How to Manage Your Money and Your Risk Exposure

Forgotten 401Ks

Zombies
They’ll eat you alive!

Failure to Rebalance – Zombie Sign #1

When was the last time you rebalanced your 401(k) or other retirement account? When you set it up, you took a fairly conservative approach and bought 60% stock mutual funds and 40% bond mutual funds. Over time, the values of those funds have changed, perhaps significantly. Right now, your stock funds might comprise 85% of your account. Great. Excellent gain. But . . . . you are now subjecting yourself to greater risk. You need to rebalance. Now. And at least every six months.

If you’re sitting on an out-of-balance retirement account—or several different retirement accounts—then you are sitting on a Zombie Account. That’s right. That’s what investment advisors call it: an account left for dead, an account that might just rise up (at night, of course) and devour your net worth.

Not a pretty sight, these Zombie accounts . . . .

iStock by Getty Images

Failure to Increase Contributions to Retirement Accounts – Zombie Sign #2

When was the last time you increased your contributions to your retirement account? You’re making more money now. Shouldn’t you be saving more? Yet many people set up retirement accounts in their youth and establish relatively small automatic contributions. But as your income increases, so should your retirement allocations. Under current federal tax law, you can contribute $19,500 to your 401(k) or similar workplace plan; that’s up from $19,000 in 2019. If you’re 50 or older, the catch-up contribution limit is $6,500, up from $6,000 in 2019. “If your employer allows after-tax contributions or you’re self-employed, you can save even more. The overall defined contribution plan limit moves up to $57,000 [in 2020], from $56,000 [in 2019].”[i]

Ask any rich person, “What’s your secret?” One answer they always give: “Save as much as you can. Compounding investment amounts in tax-free accounts can result in large returns when you reach your 60s.”

So any retirement account you have sitting around growing with contributions you made when you were young . . . . Well, that’s a Zombie Account.

Failure to Move Old Retirement Accounts – Zombie Sign #3

Oops, what about that account you set up when you worked for Acme Widgets? Great job, that was. But your current position pays a boatload more. Did you have a retirement account at Acme? The stats should make any working American sit up and take notice. Get this:

A 2013 survey by ING Direct USA showed half of American adults who participated in an employer-sponsored retirement plan, such as a 401(k), have left an account at a previous employer. These “orphaned” accounts represented more than $1 trillion in investment dollars in 2010.[ii] (emphasis added)

You need to launch a search for any Zombie accounts sitting around with previous employers. You can call the Human Resource people at those companies for assistance. You might also get in touch with the Pension Benefit Guaranty Corporation. Or you can check the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com. According to the website, “The National Registry is a nationwide, secure database listing of retirement plan account balances that have been left unclaimed by former participants of retirement plans.”

Once you locate these Zombie accounts, you need to roll them over into your current 401(k) or IRA. You should check with an investment advisor or your CPA to make sure you’re performing a tax-free rollover and not a taxable distribution.

Act Now

Anyone with Zombie accounts needs to take the steps we’ve outlined above.

Beating the Zombies

There is a better way. No Zombies can arise in the dark of night from funds we manage at Research Financial Advisors. Check us out here: rfsadvisors.com. When you establish an account with us, we ascertain your comfort level of risk. If you’re relatively young, you should probably use our Aggressive Growth Model where we automatically invest your funds in a variety of ETFs we think show the best chance of growth. Right now, as of August 14, 2020, our Aggressive portfolios are up 23.02% year-to-date, net-of-fees. Yes, you read that right. We’re up 23.02%.

Our more conservative portfolio, consisting of 100% bonds, is designed for those who want to reduce risk and increase income. But the market value of our Bond Model is up 1.62% year-to-date, net-of-fees. And that doesn’t count the income the Bond Model has produced.

Many of our clients choose a mix between the Aggressive Model and the Bond Model. The returns on those accounts are less than the Aggressive results but more than the Bond.

