WalletPop Blog

What the meltdown means to the retiree

Dan Solin — Thu, 09 Oct 2008 16:00:00 EST

The steep downturn in the markets has hit senior citizens the hardest. Many of them have seen the value of their portfolios plummet, at a time when they need their money the most.

An elderly widow I will call Mary is one victim. Her husband died a few years ago, leaving Mary, in her early eighties, with a nest egg sufficient to meet her needs for the rest of her life

Shortly after his death, her trusted "investment professional" invested most of her portfolio in two financial stocks. In less than two years, the portfolio lost over $150,000.

The news is not all bad. The brokerage firm made over $50,000 in commissions by excessively trading the balance of her portfolio.

Mary has now entered a nursing home. Her retirement funds are nearly gone. She risks becoming a ward of the state.

It is easy to blame the markets. They did fall in value. But that is precisely how markets are supposed to work. The foundation of all returns is risk. Markets go up and down, usually in cycles.

Mary's problem was the perfect storm of an inappropriately risky asset allocation and an incompetent or greedy broker. She could not afford any meaningful market risk. Her portfolio should have had an allocation of no more than 20% invested in a broadly diversified stock market index fund with the balance of 80% in a low cost index fund benchmarked to the Lehman Bros. Aggregate Bond Index.

There is plenty of blame to go around. Most of it should be focused on poor asset allocation and broker misconduct, not on the markets.

Read how the financial crisis is affecting other WalletPop bloggers.

Dan Solin is a Registered Investment Advisor and the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books 2008).

What the meltdown means to the retiree originally appeared on WalletPop Blog on Thu, 09 Oct 2008 16:00:00 EST. Please see our terms for use of feeds.

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15 ways to ruin your financial future: Not saving enough for retirement

Dan Solin — Mon, 29 Sep 2008 09:00:00 EST

Filed under: Retire, Investing

We are doing a terrible job saving for retirement. The median 401(k) plan balance is a paltry $18, 986!

While there is raging debate over how much you need to save in order to retire with dignity, everyone would agree that most Americans are falling far short of achieving this goal.

So how much do you need to save?

Ideally, you need to figure out how much your expenses will be when you retire for the rest of your life (and, if you are married, the life of your spouse or partner). This is not easy to do, given the ravages of inflation and a tax code that is subject to change.

Most financial planners simply assume that you will need a percentage of your pre-retirement salary.

Don't miss the rest of our series on 15 Ways to Ruin Your Financial Future!

One comprehensive study by Baclays Global Investors determined that 75% of pre-retirement income is a benchmark for a successful retirement. The study also found that, given the typical 401(k) plan savings rate, most Americans could count on replacing only 41% of their pre-retirement income.

Continue reading 15 ways to ruin your financial future: Not saving enough for retirement

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Bonus Insurance Tip: The best kept secret in the industry

Dan Solin — Mon, 15 Sep 2008 10:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

What if you had an uncle who was an expert in all aspects of the insurance business? He was retired and no longer sold any products.

What a great resource! He could sift through all of the confusing presentations and illustrations and tell you which policy was best for you.

Here is the next best option. Consider using a fee-only life insurance advisor. They are the best kept secret in the insurance industry.

These advisors receive compensation only from their clients. They will agree in writing to accept fiduciary responsibility (unlike your agent -- see tip #1) and will act solely in your best interest.

Continue reading Bonus Insurance Tip: The best kept secret in the industry

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Insurance Tip #10: Company ratings are not the most important factor when buying cash-value insurance

Dan Solin — Sat, 13 Sep 2008 11:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

Ratings are often bandied about as the standard by which you should select an insurance company for cash-value insurance (often called "permanent" insurance). The primary rating agencies are A.M. Best, Duff & Phelps, Moody's, and Standard and Poor's. You can access the Standard and Poor's ratings for life insurance companies here.

Weiss Ratings also rates the strength of insurance companies. Some perceive its ratings as more independent than the primary rating agencies because it does not receive most of its revenues from the insurance industry. Others believe that the Weiss methodology produces ratings that are questionable.

