• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUT OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

Currently, 49% of LTC recipients are relying on Medicaid, but keep in mind, while some in this group come from our nation’s poor, many in this group start out paying out-of-pocket then go on Medicaid after their assets are exhausted. Only 7% of people are actually paying for long-term care with private insurance coverage they have purchased. The government took a step to reduce Medicaid roles with the passage of the DRA, making Medicaid eligibility more difficult. The three-year look back is gone. Under the new law, the look-back period is five years for all transfers, and the beginning date for the penalty period is now the later of the date the person enters a nursing home or the date the person applies for Medicaid.

What this boils down to is the penalty period will not begin until the nursing home resident is virtually destitute.

Gifts made by seniors in the most innocent manner could jeopardize their eligibility for Medicaid even if it is legitimately needed. For example, a grandparent making a monetary gift to a grandchild for a wedding or college graduation could end up delaying their Medicaid eligibility.

Also, watch out for filial responsibility. Filial responsibility laws derive from England’s Elizabethan Poor Relief Act of 1601. This law required grandparents, parents and children, to the extent they were able, to support family members who could not care for themselves. Currently, 28 states have filial responsibility laws. Pennsylvania has re-enacted its law making children liable for support of their indigent parents, and other states are likely to follow suit.

The DRA of 2005 also affects the exemption of a person’s home, the use of interest-only annuities and the forgiving of loans.
• A person’s home, formerly exempt from Medicaid eligibility limits, will be counted as an asset if the equity in that home exceeds $500,000. States are allowed the option to increase that amount to $750,000.
• Some advantages in using interest-only annuities have also been eliminated. These annuities provided a small income during life and left the original investment to heirs upon the senior’s death. Under the new rules, the state must be named beneficiary of any leftover funds in the annuity for at least the amount of the medical assistance paid on behalf of the annuitant.
• A senior can no longer loan money to their children to get it out of their estate, then, forgive the loan. In order not to be considered a transfer of assets, the repayment of a loan or mortgage must be actuarially sound and cannot be forgiven or cancelled upon the death of the lender.

Projected growth in the senior population has caused states to seriously review Medicaid programs.

For a reasonable cost, life insurance with a long-term care rider can be purchased. This plan will provide funds for the insured should they need long-term care, protecting the loss of other assets they have worked so hard to accumulate. However, in the event no long-term care is ever needed, the insured has a death benefit to leave to heirs, enhancing even further the legacy they will be able to leave their loved ones.

Here is an example that we use…assume someone has a $3900 balance at 15.32% APR. It would take 150 months to pay off the debt if you paid the 36-month amount listed on the statement each month.

How do you stay within a 36-month payoff? This month, determine the amount stated to pay off the balance in 36 months; for example, $121. Do not add any new charges and keep paying the exact $121 each month. It will be paid off in 36 months. This way, 36 months does not become 150.

This process includes risk management and a review of all your insurance coverage — life, disability, liability, long-term care. Also reviewed are tax planning, cash flow analysis, and much more.

You should not just look at your own life, but, you must consider the possible caring for elderly parents, multi-generational relationships, and other personal planning issues.

Most people think that simply drafting a Will solves all these problems. Far from it. Wills are not the best vehicle for carrying out one’s wishes.

In addition, one should do at least an annual estate review with their advisor to make sure that beneficiary designations are current and intended distributions match your current intentions.

With your advisor you should discuss how you want your finances handled if you cannot function or after you pass away.

To most people their estate is simple, but, I have seen fortunes wasted by people who do not understand what the laws are and how they can and will affect your loved ones. Let me give you an example…. If you are married with children, and, you do NOT have a Will…where do your assets go? Most people think all of it goes directly to the surviving spouse…. AH-OO-GA! Wrong Answer! See your advisor for the answer!

She recently had the test done. When the bill came in, it stated…“the test costs are no longer covered under “Obama Care. You will have to pay the bill in full.”

So look at this convoluted Government thinking…. If she cannot pay for the test out of her own pocket, then, she will not find out if she has cancer. Now the treatment will be covered if cancer is detected, but if she does not pay for the tests, she will never know if she has cancer. Looks like the old Abbott and Costello routine, “Who’s on First?”

