Atlanta Planning Guys

The recent months in the equities market have seen some pretty serious returns.  Are we over this slump?  Is the future going to be bright from here on?  If you know Cass and me, you know that our philosophy on the market is reasonably consistent whether up or down.  Our mantra is to develop a plan and stick to it.  There will be times when most plans will require minor changes to adjust for different life circumstances.  However, for many of our clients…now is not one of those times.

 You may remember my blog posting from September 15^th, 2008 (http://atlantaplanningguys.com/?p=28).  We were in the midst of the downward spiral.  I think Cass and I went a solid week of daily posts and all of them market related.  My post in September had to do with avoiding those knee jerk reactions to market fluctuation.  Staying the course in good and bad times and standing fast by the portfolio and plan that had been put in place is of the utmost importance.  This was certainly applicable in September of 2008 and now with several months of pretty strong performance under our belt, holds true today.

One of the biggest issues we see when markets are on the way up is constant chasing of the leaders.  I liken it to a dog chasing its tail.  That dog will likely never catch its tail and will ultimately end up really tired and dizzy.  We are coming to the end of the second quarter.  Those performance reports will come out for your IRA’s, 401k’s and other accounts.  Don’t chase returns.  Let me create a classic example for you:

John is 46 years old and has worked for Company X for 12 years.  He has built a nice nest egg in his retirement plan by constantly investing and having a very diverse portfolio of funds.  John stayed invested through the market decline and continued to defer money every paycheck.  He pulled up his account yesterday just to see how things were doing and noticed something interesting: his international emerging growth fund had grown 37% in the last two month.  John knows he has another international fund in his portfolio and it only gained 22%.  What does John decide to do?  John does what most folks would have the tendency to do…click a few buttons with his mouse and sell the fund that only gained 22% to purchase more of the fund that grew 37%.

 Ask yourself, what John has done that’s so wrong.  The mistake I want to focus on is his complete removal of an asset class in his portfolio (international large cap).  John has decided to chase after the performance of his emerging fund and is comparing its performance to a completely different kind of fund.  This would be like firing your plumber and hiring an extra electrician.  You don’t need two electricians.  What you need are both and if you aren’t happy with the job one of them is doing…go replace them properly. 

Take a look at this chart that tracks the performance of several major asset classes over a 10-15 year term.  You will notice that rarely is the same sector the leader from year to year.  In most cases, you can see patterns of several years at the top followed by several years at the bottom.

When you open that statement in the coming weeks, don’t be so quick to chase the best performers.  Pay attention to how your investments stacked up to their peers and benchmarks…not one another.

One could ask this question of several different people and get several different answers. 

Insurance agent: “Now.  You can potentially lock in the rate and you don’t have to worry about whether you will be insurable in the future.  Something could happen to you today that might render you in need of long term care for the rest of your life.”

Financial publication X:  “When you are 60.  This is the time to start thinking about long term care expenses.  Sure you could potentially lock your rates in at a lower rate if you buy it sooner, but you will be paying the premiums longer.  The average stay in a facility only lasts 2.2 years anyway.”  [note:  any statistic meant to justify their position could have been inserted in that last sentence.  I hear "2.2" more than any other.]

Financial publication Y:  “Consider whether you really need it.  Many people should self- insure this expense.  Since the average stay is only 2.2 years, you should easily be able to weather the storm of these expenses.  Paying premiums for many years to avoid only 2.2 years of expenses is a waste of money.”

Cass Chappell:  “It depends.”

The insurance agent and the two financial publications have oversimplified the need and made some dangerous assumptions.  

My belief is that there is no concrete answer to this question.  No simple test that will give you the answer.  However, there are four basic variables to consider:

Current Financial Situation

Charles wrote a great article about long term care insurance on November 10, 2008 http://atlantaplanningguys.com/?p=67 .   His article discussed the different things to consider when you have decided to purchase the policy, such as what policy limits and elimination periods to consider.   Even if you purchase a policy with a lifetime benefit, there is still some maximum amount that the policy could reasonably be expected to payout.  Because of this, it REALLY IS POSSIBLE to self-insure against the costs of a long term care need.  The number of people that fall into that category, however, is smaller than you might think.

