Monday, February 24, 2014

Don’t fear the chart! We’re not headed for a Depression

In most instances, when an item makes it way through the Internet circuit, it’s an eye-catching video or an embarrassing photo. And, often as not, it puts a smile on your face.

Recently, however, a certain graph is making the circuit and it’s nothing to laugh about. Like many people in today’s high-tech world, you may work with graphs on a regular basis.

Or maybe you haven’t seen a graph since your high school economics class. In my 16 years of writing this personal finance column, I know I have never highlighted a graph.

So, what makes this graph so unique that I’m featuring it in a personal finance column? Just the fact that it’s putting fear into the stomachs of many investors.

The graph shows the ups and downs of the Dow Jones Industrial Average Index (DJIA) from 1928 to 1929. But it’s overlaid with a graph of the same DJIA fluctuations beginning in July 2012. What makes that scary, of course, is that the two charts look eerily identical.

If we continue to follow the trend of the 1928-29 graphs, the next line on the current graph will be severely downward. In 1929, that downward movement ignited the Great Depression.

So, naturally, the chart with the two graphs has spread quickly. Bad news travels fast and fear gets attention and nobody wants to see the value of their life savings fall off a cliff.

I have always stated that nobody has a crystal ball into the future. That being said, I’m a longtime subscriber to Investor’s Business Daily, which runs numerous graphs every day that can be valuable tools in finding stock market trends. And while they’re frequently accurate, they’re by no means infallible.

Perhaps the current graph is correct and we’re headed for a severe economic downturn. But I urge everyone to park your emotions before panicking and making the next downturn a self-fulfilling prophecy.

Over time, markets always fluctuate. At some point there will be a downturn. And when that happens, I don’t want to see people panic and do something irrational with their nest egg because they fear we’re falling into a Depression. A market decline doesn’t mean the economy is about to collapse.

If you look at history, our current environment is much different than the 1920s. The Great Depression was fueled by a debt crisis. Mom and pop investors borrowed large sums against their stock portfolios in order to buy more stocks. When the loans were called, panic stock selling ensued. Today, there are limits on loans against stock accounts.

There was also a collapse in the banking industry back then. True, today’s banks are far from perfect, but they’re much stronger than just a few years ago. Plus, they now have to go through a stress test and have to comply with a ton of regulations.

In the 1980s, there was a 20 percent tumble in one day. The anticipated problems of Y2K turned out to be no problem. And, more recently, we overcame the mortgage meltdown and near banking collapse.

Surviving those, I’m confident we can all survive the next pullback, and I don’t believe it will lead to a Depression. History does repeat itself. But this is one instance where I don’t believe it will.

Tuesday, February 18, 2014

Is the new MyRA right for you?

While watching President Obama’s State of the Union speech, I was surprised to hear him introduce yet another retirement savings vehicle. In addition to 401(k) and 403 (b) plans, and both the traditional and Roth IRAs, we now have the MyRA (my retirement account).

I was pleased that he stressed the importance of saving money for retirement. Anything that can be done to motivate people to do so is fine by me.

However, I’m a bit surprised that one of the key features and selling points of the new MyRA is the convenience of payroll deductions. Since there’s already a bill in the legislative process to make payroll deductions more convenient for employers with the existing IRA plans, that doesn’t seem to be much of an incentive.

With MyRA, Uncle Sam will pick up all the administrative costs. It only takes $25 to open an account and subsequent contributions can be as low as $5. With these smaller amounts, the target audience is clearly the low-end of the wage scale.

Investments will go into a government bond fund backed by Uncle Sam. The President emphasized that, since the U.S. Government backs deposits, there’s no risk of loss of principal.

That being said, long-time readers of this column are aware that rising interest rates and inflation are enemies of bonds. In other words, the risk of any bond is the loss of “purchasing power” due to inflation. But I’m supportive of any investment that gets people saving for retirement.

The new MyRA is similar to the current Roth IRA in that contributions are not tax deductible and the monies grow tax-free if used for retirement. As I write, not all details are available, but I imagine there will be taxes due on the interest and perhaps a penalty if funds are withdrawn before age 59 ½.

Unlike the other IRA investments, there’s a maximum cumulative total of $15,000 in the account. At that point, the MyRA is transferred into a Roth IRA.

Because the target audience is the low end of the wage scale, I was surprised that the MyRA also has features and benefits for middle and upper middle-income families. For instance, those that currently have an employer-sponsored 401(k) can also participate in the new MyRA.

In fact, families with household incomes up to $191,000 can open a MyRA. Just a word of caution, at this point I’m still waiting to see the final definition of what exactly household income entails. The $191,000 limit is by no means at the low end of the wage scale.

Although I’m pleased that we’re talking about saving for retirement, the fact is that one more choice was just added to an already complex menu. Sometimes in life the biggest step toward any goal is the first step of participation. If the new MyRA gets more people to take that first step, then it will ultimately be a good thing.

If it becomes another government program with overly complex rules, regulations and exceptions to those rules and regulations, then I think it will ultimately have minimal impact.

