Planning for Health Care Costs

Most people avoid any meaningful discussion of health care and the costs. No, I am not talking about Obamacare and the distorted statements that were made to “sell” this socialistic program to the public. Nor am I referring to people complaining about their aches and pains. The avoidance behavior to discuss health care costs is due to the non acceptance of the normal process of aging. To avoid the discussion even more, new catch phrases come out…the present 60 years old is the new 40 and the present 80 year old is really 60 and so on.

I am talking about sitting down with a trusted advisor and mapping out a plan on how to pay for your various types of medical expenses. This plan will allow you to live somewhat comfortable, and, to enjoy your grandchildren and great grandchildren.

I hear weird statements from my clients and friends… “Oh, I do not want to live that long if I need to go into an assisted living facility. I am just going to die early.” People do not just up and die! Those of you that get easily offended (wimps) may want to avoid this next statement. If you have ever seen a murder movie or TV series in which someone puts a pillow over an “old” person’s face in a hospital bed…have you noticed that “old” person will kick and scream just to live no matter how many diseases they have! Maybe, you have a special method to die early. What happens if you do live to 105? Humor me, what are your plans?

Let us take a walk down memory lane and how the health care payment system evolved in the United States. Prior to World War II (WWII) very few people had health insurance. You paid for your medical costs out of your own pocket. Thus, many people just took home remedies or shook it off (I remember as a child playing sports, or even working in the yard, when I got injured, I was told to “rub some dirt on it”, now get back out there. Ice and aspirin were my friends!…Funny, if I injured my hand Dad would tell me to get the hammer…what for, I asked…he said, so I can break your foot and then you will forget about your hand J).

During WWII Roosevelt placed a wage and price freeze to halt inflation due to demand being greater than the shorthanded supplies. Well, if Company A needed workers and wanted to hire you from Company B they could not offer a higher wage. So to lure you over they started offering benefits…namely…, Company A, would pay for your health insurance premiums/benefits. Paying for health insurance was not a violation of the wage freeze. Well, to stay competitive, every other company then offered the same benefits so it became common. During the 50’s and 60’s, union growth exploded in the U.S. and the union bosses demanded superb (Cadillac) health plans for their members. Non union companies had to match that benefit in order to keep workers. It came to the point where most people paid next to nothing to get top notch medical insurance and care. So who ended up paying the freight for these increased medical costs and insurance premiums? The employers!!! Since, the employer paid most of the premium, and, a 3rd party (insurance company) was paying for the medical costs, employees paid next to nothing. Consequently, employees kept enjoying these low cost medical visits for themselves and the medical professions kept raising prices since employees never complained about costs. What a cycle.

Sidebar…if someone was willing to pay for say, 90-95% of your gasoline and auto repair costs each year, well, you really would not care about how high the price of repairs or gas went up. Especially, if your total “out of pocket” might be only $250-$500/year. You would be in weekly to have your oil changed or checked your battery, or investigate a weird sound. Outcome of this fiasco would be massive increase in gasoline and repair costs. In many cases, you might not change your oil for 5 years and your engine would freeze. Why worry…someone else would pay for the engine replacement I am using this example to compare our present health care system…eat, drink and be merry for someone else will pay for your new heart, lungs, liposuction, other surgery, etc.

Using the automobile metaphor is what has happened to health care costs and the why.

As in all things in life the pendulum constantly swings from too little (low) of something to too much (high) and vice versa. Well, the pendulum has been too high (heavy) on health care costs on corporations for too long. Employees feel it is their “right” to have health insurance paid for by someone else (if that isn’t socialist government thinking, well, did you get a D- in world history?) Let us take a look at what has been happening and will continue to happen in the future:

As this trend continues, watch the pendulum swing the opposite of the WWII years, when companies added health insurance benefits to stay competitive. Now, companies will watch what took place with the above companies eliminating health benefits and start dropping their own coverage, since they do not need it to stay competitive in that area. This socialistic method of paying for health care is now being brought to light. As Margaret Thatcher once said “socialism works until you run out of other people’s money to pay for things”.

