Partners for Prosperity

WILL ROBOTS MAKE THE 401(k) A DINOSAUR?

kimb — Wed, 22 Feb 2012 15:00:43 +0000

WILL ROBOTS MAKE THE 401(k) A DINOSAUR?

Moore’s Law = More work for machines, less for people

Marshall Brain, the founder of the “edutainment” company How It Works, recently posted a commentary on his website titled “Robotic Nation.” In the article, he detailed the events of a recent Saturday morning with his kids:

I got money in the morning from the ATM.

I bought gas from an automated pump.

I bought groceries at (a warehouse club) using an extremely well-designed self-service check out line.

I bought some stuff for the house at (a do-it-yourself home maintenance store), using their not-as-well-designed-as-(the warehouse’s) self-service check-out line.

I bought my food at McDonald’s at the kiosk.

*(The kiosk “as described above” allowed Brain and his children to place their order remotely from the McDonald’s playspace.)

In 1965, Intel co-founder Gordon Moore noted that the number of transistors that could be placed inexpensively on an integrated circuit had doubled approximately every two years since the invention of the first integrated circuit in 1958. Moore postulated that this pace would continue, for at least the next 10 years. This statement, which became known as Moore’s Law, proved true, and not just through 1975, but for another 35 years. And while no one believes computing capacity will double forever, the latest projections are that Moore’s Law will continue well into the next decade.

Moore’s Law explains how digital technologies and devices have moved from science fiction fantasies to everyday necessities in every part of the world. It doesn’t matter if it’s agriculture, manufacturing, the retail and service industries, or various professional fields. The technologies that have come about as a result of Moore’s Law – fax machines, personal computers, digital cameras, cell phones, bar scanners, GPS systems – have redefined employment in every sector of the economy.

In theory, these new technologies benefit the consumer. They are faster, easy-to-use, and lower the cost of doing business, which usually translates to lower prices. But Brain, a technology advocate, also sees a downside: “The problem is that these systems will also eliminate jobs in massive numbers. In fact, we are about to see a seismic shift in the American workforce. As a nation, we have no way to understand or handle the level of unemployment that we will see in our economy over the next several decades.”

Mr. Brain’s observations have been echoed in a number of commentaries describing a “Jobless Recovery” from the recent recession. In a January 17, 2012, Wall Street Journal article, W. Brian Arthur, an economist at Xerox Corp.’s Palo Alto Research Center, says businesses are “increasingly using computers and software in the place of people in the nation’s vast service sector. Many companies, for instance, use automation to process orders or send bills.”

“It’s not just machines replacing people, though there’s some of that,” Mr. Arthur says. “It’s much more the digitization of the whole economy.”

The article goes on to note that the United States is second only to Japan in the use of industrial robots, and that “orders for new robots were up 41% through September from a year earlier, according to the Robotics Industries Association trade group.”

What Happens Next?

If the history of technology holds true, increased productivity from technology eventually creates new jobs and raises living standards, and those whose jobs are replaced by automation will move on to other fields. The current challenge is that the technological rate of change is occurring so much faster than the creation of new job opportunities, with the obvious consequence of higher unemployment. Another ripple effect is under-employment – many people with jobs aren’t working full-time.

Charles Murray is the author of “Coming Apart”, a study of how income and employment has dramatically changed in America in the past 50 years. A key finding is a significant increase in what Murray calls “prime-age adults” (males ages 30-49) who work fewer than 40 hours a week. For men with only a high-school education (Murray’s “working class”), his research found that fully 20% of those working were not employed full-time.

Other studies focusing on this age 30-49 group show similar trends in income and employment instability. A January 2012 study from the Insured Retirement Institute (IRI) titled “Retirement Readiness of Generation X” reported that almost one in four of those surveyed had stopped contributing to retirement accounts, while another 15% had made early withdrawals. Most cited fallout from the recent recession, i.e., job loss, reduced wages, etc., as the reason for disrupted savings.

If the trend toward automation continues, particularly in large companies, where will these displaced employees find work? One likely answer is self-employment. In a paper presented to the Federal Reserve Bank of Atlanta in November 2011, New Mexico State University economics professor Anil Rupasingha found “self-employment has surged in the last decade and will continue.” Citing Bureau of Labor Statistics data that showed 31% of the labor force was self-employed in 2011 – and was projected to represent 40% of the work force in 2019 – Rupashingha concluded “For some, self-employment may be their best hope.”

Unemployment, Under-employment, Self-employment…“and the 401(k) fits where?”

The first 401(k) plans were established by congressional legislation in the 1980s to encourage workers to defer earnings for retirement. Deferred wages deposited into the plan, along with subsequent earnings, remained non-taxable until the time of distribution, which was ideally intended to occur after age 59 ½, and not later than age 70. The employer administered the plan, provided investment options, and often encouraged participation through the addition of matching deposits. Under certain circumstances, 401(k) account holders could also access funds prior to retirement, either as loans or pre-retirement distributions.

In a static employment situation, where steady paychecks and long-term employment are the norms, the 401(k) seems like a sound concept. Even today, generic financial advice from mainstream media still usually includes the phrase “max out your 401(k) contributions.” But the viability of a 401(k) hinges on ongoing employment and a steady income. Given the changing dynamics of employment, making 401(k) contributions a financial priority may be committing to an approach that is no longer well-suited for the current economic climate.

Suppose your household encounters a period of under-employment; overtime is eliminated, bonuses are cut, or a spouse loses a job. To bridge what is anticipated to be a temporary situation, many workers end up tapping their 401(k)s. Distributions from 401(k) accounts, either as loans or early distributions, may be limited by plan regulations and/or incur tax consequences, including penalties. Thus, when 401(k) funds are used as cash reserves, the cost of access could be significantly higher than the tax advantages that were given on the deposits – and the situation is exacerbated if the 401(k) participant terminates employment with an outstanding loan. In short, a 401(k) is not well-suited for use during periods of under- or unemployment.

Similar qualified retirement accounts for the self-employed and smaller businesses (such as IRAs or SEPs) face the same challenges regarding early distributions, albeit with slightly different regulations. But other factors work against using qualified retirement plans for the self-employed. Income from self-employment is often irregular, both during the year, and from year-to-year, which can make regular deposits problematic. Early on, cash flow may not even allow for deposits. If the business grows over time, a profitable self-employed individual may find deposits restricted by annual contribution limits – “Now that I’m making a lot of money, I can’t find a place to defer it for retirement!”

Better Accumulation Plans for an Irregular Employment Future

Every year, Congress, in conjunction with economic policymakers, contemplates adjustments to existing qualified retirement plan regulations. But most of these changes are tweaks; they don’t change the fundamental structure of retirement accounts. Rather than trying to continue working within the confines of a model that may not be suited for irregular employment, individuals might be better off considering alternatives. If so, what features should be part of an “Irregular Employment Accumulation Account”? (Some marketing guru needs to come up with a better name; an “IEA Account” just isn’t catchy.) Here is a partial list:

Flexible deposits and withdrawals. Liberal contribution regulations would provide the option of adding excess deposits in good years, or forgoing deposits in lean periods.