However, in my book, any time the President discusses the importance of saving, especially for retirement, I am supportive. Hopefully, the new MyRA will be a launching pad for a successful retirement.

Monday, February 10, 2014

Can you afford affordable care?

The Affordable Care Act, commonly known as Obamacare, continues to be discussed, debated and digested virtually every day in the news. Like it or not, everyone has an opinion by now.

One major complaint has been the unexpectedly high cost. There’s no question that many people, including me, have not only seen a dramatic increase in monthly premiums but also a reduction in coverage.

My cost nearly doubled, so I understand the anger. But, I was curious when I saw a new line on my monthly health insurance bill for federal and state taxes and fees. It totaled $80 per month, just over 10.5 percent of my new increased premium.

It was surprisingly difficult to get details about this new line, but I was persistent, and eventually discovered that it’s a complex summary of several new taxes and fees, seven to be exact.

Here’s a dollar breakdown of how those seven new items apply to my monthly bill; what they’re for and how they’re to be used.

First, there’s a Federal Insurance Premium tax, which is a tax on the insurance industry by the federal government, which, of course, is passed on to the consumer. For me it comes to just over $25 per month.

This is followed by a competitive effectiveness fee, which helps fund a patient-centered outcome research institute that helps compare different medical treatments. This adds just 42 cents to my premium.

Then there’s a reinsurance fee, which adds nearly $13. This is to help stabilize the cost of insurance during the future years of health care reform.

In addition, there’s a risk adjustment fee that costs me 17 cents per month. This is to compensate insurance companies for having to insure less healthy members, thereby helping to keep costs stable.

My favorite is the market place fee of just over $22. This is to help fund the fiasco that is the Affordable Care Act health insurance marketplace web site. It’s supposed to be self-sustaining and removed by January 2015. I have my doubts that it will ever go away.

But wait, there’s more. Michigan got into the act with the Michigan claims tax, a 1 percent tax on health insurance claims. For me, this amounted to just under $7 per month. Finally, there’s the state insurance premium tax, which taxes Michigan health insurance policies that cover individuals rather than groups. This one costs me just over $12.50 per month.

Summing up, this one new line on my bill adds another $950 per year to my tab. And that’s on top of a health care premium that nearly doubled.

As a financial advisor, I always suggest to my readers and clients that they understand any charges and fees associated with an investment. In that same manner, I think it’s important that, as taxpayers and consumers, we understand where and how those that collect our money are spending it. I was alarmed to see a new tax item that totaled in excess of 10.5 percent. I wonder how many even noticed this new line item tax, let alone questioned it? Personally, when I see a new tax that’s in excess of ten percent, I want details. I think the regulators and health care industry could have done a much better job with their disclosures.

Monday, February 3, 2014

Finding a job isn’t what it used to be

A few days ago, a couple of my grandchildren were visiting. They know that I’m in the financial services profession and that I write a column. When I asked them if there was a particular topic they wanted me to write about, one suggested Zambonis and the other said garbage trucks. Don’t worry, neither has a place in a personal finance column, but it reminded me that, years ago, my firm hosted the late Art Linkletter at one of our retirement education seminars.

In the early days of television, long before HD, Mr. Linkletter had a show with a feature called “Kids say the darndest things.” He was also one of our nation’s first retiree advocates, and famous for the quote, “Old age is not for sissies.”

Connecting the dots between the innocence of youth and retirement are the many years of being in the workforce. For many, working is a task or a chore, done for a paycheck. For others, like me, it’s not so much work as it is a passion or career.

In other words, work is more than just a paycheck. If you look beyond the news reports that show unemployment numbers going down, you’d find that there are a staggering amount of Americans who would rather be in the workforce than wringing their hands and giving up.

As parents and grandparents, we have to do our very best to prepare our families for a world that will be far more complex than we could ever imagine. When Art Linkletter first aired, there were only a few stations. Television pictures were fuzzy and in black and white. One can only imagine what TV technology will bring into our homes in the years ahead.

I recently came across a study published by which indicated that people would not only move out of state to take a job, but also that four of ten young adults factor in health care benefits in the job selection process.

I mention this because there’s an image of 30-year-olds living in the basement, dependent on the Bank of Mom and Dad. Uncle Sam is about to spend millions encouraging youth to sign up for health insurance coverage. I’m a bit baffled because the study already shows that health care coverage is important to young adults.

What doesn’t get written about often enough are the young adults who boldly leave the comfort of home for their jobs rather than live in the basement. Most of the young adults I know are driven and have no desire to remain dependent on their parents.

For example, my youngest son graduated from college in a very tight job market. He left the comforts of home to find work in Texas. He soon found it, and worked around the clock for a low wage doing some of the dirtiest jobs in the Texas oil fields.

It paid off. In just over a year, his talent and work ethic were recognized and now, just a few years later, he has climbed the corporate ladder. He’s doing so well, he can now afford to fly mom and dad in for a visit. I would like to tell my youngest son, the Texan, how proud I am and wish him a Happy Birthday.