To the average employee that means money spent on frivolous items to enhance their self esteem will now need to be spent on their own health costs (As these new out of pocket costs hit watch as people avoid going to the doctor for every nick and small pain since “they” are paying for it).

Sidebar: For years I have struggled to get people to save for their future needs. Their excuse is, “we just do not have any excess money”. I laugh when I see TV reporter’s interview people at gas stations when the price of gas goes up 50¢/gallon. The people interviewed are indignant since they may have to “cut back” on their lifestyle. Yet, I never see the reporter go to the gas station when the gas price drops 75¢/gallon and say,…will you now be able to save money for your future?

Remember, when I say health care costs it is not just the doctor and medicine. You need to plan for your long term care needs as well. People are living much longer and will need different types of care (This does not mean just your costs to be in a nursing home confined to a bed).

The Insurance Institute, 4 years ago, raised the mortality age level from 105 years to 120 years. They expect to raise it again very soon. (My aunt just turned 100 and she is spry, lucid and full of vitality. Her eye sight is a little weak but glasses and Lasik surgery can handle that issue).

The issue I am talking about is “longevity risk”. The risk of living too long and depleting your wealth. Most people work from age 25 to 65 to accumulate money to live from 65 to 105. People say to me… “Oh, I will not live that long”…well, I respond, “what happens if you do?” Do you think you can go back to work at 89 and work 40-50 hours per week? Show me your plan! Look, if you tell me exactly when you will die, I can help make a plan, so, when you jump in the “hole” you will have $2 in your pocket. You cannot tell me when that day will happen!

ISSUES and COMMENTS

Know where your spouse and parent’s passwords are, military papers, social security information, investment accounts, documents like living wills, health care proxy, power of attorney, army discharge papers, etc.

 

I want you to look out now over the next 10 – 25 years and picture yourself, all your family members, the generation(s) in front of you and after you. Draw out what your plans are to cover your health care needs.

Need help…we are always here for you!

Ah yes, discipline or regret!

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The 25 year Tsunami

If you knew that someone would blow your home up and destroy it along with all your personal items…would you do something about it? The answer is probably “yes”, but, you are assuming, I mean in the next 2-3 months. What would your answer be if the time period was 25 years? You would probably answer…I will get to it later. Ah yes, the American sport of procrastination.

A September 17, 2013 report by the Congressional Budget Office (CBO) points out that the federal debt may exceed 190% of annual economic output by 2038 from the present 73% today…That would make us worse than Greece today, which presently has 27% unemployment. (As of the writing of this article 49.2% of Americans are on some type of Federal Subsidy. That means 50.8% of Americans are paying out for the other 49.2%. As the “teeter-totter” goes – once that number passes 50%, well, then, the U.S. will follow the same fate as Ancient Greece, The Roman Empire, Current Greece, The Former Soviet Union, multiple cities in California and Detroit.)

A summary of the CBO report will give you important facts:

1.)    Demographics

Warning #1:              

Do not make any plans to depend on any government programs for your future. Plan your strategy to develop your own wealth away from any avenues where the Feds will be able to tax it.

Author’s note:

The American people continue to vote for more socialistic programs, i.e., Obamacare. Funny the present administration campaigned twice on changing America into more of a European socialist model. Yet, all of Europe, after almost 80 years of a socialistic model, have seen it fail and are turning back to capitalism.

2.)    10 year window for you.

Author’s note:

For the 50% that are “pulling the wagon” following the rules and paying beyond their “fair share” of taxes…expect massive tax increases from now forward. It will even affect those in retirement with either higher taxes on social security or fewer benefits.

Warning #2:

Plan to massively increase your savings and get into programs that will not be affected by taxation. Set-up a plan “B” business so you can supplement your present income and savings. Do not procrastinate. Get professional assistance and think outside the box.

3.)    Other

SUMMARY:

Do not be frightened by this short summary. First, take a step back and recognize this is happening. Second, do a “dress rehearsal” and project forward where you will be in 10-25 years. Visit with your professional advisors to develop a strong “battle plan” to “build a financial wall around your family that nothing can get through”.

