How To Make The Most Of FAFSA For Maximum College Funding Help

October 01, 2018

If you are the parent of a college-age student or will be someday, you have a new best friend with an unusual name, and her name is FAFSA. FAFSA and I go way back.

My relationship with FAFSA

I first met her decades ago when I was preparing to launch my own college career, and she has recently come back into my life. I have one daughter heading off to college this fall and another daughter a scant two years behind her. As a result, FAFSA and I are once again spending lots of quality time together. She likes to ask a lot of pesky, intrusive financial questions, but if you are patient, thorough, and have the correct answers, FAFSA can be a very generous friend.

Getting to know FAFSA better

Who is this FAFSA, you ask? The Free Application for Federal Student Aid (FAFSA) is a standard application for financial aid filed by students (and parents thereof) attending undergraduate college programs, career schools, or graduate school.

Not just for need-based financial aid

Lest you think that your income is much too high for FAFSA to take any interest in your plight, I’ll encourage you to reconsider. While FAFSA is used to apply and qualify for practically all forms of needs-based financial aid, such as grants and loans, it is also widely used for many scholarship programs. FAFSA is not for student loans alone – many universities and state programs utilize FAFSA data to award aid from their own scholarship and grant programs.

I’ve gotten to know FAFSA intimately over the years, and if you say (and properly verify) all the right things, she just might connect you with some college cash.

Time is a cruel mistress

One of the first things to remember about a successful relationship with FAFSA is to always be on time. Always. The window for completing the FAFSA each year is between October 1 and June 30. For example, my daughter started her freshman year in college in August, 2018. That means we started working on her FAFSA during the fall of her senior year in order to complete the paperwork as close as possible to the October 1, 2017, FAFSA availability date for the 2018-2019 academic year.

We could have waited as late as June 30, 2018, (the end of the academic year) to complete this task, but that could be a costly mistake. According to Savingforcollege.com, students who file the FAFSA early (within the first three months) on average receive twice the amount of grant money as do students who file later. The lesson here is don’t leave FAFSA waiting; she just might give away your grant or scholarship money to an earlier applicant. Oh, and you’ll need to repeat this process every October until your student graduates.

More ways to cozy up with FAFSA

Other than filing early and often, are there any other ways to woo FAFSA and possibly score additional funding for college? Oh yes. Here are a few additional college aid strategies for you to explore:

  • Gifts from grandparents. Make these gifts to the student’s parent(s), not to the student directly. Gifts from grandma and grandpa are counted as “untaxed income” if made directly to the student. However, giving the money to Mom or Dad is ignored by FAFSA. Alternatively, grandparents can make a 529 plan contribution to a plan owned by either the student or a parent (but not owned by grandparents!).
  • Minimize your net worth. Do not include the value of money in parents’ retirement plans, qualified annuities, or the value of the family home when computing your family’s net worth on the FAFSA. This is a common mistake, and it can make you appear unnecessarily wealthy for financial aid purposes.
  • Marital status matters. If parents are divorced or separated and do not live together, can the student live most of the year with the lower-income or least wealthy parent? If so, only this parent should provide financial information for FAFSA.
  • Viva la Independence! Can or does the student live on his/her own and is no longer claimed as a dependent on parents’ federal income tax?  This one is tricky, as these conditions alone may NOT be sufficient to claim independent status in the eyes of FAFSA and avoid reporting parental financial information. Generally, single students with no dependents who are under the age of 24 must still include parental assets and income on the FAFSA, even if they are totally self-sufficient and live separately from Mom and Dad. There are exceptions, however. The Federal Student Aid Office of the U.S. Department of Education provides an extensive list of criteria necessary to claim independence for FAFSA purposes, including marriage, having children or dependents of one’s own, military service (active duty or veteran), and several other extenuating circumstances.

FAFSA is your friend

Sure, it can feel like a hassle to sift through all of your financial data and go through the FAFSA process every October in anticipation of the coming academic year. However, individual circumstances can and do change, so you want to keep FAFSA up to speed with what’s going on in your financial life each and every year. Otherwise, FAFSA only knows what you told her last year, and you both might be overlooking some valuable college financing options if you don’t keep her fully informed.

Besides, taking a thorough inventory of your financial situation once a year is always a good practice, even if you aren’t applying for college financial aid.

 

The Little Known Loophole That Allows Some Families To Save Beyond The Max In HSAs

September 24, 2018

Health Savings Accounts (HSAs) are often bundled with high deductible health insurance plans and can be a great tax-advantaged way to manage out-of-pocket medical expenses, as well as supplement your retirement. They can also be confusing.

If they baffle you too, you are in good company. According to a recent survey by LIMRA’s Secure Retirement Institute, only about 51% of Americans feel secure in their knowledge of Health Savings Accounts (and this survey includes financial planners!). Let’s take a quick look at what you can save with a health savings account. (it might be more than you think!)

What is an HSA?

Although the rate at which medical costs continue to rise has tapered off somewhat, a cost that increases more slowly is still an increasing expense. This means our consumer dollars continue to get stretched each year. A Health Savings Account (HSA) can be one tool that helps offset these rising health care costs.

Think of an HSA as a special type of savings account where you can contribute money on a pre-tax (or tax-deductible) basis, and then use those dollars tax-free to pay for out-of-pocket medical costs, such as health insurance deductibles, prescription medication, eye glasses, dental work, hearing aids, physical therapy, etc. You can also use this tax friendly money to help with a few retirement expenses after age 65. It’s a pretty powerful way to save, when you really get to know it better.

Deal breakers

Not everyone is eligible to contribute to an HSA, however. You must meet these requirements (check out IRS Publication 929, Health Savings Accounts and Other Tax-Favored Health Plans, for more):

  • Be participating in a group or individual high deductible health plan (HDHP) at the time of deposit.
  • Cannot be enrolled in Medicare. Be especially careful if you plan to claim your Social Security retirement benefit while still working. Doing so will automatically trigger enrollment in Medicare Part A once you’re 65, and make contributing to your HSA no longer allowed.
  • Cannot have other medical coverage in addition to the HDHP, such as coverage under your spouse’s medical plan, simultaneous health coverage at a second job or even TRICARE for veterans.
  • Cannot participate in a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) unless these are limited purpose accounts that provide benefits only for dental and vision.
  • Cannot be claimed as a dependent on someone else’s tax return.

Where to find an HSA

If your group health coverage at work includes one or more HDHP options, it probably also includes access to an HSA already. Your employer might even contribute some free money to the group HSA on your behalf. However, if your HDHP at work doesn’t include an HSA, or if you purchased your own high deductible insurance plan, you can go shopping for an HSA and make tax-deductible contributions to it (even if you don’t itemize).

There are literally hundreds of financial institutions offering HSAs these days. Each plan varies according to fees charged, opportunities to invest funds, interest rates paid, etc., so it pays to do some detective work first. Fortunately, the folks at Morningstar have already done a considerable amount of legwork with respect to evaluating and ranking various HSAs. Note that even if your workplace plan DOES come with a built-in HSA, you can always roll those funds into a different account if you prefer, just beware of any transfer fees.

“Please Sir, I want some more.” (how to super-save into your account)

Did you know that you can own and contribute to more than one HSA? Suppose your employer offers an HSA and contributes some money to it on your behalf each year. While you appreciate the benefit of additional free money, maybe you are not all that thrilled with the interest rate or investment options (if available) within that particular HSA. No problem. You can open a separate HSA on your own and make tax-deductible contributions to it.

Watch the limits

Make sure your contributions (and those of your employer) across all of your HSA accounts do not exceed the annual IRS contribution limits, however. For 2018, this means individuals can contribute a maximum of $3,450. Those with family coverage can contribute up to $6,900. Again, your employer’s contribution does count toward this maximum. HSA participants who are 55 or older can make an additional “catch-up” contribution of $1,000.

When it makes sense to open a second HSA

In some cases, you may need to open more than one HSA to take full advantage of maximum contribution limits. If you and your spouse share a single family HSA and you both are 55+, only one of you can make the $1,000 catch-up contribution to the HSA. The workaround is easy, though. One of you opens a second HSA to which you contribute your $1,000 catch-up contribution.

The loophole that could allow your family to save more than the $6,900 max

If you have an adult child still covered by your medical plan (under age 26, per the Affordable Care Act), the opportunity to stash some tax-free cash is even greater. As long as your adult child files his/her own tax return (HSA participants can’t be someone else’s tax dependent), (s)he can open up a separate HSA and contribute the family maximum of $6,900 per year.

That’s right; your single child can contribute up to the family maximum thanks to independent tax status and coverage under your family’s HDHP. Sure, it’s a loophole, but if and until Congress changes the law, there it is. As an added bonus, anyone can contribute to the child’s HSA – you, the child, grandparents, anyone.

Keep in mind though, that only your child can use those savings for their own or their future dependents’ medical expenses. But what a great way to help your child fund future medical expenses – remember that you don’t have to be enrolled in a HDHP to spend HSA dollars, so he/she could feasibly use these savings many years down the road toward your future grandchildren’s expenses as well.

 

Do You Really Need Renters Insurance?

August 30, 2018

Many years ago, when I was an apartment-dwelling single guy, I enjoyed living in a very comfortable bachelor pad — a one-bedroom apartment with a double garage beneath it. One Monday I came home from work at the same time as my neighbor, who was returning home after an extended weekend out of town.

As he pushed the automatic opener from his garage door, we watched it begin to rise, followed by a huge rush of water along with many of the items he stored in the garage. It all came gushing out into the parking lot as we helplessly watched. During the weekend it seems, the water heater in his apartment had burst and flooded the garage area beneath it. Not only did his apartment and its contents get flooded, but his neighbors on either side were also affected. (fortunately for me, he was not my next-door neighbor)

Freedom and flexibility in renting

Renting a house or apartment provides one with several measures of freedom and flexibility. Among these is freedom from responsibility (and homeowner’s insurance premiums) if your dwelling is damaged by someone or something other than you. But what about your furniture; your electronics; your other treasured belongings?

