Open Enrollment for Medicare Part C & D

For those eligible for Medicare it’s time to shop around as the open enrollment period for Medicare Advantage (Part C) and Medicare Prescription Drug Coverage (Part D) started October 15th and runs through December 7th.

Why shop around? Like any other insurance policy that renews annually, it’s important to see if your current options still best fit your needs. For example, what may have been the most efficiently priced policy last year could be significantly higher this year. Pricing for most Medicare Advantage Plans are expected to increase moderately this coming this year. However many Medicare Part D Plans are expecting double digit increases in premiums. Second, your current plans provisions and benefits may have changed and may not best fit your needs anymore. Finally, you may have had a change in your personal circumstances where another option may be more efficient. When shopping around for Medicare Advantage, just make sure that any new plan that you are considering has your primary care physician, specialists and care facilities that you are likely to use are on the plans network of providers.

The best place to start shopping is the Medicare Plan Finder on the Medicare website. Before shopping, it is recommended that you have your list of prescription drugs you take and the dosage. Plug in Medicare number and drugs and it will produce a list of available options and detail so you can determine what plan is the best fit for you. One on one advice, the State Health Insurance Assistance Program offers Medicare counseling services.

In the end, it pays to be proactive as it could prevent disappointment in the quality of coverage you receive and it may save you hundreds of dollars each year.

Long Term Care Insurance Market in Flux

Recently John Hancock raised premiums on many of its existing long term care insurance (LTCI) policies in force with increases ranging from approximately 20% to 90%. These were primarily focused on policies written over five years ago. This comes on the heels of Prudential and Berkshire both exiting the LTCI market over the past year. Insurance companies making less on their reserves in this low interest rate environment, fewer policy owners letting their policies lapse than expected and inadequate premium pricing in the past have all contributed to the flux in this marketplace.

All of this has made it even more difficult for people to protect the financial risk of needing long term care. What can you do to protect yourself? Here are some tips:

• For financial planning projections, you should make the assumption that LTCI premiums will go up with inflation over time if you currently hold or are purchasing a LTCI policy. Given the flux of the long term care insurance market and the fact that premiums will be variable over time, I suspect it will be a while before the insurance companies become effective of adequately pricing out the risk and underlying premiums needed to support this type of insurance.

• If you are one of those individuals who have insurance and received a significant price hike, I would caution you against dropping the policy altogether without thorough consideration. If you can’t afford the increase in premiums, the insurance company may allow you to reduce your benefits to keep premiums at affordable levels. It may not be ideal, but you still have some level of protection. Even with the premium hikes, many currently held policies still look attractive compared to what you can purchase new on the open market today.

• There are many riders and options available in the insurance marketplace to address long term care needs. There are a new slew of hybrid life insurance products which provide long term care benefits if needed. Traditional LTCI can have riders that protect against inflation and pays back the premium if no claims are ever made. There are options where the LTCI buyer can fully pay off their premiums in several payments in the early stages of owning the policy. These provisions all protect against the current flux of the LTCI market and are very attractive to someone shopping for LTCI. However I would be careful as everything that reduces risk comes with a cost. Insurance companies do a very good job of profiting on areas where the consumer has a heighted level of fear so I would weigh out if the benefit is worth the cost.

• Many people are resistant to buying long term care insurance because they may never use it. For those who fall in this camp, just keep in mind that most of us go for years without ever having a claim on their homeowners insurance. Somehow we continue to pay premiums on this type of insurance.

• In the end, I still continue to think shopping for this insurance in your early 50’s is the ideal time to consider this, buying a policy that covers the average daily cost in a nursing home care in the area you intend to live with a 5% compound inflation rider with a three to five year period is the best baseline place to start as far as shopping for a LTCI policy. From there you can adjust this accordingly to meet your personal circumstances.

• Finally, determine if LTCI is right for you. This type of insurance tends to be a perfect fit for those who have the financial means to pay the premiums over the long haul, but not enough in financial resources to absorb a long term care need. In some cases, people who can both afford the premiums and a long term care need buy it to increase their chances of leaving a legacy to their heirs. But LTCI is not universally the best fit for everyone.

