Last Word on Money: 2017

Friday, December 29, 2017

Following the Words of the "Prophets" to Profits?

The AARP has an end-of-the year warning for you: Most predictions about 2018 stock market performance will be wrong.

In an online article dated December 15 and titled “Market Forecasts Could be Hazardous to Your Wealth”, AARP reminds readers that the financial experts are not all that good at predicting the future of the stock market, or of anything else. The article’s author, Allan Roth, cites a Wall Street Journal report that financial “strategists as a whole have missed the actual return of the S&P 500 index [of stocks] half the time by more than 9 percent annually.” That’s not a small margin of error. For 2017 the experts’ consensus for stocks’ performance was a rise in the index of between 2.45% and 2.79%. As of mid-December, the actual performance was an increase of 19%.

Not all the economists are wrong, though. Gary Schilling, for example, nailed every one of his 12 predictions for the 2008 economy, including the housing bubble burst. Imagine the disappointment of those who then chose to follow his advice for 2009, when all 12 of his predictions turned out dead wrong.

It seems the most insightful relevant comment comes from baseball legend Yogi Berra in the form of one of his trademark Yogi-ism’s: “It’s tough to make predictions, especially about the future.”

So what am I going to do for this year-end posting? No, not make predictions, but share what others are saying about what 2018 holds in store for the nation’s economy (and thus, to at least some degree, your personal finances). Here are ten forecasts for the twelve months ahead. I’m including in parentheses the sources where I found the predictions, but keep in mind most of them are just the consensus of many economists.

And I’m adding my own touch. For each prediction I’m flipping a coin: “heads” means the prediction will come true; “tails” means it will be wrong. Next year around this time let’s compare and see if the experts were right or if the random toss of a coin was a better seer.

1. Bitcoin (the so-called crypto-currency which is all the [speculative] rage now) will decline in value in 2018. (Motley Fool) The coin toss says no, it will not decline.

2. Brexit (

Great Britain

’s exit from the European Union) will be chaos, causing the defeat of Prime Minister Theresa May and the election of the Labour Party’s Jeremy Corbyn. (Fortune) The coin toss says no to it all.

3. Growth in the Gross Domestic Product of the U.S. will not reach 3% in 2018. (Fortune) The coin toss says it will.

4. The price of crude oil will be $60 per barrel next Christmas. (Fortune) The coin toss agrees.

5. The Standard & Poor’s 500 index will be at 2950 at the end of 2018. (Brian Belski at BMO Capital Markets, and many others) No argument from the coin toss.

6. The yield on the 10-year Treasury note will be 2.8% next December. (Kiplinger) The coin toss affirms that prediction.

7. Inflation will be 2.1% in 2018. (Kiplinger) The coin toss says no.

8. “A new form of energy” will be discovered on Venus. (Blind—and dead—Bulgarian mystic Baba Vanga) The coin toss says no. I realize this prediction on its face is not directly about the economy or your finances, but if such an energy source is actually discovered it will profoundly impact financial markets. And in hopes of racking up a perfect prediction record for myself, I’m going to weigh in on this one: It won’t happen.

9. Unemployment will fall below 4% in the

U.S.

(Wallethub) The coin toss doesn’t agree.

10. Credit card debt in the U.S. will break all-time records, topping $1 trillion. (Wallethub) The coin toss affirms it.

Do whatever you can to not make #10 come true. And have a Happy New Year.

Until next time,

Roger

“But the prophet who prophesies peace will be recognized as one truly sent by the Lord only if his prediction comes true.” Jeremiah 28:9 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, December 22, 2017

In Defense of Scrooge

The case presented against Ebenezer Scrooge last week was rock solid. To escape conviction as a tight-fisted, stingy, hard, unfeeling man who cares for nothing and nobody other than Money, he is going to have to present a very strong, even unique, defense. He doesn’t disappoint.

“I’m not the man I used to be.”

That’s it. Scrooge does not—cannot—deny the witness of those who suffered most at his greedy hands. He cannot change history. He sadly admits that he lost many an opportunity to do good with his wealth, that he allowed riches to crowd out human companionship.

Yes, Scrooge actually enjoys keeping books and tracking money. But that is not his crime; it is that it became his only passion. His business prospered while his soul shrank.

“I’m not the man I used to be.”

Ask the men he encountered on the street that one Christmas morning who were so taken by his kind demeanor that they spontaneously exclaimed, “Merry Christmas, sir!” Or Bob Cratchit who the next morning became the beneficiary of a generous raise in salary. Or Bob’s son, Tiny Tim, who, it might be said, owes his life to Ebenezer Scrooge.

“I’m not the man I used to be.”

We all have our “gifts”, our talents. Scrooge and I find fulfillment in keeping financial records. I enjoy writing this blog. Bookkeeping and writing: two things I know most people would be loathe to do even for a salary. I only hope that I’ve never let it interfere with doing the right thing and that it has never prevented me from experiencing love and friendship with fellow travelers on this planet.

Scrooge blew it, no doubt about that. But he changed, and that changed the world around him into a better place. No one could have predicted that outcome from Scrooge’s earlier days. But that doesn’t matter. It’s not how we start out, it’s how we end up. And that we can say that has a great deal to do with the event we celebrate this week.

