Goal Setting

We at Paragon Financial Advisors don’t believe that “any direction” is acceptable. The financial well-being of you and your loved ones is too important to be left to chance. That’s why we encourage our clients to develop their personal financial goals.

Goals are basically a result or achievement toward which you are willing to expend time and effort. Goals vary with the individual’s wishes; hence, you set your own. Defining effective goals requires developing characteristics for those goals. For example, “I want to retire comfortably” is not a well-defined goal. Additional information is required.

Goal Characteristics

A well-defined goal requires the following characteristics:

1. Specific- An effective goal is specific in nature. It clearly defines the desired result or achievement in an unambiguous manner.
2. Measurable- Goals must be measurable, i.e. you must have a way to determine the attainment of the goal and monitor the process toward goal attainment. Financial goals would be measured in dollars.
3. Achievable- Effective goals must be achievable. For example, a goal of playing quarterback for an NFL football team would not be achievable for me given my size and athletic ability. Achievable does not necessarily mean easy. “Stretch” goals requiring significant effort are permissible if it is possible to achieve the final goal.
4. Relevant- Goals must be relevant; a relevant goal provides incentive for expending the effort required for goal attainment.
5. Priority- Most individuals will have multiple goals as they go through the goal setting process. Some goals will be more important to the individual than others. Therefore, goals should be ranked by priority. Which goals are most important and which goals have lesser importance? Identify and rank according to priority.
6. Time frames- An effective goal has associated time frames for completion and “mile posts” to monitor progress toward goal achievement.
7. Action Items- Action items outline the actions necessary to attain the goal. What needs to be done to successfully reach the goal?

Let’s restate our retirement goal according to these parameters.

“My first priority is to retire in 30 years at an income level equal to 85% of my current income adjusted for inflation at 3% per year. To accomplish this goal, I need to save X dollars per year and my investment portfolio needs to grow at Y % per year.”

This restatement clearly provides better definition with the characteristics discussed above.

• Specific/Measurable- “…retire… at an income level equal to 85% of my current income adjusted for inflation at 3% per year.”
• Achievable- certainly.
• Relevant/Priority- “…first…”
• Time frame- “… in 30 years…” with measurable mile posts—the value of the portfolio each year based on an assumed savings rate and portfolio appreciation rate can be identified and monitored.
• Action Items- “… save X dollars per year.” 

         Please contact us at Paragon Financial Advisors. We’ll assist you in developing your personal financial goals. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients

Asset Protection??

Normally, retirement plans are generally considered safe from creditors. A recent ruling by the Bankruptcy Panel for the 8^th U.S. Circuit Court of Appeals has called that safety into question. An individual was awarded ½ of his ex-wife’s 401(k) plan and her entire individual retirement account in their divorce settlement. He later filed for Chapter 7 bankruptcy and claimed those assets were exempt from creditors because they were in retirement plans. The Bankruptcy Panel disagreed on the basis that the retirement plans were not originally his; thus, they were subject to creditor claims.

Defined contribution 401(k) plans are sheltered from creditors in bankruptcy filings for individuals who own the plan. IRAs are also usually exempt from bankruptcy as well (subject to a cap under federal law that is approximately $1.2 million). However, once the assets are separated from the original owner, you should expect that the asset protection will go away. In the Supreme Court ruling of Clark v. Rameker, the Court held that inherited IRAs are not considered retirement funds for bankruptcy protection.

Although the 8^th Circuit ruling applies only in that district, other courts may follow suit. For protection, IRA assets received in a divorce settlement should not be intermingled with the individual’s own IRA. Co-mingling funds could possibly jeopardize the creditor protection of the entire IRA.

Please note that this discussion does not constitute legal or tax advice; it is informational only. Your individual circumstances should be discussed with your legal and/or tax counsel.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Alternative Investments

It has been a good run. Ten years after the 2008 “meltdown,” the bull market in securities is beginning to show its age. And, after a very placid 2017, volatility in the market is showing it’s alive and well. That volatility has been driven by interest rate expectations, trade/tariff discussions, and the mid-term elections. The elections are (mostly) behind us, but volatility may still be around for a while. Investors have made some money with this long bull market; now the goal is to protect those gains.

 Alternative investments can play a major role in hedging risk in the stock market; however, there are many different hedging strategies available. Many investors are not familiar with these strategies or how to access them. In general, there are two broad categories of alternatives: 1) those investments offering diversification from the stock market, and 2) those investments that reduce risk of loss of portfolio value while still maintaining some return potential.

