THE DATA-INFORMED INVESTOR

Overview

The performance of an individual stock may be driven by company fundamentals, a corporate announcement or developments within its industry. However, broader movements within the stock market more often are driven by changes in the economy, investor sentiment and widespread trends across various market sectors. Dozens of key economic indicators signal changes in the direction of the economy. These regular reports are monitored to help investors, market analysts and wealth managers make day-to-day decisions about when, where and how to invest money.

Leading economic indicators, which include data for employment, company profits, and supply and demand, can forecast the rise and fall of the business cycle. For example, corporate profits tend to increase during an economic expansion, slow down once the economy peaks and decrease as the economy shrinks. By reviewing the economic indicators that reveal when these events begin to take place, investors can decide whether and when to sell as the market ticks upward, hold steady or buy when prices decline.

The following is an overview of the regular data releases generally considered the most reflective of the current economy with indications for the future.

Gross Domestic Product (GDP)

Used as one of the primary indicators to measure the health of a country’s economy, gross domestic product (GDP) reflects the sum total monetary value of all finished goods and services produced within the country during a specific time period.

Price Indexes

The Consumer Price Index (CPI) is published each month by the Bureau of Labor Statistics to gauge inflation by tracking the prices of some of the most common goods and services purchased by urban consumers — such as food, transportation, clothing and medical care.

The Producer Price Index (PPI) measures the price changes of products from a broader cross section of industries in the goods-producing sectors of the U.S. economy.

Jobless Claims Report

The jobless report, published each week by the Department of Labor, also acts as an indicator of the economy. For example, unemployment filings tend to increase when the economy weakens. While released weekly, the reports are generally assessed as a four-week moving average (MA) to balance out variances from week to week. Note, too, that the report does not track job losses by part-timers, self-employed people and contract employees because they do not qualify for unemployment benefits.

Housing

We often hear about a report referred to as “housing starts.” This is the New Residential Housing Construction Report, which is released by the Census Bureau and the Department of Housing and Urban Development (HUD). It details the number of new building permits issued, which serves as an economic indicator in terms of an increase or decrease in new construction activity (supply). For example, new construction tends to pick up early in the expansion phase of the business cycle.

Another leading economic indicator from the real estate sector is the Existing Home Sales Report, compiled by the National Association of Realtors. This report reflects new demand for home sales, with considerable seasonal variance. Together, the two provide a general picture of the housing sector as well as mortgage interest rates and overall consumer confidence.

Consumer Confidence Index (CCI)

Speaking of confidence, the Consumer Confidence Index (CCI) measures perceptions and attitudes of the general population. Although it relies on a small sampling of consumers (5,000 U.S. households), it has proved surprisingly accurate in projecting consumer spending. The CCI is considered a valuable measure because consumer spending represents 70 percent of the economy. A continuing uptick in confidence can be a positive indicator for stronger economic growth.

Purchasing Managers’ Index (PMI)

Another indication of consumer confidence and buying patterns is reflected in the Purchasing Managers’ Index (PMI). This report compiles data (new orders, inventory levels, production, supplier deliveries and employment) from purchasing executives at approximately 300 companies in the manufacturing sector. A surge in new orders may indicate a pending increase in customer prices, and vice versa. For context, a PMI of more than 50 demonstrates that the manufacturing sector has expanded compared to the prior month. The PMI has a strong historical track record for predicting GDP growth.

Stock Market Indices

While investors have access to the broader stock market, performance benchmarks are generally composed of a representative collection of stocks with similar traits, such as market capitalization or sector. A particular stock market index is computed into a weighted average representing the underlying stocks and used to compare returns of specific investments or sectors. The following are some of the most popular stock market indices:

  • Dow — The Dow Jones Industrial Average (DJIA) is represented by the stocks of 30 of the largest and most well-known companies in the United States. Large swings in this index are generally a strong indicator of movement throughout the entire market.
  • S&P 500 — The Standard & Poor’s 500 Index is more diverse and is composed of 500 of the most widely traded stocks in the U.S. across an assortment of sectors. Because it represents about 80% of the total value of the U.S. stock market, the S&P 500 index represents much of the movement in the U.S. stock market as a whole.
  • Wilshire 5000 — The Wilshire 5000 is composed of almost all publicly traded companies with headquarters in the U.S. It is extremely diverse and includes stocks from every industry.
  • Nasdaq — The Nasdaq Composite Index is best known for representing technology stocks, although it also includes stocks from the financial, industrial, insurance and transportation industries, with some companies based outside the U.S. The index hosts both small and large firms as well as many speculative companies with small market capitalizations.
  • Russell indices — The Russell 3000 is an index of the U.S. stock market’s 3,000 largest publicly traded companies. The Russell 2000 is a market-capitalization-weighted index that is composed of the 2,000 smallest stocks in the Russell 3000.
“Nothing has more impact on the direction of asset prices than economic conditions and how central banks respond to those conditions. Period.”

