Today’s interesting statistic: In 2005, 3.5 million life insurance policies paid death benefits.
Today’s amazing statistic: In 2005 18.5 million life insurance policies lapsed.
(These numbers were recently reported by the Insurance Information Institute.)
I’m no insurance expert, but this seems like a lot of lapses. I’m sure many of these policies were owned by retirees who simply quit paying premiums when their perceived need for insurance declined with their retirement (no more earning power to protect and fewer if any financial dependents). Or, maybe it was just that money got a little tight.
There may have been good reasons for the majority of these lapses, but I’m sure some were simply bad financial decisions. Before letting a policy lapse, the policy owner really should give strong consideration to the following:
What benefits does the policy still provide (tax advantages, estate planning, etc.)?
What is the economic value of the policy today if I live to my normal life expectancy (present value of proceeds at death less present value of premiums paid between now and then)?
What alternatives do I have to maintain coverage (borrow to maintain premiums, convert to a paid-up policy, etc.)?
If I can’t or don’t want to maintain the policy, what alternatives do I have besides letting it lapse (give or sell the policy to someone who will maintain the premiums and designate them as beneficiary)?
Most policyowners should work with an insurance expert to fully evaluate these (and probably other) alternatives. This is especially true when considering selling a policy; this “life settlements” arena has seen lots of shady dealings and abuse, both from buyers and sellers, so be careful.
But, don’t just let your life insurance policy lapse without considering the alternatives. That could be the worst lapse . . . of judgment.
Larry Halverson: I've Been Thinking
Larry Halverson, CFA, Managing Director of MEMBERS Capital Advisors, Inc., is a veteran of more than 35 years in the financial services industry. Links: SUBSCRIBE TO: I've Been Thinking | 
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Friday, May 25, 2007
Friday, May 18, 2007
Developing Financial Discipline
Most of us near-retirees and many actual retirees were raised by people who lived through the Great Depression of the 1930s. Most of them were quite thrifty, maybe even miserly. This trait was almost universally attributed to their life experience – to their environment.
Most children of these Depression era parents are thought to be not very thrifty, maybe even spendthrifts. This is usually attributed to their opposite experience – their formative years’ environment of ready employment and rapidly advancing standards of living.
I’m sure these differences in external influences made a difference in how these two generations thought of and used money. But, I also think there is another factor. And, I base this opinion on my own personal experience
One of our two sons has an almost manic compulsion to spend. The other is still in college, but already has a pretty nice liquidity cushion in his savings account as well as a few mutual fund investments. Yet, they grew up in the same environment.
At least part of this financial characteristic has to be innate in each individual.
I recently ran across some confirmation of this. George Lowenstein of Carnegie Mellon University monitored actual brain functions as people made purchases and found that everyone experiences pleasure from buying, and also subsequent displeasure with having to pay for the purchase (buyers’ remorse?). But, some experience this displeasure/remorse far less than others. For them, it’s all gain and no pain.
The significance of this in the retirement realm? Don’t expect your spending patterns to be easily changed in retirement. Without a lot of work, however you behaved pre-retirement is likely to continue post-retirement. You’re wired that way.
Contrary to the usual perception of our generation noted above, the study also found that under-spenders are more prevalent in the U. S. today than over-spenders, but are just less visible. I guess spenders love to spread the joy of their purchases while the more penurious among us are quietly watching their wealth accumulate. I wonder who’s happier (at least until the money runs out).
Most children of these Depression era parents are thought to be not very thrifty, maybe even spendthrifts. This is usually attributed to their opposite experience – their formative years’ environment of ready employment and rapidly advancing standards of living.
I’m sure these differences in external influences made a difference in how these two generations thought of and used money. But, I also think there is another factor. And, I base this opinion on my own personal experience
One of our two sons has an almost manic compulsion to spend. The other is still in college, but already has a pretty nice liquidity cushion in his savings account as well as a few mutual fund investments. Yet, they grew up in the same environment.
At least part of this financial characteristic has to be innate in each individual.
I recently ran across some confirmation of this. George Lowenstein of Carnegie Mellon University monitored actual brain functions as people made purchases and found that everyone experiences pleasure from buying, and also subsequent displeasure with having to pay for the purchase (buyers’ remorse?). But, some experience this displeasure/remorse far less than others. For them, it’s all gain and no pain.
The significance of this in the retirement realm? Don’t expect your spending patterns to be easily changed in retirement. Without a lot of work, however you behaved pre-retirement is likely to continue post-retirement. You’re wired that way.
Contrary to the usual perception of our generation noted above, the study also found that under-spenders are more prevalent in the U. S. today than over-spenders, but are just less visible. I guess spenders love to spread the joy of their purchases while the more penurious among us are quietly watching their wealth accumulate. I wonder who’s happier (at least until the money runs out).