Do you see this sleight of hand? They laughed at Sarah Palin when she said the plan has “death panels.” The way these new rules are set up…sure looks like “death panels.”

There are so many wonderful options that could be instituted to cover people with health insurance at a lower cost but the Government won’t allow it. You have seen how all Government programs like AmTrack, the Post Office, Social Security, Medicare, and Medicaid work. They are all losing money and are insolvent. This program is in the same league and will follow the same route. It is slated to go before the Supreme Court. Contact your representatives to let them know how you feel.

I bring this to your attention to help you (1) plan for increased costs for your insurance when you retire, and (2) better plan in your budget to help pay big money for your parents’ health insurance retirement needs.

Assume a retiree’s home is paid off. They can go to a bank and obtain a reverse mortgage loan against the property. Depending on the person’s age, their health, and the property value, the lender will provide funding to the retiree. The amount may be, say, 50% of the appraised value of the property. There are no payments due to the bank. The principal and interest accrue. Once the person dies, the bank will take the property and sell it. The outstanding mortgage may be 80-90% of the home’s value at the person’s death, so, the bank can still make some money once it sells the home. On the other hand, the surviving spouse or heirs could pay off the loan and take ownership.

A recent article in the September 2011 issue of Investment Advisor magazine showed AARP suing Fannie Mae and Wells Fargo over reverse mortgages.

HUD had established original rules that “…a borrower or heir would never pay more than the home was worth at the time of repayment.” In 2008 HUD changed the rules…. The heir must pay the full mortgage amount even if it exceeded the value of the home. AARP sued and HUD returned to the original rules.

A new suit has come up, by AARP, toward Fannie Mae and Wells Fargo. These institutions are failing to give notice to surviving spouses and heirs of their rights to buy the property for the lower value. These institutions are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home.

Thus, a stranger could purchase a reverse mortgage home for the fair market value where an heir could not.

A simple solution to not getting caught in this trap is to start early funding for your retirement. Sit down with a Certified Financial Planner no later than your early thirties to get a plan in place to actively fund your plan. Day after day I have a large number of people, around the age of 58, who earn $100,000 per year or more, and have less than $50,000 saved for retirement, call into the office, looking for a quick solution. With only $50,000 that will fund the first six months of their retirement. Sad….

As always, discipline or regret.

(For years, in this blog we have advocated the extraction of the maximum equity from your home and withdrawal from your qualified plan. Take these funds and place them in a tax free investment vehicle that is not a countable asset for college funding, Medicare or Social Security. Contact us for more information.)

Colleges that use the FAFSA will determine financial needs based on your expected family contribution. The formula looks like this: Cost of Attendance minus Expected Family Contribution equals Financial Need.

Do not be tricked into putting a lot of assets into a child’s name. If you do, colleges will demand:
• The child use 35% of their assets for college before any aid is given to the family. If the asset is held in the parent’s name, then only 5.6% of that asset must be used before aid is given.
• If the child does not go to college, they can spend that asset as they please. Remember: You gifted the asset to them. Let’s see…would the child choose a new red sports car, or, would the child use the money for college? DUH!

Many private schools use the institutional method which counts home equity as an asset. If you have, say, $300,000 of home equity, it will be assessed at 5.6%, which means a difference of $17,000 in expected family contribution you will pay before getting any aid.

Keep in mind, many private schools cost in excess of $53,000 per year (without taking into consideration personal expenses of the child; e.g., football game tickets, new clothes, special events, etc.). Add in your retirement plan assets as being assessed in the formula, and parents will have a huge amount of Expected Family Contribution.

Public schools are making it so students have to go five or six years to complete their degree which pushes up these costs, also.

The best time to start saving for college is before the newborn leaves the hospital to go home with you.

I hear people say, “Paul, I feel that we will need only about 75% of our current income to retire.” The actual national average is 91-94% with many spending 103-105% of their final year’s pay. For some reason people leave out a factor for income taxes (which are set to rise in a little over a year) and inflation. That is why they think they only use 75%.