Tax advantages. If you aren’t using the money, it would be beneficial to eliminate or minimize carrying costs (such as the taxes on interest and capital gains).

Safety. Given the possibility that some funds may be required to replace income in the near future (such as between employment), these accounts should include conservative investment vehicles, preferably ones with guarantees.

Accessibility. Loan restrictions, surrender charges, and tax penalties in many financial products are practical deterrents to discourage the liquidation of long-term accumulation vehicles. But if the need or opportunity arises, access options should be possible with a minimum of restrictions.

Personal ownership and portability. Regardless of employment, and particularly in periods of unemployment, this account should be under individual control, and capable of fitting into future employment scenarios.

Adaptability and long-term value. A standard feature of personal planning for the past three decades has been to compartmentalize financial objectives and find a specific product for them, i.e., a separate account for cash reserves, retirement, college education, medical expenses, etc. Considering the ups-and-downs of irregular employment, a “multi-tool” accumulation account that can serve several purposes over one’s lifetime would be attractive.

Does such a financial vehicle exist? The best answer is “yes and no.” Profitable self-employed individuals have been working with these ideas for awhile now. A competent financial professional can probably help you construct a financial program with many of these features, although they may not be combined in one product. And if the current trend in irregular employment continues, you can be sure the marketplace will develop new products. Is there a congressionally-authorized IEA account? Not yet.

Consider your current employment circumstances and your future prospects. How has technology changed your work in the past decade? Are more automation and fewer people a possibility? More to the point…

HAS THE 401(k) BECOME A DINOSAUR IN YOUR FINANCIAL WORLD? IS IT TIME TO CONSIDER ALTERNATIVES?

Extended Family Issue: Special Needs Planning

kimb — Wed, 15 Feb 2012 15:00:25 +0000

Extended Family Issue:
Special Needs Planning

Raising a family is challenging under any circumstances, but for parents with special needs children the stakes are dramatically higher because the parenting responsibilities may last the child’s entire life. This reality can be overwhelming, both emotionally and financially. One of the best ways to face these long-term challenges is to systematically establish a long-term plan, one that considers both the emotional and financial issues likely to be encountered.

Immediate Concerns

Many special needs children may qualify for government assistance through the Social Security Administration, from either the Supplemental Security Income program (SSI), or the Social Security Disability Income program (SSDI). Eligibility for either of these programs can be complex, as both involve some means-testing to determine the extent of aid; financial decisions by the parents (such as investing in a tax-qualified retirement account or buying a home) can impact the amount of assistance received. This factor means parents must consistently monitor and review their financial plans.

Long-term Issues

In addition to handling the details that every-day parenting requires, parents who have special needs children usually have two primary long-term concerns:

Who will be around to ensure the welfare of their children or make decisions for them if they are unable to care for themselves?

How will they pay for it?

Answering these two questions is usually an interconnected process. If there is no money set aside for care, even the most qualified and trustworthy guardians (such as siblings) may not be up to the task. A good special needs care plan addresses both questions. Typically, this is accomplished through the establishment of a trust.

The trust will specify guardians, trustees and beneficiaries, as well as defining which assets should be placed in the trust. Two common types are Support Trusts and Special Needs Trusts. Support Trusts require the trustee to make distributions for the child’s support in areas like food, shelter, clothing, medical care, and educational services. It is important to note that beneficiaries of Support Trusts may not be eligible for SSI or Medicaid. If the special needs child will rely on government benefits for a significant portion of care, it may be best to avoid a Support Trust.

For many parents, a Special Needs Trust is the most effective way to help their child with a disability. A Special Needs Trust manages resources while also maintaining the child’s eligibility for public assistance benefits. When the trust is funded by the parents’ assets, it is called a Third-Party Special Needs Trust*. In some instances, the trust may be funded by the child’s assets (for example, when the receives a settlement from a personal injury lawsuit). This arrangement is called a Self-Settled Special Needs Trust.

Funding the Trust

Parents of a special needs child face some daunting financial challenges. From the moment the special need is recognized, all the financial metrics change. Not only is there a compelling desire for the parents to provide an estate at their deaths, but there is also the consideration that other aspects of their financial life must be altered, such as:

If the parents’ diminishing health affects their ability to provide care, someone else must take their place.

With continuing parental duties, the dynamics (and costs) of retirement will be different.

Besides providing immediate protection, a life insurance program might be constructed to provide guaranteed funding for a special needs trust.

Extended Family Considerations

The time and financial resources devoted to a special needs child can create imbalance and stress for other family members, particularly siblings. Because brothers and sisters will be a part of a special needs child’s life longer than anyone, the Sibling Support Project (siblingsupport.org) states that “Early in life, many brothers and sisters worry about what obligations they will have toward their sibling in the days to come.” And in many instances, one or more of the siblings will assume guardian and care responsibilities after the parents have passed away.

The immediate realities of receiving less attention and the future possibility of having to care for a special needs child – perhaps at significant emotional and financial cost – can lead to resentment. Extended family planning can mitigate these feelings and help reshape the discussion. Experts in special needs care recommend that parents involve other children in the decision-making process as early as possible, because in the long run, this is not just a nuclear family issue. In addition, establishing an estate plan that provides an equitable inheritance for the rest of the family can help the extended family members support the special needs program, because it is seen as part of a larger financial plan made for the purpose of benefiting all children.

Don’t Go It Alone

These plans, and the details they involve, require expert assistance. Integrating government regulations, legal designations and funding combinations is not a do-it-yourself project. Finding competent financial professionals and maintaining regular communication with them will go a long way toward maximizing the benefits of a special needs plan.

IF YOU HAVE CHILDREN OR GRAND-CHILDREN WITH SPECIAL NEEDS, PLANNING IS ESSENTIAL TO THEIR LONG-TERM WELL-BEING. NEED ASSISTANCE? WE CAN PROVIDE PRODUCTS, RESOURCES, AND FINANCIAL KNOWLEDGE.

Extended Family Issue: Financing Independent Living Arrangements

kimb — Wed, 08 Feb 2012 15:00:35 +0000

Extended Family Issue: Financing Independent Living Arrangements

As they have at every juncture in their lives, the demographics of the American Baby Boom generation are once again changing cultural norms. This time, the change is a “silver tsunami” encapsulated in the term “Senior Living.”

Generally classified as the population born between 1946 and 1964, the first of the Baby Boomers turned 65 in 2011. Not only are many of them retiring and collecting Social Security, these Boomers are also looking for long-term residential living options better suited to their lifestyle changes. This swell in demand is creating many different choices, as well as a new financial question: how will we pay for this?

The term “Senior Living” covers the spectrum of living options available to retirees, and can be broadly categorized in three types of facilities:

Nursing homes;
Assisted care facilities;
Independent living communities.

