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The 3 Stages of Retirement

retirementMy Comments: I recently wrote about where we are now in the overall market cycle and the likely chance of a major disruption that will effect your financial future. My post was titled “Are We There Yet?

Most of us have visions of a successful retirement. Of course, “success” is dependent on your life today, your health, and countless other variables. My role is to help anyone and everyone achieve a level of financial freedom that allows you to live your life free from financial fear. (a lot of efs there!)

Not matter how successful you are or were during the accumulation of money phase of your life, you are now, or at some time will be, in the distribution of money phase. For most of us, this requires a different mind set. That in turn requires a different set of financial tools to get you where you want to go.

What you choose to do with your life in retirement falls into what I think of as three distinct phases. How long they last is completely unknown, but they are likely to follow this sequence.

The first I call the Go-Go years. This is when you are newly retired and you have a bucket list of things you want to do, can probably afford to do, but may be afraid to do. You hold back to keep from jeopardizing your future years if history repeats itself and the markets go haywire for a while. (does anyone know the origin of the expression “haywire”?)

The second phase I call the Slow-Go years. This is when the mind and body starts to slow you down, whether you want it to or not. Hopefully by then you’ll have spent some time in the Go-Go years and are OK and recognize your limitations.

The last phase is the No-Go years. This is when you find going slow is too much and you need the help of others to get from one day to the next. It’s not a pleasant prospect. But I’ve never met an active 90 year old in the Slow-Go phase who was ready to call it quits. Quite the opposite.

But bad things happen to good people from time to time. How you manage the distribution of money phase of life will have a telling effect on the quality of your life in the Go-Go phase, the Slow-Go phase and the No-Go phase.

No matter how successful you were in the accumulation of money phase, you have to focus time and energy if you want a successful distribution of money phase. Some of this involves the recognition of what I call existential risk.

Existential risk, in my world, is a phrase to describe things that might or might not happen. No one expects our house to burn down or be destroyed by a hurricane, but we buy homeowners insurance. We might have a wreck and damage or total our car, so we buy auto insurance. Some of us buy life insurance so that if we die unexpectedly, there is cash to help our family get on with their lives. All along, we determine how much of a threat such an event will have on our lives and we allocate resources to protect ourselves.

Some of the existential risks of retirement are catastrophic illness, like a stroke, or chronic illness like dementia. As life expectancy increases, a newly talked about risk is longevity risk, which is running out of money. None of hope these things will happen, but it makes sense to at least recognize the possibility and perhaps reposition our money to offset some of the risk.

How fast you withdraw funds on a monthly basis from your accumulated funds is a largely arbitrary decision. It matters less if you have already dealt with the existential risks you might face. The financial planning community is arguing constantly about what annual rate of withdrawal is appropriate.

It depends on you. If you are willing to experience the pain of dramatic declines in value, then the rate at which you withdraw money will have to be less. That’s largely because if your accounts go down hard, you have less time to recover. Meantime, you might be sweating bullets, and that’s not usually a good thing.

If you take appropriate steps to protect yourself, then a larger withdrawal rate may be appropriate. That translates to a more satisfying experience during the Go-Go years, knowing you have taken steps to allow a smoother and later transition into the Slow-Go and No-Go years.

It’s up to you what you do. But I encourage you to believe acting sooner rather than later will be in your best interest.

4 Lessons For Us From a Century Ago

My Comments: As a nation we are on the horns of a dilemma regarding our role as the sole surviving superpower from the last century. I embraced Obama’s assertion that our national focus should revert to what is in our best interest domestically. At the time we were embroiled in Iraq and other places and I was sick and tired of the cost in terms of lives and dollars.

This article, which appeared recently in The Financial Times, tells us this is not a new dilemma. That roughly 100 years ago Britain was caught in the same issues as we face today. The comment about “spending money and men to try and civilize those who don’t want to be civilized” rings a bell with me.

However, if I want to leave this planet with some assurance it will be a better and safer place for my grandchildren, I don’t want us to hide in the shadows and hope for a better outcome. Hope is NOT a global strategy for success.

America, Britain and The Perils of Empire, By Gideon Rachman / October 13, 2014 / The Financial Times / Middle East turmoil of 1919 offers important lessons for today

General Sir Philip Chetwode, deputy chief of Britain’s Imperial General Staff, warned in 1919: “The habit of interfering with other people’s business and making what is euphoniously called ‘peace’ is like buggery; once you take to it, you cannot stop.”

It is difficult to imagine any member of the Obama administration making such an eyebrow-raising comparison. But, as the US struggles to cope with turmoil across the Middle East, Sir Philip’s complaint – quoted in David Reynolds’s recent book, The Long Shadow – has a contemporary ring to it. Even more so the lament of his boss, Sir Henry Wilson, the chief of Britain’s Imperial General Staff, who complained in 1919 that -”we have between 20 and 30 wars raging in the world” and blamed the chaotic international situation on political leaders who were “totally unfit and unable to govern”.