Thursday, April 26, 2007
Dow hits record high! Yawn.
Dow 13000 is certainly a milestone. But, really, it’s no more noteworthy than your last birthday (nothing personal), which by definition is your personal best in the age department, but does not warrant notation in the annals of mankind.
In fact, just like your age, reaching higher and higher levels is the natural progression of stock markets. It is what should be expected to happen, especially when the index represents some of the currently strongest companies operating in a steadily growing economy that is supported by (or supporting) an ever-growing and geographically expanding population base.
What’s remarkable to me is not that the stock market’s long-term growth has been so persistent, but that its short-term growth is always so erratic.
This was nicely illustrated not two weeks ago as the market reached for another “record.” It clocked eight straight days of up markets. The all time record is only 14 days (May 28 through June 14, 1897). There have been only eight instances of eleven or more consecutive up days. And, the percent of months that saw positive index price moves is a mere 59% – indexes have declined in four of every ten months on average, or about five months every year. The percent of days that saw positive price moves is (prepare to gasp) only 50% rounded to the nearest whole number! Almost exactly half of stock market trading days have been losers. No wonder the market so rarely puts two weeks or more of up days in a row.
This kind of short-term randomness is not what any normal person would expect of a market that averages advances of about 10% annually and has never had a negative return for any 20-year period. But, this is exactly why investors in retirement need to be careful not to depend on their stocks rising steadily along with their living costs. Historically, stocks have matched or exceeded the rise in living costs on average over time, but if you want steady, you’re not going to get that from stocks.
You might relate this short-term variability to how old you feel, which can vary markedly day-to-day or even hour-to-hour. The long-term growth persistence relates to how old you really are, which steadily grinds higher no matter how you feel. Until some unknown point in the future, of course. And, then it doesn’t matter any more. Yawn.
In fact, just like your age, reaching higher and higher levels is the natural progression of stock markets. It is what should be expected to happen, especially when the index represents some of the currently strongest companies operating in a steadily growing economy that is supported by (or supporting) an ever-growing and geographically expanding population base.
What’s remarkable to me is not that the stock market’s long-term growth has been so persistent, but that its short-term growth is always so erratic.
This was nicely illustrated not two weeks ago as the market reached for another “record.” It clocked eight straight days of up markets. The all time record is only 14 days (May 28 through June 14, 1897). There have been only eight instances of eleven or more consecutive up days. And, the percent of months that saw positive index price moves is a mere 59% – indexes have declined in four of every ten months on average, or about five months every year. The percent of days that saw positive price moves is (prepare to gasp) only 50% rounded to the nearest whole number! Almost exactly half of stock market trading days have been losers. No wonder the market so rarely puts two weeks or more of up days in a row.
This kind of short-term randomness is not what any normal person would expect of a market that averages advances of about 10% annually and has never had a negative return for any 20-year period. But, this is exactly why investors in retirement need to be careful not to depend on their stocks rising steadily along with their living costs. Historically, stocks have matched or exceeded the rise in living costs on average over time, but if you want steady, you’re not going to get that from stocks.
You might relate this short-term variability to how old you feel, which can vary markedly day-to-day or even hour-to-hour. The long-term growth persistence relates to how old you really are, which steadily grinds higher no matter how you feel. Until some unknown point in the future, of course. And, then it doesn’t matter any more. Yawn.
Friday, April 20, 2007
How’s that again?
So far, it seems that the number of questions answered in this retirement-focused blog is exceeded only by the number of questions the answers raised:
New Question #1
You say you plan to sell (more than your normal, periodic, small liquidations) when everything looks rosy, and not sell (any more than your normal, periodic, small liquidations) when you’re feeling depressed about the market. How are you feeling today?
New Answer #1
Fine, thanks. Not particularly positive or negative. If I had to choose, I’d say things may be closer to too rosy than to too depressed, but not close enough to alter anyone’s strategic retirement funding program.
New Question #2
You said you will do some things to help assure that your level of cash reserves is sufficient. What things?
New Answer #2
I’ll try to limit the possible costly surprises. Here’s how.
a. If those who depend on me would be hurt financially by my death, I’ll maintain enough life insurance to cover the loss of income (wages, pension, whatever) that would occur with my death.
b. If those who depend on me would be hurt financially by my disability, I’ll maintain enough disability insurance to cover the loss of income (wages, pension, whatever) that would occur with my disability.
c. To protect against high and increasing health care costs, I’ll carry some health and long-term care insurance.
d. To offset any large casualty losses, I’ll insure my home and cars, but with large deductibles to keep the premiums down.
e. To help me weather any mid-retirement financial set-backs, I’ll try to keep my fixed costs of living to a minimum.
f. To keep myself and my spouse financially flexible, I’ll constantly work to appreciate the multitude of non-financial gifts we are so fortunate to have so that we won’t be so troubled by things financial.
