Archive for the ‘Planning’ Category

Review, Retool & Renew

Wednesday, December 28th, 2011

 

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. –Charles Dickens

 

Was 2011 the best of times or the worst of times? The answer to that depends upon whether your glass was half full or half empty.

 

Review

 

Don’t let frustration cloud the path of renewal. There’s nothing worse than basking in what you didn’t accomplish – look to what worked first.

 

Take out a sheet of paper and draw a big “T” across and down the page. Write WORKING on the left side  and list the things you have in place you’re happy with. Consider whether you want to build further on any of these and make a note to do so.

 

Retool

 

Now write NEEDS WORK on the right side of the paper and list any financial concerns/objectives you’d like to address/reach in the coming year. What simple steps can be taken to start working on these?

 

Savings and cash flow are priority objectives for most people. Here are some easy things to do to rev up for the New Year:

 

Kitty Jar – Throw $5 bucks into a jar each week. A year from now you’ll have an extra $250 to pay bills, invest, or splurge with.

 

Automated Savings Account – Consider opening an automated savings account. Most banks have programs where you can designate a certain amount of money to be automatically transferred from your checking account each month into a savings account.

 

“Keep the Change” accounts are also an easy way to save automatically through your debit card transactions. Every time you buy something, the change is rounded up to the next dollar with the difference automatically deposited into the separate account. An additional amount of money may be required for auto transfer each month too, usually a $25 minimum. If you use your debit card in lieu of cash or check, an account like this can easily add up to far more than you might think over the course of a year.

 

Invested Savings – Mutual fund accounts can be opened for as little as $25 per month and set up on an automated basis. Naturally, this type of account carries no guarantee for positive results but if investing is a goal you have yet to reach, small accounts like these may be the best thing to do to get started.

 

Boost Cash Flow – There are numerous things you can do to increase cash flow: pay down/off revolving debt with the highest billed interest rates first, shop wiser, bag your lunch, etc. Now is also definitely the time to revisit the U.S. tax code. Taking advantage of every exemption, credit and deduction available to you can save hundreds to thousands in taxes. Ear mark your refund (ahead of time) for something on your list this year.

 

Embrace Economic Trends – Economies void of high interest rates of return provide affordable opportunities. Make low interest rates work for you! If you haven’t refinanced you home, do so. Financed items are cheaper now.

 

Renew

 

Work both sides of your “T” sheet and take simple steps to welcome in the New Year, clarity and resilience are on your side.

 

What was and what wasn’t becomes what can and what will in one quick tick tock. It’s really magical when you think about it.

 

We wish you a very Healthy & Prosperous New Year!

 

Kurt Rusch  CLU, ChFC

 

 

Truth in (Insurance) Advertising

Monday, December 19th, 2011

 

A client, who has their auto, homeowners and umbrella policies through my agency, asked if I still her had her auto insurance because of something she’d received in the mail. I couldn’t imagine what could possibly make her think her coverage had magically migrated to another company and quickly assured her I was still the “agent of record” on her account. Then she produced some paperwork which appeared to be quite contradictory of the fact.

 

If It Looks Real It Must Be Real

 

It became apparent upon examination that she had received a randomly generated quote prepared with a mixture of true and false personal data. The quote was unique in format because it was presented like an actual “dec” sheet – similar to the declaration page(s) you get when you receive auto insurance policies. At first glance, the documentation looked official, which explains why my client thought twice about it and why it raised a big red flag with me.

 

My client’s mailing address, marital status and the first 4 characters of her driver’s license were also included and listed correctly. Her birth date was made up, she was listed as retired, which isn’t true, and there were only zeroes listed for her social security number – definitely a relief there! However, the make/model/year of her car and the VIN number matched up exactly.

 

I asked if she had been shopping the market online or had talked to anyone about lower rates. She assured me “absolutely not” because she never does things like that and she “closes those little boxes that always pop up”. Though I was glad to hear she wasn’t displeased with my service, I became more concerned about the methods used by the solicitous company.

 

Deceptive Advertising

 

Discounts were applied for low mileage, anti-theft, defensive driver, good driver, multi-policy, miles one way to work and senior citizen (not applicable in this particular case, as previously noted). Naturally, the semi-annual premium listed was in the low-ball range.