Britain was directly or indirectly involved in the fighting in many of these wars during the years 1919-1920. Their locations sound familiar: Afghanistan, Waziristan, Iraq, Ukraine, the Baltic states. Only Britain’s involvement in a war in Ireland would ring no bells in the modern White House. The British debates, and recriminations of the time are also strongly reminiscent of the arguments that are taking place in modern America. And how events panned out holds some important lessons for today’s policy makers.

The British military effort in Iraq in 1920, like the allied effort today, was conducted largely through aerial bombing. Then, as now, there was strong scepticism about the long-term chances of achieving political stability in such an unpromising environment. AJ Balfour, the British foreign secretary complained – “We are not going to spend all our money and men in civilising a few people who do not want to be civilised.” In an echo of America’s current Middle East confusion, even British policy makers knew that they were pursuing contradictory goals. As Professor Reynolds points out – “The British had got themselves into a monumental mess in the Middle East, signing agreements that, as Balfour later admitted, were ‘not consistent with each other’.”

Then, as now, even the people making policy seemed confused about the motives for military intervention in the Middle East – was it “making peace” as Gen Chetwode suggested, was it the rich oil reserves of the area, was it the protection of another territory (India for the British, Israel for the Americans), or was it simply a vague sense that imperial prestige was at stake? The debates in London, almost a century ago, as in Washington today, suggested that all these motives were mixed together in ways that no one could completely disentangle.

Military leaders’ complaints about incompetent politicians also echo down the ages. Sir Henry’s lament about British political leaders who are “unable to govern” is matched by the increasing rumble of complaint about the leadership of Barack Obama. Even Mr Obama’s former defence secretary, Leon Panetta, has just complained that the US president “too often relies on the logic of a law professor rather than the passion of a leader”.

These comparisons between the British and American dilemmas, almost a century apart, are intriguing – but do they offer lessons? I would point to four.

First, while it is always tempting to blame political leaders, the problems often run far deeper than that. The British prime minister in 1919 was David Lloyd George, who most historians now regard as a decisive and dynamic leader. That did not prevent the imperial staff from complaining about the torpor and confusion of his administration. The real problem, however, was the intractable nature of the problems that Britain was facing, and the limits of the resources it could bring to bear.

Second, it is much harder to be a global policeman if your government’s finances are stretched and your country is war-weary. In 1919, after the collapse of the Ottoman Empire, British imperial possessions were more extensive than ever. But the UK was exhausted after the first world war and had little appetite for further conflict. The Iraq and Afghanistan wars of the past decade were small affairs, by comparison. But they left a similar reluctance in the US to get involved in further conflicts.

Third, the uncanny similarity between the trouble spots of a century ago and those of today suggests that there are some parts of the world where geography or culture create a permanent risk of political instability and war: the frontiers between Russia and the West, Afghanistan, Iraq. The idea that ‘twas ever thus’ may comfort contemporary policy makers in Washington, as they struggle to cope with multiple crises.

Yet the fourth lesson derived from Britain’s travails in 1919 is less comforting. Many of the conflicts that the Imperial General Staff were struggling with did get resolved fairly swiftly. The western allies’ involvement in the Russian civil war was over by 1920, as the Bolsheviks moved towards victory. An uneasy peace was also re-established in Iraq. But Britain’s ability to impose its will on the world was waning. The political turmoil of 1919 was, in retrospect, an early sign that the world was entering a new period of instability that – within a generation – would lead to another shattering world war. Once the dominant global power loses its grip, the world can quickly become much less orderly.

Social Security Cost-of-living Adjustments Projected to Increase Slightly in 2015

Social Security cardMy Comments: Those of us old enough to be taking SSA benefits have experienced minimal increases in the last few years. That’s because the ‘official’ numbers for inflation have been low. There is an argument they should be even lower as a way to keep the so-called SSA reserves from going to empty. In my opinion, that would be a stupid way to correct the problem.

Most of us who are interested in this issue know there are much less painful remedies available. With the SSA system now in place for over 80 years, much of the US economy has adjusted with large segments of the population relying on it as we age. To disrupt that could have dramatic consequences.

If you are near 62 or beyond and have not yet signed up for benefits, get in touch with me for a comprehensive analysis of how and when to put yourself on the receiving end of a monthly check. You’ll be surprised how big a mistake it can be if you do it wrong.

By Mary Beth Franklin / Oct 1, 2014

Social Security benefits are likely to increase by 1.7% in 2015, slightly more than this year’s 1.5% increase but still well below average increases over the past few decades, according to an unofficial projection by the Senior Citizens League.

The Social Security Administration will issue an official announcement about the 2015 cost-of-living adjustments for both benefits and taxable wages later this month.

Based on the latest consumer price index data through August, the advocacy group’s projection of a 1.7% increase in Social Security benefits for 2015 “would make the sixth consecutive year of record-low COLAs,” Ed Cates, chairman of the Senior Citizens League, said in a written statement. “That’s unprecedented since the COLA first became automatic in 1975.”