Final Thoughts

As consumers and investors, we are continually bombarded with news and information designed to help us make better decisions. Unfortunately, there’s such a thing as information overload, which can make it impossible to analyze so much data. As a result, we often end up doing nothing. When it comes to being a data-informed investor, it’s important to remember that the leading economic indicators and other analyses support just one of the three components related to our investment success.

The primary component is determining our investment goals, which is guided by more subjective data such as how much money we would like to accumulate, by when and how much risk we’re willing to take to achieve those goals. Next, it’s a good idea to work with an experienced financial advisor to determine an asset allocation strategy designed to help meet those goals. This not only encompasses different asset classes, such as stocks, bonds and cash instruments, but also various types of products such as annuities or other insurance-based contracts that can provide a guaranteed payout.

Finally, it’s important to monitor investment decisions on an ongoing basis to ensure that your strategy remains on target to meet your objectives. For this, staying abreast of data-driven reports may give us the best opportunity to predict how the economy and stock markets will perform in the future and further guide our investment decisions.

DISSOLVING THE MARITAL CONTRACT

Overview

When a marriage ends in divorce, it can take a long time for one or both spouses to recover their emotional stability — but they generally do. About 40 percent of today’s marriages involve one partner who has been married before.1 However, the financial impact of a divorce can last for quite a long time — even a lifetime. In fact, the financial pressures of going it alone without a satisfactory safety net may be an underlying reason why many people decide to remarry.

For the sake of healthy relationships in the future — for ex-spouses, their children and even potential future spouses — it’s very important to resolve financial issues during a divorce to help secure the financial future of both parties. This is especially true when children are involved, because they shouldn’t have to see one parent suffer financial consequences.

It’s a good idea to work with a financial advisor from the outset of a marriage to put plans in place to help a couple build significant net worth during the span of their union. However, there is perhaps no better time to involve a financial advisor than during a divorce. After all, divorce attorneys are not trained to provide comprehensive financial planning advice.

Divorce, unfortunately, is seldom quick or neat. In terms of money, it can be expensive and leave spouses in dire financial straits. Therefore, it is a critical time for all assets to be identified and divided between spouses appropriately and efficiently in order to meet short- and long-term goals for both parties. Indeed, this is no small feat.

Property Division

Division of property in a divorce depends largely on where the couple lives. In a common law property state, an asset that is acquired and titled by one member of a married couple is owned exclusively by that person. If a title or deed for property lists the names of both spouses, that property belongs to both spouses — with each owning a one-half interest.

In the event of a divorce, the couple can enter an agreement on how to divide assets. However, if the case goes to trial, the court will decide how marital property is divided. By contrast, there are nine community property states in the U.S.:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

In a community property state, all assets acquired during the marriage are considered owned equally (50/50) by both spouses, regardless of how they are titled. This includes all debts, earnings and property purchased with income or earnings accumulated during the marriage. However, assets acquired before the marriage and any property given to or inherited by only one spouse before or during the marriage are considered to be separate and owned exclusively by that spouse.

In a divorce, the separate property of each spouse is distributed to the spouse who owns it, and the rest is divided evenly (50/50). If an asset, such as a house, is granted to one spouse, the other spouse will receive assets equal to its total economic value.

Potential Problems

Let’s say the ex-wife is granted majority custody of the children and also full ownership of the family home. The ex-husband then receives an investment portfolio equal to the home’s value. While this may appear equitable on its face, consider that the house will require insurance payments, upkeep and maintenance costs, and perhaps even a significant tax burden when it is sold. The costs associated with the investment portfolio may not be nearly as onerous.

Sometimes, it may make sense to consult with a financial advisor before even broaching the idea of splitting up a marriage. Understanding state laws and the potential impact of dividing assets can help a couple determine whether they can even “afford” a divorce.

QDRO: Qualified Asset Division

For older couples, assets accumulated in retirement accounts and/or pension plans may account for a large part of their net worth. Be aware that federal law states that assets earned through participation in an employer-sponsored retirement plan can be divided between ex-spouses only by a qualified domestic relations order (QDRO).

A QDRO must be submitted to and accepted by the plan sponsor before a divorce is finalized. Note that a QDRO applies only to a retirement plan sponsored by a private employer. Other types of retirement plans may require a different form that performs the same function. For example, retirement plans for federal government employees require a “Court Order Acceptable for Processing (COAP).

