Atlanta Planning Guys

Have you started a savings account for your children?  Perhaps you have put money into a 529 plan for college.  Do you traditionally put money toward their future at the end of the year in the form of a gift?  Let’s take this investment in our children’s future a bit further this year.

Involve your children in the process of receiving and then subsequently investing that money into the market.  Let them see where it goes and involve them in the process.  The sooner they learn to invest for the long run, the better.  You can show them what an opportunity there is in the equity market right now.  Take that money and buy a mutual fund for them.  Think how easy it would be to explain the advantages of the diversification you get when purchasing a mutual fund.

Now you have something to sit down and talk about every year or every quarter with your children.  Who knows, maybe they will want to start putting some of their allowance toward their newfound investment.  Next thing you know, you’re raising the next Warren Buffett.

What better time than now to remind our friends and clients about the age-old practice of a sticking to a budget?  We should always strive to call on life’s challenges to help grow and nurture ourselves personally, professionally & certainly financially.  If you are like me, you wait until the last few weeks of the year to get all that holiday shopping in.  Sometimes I manage to find a perfect gift for a loved one during the year.  However, most of my shopping for Christmas gets done in a matter of a few days between Thanksgiving and Christmas.

What a great opportunity to exercise financial responsibility.   Develop and stick to a budget for your Holiday shopping.  You can make a basic list of gifts for family/friends or go overboard and include every last expense you can imagine (tree, candles, gift wrapping, holiday party food).  Make the budget as elaborate or simple as you want.  The point is to develop the budget and stick to it.

This is an incredibly powerful exercise to do with your spouse or even grown children.   This economy gives us all the perfect excuse.  Even if you aren’t tightening your belt in these economic times, it never hurts to budget.  Who knows, you may even learn something new from the process.

Have a safe and very happy holiday season!

Whether it is near the water cooler at work or following a pickup game at the gym you may have been told the magic formula to calculate how much life insurance you need.  Let me guess; someone told you 7 times your salary or was it twice the value of your home?  Was it $500,000 for every child you have?  I can’t tell you one magic formula for how much life insurance you need.  What I can tell you is there is a way to properly analyze your individual situation, and figure out the right amount for you to have.

Here are a few of the things to consider when calculating your life insurance need:

Immediate Cash Needs:  What current debts, expenses and costs do you want paid immediately upon your death?  Some examples include: burial, consumer debt & 6 months of living expenses.

Income Needs:  What percentage of your income do you want replaced and for how long?  This is a very subjective number.  It will boil down to a personal preference combined with some financial calculations.   The final calculation should incorporate short and long term goals for the family.

Goal Oriented Needs:  Would you like the house paid off, or the kid’s college expenses taken care of?  We can predict what the cost of most goals and expenses will be in the future.  This number is fairly straight-forward.

Talk to an independent financial advisor or CERTIFIED FINANCIAL PLANNER^TM about how to tie all three of these needs together.  Be prepared to discuss your ultimate vision of your family or business after you are gone.  The clearer you paint that picture, the easier it will be to pinpoint a plan that is right for you.

The major stock market index has closed today at an 11 ½ year low.  The S&P 500 closed at a level not seen since April 14, 1997.

Since our week-long, daily barrage of blog entries in mid-October we have posted very little.  Twice in that time-span I actually had a blog typed up, chock full of investor education and confidence-inspiring quotes, only to see the market turn around and finish the day on a positive note.

Last Thursday is a prime example.  This turned out to be the third largest positive move in the Dow in history.  It happened in the final minutes of trading, after being down big for most of the day.  A client called me early in the day asking what my blog was going to say.  He had apparently gotten used to the “keep your head up” blog postings.

Today was nearly the opposite of last Thursday.  It seemed that the government was going to announce a bailout of the auto industry.  Because of this rumor, the market shot up midday.  Only in the closing minutes of trading today did the markets take a tumble.

Almost every sector of the market is down for the year.  Most are down BIG.  It seems that no asset class is immune to this crash.

What is an investor to do?  I think that most of you will agree that now is NOT the time to sell.  It’s too late to sell. 

In my opinion, these are the four keys to investing over the next year:

• We are reviewing to see that our clients’ investments are diversified.  A mix of large, medium, and small companies. Domestic and foreign. Equity, fixed income, and alternative.  Are there any gaps in allocation?
• Pay close attention to small cap investments.  This asset class has typically been the first to rally when past bear markets have come to an end. 
• Fixed income may be an important asset class going forward.  The spread between corporate bonds and government bonds is among the largest in history.  If, or when, these spreads contract, corporate and municipal fixed income investors could be rewarded nicely.
• Stay in the market.  History has shown that the turn-around from a market bottom can be very rapid.

“What can I do to capitalize on the current market downturn?”

A frequent recommendation, which affects most of our clients, is to consider increasing retirement contributions.  If you can afford to increase your salary deferrals into your company’s retirement plan, it may be a great opportunity for you to “max out” your plan. 

