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A tale of three nursing homes

wheelchair

As an older adult, I have witnessed several people enter adult care facilities after a long life. The type of facility that they enter depends upon how financially successful they had been.

The first tale is a man forced to deplete his life savings when his spouse needed full-time nursing care at a relatively young age, for the rest of her life. (Even if he had long-term care insurance, it would not have helped because these insurance plans only last 2-5 years.) Due to this massive expense beyond his control, he unfortunately entered retirement with no savings. So he lived solely on social security and earned spending money from handyman work for neighbors. When he could no longer care for himself, his only option was a state nursing home facility. He shared a noisy room with 1-3 other patients and was dissatisfied with his daily experience and critical of the medical care that he received.

The second tale is man who retired with a pension and social security. When it was getting difficult for him to maintain his home, he could afford to move into an apartment at a private assisted-living facility. This facility cooks all meals and is a comfortable place for independent living. As he became accustomed to his new routine, he wished that he had moved into this place many years earlier. At this facility, as it is needed, he can move into more advanced levels of medical care.

The third tale is a man who was very successful and planned early where to spend his twilight years. He moved into a spectacular private adult facility that is so desirable that there is a waiting list. At this facility, residents rave that the services and amenities are equivalent to a 5-star hotel or a very high-end cruise ship.

Needless to say, there is a colossal gap between the level of medical treatment and general care at the state-run facilities and the best of the high-end private facilities. Which level of care is your current financial plan heading toward? It isn’t too late to revise it and learn about the state and federal rules about elder care support for you and the people that you care about.

Government continues to pummel retirees

social security plate

Washington is continuing to bash income for retirees every front.

First, the U.S. Federal Reserve has been artificially keeping interest rates near zero. This has left retirees earning almost nothing for the last 8 years. So instead of prudently putting their money into bank CDs and quality bonds, they must speculate to earn any investment income. Then, Medicare deductions from social security payments have been ratcheting up sharply for years. Cost of living adjustments for social security have been nearly nothing and will be zero for 2016 – even though food and healthcare keep rising. Now, Washington just made a budget deal that forbids the “File and Suspend” strategy of maximizing your social security benefits.

When your country is broke then: government benefits shrink, rules change, and people face even more financial struggle. I’ve been telling others since 1993 that, “Social Security and Medicare will begin falling off a financial cliff by 2015, it is simple arithmetic. So expect shrinking retirement benefits, it will become more important than ever to save on your own.” Since 1993, the only change in the government debt arithmetic is that it has gotten worse. There is a new medical program called Obamacare that is an additional unfunded liability that will cost well over a trillion in the next decade.

As predicted, retirement benefits have already been shrinking: tiny or no cost of living increases; the monthly charge for Medicare has skyrocketed for high-earners; moving back retirement dates along with changing qualification rules. I predict more rule changes to ratchet down retirement benefits in the future, again, it is a necessity of simple arithmetic of overspending.

As always, your retirement is up to you to fund it, grow it, and protect it. As government finances continue to deteriorate, it will continue to reduce benefits and increase taxes on retirement accounts.

 

This week, President Obama opened his new retirement account called a MyRA. This is not a good savings vehicle because your money can only go into a single poor long-term investment – a particular fund of government bonds. The U.S. Treasury administers these accounts and they are for people with jobs that don’t offer employer retirement accounts. In promoting these accounts, the U.S. Treasury actually makes fraudulent claims: It carries no risk whatsoever (but the fine print says your interest is not guaranteed plus the government is already insolvent); There are no fees (but there are imbedded fees in all government bond G funds like this one). Plus, you are kicked out of the plan if your account ever accumulates to a meager $15,000. Please avoid the MyRA account.  

New stock market novelty

stock certificate 2

A business named Stockpile.com received regulatory approval to sell gift cards for individual stocks. Either online or in big-box stores, you can buy a $25-$100 gift card for stock in well-known companies such as Coca-Cola, BMW, Apple, Facebook, Hershey, and Google. You can also choose to apply your gift card among ETF’s for the S&P 500 stock index, gold, oil, sugar, and others. (Although several of their stocks are a little misleading, for example, Stockpile offers the car brand Lamborghini. But if you select Lamborghini shares to purchase, you are actually buying shares of Volkswagon, the parent company of Lamborghini plus ten other car brands that may not have wanted to purchase.)