Inflation over the past five years has been growing so slowly that the annual increase has averaged only 1.4 % per year since 2010, less than half of the 3% average during the prior decade. In 2010 and 2011, benefits didn’t increase at all, following a 5.8% hike in 2009.

Although the annual adjustment is provided to protect the buying power of Social Security payments, beneficiaries report a big disparity between the benefit increases they receive and the increase in costs. The majority of Social Security recipients said that their benefits rose by less than $19 in 2014, yet their monthly expenses rose by more than $119, according to a recent national survey by the advocacy group.

Social Security beneficiaries have lost nearly one-third of their buying power since 2000, according to a study by the organization. Low COLAs affect not only people currently receiving benefits, but also those who have turned 60 and who have not yet filed a claim. The COLA is part of the formula used to determine initial benefits and can mean a somewhat lower initial retirement benefit.

A 1.7% increase would increase average Social Security benefits by about $20 next year and boost the maximum amount of wages subject to payroll taxes by nearly $2,000 above this year’s $117,000 level.

Despite the fact that Social Security benefits are not keeping up with inflation, COLA reductions remain a key proposal under consideration in Congress to reduce Social Security deficits. A leading proposal would use the “chained” consumer price index — which grows more slowly — to calculate the annual increase.

The group warned that the “chained COLA” proposal may come under debate again soon. The Social Security Trustees recently forecast that the Social Security Disability Trust Fund is facing insolvency by 2016, and that changes to the program will have to be made to avoid a reduction in disability benefits.

The organization supports legislation that would provide a different measure of inflation by using the Consumer Price Index for the Elderly, which would likely result in higher annual increases than under the current method.

Corporate U.S. Healthiest in Decades Under Obama With Lower Debt

coins and flagMy Comments: I admit to a strong bias in favor of the Democrats and the values they deem important. As someone with a good understanding of economics and finance, this article that appeared about ten days ago itemizes several positives that have become clear during the past six years of Obama’s presidency. They are worth noting as we steer our way into the next election cycle.

October 2, 2014 / By Bloomberg News Service

Steve Wynn, founder of the Wynn Resorts Ltd. (WYNN) casino empire, once called President Barack Obama’s administration “the greatest wet blanket to business and progress and job creation in my lifetime.” Barry Sternlicht, chief executive officer of Starwood Property Trust Inc. (STWD), said Obamacare was driving down wage growth and “affecting spending and the desire to buy houses and everything else.”

They are among a chorus of corporate executives and lobbying groups that regularly assail Obama for policies that they say are stifling investment and hurting companies.

Corporate and economic statistics almost six years into his administration paint a different picture. Companies in the Standard & Poor’s 500 (SPX) Index are the healthiest in decades, with the lowest net debt to earnings ratio in at least 24 years, $3.59 trillion in cash and marketable securities, and record earnings per share. They are headed this year toward the fastest average monthly job creation since 1999, manufacturing is recovering and the U.S. has returned as an engine for global growth. The recovery, which stands in contrast to weak growth in Europe and Asia, has underpinned an almost threefold gain in the Standard & Poor’s 500 Index since March 2009.

Wynn has been part of that recovery. Since Obama first took the oath on Jan. 21, 2009, the shares of his luxury hotel company have surged fivefold while the S&P 500 Index more than doubled. Starwood Property Trust, Sternlicht’s Greenwich, Connecticut-based real estate company, has risen 36 percent since its August 2009 initial public offering, while an index of real estate investment trusts declined.

Accelerating Growth
“The U.S. is leading the way — we’re the only major economy with accelerating growth,” said Mark Zandi, chief economist in West Chester, Pennsylvania, for Moody’s Analytics Inc. and a registered Democrat who has advised both the Obama administration and Senator John McCain, a Republican. “Obama deserves some credit for that, but he probably won’t get it.”

Tom Johnson, a spokesman for Sternlicht’s closely held Starwood Capital Group who works for Abernathy MacGregor Group in New York, and Michael Weaver, spokesman for Las Vegas-based Wynn, declined to comment. Wynn gets about 70 percent of its sales outside the U.S.

With Democrats fighting to hold control of the Senate in the November elections, Obama will attempt to focus attention on the economy in a speech today at Northwestern University’s Kellogg School of Management in Evanston, Illinois.

Parsing Credit
While Zandi lauds Obama’s $787 billion in stimulus spending and auto bailouts as “textbook” responses to the recession, one question for history is whether the Federal Reserve should instead get the credit. The Fed’s decision to drive down interest rates to zero allowed companies to refinance debt at lower costs, helping spur corporate growth, said Todd Lowenstein, a fund manager with San Francisco-based HighMark Capital Management Inc.

Barring any major disruptions, the economy is setting up for Obama to leave office on a high note, said Douglas Brinkley, a presidential historian and professor at Rice University in Houston.

