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Investment Planning for an Uncertain World

Investment Planning for an Uncertain World

Nov 2020

Chances are good that if you turn on the prime-time news on any given day or pull up your favorite newspaper on your iPad one of the top stories will relate to emerging risks around the world. Whether it’s strife in the Middle East, tensions with Russia, or the ever-shifting balance of power between global powers, this much seems obvious: we live in a time of both unprecedented global complexity and the technological capability to watch events unfold in real time.

Investing in a Time of Geopolitical Risk

When large investment houses start talking about geopolitical risk it’s probably a good idea to take note. Some money manager may not spend time discussing the possibility that foreign policies between countries could lead to destabilizing situations, but at the end of 2014 the chair of RIT Capital Partners (a $3.5 billion fund) issued a statement that geopolitical risk was “…as dangerous as any time we have faced since World War II…”.1

Whether such a dire warning sounds overly pessimistic or not isn’t necessarily the point. What’s important is that it reveals that large money managers are starting to pay a great deal of attention to global risk.

But how to address these risks? Historically, moving 100% into cash or government bonds hasn’t been the best way to achieve growth throughout that last 100 years or so, a period of time that has seen more than its fair share of global instability. Without moving into purely defensive investments and making overly-conservative plans how can you plan for tomorrow while being mindful of risks today?

Managing Risk - and Reward - for Potential Long-Term Success

It’s often said that without risk there is no reward, and when it comes to financial planning this maxim is particularly true. For those trying to achieve long term goals, such as retirement or estate planning, it’s often times risky to try and avoid all risk.

Being overly risk-averse toward stocks can result in low returns that hardly keep up with inflation, which may in turn increase the risk of running out of money before you die or failing to fully fund an estate. For some investors cash and bonds alone don’t offer the inflation-beating returns needed to replace an income or provide a legacy to the next generation.

Fortunately, a smart financial plan, built in a way that takes into account global risks but still seeks long term growth, can help avoid these overly-cautious decision biases.

Is Your Plan Risk – and Reward – Aware?

With all the uncertainty in the news now is a great time to evaluate your financial plan to see if its managing risks in a smart way.

Does your plan:

  • Ignore the relationship between reward (investments) and risk management (insurance), or does it address both investments and insurance in a comprehensive way?
  • Diversify investments and insurance to provide multiple sources of return and income?
  • React to the latest headlines or take emotion out of the decision-making process?
  • Rely too much on one company or country? (Note: If your pension, 401k, and life insurance are all provided by your employer or heavily invested in one country this can be a big risk.)

The best way to be sure your plan is well prepared for the risks and rewards of the global economy is to talk with a professional planner today.

After all, wouldn’t it be nice to watch or read the news and not worry about the negative headlines because you know you’ve got the right plan – and the right planner – on your side.

Tags: risk management, investment management

What’s Your Risk Management Plan?

What’s Your Risk Management Plan?

Nov 2020

Most people couldn’t bear the financial hardships resulting from unexpected events, such as a major house fire, a car accident, a disability or the premature death of a family breadwinner, which is why one of the most important component of a sound financial plan should be your personal risk management strategy. Fully protecting your and your family’s financial future against the unexpected will help you to move forward with greater confidence in your wealth management decisions.

What exactly does it mean to “fully” protect your financial future? Of course, it involves insurance planning and the purchase of different forms of insurance. But before you overextend and become insurance poor, it would be important to carefully assess your risk exposures and develop a risk management plan that fits your particular needs. That requires a full understanding of all of the protections available to you and how to optimize their capacity to protect you.

Disability Income Protection

For most people, their most valuable asset is their ability to earn an income. Becoming disabled for a period of six months or longer could have a much greater impact than any of the other threats to your financial security, including losing your home in a fire, or a major car accident, or a premature death. Obtaining the best possible disability income protection plan should be your top risk management priority. Because your risk of disability increases as you get older, disability insurance can become very expensive. The best time to consider purchasing disability coverage is when you’re young and healthy.

The most important considerations for purchasing disability insurance are:

  • Obtaining a policy that protects your occupational specialty for as long as possible
  • Insuring future income increases
  • Relying first on an individual disability insurance plan and only using a group plan as a supplement

Disability income planning has become a specialty in the insurance industry, and it would be important to work with a disability specialist with access to the top disability insurance carriers in the industry.

Property and Casualty Protection

Generally, property and casualty insurance (P&C) protects us against financial loss resulting from damage to our property as well as the liability of someone harmed. Auto insurance, homeowner’s insurance, renter’s insurance and personal liability insurance are all forms of P&C coverage. The general rule is that, if you own it, insure it. Of course, there has to be an insurable interest which an insurance company deems worth protecting.