Are these gift cards a good or bad gift item to buy? First, let’s consider other gift comparisons. What would you have bought instead as a gift of a partial share of stock, something useful or something trivial? Something fleeting like candy or something memorable like a concert ticket? At least a stock card may hold some value over time.

It is my opinion that the greatest value of these gift cards may be to expose someone young to the stock market and to understand a business P/L statement. But it is my experience that when introducing someone young to individual stock investing, it is difficult to sway their view away from speculation and daily price moves. This view is the opposite of becoming a profitable investor. A better gift idea may be an education about investing. For far less money than one of these gift cards, you could purchase an investing book that I recommend, “Unfair Advantage,” by Robert Kiyosaki, or even my own book.

Naturally, buying one of these stock-gift cards is exactly like opening a regular brokerage account, along with posting your personal information online with them for state and federal taxes. I consider these gift cards an entertaining novelty, only they come attached with fees and annual tax paperwork. These gift cards are not an efficient or profitable way to build savings or a stock portfolio, so I really do not see the value to them. I predict that many of these gifts will simply become abandoned accounts that are eventually confiscated by the state treasuries.

Big deals are now available for small investors

cigar and tuxedo

In 1933, the Securities and Exchange Commission made it illegal for small investors to invest in private businesses through brokers or advisors. This blocked small investors from placing money into startups, small businesses, or real estate that has the potential for huge returns never found in the stock market. At the time, it was a Wild West for investors and too many small investors were losing all of their money. So the government created a threshold for someone to invest in these companies, a net worth of $1 million or income of $200,000 per year. These investors were labeled, “Accredited Investors” and the thinking was these people were more sophisticated investors and could with stand losing 100% of an investment and still be financially Ok.

This month, it becomes legal again for non-accredited investors to place money directly into startups and small businesses. So now small investors can act just like a venture capitalist. However, there is a cap on how much that non-accredited investors can invest in these businesses, up to 5% of your annual income.

If you choose to get into this investing arena, be aware that 90% of start-ups fail. So you need to be bright and lucky enough so that one of your 10 investments will perform so well it will offset the losses from all of the other failing startups. There are websites already to match investors to opportunities, some perform due diligence as well. Like any investment, there is a whole lot to learn before you can intelligently invest in any area. However, start-up investing is even more challenging because the company is normally not started or run by a professional and experienced management team.

Do you have financial ticking-time bombs?

time bomb

I define a ticking-time bomb as: an unavoidable financial event on someone’s time horizon that they continue to ignore until it blows up their finances.

Examples include, putting an expense on your credit card that you had plenty of time to save up for, taking out a loan for a car or vacation, or the big expenses like: college, wedding, home, or retirement.

Some other very common ticking time bombs include:

  1. No emergency fund for being out of work
  2. Having a variable-rate mortgage
  3. No maintenance fund for predictable repairs
  4. Student loans larger than any potential salary
  5. Spending all of a lump sum when a chunk must go to income taxes
  6. No prenuptial agreement to protect your assets
  7. Hiding debts from your partner
  8. Not adjusting your spending for a drop in income
  9. Having children without mapping out all of the costs

In each case, these time bombs are created from making decisions without any financial literacy. Unfortunately, the consequence is always painful and undesirable choices that impact your physical reality. Each one of those time bombs listed, and many others, can be diffused. This is done by mapping out your financial life, to make better choices, long before these events occur to prevent blow-ups.

Institutional financial illiteracy news of the week

capitol

400,000 Teamsters Union members, who are already retired, just discovered that their pension payments may be reduced by 65%. The pension fund, managed by the union and employers, is heading toward insolvency within 10 years. Aside from corruption and mis-management, since 2008, so many small businesses went bankrupt that it left a growing number of employees being supported by a shrinking number of employers (exactly like federal social security). Teamsters members are going to be voting soon on these pay cuts and they are afraid that if they do not accept the reductions, then they will receive zero payments instead.