 

Line items such as “new acct” and “new app” in the billing section of the piece made it clear this was neither binding nor legit documentation to the trained eye. But presented in the fashion it was, it appeared like coverage was already in place. This also spurns the likelihood for people to send in payment under the assumption changes had been made to their existing contract – or at the very least to call the company that sent the quote.

 

Marketing is a necessity for any business, but this type of approach violates the parameters for “truth in advertising” as described by the U.S. Small Business Administration. Further investigation with the Illinois Department of Insurance confirmed my suspicions: the use of unauthorized personal information (such as the VIN#) is a privacy violation.

 

Lesson Learned

 

The haphazard nature in which facts were presented (and misrepresented) for this quoted premium illustrates there is very little chance that actual rates would come out anywhere near those mailed. Combined with the fact that unauthorized use of personal information was used to generate the mailing, it is alarming.

 

Those that sell lists for marketing purposes such as these glean information in ways we have yet to  imagine nor can keep absolute track of in the digital world. This situation serves as a valid reminder how crucial it is to keep a very close eye on the things we receive by postal and digital mail.

 

If you receive a similar type of questionable coverage letter for any type of insurance, complaints can be filed online through the IDOI. No one wants to do business with those that harvest personal information to obtain business underhandedly.

 

Kurt Rusch  CLU, ChFC

 

 

Top 3 FAQs on 401(k)s

Thursday, December 1st, 2011

 

The top three questions I am asked most often these days with regard to 401(k) accounts are:

 

Should I leave my 401(k) in a prior employer plan while out of work?

Is it best to roll my account into a new employer plan every time I change jobs?

Can I cash my 401(k) in if I need the money now?


Leave It

The main benefit of leaving 401(k) accounts at your former employer is that you don’t have to do anything. While this method is very convenient, it is not void of drawbacks. 401(k)’s typically come with a limited number of investment choices available to their participants. Leaving your accounts at former employers, may not serve you best, and can get confusing if you leave several or more accounts at various different companies.

 

Bring It

When you do get a new job, one option would be to roll your 401(k) over into the new employer’s retirement plan, if that is an available option. Obviously, this would make keeping track of your assets easier.

 

Some people find this an attractive option when their employer offers employee loan provisions for 401(k) accounts.  (These types of provisions allow employees to borrow against plan assets and pay the loan back via payroll deduction for return of principal and interest.) It is important to note that assets which have been lent out will be deprived of any growth on the loaned portion of the portfolio they would have received has they not taken out a loan.

 

Move It

Whether you leave your accounts at various employers, or bring them all to a new employer, investment options can be limited through workplace plans. Alternatively, there are numerous choices available if you opt to transfer your account into a Rollover IRA. This option gives investors the most flexibility if executed properly.

 

The first step in properly executing this exchange would be to assure that the account is a custodian to custodian transfer. By doing so, you eliminate the possible tax ramifications of not having the moneys properly transferred within a 60 day period as required by the IRS.

 

It is important to make certain that you do not comingle these funds with separately funded IRA’s you may have if you want to roll them into a new employer plan at some point in time. Comingling will render the account incapable of subsequently rolling back into a 401(k) plan; keeping the funds in a separate IRA Rollover Account will allow redeposit into a current 401(k).

 

Cash It In

If, and that’s a really a big ‘IF’, you really need the money before retiring, you can cash in all or part of your retirement plan. BUT, the IRS will make you pay dearly for early access. The IRS levies a 10 % penalty on anyone under age 59 ½ who cashes in all or part of their retirement plan. On top of that, you will also have to pay Federal Income Taxes on the amount withdrawn.

 

What most people don’t realize is how costly early withdrawal can be. For example, if a 40 year old in the 28% income tax bracket cashes in their $10,000 401(k), the after tax net proceeds would only be $6200. This is because they would owe $1000 in penalty for taking an early distribution plus $2800 in Federal Income Taxes. In reality, the liquidation of this retirement account yields a 62% pay out and a 38% tax and penalty on the total account value.

 

One other thought regarding early withdrawal – there are some situations where the IRS will waive the 10% penalty on early withdrawal. An example of this would be for dire and non-reimbursed medical expenses which do not exceed 7.5% of your adjusted gross income.

 

It is extremely important to tread carefully when manipulating any type of “qualified” account. Check additional rules and exemptions for early distribution on the IRS tax topics page.