Who pays if your worldly goods are damaged or stolen? Also, what if one of your dinner guests trips and falls, or your dog bites a visitor who now needs medical attention? Your landlord generally isn’t liable for those expenses, and your lease typically only covers damage to the dwelling (not caused by you) and does not provide protection for its contents or your personal liability.

How renters insurance helps

I don’t recall if my neighbor at that time had renters insurance (I certainly hope so), but I distinctly remember his anguished expression as he watched his drenched valuables float out into the parking lot. According to the Insurance Information Institute, only 41% of renters have renters insurance, compared with 95% of homeowners who do have homeowners insurance.

To be fair, most mortgage lenders require homeowners to carry homeowners insurance. It is not as likely that your landlord will insist on your buying renters insurance as a condition of your lease, however. But that doesn’t mean you don’t need renters coverage. If you own anything of value, you very likely do.

More affordable than you think

Renters may skip buying insurance because they assume it is too expensive. However, for the cost of a gourmet pizza or a modest caffeine habit at your local coffee shop, you could easily protect $40,000 worth of your belongings and provide $100,000 of personal liability protection for an average cost of about $17 per month.

Most of our budgets could handle this minor adjustment, considering how much cash it would take to replace all your valuables or to recover from an unlikely but expensive lawsuit. In general, your renters policy needs to do three things for you:

  1. Replace your personal property
  2. Offset the expense of a liability lawsuit
  3. Cover your living expenses if your rental unit is severely damaged and unlivable.

Real money

The actual cost of your renters insurance will depend upon several factors. If you elect a higher deductible – the out-of-pocket expenses you must pay for each claim – your insurance premium will be less. Likewise, choosing actual cash value coverage for your possessions is less expensive than electing replacement value coverage, although the cheaper policy will only pay you the “used” value for your stuff. If you’d rather not buy used, you might need to opt for the pricier replacement value coverage.

Exploring discounts

Your insurance company may offer some discounts if you purchase multiple types of coverage through them. Ask your auto insurance company if they also provide renters insurance at a discount if you buy it from them as a current customer. If your rental unit has smoke detectors or a security system, these might be worth additional discounts on your insurance premium.

Buying a renters insurance policy can definitely seem like just another bill to pay. It can also feel like a real lifesaver if you come home to a fire, flood, or storm damage (or a neighbor’s wonky water heater) and discover your destroyed or missing possessions are no longer all that valuable. I never had to use my renters insurance back then, but after enduring numerous hurricanes (and one tornado), my homeowners insurance has paid for itself several times over.

If it’s worth owning, it’s worth insuring.

 

 

How Soon Can You Buy A Home After Bankruptcy Or Foreclosure?

August 21, 2018

Working in the world of financial wellness gives me almost unlimited opportunities to meet and speak with people from all walks of life. I also get to see and hear all manner of personal finance failures, setbacks, and triumphs.

Whether it’s celebrating the joy of someone who finally dug themselves out from under a mountain of soul crushing debt, or soberly talking someone else through the process of giving up the family home to foreclosure or considering personal bankruptcy as their next (and unfortunately best) financial move, some of these situations can really tug at one’s heart strings.

One thing that surprises me, though, is how resilient and mentally tough most people are when facing very serious financial obstacles. For example, people who find themselves in the middle of bankruptcy or foreclosure (sometimes both) are often in a hurry to jump back in and apply for another home mortgage right away, sometimes before the ink is dry on the foreclosure document or the bankruptcy has been fully discharged.

Safely becoming a homeowner again

Although I applaud this kind of enthusiasm, let’s take a step back and review just what we need to do in order to safely re-enter the world of home ownership after employing one of these personal finance nuclear options.

When you’ve had a foreclosure

If you were unable to make your mortgage payments in the past and ended up giving the home back to the bank through a foreclosure process, you are likely looking at a minimum of two years before you could qualify for a mortgage once again. You might have to wait even longer than that.

Different programs have different waiting periods

The waiting period following foreclosure starts after your foreclosure is completed; typically the date when your former home was sold as part of the foreclosure process. Depending on what type of mortgage you are looking at for starting over, you may have to wait up to seven years in certain circumstances.

VA: The Veterans Administration requires a minimum waiting period of two years following a foreclosure

FHA: The Federal Housing Administration has a three year wait for FHA loan qualification.

Conventional mortgage: Fannie Mae (FNMA) and Freddie Mac (FHMC) conventional loan requirements are even more strict. The waiting period for a conventional mortgage following foreclosure can be up to seven years, although certain exceptions for extenuating circumstances may enable you to qualify in as few as three years.

Your best chance to expedite the process

If you can provide a large down payment (more than 25%), some private lenders might consider underwriting your mortgage as early as two years following a foreclosure, but don’t count on receiving the best interest rate on the loan.

When you’ve had a personal bankruptcy

Chapter 13 – when your debts are restructured

Chapter 13 is the less devastating (though still financially destructive) version of personal bankruptcy where your debt doesn’t go away, but it is restructured to allow you to make full or partial payments to your creditors over a specified period of time. Under Chapter 13, you generally get to keep control of your assets, but your credit score will take a considerable hit.

Surprisingly, you might be able to qualify for a home mortgage in as few as 12 months after filing (not discharging) Chapter 13 bankruptcy. Surprise! It is possible to still buy a home while in the midst of a bankruptcy. The key will be to keep your payment habits and general credit history squeaky clean during that time, and the bankruptcy court will have to agree and approve.

Waiting periods for different programs when you’ve had Chapter 13

The general waiting periods for various types of mortgage qualification following Chapter 13 are as follows:

  • FHA: 1 year after filing
  • VA and USDA: 2 years after filing
  • Conventional (Fannie Mae & Freddie Mac): 2 years after discharge, or 4 years after dismissal

Chapter 7 – when you liquidate

Chapter 7 personal bankruptcy is the more serious of the two, and generally involves selling most of what you own to pay creditors what you can, but then you start “fresh” and debt-free, albeit with a severely banged up credit history for several years afterward. Since Chapter 7 liquidation this is the more onerous of the bankruptcy types, you can expect a longer and more difficult road back to home ownership after pulling the trigger on this one.

Waiting periods for different programs when you’ve had Chapter 7

Waiting periods for various loan programs following Chapter 7 are typically:

  • FHA & VA: 2 years after discharge (not filing) of Chapter 7
  • USDA: 3 years after discharge
  • Conventional (FNMA & FMHC): 4 years after discharge

Hitting your financial reset button

If you have ever endured (or are contemplating) foreclosure, personal bankruptcy, or perhaps the agony of both simultaneously, you may think that home ownership is never to be part of your financial picture again. Fortunately, there is more than one path back to home ownership, and the key is returning to some basic financial good habits, such as regularly saving for a rainy day and avoiding credit card debt.

Rebuilding a healthy credit score and keeping it healthy will also be critical. Although it can seem like a penalty, there is one good thing about waiting periods for mortgage programs following a foreclosure or bankruptcy – the wait time is an excellent opportunity to focus on repairing and restoring our good financial habits while saving up for a down payment, so we can enjoy a fresh start in a new home.

How Will Your Social Security Income Be Taxed In Retirement?

August 13, 2018

Many of us dreamily envision the possibility of retiring someday; you know, making work optional, taking a permanent vacation, etc. While we can retire from the world of work, retiring from the world of taxes is typically not an option, as many retirees are surprised to learn.

Tax obligations may not be part of our retirement dreams, but perhaps they should be. The decisions we make about saving and investing for our retirement dreams while we are still working can help prevent a tax nightmare after we retire.

Your retirement income tax bite

As you might imagine, retirement is a popular reason for people to chat with a financial planner, and I have the pleasure of talking almost daily with people from all walks of life about their retirement concerns. Most people understand that pension income and distributions from traditional 401(k) and traditional IRA accounts will be taxed as ordinary income. One thing that surprises me though, is how many people are not aware that a significant portion of their Social Security retirement benefits will most likely be subjected to ordinary income tax as well.

Social Security is not (always) tax-free

If Social Security is your only or primary source of income in retirement, your benefit may not be taxable. However, if you have income from other sources as well (e.g., pension, distributions from a pre-tax IRA or 401(k), part-time work, self-employment, interest, dividends, etc.) that add up to a certain amount, then a portion of your Social Security will also be subject to income tax. Just how much of your Social Security is taxable will be determined by your combined income.

How to calculate whether you hit the income limits

Sometimes referred to as “provisional income,” your combined income figure is calculated as the sum total of adjusted gross income plus nontaxable interest (yes, that’s your municipal bond income) plus ½ of your Social Security income. Your combined income determines how much of your Social Security income is taxable, and the amount subject to income tax could be 0%, 50% or 85% (or even 100% in one special case). (Don’t panic – it’s not a 100% TAX, that’s the percentage of your SS that will be taxable!)

Adjusted gross income (line 37 on Form 1040)
+
Non-taxable interest (line 8b on Form 1040)
+
1/2 of what you received in Social Security (from Form SSA-1099)
_______________________________________________
Income for Social Security taxation purposes

A good rule of thumb is that if your other income is more than $44,000, you’ll be paying taxes on Social Security no matter what. Less than that (or if you’re not married), refer to the chart below.

 

Combined Income Limits for Taxation of Social Security Retirement Benefits

Taxable SS Amount Single, Head of HH, Widowed, Married Filing Separately IF apart entire year Married Filing Jointly
0% Less than $25,000 Less than $32,000
50% Between $25,000 – $34,000 Between $32,000 – $44,000
85% More than $34,000 More than $44,000

Note: If you are married and filing separately but you lived with your spouse even one day out of the year, all of your Social Security retirement benefit will be taxable for that tax year.

 

Roth to the rescue

If you think there isn’t much you can do about your taxes in retirement, you might be surprised to know that you have more control than you think. If you still have a few years to go until retirement, or if you plan to work part-time after you retire, a tax-free Roth IRA can help you keep the tax man at bay.

Here’s why: although the combined income calculation for determining Social Security benefit taxation includes non-taxable interest income (e.g., municipal bond interest), the calculation does not include Roth IRA or Roth 401(k) distributions.

You read that correctly.