When addressing my client’s retirement planning needs, the financial risk of needing long term care is always a built in assumption within my planning work. The state of the LTCI marketplace certainly isn’t making things any easier. But I urge that everyone should consider this risk and if LTCI fits you’re your needs regardless if you do this yourself or have professional guidance with your financial affairs.

Healthcare Costs Continue to Pressure Retirement Planning

Healthcare costs continue to put financial pressure on retirees. Fidelity Investments annually conducts an estimate of future retiree health care costs. In their latest release, they estimate a 65 year old couple with $75,000 in household income who retires this year should expect $10,476 in annual health care expenses and $240,000 over the course of their retirement. This represents a 4% increase from last year’s findings. This calculation assumes the couple is subject to traditional Medicare Parts A, B and D and does not have any employee retirement health benefits through their former employers. It also does not incorporate the cost of nursing home care or dental costs.

How can you account for rising health care costs within your retirement planning? Here are several things to consider:

1.) Account for Higher Costs in Your Planning: The first thing that you need to do is account for healthcare costs as a separate distinct expense in your retirement planning. The reason being is that healthcare costs grow at a faster rate than most other expenses encountered during retirement. Over the course of the past ten years, the inflation rate in the Fidelity study has been about 6% a year. If you are bundling your healthcare costs with other retirement expenses in your assumptions and not applying an appropriate inflation rate, you could be seriously underestimating your financial needs.

2.) Reconsider the Key Financial Planning Pillars: There are four key financial pillars which tend to have the most power in financial planning. This is simply the amount you save, the amount you spend, the time that you give to accomplish a goal and the risk you take in your investment strategy. Rising health care costs all suggest that more pressure needs to be applied to these pillars.

The first element is saving and spending. These are pretty straightforward and work in tandem. Usually higher saving correlates with lower spending and you will need to remain disciplined in your discretionary spending once you stop saving and begin the distribution stage of your retirement cash flow strategy. As discussed above, this includes appropriately accounting for anticipated health care costs.

Time is an issue as well. The earlier you can save towards a goal, the more compound investing can influence the dollars you will have at retirement. Working longer helps, although many people retire early due to health issues. If you want to retire early, bear in mind it is becoming harder and harder to achieve. This is because pre-age 60 retirees have to flip for all healthcare costs without Medicare subsidies, they aren’t entitled to Social Security yet and early retirement means more years of drawing down on financial resources rather than building upon them. I find a year or two can be the difference between successful and unsuccessful retirement projections for the younger retiree.

Finally, rising health care costs lend to a need to take higher risk in your investment strategy. When healthcare costs are rising at a 6% annual rate, it suggests that a portfolio with some element of growth will be required to keep up with expenses. Certificates of deposit, money market accounts and many parts of the bond world at current rates simply will not keep up.
I discussed each of the above in a vacuum. However all of these pillars can be combined and worked in tandem that best fits your needs and circumstances. The overriding theme is that more pressure will need to be applied on your planning and the basic options you have to accommodate healthcare costs if you haven’t accounted for these costs already.

3.) Consider Health Savings Accounts: If eligible, health savings accounts are the best of both worlds. Initially you get an initial up front deduction for the contribution from your income taxes. Then if used for qualified healthcare costs, then any earnings from those accounts are tax free. Now this is great by itself, but if you have a long time horizon and can afford to pay medical expenses out of pocket at this time, I suggest not tapping into this account in the short term and invest the funds in higher risk/return assets. Over time the increased growth can better keep up and match with the medical costs later in life. Unfortunately I see a lot of people using the account to pay current medical bills even when they can pay out of pocket. In addition, most investors seem to have these accounts invested in some cash equivalent bank account paying very little in yield. With trending health care inflation at 6%, the purchasing power of these assets erodes over time and offsets the tax benefit if it isn’t invested properly.