 

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Shock and Awe

An article from Financial Advisors Magazine

By Eric L. Reiner on 10-03-13

 

The rubber has hit the road, and advisors are witness to the squealing. Despite frequent conversations with wealthy clients in recent times about the specter of rising taxes, “I’ve seen a lot of shocked looks on faces this yearwhen we project people’s income and tell them how much tax they’ll owe for 2013,” says CPA David O. Erard, a partner at HCVT LLP in Orange County, Calif. “The reality of higher taxes is here.”

As you meet with clients to discuss year-end tax maneuvers, they will probably ask how the new increases impact them. “It’s a complicated answer,” says CPA Sarah Knight, managing partner at Knight Field Fabry LLP, in Denver. “Clients feel like all the changes are going to affect them, but only some may apply, or none,” she says.

For example, few of her retirees have modified adjusted gross incomes larger than the threshold for paying the loathsome 3.8% Medicare surtax on net investment income, which is $250,000 for joint filers and $200,000 for singles. Or perhaps just a small amount of their MAGI is above it. “People don’t appreciate that the 3.8% surtax is only on the incremental amount above the threshold, and that it’s on the lesser of the excess MAGI or their net investment income,” Knight says.

So you may be able to awe some anxious folks by explaining that the tax hikes don’t touch them, or not much. “But for those affected by the changes, it is a hard pill to swallow,” Knight says.

A tax of 0.9% on earned income, including self-employment earnings, kicks in at the same threshold as the surtax on investment profits. When adjusted gross income tops $300,000 for joint filers or $250,000 for singles, phaseouts curtail personal exemptions and certain itemized deductions.

And a 39.6% top ordinary tax bracket, up 4.6% from last year, awaits joint filers with taxable incomes exceeding $450,000 ($400,000 if single). These clients also pay 5% more on their long-term capital gains and qualified dividends this year, 20% versus 15%.

 

Estimated Tax A Primary Concern
Clients slapped with these increases could get nasty surprises next spring, such as an unexpected tax bill on April 15, or worse, an Internal Revenue Service penalty for underpayment. With three-quarters of the year now in the history books, it’s a great time to update clients’ 2013 income projections, estimate the federal tax liability and compare it with their withholding and estimated taxes.

“Even people with no change in income from last year could potentially owe the IRS because of the law changes,” says CPA/PFS Mike Tedone, a partner at Connecticut Wealth Management in Farmington, Conn. To help with cash-flow planning, clients who can delay paying taxes until April without penalty should be reminded how much they’ll owe, Tedone says.

Workers with high salaries are particularly vulnerable to under-withholding of the 0.9% additional Medicare tax on earned income, especially if they changed jobs midyear or have working spouses, says Knight, the Denver accountant.

To illustrate, take a single client who earns $175,000 from each of two employers. With earned income of $350,000, minus the $200,000 threshold for singles, he’ll owe additional Medicare tax on $150,000. Yet employers don’t withhold the tax until a worker’s wages reach $200,000. So none of this tricky little tax will be taken out of the client’s paycheck by either employer.

Now consider a married couple, with one spouse earning $175,000 and the other $300,000. Their joint earned income of $475,000, minus the $250,000 threshold for taxing joint filers, leaves $225,000 subject to additional Medicare tax. But the first spouse won’t have any of the tax withheld, and the second spouse’s employer will only withhold on $100,000 (a $300,000 salary, minus a $200,000 threshold for withholding).

“Clients need to understand that there may be additional withholding once they make more than $200,000 from a single employer, but it may not be adequate,” Knight says. These clients can boost withholding at work for the remainder of 2013 or make an estimated tax payment.

 

High, Certain And Stable
Taxes aren’t just loftier. They’re also etched in stone, notwithstanding the occasional tax reform blabber out of Washington. Enactment earlier this year of the American Taxpayer Relief Act established a stable set of rates and rules for 2013 and beyond, giving planners the gift of certainty.

Sureness about the future facilitates traditional multiyear planning, where you shift income to low-rate years and deductions to high-rate ones when possible, taking into account the alternative minimum tax, notes Kansas Citybased CPA Scott Slabotsky, a managing director at national accounting provider CBIZ MHM.