Other suggestions? (There may be prizes involved!)
New Question #1
You say you plan to sell (more than your normal, periodic, small liquidations) when everything looks rosy, and not sell (any more than your normal, periodic, small liquidations) when you’re feeling depressed about the market. How are you feeling today?
New Answer #1
Fine, thanks. Not particularly positive or negative. If I had to choose, I’d say things may be closer to too rosy than to too depressed, but not close enough to alter anyone’s strategic retirement funding program.
New Question #2
You said you will do some things to help assure that your level of cash reserves is sufficient. What things?
New Answer #2
I’ll try to limit the possible costly surprises. Here’s how.
a. If those who depend on me would be hurt financially by my death, I’ll maintain enough life insurance to cover the loss of income (wages, pension, whatever) that would occur with my death.
b. If those who depend on me would be hurt financially by my disability, I’ll maintain enough disability insurance to cover the loss of income (wages, pension, whatever) that would occur with my disability.
c. To protect against high and increasing health care costs, I’ll carry some health and long-term care insurance.
d. To offset any large casualty losses, I’ll insure my home and cars, but with large deductibles to keep the premiums down.
e. To help me weather any mid-retirement financial set-backs, I’ll try to keep my fixed costs of living to a minimum.
f. To keep myself and my spouse financially flexible, I’ll constantly work to appreciate the multitude of non-financial gifts we are so fortunate to have so that we won’t be so troubled by things financial.
Other suggestions? (There may be prizes involved!)
Friday, April 13, 2007
Wouldn’t it be nice . . .?
Forty years ago, we were singing along with the Beach Boys, “Wouldn’t it be nice if we were older?” As the difficulty of these very basic retirement questions indicates, “being older” brings some challenges, too. But, every retiree – current or soon-to-be – needs to answer these questions. Here are my answers:
How much do I need in liquid reserves in retirement? I feel I need at least six months of subsistence spending readily available in share draft accounts, savings accounts, and very short-term, fixed income investments. I’d also like to have another six months or more in semi-liquid assets – intermediate-term, high quality bond funds, term CDs, etc. The rest of my retirement nest egg can be in a diversified portfolio of long-term investments. (I’ll also do some things to help assure that this level of reserves is enough. We can talk about that later.)
How do I know when stock or bond prices are “depressed” (and I should wait for a recovery before selling)? For me, this question has a two-part answer. First, I hope to never have to make this decision. Ideally, I will be able to gradually liquidate our long-term investments in hundreds of small increments through a life-long systematic withdrawal/liquidation program. This will steadily “drip” dollars into my liquid reserves, from which we will pay our living costs. This gradual liquidation program will make timing virtually a non-issue. It will capture essentially the asset allocation’s balance-weighted average return over the life of the portfolio.
But, no mater how hard I try, I suspect that occasionally the drips won’t keep up and I will have to come up with what constitutes a veritable bucket of cash – for another year of college for one or more of my progeny, a once-in-a-lifetime trip with my soul mate, whatever. Hopefully, I’ll be able to fund these out of my second-tier reserves, and then take some time replenishing them with a period of doubling up the systematic drips. But, when that isn’t enough, here’s what I plan to do.
1. I will consider selling some of whichever asset class has done the best over the last few years relative to its long-term average return. Currently, that might include funds focused on mid-cap value stocks or the lowest quality junk bonds.
2. If I am feeling particularly depressed about the investment markets – if the economic environment is tenuous and most market prognosticators are bearish – I will do everything I can to not sell anything, particularly not anything that has declined to valuation levels that are well below their historical average. Instead, I will consider borrowing from my friendly credit union. Or, maybe just deferring the expenditure, thereby deferring the need to liquidate long-term investments.
So, as this indicates, the factor I will use to indicate when the investment markets are depressed . . . is my own current state of “economic depression.” If I and most of my fellow investors are afraid of the markets, chances are the markets are beaten down by the selling of more skittish investors. Likewise, if everything looks rosy, the more speculative investors have probably been throwing money into the market, making it a good time to raise some extra cash.
Tough to do? Definitely! The first alternative – gradually liquidating investments over a number of years – is unquestionably the easier and safer approach for any normally emotional human being. But, if you find yourself in need of extra cash and are able to act exactly contrary to your current state of mind, you are likely to do better than if you just go with the feeling of the moment.
That might have worked in the 60s and 70s. We were young and stupid then. But, this is now. We’re just (emotionally) stupid . . . and running out of time.