“History will eventually show that Obama inherited the Great Recession and resuscitated the economy,” Brinkley said in an interview. “He’s going to be seen as much more centrist and even friendly to business.”

Profits are showing that. In the second quarter, S&P 500 companies reported adjusted earnings that exceeded $30 a share for the first time, soaring from a 16-year low of $5.55 at the end of 2008 as Obama prepared to assume office. Earnings for those companies rose about 5.1 percent in the third quarter from a year earlier, according to average estimates compiled by Bloomberg.

Corporate Earnings
In total, S&P 500 profit as measured by Ebitda — earnings before interest, taxes, depreciation and amortization — increased to $1.84 trillion for the 12 months through the end of last quarter from $1.2 trillion in 2009.

The jump in earnings has meant that companies can service their debt more easily. In the six years since Obama became president, corporate debt as measured against earnings has fallen to the lowest point since at least 1990. For companies in the S&P 500, the ratio of net debt to Ebitda is currently 1.6, down from a high of 4.9 in 2003, according to data compiled by Bloomberg.

That ratio, a marker of corporate health, has also been helped by the cash that companies are piling up. Those holdings for S&P 500 companies have jumped to $3.59 trillion from $2.28 trillion four years ago, a build-up that lowers their net debt.

“When I came into office, our economy was in crisis.” Obama said in an interview aired Sept. 28 on CBS television’s “60 Minutes.” Now, in addition to a lower unemployment rate and a cut in federal deficits, “corporate balance sheets are probably the best they’ve been in the last several decades.”

General Motors
One example is General Motors Co. (GM), which last week regained its investment-grade debt rating from Standard & Poor’s only five years after the government-backed bankruptcy. S&P cited GM’s $28 billion of cash and “meaningful” cash generation even with the extra cost of recalls this year. Detroit-based GM is predicted to post its 16th straight profitable quarter since emerging from bankruptcy in 2009.

Obama’s $49.5 billion bailout of the automaker in exchange for taxpayers owning 61 percent of the company kept it from being liquidated, an outcome that could have crippled parts suppliers and economies throughout most of 50 states, not just the Midwest.

To be sure, not all companies have been able to improve their balance sheets. The riskiest firms are adding debt, according to a Sept. 24 report by Goldman Sachs Group Inc. Net debt for speculative-grade companies, which are rated below BBB-at S&P, climbed to 2.77 times operating income before depreciation last quarter, up from 2.65 times a year earlier.

Economic Conditions

In the broader economy, consumers are buying again and homebuilding is increasing. The unemployment rate has declined to 6.1 percent, the lowest since 2008. The economy expanded at a 4.6 percent annualized rate in April through June, after a 2.1 percent contraction in the first quarter marred by poor winter weather conditions. The last time the economy was growing so fast was in the first quarter of 2006.

Meanwhile, the economies of Europe and Japan are sluggish. The recovery for the euro area — including the countries France and Italy — stalled, with gross domestic product unchanged from the first quarter to the second, according to Eurostat, the European Union’s statistics office in Luxembourg. Japan contracted by the most in more than five years, with GDP shrinking an annualized 7.1 percent, data from the government Cabinet Office in Tokyo show.

Obama may also leave his eight-year presidency with the resurgence of the U.S. as an oil producer and the reversal of a decade-long manufacturing decline, helping buff his legacy, according to historian Brinkley.

Energy Impetus
The U.S. Energy Information Administration projects oil production will jump to 9.53 million barrels of oil per day next year, a 45-year high and a 28 percent increase over 2013, as a combination of horizontal drilling and hydraulic fracturing has unlocked resources trapped in shale formations from the Bakken in North Dakota to the Eagle Ford in Texas.

Critics say it’s unfair to credit Obama with the oil boom. The private sector drove the expansion over hurdles erected by his administration, such as delaying the Keystone XL oil pipeline from Canadian crude to the U.S. Gulf Coast, retaining limits on crude exports and imposing stiffer regulations on offshore drilling, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Still, the drilling is translating into cheap and abundant energy in the U.S. that will spur manufacturing, said Keith Nosbusch, CEO of Rockwell Automation (ROK) Inc., a Milwaukee-based company that sells factory software to companies including Nestle SA and Ford Motor Co.

Manufacturing Growth
Manufacturing jobs rose to 12.16 million in August from a low of 11.45 million in 2010. “The U.S. is in the middle of an accelerated growth in manufacturing,” said Nosbusch, whose company’s cash and marketable securities have more than doubled to $1.75 billion in about three years and are now larger than its total debt.

The rebounding economy and record profits haven’t been enough to win over some business leaders still upset by overhauls of the health-care and financial systems — the source of much vitriol toward Obama over the years. John Mackey, the co-chief executive officer of Whole Foods Markets Inc. (WFM) who has described himself as a free-market libertarian, referred to Obamacare as socialism in 2009 — and in 2013 likened it to “more like fascism.”

