Saturday, January 30, 2010

If Your Home's Value Is Down, Should You Lower Your Home Insurance?

Home prices are falling pretty much everywhere, so chances are your home's value has gone down over the past year. If that's the case, should you lower your home insurance coverage to match the new value? After all, why would you want to insure your home for $250,000 if it's only worth $200,000 now?

How much you INSURE your home for has nothing to do with home much you can SELL your for. Most people make the mistake of thinking that insurance value and selling (or buying) price are the same thing, but they're not. Sometimes, like in a very volatile housing market (either rising or falling), the two values could be very, very different - and here's the reason why.

Your insurance company is NOT in the home buying business, they are in the home building business. In fact, they're not even in the building business; they're in the REbuilding business, which costs even more. If your home burned down tomorrow, your insurance company would not go looking to buy another house for you to move into. Instead, they would start over - on your existing lot - rebuilding your home that was just destroyed. They would build it back to the home you had, using all of today's building codes, material costs and labor rates - and chances are today's costs are higher than when your home was built the first time.

Unfortunately, while home prices have been falling, costs for building materials have been on the rise. In fact, lumber, steel and concrete have seen prices go UP just as fast as home prices have come DOWN! It's a double whammy for the insurance companies, and it's the real reason you should not lower your home insurance coverage to match your new - lower - home value.

Make sure you have enough insurance to rebuild - not re-buy - your home. If you don't know how much that is, meet with your local, professional agent for a replacement cost analysis. They should have software available to determine the proper amount of insurance for your specific home. A quick rule of thumb for costs (at the time I'm writing this) is approximately $110 per square foot above ground, and $60 per square foot below ground (your basement). Don't forget, you also need to include enough money for debris removal - knocking down your destroyed home and hauling it away.

Although it seems like an easy way to save money, lowering your home insurance amount could be extremely costly if your home is destroyed and you don't have enough insurance to rebuild.

Tuesday, January 19, 2010

Why Auto and Home Insurance Rates Will Go Up In 2010

The economy is in the tanks, your home is not worth what it was 5 years ago, unemployment is at all-time highs, AND your auto and home insurance will most likely get MORE expensive during 2010. I know you don't like hearing it, and I promise I don't like saying it, but it is true. Although it won't help with the rising costs, it may be helpful to know what's behind the price increases so that it doesn't feel so personal when you open your renewal paper work and write that bigger check. Also, knowing why things are going up will give you a better understanding of how to bring your insurance rates back down (or at least minimize the increase). There are three reasons you'll see higher prices this year, which are:

  1. Small profit margins are destroyed by big storms: I know this may be surprising (I'm using my sarcastic voice), but insurance companies are in business to make money. No shocker, I know, but what most people don't know is how extremely small an insurance company’s profit margin really is. If an insurance company can make it through the year with a 99% combined ratio - meaning they only spent 99 cents out of every dollar they brought in - then they are happy. If they finish a year and they've been able to keep a nickel out of every dollar, they're on top of the world. The industry is SO competitive and SO expensive, that most companies are literally striving to keep a couple of pennies in profit out of each dollar they bring in. So when a large storm - like the two hail storms Colorado saw during the summer of 2009 - adds another $25,000,000 in expenses for the year, the profit for the year is gone. When it happens repeatedly (there have been 4 major storms in Colorado over the past 2 years), insurance companies have no choice but to raise the prices to try to make a couple of pennies per dollar again.
  2. Rising material costs: If your home value is going down, why on earth would your home insurance go up this year? The reality is that insurance companies do not care what your home's value is on the open market. They are NOT in the business of buying and selling homes, they are in the business of repairing and rebuilding homes, and those costs have gone up tremendously over the past 24 months. Lumber, concrete, roofing materials, copper, wiring, etc. - all the materials used to repair and rebuild your home if it is damaged or destroyed costs 50% more to purchase today than it did a few years ago. Add in the changing codes and methods that must be followed during repairs (i.e. t-lock shingles are no longer used, so if you got a new roof this last year the old roof had to be completely torn down and the new shingles started from scratch) and you've got a more expensive environment to operate in if you are an insurance provider. The same situation holds true for your car repairs.
  3. Rising liability and medical costs: I know you are aware of how expensive medical costs have become over the past decade. Every year your health insurance costs more than the year before, and so do the doctor's visits and hospital stays, the ambulance rides and follow up care, and everything else associated with health care. The same holds true for legal costs. There are more lawsuits filed every year, and for larger amounts. Every second commercial on TV is for an attorney that can "get you a check" every time something goes wrong. All of the extra medical and legal expenses may go to your insurance companies, but they are paid by the consumers - me and you. If there is not enough money brought in to pay the rising costs AND keep a couple pennies per dollar for profit, then everyone has to pay more until there is. This problem has seen a dramatic increase over the past few years, meaning we will all continue to see our rates go up in 2010.
So now you know. It may seem like your higher costs are just a case of the greedy insurance companies trying to get you for everything you've got, but the truth is it's nothing personal. Most insurance companies have not made ANY profit over the past few years; in fact they've lost quite a bit. I'm not saying it's time to start feeling sorry for the insurance providers - we all know they'll make it through just fine - I'm just trying to set some realistic expectations for everyone in Colorado when it comes to your insurance prices.

