When A Will Won't Do

A Last Will and Testament is the most basic of estate planning documents, but also one that is often misunderstood. Many think that if they have a Will they don’t have anything to worry about—everything will go to the persons they specify. That’s not true, though, and it’s important you understand why a Will sometimes Won’t. Let’s test your knowledge of how a Will works. Here are the basic assumptions. Husband and Wife own a home, they have a checking account, a Certificate of Deposit, a life insurance policy on Husband and an IRA for Wife. They have two children, Son and Daughter. They each have a Will that says everything gets divided equally between their Son and Daughter.

The home is in both Husband’s and Wife’s name. Since they are getting up in years, and because Daughter lives close to them, they’ve added Daughter’s name to their checking account and Certificate of Deposit so those funds can be used to help care for them. Husband has had his life insurance policy for decades and when he set it up, he named Son as the beneficiary. Wife wants Husband to have the money from her IRA in case he needs it, so she has named him the beneficiary. Lastly, Son and Daughter don’t get along very well.

Here’s the quiz:

Question: If Husband dies first, who gets the life insurance money?

Answer: Remember, the Will says it should be divided equally between Son and Daughter. Is that what will happen? No. Since the Son is named as beneficiary on the life insurance policy, the Son will get 100% of the death benefit. In this situation the Will doesn’t matter—it won’t.

Question: Who gets the home after Husband and Wife both die?

Answer: In this situation, the Will determines that the ownership of the home will be equally divided between Son and Daughter.

Question: Does the home have to go through Probate?

Answer: Yes, anytime the Will decides how something is passed on, it must go through Probate. Probate is the legal process of proving the authenticity of the Will and that the assets are handled accordingly.

Question: When both Husband and Wife die, how soon with the money from the Certificate of Deposit and the checking account be divided between Son and Daughter?

Answer: Never. This is another situation in which the Will won’t. Since Daugther’s name is on both the Certificate of Deposit and the checking account as a co-owner, Daughter gets all of that money. It doesn’t have to pass through Probate, it’s hers right away.

Imagine how happy Son would be when he finds out that even though the Will says everything is split equally, that Daughter gets all the Certificate of Deposit and checking account. At least he got the life insurance money—but it was a small policy--much, much less than what the Certificate of Deposit and checking account were worth!

Question: Husband dies first, then the Wife passes away. Who gets the IRA?

Answer: It is split between Son and Daughter, but much of it is lost to taxes. This one is more tricky. The husband was named the beneficiary. There weren’t any contingent beneficiaries named. Since she died after him, the IRA doesn’t have a beneficiary!

When an IRA doesn’t have a beneficiary, it becomes a part of the overall estate and is handled by the Will. As a part of the process, though, all the money is taken out of the IRA and taxes have to be paid on it. Whatever is left then gets divided between Son and Daughter.

This situation could have cost Son and Daughter tens of thousands of dollars. If Wife had named them as beneficiaries after Husband died, then they would have inherited the IRA and could have continued to defer most of the taxes over their lifetimes.

How’d you do?

The main thing to understand is that assets are transferred 3 different ways—by ownership, by beneficiary or by Will. It doesn’t matter what the Will says if the asset will pass by ownership or beneficiary.

The bottom line: review your life insurance and IRA beneficiaries, verify the ownership of your investments and home, and make sure your Will is up to date. Because many times, your Will won’t.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

A Crisis of Confidence

The stock market has been incredibly volatile since early July, with daily swings of 1% to 2% or more. It’s enough to cause even the most seasoned investor to stop and wonder what is going on. The news keeps talking about ‘credit swaps’, ‘CDO’s’ and sub-prime mortgages. But what does it all mean and why is the market reacting the way it is? I want to explain why there is a Crisis of Confidence, and how to manage your money in the midst of it. Since World War II, ours has become an economy that runs on debt. In 2001, the Federal Reserve drastically lowered interest rates to make it easier for consumers to obtain credit, especially for homes. It worked, at least for a while.