Money you take out of a Roth account (assuming it has been in there at least five years) is not subject to income tax, nor does it affect how much of your Social Security is taxable. Accumulating Roth assets during your working years, including converting some traditional IRA/401(k) dollars to Roth accounts, can pay off hugely in retirement by giving you a source of tax-free income that reduces your combined income for Social Security purposes and potentially lessens the tax bite on that benefit.

Remember, you can even convert traditional/pre-tax retirement dollars to Roth IN RETIREMENT, although you’ll have to pay taxes on the amount you convert. However, that’s one way to plan ahead to hopefully avoid taxation of your Social Security in the future. If you want to read about more strategies for reducing your taxes in retirement, my colleague Erik Carter wrote about several strategies in one of his Forbes articles.

Should You Pay An Item In Collections Or Just Let It Fall Off Your Report?

July 25, 2018

I was speaking with a client the other day about things she should consider before purchasing her first home. The conversation was going well until I asked her about her credit score. Oddly, her number was fairly low, despite her responsible use of credit.

She paid all bills on time, and her credit card use was minimal. As she eventually divulged, she did have this one old medical bill that went to collections. The amount was a whopping $81.00. Not eighty-one hundred and not eight thousand one hundred… $81.00.

In her case, the bill had been out there in collections land for a few years, and she was unsure as to whether she should pay it or just let it eventually fall off her credit report. She could easily afford to pay it, and we agreed this was the thing to do. However, her situation did cause me to ponder her question further…

When is it okay to just walk away?

The general and responsible answer to this question is Never.  If we owe, we owe, and we have a contractual obligation to pay what we owe. Legally, there are steps a bill collector may take to collect money that is owed, including lawsuits leading to judgments enabling them to garnish your wages, pull funds from your bank account, or place liens on any real estate you own. There are, however, some options to get some financial breathing room on a temporary or permanent basis.

When the debt is several years old

You have probably heard that after several years, an uncollected debt eventually drops off your credit report. For the most part, this is true. Even though an unpaid bill may no longer be reported on your credit after seven years, this doesn’t mean the debt itself has gone away. In fact, collections agencies sometimes engage in tactics to keep the debt “current,” which means that the 7 year clock hasn’t even started ticking yet. And as long as a debt is shown as current and past-due, your credit score will suffer.

Each state has laws (statutes of limitation) regarding how long a collector may continue collecting a debt by suing you in court. Some debts, such as student loans or taxes owed to the IRS, NEVER go away. Even after the statute of limitations on debt collection lawsuits expires, a collector may continue efforts outside the courts to collect a debt – potentially forever. It is possible that your delinquent loan or bill could be sold and resold to a series of debt collectors over and over. Even though you may be willing and able to just let it go, the collections industry can be very tenacious.

You don’t (and likely won’t) have the money

If your difficult situation is likely to be temporary, contact your creditors and request assistance. Ideally, you want to talk to your creditors before missing too many payments. Otherwise, your lender may write off your bad debt and hand it off to a bill collector. Negotiating with a debt collector is not impossible, but your options to explain your situation and negotiate more favorable payment terms may be severely limited.

If your situation is both permanent and extreme, meaning there is no way under the sun you could ever find the money needed to pay the debt, you may be a candidate for personal bankruptcy. Before you file, however, many states require you to first complete a pre-bankruptcy counseling session with a certified credit and debt counselor. Even if you elect not to file for bankruptcy, meeting with a debt counselor is a good idea to help you objectively evaluate your situation and decide if it makes sense to take this sober financial step. Personal bankruptcy is the only legal way to truly “walk away” from your debt, but it comes with some lengthy consequences.

Remember to breathe

Owing money on a bill you can’t pay is an emotional situation, and it is natural to feel frustrated or even helpless about what to do next. A good place to start is by taking an honest and detailed review of your finances, either on your own or with the help of a trusted, unbiased financial planner or similar advisor. You may be surprised at how many good alternatives you actually do have.

Keep in mind that paying a past-due debt and having it show as finally closed may not give your credit score the immediate boost you’re looking for – it will still be reflected as something that you paid late. The further you can get that delinquency in the rear-view mirror (and paying it off gets that clock started), the more your score will improve until the item is a distant memory.

 

Is An Expensive College Worth It?

July 19, 2018

One of our daughters is preparing to head off to college in a few short weeks, which has me reminiscing about my own college days and the experiences and opportunities that await her as she enters this transformative stage of her life. It also has me contemplating the cost of these transformative experiences. Or should I say, “transformative expenses?”

As parents, we want our children to grow into successful, productive adults. For many parents, the path to that future success includes a college education. Unfortunately, the high cost of college can become a dream killer for parents and children alike; doubly-so if those college dreams include attending a prestigious private institution or studying abroad.

Current costs of college

According to the College Board, the annual cost of attending an in-state public college in the U.S. during the 2017-2018 academic year was approximately $14,490. Annual costs for attending a moderately priced private institution were more than twice that amount at $38,690.

Is it worth it? How we helped our daughter decide

When comparing university price tags, the question inevitably arises within the minds of parents – is this high-priced education worth it? In my daughter’s case, she originally applied and was accepted into a language studies program at The American University of Rome (AUR). While it would have been quite the experience for her to study in Rome, the annual $44,530 price tag was a deal breaker. She would also be forfeiting her Florida Bright Futures Scholarship, which pays 100% of her tuition if she attends college in our home state. Another deal breaker.

We encouraged her to look a little closer at some state schools and she found a program of study at Florida State University with an annual cost of $22,575 or about half the cost of attending AUR (even less with her Bright Futures scholarship). Not only is the cost savings significant, but the program she selected is an accelerated BS/MS program – two degrees at once! Lest you think she’s missing out on the opportunity to study abroad, I should add that she recently returned home from spending her high school senior year as an exchange student in Germany.

Re-thinking college altogether

Parents and students may also consider foregoing or postponing a college education, opting to work instead. Some very lucrative career fields do not require a college degree and can pay very well. In a 2017 report, Kiplinger rates their 10 best jobs that do not require a college degree. Many of them do, however, require some specialized training or certification. These jobs include plumber, sales representative, industrial machinery mechanic, aircraft assembler, surgical technologist, and more.

Checking at work

Other employers offer tuition assistance for students who desire to work full-time and attend college part-time. This was the case with our oldest daughter, who quite to my surprise, elected to enlist in the Army right after she graduated from high school. She’s embracing military life these days, and she can begin studying while she’s on active duty (with no small amount of cajoling, er, encouragement from her dad), or she can use her GI Bill benefits to help pay for college if she decides to leave the military and pursue another career.

College vs. retirement

Finally, it is also important for parents to remember there are many ways to pay for a college education, but relatively few ways to finance retirement. Money spent on an expensive college education is money that Mom and Dad did not invest for their own futures in retirement. If they misjudged their priorities and end up with too little retirement savings, their only fallback might be moving in with their well-educated children. This is a choice that is not likely to be popular with either side.

A better idea is to shop around for more affordable schools or consider other education opportunities after first making sure Mom and Dad are on track with their retirement savings.

 

A version of this article was originally published on Forbes

3 Fast Fixes To Get Your Finances In Shape

July 11, 2018

Feeling less than happy with your finances these days? If you are like me, it’s not enough to know that you feel bad about your financial choices. I also want to know why I made those dumb money decisions in the first place.

Getting out of your own head

Some psychologists suggest that our critical inner voice may be one of the culprits. It’s that internal self-chatter that sometimes tells you it’s okay to spend because you deserve that next shiny object and in the next instant berates you for spending like an idiot. Other researchers point to our internal money scripts; the programming in our heads attributed to past experiences with money.

Whatever the reason, it couldn’t hurt to examine our own stinkin’ thinkin’ now and then and give ourselves a positive pep talk instead.

Fixing your finances (and your head)

With almost 3 out of every 4 Americans walking around feeling anxious about money every month, is that any way to enjoy your life? Let’s put an end to this ugly behavior once and for all. We live in the land of fast food, fast cars, and instant gratification after all. Let’s fix our finances, and let’s do it now! Here’s how to make a fast start:

  1. Put your savings on autopilot. You do use online banking, right? If not, stop reading, contact your bank or credit union, and enroll in online banking. While you’re at it, go ahead and download the app for your bank as well. The service is free, and if it isn’t, go shopping for a new banking institution. You also participate in your employer’s retirement savings plan (401(k), 403(b), etc.) at work, right? Here’s how to become a regular saver:
    • Set up an automatic transfer in your online banking app to happen every payday. Use this feature to automatically transfer a set amount of cash ($20, $50, $100, whatever you can swing) from your checking account to a savings account. Specifically, transfer this cash to a savings account you will use for emergencies. You are now building and maintaining an emergency fund. Set up separate savings accounts for vacations, new cars, etc. Making it automatic is key — don’t wait to see if the money is available at the end of the pay period.
    • If you are not already contributing to your retirement plan at work, enroll in that plan ASAP. Contribute at least as much as your employer will match, and more if you are not setting aside 10% – 12% (or more) each paycheck. If your retirement plan has a contribution rate escalator feature, turn that on, too. 
  1. Stop trying to budget. Budgets are for suckers (Not really, but work with me here; I’m trying to stick with a theme). Few people stick with them anyway (including more than a few experienced financial planners). Instead, consider the “no-tracking budget” approach that my colleague Kelley Long wrote about on our blog page not too long ago.
    • Keep your spending plan simple. You’re already saving on autopilot (see #1 above), and you probably have a good idea about how much your regular fixed expenses are each month for mortgage/rent, utilities, car payment, debt payments, etc.
    • Use automatic bill pay through your online banking service to put those on autopilot, too. That just leaves the variable expenses, such as dining out, entertainment, frivolous spending, and the like. For these spending categories, give yourself a good old fashioned cash allowance. When the cash is gone, the fun stops until the next payday.
  1. Pay off debt as fast as possible. Use the debt blaster. Some say pay off the smaller balances first. I say no; we’re in a hurry, remember? The first order of business is to stop the bleeding, and it’s those high interest rate cards and loans that are bleeding your bank account dry the fastest. Pay those off first. Better still, if you can roll over some of your balances to zero interest rate cards first, do that (stop the bleeding). Keep all payments current by paying minimums via online bill pay (see #1 above). Commit the largest amount you can to the highest rate loan on your books, and blast away at it until it evaporates. As your shampoo bottle says, lather, rinse, repeat all the way down the list until you are debt free.