 

Kurt Rusch, CLU, ChFC

 

 

New Medicaid Laws May Impact Families

Tuesday, November 1st, 2011

 

We just received confirmation from our Elder Care Attorney that the Illinois Medicaid Laws will change January 1, 2012.  Current and future planning needs are now at crucial issue.

 

Why should you care?

 

The current state laws are much more favorable to applicants and their families; the new laws will make it more difficult to receive Medicaid benefits.

 

This is extremely important news for all senior parents and adult children – those with current need and those who have yet to reach that advent.

 

Legislated changes such as these can severely impact assumed expectations. Assisted and higher level care can drain an average middle income estate very quickly; for those without long term care coverage, pre-planning for Medicaid in the event it may be needed should be of paramount consideration.

 

There are many changes to the Medicaid system which will take place in the coming year. These highlights examine the issues of timely application (all assets do not have to be spent down prior to filing a Medicaid application) and asset protection.

 

Applications Filed Prior to January 1, 2012 Will Fall Under Current Medicaid Laws

 

Under the current laws if a nursing home or supportive living resident applies for Medicaid benefits the applicant is required to provide three years for all financial records to verify their assets. This includes all bank, investment, pension and retirement account statements, life insurance policies, and tax returns.

 

Medicaid is particularly concerned with whether the applicant has given anything away during the three year “look back” period, such as a gift to help pay for a grandchild’s college tuition or to a son or daughter in need. The current laws allow any ineligibility created from the gifts to begin tolling immediately when the gift is given. This offers the Medicaid applicant an important advantage in avoiding any penalties which may result from the gift.

 

NOTE: For those who are planning to enter nursing home or supportive living facilities before January 1st,  it is essential to determine if Medicaid application should be filed before the implementation of the changes in Illinois law.

 

Applications Filed After January 1, 2012 Fall Under New Medicaid Laws

 

Applicants will be required to provide five years for all financial records to verify assets. More importantly, gifts will not begin to toll until the applicant is already spent down. This is a significant change between the old and new laws.

 

Under the new law, applicants will likely have to try to recoup any significant gifts that were made within five years of filing a Medicaid application. In the event that the applicant cannot recoup the funds that were given away, then they will have an opportunity to plead for a hardship waiver and hope that the waiver is granted in order to obtain Medicaid benefits. The criterion in which a hardship waiver will be granted is somewhat unclear at this time, but it is anticipated it will be a very difficult process.

 

The current laws allow the spouse (community spouse) of a Medicaid applicant to protect all the assets that the community spouse has held solely in their own name (for three years or more) prior to filing for Medicaid. Current laws also allow applicants and their spouse to divide their joint accounts in half, so that the community spouse can keep half of the joint accounts.

 

Under the new laws, joint accounts will not be permitted to be divided between spouses. The community spouse will be allowed to retain a specified amount of account funds (currently $109,560). This amount is also subject to change from year to year.

 

For many families, it may be extremely advantageous to file a Medicaid application prior to the law change from an asset protection planning standpoint. After January 1st, asset protection will become more difficult to navigate under the new rules.

 

Please consider these options now and do not hesitate to contact me if you are unsure of the timing regarding your family situation at hand.

 

Kurt Rusch CLU, ChFC

 

Many thanks to John Belconis, JD, for his help in sharing this information with us.

 


 

 

 

 

 

Static Planning: The Need for Review

Friday, October 21st, 2011

 

In a perfect world planning would be easy. You would figure out how much of a resource you would need at a specific time and allocate assets either in a lump sum or systematically over time until this goal was reached. The account would grow steadily over time until the mark was reached – perfect indeed and static.

 

Enter my ism for today: static planning.  Something static doesn’t move; static planning is planning that doesn’t take into consideration market gyrations and changes in business. Static scenarios and the real world do not resemble each other much. Reality dictates that different times call for different assumptions and actions.

 

Here are two real world situations which at different times would have greatly skewed static planning assumptions and results:

 

MORTGAGE LOANS

The average interest rate on a 30 year fixed rate mortgage on October 19, 1981 was 18.45%.  The interest rate on that same 30 year fixed rate mortgage on October 13, 2011 was 4.12%.

