Q1 2019 Newsletter
Volume 10, Issue 1 - April 2019
Following the wild ride of Q4 2018 global equity markets stabilized and began a new march higher in the months to begin 2019. This was in large part due to the Federal Open Market Committee’s (FOMC) shift away from monetary tightening. And while this pause has had a near-term stimulus effect, global monetary policy remains tighter than it was two plus years ago.
We still believe, as outlined in our Q4 2018 newsletter, late-cycle economic conditions (tight labor markets, high debt levels, slowing global growth…) remain but that recession risk particularly in the U.S. remains low. If you did not have the opportunity to view our Weekly Market Update from March 8, 2019, we have included it again here: https://bit.ly/2VrrLGI. This mentality coupled with a potential U.S.-China trade deal could bode well for equities moving forward.
That said, Q1 also brought with it an inversion of 10-year and 3-month treasury yields which has preceded the previous seven recessions. It is wort noting that the amount of time between inversion and recession varies significantly and can be years between occurrences. It is difficult to say if history will repeat itself but for now seems like an indicator to be watched but not overly concerned about.
In terms of the Tactical Allocation Portfolio (TAP) the model gained traction and reentered equity markets in the late-January/early-February time frame following the full-blown risk-management event in Q4. The first bear market cycle since 2009 led to a V
shaped recovery and a full reinvestment of cash and cash equivalents in a relatively short amount of time. When looking back, the model reduced risk entirely by the mid-October timeframe and subsequently reinvested those proceeds as stated above. Essentially side-stepping the V, both to the downside and as markets began their recovery. All in an effort to potentially avoid bear market conditions becoming something much worse. At the end of the day the model missed very little if any growth potential as seen below:
In short, the enhancements to the model we implemented over the course of 2018 proved worthwhile, having scaled out of harm’s way yet ultimately leaving us fully invested in equities moving forward.
As always, please do not hesitate to contact us at any time if we can help to clarify anything above as it relates to you, your family, your portfolio or your plan. We look forward to hearing from you!
Fraser, Dudley, Alex & Josh
Discussing potential future long term care needs with aging parents can be intimidating. But it’s important for your whole family to make informed decisions while there are several options to choose from. The longer you wait, the more limited options become. By making these important decisions together and planning ahead, you can help make sure your parents can age on their own terms.
It’s important to consider what kind of assistance might be necessary for one parent should the other pass away. Would they be able to take care of daily activities on their own? Would they like to live independently or in a community setting? These issues are difficult to discuss and it’s important to remember that empathy and a positive attitude can make the conversation easier for everyone. With a little objectivity and a lot of compassion, you can help create a plan to prepare your entire family for whatever the future brings. Only 11% of consumers have had a conversation with their parents or in-laws about the potential need for long term care.1
As you start the discussion about long term care, it may be helpful to create a checklist to guide the conversation. You’ll want to discuss what plans your parents currently have in place for the future, including whether they have a current will, a power of attorney appointed, and a living will. Take note of if they have a preferred doctor that already knows their health history and make sure you have that contact information. Discuss what their preferences are for their overall standard of living including housing and their choice of caregiver, and ask about anything specific they would like to avoid.
This discussion about long term care planning is one that will likely not be resolved in one sitting. You’ll want to take notes, and start researching the different options for receiving and funding long term care based on their needs, desires and resources. It may also be helpful to accompany your parents to meetings with their current financial professionals. By taking care of these details now, you, your parents, and your family will be ready to face tomorrow with confidence.
If you’re still unsure of how to best approach your parents about this topic please email firstname.lastname@example.org and we’ll send a free guide to get you started!
covering the cost
Long-term care planning is really hard to talk about. It can be frightening to imagine ourselves with diminished capacity and needing help from others. And since we find it challenging to discuss it, we often don’t plan for it. Very wealthy people can pay cash for upscale nursing facilities where they’ll receive great care. Those with fewer assets tend to get help from family and friends or Medicaid. Everyone in the middle has two options: self-insure or shift some of the risk to an insurance company. When a married couple in their 60s receives a long-term care insurance quote of $5,000 to $8,000 per year, they often decide against the policy and think they can use the extra $8,000 to travel. This sounds fun, but it’s not a smart approach. It’s important to have a plan for covering long-term care costs.
Those who decide against buying insurance are, by definition, self-insuring. If you go this route, you must dedicate a portion of your assets to the possibility of needing care. You can never spend that money on a vacation or other big-ticket items, because you never know when you might need it. Let’s say a married couple retires with $1 million in an IRA and their financial planner tells them they can pull only $40,000 (4%) from the account each year, plus increases for inflation. If they decide not to buy insurance, they should dedicate $150,000 to $300,000 for the possibility of future care, depending on assumptions in regard to return on investment, estimated inflation, the number of years for which they want funding, etc. If the same couple dedicates $250,000 to long-term care, they must reduce their withdrawals from $40,000 per year to only $30,000 (4% of $750,000).