Access to hedging strategies used to be a major problem; lack of liquidity (the ability to easily buy and sell) being a prime example. Many of these strategies are now available in a mutual fund format. Shares can be purchased or sold daily with valuations set at the end of the day. Some strategies are available as exchange traded funds (ETFs) which provide intra-day liquidity.

Correlation

Correlation is an analysis of the relationship of two data variables, or how the variables move in relation to each other. Normally this relationship is combined into a single number—the correlation coefficient. A correlation coefficient can have a value of +1 to -1. A value of 0 indicates that the variables have no relationship, i.e. they are independent. Positive values (>0) imply that when one variable goes up, the other variable goes up also. Negative values (<0) imply that wen one variable goes up, the other variable goes down. The magnitude of the number (the closer the coefficient is to a value of +/- 1) explains the degree to which moves in one variable are like moves in the other variable.

Diversification Alternatives

Since most investment portfolios contain stocks, alternative strategies which have a lower correlation to them can provide diversification benefits. Listed below are three strategies which have lower correlations to the S&P 500 over the last 10 years.

• Managed Futures- A fund manager utilizing this strategy usually invests in different asset classes (both long and short positions) depending on the manager’s analysis of which asset classes are going to increase or decrease. Successful ability to capture both rising and falling markets have a substantially different return profile from the stock market—a correlation coefficient of about -0.10.
• Market Neutral- A market neutral manager usually has a portfolio long (owned) on stocks the manager expects to rise and short (sold) on stocks the manager expects to under-perform the market. When the portfolio has similar long and short holdings, the return of the portfolio has returns less related to the stock market- a correlation coefficient of about +0.34
• Multi-currency- A multi-currency manager usually invests in different currencies depending on the manager’s perceived relative strength. Since returns are usually different between stocks and fixed income investments, this strategy has had a correlation coefficient of +0.48.

Risk Reduction Alternatives

Ideally, investors would like a diversification strategy that doesn’t significantly sacrifice returns. Such strategies would not only have less losses in down equity markets, but would also have more positive returns in up equity markets. Over longer time periods, these alternatives would outperform those alternatives that provide only downside risk mitigation. Examples include the following:

• Long/Short Equity- A long/short manager usually has a long (owns) position in stocks in which the manager expects to outperform the market and short (sells) stocks which are expected to under-perform the market. The manager may use the sale proceeds from the short positions to increase his/her holdings in the long positions.
• Non-traditional Bonds-Such a manager usually has the ability to invest in bonds of varying maturities, differing credit quality, differing economic sectors, or varying geographic areas as the manager perceives have value. A successful manager has the ability to move according to interest rate changes and other variables affecting the returns markets.

The Bottom Line

Make no mistake—investing involves risk! So does putting money under the mattress in times of inflation. However, if one can mitigate risk (even in a minor way), it surely is worth the effort. Please contact us at Paragon Financial Advisors to see if such alternative investments might benefit your investment portfolio.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Social Security, Medicare, and You

Each year the Trustees of the Social Security and Medicare trust funds provide a report on the financial status of these programs—current and projected. The information below is from a summary of the 2016 Annual Reports www.ssa.gov, Office of the Chief Actuary, 2016 Trustees Report-Jacob J. Lew, Sec. of the Treasury and Managing Trustee, and Thomas E. Perez, Sec. of Labor, and Trustee).
 
In general, both programs (as currently scheduled) are facing funding shortfalls. Social Security and Medicare accounted for about 41% of Federal program spending in 2015. Both programs will have cost growth in excess of Gross Domestic Product (GDP) growth through the mid-2030s. This shortfall is due to: 1) growth in the aging population (baby boomers beginning retirement—about 10,000 per day) eligible for benefits, and 2) fewer employees entering the labor market (because of lower birth rates) to fund the programs. Medicare expenditures per beneficiary are also projected to increase above the growth in per capita GDP over the same time period.
 
Social Security
 
Social Security has two separate trust funds to provide benefits for two programs: 1) Old Age and Survivors Insurance (OASI), and 2) Disability Insurance (DI). Although the trust funds are technically separate, the Trustees typically combine the funds to provide the actuarial financial status for the total plan. Funding for plan benefits comes from combined payroll taxes from both employees and employers. Current benefit payments to plan recipients are paid from these payroll taxes and any excess payment is scheduled to be added to a “trust fund” to provide for future benefit payments. In the 2016 report, the Trustees project that combined fund asset reserves will exceed projected benefit costs through 2028; benefit payments will then begin to dip into trust fund reserves. Trustees currently project that those trust funds will be depleted in 2034. When the funds are depleted, projected tax income is sufficient to pay about three-quarters of projected benefits through 2090.
 