 

The difference in these two figures is staggering. Where it would have taken regular monthly mortgage payments of $1,544 to pay off the mortgage under the previous figures, that payment would only require principal and interest payments of $484 per month currently to retire the same $100,000 balance over thirty years. Staggering!

 

MARKET INVESTMENTS

 

Market investments are far from a steady growing figure. For example, so far in 2011, the first four months of the year saw the S & P 500 average increase by 9.1%. Subsequently, that same average fell 18.6% through October 3rd. In the following nine days, the market rallied to 11.5% providing a return total of -1.1% for the year as of 10/14/2011.

 

Volatility like this is certainly not for the faint of heart. That being said, short term bank interest rates of less than 1% hardly seem the place to park assets in hopes of reaching long term goals.

 

MORAL OF THE STORY

 

These are but two examples of the need to revisit plans to see if they are still living up to wants and needs. While everyone is bullish in a good market (just ask them) reality indicates that many people are not anywhere near the risk takers they thought they were. Typical investors have a difficult time allocating enough resources to meet long term goals utilizing low fixed rate products.

 

This is precisely why all types of financial considerations, mortgages, retirement plans, investment strategies and the like, should be regularly reviewed. Advisors are trained to assess different economic environments and tailor them to investor profiles. Can you walk the walk or do you have commitment issues? Matching goals with disposition and financial change requires trained and routine review.

 

Kurt Rusch  CLU,ChFC

Proactive Retirement Planning

Tuesday, October 18th, 2011

 

I just read an article entitled, “5 Biggest Planning Retirement Mistakes”. The problem with titles like these in general is they are negative, and many times, as misleading as they are disheartening.

 

Proactive retirement planning on the other hand, is a different workhorse (pardon the pun) altogether. It should be ongoing and positive, starting over the course of your working years and cultivated throughout your retirement years. It also involves deliberate consideration beyond the lone act of making regular payments to employee contribution plans.

 

What type of proactive things should you be doing to plan for a life of leisure? Consider these 5 things now (even if you’re still working):

 

1.      VALUATION  

 

Project your current retirement programs forward to see how big of a lump sum you will have when you reach retirement and begin systematic liquidation.  While this may seem a monumental undertaking with market upheavals and historic lows in fixed income options, getting to that number will provide the baseline figure you need to work with.

 

If you tend to be risk averse, project your account balances into the future by using rates of return that could be obtained using less volatile investment choices. The worst case scenario here is that things change and you receive a higher rate of return netting a larger sum of distributable retirement funds.

 

On the other side of the coin, the market tends to be a lot more dependable over long periods of time than generally assumed. Utilizing these returns has not historically been as risky as you may think.  A volatile market is, in reality, a friend to those systematically investing via retirement plans at work and independently because: fixed amounts invested on a regular basis will always purchase more when the markets are at their lows and less when they are at their highs. This system allows you to buy low without ever having to consciously make investment decisions.

 

2.      DISRUPTION   

 

No one can possibly plan for every “what if?” in life, but addressing the types of disruptions to retirement income streams which may occur is essential.

 

Case in point; what would you do if Social Security changed drastically by the time you were counting on receiving it? Currently, with no modifications or adjustments, the Social Security Administration projects that by 2036 the Social Security Trust Fund will only be able to pay 75% of their obligations.  Would you be able to handle this decrease? Or any other type of unplanned reductions? If not, have you considered what you can do to make up possible shortfalls?

 

If you begin making up the gap sooner rather than later, the amount that would need to be set aside on a regular basis would be comparatively small. Conversely, if this gap is left unaddressed, the magnitude of future contributions could be daunting. Remember: Compound interest (really) is the Eighth Wonder of the World.

 

3.      VISUALIZATION 

 

Envision (literally) your retirement and what you (actually) want it to look like. While there are numerous statistics and figures utilized in planning, the best way to assure that you are planning for YOUR retirement is to personalize it.

 

Some people may think this silly but if you’ve never really taken a moment to think about how you’d like to see yourself in this future, you may be surprised what comes to mind. Are you planning on traveling a lot? Are you planning on working? If so, what is the magnitude of your commitment to work? What do you envision your living situation as being?

 

These kinds of questions and many more will affect the dynamics of your retirement plan. For example, if extensive travel is part of your plan, you must put more money aside than someone without these ambitions. On the other hand, if you plan on working, that may decrease the amount that must be set aside to meet expenses in retirement.

