Sushi Money

I took a week off to catch up on, and reflect on, a few things.  Those of us who didn’t vote for President-elect Obama may be feeling a little out of touch these days.  Generally I look at life in a hopeful and constructive manner, living each day in a positive manner. Most of us do, and I don’t think that’s going to change in the months and years ahead.

But I think there are different considerations now, especially if you don’t agree with certain actions or the economic philosophy of our political leadership.  If we’re not careful we may find ourselves caught up in a negative cycle of news and frustration.  Whatever direction the nation takes politically however, I have to believe that the leadership, by and large, has the best interests of the American people at heart.   And even if I don’t want to pay attention, we must stay involved and aware of the changes that will take place ’cause it’s going to affect us most in our wallets. 

The stock market has been wavering dramatically in recent weeks, even ringing up the worst post-election loss in history.  Say what you will, a lot of folks are realigning their portfolios based on perceived (and real) threats of increased taxation at both the personal and the corporate levels.  We have even seen that based on fears of an Obama administration, firearm and ammunition sales have skyrocketed as never before in history.  And why not?  President-elect Obama may not “take our guns away,” but the Democrats in Congress can certainly make it difficult, and very expensive, to purchase ammunition. 

So will potential tax hikes and increases to capital gains and income taxes affect the stock market?  Absolutely.  But hopefully not right away.  Yet the real significance for tax policy at the individual level is the affect it has over the long term on wealth creation and investment. It may not affect the average investor now, or in two years.  But over a working lifetime it’s a huge impact. If there’s one thing President-elect Obama can do to strengthen the nation economically, and the investment climate, it would be to not raise taxes on anyone, anywhere.  Heck, we’re still facing too many uphill financial challenges, so I’m sure the Democrats are smart enough to wait for a while.  Well, I’m not sure but I sure hope so.   

“Speaking in terms of individual taxpayers’ bills, that’s good news for high-income earners. “I don’t think there are going to be any tax increases in the next year or so,” said Len Berman, director of the Tax Policy Center.” 

But you watch- the Democrats and Obama will “cut taxes” in a few months and shout from the rooftops that they’re giving Americans a tax cut for the middle class.  It will be there somehow, even if most of us don’t get it or notice it.  Yet Alan Reynolds from the CATO institute thinks taxpayers have short memories. 

“Armed with that lucrative blank slate as the looming new baseline, a Democratic president and Congress could magnanimously agree to preserve only the fiscally wasteful “feel good” aspects of the original Bush bill–the hugely expensive 10% tax rate and child credit, for example–while letting more than just the top two tax rates go back up, and lifting the estate tax rate, too. All in the name of fiscal responsibility, of course.”

“Higher tax rates always fail to raise the revenue their proponents are counting on. When that happens, we know where Democrats will look to raise more. And that is to reach even deeper into the pockets of any remaining profitable businesses or (even rarer) successful investors.”

“For those looking beyond one year, the biggest risk to both individual and corporate taxpayers is not that the new president will make good on his promises to raise a few tax rates and close a few loopholes. The biggest risk is that he will make good on his grander promises to enact all those tax-based entitlement programs disguised as “tax credits.”

“If millions more voters become accustomed to paying nothing for government (not even for their own Social Security benefits), and instead to receiving a bundle of Treasury checks, it will become almost as difficult for any future president to end those programs as it will be for taxpayers to pay for them.”

And how are we going to pay for those programs over time?!  There’s only one way… those who add spending programs must get the money from somewhere.  That somewhere is the U.S. taxpayer.

Certainly those of us in the middle class may see a tax cut over the next couple of years, at least if you don’t earn too much, or have too many investments, or even entreprenurial thoughts…  Maybe a larger child tax or other credit. But Obama has stated he wants to see an increase of tax on income and dividends from investments.  I’ve read some as high as 40% tax on dividends and income!  Can you imagine?  How will that help folks save and invest for retirement?  Not something we’ll see over the short term, but that’s a “heck of a dinger” for retirees down the road.

“Still, tax hikes are coming - eventually. Obama’s plan is to allow the Bush tax cuts to expire for high-income earners in 2010, but make those cuts permanent for taxpayers in the lower tax brackets. That means the top income tax rate will likely rise to 39.6% by 2011.”

“According to Deloitte’s analysis, a married couple with two children under 17, household income of $1 million ($500,000 of it from capital gains or dividends) could see their tax bill rise by $34,900. “That’s a real increase,” Stretch said, with that couple’s effective tax rate rising to about 28% from about 24% now. “It’s higher than the Bush years but where it was in the Clinton years.”

“Eventually, higher-income taxpayers “will definitely be paying higher taxes,” Baker said. “I can’t imagine [Obama] turning back on that.”

“Obama has also said he’ll increase the capital gains tax rate for higher earners to 20% from the current 15%, though many agree that won’t happen soon. “If he decided to raise capital gains tax rates right now, the financial markets would probably go crazy,” Berman said.

But not raising taxes is not very likely in the years ahead.  Even the Terminator in California is proposing huge tax increases (and spending cuts) because they have to.  Realistically, we’re going to face some large spending cuts and tax increases as well.   Within the next year, President Obama and the Democrats may simply say, “We’ve tried to get by without tax hikes, but we really need to raise them now…”    How will that affect older investors and retirees?  Maybe not much at first, and we could even see some quick action in key areas:

“One tax perk related to the financial crisis is expected soon for retirees: Some form of help to avoid required minimum distributions from their individual retirement accounts. “We think there will be a very serious effort to put some provisions in [a new stimulus bill] to take care of the RMDs,” said Clint Stretch, managing principal of tax policy for Deloitte. “People are very sympathetic to the plight of retirees who are forced to take money out at the depths of the market.”

“Another tax change expected in 2009: The estate tax. Under current law the estate tax completely disappears in 2010, so look for Congress to act in 2009. Lawmakers may opt for a quick solution — a one-year patch that holds this year’s exemption amount and tax rate in place - or they may put in place a permanent estate tax law. Obama’s proposal: A permanent estate tax rate of 45% and a $3.5 million exemption.”