Income planning is in vogue, too, to prevent the client’s earnings from spiking into surtax or phase-out territory, or into the next bracket, all of which take effect at different income levels.

To help clients appreciate the tax cost of phase-outs, explain that when individuals who are subject to the so-called Pease limitation on itemized deductions earn $1 more, their taxable income typically increases by $1.03, a 3% adjustment. Because the ordinary bracket of these taxpayers is usually at least 33%, the phase-out effectively adds at least 1% (33% of 3%) to the marginal rate. The personal exemption phase-out augments the woe.

Note that high-income single individuals face scrunched brackets. When their taxable income breaches $398,350, the ordinary rate rises from 33% to 35%, then quickly advances to 39.6% above $400,000.

 

Strategies For Elevated Rates
With so much potentially at stake, there is enhanced value to keeping income off the client’s tax return. This can be accomplished in many ways, of course, including via such timeworn strategies as maximizing contributions to qualified retirement plans and taking losses to offset gains.

Tell clients age 70 and a half or older this is the final year they can make tax-free qualified charitable distributions. QCDs allow taxpayers to give up to $100,000 directly to charity from their individual retirement account without having to count the distribution as income. This is also the last year clients can exclude from income cancelled debt on a principal residence, Knight says.

Real estate investors may be able to keep gains off their returns with a Section 1031 like-kind property exchange. With this technique, investors can defer all or a significant portion of their gain on one investment property by reinvesting in another, following very structured rules.

Erard, the Orange County CPA, reports “a significant uptick” in the number of 1031-related questions he’s fielded from clients in 2013. “As long as the client wants to remain invested in real estate, a 1031 exchange can be a pretty good option,” Erard says. The drawbacks include the complexity of the exchange and the lowered depreciation deductions on the new property compared to acquiring it outside of a 1031 exchange.

Some real estate investors may be able to avoid the 3.8% surtax on their rental real estate income. “If they can qualify as a real estate professional under code Section 469(c)(7), and then further qualify to be considered in a trade or business for purposes of Section 1411, that’s one of the few carve-outs from the surtax,” says Erard.

To qualify as a real estate professional, the client must devote more than half of his or her working hours, and at least 750 hours, to certain real estate activities; document the time spent on those and other activities; and meet other requirements.

 

Deduction Planning
Turning now to the deduction side, clients have one last shot at some breaks set to expire December 31, most notably the above-the-line deduction for teachers’ classroom expenses and the itemized deduction for state and local sales taxes instead of income taxes.

For business owners (including advisors) the situation is more dramatic. The maximum write-off under Section 179 for equipment purchased during the year plunges from $500,000 in 2013 to $25,000 in 2014. And this is the last year entrepreneurs can take 50% bonus depreciation on most new property.

To maximize the benefit of itemizing for clients who have relatively small deductions, recommend the age-old strategy of “bunching,” i.e., shifting as many deductible expenses as possible into one year in order to clear the standard deduction hurdle, which for 2013 is $12,200 for joint filers and $6,100 for singles.

A similar approach produces benefits even when the client’s itemized deductions exceed the standard deduction each year by a modest amount, according to planner Roger Pine, a partner at Briaud Financial Advisors in College Station, Texas.

Consider a client couple with $15,200 in annual deductible expenses. Itemizing for 2013 provides them with $3,000 additional deductions over the $12,200 standard deduction. If we assume the same numbers will hold for 2014 (even though the standard deduction is indexed annually for inflation), then itemizing in both years gives the clients a total of $6,000 in additional deductions, compared to taking the standard deduction.

But if the client can “double up” the expenses in one year to $30,400, Pine says, the benefit of itemizing soars dramatically, even though this tactic forces the client to take the standard deduction in the second year. Here’s the math: $30,400 in itemized deductions, minus a $12,200 standard deduction, yields $18,200 in additional deductions from itemizing in a single year, more than triple the $6,000 benefit of itemizing in both years.