If we are being brutally honest with ourselves, there are no quick fixes to our financial woes. Discipline, dedication, and hard work are what it takes, as with any worthwhile goal. There are, however, plenty of fixes we can quickly begin doing. Which one will you commit to first?

What To Do When You Can’t Pay Your Bills

June 25, 2018

Many years ago, when we were just starting our family and wrestling with a host of competing financial obligations – a mortgage, car payments, large credit card balances, insurance, switching from two incomes down to one after our first baby arrived – my mind began to flirt with thoughts of the blissful financial freedom that declaring bankruptcy might bring. How refreshing it would be to make those pesky credit card bills (and the annoying bill collectors) all just go away.

Looking beyond bankruptcy

In retrospect, I’m glad I didn’t pull the trigger on that particular choice. Among other things, the Certified Financial Planner™ Board of Standards doesn’t look kindly on that sort of thing for my profession. There would also have been the consequences of living a cash-only lifestyle for several years, paying more for insurance, possibly missing out on some job opportunities, and personal guilt over failing to successfully manage my family’s finances.

Personal bankruptcy was also a bit easier to claim back then (too easy some might say). Although I probably could have taken that route, I’m glad I elected instead to find other, better solutions to our money woes at the time. In my case, a combination of some moonlighting and working with a nonprofit consumer credit counselor to negotiate some friendlier terms with my creditors did the trick. That, and putting my credit cards on ice for a while.

Here are some other ways to get those bills paid without having to go to court.

401(k) mayday – proceed with caution

When there is more month than money at the end of the month as the saying goes, we have a cash flow problem. In this stressful moment, it can be tempting to send up a mental flare and reach out for a financial lifeline. Asking for help from friends or family is often just too uncomfortable for most of us.

However, our retirement plans at work (401(k), 403(b), etc.) can offer an enticing band-aid to patch up the immediate problem by taking out a retirement plan loan. As a one-time, temporary solution, this can be an okay solution, but much caution is advised. My colleague Cynthia Meyer writes extensively about this temptation – including how to do it and why you probably shouldn’t – in this article:  Should You Pay Off Credit Cards with a 401(k) Loan?

If at all possible, it’s best to let our retirement money do its job as retirement money and not take on the confused role of a personal financial bailout. If bankruptcy truly is the only alternative, perhaps then it is time to tap into your 401(k) piggy bank for a short term loan, although ONLY if that will keep you from going into bankruptcy — retirement plan loans are not forgiven in bankruptcy!

When you just don’t have the money to pay

Prioritize the important stuff

If you don’t have retirement assets to borrow or helpful family and friends to lean on, then it’s time to make some very hard choices. Take a look at your budget (you have one, right?) and identify the bills that must be paid – those that affect your health, welfare, and safety: rent/mortgage, transportation (so you can get to work and earn money), food, and utilities.

Letting some things slide if you have to

Everything else can slide for now, but not forever. Keep the roof over your head, along with the utilities and your transportation, and look into postponing or canceling things like cable, cell phones, memberships, even debt payments, etc. Then you focus on how to improve your cash flow situation.

When your cash flow is so tight that it is just impossible to pay all the bills, there are several resources to draw upon that can help you when things seem truly desperate:

  • Talk to your creditors; you might be surprised at how much is negotiable, particularly if your debt consists of medical bills
  • Your employer’s employee assistance program (EAP)
  • United Way and other charitable organizations (churches, Salvation Army, etc.)
  • Non-profit consumer credit counseling services (National Foundation for Credit Counseling, etc.)
  • Look into these other places to get cash in a pinch (and where not to!)
  • Your employer’s financial wellness program (especially if that program includes education and guidance from a team of unbiased Certified Financial Planner™ professionals)

Take time to breathe

Even though it might feel as if bills and late notices are raining down upon you nonstop, there is often another way to approach them so you can find a workable solution. As I was (eventually) happy to discover, the easy way out may not always be the best way. I’m glad I considered the alternatives, even if it did take a bit more work and endurance.

Why We Avoid Paying Our Bills (And How To Fix It)

June 19, 2018

There it is. The dreaded stack of unpaid bills. The “I’ll get to that later” pile. The pile that occupies a prominent spot on my desk so it can grab my attention, yet it still sits there unpaid day after day pile.

You’re not alone

If you also have a pile like this, you’re in good company. I’m an experienced Certified Financial Planner™ professional, and I have one, too.

That doesn’t get either one of us off the hook, however. The bills still need to be paid; we both know that. Otherwise, ugly things begin to happen to our credit scores and the phone begins to ring with urgent calls from strangers demanding money. We both know that, too.

Miscellaneous bills are my kryptonite

In my own defense, these are “miscellaneous” bills. Oddities that occur sometimes, like the occasional medical co-pay from that dermatologist visit a couple of months ago. Or the bill for that awesome discount I got by subscribing to Florida Sportsman and checking the “bill me later” box. Or my annual Certified Financial Planner™ credentials renewal fee.

The critical bills however, those that take care of life’s necessities — food, shelter, clothing, transportation, insurance, and debt payments – those are set up on electronic bill pay with my credit union so they are paid like clockwork every payday and never missed. I find that putting as much of my financial life on autopilot as possible avoids quite a few financial stressors.

Why do we put off paying bills?

As an informal yet long time student of human behavior, I often ask myself why we sometimes let our unpaid bills stack up? Why don’t we just pick up the check book (or fire up the bill pay app on our smart phones) and pay the silly things? There are a few obvious reasons:

  1. Something more urgent (or enjoyable) demands our attention or our money or both.
  2. It’s an out-of-the-ordinary expense, and we will have to break from our usual routine to pay it.
  3. We don’t have the cash to cover it just yet (this is a biggie; I’ll cover it in a future blog post).

There are also some not-so-obvious reasons too

Some psychologists suggest that humans may be predisposed to naturally avoid unpleasant experiences. For example, our hunter/gatherer ancestors were served quite well by their instinctive avoidance of unpleasant experiences, such as poisonous reptiles, animals with large claws and teeth, and fellow humans sporting angry facial expressions and spears.

Unfortunately, our brain development hasn’t yet caught up to the modern world, and it still tells us to avoid some unpleasantries that we really should stare in the face, grab by the ears, and deal with right away. Like that pile of unpaid bills. In the deepest recesses of our brains, however, we react to that bill the same way our ancestors reacted to rattlesnakes – Put that down! Stay away!

Is it just your money beliefs rearing up again?

Like everything else in our lives, our budgets, bills, and retirement balances are driven by the choices and actions we choose or fail to choose. Dr. Bradley Klontz and several of his colleagues have conducted extensive research into the various beliefs people hold about money and how it affects their behavior. In Are Your Money Beliefs Holding You Back?, my colleague Dr. Scott Spann summarizes many of Dr. Klontz’s findings and discusses how we can go about modifying our long held money beliefs and train them to work for us rather than against us.

Or is it a budgeting issue?

The central issue is often a budget that is out of whack. You do have a budget, right?  No? Again, you have plenty of company. We talk to people almost every day about budgets. One of my other colleagues, Tania Brown, shares some great budgeting tips in  Why Your Budget is Failing and How to Fix It.

Baby steps to get the bills paid

Even though it might feel as if your financial world is not as good as it could be, things are rarely as unpleasant as our minds lead us to believe. A sense of perspective and some baby steps along the way can help us adjust our perspective and get back on track.

Psychologists remind us that a good way to overcome this type of avoidance behavior is to break it down into smaller pieces:

  • Day 1) open the envelope.
  • Day 2) Take out the bill and look at it.
  • Day 3) Pay the bill, then congratulate yourself and celebrate your success.

As comedic actor Bill Murray reminds us in What About Bob with baby steps, we can do anything. It sounds a little silly. It looks way too simple. And it really works.

Take it one at a time

There’s no rush to change all of our money habits all at once. Pick one and work on that one for a while. Give yourself permission to take some baby steps.

Now, if you’ll excuse me for a bit, I have some unpaid bills I need to open.

 

Ways To Delay Social Security While Maintaining Your Lifestyle

June 14, 2018

Financial planners generally agree that delaying your Social Security retirement benefits can be an excellent way to maximize your available retirement income and potentially stretch your savings over your lifetime. As you are probably aware, each year past full retirement age that you wait to file your claim, your Social Security retirement benefit increases by as much as 8%. Where else are you going to find a guaranteed 8% return on an investment these days?

Where else are you going to find a guaranteed 8% return on an investment these days?

On the other hand, if you are thinking about waiting until after you reach full retirement age to claim your Social Security retirement benefit, you might also be wondering where you are going to get the income that Social Security will not be paying you during those years when you delay this benefit. Fortunately, making a few little changes to your retirement spending plan in the near term could result in some big benefits in the long run.

How to plug the gap

Continue working a little longer

This is probably the most obvious alternative for generating income in place of a delayed Social Security retirement benefit and what most people choose to do. Working full-time or part-time provides immediate cash flow, but there is also another benefit that may not be quite so obvious.

Each year that you continue to work past your full retirement age, you also continue to accrue Social Security credits. These additional earnings and credits might begin to replace those from some of your earliest working years when you worked for significantly lower wages, fewer hours, or both. As a result, the formula used by the Social Security Administration to calculate your retirement benefit could generate an even larger benefit check than if you chose not to work a few more years.

Spend a little more of your retirement savings in the early years

I’m always surprised by the number of people who just assume they have to start collecting Social Security just because they are done working. Many of us have been coached during our working years not to touch our retirement assets and to make them last as long as possible once we do retire. Consequently, spending a little extra on the front end of retirement might seem like the wrong thing to do.