Consider a couple with $2 million in savings.  This is the sole source of their retirement savings.  They are currently living on about $80,000 a year in withdrawals from their investment accounts.  [Let's ignore ANY social security or pension payments that they might have coming in].  We subscribe to a withdrawal rate from a nest egg of about 4.5%.  As you can see, this couple is already cutting it close.  If a long term care event were to happen and an added expense of, say, $30,000 per year were added, this could be detrimental to their nest egg. 

Self-insuring should be considered only when a nest egg is large enough to withstand withdrawals of 4.5% INCLUDING long term care expenses.  In that situation, one might purchase the insurance ANYWAY (since the premiums are so small in relation to the nest egg).

Appetite for Risk

Many people live their lives and never need to pay for assistance.  Many people who do pay for assistance only pay for a very short time (because they pass away after 2.2 years, remember?).  Deciding to “roll the dice” and forego the purchase of an LTCI policy is something many Americans have decided to do (LTCI sales have recently slowed somewhat). 

“It won’t happen to me.”  “My mom and dad lived to 90….never any problems.”

I have heard every variation of the two statements above.

The worst excuse I have ever heard?

“If I need to someone to take care of me because I can’t do it myself, just shoot me.”

Believe it or not, I have heard that EXACT statement many times.  I don’t really need to address what is wrong with that logic.

In all seriousness, you could take the risk of not purchasing the insurance.  I would point out that the premiums are small compared to the devastating effects of a prolonged long term care event.  Modern medicine is keeping people alive that would have died after a few years in the past.  This trend is likely to continue, meaning that the chance of a prolonged, financially devastating, event will only grow larger.  Just understand this risk before you take it………

Other Types of Insurance

You might have a disability policy that provided for benefit payments to age 65.  Benefit payments are usually expressed as a percentage of income.  For most people, this payment would be larger than the payments from an LTCI policy.  Some policies allow for conversion to an LTCI policy at a stated age.  If you fall into this category, you might consider delaying the purchase of an LTCI policy until either your disability policy terminated or your conversion period was set to expire.

Health Status

Buying insurance NOW does eliminate the risk that you may not be insurable in the future.  With the exception of someone who has an insurance policy that allows for the guaranteed conversion to an LTCI policy, you ARE taking a risk that you may not be insurable in the future.  Once you have been diagnosed with a cognitive impairment it is too late to get a policy.  Once a degenerative bone condition has been diagnosed it is too late to get a policy.  Once you have a stroke,…. ETC, ETC, ETC, ETC.

This is a REAL risk.  In our experience, many people decide to purchase a policy simply because they are currently healthy and don’t want to risk being denied in the future.

So we have covered some important things to consider when choosing or designing your health care plan.  In addition to figuring out networks, deductibles and co-pays, there are several underlying themes that transcend most every health insurance plan.  These simple guidelines, over the long run, will help you keep health insurance costs under control and stress at bay.

1.      Utilize your plan properly:  by using your plan properly, it will save you out of pocket expenses and time.

a.      Emergency rooms are for exactly that…emergencies

         i.     Don’t use that as your primary entry for treatment

         ii.     It should be a last resort

b.      Plan ahead with testing and lab work

c.      Understand how your deductible/co-pays/coinsurance works

2.      Check all your plan options: you may be able to get better coverage or a better premium by exploring what is available to you.

a.      Could an individual plan cost you less?

b.      The rates at your spouse’s company plan may be lower than yours

c.       What programs are available for my children?