Remember President Bush’s efforts to remove the estate tax altogether?  Forget about it- that’s history.  Kind of a shame in my view, not that I have any reason to benefit from it!  But at least we’ll keep a lot of financial planners, estate tax lawyers and CPA’s in business for years to come.  Somehow I think the tax code is going to become a lot more complicated rather than less complicated over time.  And overall I’m not excited about the direction of economic or tax policy.

Call me crazy, but I can’t help but think that the Democrats economic and taxation policies will provide long term disincentives for entreprenurialism, investment and market gains over time.

Let’s hope the focus of our new political leadership is first and foremost on the economy.  What I’ve read lately however does not inspire confidence.   Giving U.S. dollars to international agencies for “family planning” (i.e. abortions),  giving civil criminal trials to foreign terrorists on U.S. soil, jeopardizing national security through drastically cutting defense spending and procurement… we may see a laundry list of policies and executive orders that a lot of folks were unprepared for. 

Overall, I don’t know how an Obama Administration will affect the average guy on the street, or in the market, but I’m willing to give it the benefit of the doubt for now.  Historically the market has done very well under Democratic administrations, and maybe it will again.  The nation, and the economy, will eventually gain traction and once again the business cycle will return to a more profitable footing, with job gains instead of losses.  Unfortunately that may take a while, and the taxation picture for the years ahead looks pretty bumpy. 

My next goal?  Try to figure out an ideal portfolio and investment strategy that minimizes taxes while protecting (and growing) long term wealth.

In these last days before the election I find myself amazed at the emotions and tactics of the political candidates and their followers, on both sides of the aisle and at both the national and local level.  This surely is one of the most fascinating, if not important elections we have faced in decades. Today I’m stepping out of the financial discussion to share a few thoughts on the election.  This may frustrate or disappoint some of you, and it may please others.  Whether you agree or disagree, that’s fine.  I respect your views and the choice that’s right for you.  I’ll even try to put up a guest post with opposing views if someone sends it in.  But for today, here’s mine:

Who am I voting for?  McCain.  Why?  Primarily because I believe he has a better vision for the future of the nation, as well as a philosophy that strengthens rather than weakens the foundations of society over time. 

I’m voting for McCain not only in terms of my views on national security or economics, but more importantly in considering the basic elements of what one believes about freedom and democracy.   At the heart of these beliefs, for me, is an understanding that the individual in society is the strength of that same society. Whatever we do to help grow, foster, improve and assist that individual in realizing their potential and expanding their ability to contribute to society is essential both for them and the nation as a whole.  

One of the growing socio-economic buzzwords is the term human capital.  Human capital refers basically to the inherent skills and knowledge that an individual may possess in order to contribute to society and produce economic value both personally and for that society.   One of the hallmarks of America has been to establish a foundation of freedom that allows this tremendous drive by individuals to grow and succeed, personally and professionally, and to seek ”…life, liberty and the pursuit of happiness.”    I prefer to think of it the same way as Benjamin Franklin:

“All the constitution guarantees is the pursuit of happiness. You have to catch up with it by yourself.”              

The expansion of human capital through the economic fabric of our free American democracy has arguably fostered the greatest revolution of invention and creative genius in history.  Yet it isn’t perfect.  What society is?  Even with the current economic challenges we face, the grand experiment of American democracy has been an incredible success story that continues to foster industrial, technological and environmental change throughout the world.  More importantly it places people first, acknowledging both the value of human rights and the value of human life.  Something that far too often is forgotten about most of the world in which we live.

We owe that strength and genius not to the nation of America itself, but rather to its people.  And the only way we are going to continue fostering the strength of the American nation over time is to continue empowering people as individuals, and not as recipients of government programs and largesse that increasingly demands adherence and holds their future hostage. 

I read a message on one of the news sites today that was interesting.  I think it’s a creative story and not a real event, but it makes an interesting point:

“Today on my way to lunch I passed a homeless guy with a sign that read “Vote Obama, I need the money.” I laughed. Once in the restaurant my server had on a “Obama 08″ tie, again I laughed as he had given away his political preference- just imagine the coincidence. When the bill came I decided not to tip the server and explained to him that I was exploring the Obama redistribution of wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need–the homeless guy outside….”

Maybe the waiter would actually smile, and say “Good idea!” if this were to happen.  Probably not however, because few of us like having our money taken from us and being told we must give it to others.  Choosing to do so is one thing.  Not having that choice is another.

I believe Obama’s vision of change and “economic justice” to be lacking in understanding for the basics of freedom and democracy, and that it devalues rather than empowers the individual in society over time.

And quite frankly I would rather politicians work to legislate for structural  economic foundations, with evolving regulatory approaches, that support free enterprise rather than redirecting the hard work and success of some to those that may do little to earn it.  I believe the dreams, creative vision and efforts of hard-working Americans actually lift up the nation over time, and that if we make taxes too burdensome, and focus on re-distributing the products of their success to those who do not earn it can only serve to undermine the fabric of the nation.

I do believe we must give and share with those who may not ever be able to achieve or survive on their own, or without help in so many areas.  But giving of your own volition is one thing.  Having your money taken and being told that you must do so is another.  Rather than government deciding who are the deserving among society to receive the wealth of others, we must foster a nation that lifts up the poorest and those who are struggling. 

We can teach, train, volunteer, and give of ourselves in so many ways, and government can help establish programs and structures to facilitate those goals.  But economic justice is far more than being “neighborly” by taxing the rich, and handing out money to the poor.  It’s a balance to be sure, but Obama’s views- and those of Pelosi, Reid, Frank, Dodd, etc., are balanced much too far to the left.

Essentially I think America needs McCain more right now than we need Obama. 

Yet from the polls, media blitz and just about every other indicator, it looks like Obama has some incredible force that may sweep him into the Presidency this election.  If so then perhaps I’m voting with the minority.  Maybe the nation needs a pyschological shift of energy or some zen-like aura of charismatic change that Obama seems to bring for so many people.   But I just don’t see it.  I would rather focus on McCain’s experience and practical approach to moving the nation forward, rather than some lofty, unscripted vision of change. 