The state of Illinois has been unable to pass a budget that was due four months ago. Since then, the state has been financially loping along with consent decrees. One of the many ways the state has chosen to free up money is simply not to pay lottery winners. Today, any Illinois lottery winner owed over $600 is given an IOU from the state. Illinois State Lottery tickets are still being advertised and sold, which would be consumer fraud and a prison sentence if any company did this. The amount that the state has withheld from winners is now over $288 million. Lottery winners have formed a class-action lawsuit to sue the state for payments plus interest.

The U.S. federal government brought in a record $3.3 trillion in taxes for the 2015 fiscal year. But that tax haul still wasn’t enough money, there was still an accounting deficit of $439 billion, although the lowest in 8 years. However, this is with an artificially low interest rate engineered by the Federal Reserve. If interest rates were anywhere near normal, the federal deficit would have been about $600 billion higher. Let me state this another way, with normal interest rates, the federal government will be spending one-quarter of all taxes they collect just to pay for the interest on the national debt. This is not a sustainable financial structure.

Whether it is a household, a business, or public institution, financial illiteracy results in a physical calamity, sooner or later.

Turn a 5% dividend into a 20% dividend

dividend book

An investor’s dream is to receive a 20% cash return on his or her investment. For example, invest $1,000 and receive a cash payment of $200 per year, forevermore. Wouldn’t that be great?

There is a way to do it, with relatively safe stocks, however, there are two requirements. First, you need a stable company with a long history of paying dividends. This company, however, must also have a history of increasing their dividend every year. This requirement will whittle down thousands of potential stocks to only a few dozen very solid companies.

Once you purchase a stock that meets this first qualification, you are going to be receiving dividend payments in your brokerage account. Most brokers have a feature that permits, “Automatic Reinvestment of Dividends.” By making this election on your stock, then your dividend payment will be used to purchase more shares of that stock. By doing this, you are adding to your position and therefore increasing your dividend payments each pay period.

Now, let me explain how you move from a normal 3-5% dividend to earning 20% with your dividends. In today’s economic environment, stock candidates that have a long history of increasing their dividends typically yield around 3-5% from dividends. However, you are employing two drivers to compound your cash dividend payments:

  1. Reinvesting all of the dividend payments to purchase more shares.
  2. The company will continue to increase their dividend payments each year.

If a company you selected never increased their dividend, then it would likely take 15 years for your cash payments to double, and then another 15 years to double again. So your 5% return would increase to 20%, but it would take a long time, roughly 30 years. But when your stock continually increases their dividend, depending upon how fast they increase it, it can reduce the time period to surpass 20% in cash dividend payments to less than 18 years. And if there are some larger increases, it can be less than 10 years.

Other dividend candidates include companies that routinely increase their dividend more than once a year or those companies that routinely make an extra dividend payment each year (note that these do not show up in the stock’s normal yield calculation because these are extra, non-regular dividends).

A more advanced strategy is to turn off your “dividend reinvestment” election, and instead sell puts on shares you want to purchase. This is a strategy called writing naked options and can boost your brokerage account with options income, while you wait to have shares ‘put’ to you that you wanted to buy anyway.

This is a very brief introduction for tactics to utilize dividend-paying stocks to ratchet up your cash income by thinking in a longer time-frame. While other investors might ignore a 2.5% yield on a stock, you may employ these tactics to create a substantial 20% yield much sooner than you’d expect.

Spending rates from retirement savings

retired 2

Retirement savings can be viewed as an account of money to pay your bills once you retire from working for a living. This retirement account, naturally, must have enough money to last your lifetime.

Two other retirement accounts may assist your lifestyle spending in retirement, pensions and social security. However, as pensions are being reduced, and social security was never much to begin with, your most significant account will consist of how much money you’ve set aside for retirement.

Once you have funded your own retirement account and begin spending it, there is a concept called a “withdrawal rate.” This refers to how much of your retirement account you can spend each year with a likelihood that it will last your lifetime. Depending on several assumptions, there is academic research that 4% per year is a robust withdrawal-rate starting point for you to consider. To make this easy for retirees, there are now funds that automatically do this for you and you can choose an annual withdrawal rate, from 2.5% to 5.0%.