4.) Invest in Healthy Personal Habits: Diet, exercise and preventative care are all attributable to better health and lower medical costs. It doesn’t guarantee health, but studies have shown they all increase the chance of living a healthier life. Over the past several years the financial planning world has not only focused on healthy financial habits, but also encouraging people to live healthier lifestyles due to the influence of these on health care costs.

Healthcare costs will continue put pressure on ones retirement plans. But these simple steps will make this more affordable in your later years.

Tax Planning: Better Plan for 2013 Now

Currently millions of taxpayers are trying to get their tax returns prepared. But if you are wise, I would take a look at what’s coming in 2013 and take action now to address it.

If the tax code remains as it currently stands, we will face the largest tax increase in history. The majority of this would come from the expiration of the Bush Era tax cuts. Current tax brackets would go from 10%, 15%, 25%, 28%, 33%, 35% to 15%, 28%, 31%, 36% and 39.6%. Capital gains rates would increase from 20% for those who are currently subject to the 15% rate and those eligible for the current 0% rate would be subject to the 10% rate. The most egregious taxes would be for qualified dividends. Rates would revert back and be taxed at ordinary rates. Those currently paying 0% in the 10% and 15% tax bracket would pay 15% and 28% next year. Those currently paying 15% could be pay either 31%, 36% or 39.6%. Dividend paying stocks have been in vogue these days, but this could quickly come to a halt. In addition, the phase-out of itemized deductions and exemptions would return affecting higher income households while the marriage penalty would return.

Outside of the expiration of the Bush Era tax code, there are a few other taxes coming into play for 2013. The payroll tax cut is set to expire at year. Also the 3.8% healthcare reform act surtax on investment income will start. For those who will be in the 39.6% tax bracket next year, their qualified dividend income will go from 15% to a whopping 43.4% which doesn’t take state income taxes into account.

Now there is periodic talk about extending or modifying these tax issues. But I’m not holding my breath. Election years tend to create standstill before the election. After the election, lame duck politicians are hard to rely on – especially if the power is split up between political parties within Congress and the Presidency. Rather than relying on politics and other things that we can’t control, I am advocating a more proactive approach. These are the things you may want to consider:

Tax Location: This strategy involves allocating your individual investments into accounts in a manner which optimizes the after tax efficiency of your overall portfolio. I like to call this tax account diversification as Roth IRA/401(k)’s are designed to be tax free, Traditional IRA/401(k)’s are tax deferred and then investors can also have regularly taxable accounts. You would want to be more cognizant of placing more of your tax efficient investments within taxable accounts. Low turnover stock funds and index funds and municipal bond funds (if they don’t have a great deal of private activity interest which is subject to the alternative minimum tax (AMT)) are very tax efficient in a taxable account. Roth IRA’s/401(k)’s are a great place to place the high growth portion of your portfolio. The greater the growth potential, the more potential dollars you should have for your needs over the long haul; all of this would be tax free. Mutual funds that invest in higher risk stock and commodities tend to be a good location for a Roth. Tax deferred vehicles such as Traditional IRA’s/regular 401(k)’s tend to be a great place for your slower growing diversifiers within the portfolio. Leaning slower growers in the tax deferred accounts means that less of your dollars will be subject to ordinary tax rates when withdrawn. Taxable bond funds and other high turnover/non-tax efficient strategies tend to fit well within the tax deferred account. If you have a mix of different accounts, you will find this strategy more powerful in the years to come.

Tax Gain Harvesting: Most of the time financial planners talk about tax loss harvesting. But given the higher future capital gain rates, one may want to consider taking capital gains now at the current lower rate rather than incurring a higher tax rate later in the future, especially if you were planning to incur a capital gain with an asset sale in the near future. If you find yourself in the tax bracket where you would be subject to the 0% capital gain rate, it may even make sense to incur a capital gain only to buy the holding back to create the higher cost basis for a later sale date. It may defy common logic, but sometimes the best financial strategies are counterintuitive in nature.