Of course, anytime you start shifting deductions around, you have to consider the alternative minimum tax consequences. Yet the impact may be diminished or even eliminated this year for some lucky clients, according to Erard. Taxpayers owe the IRS the difference between their regular and alternative minimum taxes when the AMT is higher, and that difference may have narrowed for the client as the phase-outs and new top tax rate push his regular tax upward.

Clients who are no longer in the AMT’s grasp may need new advice. “Some of my clients who in the past paid state taxes after the end of the year [because they were subject to AMT] may instead accelerate their payments into 2013,” Erard says. State taxes are deductible when the client is not in alt min.

There’s a broader lesson here, Erard observes. “The 2013 changes increase the importance of revisiting your assumptions.”

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7 SIGNS OF THE NEXT FINANCIAL CRISIS

Article By: Michael Brush, MSN Money

Five years ago, Lehman’s collapse sent the market and economy into a panic. One of the insiders who saw it coming sees eerie similarities in the U.S. market and Asian banks, and a big drop ahead for stocks.

BIG TROUBLE AHEAD

With the fifth anniversary of the disastrous 2008 Lehman Brothers implosion on Sept. 15, 2008, you’re probably hearing lots of ruminating about the bankruptcy that sparked the worst financial crisis in 80 years.

But as investors, it may be more useful to look at what the lessons from Lehman’s collapse are telling us about the outlook for U.S. stocks now.

The bottom line: There’s big trouble ahead. Many of the risk indicators that foreshadowed the last big meltdown are blinking red. And stocks could fall 10% to 15% before the end of the year.

That’s all according to a guy who should know — he was inside Lehman at the time, he was part of the group that tried to warn the company of the risks of subprime mortgages, and he wrote perhaps the best book on the blow-up.

“The next crisis will be Asia-led, but it will bring down U.S. stocks. You want to be lightening up on U.S. stocks,” says Lawrence McDonald, the author of “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers.”

McDonald, who now advises hedge funds and investors on how to spot market risk, is seeing signs of distress in Chinese banks that are eerily similar to what U.S. banks faced ahead of the 2008 meltdown. (Read more about him, and check out his investing newsletter and other work, at his website.)

“The systemic indicators are dangerously high in Asia,” says McDonald, who tracks 17 key indicators modeled on the Lehman mess to get a “20,000 foot view of risk in the market” as chief U.S. strategist at Newedge USA, a futures broker. “The indicators are saying something very big is happening in Asia.”

McDonald remains bullish on stocks for the long term, because valuations still look good, mind you. But the near term looks dicey.

Here are six of his Lehman risk indicators and one more sign that suggest something bad is cooking in banking, and that U.S. stocks are vulnerable. We’ll start with some overall readings, then zero in on China.

 WILD LENDING HAS SPIKED 

A favorite Lehman indicator for McDonald is one that gauges the number of business loans being made that contain scant protections for the lenders.

Lender protections, known as covenants, are provisions in loans that typically ease loan repayment when financial warning signs crop up for a borrower. For example, a covenant might push a company into bankruptcy — protecting assets for lenders — if cash flow falls enough..

Excessive amounts of “covenant-light loans,” as they’re called, signal that lenders are handing out money too freely. This can be a sign of trouble in the financial system, which can then spook stock investors.

Recently, this Lehman indicator — the number of covenant-light loans — was at the same level it was in 2007, the year before credit markets blew up.

McDonald attributes the covenant-light loan binge to the Federal Reserve’s policy of maintaining near-zero interest rates to spur the economy. Rock-bottom rates have investors chasing yield. “They don’t give a darn about protection. They just want the income,” says McDonald. “People have really reached into very dark corners for extra yield. This is what happened in 2007.”

This kind of wild lending can cause trouble, because it funnels money to less responsible business managers who invest it frivolously. When their bets go bad, lenders — meaning banks, insurance companies and the rest of the financial system — get hurt. That in turn spooks investors into selling stocks.

JUNK BOND MANAGERS ARE CUTTING RISK

One of McDonald’s favorite canaries in the coal mine is the junk bond fund manager, who invests in high yield, aka “junk,” bonds. (Risky companies have to pay more for loans, so interest rates on their debt are much higher. These loans are also more likely to go bad, which is why they’re called junk.)