However, according to research by William Reichenstein and William Meyer, if your retirement portfolio is somewhere between $200,000 and $600,000, this strategy might be a good way to minimize taxes and stretch your retirement savings. Keep in mind, the additional spending only happens until you turn on your delayed – and larger – Social Security benefit. At that point, you would then begin spending substantially less of your retirement savings.

What it looks like

Let’s say your monthly Social Security check at a full retirement age of 67 would be $1,800. If you delay filing for three years until the maximum claiming age of 70, your check would increase to $2,232 (not counting any cost of living adjustments or additional credits for working during those years) or a flat 8% for each of three years, giving you 24% more Social Security income.

Since you would not be receiving the $1,800 in monthly Social Security between the ages of 67 and 70, you would have to withdraw an additional $21,600 from your retirement savings each year ($1,800 x 12). However, at age 70, not only would you be able to stop taking out the annual $21,600 from your savings, you would also begin receiving an additional $5,184 each year from Social Security, thanks to the delayed retirement credits paid to you by Social Security in return for delaying your benefit until the maximum claiming age of 70.

Convert a little of your investment portfolio to an income annuity

Everything you’ve heard about annuities is generally true: they can be expensive, complicated, and very difficult (as in even more expensive) to unravel if you change your mind. However, not all annuities are the same. An income annuity (also known as an immediate annuity) is about as plain vanilla and inexpensive as these products can get.

Assuming you have a pretty good idea of what your retirement budget may look like, converting a portion of your retirement portfolio to a lifetime stream of income by purchasing an immediate annuity at or a few years before you retire can help take some of the unpredictability out of your future retirement income.

There are many ways to slice and dice this strategy, and the free immediate annuity calculator at ImmediateAnnuities.com can help you see how much income can be generated from various investment amounts. Another great feature about this site – no sales pressure. You do not have to enter any personal contact information.

Think a little longer before you choose a reverse mortgage

If you are at least age 62 and have a considerable amount of equity in your home, you might be considering a reverse mortgage as another way to bridge the income gap between the date you retire and the date you elect to claim your delayed Social Security benefit. However, caution is advised with this particular strategy.

The Consumer Financial Protection Bureau (CFPB) recently issued a report advising older consumers that the relative costs and associated risks of taking out a reverse mortgage loan may not be worth the additional increase in delayed Social Security retirement benefits. The report points out that consumers should be fully aware of how this strategy may significantly reduce available home equity and limit retirees’ ability to handle future financial needs. The CFPB also makes available a helpful “Reverse Mortgage Decision Guide,” as well as an informative video for those who wish to know more about reverse mortgages.

A few more ideas

Finally, a few more ideas to help you bridge that retirement income gap include these:

  • Encourage your spouse to work a little longer to prolong income and benefits.
  • Live on less for a few years (or forever – tiny houses are popular!).
  • Take pension benefits (if you have a pension).
  • Convert some of your assets to cash (sell some stuff).

Whichever strategies or approaches you choose, a well-worn and familiar expression reminds us, “A little goes a long way.” With this in mind, a little change here and there in the way we manage our retirement assets just might go a long way toward making the most of our savings and enjoying retirement just a little bit more. Which one will you choose?

 

This post was originally published on Forbes

Do We Really Have A Retirement Crisis In America?

June 05, 2018

Since my early days in the financial services industry, around 1997 or so, the industry mantra has always been, “Save more money for retirement; you never know how long it may last.” I’m not sure if we were talking more about time or money, but most people assume the money won’t last as long as retirement might, which is a scary thought.

The idea that we aren’t saving enough conjures up a pervasive image of an elderly grandma eating cat food because she is now unable to afford groceries in retirement. This thought always bothered me some, though not so much from the imagery as the skewed economic priorities. Have you seen the price of canned cat food lately? From what I’ve seen, it’s actually less expensive to buy whole chicken than some of the premium brands out there.

At least we can now put to rest that image of grandma eating cat food because she went broke. Unless grandma is also housing and feeding 20 or 30 felines, in which case her retirement savings are taking a severe beating.

Are we actually saving enough though?

This story is more about grandma than her cats, however, so let’s get back to her. How much has the average grandma (or grandpa) been saving towards retirement? According to a recent article, many workers contribute sporadically to their 401(k)s and similar retirement plans at work, only to see their savings eroded by subpar returns and high administrative expenses.

Other sources suggest that workers in their 40’s have saved only around $14,000 or so in their 401(k) plans, and the middle 40% of wage earners have socked away only $60,000 or so for retirement. Our own Financial Finesse 2015 research report on Retirement Preparedness shows that just 19% of workers surveyed believe they are on track with their retirement savings.

When the wolf says the sky is falling

Most of us are probably familiar with the children’s stories of Chicken Little and the Boy Who Cried Wolf. I can’t help but think about these tales when I see all the doom and gloom reporting about retirement savings in the media and from the lips of some of my financial industry colleagues.

Of course, creating a crisis mentality can be a good way to sell investments and annuities. Who wants to end up in poverty when there was something we could do about it, if we only acted now, you know, before it’s too late; before rates go up, or down, or Congress does this or that, or blah, blah, blah.

Think about who you know

Despite hearing the cries that we aren’t saving enough and will end up retiring in poverty, how many people do you know that ended up in that situation? As a practicing middle-market financial planner for the past 20+ years, I’ve seen this happen to exactly – zero people. I’m sure there are exceptions out there. There are certainly people who ended up working longer than they originally intended or scaled back their retirement expectations for various reasons. But by and large, Americans seem to find a way to make do, even when their retirement reality doesn’t turn out quite as they imagined it might.

It’s not just rich people I’m talking about

And no, I haven’t been working exclusively with high net worth clients. I’ve also started taking a very close look at exactly who is sounding the alarm about a so-called retirement savings crisis. Often the message comes from someone connected with the financial industry and with a vested interest in the sale of investment and insurance products. Politicians also get in on the message by proclaiming how the private sector has failed and how Social Security and similar programs must be expanded to save people (i.e., voters) from certain doom.

The real cost of retirement

Not the kind to take many things at face value, I began a search for some unbiased (or less-than-biased) information that might suggest exactly how Americans do spend their retirement savings. Perhaps the most telling story comes from a longitudinal study performed by the Employee Benefits Research Institute (EBRI). Following a group of households for several years, this study showed that median household spending actually dropped by as much as 12.5% in the first four years of retirement, and by the sixth year a majority of households were spending less than 80% of what they spent during their working years. (Note that these retirees were living on less than 80% of preretirement spending, not 80% of preretirement earnings.)

Other studies have confirmed this finding, like this one and this one. Most interesting to me were discoveries regarding just how frugal retirees tend to be when it comes to spending down their retirement savings:

  • People who had accumulated less than $200,000 in non-housing assets at retirement had spent only about 25% of their savings, on average, during the first 18 years of retirement.
  • Those with assets between $200,000 and $500,000 generally had spent around 27.2% by year 18 of retirement.
  • Wealthier retirees with nest eggs in excess of $500,000 had spent less than 12% of their savings by the 20th year in retirement.
  • Even though some retirees had spent down their savings significantly in the first 18 years of retirement, almost one-third of retirees in the study actually grew their assets during that period. Those with access to pensions were much more likely to fall into this group.

The most important question is: are you saving enough?

The most important question is not so much are Americans saving enough but are you saving enough to fund your retirement? Even though there is substantial research out there suggesting that our retirement years are likely to be more affordable than we might fear, we don’t want to become lulled by false hope and fall behind in our savings efforts. The fact remains that the majority of people we work with don’t think they are on track, and the only way to get there is to save.

At the very least, contributing to one’s retirement plan at work at whatever rate the employer will fully match is a powerful move. Why leave free money on the table, right?

Beyond that, saving at a higher contribution rate may be needed in order to replace 70% – 80% or so of your preretirement income. You can use our retirement estimator calculator or a similar online calculator to measure your progress. If you are able to replace 80% of your income, then the odds are very good that you will have little trouble replacing at least 80% of your pre-retirement spending, which appears to be the true cost of your future retirement.

Should You Get Divorced Before The End Of This Year?

May 24, 2018

The new tax law changes have implications for alimony payments that could help or hurt your finances if you’re in a situation to pay or collect alimony (usually called “maintenance” in divorce agreements).

Should you get divorced right now, or should you wait? Chances are, if you are wrestling with this question, taxes may not be one of the primary reasons you are pondering your options. Divorce is complicated and nerve-wracking enough without having to also think about taxes, right? Considering some recent changes to the tax code, maybe you should consider the tax angle as well.

Ordinarily, I’d be reluctant to recommend anyone rush a serious and somber process like ending a marriage, but in this case, a little thoughtful expediency might save you some serious cash in the long run. Happily married and not even contemplating divorce? The new tax law might affect you, too, if you already have a prenuptial agreement in place.

What changed?

As almost anyone will tell you, divorces and attorneys are not inexpensive; every dollar matters. In addition to attorney fees to get the deed done (undone?), ongoing costs often include years of alimony and child support payments. It is the treatment of alimony payments that has undergone some significant change.

If your divorce is finalized on or before December 31, 2018, nothing changes. Under the old tax rules, alimony payments are a tax deduction for the payor, and the alimony recipient must pay taxes on alimony dollars received (albeit at a usually lower rate than ordinary income). Child support payments are neither deductible nor taxable; they are considered a division of marital assets and that treatment will remain the same.

With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the tax treatment of alimony payments for divorces finalized in 2019 or later switches to the same treatment as that for child support payments. Under the new law, alimony payments will no longer be deductible for the payor, nor will they be taxed as income to the recipient.

Why this tax change matters

Whether you love or hate the new tax law likely depends on which side of the alimony transaction you find yourself and how quickly or slowly you can finalize your divorce proceedings.

If you’re the recipient

If you are the future recipient of alimony payments, this tax law change could be seen as good news. Depending upon how things are negotiated in your divorce, you could count on receiving a stream of tax-free alimony income from your ex as long as your divorce is finalized in 2019 or later. There is no incentive for you to hurry divorce proceedings along prior to the end of this year (2018). Why pay income taxes on that alimony income if you don’t have to?

