percent yield), according to data from the Federal Reserve. Now, it would generate only about $200 (a 0.2 percent yield).

The Fed may be in a classic Catch-22, according to CNBC. With sluggish economic growth, it’s certainly hard to justify a rate hike, yet, low rates are increasingly ineffective. CNBC says a growing number of analysts suggest the best course of action is to allow “the cash-rich private sector to sort out its own problems without the government’s interference.” However, they acknowledge it “likely would be painful, but could be the only sustainable path to recovery.”

With the Fed on the record as saying they plan “to keep interest rates at their historically low range of 0 to 0.25 percent through late 2014,” investors shouldn’t expect the Fed to raise rates any time soon, according to Fox Business. Only time will tell if this low rate strategy is the right medicine for the economy.

Data as of 7/13/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.2%	7.9%	3.1%	14.6%	-2.7%	4.0%
DJ Global ex US (Foreign Stocks)	-1.1	-0.2	-17.4	5.7	-7.9	5.2
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.4	5.1	4.6
Gold (per ounce)	0.5	1.3	1.1	20.7	19.1	17.5
DJ-UBS Commodity Index	2.5	-0.2	-14.8	7.2	-4.3	3.5
DJ Equity All REIT TR Index	0.9	17.3	12.7	34.8	2.3	11.6

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.  Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

HOW DO YOU TURN A PENNY INTO 1.25 BILLION DOLLARS? Sounds like a magic trick, right? Well, there’s really no magic other than the law of large numbers.

Here’s how it works and how it may benefit our economy.

A report from the Federal Highway Administration shows Americans traveled approximately 2.94 trillion miles in motor vehicles for the 12 months ending April 2012. Now, when you figure how many gallons of gas that burns up, you get a really big number! Moody’s Economy.com chief economist Mark Zandi has done the math and, by his reckoning, each penny change in the price of a gallon of gas equates to, you guessed it, about $1.25 billion over the course of a year, as reported by CNBC.

With the wild swings we’ve seen in the price of gas, the savings – or cost – can add up quickly. A recent check with AAA showed the average price for a gallon of regular gas dropped by about $.25 over the past year. So, multiply $1.25 billion by 25 and you get, to quote Carl Sagan, “billions upon billions” of additional coin in consumer’s pockets. And, that coin could fuel further growth in consumer spending.

You’ve heard the old saying, “A penny saved is a penny earned.” Today, a few pennies saved on gas can add up to billions!

Weekly Focus – Did You Know…

There’s about $1.1 trillion of US dollars in circulation today – an all-time record high. However, most of it is not “floating” around in everyday transactions. About 75 percent of the $1.1 trillion is in $100 bills which don’t circulate much. On top of that, about 50 to 66 percent of U.S. cash is held abroad. Despite the proliferation of credit cards and debit cards, we still seem a long way away from a cashless society.

Source: CNNMoney

Best regards,

Gregory Ricks

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The Why, When and How of Consolidating Your Retirement Accounts

Consolidate: to combine separate items or scattered material into a single whole or mass.  The definition makes consolidation seem tidy, productive and even a bit powerful.  With all those good vibes, it’s a wonder why more people hesitate to use consolidation tactics in their lives, especially in terms of their retirement.  Many people have multiple retirement accounts through multiple different custodians with multiple different terms.  That is a lot of “separate items or scattered material” that can be combined into the “single whole or mass” that consolidation affords its users.

So if you are one of those people, it’s time you look into simplifying your retirement plans and consolidating those accounts. But you might ask yourself, why consolidate?  Or when is the best time to consolidate?  Or how do you actually go about consolidating?  Well, since you asked…

Why: The essential of why you should consolidate is best described by a demonstration.  Take a piece of paper at your desk, and now rip it in half (make sure it’s not your paycheck before you start the ripping stage).   Now grab a stack of 15-20 papers and try to tear that in half.  More difficult, right?  Materials are stronger when grouped together, we know that.  What most people don’t know is that when it comes to retirement accounts, grouping them works in essentially the same way.  Your financial position is much stronger when each investment isn’t standing individually.  Having multiple accounts leaves you at the risk of portfolio duplications in which similar investments have similar objectives and they overlap, wasting your assets with unnecessary risk.  Fees can be avoided and paperwork is simplified.  Also, by combining into one account, you are better able to adjust your investments in reaction to market changes by simply accessing one account.