In the car this morning I actually heard two religious hymns being sung with Obama’s name in them, holding him up even as “holy.”  I have to admit that was a little shocking to me, and I’m not even an ardent religious observer.  I have to wonder if in times of national challenge or crisis that people might be flocking to someone new, someone they want to believe in and that can “save” America?  Have many of our fellow Americans replaced their religious views with a secular perspective that is looking somewhere for hope, and are they now looking toward Obama to provide that level of dramatic change?  Maybe so.  Whoever wins the Presidency, I do think the country will be fine.  But it’s going to be a very interesting ride depending upon the direction we take.

The U.S. Department of Labor released the September 2008 CPI-U, or Consumer’s Price Index data showing that the CPI was virtually unchanged since the prior month.  What does this mean?

There’s lots more data there than most of us want, but basically it indicates that inflation is lower based on overall energy and transportation costs.  More importantly it means that Social Security recipients will receive a 5.8% increase in January 2009.

“Monthly Social Security and Supplemental Security Income benefits for more than 55 million Americans will increase 5.8 percent in 2009, the Social Security Administration announced today.  The 5.8 percent increase is the largest since 1982.”

“Social Security and Supplemental Security Income benefits increase automatically each year based on the rise in the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year.  This year’s increase in the CPI-W was 5.8 percent.”

“The 5.8 percent Cost-of-Living Adjustment (COLA) will begin with benefits that over 50 million Social Security beneficiaries receive in January 2009.  Increased payments to more than 7 million Supplemental Security Income beneficiaries will begin on December 31.”

That’s a healthy annual cost-of-living adjustment and many people will be happy to get it.  Unfortunately, just keeping pace with inflation doesn’t take into account all the other rising costs that people face.   Some say the 2009 5.8% cola increase will leave millions in poverty.

“… the announcement ignores the fact that the increase still badly trails inflation, will leave seniors with less buying power than they currently have, and will thrust more elderly Americans into poverty”

“Although the COLA is intended to help seniors keep up with inflation, a recent study by The Senior Citizens League (TSCL) that analyzed 15 key expenditures found that people 65 and over have lost 51 percent of their buying power since 2000. Expenses such as home heating oil and gasoline have more than doubled since the beginning of the decade, while food staples such as eggs and potatoes have increased by 137 and 97 percent, respectively.”

“In addition, the average Medicare Part D prescription drug program will increase by 24 percent next year, and home heating oil this winter is forecast to increase by 23 percent from last year.”

“A majority of the 50 million Americans who receive a Social Security check depend on it for at least 50 percent of their total income, and one in three beneficiaries relies on it for 90 percent or more of their total income.”

So what does that tell us?  It tell’s us that we don’t want Social Security to be our only source of income in retirement!  But for millions of Americans, that is the reality.  For those who are younger, we still have time to save and invest in order to establish a retirement income foundation that supports our lifestyle needs.  Social Security is then available to supplement our retirement needs.   Of course many people believe Social Security benefits may not be available at all, or may have to be reduced over time simply because of the vast number of people who will be receiving it and the government’s ability to pay for it.

However I believe Social Security will be around for a very long time, and that the government will find ways to sustain and fund the accounts (taxes…).  But the benefits may have to be reduced, and no matter how much Social Security provides, it will not be enough to provide a substantial retirement income.   The rest is up to us.  But at least for those receiving Social Security now, a 5.8% raise is a lot better than nothing.

Well then.  A day to be in the markets.  Nearly an 11% gain in one day, after losing 18% last week. 

Last week was the worst week ever for the Dow… and Today was the best day ever for the Dow. 

It almost presents some zen-like Yin and Yang investing paradox as we struggle to understand how it affects us.

So what’s it mean really?  Does this mean we’ve hit a bottom?  Is the pain over?  Does our retirement portfolio head back in the other direction?   Questions many of us want to know.  But the market is funny that way.  Not funny “ha ha” but funny as in fickle:  There really are few definitive answers.  As much as we would like to know that it’s time to start investing again, we look the other way and the market has taken off somewhere else. 

So was last week the value investors opportunity of a liftetime?  Or was today really just a bear market rally?

My humble opinion:  Last week was a bottom for the short term.  Much easier calling in retrospect, huh? We may take off on a bumpy ride toward 10,000 or 11,000 on the Dow.  But let’s be realistic- the market was extremely oversold last week, and many companys’ stocks were selling for less than they were worth.   We were due for a rally… BUT!  Does that mean the credit crisis has changed?  No.  The U.S. and other countries throughout the world face many economic challenges ahead.  The landscape has changed just enough to provide hope and encouragement over the short term.  Meanwhile we watch the housing and mortgage markets, the jobs reports and the earnings reports, and we know that we may struggle through a recession or other challenges ahead.

We obviously don’t know what tomorrow brings. But here is an excellent article that shows how Keeping Your Money in the Market is a long term strategy for success.  Stocks have not been this cheap in several decades.  

But knowing that we don’t know what’s ahead, many people have figured out that they are not willing to risk their money in the stock market anymore.  Lots of folks have flocked to CD’s for a safe and sure return.  Nothing wrong with that at all, especially with a 4%-5% yield over 5 years.   

Are you that risk averse?  If investing bothers you that much, then you need to sit down with your advisor or planner and figure out a more conservative asset allocation.  If you’re handling your investments yourself, maybe sitting down with a financial planner can help as well anyway.  A year ago I talked about risk tolerance in the context of real estate investing.  It’s worth examining a little more closely, and better late than never.

The time to decide you are not comfortable losing money in a particular market investment choice is ideally before you put money there! But most of us learn things a little harder, through experience. Knowing our risk tolerance is not hard, but making decisions appropriate to our risk tolerance often is.

Risk tolerance is a very personal thing, and there are few right answers. What is right for you may not be right for me. What is right for your spouse may not be right for you, so you will need to strike a balance or an agreement for your investing goals and allocation. Risk tolerance is also tied to the time horizon for your investment goals.

If you’re saving for a down payment on home, your risk tolerance should necessarily be very low and your assets should be in a savings or money market account. If you’re examining risk tolerance in terms of retirement in 20 years, that presents a whole new perspective. The ancient Greek saying “Know Thyself” is very appropriate. We are trying to work with a level of risk that is appropriate to our goals, time horizon and personal level of comfort.

