(Evansville Business Magazine…February/March 2012)

OK, it’s mid-winter and your New Year’s resolutions about money are kicking into high gear…or, more likely, you’ve simply kicked them down the road. Fear not. ‘My Money’ has produced the definitive ‘There’s Still Time’ resolutions for you.

20-Somethings: In the words of Suze Orman, you are young, fabulous and broke. (1) Cobble together $500 to start an emergency fund. (2) Pay off student loans. They will always be an anchor around your financial neck. (3) Contribute enough to your 401(k) to earn the company match—a.k.a. free money. (4) Don’t buy insurance that you don’t understand. (5) Work hard to increase your salary, and have some fun.

Young Families: Your life is no longer yours. It belongs to your employer, your spouse and your kids. Quit whining; you’re now officially a grown-up. (1) Put as much as possible—automatically, every month—into your retirement account. It gives you no reward now, but you'll be so glad it's there when you need it. (2) Open a 529 college savings account for your children and ask every relative to help fund it. (3) Buy a house if you can put down at least 20%, or move up if it’s affordable. Mortgage rates are incredibly low. (4) Read to your kids, and have some fun.

Established Families: Your life is still not yours. Now you’re dealing with teenagers and/or aging parents. (1) Keep socking away the retirement and college savings money. (2) Consider long-term care insurance. It’s affordable at your age. (3) Prepare now to retire, even if it’s 20 years away. Sitting down with a pro to map your financial future can help tremendously. (4) Plan so you can pay off the mortgage before retirement. (5) Your wallet’s probably lighter than you hoped; find cheap ways to have some fun.

In Retirement: It’s not as relaxing as young folks think. You worry about your health and outliving your money. (1) Exercise daily, even when the body wants to sit in the rocking chair. (2) Understand Social Security and Medicare rules so that you take full advantage of both. (3) Keep your investments conservative, but keep investing. You have plenty of years remaining. (4) Stay engaged by working part-time or volunteering. Do all that, and you’re sure to have some fun!

(Evansville Business Magazine…April/May 2012)

Despite the Dow’s ability to bust through the 13,000 level earlier this year for the first time since 2008, investors at all income levels continue to hold their breath instead of letting out a big sigh of relief. Europe still appears shaky, especially with the prospect of another bailout of Greece looming. In this country, the economy must slog through a poor housing market, high gas prices, and debt, in order to keep climbing. Lipper, a fund-tracking company, found that investors pulled out $3.6 billion from stocks in January and February at the same time the stock market was rising 8%, the best start since 1998.

At least one veteran Evansville financial advisor believes investors have more to fear by sitting on their money than by trusting at least a portion to the stock market.

“A lot of people are way too defensive,” says Certified Financial Planner Mark Pettinga, chief executive officer of Pettinga Financial Advisors. “The biggest opportunity is for those fully allocated in a balanced portfolio that includes stocks and bonds. That’s not very flashy, but I really believe that is what will work best in the long run. I also think the tide is beginning to change. People see virtually no interest credited to their savings accounts, they see inflation moving up, and at least in the early part of the year they’ve seen the stock market go back up. People are not shooting for the moon. They just want to get back to an acceptable level of return.”

Here is Pettinga’s list of five ways for investors to prosper:
1. Maximize your 401(k) or 403(b) retirement account.
2. Diversify your assets.
3. Have exposure to the stock market.
4. Make sure the stock market exposure includes international funds, including emerging markets.
5. Monitor your debt. Make it a manageable amount in case of a job loss or some other unforeseen event.

“I get it,” Pettinga says about investors’ caution. “They’ve been through crashes in 2000 and 2008. They’ve seen some pretty harsh treatment, and there’s more negative news out of Washington. But despite the lack of pro-economic policy-making, the private sector has continued to strengthen. That’s what keeps me optimistic.”

Rarely does an insurance product receive an endorsement from the Governor’s office, but it’s happening in Indiana.

A letter from Governor Mitch Daniels has been going out to Hoosiers for the past two years, encouraging residents to consider long-term care insurance. No, the Governor isn’t moonlighting as an insurance agent. He does have a vested interest, however, because nearly half of Medicaid payments come from state funds. Medicaid takes over when people run out of money and still require care. This scenario plays out far too often for nursing home residents since a nursing home stay can cost $65,000 or more per year, quickly wiping out the finances of many people. From the Governor’s point of view, the more that people invest in long-term care insurance, the less likely they will require Medicaid.

