How to Survive the Financial Crisis... with Your 401k and Your Sanity Intact

What a mess. Who ever thought we would see the financial world brought to its knees like we have the past two weeks? Just think, household names like Bear Stearns, Merrill Lynch, Wachovia and WAMU are now a thing of the past while insurance giants like AIG have gotten by with the skin of their teeth thanks to billions from Uncle Sam. Fannie Mae and Freddy Mac are now officially directed by the government, the same government that is now poised to inject billions into the frozen banking system. And while terms like sub-prime mortgages and credit default swaps have become a part of our every day jargon, we the tax payers are billed to keep the whole ship afloat. Is it any wonder that the stock market has been on a roller coaster ride like we haven't seen since the Great Depression?

As if $4 gallon gas, rising oil prices, plummeting home values and rising unemployment weren't enough. What's next? A new president?

Has Your 401(k) Become a 201(k)?

While politicians and financiers try to sort the "crisis" out, your 401k or IRA has probably taken a huge hit right along with the Dow Jones and NASDAQ averages - both off their highs by almost 40%. Wow, that really hurts and there's no way to sugar coat a blow to the head like that. So if you feel like you've been taken for a ride, it's because you have. If you're money is predominantly in stocks, then you've likely taken at least a 20% hit or more even if your advisor's done an excellent job of protecting you from the downside. And you've probably lost a lot more than that.

But before you go out and sell off your investments and bury the cash underneath the bedroom mattress, know this one simple fact: markets have always fallen and markets have always risen. And this too shall pass.

Although there are no shortage of prognosticators forecasting when this roller coaster ride will come to an end, the truth is that no one really knows. So don't believe the hype. The previous market downturns in the long gone era of the 30s, in 1974, in 1987, the technology bubble bust in 2000 and the days and months following 9/11 were all unique animals made of their own day and time. Today's crisis is entirely different and magnified by the far reaching effects of globalization while public panic is fed by today's overwhelming 24x7 media coverage as never seen before. Nevertheless, history does teach us this, that markets do recover lost ground and then head higher. Eventually. So what do you do in the meantime?

1) Save in the good times. Save in the bad times. But always save. Don't stop now! Continue to save and invest in your retirement plan on a regular basis. Doing this helps guard against short-term market volatility and risk by spreading one's investment over time. This is known as dollar-cost averaging.

2) Don't put all your eggs in one basket. You've heard it before and you're going to hear it again. You need to properly diversify your retirement savings among different funds and fund types. Determining how to do this is not difficult and is based on your investment time horizon and individual risk tolerance. For those that would rather go on auto-pilot, there are new funds called Life Cycle Funds that automatically shift your mix of investments to a more conservative mix as you approach a particular year called the "target date" (typically your near-retirement date). As a result, these are often called Target Date Funds as well. Regardless of how you do it, be sure to diversify and allocate your investments accordingly.

These suggestions are straight from the first page of Investing 101, but they are still the most important principals for investing and saving for retirement. For those who have realized losses in recent weeks, remember that saving for retirement is a long-term process. So turn off the TV and get back to the work of doing your thing and letting Father Time do his. And if you're not sure if you're doing it right, consult with an experienced advisor.

The Million Dollar Question

So when will the financial crisis clear up? Some of the best and brightest feel that we may be in for a long couple of years, but only time will tell. As one panelist at a recent conference said, "Eventually, people will get bored with being afraid." And business will go on as usual.

Until then, just keep your cool. Remember that planning for your retirement is like a cross country flight in a jumbo jet. As winds and weather push the plane off course, the pilots (aided by sophisticated guidance technology) make regular adjustments to the plane's speed, course and altitude to make sure your flight keeps on track, stays as comfortable as possible, and gets you safely to your final destination. So if economic turbulence seems to have thrown your retirement plans off course, make the necessary adjustments and you too will meet your financial goals and arrive comfortably at your destination in retirement.

Keep Your Hands Out of the Retirement Plan Cookie Jar

The need for self-control and the propensity to give in are something we all must grapple with on a daily basis. But the now well known adage to "Just Say No" applies to much more than just resisting the urge to smoke, drink too much, or indulge in other unhealthy lifestyles. For many, this includes the urge to dip into their retirement savings when things get tight.

