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By Bob Moeller
WEAC Member Benefits
May 2006
Financial
Planning Seminars
Achieving
Financial Independence
Once again the end of the teaching year approaches and many members will have time to review their financial futures. Financial principles don’t change a great deal, but they do need to be adjusted to reflect current market realities. Here are some recent developments to be aware of when planning.
1. As this is written, the Fed has just completed a long string of interest rate increases, and apparently more increases may be upcoming. You should adapt to that fact by taking the following approach;
A: Money market accounts are now paying 4.4% or higher. You should abandon any sizable savings or checking accounts that are not paying that much with the sole exception of your local free checking account in which you keep a small amount, transferring in money as needed from your higher- paying money market accounts to pay your bills. Have your paycheck or retirement checks deposited directly into the higher-paying money market account.
B: The interest curve is essentially flat. A one-year CD will pay you just about as much as a five-year CD. A five-year treasury note pays about the same as a 20-year treasury bond. You are not rewarded for placing your money long term, and since interest rates are rising, you shouldn’t. A perfectly respectable approach these days is to put your money in short-term CDs until the interest curve gets a little more normal and rates stabilize. The going rate for a one-year CD is now around 5%.
2. The fastest-increasing insurance sales product is an “index annuity.” The pitch is you can’t lose money and you will get any increases that occur in the selected stock market index. Sounds like a guaranteed deal. I just went to a free lunch, listened to the pitch, and even met individually with the salesperson a few days later (the sacrifices I make for this job). Was it a good deal? NO! Was it easy to figure out it wasn’t a good deal? NO! I had to later call three times to get the information I should have been given at the first meeting. Northwestern Mutual refuses to sell these things. Don’t buy them.
3. It seems more frequently now that I meet with a member who has serious credit problems, usually because they fell behind on a credit card payment or two and all of a sudden they are paying very high interest rates (31%, for example). I don’t think I am a very good debt counselor and I find it very hard to come up with good suggestions other than spend less.
Remember it is the credit card companies’ mission to have you overspend, pay too much interest, etc. Add to this the fact that the new bankruptcy laws make it tougher to file and you’ve got real problems. The relatively new development is that there are now a lot of unrelated situations in which your credit score becomes an issue. Companies are making hiring decisions based on your credit score. Auto insurers are using your credit score to determine whether they will write you a policy and how much you might pay. You should strive to have no credit card debt, and if that means spend less, spend less.
4. This past February, the U.S. Congress passed dramatic changes to the Medicaid provisions. If you or your parents are concerned about future nursing home costs, it is now much more difficult to give away property, buy annuities, etc., in order to avoid paying your money for nursing home costs.
A basic example: any gifts within five years (used to be three years) of applying for Medicaid will be calculated back into the picture. The best thing you can do is try to plan in advance just how you want to handle this issue. You might consider long-term care insurance. You might want to consult with an eldercare attorney. But try to do it early. Also, remember WEAC will provide you with blank simple will forms (married, single, divorced/separated with dependent children), and the official State of Wisconsin durable power of attorney forms for health care and finances. Finally, we can send you the State of Wisconsin living will form. Just mail or e-mail me your mailing address and what forms you need. There is no charge.
5. Increasingly, mutual funds and other investment sources are trying to make your investment decisions easier. I recently wrote about target retirement date type mutual funds in which you pick a fund based on your expected retirement date, such as 2040, and the fund handles the investments for you, gradually getting more conservative each year. If you pick a low-cost, no-load mutual fund family, this can be a very attractive way to have help in your investment decisions.
6. Take a few minutes this summer to consider your own salary schedule as stated in your master agreement. Remember that getting over to the far right column not only increases your annual pay, but also increases your future retirement. As a strictly business proposition it may pay you to spend the time to get to that last column.
7. Take a few minutes also on a regular basis to have a joint discussion with your spouse about just what the financial situation is. Both of you should be aware of the main facts even though maybe only one of you deals with it on a day-to-day basis.
Posted May 9, 2006