Private Advisory Group

Talking with Mom and Dad Before it’s Necessary

Posted by Steve on March 2, 2011  |  Comments Off

According to a 2006 survey of 1,000 people by Home Instead, Inc., an Omaha-based provider of in-home elderly care, as high as 42% of adults between the ages of 45 and 65 say that having ‘the talk’ with their parents is the most difficult discussion of their lives. Deciding when aging parents can no longer live on their own, and what their next step should be is often an agonizing one – for parents and for their adult children.

According to 2008 federal data, however, it is a crucial step because:

• Approximately 70% of people over 65 are expected to need some long-term care services.
• More than 40% of people over 65 are expected to spend at least some time in a nursing home (the average is three years).
• And 20% of people over 65 are expected to need long-term care services for more than five years.

Putting together a planned strategy with your parents can be a great way to start the discussion. It can give Mom and Dad a way to define and explain their goals and needs. The strategic plan can define the factors that determine when it is appropriate to get in-home help or make the move to assisted living.

Timing May Be Crucial

While many seniors do fine at home, others need long-term care facilities or something as simple as a visiting home aid. Either way, it’s important to start such conversations early. The rule of thumb is “the 40-70 rule”, which means if you’re 40 or your parents are 70 then it’s time to start talking.

Concerns about dementia, of course, will put additional pressure on the situation. People with dementia are eventually unable to make decisions in their own best interests. In addition, they may begin to misinterpret what other people are trying to do for them. Seniors with dementia may become paranoid, depressed or so confused as to be incapable of taking care of themselves.

Having the talk with your parents before the danger of dementia is crucial to their safety. Plus, having a strategic plan in place takes some of the pain out of the decision-making process if that time comes.

Considering the Options

While some busy working adult children may feel pressure to push their parents into choosing the most efficient option, taking the time to discuss the options and encouraging their parents to stay independent as long as possible is nearly always the better choice. Not only is this the less costly option, it also keeps the elderly parent in familiar surroundings.

Parents may resist their offspring’s efforts to relocate them for a variety of reasons. It’s important for adult children to recognize that their parents have their own reasons for wanting to stay in their homes. Some parents worry their children and grandchildren will miss the family home. In some cases, they fear their close friends or siblings will be left alone. Spending the time to figure out what those reasons are will help everyone find the right solution, not just the most expedient one.

Not all elderly parents have to move into assisted living immediately either. In some cases, when elderly parents show signs of not taking care of themselves well, they may simply need some in-home help with cleaning the house or keeping up with the bills. When one parent dies, the other may show signs of not caring for themselves well. The surviving spouse may simply need more regular contact with friends and a social support system to stay motivated and engaged.

Social Security: Shall I wait until 67 or 79 to claim mine?

Posted by Steve on October 12, 2010  |  Comments Off

Back in 1983 when the delayed retirement credits were raised from a mere 3% to a more comfortable 8%, the annual boost may not have seemed that significant. Treasury bills at that time were returning 9% and short-term bank CDs were paying as high as 9.5%, but in today’s world of scant yields on safe investments, an 8% increase for four years could be very hard to ignore.

Why delay?

This is an easy one and it reminds us of the old saying, “Patience is a virtue.” In this case, your patience will pay off as well. The longer you defer receiving social security benefits, the more you you’ll receive in delayed retirement credits. The current credits amount to an 8% increase each year, or a full 32% increase for those who wait four full years to start claiming social security at age 70.

Let’s do a quick comparison:

• Senior #1 starts claiming at 66 and qualifies for the maximum benefit. This senior receives a monthly benefit of $2,346 in 2010, an annual amount of $28,152.
• Senior #2 waits to start claiming at 70 and also qualifies for the maximum benefit. This senior will receive $3,096.75 each month or an annual benefit of $37,161.

Senior #2 enjoys approximately $9,000 more in benefits each year for the rest of his or her life. That’s a lot of money when we consider that life expectancies are rising steadily.

What’s the break even point?

If clients are unwilling to wait until age 70 for their benefits, we recommend reviewing the numbers to find your break even point. Our Senior #2 gave up $28,152 per year for four years, which means he or she starts out $112,608 behind. Calculating the 8%, it will take over 12 years to make up that shortfall, so our senior will have to live past the age of 78 in order to make the deferral worthwhile. Figuring the break even point requires understanding other factors that affect the calculation, such as marital status, investment growth rates, current inflation and personal tax rates.

