Efficient Funding of Long-term Care Insurance

Posted by dfederman on Dec 28, 2011 in Investor Education | Comments Off

Efficient Funding of Long-term Care Insurance

Over the next 20 years, the number of Americans age 65 years and older will more than double to 71 million, comprising roughly 20% of the U.S. population.

Greater longevity among the Baby Boom generation will also contribute to increased demand for long-term care services; those surviving to age 65 years can expect to live an average of 20 more years. As Baby Boomers live longer, their chance of needing some form of long-term care services will rise as well. Roughly 70% of people over the age of 65 years require some form of long-term care, and more than 30% will receive some nursing home care in their lifetime.

Long-term care is expensive, and the cost is rising every year. Currently, the average annual cost of a one-year stay in a private room at a nursing home in a Virginia metropolitan area is $77,380. Future long-term care will be even more expensive. If costs rise at just 3% annually (a conservative estimate), then 20 years from now a one-year stay in a nursing home will cost approximately $139,757. It’s easy to see how long-term care expenses can threaten or even wipe out your retirement savings and jeopardize any assets you had planned to leave your loved ones.

With the Standard & Poor’s (S&P 500) index returning an average of only 2.72%2 a year for the last ten years and a one-year certificate of deposit returning an average of under 1.0%, it may seem like an insurmountable task to save enough money to fund a retirement and potential long-term care costs.

The experienced attorneys at The Estate Planning & Elder Law Firm can help you come up with creative options to help plan for your family’s future long-term care costs. Let’s take a look at one of the innovative funding solutions someone might want to consider.

Let’s assume that Cheryl, age 56 years and Frank, age 58 years, are a married, working couple with assets in excess of $500,000, mostly in certificates of deposits. Cheryl’s mother has Alzheimer’s disease and has been in a nursing home for the past six years. Cheryl and Frank have seen first-hand how her mother’s nursing home expenses have decimated her parents’ retirement nest egg. To avoid this from happening to them, Cheryl and Frank want to plan ahead for their own retirement.

Cheryl and Frank can purchase a shared long-term care insurance policy that will cost them roughly $4,000 annually if they are in good health. Cheryl and Frank can then take $75,000 from one of their certificates of deposit that is maturing and purchase a Single Premium Immediate Annuity (SPIA) with a “Life with Cash Refund” payout option.

SPIA income payments with specific life insurance companies can be set up to automatically pay the long-term care insurance premiums each year to ensure the policy stays in force for life. Also, beginning in 2010 (thanks to the Pension Protection Act), income payments from a SPIA can fund a long-term care insurance policy. If set up properly, these income payments can be federal income tax free. Thus, using a SPIA to fund long-term care insurance premiums creates not only a tax-efficient funding solution, but also a convenient way to help protect Cheryl and Frank’s lifestyle and portfolio from the high costs of long-term care.

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C.

If you are interested in having an Elder Law attorney from The Estate Planning & Elder Law Firm, P.C. speak at an event, then please call them at:

Maryland (301) 214-2229
Virginia (703) 243-3200
Washington DC (202) 223-0270

For a review of your financial plan and investment portfolio, contact a financial adviser at Ariba Asset Management at 1-800-808-7488

As Rents Rise, Is It Time to Buy?

Posted by dfederman on Dec 27, 2011 in Investor Education | Comments Off

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As the nation’s home ownership rate shows signs of creeping back up, so too does the average monthly rent paid by those who don’t yet own their homes. With that in mind, this article reviews key considerations for those considering making the transition from renter to owner.

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The cost of renting is on the rise. Is now a good time to buy?

The number of Americans who own their home increased modestly during the third quarter, yet remained below the level recorded one year earlier. The seasonally adjusted home-ownership rate rose to 66.1% from 66%; it stood at 66.7% during the third quarter of 2010. The rate approached 70% during the recent housing boom.

The rental vacancy rate rose to 9.8% from 9.2% in the second quarter, although it was down from 10.3% year-over-year. The national rental rate climbed to $1,004 in the third quarter, up from $981 one year earlier.

For today’s renters, low interest rates continue to create an ideal opportunity to purchase a first home. Even if interest rates begin to creep upward, starting out with a solid understanding of mortgages could help you identify the best deals and save you thousands of dollars over the years. For example, if a mortgage has a fixed rate, it means that you’ll pay the same interest rate during the entire life of the loan; the interest rates on an adjustable-rate mortgage may vary from year to year. Here are some additional factors to consider:

• Shorter terms = lower rates, but higher payments. The “term” of a mortgage is the amount of time you have to pay off your loan. For example, a mortgage with a 15-year term requires to you repay your entire debt, plus interest, within 15 years. In general, shorter-term mortgages offer lower interest rates than longer-term loans. But shorter-term mortgages also require you to make higher monthly payments in order to meet the more aggressive schedule.
• Points are up-front fees. Some lenders may want you to pay “points” when you sign a mortgage. A point is essentially a fee equal to 1% of the value of the mortgage. For example, three points on a $100,000 mortgage translates to $3,000. Your willingness to pay points may help you negotiate a lower interest rate, but that decision should depend on how long you plan to own the property, and how long it would take for your lower monthly payments to compensate for the additional up-front expense.
• Prequalifying can give you a head start. Prequalifying for a mortgage, which involves working with a lender before you find a home to determine how much you’ll be able to borrow, has important benefits. It lets you focus on houses you know you can afford, and it may save precious time once you decide to make an offer.
• Debt makes a difference. Lenders look at something called your “debt to income” ratio to determine how much mortgage you can afford. In general, no more than 28% of your monthly income should go toward housing expenses; overall debt shouldn’t consume more than 36% of income. However, lenders have the flexibility to make case-by-case decisions.