What makes junk bond managers good canaries? Their markets are less liquid than the markets for large-cap stocks, which means volume is lower and there are fewer buyers and sellers. So junk bond managers tend to be more sensitive to risks than stock investors are. “They have to be more nimble. They have to reduce positions quickly, any time they see a sign of risk,” says McDonald.

Junk bond managers sell fast when they see risk. So when junk bonds underperform stocks, it can mean trouble.

“In the months before Lehman blew up, high yield investments were down 2%, and stocks were up 3%,” says McDonald. High yield also lagged stocks ahead of sell-offs in stocks in 2010, 2011 and 2012.

Now, troublingly, we see the same thing. This summer, high yield bonds have underperformed stocks. Over the past three months, the SPDR S&P 500 (SPY) exchange traded fund is up 75%. But the SPDR Barclays High Yield Bond (JNK) ETF has fallen 2.10%. “This is a very dark sign for stocks,” says McDonald.

INVESTORS SEEM OVERCONFIDENT

This Lehman indicator focuses on two data points that can tell us if stocks are particularly vulnerable to shocks. These figures suggest investors are too confident, following the 23% market increase since November. That makes investors more vulnerable to bad news.

One great way to measure if investors are overconfident, says McDonald, is to look at the percentage of stocks trading above their 50-day and 150-day moving averages. Lately, these technical signals have been at extremes, suggesting that investors are brimming with confidence. This state of mind makes them more vulnerable to shocks of bad news, such as a potential financial crisis in China.

Similar signals of overconfidence preceded big stock market corrections in June 2011, April 2012, October 2012 and May 2013. In all those cases, the proportion of stocks trading above their 50-day or 150-day moving averages was high — 70% to 80%.

This summer, 85% of stocks in the Standard & Poor’s 500 Index ($INX) were trading above their 50-day moving averages, and 70% were above their 150-day moving averages. Those numbers have declined a bit. But such peaks are still signs of trouble ahead, says McDonald, because the decline in stocks since early August may only be the start of something bigger.

MARGIN DEBT IS AT OR NEAR RECORD LEVELS

When investors borrow lots of money to get into stocks, that’s a sure warning sign of trouble in the market ahead. That’s exactly what’s happening in the U.S. stock market right now.

In April and May, margin debt eclipsed $400 billion, well surpassing the 2007 peak of $381 billion, a top that was followed by the credit crisis and the stock market meltdown. Indeed, major market corrections and crashes are almost invariably foreshadowed by peaks in the use of margin to buy stocks.

If you’re guilty here and you have borrowed heavily from your broker to buy stocks, now might be the time to part with some of your positions to bring down your borrowing.

Otherwise, you run the risk that if your stocks fall enough — which is likely in any 10%-15% overall correction — the amount of equity in your account won’t be enough to back up your margin borrowing. You will be forced to either sell stocks after they have declined or send a check to your broker.

Trust me, this will hurt at a time when you’re already bothered by how much your account is down. At such times, the last thing you want is for your broker to call and ask, “Is Marge in?”

GOLDMAN, B OF A EXITING CHINA

If you want to know what’s going to happen in the markets, it pays to follow the smart money. And love ‘em or hate ‘em, the guys and gals at Goldman Sachs Group (GS) definitely qualify. That’s why it’s interesting to note that a few months ago, Goldman Sachs dumped the last of its stake in China’s biggest bank, Industrial & Commercial Bank of China (IDCBY).

Goldman is not alone. Two weeks ago, Bank of America (BAC), which learned a thing or two about bank risk in the credit meltdown, said it sold its remaining stake in China Construction Bank (CICHY) for $1.47 billion.

Many skeptics are increasingly questioning the quality of Chinese bank assets following the huge credit boom that has fueled that economy there in recent years — and with good reason. There may be big problems with those banks. China Construction Bank recently said it wrote off $879 million in bad loans in the first half of this year, or four times as much compared with the year before. China Banking Regulatory Commission Chairman Shang Fulin recently warned about rising risks in the banking sector.