According to a recent report in the Wall Street Journal, more Americans are now dipping into their retirement funds than ever before. And recent economic conditions make it easy to justify doing so. Part of the problem is that liquidating or borrowing even a few thousand dollars in one's 401(k) doesn't seem too harmful, particularly when families are scrambling to pay bills in the face of unemployment or unexpected medical bills. But it is harmful and even reducing one's retirement account by "just" a few thousdan dollars can have a huge impact on one's future retirement income.

Can a few thousand dollars really make that big of a difference? The answer is Yes. And the answer is even more Yes when considering that future resources for retirement income are drying up.

With pensions going the way of the dodo bird, most Americans will have to rely on their personal and retirement savings more than ever. This on top of the fact that studies show 4 out of 5 Americans aren't saving enough for retirement to begin with. Then add in rising medical care, increased longevity and the "i" word (inflation), and you're talking about adding real insult to your retirement injury!

The good news is that you can Just Say No to borrowing or spending down your retirement savings. It might require a little fiscal dieting, but the long-term prognosis for your future will be much healthier.

Income Replacement Funds - A Good Idea Finally Come Of Age

Back in the day, one of the most common problems for many who had saved well for retirement was having "too much MONEY at the end of one's life" - and thus an entire industry matured in serving the needs for estate planning, charitable giving and more. Although the need for these services is now greater than ever, an even larger problem now looming on the horizon is having "too much LIFE at the end of one's money!"

Increasing longevity is one of the major reasons that insurance and mutual fund companies are now developing new products and solutions to help provide an aging America much needed income solutions. And one of these new solutions is the income replacement fund.

As the name implies, this solution at its heart is a mutual fund and like any other, it comes in a variety of flavors. Although mutual funds are typically accumulation solutions (and the most popular investment vehicle for IRAs and K plans), income replacement funds are just the opposite - they are "decumulation" solutions. So what makes these funds unique is their feature to pay out over a specified length of time. Many of these funds now offer payout terms ranging from 7 years to 25 years or longer. The termed payout is the feature that gives these funds their name and is a new way to help one strategically spend down a portion of their retirement assets.

ADVANTAGES: The primary advantage of these funds is their simple and systematic approach in spending down or "decumulating" retirement assets. Since these are mutual funds, they are liquid and have no surrender schedule or fees. Furthermore one may turn the income feature on or off as desired unlike money that has been annuitized.

DISADVANTAGES: The disadvantages of the income replacement funds are the same as all other mutual funds. Since these are securities products that participate in the market, their values may fluctuate and there is no guarantee of principal. As a result, the payout is tied to annual investment performance, so there is no guaranteed stream of income. Depending on investment performance and account balance, payout may even be accelerated to payout the account balance by the end of the selected term.

Income replacement funds are another excellent solution now available to those nearing or already in retirement and may be used in a variety of retirement strategies. Many have found these funds to be an excellent compliment to existing annuity investments as a hybrid income solution providing the best features of both worlds including:

• Variable income (IRF) and guaranteed income (immediate annuity)
• Market participation and principal protection (available through variable annuity living benefits)
• Liquidity (IRF & partial liquidity through annuity surrender schedule)
• Insurance protection (annuity)
• Diversification & asset allocation (IRF and variable annuities)
• Laddered strategies for growth as a hedge against inflation

Long-Term Care - By The Numbers

One need only do a search on Google or read a newspaper to see that long-term care is becoming an increasingly important topic due to the benefits of improved health care, longer life expectation and the demographics of a generation of retiring Baby Boomers. Furthermore, long-term care is no longer an elders-only issue. Many middle-aged professionals find themselves on the inside looking out as they take care of their aging parents and look at the prospects of their own retirement.

Since long-term care applies to the care required if one is no longer able to perform everyday tasks (activities of daily living) due to chronic illness, injury, disability, or aging, most companies position long-term care as a lifestyle choice of how and where one may receive needed care in their twilight years: at home, in an adult day care or assisted living facility, in hospice care or, yes, even a nursing home. Never the less, long-term care most often boils down to a matter of affordability and this is especially true for those living here in the Golden State.

The High Cost of Care in California

The statistics often cited for the average cost of long-term care in America can be daunting. And for California residents, the numbers are even more intimidating. Based on the Mature Market Institute’s 2007 study of nursing home costs, the average Los Angeles area private nursing home costs $215 per day—more than $78,000 per year. In 20 years, if costs grow at 5 percent, the same facilities will cost more than $208,000 per year! And these are only averages; top-shelf care can cost as much as 40 percent more, while prices for other California cities, including San Diego and San Francisco, are even higher. Furthermore, home health care – where most long-term care is received – can be just as costly at average hourly rates of $20/hour.