While there is no standard applicable to every situation, since there are so many companies rated either "superior" or "excellent,' it would be difficult to justify the additional risk of purchasing insurance from a company with a lower rating.

However, ratings tell only part of the story.

You want an insurance company that has relatively strong investment performance, relatively low mortality rates, relatively low expenses and has demonstrated a willingness to treat both new and existing policyholders fairly.

One area that you can easily understand is expenses.

Continue reading Insurance Tip #10: Company ratings are not the most important factor when buying cash-value insurance

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Insurance Tip #9: Disability insurance may be the most overlooked part of your financial plan

Dan Solin — Fri, 12 Sep 2008 11:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

If you knew the data, you would take a hard look at disability insurance. Now is the right time since you probably don't have any disability coverage.

There is about a 40% probability that you will have at least one disability that lasts three months or longer before you reach age 65.

Women are more likely to become seriously disabled than men.

The most likely cause of disability is illness, not an accident.

The most common cause of disability is back injury.

More than seventeen million Americans have a disability that limits or affects their ability to perform their work.

Nearly 20% of Americans will become disabled for one year or more during the course of their employment.

If you become disabled, you may be partially covered by Social Security Disability Insurance, by Worker's Compensation (if you were injured at work or if your illness was work related) or by other state and federal programs.

You can purchase disability insurance individually, although it can be quite expensive. If you pay the premiums yourself, then any benefits you receive will be tax free, which is not the case with an employer-paid group policy.

Continue reading Insurance Tip #9: Disability insurance may be the most overlooked part of your financial plan

Insurance Tip #9: Disability insurance may be the most overlooked part of your financial plan originally appeared on WalletPop Blog on Fri, 12 Sep 2008 11:00:00 EST. Please see our terms for use of feeds.

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Insurance Tip #8: Buying term insurance and investing the difference may be a dumb move

Dan Solin — Thu, 11 Sep 2008 13:00:00 EST

Filed under: Insurance, Investing

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

I agree with the traditional advice that term insurance is appropriate for most people. It is relatively inexpensive if purchased at a young age. It's simple to understand and it makes it easy for most people to obtain enough coverage to protect their families in the event the primary breadwinner dies prematurely.

Insurance that builds cash value (often called "permanent" insurance) comes in a dizzying array of options. There is whole life insurance, adjustable life, universal life and variants of each of those policies.

So why not just "buy term and invest the difference" in the cost between term and the higher cost of cash value insurance?

The primary reason is that few people have the discipline to invest the difference. Most likely, this money will be spent just staying afloat.

Even if you do "invest the difference," how will you do it? The data indicates that Americans are terrible investors. The projections that are so casually tossed around usually assume that your investments will achieve at least market returns. The reality is that the average stock investor earns around one-third of market returns. When you consider inflation and taxes, these investors lose money! This is one of the big secrets of the securities industry. Market returns are yours for the taking, but they don't want you to know how easy it is to do it. Hint: It does not involve using their services.

If you are in it for the long haul, buying term and investing the difference can be a dumb move for many reasons.

Continue reading Insurance Tip #8: Buying term insurance and investing the difference may be a dumb move

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Insurance Tip #7: Your auto insurance should cover replacement with original parts

Dan Solin — Wed, 10 Sep 2008 14:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

When it comes to buying auto insurance, the focus is mainly on the premiums.

Premiums are important. Fortunately, there are many web sites that permit consumers to do comparison shopping.

However, everyone knows that there is more to shopping for auto insurance than getting the lowest price. Among the issues to consider are:

Bodily injury and liability insurance -- covers injury to others if you are at fault
Collision insurance -- covers damage to your car
Comprehensive coverage -- covers damage to your car caused by an event other than an accident
Car rental -- while yours is being repaired
Glass -- eliminates deductibles for broken glass
Medical -- covers your medical expenses
No-fault personal injury protection -- covers medical and related expenses for everyone injured in an accident, regardless of fault
Liability -- covers damage you cause to the car or property of others
Uninsured motorist -- covers injuries (bodily and property) caused to you by uninsured drivers

Here's a tip on buying auto insurance that most agents won't tell you:

Continue reading Insurance Tip #7: Your auto insurance should cover replacement with original parts

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Insurance Tip #6: Choosing the right health care plan is a critical decision

Dan Solin — Tue, 09 Sep 2008 13:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

I am for universal health care. The present system -- which leaves almost 50 million Americans (16% of the population) uninsured -- is a confusing mess.