Now for a bit of good news - there are some ways to fight off some of the rising costs, IF you're willing to make some adjustments to your insurance programs. Here are 3 quickies to get you started:
  1. Raise your deductibles: I know you've heard it before, but it really is one of the fastest, easiest ways to cut your insurance costs. Most insurance company’s rates are based on $1,000 deductibles, so every time you lower your deductible below $1,000, your price goes up.
  2. Double check your discounts: There are more discounts available today than ever before, including some for where you work and what kind of work you do. Have a discount discussion with your agent to review your program and make sure you're getting everything you deserve.
  3. Combine policies: Another oldie but goodie. Combining policies under one company has never made more sense than now. Insurance companies have new statistics that show the more policies you have with their company the less likely you are to file claims. The result, lower insurance rates and more rewards for consumers who package all their policies with one company.
Sit down with your local, professional agent today and discuss your options. An annual review is an opportunity to have your overall program reviewed and look for little tweaked that will help you find the best value - the proper coverage, at the best possible price.

Thursday, January 14, 2010

2009's Market Rally Is Turning You Into A Sucker

Every time you turn on the news, check the newspaper, or turn on your computer, one of the first things you hear is how much of a rally the stock market has had this month, quarter, or year. I can hear them on CNBC now, “the markets are on the rise…time to buy, buy, buy…forget about last year’s financial disaster, everyone smarter than a 5th grader is jumping back in and investing ALL their money!” Unfortunately, what most people DON’T realize is that even if the market does go up 25%-50% in a given year, if they don’t protect themselves from the downturns then they will never get ahead. In fact, chances are they’ll spend their retirement years working instead of…well, retiring (see “Retirees trading their golden years for the golden arches).

Here’s the math that you don’t see on the evening news or find in the Wall Street Journal. If you’re account lost 50% last year, it must make 100% JUST to recover and get you back to a break even. Most people think that if the market goes down 50% and then back up by 50%, they’ll be even again. Unfortunately, that is way off. Here is an example:

Account Value June, 2007: $100,000
Market Change June, 2008: -50%
Account Value June, 2008: $50,000
Market Change 2009: +50%
Account Value Dec, 2009 $75,000

How long does it take for the markets (or your account) to go up 100%? It certainly does not happen over the course of a year…or two…or five. If the market averages 10% per year, it will take 7 years to achieve 100% growth (the rule of 72. Look it up, it comes in handy). And what happens if 5 years into it, we see another drop of 25%-50%? Unless you guard against the market declines, you’ll never have enough money to retire. The market increases do nothing but lure suckers into investing all their hard-earned money into a system that statistically produces 80 losers for every 20 winners. I know what you’re thinking, YOU will be one of the 20 winners…o.k., if you say so. But let me ask you this, how has that worked for you so far? How has that worked for your parents, or your grandparents who are headed back into the job market because their retirement funds aren’t enough to pay the bills any more?