3.      Be SMART with your health: there are just too many things that are well within your control that will help your premiums and general medical costs stay lower over time.  I’m not a nutritionist or doctor…but it’s hard to argue with the potential impact these can have on your overall health:

a.      Proper Diet/Nutrition

b.      Drinking the right fluids to stay hydrated

c.       Quitting that nasty tobacco habit

In part 1 of this series, we addressed several considerations for how your health insurance plan could be designed if you were trying to reduce your premium.  The aim of this blog is to potentially help you reduce your health insurance costs without reducing too much of the benefits you pay for.  As stated in the previous blog, “Once you have paid a premium dollar to the insurance company, it’s GONE!”

How else might you curb those premium dollars?

• Be realistic about your Network Needs: There are generally three network options to choose from
  • Health Maintenance Organization (HMO)- Typically, the most restrictive plan model.
    • Coverage must stay “in network” for coverage
    • Network is generally smaller
    • Least expensive form of network option
  • Point of Service (POS)- Generally a more open architecture that lends itself to broader provider options
    • Network size is significantly larger than HMO (in most cases)
    • Primary Care Physician (PCP) selection is usually required
    • Referrals must usually come from PCP to qualify for coverage
    • Mid-tier cost relative to HMO and PPO
  • Preferred Provider Organization (PPO)- Completely open architecture within a large network of doctors
    • Networks stretch over the nation in some cases
    • No PCP required, with few exceptions for special treatments
    • No referral required
    • Cost is highest of three plan options
    • Out of Network Benefit is available

Let’s apply some real life situations to the above information and see what we come up with (keeping in mind that this is general advice and meant to get you thinking along the lines of saving money on health insurance):

Single Male/Female: Just starting a career or still looking for one…either way the younger you are…the less likely you are to need health insurance for routine maintenance.  In many cases, the only trips to the doctor are for emergencies.  Bottom line; don’t spend a penny more than you have to for your health network.  HMO’s may be the way to go for you.  It reduces your premium as much as possible and still gives you access to a huge network of hospitals and doctors to select from.

Young Couple wanting to start a family:  You may want to do a little shopping around for your OB/GYN before you select the network option you want.  Chances are pretty good that your doctor will be in an HMO network…it might not be the right one though.  Your situation may call for a little more open architecture.  Check into the POS first, then the PPO.  Keep in mind that you may also want to consider changing doctors if the network isn’t going to work.  The savings between HMO and POS/PPO could be in the thousands per year.

Family of Five:  This is perhaps the most difficult situation to figure out.  There are a number of factors that play a role in network selection for a family.  As is the case with everyone of our scenarios, the HMO is always going to save you the most money.  That is no different here.  Some considerations to venture into a more open network might be:

- Children with Allergies: some of the best specialists usually hang out in the bigger networks structures (POS/PPO’s).

- If you travel a good bit with your children (vacations, sports, distant family visits): HMO’s usually extend coverage out of network if it’s life/limb threatening. However you might get stuck on a family trip with a sick child that isn’t in real danger but should see a physician. This could get costly with “out-of-pocket” expenses.

Kids are out of the House:  Time seems to begin catching up with most of us by the time we hit 50.  Chances are pretty good that you are going to end up at the hospital or clinic for tests.  All three traditional network options are going to give you access to these tests.  Sounds like homework time again.  These are largest earning years for many people.  With the early detection capability of many screening exams today, don’t short yourself on access to the best testing possible. 

A few dollars in extra premiums will more than be made up if they catch that cancer before it spreads or pick up on that slight blockage you have near your heart.  Remember that prudence still wins the day.  If access to all the necessary doctors and clinics is available through the HMO network…go for it.

It has been called “The Fastest Two Minutes in Sports” and, of course, “The Run for The Roses”.  The Kentucky Derby is my favorite sporting event of the year and a GREAT EXCUSE TO WEAR A SEERSUCKER SUIT!

My success in picking the actual winner has been rocky, at best.  I attended my first Derby in 1993 and haven’t missed one since.  For several years I doubted that I would ever cash a ticket on the winner, but that all changed in 2006 with Barbaro.  Ridden by my favorite jockey, Edgar Prado, I had been pulling for Barbaro well in advance of the 132^nd edition of the greatest horse race in the world.