These three facilities reflect differing levels of care and independence.

Nursing homes are more commonly referred to as skilled nursing and rehab centers. Nursing care is typically provided for people who need long-term care, or rehabilitation from surgery or recovery from a severe medical condition like a stroke.

Long-term care in a nursing home is for older adults who need around-the-clock nursing care. These residents need help not only with basic ADLs (activities of daily living) but need the supervision of staff to maintain their safety. Residents typically live in private or shared accommodations, often with bathrooms shared between patients or even between two rooms.

Nursing home care is usually the most expensive type of care due to the personnel and equipment required to maintain patient care. According to Chris Orestis, in an April 2011 article for the Life Care Funding Group, the national average cost for a nursing home is currently around $6,000/mo. For long-term care residents, private funds, Medicaid, and long-term care insurance are the typical methods of payment.

Assisted care facilities are a residential option for seniors who want or need help with some of the activities of daily living, but are still able to manage most aspects of life on their own. A typical assisted living facility will provide three meals a day served in a common dining area, housekeeping services, transportation, access to health and medical services, and security, as well as exercise and wellness programs and social and recreational activities.

The cost for assisted care facilities is a monthly rent, plus additional fees based on the level of individual attention the resident requires. According to the American Elder Care Research Organization, the 2011 national monthly average cost of assisted care was $3,477/mo. with a range of $2,156 to $5,757. Depending on the definition of terms and a resident’s condition, a long-term care insurance policy may cover some or all of the costs, but most long-term residents pay for assisted living from personal assets.

Independent living communities may be retirement communities, retirement homes, senior housing or senior apartments. These housing arrangements, from apartment-style living to freestanding homes, are designed exclusively for seniors, generally those age 55 and over. The physical arrangement is friendlier to older adults, often being more compact, with easier navigation, little or no maintenance responsibilities, and security. While some care services may be available, residents must have the ability to live independently, according to terms defined by the facility.

The costs for independent living facilities will vary, from government-subsidized rental units for low-income seniors to retirement homes requiring an initial investment as well as monthly fees. In some instances, a portion of the initial investment may be refunded to the resident when he/she leaves the facility.

For seniors considering an independent living retirement community, all of the funds will come from personal assets; neither government programs like Medicaid or individual insurance coverage will apply.

Continuing Care Retirement Communities (CCRC) are all-in-one facilities that provide a continuum of care from independent living to assisted living to skilled nursing, typically as a complex of buildings on one campus. CCRCs are designed to enable seniors to remain in a single residential location, which is attractive for seniors with declining health conditions, or couples in mixed health. While CCRCs offer much for seniors, they are the most expensive senior living solution available. The typical CCRC requires a one-time entrance fee and monthly maintenance fees. Entrance fees range from $60,000-$120,000 and monthly maintenance fees from $400 to $2,500. Some facilities offer return-of-capital guarantees and long-term insurance as part of their pricing structures. These options guarantee some assets will be left to the resident’s estate, and make future medical expenses a fixed cost.

A common funding paradigm for independent living communities is to sell one’s existing home, then use the proceeds to pay for the initial buy-in purchase. Monthly facility expenses are structured to equal a retiree’s Social Security income, leaving other needs and wants to be paid from savings. Many facilities will offer the option of financing the initial fee through a short-term bridge loan drawn against the equity in the applicant’s residence. When the house sells, the facility is repaid from the proceeds.

Navigating the Funding Maze of Senior Living

The type of senior living arrangements, the amount of the individual’s assets, and the availability of insurance all figure prominently in determining how to pay for senior living arrangements. And many of these decisions can have significant financial ramifications, so each step should be carefully considered, with input from family members and trusted advisers.

While almost all seniors are covered by the federal government’s Medicare and Medicaid programs, one’s eligibility to receive benefits, particularly Medicaid, is dependent on one’s assets, or lack of assets. Attempting to preserve assets for heirs and qualify sooner for Medicaid, some individuals reposition, gift or liquidate assets in anticipation of going to a nursing home. While Medicaid allows a spouse to keep some assets, the agency also has the authority to “claw back” assets it feels were removed or transferred incorrectly. To find out how these rules apply, you or a family member may need to consult an informed counselor or a qualified elder law attorney.

Some of the payment programs offered by Continuing Care Retirement Communities are essentially “housing annuities.” For a lump-sum and a fixed monthly cost, housing (and in some cases, long-term care) are guaranteed for life. Similar to purchasing a regular annuity, the individual is exchanging control over one’s assets for a certain outcome, and must weigh the costs and benefits of surrendering control and receiving a guarantee. And just like an annuity, the options for revoking a senior living agreement are limited once the program has begun.

Other assets may be in play as well. Owners of life insurance policies may have the option of exchanging them for long term care benefit plans. In a January 5, 2011, article (“Funding Long Term Care with Life Insurance,” lifehealthpro.com), Orestis notes that several states have passed laws in which…

“life insurance companies are legally required to inform policy owners older than 60, or if they have a terminal or chronic condition, that they have eight alternative options to consider before lapsing or surrendering a policy – and one of them is converting a life insurance policy into a long term care benefit plan.”

This arrangement is similar to a life settlement, and is brokered by a “senior care company.” Orestis states that this agreement “will convert any form of life insurance to pay directly for the costs of long term care in a nursing home, assisted living facility and home healthcare. (The) option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Recovery legal action against the estate.”

If you or your parents are considering entering into a senior living arrangement, it is strongly recommended that you seek input from your team of financial professionals. A 2009 paper published by J. Carl Holowaty declared that “moving into an institutional care facility is possibly the single most disruptive event to patterns of social engagement that a person could experience (ranking maybe even higher than the death of a spouse).” Knowing how to best use assets and quantify costs can go a long way toward making a good decision, for you or your extended family.

IF YOU OR AN EXTENDED FAMILY MEMBER ARE CONTEMPLATING A SENIOR LIVING ARRANGE-MENT, A GOOD PLACE TO START IS A REVIEW OF YOUR ASSETS, AND HOW THEY MIGHT BE USED FOR MAXIMUM BENEFIT.

Nuclear Family Financial Models

kimb — Wed, 01 Feb 2012 15:00:54 +0000

Nuclear Family Financial Models,
Extended Family Realities

Look at this picture of the silver-haired couple. It is a stock photo, one that could be used as the advertising background for any number of products or services. But since this is a newsletter about personal financial issues, what topic is most likely associated with this image?

Can you say “Retirement Planning”?

You should, because that’s the tagline that appears with this photo on the homepage for a prominent financial services company. And since a picture is worth a thousand words, there’s a lot more being said in this image than just those two words. For instance, it would be easy to imagine…

The couple is married. While they are obviously older, they are healthy, attractive, well-dressed and self-confident. They are moderately wealthy, have led successful, happy lives and are optimistic about their future together.