If you’re the payor

As the future payor of alimony payments after your divorce is finalized, time is now your potential enemy. If you can negotiate your way to a finalized divorce no later than December 31, 2018, you get to keep the current tax deduction that is in place regarding your future alimony payments. Your ex, in this case, would also be responsible for paying income tax on those future payments. While you may be in a hurry to move things along, don’t be surprised if your ex (or your ex’s attorney) pushes back to delay things in order to make those alimony payments nontaxable.

On the other hand, you (or your attorney) may be able to negotiate lower alimony payments in light of the fact that you will not be able to deduct these payments under the new tax law.

You both might be losing out

Many divorce attorneys see this tax law change as a net loss to both sides of the divorce. Under the old law, a high-income spouse may find it attractive to offer a higher amount of tax deductible alimony that results in a net lower after-tax payment for them. Subsequently, the alimony recipient is often in a lower income tax bracket and also pockets more after-tax dollars, even after paying income tax on the alimony received.

Under the new law, there is more incentive now for payors to negotiate a lower amount of nondeductible alimony, which may also lead to less net alimony for the recipient, even if the alimony can now be received tax free. Your best bet: have a frank and detailed discussion with your divorce attorney and your tax professional to find out which divorce timing strategy may be the best fit for you.

The Worst Money Mistakes I’ve Made

April 26, 2018

This question was posed to me recently by a fellow financial planner. His question certainly caused me to pause and think. Over the years, I’m fairly certain that I’ve made a number of unwise money decisions, but two in particular stand out as blunders I’m not particularly proud of. Borrowing from a popular late night TV sketch, let’s take a look at some of the silliest money mistakes we’ve all done or seen and see what useful life lessons we can take from those.

Buying a timeshare

While honeymooning in Mexico, my wife and I fell for the sales pitch and bought into a long-term resort condo timeshare. For those who like to travel frequently and also have the budget to support that lifestyle, vacation time shares might be a reasonable move. At that point in our lives, however – young, early career, modest incomes – we were not the ideal candidates. We also did not pay attention to the ongoing additional fees often tied to timeshare ownership.

Furthermore, we had no idea how illiquid these “investments” are. As anyone who has ever tried to sell a timeshare to someone else can tell you, the supply greatly outstrips demand. In other words, selling your timeshare is close to impossible. If you do find a buyer, expect to sell at a very deep discount to what you likely paid for the property.

What I learned from this mistake

After many years and thousands of wasted dollars, we were eventually able to dump ours and walk away. What important financial life lessons did we learn? Ultimately, we learned never to make a major financial commitment driven primarily by emotion. We were young, on our honeymoon in a beautiful location, and all too agreeable to an opportunity to repeat that experience. Marketers, of course, are very aware of this, and we fell for it all.

Now we know it is much better to first say no and then take plenty of time (days, weeks, or even months) to think things over before committing thousands of dollars to purchase something we may or may not use or continue to enjoy as much as we originally thought. As a result, we’ve avoided the purchase of numerous boats, campers, and vacation homes over the years. These days, when we want to vacation in a fun location, plenty of economical rental choices are available through sites like Airbnb.com or VRBO.com without the long-term commitment or expensive maintenance fees.

Student loans (sometimes)

Student loans can be a good investment. For a relatively modest interest rate, in today’s environment at least, you can leverage other people’s money into an education that boosts your future income significantly, making the comparatively small amount of interest you pay in the short run well worth it in the long run.  However, like any financial tool, student loan debt can also be abused or misused.

For example, at one point in my career, I decided earning my MBA might be a good move, and I applied for student loans to help finance this venture. Along the way, however, my career ambitions took a different tack, and I elected to focus instead on earning my CERTIFIED FINANCIAL PLANNER™ designation and subsequently, a master’s degree in personal financial planning (a decision I have never regretted). Although I had abandoned my MBA pursuits at the time, the student loan debt used to finance that pursuit remained and still had to be paid. Fortunately, I had not borrowed a large sum for this and we paid it off fairly quickly.

What I learned from this mistake

The financial lesson here is to carefully consider the commitment of time, effort, money, and ongoing personal motivation needed to make a particular career choice work. If a substantial amount of student loan debt will be necessary to obtain a degree, we need to be prepared to remain committed to that career choice, at least until we repay the student loan debt. Otherwise, we will very likely be stuck with paying for a decision error over many, many years with zero return on our investment. Another consideration is whether or not the degree we are pursuing really has the future income potential to justify taking on large amounts of debt to finance it.

To err is human

As financial planners, we have the benefit of working with many people from a variety of backgrounds and circumstances. This not only gives us a front row seat to many of the money errors and financial regrets our clients have endured, but it also enables us to share the related financial lessons with others. In no particular order, here are a few of the more common silly money mistakes that can provide helpful lessons for us all:

  • Carrying long-term credit card debt – The insidious evil of carrying credit debt month after month is the reverse compounding effect. Just as positive compounding helps us become wealthy by earning interest on interest, the reverse is true of debt. The negative compounding begins to make our credit purchases exponentially more expensive over time. Transferring balances to a 0% balance transfer card or otherwise refinancing to a lower interest rate is a good start to reducing our debt risk. The quickest way to get out of debt, however, is to employ the DebtBlaster approach we recommend at Financial Finesse and pay off the highest interest debts first, gradually rolling up those monthly payments until the last credit card in the list is receiving a monthly payment equal to the combined payments you were making on all of your cards.
  • Lending money to family – Money decisions driven by emotion rarely turn out well, and what gets more emotional than a plea for money from a family member? If you do lend money to family, most planners recommend formalizing the loan with a written agreement that includes at least a modest amount of interest. Practically, however, treat it the same way you would treat giving money as a gift. Make sure your family loan won’t negatively impact your own cash flow if your family member borrower cannot or does not pay you back. These arrangements work best if you don’t expect to receive the money back in the first place.
  • Borrowing from your retirement plan – On the surface, borrowing from your traditional 401(k) or 403(b) savings plan at work might seem harmless, but it has some obvious and not-so-obvious risks. On the positive side, you are borrowing your own money and paying yourself back with interest. Furthermore, doing this will not affect your credit score one way or the other. However, you will be paying your retirement plan loan interest with after-tax dollars. The not-so-obvious downside to this strategy is that these same after-tax dollars you used to pay the interest will be taxed again when you eventually spend this money in retirement.

Financial planners are just as human as anyone else, and in many instances, we were not always professional financial planners our entire careers. We’ve made many of the same money mistakes our clients sometimes experience. Consequently, we understand and have compassion for the frustration and disappointment that comes from looking back on a financial mistake and wondering how on earth we could have been so foolish. Although our individual “silly money mistakes” may have been expensive, they do not need to be permanent, and we can always learn from them.

The Important Estate Planning Step You Can Take Right Now For Free

April 16, 2018

Along with contemplating wills and death, putting together a set of medical directives and a living will is right up there amongst our least favorite things to do. Realistically, it is also a very important thing to do.

As in do it right now, after you finish reading my blog post. You can even take care of it before you finish reading. I’ll make it easy for you. You can do it right now if you want. You don’t even have to get up.

I’ll wait. Still avoiding it, eh?

What’s the worst that could happen?

Okay, let’s see what could happen if you don’t quite get around to writing down your wishes regarding your medical care. What’s the worst that could happen? Well, I hate to be brutal, but the worst that could happen is that you could find yourself on life support someday as your spouse and family agonize over what to do for you. Let me tell you a story about that.

Meet Terri Schiavo

Terri’s tragic story unfolded in my home state of Florida. In short, Terri was a young woman whose heart stopped and deprived her brain of oxygen for a prolonged period. Although her body survived the ordeal, her major brain functions did not and she was kept alive with a feeding tube. Terri did not have a living will to tell her family about her wishes for life support, and subsequently her husband and her parents battled in the courts over whether or not to allow her to die. (See this article for more details)

Terri’s predicament and the headlines that followed dragged on for years. Fifteen years, actually. Fifteen years of mental anguish, legal battles, and expenses for her family. Although it is a sad story, her situation brought to light a very important issue for us all — we all, no matter how old, need to complete our own living will and medical directive.

Living will or medical directive – do you need both?

What’s the difference between a living will and a medical directive, you ask? Excellent question. Also known as advanced directives, medical directives are instructions that you specify verbally or in writing (best if you write them down) regarding what kind of health care you prefer if you are unable to communicate your wishes on your own.

Your living will is a type of advance directive used to describe your wishes regarding resuscitation efforts, quality of life, and to what extent you do or do not want life prolonging treatments applied if you become terminally ill. This is the document that could have helped Terri Schiavo’s family potentially avoid the 15 years of difficulty and expense they endured.

Not just about end-of-life care

Your advance directives do not have to be limited to only to end-of-life decisions. Legal and medical professionals recommend also drafting another type of directive known as a durable power of attorney for healthcare. Since trying to specify every potential situation in your living will would be impossible, you can use a healthcare power of attorney to authorize someone else to make decisions on your behalf regarding your medical care if you are incapacitated, but not necessarily terminally ill.

How to put these documents in place, preferably ASAP

Anytime you begin drafting legal documents, it is highly recommended that you work with an attorney. And working with an attorney will take time and money — one of the primary reasons we put off drafting these important legal documents. I get it. So let’s skip the attorney – for now – and take care of the basics. Earlier, I said we could create your living will right now. We can also do it absolutely free. So let’s do that. Here’s how:

MyDirectives.com

MyDirectives is a free service that makes it easy for you to quickly draft your own medical directives and share them with your family and your doctor. You can also include video instructions, in addition to checking the boxes next to prepared statements. Quick. Easy. Free. And yes, it also includes a mobile app now. I’ve used this service myself, because like you, I procrastinated for a long time about getting this done.

Five Wishes

Another free service (for one year) is provided by Aging with Dignity. Using their Five Wishes tool, you can quickly and easily draft an advanced directive document by checking a few boxes, circling some directions, or writing a few sentences. Is it legal and binding in your state? They help you address that question as well.

In many cases, all you need to do is answer a few questions, print it, sign it, and have it witnessed. Simple. Easy. Free. Some states may also require you to use a state approved form, so check your state requirements while you are visiting the site.