Mackey promptly wrote a blog post in which he said he regretted using the word fascism, said Kate Lowery, a spokeswoman for Austin, Texas-based Whole Foods.

Medicare Costs
Rising corporate profits are due mainly to cost cutting that came amid added expenses from new health-care, environmental and banking regulations, said Martin Regalia, the U.S. Chamber of Commerce’s chief economist and senior vice president for economic and tax policy.

After doubling in the past two decades, medical expenses rose 2 percent last year, the least in 65 years, helped by Medicare reimbursement cuts, according to data compiled by the U.S. Labor Department. Obama’s 2010 health-care program will hold down consumer prices for years to come as millions of Americans obtain coverage, BNP Paribas SA and Credit Suisse Group AG said.

The “Medicare cost miracle” resulted at least in part from Obama’s Patient Protection and Affordable Care Act, Nobel-Prize winning economist Paul Krugman wrote in a Sept. 1 New York times article.

While large cash holdings often are viewed as a sign of financial health, they reflect companies’ lack of confidence to invest, said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado.

“We’re not making the risky investments needed to achieve a higher level of growth,” he said. “So to a certain degree the rebuilding of corporate balance sheets has come at the expense of growth.”

Fed Policies
Companies have also refinanced debt at lower cost thanks to the Fed, not Obama, said HighMark Capital’s Lowenstein. Corporate bond issues in the U.S. this year have exceeded $1.2 trillion, topping 2013’s record pace, according to data compiled by Bloomberg. The central bank has kept its target for the overnight interbank interest rate at zero to 0.25 percent since December 2008.

“That’s been a huge benefit to their margin structure in terms of lowering the cost of debt,” Lowenstein said. “It’s been one of the pillars of peak profits.”

Ending his tenure with a strengthened economy would put Obama more in line with Republican Ronald Reagan and Democrat Bill Clinton than other recent predecessors. Jimmy Carter was shackled with stagflation while a slump marred George H.W. Bush’s bid for a second term. George W. Bush’s presidency, scarred by the Sept. 11 terrorist attacks, ended with the deepest recession in six decades and a global financial crisis.

Presidential Legacy
John Carey, a Boston-based fund manager with Pioneer Investment Management Inc. and a Republican, gives Obama a B+ grade on the economy and business environment. Growth is steady, financial markets are robust and deficit spending has come down, he said.

“I don’t think they’ve done a terrible job,” said Carey, whose firm oversees $230 billion. “My main issue with President Obama is that he just doesn’t seem to be enough of a booster — an enthusiastic advocate of America and our economy.”

Such comments reflect how some business executives are likely to see the gains as being in spite of Obama instead of spurred by the president, Moody’s Zandi said.

“The perceptions have been solidified in that regard,” Zandi said. “It’s going to be pretty hard for him to shake that.”

What Should We Expect From Our Stock Investments?

investment-tipsMy Comments: Lots of questions about the markets these days. I came across this short summary and thought it relevant. I didn’t understand the chart until after I finished reading, so be warned. I’m in a very cautious mode and have my clients positioned to avoid large losses and perhaps make money as things go down.

The intent here is to give you an idea about the future, one that includes a major correction. If you are willing to accept some serious pain in the short term, the current number from which to make a judgement is 26.3. Find that on the chart and you have an idea what the future holds in the medium turn, that is if you think 5 -10 years is medium. ( I once knew someone who traded currencies, and for him, a medium term hold was 48 hours! )

Brad McMillan , Oct. 2, 2014

With the market recently bouncing off all-time highs, it seems like a good time to consider what the future holds.

Are we poised for more of a run-up over the next several years, or is the market likely to disappoint in its returns?

The answer very probably depends on the timeframe we look at. Over one year, it’s anybody’s guess. Over three to five years, we can probably make a reasonable estimation. And over ten years, we likely have a pretty good idea. Let’s take a look at what history tells us about returns going forward.

Selecting a valuation indicator
How do we characterize today’s market environment in relation to past market environments? There are several ways to measure the market, but the best revolve around valuation. How we measure valuation can make a significant difference in the results we get. A good indicator of market value should have a meaningful relationship with future returns. If not, what’s the point?

Looking at the correlation between different valuation measures and future returns, a couple of things stand out:
• Forward price-earnings ratios have a relatively poor correlation with future returns.
• Trailing price-earnings ratios have a fairly strong relationship with future returns. This makes sense, as the trailing P/E ratio reflects actual rather than expected performance.

The valuation indicator that has the best correlation with future returns, however, is the Shiller price-earnings ratio. It’s my preferred metric for several reasons, and the actual numbers bear it out. If you’re looking to estimate returns over 5 to 10 years, the Shiller P/E is the best indicator to use.

So, what does the Shiller P/E tell us about future returns? Here’s what we can expect returns to be going forward, using the Shiller P/E as an indicator.
Shiller PE
This chart comes from an older study I did, but the numbers are still reasonably accurate. The main point is that the more expensive the market is, the lower future returns are likely to be.