Worried about current market volatility? Afraid of another crash just around the corner? Not a problem here at RFS. We know how to play defense. Consider the recent crash. The all-time high of the S&P 500 Index was February 19th. By March 23, the S&P declined 33.92%. Just 8 days after the S&P all-time high, on February 27, 2020, just before the close at 3:56 p.m., we purchased SPXS for all our accounts (larger amounts in the aggressive funds, smaller amounts in the conservative ones). The SPXS ETF produces three times the inverse of drops in the S&P Index. If the S&P goes down 10%, this ETF goes up 30%.

Our purchase price for SPXS: $16.1189 per ETF.

It’s a risky ETF, and we watch it carefully. After all, when the S&P goes up 10%, this ETF drops 30%. But it performed beautifully in March of this year, and shielded our accounts from gut-wrenching market drops. At 1:06 p.m., on March 23, 2020, the exact date of the S&P 33.92% decline, we sold the SPXS positions, banking a significant profit.

Our selling price for SPXS: $26.28 per ETF.

Today, the SPXS is trading at $5.86 or so. The following chart of SPXS shows how we entered our positions at $16.1189 as the rise started to accelerate Notice that we exited our position on March 23 at $26.28, right near the very top of the spike in price.

Each day, we study charts like the one above. We stay alert, ready for the next market rise or the next market plunge. Will the market go down again? Yes. Absolutely. How much? No one knows. When? No one knows. But we’re ready. We’re nimble. We’ll act and play defense when our indicators tell us a drop is about to morph into a plunge.

So say good-bye to Zombies. At RFS, you’ll never experience a failure to rebalance (Zombie Sign #1), for we constantly review your account and make certain it continues to hold those ETFs best suited to your level of risk. Further, we’ll encourage you to increase your contributions to your account as your salary and other remuneration grow (Zombie Sign #2), making sure you comply with all applicable IRS regulations. And we sure as heck won’t let you forget us (Zombie Sign #3), because we stay in touch with you weekly . . . sometimes daily.

In fact, if you need to get in touch with us quickly, we give out our cell phone numbers: There’s no elevator music on our phone system.

Give Us a Call

So look around your financial world and see if some of your accounts qualify as Zombies. Look for the three signs: accounts not rebalanced, retirement accounts receiving low and out-of-date contributions, and accounts sitting at former employers. Or look at your nonretirement accounts. Do any of them qualify as Zombies?

You may call my cell number right now: (240) 401-2355. We can talk about your situation and look at your various accounts.

After all, doing it yourself can sometimes result in doing yourself in.

Best regards,

Jack Reutemann

 

[1] https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#7ecdb4e333bb
[1] https://finance.yahoo.com/news/zombie-401-k-131547647.html

How to Manage Your Money and Your Risk Exposure

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If you have any questions, please feel free to contact us. We are always here for you.
Enjoy!​

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How to Manage Your Money and Your Risk Exposure

Heads Or Tails?

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

Heads or Tails?

Them’s your odds.

Heads a normal, relatively healthy retirement. Tails long-term care (LTC).

So it’s 50-50.

Actually, the stats show differing percentages for men and women over 65. For men, 46.7% will need LTC, for women it’s 57.5%. 1

For all, roughly 50-50. Flip a coin. Heads or tails.

No one should plan a financial future with a coin flip.

Unfortunately, many do just that: they take the chance that the coin flips to heads. Then, something happens. A broken hip. Onset of dementia. Or these days, COVID-19. Suddenly, the husband or the wife, or both, need assisted care. The cost can spell financial disaster.

Horror Stories Abound

Writing for MoneyWatch, Steve Vernon recounted “3 Horror Stories” involving the need for long-term care. 

Here’s one:

A seventy-something friend of ours is taking in her 98-year old aunt, who ran out of money. The aunt’s son can’t or won’t help his mother, for whatever reason. Our friend and her eighty-something husband feel very strongly about letting her aunt live with them, despite the extreme disruption to their lives. But what happens when the aunt needs some form of long-term care? Our friend still works full time, and her husband isn’t really qualified or able to help if the aunt needs extensive care.  

​Many will face situations requiring LTC. And when they check their balance sheets, the question inevitably arises: Just how the heck am I going to pay for this?

