Money Clinic: Hedging Inflation without Gold

If you weren’t haunted forever by the inflation scare in the 1970s, you may have missed an important financial lesson that needs to be on the forefront of your mind when making decisions about money.

Inflation is a perfectly rational fear for investors because rising prices of consumer items, college tuition and healthcare erode the value of your retirement dollars. High inflation and taxes cut into the earnings you need to grow your assets.

While inflation has been relatively low over the last decade, you can’t count on that being the case forever. Someone retiring at age 65 has to consider the real possibility of needing a rising income stream for the next thirty years because life expectancy has increased.

Conventional wisdom says that gold is the best cure for inflation. However, gold’s record has been spotty. In the beginning of 1980, gold started at around $559/ounce and finished the year 2000 at about $275/ounce. Heavy gold investors didn’t keep up with inflation and they incurred losses that were hard to recover from.

On the other hand, investors of equities (measured by the S&P 500) did much better over that same period. Investors in stocks also had to survive two horrible corrections since 2000 but if you invested at that time and fell asleep for the last 17 years, you wouldn’t have noticed the carnage that took place. Of course, owning some gold over this period would have been the same as having a really nice dream while you slept! And, as usual, when you wake up to hear the late-night tv pundits pushing gold on seniors, the gold rally is usually near an end.

With the markets at or near all-time highs, you may be tempted to sell your holding and run for the hills. Unfortunately, the cash markets aren’t going to keep you safe from the inflation monster and gold isn’t very liquid.

You might want to consider looking at TIPS. Treasury Inflation-Protected Securities are a type of investment that adds to your principal as the CPI (Consumer Price Index) rises. Be careful though, these bonds are still subject to interest rate risk and they are taxable.

Still, one of the best ways to stay ahead of inflation is to purchase stocks of dividend-paying companies that have a long track record of increasing their dividends. Even if your principal takes a hit due to a market correction, you still have a steady stream of income to count on. Investors that have re-invested their dividends over time have been handsomely rewarded.

Also, stocks in the materials and technology sectors usually fare well during periods of higher inflation. Since inflation usually implies that demand is rising faster than supply, that means that the price of raw materials is climbing. Meanwhile, technology allows businesses to substitute machines for workers to keep costs down and profits higher.

So, when forecasts for inflation move higher, you have to make moves in your portfolios to compensate for the risk that higher prices will erode your investment earnings. There are many ways to diversify your risk so don’t be pressured when you see all of the late-night commercials on tv pushing gold. By then, it’s probably already too late to catch the gold bug anyways!

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Money Clinic: Getting old in America isn’t what it used to be

While America has a high income per capita, we also have one of the lowest scores for income equality, suggesting that retirement saving is difficult for average workers.

A big part of the problem is demographics. Overall, we are living longer — and that’s not necessarily a good thing because we spend a huge amount on health care compared to many other countries.

Too many people are unprepared for retirement because they base it on what it was like for their parents. Heck, we’ve been sold the retire at age 65 mantra for as long as I can remember. The problem is (not to blame everything on our parents) that we have expectations that are outdated.

With the decline of the company pension, individuals have been forced to take on more responsibility for retirement savings and planning. That’s a significant burden because no one knows exactly how much money they’ll need or how long they’ll live and also because most people don’t have the confidence or skill to make such consequential financial decisions, and many don’t trust the financial markets.

Also, financial advisors are to blame for pushing financial products pushed by their employers instead of taking a holistic view of clients’ portfolios. If your guy isn’t preparing you with multiple options in your retirement planning process, you need to fire him immediately. Too many people are working longer because they are still recovering from losses incurred in 2008.

“Knowledge is power” is a saying that holds true in many parts of life, including evaluating your finances. Before setting realistic goals or creating a budget, you need to understand the important details. Gather your financial information, and evaluate the truth of your finances. The most important figures include protection, savings and investments – and of course, your present and future income sources.

No matter where you are in life — just starting out, newly married or well established — you should have short-term and long-term goals. Setting goals in advance allows you to establish a plan to set aside the right amount of money to achieve them.

