Wednesday, November 19, 2014

Not Always So

And the Zen master says, “Not always so.”
Shunryu Suzuki

Comments on “Do You Have Money Smarts?” an article by Carrie Schwab-Pomerantz exploring five “money myths.”

Let’s play some “Yes, but!” games with your mind.

Myth #1 “A will is the best way to ensure that your estate will be distributed the way you want.”

And the Zen master says, "Nothing ever exists entirely alone. Everything is in relation to everything else."

Every adult needs a will. If you going off to college, a $30 Internet will is enough. If you have children a will is an absolute necessity. If you die you want to determine who will have custody of your minor children. Don’t let the courts make that decision for your family. For everyone the will is the foundation of a good estate plan. The point the author wants to make is that your will is not the last word in every case. If that old life insurance policy names your ex-spouse as sole beneficiary, that is who gets your money. Choosing how to use the selection of beneficiaries wisely can save your family time and money when your will goes to probate. You can even name a family trust the sole beneficiary of CDs, annuities, life insurance policies, or even brokerage accounts. Talk to your lawyer every five years or after a major life event. Your will is a living document until you are dead.

Myth #2 “Every adult should have life insurance.”

And the Zen master says, "It is easy to start a family but difficult to maintain it."
Tibetan Proverb

If you have minor children, you need life insurance, a lot of life insurance, low cost term insurance. How much? Rules of thumb include ten times your gross annual salary or $250,000 for every planned child before you start having them. Stay at home moms need life insurance too. How much? How much would it cost to replace her? Yes, you do have to put a value on the labor you will have to pay to replace in her absence. If you don’t have minor children, you probably don’t need life insurance. In certain cases whole life policies can be used as an estate planning tool, but be careful you are not buying anything just to send the salesman’s daughter to the private college of her choice.

Myth #3 “You should start taking Social Security as soon as you’re eligible.”

And the Zen master says, “In the beginner’s mind there are many possibilities, but in the expert’s there are few”
Shunryu Suzuki

Oh my! There are so many ways to take Social Security it boggles the mind. What is best for you depends on how long you want to work, how much you earn, and how urgently you need the money. Strategies allow one partner (usually the low earner) to take earn Social Security then flip to a higher spousal benefit when the primary earner begins to draw Social Security at a later point in time. As always, more money makes tax considerations more important. Before making this very important decision use one of the Social Security calculators found on the web and/or consult with your CPA.

A final note: When you choose to take Social Security is ultimately a bet on your life expectancy. If you think you will die before you are 78 or79 take your Social Security at age 62. If you think you will live past 78-79, wait until your full retirement age. If you don’t need the money and believe you will live to a good old age, consider postponing your draw until age 70.

Myth #4 “You should purchase long-term care insurance when you’re in your 40s or younger.

And the Zen master says, “If you have less than $500,000 you can’t afford long term care insurance. If you have more than $1,000,000 you don’t need long term care insurance. If you have more than $500,000 and less than $1,000,000 you can’t buy long term care insurance.”

The new conventional wisdom on long term care insurance sounds so much like a Zen koan I just had to use it. We buy insurance to protect us against the financial consequences of events we can not afford to cover with our own money. Using that definition, we can no longer buy long term care insurance. Today, that very expensive product is sold in multiples of $100,000. The days of no limit long term care insurance are over. Some recommend $300,000 as the “sweet spot” giving the most coverage at the most affordable rates. The problem is most people with a net worth of less than $500,000 can not afford to buy this insurance and the people with more than $1,000,000, given the cost of the product, would generally be better off self insuring. If you are somewhere in the middle look into buying long term care insurance sometime around your 60th birthday.

Myth #5 “If you need cash while you’re still working, a 401(k) plan is a good place to turn for a loan or a withdrawal.”

And the Zen master says, "When you try to stay on the surface of the water, you sink; but when you try to sink, you float."
Zen Proverb

When 401 (k) plans came into existence some very bad financial advisors discovered that the owners of these plans could borrow their own money from these plans at a low interest rate that is going back into your plan. Essentially, you are paying the loan back to yourself. Hopefully, that bad idea has been put to rest by the responsible financial press. When you borrow money from a 401 (k), you are losing the 7% to 7.5% return on your investment predicted by Siegel’s Constant plus the added benefit of growth in a tax sheltered environment. Even if you successfully pay yourself back, you are using after tax dollars. When you take that money out in retirement, you will be taxed a second time on those same dollars. How special is that? If you fail to pay your loan off on time, you will get hit with taxes and penalties. If you lose your job you have 60 days to pay off the entire balance or face early withdrawal penalties and taxes. Now think about coming up with say, $50,000 cash on the day you lose your job.

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