Medicare
 
The Medicare program also has two trust funds: 1) Hospital Insurance Trust Fund (Part A), and 2) Supplementary Medical Insurance Trust Fund (Parts B and D). Part A of Medicare helps pay for the cost of hospitalization, home health care following hospital stays, skilled nursing care, and hospice care for the elderly and disabled. Part B of Medicare helps pay for the costs of physicians, outpatient hospitalization, and home health services. Part D subsidizes the cost of drug coverage.
 
The Trustees project that the Part A trust fund will be depleted in 2028 (two years sooner than projections in the 2015 report). Part A expenditures have been exceeding income received since 2008; at fund depletion in 2028, revenues are projected to pay 87% of Part A costs. Parts B and D are adequately funded because current law allows funding from both general revenues and beneficiary premiums. However, because of an aging population and increasing health care costs, the cost of Parts B and D are expected to grow from 2.1% of GDP in 2015 to about 3.5% of GDP in 2037.  Trustee projections in the 2016 report are that total Medicare expenditures will grow from about 3.6% of GDP in 2015 to 5.6% of GDP in 2040. The costs are projected to increase to about 6.0% of GDP in 2090.
 
The Bottom Line
 
Social Security and Medicare benefits are a key component in long range planning for most individuals. The 2016 Trustee Report indicates that changes in these plans will be forthcoming. Please contact us at Paragon Financial Advisors to see how your future plans may be affected.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Hurricane Harvey

Hurricane Harvey has come—but hasn’t gone. This storm is one the Gulf Coast will remember for a long time. A sudden strengthening category 4 hurricane trapped between high pressure areas dumping a year’s worth of rain in several days is not something one plans for. However, it happened and we’re left with the cleanup.

Priority One--Are You and Your Family OK?

Our primary concern is for our family and loved ones. Loss of “things” is not easy, but loss of life is irreplaceable. We encourage our clients to let us know if they have suffered loss and how we might help. The recovery process is arduous; let us help you if we can.

Next

Insurance agents are going to be overwhelmed with claims in the coming days. There are some things you can do to make their (and your) life a little easier:

• Make only the repairs necessary to prevent further damage. The adjuster will need to see the full extent of the damage. TAKE PICTURES.
• Save all receipts—replacement housing, food costs, transportation, expenses for daily living. You may be eligible to receive an advance from your insurance company.
• Make a list of all damages as soon as possible. Document to the best of your ability.
• File your claim as quickly as possible. Document all interactions with insurance companies, FEMA, or anyone else with whom you discuss the damage.

Homeowner’s insurance coverage usually does not cover damage from rising water; though your first contact should be with your insurance company. For rising water, the National Flood Insurance Program provides basic coverage for building property and contents. For claims not covered by insurance, check for disaster assistance as President Trump has declared much of the Gulf Coast as a disaster area. To research and apply for aid, go to https://www.disasterassistance.gov/

For small business owners, the U.S. Small Business Administration has low interest disaster loans for small businesses in declared disaster areas. (https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/disaster-loans)

A home equity line of credit may provide assistance if established before the damage was done. Check with your friendly banker.

Taxes

People living in a disaster area may be allowed to delay tax filings and payments without penalty. Be sure and keep records of all costs relating to the disaster as these may be claimed as a casualty loss on tax returns.

No question that there are trying days ahead for many Gulf Coast residents. Let us at Paragon Financial Advisors know if we can help.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Navigating Retirement

Ahhh—the good ole’ days. We’ve heard that expression applied to many things. It used to apply to retirement. Work 35 to 40 years for the same company, get a gold watch at retirement, then collect a pension check from the company for the rest of your life. But things changed. Pension plans (defined benefit plans) were phased out in favor of 401k plans (defined contribution plans). This change essentially shifted risk for providing retirement benefits from the employer to the employee. In addition, employees began changing jobs/careers more frequently; the long-term employee with a single company became the exception rather than the rule. Retirement resources historically were a “three-legged stool”—the benefits came from 1) a pension from the employer, 2) personal savings, and 3) Social Security.