Be cautioned that if the appropriate form is not on file by the time the divorce is finalized, a former spouse may have no rights to the participant’s retirement benefits — a fact that often does not come to light until years later when the ex-spouse retires.

IRA

IRA accounts are divided according to state law and agreements pertaining to divorce proceedings. However, it is important to understand that when IRA assets are to be split into separate accounts, the IRA custodian must be notified that a transfer or rollover is part of a divorce decree in order to avoid taxes and/or an early withdrawal penalty. This is another reason to work with a financial advisor to help ensure assets are transferred correctly.

“In the modern era, a good divorce is better than a bad marriage.”

New Financial Planning

Remarkably, there can be a silver lining to divorce. Each spouse has the opportunity to develop a financial plan specific to his or her new lifestyle and goals. If money was a constant issue during the marriage, as it often is, a single person generally has control of his or her income, saving, spending and investment decisions from the divorce on. This fresh start also presents an ideal time to work with a financial advisor to identify goals, savings and investment vehicles, an allocation strategy, risk profile and timeline to meet those goals.

Bear in mind these tips when developing a new solo financial plan:

  • Update beneficiaries for personal investments, bank accounts and qualified retirement plans.
  • Update the beneficiaries for all other financial assets, such as annuities and life insurance.
  • Develop a new estate plan that includes choosing a person to be your health care proxy, asset beneficiaries and, if necessary, a guardian for your children.

As troublesome as divorce can be, there is always a tomorrow and a new opportunity to secure a brighter financial future.

Final Thoughts

As a couple enters divorce proceedings, it’s important to consult with an experienced financial advisor to help navigate issues related to dividing assets and ongoing alimony and/or child support payments.

As a final thought, when engaged in a contentious separation in which both spouses have their own divorce lawyers, they should perhaps consider having their own professional financial advisors, too. While an attorney may understand legal issues, a financial advisor is better prepared to analyze and understand the performance potential, tax implications and long-term outcomes of financial assets and — perhaps most important — represent the individual client’s best interests.

WORKING PART TIME IN RETIREMENT

Overview

According to a study sponsored in part by Bank of America and Merrill Lynch, approximately 50 percent of current retirees have worked during retirement or are considering it. Moreover, nearly three-quarters of pre-retirees over age 50 say that their ideal retirement would include paid work of some sort. It’s interesting to note that among them, 35 percent say the ideal scenario for retirement is part-time work.

Some folks may need the extra income. However, even high-net worth professionals who are more than prepared for retirement — financially speaking — also indicate that they’d like to work at least part time in retirement. For some, it’s a matter of maintaining social relationships and/or having intellectual challenges and responsibilities.

Unfortunately, some people retire earlier than they would like to, often a result of losing their jobs or just plain being unhappy with them. Others suffer from health conditions that make work unsustainable, while some find they have to quit in order to spend more time caring for loved ones.

And yet, even for caregivers and people with disabilities, there may be opportunities to work part-time. While there are challenges to working as we age, bear in mind the benefits to be gained as well.

Investment Strategies

Even for people who believe they have enough money saved for retirement, it never hurts to add more to the coffers. Those who work part time during retirement are less likely to drain their income each month, possibly using excess earnings to continue contributing to retirement investment accounts.

Unlike the traditional IRA, which does not permit contributions after age 70½, there are no age limits to contributing to a Roth IRA as long as you are earning income. It’s also worth noting that after age 70½, a worker may contribute to a traditional or Roth IRA on behalf of a non-working spouse as long as the spouse is younger.

Those who embark on a career as an entrepreneur or independent contractor may be eligible to set up a solo 401(k) plan. In 2018, the employee contribution limit to an individual 401(k) plan is $24,500 for people age 50 and up. Furthermore, their “business” can contribute an additional percentage of earned income for a combined total maximum of $55,000 per year.

Even if a working retiree doesn’t contribute to a savings account, earnings can help delay withdrawals from retirement investments and allow more time for growth opportunity.

Income Strategies

Another benefit to working part-time in retirement is the ability to delay drawing Social Security. While benefits may begin at age 62, delaying enables a higher permanent payout amount. Not only does the extra income contribute to wages calculated for the Social Security benefit, but delaying until age 70 allows the benefit to accrue by 8 percent each year beyond full retirement age.