Don’t get caught up in the hype that the stock market is THE way – the ONLY way – to save for your retirement. It is ONE way to save and should be used for some of your savings, but only as one piece of your retirement puzzle – not EVERY piece! I know you’ve probably been listening to the Ramseys and Ormans of the world, but just because they say it on tv, that does not make it true. I’m not saying they are not smart people (don’t start bashing me yet, Ramseyites), I’m just saying they don’t know everything when it comes to investing.

If the stock market really isn’t the holy grail of retirement, but just one piece of your retirement puzzle, where else should you invest? The answer, a lot of places. Here’s a list of some places to consider. They may not be as sexy as the markets, but rich is better than sexy anyway when you’re turning 65 and leaving your job!
1. Municipal Bonds
2. Bond Funds
3. Investment Grade Life Insurance
4. Annuities
There are others, but these four are all good places to start. They are more defensive by nature, but still offer a lot of opportunity to earn good returns year in and year out to use when you retire. Besides, when your co-worker is crying in their cubicle next year because their account is down 25%, your 6% return for the year will be sounding pretty good. AND, you won’t have to sit around worrying about how your money is doing all the time. You could use that time to do other things, like enjoy life…or work to earn more money.
Talk to a local, professional advisor about your personal situation and find out what options are right for you. If you don’t yet have a professional you can talk to – or your’s decided to get out of the business after last year’s crash – give us a call. We’re always here to help.
What do you think? Are you diversifying and branching out to include other investment vehicles in your retirement plan? Leave your comments and stories below.

Sunday, January 10, 2010

Retirees Are Trading Their Golden Years For tThe Golden Arches

It seems like every time I take my 10-year-old to McDonalds lately, I’m giving my order to someone who probably hangs out with my grandparents. In fact, I’m guessing most of them ARE grandparents. I started thinking that maybe they knew something I didn’t about the best place to work – a free uniform, discounts on quarter pounders, an extra order of McNuggets – but then I realized that these retirees were working not because they wanted to, but because they HAD to. After all, if you could choose between traveling, playing golf and enjoying your golden years or standing behind the cash register at the golden arches…well, the choice would have already been made.
Unfortunately, retirees are heading back into the workforce – a result of watching their nest egg lose 25 – 50% of its value over the past few years. They were all convinced by the financial gurus that the best way to retire was to spend 30 years contributing to a plan that would be heavily taxed and prone to losing money for 80% of the participants. They listened to the Ramsey’s and the Orman’s shout lies about unrealistic returns and believed the hype that “there is no other way!” when it comes to preparing for the day you (hopefully) stop working (for good) and start living your dreams. The result, hundreds of thousands of baby boomers frantically trying to find a way to recover, and even more retirees heading back to work – finding that the competition is so stiff the only place they can easily find employment is somewhere that asks “would you like fries with that?”

For retirees, it’s too late. The damage is done and they’ll be recovering for the rest of their lives. For baby boomers, the time is now to take big steps to secure your future. Continuing on with the status quo will get you to the same place as today’s retirees. Waiting around for the market to recover is NOT a plan, it’s insanity (insanity – doing the same thing and expecting different results). Do the math; if your account lost 50% in last year’s sell off (ie. your balance went from $100,000 down to $50,000), the market has to go up by 100% just for you to BREAK EVEN! The average time it takes for the market to go up 100% is 7 – 10 years!! The average recovery time (a flat market) after a recession is 16 years! Are you starting to see the problem?

Fact – the average mutual fund investor has actually lost one percent per year, adjusted for inflation.
Fact – 80% of all investment advisors and mutual funds do WORSE than the overall market every year.

I am an advisor, so the truth hurts…but that does not make it any less true. Advisors do their best to help, but the numbers don't lie. I’m sure you’re thinking you’ll be one of the 20% whose account continues to rise – beating the market and building a fortune for your later years. That’s what today’s retirees thought as well, convinced of this lie every time they turned on CNBC or talk radio. If they’ve got you convinced as well, please keep doing what you’ve always done – the world will always need someone to put down another batch of fries for the lunch rush.