The other possible route involves shifting some of the financial burden to an insurance company. In my financial planning practice, I recommend three different ways for my clients to cover their potential long-term care costs:
Traditional long-term care insurance
If you have a traditional long-term care insurance policy, you’ll pay an annual premium based on your age, health and partner status. Most policies’ benefits kick in if you receive an Alzheimer’s or dementia diagnosis or are unable to perform at least two of the basic “activities of daily living.” These activities include transferring — for example, being able to move from the bed to the couch — bathing, dressing, eating and using the toilet. If you qualify, your policy will have a waiting period before you can receive benefits. Afterward, it pays either you or your caregiver a daily or monthly benefit specified in the contract until you’ve used up the benefit pool, the amount of coverage you’ve paid for. Traditional long-term care insurance tends to be the cheapest way to get a lot of coverage.
Hybrid long-term care insurance
Insurance companies realize that people are reluctant to shell out tens of thousands of dollars and potentially receive no benefit, so they’ve created policies that combine permanent life insurance — which has a cash value component — with long-term care insurance. When you need money for long-term care, you withdraw it from your cash value. Once that money is depleted, the insurance company starts to pay for your care. You’ll receive a lower long-term care benefit for the premium, but your heirs will receive your death benefit if you die without needing care — so you won’t feel like your premiums are going to waste. If you find a better use for the cash value of your policy or believe it isn’t performing as you expected, you can also cancel and receive most of your premiums back. However, there are usually surrender charges if you cancel within the first 10 years of the policy.
Indexed universal life insurance with a critical care or accelerated death benefit rider
Some cash value life insurance policies have low-cost or no-cost riders that allow you to access most of the policy’s death benefit for long-term care. If you’re healthy, these policies can be funded to provide better cash value and more death benefit than hybrid policies. The cash value of indexed universal life insurance grows based on the returns of a particular index like the S&P 500. Most policies have a floor of zero to 1% and a cap rate of around 10% to 15%. If your cap rate is 13% and the S&P 500 goes up 30%, you would make 13% that year. But if the S&P 500 loses 40%, the floor prevents you from losing money. You won’t receive the dividends you would if invested directly in the market. This policy’s potential growth could make it your best option if you care more about your cash value and death benefit than about having the largest pool of funds available for long-term care.
Comparing the options
I gathered the following quotes to show a healthy 62-year-old woman how these three policies would compare when she’s 80 and might need long-term care. For each category, I used a leading company that provides the most benefit for the premium paid. Keep in mind that the numbers would be different at every age. For the indexed universal life policy, I assumed that the average annual return would be 6%. Remember, the actual return will fluctuate between a floor and a cap. As you can see in the table, there are two values for both the death benefit and cash value: One is the guaranteed value, and the other is a projected value based on the expected average return. It’s good to separate the categories to show the range of possibilities. Some people shopping for insurance will want to use the more conservative guaranteed values for planning purposes, while others would like to see how their policy might grow.
Each option has different strengths and weaknesses. You tend to get the most long-term care benefit for the least cost with traditional long-term care insurance. Hybrid long-term care insurance has the benefit of very simple underwriting, and policyholders get a good amount of care for the amount they pay, with the bonus of a death benefit. Indexed universal life is likely to provide higher cash values and a better death benefit, but gives you the lowest long-term care benefit. Think outside the box There are a variety of ways to plan for the potential costs of long-term care, and each has its pros and cons. But if you decide not to self-insure, don’t be afraid to think outside the traditional long-term care insurance box. Compare different carriers and types of policies to find the one that best meets your needs.
Author: Damon Gonzalez
planning makes a difference
Five reasons why you should work with a financial professional to create a retirement plan:
1 Focus goals in retirement and how you want to pay for them
2 Address your concerns and expectations for retirement.
3 Identify things that could pose a threat to your retirement and manage them
4 Feel more educated, confident andin control of your financial future.
5 To help you navigate the complexity of financially moving into retirement.
What does it mean for you?
Financial planning is about more than assets, investments and net worth. It’s about what you want to do with your money and why. It’s about identifying your concerns, expectations and goals – it’s about how you feel and what you want.
MoneyGuidePro® helps address common fears and concerns such as health care costs, outliving your money and the best time to file for Social Security benefits. The confidence meter helps you gauge how likely you are to reach your goals and whether you are on track instead of focusing on headlines.
Learn more about how financial planning with MoneyGuidePro® can help you by giving us a call today!
*The interpretations and organizations of these ideas are the confidential thoughts of 1st & Main Investment Advisors and do not represent the opinions of Berthel Fisher & Co. Financial Services, Inc. nor Berthel Planning, Inc.
*Our firm does not provide legal or tax advice. Be sure to consult with your own legal and tax advisors before taking any action that may have tax or legal implications