That win snapped my 0 for 13 losing streak.

The following year brought Street Sense.  I had him too.  Two in a row!  My fortunes had changed and I was convinced that I was poised to pick the winner each and every year from now on.

Last year, Kentucky Derby 134, brought me back down to earth.  I went with Pyro. Big Brown ROLLED.

(On a side note: I went to the Belmont Stakes, convinced that I was about to see Big Brown win the first triple crown since Affirmed in 1978.  That didn’t work out too well…)

This year, I am going with……

#13 - I Want Revenge

 I Want Revenge, coincidentally, has the same connections as Big Brown.  Even though that fact alone makes me nervous (two years in a row for the same ownership team?), I still think he is just too good.

The young hotshot of Animal Planet’s “Jockeys” show, Joe Talamo, takes the reigns in the biggest race of his life.

Why I think he will win

• He has the highest lifetime Beyer speed figure (113) in the field, by far.

• The horse had an incredibly difficult trip in its last race, the Wood Memorial, but was able to post and impressive last to first win. This experience should come in handy in a 20 horse field that is traditionally crowded around the turns.

• The Louisville Courier Journal came up with an interesting predictor of Derby success several years ago. In a horse’s final 1 1/8 mile prep race, he should run the final eighth in under 13 seconds and the final 3/8 in under 38 seconds. This is a measure of stamina. In the Wood, I Want Revenge ran his last 1/8 in 11.91 and the last 3/8 in 36.37. Only Hold Me Back ran both of those distances faster in his final prep.

• I Want Revenge posted a BULLET workout (fastest of the day) on Tuesday, working 4 furlongs in 41.2 seconds - the fastest of 49 other horses.

Who I am fearful of

#16 - Pioneer of the Nile

• Career best Beyer of 96. Not fast enough??
• Trainer Baffert has won three Derbies and he is talking a good game.
• Never raced on dirt before. Can he handle the Churchill Downs dirt track?
• Garrett Gomez, the best jockey in America, chose this horse over Dunkirk.

#15 - Dunkirk

• Only three lifetime races. But Big Brown was lightly raced too. Look how that turned out?
• How long can trainer Todd Pletcher’s drought at the Derby last?
• Edgar Prado is onboard. I hate to bet against MY MAN!
• His Tomlinson Figure for 1 ¼ miles is only 281. I Want Revenge is 331 and Pioneer Of The Nile is 328. The higher the better.

#6 - Friesan Fire

• Larry Jones charge comes out of a good post position (6) and is fresh after posting a bullet workout of his own on Monday. This was very similar to two other horses Larry Jones trained for the Derby recently: Hard Spun - second in 2007, and Eight Belles - second in 2008.
• He has shown the ability to run well on an off track. Could it be soft on Derby Day?

#7 - Papa Clem

• Could he be peaking at the right time?
• Winner of the Arkansas Derby.
• Upward Beyer speed figure trend.

Post time is 6:24 (coverage begins at 4 pm on NBC).

Hopefully, at 6:26 I will be enjoying a tall frosty Mint Julep while celebrating the victory of I Want Revenge.

UPDATE

I Want Revenge scratched from the Kentucky Derby early on Saturday morning with some slight lameness.  My official Derby pick then became Dunkirk (at about 6-1 odds).  Mine That Bird pulled off a MAJOR UPSET at over 50-1 odds….on to Baltimore and the Preakness.

The problems continue to mount for our health care system in the US.  What can you do about it?  Your options may not be as limited as you think.  There are a number of things you can do as an insured to curb costs.  Let’s spend some time today discussing how to make wise decisions on your plan design.  Whether your choice is between two plan options sponsored by your employer or the endless offerings put forth by individual carriers, there are certainly some general guidelines to follow.