But, be careful…..

Several times a year we find someone who is maxing out their retirement plan very early in the year.  Makes sense right?  Get it in there quickly so it can go to work…….

As Lee Corso, ESPN College Football analyst, says: “Not so fast, my friends”

If your company offers a match, maxing out your retirement account early in the year will usually leave money on the table.

An example

Company ABC offers a 5% match

Joe Smith earns 100k per year

2008 401(k) maximum contribution is $15,500

Joe contributes 20% of each paycheck into his 401k.  He will max out his 401k some time in October ($15,500 is 20% of $77,500).  This means that his employer will not match his contributions for the $22,500 that he earns the remainder of the year.

In this example, Joe left $1125 on the table (5% of $22,500 is $1125).

An employer only matches contributions as the EMPLOYEE makes contributions. 

To maximize the employer match, it is important to max out the plan as late in the year as possible. 

To calculate how much to contribute in order to max your account out at the end of a full year, divide your salary (include the bonus if your employer uses the bonus in the matching formula) by the current year limit.

In the example above, Joe should contribute 15.5% of his salary.  By doing this, he will contribute the full $15,500 into his plan AND the company will match for the entire year (putting $5000 into his plan).

If you are a high earner (over 250k in 2008) there is a caveat to this, however.  In 2008, only the first $250,000 of salary is allowed to be matched (this maximum match amount is indexed for inflation).  Since the employer only matches as the employee contributes, someone who earns a salary of 250k or above would want to contribute 6.2% of their salary.

By contributing 6.2%, the maximum $15,500 will have been contributed by the time this employee earned 250k (whether that milestone is hit early or late in the year).

This is an illustration of how the mechanics of company matching contributions can work.  Your results will vary.

These rocky times in the market have certainly got plenty of us on edge about what our money is doing for us.  I felt like this was a great opportunity to use the current state of affairs to highlight another tool that helps protect our clients.  No…Long Term Care (LTC) Insurance will not keep your portfolio from declining in these volatile markets.  However, if your investments are down, it only further drives home the importance of making that money last in retirement.

 In planning for retirement, there are many costs that consumers should always count on.  Housing costs, utilities, vacation, food and health care costs just to name a few.  What is often overlooked is the cost associated with a physical or mental impairment that limits our ability to perform the simplest of tasks without assistance.  These tasks, known the activities of daily living (ADL’s) are: feeding, bathing, clothing, transferring, going to the bathroom and continence.  Additionally, you could have a cognitive impairment such as a stroke.  It is very difficult to plan for such an illness or injury in much the same way you can’t really plan for a car accident.   LTC Insurance is designed to protect our savings and assets against the additional costs incurred by the needs associated with this care.  Most policies trigger when the insured cannot perform two of the ADL’s or has a cognitive impairment.

Not so long ago, you could see a few nursing homes scattered throughout local metropolitan areas.  Today, we see assisted living facilities, adult day care and the increasingly popular “in home care”.  The majority of policies sold today will cover treatment received in any or all of these settings.  The average cost of care in the US today is a little over $120 per day.  This can vary dramatically depending on where you live (rural/major city/state).  The purpose of this blog is to provide consumers with some real “take-away” information regarding relevant topics.  So, please allow me to give you some basic information to look for when it comes to making a decision regarding LTC and its place in your overall planning.

First, if you are over the age of 50, now is the time to begin exploring long term care insurance.  There is supportive date that suggests the odds of needing the coverage go up significantly past this age.  Second, you should rarely fully insure the risk.  In other words, if the cost of care is $120 per day…consider a policy that provides you with $80-$100 per day in benefit.  Obviously, the more coverage you buy the more expensive it gets.  It is imperative that the cost of LTC fit into your budget now and in the future.  Lastly, LTC is a very dynamic policy.  There are many different features and benefits that make up a policy.  I want to highlight the four main features and give my suggestions on how to shop for them:

- Daily Benefit: How much coverage (usually expressed either per day or per month)

•  I have touched on this above. This is the ultimate cost driver when constructing a policy.
•  I suggest insuring 70-80% of the costs associated with where you live…or plan to live in retirement

- Benefit Period: How long will my benefits be payable (2,3,4,5,10 years and lifetime)

• This benefit is calculated using 365 days per year (a 2 year benefit would really give you 730 days of coverage)
• Most policies only count days you need care as days against your benefit period
• Not an area I like to skimp on. When I quote this for our clients, I typically start with lifetime and work our way back if the premium is out of budget.
• The statistics say that the average need is a little more than 3.5 years. However these numbers don’t account for much of the unskilled care performed by family. Nor do they track what happens when someone leaves a facility.

- Inflation Protection: How much does my benefit grow each year (none, Simple, Compound are most common options)

• If I purchase $100/day today, it needs to grow with the cost of care
• There are several ‘hybrid’ inflation riders that allow for premium control
• What option you select should depend slightly on how old you are when you purchase the coverage. The older you are, the more I would recommend the simple interest option.