Long-Term Care: The Price Tag

The numbers provide little solace. According to the National Association of Insurance Commissioners and the Center for Insurance Policy and Research, of those turning 65 between 2015 and 2019, 57.5% can expect to pay less than $25,000 on long-term care during their lifetimes. But 15.2% can expect to pay more than $250,000. 3

In 2016, the median annual cost of a semiprivate room in a nursing home was $82,125. A private room ups the ante to $92,378. 4

Planning for Long-Term Care

Many have looked to insurance to stave off the costs of long-term care. In the late 1970s, LTC insurance was called “nursing home insurance.” Only a few insurance companies wrote these policies. Back then, the annual national cost of long-term care totaled $20 billion. By 1980, those numbers grew to $30 billion. Now they have ballooned to $225 billion. 5

When the calendar flipped to the current century, many carriers started to exit the market. In the words of the NAIC Report:

Most insurers’ [LTC policies] issued before the mid-2000s have seen adverse experience when compared to their original pricing assumptions. Rising claims, low mortality and lower than expected lapses have led to higher prices often unaffordable to a large segment of the affected population. A number of insurers have also opted out of the market, leaving only a relatively few insurers to provide much needed LTC products. 6

The LTC policies provided back then were reimbursement, term-type policies. They resembled car insurance. They provided no cash value and no refund options if you died suddenly. You received no guaranteed renewal options. The insurance company could cancel your policy or raise your premiums. Not a pretty sight.

Needless to say, buyers of these products stopped buying. So insurance companies came up with hybrid products.

Now, using a guaranteed “no lapse” life insurance policy with two important riders, clients can protect their families from their early death, from disability, and from running out of money at, say, age 85.

The NAIC study describes this new approach:

One area of continued growth in the market is with combination or hybrid products. These products combine LTC benefits with either life insurance or an annuity. They can pay out if LTC is needed, but if not needed, there is a death benefit or annuity payout. In cases where an individual uses some, but not all, of LTC benefits, the remainder would be payable as a death benefit. This is one of the principal appeals of combo products. If LTC is never needed, there is still a return on the money invested in the premium. 7 

Example of the Hybrid Approach

To take just one example, a one million dollar life insurance policy with LTC and annuity riders protects your family from your premature death with the payment of a tax-free amount of $1 million. If you become disabled and can show an inability to perform certain daily routines, the LTC rider provides up to $120,000 of annual long-term care costs. And, if you live to age 85, the annuity feature kicks in: you can receive the entire $1 million death benefit through 10 annual payments of $100,000.

Give Us a Call

For 30 years, Research Financial Strategies has helped families like yours achieve their financial goals by providing a customized investment solution that is not only easy to understand and but is also focused on meeting your goals.

This starts with an in-depth understanding of you and your family, your current situation and your aspirations—not just for your money, but for your entire life. Often, that’s where LTC insurance, life insurance, and annuities can play a big role.

We always provide first-class service by taking the time to gain a deep understanding of you and your family. We work closely with you to develop a customized strategy that connects all aspects of your financial life. By focusing on all risks, we can help you protect what you’ve earned and guard against events that can take it away.

​Give Jack Reutemann a call at (301) 294-7500.

 

 

 

75 Must-Know Statistics About Long-Term Care: Sobering data on usage, cost, insurance products, and the toll on unpaid caregivers, by Christine Benz, Aug 31, 2017. https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care (“Morningstar Report”)
2 The Long-Term Care Threat: 3 Horror Stories, by Steve Vernon, Updated on: July 28, 2011 / 6:03 PM / MoneyWatch, CBS News. https://www.cbsnews.com/news/the-long-term-care-threat-3-horror-stories/
 The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, by Eric C. Nordman, Director, Center for Insurance Policy and Research, May 2016 (“NAIC Report”). https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
4  Morningstar Report https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care
5  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
6  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
7  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
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* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
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* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
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* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
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Investment advice offered through Research Financial Strategies, a registered investment advisor.

Where is Your Best Place to Retire?

Where is Your Best Place to Retire?