With good reason, long-term care is an increasing concern for financial planners. “Long-term care is one of the six common retirement liabilities that a comprehensive retirement plan should factor in,” says Richard Tassiello, President of Retirement Strategies Group. “Flip a coin and you’ll understand the potential for risk long-term care poses to your retirement nest egg.”

When people think about threats to their retirement savings, they often think of untimely market losses. Never the less, no amount of asset allocation or investment diversification can mitigate the risk of a long-term care incident. For many, long-term care insurance serves as portfolio protection for their retirement plan.

As the public is becoming more aware of the long-term care risk, so is Uncle Sam. In fact, recent changes made in government policy encourage private solutions to this dilemma by providing favorable tax treatment to those buying long-term care insurance.

Changes in Government Policy

In February 2006, President Bush signed the Deficit Reduction Act of 2005. Key provisions highlight the need for estate planning and the part that long-term care insurance plays in protecting ones assets. Among other things, the Act:

• Extends the look-back period for all asset transfers from three to five years. An even longer look-back period now makes it even more difficult to transfer funds out of one’s estate to qualify for welfare and long-term care benefits.
• Makes ineligible for Medi-Cal (Medicaid in the rest of the country) any individual with home equity above $500,000 (a limit that states can raise as high as $750,000, which California is expected to do). Previously the value of an individual’s home was not included when determining eligibility for Medi-Cal. The implications for those living in the Golden State, where home values have seen unprecedented appreciation over the past decade, are obvious.
  
• Requires Medi-Cal applications with annuities to name the state as remainder beneficiary. No longer can annuities be used as a loophole to shield assets.
  

The end result of these policy changes is that most Californians, and particularly those with substantial assets, can now depend even less on the government for their long-term care needs.

Long-Term Care Solutions

The inherent risks to a long-term care incident are many, but there are only a few solutions that answer the questions of who provides and who pays for the requisite care. These include:

• Self-insure – A great solution if you’re lucky enough to have inexhaustible assets. Otherwise, this means liquidating savings and assets to pay for care.
  
• Family - The most common solution, which puts the weight of responsibility and cost on the shoulders of loved ones. This option, however, disproportionately affects women, wives or daughters, who are the typical family caregivers.
  
• Government assistance – Generally speaking, government assistance is a non-solution; neither Medicare nor Medicaid cover long-term care. Although Medicare may cover a small amount of skilled nursing care under very specific circumstances (averaging only 21 days), it does not pay for the ongoing custodial care that many elderly, ill, or injured need. Medi-Cal is welfare that’s only available after one’s assets are spent down to a nominal point and Medicaid, the federal program that provides health-care coverage to lower-income Americans, only pays benefits for those meeting federal poverty guidelines or after nursing home residents exhaust their savings and become eligible.
  
• Long-term care insurance – Transferring one’s long-term care risk from one’s estate, family or the government to a financially stable insurer.
  

Given the limited solutions available, more are now choosing to transfer their long-term risk to a deep-pocketed insurer.

What to Consider When Purchasing LTC Insurance

Although individual features and benefits will differ between long-term care policies, there are several key factors to consider when reviewing coverage.

How much coverage is necessary?  The monthly or daily benefit selected is the maximum dollar amount that the insurance company must pay for covered long term care expenses on a given day. Some policies pay a daily benefit out as a weekly or monthly benefit which allows reception of benefits for expenses on specific days that are greater than the daily benefit. The higher the benefit, the higher your premium. Location and the individual’s risk profile have a big impact on deciding this amount.

When will coverage begin?
The elimination period (often thought of as a deductible) is the length of time before the insurance policy begins to pay benefits. The available choices range widely from zero to 100 days to as long as one or two years. The longer the elimination period, the lower the premium.

How long will the coverage last?
The benefit period (usually expressed in years) is the minimum amount of time one receives benefits and can range anywhere from one year to five years to as long as lifetime unlimited coverage.

Including inflation protection for your policy is of paramount importance since health care costs continue to rise (not to mention the results of the increasing supply and demand the Baby Boomer population will produce). To guarantee that daily benefits keep pace with inflation, a 5 percent compound inflation rider is recommended (for those up to 70 and 5 percent simple thereafter).

Something more to consider is one’s family history. If longevity or chronic disease runs in one’s family (especially dementia related diseases), one may be more likely to need long-term care. Further more, women live longer than men on average and are 50% more likely to need nursing home or extended care after age 65.