The other consideration when it comes to P&C coverage is: Don’t skimp on your coverage to save money; rather find all ways to optimize your capacity in your insurance coverage. For example: Choose the highest possible deduction for which you are financially able to cover. Paying a $1,000 deductible for a dented bumper or covering the first $2,500 of the cost of a roof replacement won’t break you. The higher deductible levels will lower your premium costs which should be redirected towards increasing your liability limits.

Personal Liability Protection

One of the least understood forms of protection is personal liability insurance; and with its capacity to form an extensive umbrella of financial protection for a low cost, it can also be the most overlooked. Most people don’t consider it because they think they have plenty of liability coverage in their homeowners and auto insurance policies.

Most people are just a slip on a banana peel away from a major lawsuit; however, people of wealth or high-income earners, such as physicians, can actually become targets of people seeking to benefit from an accommodating court system. For a few hundred dollars a year, you can provide yourself with a million dollars of umbrella protection. As a general rule, you should have umbrella liability protection to equivalent to the value of all of your assets.

Life Insurance Protection

The purchase of a life insurance policy may never make anyone's top ten list of favorite things to do. But, when given the opportunity to consider the range of purposes it can serve, it could turn out to be the most important financial instrument you own.

  • It creates an instant estate – Life insurance creates the capital a family needs when there are sufficient assets to cover their needs.
  • It provides tax advantages – Life insurance has a host of tax properties that make it attractive as a financial instrument. The death benefit is tax free to the beneficiaries. The cash value accumulates tax free. And, under certain circumstances, you can access your cash values tax free. Certain policies, such as Universal Life allow for tax free withdrawals of principal and most cash value policies allow for policy loans which are tax free. *
  • It’s cost effective – Life Insurance is a financial instrument with potential to provide the capital needed to provide for surviving family members or to settle the costs of a large estate, or to buy out the family of a deceased business partner, as inexpensively as life insurance.

The mistake many people make is to wait too long before purchasing life insurance. As with disability income insurance, the time to buy life insurance is when you are young and healthy.

*Policy loans can become taxable should the policy lapse. Also, policy loans, if not repaid, will reduce the death benefit amount.

Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, terminates, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.

Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details.

Tags: risk management, retirement

Managing Investment Risks

Managing Investment Risks

Nov 2020

In my opinion, it is impossible to predict future stock market returns. Investment models can produce hypothetical returns but they can’t account for future events. So, in my opinion, investors who manage their investments based on market performance or what they perceive as opportunities for better returns have very little control over the outcome.

On the other hand, there may be market risk, interest rate risk, inflation risk and taxation risk. If your investment portfolio is not vulnerable to market risk it may be vulnerable to interest rate or inflation risk. In my opinion, over the long term, taxes may impede returns and portfolio performance. If it were possible to control the risks to your portfolio, then you could try to improve the long-term performance of your investments

Understanding all Risks -Some investors understand the concept of risk and reward. The risk of loss associated with the stock market is called 'market risk'.

In my opinion, the investors who were rattled from the steep declines in the market during the 2008 crash, and more recently in the August 2011 plunge, may have decided they have little tolerance left for market risk, and some of them may have moved their money to 'less risky' investments. The problem for these investors is they have now left their portfolio vulnerable to other adverse risks. Effectively managing all of your risks entails allocating your investments along a mix of assets that can act as counter-weights to the various types of risk. *

Inflation RiskThere is going to be inflation. When there hasn’t been inflation, there could have been deflation or stagflation, which some would consider to more dangerous conditions for investments. When investors shift their assets to low yielding or fixed yield investments to avoid market risk, they may be exposing them to inflation risk.

Interest Rate Risk -We also know that interest rates may rise; and they could fall. Unlike changes in the direction of the stock market, changes in interest rates could come with some forewarning. For instance, when the economy slows down as it has these last few years, the Federal Reserve may lower interest rates to try to stimulate economic activity. Conversely, when the economy begins to overheat, the Feds may increase rates to try to contain inflation. Generally, when interest rates rise, the prices of debt securities decrease, and in a declining interest rate environment their prices will increase.

People who stash their money in fixed yield vehicles could also be vulnerable to interest rate changes.

Taxation Risk -At one time or another, the IRS will collect its share of your investment earnings. But, as imposing as the tax code is, it may allow investors to use means to minimize taxes. Deferring taxes, which can be done using qualified retirement plans and annuities, enables your earnings to compound unimpeded by taxes so they can accumulate more quickly; however, there is usually a tax consequence when you eventually access those funds. Understanding investment taxation, such as capital gains, loss carry forward, investment income, etc., may affect the long-term growth of your assets.