• A married senior may or may not live to 90-plus, but there is a much greater chance that their younger spouse will. A surviving spouse will often receive the benefits of the first spouse to die, so delaying the start of benefits will commonly increase the surviving spouse’s income.
• Your investment growth rate will affect your break even point as well. The more money you could earn on early cash flow, the longer it takes for a late starter to catch up. Today, of course, short-term deposits yield virtually nothing and clients who delay their benefits may need to tap into money market funds or bank accounts for their spending.
• When the relevant price index goes up – also known as inflation – your benefits move up as well. If you receive an 8% delayed retirement credit while waiting a year to receive benefits, and there is a 3% cost-of-living adjustment, then your benefit will actually rise a full 11% instead.
• Personal tax rates are, of course, one of the magnifiers that point to delaying the claim of Social Security benefits as wise. Under current tax codes, delaying has tax advantages.

When should you defer?

If you put these concepts together, deferring the receipt of Social Security is a better choice if investment returns are low and inflation is relatively high. If tax rates rise in the future and the current laws remain, enlarged benefit checks will provide a more valuable tax shelter. Obviously, the time when deferring will be most important is when a senior lives beyond common life expectancy. A 96-year-old senior will appreciate receiving a $37,000 COLA annual benefit rather than a mere $28,000.

The bottom line is that the decision about whether and how long to defer your benefits goes beyond simple analysis you can do on your own. Some of the greatest risks to your retirement assets are longevity, poor investment performance (which is common these days), and inflation. Depending on what happens with the tax discussions going on in Congress currently, there may be higher taxes.

When do you want to be an early bird?

In some cases, seniors may find that being the early bird is best for their situation. For example, if a senior is in poor health and unmarried, it might be best to begin benefits as soon as possible. In some cases, clients choose to have their benefits start immediately in order to keep from depleting their other retirement savings, such as IRAs. This keeps their money in a tax-favorable account over a longer term. Many clients, especially the married couples, will find that the longer they live the better the deal.

As always, it’s entirely dependent upon your personal situation and we make our recommendations on a case-by-case basis to ensure that you have the information you need to make your decision. After all an 8% increase may be attractive, but it’s not a rule of thumb that applies to everyone.

Funding College – should you go private or federal?

Posted by Steve on June 21, 2010  |  Comments Off

An unlikely change resulting from the recent Health Care and Education Reconciliation Act of 2010 relates to the federal student loan program. Beginning the first of July, 2010, all student loan lending through the Federal Family Education Loan Program (FFELP) will originate from the federal government’s Direct Loan program. This means that private banks will no longer be able to make government-backed loans to students and their families. The intent is to streamline the process, which was often confusing and sometimes misused by dishonest lenders.

What difference will the changes make?

The process of applying for college loans is now simplified into a single system. You won’t have to shop around to find a lender offering the most competitive rates and loan rate terms. Remember the 2007 student loan scandals, which revealed that lenders were providing university kickbacks to be on a ‘preferred lender’ list handed out to students and parents? Well, those are long gone.

It’s important to remember too that private educational loans also often came with variable interest rates, no caps, high origination fees, and less flexible repayment terms – all features the Stafford loans were designed to eliminate.

So what’s the College Loan Process now?

The process won’t change – students and parents will fill out the Free Application for Federal Student Aid (FAFSA) to apply for Stafford loans, which are unsubsidized loans made directly with the federal government. Interest rates are fixed at 6.8% (the same as in 2009-2010) and no credit check is required.

Stafford loans have limits:

• freshman can borrow no more than $5,500


• sophomores can borrow no more than $6,500


• upper-class undergrads can borrow no more than $7,400


• the lifetime cap remains at $31,000

When your student reaches these limits, parents can apply for a Parent PLUS loan, which is also available through the FFELP (the federal government). The rules on PLUS loans are slightly different, however. Parents are required to pass a credit check and sign a promissory note. The interest rates on PLUS loans is now fixed at 7.9% (reduced from the previous 8.5%), which is great for parents.

How does Repayment work now?

The new health bill also contains some provisions for future repayment of college loans that will help low-income borrowers. Borrowers taking out student loans on or after July 1, 2014 can choose a repayment plan that is income-based, with an accelerated duration of 20 years instead of 25.

2010 Graduate – current repayment rules
$40,000 in student loans
standard 10-year repayment schedule
6.8% interest rate
single
= Graduate pays $460/month

Post 2014 Graduate – new repayment rules
$40,000 in student loans
standard 10-year repayment schedule
6.8% interest rate
married with a child
earning less than $27,000 (150% of poverty level)
= Graduate pays $160 per month and any unpaid balance is forgiven after 25 years.