Saving Money on Long-Term Care Insurance

Individuals, couples, the self-employed and businesses can all save money when paying for long-term care insurance by:

• Funding the policy with pre-tax dollars
  
• Taking advantage of lower costs when one is younger and healthier
  
• Buying “short and fat” versus “long and thin”
  
• Buying for two or more
  
• Availing oneself of association member discounts
  

Funding LTC Insurance Premiums with Pre-tax Dollars

For individuals itemizing their taxes, tax-qualified long-term care premiums (for themselves, their spouse or any tax dependent such as parents) are considered a personal medical expense and may be deductible, subject to IRS age-based  limitations and the 7.5 percent threshold based on the filer’s adjusted gross income.

For employees whose employers offer a health savings account, eligible long-term care premiums may be paid with these pre-tax dollars.

The self-employed may deduct tax qualified long-term care premiums as a business expense similar to health insurance, according to the IRS age-based limits.

And when a business purchases a tax-qualified policy for its employees (including their spouses and dependents), the corporation is entitled to take a 100 percent deduction as a business expense on the total premium paid by the business. In addition, businesses are not subject to any non-discrimination rules, so they may be selective in the classification of employees they elect to cover. This flexibility gives business owners the ability to use this benefit to recruit, reward and retain key employees.

Buying Sooner Than Later

Since long-term care premiums are age-based, it’s better to buy when one is younger and more likely to qualify for coverage and lock in a preferred health discount. According to Janie DeCelles, a long-term care consultant in Southern California, “When I analyze the option of buying at 45 versus waiting until age 50 or 55, it’s always a better decision to do it at a younger age because I build inflation protection into the plan. A fair analysis of the cumulative premiums paid to age 85 always shows that the most economical decision is to purchase the coverage at a younger age.”

Buying “Short & Fat” versus “Long and Thin”

Since most long-term care incidents last less than five years and average between two to three, one strategy to save on long-term care insurance is to buy coverage with a shorter benefit period (three years vs. unlimited lifetime coverage) and higher (fatter) daily benefit ($200/day vs. $150/day). Deciding on this coverage in this way could yield 25 percent in savings and is therefore a great strategy in purchasing long-term care coverage while saving on annual premiums.

Buying for Two or More

For those interested in purchasing long-term care for both themselves and their spouses, new optional enhancements such as “shared care” policy riders allow spouses to share each other’s benefit pools.  And for small businesses, new multi-life programs make it possible to offer long-term care insurance as an attractive employee benefit at discounted rates of 5 to 10 percent that may even include simplified underwriting.

Something important to remember is that individuals must undergo medical underwriting to be eligible for coverage and there may be discounts for those in excellent health. Underwriting for long-term care insurance is different than for life or health insurance since different criteria apply.

Discounts Available

Perhaps the easiest way to save money on long-term care insurance is to pay less for it to begin with! Many associations and professional organizations offer discounts from some of the nation’s top insurance carriers, so be sure to take advantage of these valuable discounts when ever possible.

After considering the need and the cost of long-term care, perhaps the best advice in buying coverage is to find competent guidance from an experienced long-term care consultant. Since policy features differ so greatly and do not compare apples-to-apples, obtaining guidance and direction in the purchasing process is of paramount importance.

As the American population continues to grow older (the group over 85 is now the fastest-growing segment of the population) and more Baby Boomers move into retirement, the growing need for long-term care will continue as a topic of interest for decades to come. Educating oneself and planning for this reality should be an integral part of the retirement planning process. And given the need for long-term care can occur at any time, doing your research and planning now, before the need arises, can save you time—and possibly money.

PUBLISHED IN THE MAY 2008 CALCPA MAGAZINE AND BIOCOM BIOCOMMUNIQUE

How to Stay On Budget & On Target with Geezeo

REVIEW: Geezeo.com - A funny name, but a seriously valuable service. Get your Geezeo on now!

On the Internet, there's often very little left to the imagination these days and even less of value to be found without a price, so finding a service that's both practical and free is always something worth writing about. For those who are religious about tracking their finances and sticking to a budget, or know they need to, Geezeo is a great place to help make educated financial decisions through a simple web-based interface.

In short, Geezeo is a money management platform designed to help individuals track their finances and budgets including income, expenses, debt, investments and more. Budget creation, tracking and reporting features help you visualize how well you are meeting your goals. And for those inclined to share their experiences, Web 2.0 community support features allow you to share your successes and your disappointments with others. And when you really commit a financial faux pas, feel free to ease your conscience in the Money Confessions message board!

