The Six Classic Investment Risks – Can You Afford Them?

“Risk Tolerance” is a big deal. Every information gathering tool used by a financial advisor for a client interview addresses the issue of how much and what type of investment risk you can handle. It’s usualyy the advisor can cope with and find an acceptable investment approach – unless all the stock markets take a world-wide melt-down. Like they did twice in the last decade.

Then “Risk Tolerance” becomes a really big dea, although, by then, it’s a bit too late. Unless your investments have true guarantees built in to assure you that your hard-earned Nest Egg will never lose value, you had better get a better understanding of “Risk”. Let’s start here.

Defining Risk

Risk is the uncertainty tied to any investment decision that does not have guarantees. Since few of us can accurately predict the future, risk is then a factor in the decision-making process.
Here are the various forms of risk:
• Market risk is the possibility that the value of an investment will either depreciate or appreciate because of fluctuations in the financial markets.
• Interest-rate risk occurs when the direction of leading interest rates changes, directly affecting the value of an investment. (See those “safe” corporate or municipal bonds, that will go down in value every time interest rates go up.)
• Inflation risk is the possible erosion of your purchasing power. An investment must yield a rate of return that exceeds the current rate of inflation to be considered a profitable investment.
• Economic risk concerns the strength or weakness of near-term economic growth and its impact on investment return.
• Political risk is the possibility that domestic or global political events may affect the stability of return on an investment.
• Illiquidity risk is the possible absence of a buyer (or market) in the event that you are forced to sell. This typically affects real estate and collectibles.

Risk vs. Reward

Financial Advisors like to talk about “Risk vs Reward”, as if the higher the risk, the higher the potential increase in value in good times. But can you afford to have all your Nest Egg playing in the “Risk vs Reward” Game?

It is crucial to develop an investment mix that is suited to the (1) amount of Nest Egg that you can’t allow to be part of that game , and then, (2) the level of risk you are willing to assume with the rest. The point where you stand on the risk/reward spectrum depends on variables like age, family situation, current and expected future income, tax bracket, and overall net worth.

30 States Require Kids to Support Parents.

At last count, 30 states have “Filial Responsibility laws”. Whazzat?

These are laws that state that children have a legal duty to support their parents with necessities, if the parents are needy and can’t support themselves. Is your state one of them?

States with filial responsibility laws are: Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, and West Virginia.

Decades ago in Ohio, as a young lawyer in a firm, I was, as are all young lawyers in a firm, relegated to the law library, researching.

One day I stumbled on this law that said that children could be prosecuted if they did not support their needy parents. Even back then before Medicare, Medicaid, Food Stamps, and all the other entitlement programs, this looked really weird.

I showed it to our lead attorney. He had never heard of it, either. And he thought it was weird, too. I put it out of my head until a few years ago. Then I ran across an internet article by Jane Gross, who had researched it. Why would she do that? She probably got a grant, or something.

That’s where I found out that 29 other states had similar laws.

Wouldn’t it be nice if we could enforce these laws? But we probably can’t. We probably never could. But it was the intent of these states to put into law what we all know we should do.

Why bring this up? Because more than any other responses I get when I bring up the need for Long Term Care Insurance is, “The kids will take care of me”. Oh yeah? Have you asked them?

Today, with fewer kids than in the “old days”, with families living farther apart, and with the daughters (traditionally, once upon a time, the primary care givers) almost all having jobs outside the home, too, the kids are the classic “Sandwich Generation”. They may not be able to do it.

Just like those old, well meaning, but ultimately useless laws, the idea that the “kids will take care of me” has gone the way of the buggy whip. It’s time to take a serious look at this issue.

10 Steps to Less Stressful Caregiving

Inspired by an article received from the National Academy of Elder Law Attorneys newsletter:

Taking care of an elderly loved one can be exhausting and stressful. Often due to the lack of outside help, a devotion to the person needing care, or the tunnel vision that can accompany exhaustion, caretakers don't take care of themselves.

But they must. Failure to do so can lead to burnout, injury or illness. If you are the caregiver, any of these results will harm your ability to care for your loved one. Here are some ways to take care of yourself and make sure you can take care of your loved one. The list is adapted from New York Times columnist Jane Brody's excellent Nov. 17, 2008, column, "Caring for Family, Caring for Yourself."