You have many options for selecting health insurance. The one you pick may be your most important financial decision.

If you are covered at work, you may be able to select from various options. Check out the coverages and costs carefully. My advice generally is to focus on big ticket items. It may not be worth the additional premium to cover smaller costs.

If you need to purchase individual insurance, things get more complicated.

If you can afford the higher premiums, check out indemnity insurance. It lets you pick your own doctors and hospitals and to consult with specialists without being referred by your primary care physician.

Since indemnity policies often have a limit on lifetime benefits, be sure the cap is realistic. Personally, I would want a $2 million cap, but many experts believe $1 million is sufficient.

Most Americans have "managed care" plans. These plans are more cost effective, but they require you to see providers who are part of the plan network.

Continue reading Insurance Tip #6: Choosing the right health care plan is a critical decision

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Insurance Tip #5: Insurance for singles and children can be a smart buy

Dan Solin — Mon, 08 Sep 2008 14:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

I know it sounds counter-intuitive.

Children don't earn income and singles typically have no dependents. Since the primary purpose of life insurance is to replace lost income, why would you insure the lives of children or singles?

Insurance on the lives of children is not generally necessary. But there are circumstances where it might be a good idea.

First, insurance at a young age is very inexpensive.

Second, by purchasing permanent insurance on a child (term insurance is generally not available until age 18), you are guaranteeing the child will always be insurable, regardless of any change in her medical condition.

Third, permanent insurance can be used as a vehicle for accumulating cash value. This can add up over time. More money would probably accrue in an appropriately diversified portfolio of low cost index funds. However, the mandatory nature of insurance, combined with its other benefits, makes it more likely that one day your child will awaken and find that she has a considerable nest egg.

Finally, under the right circumstances, a policy on a child could be structured in a way to permit a tax-free death benefit to future generations.

Continue reading Insurance Tip #5: Insurance for singles and children can be a smart buy

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Insurance Tip #4: Blending term and whole life coverage into one policy is the secret your agent doesn't want you to know

Dan Solin — Sun, 07 Sep 2008 16:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

Let's say you have determined that you need "permanent" insurance. Probably, you made this decision because you are convinced that you will hold the policy for a very long time, maybe even up to the time you will die.

However, as an educated consumer, you know that the commission on many of these products can be 100%, or even more, of the first year's premium. Obviously, this is going to cause the policy to accumulate relatively little cash value in the early years, to compensate for this high selling cost.

What if you could get the best of both worlds: permanent insurance with high initial cash values?

The good news is that you can.

The bad news is that your agent probably won't tell you about it because it may clobber her commissions.

A blended policy combines term and whole life coverage into a single policy. Over time, the term portion of the policy is replaced with whole life. Generally, the term portion has a lower commission rate.

The bottom line is that a blended policy can result in lower premiums, higher cash values and higher death benefits because of lower sales costs.

Continue reading Insurance Tip #4: Blending term and whole life coverage into one policy is the secret your agent doesn't want you to know

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Insurance Tip #3: The type of policy you buy may be as important as determining the amount of coverage you need

Dan Solin — Sun, 07 Sep 2008 10:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

Almost one-third of all Americans have no life insurance. The average amount of life insurance held by those that have it is $146,000 -- far below what would likely be needed.

The focus of the insurance industry has been to persuade people that they need to purchase more life insurance. Unfortunately, the analysis is very complicated, confusing and fact intensive.

Among the various formulas used are multiples of your income, a "capital needs analysis" (which determines the income required to meet the needs of survivors) and a model that projects consumption and savings. The software to compute this model was written by famed economist Laurence Kotlikoff and financial columnist Scott Burns.

The amount of life insurance you should purchase may seem staggering. In your younger years (up to age 30), you may need insurance covering almost thirteen years of income.