With a bit more imagination, it would also be logical to assume…

The couple’s two or three children are independent, successful adults who have careers and families of their own, and wonderful grandchildren that love to come and visit. With family, career and financial objectives completed, this wise, contented couple is now ready to plan a rewarding and relaxing retirement.

In summation, the unspoken message this photo presents is the picture-perfect financial conclusion for the ideal nuclear family. It’s the last snapshot in a social motif that advertisers have been selling since the 1940s. The image sequence begins with boy meets girl. Soon after, the photos show they are working, getting married, having kids, and buying a house (the order may vary). Then, for the next two decades, there’s a montage of raising children, establishing a career, and accumulating a nest egg. Finally, the sequence comes full circle, as the silver-haired boy and girl live happily ever after. It’s the American Dream.

There’s a lot to like about this idealized version of nuclear family life in the United States. Who wouldn’t want to look and feel good after 60, have well-adjusted independent adult children, adorable grandchildren, and finish with both the money and companionship to enjoy a relaxed and rewarding retirement? That’s not a bad life at all.

In the financial services field, it’s no surprise that a lot of the marketing is designed to resonate with these nuclear family themes. Life insurance is often associated with protecting your nuclear family. College funding plans tap into the parental desire to help your children become successful nuclear family units of their own. Long-term care insurance is there so your nuclear family unit will not be a burden to other family units, particularly your children. And most retirement planning occurs within a nuclear family paradigm; the computer models and portfolio analyses are focused on guaranteeing you and your spouse have enough to live on for the rest of your lives.

But ironically, when advertisers in the financial services field focus their marketing efforts on nuclear family success, they may be making it harder to achieve it – and overlooking some great opportunities.

The Nuclear Family is an Anomaly in History

The concept of the nuclear family unit – broadly defined as “a household consisting of a father, a mother and their children” – didn’t exist before the 20th century. (The Merriam-Webster dictionary first listed the term in 1947.) Nuclear families have certainly existed, but in the past, they were typically identified as components of extended families. One’s true family unit included parents, siblings, grandparents, grandchildren, and other close relations. To a great extent, the well-being and obligations of any nuclear family units were intimately connected to the well-being and obligations of the extended family. The extended family owned property, provided a structure for transferring wealth to successive generations, and offered protection and support. In fact, prior to the Industrial Revolution, it was almost impossible for nuclear family units to be financially viable – a single family couldn’t own enough property or provide enough labor or protection to function independently.

In Western societies, the Industrial Revolution freed nuclear family units from the need to remain connected to an extended family. Factory workers didn’t need land to make a living, didn’t need to become apprentices to find work, and didn’t need to stay in their hometowns. Instead, nuclear families found they could derive extended family benefits from what Stanford professor Avner Greif calls “corporate” institutions, such as fraternal organizations, unions, large employers and governments. Since the end of the 19th century, these corporate entities have provided many of the institutional benefits that once could only be found in the context of an extended family. These developments allowed nuclear family units some freedom to determine how they will construct an extended family – who would assist in childcare, protect their employment rights, provide a retirement, care for them in their old age, etc. One hundred and fifty years later, most of us see this corporate model of social support simply as the way things are. But Greif points out that “providing institutions through corporations is a novelty.”

The Persistence of Extended Family Connections

Even as industrialized modern society has mitigated much of the financial necessity for extended family connections, it has also brought forth other issues that create new financial and social concerns between nuclear families and extended families.

Increased longevity makes for circumstances where adult children must become caretakers for their parents, perhaps even as these children are nearing retirement. Divorce, while no longer having a social stigma, often results in the realignment of nuclear families through remarriage and can result in major shifts in financial obligations and inheritance. “Boomerang” children – those who leave only to return because of a divorce, job loss or other disruption – can dramatically alter the nuclear family storyline. And because the health of corporate extended family units is closely connected to the economy and demographics, many of the financial supports once provided by corporate entities may no longer be available; there are no lifetime employment guarantees, government assistance programs may be slashed, and pensions may diminish or disappear. In short, even in “modern” society, it is difficult for a nuclear family to remain unaffected by its extended family connections. To make financial plans without considering one’s extended family is short-sighted and unrealistic.

The Reality of Extended Family Connections

In some ways, the idealized nuclear family financial scenario is unrealistic. In order for a nuclear family to succeed “on its own,” every nuclear family with a connection to it has to succeed as well – the parents need to be self-sufficient and so do the kids. It really helps if there’s no divorce, no unemployment, no disease or disability, and no untimely deaths among the three generations – and it helps if the nuclear family plan consists of an only child, so there aren’t any siblings who might have issues. That’s a lot of variables that have to go right, and many are beyond individual control.

Consider just three statistics:

In 2008, data compiled by the National Alliance for Caregiving from the U.S. Health and Retirement Study found that 28% of women in the United States were providing care for an aging parent.

A 2005 report from the Census Bureau on disability determined that 2 in every 7 families reported at least one member with a disability.

The same report stated that one in 26 American families is raising children with a disability.

Bottom line: The numbers say it is likely that your financial world will be impacted by your extended family.

The Value of Extended Family Connections

In this era where the cultural focus is on the nuclear family, it’s easy to downplay extended family connections. It’s the stereotypical mother-in-law who always interferes, the ne’er-do-well brother who hits you up for a loan that will never be repaid, or the crazy uncle who says the most embarrassing things at family gatherings. But even today, extended family connections can be valuable assets in making a better financial life – for everyone involved.

There may not be the same binding sociological factors of 200 years ago, but kinship allegiances still matter. Most people have a keen interest in the well-being of family members, and given the right circumstances, have great incentive to help, even to sacrifice. Successful grandparents may be sources of financial wisdom and capital, perhaps assisting children and grandchildren with the costs of education, or subsidizing the purchase of a home. Siblings can often become great business partners. Specialized living arrangements for elderly family members may offer them a level of care and dignity that could never be obtained elsewhere.

Including extended family considerations in financial programs is not the prevailing mindset today, but historically, extended families have been powerhouses for wealth accumulation because there are strong incentives for long-term, multi-generational planning. Unlike a nuclear family perspective, an accumulation plan isn’t intended simply for consumption in retirement. Rather, the extended family perspective is often about building, accumulating and passing wealth, as well as enjoying some of it today. If that mindset is maintained over several generations, the cumulative financial benefits can be tremendous.

Of course, there can be challenges to extended family financial arrangements; one of the attractions of keeping your financial program “nuclear” is that you don’t have to worry about anyone else’s behavior. But considering how much might be accomplished when the finances of extended families are coordinated instead of separated, the possibilities are worth exploring. For example…

Could you borrow from extended family at terms more favorable than a bank?

Could you lend to extended family and receive a higher return than a financial institution is paying?

Could pooling assets make it possible to acquire and enjoy a long-term asset (like a vacation property) that you can’t afford on your own?

Could a small amount invested today on behalf of your children and grandchildren be a legacy that reaps huge dividends long after you are gone?

