Paul Ferraresi

I see so many people working in a job that they hate. Countless people become addicted to drugs, alcohol or unconventional activities in order to bring pleasure into their lives. When I ask them what their life’s dreams are, I often hear “I want to retire about 2-3 years, or before I am 40 (or 50).” “Why?”, I ask? “Because I hate my job” is the usual response. My retort is, “Then why not leave your job today?” Read the rest of this entry »

Most young people work hard and try to accumulate money for retirement. Few actually think about the withdrawal period, from say, age 65 to 100+. Funny, we work from age 25 to age 65 (40 years) to accumulate money to fund retirement age 65 to 100 (40 years).

I continue to advocate that saving 10 % of your gross income will NOT fund a “comfortable” retirement. A 25 % savings rate, just for retirement, is getting you on track. Let me present a simple explination. Let us assume no rate of return on your investments for simple math. If you save 10 % of your gross income from age 25 to 65 you will have set aside 4 years of retirement income. So, you are dead broke at age 69, long before you are dead. At a 25 % savings rate (no rate of return) over a 40 year work period…you will have 10 years of retirement income. Now apply a “reasonable” rate of return, make sure you subtract taxes, and input something for inflation and you get the picture why people “wince” the first time we visit together looking at their future retirement numbers. It is scary when you understand the average baby boomer has less than $50,000 set aside for retirement. Hello Walmart greeters!

All financial empirical studies show the most efficient withdrawal rate from your retirement nest egg should be about 4 %. That is, if you have $1 million set aside for retirement, then, do not pull out more than $40,000 per year. (Keep in mind…this assumes (1.) your taxes will never go higher…sure!, (2.) that your portfolio is heavily weighted toward equities versus bonds or CD’s, and (3.) inflation will be very low.)

A problem with this plan is that if the stock market takes a dive in the first year or two of retirement, then your portfolio has been hammered. Add to this that (1.) there are few people that have pension plans, (2.) social security is in disrepair, and (3.) plans are for social security to be means tested, that is, eventually having 100 % of social security income taxable versus 85 % today. Whew!

Most people start planning their retirement about age 63. Wrong. Get help early so the changes will be small for you.

You must start thinking in a “transition” planning mentality. That is, pick your retirement age. Then, set up the implementation period starting 10 years prior to retirement and ending up to 10 years after retirement.

Unfortunately, most people make their retirement investment portfolio mix as if they are going to die at age 65. Yes, they place all their monies into bank CD’s and government bonds at 65. This is a guaranteed plan to eat “dog food” in retirement.

There are some great investments that can simulate what a pension plan payment plan used to do. The income is guaranteed and you cannot outlive the income. In addition there are other conservative investments that will provide perpetual income that you and your spouse cannot outlive!! The income from this second program is tax free and it blossoms at death income tax free to your heirs.

Here is one final idea. I structure most people’s retirement nest egg so it looks like a series of railroad box cars starting at age 65. In the first car, used for age 65-72, I place assets into safe, conservative income producing investments. The second box car, to be used at age 72-82, is in growth and income investments. Car three, for age 82-100, is placed in growth investments. Since, at age 65, the 2nd and the 3rd car will not be used for 8-30 years, then, we can place these monies into investments that may be down in value for a year or two. We do not care because we are living off car #1. When the person reaches age 70, we switch car #2 to safe income investments and car #3 to more conservative growth and income. We do the final shift at age 80.

Get some help from a professional early. It may “hurt” a little now to change, but if you wait until retirement-I can guarantee it will really hurt to change.

Ah yes, discipline or regret?

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Interesting Tidbit

MORE AND MORE

The combined cost of Social Security, Medicare, and Medicaid will double as a percentage of our nation’s gross domestic product (GDP) from now through 2045. The cost of the 3 government programs is projected to rise as a percentage of GDP from 9-18%. GDP is the annual market value of all goods and services produced domestically by the U.S.
(Source: Center for Retirement Resource)

Long-Term Care Planning, Not Just for the Elderly

Comments by Paul Ferraresi:

The Medicaid program was introduced in 1965. President Johnson predicted the costs would never exceed $9 billion. Presently, the costs are running close to $200 billion per year and rising.

The system is broken so the government is finding ways to inhibit citizens from using the program. You may be thinking that this article is just for your parents, but, if you are over 30 years old you better start your own Long-Term Care/Medicaid program now.