In my opinion, an effective way to manage and potentially minimize investment risks is through the broad diversification of assets under a long-term investment strategy. Investors should consider their long-term objectives and overall tolerance for risk when selecting investments.

* Diversification does not necessarily produce results.

Tags: investment risk, risk management, investments

Insurance Basics

Insurance Basics

Nov 2020

Insurance may be less about if you’ll need it than when you’ll need it. Anyone who started driving at 16 is likely to have had a claim by the time they’re 34. More than 1 in 20 insured properties reported a claim in 2016, according to Insurance Services Office (ISO). And according to the U.S. government, someone who turns 65 this year has an almost 70% chance of needing long-term care services, which are generally not covered by Medicare.

A network of prudent insurance coverage is the foundation of any solid financial plan. A single healthcare crisis, incident of property loss, or other liability can quickly wipe out a lifetime of savings. The types of circumstances that may require the use of insurance may not be a subject we like to think about, but it’s one of the most important issues to address when planning for the financial security of you and your family.

Here are some common types of insurance available and the associated risks they can help address.

Health Insurance:

Many people receive health insurance through their employer, while others purchase it independently. Health insurance can cover everything from preventive care, treatment for injuries and disease and mental health treatment, as well as products and equipment necessary to address various medical needs. Your insurance may dictate from whom and in what types of facilities you are eligible to receive treatment. It will also indicat what your responsibilities are for payment in terms of deductibles and any limits to your coverage. It is critically important that you review your health insurance on an annual basis and fully understand your policy.

Auto Insurance:

Your automobile insurance is designed to cover property damage and personal injury in the event of an accident. The amount of coverage for these occurrences can range dramatically from policy to policy. With car insurance, you not only have to be concerned about covering your own liability if you’re at fault — but damage that may be caused by uninsured drivers as well. One in eight drivers are uninsured according to The Insurance Information Institute. Luckily uninsured motorists coverage for both property damage and bodily injury is available, although not all states require it.

Disability Insurance:

This covers loss of income resulting from injury or illness. Many people receive disability insurance from their employer, but not everyone does — so it’s important to understand whether or not you have this benefit. If you do not have disability insurance through your employer, you may wish to buy a private policy. You may elect to purchase short-term disability insurance, long-term disability insurance or both. Many people think they’re automatically covered for disability losses through Social Security disability, otherwise known as SSD. However, SSD which is administered through the Social Security Administration, has stringent requirements:

  • You are unable to perform the work you did before.
  • The SSA determines you are unable to do other work due to your condition(s).
  • The disability is expected to last at least a year or lead to death.

Private disability insurance eligibility requirements are often less strict and no not require a complete inability to work in order to receive benefits. And it is possible to receive SSD and benefits from private disability insurance simultaneously.

Long-term Care Insurance:

This can cover medically necessary assisted living or nursing home care —or if you require help at home to carry out daily activities. Many people mistakenly assume that Medicare pays for such services, but this would be a faulty assumption. With Medicare, coverage is generally limited to rehabilitation from an acute injury or illness where a full recovery is anticipated as opposed to long-term care needed in old age as a result of gradually declining function. This type of care is extremely costly. Here are some averages according to government statistics:

  • $6,844/month for a semi-private room in a nursing home
  • $7,698/month for a private room in a nursing home
  • $3,628/month for care provided in an assisted living facility

Life Insurance:

This coverage pays a death benefit when the insured passes away. It’s particularly important for breadwinners with family members who depend on their income. Life insurance needs often change over time as children grow up and move out of the house. Here’s an article that explains some common types of life insurance (link to previous life insurance blog here). This may be the type of insurance people don’t like to think about the most — but in the event of the unthinkable, it may matter the most.

Property and Casualty Insurance:

P&C can cover your home and possessions as well as provide personal liability protection should you injure someone or damage their property. It’s a broad category of insurance. Here are some common types:

  • Homeowners Insurance:insures your home and possessions in the event of theft or damage. It’s important to know your deductible for different types of losses, and any limitation for certain types of events, such as floods and hurricanes.
  • Renters Insurance:this insurance is specifically designed for renters, who do not own their dwelling. It is substantially less expensive than homeowners insurance, and can cover property and liability as a renter.
  • Condo Insurance: These policies can mitigate risks specific to condominium owners,including portions of the structure they’re responsible for, as well as assessments levied against owners to pay for repairs or improvements to commonly owned elements.
  • Umbrella PolicyAn umbrella can extend the coverage of your auto and homeowners insurance policies. Carriers will generally require insured individuals to have a minimum amount of coverage already in place before they will write an umbrella policy.