Part-time workers also should be aware that earning income may reduce Social Security benefits, as detailed below:

  • Before full retirement age: Benefit is deducted by $1 for every $2 earned above an annual limit of $17,040 (2018)
  • The year of full retirement age: Benefit is deducted by $1 for every $3 earned above $45,360 (2018)
  • After full retirement age: No benefit deduction

On-Demand Economy

You don’t need a special skill like pottery or woodwork to earn a part-time living. Many retirees have found fulfilling work using skills they've had their entire adult lives — like driving for Uber or Lyft, making coffee at Starbucks or answering the phone at a local dentist office. Retirees can even earn income doing whatever it is that led them to retirement — such as providing caregiving services for others in addition to a grandchild or elderly parent.

Entrepreneurship

Some retirees consider starting their own businesses for part-time work. In fact, according to a report on startup business activity, the demographic between 55 and 64 years old accounted for nearly a quarter of all new entrepreneurs in 2015.

Thanks to the internet, web-savvy seniors can create new businesses without a lot of capital or complexity. Many have found avenues to sell wares based on a passion or hobby. For example, a retired financial services manager pursued her long-held dream to become a fashion designer. She opened a niche business online taking orders to convert fabrics from used wedding dresses into pillowcases and other keepsake items.

“I don't really need the money. I really do it more for fun. It just makes me feel good about me.”

Plan Ahead

If you’re considering working part time during retirement, think about what that might look like while you’re still gainfully employed. Depending on your post-retirement aspirations, you may need to take classes, get another degree, get certified or engage in some other type of training that requires funding. You can either work on getting that training while still employed full time or start setting aside some money to pay for it once you retire, letting you avoid dipping into retirement savings.

It’s a good idea to discuss these plans with a financial advisor to help determine the best way to make the transition from full- to part-time work. If a startup is in your future, it may require transitioning investment funds to help pay for the venture. The earlier you start making plans, the better — even if that day is years away.

Health Care Options

Health insurance is nearly always a factor when it comes to working part time because employers typically do not provide health care benefits for part-timers. If you plan to retire before qualifying for Medicare at age 65, you’ll need to consider ways to procure health insurance.

One option may be coverage under a working spouse’s plan. Another is to purchase an individual policy on the marketplace exchange. Note that in the past, not having a health insurance option was a real deal-breaker for retirees who wanted to start their own businesses or take part-time jobs. Health insurance premiums for pre-Medicare retirees with pre-existing conditions ran as high as $30,000, $40,000 or $50,000 a year before the enactment of the Patient Protection and Affordable Care Act (better known as Obamacare).

Presently, one of the advantages of the individual exchanges is that some applicants qualify for premium and/or cost subsidies based on low income — which may prove beneficial for a retiree working part time. In certain scenarios, a retiree even may pay a lower premium via the exchange than under a previous employer plan.

Final Thoughts

Another finding of the Bank of America/Merrill Lynch study was that more retirees ranked staying mentally and physically active and having social connections above earning money among their reasons to keep working. Many career professionals look forward to the opportunity to try their hand at something else, even if they don’t need the money.

In fact, staying active and engaged in the workforce — even if it’s just part time — can help retirees stay healthy and upbeat as they age. Which brings us to our final thought: Have you thought about what you want to do next?

While it’s great to aspire to a higher income, our lifestyles should fit our current income. If we can learn to be content with what we have, any additional funds are a bonus. There are few negative consequences to living below our means but quite a few advantages. One, of course, is that we have money available for those periodic big-ticket items without disrupting long-term plans for financial security.

STRATEGIES FOR BIG-TICKET PURCHASES

Overview

Two roads diverge when we become adults, and the path we choose is frequently influenced by the opinions and lessons of our parents. When it comes to saving and financial security, do you start right away or take a bit of time to enjoy yourself?

That’s one of the factors considered by students who take a “gap year” before or just after college — before getting “a real job.” In fact, some seasoned parents will advise their children to go ahead and enjoy their financial freedom while they’re young before getting tied down to the responsibilities of a mortgage and raising a family.

However, just because young adults want to live a little doesn’t mean they don’t eventually want to own a house or start a family. By the same token, midcareer professionals and families with children who juggle a mortgage, education expenses, vacations, automobiles, braces, summer camps and other expenses know that each financial decision could impact their lifestyle during retirement. It’s a constant battle to decide where and how much money we can spend without jeopardizing our long-term goals.

The key is to balance a saving and spending strategy that allows for a satisfactory standard of living today without sacrificing our lifestyle tomorrow.

Automatic Saving

One time-tested strategy is to use a household budget. By tracking the money that comes in and goes out of the household, it is possible to develop a budget that covers expenses while allowing for entertainment and a few luxuries — without compromising the future.

An important tactic is to make saving and investing a line item in the household budget. Financial advisors often refer to this tactic as “paying yourself first.” In other words, allocating money for saving should be considered just as important and automatic as paying your car loan and electric bill.