Note! These changes do not affect current borrowers.

Should You go with a Private Loan?

It depends. First, many parents expect their children to assume some of the debt related to their higher education and, in that case, your student should fill out the FAFSA which will entitle them to Stafford Loans and their relatively easy terms.

After that, if you want to borrow in your own name, you should generally consider the PLUS loans because of the relatively low interest rate (7.9%). If you prefer to borrow educational funds for your children from a bank where you have a personal relationship, you may be able to get a better interest rate than those offered by the PLUS loan program.

A word of caution, however: many private student loans have typically held variable interest rates in the past. While some private lenders are returning to the incentives they abandoned during the credit crisis, it’s important to understand the terms before you sign the loan agreement.

Of course, it’s important to remember that saving for your child’s education comes after saving for your own retirement and security needs. Losing sleep over how to pay for college pales in comparison to losing sleep over how to pay for your own retirement.

So, the most important rule is to take care of your own needs first.

Will someone please tell me when bonds become the Next Big Thing?

Posted by Steve on May 28, 2010  |  Comments Off

In the first ten months of 2009, investors plowed $313 billion more into bond funds than they took out … that’s a staggering shift in the investing market considering that over the same time investors also withdrew about as much money as they put into their stock funds. In a remarkably short period, a good many of the bond funds are now yielding around half what they did just a year ago.

We understand that many investors, scared by the realities of the economic market woes and fears of losing their nest eggs, are just looking for some safety. Bonds, the once dull and staid investment product, are now being heavily advertised as the safe refuge for your money. Investors have also gotten a huge push from the financial industry lately as everyone started touting diversification through bonds right after the latest crash and bonds have continued to be pitched – even as bond yields are flattening out or dropping.

We’re not opposed to bonds as a whole, they have their place in many well-considered, diversified financial portfolios. What we are concerned about is the lemming-like about face investors seem to have taken toward stocks and we believe that many investors are being lured into some pretty bleak investments simply for the sake of ensuring a risk-free portfolio.

We’re also concerned with a few facts that are not well known by many investors. The first of which is that while returns on any corporate, municipal, or Treasury bond looks better than say a bank account, it’s important to understand that many bonds these days are carrying a lot more risk. Plus, when investment professionals look at the frenzied buying on the bond market and the high demand for fixed income, it starts to look a lot like a bubble.

A bust in the bond market isn’t as obvious as a stock-market crash, but it could still have a nasty effect on investor’s nest eggs. If interest rates are to rise, for example and many analysts believe that’s likely, bond prices could suffer. Even prices on so-called ’safe’ Treasury and municipal bonds could fall 30 percent or more if interest rates slip higher in the next few years. It’s important to understand that bonds are not the end of all investor risk – even with government funds, investors can still lose money in bonds.

Of course, if a bond’s price falls, the investor can choose to simply hold and collect the interest it pays and wait. Doing so could mean holding a bond for years, perhaps even decades. While a 4.7 percent annual interest on a current 20-year Treasury bond looks good right now when compared with a CD, it will seem ridiculous if interest rates rise and banks start to offer 7 percent CDs. Then, you could be stuck with a bond that doesn’t mature for a decade more and earning the lesser rate.

Still, the perceived safety of bonds and bond funds is a powerful draw for investors who’ve really been tossed around and shaken lately. If rushing willy-nilly into the bond market isn’t the answer, what is?

A well diversified portfolio is always the answer. Every investor’s portfolio should be unique to their age, their financial goals, their wealth status, and their current earning power, so each investor’s portfolio is as different as they are and it changes as you change. At Private Advisory Group, we want to help our clients manage their risk, and even a few of their fears, with a strong diversified portfolio that works for you.

Generation Transfer

Posted by Steve on April 21, 2010  |  No Comments

As children grow into adults, there are many skills that are
important for them to learn. These ‘life skills’ are not often taught
in schools or through other educational avenues available to kids and
teens, so it becomes another responsibility of the parents,
grandparents, aunts and uncles to teach kids accountability, the
value of hard work, the importance of individual success. Before they
become fully independent, young adults need to learn especially how
to manage their personal finances.

The earlier the individual learns solid personal financial
practices and commits to investing, the more financially sound that
individual will be in the future. Responsible investing is the direct
result of understanding how money works and it’s vital that we take
the time to educate the younger ones we love how to handle this
correctly so that they avoid common pitfalls – probably the
same ones you and I made when we were younger!