Risk is a part of life — there’s no getting around that. But with solid insurance coverage, you just might be able to sleep a little better at night no matter what the future may hold.

Reference:

https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance

https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

Tags: Baby Boomer, behavioral finance, education, finance, insurance, millennials, retirement planning, risk management

What If I Can’t Save Enough to Reach my Retirement Goals?

What If I Can’t Save Enough to Reach my Retirement Goals?

Nov 2020

You just ran the numbers on your retirement and realized that you aren’t going to be able to save enough to make it happen. Don’t panic: There are still things you can do to better your situation, especially if you’re willing to be flexible about your plans and your lifestyle.

The first step is to determine exactly where you are. In retirement, you may have income from a number of sources:

  • Social Security
  • Pensions
  • Investment income
  • An inheritance
  • Earned income from a side hustle

Next, estimate the likely cost of your future monthly expenses: rent or mortgage, utilities, automobile payments and insurance, credit card and loan payments, food, health care (insurance plus out of pocket) and emergency repairs. A good way to capture these categories is to look at your credit card statements and checkbook and list everything you’re spending on now. If you haven’t kept track of this on paper, most online bank and credit card services offer easy access to your transaction history.

Leave out or lower your estimate for anything you won’t spend as much on when you’re retired (your commuting cost should go down, for example). Now, what about potential costs for travel, hobbies and other post-retirement fun? Will you set aside money to give to grandchildren or other relatives in the years ahead?

Once you have your monthly income and expense estimates, compare the two. Are you still coming up short?

If you don’t have enough income to cover your projected expenses, there are some things you can do. But first, there are some things you should definitely NOT do:

  • Panic.
  • Shift into higher-risk investments to try to capture higher returns.
  • Decide your head hurts, avoid thinking about it altogether and assume your health and career will allow you to work long enough to make up the difference.

Here are some things you CAN do:

  • Make catchup contributions to an IRA. The tax code allows workers over 50 to make extra, pre-tax contributions to boost their savings.
  • Re-think your lifestyle. Do you really need to live on a golf course? Maybe you could live near a golf course and be just as happy.
  • Take on a side hustle to create a little extra income. This could be something that’s been a hobby – tying fishing flies, restoring old cars, or knitting comforters. Or work a few hours a week at a friend’s business. Be aware, however, that your earnings may have implications for your taxes and Social Security benefits. Because the tax code governing what portion of benefits can be taxed is complex and subject to change, you should talk to an accountant or financial advisor well versed in that part of the code.
  • Do you have two cars? Maybe one would do. Or perhaps you can do just fine with a used model with a reputation for reliability and longevity.
  • Downsize. Move to a smaller house or condo, and if you’re single, maybe take on a roommate.
  • Consider relocating to a lower-cost area. The cost of living in Knoxville, TN is about 17% below the national average, and there are plenty of other places below the norm: Cheyenne, WY (-8%), Green Bay, WI (-10%) and Sherman, TX (-14%) are just a few.
  • Tap your home equity to pay expenses.
  • Consider a reverse mortgage. However, be aware that the reverse mortgage products offered by various lenders are wildly different in their terms and risks. Look at this very, very carefully before committing.
  • Delay taking Social Security benefits. Waiting until at least your full retirement age boosts your monthly check significantly; your monthly benefit will increase by about 0.67% for each month you delay past your full retirement age, and will add about 8% for each full year you wait until you reach age 70. Your full retirement age depends on your year of birth. Use the calculator on The Social Security Administration website to figure all of this out for your particular situation based on your personal earnings record.

But before you do any of these things, the most important step you can take is to talk to your financial advisor. Because they deal with the intricacies of the tax codes and Social Security every day, they can help you steer clear of landmines and set a course to that bright retirement you’ve been dreaming of.

Sources:

1. https://www.forbes.com/sites/investor/2017/06/09/what-to-do-when-you-havent-saved-enough-for-retirement/#368f06f06e20

2. https://www.aginginplace.org/are-there-taxes-on-social-security-for-seniors/

3. https://www.ssa.gov/planners/retire/1955-delay.html

4. https://www.kiplinger.com/slideshow/retirement/T047-S001-cheapest-places-where-you-ll-want-to-retire-2019/index.html

#save #retirement #future #wellcents

ACR# 336900 NFPR-2020-8


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