Many studies have been done to investigate consumer risk tolerance, and basically the studies show that people are normally far more conservative than they think. In other words, we often think we are willing to handle degrees of risk, but when it comes to losing money, we are not prepared for risk at all. Here are some tools you can use to analyze your own tolerance for risk:

• MSN/Money Online Risk Tolerance Quiz: A quick online assessment of risk tolerance.

The following are printable .pdf files:

• Investment Risk Tolerance Quiz: An excellent risk tolerance quiz courtesy of North Dakota State University, by J.E. Grable and R.H. Lytton.
• Risk Tolerance Quiz: This is a useful risk tolerance questionnaire from Richard D. Margarian. Use your answer choice as the points for each question, then total them up at the end.
• Retirement Risk Tolerance: A short analysis form that looks at risk from a retirement goal perspective.

There’s also few things better than a good second opinion. If you want objective advice and a closer examination of risk and asset allocation, find a professional Certified Financial Planner in your area using the Financial Planning Association’s search tool.

And one other note:  If like many people, you’re just not looking at it anymore… well that’s called “The Ostrich Method of Investing.”  Might be okay if you’ve established some long term goals for 10-20 years from now, but it doesn’t always work out the way you might think!   Especially if you need money over the short term. 

For those who really believe the future is pretty bleak for the next 10-15 years, then maybe you do want to find a safe place to keep your money.  But I’m not going to bet against America, or the ingenuity of a whole bunch of folks that love business and capitalism. 

Besides, too many people like finding ways to make money. Greed is a heck of a motivator.  And from my perspective, the stock market is a pretty good long term proxy for the success of our free market economy. 

After a grueling day yesterday, and an equally challenging year, many folks are wondering where the markets are headed.  It’s not fun to watch that retirement portfolio shrink over time, but for value investors the market may offer a strategic long-term opportunity.

The only problem is that most of us don’t have a spare chunk of retirment money sitting around waiting to be invested in strategic opportunities.  Even if we do, and as compelling as valuations are right now, it’s a pretty gutsy move to invest that chunk of change in a wildly volatile and dwindling stock market these days. 

Which makes the argument for dollar-cost-averaging a viable strategy over the long-term.  Dollar-cost-averaging basically means investing money at regular intervals (for example, $100 or $200 every month or $500 every quarter into a mutual fund). Regardless of what the stock market is doing, you simply keep investing money over time. How does this affect your portfolio over the long term?   In essence, you may end up buying more shares when stock prices are low, and fewer shares when prices are higher.  Over time an investor can theoretically accumulate a substantial portfolio with a lower cost-basis than investing a lump-sum otherwise.

Of course this strategy is based on the critical assumption that over the very long term, the equity markets will go higher.  And historically speaking that is true: The stock market has always gone higher over the long term, typically beyond 10 year periods.

But what about dollar-cost-averaging when the market is falling over a period of years?  Doesn’t that mean we are buying high as the markets keep falling lower over time?   Well it may seem like that, but again based on the assumption of a future rising market, we will still have purchased more lower priced shares when the markets are down.   The average price of the shares purchased is lower over time as markets go down.   It’s correct that dollar-cost-averaging will not keep us from losing money if the market keeps going down.  But the more shares you buy at lower prices, the greater the profit will be when markets do rise and share prices go back up. 

Some of us invest money in larger chunks, less frequently. Could that be a better strategy? It might mean that we can lose even more money in a falling market, or make more money in rising market.  But how do you feel about “market timing”?  Most of us cannot time the market very well at all, and when emotions are brought into the equation we have a prescription for losing money when buying and selling at the wrong times.

That’s another reason dollar-cost-averaging may help the average investor succeed over time:  It removes the decision and emotion from investing at some perceived “right time,” and becomes a routine, automated process that helps us accumulate shares of stocks or mutual funds without worrying about market timing.  We’re doing it for the long-term and building a portfolio for the future.  Dollar-cost-averaging can turn even the most undisciplined spender into a disciplined investor.

But many financial professionals disagree (here, here and here) and see lump sum or other investing styles as better alternatives.  They argue that a lump sum can be allocated more strategically to create an investment portfolio that will outperform dollar-cost-averaging over time.  That may well be true and in that case, maybe it’s more a question of what you invest your money in and/or when you invest your money.

“If you were looking for an easy way to boost your returns over time, dollar-cost averaging probably isn’t it. The stock market generally rises over long periods. That being the case, you’ll usually do better investing all at once, as long as you’re investing for the long run.”

“Dollar-cost averaging typically does best when an investment goes sideways or down for years and then, at the end of a period, suddenly breaks to the upside.”

Sound familiar the past few years?  When the markets do turn around, many dollar-cost-average folks may be quite pleased with their portfolios.  Heck, we’ll all be pleased with our portfolios when the markets turn around.  But we’re not talking about how to invest a spare $20,000 sitting in the bank. We’re talking about saving and investing on a regular basis over one’s working years in order to build a retirement portfolio.   

And what are most people going to do with their paycheck’s allocation for investments anyway?  Put it in a measly money-market or savings account, losing money to inflation in order to accumulate a large “lump sum” and one fine day invest it in the hope that a strategic, well-timed investment will achieve a better return than dollar-cost-averaging? 

Maybe it will.  If I won the lottery tomorrow, I would indeed find a few professional money managers and have that lump sum allocated for both long-term growth and capital preservation in accordance with my personal financial goals.  But for most people, on a regular basis, I believe dollar-cost-averaging works just fine.

What about the economy? Of course many people are still worried about the family economy and the stock market, and we wonder how our retirement portfolio is going to grow.  No one has a crystal ball, and the last decade has been very challenging for investors.  Will it get better?  Will the markets roar back in a few years as the business cycle improves?   

I think the answer to those questions depend much upon your outlook on life and the future of the nation as a whole.   Some of us may be near-blind optimists wearing those rose-colored glasses as we look at the long term.  As such we base our choices (and retirement planning) on assumptions that frame the future with that context.  