Roth Conversions: If you have a large portion of your portfolio in a Traditional IRA and enough funds outside of retirement accounts available to pay the tax (and if your taxable income will get hit the hardest by the tax increase), you may want to consider converting some or all of your Traditional IRA to a Roth IRA. In the future, I will discuss Roth conversions in greater detail.

Higher Funding of Tax Advantage Accounts: Higher future taxes increase the attractiveness of funding tax advantaged accounts whether they are IRA’s, employer provided retirement plans, health savings accounts, college funding vehicles and tax deferred annuities. You just want to make sure that you have accessible funds available for an emergency fund and future spending needs that aren’t subject to a tax penalty for early withdrawal. But it may make sense to keep your taxable accounts as small as possible.

Don’t Let the Tax Tail Wag the Dog: Be careful to make sure that the funding vehicle fits your goals and future needs. Often times I see people mistake tax efficiency for tax avoidance and they end up investing in areas that are a poor fit for their needs. For example I often times life insurance will be sold as an investment vehicle where a need for the actual insurance need should take precedent over the investment characteristics.

With some careful planning, there is a lot to benefit from if you think about your future tax circumstances right now. Before taking action, I would highly recommend working closely with your financial planner and tax accountant (and coordinate it so they are communication to each other as well) to see what actions make the most sense for you. With our current and projected federal budget deficits, it would suggest we will be more likely to face a higher tax environment in the future. Small tax efficient measures now could potentially make a big difference over the long term.

Time to Fund Your Retirement Account

The two biggest factors influencing how much money you will accumulate for your goals is time and the amount that you will save over this time; this far outpaces the influence investment returns have on portfolio values. For those saving for their retirement goals, the recent market decline provides a great opportunity to fully fund your retirement accounts for 2011. Rather than waiting until the tax deadline in April of 2012 to fund their Roth or Traditional IRA now may be a more opportune time to take care of this.

For those who participate in an employer sponsored retirement plan and want to maximize their contributions, this is a good time to determine if you are on target. Not only to optimize contributions for this year, but also to determine what deferral percentage you will need to maximize contributions for next year. This month, the IRS will announce if any changes will be made as employee contribution limits are adjusted over time with inflation. We haven’t had any changes over the past couple of years so I suspect that we will see some sort of increase for 2012.

Also for those who participate in an employer provided plan where the employer has matching contributions, in most cases you want to make sure you stretch out your employee deferrals throughout the year. By doing so, it optimizes the dollar amount of the employer match. Often times I will see people maximize their employee deferrals way before year end. They think they are doing the right thing, but unfortunately they end up leaving employer provided money on the table. Employees who are subject to large bonuses and/or commission have the most trouble with this as it’s hard to predict incoming earnings. Some employers are now offering programs where they will assume you are making deferrals throughout the year – providing a full match even if you maximize your contributions before year end. You usually have to sign up for this so I would take advantage of this if your employer offers this.

Finally, don’t forget about Roth Conversions. In an off-hand way, the taxes that are paid from the conversion could be considered an additional contribution. Again, with the recent drop in the market, this makes this strategy more attractive and if the market continues to drop throughout next year, you always can re-characterize the conversion before October 15th. Roth conversions usually only makes sense if you have the cash outside the IRA to pay the tax. Just keep in mind that conversions don’t make sense in all scenarios so be careful and fully think this through before executing.

Meeting goals in a low return environment requires one to save more – simple but true. In the long run it’s a lot better to employ strategies that you can control rather than relying on things outside our control (like the financial markets). If any of my clients would like to fully fund their retirement accounts or explore their options, please feel free to call or e-mail.

Thoughts on the Downgrade of the U.S.

On Friday, Standard & Poor’s lowered the credit ranking of the United States from its most creditworthy status of AAA to AA+. This is the first time in history the United States has been lowered. As a result, the stock market tumbled with the S&P 500 down roughly 6.7% for the day. Here are my thoughts on the situation:

• The announcement of the downgrade by Standard & Poor’s simply reflects what is already known. The creditworthiness of the United States is still strong, but we have structural issues with our fiscal policy that need to be addressed. The only new news was the announcement. This created no surprise to me.