The Goldman and Bank of America sales aren’t strictly speaking, a Lehman indicator. But next are two from McDonald that paint the same picture for China.

TRUST AMONG ASIAN BANKS IS SLIPPING, TOO

Remember “Libor”? This measure of interbank trust told us trouble was on the way for U.S. banks before crunch time in the fall of 2008. Now, a Chinese cousin is saying the same about Chinese banks and about Asian banks that do a lot of business in China.

A quick primer: Libor, the London Interbank offer rate, is the interest that banks charge each other for short-term loans. When it shoots up, it’s a sign of mistrust — and problems — among banks. Libor spikes also signaled the European meltdowns in 2010 and 2011.

Now, Shibor, the Shanghai interbank offered rate used by Chinese banks, is flashing red. It shot up to 12% on June 20, its highest level since the summer of 2011. Sure, it has calmed down since, but it’s still elevated, and the decline is not necessarily an “all-clear” signal, says McDonald. After all, Libor signaled trouble for nine months before the Lehman meltdown.

McDonald likens the June Shibor spike to a warning tremor ahead of an earthquake. He expects another one around Sept. 30, at the end of a quarter, when banks have to roll over lots of debt. This is a natural time for the quality of bank loan collateral (assets) to go under the microscope. “There is very high probably that Sept. 30 will be a rocky time for the markets,” predicts McDonald. “If one quarterly refunding is rocky, the next one is normally rocky, too.”

He sees a similar red flag in recent spikes in the Chinese “repo rate,” an interest rate used in a different kind of interbank lending. McDonald calls both types of short-term lending among banks the “plumbing” of the financial system. “When it starts to freeze up, it affects all types of lending,” says McDonald. “This is what happened in the U.S. in 2008. And this is what is happening in Asia now.”

The good news is that Asian banks are less interconnected with the world outside than U.S. banks are, says McDonald. The bad news: Everyone is counting on continued rapid growth in developing countries such as China to lift the global economy. Clear signs of financial sector rot this will hurt U.S. stocks.

INVESTOR INSURANCE ON KEY BANKS WITH ASIAN EXPOSURE IS GETTING PRICIER

Another key Lehman indicator of trouble is the rate big investors have to pay for insurance on bank debt. When this price jumps, as it did ahead of the 2008 bank and credit sector meltdown, it’s a warning sign. One popular form of insurance here: derivatives known as credit default swaps, which repay investors if the bank debt goes bad because a bank goes belly up.

You don’t even have to own a bank’s debt; you can just buy the insurance, in effect betting the bank will collapse.

Recently, CDS prices have risen sharply for two banks with lots of exposure to China, the British banks HSBC (HBC) and Standard Chartered (SCBFF). This signals increased worry about the strength of these banks, due to fears that they are exposed to potentially bad debt in China. “This is the sniffer that tells you something god-awful is going on,” says McDonald. “Now, it tells me that something horrifying is happening in Asia.”

Since May, the price of CDS protection for HSBC has risen to trade in line with swaps for Bank of America (BAC) and Citigroup (C) debt. The price had been much lower for years. And the CDS prices for Standard Charter rose to match those for Morgan Stanley (MS), a similar kind of bank, when they, too, had traded much lower for years.

Here’s another bad sign: Since April, the number of investors betting against HSBC and Standard Chartered by shorting their stocks has seen a big  jump. In shorting, investors borrow shares and sell them, hoping the stock will fall so they can pay back the stock loans with cheaper shares later.

Standard Charter and HSBC declined comment. But HSBC has been dumping holdings of Chinese banks and insurance companies. Another red flag for China? I’d say so.

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RETIRED COUPLES MAY NEED $220K FOR HEALTH CARE

Associated Press - Article Written By: MATTHEW PERRONE May 15, 2013

WASHINGTON (AP) – After years of increasing health care costs, the outlook is improving for seniors worried about paying their medical bills during retirement.

