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.

Are We There Yet?

It is no secret that returns in the capital markets (stocks and bonds) have been volatile (and below historical averages) for the past few years. Some market “experts” are predicting that those lower returns will be the “new normal” for some years to come. If that prediction is correct, individuals must save more to maintain their desired standard of living in retirement.

We are presenting below a “savings checkpoint” table for determining whether your current savings amount is “on schedule” to fund retirement at your current standard of living. The table is a function of current age and income level. This table is based on J.P. Morgan Asset Management’s proprietary model with their capital market assumptions and an 80% confidence level.¹  Several additional assumptions are involved:

• The assumed annual gross savings rate going forward is 10% (about twice the current US average savings rate).
• Pre-retirement investments earn 6.0% per year.
• Post-retirement investments earn 5.0% per year.
• Inflation is 2.25% per year.
• Retirement age is 65 for the primary wage earner; age 62 for the spouse.
• Retirement will last 30 years.

You can use the factors in the table below to determine if your accumulated savings is sufficient:

Age	$50,000	$75,000	$100,000	$150,000	$200,000	$250,000	$300,000
30	-	0.5	0.8	1.3	1.8	2.1	2.2
35	0.3	1.2	1.5	2.1	2.6	3.0	3.2
40	0.8	1.9	2.3	3.1	3.7	4.1	4.3
45	1.5	2.8	3.3	4.2	4.9	5.4	5.7
50	2.4	3.9	4.5	5.6	6.4	7.0	7.3
55	3.4	5.2	5.9	7.2	8.2	9.0	9.3
60	4.5	6.8	7.5	9.1	10.4	11.2	11.7

The income levels across the top are gross income (before taxes and savings). Go to the intersection of age and income level to determine the appropriate factor. For example, a 40 year old person earning $100,000 per year has a factor of 2.3. Multiply your current salary times that factor to determine the amount you should have saved today or $230,000 in this case (2.3 x $100,000). Savings are assumed to continue at 10% per year until retirement.

Are we there yet? Please visit us at Paragon Financial Advisors to determine whether your savings level is sufficient to provide the retirement lifestyle you desire. We can help you plan for your future 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.

 

¹The J.P. Morgan model uses household income replacement rates from an inflation-adjusted analysis of Consumer Expenditure Survey (BLS) data (2011-2014). Social Security benefits are assumed using modified scaled earnings in 2017 for a single wage earner at age 65 and a spousal benefit at age 62 reduced by Medicare Part B premiums.

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. 

 

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.