Nursing home care costs are running an average of $100,000 per year in the U.S. and rising 14% per year. If you lack Long-Term Care insurance and are planning to use Medicaid… watch out! The rules are changing and will continue to change. The largest population growth in the U.S. are those over 85. At 85 years old, 50% of the people have, not will get, Alzheimer’s. With the population longevity expected to increase to 100 years, everyone will be affected. I see clients in their 40s and 50s having to come up with long-term care money for their parents, and it’s ruining their retirement plans. It’s time to have a family meeting.

Let’s look at some of the changes that have gone into effect from the Deficit Reduction Act of 2005…

• Some older couples may turn to divorce as an unintended consequence of the new laws. To qualify for Medicaid, one needs to “spend down” all their assets to $2,000. The community spouse (versus the institutionalized spouse) is permitted to keep $100,000 in resources. (Medicaid follows federal rules, but each state varies widely). Now the community spouses will end up with fewer assets.

• The penalty period has changed, during which a person is ineligible for Medicaid dues to gifts and transfers valued at less than fair market value. This will leave patients confined to a nursing home with funds exhausted, but, ineligible for Medicaid. The new rules extend the “look back” period for gifts or transfers from the old 3 years to 5 years now. The clock begins ticking on the penalty period from the date the nursing home resident is eligible to receive Medicaid instead of from the date of transfer.

Here is an example… In the old days, if you transferred an asset, say, 40 months before entering a nursing home then you were okay since the look back rule was 36 months. Now, if Joe gave a family member $20,000 4 ½ years ago, and subsequently went into a nursing home, spent down his life savings over 2 years, and applied for Medicaid in January, these are clouds in the horizon. Even though he is out of money, the earlier gift would trigger another 4 month waiting period. That is figured by dividing $20,000 by the $5,000 monthly costs level of Florida. REMEMBER: each state has its own cost level.

Here are some strategies used to preserve family assets by getting them out of potential Medicaid recipient’s ownership and the impact of the new rules:

Annuities: Under the new rules, an annuity will not be a countable asset if the state is named as a remainder beneficiary. That way, the state is reimbursed for Medicaid assistance, long-term care and community services.

Loans, Mortgages, and Promissory Notes: Under the new rules, the loan’s repayment must be sound and made in equal payments during the loan payment term with no deferral of payments and no balloon payments. Cancelation of the loan balance upon death of the lender is not allowed. So, if your parents have lent you money, then you must follow the above rules so this asset will not be countable.

Life Estates; The right to live in a property until death: Under the new rules, this is a transfer of assets unless the buyer of a life estate, in another person’s home, lives there for at least one year after the purchase.

Houses: In the past, these were considered exempt for Medicaid purposes. States must now consider an applicant’s home equity in excess of $500,000 up to $750,000 as monies that applicant must use.

As stated many times in past articles- this is another reason to ALWAYS keep your home mortgaged to the maximum (see all previous Missed Fortune articles).

Investment Grade Equity Indexed Universal Life: The accumulated value is off limits to Medicaid. This is a great way to accumulate monies tax free, have access to the money tax free, and, upon death the money blossoms and transfers tax free. The withdrawals are NOT considered income for Medicaid and it does NOT affect the taxation of Social Security income. This is a layup with a ladder, or, a stolen base on a passed ball. Hmmm…

Medicaid planning is complicated and needs the services of a professional. I implore you to work with your family members now. Although some family members in their seventies may be fine now, in 5 years they may need assistance. So make decisions now to avoid the 5 year look back.

Note by Paul Ferraresi:

Everyone over 40 should have Long-Term Care insurance and invest in those items that are exempt.

Discipline or Regret?