Here is the real item they have left out – health care costs. An average married couple with children pays approximately $300-400 per month for health care. The “street” cost for a Blue Cross/Blue Shield policy is around $1400 per month. That means, your company is making up the difference. (Say Thank You!) Group health insurance has been set up on a socialistic system. That is, the young and healthy workers are paying for the older, less healthy individuals in your company.

If you want “good” health care when you retire, you probably will not go with Medicare. By the way, watch for the bankrupt Medicare system to raise rates and cut benefits shortly in order to survive. (Ah yes, another government program that does not work.) At age 65, a married couple with a private health plan can expect to pay $2000 to $2500 per month with a $2500 deductible. That is $24,000-30,000 per year for the insurance plus the deductible and out-of-pocket costs for medications. Did you add that into your budget for retirement? I think not! So, a couple now earning $100k per year, guesses they will only need $75k. Gross up to pay for taxes and they are up to $95k to $100k. Then add in the new health care costs, more travel and gifts for grandchildren. It is not unreasonable for them to need over $100k.

Most people probably will take Medicare. You know – where the government says it will take care of you. (One of my favorite quotes is: Be careful of those who want to take care of you…for your caretaker will soon become your jailer!) The quality and quantity of service is lacking, to say the least.

Another thing to add to your retirement budget will be long-term care coverage. If you have not started the purchase of this coverage, well, it gets real expensive starting at age 55-60. Oh, you say, you will pay for it on your own instead of buying the insurance. Costs today for care in a nursing home or at-home care averages $6,000-10,000 per month ($72,000-120,000 per year). Remember, a married couple can expect one of the two people to need nursing home services for at least five years. (That is $360,000 to $600,000.) Today’s costs can wipe out your finances. Where will it come from as people are living longer? These costs are going up at a rate of 15-20% per year.

Stop putting your head in the sand and develop a plan for you and maybe your parents, also. Unfortunately, most Americans have been brainwashed to not take responsibility for themselves. Sit down with a professional advisor, face the truth, and get to work on providing a comfortable future for yourselves.

Discipline or regret.

It’s the same for you and me and our goals: once you complete them, make another list. My father lived to be 83 years old. You can’t imagine the goals he had at 83: get his driver’s license renewed. He got it renewed for four years.

• How far into the future should you plan? As far as you can.
• How many books should you read? As many as you can.
• How many friends should you make? As many as you can.
• How much should you earn? As much as you can.
• What should you try to be? All you possibly can.

The purpose of this exercise is to stretch you, get you to think, get you to wonder, ponder…. I wonder what would be possible if I could get everything I wanted. What would it be like?

Goals for Personal Accomplishment
Once I reached eight years old, the fires were lit for me and they have never gone out. Since I was eight years old, no one ever said to me, “When are you going to get going? When are you going to get off the couch? When are you going to get off the dime?” I only hear, “When are you going to slow down? You can’t do that many things. You’ll have a heart attack and die.”

It’s easy to get lazy in designing the day, the month, the year, or your life. It’s easy to cross your fingers and hope it all works out. The way to keep this up and not get lazy is to teach it to others; e.g., your family.

The Why Is Important
Pick out the top four goals you want to complete by the end of this year. Then, write a short paragraph:

“Why These Four Goals Are Important to Me.”

When the Why gets big, powerful, and strong…

The How Seems to be So Much Easier
Without a strong enough Why, the How seems too difficult to accomplish. How do you manage your time? If you had strong and powerful goals you would figure out how to manage your time if it was worth it. If it wasn’t worth it, why bother struggling with the art of managing your time if it really doesn’t matter?

We are now approaching the final quarter of this year. How are you doing on the goals you set nine months ago? Take this short quiz to determine your priorities and finish the year strong – even if it means completing only one of your goals.

1. You win $100 million in the lottery. What would you do with the money? What would you change in your life? What would you do differently?
______________________________________________________________________________________________________________________________________________________________________________________________________________________________
2. If you knew you had only five years left to live, what would you change in your life?
______________________________________________________________________________________________________________________________________________________________________________________________________________________________
3. If you found you had only 24 hours left to live, what would you regret not having done; regret not having had; or regret not having been in your life?
______________________________________________________________________________________________________________________________________________________________________________________________________________________________

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.