With the current level at 26.3, per Shiller’s website, we can see that over the next five years, based on history, the average return may be in the 5 percent range, while the likely 10-year return may be in the 7.5 percent range.

Not too shabby, actually. As a basis for planning, this analysis constrains what we might hope for, but it doesn’t look all that bad, either.

There are other factors to consider, of course. Averages can conceal a multitude of sins, so tomorrow we’ll look at the data in more detail to see what else we can divine about future stock returns.

Long-Term Care Update: 6 Trends to Watch

retired personMy Comments: The baby boom generation is going to be hit hard by this phenomena, and most of us know it. We just aren’t sure how to deal with it. This is not a solution but a needed reminder that pretending it will go away is not likely. While I disagree with their conclusion about hybrid products, it’s a good article.

by Miriam Rozen / SEP 2, 2014

Just when financial planners imagined long-term care coverage discussions couldn’t get any knottier, they managed to do so.

Long-term care insurance has prompted groans since the product’s inception in the late 1970s, taking black eyes from broad mispricings and the exits of big players like Prudential Financial.

Now three unwelcome new trends have surfaced: long-term care premiums have gotten even more expensive, benefits have shrunk, and cost of living adjustments have done the same — with the latter dropping to 3% from 5% annually, or, in some cases, withering away to nothing.

But planners might welcome other emerging trends in the long-term care insurance industry — including revised pricing and product packaging targeted at the middle market, rather than just high-net-worth clients. Those new developments emphasize portfolio protection and partial, rather than comprehensive, long-term care coverage.

While some of the changes have increased plan flexibility, expanding the types of long-term care benefits that insurers will pay, the complexity in plans’ structures has amped up, as well. A financial planner could easily lose many productive workdays reviewing the wide variety of (usually expensive) provisions for inflation protection and other riders.

Availability is an issue, too: Some financial planners grimly recall recent calls to clients, warning that they only have a week to enroll for a policy because it’s about to be pulled off the shelf. (Existing policyholders usually have more time and warning before the price hikes announced by renewal notices become effective.)

To get the biggest bang for their clients’ buck, financial planners must therefore still focus on the granular distinctions between policy bells and whistles.

“It’s impossible. The fact is that insurance companies are losing money on long-term care insurance because people are starting to use it,” says Lynn Ferraina, a partner at Ciccarelli Advisory Services in Naples, Fla., who has been advising about long-term care insurance for two decades.

“The insurance companies are starting to pay out and they are realizing the costs and that’s why they are increasing the premiums for others,” Ferraina adds. “I think it’s a national dilemma.”


“We stay educated. We go to a lot of conferences,” says Donald Haisman, an advisor in Fort Myers, Fla., who says he has offered long-term care insurance to clients for decades.

When the products first became available in the 1970s, dozens of insurance companies jumped into the market — and most coverage paid only for traditional nursing-home stays.

These days, only a few major providers — Genworth, New York Life, John Hancock and Transamerica Financial — remain in the business. But the products they offer now cover a wide range of needs for the elderly and infirm, including nursing homes, assisted living and home care services.

For help navigating the specialized area, Haisman hires — on an hourly basis — Roger Macaione, a certified financial planner who focuses on long-term care policies. Macaione receives no commissions, so he can help clients understand what they need rather than pushing product, Haisman says.

Indeed, no financial planner can afford to ignore the new developments in long-term care insurance.

Long-term care insurance providers recently introduced yet another round of prices increases, along with gender-based premium pricing. That means everyone should expect to pay considerably more for less — but particularly women.

Prices vary by location: Floridians can expect some of the highest increases; New Yorkers some of the lowest. Overall, according to the American Association for Long-Term Care Insurance, premiums have risen on average 4.8% in the past two years.

“How much higher can pricing go? I don’t know,” says Rachelle Kulback, who helps the planners at Schneider Downs Wealth Management Advisors in Pittsburgh with long-term care questions.
“We’ve had one client who simply chose to cancel,” when faced with a premium increase, says Benjamin Birken, an advisor at Woodward Financial Advisors in Chapel Hill, N.C.


Long-term care insurers have started to recognize that their industry has soured its reputation by raising premiums, halting sales of new policies, eliminating attractive options — and, debatably, offering an inherently unappealing product. (After all: Who really wants to think about long-term care?)

Haisman himself recalls that when his own father’s health began deteriorating, he initially took comfort in knowing that his father had paid premiums on a long-term care insurance policy for 25 years. But then reality set in. “The insurer would never pay; they always had a reason not to,” Haisman recalls.

Haisman says he submitted paperwork for his claims — “probably 100 documents” — but “there was always some reason that my father’s costs didn’t meet the criteria, according to the insurer, even when we he was in a hospice. … That’s why we do so much research on long-term care insurance policies for clients.”