Things to consider about the plan design that can impact the premium:

• - Co-pays:  - $10 & $20 co-pays are too rich a benefit and cost a ton
  • o Any of the following could reduce your premium substantially
    • Consider $40 or $50
    • Many plans offer you the ability to limit the number of co-pays per calendar year (usually 4 or 6)
      • Once met, the deductible applies
    •  Consider removing co-pays altogether with an H.S.A plan
• - Deductibles: it seems so obvious, but I needed to say it
  •  The higher your deductible, the lower your premium
  • Be careful not to go too high.
    • You need to be able to afford the catastrophe
• - Co-Insurance: What you pay once the deductible is met
  • Represented as a percentage (100%, 90/10, 80/20, 70/30)
    • The more you pay (70/30), the lower your premium
  • Must consider deductible when choosing your coinsurance
• - Drug Benefits: premiums are certainly tied to prescriptions
  • Are you carrying a prescription deductible?
    • Even a $100 or $200 deductible helps
  • Know your formulary
    • What counts as generic?
    • Are my brand drugs covered?
  • Raise your Co-pays

Take a moment and really think about what benefits are most important to you.  Whether you’re a self employed person, business owner or employee trying to choose the right plan for you; these factors will ultimately impact your premium.

If you take away one thought from this article, let it be this: “Once you have paid a premium dollar to the insurance company, it’s GONE!  Reducing premiums can ultimately lead to substantial savings if you stay healthy.”

On March 9, 2009 the Dow Jones Industrial Average closed at 6547.05.

Today, April 7, 2009 the DJIA closed at 7789.56 - almost 19% higher.

The attached slide meets my criteria for posting on our blog (short and easy to understand) and shows some interesting information about each bear market since 1900.

This slide, courtesy of Wachovia Securities, reinforces many of our previous blogs.  In the past, bear markets have been followed by strong returns in the following 12 months.  Since WWII, for example, the average return for the DJIA was 29.6% one year following the bear market low.

We believe it is impossible to accurately “pick the bottom”, so I do not want to imply that March 9 was the low OR that the next twelve months following a low will behave the same as in the past.  

You can’t know if it was the low until 12 months later - but here’s to hoping it was!

Wachovia Securities is its own broker/dealer.  We are not affiliated with Wachovia Securities.  This attachment is for informational purposes only.  We offer access to securities through LPL Financial, member FINRA/SIPC.

I got the “double dumb” phrase from one of my earliest career mentors, Bill Lohnes.  Bill was the managing director with the company Cass and I worked with before starting our own firm.  Bill used the term “double dumb” quite a bit in the year 2000.  In many cases, he was referring to clients making a terrible financial decision.  Typically, these decisions were emotional in nature and either involved greed or fear.  We have certainly seen our fair share of greed and fear in the market lately.

Twice in the last week, I’ve had a conversation with a client on the topic of benefits.  In both cases, I was informed that our client’s employer had decided to stop matching contributions to their 401k.  Once we worked through the expletives, I uncovered that both of these clients were considering taking all their 401k balances and putting them in cash.  I certainly understand the fear that drives a decision such as this.  However, I advised them to stick it out. 

In both instances, I was able to talk them out of moving money into cash.  Only to have them tell me that if they were going to keep it in the market…then they would at least be cutting their contribution now since there was no longer a match.  Double dumb! 

There are two very time tested investment philosophies that work in the long run: dollar cost averaging* & time “in” the market.

 We have discussed dollar cost averaging* before and will certainly do it again.  For this post, let’s focus on time in the market compared with trying to time the market.  This slide  illustrates the impact being out of the market can have on a portfolio over a substantial period of time.  We don’t know where the bottom of this market is.  No one knows.  Getting out now, parking your money in cash is most likely counterproductive to your portfolio’s long term health.  Stay diversified and in the market.  If history repeats itself, you’ll be glad you did.

*Such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities.  An investor should consider their ability to continue purchasing through periods of low price levels.  Such a plan does not assure a profit and does not protect against loss in declining markets.