An even more critical issue may relate to the kind of policy you buy.

Continue reading Insurance Tip #3: The type of policy you buy may be as important as determining the amount of coverage you need

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Insurance Tip #2: You may not need long-term care insurance

Dan Solin — Sat, 06 Sep 2008 16:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

Don't get me wrong. Many people do need long-term care insurance.

According to Debra C. Newman, the owner of an insurance agency that specializes in long-term care policies, 68% of Americans over age 65 will require some form of long-term care. The cost of this care can range from $3,000 to $9,000 per month. On average, care may be required for up to five years, with an average nursing facility stay of 2.4 years.

A common misconception about long-term care is that it is only required by senior citizens. Not true. According to one report, almost 40% of long-term care recipients were of working age.

But before you grab the phone to call your insurance agent, consider whether you really need this insurance.

Long-term care provides assistance with daily tasks for those who need some help in order to remain independent. The primary benefit of long-term care is that it may permit you to receive care in your home, so be sure your policy covers home care and not just nursing home care.

Before buying long-term care coverage, consider the possibility that your care may be covered by Medicare or Medicare Supplement insurance. Medicare does not cover "custodial care" (assistance with daily living tasks) either at home or in a nursing facility. However, if you meet certain conditions, Medicare may cover "medically necessary" care in a nursing home or at home.

Continue reading Insurance Tip #2: You may not need long-term care insurance

Insurance Tip #2: You may not need long-term care insurance originally appeared on WalletPop Blog on Sat, 06 Sep 2008 16:00:00 EST. Please see our terms for use of feeds.

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Insurance Tip #1: Your agent does not have to act in your best interest

Dan Solin — Sat, 06 Sep 2008 10:00:00 EST

Filed under: Insurance

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

Whose interests does your insurance agent represent?

You might think the answer is obvious: Yours, of course.

Not so.

The issue is whether or not your agent has a "fiduciary" obligation to you. If so, she accepts the highest duty of loyalty and care. She cannot have any interests that conflict with yours.

In most states, however, insurance agents are not fiduciaries. They have no obligation to place your interests above their own or above those of the insurance companies they represent.

In those states that impose a fiduciary obligation on insurance producers, the industry has strongly resisted being held to this higher standard. The California Department of Insurance issued a legal opinion imposing a fiduciary duty on insurance brokers. The industry strongly criticized the opinion, calling it "erroneous."

The insurance industry spends mega advertising dollars to convince you to "trust" its agents. Most consumers believe that their agents are acting solely in their best interest -- and I am sure that many are.

Continue reading Insurance Tip #1: Your agent does not have to act in your best interest

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Naked Truth Investing: A two-letter word that could double or triple your retirement savings

Dan Solin — Wed, 28 May 2008 16:30:00 EST

Filed under: Extracurriculars, Retire, Saving Money

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

I have a two-letter word for you that could double or triple your retirement savings. It is the answer to each of the following questions:

1. Open an account with us and we will put together a portfolio of stocks and bonds for you.

Continue reading Naked Truth Investing: A two-letter word that could double or triple your retirement savings

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Naked Truth Investing: A hot tip on oil stocks!

Dan Solin — Tue, 27 May 2008 16:30:00 EST

Filed under: Extracurriculars, Retire, Saving Money

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Brett Arenda, who writes a personal finance column for WSJ.com., has a hot tip for you. Buy shares in the Global Energy iShare.

According to Mr. Arenda, "You're already paying for the gasoline and energy at home. Shouldn't you be pocketing some of the profits as well?"

Here is my hot tip that will boost your retirement savings.

Don't listen to him or to any other stock picker.

Continue reading Naked Truth Investing: A hot tip on oil stocks!

Naked Truth Investing: A hot tip on oil stocks! originally appeared on WalletPop Blog on Tue, 27 May 2008 16:30:00 EST. Please see our terms for use of feeds.

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Naked Truth Investing: Pick a card. Any card.