Take a break every day. Make sure you have some down time to relax, whether it's watching television, reading the newspaper, or calling a friend. Make sure you do at least one thing for yourself every day.

Take a break every week. If possible, get out of the house at least once a week to do something you want to do -- go to the movies, have dinner with friends, whatever works for you. If you cannot get someone to cover for you, have friends over to your house.

Get respite. Take a break of at least a week at least once a year. You can hire help in the house or arrange for a respite stay at an assisted living facility or nursing home.

Get regular exercise. It's necessary for your health and to moderate any stress you may be feeling. If you can't get out of the house to exercise, buy or rent a stationary bicycle or other exercise equipment.

Eat well. Make sure you stay healthy and have sufficient energy to do what you need to for your loved one.

Get enough sleep. Lack of sleep will sap your patience and reserves, making it more difficult for you to provide the care you would like to give your loved one.

Join a support group. You are not in this alone. Others are going through similar experiences. Here are sources for finding support groups: the National Family Caregivers Association (www.nfcacares.org) and its Community Action Network (www.thefamilycaregiver.org), and the Family Caregiver Alliance and its online support group (www.caregiver.org).

Hire a geriatric care manager. An experienced geriatric care manager can help you determine whether your loved one is receiving the most appropriate care and what resources in the community are available to assist you.

Consult with an elder law attorney. In order to access many of the programs recommended by the geriatric care manager, your loved one will have to qualify financially. An elder law attorney can help you qualify for these benefits. In addition, make sure you don't get hit with a double financial whammy of losing years of earnings while you're caring for your family member and losing his or her assets due to squabbles with other family members or Medicaid estate recovery. Also, you may be entitled to some pay by the state for the care you are providing.

Lotsa Helping Hands. Check out www.lotsahelpinghands.com as a resource for getting volunteer help in your community and coordinating the help your family and friends already provide.

Think of the care you are providing as a marathon, not a sprint. You need to pace yourself and conserve your energy for the long-term. Too much stress and exhaustion won't help your loved one.

Case Study: Can We Help This 87 Year Old Preserve Her Estate?*

What options does a family have when their 87 year old mother, who requires help with 4 Activities of Daily Living (ADL’s) due to Dementia, has no Long Term Care Insurance, but has $500,000 of “countable assets” (a Medicaid term) which her family knows they must use to pay for her care?

Her income from Social Security and a pension left by her husband totals $2,500 a month. And, oh yes, her nearest child lives 500 miles away.*

Can anything be done to preserve her estate? Quite likely. We may be able to preserve a considerable portion of her estate and still guarantee a lifetime of income sufficient to pay her Long Term Care bills.

First of all, we can rule out Medicaidas an option, since it will take several years for her to “spend down” her entire estate to become eligible. But, with Dementia, patients can survive for many years. If nothing is done and the estate gets close to its vanishing point, we can look into possibly preserving a small portion of it and still qualify for Medicaid – depending how much further Congress reduces benefits in the future.

But for those who want to preserve the family’s lifestyle, and perhaps continue home health care as long as possible for their loved one, there is a unique product that can help. It is a special type of Immediate Annuity that adds two distinct features: (1) it considers not just the age, but also the health of the annuitant when it determines a payout, and (2) for an additional premium it offers a guaranteed return of all or a portion of that premium paid, as well as the benefits received, on the death of the annuitant. .

Here is how it could help this hypothetical family:
1. On the base policy, for a premium of $182,400, this lady would receive $4,000 per month, guaranteed for life. This would effectively insulate the balance of her estate from the dreaded “Medicaid Spend Down” if she lives a long time.
2. For an additional premium of $43,275 (total then would equal $225,675), there would be a return of 75% of the premium (being $169,250) plus benefits received if she died in the first year and 50% of the premium ($112,837) plus benefits received upon death any time after the first year.

Too often in the past, I have conducted “The Dreaded Medicaid Meeting” with the spouse and children of a loved one who needed care and did not have LTC Insurance to cover the costs. It was a time of futility and frustration because decisions (or non-decisions) were made and now there was little to do but shift a portions of the assets as allowed by law, as the loved one's estate evaporated.