Indiana added to this incentive nearly 20 years ago with the Indiana Long-Term Care Partnership. By purchasing long-term care insurance through the Partnership, residents protect assets so that Medicaid cannot take them away. Let’s take a 65-year-old couple in good health. They buy a three-year policy that pays out $200 per day, which is approximately the daily cost of nursing home care. They are covered for up to $73,000 in long-term care expenses ($200 x 365 days) for each of three years. Money left over after three years can be used for long-term care until it is gone. They would spend about $585 per month to pay for the insurance, which is worth a total of $220,000 (three years x $200 per day). Under the Indiana Long-Term Care Partnership, for every dollar they spend from insurance, they keep that much in assets. So if they spend the entire $220,000 in the insurance policy, their future long-term care expenses will be covered by Medicaid once the value of their assets such as cash, savings, stocks, bonds, CDs, cash value of life insurance, even a second home, drops to $220,000. Other states have similar Partnership plans. Indiana is unique because if residents buy a Partnership policy worth a certain amount (in 2012 it’s $277,000) and receive care in Indiana, they could qualify to keep all of their assets.

The younger you buy, the lower your premiums—makes sense since you’re paying those premiums for a longer
time. Plus, putting off the purchase risks that your health may deteriorate and you become uninsurable. A 60-year-old couple that buys the same policy (three years, $200 per day) would pay approximately $420 per month, a lower amount because they are five years younger than the example above. A 60-year-old woman would pay about $275 per month.

OK, we know that long-term care insurance is a good deal for Governors who must balance a budget. Is it good for their citizens? For those with total assets under $200,000 or over $2 million, probably not. The insurance is too expensive for those in the former group, and not necessary for the latter since they can self-insure. For the rest of us, it’s worth a look. Cost has scared away people in the past, but today’s policies cover in-home care, which is less expensive than nursing home care. Plus, no one wants to be shipped off to a nursing home if they can stay in their own home. Keep in mind, however, that many people purchased LTC insurance while they were working, then surrendered the policy when they couldn’t afford the premiums with their reduced income during retirement.

A primary advantage to long-term care insurance is protecting assets for heirs, but there are even better reasons to consider LTC protection. Insurance can provide the money necessary to give you a wider choice of assisted living facilities or nursing homes, and keep you there. In Evansville, several popular facilities may not accept or keep Medicaid patients.

Insurance can also relieve the burden on loved ones. Everyone would like to stay at home for as long as possible, but that often means extra work for daughters and sons. Insurance can bring professional health aides into the home and alleviate the demands on children who still have their own lives to manage.
Many people purchase policies that pay only a portion of the daily in-home care or nursing home bill, but there’s nothing wrong with that. The insurance allows them to keep enough assets so they can supplement the policy, if necessary, with their own funds.

Like many complicated insurance products, this one requires another set of eyes to make sure you receive the right coverage. Second opinions from local health care organizations, senior citizen advocacy groups or your own doctor can help you decide if you are purchasing valuable protection, or an expensive product that you might drop right before you need it.

With a little help from behavioral economists, I presented the following points this week at our monthly University of Evansville Lunch & Learn. It was a good discussion with a good group of people!

Making Your Money Grow…
With A Little Help From Financial Psychologists

1. We frustrate ourselves with our inability to control our investments
2. We could have more control over our investments, but we get greedy
3. We dwell more on losing investments than winning ones, and become fearful

So…

1. Keep your goals reasonable and realistic
2. Once your goal is established, determine how much risk you must take
3. The longer you have to save, the more risk you can stomach

Maximizing Your Savings

10. Start with your retirement plan…understand your options…learn about various investments to find out what’s best for you…put in enough to get the company match.

9. Don’t forget the flexible spending account if it's available through your employer. You’ll spend about 25% less in taxes on the money you put into the FSA.

8. Keep some money outside your retirement plan in separate accounts, including an emergency fund, new car fund, vacation fund, Christmas fund, house improvement fund. Studies have proven that people save more when they set up specific accounts.

7. Above the company match, consider a Roth IRA ($5,000 annually; $6,000 if 50 or older). Not all of your money should go into retirement. You can always take out your contributions penalty free, and you may never have to pay taxes on a Roth.

6. Annuities are as close as most of us come these days to receiving pensions. Annuities guarantee you money at an interest rate higher than you can get with a bank savings account or certificates of deposit.

5. Dump your debt. Pay off student loans, car loans, the mortgage, and get your credit card balances to zero. The Dave Ramsey way—smallest debt to largest so it becomes a 'snowball.' Many others recommend first paying off the bill with the highest interest rate. The best way? Whichever works for you.

4. Keep a list of every expense for just one month. It's boring. It's nerdy. But it works to find those nickel and dime expenses that add up.

3. Invest in retirement ahead of saving for your children’s college. Hopefully you can do both, but remember that you can get tax credits and low-interest loans for college, not for retirement.

2. Make sure that money you are trying to save gets deposited automatically, before you ever see it. For most people, once it's in their hands, or even in their checkbook, it's spent.

1. Set a specific goal(s) on paper no later than this weekend. Make sure the goal is realistic, and has an end date. If you have a spouse or significant other, decide on your spending and saving goals together. That's not easy since there's often a spender and saver in each relationship, but communication--and patience--go a long way.