“I’m not the man I used to be.”

Merry Christmas to you.

Roger

“For unto us a Child is born, to us a Son is given, and the government will be on his shoulders. And He will be called Wonderful Counselor, Mighty God, Everlasting Father, Prince of Peace.” Isaiah 9:6 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, December 15, 2017

The People v. Ebenezer Scrooge

I ran into my college roommate when walking out of church a few weeks ago. Mark and I spent a few minutes catching up on each other’s life; but then randomly and without any obvious lead-in from the previous conversation, he recalled a time when he walked into our dorm room to find me at my desk writing figures in a notebook. It didn’t look like homework, so he asked me what I was doing. I told him I was recording an expenditure—seventy-nine cents spent at the campus snack shop. Decades later he still marveled that I kept a record of seemingly inconsequential financial transactions.

I glanced over at my wife who rolled her knowing eyes. She has lived with that quirk of mine much, much longer than anyone else has. She is a good record-keeper in her own right, but to list every single expenditure and every cent of income—even to the level of this one actual entry:“Income: $0.05 Source: Found on street”—well, NOBODY in his right mind does that.

As Mark and I parted, I walked away pondering just what kind of man I am. The image that came to mind was…Ebenezer Scrooge, the miserable and miserly old man of A Christmas Carol, bent over his business ledgers and thinking of little other than money. Scrooge—the epitome of greed and selfishness; the antithesis of the Christmas spirit. In fact, as we approach Christmas, let’s put him—and vicariously all like him—on trial for his greed.

The prosecution presents its case:

His “biographer”, Charles Dickens, weighs in first: Scrooge is “tight-fisted…a squeezing, wrenching, grasping, scraping, clutching, covetous old sinner.” He often, after work, “beguiled the rest of the evening with his banker’s book.”

Mrs. Scrooge reluctantly charges: Scrooge has “one master-passion” that “engrosses” him: “GAIN”. He “weighs everything by Gain.” (She capitalizes the word as if to distinguish it as a god to her husband, and certainly occupying a more important place in his heart than she does.)

Mrs. Bob Cratchit: He’s “an odious, stingy, hard, unfeeling man.”

A little less harsh and with an implicit plea for mercy, Scrooge’s nephew, Fred tells the court: “[H]is offences carry their own punishment….His wealth is of no use to him. He don’t do any good with it. He don’t make himself comfortable with it.”

Marley, Scrooge’s now-deceased business partner, cannot, for obvious reasons, be in the courtroom, but the judge has indicated he may admit hearsay evidence that Marley was equally consumed by his work, bound by a chain of “cashboxes, keys, padlocks, ledgers, deeds, and heavy purses wrought in steel” and that he and Scrooge were complicit in their greed and money-grubbing ways.

It doesn’t look good for Mr. Scrooge. But next week the defense presents its case.

Until next time,

Roger

“The greedy bring ruin to their households.” Proverbs 15:27 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Thursday, December 7, 2017

Rehabilitating Michael Vick

I suspect Michael Vick makes the “my favorite athletes” list of precious few people. No, he usually ends up at the other extreme, managing to land at the top of the Nielsen and E-Poll Market Research list of most disliked athletes in February 2012, and probably wouldn’t fare much better today if he were still an active player in the NFL.

He didn’t start that way. Vick gained national attention as the star quarterback of the Virginia Tech football team for two years, a tenure that saw him lose only one regular season game (in which he did not play the entire game) and took him to an exciting national championship showdown with Florida State University. He declared himself eligible for the NFL draft after the second year and became the highest paid NFL player in history up to that time, going on to demonstrate his stunning athleticism as the quarterback for the Atlanta Falcons.

But in 2007 it came crashing down around him when, as evidence against him mounted, he pled guilty to running an illegal dog-fighting ring. He eventually served 18 months in federal prison. He lost all his endorsement deals and declared bankruptcy in 2008.

Vick and his apparently competent but unheeded financial advisor later cited Vick’s propensity for listening to the advice of friends over the advisor’s counsel, bad investments and business ventures, and overspending on himself and others as the main causes of his bankruptcy. From a ten-year, $130 million dollar contract with the Falcons to millions in debt in just a few short years—he looked like just another free-spending, self-centered star.

I remember Vick at the time appealed to his faith in God that would get him through the ordeal, lamenting that he’d lost his way but had rediscovered his spiritual roots. I also recall that many people accused him of playing the Jesus Card as his get-off-easy pass. I can’t say I wasn’t one of them. And could anyone blame me? How many crooks play that game? It’s easy to get jaded and cynical about these appeals to faith when the appellants are guilty of despicable acts but suddenly turn to heaven…after getting caught.

Released from prison in May 2009, Vick was eventually allowed back into the NFL and in 2010 was named its Comeback Player of the Year, setting career highs for passing yards and touchdowns. He retired from playing this year and became a studio analyst for football telecasts at Fox.

He has never really shaken the Bad Boy label, despite his efforts at promoting animal rights causes and performing other public service. In fact, in 2013 he cancelled several book signings due to “credible threats” against the retailers, his publisher, and even his family. I suppose he will always carry the baggage of his past. No redemption for him.