Thirty-somethings and forty-somethings need to start planning for their retirement in different ways. They need to shift some of their retirement savings into accounts that don’t fluctuate with the market. Another lie out there in the media is that the stock market averages 10-12% per year…NO WAY! The actual inflation-adjusted, long-term average is 6%, and it comes with all the stress of the constant roller coaster ride and the knowledge that the year you decide to retire could be another year the market drops and you lose 1/2 of your money.

The other problem retirees are facing are ever-increasing taxes. Convinced that their 401(K)’s were the best place for their retirement savings, they built up as much pre-tax savings as they possibly could. They were told (as you are today) that it is better to postpone taxes until retirement because you’ll be earning less and be in a lower tax bracket. There are TWO problems with this line of thinking:

1. No one is in a lower tax bracket now than they were 20-30 years ago because taxes have gone UP, and continue to go up. We’re in store for more tax increases in the next few years – a necessity to pay for the increased government spending and bailouts. Seniors who were in a 15% net tax bracket 20 years ago no longer have the tax breaks they did when they were younger (children at home, mortgage interest, etc, and are paying 25-30% in taxes today.

2. Who wants to PLAN on being in a lower tax bracket when you retire? Think about it, that means you are planning on having less money then you do now. Do you feel like you have too much right now? If not, why would you want to PLAN on having less in the future?

There has never been a better time to sit down with an advisor who is focused on tax-free, risk-free planning and evaluate the road you are headed down to determine where you’ll be when it’s finally time to retire. A Chinese proverb states, “no matter how far down the path you discover you are going the wrong direction…TURN AROUND! Continuing will only put you farther away from your desired destination.”

Tuesday, January 5, 2010

Covered In Raw Sewage, I Chose Not To File A Claim

My new year's day started out with a bang...literally! At noon I was standing on top of my sewage system (the system is required because I live on the side of a hill and have to pump the sewage to the top) wondering why it was not working. Unfortunately, that is when it blew up - showering 100+ gallons of raw sewage on my basement ceiling...walls...and me! I carry the proper coverage on my insurance to pay for clean up as well as repairs, but instead of filing a claim I spent the next 4 hours cleaning and sterilizing and then covered the $2,000 bill myself, instead of filing a claim.

Why would I choose NOT to file a claim and take on the cleanup and plumbing bills myself?
That's a good question - one I asked myself multiple times during the ordeal! The answer has to do with what your home insurance is really designed for, and what happens if you have to use it too often. Here's the quick run down:

  1. What home insurance is designed for: Home owner's insurance was originally designed to cover the large, catastrophic events that could happen to a home - a fire, tornado, etc. - where you pretty much lost your home and had no place to live. That would have a devastating effect that most families would not be able to recover from. Over the years, people's IDEA of what their home insurance should pay for has changed - broken windows, small thefts, new roofs, etc. This new way of thinking has caused most people's home insurance rates to rise more than 100% over the past decade alone, because as insurance companies experience more claims EVERYONE shares the cost of those claims through rate increases. Also, every person who files a claim pays an extra charge - a penalty for filing the claim (no matter whose fault the claim or what kind of claim), and they see even larger price increases for at least the next 3 years. 
  2. What happens if you use your home insurance to often: Most insurance companies allow for 2 claims every 3 years (although it is becoming more common for companies to allow for 2 claims every 5-6 years). If you go over your company's claim limit your policy will most likely be non-renewed. If you find yourself without insurance due to the amount of claims you have filed, you will probably find you are forced to pay three or four times the normal rates to get a new policy - IF YOU CAN FIND ONE AT ALL! I've seen clients forced to go to a state issued policy that offers minimal coverage and still costs four times as much because no company would offer them a policy due to their claims history.
I've seen it happen more times than I can count, a client chooses to file a small claim (thinking it will be years before anything else happens) only to be hit with something major later on the same year. The result - the insurance company chooses to cancel the policy at the next renewal, forcing the client into a much higher priced high-risk policy. Had I wanted, I could have saved myself the cleanup (my policy would pay for it) and cut my cost down to $1,000 (my deductible), but I chose to save my policy just in case it is really needed for something major.