There are two roads that diverge here as well. Some people pay all the necessary bills and save whatever they have left. Unfortunately, a lot of discretionary expenses tend to creep into that regular household budget, frequently leaving little to no money for saving. The second road is to make saving and investing part of those necessary expenses, leaving any leftover money available for discretionary spending.

Compartmentalize

A second strategy is to compartmentalize savings goals. For example, if you participate in a company 401(k) or another employer-sponsored plan, then money is drafted from your paycheck and invested before it even hits your checking account. This is the most efficient and effective way to save for retirement.

However, most people have other big-ticket things they want in addition to retirement savings. One tactic is to create separate accounts earmarked for those goals rather than throw all leftover savings into one account. A key reason for this is that it helps measure progress toward a specific goal, which can be very motivating.

The opposite is true of a catch-all savings account. That’s because this account will rise and fall based on a variety of expenses you must pay throughout the year, such as annual property taxes, auto and homeowners insurance, homeowners association fees, home maintenance and repair, vacations or cash for an emergency.

It is a good idea to maintain a catch-all savings account for these types of one-o" expenses. However, if you have a specific goal in mind — such as a new car — consider opening a separate account and contributing to it regularly. Even if you need to stop contributing for a month or two to pay other expenses, that’s OK. It is psychologically comforting to know that you don’t have to deplete this account to pay regular expenses. Eventually, you’ll meet your financial goal and can purchase the item without sacrificing short- or long-term financial obligations.

Due Diligence
Another tip is to plan and research while you save so that once you have the funds, you know exactly what to buy. This can help you determine the true expense of that item. For example, if your goal is to buy a boat, consider where you will keep it. If you keep it in your driveway, will your homeowners' association object? If you rent a marina slip, what will be the ongoing cost? What expenses are involved in gas, maintenance, and upkeep?

It’s important to know all of the ancillary costs involved now and in the future before you make a big purchase. Not only does this due diligence help you get the most value from your big-ticket item, but it also provides a high level of confidence in making the right decision and a strong feeling of satisfaction for having saved for it.

Saving For “Come-What-May”
Another part of the compartmentalization strategy is to save regularly in a savings account for unexpected expenses. Even if you don’t have a specific goal, that money creates a safety net for unknowns and emergencies, such as a new roof or car repair. Consider keeping at least
$1,000 or $2,000 in this account so you can cover these unexpected needs without running up a credit card balance or siphoning money from other accounts.

Equity Builder

As a general rule, some purchases increase in value while others decline. Therefore, consider whether your big-ticket purchase will be an asset or liability. For example, your mortgage and your auto loan may both fall into the high-debt, liability column. However, houses generally increase in value over time while cars decrease.

When making a large purchase, consider whether it has the potential to offer a return on your investment. Second, consider whether it will replace a current cost. For example, buying a home may cost more, but it will replace the cost of renting. Buying a new or at least newer car may replace the cost of one that is paid o" but generates ongoing repair bills. In both cases, the new purchase may build equity or at least forestall higher expenses in the future.

On the other hand, a vacation doesn’t replace costs — it adds to it. In some cases, however, a little outside-the-box thinking can help counteract additional expenses. For example, if a couple in Minnesota want to spend half the year in Florida, perhaps they can offset that expense by renting out their home while they’re away.

Investing
Using invested funds to pay for high-ticket purchases can be tricky. Investors may want to work with an experienced advisor to determine whether withdrawals will trigger capital gains, income taxes or an early withdrawal penalty. It’s also important to consider whether depleting that account would unduly sacrifice potential gains and/or derail the potential for long-term financial security.

Bear in mind that investment accounts specifically designed for a certain goal, such as a 529 college savings account or IRA, generally have barriers intended to deter the investor from using those funds for any other purpose. Some may provide exceptions, however, such as waiving an early withdrawal penalty for a qualified first-time homebuyer.

Consult with your advisor on the most suitable way to fund a large-ticket item to help you evaluate the pros and cons of each available option.

Potential Funding Sources

  • Bank savings account
  • Life insurance cash value account
  • Certificate of deposit
  • Annuity withdrawal
  • Securities or mutual funds
  • Credit card
  • Traditional IRA
  • Home equity
  • Roth IRA
  • Sell an item of value
  • 401(k) loan
  • Part-time job
“Generally, early distributions are those you receive from an IRA before reaching age 59 ½. Ne additional 10 percent tax applies to the part of the distribution that you have to include in gross income. It’s in addition to any regular income tax on that amount.”