The modern perspective may have changed a lot of our social and financial arrangements, but it hasn’t eliminated the impact of extended family. Given today’s nuclear family focus, we may see most extended family incidents as impediments to our financial well-being. However, it would be misguided to overlook the opportunities that might come from planning and operating with one’s extended family in mind – particularly one’s children.

DO YOUR FINANCIAL PLANS EXTEND BEYOND YOUR NUCLEAR FAMILY?

Inflation Distortions

kimb — Wed, 25 Jan 2012 15:00:29 +0000

INFLATION DISTORTIONS

A bit of financial trivia that received a lot of attention in November was the increased cost of Thanksgiving dinner this year. According to the American Farm Bureau Federations’ survey, a turkey dinner for five with all the fixings cost about $49.20 this year, a 13% increase over last year. This price jump seems significant until it’s compared with the cost of the same meal during the Great Depression.
In a November 26, 2011, article for the Salt Lake City History Examiner, Rachel Quist did some research and calculated the cost of a similar turkey dinner in 1934. The amount: a mere $4.38 – until you adjust for inflation. In today’s dollars, the 1934 meal cost $72.73 – a difference of $23.53. Put another way, a 2011 Thanksgiving dinner cost 32% less than it did in 1934. Who would have expected that?
We all know inflation exists. In fact, we expect it and accept it as part of our financial lives. Some of us can remember when gas was $1.00/gallon and hamburgers were 50 cents, and recognize it’s unlikely we will see those prices again. But over time, inflation makes it hard to determine where we stand. Here’s another example:
According to the Internal Revenue Service, Americans filing a joint tax return in 1953 paid a top marginal tax rate of 92% on taxable income in excess of $400,000. A 92% tax rate is steep in any time period, but it’s the $400,000 threshold that might be worrisome to many people – until you adjust for inflation. According to Department of Labor statistics, $400,000 of taxable income is equivalent to $3.4 million in today’s dollars. So while the top-end tax rates were obviously high in 1953, a very small percentage of Americans reached that level of taxable income.
Inflation’s greatest distortions of perceived value occur when longer time periods are involved. This is one of the reasons calculating a “retirement number” is a dicey proposition. Suppose you are age 45, and want to retire at age 65, with an accumulation that can provide 75% of your annual pre-retirement income. What’s the inflation factor for 20 years? In short order, you find that if inflation averages 3%, $1 million in today’s dollars must increase to almost $2 million to maintain purchasing power. Suddenly, it occurs to you that $1 million is no longer a big number. And the task of reaching your financial goals may suddenly seem overwhelming. But don’t despair. It’s helpful to remember that inflation also tends to bump up incomes as well as costs – although not always to the same degree.
Given the capricious history of inflation, you can’t really “plan” for it, even though you are aware of its financial impact. The only psychologically healthy and rational strategy is to guard against risks, consistently maximize your present transactions, and adjust as you are able. Meanwhile, enjoy the things that are less expensive today, even if inflation makes the price higher.

APPLES AND ORANGES: The Chance To Get Rich vs. The Guarantee of Avoiding Poverty

kimb — Wed, 18 Jan 2012 15:00:58 +0000

APPLES & ORANGES:
The Chance to Get Rich vs. The Guarantee of Avoiding Poverty

“The more things change, the more they stay the same.”

Every now and then, a look backward can be enlightening. That’s the case with the on-going debate about how whole life insurance fits into individual financial programs. Because whole life insurance is a unique financial asset, the challenge for professionals and consumers has always been to properly evaluate its value in relation to other alternatives.
Life Insurance Selling is a professional trade publication with a long history of reporting on issues and trends relating to life insurance. In its November 2011 issue, LIS published an excerpt from a November 1967 article titled “Apples or Oranges – A Meaningful Comparison?” by R. Earl Denman. Although Mr. Denman’s commentary was written 44 years ago, his words remain relevant today; the same issues are still being discussed, and the same distinctions still apply. Here’s the excerpt:

There is such a to-do these days about life insurance versus mutual funds, common stocks, etc., that unless an agent is careful, he finds himself comparing life insurance as an investment with a lot of other things or becoming involved in a long discussion of the history of the stock market, mutual funds, and investment trusts, in which people have put surplus cash in years past, only to find that age did not fulfill the promises of youth.
It has been helpful to me in the past year or so, when the [individual] wanted to compare life insurance with these other things, to remind him that he is comparing apples with oranges.
Life insurance is a guarantee that he and his dependents will not be poor. All the other institutions offer is a chance to get rich. After 45 years of observing people and reading financial results obtained by my friends and acquaintances, I’m convinced that 99 out of 100 need the guarantee that they won’t be poor more than they need the chance to get rich.

Denman’s last paragraph neatly summarizes the apples-and-oranges issue in evaluating whole life insurance: Which objective is more valuable, the guarantee of avoiding poverty or having the opportunity to get rich? Both paths offer the prospect of greater financial security, but address the objective in markedly different ways. And in spite of the many changes in products over the past five decades, consumers today face the same decisions about saving and accumulating: Should I take the risk or play it safe?
Mathematically, the determination of which approach to follow depends on how the variables are manipulated. The results of any mathematical analysis between whole life insurance and another investment and/or combination of investments and term insurance will hinge largely on the projected rate of return, tax assumptions and length of time used for comparison. Of course, the math isn’t the whole story; there are also the intangible aspects of the risk-vs.-guarantee issue.
Historically, Americans’ response to investment risk has hinged on their perceptions. When double-digit annual returns were an every-year expectation, money flowed into all sorts of equity products. Sure, it was possible to lose money, but it seemed so many people were profiting that the risk of loss seemed minimal. Conversely, the performance of many equity products in the past decade has driven many investors to re-evaluate their risk tolerance, and guess what? Whole life is back in the discussion again. Insurance companies run television ads during football games promoting whole life insurance, and the Wall Street Journal features articles like “Honestly, What’s the Best Policy?” explaining why Baby Boomers and their children may want to invest in whole life insurance.

Psst!… It’s not an either-or decision

In real life, no one insists that you decide between apples or oranges; you can have both. Likewise, although there is a tendency for experts to make an exclusive declaration in favor of one option over another, many American consumers would benefit from a financial approach that included both the guarantee of avoiding poverty and the chance to get rich. In fact, having the guarantees against poverty might make it easier to take advantage of chances to get rich.
Whole life insurance is a unique financial product, but one with a proven track record in the market place. Just because comparing whole life to almost everything else may be an apple-and-oranges endeavor, shouldn’t mean you don’t want whole life. The key to a successful whole life program is properly positioning it among your other financial assets, – i.e., finding a place where the apples and oranges can grow together.