Naturally that optimism should be tempered with a realistic assessment of the investment climate over the years, which means there are measured choices about risk tolerance, investment strategies and portfolio allocations.  And regardless of one’s optimism, investing and saving for retirement is a choice.  It’s a choice about how much money to save or invest, and how or where to invest it.   It doesn’t matter if it’s a lump sum or a regular monthly investment: You still have to choose how to do it.  You still need a long-term investing strategy to build that retirement portfolio. 

More importantly I believe we’re making choices that will determine the strength and security our future retirement years.  Am I satisified with my portfolio while watching my investments lose money?  Absolutely not.  But it won’t always be that way.  How many people honestly believe the future of our economy, even our nation’s future, is destined for financial ruin and chaos?   Some people are indeed that negative about our future.   

But without apology, I am not one of those people.  I believe in the strength of this nation, our long term economic prospects and a bright future that is filled with growth and opportunity for our children.  Call it blind optimism if you will.  I call it having a disciplined faith and conviction to succeed based on the courage and strength of generations that have come before.  And I will invest accordingly.  Have a great day.

It’s no surprise to many of us that consumer price inflation has risen at the fastest rate in 17 years.  We see that with each trip to the grocery store or gas station.  It raises questions about interest rates.and a lot of other issues in our future. Per Bloomberg:

“The report may intensify the debate between those Fed policy makers that forecast inflation will slow and those concerned that price pressures will accelerate. Increases beyond food and fuel, including gains in clothing, airline fares and education, make it less likely that central bankers will be able to keep interest rates unchanged for long.”

So far this year the government’s CPI shows inflation running at over 5 %.  

“There is “a tremendous amount of cost pressure here that is affecting many, many industries,” William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. Today’s report “raises the general trajectory” of interest rates, reducing the chance of cuts and bringing forward the likelihood of increases, he said.  ”

Imagine if inflation stayed at that rate for several years or even increased more?  If we’re not earning at least that much in interest on our savings or investments over time, then we’re actually losing money.  

The Fed must walk a fine line between keeping rates low due to our current economic challenges and raising rates based on the threat of inflation.  So far they’ve held the line and most believe will continue to do so this year.  But real estate is clawing for traction while foreclosures are still high.  Yet Alan Greenspan sees a potential housing bottom in 2009.  That doesn’t mean housing recovers quickly however.

Greenspan cautioned that even at a bottom “prices could continue to drift lower through 2009 and beyond.”  An end to the decline in house prices, he explained, matters not only to American homeowners but is a necessary condition for an end to the current global financial crisis.

“Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities,” he said. “We won’t really know the market value of the asset side of the banking system’s balance sheet — and hence banks’ capital — until then,” he said.

And that’s the question:  When is Then?   I’ve believed housing would begin to recover in 2009, and we may indeed see that.  But based on the credit and banking issues the nation (world) is facing, we’re going to see a slowly drawn out recovery.  It may be 3-4 years before we really see stability in both housing and lending, or the economy.

But the economy may recover more quickly in terms of jobs and growth if we can get a handle on energy and defense spending.  Also not something that may happen for a couple years or more, but I believe it will come.  Yet that belief is simply an opinion, one of thousands. We don’t know what the nation will face economically in a few years, or the challenges we’ll see at home.

For that reason, there’s little choice but to keep improving the “family bottom line.”  That means we’re still saving, working off debt and investing for our future.   To get to that future, we must embrace our vital role in creation of a financial structure that supports our needs and choices.  Retirement is something we all dream of, but it’s not something that, ideally, just happens when we reach a magical age.  It could, but most of us would like to plan ahead a little more. 

Walter Updegrave hits on the retirement planning issue when asked by a couple how they can determine how much money they’ll have when they retire at age 65.  He says instead to determine how much money we’ll need to support the lifestyle we want, and then we can decide when to retire.  

“I mean, it’s not as if we get a comfortable and secure retirement just because we reach a certain age. The real issue in determining when you can retire is whether you’ve got enough in savings and other resources so you can leave your job yet still live the lifestyle you want, or at least one that’s acceptable to you.”

“What’s more, this sort of assessment isn’t something that you should be leaving to the eve of your expected retirement date. You should ideally keep tabs over the course of your career on your progress toward a comfortable retirement. And at the very least once you hit the home stretch - that is, when you’re within 10 or so years of when you hope to retire - you should be doing a fairly rigorous analysis every year or so to confirm whether you’re still on track to achieve your target retirement date and, if not, re-assess your plan.”

The article cites many other considerations such as social security and a retirement budget.  If the discussion looks somewhat redundant to many people, that’s because there are so many people asking these questions. 

I don’t know about you, but I find new things to learn every day.  A smooth upward track toward a financially secure future would be nice.  But along the way our financial fortunes fluctuate and change.   Keeping up with those changes is part of the game, and planning for how to get to retirement means we re-visit a few things along the way.  I’m still working on the financial structure that will support the future I want.  And I’ve embraced my role in helping create it.  It would be nice if the economy and markets would help out a little more, but there’s no time to wait. 

Let’s see, durable goods are way up?  Could that be significant for employment going forward?  Hmmm… maybe that means we’re not really headed deep into recession, but just bouncing off the bottom a bit.  What else does that mean? 

Could the market be forming a base here?  All this government bailout stuff and an election year too (although why is one of our candidates campaigning in Europe?!).  Housing’s still way off from a bottom though, and banks are still tightening credit it seems.  But oil’s come down quite a bit the past couple of weeks, about $22 per barrel less than before.  Was that the top? 

The Treasury Secretary and FDIC folks see the current events as a “challenging environment” for consumers and financial firms.  No kidding.   But with all that money flowing out of the government, it’s got to go somewhere.  Eventually it’s going to make it’s way to consumers, and maybe show up in the way of inflation?  Which means the Fed may be raising rates over the next year.  Could be why mortgage rates have headed up too.

I don’t have a clue where the markets are headed, but I’m staying in the game.  There are some hopeful signs for economic growth and a continued recovery.  So how do I see it?  I’m focusing on safe places to put money and not taking any big risks.  But I’m not parking the money in the mattress either.  But safe is a relative term that means different things to different people.