Lifestyle Should Fit Income

Probably the most significant strategy for making an expensive purchase is to determine whether you can afford it. This is not as simple as it may appear. In other words, your income may justify a higher expense than normal — but does your lifestyle?

For example, perhaps you can afford to buy an expensive foreign sports car. However, consider that it may be costly to insure, maintain and repair. Furthermore, does it reflect your values? If you’ve taken pains to live within your means in terms of your housing and other choices, perhaps it is more prudent to buy a car aligned with the rest of your lifestyle choices and save what you might have otherwise spent.

While it’s great to aspire to a higher income, our lifestyle should fit our current income. If we can learn to be content with what we have, any additional funds are a bonus. There are few negative consequences to living below our means but quite a few advantages. One, of course, is that we have money available for those periodic big-ticket items without disrupting long-term plans for financial security.

Final Thoughts

When you consider making a high-expense purchase beyond the usual household budget, differentiate between a predetermined goal and an impulse. This distinction may force you to weigh, for example, whether your sudden desire to buy a boat after a fun-filled week at a friend’s lake house is worth derailing your plans to buy a house in two years.

Even when you establish a specific financial goal worth saving for, remember that you also must address your sequence of priorities. Establishing an order for which goals are most important can be very helpful when it comes time to make a decision about whether (and when) to make an expensive purchase.

We’ve always known that patience is a virtue. But we may not always recognize that it is a financial virtue, as well.
 

A PLAN FOR WEALTH ALLOCATION

Overview

Behavioral finance is a relatively new field that explores how human behavior and thought patterns influence our financial decisions and therefore, on a larger scale, our economy and financial markets. It’s basically this: Human nature meets economic principles. What we have found through the study of behavioral finance is that people do not always behave rationally when addressing different market environments.

For example, we may sell stocks when share prices drop in order to limit our losses, when it may make more sense to buy when prices are low. We are motivated to stock up on consumer products when there is a shortage even though we may have to pay much higher prices. In short, what we think and feel drives actions that may work to our disadvantage.

The practical reason for the study of behavioral finance is that we live in the real world. Our thoughts and actions are motivated by what’s happening in our lives, so we don’t always take a step back and think like an economics professor. When we need something now — be it money or peace of mind — we react quickly to get it. We do it to fix a short-term problem. We do it to alleviate stress. And we frequently do it without putting a lot of thought into how it might hurt our finances in the long run.

Wealth Allocation

Wealth allocation is a strategy that can help investors meld fundamental economic principles with the urgency of real-world problems. It’s simply a way to stratify where our money is located so that when we feel the need to react, either to a financial emergency or to relieve financial anxiety, we know which accounts are best to tap for certain situations.

A wealth allocation strategy divides our net worth into three separate categories of financial goals, each with a representative risk level.

Safe Assets

Safe assets are the ones that aren’t going to go away. These include cash savings, quality fixed income, our primary residence, Social Security benefits, guaranteed pensions and highly rated life insurance policies. The purpose of safe assets is to maintain our standard of living. However, they may not be able to sustain that level indefinitely. Early- and mid-career workers may have greater long-term needs, such as saving to buy a home, pay off debt, fund children’s education and plan for retirement. Even retirees living on a fixed income should have a cache of additional funds available for an emergency.

The amount and location of safe assets will be different for each household, based on need. It’s important to consider how long you may be able to sustain your lifestyle if you lost your current income. This means liquid funds available to pay for housing, food, transportation, health care and basic entertainment. Depending on your circumstances, how long would it take to restore your income — would you need six months of reserve living expenses? One year? Three years?

Growth Assets

Safe assets should be accessible for the here and now. The next step up is growth assets. This is money you tuck away for the future. Most people invest a portion of their income automatically through an employer-sponsored retirement plan, IRA or other type of vehicle, such as a personal portfolio of stock, bonds and/or mutual funds.

Growth assets are designed to grow over time, so they are not the first funds you’ll want to tap if you need money. In fact, there may be a cost associated with having to tap these quickly, such as a capital loss, income taxes or an early withdrawal penalty. This money should be allocated to securities and asset classes that align with specific investor goals, the timeframe for reaching those goals and the investor’s tolerance for market risk.

Ambitious Assets

For investors who either have sufficient funds in the first two categories, or need to allocate a portion of assets to higher-risk, potentially higher-reward options to make up for lost ground, the third wealth allocation category is for ambitious assets. In a sense, these assets are invested to “swing for the fences” in an attempt to make lots of money with a financial home run.