- Benefits Payment Options: How the insurance company pays benefits to you (Cash, Monthly, Daily)

• Daily reimburses you for costs incurred on a daily basis, up to your daily benefit.
• If you exceed this figure on any given day, you will pay the balance
• Monthly reimburses you for all daily costs tallied over the course of a month
• This is the benefit level I typically recommend, at least initially
• Cash, the most expensive of these options, pays you a check to spend as you see fit. There is no need to provide proof of expenses as there is with Daily/Monthly.

 
It goes without saying that you should always work with a trusted advisor when making a purchasing decision regarding LTCI.  Preferably, someone very familiar with these policies and how the benefits can be massaged to create a plan that falls within your budget.  Additionally, you should choose a very reputable insurance company with sound balance sheets and experience in underwriting Long Term Care.

We have all heard that “those who don’t study history are bound to repeat it” or something similar.  This attachment is an excerpt from a letter written in 1974 by Jim Fullerton, former chairman of the Capital Group.

The situation in 1974 was eerily similar to that of today.  I promise that this should only take a few moments to read.  I think that this is by far the most enlightening piece I have seen during these trying times.

Gas prices have been extremely high and unpredictable thus far in 2008.  Several weeks ago I was travelling home from work.  As I approached the gas station I pass nearly every day of my life, two things caught my eye.  First, they actually had gas.  Those of you that live in Atlanta certainly know of the recent supply issues we have been burdened with.  However, what I was truly excited to see was the $3.35/gallon price that was proudly displayed on their roadside board.  I looked at my tank…half full.  Having been programmed for the last several months to pay nearly $4 for a tank of gas I decided to stop and fill up my tank.  Besides, at that price, they might be out of gas tomorrow.  Needless to say I went to sleep that night feeling great about my decision.

The next morning I rose to head to my morning workout and passed a different gas station.  You can imagine the shock when the gas price was $2.95/gallon.  Now here is where this gets interesting.  I didn’t feel bad about my purchase the evening before.  Frankly, I was quite pleased that I wasn’t paying the accustomed $4 per gallon.  I ask you, if you had a 500 gallon gas tank in your car, would you have filled it up at $2.95 or how about today when I see gas for $2.53/gallon?

We tend to purchase things that appear to be relatively cheap compared to what we are used to.  We clip coupons, shop on tax free weekends and rush department stores for clearance sales.  Why?  If there is perceived value in something, we buy it.  Americans will buy 10 bottles of mouthwash if we think that we are saving money.  Besides…we will use the mouthwash eventually, right?  Why don’t we treat our investments the same way? 

If anything is certain, it’s that someone is going to eventually use those dollars you are saving for retirement.  Why do we take the opposite approach than when buying everything else?   Would you throw away your old comfortable jeans that you have broken in for a new pair just because they are cheaper?  NO.  Keep investing.  Stay the course. I’m not sure when or how it happened…but we have been programmed to act inappropriately (sell instead of buy) when markets are on the decline or uncertain.   Do what most folks talk themselves out of…keep investing. 

Do you remember the last time you bought something and saw it days later with a higher retail price?  How good does it feel to negotiate that extra $1000 off the price of a new car?  Try to call upon those feelings the next time you look at your investment account statements.  “I’m getting such a discount”… or “I’m in this for the long haul.”  Practice these affirmations. 

Practice patience and common sense.  Talk to your investment professional.  If they can’t justify why they have you invested a certain way…then find a new one.  Cass and I stand by the decisions we have made for our clients, and can justify every recommendation made, now more than ever.  You should expect the same from your advisor.

Per the October 20, 2008 edition of Barron’s, Warren Buffett revealed that he was now buying US stocks in his personal account (which had previously been invested solely in US Treasuries).  He emphasized that he hasn’t any idea where the market will go in the short term, but he’s confident that it will improve before investor sentiment or the economy does.  Mr. Buffett also went so far as to say that most major companies “will be setting new profit records 5, 10 and 20 years from now.”

These are the opinions of Warren Buffett and are for informational purposes only.  This is not intended to provide specific advice or recommendations for any individual.  Consult me, your financial advisor, prior to making any investment decisions.  Past performance is no guarantee of future results.  Indexes are unmanaged and cannot be invested into directly.

Last week the Dow Jones Industrial Average had its best week since March 2003, up 4.8%.  What is particularly noteworthy about the week was that it included the best day since the Depression (in percentage terms) AND the worst day since the stock market crash of 1987.  Needless to say, the markets continue to be volatile.  Many experts are suggesting that the market is not trading on fundamentals.

Fundamentals are often associated with sports.  A popular phrase, usually used by angry coaches after a loss or sloppy performance, is “we need to get back to basics and focus on the fundamentals.”

Someone please give Wall Street this same speech…