One useful way to productively teach responsible investing and
personal money management is by creating a workbook based on the five
topics discussed below. Of course, the depth of teaching is up to you
and it should be relative to the student’s age, but these lessons are
designed to teach the basics of financial responsibility to anyone of
any age.

Lessons for Gaining Financial Responsibility

1. Establish and keep an accurate budget. This may be
   among the biggest challenges for young adults – even for our
   nation’s population in general. Excessive spending is rampant, and
   many people feel powerless in the face of rising debt, but debt has
   a lasting and negative impact on a person’s future savings and their
   current and future lifestyle. Debt causes unnecessary stress for the
   individual and it can damage close relationships and trust. Notice I
   said to establish and keep an ‘accurate’ budget. An accurate budget
   is sometimes the hardest of all because most of use live day-to-day
   and don’t spend a lot of time really analyzing where each dollar is
   spent. Plus, for a budget to be realistic, it must include regular
   and consistent efforts toward investing. Long ago, they told people
   to ‘pay yourself first’. This meant to set aside money for you –
   that’s investing. Before your young adult starts paying any regular
   bills, they should understand that they have to make enough money to
   pay themselves first so that that money is available for the future.
   This teaches your young adult (indeed, this works at any age) to
   live off less than they actually earn, and thus, to always be
   building wealth. Help your young adult set up a monthly budget for
   everything they regularly spend money on. One technique you can use
   to help your young adult see this is to help them set up at least
   two accounts: one for spending and one for saving for later. They
   can proceed to pay for things on their budget with the account
   designated for spending and watch the account for saving grow.

2. Get financially organized. Keeping all important
   financial documents in systematic order can be done in a variety of
   ways, so it’s important to find the one that works for your young
   adult. Help them set up and keep their financial documents in a
   filing drawer or cabinet, or in a digital filing system when they
   are young. As young adults practice this fundamental skill, it will
   help them easily locate papers they need now and in the future. When
   it comes time to do taxes, they’ll be able to easily access the
   documents they need. Staying organized is one of those good habits
   that can save a lot of time and reduce stress as they move into
   adulthood.
   
3. Consolidate debt and destroy all credit cards. Many
   credit card companies and loan agencies made their early fortunes on
   18-year-old kids fresh out of high school as they headed into
   college or their first jobs. These young adults were ignorant of how
   credit cards and loans work, and there are countless stories
   (perhaps you were a victim as well) of young adults getting access
   to plastic and running up enough debt to bury them. A proper
   education can help your young adult avoid these devastating
   financial situations. Teach your youngsters the proper meaning of
   credit cards and loans. Instruct them to be wise and prudent when
   making large (and small!) purchases. Show them how interest rates
   can either be their friend or their enemy. This education will save
   them future headaches, sleepless nights, damaged marriages, and
   more, and it will show them how to take advantage of other financial
   opportunities.
   
4. Know your credit score. Early in my own career, when I
   worked as a paralegal helping individuals try to restore their
   credit scores, I learned what an important thing your credit score
   is. I spoke with over 40,000 individual Americans who had hammered
   their credit with unwise spending habits. By the time they came to
   me, it was late and they were trying to purchase a badly needed
   vehicle to get to work or a new house for their children.
   Regrettably, with a sub-prime credit score, you can barely finance
   an apple, let alone an automobile. So, teach your kids how the
   credit score system works. For information, check out common
   websites like www.myfico.com.

5. Protect your identity from being stolen. Identity
   theft is the fastest growing crime in the world right now and it can
   be one of the most personally devastating occurrences that a young
   adult can experience. When I was in college, one of my best friends
   had her identity stolen by unwarily stating her social security
   number. The person who heard that number was able to drain her bank
   account and leave her stranded far from home with little more than
   the clothes on her back by that afternoon! Because her identity had
   been stolen, she had to drop out of school, move in with friends,
   and work two jobs for years until she finally recovered all that
   she’d lost. By keeping her social security number to herself, she
   could have avoided this ordeal. Teach your youngsters to examine
   their financial records and shred anything that may reveal clues as
   to their identity to someone rooting through the trash. Show them
   how to safely purchase items online, and how to be wary of luring
   e-mails that fall into their in boxes. Teach them to check their
   accounts regularly for any sign of misuse or abuse and to call their
   financial institutions when anything that seems odd occurs.
   