I recently lost a great client because they chose to file 3 small claims in 18 months for a total of $2,500 in total payouts by their company. The result - their home insurance went up to over $5,000 per year for a policy with a high-risk provider, AND the new policy specifically excluded the type of loss that they had repeatedly filed on their old policy!

Before you file a claim, PLEASE consult your local, professional agent about the pro's and cons of the claim. Insurance is there if you need it, but if your insurance company thinks you are abusing the system it won't be long before you find yourself with no insurance at all!

Have you ever chosen NOT to file a claim? Let us know about your experience, we'd love to hear from you!

Friday, January 1, 2010

Top 10 Reasons To Start A Roth In 2010

Instead of making resolutions for 2010, how about just making a few smart money moves that will have HUGE impacts on your future. For example, starting a ROTH IRA! You already know you need to start putting asidemore for your retirement (or perhaps you’re one of the millions who need to start putting aside something!), and there is no time like the present. So here are 10 reasons to start a ROTH IRA in 2010:
1. The sooner you start, the more you’ll have. Let’s start with a no-brainer, the longer you put money aside for retirement, the more money you will have when it’s time to retire (duh). It just takes common sense and simple math to figure that one out. What may surprise you though is the staggering difference in your savings amount for every five years you put off starting a ROTH. Let’s take a nice easy number like $100 per month. Depending on your age when you start, here are your ROTH account balances at age 65 (assuming 8% average interest/year):
Starting Age 20 = $530,000 at age 65
Starting Age 25 = $351,000 at age 65
Starting Age 30 = $230,000 at age 65
Starting Age 40 = $95,000 at age 65
Don’t beat yourself up if you’ve been waiting and now you see the impact it’s going to have on your retirement account. There’s helpful news for late-starters in reason number 7.
2. Taxes are bad; tax free retirements are good. Taxes obviously play an important part in funding our country’s government and military, but as far as retirement is concerned, taxes are a very bad thing. In fact, taxes are one of the top wealth stealers that individuals face today. Fortunately, ROTH IRAs are completely tax free during retirement because you are using after tax dollars to fund your account. Thanks for the tax break, Uncle Sam! If all of your retirement is sitting in your employer sponsored plan, you need to plan on losing about 1/3rd of your money to taxes when it is time to retire. I know you’ve heard that you’ll be in a lower tax bracket at retirement so you won’t have to pay as much in taxes on your retirement accounts, but here are a couple of things to chew on regarding that little fib people have been feeding you:
1. Taxes have historically gone UP, not down. With trillions of dollars in debt, increased war spending, a new government health plan and the many stimulus programs that need to be repaid it is only logical that everyone’s taxes will go up in the future. Some experts believe top tax rates will reach 45-50% over the next 10-15 years.
2. Assuming tax rates do not go up (highly unlikely), why would you WANT to be in a lower tax bracket? Being in a lower tax bracket in retirement means you are making less money. Correct me if I’m wrong, but don’t most people want to have the money necessary to travel and live it up during their golden years? Estimates show retirees require 80% of their pre-retirement income just to maintain their current lifestyle, and 100% if they plan on traveling and enjoying new hobbies!
3. New ROTH rules in 2010 for high earners. Beginning in 2010, the income restrictions to convert your 401(K) or traditional IRA to a ROTH will be removed thanks to a change in the tax laws passed way back in May of 2006. For the first time ever, individuals who earn more than $100,000 per year can take advantage of a ROTH conversion. If you convert an account to a ROTH IRA you must pay taxes on the conversion at your normal tax rate, but for those converting in 2010 you’ll have a special opportunity to spread those taxes over a two year period – 1/2 due in 2011 and 1/2 due in 2012.
4. You have more control over a ROTH than your 401(K). Most employer sponsored retirement plans are very limiting with the investment options; on average there are 15 funds to choose from. In comparison, ROTH IRAs are virtually limitless in where you can invest your money. There are 1,000’s of mutual funds, bonds and annuities available in a ROTH IRA, while most employer plans have a maximum of 30 or 40 choices available. When it comes to your money and your investments, options are always a good thing. IF you’re one of the millions who watched their 401(K) become a 201(K) last year, part of the problem could have been a lack of alternative investment choices. For example, individuals who made the move the government securities and corporate bonds in 2008 actually saw their account values go up.