When: The question of when is less about timing, and more about in what situations it should be used.  Consolidation is an advantage to almost anyone who is looking for a simple and productive retirement plan, but there are certain instances in which it is a good strategy to apply.  For example, when many people leave a company, they leave their retirement funds in that company’s 401(k) or pension plan.  This is a great opportunity for consolidation as you can roll those funds into your IRA to increase your existing investment selection while also minimizing the number of accounts you have to manage.  It’s also important to understand the investment options available for different types of investments.  For example, Rollover IRAs have nearly unlimited investment choices, while 401(k) plans are limited to usually a maximum of 25 choices.  The more options you have, the more flexible your plans are, and the better off you are.  You also must understand which accounts are available for consolidation.  All traditional IRA’s can be combined, both deductible and non-deductible, but a Roth IRA cannot be combined with a traditional IRA.  Make sure you understand these stipulations before you make your decisions.

How: Here is the meat of the issue, how to go about this consolidation process.  With this there is good news, and better news.  The good news is that most of work involves information you already have.  The better news is that all you have to do is take that information and follow these simple, step by step directions and you will be well on your way. The first step is to make a list of each of your individual accounts that you hold currently.  In this list, include details on each account such as the type of account it is, the current balance, its recent and long-term performance, as well as any fees associated with it.  Next you need to think about and plan your retirement goals and investment philosophy.  The third step is to determine the plan or institution that best fits those goals.  After that, you start to combine your accounts into the institution and plan that you chose.  This should begin with you smaller accounts, followed by the non-performing accounts and accounts with high fees.  Continue this until all your accounts have been rolled into one.  Then take all of your funds and determine the specific investments needed to reach the goals that you set earlier in the process, all in one tidy account.  Then bake at 375 degrees until golden brown.  Just kidding, but in all seriousness if you follow these steps, consolidating your retirement accounts can be as easy as baking a cake, probably easier for most of you.

When it comes to your retirement, it’s important to find ways to work smarter, not harder.  Consolidating your accounts is one of the simplest ways to do that.  Combine your accounts, limit your paperwork and strengthen your investments.  Aristotle once said, “The whole is greater than the sum of its parts.”  It’s pretty unlikely he was speaking specifically about your retirement accounts, but you get where he was going.

 

Photo courtesy of prlog.org.

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The Ricks Report – July 9, 2012

The Ricks Report

July 9, 2012

The Markets

Where is the recovery in jobs?

In the 10 recessions between World War II and 2001, the jobs lost during the recession were fully recovered within 4 years of the previous peak in employment, according to the blog, Calculated Risk. In fact, with the exception of the 2001 recession, the previous 9 recessions had recovered all their lost jobs within a relatively short 2½ years.

The 2007 recession, however, is a different story.

At its nadir in February 2010, the U.S. economy had shed nearly 9 million jobs from its prior peak, according to the Bureau of Labor Statistics (BLS). As of last week’s June employment report, the U.S. economy had recovered less than half of those lost jobs – and we’re more than 4 years removed from the peak employment level of late 2007, according to the BLS.

Why has the jobs recovery from this recession been so painfully slow? Here are several reasons:

(1)   Recoveries from recessions caused by financial crises – like this one – are notoriously slow.

(2)   Extremely high economic policy uncertainty emanating from Washington made corporations cautious in hiring.

(3)   The extension of unemployment benefits to 99 weeks reduced some people’s desire to find new work.

(4)   Uncertainty from events related to the euro crisis dampened business demand and the need for more workers.

Sources: Gary Becker, Nobel Prize Winner and Richard Posner blog; The Wall Street Journal

There is some good news, though, that could eventually provide a spark for new hiring.

Corporate profits as a percentage of gross domestic product (the value of all goods and services produced in the U.S.) recently hit an all-time high, according to Business Insider. This means corporate profits are at record levels. On top of that, corporate cash levels have reached historic highs which suggest corporations have plenty of money to reinvest for growth, according to Yahoo! Finance. With corporate profits and balance sheets looking solid, all we have to do is get these companies to start spending some of that cash on new hires. If that happens on a large scale, it could be a huge boost to the economy and the financial markets.

Data as of 7/6/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	-0.6%	7.7%	0.8%	14.7%	-2.4%	3.3%
DJ Global ex US (Foreign Stocks)	-0.1	1.0	-17.8	5.4	-7.4	4.6
10-year Treasury Note (Yield Only)	1.5	N/A	3.1	3.5	5.2	4.8
Gold (per ounce)	-0.7	0.8	3.9	19.7	19.6	17.7
DJ-UBS Commodity Index	1.1	-2.7	-13.8	5.0	-4.4	3.4
DJ Equity All REIT TR Index	1.2	16.3	10.2	33.2	2.0	10.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

INVESTORS HAVE GROWN VERY FICKLE in recent years as measured by how long they hold on to a stock. There was a time when investors were really investors and bought a stock for the long run. In fact, between 1940 and 1975, the average length of time a New York Stock Exchange stock was held before it was sold was almost 7 years, according to data from the New York Stock Exchange as reported by a September 2010 Top Foreign Stocks blog post. By 1987, it had dropped to less than 2 years. And, in the highly volatile year of 2008, the average holding period was less than 9 months, according to The New York Stock Exchange.