WANT TO LEARN HOW TO MAKE WHOLE LIFE FIT IN YOUR FINANCIAL PICTURE? CONTACT US TODAY FOR IDEAS AND DETAILS

Research Shows Financial I.Q. Declines – Just When You’ll Need It Most

kimb — Wed, 11 Jan 2012 15:00:53 +0000

RESEARCH SHOWS FINANCIAL I.Q. DECLINES – JUST WHEN YOU’LL NEED IT MOST

For many Americans, their most important financial decisions come at the end of their lives. They must decide when to retire, when to take Social Security, how to make retirement distributions, which Medicare supplemental insurance to buy, to keep the house or downsize, which investments to choose, how to update the will or establish a trust. These decisions not only involve large dollars, some of them are irrevocable. Yet a new study shows that, regardless of gender or education level, Americans’ financial literacy diminishes rapidly after age 60.
On a 16-question test measuring knowledge of investments, insurance, credit and money basics, scores fell about 2% each year starting after age 60, according to Michael Finke, an associate professor at Texas Tech University and a co-author of the study. For those 80 and older, this decline represented a 50% decrease in financial understanding compared to 60-year-olds.
This information has an additional twist: Finke found that peoples’ confidence in their financial decision-making abilities rises with age. As MarketWatch’s Robert Powell noted in an October 27, 2011, article, this means…
We are not older and wiser. Rather, we are older, less smart and over-confident.
Finke’s research is confirmed by other studies. Experts say the process of making financial decisions relies heavily on two forms of intelligence. The first is crystallized intelligence, which involves both memory and problem-solving skills. The second is fluid intelligence, which is the capacity to think logically and solve problems in novel situations, independent of acquired knowledge. Applied to financial decision-making, one must have fundamental knowledge of basic financial concepts and products, then be able to adapt this knowledge to match one’s unique circumstances.
In 2009, Harvard’s David Laibson reported that cognitive performance improves from youth to middle age, at which point it peaks before beginning a steady decline. Finke confirmed this finding, but added “the decline in cognition is due to a decline in financial literacy.” In other words, as people got older, they had a harder time deciphering financial information.
Given their combination of life experience and mental acuity, middle-aged adults are in their decision-making prime. But what if your big financial decisions are still a few years away? Are there steps you can take today to minimize the likelihood of making a poor decision in the future? Here are several suggestions.

Admit your weakness. First and foremost, acknowledge that your ability to make financial decisions will decline after age 60. Don’t think, “This won’t happen to me!” At some point, it will. Just like you won’t be able to run as fast, or jump as high, it’s reasonable – and responsible – to anticipate a decline in your mental capabilities.
Educate early and often. Most financial concepts and products are detailed applications of basic ideas. Life insurance, estate planning, retirement and the like can be understood by the average consumer – it isn’t rocket science. The more you are exposed to both the concepts and the details, the easier it is for you to maintain understanding. It sounds simplistic, but most people would dramatically increase their financial literacy if they just read a personal finance publication on a regular basis. Even better would be scheduling regular meetings with your financial advisors, not every week, but perhaps once a quarter. Regular discussion conversation keeps you sharp.
Prepare a plan today – and put it in writing. No one says you have to wait until the event is upon you before making a decision. For example, since you know the likelihood of diminished capacity in old age, it makes sense to develop a retirement-income plan that won’t require ongoing complex decision-making in the future. Putting these plans in writing serves as a ongoing reference for you, and can instruct others who may offer help or advice.
Find help. Cultivate relationships today with those you might consider delegating some decisions to in the future. If you know your decision-making may slip in later years, begin working with someone who will be 60 when you’re 80. Meet with a family member, knowledgeable friend, or financial expert who has your trust and understands your priorities. Ideally, you want an individual who is younger than you working at a firm that’s older than you – it’s a combination of youth and experience that can stay with you over time.
Annuitize. Like many other economists and financial behaviorists, Finke recommends planning to annuitize a portion of your assets, preferably in a straightforward immediate annuity, or perhaps using a mix of annuity and investment products (but don’t make it too complicated, right?). This “pre-set” strategy takes pressure off you andyour financial advisers.

Whether the topic is saving for retirement, executing a will, applying for life insurance, or some other aspect of personal finance, an accompanying statement is often “Do it now!” because procrastinating may result in a missed opportunity. But the value of acting today is more than simply completing a task and crossing it off the list.
One of the major themes from the Millionaire Next Door, a 1996 book that studied the habits and priorities of prodigious accumulators of wealth (PAWs), was that wealthy Americans invested considerably more time and energy discussing, executing and reviewing their financial plans – long before retirement. The comparative success of PAWs was due to a solid foundation of knowledge and preparation. They knew more, and had more successful experience to draw on.
Acting today, when you are most lucid and capable of making a good decision, is the best way to secure your financial future. You don’t want to delegate your financial decision-making to the 80-year-old version of yourself, who may not be as capable as the 60-year-old version. And in order for the 60-year-old you to make the best decisions, the time to prepare is now.

TO BE AT YOUR DECISION-MAKING BEST, WHAT NEEDS TO IMPROVE?

YOUR BASIC PHILOSOPHIES OF WEALTH AND MONEY?
A CLARIFICATION OF YOUR GOALS?
KNOWLEDGE OF FINANCIAL CONCEPTS AND PRODUCTS?
REVIEWS OF YOUR CURRENT POSITIONS?
THE RELATIONSHIP WITH YOUR FINANCIAL PROFESSIONALS?

How Will The ‘Great Recession’ Change Your Perception?

kimb — Wed, 04 Jan 2012 19:58:02 +0000

HOW WILL THE ‘GREAT RECESSION’
CHANGE YOUR PERCEPTION?

When it comes to money, the financial climate in which you grew up can have a life-long impact on your financial perceptions and behavior. The influence appears to be particularly strong if the financial events are extreme, such as those occurring in a boom or bust period and especially impactful for people who are between the ages of 18 and 25 when the major event occurs. A research paper published in September 2009 by Paola Guilano and Antonio Spolombergo (Growing up in a Recession: Beliefs and the Macro-Economy) reported that “recessions do alter perceptions,” and that these changes in perspective tend to persist throughout one’s life.

Looking back on 20^thcentury American experiences, it is possible to see how significant financial events shaped the behavior of different generations. The generation that came of age in the Great Depression placed a high priority on frugality, steady employment, and saving. They had strong aversions to almost all debt (and unsecured credit in particular), and were reluctant to take risks in the stock market. Guilano and Spolombergo concluded that because “recession-influenced respondents…tended to believe that success in life was more a matter of luck than hard work,” they also displayed a greater preference for government intervention, in the form of entitlement programs and progressive tax rates.

In contrast, the authors found that “birth cohorts that experienced high stock market returns throughout their life report lower risk aversion.” They are “more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks.” This observation describes the Baby Boom generation that was born following World War II, as well as the Boomers’ children. In addition to taking greater investment risk, these generations embraced easy credit, longer mortgages, and became comfortable using financial leverage (credit) for almost every transaction.