But with products such as that outlined above, and assuming the family's circumstances fit the needs, I now have an option that will avoid Medicaid and still protect the much of the estate. It could assure that their loved one will be able to get care at home as long as physically possible. That’s because when on Medicaid, home health care is not an option. It is nursing home only. In order to succeed with this strategy, the major criteria is that the loved one has enough assets to protect and that the assets are sufficient to cover the costs of care needed. With that confirmed, the family could look seriously at this strategy.

I can’t stress enough that the "facts" described here are made up, even if the numbers for those “facts” are real. If you have a specific situation for a loved one, the premium options and benefits can only be determined by providing a complete personal and medical profile.

If you would like to learn more about this, please call for a no-obligation conference.

*This is a hypothetical case study based on the above fictional circumstances. The writer has added certain assumptions that he believes may be typical of someone in this situation. But since this is purely hypothetical, nothing herein should be considered to apply to any paticular individual. Each case and each personal situation is different and a determination of premiums and benefits would be specific to that situation. This is strictly for illustrative purposes only.

Why Are Some Pre-Retirees NOT Concerned About the Stock Market Falling?

There are few things more frightening than a stock market doing one of its free falls. Intellectually, we know that it will rebound. It always has - even after 1929. But that doesn't make it much easier on our confidence level.

It's especially upsetting for those in retirement or just about to go there. A rule of thumb is that the market fluctuates from high to low and back in 7 to 8 year cycles. (Let's see, 2000 to 2008? Hmm. Coincidence?) Younger people can ride out a few cycles, but you may not have time to recover from a downturn if you are going to "pull the trigger" and retire soon.

In 2000, we saw a lot of people who had been planning to retire, but by 2002 they couldn't "pull the trigger"because their Nest Egg had shrunk so much. Their nest Egg could not sustain their planned retirement lifestyle. A lot of those people are still working today.

But I have clients who are unconcerned. Since 2000 they became aware of investments with Guarantees. Despite the fact that they can continue to invest in the market, their investment accounts will not go below what they invested. Plus the accounts will actually lock in gains on a periodic basis. That is, if the account increases in value at the designated time, the account will lock in the amount of that gain and will not go below that new, higher, value in the future.

What are these magical investments? They are Annuities.

Before we go on, this is a good time for a warning. Annuities are complex and they have special rules. Also, there may be extra costs. But, after a complete disclosure of all the points of Annuities, a confirmation of suitability for the prospect, and a full understanding of it, Annuities may be appropriate to help you protect your Nest Egg.

Annuities are offered by insurance companies and have special rules about when you can access the funds (age 591/2 is the minimum age without tax penalty), and where surrender charges for a period from 5 to 16 years are charged if you choose to liquidate your account. These are to be long term investments. Some Annuities even off an "Equity Bonus", which means the company adds to your invested amount. For that, you typically see a longer "surrender period".

But they were designed for retirement and the special treatment given by the IRS (tax deferred account growth, for example) are benefits you get in exchange for the complexity.

But what of the Guarantees and their costs? Sometimes, you do not pay extra for these Guarantees. But you often do, especially with Vairiable Annuities. When you do, here is how it works.

Simply put, you pay a relatively small amount annually to be sure your Nest Egg is safe and will not lose ground when the market turns. You insure your house, your life, your car, and your health, don't you? Why wouldn't you insure that one asset that you are counting on to help you through those "Golden Years"?

But, are the extra costs worth it? To decide that, you need to check the past annual returns to investors. See how that compares to returns of those who did not have guarantees on their Nest Eggs. When the stock markets are volatile the guarantees can be a big comfort to those looking to retire soon.

While those past returns are no assurance of future performance, they can give you some idea of whether the costs would be worth it. In most cases, you will probably find that the extra premium is worth the costs and the return is not noticeably lessened. If you don't agree, that is the time to say "No".

What about all those commissions you hear commentators criticize? They are higher than simple Mutual Funds.

That's the bad news. The good news is that - unlike mutual funds or most any other investments Annuities' commissions and costs typically do not come out of the invested amount. Thus, if you invest $100,000, that $100,000 goes to work for you right away. And it's tax deferred, too.

With Annuities, time is money. The cost of commissions and expenses are returned to the insurance company over a period of time from earnings. That's why there are surrender charges. They repay the company those costs if someone liquidates early.

But, the bottom line is still to check the returns reported against what you might find elsewhere, taking into consideration the tax deferred nature of the investment and the ability to have those Guarantees of principal.