 

Today’s retirement picture is significantly different. Let’s look at today’s retirement factors but do it in a framework of “control.” There are some factors over which we have complete control, some factors over which we have partial control, and some factors over which we have no control. For example:

Complete Control

1. Saving- today’s worker has complete control over the amount he/she chooses to save and when that saving starts (the sooner the better!!).
2. Spending-spending choices directly affect the amount saved; again, a choice made by the individual. Less spending means invested funds last longer.
3. Asset allocation-with 401k plans, the plan participant chooses how the money is invested. A greater the allocation to stock means a greater possible gain (or loss).
4. Location-cost of living in retirement varies significantly by geographic location. Relocation may mean a reduced need for daily living expenses. Of course, there are social considerations (friends, family, etc.) that affect this choice.

Partial Control

1. Employment earnings during working years-choice of jobs, education, work location can affect career earnings significantly. Aptitudes and personal preferences play a role here.
2. Duration of working career-how long one chooses to work significantly affects life style standards in retirement. Working longer means greater contribution to savings and fewer years those savings must cover in retirement.
3. Life span-while everyone has a genetic makeup that affects life span, so does life style choices. Proper diet, exercise, etc. can affect both longevity and quality of life in retirement.

No Control

1. Investment returns-asset allocation is an individual choice relating desired goals with acceptable risk. However, the actual performance of investments in each of those asset categories (stocks, bonds, etc.) is something over which we have no control.
2. Governmental polices/regulations-tax policies (and rates) and government regulations have an impact in retirement. Individuals with significant holdings in qualified plans (IRAs, 401ks) have a significant partner in those plans—the Infernal Revenue Service (note: not a typo)!

We at Paragon Financial Advisors assist our clients in navigating the path to and through retirement. Possibilities and pitfalls abound; please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 



   

The Long Goodbye

The associate minister at my church once said he lost his mother twice—once when she no longer recognized him and once when she passed away. His mother suffered from Alzheimer’s disease. According to the Alzheimer’s Association “2015 Alzheimer’s Disease Facts and Figures,” more than 5 million Americans are living with Alzheimer’s disease. It was the fastest growing cause of death by disease diagnosis in the U.S. from 2000 to 2013 (up 71%). Currently no way exists to cure, prevent, or effectively slow the progression of Alzheimer’s and other forms of dementia. In addition, more the 15 million Americans are providing care for an individual suffering from Alzheimer’s or another type of dementia. In 2015, dementia and Alzheimer’s was estimated to cost approximately $226 billion (with about $153 billion of that being borne by Medicare/Medicaid). Planning for this type of disease poses many challenges; we will discuss some of them here.

Warning Signs of Dementia

According to the Alzheimer’s Association, the disease has ten warning signs. These signs do not always indicate Alzheimer’s but may be useful in diagnosing the problem. Every individual will not necessarily have all ten symptoms. These ten signs are as follows:

1. Memory loss that disrupts ordinary life—forgetting dates/events or asking the same questions repeatedly.
2. Difficulty with planning or problem solving—monitoring and paying routine bills.
3. Difficulty in completing routine tasks—driving to a familiar place or repeating common tasks at work.
4. Confusing Time and Places—forgetting where they are and how they got there.
5. Trouble understanding visual images and spatial relationships—the inability to judge distances (a significant problem in driving).
6. Having a problem with words in writing and speaking—not remembering the name of common items.
7. Misplacing items—putting an item in an unusual place (car keys in the refrigerator) and not remembering how they got there.
8. Declining or poor judgement—large, unnecessary purchases or donations to telemarketers.
9. Withdrawing from work/social activities—no longer participating in long standing activities which previously had brought enjoyment.
10. Changes in personality---becoming more easily upset, depressed, or confused.

Stages of Decline

Dementia is a progressive disease. The earlier the identification and diagnosis, the easier to plan effectively.

In the early stage, financial mismanagement is one of the most frequently displayed signs of the disease. The inability to manage a bank account or inability to pay routine bills becomes more obvious. Misplacing items and trouble remembering things becomes more prevalent. Family members may begin to see these signs first; this situation becomes more problematic if they lack direct contact with individual on a routine basis. At this stage, work with the individual to begin preparations. Since dementia will progress, a finite “window of opportunity” exists to establish all planning and legal work necessary to prepare for care.

Consult with medical personnel to confirm a diagnosis. Discuss the implications of the disease on the legal, financial, and caregiving items associated with the disease. Elicit comments/preferences from the individual in these matters. Make sure all estate planning documents are up to date and represent the individual’s wishes. Of critical importance is the appointment of powers of attorney (giving another person the power to act on behalf of the diagnosed family member). Ask your family member to take you along on meetings with doctors, attorneys, tax advisors, and financial advisors.