5. Penalty free withdrawals for emergencies. Since your ROTH is funded with money you’ve ALREADY paid taxes on, you can access your account in case of an emergency with no penalties or fees (up to your contribution amount). Obviously this should be avoided if at all possible, but if you were 10 years into your contributions and you found yourself out of work for an extended amount of time you would have a safety net within your ROTH IRA to help get you through.
6. Remove the taxes on your savings accounts. If you are setting money aside each month and just keeping it in your savings account or a CD, you’re getting hit with a tax bill on the growth (however small your savings account growth is) at the end of each year. Any interest earned on your bank accounts is reported to the IRS through a 1099 at the end of each year. So if you put $5,000 into a savings account and it earned $250 in interest for the year, you would be responsible for taxes on that interest. Contrast that to a ROTH IRA where the same $250 would go untouched, and you’ve just lowered your tax bill ,AND more importantly, allowed your money to continue to grow without being reduced by taxes. It might not seem like a big deal, but over a 30 year period a non-taxable account (like the new ROTH IRA you’re about to start) would have an additional $215,000 compared to your TAXABLE savings account and CD’s.
7. Because you’re not young anymore. So you’re no longer a spring chicken, and starting early to allow your retirement account plenty of time to grow is no longer an option (as discussed in number 1). You are allowed a special “catch up” provision if you are age 55 or over to get as much savings into a tax free retirement account as possible. When you were younger, you probably did not have your finances figured out in order to contribute the maximum allowed to your account. However, now that you’re a little bit wiser and a better manager of your money, you can contribute $6,000 to your ROTH during 2010. If you’re married, your spouse can do the same. How does that add up for your retirement? I’m glad you asked! If you and your spouse each put away your maximum allowed limit, you could have almost $200,000 waiting for you at age 65 and $250,000 if you wait until age 67 (assuming 8% average interest per year).
8. It’s easier than working after retirement. Let’s face it, for most people the thought of giving up money that you could be spending now is a tough decision (especially in a struggling economy). But i promise you giving up a little money now is a whole lot easier than trying to live for 30 years in your retirement WITHOUT the money you’re setting aside! The next time you are in McDonalds and a 70 year-old takes your order, ask him if he’s there because he wants to be, or because he HAS to be. Statistics show that a surprisingly small number of retirees have enough set aside to meet their income needs. In fact, the average retiree has has to live on just 58% of their pre-retirement income due to a lack of savings. Unless downgrading your retirement and giving up your golden years for working at the golden arches sounds like a good idea, a ROTH IRA is your easier choice.
9. No required minimum distributions. All traditional IRAs and employer sponsored plans (ie. your 401(K)) have required minimum distributions that begin at age 70 1/2, even if you don’t need the money. You see, Uncle Sam needs to to retire too, and taxing your retirement account is how the IRS is planning to fund their retirement. ROTH IRAs do not have a minimum required distribution, so if you do not need to use the money you are free to leave them in the ROTH forever. If you only need a small amount, there are no rules requiring you to take more than you need.
10. Because ROTHs make you more attractive to the opposite sex. O.k., I threw this one in to make sure you were paying attention. Although a ROTH may not make you more attractive, having a plan for retirement and the ability to be a financial contributor will probably make you a more appealing catch. After all, when was the last time you heard someone say “wow, I hope I can meet and marry someone who will be broke when they retire so we can both stay home, skip out on traveling, give up our hobbies and struggle for 30 years.”? Yeah, it’s been awhile since I’ve heard it too!
Enough talking, it’s time for action! Get a hold of your financial advisor today and make an appointment to start your ROTH. In less than 30 minutes you’ll have an account you can set on auto-pilot that will make your retirement better and brighter. There is not time like the present to get it done.