Will there be prominent perception shifts as a result of the Great Recession (or as economist Paul Krugman likes to say, the “Lesser Depression”)? Based on previous experience, the past few years qualify as an extreme period in financial history, so it seems likely that major attitude shifts might follow. From a broad survey of current financial commentary, here are some possible perception changes that are in the making:

Eighty (80) is the new 65. For the generation that grew up during the Depression, the magic number for retirement was age 65, when fully vested pension payments and maximum Social Security benefits began. For awhile during the 1980s and 1990s, that magic number dropped into the 50s as a high-flying stock market led many to believe they could accumulate enough to retire early.

But today, age 65 has “become irrelevant,” according to a November 17, 2011, wire report from Moneynews.com. Longer life spans, rising healthcare costs, falling stock market values, and heavy debt loads have led many Americans to conclude that continuing to work as long as possible is their only retirement option. A November, 2011, Wells Fargo study showed almost one fourth of middle class Americans now see age 80 as “a good age to shoot for when it comes to retirement.”

A trend toward prolonged working lifetimes could result in a fundamental change to many financial dynamics, from accumulation and distribution strategies to the cost of employee benefits, required minimum distributions, tax credits, and eligibility for government programs like Social Security and Medicare.

“Sure things” aren’t sure things.Two financial clichés that were popularized in the late 20^thcentury and persisted up to 2007: (1) “Stock markets may fluctuate, but the long-term trend is always up,” and (2) “Buying a home is the best long-term investment a person can make.”

For awhile, the numbers seemed to support these assertions.

And then the sub-prime bubble burst. The market for housing dried up, foreclosures skyrocketed, and prices plummeted. Now, as the November 10, 2011, headline from the Wall Street Journal states: “Home Prices Keep Dropping.” The actual numbers vary with the location, but a 30-40% decline in home prices since their 2007 peak is not uncommon. What’s worse, says Paul Dales, an economist for Capital Economics, it will take “years rather than days for a proper recovery to get going.”

Meanwhile, the past decade has not been good for stocks. While there have been significant ups and downs during this period, the net result over 10 years from most market indexes is slightly better than break-even. Even though many financial professionals continue to remind consumers that stock market investing is a long-term project, a 10-year period with almost no return (or a loss) is hardly reflective of an upward trend. What’s worse, markets have become more volatile – even if the overall return is flat, fluctuations are higher and more frequent.

Insurance matters. With fewer assets and lower returns, more Americans find themselves living on a thin financial margin where one unforeseen incident can unravel everything. Suddenly, it seems financial discussions – in the media and around the dinner table – are as much about protecting oneself from poverty as getting rich. People know they need insurance.

Right now, health insurance is the front-and-center topic, one that will apparently require a Supreme Court ruling to determine how the nation will address both affordability and protection. But other insurance issues need to be resolved as well. And much like health insurance, it will be interesting to see whether private or government programs will win the day.

As defined benefit pensions have been replaced by 401(k) accounts, retirees face the challenge of turning their accumulation into a steady income stream. In the marketplace, this concern has meant the revival of immediate annuity purchases, allowing individuals to exchange a lump-sum for a guaranteed stream of payments. From the government side, public policy advocates have floated several ideas to reshape Social Security or establish national retirement accounts.

Where once a popular strategy for life insurance was to buy cheap term insurance to cover one’s working years, increased life expectancies and a lack of retirement assets have prompted many Americans to take a second look at life insurance designed to stay in force for their whole lives. Additionally, hybrid financial products that combine either life insurance or an annuity with long-term care insurance are also attracting consumer interest. Going forward, insurance will play a larger role in individual finances.

Employment is a fluid condition. Once upon a time, the average American graduated from high school or college and settled into a lifetime of steady employment, often staying with the same employer until retirement. At least, that’s how we imagined the story went. The reality is much different, both then and now.

“For the great majority of American workers, so-called ‘career jobs’ never existed, and they certainly do not exist today,” says Craig Copeland, an Employee Benefit Research Institute senior research associate and author of the study “Job Tenure Trends, 1983-2010.” “A distinct minority of workers have ever spent their entire working career at just one employer.” The median job tenure for Americans is slightly more than five years, and considerably less for younger Americans, but this number hasn’t changed much over the past 20 years. What is different today are the reasons for job change.

In periods of high employment and prosperity, people changed jobs to pursue better opportunities. Today, job change is more likely the result of layoffs or downsizing. People aren’t moving from job to job, they are moving from employment to periods of unemployment. Furthermore, due to the high ancillary costs that come with hiring full-time employees, more businesses are meeting their labor needs with contract and temporary workers. As a result of the Recession and the subsequent changes in employment, census data released in September 2011 showed US households earned less in 2010 than they did 13 years ago (see chart).

Obviously, this on-again-off-again work format has the potential to disrupt or complicate efforts to achieve financial security.

Adjusted for inflation, real household income has dropped to 1997 levels. Outstanding debts must eventually be repaid. One of the reasons economic recovery has been so slow to take hold is because there has not been a bounce-back in consumer spending. Shaken by the events of the past few years, many Americans are coming to the conclusion that they can’t always outgrow, out-earn, defer or restructure their debts. Instead of borrowing for a new car, or refinancing the mortgage to add an addition, more Americans are paying off credit card balances, cleaning up their student loans, and trying to build cash reserves as a hedge against employment and investment uncertainties. Some observers wonder if those who have grown up in a culture of leverage – always borrowing today, and hoping to pay tomorrow – can truly embrace a new paradigm, but as was mentioned at the beginning of this article, recessions alter perceptions. And it appears many Americans have embraced an austerity program as a way to stabilize their financial status.

If only governments were so responsible. Whether it’s Greece or the United States, deficit spending cannot continue indefinitely. The optimists may still believe it is possible for a national economy to outgrow its obligations, but when debts get too large, a tipping point is reached, and the only solutions are decreased spending, higher taxes, or bankruptcy. None of these options are good ones. But somehow, the debts must be resolved.

Adjusting to Changing Perceptions: Recapitalize and Restructure. In the business cycle economic model, bust follows boom, which precipitates a recapitalization and restructuring that lays the foundation for the next boom. The events of the Great Recession certainly have the characteristics of a bust. The question is how best to recapitalize and restructure.

In the Great Depression, much of the restructuring came from government initiative. Employment programs like the Civilian Conservation Corps and the Works Progress Administration stepped in to put Americans to work. Social Security was established to assist with retirement. The funding for these programs came from higher taxes and deficit spending (i.e., borrowing). Today, it is an open question as to whether voters will accept either higher taxes or deficit spending as a way to facilitate government solutions to these financial issues.

There is a second problem with government intervention: Even if the electorate approves these steps, lenders may not. Look at Greece. While the Greek population seems strongly in favor of maintaining the country’s entitlement programs, the government is finding it can no longer borrow to pay for the programs. In effect, outside creditors are determining national economic policy; while the Greek government may want to provide for its citizens, its credit card is maxed out. When governments reach their spending limits, the only recourse is individual initiative to develop and implement individual solutions.