If you’re 77 years old and have $65,000 of life savings, you want to feel that the money is safe in the bank savings account or a CD to use when you might need it.  And if you’re a young family, working hard to pay your bills and feed your children, it’s important to make sure that the $3500 you have in the savings account is safe.   And with almost every bank across the nation, that money is safe. That’s why they’re FDIC insured for up to $100,000 for most accounts.

But what’s the word safe mean to a family making over $100,000 a year, with three kids and one heading to college, and a modest 401(k) and retirement savings of $200,000?   Maybe that family is doing just fine at home and handling the economic challenges without any hardship on a monthly basis.  But are their investments and retirement savings in a safe place, especially when considered against a spectrum of 20-30 years?  Maybe not.

And that’s where a professional financial planner or advisor can help to structure your diversification and asset allocation based on what you believe is safe and appropriate to your age, your family situation and your financial goals.   Eventually the tide is going to turn, and you want to be ready to take advantage of positive economic change, while minimizing economic challenge.

What are the core values from my perspective?  Staying invested for the long term, staying patient, paying down debt and building up that emergency fund in the bank.  Not necessarily in that order!

I does feel good to save for a cushion in case we need it, and yes, there’s still many good places out there to park your money.   Folks are jumping at the chance to open a 4.0% CD with Bank of America while the company extends their business hours this weekend.  That’s not bad at all.  And there are other FDIC insured places to save such as with ING Direct’s High Yield Savings account offering a 3.00% annual percentage yield.

But here’s a question: Is the American Dream dead?  Is it too hard anymore to get an education, a decent paying job, find a home and raise a family?   Are there really hoards of “Empty ATM’s and Desperate Boomers” out there?

Maybe for some folks, but for the nation as a whole?  No way.  I don’t buy that for a minute, and I refuse to believe that the dream so many of us have for a better future has fallen by the wayside just because we’re facing economic challenge in many ways.   We’ve been through this before, and we’ll face it again.  But we’ll get through it.

No matter what I read, and all the negative hype about financial markets and the credit crisis, what the economy really is about is what we do at home.  If you’re the one struggling right now my thoughts and best wishes are with you.  But no matter what, don’t give up, keep the faith and stay hopeful.  This country has been through some pretty hard times in the past, and we’ll move forward from here just as well. 

* On a sad but inspirational note, Randy Pausch who gave us The Last Lecture has passed away today, July 25th, 2008.  I posted a Wall Street Journal video about Randy in September 2007.  He truly showed us what living is all about.  Here’s the link to his full 76 minute Last Lecture on YouTube.  And Randy’s personal site is worth visiting.  God Bless Randy, and to your family.

When was the last time you reviewed your employee benefit situation?   Most of us fill out tons of paperwork when we start a new job, and then we don’t think much about our overall benefits unless we use them.

But do you know if you’re qualified to receive life insurance?  Have you designated beneficiaries where necessary?  Do you even know who the benefits personnel are with your employer?   And if you do know a lot about your benefits, when was the last time you reviewed them?

Sometimes it’s not what we do that matters, but what our employer does.  Sometimes you can do everything right, and still end up without promised benefits simply because your employer has the law on their side.

Here’s a story from the AP about Spherion Corporation that denied $426,000 of benefits to the spouse of an employee who died simply because he didn’t fulfill one day of employment under a new insurance policy, that he didn’t even know he was required to do. 

“Spherion’s decision to deny benefits to Amschwand-Bellinger turned on an odd set of facts. Spherion, which employs about 300,000 people, switched insurers after Thomas Amschwand was diagnosed with a rare form of heart cancer. The new policy did not take effect until an employee worked one full day. Spherion never informed Amschwand of the requirement.”

“Amschwand asked repeatedly whether there was anything else he needed to do and was told no. He asked that the new policy be sent to him. Spherion never did so.”

“He died without returning to work. His widow said he easily could have worked a day if that was what it took to activate the new policy. Spherion could have waived the one-day-of-work provision, as it did for other employees but not for Amschwand.”

Incredibly, even though his widow sued the company, she lost under current legal guidelines.  

 **Update:  Spherion Corporation has provided some additional information about this case.  For further information, click here to read about the Amschwand case on the Spherion website.  Only the family and Spherion really know the details, but in fairness we wanted to ensure all available information was provided.

Employee benefits issues will certainly become more important in the years ahead, especially with an aging workforce.

Along those lines,  the Supreme Court has come down on the side of employee rights in several workplace discrimination cases recently.  Arguably some employers see this as another expanding threat of increasing costs and bureaucratic mandates.  Yet for older workers, discrimation within the workplace can be a real concern, especially coupled with the dual impact of health care benefit needs and retirement planning needs.  Employers are now on notice to ensure they are not denying benefits or job advancement opportunties to older workers due to discrimination, or basically “firing” an older worker simply because of the potential cost of health or retirement plan benefits.

Most importantly however, it’s up to individual employees - young or old - to make sure they know and are receiving benefit information, and that they’ve signed and completed paperwork or other requirements for the benefits to be valid.

Understanding and implementing benefit programs for employees shouldn’t be this difficult.  For many companies it’s not, and the company works together with employees to help them understand their benefits.  But like much in our financial lives, it pays to be prepared.  

Take another look at your benefit programs and make sure you understand the rights (and responsibilities) you have in making sure you receive the benefits you are entitled to when necessary. 

For more information, see your Human Resources or Benefits Personnel office, or check out a few helpful links at the U.S. Department of Labor:

• Health Care Plan benefit information
• Retirement and Pension Plan information
• Retirement Savings issues
• Consumer Publications available

For most of us in the U.S. prices at the gas pump are ridiculously high.  It would almost be funny if it wasn’t such a crucial issue for the national economy and consumers.  When I filled the tank the other day it was staggering to see the difference in cost from just months ago.  We don’t know if gas prices will remain high or continue higher in the years ahead, but global demand is still growing which makes it likely. These prices are almost inconceivable in some ways, and when you’ve got to make a long commute each day it’s hard to reconcile paying a larger chunk of the monthly budget to get the same amount of miles out of a vehicle.  Those chunks of the monthly budget add up to real dollars over time- dollars that we are giving up in saving for our future retirement security.