In the second stage of moderate decline, financial skills deteriorate even further. The family member may become more easily frustrated and begin to withdraw socially. Wandering may begin at this stage, and a caregiver may become necessary. At this stage, the appointed power of attorney should become the manager of the family member’s financial affairs. Being the caregiver for a family member at this stage can be extremely time consuming and stressful. If the caregiver is also a family member, preserving the health of the caregiver is extremely important (see below). An excessively stressed caregiver cannot provide the needed care to an affected person in an efficient manner.

In the final stage or severe decline, the dementia patient will have a difficult time remembering (discussions, events, meetings, etc.). Caregivers may notice mood changes or changes in personality, and the patient may need assistance with the activities of daily living (eating, toileting, etc.). At this stage, institutional care may also become necessary.

Caring for the Caregiver

Alzheimer’s patients have an average lifespan of four to eight years after diagnosis of the disease. However, some individuals may not be diagnosed in a timely manner or may have a physical constitution that extends their lifetimes. Caring for family members with Alzheimer’s takes a toll (both physically and mentally) on the caregiver. The Alzheimer’s Association has prepared a list of ten indications of stress on the caregiver:

1. Denial-Mom/Dad doesn’t have this and things will get better.
2. Anger-at the patient (having to answer the same questions over and over again).
3. Withdrawal-from the activities or social life once enjoyed (“I don’t have time for that.”)
4. Anxiety-about what the future holds for both the patient and caregiver.
5. Depression-an inability to cope with the situation.
6. Physical Exhaustion-being too tired to physically perform daily activities.
7. Lack of Sleep-constantly aware of the pressures to avoid the patient’s needs or wandering.
8. Irritability, Moodiness, etc.-things that can lead to negative actions on behalf of the caregiver.
9. Lack of Concentration-pre-occupation that leads to an inability to complete normal tasks.
10. Health Problems-physical deterioration of the caregiver’s own health.

After all, if the caregiver becomes incapacitated, the problems compound. Available resources can help the caregiver. The Alzheimer’s Association Alzheimer’s and Dementia Caregiver Center (alz.org/care) is a good place to begin; it can help gain  a better understanding of what the caregiver can expect as the disease progresses. A support helpline is also available (Alzheimer’s Association 24/7 Helpline- 800-272-3900).

Unfortunately, we at Paragon Financial Advisors have experience with dementia situations. We have worked with clients and/or family members facing these problems on behalf of a loved one. No easy outcome exists, but proper planning can ease some of the stress. If you should see the need in your family, please call us. We can help with the financial preparations required. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

What’s New in Social Security?

Changes in 2017.

Changes in Social Security benefits for 2017 have been announced. The cost of living adjustment is an increase of 0.3% (an increase of $5 per month for the average recipient). A small increase, but an increase none the less; there was no increase in benefits for 2016.

 

Social Security taxes are paid by both the worker and the employer. Each pays 6.2% of earnings (or 12.4% of pay in total) to support the Social Security system. There is a maximum amount of earnings on which that tax is paid (the “taxable wage base”); no taxes are paid on earnings above the taxable wage base. In 2016, the taxable wage base is $118,500. The wage base will rise to $127,200 in 2017.

 

Individuals who elect to start taking their benefits before their full retirement age (66 years or more) have their Social Security benefit reduced for each dollar of earnings they have over a certain amount. For each $2 a beneficiary earns above that amount, Social Security benefits will be reduced by $1. The earnings limit in 2016 is $15,720; in 2017 that amount increases to $16,920.

 

What’s Next?

 

Now that the election is over, President Elect Trump and Congress will face some challenges with the “entitlement” programs of Social Security, Medicare, and Medicaid. According to the Wall Street Journal (Wed, Nov. 9, 2016, pg. A18), those programs account for 10% of the US economy and that percent is rising. The deficit in 2016 is projected at 3.2% of GDP (in an economy growing at less than 2%). Medicaid spending has been increasing with the increased coverage under Obamacare. In addition, the US (and other developed economies) has an increasing population age. More individuals will become eligible for entitlement benefits. Our current system is not sustainable; be on the lookout for more changes to come.

 

We at Paragon Financial Advisors assist our clients in evaluating their Social Security options. Please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

 

Living on the Financial Edge

 Living on the Financial Edge

At Paragon Financial Advisors, we recommend our clients have a 3-6 month cash “ready reserve” to meet unexpected expenditures. For most Americans, accumulating that amount appears to be much easier said than done. In the May, 2016 The Atlantic magazine, Neal Gabler wrote an article entitled “The Secret Shame of Middle Class Americans.” Some of the items he mentioned (and the sources he quoted) are shown below.