• The ramifications of a downgrade would suggest that interest rates would increase as buyers of United States bonds would require a higher interest rate as compensation for more risk. Ultimately the market would decide this, but given the weak economic conditions around the world, I doubt that rates will rise quickly in the near future. Japan was downgraded earlier this year and no one flinched.

• The other concern would be the loss of the dollar as the reserve currency of the world. But it begs to ask, what would replace the dollar? The only remaining “real” AAA rated countries are too small to handle the volume or do not want to assume this implied leadership. The Chinese want our dollar strong so they can continue to sell stuff to us at affordable prices. The Euro is worse off and there is not enough gold in the world. The United States economy is weak, but it is still the largest and strongest economy in the world and our largest companies are still quite profitable. Ironically Treasuries rose yesterday because they are still the safe haven of the world.

• The real risk is uncertainty. The announcement of the downgrade was nothing within itself. However, the consequences of the announcement and combination of reactions could potentially create a tipping point or Black Swan event, creating capitulation similar to the fall of 2008. We won’t know if this will create a tipping point or if this is a tipping point until we are looking back at this in the future. The risk of these events is always present in both good and bad times.

• Keep in mind that a country with a sovereign debt issue that can control its currency can never fall into actual default. When you control your currency, all you need to do is start printing currency and devalue the debt away. Unfortunately the cost of this is high inflation.

• A political silver lining? I think our elected officials thought they were going to get off easy last week. They thought they could do some political posturing, defend their ideology and make a last minute deal to avoid chaos and save face. Ironically it backfired because as their inability to address our debt problem in the long term created a ripple in an already fragile global economy. It’s time to address the situation rather than kick the can down the road – remember – we are the ones that vote them into office.

• The ratings agencies don’t have a great track record. A few years ago, Standard & Poor’s gave solid credit ratings to Lehman Brothers, AIG and plenty of those toxic mortgage backed securities. None of these exist anymore. Billionaire Warren Buffett, the world’s most successful investor, said S&P erred and the U.S. should be rated “quadruple-A.” I don’t know about you, but I’d trust Buffett more than Standard & Poor’s. Moody’s today also rebuked S&P’s downgrade.

• Unless there is some unforeseen tipping point as discussed above, I believe the reaction of the markets were more emotion and animal spirits than based on fundamentals. And the financial press does not help quell that fear because sound investing principals don’t generate great ratings. As discussed the other day, if the market continues to give you trouble, one of the best things that you can do is periodically rebalance your portfolio. This is nothing sexy, but rebalancing forces you to buy low and sell high.

Finally, no matter how scary it might seem, this is atypical market behavior. If you allow yourself to be swept away by Mr. Market every time a blip occurs, you will not be very successful over time. If you allow yourself to work with the things that you can control and be opportunistic of what the market brings you, a contrarian investment strategy can be very rewarding.

What If We Don’t Raise the Debt Ceiling?

This is the question that clients, friends and colleagues having been asking me over the past several weeks. Here is my take on the subject:

Will They Reach a Deal? At this point, I feel that the likelihood of a technical default is low and that some sort of reconciliation will be made prior to August 2nd. The one thing that I can count on is politicians wanting to stay employed. I suspect the only reason the politicians have been posturing so long is because the financial markets haven’t over-reacted to this point. There is a sense of caution out there, but it is definitely not panic. If Washington felt votes were on the line, this would be a done deal.

Will There Be Panic if Congress Fails to Make a Deal? There have been some catastrophic predictions of what would happen if we failed to raise the debt ceiling. Most notably, Bill Gross of the PIMCO funds in a recent letter stated: “default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008.” A post Lehman situation is always a possibility, but I would think it would take a combination of negative events like more trouble from the Euro zone or sudden weakness in China’s economy along with a technical default to set off a contagion like event. Just keep in mind that the probability of a “Black Swan” event is always a possibility and usually comes out of the blue from some combination of catalysts that nobody can foresee. Given there has been quite a bit of doomsday talk about what would happen here, I’m skeptical that contagion would be created solely from technical default; there would have to be more out there.