But I’m one skeptic who has changed his tune. On November 17, ESPN reported that Michael Vick had just the day before made the final $1.5 million payment to creditors to whom he owed money when he declared bankruptcy nine years ago. Vick had opted NOT to file under Chapter 7 bankruptcy which would have allowed him to liquidate his assets and not owe anything more. ESPN reported that instead he went on a restrictive budget as part of an effort to repay his creditors. “I didn’t want to stiff people who never stiffed me,” they quoted him as saying. So in the end he had repaid $17.4 million, about 99 cents on the dollar of his outstanding debt. It’s almost unheard of in bankruptcy cases.

I don’t recall seeing this story making the headlines anywhere other than ESPN, certainly not to the extent that the media covered Vick’s fall from grace. But he stands tall in my estimation. Perfect? Who of us is? But to use that common expression, he “put his money where his mouth is”. Faith-talk, God-talk….that’s easy. Here’s a man who put cleats on his faith and walked a righteous path.

Thank you, Michael Vick. I even forgive you for trouncing my University of Virginia Cavaliers, twice, in the annual Commonwealth Cup matchup.

Until next time,

Roger

“But Zacchaeus stood up and said to the Lord, ‘Look, Lord! Here and now I give half of my possessions to the poor, and if I have cheated anybody out of anything I will pay back four times the amount.’ Jesus said to him, ‘Today salvation has come to this house.’” Luke 19:8,9 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, December 1, 2017

Is a Health Savings Account in Your Future?

So last week’s post explained Flexible Spending Accounts (FSA’s) and Health Savings Accounts (HSA’s) and how they differ. I’ve been enrolled in a high-deductible health plan for several months now, and opened an HSA to go along with it. I’m thinking I made the right choice. But would it be right for you? Let’s consider a couple of family situations and whether they make good candidates for the high-deductible/HSA combination.

1. A young, healthy couple (or individual): You and your spouse are free of any chronic medical conditions, rarely go to the doctor or have to fill a prescription, and do not expect to become pregnant over the next twelve months. Many employers who help pay for their employees’ health plan coverage will encourage people to sign up for the high-deductible option because the premiums are lower and it saves them (and the employee!) money. To entice people to go that route, they will even contribute some of the money they are saving into an HSA for the employee/family. That’s free, untaxed money; and if it’s not spent this year it continues to accumulate in the account for future use and can even be invested. And the investment returns are also never taxed if spent on qualified expenses. If that employer contribution exceeds your expected expenses during the plan year, it’s a no-brainer: go with the HSA. Even if that contribution is less than expected expenses, or if the employer contributes nothing, the lower premiums may still make this choice a bargain.

For the next two scenarios, let’s use these policy descriptions to work through the examples:

High-deductible plan with HSA: $3000 deductible for individual, $6000 for family; then a 20% co-pay on next $3000 for each individual, after which insurance pays 100%, unlimited. Employer contributes $1000 to the HSA for an individual policy, $2000 for a family policy.

Employee’s cost of family policy: $80/month ($960/year)

Regular policy without HSA: Deductible is $250/individual, and two individuals must meet their deductible to meet the family deductible of $500. Then there is a 20% co-pay on the next $5000 of family expenses, after which the insurance pays 100%, unlimited.

Employee’s cost for the policy: $220/month ($2640/year).

2. A couple with one having predictably high expenses, but the other healthy: Even though the employer kicks in $2000 to an HSA for a family policy, it may all be spent on one individual’s medical expenses, as in this scenario with a high-deductible plan.

Adult A: $20,000 in expected medical expenses

$3000 deductible

600 the 20% co-pay on the next $3000 of expenses

$3600 total for adult A

Adult B: $400 expected medical expenses; out-of-pocket:

$400 deductible and total for adult B

Family’s total out-of-pocket: $4000 medical expenses + $960 policy cost - $2000 employer contribution to HSA = $2960

But what if they had the other policy?

Adult A: $20,000 in expected medical expenses; out-of-pocket:

$250 deductible

1000 co-pay on the next $5000 of expenses

$1250 total for adult A

Adult B: $400 in expected medical expenses; out-of-pocket:

$250 deductible

30 co-pay on $150

$280 Total for adult B

Family’s total out-of-pocket: $1530 medical expenses + $2640 policy cost = $4170

3. Family of two adults and two children under 12: Assumes the adults are still relatively young and healthy and the children will have fairly low, predictable expenses; with the traditional plan:

Adult A: $600 in medical expenses Adult B: $750 in medical expenses

$250 deductible $250 deductible

70 co-pay on $350 100 co-pay on $500

$320 total adult A $350 total adult B

Child A: $2000 in medical expenses Child B: $1200 in medical expenses

$400 co-pay on $2000 $240 co-pay on $1200

Family total out-of-pocket: $1310 medical expenses + $2640 policy cost = $3950

With the high-deductible option, no one in the family meets the $3000 individual deductible, so they must bear all the costs, and insurance pays nothing. So:
Family total out-of-pocket: $4550 medical expenses + $960 policy cost – $2000 employer’s contribution to HSA = $3510

In all three scenarios the HSA option would have been the better choice, although the third one was borderline because children’s expenses are predictably unpredictable. Moreover, my calculations do not account for the tax savings realized through an HSA.