Many people in Europe or other nations have little empathy for U.S. drivers, but our country is so large that many of us routinely drive for an hour or more one-way to work each morning. It’s not uncommon for many of us to put over 75 or 100 miles on the car each day.  It’s a fact of life based on our geography that many of our own citizens often forget.  Those of you living in the city or suburbs of a large metropolitan area may not commuite or drive quite as far.  But many other people live in rural areas far from any metropolitan city and must not only drive long distances to work, but also to see a doctor, receive medical care or simply shop for groceries.

Obviously some of us drive vehicles that use a lot more gas, and it’s dawning on a lot more people that the money we spend for gas is simply being wasted on gas fumes.  Sure we love our big cars and trucks, but at what point are we willing to give up our future retirement security by driving a comfortable car?  Do we really need such a big car?  Maybe. But I believe that more Americans will give up the luxury of a larger car for the convenience and economic bonus of driving a smaller car. 

Most of us will never really understand the reasons for the runup of oil prices.  Demand is obviously a huge issue worldwide and speculation is being looked at more closely for the impact to high prices.    It is somewhat amazing that large investment banks can control enormous trading positions in oil and gas reserves.  Even billionaire George Soros sees much of the energy price runup due to “craze-following” behavior by financial institutions.

But regardless of the cause, the energy crisis is here and is causing a major shift in U.S. consumer behavior.  The media has begun reporting on the extinction of gas guzzlers in the U.S. as well as how American companies are reeling from energy costs.   U.S. consumers have cut back on gasoline use for the third month in a row, and the airlines are struggling as never before as corporate costs will continue to be passed to consumers. 

“Pressure from higher energy costs is already being felt, with Kimberly-Clark announcing it intends to raise prices on its consumer goods products 6 percent to 8 percent in the third quarter. The maker of Kleenex tissues and Huggies diapers said higher energy and raw materials costs were to blame for the price increases.”

We’re seeing price increases all around with food, energy and a greater number of retail goods.  The point is simply that high gas prices and the related impact on the family budget are a very real personal financial planning and retirement issue.  In what way?  Based on the cost of ownership of various vehicles, including how much it costs to put gas in the tank.  Don’t get me wrong, this is a free country and I love a big vehicle to move people and stuff around when I need it.  But when I need it is the important part of that sentence.  Most of us are realizing that we don’t really need quite as much car or truck as we thought we did. 

The New York Times describes how we’re staggering under the cost of $4 gas while examining the cost of ownership of various vehicles, and why consumers are changing their minds about what they’ll buy and drive these days:

“While the F-250 costs $100,000 and a fully loaded F-150 — the better-known, smaller Ford pickup — costs about $70,000, a Ford Focus still costs less than $40,000 over five years. A Honda Civic Hybrid does, too. A Toyota Prius costs only a little more. A Subaru Outback station wagon runs $50,000 or so.”

“To put this in perspective, the difference between a Focus and an F-250 over five years is $60,000. The annual pretax income of a typical family in this country is also about $60,000. So choosing a F-250 over a Focus is like volunteering for a 20 percent pay cut. The relative resale values might cushion the blow a little, but not much.”

“That’s why more people are deciding that towing capacity and the other benefits of pickup trucks and S.U.V.’s are not worth the costs. The F-250 may still make sense for some business owners. But, as Mr. Fisher says, on those few occasions when the rest of us need to move some horses, we can rent a truck. “The new economics of car buying is, ‘Don’t overbuy,’ ” he told me. “Buy something you’re going to need most of the time.”

That’s a great example for the impact of gas prices based on the type of vehicle we drive (it’s still somehwat incredible to me that U.S. automakers have been so ill-prepared to deal with this shift in need and demand!).  

But sky-high gas prices affect everything, including retirement security for you and me.  What are we giving up in future dollars and earnings simply to drive that big truck around town?  If I were to run the numbers it would be staggering.  Think of  the tremendous amount of money over time and it’s not hard to see how $30,000 to $40,000 over five years can become an incredible sum of money.  So what we drive each day and how much money we spend on it can make an enormous difference in our ability to save discretionary income for retirement. 

It’s not all about gas prices either.  While we continue to see price increases at the grocery store, it’s only a matter of time before wage increases won’t keep up.   The fact that wage inflation is under control right now may be more due to widespread economic challenges rather than anything else.  As the business cycle heats up again in the years ahead I have to believe we’ll see stronger inflationary pressures and rising interest rates all around. Fuel prices may be even higher.  If it costs more to live in the years ahead we need to think hard about how much money we’re willing to give up from savings right now.   Every dollar we save by driving a higher mileage vehicle means more dollars saved in the years ahead.

With that said, it’s a pretty good time to re-think the monthly budget, and and how much we’re willing to spend each year on fuel costs.  I’m not willing to sacrifice my future retirement security by spending so much money on gas.  Like many people I’m just not sure what I’ll do about it yet.  But I suspect a better mileage vehicle may be in our future.

If you are younger than thirty-something, you probably haven’t given much thought to Medicare or what kind of long-term care insurance you’ll have in your senior years.  For many of us, our first experience with the bureaucratic maze that is Medicare comes in our forties or fifties when we are helping aging parents navigate their health care options.  That can be a sobering experience as we realize that someday we’ll be facing those same challenges.  And for those looking ahead or living in retirement, the questions about general healthcare and medicare become increasingly important. 

It’s no surprise that healthcare issues are so confusing.  Most of us are still trying to figure out our financial retirement needs let alone examine how much we might need for health care in our senior years.   That’s why Long-Term Care is such an important financial planning issue.  Have you really looked at long-term health care insurance plans yet?  Most of us have not. 

What is Long-Term Care?

In general, long-term care insurance provides financial assistance with physical and/or emotional care for a person who is unable to perform routine activities of daily living such as bathing, dressing, preparing meals, walking, using the bathroom, staying safe in the home, managing the home, etc.  This type of care is continuous and may be due to illness or normal aging conditions. 