Comments by Paul Ferraresi:

Continuing our thesis on investment trends from Part 1…

1. A changing Japanese population

• The most rapidly aging population of any industrialized country
• Young Chinese consumers are buying Japanese made products unlike their parents who still remember the Japanese occupation in the 1930’s
• The April 2007 Japanese exports to China exceeded their export to the U.S for the first time in history. This will continue
• Japan will capitalize on China’s appetite for consumer goods
• Trends in marriage are changing in Japan. Women are still single in their late 20’s. After marriage they wait 2.5 years to have their first child. This leads to more disposal income per family. Hmmm… more spending on flat screen TV’s, computers and other electronics (Bonanza investment time for you)
• Japan’s saving boom of 10 years ago, due to their stock market crash, is coming to an end. The investment duration was 10 years, so these investors can remove the money and spend or invest in other securities

2. Eastern European Workers

• Made up of 25 members countries in the European Union; 450 million citizens
• The old “Iron Curtain” Eastern European countries are joining the Western European nations
• The first impact of this was the opening up of cheap skilled labor from Eastern Europe. Profitability is exploding for companies throughout the continent due to the benefits of highly educated yet inexpensive labor
• Eastern European economies are growing stronger as Western Europe companies are more profitable
• Standard of living and disposal income is rising for both east and west, increasing the demand for consumer goods(more KA-CHING $)
• World’s largest maker of telecommunication equipment is Ericsson. What a way to partake in the increase in the standard of living boom. Half of all the calls in the world go through Ericsson systems

3. The American baby boomers

• By 2030, baby boomers will account for 20% of the population. The number of elderly will have doubled. At 65 years old they will have an average of 21 years of life expectancy to save and invest
• The huge number of this generation means more people with more money to transfer to children and grand kids. The group will save and invest thus needing services of financial advisors.
• This generation loves leisure pursuits and technology. Increased use of the internet and computers to communicate with family will be very profitable. In addition, they have the money to buy the latest electronic gizmos.
• As they retire, boomers will have more leisure time and disposal income. They are already spending more on eating out, vehicle purchases and alcohol than the rest of the nation. It will not stop.
• A final theme is a focus on health and nutrition. As seniors they will eat right and healthy changing the food sector focus. Also, look for a high demand for over the counter skin and hair care products plus medical devices and pharmaceuticals.

Well there you have it. These are just a FEW of the trends that you can profit handsomely in the future. Don’t let this one pass you by. You know, like the land that you planned to buy but never did. Now there is a shopping center on that land. Discipline or Regret?

Use your gut feeling of investments trends, diversify and have your financial advisor guide you.

Until next time- “KA-CHING $”

End part 2 of 2…

Comments by Paul Ferraresi:

Everyone is always looking for the “quick buck” return. It rarely happens. Most people lament when they look back and see they had the opportunity to invest in great mega trends, but procrastinated and lost out. for instance, when the computer industry took off in this country it did not matter if you invested in Dell, Gateway, Apple or Microsoft stock. When a trend or theme takes hold, all elements of the trends go up in value.

Let’s take a look at a few coming trends that you can invest in now and cash in 10 years from now. You say that you do not want to wait 10 years to cash in? Whether you believe this or not, you will most likely be around in 10 years and these things will take place whether you participate or not.

In the next 5-10 years some long-term demographic trends and global shifts in economics will push short-term concerns (elections, interest rates) into the background and bring change to the investment landscape.

Here are some mega trends:

1. Change in Economic balance

• US economic dominance will move toward foreign countries
• Today the U.S leads the financial markets followed by Japan, Eastern Europe and China
• Ten years from now it will be turned upside down. China will lead the finanacial markets followed by Eastern Europe, Japan and then the U.S
• The U.S is on solid ground but it is a mature industrialized economy with a limit on its growth
• Foreign countries are benefiting from the U.S. maturing as their growing populations and consumer demands will push them past the U.S
• Wall Street says to allocate 10% toward international and 90% to U.S stocks. That is a backward allocation. It should almost be reversed.

2. Rise of Chinese Consumer Generation

• Presently the U.S has the largest consumer base, stock market and economy in the world
• Over the next 10 years China will replace the U.S as the world’s leading financial stronghold
• In the U.S we have 300 million people with economic growth at 1%
• China has 1.3 billion people growing their economy at 11%
• Chinese consumers will drive commodity prices higher especially for oil and chemicals to produce and manufacture (make investments here)
• These consumers will need more electricity to run more computers and appliances(KA-CHING $)
• China’s one child policy has lead to a “Little Emperor” society. This will drive up demand for jeans, fast food beverages and other items geared toward children (Are you getting it yet?)
• Chinese women are buying cosmetics, apparel and luxury items. Total value of the cosmetics market is near $6 billion. This is the 4th largest category behind real estate, autos and tourism
• The country’s saving rate is 35 % (Hear that American spenders?) and this capital pool is used to finance productive capital investments

End part 1 of 2…