The Long Run: My main concern focuses on the long run implications of what will happen if we don’t get our financial house in order. The U.S. federal debt to GDP ratio is closing in on the 100% level. Once we go beyond this mark, it begins to have a detrimental effect on economic growth. If the confidence of buyers of U.S. debt wanes, this would erode our status as the reserve currency of the world. With more perceived risk in us meeting our obligations, this would result in higher interest rates, inflationary pressure and would undermine our ability to grow economically. Although it wouldn’t be pleasant, I would even accept some short term anxiety if action was taken to fix the problem in the long term. The days of kicking the can down the road should end.

The Reality of It All: Our problem is far from being unfixable. However it won’t be fixed overnight either so I think it’s absolutely silly for our politicians to be dangling the debt ceiling and deadlines as a bargaining chip. In the big picture the reality is that the plan will take years of gradual implementation to eventually right the ship, while not blowing up the economy in the process. Both sides are going to have to compromise. If a politician discusses deficit reductions without talking about entitlement reform, they will never fix the problem. The same thing goes for those that think that permanent changes in our tax system are not a necessity. Everyone will have to experience some pain in the form of paying more or getting less. It should not be “us versus them” in this debate. In reality it’s just us. I would rather be able to address the problem while it is still manageable, rather than creating a crisis that probably my kids would need to fix. Greece is now stuck and has no easy choices anymore. We don’t want Greece’s problem to be our problem as well.

Should You Retire with a Mortgage?

Does holding a mortgage into retirement make sense? Recently I was quoted in about this subject. In “Is Refinancing Before Retirement Wise” I made several points on the subject including:

-Those who have a long term steady stream of income such as a large Social Security and/or a pension benefit are more likely to be able to afford mortgage debt during retirement. The more you have to rely on the financial markets, the riskier this becomes.

-When you refinance, not only should you look at the breakeven time frame where the total monthly cost savings exceeds the cost of closing, but you should be very careful to also factor in the extra payments if you extend the term of the loan.

-Deductible interest isn’t usually as robust during retirement as during your working years because you are usually in a lower tax bracket. Also as the mortgage term continues in the future, less of the payment will be deductible interest and more will represent the principal of the loan as it amortizes.

-The decision can mean more than numbers. Sleeping well at night has value also.

Ultimately the optimal decision depends on the individuals circumstances. Most of the time, it is wise to eliminate your debt before your retire. However I have had several cases where holding a mortgage during retirement held little risk. If you are considering refinancing and are within ten years of retirement, I would highly suggest doing your due diligence and seeking expert guidance to see if this makes sense for you.

The Curse of Cash

Recently the Wall Street Journal highlighted how the Federal Reserve’s policy of keeping interest rates low to spur economic growth has hurt retiree’s who rely on interest rates to maintain their lifestyle. In the article Fed’s Low Interest Rates Crack Retiree’s Nest Eggs, they highlight residents within the Port Charlotte area of Florida and how many of them are coping with little help coming from their CD’s and Money Market accounts.

Unfortunately, this highlights that an all cash portfolio may not last a lifetime. You will never lose principal and you don’t face the same risks as you do with the stock market. But an all cash portfolio can provide as much risk of running out of money during your lifetime as stocks or other investments. Here are my thoughts on cash and the retirement portfolio:

1.) Obsolete Core Holding for Many: Cash in the past used to be a great and logical core holding for retirees. However the forces of longevity and inflation make it very hard for people to continue to maintain their purchasing power over the long term (especially after taxes are considered). In my experience, the few who could afford an all cash portfolio usually had rich pensions (which are diminishing as well) and Social Security coupled with disciplined frugality.