 

Housing will also greatly affect your financial situation. Many people “downsize” in retirement. Downsizing can often free up funds that can be invested to subsidize other plans already in place. These are just a few examples to consider.

 

4.      SAFEGUARDING

 

Have you safeguarded your plan for longevity?

 

If a husband and wife have plans in place as a couple in retirement, will they still be okay if one of them was no longer around? Upon passing, a surviving spouse will receive the higher of the two spouses’ Social Security payment. Would you be able to live the retirement lifestyle you envisioned without the aid of dual Social Security payments? Beyond Social Security, pension options must also be reviewed closely.

 

Pensions generally have irrevocable options that must be elected at the time of retirement. A sample of the array of these types of elections would include a single life option for the pensioner. This option would yield the highest monthly payment because it would continue only for the life of the pensioner. There would be no continuation of payment to a surviving spouse if the pensioner predeceased him/her.

 

At the other end of the spectrum, is a spousal option paying the surviving spouse 100% of the pensioner’s payment at the time of the pensioner’s death. This option would yield the lowest monthly payment to the recipient because essentially this pension plan is buying life insurance on the pensioner to be used to continue payments in the event of predeceasing their spouse. Examination of these costs should be made to see if the pensioner would be better off financially to receive the higher single life pension payment in combination with a taking out a private life policy to provide for the surviving spouse. This would also provide the flexibility to drop the policy or change beneficiaries to children in the event of the spouse predeceasing the pensioner.

 

5.      INCAPACITY   

 

Have you addressed the possibility of incapacity? While this is a very distasteful subject to broach, statistics indicate that up to 75% of couples will have at least one spouse needing some sort of long term care within their lifetimes. Given the state of rising healthcare costs, this situation can devastate a retirement plan very, very quickly.

 

Those who elect not to address the subject make a default decision to self-insure. This works out well only if you remain healthy without the need for support services. It is also a risky choice to make for the time period in your life when your options for financially rectifying an error in planning will be drastically limited.

 

Chicago nursing home costs currently run about $200 per day. For those who assume that this will be handled by Medicare, you are mostly incorrect. Medicare only covers follow up treatment after release from a hospital. There is no provision for convalescent care (long term daily living) from Medicare.

 

Coverage for long term care is available through Medicaid but to qualify, your assets must be liquidated and spent down. This radically limits your future choices. Home health care is also not covered by Medicaid. Many of the better nursing facilities may also refuse admittance to people   already on Medicaid. The last thing your loved ones need to face at a time like that is the challenge  of finding a geographically desirable and decent facility to take you in.

 

Valuation, Disruption, Visualization, Safeguarding and Incapacity are all key factors in planning for life after work. Safe, secure and solid navigation of this terrain should be done with the assistance of a licensed professional.

 

Kurt Rusch  CLU, ChFC

Mature Health: Time Sensitive Changes

Friday, September 30th, 2011


This is a MUST READ for Adults 65 & Up, Caregivers, Adult Children and Estate Managers!

 

New Changes to Part D Enrollment Period

 

The Annual Enrollment Period (AED) has changed for Medicare Part D plans. This is a big deal for anyone 65 and older because failure to make changes within this period will result in Part D benefits remaining the same as were elected in 2011. While this may not affect some people, it will be vital to others.

 

Historically, the Part D Annual Enrollment Period ran from November 15th through December 31st each year. However, plan changes with an effective date of January 1, 2012 must be executed within the new AED time frame: October 15th through December 7th.

 

 

EHealthInsurance reports that 65 percent of seniors are not aware of these enrollment date changes. It is imperative to review and revise any and all Part D information within this time frame to assure that current plans are still preferable or amended accordingly.

 

 

 

 

Medicare Advantage Premiums

 

The Department of Health & Human Services announced that enrollees will see their Medicare Advantage premium shrink 4 percent next year. Prescription drug premiums will not change.

 

Drug Deductibles

 

Part D Deductibles will increase by $10 from $310 to $320 in 2012. It is also important to keep in mind that the lists of formulary drugs are constantly changing. There is no safe assumption that  prescriptions will continue to be treated in the same manner from one year to the next.

 

Cost of Living Adjustment

 

The Annual Cost of Living Adjustment (COLA) for Social Security is predicted to rise in 2012 by a few percent; this would be the first increase in three years. If the increase does come through as expected, it may not automatically translate into additional pocket dollars for beneficiaries.