There are many obstacles that stand in the way of successful retirement. That is why it is imperative that you have multiple sources of income and diversified assets so that you can be prepared for any economic environment.

Since higher health care costs are certain to be an issue in the future, you should prepare both financially and physically to help pay for care and try to curb any major expenses. Also, since long-term care is a distinct possibility, start thinking of ways to protect some of your money.

Our parents talked about retiring at age 65. Unfortunately, the new reality is that once you are 65, you are looking at needing a rising income for another 30 years.

So, make plans with the new reality of retirement in mind and perhaps you won’t be disappointed.

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Money Clinic: How to Avoid Medicaid Estate Recovery

It is an unfortunate reality of aging. If we live long enough, we may eventually develop a chronic condition or illness that limits our ability to do some basic tasks. We might need help with household chores, shopping, money management, medications or transportation. Furthermore, we may need assistance with “activities of daily living” such as eating, bathing, dressing, toileting, and walking.

Despite the likelihood that we will need long term care someday, older adults typically fail to plan for it. This can be devastating when a care crisis arises. It can place an unnecessary extra financial, physical, and emotional burden on our families.

One of the factors to consider when you do plan is a program called Medicaid Estate Recovery. This is one of the problems that can be minimized or totally avoided by adequate planning.

Since both nursing homes and home care are so expensive, many recipients eventually run out of money and end up relying on Medicaid benefits. But, when you die, Medicaid expects to be repaid for the money it spent on your nursing home or other long-term care. This repayment requirement is enforced through the Medicaid Estate Recovery program.

Most people want their home to go to their children or other family members when they die, not to the government. But Medicaid Estate Recovery can force your home to be sold to pay the government back.

Medicaid Estate Recovery forces the sale of assets, like your home, that you own when you die. One way people try to avoid the recovery program is to give things away before they die. For example, parents sometimes try to protect their homes from nursing home costs and estate recovery by giving the home outright to their children.

While this strategy may ultimately protect the home from Medicaid Estate Recovery, it carries many risks. It’s not as simple as it seems. One problem is that deeding your home to your children will make you ineligible for Medicaid for at least five years. You may have no way to pay for the care that you need during the Medicaid five-year look-back period. And in Pennsylvania, under our State’s filial responsibility laws, a nursing home, hospital or other care provider can then sue your children.

Deeding your home to your children can also have significant tax disadvantages, and can put you at risk of losing your home in the event your child predeceases you or runs into legal, financial or marital problems.

Usually, a better option is to deed the home so that it is owned by a trust rather than being owned by a child. [The term “trust” describes the holding of title to a property by a trustee (one or more individuals or a trust company) in accordance with the provisions you create in a written trust instrument.]

With a Medicaid Asset Protection Trust (MAPT), you transfer assets to the trust and thereby give up the ability to control those funds. You can remain in your home, but once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold.

Because a trust involves the transfer of property for Medicaid purposes, Medicaid’s five-year look back period rule on transfers applies. This means that it is best if you can create and fund your trust at least five years before either you or your spouse are likely to need to apply for Medicaid.

A trust allows you to protect your real estate (and other assets if you wish) from long term care costs while avoiding the risks and negative consequences of outright transfers to children. By transferring your home and other assets into a properly designed trust, you can still reserve an interest in and some control over the transferred assets – advantages that are not available when transfers are made outright to a child. Investments, such as stocks, bonds, bank accounts, and life insurance policies are also commonly protected using a trust.

Also, when you transfer assets to a trust, you don’t have to sell them. The trust can sell things held by it, and buy new things. If your home is held under the trust, and you need to move, the trust can sell it and buy a new one.

People often name one or more of their children as trustees – this is kind of like naming someone in a power of attorney or an executor in a Will – the trustee doesn’t personally own the assets of the trust, they just manage them according to the terms you set up in the trust. While most people name one or more family members as the trustee, you can also name a professional trustee like a bank.

As with all financial matters, don’t wait for a crisis to happen. Find someone that can help you protect your assets from all financial and personal risks.