Whew! This article started out as a simple discussion of how Annuities can help you sleep at night, not worrying about what the stock market is doing to your Nest Egg. But it ended up discussing a lot of the good news/bad news of Annuities. That's probably good, since they are complex and need to be thoroughly understood before investing.

But the concept embodied in Annuities is one of the precepts for Retirement Rescuers - to give clients the ability to earn returns that follow the upsides of the stock markets, and still have the peace of mind knowing that you will have your Nest Egg intact, no matter what the market does.
- Tom Willoughby, JD

This article is a general discussion of features available with some various types of Anuities and is not an offer to sell nor an invitation of an offer to buy any securities mentioned herein. Such an offer or invitation of an offer can only be made through an offering memorandum or prospectus, and then only after a thorough review of the offeree's suitability for such product.

Myths & Urban Legends About Wills & Probate

Over the years I've heard a lot of misconceptions about wills and probate. Here are a couple of them that keep popping up:

#1. Without a will the state will take your estate.
#2. If you have a will you avoid probate.
#3. Probate costs and death taxes can rob your estate.
#4. I have to leave my child at least a dollar to effectively cut him out of the will.
#5. I can write my spouse out of the well entirely.
#6. You are only allowed to give $12,000 a year to others during your lifetime.

Maybe you already know that these are not correct statements. Let's take a closer look to see where these miss the mark.

#1. Without a will the state will take your estate.
Lawyers who advertise generally will not dispel this rumor, but what they typically say in their ads is that "If you don't have a will, the state has a will for you", which is true. More on that later.

But, really, does the state ever actually take your estate? Yes, but very, very rarely. And they can do this with or without a will. When there are no heirs at law (i.e., family) or no one named in the will can be found, no matter how hard you look, the state will eventually take over the assets. There really is no other place for them to go at that point. It's when the estate “escheat’s” to the state of residence of the deceased.

If a person doesn't have a will, it is called an intestate estate. The state does truly have it's own the will for you. And, as the advertising attorneys are quick to point out, you probably aren't going to like it. Especially if you leave a spouse.

It's reasonable to expect that you would want your entire estate to go to your spouse. But, the states -- and to my knowledge, each and every state -- has decided that you really wanted your kids to get a portion of the estate, too. In most (all?) states the spouse has an automatic claim to fairly a small amount off the top (perhaps $20,000 to $75,000) of the estate. Then a surviving spouse might receive half of the decedent’s estate if there is one child surviving. If there is more than one child, the spouse may only receive one third of the estate. The rest goes to the kids. Each state varies, but the flavor remains the same.

If there is no spouse, the will that is “written by the state” usually makes pretty good sense, assuming you want your closest relatives to receive your estate equally.

#2. If you have a will you will avoid probate.
This is not true. In fact a will virtually guarantees probate. The will just tells the court who is to receive your estate and nominates those whom you want to handle your affairs.

#3. Probate costs and Estate Taxes can rob your estate.
This is not true in Florida and in most other states. Many states have no estate taxes at all. Others have them, but close relatives (e. g., spouse, children, parents, siblings) are exempt. In several other states, the taxes don't kick in until the estate values exceed a very large amount. That's the good news

But, in some states the estate taxes, inheritance taxes, or death taxes (take your pick on the terminology) are still in place. Most of the taxes are graduated, such as the low rate in Iowa at 1%. But Iowa does grow to 15% for the largest estates. The "Greed Factor Award", however, goes to Nebraska which takes 5.6% of estates under $100,000 up to a whopping 16.8% on estates in excess of $9 million.

Therefore, I guess this is an "Urban Legend", if you live in Florida or most states. Give me a call to find out all of the various tax rates in a state that interests you.

Actual court costs for probate is relatively inconsequential. But be aware of attorney fees. Typically, as in Florida, attorneys have the right to negotiate fees based on an hourly rate or a set fee. If no arrangement has been made ahead of time, the default fee – at least in Florida - is 3% of the gross estate. Any amounts charged above that would require court approval. States vary, so don't be afraid to bring up the fee issue with the attorney ahead of time, if they don’t.

#4. I have to leave my child at least a dollar to effectively cut him out of the will.
Not true. But if you don't at least say something about the kid, you could run into complications.

Picture the funeral. The prodigal child shows up and finds out that he is not in the will. He hasn't seen mom in 40 years, but, leaking crocodile tears, he cries, "Poor mom. Towards the end she couldn't remember any of us. She must have forgotten me."