However, even in this category, investments should be balanced between risk and reward to reflect the asset owner’s personal circumstances — and interests. In some cases, this could mean purchasing a higher stake in a concentrated sector or company stock. It could mean buying real estate for ongoing rental income and the opportunity for growing equity. It could mean purchasing mispriced securities for a long-term bet that they will reach their true value. The placement, and amount, of ambitious assets will vary among each investor, but the goal is the same: Above average investment success.

Note, however, that an investor should never invest more in ambitious assets than she can afford to lose. 

wealthreport.PNG
“A clear understanding of how a family’s wealth is invested increases
everyone’s conviction to stay the course when an unforeseen event
occurs. One of the greatest risks to sustaining wealth is letting emotions
drive a change in strategy at the wrong time.”

The Wealth Allocation Conversation

The thing is, most investors already have these types of “buckets” where their assets are stowed. The purpose of the allocation strategy is to identify the buckets ahead of time that are best tapped for certain situations. In other words, if today’s long-running bull market suddenly experienced a correction, an investor should ask himself how that impacts his current financial situation. For example:

  • Does it impact his income and ability to sustain his current lifestyle? If so, how long can he continue paying current expenses before he needs to make a change?
  • If it doesn’t impact his current lifestyle, what is the potential impact on his long-term goals? How long should he wait before considering a change?
  • Does it devastate his more ambitious goals? Will waiting longer help recover any losses? Will accessing those assets quickly solve an immediate problem without sacrificing long-term financial security?

There are two reasons these questions are important. First, if an investor needs cash right away, this stratification of assets can help her determine where to go quickly if cash is needed without compromising long-term goals.

Second, it helps facilitate the conversation among household members to help them arrive at the same conclusion. In other words, if the rental lake house property was placed in the growth assets category, both spouses may agree it is a critical component for their long-term financial goals. However, if the lake house was a “swing to the fences” asset, it may be easier to agree that it’s the less crucial asset in an investment portfolio.

Applying the wealth allocation strategy to current assets helps investors rely more on rational reasoning to solve short-term problems with less panic and emotion. The household portfolio is essentially allocated for protection of current lifestyle, growth for future lifestyle and risk-taking for an ambitious lifestyle.

Final Thoughts

By allocating wealth into these three risk groups, it’s easier for family members to discuss how to address real-life situations with predetermined solutions. By identifying where the household wealth is invested and the target purpose of each asset, it is easier to stay the course when unforeseen events occur. It also helps to avoid allowing our fears and emotions to drive decisions that could jeopardize long-term financial security.

HOW TO “PLAN” FOR COGNITIVE DECLINE

Overview

One day in the future we may have genetic tests that can accurately determine who will develop dementia and by approximately what age. For now, it’s largely guesswork.

However, while we may not know who will develop a cognitive condition such as Alzheimer’s, we do have a pretty good understanding of the potential financial burden of this progressive disease.

Today, Alzheimer’s disease is the most common form of dementia, representing up to 80 percent of all cases, and a third of seniors die with the disease.1 However, the key numbers for the sake of financial planning is that while people with Alzheimer’s live, on average, four to eight years after diagnosis, they can live as long as 20 years.2

Consider then, that the average coverage of a long-term care insurance policy is three years — less than the average duration of the disease.3 Clearly, given the statistics we do know about age-related cognitive impairment, it is prudent for retirees to include this possibility as part of their financial plan.

While dementia may take years for a progressive decline, studies show that one of the first symptoms to appear is the deterioration of financial management skills. This means three things are important:

  1. Early diagnosis for ease of transferring money management responsibilities with the help of the patient.
  2. Ensure the responsibility is transferred to a person with sufficient experience handling money and managing financial issues.
  3. Consider if the person taking over finances is trustworthy and/or could potentially develop dementia in the near future — which would, of course, require another subsequent transfer of financial responsibilities.

Stage Planning

Dementia is a progressive disease, but the Alzheimer’s form can be even more severe and progress more rapidly. It generally follows three basic stages: mild, moderate and severe.

It is during the mild decline stage that financial skills begin to deteriorate. This may be evident as the patient starts to have trouble paying bills and managing bank statements. It’s a good idea to utilize bank services such as direct deposit for all incoming sources of income and automatic bill pay for outgoing payments. The mild stage may last several years.

Also during this time, it is important to establish a legal authority as power of attorney to take over financial management on the patient’s behalf when necessary. It is critical to take this action while the patient is still capable of understanding and agreeing to the decision.

During the moderate decline stage, the patient may lose the ability to manage daily finances altogether. This often causes anger and frustration, leading to irrational thoughts and behaviors — which is why it is important to transfer money management to another person before this stage. Depending on the person’s living situation, it may be necessary to hire a caregiver to shop, cook and even help the patient dress.