Unexpected Expenses

A Federal Reserve Board survey designed “to monitor the financial and economic status of American consumers” found that 47% would not be able to cover a $400 unexpected expense unless they borrowed, sold something, or could not cover it at all. David Johnson (University of Michigan) surmised that Americans usually smooth consumption over their lifetime: borrowing in bad years and saving in good years. People are now spending any unexpected income (bonuses, tax refunds, etc.) instead of saving it.

A 2014 Bankrate survey found that only 38% of Americans had enough in savings to cover a $1000 emergency room visit or a $500 car repair. Nearly one-half of college graduates could not cover the expense through savings. In 2015, A Pew Charitable Trust study found that 55% of households didn’t have enough liquid savings to cover one month’s living expenses.

Another study by Annamaria Lusardi, Peter Tufano, and Daniel Schneider asked whether a household could raise $2000 within 30 days for an unexpected event. More than 25% could not; another 19% would have to pawn something or use a payday loan to raise the money. Nearly a quarter of households with an income of $100-$150,000 per year could not raise the $2000 in one month.

Liquidity or Net Worth

Is this situation only a liquidity problem or is net worth (the net sum of all assets including retirement accounts and home equity) also at risk? Edward Wolff, an economist at New York University, reported that net worth has declined significantly in the last generation. Net worth declined 85.3% from 1983 to 2013 for the bottom income quintile, decreased 63.5% for the second lowest quintile, and decreased 25.8% for the middle quintile. He looked at the number of months a household could fund its current consumption by liquidating assets if the household lost all current income. In 2013, the bottom two quintiles had no net worth; hence, they couldn’t spend anything. The middle quintile (with an average income of approximately $50,000 per year) could continue spending for 6 days. A family in the second highest quintile could maintain current spending for a little over 5 months.

Research funded by the Russell Sage Foundation found that the inflation adjusted net worth of the median point of the wealth distribution was $87,992 in 2003. In 2013, it had declined to $54,500—a decline of 38%.

Debt

Value Penguin did an analysis of Federal Reserve and Transmission data pertaining to credit card debt. In 2015, credit card debt per household was $5700. Thirty eight percent of households carried some debt; the average debt of those households was greater than $15,000. Apparently the rise of easy credit availability has supplanted the need for personal savings. The personal savings rate peaked around 13% in 1971, fell to 2.6% in 2005, and has risen only to 5.1% now. These debt levels reflect only personal debt; no serious attention is being paid to our $19 trillion government debt.

What’s Going On?

Financial products are becoming more sophisticated, both in quantity and complexity. Such additional products should provide a better way to manage personal financial “hiccups.” Lusardi and her associates (in a 2011 study) found that the more complex a country’s financial and credit market became, the worse the problem of financial insecurity becomes for its citizens. That study measured the knowledge of basic financial principles (compound interest, risk diversification, the effects of inflation, etc.) among Americans ages 25 to 65. Sixty five percent were basically financially illiterate.

Why are we at a financial advisory firm writing about this situation? The United States finds itself in the midst of a most unusual political situation. Some candidates for President of the United States are espousing theories or programs outside the normal capitalistic structure. Are conditions such as the ones described above partially to blame?

A crucial part of managing investment portfolios is attempting to monitor the economic, political, and social conditions that might affect the investing environment in the future. What will that environment look like and how will it affect the selection of assets going forward? We at Paragon Financial Advisors don’t have a crystal ball for the future, but we do try to help our clients invest for the long term. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

The Retirement Plan-Success of Failure

When one reads about retirement planning, the writer usually focuses on planning for retirement. An equally important part of that plan needs to focus on what to do after retirement. A spending plan normally covers the adequacy of income over expenses during retirement and whether or not that income is sufficient over a long period of time. A well-developed spending plan is much more than that. Increasing life spans (and the corresponding lengthening of retirement years) has some interesting consequences.

A symposium at the recent Financial Advisors “Inside Retirement” conference (May 5-6, 2016 in Dallas, Texas) included a discussion on why people “fail” at retirement. Failure is not defined as “bankruptcy,” or inability to retire; , only a failure to live retirement as originally planned. Some of the items discussed for such failure include the following:

1. Health Care—Health care costs are increasing, even if one has health insurance. A retired couple could easily face medical costs in the hundreds of thousands of dollars over their life spans. A USA Today article (March 14, 2015, “How much will health care cost in retirement?”) quoted a study indicating that a man will spend $116,000 on health care in retirement; a woman will spend $131,000. Fidelity Investments has projected that a 65 year old couple retiring in 2015 will spend $245,000 on health care during their retirement.
2. Divorce—Surprisingly, an increase in divorces in the 50 plus age group has appeared. The reduction in assets from such a separation means a potentially lower standard of living for both parties. Multiple marriages (through divorce or death) may also bring the necessity of planning for a subsequent re-marriage. Pre-nuptial agreements, especially where a disparity of assets exists between the couple, can prevent many future problems and are a definite item to consider.
3. Overspending—Prior to retirement, a couple may spend more (especially on week-ends when they are not working) than they do in the normal course of living with a five day a week job. At retirement, every day is Saturday! Spending patterns may need to be adjusted significantly (i.e. reduced).
4. Children-Parenting never stops. Many children return home after college to save money until they “get established.” Helping a child with bills, a substance abuse problem, or even a special needs child can add significantly to retirement outflows.
5. Second Home-A second home purchased prior to retirement might be easily maintained financially while working. In retirement, property maintenance, insurance, property taxes, etc. may become more of a financial burden.
6. Business-Starting a business in retirement may sound appealing, especially if another family member (see “Children” above) is involved. Some basic rules apply: a) It will cost more than you think, and b) revenues will come in more slowly than you plan. Always have a good business plan and, if other parties are involved, have a written agreement spelling out what is to be done. Allocate a set dollar amount (the maximum which you can afford to lose in entirety) to prevent “throwing good money after bad.”
7. Identity-Many individual’s identity and self-worth are associated with their professional, work life. Retirement can change that significantly. Prepare for that transition. Retire to something, not from something.

Most individuals work long and hard during their active career; they look forward to a retirement period that matches their expectations. We at Paragon Financial Advisors assist our clients in developing plans for and during retirement. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.

“It’s the Life Insurance Guy Again”

How much should I own?

How do I know how much death benefit is appropriate for my family? This is where working with a Financial Planner can help you accurately assess how much exactly your family would need today if you were to pass. How much of your current debts, future college costs and retirement would you like covered if your family were to have to cover these costs without your income? Many times life insurance agents will try to sell more insurance coverage than is needed to earn more commission on a higher annual premium. We always recommend consulting with Paragon Financial Advisors before buying a policy.

What type of life insurance should I own?

Term Insurance- this is the most affordable way to purchase a death benefit; you can lock in your premium for a set amount of years or “Term”. Many term policies allow you to convert the policy from term or temporary coverage to a permanent policy at the same risk class you were approved on for your term policy years prior. But why would you want to do that? Let’s say that Bob was approved at Select Preferred for a 20 year term policy and a $500,000 death benefit. At year 10 of the policy being in effect, Bob gets a rare disease that could potentially cause him to die prematurely in the next 10-20 years. With the conversion option, Bob has the ability within the life of the 20 year term policy to convert it to a permanent life policy at his select preferred rating without going through medical underwriting again. Otherwise, it’s very likely he would be uninsurable and denied life insurance coverage.

Universal Life Insurance- this is a form of permanent life insurance that allows for flexibility on the premium payment each year. Universal life is generally a less expensive means to a permanent life insurance policy offering the same death benefit compared to other forms of permanent insurance. Additionally, VUL (Variable Universal Life) or IUL (Indexed Universal Life) contracts offer higher potential returns than some other fixed insurance contracts. With a VUL or IUL contract the insurance and administrative expenses are not fixed and could increase as the insured nears mortality age. As interest rates continue to fall since 2008, many Universal Life policy holders from pre 2008 have received notice that their premiums are going up. The flexibility that these life insurance companies offer comes with flexibility on their end as well. Another disadvantage to Universal Life policies are surrender charges to cash values, which can vary from company to company, but many times are 10 years or more. This limits your ability to access the full portion of the cash values until the surrender schedule has been met. Let’s quickly explain some of the different types of Universal Life contracts.