Budgets: In addition to aggregating data from financial institutions, budgeting tools can automatically track individual checking and credit card transactions to create monthly budgeting reports. In a very simple and visual way, spending targets report whether you are meeting your budget (green) or are over your budget (red). This budgeting feature is perhaps the most valuable part of the service providing a one page summary view of how you are doing with your monthly expenses.

Goals: We are all encouraged to write down our goals, whether they are personal, professional, or financial. Geezeo gives you a place to write down your financial goals and tie these to actual accounts. Whether you are paying off a school loan, saving for a vacation, or investing for your retirement, now you have a place to hard code your goals and see how well you are meeting them.

Setting Up Your Account: Setting up your free Geezeo account veryis simple. Never the less, setting up all of your accounts, tagging checking and credit card transactions, and setting up budgets is likely to take at least a couple of hours. But once you have invested the time to set up your account, Geezeo runs pretty much on auto-pilot. Not only can you review automatically updated account balances and budgets at any time - you can even access the information via text messaging on your phone. Where else can you view all this data in one place at the literal touch of a button? For free? Exactly.

Shortcomings: As many good features as there are, Geezeo still has plenty of room for improvement. There have been reported problems in setting up accounts and for many, some of the transaction information is published in a counter-intuitive way. In some instances, functionality is entirely missing. And with all the work involved in listing financial assets and loan information, another nice feature would include corresponding assets so that a Balance Sheet could be generated as well.

Although some of the feature sets in Geezeo are not quite ready for prime-time, Geezeo is still a great tool for helping set and manage personal budgets. If you're tired of creating and managing your own spreadsheets, or if importing and managing data in Quicken or MS Money has become too cumbersome, then this may provide a simpler way to keep an eye on the traffic in and out of your wallet. Best of all, Geezeo will help you manage your budgets and finances all for a very nominal charge - for FREE!

If you have questions about the security of your personal financial information at Geezeo, be sure to CLICK HERE to read an interview with Geezeo Co-Founder, Peter Glyman who addresses this typical concern and provides some insight into how the service works behind the scenes. 

With a recent investment by TheStreet.com, you can look forward to seeing further development at Geezeo with expanded features and new services. Of course, competition is already on the way and in one case it comes in a Mint flavor! Come back soon for a review of another up-and-coming online money management service that promises to heat up the competition.

Bad Agents Selling Bad Products Giving Annuities a Bad Name

A response to Dateline NBC's program entitled "Tricks of the Trade"

On Sunday, April 13, 2008, Dateline NBC aired a show entitled "Tricks of the Trade" that exposed many of the unethical and misleading tactics some salespeople use to persuade seniors to buy equity-indexed annuities. Although anyone taking advantage of the aged should rightly be exposed, the Dateline program did little more than paint the entire annuity marketplace with a broad and unfavorable brushstroke. Instead of focusing only on the real problem - rogue insurance agents selling inappropriate investments that were unsuitable for their senior clients - the program unfairly pigeon-holed all annuities and those who sell them into the same negative category.

The problem with the program's format is that it would lead many to believe that all annuities have extremely long surrender terms, little or no liquidity and truly excessive surrender charges - all of which are untrue. Many annuities feature surrender terms as short as three years and most allow for annual withdrawals without penalty  - an advantage that most annuities have over their more conservative counterparts the CD.

Furthermore, the program would also lead many to believe that annuities are always an unsuitable investment for seniors - also untrue. Although it would be unwise for a senior to invest their entire life savings in a long-term annuity (or any long-term illiquid investment for that matter), many seniors today successfully diversify their portfolios by investing a portion of their assets into annuities many of which now offer valuable living benefits not available through more traditional investments. Other seniors find immediate annuities an attractive solution in providing lifetime income they cannot outlive. And still others somewhere in between incorporate laddered annuity strategies that provide a combination of both growth and income.

Although annuities are not the solution for everyone, they continue to serve as a popular investment option because of their tax-deferred growth, tax-free transfer privileges, guaranteed death benefits for beneficiaries and options for a guaranteed lifetime income. And as mentioned before, new living benefits make many variable annuities particularly attractive for those who want to participate in equity markets while protecting investment principal.

Despite the misleading and dishonest practices of some in the industry who are only seeking a big commission and a quick buck, reports like these also serve as a valuable opportunity to explain how basic investment principals and sound guidance will never go out of style.