The best place to retire in the United States is in dispute. There’s no formal debate, but a review of reliable publications showed surveys have named different states and cities as the “best” place to retire. For instance:

  • Iowa was #1 in a best places to retire survey cited by Yahoo! Money.1
  • Fort Myers, Florida was #1 in the ranking from S. News & World Report.2
  • Athens, Georgia was the first name on a list of 25 places that are all the best, according to Forbes.3
  • Catalina Foothills, Arizona topped com’s list of eight equally best places to retire.4

In 2019, Kiplinger offered a list of the 50 best places to retire. There was one in each state.5

It begs the question, doesn’t it? How can there be so many ‘best’ places to retire? The answer is it all depends on the criteria used to make the determination. If you plan to move and start life in a new place during retirement, there are a variety of factors to consider. Some are general, like cost of living, state tax rates, and healthcare services. Others are personal, like livability or proximity to children and grandchildren.

Here are a few of the issues to consider when deciding where you’ll spend retirement:

Cost of living.
Affordability is an important consideration. The cost of living – the amount needed to pay for basic expenses like housing, transportation, groceries, and healthcare, varies significantly from state to state and city to city. According to a study by GoBankingRates.com, those four items cost retirees in Hawaii about $118,000 a year, on average. In Mississippi, they cost about $53,000 a year, on average.6

Home prices.
While cost-of-living calculations often include housing costs, some focus on renting rather than buying. If you plan to buy a home, then it will be important to learn about the average housing costs in the regions you’re considering. In September 2019, the U.S. Census Bureau reported the median home price in the United States was $299,400.7

Taxes.
There is a lot to think about when it comes to taxes. Kiplinger determines the most and least tax-friendly states for “a hypothetical retired couple with a mixture of income from Social Security, an IRA, a private pension, interest and dividends, and capital gains. We also gave them a $400,000 home (with a small mortgage) and $10,000 in deductible medical expenses.”8

The publication evaluates state income tax, taxation of Social Security benefits, retirement income tax-exemptions, property taxes, and sales taxes. You may want to consider these as well.8

Fiscal soundness.
Fiscal policy is the way a government balances taxes and spending, which can affect economic conditions in a city or state. A government that spends profligately will need to raise revenue and that could lead to higher taxes. Similarly, a government that restricts taxation may have little room to innovate and govern. A 2018 Pew Research report described the types of steps some states are taking to evaluate and adjust fiscal policies.9

Livability.
It’s a catch-all category that speaks to quality of life. For instance, how does the crime rate compare to other places? Can you get around without a car? Is it easy to walk or bike around town? Are there opportunities to take advantage of continuing education? What types of cultural events and entertainment are available?

If your list of potential retirement spots includes places you have not visited before, make sure you travel to them more than once. If possible, live in the community for a few weeks or months.

Availability of healthcare.
If your list of possible retirement locales is comprised primarily of cities, healthcare services may be readily available to you. If your preference is for more remote locations, it will be important to investigate the availability of healthcare services.

One of the criteria that informed Kiplinger’s ‘10 Great Places to Retire for Your Health,’ was the availability of a hospital with a five-star rating from the Centers for Medicare and Medicaid Services. In rural areas, you may need to consider physicians per capita.10, 11

Work prospects.
A lot of people would like to continue working in retirement. They may begin a new career, start a business, offer mentoring, or take on a part-time job. If a working retirement is a priority, you may want to research which cities have the highest percentage of workers age 65 and older, and where the growth of 65 and older workers is fastest. A 2019 CNBC article ‘Here are the cities with the biggest share of 65-and-older workers,’ offered some insights such as the top 10 cities, where these workers have a significant share of the workforce, five Texas cities are listed.12

Weather.
If you hate the cold, South Dakota will never be the best place for you to retire. Similarly, if you hate heat, Arizona may not be the most desirable choice.

The bottom line is the best place for you to retire is the place that meets your criteria. Money.com explained it pretty well:5

“What makes a great place to retire? It’s a trick question, of course – there are as many answers as there are retirees. Some love to golf in the sun, while others feel most invigorated by winter sports. For every history buff, there’s a modern art enthusiast, an adventurer for every homebody.”

