Drown-proofing your finances

Posted on April 9, 2013April 9, 2013 by Danielle

House on Fire (Photo credit: dvs)

We all know that we should plan for retirement and our kids’ college education. Like many other things in life, it’s simple but not easy and the how-to keeps plenty of financial planners in business. But what about the stuff you never see coming—anything you can do to protect yourself from drowning in the unexpected?

Have an emergency fund. Yes, it’s obvious in theory but apparently most people don’t believe it because few people have an even barely-adequate one. Yes, you have insurance (you do, don’t you? See below!) but there are plenty of things insurance doesn’t cover. A few:

veterinary bills;
dental work (insurance is rarely worth the cost);
deductibles on multiple policies (such as you drive your car accidently through your garage, or the house and the car burn in a fire or float away in a flood);
the cost of repairs or care when insurance doesn’t pay the full bill, one person gets really ill and the other person has to take off work to care for them or investigate or arrange care (unbelievably time consuming),
a loved one needs psychological care (few health policies pay the whole cost of this);
your car develops sudden, expensive repairs or you suddenly need a new one;
the new ones I hear about nearly every week.

In fact, many, many disasters could be avoided if an emergency fund were in place.

You say you have credit cards for that? And so did many of the people now facing bankruptcy because disasters multiplied, forcing them to put more and more on a credit card while they often had less and less income.

You’ll just cash in investments? How about in March, 2009 (market bottom,remember)? Tap your retirement fund? You’ll either get taxed on that or have a loan to repay. And a lot smaller retirement fund.

Continually upgrade your professional abilities. Join and keep active in whatever networking groups are applicable to your profession. Take any opportunities your company or professional association offers for skill upgrades. Take more classes at night or weekend workshops. If you ever get fired, you’ll know people and your resume will be fresh.

Don’t quit the day job. If you want to start a business, write a novel, change careers, do it part time. That way you can test out the viability and find out whether you really like it. Sure it takes time. Sure you’re tired. Sure it’s hard. Sure it takes herculean discipline. All of which are true, but more so, once you do quit the day job.

Also, after talking to oh so many stay at home moms going through divorces, I strongly advise anyone to keep a part-time or consulting foot in the door of their career. It’s far easier to re-activate a career from part-time than from scratch. Sure you’re madly in love, have the perfect marriage, and will never be in that situation. Unless your spouse suddenly becomes disabled. It happens. And, the impact on your future Social Security benefits can be dismal if you take a decade or two off of earning.

Live below your means and especially control your housing costs. Yeah, I know we’ve all heard it. It’s hard to live in a big city. Anyone can cut back on eating out, travel, and electronics purchases but ratcheting back the mortgage is much harder. Instead of living large for the neighbors, smile to yourself when you compare their new car to how much money you have in the bank, er, no-load mutual fund portfolio.

Don’t have all your wealth in your house. In an emergency you can’t spend equity, and it can be very hard to get a home equity loan if you suddenly have no income. People near retirement should be very careful about using significant cash assets to pay off the house if they have no other savings. (Whether to pay off is too complex and individual to discuss thoroughly here).

Understand what’s in your retirement accounts. Some people are very focused on saving, but park the money in investment choices that are absolute crap. Surprise, you’re 58 and your retirement is a disaster. Listen to the presentations, read the brochures, and learn something about investing. It won’t hurt, I promise.

Never, ever sign for your kids’ college loans. They have a lot of time to repay them. You don’t. If your kids don’t have enough initiative to be participants in their college funding, I wouldn’t say the future looks too bright on the employment front for them, either. Better clean up that basement room now.

Don’t borrow more than you will make the first year after college (or any other education). That way, you can pay it off in 10 years with a reasonable kick to your future income. If you can’t make it with that level of borrowing (combined with work, financial aid, individual scholarships, and whatever parental aid can be cajoled), you can’t afford to attend a traditional, full time, four year college. There are plenty of other ways to get an education and you’re going to need to explore them. It’s a good thing—you’ll have more self-reliance, more marketable skills, and you won’t decide to major in something dopey. Really, it’s not as hard as paying off a quarter of a mil for a degree in communications.

Don’t do everything for your kids and don’t pay for everything. You set their expectations too high while destroying their own initiative. The kid that has a job in high school (as opposed to 7 extracurricular, paid-for activities) is, IMHO, much more likely to have a job after college! Would your kid be willing to earn part of the money to pay for all those extras? If not, maybe you ought to save yourself the cost of those music lessons, language camps, etc.

Pay attention to insurance. Make sure you have it. Then make sure you re-evaluate it every 2 years or so for coverage and cost. Get some quotes. Be sure the values are current.