Still putting it off?

I’m right there with you. I don’t like to think or talk about this depressing stuff, either (and it’s my job to talk about it). I’m hoping you’ll do me and your family a huge favor and at least take care of your living will. Not only because it’s the right and responsible thing to do, but mainly so we both won’t have to keep talking about it. You might even save your family from being forced to talk about it for years like Terri’s family did.

Should You Save More For Retirement Or Pay Off Debt First?

March 29, 2018

This is a common question posed to financial planners and advisers: “Should I save more for retirement or pay off debt first?” Even well-known personal finance pundits disagree on this one. Mathematically, this is a fairly simple question to answer. Behaviorally, however — actually taking action and sticking with the plan – approaching this question can be much more difficult.

Let’s assume you sat down recently and reviewed your monthly budget. During that exercise, you were happy to discover that you have a couple hundred “extra” dollars available each month. You now face the happy dilemma of deciding what to do with those dollars. Your basic options are simple, of course. You could spend it, you could save it, or you could pay off some debt.

What the experts say

As I mentioned, even seasoned financial pros disagree as to the exact approach to take when deciding between paying off debt or contributing more to retirement savings. What we all agree on, however, is the importance of having and staying with a definite plan to pay off expensive consumer debt in a timely fashion.

For example, personal finance radio personality Dave Ramsey recommends not even bothering with retirement savings at all until you first pay off all consumer and student loan debt (but it’s okay to carry a low-interest rate mortgage). Once you become debt-free, he then suggests redirecting 15% or more of your income toward retirement savings. He’s a bit of a lone ranger in that opinion though.

Almost every other personal finance expert recommends more of a balanced approach, such as:

  1. Contributing to your employer’s retirement plan at least up to the percentage they will match.
  2. Regularly setting aside cash into an emergency fund every pay period.
  3. Paying off consumer and student loans, either in descending order according to interest rate or ascending order according to balance (i.e., pay off the small balances first).

Which is better?

We could spend hours standing around the water cooler debating the pros and cons of each approach (and financial planners often do). The important part is to pick a strategy – any strategy – and then stick with it. Briefly, though, let’s consider the upside and downside to these strategies, including some practical armchair psychology that might help you determine which method best fits your personal preferences.

The mathematical approach

If the purity and logic of a straight mathematical approach appeals to you, then the solution to the debt vs. savings dilemma is probably fairly clear. Do both. Here’s how:

Retirement savings

Contribute at least up to the maximum matched percentage in your employer’s retirement plan. This will capture an instant and guaranteed return on your investment, and you won’t feel as if you are missing out on a benefit by not participating. (If you prefer a side-by-side comparison, CalcXML provides an online calculator to help you compare the after-tax return on investing with the after-tax cost of debt.)

Debt pay-off

With respect to your debt payments, the strategy is also quite straightforward. Pay the minimum required monthly amount on all debts to keep them current, of course. All available additional dollars from your budget (after retirement plan and emergency fund contributions) goes to the highest interest rate debt until it is fully paid. We call this the DebtBlaster approach, and it is by far the quickest way to eliminate your debt.

However, it may not be the most satisfying from an emotional or psychological perspective. Consequently, there is the risk that you may not stick with it long enough to fully get yourself out of debt. If this could be a concern for you, read on.

The psychological approach to debt

According to research, the purely mathematical approach to paying off debt may not be the best approach for everyone. Paying off the smaller balances instead, regardless of the interest rates being charged, seems to provide greater motivation toward sticking with a debt repayment strategy. Mathematics aside, what you do or don’t do ultimately determines your success or failure. Intuitively, most of us understand that breaking up a large task into smaller bites makes it easier to accomplish.

The same is true when it comes to getting out of debt. Maybe Dave Ramsey is onto something with this approach. Consider going for the short term win and the relatively quick sense of satisfaction to fuel your motivation toward paying off all your consumer debt.

The psychological approach to retirement

The psychology behind successfully saving for retirement is a bit more complex. Unless you are far along in your career, retirement can seem far away and abstract. This adds more urgency to immediate needs and problems like getting out of debt, paying for the kids’ college, or buying a house – all goals with more immediate gratification tied to them.

Furthermore, people often struggle to fully understand how compound growth works, which leads us to underestimate how much our savings could potentially grow. Perhaps worse, our difficulty with compounding leads us to also underestimate the cost of waiting, making that option appear much too attractive and fostering procrastination.

Overcoming the barriers

An effective way to combat these psychological savings barriers is to make retirement more tangible by giving ourselves a monthly savings target. Generally speaking, if you are saving enough money from each paycheck to replace approximately 80% of your pre-retirement income once you retire, you are very likely on track with your retirement savings efforts. Use the retirement estimator calculator to see how your current savings measure up. If there is a substantial gap, the calculator can help you see how much additional you need to contribute to your retirement plan at work or to an individual retirement account or perhaps to both.

The best approach? What motivates you?

Now that you’ve examined different perspectives of the debt vs. investing issue, what do you do with this knowledge? It’s not what we know that ultimately matters, it is what we choose to do. Consider taking a best-of-the-best approach:

  1. Contribute to your employer’s retirement plan at least up to the maximum amount they will match. Free money is free money, and nothing beats a guaranteed return on your investment.
  2. Go for the small, quick win and pay off your smallest credit card and consumer loan balances first. That’s one less bill to pay each month and having one less bill just feels good.

With modest apologies to all of my math teachers, math just never felt quite that good. Use those good feelings of accomplishment to help motivate you to stay on track and hammer away at the next debt on your list until you kill that one too.

If you have two debts with similar balances, then focus on pouring additional dollars into the debt with the highest interest rate. Take advantage of both mathematics and psychology to help dig your way out of debt and land firmly on the path toward financial independence.

 

A version of this article was originally published on Forbes.

 

How To Adopt Financial Habits That Stick

March 16, 2018

If your goal is to become a better steward of your hard-earned money, what does it take to improve your odds of succeeding once you decide to make some positive financial changes? It helps to make your goals as specific as possible.

Since the acronym SMART was introduced in a Management Review article in 1981, many of us have become familiar with the notion of making our goals:

Specific
Measurable
Assignable
Realistic
Time-related

For example, common personal financial goals might include contributing a set percentage of pay to your retirement plan at work, paying off all credit card debt within 24 months, and building emergency savings equal to three months of take-home pay within 5 years.

Behavioral change is tricky business

Although SMART is a handy and easily remembered acronym for developing and articulating goals, it doesn’t do much to actually keep us motivated to achieve them. Changing the way we think about and spend money means finding ways to change our behaviors, and humans are largely creatures of habit. Accordingly, becoming a better money manager means modifying those habits and establishing some key financial priorities.

Translating intentions into action

For example, becoming better prepared for retirement could mean committing to regularly saving a specific percentage, say 10% or more, of every paycheck to your employer’s retirement savings plan and simultaneously learning to live on less than we earn. Becoming a better saver means committing to regular transfers from a checking account to an emergency fund savings account every payday. Getting out of credit card debt means committing to a cash-only lifestyle while also paying off the highest interest rate cards first.

Deciding what we need to do and being very specific about it is relatively easy. It is the commitment part that presents most of us with an ongoing and often difficult challenge.

Getting from tricky to sticky

Creating meaningful and lasting behavior changes is no small task, nor is the process for doing so consistently and successfully fully understood, even by experts. University of Pennsylvania research professors Angela Duckworth and Katherine Milkman, both PhDs with considerable achievements under their respective belts, recently launched an impressive and appropriately named project called “Making Behavior Change Stick.”

The goal of the project is to better understand the various nudges and incentives that help people consistently make better decisions with respect to health, education, and personal finance by utilizing a research team comprised of large corporate sponsors and professionals from the fields of psychology, economics, medicine, computer science, marketing, and sociology.  This particular research project is relatively new, ambitious, and ongoing. It will be interesting to follow the various insights that it uncovers over time.

What we’ve learned at Financial Finesse

In the meantime, my colleagues and I have a considerable amount of experience with facilitating behavioral change within the realm of personal finance via financial education and individual financial coaching tied to workplace financial wellness programs. Data from our 2016 Year in Review research summary shows that improving behavior is the key to improving employee financial wellness among a sizable cross-section of large employers with active financial wellness programs in place for their employees.

Gradually adopting positive financial behaviors leads to improved cash management, less debt, and better preparedness for retirement, particularly among repeat users of financial education and coaching resources. The availability of individualized financial coaching appears to be particularly helpful in facilitating sticky financial behavior changes that are both effective and enduring. Whether you participate in a formal financial wellness program or not, some of the best practices that can make your financial behavioral changes more sticky and less tricky include:

Automate. Put as many decisions on autopilot as possible. Using your bank’s electronic bill pay feature to schedule regular monthly credit card payments so they are always made on time is one example. Another is setting up automatic transfers every payday from your checking account to a savings account in order to build up an emergency fund.

You are probably already saving for retirement with automatic payroll deductions to your 401(k), 403(b) or similar employer retirement plan. Use similar techniques to automatically save for other goals or to help get out of debt faster. Instead of having to make many great decisions every month, make a few great decisions now that automatically repeat themselves every month from now on.

Be mindful. Practice mindfulness and recognize that many of our decisions are driven as much or more by our emotions as they are by logic. We are only human, and emotional biases are going to creep into our thoughts and decision making abilities.

Rather than trying to bottle up or ignore our emotional and often illogical sides, we can choose instead to acknowledge and explore them. The next time we fall short of a financial goal or slide back into bad spending habits, we can use those opportunities to carefully examine both why we made those choices and what we were feeling at the time, along with considering what we could do differently next time. Celebrate the small wins along the way. These are what add up over time to become much bigger improvements.

Find a money coach. Have you ever stopped to consider how many superstar level athletes, people who in every sense of the word are quite literally at the top of their game, continue to work with personal coaches and trainers? Although a coach can certainly help us learn new skills and techniques that make us better, their real and lasting value comes from helping us stay better at those important skills and techniques.