Providers have responded to the reputational hit by attempting to simplify the structure and marketing of their products. They’re now promoting their products as a way for middle-class clients to get partial portfolio protection rather than as a total solution for all long-term care needs.

Aaron Ball, a senior vice president for long-term care insurance at Genworth — the provider with the largest share of the nearly $406 million market — says his company in late July introduced a new set of products that offer flexibility in terms of how much insurance coverage consumers buy and how they use it. The new FlexFit products let planners offer clients either budget-friendly premiums, starting as low as $100 a month, or packages priced according to asset-protection goals, starting at $100,000 of assets, he says.

Such products may appeal to advisors who understand how the costs of keeping a parent in long-term care can wipe out savings.

Of course, even $100,000 doesn’t sound like much when nursing home costs in some parts of the nation run as high as $95,000 per year. But providers, including Genworth’s Ball, stress that their products cover home care, and that typically costs much less — about $45,000 a year, on average.

As it turns out, home care services are what more than 70% of Genworth’s long-term care claimants seek.

And home care costs may be expected to drop even further, says Dallas advisor Suzanne Fitzgerald, who markets New York Life’s long-term care products. She cites two key reasons: Competition is increasing, as more companies enter the growing business, and technological advancements — such as wireless monitoring, automated pharmaceutical deliveries, and even the Uber app — are making some home care services less expensive to provide.

“There are so many home care providers now and most of my clients want in-home care,” she says. According to the AALTCI, which keeps industrywide statistics, home care claims accounted for 51% of those opened under long-term care policies in 2012, the most recent year of figures available.

Both Genworth and New York Life have attempted to make the home care services options even more attractive for their claimants by providing care coordinators — counselors who help families arrange for home care services in their own communities. Both insurers accelerate coverage (by eliminating waiting periods) for families who rely on those home care-coordinating professionals.

“We have experts in every region of the country. They know who is good and bad,” among home care providers, says Fitzgerald.


While long-term care riders can be complex and expensive, one subset should be particularly worthy of any financial advisor’s attention, says Nancy Skeans, managing director at Schneider Downs Wealth Management: spousal-sharing riders.

These new products, which emerged about two years ago, allow a couple to buy a designated number of years’ coverage — and then permit either spouse to use any of those years.

Since statistics show that long-term care needs rarely exceed three years, the spousal-sharing option makes economic sense, Skeans says: For one price, a couple gains good odds of having coverage for all their needs.

“Each person is buying two years of protection at least, but it is much less expensive than having their own policies,” Skeans says.

Another way providers have been countering the high cost of coverage is to reduce or eliminate options once seen as advantageous to purchasers.
One virtually extinct provision that was once common is the “refund of premium” benefit. If the insured died before a certain age, this provision would have paid heirs all the premium payments that the client had made, minus any benefits already paid against the policy.

Inflation provisions, too, were once a way for financial planners to help clients effectively customize plans for their needs and budgets. But most LTC carriers no longer offer what had once been an industry standard: 5% compound inflation protection.

Genworth’s new products, for instance, allow a 2% compound inflation option. And New York Life’s policies, offered in partnership with a Florida state program, no longer require compounded inflation protection for policyholders age 61 or older.

Birken, for one, thinks some clients may benefit from the reduced inflation protection — because those missing options make long-term care premiums more manageable. “The difference in cost for an inflation rider can make or break” a policy’s affordability for the client, he says.

Birken downplays the benefits of another long-term care funding alternative: hybrids. These combination products — which combine life insurance with long-term care riders — appeal to some financial advisors because they represent an easier sale; life insurance is something clients already understand.

And the hybrids form a growing part of the market, according Genworth’s Ball, whose company sold about $100 million in the products last year.

For Birken and others, though, the hybrids represent a second-rate alternative. Why? They typically offer no inflation protection and less valuable benefits than traditional long-term care insurance, he says.

Because the underwriters’ qualifying requirements are frequently “less stringent,” Birken says, “it makes them an opportunity for some folks.”

However, he adds: “We would never go with a hybrid first.”

Bernanke Says 2008 Worse Than Great Depression

FDRMy Comments: Ben Bernancke is no longer Chairman of the Federal Reserve. However, before he became chairman he was widely recognized as a world class economist and an expert of the Great Depression. It was that expertise that gave him so much credibility as he maneuvered the Fed through 2008-2009 until earlier this year.

There is no question that many of us are still hurting. The gap between the haves and the have nots is increasing. The ability of many of us to spend money like we used to is limited, which to some degree keeps recovery uncertain.

There is blame to go around, but not because anyone or sector of the economy was and is evil. That presumes a conspiracy involving thousands of people which is enough to debunk that idea. Bad things happen from time to time. There is little point in worrying about the past; we can only influence the future, but an understanding of the dynamics that led to the mess may be helpful.

Brian Gilmartin, CFA, Aug. 28, 2014


The above link was copied and pasted from a Real Time Economics Wall Street Journal tweet yesterday (8/26), after Gentle Ben testified in the AIG litigation recently.