 

The links between changes in Social Security and Medicare each year are complex – that’s putting it mildly. There are numerous factors involved. For example, your annual income and the date when you began Medicare, could ultimately squash much or all of the COLA gains from higher Medicare premiums. (Help Link: 10 Ways to Boost Your Social Security Checks.)

 

The many moving parts within the machinations of Medicare, Supplements, Part D and Social Security, must be reviewed annually. This is not an option, but a necessity to assure consistent and proper coverage. Please feel free to contact me for assistance in maneuvering the healthcare minefield.

 

Kurt Rusch, CLU, ChFC

 

 

 

 

 

What if you couldn’t work and pay bills?

Wednesday, September 21st, 2011

 

 

According to statistics provided by the Social Security Administration, 3 in 10 workers entering the workforce today will become disabled before they retire. If that stat isn’t staggering enough, consider the fact that 71% of Americans would find it very difficult or somewhat difficult to meet their current obligations if their paycheck was delayed by just one week. This is a potential recipe for disaster.

 

A full 64% of wage earners believe that they have a 2% or less chance of becoming disabled when the actual percentage is more like 30%. Another misconception is that Social Security will pay disability benefits. While this is possible, it is only true to a small extent; 65% of new disability claims with Social Security were denied in 2009. For the fortunate 35% who were able to receive benefits, the average monthly payment was $1065.

 

Consider further the fact that 90% of disabling events happen outside the workplace, where Workers’ Comp does not apply, and we are looking at major gaps in one’s financial plans. Bottom line? There is a gross underestimation of the chances of becoming disabled over one’s working lifetime.

 

Biggest challenge? Being able to initiate and continue funding a financial plan. In the event of a disability, you will potentially lose anywhere from a month to a lifetime of future income that will make funding any other hopes and dreams for your future difficult if not impossible.

 

Overcoming Obstacles & Putting the Pieces Together

 

The common argument against additional planning is that there is no money left after allocating standard premium dollars for car, house, health and life insurance. The good news is that often, by simply changing the terms of your current contracts, you can obtain protective coverage with little or no additional out of pocket expense. While statistics show this is too important to ignore, 67% of workers in the private sector still have no provisions for long term disability.

 

More than worthy of further investigation, there are numerous variables that will influence the amount premium paid for disability contracts. Firstly, your current health is a big factor to qualify for this contract. Influences include height/weight ratio, chronic conditions including not only medical issues but injury history as well. The usual readings for blood pressure, cholesterol and the like will also influence the situation.

 

Next is occupation. Since the likelihood of becoming disabled in a physical pursuit such as a mechanic is much more likely than it would be for an accountant, the rates will be reflected accordingly.

 

The monthly benefit amount received will be very important in determining the premium. Insurance companies will typically limit you to about 65% of your current income which approximately reflects your current take home pay. The reason for this is that the insurance company does not want you to be better off financially on disability than working nor support a financial disincentive to get back to work.

 

One key point to keep in mind when considering how much coverage you desire: personally paid for disability insurance benefits are not subject to Federal Income Taxes. That provides savings at a time when you will need it the most.

 

The benefit period you choose is also of paramount importance. You can select a 1 year policy all the way up to a lifetime policy which will typically pay your benefit until the time that you typically would be retiring from work.

 

Finally, the elimination period for disability insurance is like a deductible. This reflects the time after you are unable to work before you can begin to collect benefits. The longer you wait before you begin to collect benefits, the lower the premium.

 

Putting all these pieces together in a strategic manner should be your main objective. It is highly possible to customize a plan that will not only provide security to you and your family but also work within the parameters of your budget.

 

Kurt Rusch  CLU,ChFC

Pension Plans: Who’s Funding Who?

Wednesday, September 7th, 2011

 

According to studies by the Government Accountability Office (GAO), a growing number of DFP’s (Defined Benefit Plans, better known as pension plans) are funding their obligations by purchasing Hedge Funds and Private Equity Funds. While the prevalence of this usage funding is constituted in larger pension funds, their usage is not forbidden in smaller plans.

 

So, you might be thinking, “Thanks for the tidbit Kurt, who cares?” I’ll tell you exactly ‘who’: anyone. This affects any and every person who has a pension plan.