You should be aware that a continual reduction of your retirement principal amount is exactly like landing a plane, you want a glide slope that will comfortably last your lifetime for a gentle landing. Too many retirees withdraw too much, too fast, and crash land too early with painful consequences. Even if money isn’t being withdrawn too quickly, a couple bad years in the stock market and it triggers a “sequence of returns” downward spiral of your money dramatically sooner that you had planned. Withdrawing less money in bad market conditions greatly increases the lifespan of your retirement funds.

The most successful retirement plan is one in which there is never any reduction of your principal balance. Your withdrawals are a maximum of your interest and dividend income. Even better, is to leave some interest and dividends to be reinvested so that each year your portfolio income is increasing. The glaring problem with this withdrawal strategy is that your account needs to be large enough when you retire so that the dividends and interest amount to a meaningful amount of money. The annual income in your retirement account needs to be large enough so that you don’t have to remove part of your principal balance in order to pay your bills. The greatest benefit of having an account large enough to do this is the financial peace of mind that you’ve eliminated any potential financial-crash landing from running out of money when you are least able to earn money.

Are you more of a spending addict or asset addict?

statement #9

I read a quote by Porter Stansberry this week, “Young people I meet today have a very unfortunate characteristic: they tie their feelings about their self-worth to their spending instead of to their net worth (their saving). They’ve confused trying to live rich instead of moving toward being rich. The most significant variable in getting rich is how much of your income that you save.”

I believe this helps explain why it is so difficult to get someone young to save and invest: all they observe about their peers and heroes is their spending. I never see brokerage statements posted on social media. Expensive trips, yes, rental-property portfolio, no. Spending is visible, tangible, and pleasurable, while saving is boring, invisible, and a deprivation.

I prefer to spend money on income-producing assets. Assets such as: securities with dividends or interest, property paying me rent, or other assets with a business that produces income. While other people are shopping in malls, I’m examining cherry-tree orchards for sale. While others are buying big electronics on payment plans, I’m receiving payment plans from secured real estate notes. While others are looking to buy a recreational RV, I’m evaluating an investment that leases RV’s to dealerships. One side is spending money and becoming poorer while the other side is investing money to become richer. The consumer side is killing their money while the investor side is putting their money to work so they personally don’t have to actively work as hard.

Which camp are you closer to: the spending addict or the asset addict? I’m not saying that any or all spending is poor choice, it is just that in my experience, along with Porter, that spending is far overvalued while saving and investing are underperformed by the vast majority of people.

Medical tourism still increasing

passenger jet

Americans traveling abroad for cheaper medical treatment is still increasing. After the financial crash of 2008, Americans out of work or earning less increasingly turned to offshore facilities for cheaper medical procedures. There are world-class medical facilities in India, Singapore, Costa Rica, Philippines, and Mexico where Americans spend only 10-20% of what it would cost in the U.S.

The term “medical tourism” arose because people were saving so much by going abroad that there was plenty of money left over for touring around either before or after their medical treatment. As an example, dental procedures in Mexico (with American trained dentists) are roughly 20% of the cost in the U.S. One man in Alaska was quoted a price of $65,000 for extensive dental work that he needed. He then found a U.S. dental school where students would do the work for $35,000; but then he actually had the work done in Mexico where his cost was only $3,000.

There are many procedures that are cost prohibitive for people without insurance or their insurance has high deductibles, or their insurance doesn’t have specialists in the area. Medical tourists have been able to save $150,000 for cardiac surgery; $80,000 for double knee-replacements; or $700 for a tooth cap.

Prestigious medical institutions have expanded abroad to expand their brand. For example, Harvard Medical School and Mayo Clinic have posts in Dubai, India, and are looking to expand in other countries as well. These efforts help raise the level of world-class healthcare for locals and medical tourists.

If you are interested in offshore medical treatment, the best place to start is a medical tourism agency because they are experts and it is free (they are compensated by the hospitals). Below are the questions you’ll want answered up front:

  • Different countries have different areas of expertise, what is your procedure and who is the best for that?
  • Has the facility received an ISO quality certification?
  • Aftercare and emergency treatment – if something goes wrong, where do you get emergency care?
  • Background checks on doctors and patient recommendations?
  • Several price quotes from different facilities?

While many Canadians come to the U.S. to get access to procedures, Americans are increasingly going abroad to spend a fraction of the cost for their own procedures.

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