But my point here is to show you how you should do your own calculations if you ever have a choice of insurance plans. And remember, although I tried to make these scenarios realistic based on my own experience and the types of health plans I’ve seen, these are completely hypothetical policies and situations and are not intended to direct or advise you to choose a particular type of health coverage. You MUST run your own numbers and make your own decision.

Until next time,

Roger

“We make our own decisions, but the Lord alone determines what happens.” Proverbs 16:33 CEV

Friday, November 24, 2017

Money the IRS Never Sees

As far as I can tell, none of the versions of tax reform introduced recently in Congress propose to make any changes to a couple of very useful tools for saving money to pay for medical expenses, and that is a very good thing. By following a few simple rules it is possible to save, invest, and spend thousands of dollars tax-free for your health care expenses.

A medical Flexible Spending Account (FSA) allows an employee to have as much as $2550 deducted pre-tax (i.e. it is not taxed before it goes into the account) from his earnings each year to pay for medical bills not covered by his insurance. It may be spent to cover such costs as co-pays and deductibles for doctor visits and prescriptions; dental exams; eyeglasses and contacts; even over-the-counter drugs that a physician prescribes. When the money is withdrawn and spent on qualified medical expenses, it is not taxed then, either.

The catch is that the FSA is a use-it-or-lose-it account. If the owner doesn’t incur enough expenses to drain the account in the 12-month period, he will forfeit what he hasn’t spent. (Some plans will allow the account owner to carry over as much as $500 to the next year.) So anyone funding an FSA should carefully estimate his annual expenses when deciding how much to deposit. One other benefit of the FSA: it is pre-funded. For example, if a worker is having $100 withheld each of the 24 paychecks in a calendar year, the entire $2400 is available to him on day one, before he has actually deposited the money into the account.

Ironically, a Health Savings Account (HSA) offers a bit more flexibility and some better benefits than an FSA but comes with some more stringent rules for qualifying to own one.

First, the HSA is only available to people who are covered by a high-deductible health insurance plan. “High” is currently defined as a minimum $1300 deductible for an individual plan, with a maximum combined deductible/out-of-pocket limit of $6550. It’s $2600/$13,000 for a family plan. As with an FSA, contributions may be made by the owner via payroll deduction and are pre-tax. And again, if spent on qualified medical expenses, the tax man never touches that money.

Unfortunately, the HSA is not pre-funded. The owner can only spend what is actually on deposit. On the other hand, the contribution limits are higher: $3400 for an individual, $6750 for a family. And unlike the FSA, money in an HSA can roll over year-to-year and is available to cover any qualified expense incurred after the account was opened. So if someone had some big expenses early in the year and had to pay with cash or credit card, he can reimburse himself later when the account balance grows large enough.

The account can even follow the owner into retirement. Being on Medicare disqualifies a person from contributing further to an HSA, but any money saved while qualified still belongs to the owner to offset future medical bills.

If you anticipate spending anything on medical or dental care over the course of a year, you should at least fund an FSA if your employer offers it. But if you employer offers a health insurance plan that qualifies as high-deductible, give some thought to choosing that and opening an HSA.

Next week we will examine who can benefit most from funding an HSA and maybe run through a couple of hypothetical situations.

Until next week,

Roger

“Ants don’t have leaders, but they store up food during harvest season.” Proverbs 6:7, 8 (CEV)

Friday, November 17, 2017

You Didn't Know You Had It So Bad

This week has been a public health disaster for America. Millions of adults across the country who went to bed healthy Sunday night found themselves Monday with high blood pressure and at higher risk for heart disease. They didn’t all go to the doctor that day for a check-up or have an at-the-workplace blood pressure check as part of a national screening day. No, Monday was the day the American Heart Association and the American College of Cardiology released new guidelines that define hypertension as pressure of 130 systolic over 80 diastolic, or higher. The previous standard was 140/90. The experts estimate that an additional 31 million adults in the U.S. are now classified as having high blood pressure.

The new standard is based largely on a 2015 study which showed that older adults aggressively aiming for a 120 systolic pressure reading rather than 140 cut their comparative risk of heart attack and stroke by one-third.

I freely acknowledge Americans need to improve their diets and get more exercise, both conservative means to lower blood pressure. I also know cardiovascular disease remains the nation’s biggest killer. But if this recommendation from the experts causes more stress for patients, is it worth it? If to get down to the prescribed level a person has to take three, instead of one, medications, will they suffer new side effects like compromised kidney function? Nephrologists are warning against that very thing. What is a patient to do?

But health care is not the only field where experts issue dire warnings and set standards that may be a stretch for many of their patients/clients. I refer (as if you didn’t already guess) to financial planning. I’ve listed here a few recommendations from “experts” that I think fall into that “maybe, but maybe not” category. I believe financial planning is an intensely personal exercise, that it is not formulaic. These recommendations may be appropriate for many or even most people; but just as you know your own body better than anyone else, so also you know your family history, your spending and saving habits, your goals, your dreams, your values, even your politics….everything that plays into how you approach and plan your financial future. You must decide for yourself if any given piece of financial advice is really appropriate for you.