It is no surprise that public figures make an easy target for ridicule when things go south.  I read an article on MSN.com recently throwing Suze Orman under the bus.  It points out the differences between the guidance she provides to her clients versus what she practices in her own portfolio.  Here’s a hint…she doesn’t practice what she preaches.

Financial pundits are all over the place.  We have several very notable ones right here in Atlanta.  The advice handed out over these various mediums is general at best.  It has always amazed me that people are so willing to blindly trust the advice they get from someone they spoken to for less than 90 seconds.  The one thing that all of these so called ‘experts’ seem to have in common is…they know next to nothing about your personal situation!  I’m not begrudging everything that they say.  We could all take a lesson or two from anyone that promotes making smart financial decisions.  My feeling is that many of these so called gurus do one thing extremely well…sell their latest book or seminar program. 

The keys to financial success do not lie within the pages of a book or a 3 disc set that you can order right now for $29.99 plus shipping.  Financial planning and wealth management are practiced on a very personal level with a professional that has the education and experience to guide you through the labyrinth of decisions that must be made in order to reach your goals.  Is it possible to pick up some very helpful hints on improving your financial picture by watching a television show or listening to someone on the radio?  Absolutely!  Are you going to be able to build a sound financial strategy that puts you in the best position possible?  It’s not likely.

The real experts aren’t selling books.  They are meeting with clients and becoming intimately involved with every aspect of their life.  These professionals are the people you should turn to in good times and bad…not the television or radio.

I have been searching for ANY silver lining to the current stormy clouds that almost all investors have been weathering.

2010 should be an exciting year for investors who are still saving for retirement (and even those who may have to start saving again!).

The posting below was originally sent to our clients in mid-2007 - well before the current market decline.   If your balance is lower now than it was then, this strategy might make EVEN MORE sense.

Chappell Mayfield and Associates supports being green.  So, here is a recycled idea…………..        

                        .                                                                                                                                           

Originally sent March 2, 2007

2010: A Roth Odyssey

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).  The law contains many provisions, however, there is one provision that is one of the most exciting things I can remember in my 10 years in this business.

 First, let’s review:

• Withdrawals from a traditional IRA at retirement are subject to income tax, withdrawals from a Roth IRA at retirement are not subject to income tax (with few limitations - consult your tax advisor).
• Under current law, a couple (or single for that matter) must have an adjusted gross income of under $100,000 to convert an IRA (or 401k rollover) to a Roth IRA.

Drum roll please…………:

• In 2010 (because of TIPRA), one can convert an IRA, 401k rollover, and virtually any type of retirement plan to a Roth IRA regardless of income.

•   The rules also allow the taxpayer to spread the tax on the conversion over the next two years (2011 and 2012)!

“OK.  So how will this affect me?”

The main advantage of a Roth IRA is that withdrawals are made, after age 59 ½, totally income tax free (as long as it has been 5 years since your date of first contribution or 5 years since each conversion is made).  Also, there is no required minimum distribution after you reach 70 ½, like there is with a traditional IRA.

The decision to convert, or not to convert, will be affected by many issues, such as life expectancy and your tax bracket expectation at retirement.  Needless to say, we will have calculators and other resources to help you make your decision.

 “What can I be doing in the meantime?”

•  It is almost always a good idea to maximize retirement savings. This event makes it even more appealing.
•  If you aren’t able to contribute to a Roth now, contribute to a traditional IRA….we can convert it in 2010.
• If you have an old 401k lying around, don’t automatically roll it into your new 401(k) at work. Consider rolling it over to an IRA and funding it…we can convert it in 2010.
•  Many 401(k) plans allow you to rollover your balance even while you are working. It may be a good idea to beef up your contributions in anticipation of 2010.
•  Imagine having a pool of money to draw from in retirement that is 100% income tax free forever!

For some, this may even impact your 2008 taxes.  There is still enough time to make a substantial impact on your 2010 retirement savings - and beyond.