Category Archives: Life Styles

Putting Emergency Funds Aside

On Thursday, 12/5/13, Andrew Blackman, writing in the Wall Street Journal, took on the conventional wisdom of having an emergency fund equal to 6 months of expenses and that those funds be in a bank account. He suggested as possible alternatives: a 5 year CD (with a low withdrawal penalty) and a diversified equity portfolio. While the first one would be fine, the latter just puts more money into the broker’s pockets in place of it going into banker’s pockets.

Why not start at the root?

The six month figure sounds fine, but as a starting point not an ending.

Why should we not go back to the source to find the funds needed?

True, if you are an “At Will” employee and the employer may come to you at any time and say that you are not needed you need six months of reserves. However, what if you know you will receive at least some number of weeks or months in the form of a severance package? How about unemployment insurance? Shouldn’t those sums be subtracted from the six months figure to reduce the need for the six months cash reserve and let people feel better about investing in alternative ways.

More reason to be careful in choosing to use a LTC (Long Term Care) Insurance Policy

Add together prolonged low interest rates to advances in both health care and life expectancy, sprinkle in spiraling costs of healthcare and you have a recipe for major change in the long-term care (LTC) insurance industry. These industry dynamics, as well as a few others, have many LTC insurance carriers rethinking how to balance consumer needs with achieving long-term profitability. Many carriers are beginning to make significant adjustments to their product offerings, increasing premiums, changing pricing strategies and reducing product benefits. Even more dramatic, some are exiting the long-term insurance business entirely.

While long-term care insurance (LTCi) isn’t for every client, preparing for long-term senior care is prudent and oftentimes pays off. As we progress through life and age into retirement, it is common to expect new health concerns to greet us. As such, clients may want to consider long-term care planning early because once certain health issues set in, LTC planning gets much trickier and much more costly. LTC insurance can pay for extended care needs that often result from normal aging, and help pay for quality long-term care services that are not covered by health insurance or Medicare.

LTCi is a relatively young industry with a shorter history when compared to other coverage such as life insurance. Although the first traditional LTCi policy was issued close to 40 years ago, actuarially speaking the application of mathematical and statistical evidence to assess risk in this industry is in its infancy. Actuaries across the board have admitted to missing the mark when initially pricing this new form of insurance. Short medical histories as related to activities of daily living, low interest rates and increasing payouts for claims means today’s LTC insurance products are not priced appropriately (i.e., not generating acceptable profit margins for insurance carriers).

Major insurance carriers have begun announcing significant changes to their LTC products and requirements. Just recently, Genworth instituted a new pricing strategy and underwriting practice to reduce risk and improve the sustainability of their LTC insurance portfolio.

While there have been several changes announced recently across the industry (reduced advisor commissions, suspension of new sales), two significant developments on the horizon and already with one major carrier are:

  • Gender-based pricing with premiums for females increasing across the spectrum, substantially in some cases
  • Expanded underwriting requirements for applicants such as paramed exams, and blood/urine samples

Though long-term care is a concern for both men and women, there is greater risk for women. Industry studies show up to two-thirds of new claims are for female policyholders. New policies in gender-based pricing translates into increased cost for future female policyholders anywhere from 15 to 50 percent, while for men it may decrease 15 to 20 percent.

In the U.S., women live longer than men (81 years on average versus 76 for men), according to data released in 2013 by the Institute for Health Metrics and Evaluation.¹ This longevity translates to potentially more unhealthy years on average for women — 11 years compared to 9.7 for men, according to² Women are also more likely to live alone in older age or to be a caregiver for their spouse. Women who need care themselves in old age are less likely to have a family caregiver, which may further increase their potential expense to an insurance company.