• Guaranteed Universal Life: a “GUL” contract accrues little cash value, maintains a level death benefit and a level premium guaranteed to a certain age (Most are to age 100 or for life). This looks and acts very similar to term insurance, except it is for the insured’s lifetime.
• Variable Universal Life: a “VUL” contract does accrue cash values and has a potentially increasing death benefit with a minimum guaranteed face value that stays in force as long as the premiums are paid. The accrual of cash values and the death benefit is tied to the performance of “separate accounts” which for all intents and purposes are mutual funds. These contracts offer the policy owner market participation via these separate accounts. If the policy underperforms than it could require the policy owner to dump more money into the contract to keep it in force.
• Indexed Universal Life: “IUL” contracts are the most popular universal life policies currently sold. Unlike a VUL contract, they are actually a fixed interest rate product that offers a crediting rate tied to an index, mostly the S&P 500. Insurance companies generally offer several crediting methods: monthly sum, monthly average, a trigger method, or the most popular point to point. These policies many times offer a “floor” or minimum crediting rate to the policy of say +.5% even though the S&P 500 Index return for the year was negative. However, they also “cap” the upside potential of the return of the index and it’s important to note that the insurance companies do have the ability to lower the cap rate and the participation rate on inforce policies. Many IUL policies offer 100% participation up to 12.5%. One final note, the crediting rate applied based on the return of the S&P 500 does not include dividends, a sizeable portion of the total return over 10, 20 and 30 year time periods.

Whole Life Insurance- this is a permanent form of life insurance that accrues cash value and has a guaranteed “face” value or death benefit. Most whole life policies have a contractual guarantee on the return of cash values, many of the large mutual insurers offer 4% currently. It is important to note that this is not a 4% return on your total premium paid but a guarantee return on the net amount applied to cash value after all expenses have been taken out of your premium for the cost of insurance and operational expense. In addition, whole life policies may pay “dividends” into the policy, though these are not guaranteed. This term is not to be confused with the dividend that you receive from some of your stocks in your investment portfolio. Dividends from a mutual company are a return of surplus profits from their investment earnings, mortality experience (death benefits paid) and expenses over that time period and returned to their policy holders, hence the name participating life insurance. When contemplating a whole life policy, generally a well-designed one should reveal positive net cash values at the end of year 5 or 6 under the Current Assumptions Illustration.

What is the purpose of life insurance?

Risk Management: depending on how long your debts and future expenses extend, will help you determine the appropriate length of time you need coverage and what amount of coverage is needed. Many times term insurance will suffice for this need.

Estate Tax: the goal of this policy is to get the highest return of your premium on the death benefit. Many times a husband and wife will get a joint, last survivor policy that pays on the death of the second insured’s passing. This usually allows the insureds to get more death benefit for the same amount of premium. Also, when dealing with estate tax issues, it’s important to note that life insurance does offer an income tax free death benefit, but this amount is included in the value of the estate. In order to exclude the death benefit from the inclusion into the estate value for estate tax purposes, an Irrevocable Life Insurance Trust or “ILIT” is often used.

Creditor Protection & Cash Accumulation: life insurance is a creditor protected asset in the state of Texas and allows the policy holder to enjoy creditor protection on their life insurance values. Once you have maximized your retirement vehicles, life insurance if designed appropriately, may be a good place to put some excess cash.

Tax deferral & Tax Free Distributions: life insurance cash values do enjoy tax deferred growth as the policy values accumulate. In addition, after all premiums have been withdrawn, policy holders can take out cash via loans as a tax free distribution assuming the policy is not a Modified Endowment Contract

What is a Modified Endowment Contract?

A ‘MEC’ is essentially a policy that’s cash value has been “overfunded” based on the limits under the Internal Revenue Code. When a policy is classified as a MEC, any distributions from cash values of the policy are received on a taxable basis first or Last In First Out “LIFO” accounting method. The interest received on premiums is taxed at ordinary income rates and then the premium portion is returned tax free. A ‘MEC’ still benefits from a tax free death benefit, tax deferred growth and creditor protection. To determine if a contract is a MEC, a premium limit is set. This limit (referred to as a seven-pay limit or MEC limit) is based on the annual premium that would pay up the policy after the payment of seven level annual premiums. This limit is based upon rules established by the Internal Revenue Code, and it sets the maximum amount of premium that can be paid into the contract during the first seven years from the date of issue in order to avoid MEC status. Under what is known as the MEC test, the cumulative amount paid at any time in the first seven years cannot exceed the cumulative MEC limit applicable in that policy year.

What company should I use?

First, it’s important to make sure the life insurance company you’re considering is a stable and functioning company able to pay claims to its policy holders with enough reserves set aside to meet these obligations. You never want to purchase a policy from a company that is more sick than you are when you need them! Finding one with a Comdex score above 90 or a minimum Moody’s Investors Service rating of AA or higher is strongly recommended.

Secondly, we recommend using a broker to shop your life insurance need out to many different carriers. Career Agents or those working for a specific life insurance company, have strong incentives tied to their personal benefits to sell their company’s policies even though it may not be the very best one for your situation.

Please contact the Paragon Financial Advisors to review your life insurance policy(s) or help you review the available options to meet your life insurance needs. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.