I offer no opinion on these recommendations in this posting. For now they are purely illustrative of a point. As one doctor told an interviewer, he’s not going to stress out his patient or himself trying to get that patient with a 180 systolic down to 120. He’ll just do his best. Take these in the same spirit, and don’t stress over them.

You need to have at least a million dollars saved for retirement if you want to be financially secure.

Cut up all your credit cards.

You must save 15% of your earnings each year for retirement. (It used to be 10%.)

Social Security will not be there for you in retirement; do not count on that income.

You must have long-term care insurance.

You must have a Roth account as part of your retirement planning strategy.

You must plan to make your retirement savings last as if you’ll live to be 100.

You must own a home to build wealth.

Pay off all debt before you retire.

Don’t rush to pay off your house; it’s a great tax deduction.

Depressed? Then you have some inkling of how those 31 million newly hypertensive Americans feel. Just remember that doctors want to look like they’re contributing to longer and better lives, so they push more aggressive goals. In the same vein, financial planners don’t want to be responsible for someone not living a grand and financially secure life, so they are going to push their own aggressive ideas and standards for you. After all, if your client didn’t save a million dollars like you told him to, how can he blame you if he runs out of money when he’s 95?

Happy Thanksgiving. Until next time,

Roger

“Enter His gates with thanksgiving and His courts with praise.” “Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God….for I have learned to be content whatever the circumstances.” Psalm 100:4 and Philippians 4:6, 11 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, November 10, 2017

Interred With Your Bones?

In William Shakespeare’s play, Julius Caesar, Mark Antony tells the crowd at Caesar’s funeral, “The evil that men do lives after them; the good is oft interred with their bones.”

I can’t think of a better classical quote than that to describe the modern obsession with social media. Forget the obvious narcissism for a moment; think about the way Twitter, Facebook, and a host of other sites have become the means for attacking people we don’t like and even people we haven’t met. Someone posts an ill-advised comment, joke, picture, or opinion online, somehow it spreads across the globe, and out of nowhere comes a horde of critics on social media who vilify that individual, call him or her very unsocial names, and even make threats that border on criminal.

Author Jon Ronson addressed this phenomenon in his book So You’ve Been Publicly Shamed (Riverhead Books, copyright 2015 by Jon Ronson) documenting the cases of people who created a regrettable post and suffered the resulting public humiliation that often ended in the person losing his job and otherwise having his life ruined. Decent people convicted by a mob. One mistake defines their life. One strike and they’re out. As Ronson wrote, “[W]e’ve created a stage for constant artificial high drama. Every day a new person emerges as a magnificent hero or sickening villain.” (pp. 78-79).

We tend to keep our financial lives to ourselves, except for the bragging (online and elsewhere) about our purchases of fancy cars, gadgetry, houses, vacations, boats—all, by the way, probably financed by a boatload of debt. So your worst critic in that arena may be you. Perhaps you are racked by guilt because you made an awful financial gamble that cost you thousands of dollars. Or failed to start saving early for retirement. Or spent too much on a large purchase. Or started a business that went bust. Or took what seems to be the wrong career path.

I urge you not to let that one thing define your life. Yes, there may be some uncomfortable financial fallout from it, but there is redemption. The joy you or a loved one experienced through it; living a dream, even a short-lived one, through your “mistake”; creating a memory that you will always fondly cherish—these are things that even money seemingly poorly spent or even lost may still yield as dividends. And even if you find no redeeming value in your error, it is not the total sum of you. You are much more than that. Life consists of many choices and ever-changing scenes, and you can use the decisions and experiences of the past to inform your choices now to create a better future and ensure that the “good” of your life—friends, family, and the love and nurture for which you are known—will live after you.

Until next time,

Roger

“Even the hairs on your head are counted. So don’t be afraid! You are worth much more…” Luke 12:7 CEV

Friday, November 3, 2017

Don't Do "eeny meeny"

Trees painting the outdoors with their leaves, chillier nights, shorter days—you know what that means. It’s Medicare open enrollment season.

Okay, maybe that’s not what came to your mind first. But working as I do (at least tangentially) with the Medicare program, I know October 15 to December 7 to be the annual opportunity for the Medicare-eligible population to choose their coverage for next calendar year. But it’s also the time of year in which many employers have their own open enrollment for workers to select their health care plan or other benefits for the next twelve months. And this week many Americans began shopping on the various insurance exchanges for their 2018 health insurance under the Affordable Care Act (ACA).

If you fit into any one of those categories, here are a few tips to making your selection.

Cost is about more than the monthly premium. An insurance policy with lower premiums may not be a bargain. Your co-pay (the amount you have to pay at each health care encounter), your co-insurance (the percentage of the cost of a service that you are responsible for paying), and your deductible (the dollar amount of your expenses you are responsible for paying before your insurance even kicks in its first dollar of coverage) could all be much higher and more than erase whatever you save in monthly premiums.