How much do I need in liquid reserves in retirement? I feel I need at least six months of subsistence spending readily available in share draft accounts, savings accounts, and very short-term, fixed income investments. I’d also like to have another six months or more in semi-liquid assets – intermediate-term, high quality bond funds, term CDs, etc. The rest of my retirement nest egg can be in a diversified portfolio of long-term investments. (I’ll also do some things to help assure that this level of reserves is enough. We can talk about that later.)
How do I know when stock or bond prices are “depressed” (and I should wait for a recovery before selling)? For me, this question has a two-part answer. First, I hope to never have to make this decision. Ideally, I will be able to gradually liquidate our long-term investments in hundreds of small increments through a life-long systematic withdrawal/liquidation program. This will steadily “drip” dollars into my liquid reserves, from which we will pay our living costs. This gradual liquidation program will make timing virtually a non-issue. It will capture essentially the asset allocation’s balance-weighted average return over the life of the portfolio.
But, no mater how hard I try, I suspect that occasionally the drips won’t keep up and I will have to come up with what constitutes a veritable bucket of cash – for another year of college for one or more of my progeny, a once-in-a-lifetime trip with my soul mate, whatever. Hopefully, I’ll be able to fund these out of my second-tier reserves, and then take some time replenishing them with a period of doubling up the systematic drips. But, when that isn’t enough, here’s what I plan to do.
1. I will consider selling some of whichever asset class has done the best over the last few years relative to its long-term average return. Currently, that might include funds focused on mid-cap value stocks or the lowest quality junk bonds.
2. If I am feeling particularly depressed about the investment markets – if the economic environment is tenuous and most market prognosticators are bearish – I will do everything I can to not sell anything, particularly not anything that has declined to valuation levels that are well below their historical average. Instead, I will consider borrowing from my friendly credit union. Or, maybe just deferring the expenditure, thereby deferring the need to liquidate long-term investments.
So, as this indicates, the factor I will use to indicate when the investment markets are depressed . . . is my own current state of “economic depression.” If I and most of my fellow investors are afraid of the markets, chances are the markets are beaten down by the selling of more skittish investors. Likewise, if everything looks rosy, the more speculative investors have probably been throwing money into the market, making it a good time to raise some extra cash.
Tough to do? Definitely! The first alternative – gradually liquidating investments over a number of years – is unquestionably the easier and safer approach for any normally emotional human being. But, if you find yourself in need of extra cash and are able to act exactly contrary to your current state of mind, you are likely to do better than if you just go with the feeling of the moment.
That might have worked in the 60s and 70s. We were young and stupid then. But, this is now. We’re just (emotionally) stupid . . . and running out of time.
Tuesday, April 10, 2007
And, we have a winner!
If you haven’t done so yet, click on “comments” below. You’ll see the four responses that (1) the authors allowed me to post, (2) had enough substance to warrant posting, and (3) were appropriate for this family-friendly site.
Instead of doing the drawing for two winners, we have decided to take the public schools approach and award a prize to each of the four. Michael Armour wins for the shortest right answer, Tim Hamele for the most conservative right answer, Richard Corbin for the most real right answer, and jddeadendfarm for the most entertaining right answer.
So, we need each of you winners to email (or “comment” again) your shirt size to us and we’ll send one of the very attractive and high quality (really!) MEMBERS Capital Advisors polo shirts to each of you. If you have a color preference, cross your fingers and you might get lucky.
Thanks to each of you four for participating, and to all the others for . . . all the fun ideas that you shared!
I’ll give you my thoughts on these questions later in the week.
Instead of doing the drawing for two winners, we have decided to take the public schools approach and award a prize to each of the four. Michael Armour wins for the shortest right answer, Tim Hamele for the most conservative right answer, Richard Corbin for the most real right answer, and jddeadendfarm for the most entertaining right answer.
So, we need each of you winners to email (or “comment” again) your shirt size to us and we’ll send one of the very attractive and high quality (really!) MEMBERS Capital Advisors polo shirts to each of you. If you have a color preference, cross your fingers and you might get lucky.
Thanks to each of you four for participating, and to all the others for . . . all the fun ideas that you shared!
I’ll give you my thoughts on these questions later in the week.
Thursday, April 5, 2007
Hey! Free Stuff!!
No ideas? Come on, folks. There’s a free MEMBERS Capital Advisors shirt/blouse for each of two lucky contributors. Send in your answer to one or both questions. We’ll put all your names (or email addresses) in a hat and draw one for each question:
How much do you need in liquid reserves in retirement?
How do you know when stock or bond prices are “depressed” (and you should wait for a recovery before selling)?
So, send me your thoughts on this. If you don’t want them posted or attributed to you, just say so.
Enjoy this special weekend!
How much do you need in liquid reserves in retirement?
How do you know when stock or bond prices are “depressed” (and you should wait for a recovery before selling)?
So, send me your thoughts on this. If you don’t want them posted or attributed to you, just say so.
Enjoy this special weekend!
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