What sets it apart from other forms of care is that it is required and necessary, and is usually due to illness, disability or some other chronic health care problem.  Long-term care typically involves a person living in a nursing home or other assisted living care facility that provides specialized medical, social or physical services.  But long term care can also be temporary due to a specific need, and is very often provided by relatives or other caregivers in the home because that’s the traditional way we help family members.  Sometimes it’s the only help someone has.

The vast majority of us live at home in our senior years and have relatives or friends as caregivers when we need help with something.  But at some point, many people do need long-term care and it is very expensive.  Formal long term care costs often range from $30,000 to $60,000 a year or more.  According to AARP, the average U. S. costs for long-term care are:

• $5,566 a month for a semi-private room in a nursing home
• $6,266 a month for a private room in a nursing home
• $2,968 a month for care in an assisted living unit
• $19 per hour for a home health aide 

Those numbers can really add up, and that’s the reason that many financial planners believe that without long-term care insurance, you really don’t have a financial plan.  If you’ve planned for most financial contingencies except for long term care, then what happens when you end up spending your life savings to provide care for a spouse or family member?  If you haven’t planned for that possibility as well, then your financial plan may have holes in it.

Why should you plan for Long-Term Care? 
Because, at least 70 percent of people over age 65 will require some long-term care services at some point in their lives.  And, contrary to what many people believe, Medicare and private health insurance programs do not pay for the majority of long-term care services that most people need - help with personal care such as dressing or using the bathroom independently.  Planning is essential for you to be able to get the care you might need.  Source: National Clearinghouse for Long-Term Care Information

Admittedly however, not everyone needs or can afford to purchase long-term care insurance.  Lets be realistic: Long-term care insurance itself is very expensive. With annual costs around $2000 to $3000 for a basic policy in the early years, those cost may increase as a person gets older.  And it’s not designed as forever care.  Long-term care insurance typically covers a certain period of time, for example a three to five year period.  But it can provide longer care, even over the course of a person’s liftetime, but that will be very expensive.   When do most people get long-term care insurance?  Most financial planners advise looking at it in your early to mid-fifties.  But if you wait until your sixties or seventies, the costs may become prohibitive.  The fifties provide a balance of cost of insurance versus affordability based on income and retirement planning needs.

But it’s important to shop carefully and make sure you knowing what type of long-term care policy you are agreeing to.   From an historical perpsective, long-term care insurance is relatively new.  So are the laws and regulations that govern its use, and practically we are just beginning to see how it works out for people.  The concept is sound, and the need is real.  But as with other insurance products, it may be best to get a second opinion in the early years. 

For those who can afford it, long-term care insurance is just that.  Insurance to provide financial assistance in times of need.  Like many other people, I am learning how hard it is to face these realities.  When you’re in good health in your forties, fifties or sixties, it’s hard to rationalize spending a good chunk of money each month on long term care that you only might need. 

But long term care insurance provides valuable coverage for specific life needs, just as auto or home insurance protects a family from catastrophic financial loss due to accident or disaster.  Long term care insurance protects that same family from catastrophic financial costs due to health care factors that many adults face in their senior years.

And the crux of the issue is that Medicare is not going to take care of most long term care needs.  What does this mean exactly?  Well, Medicare by itself will not meet long term care (LTC) needs because Medicare only covers some home health, skilled nursing and hospice care, all of which have degrees of meaning and definitions.  Medicare does not cover custodial care such as cooking food, cleaning a home or providing nursing home related care. 

Medicare will help pay for home care in certain situations such as:

• A doctor certifies that a patient is homebound, meaning it takes considerable effort to leave the home, and
• The individual needs skilled physical, speech or occupational therapy services, or skilled nursing on an intermittent level (less than 7 days a week) or part-tim (less than 8 hours a day) basis.  If the medicare recipient only needs skilled nursing, they must either need it fewer than 7 days a week (even as little as once every 60-90 days) or daily (seven days a week) for a short period of time (usually 2-3 weeks), and
• The doctor certifies the need for home care, and
• The individual receives care from a Medicare-certified home health agency (HHA).

What about other situations where Medicare does help with long-term care?   Well, if you qualify for the home health benefit, Medicare may cover the following types of care:

1.     Skilled nursing services. Medicare pays in full for skilled nursing, which includes services and care that can only be performed safely and effectively by a licensed nurse. Administration of medications, tube feedings, catheter changes, observation and assessment of a patient’s condition, management and evaluation of a patient’s care plan, and wound care are examples of skilled nursing. Any service that could be safely performed by a nonmedical person (or one’s self) without the direct supervision of a licensed nurse is not covered.
2.    Skilled therapy services. Medicare pays in full for physical, speech and occupational therapy. Physical therapy includes exercises to regain movement and strength to a body area and training on how to use special equipment. Speech-language pathology services include exercises to regain and strengthen speech and language skills. Occupational therapy helps you become able to do usual daily activities by yourself, such as eating and putting on clothes. Medicare will pay for therapy services to maintain your condition and prevent you from getting worse; you do not need to have the potential to improve.
3.     Home health aide services. Medicare pays in full for a home health aide if you require skilled services. A home health aide provides personal care services including help with bathing, using the toilet, and dressing. If you ONLY require personal care, you do NOT qualify for the Medicare home care benefit.
4.     Medical social services. Medicare pays in full for services to help you with social and emotional concerns you have related to your illness. This might include counseling or help finding resources in your community.
5.     Medical supplies. Medicare pays in full for medical supplies provided by the Medicare-certified home health agency, such as wound dressings and catheters needed for your care.
6.     Evaluation services. Medicare pays for evaluation services if performed by a skilled nurse or therapist.
7.     Durable medical equipment. Medicare pays 80% of its approved amount for certain pieces of medical equipment, such as a wheelchair or walker.

Obviously it is best to thoroughly research your situation, talk with an informed health care provider, and seek counseling assistance if necessary.  Did you know that your State Health Insurance Program has representatives available to discuss Medicare related issues with you?  If you have questions or concerns, you can call a toll-free number at this Medicare page and speak to someone within your State about Medicare issues.  These counselors will help you meet a local representative to answer questions if necessary. 

For more information please see the Medicare.gov site on Long-Term Care or the National Clearinghouse for Long-Term Care Information.