Financial Psychology Reading:
Your Money Personality, by Dr. Kathleen Gurney
The Intelligent Investor, by Benjamin Graham
The Behavior Gap, by Carl Richards
Nudge, by Richard Thaler and Cass Sunstein

(Evansville Business Magazine, August, 2011)

If you like roller coasters, you’ll love these two stomach-churners: the Dow Jones Beast and the S&P 500 Raven. The economic quarter that ended June 30 included a quick 4% ride upward into early May, followed by a 7% drop into June. Then came the big finish: a 5% rebound in just five days to begin the current quarter. Halfway through the 3-month white-knuckler, a Goldman Sachs report described the markets as “puzzling.” If Goldman Sachs is scratching its collective head, what are the rest of us investors supposed to do?

“If you watch the markets daily, it’ll make you crazy,” says Myra Teal, a financial advisor for Edward Jones in Newburgh, Ind. “It all starts with having a plan, and then we stress three things: buy high quality products, diversify, and hold for the long term.”

Certified Financial Planner™ Chad Sander, 46, began his career as an investment advisor in the 1990s when double-digit stock market returns were the norm. Now director of investments and vice president at Payne Wealth Partners in Evansville, Sander knows the ride has become bumpy.

“My first five years in the business, it all seemed pretty easy,” he smiles. “Those 15 and 20% returns were nice, but we are in a lower return environment now and probably will be for quite awhile because of several factors, primarily debt here and in Europe.”

Both Teal and Sander agree that investors of all ages should establish goals, understand how much and how fast their money must grow to reach those goals, and prepare for the V word.

“Dealing with volatility is a big part of investing,” Sander says. “Having the discipline to stick with your investment strategy in uncertain times is difficult, but it’s critical to reaching your goals.”

Adds Teal, “I have clients 70 or older who have seen the ups and downs for years, and they’re often the ones who come in when the markets look terrible and say, ‘You know, I think it’s time to buy.’ If you ignore most of what the media says, and know the world’s not going to implode, you’ll do well in the long run.”

In the meantime, hang on tight and enjoy the ride.

The late Senator William Roth was one of America's biggest tax dodgers...and people of all income levels should thank him for that.

No, there was nothing shady about the Delaware Republican. In fact, he was the guiding force behind the legislation that Congress put into law in 1998--the Roth Individual Retirement Account. It may be the most significant investment assistance in the last 20 years for most Americans.

The Roth is a great deal for young people. True, there's no tax deduction up front as there is with traditional IRAs or 401K retirement accounts, but if you're young and don't have a ton of money, the tax deduction isn't substantial. So go ahead and pay income tax on your money, then take out up to $5,000 per year and invest in a Roth IRA tax-free for the rest of your life. You keep putting money in, the beauty of compound interest kicks in (assuming that investments begin behaving normally again) and voila, you have a nice chunk of change when you retire. Then, when everyone else is paying income taxes on withdrawals from their 401(K) and traditional IRAs, you are paying zero taxes on your Roth withdrawals.

It gets even better. Roths give you flexibility. They're best left untouched until retirement, but if an emergency comes up, contributions can be withdrawn at any time (remember, you've already paid taxes on the money you've put in). You can also take out up to $10,000 to buy your first home, or you can tap the keg to pay many educational expenses.

When you hit age 70 1/2, you must begin withdrawing money from your 401(K) or a traditional IRA whether you need the money or not, but with a Roth it's strictly your choice. Since you paid taxes on that money way back in the early 21st century, the IRS can't tax those dollars again. Roth money can even go tax-free to your heirs.

We helped our oldest son open a Roth five years ago when he got his first job at age 17, and younger brother opened his own this summer, also at 17. It takes some searching, but there are well regarded, no-load mutual funds that will allow you to open retirement accounts with $1,000 or less.

There are rules regarding a Roth--(1) you'll get slapped with penalties if you touch any earnings during the first five years, or if you withdraw any earnings before age 59 1/2 except for the aforementioned purchase of a first house, education expenses, or major medical expenses; (2) you must have income at least as high as your Roth contribution each year; (3) you can only put in $5,000 per year; $6,000 if you're 50 or older; and (4) your modified adjusted gross income (MAGI) for 2009 has to be less than $166,000 for those married and filing jointly, or less than $105,000 for single filers. Good news for the more wealthy: beginning in 2010 anyone can transfer money from a traditional IRA to a Roth. Right now that can only be done by those making less than $100,000. Yes, you must pay full taxes on your current IRA before turning it into a Roth.

As great as they are, Roth IRAs should not replace your company retirement plan if the company matches a portion of your contribution. Always take the maximum match; that's free money. However, a growing number of financial planners are suggesting that employees put beyond-the-match retirement money into Roths as a way to create tax-free retirement money, according to consulting firm Hewitt Associates.

You can't get much better in the personal finance world than guilt-free tax evasion. Thanks, Senator Roth.

Next time: OK, you're lapping up the Roth Kool-Aid. Now, how do I invest my money in a Roth?