During the final stage of severe decline, patients tend to lose short-term memory, including the ability to hold conversations and make decisions. Caregiving duties may range, progressively, from helping the patient eat and use the toilet to complete 24-hour monitoring. The patient may become completely bed-ridden, unable to sit without support, and may no longer recognize loved ones, speak or understand words.

Financial Options

Once a family receives a diagnosis of progressive cognitive impairment, the trajectory of expenses will change. Instead of travel and transportation, assets will increasingly be allocated to pay for prescription drugs, personal care supplies, adult day care, full-time in-home or residential care services.

It’s important to be aware that if a family hires an independent professional caregiver to work inside the home, the household may be responsible for the caregiver’s Social Security and unemployment taxes.

The following are some of the resources and financial options available    to help develop a plan for a person facing dementia and its related expenses.4

Medicare & Medicaid

  • Medicare pays only for acute care in a skilled nursing facility and only for the first 100 days.
  • To qualify for Medicaid long-term care coverage, beneficiaries must spend down assets that could be used to fund their care.
  • Not all nursing homes accept Medicaid and ones that do may have limited availability.

Veterans Benefits

  • Certain government benefits, including health and long-term care, may be available for people who served in the military.

 Long-Term Care Insurance (LTC)

  • An LTC policy needs to be purchased before a dementia or Alzheimer’s diagnosis.
  • Pay attention to the amount of the daily benefit and if it is adjusted annually for inflation.
  • Understand how long benefits will be paid and if there is a maximum lifetime payout.
  • Check what type of care is covered (e.g., skilled nursing home, assisted living, licensed home care, etc.).
  • Check if there is an elimination period before coverage begins.

Life Insurance

  • Life Insurance should be discussed prior to any hint of dementia or Alzheimer's. Once a diagnosis is made or symptoms have begun coverage will be declined.
  • Policy owners may be able to borrow or withdraw from the cash value account of certain types of life insurance contracts.
  • May offer accelerated death benefits (e.g., 80-85% of policy face value and tax-free income), paid out if the insured person is not expected to live beyond the next six to 12 months due to a  terminal illness.
  • May offer a rider that waives premium payments if the owner becomes disabled.

Long-Term Care Annuity

  • Fully funded by the initial premium.
  • Coverage typically valued at 200 to 300 percent of the initial premium amount (the higher the initial premium paid, the more coverage received).
  • If and when long-term care is required, a specific monthly amount is paid from the annuity’s coverage until the value is depleted.
  • The policy owner may be able to access cash value from the account even if he or she never requires care.
  • Once the annuity contract matures, any remaining cash value may be passed on to named beneficiaries.

Asset-Based Long-Term Care Insurance

  • Offers coverage for long-term care expenses as well as a death benefit.
  • If the policy owner depletes the LTC coverage, the death benefit may be used to continue paying for expenses.
Please work with a qualified financial professional and attorney before making any purchasing decisions to ensure you fully understand all of the benefits, features and limitations of the above-referenced programs and financial products.

 Financial Planning Checklist

  1. Identify all assets (bank accounts, investment accounts, property, household items, real estate).
  2. What is their estimated value?
  3. How is the main residence titled?
  4. Review all insurance policies – what is covered (e.g., cognitive conditions, long-term care), benefits payable, named beneficiaries.
  5. Review all income sources, including Social Security, disability payments and required minimum distributions from retirement accounts.
  6. Research if penalty-free distributions are allowed from qualified retirement accounts.
  7. Consider government resources, such as Medicare, Medicaid, Social Security and veteran's benefits.
  8. Consider what tax deductions and/or credits the patient or caregiver may be able to claim.
  9. Seek out free or low-cost community resources for meals, transportation, respite and adult daycare.
  10. Consider how personal property and work-related benefits can be utilized, such as a flexible spending account, family, and Medical unpaid leave or paid time-off.
  11. Who will manage the patient’s money and tax returns?
  12. Consult with experienced financial and legal advisors.
“Knowing intentions about care, living arrangements and desire to protect income for other family members will better prepare you and a financial professional to design an effective plan.”

Final Thoughts

As a final consideration, it’s worth mentioning the financial plight of a family caregiver for a person with Alzheimer’s or other type of dementia. While it is recognized that most family caregivers are not compensated for this role, what is less evident is that they spend an average of $5,155 a year of their own money toward this aid — which  can put their own financial security at risk.7

Retirement planning is difficult enough, but planning for the possibility of cognitive impairment adds a whole new dimension to the issue. It’s a good idea to work with a trusted financial advisor and attorney to develop a comprehensive plan to help protect your financial security and that of a spouse and other family members.