I’ve just received a brochure from my Credit Union talking about Cashier’s Checks

The availability of scanners and high quality printers as made it much easier for scam artists to create genuine-looking counterfeit documents.
Those people who are bright enough to use HFH Planning Inc. (an HOURLY ONLY financial advisor) are smart enough to know if it sounds too good to be true it likely is too good, except for the scammer.
You, however, might have family or acquaintances who need to be cautioned.
The brochure lists a number of ways these fake checks might be used. I’m not going to list them because the solution is easy. Look up the bank (make certain it’s not a phony number) and call to assure the check is not bogus. Even better, deposit the check on a “collection” basis. Only turn over the “extra” proceeds or the goods when the bank informs you the funds are good. That may take up to two weeks.
Yes, I know the person isn’t willing to wait that long. The price he is willing to pay for the goods is 15% above what you could get from someone else. Sales are sluggish, at best. And, put away your sales hat and put on your credit hat and figure how much you can lose if the check is bogus.
Even worse, if the check is for more than the bill and she wants the difference in cash.
If the incidents are enough for a financial institution to send out a brochure it is not happening only a few times a year.
PS I just learned that a number of car dealers were scammed in this way. Person came in, negotiated on a car, came in the next day, as he had stated, with a cashier’s check. One week later, check bounced – car and individual not to be found.
So it aint just dummies that are gullible.

Buying a Lottery Ticket – Is it really worth it?

A common behavioral error occurred this week: Many people thought they could increase their odds of winning the $587.5 million Powerball jackpot by purchasing more than one ticket. On the surface, the logic makes sense. Buy two tickets instead of one and you double your odds. Buy 50 instead of one, and your odds are 50 times better. The problem with such logic is that it doesn’t consider whether buying the extra tickets has any significant impact on the probability of winning.

Powerball, like other forms of gambling, has a fixed number of outcomes. The lottery game picks five unique numbers between 1 and 59. A sixth number, the “Powerball,” is then drawn. The Powerball number ranges between 1 and 35. A total of 175,223,510 combinations can be formed. Since there are a fixed number of combinations, it is easy to calculate the probability of winning the jackpot for any number of tickets purchased. We simply need to divide the number of tickets purchased (assuming each has a different combination of numbers) by 175,223,510.

If you bought one ticket, you had a 0.00000057% chance of winning. Not very good, but a ticketholder in Missouri and a ticketholder in Arizona did win last night. Buying two tickets increased your odds to 0.00000114%. Yes, this was technically twice as good, but your odds were still very low. Splurged and bought 100 tickets (a $200 expenditure)? Your probability of winning only improved to 0.00005707%.

If your goal was to just to have a 1% chance of winning, you would have had to spend $3,504,470, at a price of $2 per ticket. (You would also need several very patient store clerks, the free time to have all of those tickets printed, a system to avoid any duplicate tickets being selected and a method for checking all of those tickets.) Even with the large expenditure, there was a 99% chance you wouldn’t have won the jackpot. You also didn’t have any guarantee of winning enough of the smaller prizes to compensate for the money you spent on tickets.

I bring this up because part of both gambling and investing is understanding the probabilities of winning (making) or losing money. In a game with known fixed odds (e.g., the lottery, poker, roulette, etc.) you can assess how risky a bet is with math. When it comes to investing, the outcome is not always finite (a stock can theoretically keep appreciating in price), but you can still assess the risk by considering what has worked historically. Over the long term, we know value stocks perform better than growth stocks and small-cap stocks beat out large-cap stocks. Companies that initiate or raise their dividends deliver higher total returns than those that don’t pay a dividend. Investment-grade bonds are less likely to default than junk bonds. Funds with lower fees have to beat their benchmarks by a lower margin than funds with high fees to give shareholders the same amount of profit. Diversification and a long-term view will help your portfolio more than a concentration in a few investments and a short-term view.

Keep in mind that, by definition, probability is not the same as certainty. You could do everything right with your portfolio and still not be happy with your returns. Similarly, you could ignore the statistics above, spend $250 on Powerball tickets and win the jackpot. But, if you stop to consider the probabilities of making or losing money, the odds of you making better financial decisions (and not overspending on lottery games) are likely to improve.