So, it's better to say something. How about, "To my ne'er-do-well son, Alfonzo, whom I promised to remember in my will no matter what, ‘Hello, Alfonzo’”. It works and no one can question if someone had forgotten one of his "objects of natural affection". Maybe you would like to use more polite language.

#5. I can write my spouse out of the well entirely.
Not so. At least not in any state I have seen. The states protect the surviving spouse by granting them an "Elective Share" or “Spousal Share”, which typically runs in the range of 30% to 35% of the gross estate. That is, the Out-of-the Will Spouse gets that much off the top, before the balance goes to the heirs under the will.

Also, since so many assets no longer go through probate without being subject to it, such as insurance death benefits, qualified plans, annuities, transferable on death investment accounts and payable on death bank accounts, the states are also including those assets to be subject to the spousal share claim, even though they did not go through probate.

If this wasn't the case, a spouse could be left completely out in the cold

#6. You are only allowed to give $12,000 a year to others during your lifetime.
This is getting a federal estate tax exemption mixed in with plain old gifting. Federally, if your estate is large enough ($2,000,000 in 2008) to require filing a federal estate tax form on death, then, you can gift $12,000 per year to as many people as you choose, without having to file a gift tax exemption report. That’s all it is and it has nothing to do with probate or any limitation on gifts.

But while we are on the subject, the $12,000 figure also has nothing to do with Medicaid qualification, either. Any gift (i. e., a “transfer for less than value”) is subject to a penalty of Medicaid disqualification, if done within 5 years of needing Medicaid for long term care. The $12,000 has nothing to do with it.

Well now. There you have it. I’m glad we could get together and straighten this out.

Being a Caregiver is a Dangerous Job!

Question: When do loved ones go to a Nursing Home?
Answer: When the Caregiver gives out.

Several reasons are given. “We ran out of money to care for her.” “The house isn’t equipped for his needs.” “I can’t lift her anymore.” And the most frightening: "I just can't do it anymore". Nearly every reason that is given points back to the Caregiver’s inability to continue to perform for their family member.

It is a dangerous time for a Caregiver, and the family needs to be aware of the signs of Caregiver stress. You can probably come up with more than eight, but these should help you to indentify it when a problem comes up.

The eight signs of Caregiver stress according to the Wisconsin State Journal are:
Anger
Social withdrawal
Anxiety, depression
Exhaustion, sleeplessness
Irritability, moodiness
Inability to concentrate
Health problems
Denial of elder’s disease

It’s no wonder that physical and emotional symptoms arise. One client of mine once admitted that caring for her parents was “the toughest job I have ever had”. And her parents were both mentally fit, in pretty good physical shape, living in a nearby Assisted Living Center, and both had Long Term Care Insurance! Imagine the dangers for someone in a less ideal situation.

Prevention Magazine in its August, 2007 issue, came up with some surprising figures and some good advice, too.

Problem: Studies found that Caregivers have immune systems that are 15% weaker than the rest of us. Long term stress suppresses cells’ abilities to fight such enemies as viruses and tumors.
Solution: Make time to exercise sometime each day and be sure to take flu shots and the like. Care for yourself first, even if you feel guilty about. Remember, you are staying fit to help your loved one.

Problem: Women caring for a spouse for 9 hours a day have almost twice the risk of heart disease. Mental strain is the culprit. Stress increases adrenaline and other hormones, raising blood sugar, contributing to hypertension and plaque buildup.
Solution: The usual for Americans: a low fat diet with lots of potassium. And medication for cholesterol, etc.

Problem: You are so focused on Caregiving that you do not see your own doctor enough. Seventy-five percent of reported Caregivers say their health has suffered and they haven’t seen their physician as they should.
Solution: Like every other problem listed. Take time for yourself. See the doctor. Consider it a one hour respite every so often.

Problem: Consider all the other signs of stress listed above as one problem.
They relate to your mental health.
Solution: This where your support group needs to step in. While you should keep track of your physical and mental condition, it’s far easier for your loved ones to be aware of the dangers and monitor your health accordingly.

Caregivers may have the toughest job of all. But, as my client, above, found out with her parents, we’re not looking to replace Caregivers. Just help do their job better, longer, and make it a bit easier.