2.) Don’t Touch the Principal is Outdated: It is very difficult to have a sustainable retirement cash flow strategy without having to touch the principal. The great draw for risk adverse people towards cash is the interest is consistently spun off without principal. But this limits your alternatives. When you have a diversified portfolio of other asset classes with varying traits, you may be able to touch the principal and still have a better chance of not outliving your money. With a diversified portfolio you can harvest cash flow from investments which are doing well and ripe for the picking while leaving your under-performers in the garden to mature. Dividends, interest, capital gains, principal redemption, it is all money.

3.) Where Are The Bonds? The most interesting thing that I see is most investors have a “barbell” portfolio approach where the decision is either stocks or cash. Where are the bonds? Bonds over the past decade have done quite well as interest rates bottomed out. I suspect that if some of the people highlighted in the WSJ article had part of their nest egg in bond funds over the past decade, they may not be facing the same predicament they are in now.

4.) Cash Has Its Place: Cash is great for expenses needed within the short term, usually within the next 3-5 years. Bad market cycles for stocks usually take three years to recover. By having cash on hand, you avoid the sequence risk of having to sell stocks at lows and instead you can use cash to allow these investments the time to recover their losses.

5.) Excessive Risk Taking May Set In: Chasing yield or going outside the norm usually suggests a tipping point with the retiree who relies on cash and is frustrated with low yields. The real estate bubble was spurred on by mortgage backed securities that were leveraged to provide that higher yield than other interest deriving vehicles. Reverse mortgages or insurance products with implicit “guarantees” start looking attractive. A 70 year old person in the article had 80% of his portfolio in stocks. Why so high? He was quoted as saying, “That’s why most of us are in the stock market, because there is no place to go.”

6.) Problem Appears When It Is Too Late: In retirement planning, usually the problem of having too much cash appears later in life. Even if the person is presented with this projection with time to fix it, many people don’t take action or make change. Why? Human nature tends to discount delayed gratification and provide a premium for today. But for a lot of these people, small changes made a decade ago would have gone a long way. Now the choices are few without taking on excessive risk.

7.) Where’s the Planning? This is where a little financial planning would have gone a long way. A financial planner could have helped these people determine if they had a sustainable lifestyle, addressed the risk of having all cash, and could have helped developed a strategy to balance the needs of today with those of tomorrow. In the article, it discusses one person who turned primarily to cash after the stock market crash of 1987. Unfortunately I suspect a lot of damage may have been done with that one move.

Unfortunately relying on interest rates is something that is out of your control. In the end, I am a firm believer that financial education is a 21st century survival skill and that people need to work with things they can actually influence. The above illustrates that there is a large need for this as I suspect we will see more of these stories as the Baby Boomers enter their retirement years.

How Good Is Your 401(k) Plan? A New Tool

Over the years, as a financial advisor I’ve seen some company 401(k) plans that have been absolutely great while I’ve seen others that have been mediocre at best. The common thread between all these plans is very few of the participants had an idea how good their plan was. In a few cases I even wonder if the company knew how good their 401(k) program was. Now there is a tool that can help. is an online tool that provides a quantitative rating of company 401(k) plans. Plan components to calculate the rating include the Total Plan Cost, Company Generosity, Investment Menu Quality, Participation Rate, Salary Deferrals and Account Balances with individual grades for each. From there, a rating of 0-100 is produced based on these factors, from there the rating of the company’s 401(k) plan is compared to the lowest rating in their peer group, average rating in the peer group and the highest in the peer group.

How can this help? For the participant, it may provide some guidance on if you should be fully funding your 401(k) plan or if you should be complementing your 401(k) with outside accounts such as a Roth, a Traditional IRA or a taxable brokerage account (the best depending on your individual situation of course). If your company is open to employee input, it may be a great tool to share with managers who are in charge of employee benefits to help improve their plan. For the employer who wants to provide excellent benefits to retain valued employees, this may be a great tool to help them improve the weaknesses in their current 401(k) plan.

In the past, 401(k) quality has been a bit of a “black box.” is a tool that appears to be turning this around.