The deductible can be the real killer. When I’ve called on doctors’ offices as part of my job, their main complaint about the ACA has been some of the plans’ high deductibles. Patients come into their office, excited to finally have health insurance, only to learn it covers $0 of the first $5000, or even $10,000, of medical expenses. Essentially, they just have catastrophic health insurance. To avoid that trap, read the policy description thoroughly and try doing a little math based on the number and cost of your (and your family’s) doctor, urgent care, lab, radiology, and hospital encounters over the past year. Will you likely meet the deductible early in the year? Not at all? If you or a member of your family suffer from a chronic condition or are otherwise a frequent user of physician or hospital services, then paying a higher premium to ensure the insurance company starts paying for services earlier might well be worth it. Take note of the out-of-pocket limit, the maximum amount you would be responsible for paying before the insurance company begins paying at 100%.

Are your providers “in network” with the insurer? Many health insurance plans have a limited universe of providers who are considered in their network. It is important that you determine if your preferred doctors—both primary care and specialists—as well as the local hospital and pharmacy and the nearest full-service large medical center are considered “in network” with the plan you are contemplating buying. Using in-network providers keeps your costs lower.

The insurer’s website is usually the best source for determining who is in their network. Be certain you select the correct plan on the website, because they are likely to have several plans, each with its own network of doctors.

But I’ve found that those online listings can be out-of-date. I recommend you also call your doctors’ offices and speak with either the insurance clerk or the office manager to double-check. Let me stress that when you call that you do NOT say, “Do you accept XYZ Insurance?” You SHOULD directly ask, “Are you in XYZ’s network of approved providers?” The difference can be critical. A provider may “accept” any insurance, in the sense that they will file a claim to any company. But if they are not in-network then they will be paid less, and you will be responsible for more of the bill, if not all of it.

Investigate the reputation of the insurance company. This can be easier than it sounds. If you are shopping for a Medicare Advantage plan (also known as a Part C plan), the government rates them on a star system: one star for poor customer service, up to five stars for superior service. For other insurances, there is not an equivalent rating system; but friends or even co-workers can make recommendations based on their experiences. And again, your physician’s office can be good source of intelligence. I have found that the back-office staff freely discusses what insurance companies are better than others, which ones are reliable payers, and which they like more than others. You might be surprised to learn that insurance companies that advertise the most and are best known by the public do not enjoy a good reputation among the providers I know. Just remember, a physician’s contracts with the insurance companies most likely restrict him and his staff from recommending one company over another, so don’t ask them to tell you which to choose.

Happy Open Enrollment. And until next time,

Roger

And perhaps the best way to save money on health care in 2018:

“Dear friend, I pray that you may enjoy good health and that all may go well with you, even as your soul is getting along well.” III John 2 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, October 27, 2017

Was Merle Haggard Right? (Part 2)

Last week I delivered the bad news you may already have known if you’ve ever looked up how much Social Security will pay you in retirement: it will not replace 100% of your income from the workplace—or even the 70% of pre-retirement income financial planners say you will need. But then again….When experts say that Social Security will, on average, replace 40% of your annual income from your working years, they apparently mean 40% of your gross income. And unless you are living way beyond your means, you do not live on your gross income. Taxes take a big cut, maybe as much as 30% for even the average worker when all payroll taxes—including FICA, which funds Social Security—are counted. (If you are afraid taxes will still hit you hard in retirement, read my April 28 and May 5, 2017, posts, “IRA, RMD, IRA, OMG”.) You may already be living on “70% of your pre-retirement income”.

So a worker with a $60,000 salary would gross $5000 per month. Take away that 30% to arrive at a net paycheck and it’s more like $3500. (For simplicity’s sake, we’ll not consider in this calculation that the employee’s net income may have been further reduced by contributions to a 401(k) plan, an expense he will not have in retirement.) If he draws that estimated $2100 Social Security check monthly (see last week’s post), he already has climbed to 60% of the actual income on which he has been living.

To close the gap, this retiree would most likely look next to his retirement savings account(s) like 401(k) plans or Individual Retirement Accounts (IRA’s). As a rule of thumb, financial planners often recommend withdrawing just 3% to 4% each year from such accounts as a way to stretch that money over a retirement that might last 30 years or even longer. Assuming a relatively modest $150,000 balance, 3% annual withdrawals yield $4500 per year, or $375 per month. Now he has reached 70% of his net income from his working years.

If there’s no pension or other steady source of income, he will probably need to work at least part-time or seasonally to reach his desired standard of living. Working is not such a bad fate if you can choose something low-stress and enjoyable. It doesn’t have to make you rich. About $12,000 per year for this worker would do it.

To recap, his situation looks like this:

$5000 Monthly pre-retirement income (gross) $2100 Monthly SS benefit

-1500 Taxes (FICA, federal, state, local income) 375 Monthly income from 401k)

$3500 Net monthly income +1000 Monthly employment income

$3475 Monthly Retirement income

But to me, even that $1000 per month employment income sounds like more of a demand than it should be for a retiree. Personally, I think debt reduction is a much better way to make ends meet. Credit.com reports that 73% of Americans die with debt. The average amount is $61,554, or $12,875 if not counting mortgage debt. The payment on that takes a big chunk of one’s income in retirement. Eliminate that and I’d wager you could live on less than that proverbial 70%.

