Paul Ferraresi

As gold prices exploded through $1800 and $1900 per ounce, people continued to ask me, “Should I buy gold now?”” It has more than doubled in the last few years. My response, as usual, was, “Why didn’t you buy it when it was $700-$800 per ounce before it took off?” The classic answer was…it was too low then. Oh, I see. So you do not believe in buying low and selling high? The majority of American investors are “wired” backward at the factory when it comes to investing. They buy high and sell low. Here is proof, again:

Many people that recently bought gold at over $1900 per ounce have told me they just sold it, as I write this today, with prices at $1690 per ounce!!!

You do not buy gold to make money. It is a hedge against a devaluing dollar, a safety net against war and financial crises. As gold went up over the last few years, all your dollar asset values were dropping due to the devaluation of the dollar so you did not make or lose anything. It is a hedge. It is simply an insurance policy.

Will it go higher from here? Here are some notes from some gold experts who see prices rising due to the following:

•China’s gold jewelry consumption has exploded and will continue to do so as their wealth increases and the affluent buy finer things.

•Although the Chinese government did open up the gold market for jewelry sales in the early 1990s (isn’t that nice of the controlling government to do that?). There still was a value added tax of 17% on gold jewelry and a monopoly in sales by the Chinese government.

•In 2003 most of the controls and taxes were removed in China and thus helped push the price up recently. Demand for gold bars has grown even faster due to (1) rapid income growth, (2) lack of investment alternatives, (3) low interest rates on bank deposits, and (4) as a local currency hedge.

•China is the world’s largest gold producer, but, still must import a great deal to meet demand.

•Also, a growing concern in China over rapidly increasing inflation encouraged the purchase of gold as a safe haven.

•Massive worldwide marketing is also creating more demand in all corners of the globe.

So, should you buy gold now? If you look at the government policies that have created the demand for gold, and you think those negative policies will be reversed quickly, then I would not buy. If you see these negative policies staying around, world income levels rising and it taking a while to solve the world’s financial crisis, then I would be a buyer.

How much gold and at what price? See your financial advisor…. Isn’t that why you pay them their hourly fee?

If I had my way, I wish for the price of gold to drop to zero. Then, there would be peace, harmony and love all over the world. People would be holding hands and singing all day long. With that in mind, I have a bridge in Brooklyn to sell you along with swamp land in Florida! And…a very special deal for you…. I can get Bernie Madoff to be your investment advisor from behind bars. Are you laughing yet?

I experienced this with a close friend. We will call her, “Marg.” She is 72 years old and had a double mastectomy done about 20 years ago. She has recovered wonderfully and lives a full life. Every two years she goes in for a special test to determine if any cancer cells have developed in her body. The test costs about $2800 to $3000 per exam. Medicare usually covers the majority of the expense except for her office visit costs and a deductible.

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.

Oftentimes, when a person does not prepare adequately for retirement funding, they consider using a reverse mortgage just to exist.

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.

One way to prevent identity theft is to monitor reports from the credit bureaus. You should review the reports at least annually. Ideally it should be every four months. There are three major credit bureaus and you are entitled to one free credit report annually from each one. I suggest you work a rotating system. That is, every four months get a free report from one of the bureaus. It will not cost anything and you will have an up-to-date review. See www.annualcreditreport.com.

Look over the report for credit companies you have never sought an account from or an account balance that you know is not yours. Examine for a past address where you or your children have never lived. This is a flag that the thief may be setting up to get a loan application on that address.

Ah yes, discipline or regret.

Most colleges use the FAFSA Form as the only item for assigning need-based financial aid. About 300 colleges (private schools) use a formula called the “institutional methodology” which also requires the CSS/Financial Aid Profile application. The CSS Profile asks for more detailed data about a family’s income, assets, and resources not required on the FAFSA form. This additional information includes your home equity and your retirement accounts.

(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.