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Money Clinic: Planning Financially for Long-Term Care

If financial planning and long-term care planning have not been done previous to the need for care, the burden usually falls on the caregiving family member. Decisions about how care will be paid for, who will be responsible for managing the estate as well as how the long term care will be given can cause stress and contention among family members.

It is best for parents and all family members to be involved in planning for future financial needs. The financial resources being used today could change drastically with the occurrence of a stroke, illness or onset of dementia. In order to plan financially for long term care, you need to know what the costs are now and what they will be in the future.

Planning financial needs can be very difficult, considering you do not know when long term care will be required or how long it will be needed. You can determine what will be needed in certain living situations. Staying in your home for care will require Professional Home Care assistance, travel accommodations to doctor appointments, help with shopping, meals, medical supplies and medication and possibly a 24-hour attendant. Even if a family member is doing most of the care, eventually professional care will be required or a move to a nursing home facility will be necessary.

When evaluating your present income and assets consider how they would work for future needs.

• What are my care options?
• What type of long-term care can I afford?
• Do I have long term care insurance?
• Are there assets I can sell?
• If I stay at home how will I pay for care?
• Do I have to sell the house to pay for other living arrangements?
• Are there other financing alternatives?
• Do I have life Insurance or the means to pay for a funeral and burial?
• Will my spouse be cared for financially?
• Should I do Medicaid planning?
• Do I have the legal documents that may be needed?

Knowing your needs and financial resources is paramount before making any long-term care decisions. Working together, both parents and family members can ease the stress and burden of elder care needs.

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Money Clinic: Economic Anomaly

The idea of “maintaining a standard of living,” has become a foundational bedrock in our society today. Americans, in general, have come to believe they are “entitled” to a certain type of house, car, and general lifestyle which includes NOT just the very necessities of living such as food, transportation, shelter, running water and electricity, but also the latest mobile phone, television, computer, and Internet connection.

Unfortunately, maintaining a decent standard of living is coming at a very high price.

With interest rates already at historic lows, the consumer already heavily leveraged and wage growth stagnant, the capability to increase consumption to foster higher rates of economic growth is limited.

It’s hard to imagine this scenario when you look at your recent investment statements. This eight-year bull market has given us hope for unlimited upside in the financial markets.

However, economic data suggests this is likely not the case. The “real” economy, is struggling to recover from monetary policy errors of the past. S&P 500 companies have shown zero earnings growth over the past three years, even under the most optimistic use of accounting methods. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have the most money that was invested in the financial markets at the right time while everyone else is still climbing back from the last few market crashes.

The “structural shift” is quite apparent as burdensome debt levels prohibit the productive investment necessary to fuel higher rates of production, employment, wage growth, and consumption. It is quite possible that we may look back at this point in the future and wonder why governments failed to use such artificially low-interest rates and excessive liquidity to support the deleveraging process, fund productive investments, refinance government debts, and restructure unfunded social welfare systems.

Also, business owners are highly aware of the employment and business climate and are milking for all it is worth to maintain profitability. With high competition levels for existing jobs and the impending threat of job loss for those working, employers can work employees longer hours with only a modest increase in wages. Real unemployment rates are still high and wages are stagnating (unless you are working 2 or 3 jobs).

This impact on wages, as other inflationary pressures rise such as surging health care costs, rental rates, and college tuition, hits the consumer where it hurts the most. This bleed on incomes has led to significant slides in the real savings rates and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living without incurring massive debt.

With extended low rates, companies should be investing in product development, hiring new employees to fill demand for their new products and fixing broken-down equipment. We should be nearing an economic peak that has been prosperous for all.

I’m not seeing it.

Furthermore, one of the arguments for higher stock prices has been that higher valuations are okay because interest rates are so low.

However, given the breakdown of wealth across America we once again find that virtually all the net worth resides in handful of the wealthiest Americans.

Someone is going to have to update all the economic textbooks to record this economic anomaly.

At least there will be an increase in production by doing that.

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