Financial coaches are available through a variety of channels. Check your financial wellness benefit or you may already work with a financial advisor or planner who can provide you with financial coaching from time to time. If not, the Certified Financial Planner Board of Standards, Inc has a free planner search tool on their website, www.letsmakeaplan.org.

These are just some of the techniques that we’ve found helpful in creating behavioral change that can produce results. The key is to find what works best for you. Which ones will you adopt to finally tackle those financial goals?

 

This post was originally published on Forbes.

How To Shop For Long Term Care Insurance

February 26, 2018

If, after running the numbers and statistics, you’ve determined that you do indeed need to purchase long term care insurance (LTC), the next step is obviously shopping. It’s a weird wacky world of insurance out there, so I’ll try to break it down a little bit.

Check existing policies

First, you may already own long term care coverage and not realize it. If you own life insurance, and particularly a policy you bought on your own that is not part of your group life insurance at work, your life insurance might include some LTC benefits. Some life insurance policies are sold with add-ons, known as “riders,” that offer various types of living benefits you can use if you don’t die.

LTC riders

A long-term care rider, for instance, may allow you to use a portion of the life insurance policy’s death benefit to pay for costs associated with a nursing home stay. It might be time to dig up those life insurance policies and give them a good review, or call your agent for an update. If you are also considering an update to your life insurance, adding a long term care rider might be less expensive than purchasing an individual LTC policy, and you would be taking care of two risks at once with a hybrid policy.

Check at work

Another good place to start looking for LTC coverage you might not know about is within your group benefits. Some employers make long term care insurance part of their employee benefits package, and this benefit may cover the worker as well as family members. Due to the relatively large number of people insured under a group plan, you may find the LTC insurance premiums as a group participant are significantly less expensive than if you went shopping for coverage on your own. Find out if your employee policy is also portable, so you can take it with you if you change employers or retire.

Check your memberships

Professional or service organizations to which you belong may be another opportunity to purchase LTC insurance coverage at competitive rates. As with employer provided benefits, being part of a large service or professional group may entitle you to better pricing.

Individual coverage

You can purchase an individual (or couple’s) policy from a licensed insurance agent, either locally or online. Be prepared to comparison shop and obtain policy quotes from several different providers. Better still, talk to an insurance broker who is not tied to only one company and let him or her get quotes from a variety of insurance companies and do the shopping on your behalf. Check with your state insurance commissioner to confirm the agent or company you are considering is both licensed to sell LTC insurance in your state and has a trouble-free track record.

As I mentioned earlier, the task of deciding how best to handle your future long term care needs is neither pleasant nor simple. It is, however, an important part of anyone’s financial plan. Hopefully you are now more confident in how to assess your needs, weigh your priorities, do some shrewdly competitive shopping, and find the type of strategy or coverage that is just right for you.

 

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Do You Really Need Long Term Care Insurance?

February 16, 2018

Long term care (LTC) insurance can be an important part of retirement planning and one that many of us postpone doing anything about because, well, it is depressing to think about. It is also a complicated insurance product. And there is the added expense, of course. Thinking about it might make you feel a little bit like Goldilocks: Too much or too little? Too early or too late? Too expensive or too cheap? Given so many convenient and seemingly built-in excuses to put off making this decision, no wonder few people are eager to tackle this part of one’s financial plan.

First of all, do you even need it?

Perhaps a good question to start with is: Do you actually need this insurance? If so, when is the best time to buy it? Purchase it too young and you spend years paying into something you very likely won’t use or sacrificing dollars that could have been spent elsewhere. Buy it too late, and it might be incredibly expensive or even unobtainable. Surely, there must be something resembling a Goldilocks type of solution to buying just the right amount of coverage at just the right time?

When to buy LTC

As with life insurance, LTC insurance premiums tend to be lower during our younger, healthier years. However, that means paying those premiums for many years during which we are statistically unlikely to need the type of care we are insuring. Most of the quoted statistics regarding nursing home care (whether provided by family members or in an actual nursing home) focus on age 65. For instance, 68% is the probability that individuals age 65 or older will begin to suffer from cognitive or physical impairment that would lead to using their long-term care insurance.

The best age to buy

Does this suggest we should all wait until our 65th birthdays to buy LTC insurance? Unfortunately, that could be an expensive mistake. Given the odds of needing it go up quite a bit after 65, so does the cost of the insurance. Instead, the sweet spot for buying long term care insurance may lie somewhere between ages 55 and 60 for many people.

Your gender and marital status matter too

According to a 2018 price analysis, typical insurance costs for singles and marrieds can vary considerably between ages 55 and 65. Among single males, the cost increases only slightly between 55 and 60. However, after age 55, the cost begins to jump considerably for women and married couples.

The other determining factor

In addition to your age and health status, another consideration for purchasing long-term care insurance is your relative level of wealth. Generally speaking, many financial professionals suggest that those with a net worth of less than $200,000 may be better off skipping the LTC insurance altogether. The same can be said for people with a net worth in excess of $2 million or so.

People on the lower end of that spectrum likely would be able to qualify for Medicaid fairly quickly if they enter a nursing home, and those who are wealthier could self-insure (aka just pay out of pocket should the need arise), rather than pay for coverage they may never need.

You still may not need it

What if your net worth lies somewhere in between $200,000 and $2 million or more? That doesn’t suggest you rush right out and buy a LTC insurance policy, either. According to a recent study conducted by the Center for Retirement Research (CRR) at Boston College, previous assumptions about how many people actually need LTC insurance may have been significantly overstated. These new insights are based on a fresh look at how long people actually spend in nursing home care and assumptions about how Medicare (not to be confused with Medicaid) plays a role in LTC health coverage.

Don’t count out Medicare

Although it is widely assumed that Medicare will not cover nursing home costs (a “fact” some insurance sales people seem to enjoy touting), this is not entirely true. Medicare can actually pay for up to 100 days of care in a skilled nursing facility or long term care hospital following a hospital stay of at least three days. Although Medicare does not pay for care related to chronic (permanent) conditions such as dementia, it can cover a limited amount of long term care services related to conditions from which you are expected to recover (e.g., following surgery).

Consider how long your stay might be

While it is true that 44% of men and 58% of women may ever use a nursing facility, the CRR also reports that the average duration for these stays tends to be relatively short. The average stay for men is around 11 months and just under 1.5 years for women. Given the relatively short average stay and the availability of Medicare to cover what could be a significant portion of that stay, the CRR further concluded that purchasing LTC insurance actually made economic sense for only about 25% of consumers (19% of men and 31% of women).

There is more to the LTC insurance decision than the numbers, of course. Your specific financial situation, family dynamics, personal priorities, family health history, etc. all blend together to help shape your individual decision. However, it’s a good idea to consider all of the factors when deciding whether or not and when to purchase coverage.

 

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Does The Billboard Top 10 Mean The Market Is Heading For A Crash?

November 24, 2017

In my 20 years or so as a financial planner, I’ve heard some pretty wacky theories about things and events that allegedly have an influence on the stock market. They all have interesting and catchy names too like the “Santa Claus Rally,” the “January Effect,” or the “Super Bowl Indicator.” According to market folklore, each of these seemingly unrelated conditions or outcomes is supposed to determine the future direction of the U.S. stock market.

For example, according to the Super Bowl Indicator, a win by the American Football Conference (AFC) team is supposed to bode negatively for the stock market in the coming year, whereas a win by the National Football Conference (NFC) team is supposed to foretell a rising stock market for the next twelve months or so.

Balderdash! Correlation does not indicate causation. Everyone knows that, right? Entertaining as those correlations might be, there isn’t much (okay nothing) in the way of practical scientific support to back them up.

Can Billboard predict the next market crash?

However, some new research suggests yet another seemingly unrelated indicator that may actually have a hint of scientific support behind it. According to recent research conducted by Dr. Philip Maymin, then assistant professor of finance and risk engineering at NYU’s Polytechnic Institute, the public’s choice regarding popular music may indeed be closely tied to forecasted movement within the U.S. stock market.

Based upon Dr. Maymin’s findings, people tend to prefer softer, calmer musical beats when they anticipate a more volatile stock market in the coming months and faster, livelier music in anticipation of calmer markets. He based these findings on observations of variance in standard deviation of returns for the S&P 500 index in comparison to average annual beat variance in songs tracked by the Billboard Top 100.

Market timing – investing with two left feet

If making your investment decisions based upon who wins the Super Bowl or whether the song in your head sounds more like “Despacito” or a Mariah Carey tune comes across as a rather silly way to manage your money, you are probably right. Imagine trying to dance at a club or wedding where the DJ changes songs every few seconds. Investment choices based on changing market conditions can feel the same way.

Nevertheless, investors of all stripes frequently do engage in attempts to time the market based upon their thoughts, feelings, fears, hopes, dreams, etc. regarding a whole host of events, including election outcomes, the weather, how long the market has been up or down, chitchat among coworkers, and more.

Humans, it seems, are just not wired to handle uncertainty very well, and investment markets are the definition of uncertainty as they can be down one day and up the next. Much has been and continues to be written regarding human psychology and the uncertainty of investment markets.

Even market trend timing guru Paul Merriman applies mechanical market trend timing strategies to only half of his own investment portfolio, and he is adamant that timing in general is not suitable for the majority of individual investors. As Mr. Merriman and I tend to agree based upon our collective experience, most investors lack the psychological fortitude, discipline, and stamina to stick to a timing strategy during periods of short-term financial losses that will inevitably happen.

Why? The simple fact is we hate to lose money, and when we see values drop, we feel obligated to do something, even when the best course of action is often to do nothing. As a result, market timing doesn’t work and often serves to do nothing more than make a bad decision even worse.

Stick with the same old song

As with dieting, exercising, and balancing your checkbook, there are no reliable shortcuts to success with disciplined long-term investing. Diversify your investments appropriately across stocks, bonds, and cash. Buy and hold even when it feels wrong and continue to invest regardless of whether the market is up or down that day. Be mindful of fees and commissions.

It’s not sexy and it doesn’t make for riveting conversation in the lunch room or around the water cooler, but a consistent, disciplined approach to your investments will ultimately leave you humming a much happier tune.

This post was originally published on Forbes.