 

Hedge & Private Equity Funds

 

Stories of hedge fund disasters are regular features on the news, the most notable of which involved the former head of NASDAQ, Bernie Madoff. This is not to say that every Hedge Fund and Private Equity Fund are being run fraudulently, because the vast majority are ethical and well run. However, the valuation issues stemming from the lack of a regular market for these issues, combined with the challenge of transparency further magnifies their unpredictable nature.

 

Due to the rapid increase in the usage of these types of investments, (60% of large pension plans used hedge funds in 2010 compared to only 11% which used them in 2001), further scrutiny of their attributes is necessary. Private Equity Funds, which typically provide working capital for expansion, product development and restructuring to other entities, were utilized by 92% of large pension funds in 2010, up from 71% in 2001. This is a trend that shows no signs of reversing anytime soon.

 

Equally prevalent in the news these days are the horror stories regarding underfunded pension plans. Scads of separatist managed plans for fire, police and even now, teachers, are coming to light as being incapable of living up to the payout demands promised to their populations. And that is, scary – very scary.

 

The lack of transparency and illiquid nature makes overseeing these kinds of investments also more laborious (and perhaps neglected?) versus the management of stocks, bonds, cash and other easily valued asset portfolios in kind. Hedge Funds and Private Equity Funds often fly under the radar.

 

Diversify, Diversify, Diversify!

 

Today, perhaps more than ever before, alternative pension planning is imperative. We need to plan for the possibility that full pensions may not be received as expected whether due to fund performance, mismanagement or any other unforeseen factors. Alternatively, look to the following: 1) Additional funding to an IRA, Roth IRA, annuity or any other tax qualified product. 2) Investing additional funds in stocks, bonds, mutual funds, CD’s, etc.

 

There is safety in diversification. If you count on your pension 100% and it is no longer there or not to the extent expected, you will have serious problems. If, on the other hand, there are problems with your pension but you have done alternative planning with provisional investments in other asset classes, the impact will be lessened.

 

Kurt Rusch CLU, ChFC

 

The Top 2 Things You Can Do To Battle Market Fatigue

Monday, August 22nd, 2011

 

You need only turn on the TV, radio, or skim a newspaper to realize we are right in the middle of some challenging economic times. The BIG question is what can we do when our individual abilities to change the quagmire we’re stuck in is minimal? Here is the shortlist.

 

#1 Look at your personal situation and choose the best plan of action

 

If you are trying to accumulate funds for retirement, do you really want to retreat to the safety of CD’s or money market funds when returns are struggling to yield 1% on your money? Yes, you would at least have a guaranteed return of your money but at these rates, even the slow but sure tortoise would give up the race.

 

Historically, the market is a very predictable and much higher yielding place to be. That being said, the number one prerequisite of market investing will be your ability to weather the volatility that is inherent in equity investments. Simply put: don’t be a jack rabbit about it.

 

Investors who cycle through euphoria and misery only to jump in and out of the market typically do so at precisely the wrong times. The scenario plays out something like this:

When the market is doing well, investors feel renewed confidence it is the place to be. They plunge wholeheartedly in, at a point that reflects a price that is much higher after two years of outstanding returns. The market may or may not continue on its upturn for a while. However, at some point, the market will sour and begin a hasty retreat. These same people who got in at or near the top begin to panic. They decide they can no longer stomach the volatility and opt out after the market has been in a free fall for some time.

 

This is a recipe for disaster and one reason why we see such a roller coaster of reports in the news each day. If you lack the fortitude to invest in the market and weather the vacillations, don’t jump in and out – stay out. Buying high and selling low is not the way to go.

 

#2 Consider alternative strategies for investing in the market

 

An example of a strategy that may take some of the trepidation out of investing in the market is using the strategy of dollar cost averaging. This is already inherent in payroll deduction retirement plans. Since the funds are invested on an ongoing and regular basis, investors will automatically get the benefit of purchasing more of the investment when prices are low and less when they are high.

 

This same strategy would work in investing non-qualified money. Instead of investing it all at once, take the sum to be invested and invest a certain portion each month over a period of time instead of plunging it all in at once. This way, if the market does go down, you will be able to capture a lot more shares or units at the lower price.

 

Kurt Rusch CLU, ChFC