Thoughts on another advisor's advice

Suze Orman has been in the news recently and made me think of a number of things that Ms Orman suggests that don’t sound as if they should be put into practice.  Rather, they sound as if they were lobbied for by the banks.

Having an emergency fund is great.  The question is how many months of expenses should be in that bank account.  Six months expenses mighty be the right amount.  Further, if one is an “employee at will” for a company six months might be appropriate.  Who is an “employee at will”?  Someone who may be discharges for any reason or no reason without any recourse.  Of course that is not most people.  If one will receive a sum of money when they are fired (laid off, downsized, etc.) the amount of money that they will receive should reduce the six month figure.  So, if you will get two weeks notice you need five and one half months savings.  If you’ve been with the company for 10 years and will get one months salary for every year you’ve been there you need no money in the emergency fund.

Another bad idea is the savings account when you have debt.  When I was teaching a continuing ed course at NYU one of the first things I asked was how many of you have credit card debt.  A number of people raised their hands.  I then asked those who had hands up to keep them up if they had money in the bank.  A good percentage did.  When I asked why, they told me they were told to do that in case of an emergency.  So my next question was, “if you reduced the debt by the amount in the bank and you had an emergency couldn’t you the charge the money to the card?”  In the meantime they would not be paying 15 or 20 % on the debt and getting 1% minus taxes on that income.  WOW.

As long as we’re discussing her recommendations there is one I totally agree with.  If you need life insurance buy Term.  Insurance is risk transference.  If you do not have enough in wealth to permit those who depend on you to continue living in the lifestyle you have been providing they need extra money to invest to continue the lifestyle.  Term life insurance is the vehicle. Other types of life insurance are there to make the insurance company richer.

Fallacy in Generic Thinking

There’s an adage that says you can never be too rich or too skinny. The fact is that it depends on how you try to get there. We’re pretty much all in agreement that bulimia and anorexia (an eating disorder characterized by refusal to maintain a healthy body weight and an obsessive fear of gaining weight) are notable exceptions to the latter.
Those in the Hedge fund business, on the other hand work hard at making themselves more wealthy. These people use their expertise to bring in returns that are in excess of what the general individual can find. I’m not about to suggest that being bad. Of course, even they have losses. But not losses that forces the individual into bankruptcy.
However, along comes the story of the professional football player who chooses to use his wealth by investing in areas that he knows little or nothing about to create wealth that he REALLY doesn’t need. Maybe like the anorexic. If the quarterback had invested in a diversified portfolio, similar to what we encourage people to do, he would be able to live out his entire life ( to whatever age that turns out to be) spending at the same level he did during his career, without concern about running out of funds and be able to leave money to heirs.
So where was the financial advisor? Thinking about assets under management or getting great commissions?

Bank Fees

Most people who read this blog do not use a bank debit card. For those who do, I implore you to switch your bank to a bank that does not plan to charge a fee for the use of the card. I also encourage you to examine the use of a credit union. There are a number of reasons to do so.
The interest rate on your deposit is generally higher than at banks.
Loans are generally easier to obtain and the charges are, again, generally lower.
Most care about the people they serve.
If you need the name of a credit union to use – email us.

How to Live a Vital Retirement: Lessons From a Life Lived Well

This is stolen from Money for Life by Steve Vernon
“Here are the characteristics that we agreed made for a vital life:
• Take a sincere interest in the lives of your family and friends. Ask what’s going on in their lives — demonstrate with your actions that you care about them and what’s going on with them.
• Have a passion for something that makes a positive difference in the world. It can be a cause, a volunteer position, or paid work.
• With all of your personal roles — spouse, partner, parent, grandparent, relative, and friend — be the best that you can be. Make time for others, and never take them for granted.
• Take care of your health, and have vigorous activities and hobbies.
• Be generous with your time and money.
• Take the time to appreciate all the good things in your life. Many people make the mistake of taking for granted all that is going well, while obsessing on one or two things that aren’t going well.”

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