   

Money can be a powerful resource when it’s managed responsibly but
without the proper understanding and tools, your young adult can face
serious financial disasters. Remember that better understanding and a
richer education leads to more informed decision making down the
road. Some financial stress is inevitable, but your young adult will
be able to think their way through it and make smart decisions when
they are armed with the right information.

You can find more information on managing risk at our website. If
you have a question about this blog post or want us to examine a
particular topic in the future, please let
us know.

Today’s 70 is Yesterday’s 50

Posted by Christopher on May 27, 2009  |  Comments Off

  The concept of the “New Retirement” has become as popular with near retirees as it is with those who recently entered the retirement zone. While golf every day, cocktail parties, and grandparenting comprised a leisure-defined lifestyle in previous decades, today’s affluent think in terms of retirement careers and a daily schedule fueled by the same kind of boomer energy that drove their middle years. Today’s 70 year-olds are performing physically, mentally, and attitudinally the way 50 year-olds did in the past, according William C. Byham, author of 70: The New 50.Lee Iacocca, for example, has not spent his retirement years waxing a sailboat and sipping ice tea since leaving his role as CEO of Chrysler in 1992. Since then, he’s focused on philanthropic and entrepreneurial pursuits–and stayed in public view through books and speeches. The Iacocca Foundation awards grants to researchers working on diabetes; he started it after his wife died of the disease and continues to raise money for it through both fund raising and profit-making enterprises.

 

On the business side, he’s devoted considerable energy to the development of electric vehicles–first an electric bike, then cars–with mixed bottom-line results. He’s described the working on the start up of the electric bike venture as harder than his last two years at Chrysler, but he’s gained greater satisfaction doing business in a direct, more immediate way that he never could as head of a major manufacturer. “I’ve had my 50 years of building, and quality problems and the manufacturing and assembly line, and a zillion purchasing buyers, and all the unions. I’ve had enough of that,” Iacocca told the Los Angeles Business Journal.

For example, less than an hour after meeting a new supplier for the first time, Iacocca was ready to cut a deal–without the corporate committees, board of directors, or shareholder discussions that followed him at Chrysler. For him, retirement also meant conducting an entrepreneurial life as a small-business owner, something he never did in his pre-retirement years. From an advanced planning team perspective, Iacocca’s mix of philanthropic activities, profit-making business ventures and the management of his personal portfolio, clearly represent a very active retirement life that requires analysis, projections, and modeling–not just creating a lifetime income stream.

It’s Not the Money
The findings of The New Retirement Survey, conducted for Merrill Lynch by Harris Interactive in collaboration with Age Wave in 2005, about retirement attitudes among a broad spectrum of Americans offer some surprising insights into the importance of creating the appropriate retirement “ecology” to achieve happiness. For those age 60 to 70, for example, the three most important reasons to work during retirement have nothing to do with money: to keep mentally active, to keep physically active, and to keep connected with others. Also, having a retirement career seems to drive a positive retirement experience. Those who work part-time on their own terms find the retirement better than they expected, and are more satisfied than either those not working or those working full-time.

For those planning on working during retirement, most want to pursue a different kind of work experience, such as Lee Iacocca. Of this group, the majority has taken some steps to prepare a new career by talking with others, researching opportunities, attending training classes, examining the financial issues, or other activities. Becoming a consultant is the most popular choice for 60-70 year olds.

Other key findings include:

• Having a “retirement career” is part of an ideal retirement scenario for a majority of interviewees.
• Approximately half who plan on working expect they’ll never stop completely.

The ideal form of working during retirement is alternating periods of work and leisure, which aligns with those seeking a consulting career or similar project-based employment. Sharing and passing on knowledge ranked high on the preferences of boomers.

 

The transition from pre-retiree stage with a focus on career and accumulation of assets to the retirement stage with a redefined self in terms of career and finances can be bumpy for some. Someone like Iacocca spent his executive years calculating risks vs. rewards for the companies and for himself. When he starts a new company during his retirement such as Olivio to distribute olive oil products–and then donates all profits to his diabetes foundation, he’s satisfying both his entrepreneurial instincts and his emotional need to contribute to the greater good.

It’s this personal blend of new emotional and career needs that advanced planning teams need to understand before creating any lasting retirement plans for affluent clients.

lewisschiff@advancedplanning.org.

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Lewis Schiff is the principal of Advanced Planning Group, a private wealth specialist for advisors and their top clients. His latest book, The Middle-Class Millionaire, was published in February 2008.