The first step in finding your ‘best’ place to retire is to know yourself and your spouse and what will be important to you in retirement. If you would like to discuss the financial aspects of retirement, give us a call. We’d be happy to talk with you.

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Things Financial Advisors Don’t Tell You – The importance of prioritizing your goals

Things Financial Advisors Don’t Tell You – The importance of prioritizing your goals

Things Financial Advisors Don't Tell You

 The importance of prioritizing your goals

Recently, we decided to share some non-financial lessons we’ve learned in a series of letters called, “Things Most Advisors Don’t Tell You.” You see, there are certain habits and behaviors that, while not directly related to finance, can spell the difference between reaching your goals or not. But in our experience, people rarely hear about these things from their financial advisor.

That’s unfortunate, because applying these lessons makes working towards your goals both easier and more rewarding. So, without further ado, here is:

Things Most Advisors Don’t Tell You #3: The importance of prioritization

Once there was a farmer who woke up early to milk his cows. On the way to the barn, he noticed his fence was broken. So, he went to his shed to get his tools, only to find he was out of nails. On the way to town to buy more, the fuel light in his truck came on. As he filled up at the gas station, he noticed a shoe store across the street advertising a special on men’s work boots. As his own were starting to wear down, he went to buy a pair. Then, he went to the hardware store. Once inside, he remembered his tractor needed a tune-up, so he bought the equipment he needed and drove home. Upon arriving, the sound of clucking hens reminded him to collect their eggs. After finishing that, he turned his attention to his tractor. By the time he finished, the afternoon was making way for the evening. “Still time to fix the fence,” he thought, when he realized he’d never actually bought the nails. So, back to town he went to get more.

The stars were out by the time he finally fixed the fence. Exhausted, the farmer went inside and kicked off his boots. But just as he sat down, his wife asked him why they had no fresh milk.

Groaning, the farmer rubbed his eyes and wondered why there was never enough time in the day to do what needed doing.

***

This is an extreme example – and obviously no self-respecting farmer would work like this – but it illustrates an important point. Too often, many people start the day – or the month, the year, or even an entire phase of their life – with a goal in mind, only to be distracted and side-tracked.

The result? We fail to achieve what we originally set out to do. We fail to realize our most cherished dreams.

There are two main culprits behind this.
1. We don’t plan ahead.
In the story above, the farmer probably would have felt a lot better about his day if he’d laid out a plan. But instead, he started going around in circles, always making decisions based on what he saw right in front of him. Many people to do this with their finances, too. For instance, maybe you decide it’s time to pay off your debt. But then you notice the roof needs repaired, so you pay for that. Then you get frustrated because your personal computer is old and slow, so you buy a new one. By that time, your money is running low, so you decide to just wait until your tax refund comes. But when the refund comes, you’re burned out from work, so you go on vacation instead. Meanwhile, your debt just grows and grows. When we plan ahead, we can determine what we want to accomplish, what steps it will take to get there, and when and in what order we execute those steps. Done correctly, this ensures we do more of what we actually want to do.

2. We don’t prioritize.
This is the culprit many advisors don’t talk about.
Let’s take the farmer again. Obviously, everything he did needed to get done – but some things were probably more important than others. The fence, maybe, could have waited. Buying new boots could have waited. Or perhaps he could have made a list of everything he could do without going into town, and a list of everything that required going into town. Then, he could have prioritized which tasks to do first, and in doing so, gotten a lot more done with a lot less effort.

Taking time to prioritize our goals, needs, and short-term wants has a similar effect. It ensures that we allocate our time and our money as effectively as possible. For instance, some people may find that investing their money for retirement is a lower priority than starting a rainy-day fund. Others, meanwhile, may get the most bang for their buck if they prioritize minimizing their taxes over, say, earning more money.

Life is hectic, and it seems like we always have a million-and-one things to do. Thankfully, the solution doesn’t always require beating our heads against the wall because we’re trying to “work harder.” Sometimes, the solution is to work smarter – by planning and prioritizing how we spend our time and money.

Next time, we’ll move on to a topic you’ll rarely hear a financial advisor talk about: Achieving financial harmony in the home. In the meantime, have a great month!

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