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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

Apples to Apples

Posted by dfederman on Dec 20, 2011 in Investor Education | Comments Off

“What do you think of these top rated mutual funds ranked in Kiplinger’s magazine?”

This was a question recently asked to us by a client. One of the funds was an “Emerging Markets Small Cap Dividend” ETF which had a “great three year track record of 16% a year.” As impressive as this may seem, this information is irrelevant and really does not explain why the fund did so well. Nor does it predict how it will do in the next three years.

When reading about a highly touted mutual fund (or any other investment) in a financial magazine, avoid getting sucked into the hype, and never assume that past performance can predict the future. It is important to compare “apples to apples.” i.e. small cap emerging markets dividend funds should be compared to the small cap emerging markets category in terms of both performance AND risk.

Instead of starting your next financial/investment conversation by asking, “what do you think about XYZ investment?” Ask, “how does XYZ investment fit into my overall financial plan?” By focusing on your financial plan, you will be forced to examine your net worth, expenses, income needs, time horizon, goals and most importantly, your personal values.

By holistically reviewing your personal financial circumstances, you will in large part be able to avoid many of the pitfalls that come from seemingly harmless investment ideas you read about in a magazine. As you examine your situation, you will then determine how much risk you NEED to take to reach your financial goals. If the analysis from your advisor determines you only need to earn 5% a year for the next 15 years, then clearly you do not need to place your entire investment portfolio into the stock market, let alone small cap emerging market dividends. With that being said, if it makes sense to add emerging market small cap dividends to the mix, then by all means include this asset class as part of a highly diversified portfolio to help you reach your long term financial goals.

Apples to Apples - comparing your funds to their respective asset class

Retirement Planning: Better With an Advisor?

Posted by dfederman on Dec 19, 2011 in Investor Education | Comments Off

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Estimating your financial needs in retirement can be difficult. How can working with an advisor help you?

The past few years have been harsh ones for retirees as a volatile stock market and economic uncertainty have made retirement planning especially challenging. That said, it is important not to neglect one of the most important tasks in successful preparation for your later years: conducting a retirement needs calculation to estimate how much money you will need for ongoing expenses.

Unfortunately, more than one-third of retirees with financial advisors had not estimated how much money they would need to maintain their current standard of living throughout their retirement.¹ This is a glaring omission because research has shown that those who have done a retirement needs calculation are likely to be more confident that they are accumulating enough assets.² They also are likely to have higher savings goals, which may be an indication that completing the needs calculation has given them a realistic assessment of how much they need to save.

Help From a Financial Advisor

If you are uncertain about how to conduct a needs calculation, it may be helpful to consult a financial advisor. More than 6 in 10 (61%) of retirees who participated in a recent survey had a relationship with a personal financial advisor. Retirees with financial advisors were more likely to engage in some aspect of financial planning and were somewhat more willing to take a degree of investment risk, but not to the point of aggressively managing household assets.

If a financial advisor is not available to you, an online calculator or a worksheet can help you estimate how much you will need. Surprisingly, when workers polled by the Employee Benefit Research Institute were asked how they went about conducting a needs calculation, 42% said they guessed and 9% read or heard how much was needed.² These offhand estimates may not be as reliable as a financial advisor or a tool that takes into consideration your current level of retirement assets, your estimated expenses, your time horizon, and other variables.

There’s no question that the past few years have heightened feelings of uncertainty, but try not to let these feelings cloud your planning. Doing the math of retirement is a wise investment of time and effort in your financial future.

Source/Disclaimer:

¹ Sources: International Foundation for Retirement Education; LIMRA; the Society of Actuaries, “The Financial Recovery for Retirees Continues: The Impact of the 2008-2011 Financial Crisis,” 2011.

²Source: Employee Benefit Research Institute, Issue Brief, March 2011.

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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

What is “Passive” investing?

Posted by dfederman on Dec 15, 2011 in Investor Education | Comments Off

Passive investing is an investment style in which investors:

1. focus on the ways markets are correct, rather than trying to take advantage of the ways markets are mistaken.
2. view markets as an ally and try to take advantage of the ways markets compensate investors.
3. believe exposures to risk factors [market (stocks vs. T-bills), size (small stocks vs. large stocks), and price (high/low book-to-market)--or (value vs. growth)] — collectively do the best job pinpointing the sources of investment risk that account for stock market returns.
4. focus on costs, which significantly affect net returns and are one of the few areas investors can control.
5. believe investments need not be complicated or exciting, just effective.Because capital markets work and generate long-term positive returns, you can set expected return targets. For many investors, investment risk is a preference, and your portfolio objectives determine the amount of intentional risk you need to capture. Ultimately, everyone’s financial goal is to be financially secure.