For the second time in the last three years, estimated medical expenses for new retirees have fallen, according to a study released Wednesday by Fidelity Investments. A 65-year-old couple retiring this year would need $220,000 on average to cover medical expenses, an 8 percent decrease from last year’s estimate of $240,000. The study assumes a life expectancy of 85 for women and 82 for men.

Fidelity attributes this year’s decrease to several factors, including a slowdown in healthcare spending that hasn’t rebounded with the economy.

“When times are tough people tend to cut back on health care expenditures,” said Sunil Patel, a senior vice president for benefits consulting at Fidelity. “I think what surprised many people is that in recent years, even as the economy recovered, you’ve still seen a fairly significant slowdown.”

Although fewer doctor’s visits can help seniors save money, Patel stressed that skipping necessary care can lead to more serious health problems and higher expenses down the road.

The 2013 decrease is significant since Fidelity’s estimates had increased 6 percent per year, on average, between 2002 and 2012. The estimate decreased only once before in 2011 due to changes in the Obama administration’s health care overhaul, which have reduced seniors’ out-of-pocket spending on prescription drugs.

Fidelity’s projections assume that a 65-year-old couple retires this year with Medicare coverage and no additional coverage from former employers. The estimate factors in the federal program’s premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The estimate doesn’t factor in most dental services, or long-term care, such as the cost of living in a nursing home.

The company’s projection has fallen 12 percent from its high of $250,000 in 2010. But Americans continue to drastically underestimate how much money they’re likely to spend on health care during retirement. A recent poll of people in their 50s and 60s conducted by Fidelity found that nearly half of respondents think they will need just $50,000 to cover medical expenses.

Although many Americans underestimate the scale of medical expenses they’ll need in retirement, the financial burden remains a serious concern.

A recent survey by Merrill Lynch found that health care expenses were the number one retirement worry among people preparing to retire. Three out of five retirees surveyed said they were forced to retire earlier than expected due to a health problem.

“This is a generation that is living longer than any previous generation and because of that longevity they have a whole new set of risks they’re worried about,” said David Tyrie, managing director of Merrill Lynch’s personal wealth and retirement business.

Here are some initial steps to help prepare for medical expenses during retirement:

— Talk to a financial planner: Experts agree there is no universal formula to plan for retirement costs. The amount of savings needed for medical care can vary depending on whether seniors continue working during retirement or retire before they become eligible for Medicare.

The Employee Benefit Research Institute, an independent nonprofit, conducts similar research to Fidelity, but doesn’t focus on an average cost because there are so many variables that impact a retiree’s circumstances. The group recommends working with a financial professional to develop a retirement plan that factors in medical bills.

“In general, people need to sit down and figure out what they want and talk to a financial planner to realize their goals,” says Paul Fronstin, EBRI’s director of health research and education.

In its most recent estimate, EBRI projected that a couple with typical drug expenses would need $163,000 for a 50 percent chance of covering all medical expenses in retirement. They’d need $283,000 to have a 90 percent chance.

— Consider a health savings account: One of the best vehicles to begin saving for medical costs in retirement are health savings accounts offered by many employers and financial institutions. Workers can begin contributing to health savings accounts while they are younger and generally healthier. The money is invested tax-free and rolls over each year, regardless of whether you change employers. Unlike retirements accounts like IRAs and 401ks, the money is not taxed when it is withdrawn as long as it is spent on health care. Currently health savings accounts are only available to people enrolled in high-deductible health plans. These plans have lower premiums but a fixed deductible that must be paid out of pocket before coverage begins. They are generally a good idea for people in good health with few health care needs.

— Consider an annuity: For workers who don’t have a health savings account an annuity can be another useful investment tool. Under a deferred annuity, a person can set aside a large amount of savings in return for a steady stream of payments in the future. The advantage of an annuity is that it provides a guaranteed minimum monthly payment, no matter what happens to the value of the principal investment.

A couple that knows they are likely to face $220,000 in expenses over their retirement could setup an annuity to provide about $11,000 a year over twenty years. The downside to an annuity, versus a healthcare savings account, is that withdrawals are taxed as income. Annuities can be very complex and investors need to do their homework about the related fees. For more info visit: www.choosetosave.org

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