I think former Fed Chair Bernanke was right in concluding that 2008′s recession, if left to run its course, would have been a far greater calamity for the US economy than the Great Depression, but for different reasons:

1.) The money markets and the commercial paper market was at real risk of failure, which means S&P 500 companies couldn’t have rolled short-term high quality CP;

2.) Far more Americans through 401(k)s and pensions, had exposure to the stock and bond markets than Americans had in the late 1920′s and early 1930′s;

3.) A 70 year bull market in home prices came to a crashing halt, the first national real estate depressions since the 1930′s. While the US economy was thought to be a primarily agrarian economy during the Great Depression, single-family homes as a percentage of household net worth, would have been far greater in 2007 – 2008 than in the 1930′s;

4.) The truly shocking action for me wasn’t the Lehman default or even the Bear Stearns default, but the drop in Northern Trust’s and State Street’s stock in late September, early October, 2008. Northern Trust traded up to $88 in September ’08 only to collapse to $33 within a two week time frame. NTRS and STT are “global custodian” banks and thus are huge custodians (recordkeepers) for corporate pension plans and such, with far bigger assets in custody and administration than assets under management. If The Reserve Fund had broken the buck, there would have been true calamity in the Street and although it is simply a guess, I would have thought that the US unemployment rate would have seen 50% easily, at least over the near term;

5.) The Reserve Fund was, at that time (I believe) in 2008, one of the world’s largest money market funds, and if the Reserve Fund had “broken the buck” which means that if the Reserve Fund’s NAV had moved below $1 per share, it could have resulted in a run on money markets that would have made the bank run and the Bailey Building & Loan run (“It’s A Wonderful Life”) look like a day in the park. (The aftermath of what happened with the Reserve Fund in 2008 is that today, the SEC is contemplating and is close to letting money market fund NAVs (net asset values) float. The thought is that the $1 money market price creates a “moral hazard” and what I told a client recently is that what retail investors will likely wind up with is whole array of “ultra-short” bond funds as money market funds, which do fluctuate minimally in price.)

6.) Although some of the fiscal policy has been horrid since 2008, I do think that one of the root issues in the economic recovery following 2008 has been the true “shock” of the drop in real estate and household wealth. Remember consumption is 2/3rd’s of GDP and with the capital markets and the real estate markets, being two of the greatest wealth-creation vehicles post WWII (not to mention the value of an education), it is taking years for the consumer to restore their savings and confidence.

7.) The fact that “disinflation” (a declining rate of inflation) and deflation continue to be an issue 5 years after the stock market low and the substantial economic recovery, is indicative of lingering overcapacity. Part of that is due to the life-cycle of technology which has dramatically accelerated productivity and shortened tech product cycles (not to mention kept a lid on inflation) and part could be demographics and the Aging of America (it is a bigger debate);

8.) The Great Mistake in the 1930′s by the Federal Reserve is that they actually withdrew liquidity sometime in 1935 – 1936, which resulted in another downturn in the US economy in the late 1930′s just prior to WWII. In other words, Fed policy errors actually exacerbated the Great Depression, rather than shorten it. Both Janet Yellen (I’m sure), just like Ben Bernanke are / were both aware of the Fed’s policy mistakes and are obviously loathe to make the same mistake. The fact that there isn’t a meaningful inflation today just makes the Fed’s ability to maintain ZIRP (zero interest rate policy) and low rates that much easier. However it will end at some point, and we will get some inflation, I would suspect.

Most intelligent investors blame leverage on the 2008 collapse, but I think it was far more involved than that. It just wasn’t that simple.

In client meetings the last few years, I’ve been telling clients that there is less than a 5% chance that they will see the 2008 confluence of events happen again in their lifetime (probably less).

Certainly I could be wrong, but I continue to think the US economy, and the US stock market, particularly the S&P 500 is in a perfect glide slope of healthy, albeit subdued growth, low inflation, and a healthy respect for stock volatility and negative sentiment on the part of retail investors.

One commentator from PIMCO called it the “Goldilocks economy” and the metaphor seems appropriate.
We will see S&P 500 corrections over time, but I will bet in 10 years that we will look back and see this period of time as similar to post WWII economic stability and growth. Perhaps that conclusion is somewhat of a stretch given the demographics of the US economy today, but we’ll see.

Thanks for reading today. We’ve been contemplating this commentary on 2008 for some time. Watching NTRS and STT trade in late September, early October, 2008 was one of the few times, I’ve felt true fear watching the stock market. The potential collapse of the money market as was being telegraphed by the global custodian banks, would have been a horrific scenario to conceive, let alone experience.

When all the books are written about the “near Great Collapse of 2008″ after 20 – 30 years of hindsight, I do think Ben Bernanke, then Treasury-Secretary Hank Paulson, and Tim Geithner will be due a huge debt of gratitude.
For a few days/weeks, educated American’s had a brief look into the abyss. It won’t be forgotten by those of us that sat through it.