Take advantage of any government program for which you are (or your loved ones) are eligible. Veterans benefits, Social Security disability, whatever—don’t be too proud. These programs are designed to provide a safety net and sometimes we all need that net. You paid taxes for it. I paid taxes for it, so use it already. You won’t be the first person going through a divorce who ever applied for food stamps.

Face up to age. Get your estate documents in order. Sacrifice for long-term care insurance. Talk to your parents about their finances, and let your kids in on your “secrets”, too. (Who do you think will be making the decisions?) Don’t stay in your house until you’re too feeble to walk out on your own. Make some plans while you have choices.

Clean up the place. Junk, clutter and deferred maintenance reduce the value of your assets, damage your possessions, and can cost a ton of money to your heirs and anyone responsible for your care should you suddenly become disabled or need to sell in a hurry. Any realtor can tell you about the beautiful home gone to wrack and ruin by terrible housekeeping and neglected maintenance. Anyone willing to buy and repair a wreck is going to expect a discount far exceeding the cost of repairs. After all, they have to factor in THEIR labor cleaning up and fixing YOUR crap.

Pick any one of the above pointers, do the opposite, and you’re living on the edge. Save yourself now! And be careful out there.

A Tisket, a tasket, a windfall in my basket

Posted on March 25, 2013March 25, 2013 by Danielle

Jackpot (Photo credit: pirate johnny)

A lot of people daydream about winning the lottery, even those of us who never buy a ticket. But like many windfalls, lottery winners often have had a hard time holding on to it. Before we shake our heads at them, let’s see if we’re without sin. Have you held on to your tax refund (which you shouldn’t be getting if you’ve planned correctly, but that’s another matter)? How about that $50 you got as a rebate? The work bonus? An inheritance? Your most recent raise? Ahem.

Wealth is not what you make, it’s what you manage to hold on to. It’s the rare person who dreams about a windfall and thinks to themselves, boy, I can’t wait to invest that! If so, my guess is your profession is either 1) financial planner or 2) actuary. But let’s say you’re a normal person, what should you do? Of course, it depends on the amount (really, $50 is a little different than $500,000), but here’s my advice:

1. If it’s a large amount, park it in an on-line savings account, or CD, or some other safe place for at least 3 months until you get used to the idea. What’s a large amount? Anything where your first thought is OMG. You need time to calm down and think straight.

2. AT A MINIMUM, save half. Ideally, I’d like to see you save 50%, pay off debts with 40%, and spend no more than 10%. If you don’t have any debts, I’m okay with that 40% going to a long term, needed goal (kid’s education, home repairs, etc.). I’d still rather see you invest it.

Then what?

I’d do the following, in the following order. If one is already complete, move on to the next. This applies whether it’s $50 or $50,000. (Legal disclaimer: please see a professional who can advise on your individual situation. The following is intended as general guidelines only, and no specific recommendations are intended.)

Create or top off your emergency fund so that it’s at least 3 months’ worth of living expenses. Better if it’s 6 months.
Pay off consumer debt. DON’T pay off unless you have an emergency fund, or when the next emergency happens, you’ll just put it on the credit card. This is an ideal method to never get out of debt
Invest in a IRA or Roth if you’re eligible
If you’re not eligible, invest at least the same amount in mutual funds (or, preferably, that 50%) so you build an investment nest egg.
If you still have some of that 40% left, pay off student loans. No student loans? Pay down the principal of your mortgage.
Invest in yourself. Get some decent, fee-only advice from someone who won’t sell you a bunch of crap, get savvy tax advice, and nail a good estate attorney to update your documents. Once you’ve got a reliable team working for you, get more education—I don’t care if it’s knitting or an MBA, knowledge is something no one can take away from you, no matter what the market. Consider career counseling. Ignore no-money-down seminars for buying real estate, day trading schemes, and all the other garbage that makes money for the seminar leaders and no one else.
Invest. Educate yourself so you know what you’re doing, and only invest when you understand the reasons for the investment, how you will make money, and what the costs are.
Give something to charity. You’ll feel way better about yourself. If you live in the U.S., you’re already wealthier than most of the world. Check out Peter Singer’s website for guidelines on reasonable giving.
Make improvements to your home, but only if it will increase the value or repair something that’s really falling apart. This would NOT include a hot tub, pool, or Sub-zero refrigerator.
Blow a little. A LITTLE! Max 10%
Maybe consider the pleas of your deadbeat relatives.

So now I’ve covered how you should spend your tax refund, your raise, and the money you inherited from your aunt in Azerbaijan. Call me if you win the lottery. In fact, maybe you should call me even if you don’t! And, good luck!

Is long-term care a women’s issue?

Posted on March 1, 2013March 1, 2013 by Danielle

It’s a pretty good bet that if you read a daily newspaper (some of us still do!) you’ll see at least one scare article per week about how much health care is going to cost you in retirement. Now, these articles have always mystified me, because almost anyone who can afford it is purchasing “medigap” insurance, and anyone who isn’t probably doesn’t have enough money to be worth collecting against. Agreed, there’s a lot of stuff Medicare doesn’t cover, but the medigap stuff, IMHO, has been pretty good.

Of course, there are some things that medigap doesn’t cover either—extensive therapy, experimental treatments, and drugs. Many people find that they slip through the “donut hole” in the Part D drug program, especially if they select a program based on what drugs they’re taking, and then the doctor decides to switch a prescription or they develop a new and uncovered need for a specific drug. However, the specific program can be switched next year. So, where are these huge estimates coming from?

As far as I can tell, most of these projection type studies assume that the cost of these various insurances will inflate over the years. But I don’t see many people having a specific fund or savings program for health care costs—we tend to pay these things (just like a great part of college tuition) from current income. Certainly, the cost of health care should be factored into your overall budget, and just like everything else, you can expect it to inflate.

But where do the really huge numbers come into play? Long-term care. And despite what a distressing amount of people seem to believe, Medicare does NOT pay for long term care. Medicare will pay for 100 days of long term care provided you have been hospitalized for THREE days, and provided you can be certified as continuing to make progress. And boy does the medical system work those qualifications! You have to fight tooth and nail to be kept in a hospital for three days—when my father landed in the hospital while I was out of town (bed-ridden, with pneumonia, and semi-incoherent) I received a call saying that they were releasing him in two days. Since I was out of town and had no way to find a placement for him, I told them they’d have to park him in the lobby. When I arrived at his bedside right from the airport, I was told that he, and only he, could make a direct appeal to Medicare. I’m still not clear exactly what that procedure was, but he was given a phone number and while I watched him gasp out answers, he apparently demonstrated enough illness and incoherence that they kept him another two days.

Fast forward—we placed him in a nursing home. For 100 days at Medicare’s expense? Nope—he collapsed at the “physical therapy” sessions, had to be lifted onto a gurney by three people, and because he was “refusing” to go to therapy (since he couldn’t even turn over), he was no longer eligible for Medicare coverage for the nursing care. Moral: don’t count on Medicare AT ALL for so-called custodial care.

Long term care insurance is expensive, but for most people, paying for that insurance for 20 years isn’t as expensive as one year in skilled nursing care. In this neck of the woods, a semi-private room will cost $275-$300 x 365 days = or somewhere north of $100,000 per year. But that’s not the end of it—every aspirin, mouthwash, or bit of shampoo you consume will also be added on, at nursing home prices. Compare that to $3,500 for 20 years = $70,000. And what about if you live for several years needing skilled care?—believe me, when you need it you really need it. For some reason, people hate the thought that they might pay for It and never use it. I say, do you have homeowner’s insurance? What’s the likelihood that your house will ever burn down?

So why is it a women’s issue? Well, every single article you see always estimates health care for the elderly as costing more for women—we simply live longer, and that means significantly more costs. But, there’s more.

You may think you have enough assets to cover the cost of nursing care. There’s the side problem that your kids will be thinking about how you’re burning up their inheritance, but maybe you don’t care about that. For couples, though, there’s a sad and ignored scenario. The usually older husband ends up needing care. The elderly wife takes care of him as long as she can, but she’s elderly too, and there’s a serious cost to her own health and well-being, as anyone who has ever done this will attest.

Finally, he ends up in a nursing home, but now a huge amount of their assets, and all his Social Security, are going to pay for costs of care. Yet, except for food, her expenses at home are probably not going down. It’s stunning to see how fast the retirement fund will need to be liquidated. Finally, he passes on and she’s left with 1/3 less Social Security, far less assets, and probably much poorer health. Who’s going to take care of her? When she needs long term care, will there be anything left?

Oh, perhaps you think your children will care for you. Me, too. But having also been a daughter in that position, I can attest that it is much better to be a care manager than a care provider. Even with long-term care funds, your children will be exhausted from all the doctor’s appointments, midnight calls, and rocket rides to the emergency room. I don’t want my daughter cleaning me up, lifting me, and even more unspeakable tasks. I want someone who has professional training, knows what they’re doing and can properly use assistive equipment. And statistics say that it almost always is the daughter, or the daughter-in-law, to whom care-giving falls. One of the consequences of modern medicine is that far more of us are likely to spend an extended time as very frail and very elderly.

If you love your spouse and care about your children, you’ll get long term care insurance. If you as a couple can only afford the premium for one, make it the woman—she’s way more likely to collect on it.