Dan Solin — Mon, 19 May 2008 15:00:00 EST

Filed under: Extracurriculars, Retire, Saving Money

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

If that headline conjures up an image of a circus barker, you have hit the nail on the head.

Yet every day, millions of investors engage in the same kind of activity when they make investment decisions that are critical to their retirement planning.

Continue reading Naked Truth Investing: Pick a card. Any card.

Naked Truth Investing: Pick a card. Any card. originally appeared on WalletPop Blog on Mon, 19 May 2008 15:00:00 EST. Please see our terms for use of feeds.

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Naked Truth Investing: A $500 billion rip-off you must avoid!

Dan Solin — Fri, 16 May 2008 14:00:00 EST

Filed under: Extracurriculars, Retire, Saving Money

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

What is the biggest threat to your retirement savings?

You may be surprised to learn that it is the securities industry. Specifically, your "investment professional" to whom millions of investors entrust their retirement nest eggs.

Continue reading Naked Truth Investing: A $500 billion rip-off you must avoid!

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Naked Truth Investing: Go for the Roth IRA!

Dan Solin — Mon, 12 May 2008 15:15:00 EST

Filed under: Retire, Saving Money, Wealth

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: What is better. Traditional or Roth IRA? I have my Roth IRA invested in the Vanguard Total International Stock Index Fund (VGSTX)? I am 38 years old.

Answer: While this subject is not free of doubt, I prefer the Roth IRA. Both the Roth and traditional IRA's are tax-deferred accounts. But, unlike a traditional IRA, Roth IRA contributions are made with already-taxed income.

Continue reading Naked Truth Investing: Go for the Roth IRA!

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Naked Truth Investing: Watch out for these signs on the road to financial perdition

Dan Solin — Mon, 05 May 2008 17:30:00 EST

Filed under: Retire

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

The are many minefields for investors who want to save for retirement. Fortunately, the warning signs are clear. If you see any of these signs, you are driving on the road to financial perdition. Stop. Turn around and go in the opposite direction:

1. "This mutual fund has a 5-star Morningstar rating." It still is unlikely to beat an index fund with a comparable risk over the long term.

Continue reading Naked Truth Investing: Watch out for these signs on the road to financial perdition

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Naked Truth Investing: 401(k) plans: Making lemonade from lemons.

Dan Solin — Tue, 29 Apr 2008 10:30:00 EST

Filed under: Extracurriculars, Retire, Saving Money

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: I have quit my job and taken my retirement monies, but I still need to leave my 401K alone for 4 more years. I can leave it there and let it ride, or with your suggestions I could switch it over to one that is doing better than my current one with Safeway Corp.

Answer: Since I don't know the investment options available in your current plan, I cannot evaluate whether you would be better off keeping your funds with that plan or rolling it over into an IRA. However, as a general matter, I can tell you that most 401(k) plans do not offer appropriate low cost index funds for their employees. If this is the case with your current plan, you might be better off rolling it over to an IRA.

If you decide to pursue this option, here is my advice:

First: Determine your asset allocation by taking an asset allocation questionnaire. You will find many on the internet, including one on my web site.

Second: Open an account with Vanguard. There are other excellent fund families you could consider, like Fidelity and T. Rowe Price. However, Vanguard has historically been the leader in offering low cost index funds.

Third: Invest 70% of the amount of your funds allocated to stocks in the Vanguard Total Stock Market Index Fund (VTSMX), and the balance of 30% in the Vanguard Total International Stock Index Fund (VGTSX). Invest 100% of the funds allocated to bonds in the Vanguard Total Bond Market Index Fund (VBMFX).

Fourth: Once or twice a year, rebalance your portfolio to be sure that your asset allocation remains intact.

This simple portfolio has historically outperformed 95% of all professionally managed money over the long term. In your case, if you intend to withdraw the money in four years, it may or may not outperform the investments in your current 401(k) plan.

If you are in a 401(k) that does not offer these options, this is a way to make lemonade from lemons.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.

Naked Truth Investing: 401(k) plans: Making lemonade from lemons. originally appeared on WalletPop Blog on Tue, 29 Apr 2008 10:30:00 EST. Please see our terms for use of feeds.

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