But over time, there were only so many people that could afford to put down 20% to buy a home. To increase their profits, banks and mortgage companies relaxed their requirements so buyers only had to put down 10%.

This increased the demand for housing and caused home values to rise. Before long, fewer people were able to afford to a 10% down payment. Once again, loan standards were lowered, allowing people with little or no credit to buy a home without putting up any money.

Many of those ‘nothing down’ loans were done with adjustable rate mortgages (ARMs). The initial interest rate was low, but that rate (and the monthly payment) would increase as interest rates go up.

Unfortunately for home owners, the Federal Reserve has been raising interest rates lately due to inflation fears. Those with ARMs who could barely make the payment when interest rates were low can’t make the higher payment now and are having to default.

As the real estate market has declined, banks are taking a loss when they try to sell these foreclosed homes. But it’s no longer the bank that holds the mortgage paper. The bank and mortgage companies quickly sell the mortgage paper to others, retaining a portion. Traditionally, it was Freddie Mac and Fannie Mae that bought many of these mortgages, packaged them into loans, and sold them to investors.

In the last several years, large banks, insurance companies and hedge funds saw an opportunity to increase their profits in the same way. They turned these mortgages into Collateralized Debt Obligations, or CDOs, and sold them in large blocks to other institutions, including other banks, insurance companies, hedge funds, mutual funds and pension funds.

So if someone is unable to make their higher mortgage payment, it’s not the local bank that takes the loss, it’s these big institutions. If a big institution starts taking a loss they are going to try to sell those bonds. But other institutions aren’t buying.

Another problem is that many of these big institutions, such as hedge funds, leveraged their investments. They might borrow $9 for every $1 they have, using that money to buy more stocks and mortgage bonds.

So when stocks or bonds drop too much, they face a margin call. They have to sell what they have, quickly, to pay back their lender. Of course, this causes the prices to go down further. When many institutions are involved it results in a sharp market decline. That’s what we’ve been experiencing.

The Crisis of Confidence is that the lenders are concerned that they won’t be able to get their money back because those that borrowed it won’t be able to sell what they own. This is referred to as liquidity.

Right now, there are those that have to sell regardless of the price, to pay back their lenders. There are those who don’t understand what is going on (typically individual investors) who panic and sell because they’re afraid it’s the next crash. And there are those professionals who are calmly waiting and picking up bargains.

I don’t believe that we are on the edge of a market crash. The economy is strong and I believe the crisis is one of confidence. By the end of this year, the markets should have recovered. Now would be a good time to move out of short term positions, but I would hold on to medium and longer-term holdings that represent good companies. You can read an expanded explanation on my website.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

Reducing Market Stress

Everyone wants to invest in the stock market when it’s going up. The key to successful stock market investing isn’t how well you do during the good times, but how you handle the bad times. Read on to learn ways you can reduce your market stress without jumping ship. The returns associated with investing in the stock market the last several years have been spectacular! The Dow Jones Industrial Average surged 72% between February 2003 and May 2007. It powered ahead 22% in the ten months ending in May ’07. This ‘bull’ market is double the length of most, now at four years and counting.

During such great times, it’s easy to forget that the stock market can go down. One day in February saw the DJIA drop over 4%. Last week saw all the major averages decline significantly, some of them wiping out all the gains they had accumulated for the year. With the bear market of 2000 – 2002 still fresh in many investors’ minds, it’s easy to see why someone might panic in the midst of such a quick, sharp decline.

Your actions during the ‘panic’ times in the stock market will determine your overall success. Professional investors don’t react emotionally to market events. They know that small investors usually do. As a result, it’s the perfect time for the professionals to buy stocks on sale when the small investors run for the exits.

That doesn’t mean you should sit by and do nothing. Personally, I don’t believe ‘hope’ is a reliable stock market strategy! Instead, you need to prepare ahead of time for the tumultuous times that are sure to happen. