Long-Term Care: What’s Your Plan?

LTC- Ostrich head in the sandLong-Term Care (“LTC”) is a big deal. 70% of those over 65 will need LTC before the end of their lives. One in eight Americans over 65 has Alzheimer’s. 40% of those currently needing LTC are between the ages of 16-64. The 2012 national average annual cost of LTC was $81,000. Costs are escalating 4-5% per year. People are living longer and the cost of care continues to rise.

As a review, LTC means the help needed when someone suffers from dementia or needs assistance with at least two “activities of daily living,” such as bathing or dressing. The care can be provided at home, an assisted living facility, a skilled nursing facility, or a continuing care retirement community.

It’s no surprise that we at DWM consider planning and financing for LTC a key element of financial planning. When we are reviewing MoneyGuidePro simulations of the future with our clients, we usually stress test the plan for LTC. Can the plan sustain the burden of 2-5 years of LTC costs per individual? There are public programs such as Medicaid that pay for LTC, however, our typical client would not qualify for Medicaid. Hence, it is typically a question of “Do we self-insure or do we get a LTC policy?”

Traditional LTC policies are priced based on age, health, years of coverage, the inflation factor selected, and other details. Joint plans are available that provide a couple with a pool of money, that can be used by either of them. Premiums are increasing due to three main factors: claims have been higher than expected, policyholders are not allowing policies to “lapse,” and insurance companies aren’t earning as much these days on the investments of the premiums they collect.

In addition, women are starting to be charged higher premiums than men. It’s not surprising: 2/3 of every LTC benefit dollar is paid to women. They generally live longer than men and have no caregivers at home. Genworth Financial, the country’s largest LTC insurer, plans to start charging women as much as 40% more than men. In addition, in an attempt to minimize future claims, underwriting at insurance companies is getting much tougher.

If you decide to insure, it’s important to work with knowledgeable LTC professionals and make sure your insurer is strong financially so they will likely still be in business if you need to submit claims. You also want your LTC insurance agency as committed to being your advocate when you file benefits claims as they are to have you sign on as a new policyholder.

Lastly, many seniors these days would prefer to stay safely, comfortably, and independently in their chosen residence as long as possible. LTC policies generally provide coverage for both assisted living facilities and benefits for care at home and services for aging in place.

Planning for LTC is very important for everyone, but more so if you are 50 or over. The decision to self-insure or get a LTC policy is often difficult. DWM, of course, doesn’t sell insurance, but we work with excellent LTC professionals in both Chicago and Charleston/Mt. Pleasant who can provide information and answers so that you can make informed decisions for your and your family’s future. If your LTC plan is not in place yet, give us a call. We can help.

Student Debt: On the Rise Big Time

Student Loans

Student debt is accumulating at an alarming rate for a large number of people. According to a recent study by The Federal Reserve Bank of New York, student debt is approaching $1 trillion, making student debt the second largest after mortgage debt. The study estimates that 43% of 25-year-olds had student debt in 2012. We are meeting young clients with loans in excess of $200,000.

This immense level of debt is creating a drag on the economy. With such a large burden, a recent graduate is less likely to start a business, buy a house, or even start a family.

What has led to these high levels of student debt? Contributing factors include: increasing tuition rates, income levels that do not line up with the amount of debt, states funding cutbacks and the notion that all Americans need a college education. Tuition rates have increased to astounding levels; it’s not uncommon for a graduate school’s tuition to exceed $40,000. Yet, the Center for College Affordability and Productivity reported that around 48% of college graduates are in jobs that do not require a four-year college degree. The amount of a recent graduate’s loan can play a major role in the career decision that person makes when considering monthly repayments.

Many recent graduates are spending between 10 -25% of their income in student loan repayment. There are three new repayment programs that adjust the monthly payments to reflect the borrower’s adjusted gross income and ability to pay. They also provide a forgiveness of any unpaid principal at the end of the loan repayment period. However, these programs are only available to recent borrowers with federal loans and borrowers must meet a number of criteria to qualify for these programs. Additionally, unless the borrower works for the government or non-profit companies, the forgiven balance will be included as taxable income.

When the cost of attending school and the high interest rates for federal loans (6.8%) are combined, the remaining balance can be the same or larger than the original loan amount, even after 25 years of payments. This means that the borrower paid more interest than the original loan was for, and will now have tax consequences on the remaining balance. Also, unless the borrower can prove he or she is physically unable to work and there’s no chance he or she will be able to earn money, student loans will not be discharged in bankruptcy.

DWM is here to help plan a successful financial future for clients of all ages; even those with a seemingly unmanageable amount of student loan debt. Taking advantage of the repayment programs available to a client is just a part of the plan. Make sure you know all the rules for repaying the loans and follow those rules to the letter. Continue to invest in your retirement plan and don’t be afraid to have that Tuesday latté. With strategic financial planning from DWM, that student loan burden can be paid off and out of your life for good.

DWM 1Q13 Market Commentary

Brett DetterbeckRemember how ‘scary’ the Fiscal Cliff ordeal was just a few months ago?! Well, not only did stock markets shrug that off, but they also shrugged off a spending-cuts-sequester, higher tax rates, and further turmoil in Europe to soar to all-time record highs. Amazing really. “How is this happening?” one might ask. The simple reason is: Federal stimulus. The Fed Quantitative Easing bond-buying program continues to keep interest rates low, thus reducing the attractiveness of ‘safer’ investments such as Treasuries, and hence propelling ‘riskier’ assets such as stocks.

And did they ever propel! The S&P500 was up over 10% for the first quarter. Small Cap and Mid Cap fared even better, up 11.8% and 13.5%, respectively. Domestic certainly outperformed international markets as Eurozone worries continued. (For example, you may have heard about the tiny island in the Mediterranean called Cyprus who has a big banking presence. Unfortunately, both its banks and its government are a mess. To fix it, depositors with over $100K will have to give up some of their hard-earned money. This is the first time that depositors have had to share the pain in the modern era so it’s a big deal. The fear is that if they can put this in place within Cyprus that it could happen anywhere else in Europe, creating tremendous anxiety.) The MSCI ex-US was “only” up 4.7% and emerging markets were actually down 3.5%.

Fixed income on the other hand did not do much, with the well-known Barclays US Aggregate Bond Index about flat (-0.1%). Investment models that employed more than just the basic “Agg” type of exposure – like high yield (up 2.9%) and currencies (up 4.2%) – were able to produce small albeit positive fixed income results.

We urge clients to have a minority stake in alternatives, typically 10-30% depending upon their profile. Many investors may be familiar with the famous “alts” like commodities (essentially flat for 1q13) and real estate (up over 7% as represented by the SPDR Dow Jones Global Real Estate ETF ).  But many aren’t familiar with the majority of alternative vehicles and strategies out there.  For some quick education, here’s an example of an alternative publically traded mutual fund we utilize: Pioneer Floating Rate (symbol: FLARX), a fund which holds bank loans. What makes this fund so attractive is that unlike traditional fixed income funds where there is an inverse relationship between interest rates and price, this fund actually benefits when rates go up. Why? Bank loans are tied to interest rates in that they can go up when rates go up. Thus, this fund offers not only a decent current yield but is poised for appreciation when rates do in fact start marching higher.

1Q13 is a good reason why we don’t try to “time” the market. Many going into this New Year said that equities after a strong 2012 were poised for a correction particularly given all the global economic headwinds. Yet, here we are in April with a strong first quarter stock market showing and a good start to 2Q13. By not avoiding any one particular asset class and having at least a portion of your portfolio within all of the three major asset classes (equities, fixed income, and alternatives), an investor employing relatively little risk should benefit with stable, steady returns. This is the benefit of having a diversified, multi-asset class portfolio, with 1Q13 being a perfect example.

As we prepare for Spring – I know both our Charleston and Chicagoland clients are waiting patiently (Will it ever get here?) – we also look forward to what the markets will bring us in 2Q13. Will the US continue to show healthy signs of improvement like we’ve been seeing in the housing market? Will the sequester slow the US down? Will there be an equity correction of some sort after this tremendous rally? Will Europe ever recover? How much will Europe woes affect us here in the US? And the questions go on and on, but ultimately lead to “How does this affect me?” As our client’s wealth manager, we know that’s the most important question and one of the reasons why we are here: to filter out the noise and make the correct portfolio management moves to ultimately enhance your personal and family’s wealth and well-being. Protecting and growing these portfolios and helping clients attain their long-term financial goals are what we take pride in.

Happy Spring!

Quantitative Easing: QE 4ever?

QE (2)We are all in the midst of one of the biggest global financial experiments ever conducted: Quantitative Easing. Since the world financial crisis in late 2008, the Fed and other central banks have employed this technique in an effort to stimulate the world economy. QE has certainly has had an impact. It has reduced home mortgage rates to all-time lows and helped push the stock markets to all-time highs. Yet, QE is not an elixir. QE can’t cure all the ills of a moribund world economy. Furthermore, QE could ultimately cause major damage to the U.S. and world economy.

Last week, a good friend and client suggested that an update on QE might be appropriate for our readers. Good idea DD; thanks for the suggestion.

Quantitative Easing is an unconventional monetary policy used by central banks to stimulate the economy when conventional monetary policy isn’t working. Historically, the Fed has principally stimulated the economy by lowering short-term (fed funds) rates and cooled down the economy by raising short-term rates. However, by late 2008, the Fed funds rate was as low as it could go-effectively at zero. The Fed needed another tool. QE, last used in the U.S. from 1932-1936, got the call.

QE has the same effect as printing money. The central bank buys treasury and agency bonds from commercial banks and other private institutions (using electronic transfers), thereby creating money and liquidity. The purchases raise bond prices and reduce their yields, thereby reducing long-term interest rates. Interest rates on 10 yr. U.S. Treasuries have fallen from roughly 3% to 2% since QE started. Lower treasury rates mean lower home mortgage rates, which has certainly helped the housing industry get back on its feet.

Many investors, uncomfortable with lower returns on fixed income, started loading up on stocks and riskier debt. Since the start of QE, there has been an 85% direct correlation between the amounts of money added to QE and the rise in the stock markets. During 1Q2013, the move to riskier assets intensified. The result -stocks hitting all-time highs. Furthermore, increasing stock values have been shown to affect both consumption and investment decisions, which helps the economy as well.

Other developed countries have also adopted QE to stimulate their economies. The UK started in 2009. The European Union started in 2011. And Japan, which used QE in 2001-2006, started a new round of QE last year. In total, about $10 trillion has been invested by central banks world-wide in QE programs.

There are two major concerns with QE. First, many believe that QE will ultimately cause inflation-perhaps hyperinflation. With the money supply expanding faster than the real economy, one would expect inflation to occur. This hasn’t happened yet. Fortunately, the U.S. dollar continues to be the world’s reserve currency. Hence, events in Cyprus and other parts of Europe cause investors to dump the euro for dollars. Certainly if China and/or Saudi Arabia would ever drop the dollar or dump U.S. Treasuries, we could certainly see a run on the dollar and perhaps hyperinflation. However, that scenario, if it does occur, is likely years or decades away.

The second concern of QE is the impact when it starts to unwind. At their FOMC meeting in March, the Fed signaled that it would keep its ultra-easy money policy for now. They will continue this at least as long as the unemployment rate is above 6 ½%. As it approaches this level, it is expected the Fed will taper off QE. However, Chairman Bernanke made it clear that the Fed would discontinue QE long before it would raise the fed-funds rate. And it promised to keep the fed-funds rate at current levels until 2015.

So, the net effect is that once there is a substantial improvement in the economy, QE will stop. This will likely result in higher interest rates and higher inflation- both of which could slow economic growth. As a result, some are calling for the Fed to start unwinding QE now. With the unrest in Europe and around the world currently, perhaps the impact of unwinding of QE now would be less damaging to the U.S. economy than it will be in the future.

Rest assured, DWM is following QE very carefully. This experiment has already had a huge impact on the U.S. and world economy and undoubtedly will for years to come.