In any phase of the business cycle, people who are paying down debt and rebuilding their savings are recapitalizing, and better prepared to prosper in the future. But what is often overlooked is how efficiently this recapitalization is taking place. New perceptions may require changes in strategies as well. For example:

If your future employment may be characterized by periods of unemployment, should you adjust how you contribute to a qualified retirement plan, such as a 401(k)?

If your house isn’t the best investment you’ve ever made, are you sure you want to make extra principal payments to pay off the mortgage earlier?

If you are ready to retire, should some of your accumulation be used to purchase a guaranteed stream of income?

If it is likely your current employer will not be your employer 10 years from now, should you consider portable, personally-owned disability and/or life insurance benefits?

This discussion is a bare-bones overview of some projected long-term effects of a significant financial event. The challenge for individuals is determining how best to respond to these changing financial perceptions. Effective financial management has never been a set-it-and-forget-it program; even if you are well-positioned right now, some changes may be necessary in the future.

IN LIGHT OF RECENT EVENTS, COULD YOUR FINANCIAL PROGRAMS BENEFIT FROM RECAPITALIZING AND RESTRUCTURING?

ARE YOUR FINANCIAL PERCEPTIONS IN LINE WITH THE AFTERMATH OF THE GREAT RECESSION?

“Deleveraging” vs. Saving

kimb — Wed, 28 Dec 2011 20:05:10 +0000

“DELEVERAGING” VS. SAVING

With the economic turmoil of the past few years still roiling their personal finances, many American households have made a focused effort to “deleverage,” that is, to pay down their debt balances. And while the average American consumer may have given lip service to reducing their indebtedness in the past, this time it appears they are serious about it. The Federal Reserve reported that revolving credit debt for Americans (mostly in the form of unpaid credit card balances) was at its lowest level since 2004. The Fed also determined that total household debt dropped 8.6% since 2008.

Because consumer spending is also down, it seems that most of the accelerated debt payments are primarily because people are reducing or eliminating purchases, and instead applying those unspent dollars as additional payments on their credit cards, loans and mortgages. But some financial commentators are also touting the idea of redirecting funds previously allocated to long-term savings toward paying off debt. Their logic is as follows:

With the volatility of the stock market and diminished real estate values, paying off debt is a good “investment,” with a rate of return equivalent to earning the interest rate charged. In other words, paying off a credit card balance which charges 12% interest is akin to earning 12% – guaranteed.

Mathematically, this is an enticing perspective. It’s simple to picture, simple to calculate. But a closer look at some of the other issues involved (instead of just the simple parts) should prompt most people to think twice before they divert too much of their savings to increased debt reduction.

Paying down debt is not the same as saving.

Sometimes financial commentators confuse the two ideas, or view them as interchangeable. They are not. When you save, you accumulate money under your control. You can decide where to put it, when to take it, what to use it for. When you repay debt, you reduce the control the creditors have over you. But just because the creditors control you less, doesn’t mean you have more financial control.

If all your earnings were put toward debt reduction, and you had no savings and no capital, how would you be able to take advantage of a financial opportunity? Either you couldn’t, or you would go back to your creditors — you’d run up the credit card to its limit, or see the bank for another loan. When you must rely on borrowing to participate in a financial opportunity, the ultimate decision-making power (control) lies with the lender, not you. Paying off debt is not saving.

Debt is really about control.

When you owe a creditor, the creditor exercises a measure of financial control over you until the loan is satisfied. As long as there is a lien, they can lean on you. Paying the debt faster (such as making extra principal payments) without paying the balance in full, does not decrease the creditor’s immediate control over a portion of your finances. Even with extra principal paid, you still have an obligation to make next month’s payment. The lender’s control is not removed until the loan is completely repaid.

In fact, you could argue that making additional periodic payments on debt obligations actually gives greater immediate control to the lender. Not only do you still have another monthly payment coming, but the additional debt repayment means more of your “discretionary” dollars are also in the lender’s hands.

From a control perspective, a better approach to reducing debt could be to systematically fund an account for the purpose of accumulating enough to make a single balance-clearing payment. Rather than sending an extra $500 on the credit card balance, the “controlled alternative” is to deposit that same amount into another savings vehicle, while continuing to make the regular minimum monthly payment. When the savings account equals the remaining balance, you would pay the balance off.

Some may be quick to point out that the interest earned in the savings account will most likely not be equal to the rate of interest charged by the lender, thus arguing that you “lose money” by not paying the additional amount to the credit card account. That’s probably true, and saving in an outside account might take a few months longer to fully pay off the obligation. But the key financial issue here is control, not rate of return. Keeping the money under your control gives you greater current financial security and opportunity than if you send those dollars to a creditor.

Integrating Deleveraging and Saving

Under almost all circumstances, paying off debt is a good thing, and so is saving. Being debt-free gives you financial freedom, savings allows for financial opportunity. And the two actions are not mutually exclusive – you can pay off debt and save at the same time. Furthermore, you may find a financial advantage in integrating the two activities by saving in a format that can eventually reduce or eliminate debt.

IF YOU ARE INTERESTED IN WAYS TO COMBINE SAVING AND DELEVERAGING IN YOUR FINANCIAL PROGRAMS, NOW MIGHT THIS BE THE BEST TIME TO EXPLORE NEW IDEAS OR ADJUST YOUR CURRENT PLANS.

THE “GOOD OLD DAYS”?

By some measures, the past four years have been the worst economically since the Great Depression of the 1930s. But while today’s financial difficulties are real, there are some positives. For example…

According to statistics from Freddie Mac, the average interest rate on a 30-year fixed rate mortgage was 18.45% in October 1981 (i.e., 30 years ago). The average interest rate on a 30-year fixed rate mortgage last week on Thursday, 10/13/11, was 4.12%. The former mortgage rate would produce a $1,544 monthly “principal and interest” payment on a 30-year fixed rate mortgage for $100,000 while the latter would cost just $484 per month.

Have You Scheduled Your Check-Up?

kimb — Fri, 23 Dec 2011 07:15:08 +0000

HAVE YOU SCHEDULED YOUR CHECK-UP?

December 31, 2011 represents the fiscal year-end for individuals and many businesses. In short order, this means collecting financial information, preparing tax returns, and compiling other accounting summaries, such as profit/loss and net worth statements. With this information fresh in your mind and readily accessible, now might also be a good time to schedule a review with your financial professionals.

Besides the advantage of starting the year with a renewed understanding of your financial condition, scheduling a review also gives you time to make deliberate decisions about any financial transactions that may need to be executed before April 15th or any other deadline throughout the year.

Start the year right. Get the knowledge you need, update your strategies, and give yourself the best opportunity to prosper in the coming year. Sounds like a resolution! Call or email us if you’d like help as we have an annual checklist as well as our Prosperity Economic Strategies list for 2012.