So, does this fast trading result in better returns?

A highly quoted study by Brad Barber and Terrance Odean of University of California-Davis published in April 2000 analyzed the results of nearly 2 million trades from a discount brokerage firm between 1991 and 1996. The study concluded that the 20 percent of investors who traded the most frequently underperformed the 20 percent of investors who traded the least frequently by a whopping 7.1 percentage points on an annualized basis after expenses.

The main conclusion of the study was, “Trading is hazardous to your wealth.”

One very interesting tidbit from the study was the gross returns between the frequent and infrequent traders were basically the same. In other words, stock selection was not a problem for the fast traders; rather, it was the expenses of the frequent trading that caused their net returns to lag far behind the infrequent traders.

From a practical standpoint, selling a stock is necessary from time to time. The study simply drives home the point that keeping trading costs as low as possible is critical to having net returns come close to gross returns.

Weekly Focus – Think About It…

“Learn every day, but especially from the experiences of others. It’s cheaper!”

—John Bogle, founder of The Vanguard Group

Best regards,

Gregory Ricks

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Emergency Funds Are Like Spare Tires…

Emergency funds are like spare tires: you never think about them until you need one.  This is an unfortunate truth for many people who don’t have a rainy day fund saved up for themselves.  Some people fail to see the advantage in creating a fund, while others want to create one, but don’t know how.  Creating an emergency fund is more important, and more simple, than many people believe.

The first thing to cover is why you need an emergency fund.  This question can be answered easily by anyone who has ever needed one.  Life is unpredictable.  The situations that could arise causing a need for extra money are almost endless:  divorce, healthcare, car troubles, emergency travel, or, as many people in recent years have encountered, job loss.  Things come up, things that you can’t see coming, and it’s much easier to roll with these punches if you have prepared for them in advance

The amount needed in this fund varies according to your situation and lifestyle.  Contingency plans are most successful when you plan for the worst case scenario, which in this case, is job loss.  You need to create a monthly budget of your expenses in that case that you suddenly find yourself with no income.  This means your rent, food, utilities, insurance, debt payments, prescription medications, cellphone bill and so on.  The bare minimum amount in your emergency fund should be equal to three months-worth of these expenses.  The overall goal is to have six months of your expenses available to you in the fund.  This may seem intimidating at first, but every little bit helps, so put in what you can over time, and aim for that target number.

Many people think that these emergency funds are best located in a box buried in the back yard or stuffed between their mattresses, but, believe it or not, there are better options.  The main requirement of the fund or account is that is must be easily accessible.  Most emergencies don’t allow for the months or years needed to access money in some investment accounts.  You should be able to access your funds within one business day.  This is the case with traditional savings accounts or money market accounts.  The drawback of these is the lack of growth in those accounts.  There are other accounts that allow moderately quick access, less than 30 days, while still allowing you to earn money from the investments.

One of these options is a bond mutual fund with either a short or immediate duration.  These don’t offer the protection of other accounts, but can bring about modest growth without locking your money away.  Investors must understand that their funds are vulnerable and can expect the value to fluctuate a bit.  Many mutual funds also offer more flexible payouts directly to checking accounts, as well.

Another suggestion in creating an emergency account is to cut into your long term investment contributions.  401(k)’s and IRA’s are critical to your future, in the long term, but if you are walking around with a great long term, and nothing for the short term, you could find yourself in some trouble.  This doesn’t mean you need to take thousands from your retirement contributions, but forty to fifty bucks a month until you have yourself protected isn’t going to drastically affect your plans 30 years from now, but it could be lifesaving in just a few.

One of the easiest ways to protect yourself in an emergency such as a job loss is to take care of what expenses you can eliminate ahead of time.  This means paying off debt.  The debt on high interest credit cards can get a lot more painful if you don’t have an income.  This not only cuts down on your expenses, but if you’re paid up to date, you allow yourself some room if you need to use those credit cards as a source of financing in an emergency.

The two most important aspects of creating an emergency fund is having the foresight to know you might need one and having the discipline to be able to create one.  If you have those two things, the rest is easy.  Just account for your monthly expenses, plan an account to funnel money into, and budget your income to allow that account to grow.

 

Photo courtesy of: http://www.financialpage.com

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