You can also stay in the full-time workforce a couple of extra years and thus delay claiming your Social Security benefits. When you go online to check your own benefits, look at what a difference it makes in the monthly benefit to wait until age 70 to collect. Even if you don’t want to wait that long, each month you delay increases your benefit and closes the income spread a bit more.

Consider downsizing your living space. If selling a house to do so, bank the profit realized by the sale to draw on for regular income. Or just eliminate clutter; sell your excess stuff. Your heirs will appreciate not having to do it themselves after you’re gone.

I don’t recommend them, primarily because they come with high expenses, can be complicated, and may leave your heirs with some headaches and probably without the house; but homeowners age 62+ and meeting a few other requirements can convert the equity in their home to a monthly income stream—a reverse mortgage. Just be careful and make sure you understand the terms and conditions of the loan—because it is a special type of loan. The mortgagor does want to get his money back, and that will probably be effected by taking possession of, and selling, the house rather quickly after you die.

I hope I’ve given you cause for optimism. We can discuss the viability of the Social Security system some other time, but I’m pretty upbeat about prospects for yours and my retirement. Keep saving!

Until next time,

Roger

“If you plan and work hard, you will have plenty. If you get in a hurry, you will end up poor.” Proverbs 21: 5 CEV

Friday, October 20, 2017

Was Merle Haggard Right?

Country singer Merle Haggard recorded a song in 1982 that included the line “keep…your so-called Social Security”. That came to mind recently when a friend took my advice and went on the Social Security Administration (SSA) website (ssa.gov) to get an estimate of what she can expect to collect when she retires. She was not happy with what she saw. Her projected monthly benefit is far less than not only her current income but her current monthly expenses. That experience speaks to a fundamental and widely held misunderstanding of what Social Security is intended to do. By itself it is not likely to ensure security, social or otherwise, for most people.

Far from being a full replacement of one’s working income, Social Security is intended only to provide a foundational income in retirement years, to afford retirees a base for financial and (together with Medicare) medical stability. Nevertheless, for about a quarter of retired Americans collecting Social Security benefits, that monthly deposit from Uncle Sam into their bank account is their sole source of income. This year the average monthly benefit is about $1366. Consider that when the Social Security Act was signed in 1935, the law set the age at which someone could collect his retirement benefit at sixty-five. I’ve checked a couple of sources, and the average life expectancy of an American male in 1935 was just over sixty-one years. As someone wryly observed, Congress back then could do math. Clearly, the program was not meant—nor anticipated—to fund a decades-long retirement.

So realistically, what can you expect Social Security to do for you? For starters, it will likely replace only about 40% of your income, assuming you are not on either extreme of the income scale during your working years. To qualify for the highest monthly benefit, just north of $2600, you would have had to earn the maximum annual salary that is subject to Social Security taxes—which is currently $127,200—for thirty-five years. (The Social Security Administration calculates benefits based on your highest 35 years of earnings.) That is obviously less than 40% for that high earner. But what if someone made half of $127,200 ($63,000) per year for 35 years? Would they just get half of $2600 ($1300) as their monthly benefit? Actually, no, they would probably qualify for something in excess of $2100 per month. The formula used by SSA is purposely skewed to replace a higher percentage of a low-wage worker’s income. In other words, a minimum wage employee will likely qualify for retirement benefits well in excess of 40% of his pre-retirement income.

Financial planners tell their clients to plan to replace at least 75% to 80% of their pre-retirement income after they retire. Depending on the nature of their expenses, 100% might be more realistic for some. So by that measure Social Security comes up woefully short.

On the other hand, that 40% is a good start toward the approximate 80% you might need. How can you close the rest of the gap?

First, look into whether you have a pension due to you. There are fewer and fewer workers covered by these defined benefit plans; but if you ever worked for an employer that offered one, checking that source is your second step (after checking your SS benefits at ssa.gov) to determine how much income you qualify to receive in retirement. Unless you worked 20+ years for the same employer, it’s not likely to be a huge monthly check; but remember, it’s in addition to Social Security. Unless you were not paying Social Security payroll taxes while working for that employer (e.g. if you were a government employee) that pension does not diminish your Social Security benefit.

Still not up to the magical 80% (or whatever figure you’re trying to reach)? Then next week let’s look at some ideas to financially secure your post-work years. (Hint: It might not be accurate to call them “post-work”.)

Until next time,

Roger

“Great wealth can be a fortress, but poverty is no protection at all." Proverbs 10:15 CEV

Friday, August 18, 2017

Four Funerals and a Wedding

In the span of just eight weeks I have attended four funerals, including two in two days.

As I age and approach the euphemistically named Golden Years along with my friends and family, I suppose it shouldn’t come as a surprise to me if I find myself in mourning more often. But that explanation doesn’t fit the reality of these four deaths. Three of the four deaths were unexpected. Those friends died well before reaching their normal life expectancy. One was in his forties, and two were not even retired yet.

In addition to my shock and grief, I came to learn some sobering realities of the void these deaths left in the surviving families, including the financial burdens they will experience. There’s lost income with no provision for replacing it. One of the deceased handled all the finances and left the spouse pretty much clueless of how to function in that role. The expense of the funeral weighed on the survivors, too.

Perhaps it was the sheer number of friends dying in such a short period of time that caused me to examine my own life a little more closely than I have in the past on such occasions. Some of that entails money. Have I made adequate provision for my wife in the event of my death? She has paid the bills before. But does she still know which ones are due and when? The passwords to our online bank and investment accounts? Is the will up to date? Correct beneficiaries named and information recorded for all accounts?

But above and beyond the financial ramifications of losing a loved one, shouldn’t that also teach us something of life’s fragility? My wife talked to one of the friends just hours before her death, and in hindsight she is very glad she took the time to do so. As much as I love to talk and write about money, I pray that I always remember that there are many, many things that money could never buy, including friends and family and time spent with them. Time will always be more precious than gold. As I’ve written before, build a life and not just a nest egg.

As I consider all this, I rejoice in the happy event of a friend’s wedding this week, a relative of one of the deceased. So life goes on. I will pray for this couple’s life together and for decades of happiness ahead for them. Time. But I can’t help myself: In addition to the gift I bought them I’m also giving them a book about marriage and money.

Until next time,

Roger

“It is better to go to a house of mourning than to go to a house of feasting, for death is the destiny of everyone; the living should take this to heart.” Proverbs 7:2 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, August 4, 2017

USA Says No to myRA--Good Riddance?

MyRA is dead. On July 28 the U.S. Treasury department announced that it was ending the program that began about three years ago as an attempt to entice workers without access to an employer-sponsored retirement plan such as a 401(k) to save money for retirement through a government sponsored account.

Economists estimate that more than half of American workers—around 55 million people—fall into that category. So with such a great need, why end the program? It came down to two things: too little money…..and too much money.

Too little money in the sense that too few people were putting too few dollars into the accounts. Only 30,000 people opened myRA accounts, and of those only two-thirds actually made any deposit at all to their account. The median balance of the accounts was $500. That is, half of the account holders had less than $500 saved.

Too much money because the federal government spent $70 million to operate the program since its inception yet only enrolled that relative handful of participants.

A lot of folks are complaining that ending this program is a slap in the face to the little guy and is putting a significant portion of our national population at risk of not having a vehicle for saving for retirement. I thought Money magazine was particularly harsh in its criticism of the president and his administration over this decision.

This administration has no shortage of missteps, but this wasn’t one of them. (I think every administration makes mistakes, so don’t try to guess my politics from any of this.) Ending myRA was the right decision, for what I think are some very solid reasons.

The cost vs. the results: If Ben & Jerry’s launched a new flavor of ice cream, served it in all their stores, and the average B&J store served 100 customers per day, but they only had one person each month at each store actually try the new flavor, how long would B&J keep making and serving that flavor? Probably not three years. At some point they cut their losses and admit it’s not working. That’s roughly the equivalent of Treasury’s dilemma with the myRA program. The government has a responsibility to spend our tax dollars wisely. Spending what amounted to $2333 per person to help them save an average of less than half that amount is inefficient, to put it kindly.

MyRA was an awful savings tool: Balances were capped at $15,000 at which point the money had to be transferred to an Individual Retirement Account. Moreover, they had only a single investment choice: a Treasury bond currently yielding about 2%. No wonder that, even with the record high stock market going on, balances stayed so low. What newcomer to retirement saving is going to get excited over a return that small? It might even turn that person off to saving to the point he throws up his hands and says, “What’s the use?”

Sky-high administrative fees: myRA account holders didn’t have to pay administrative fees; but that doesn’t mean the accounts didn’t have expenses. That was probably the greatest irony in Money magazine’s story about myRA. Money is well known for promoting low-fee investment choices, rightly pointing out that lower fees are predictive generally of better investment results. While the editors would look askance at a mutual fund that even approaches a 2% administrative fee, they apparently failed to do the math on the figures they quoted on the government’s expense ratio. To manage the approximately $34 million on deposit in myRA accounts, Treasury expected to spend about $10 million annually. Hey Money editors, that’s a 29.4% administrative fee. Wake up.

Taught all the wrong lessons: myRA did not adequately mimic a 401(k) account. From the single investment choice to the low cap on the maximum balance to the “no minimum balance” requirement, this savings vehicle tended to convey the message that saving for retirement was easy, free, and without risk. In fact, though, savers must sometimes sacrifice to save and must pay administrative fees. And over the long term it is riskier for one’s financial security in retirement to not be invested in the stock market than to be invested in a too-conservative option. MyRA taught none of that.

Better ways to save: States are starting to launch their own programs to encourage and enable retirement saving for workers without an employer retirement plan. Private sector financial firms of all sorts, including local banks, can open individual retirement accounts for clients. More than an account in which to put their savings, most people need education about how to save. Whether that be done in the schools, by employers, by public service agencies like an extension service, or by the banks and investment firms themselves, I still think that is the greatest need.

Until next time,

Roger

“There will always be poor people in the land. Therefore I command you to be open-handed to your fellow Israelites who are poor and needy in your land.” Deuteronomy 15:11 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®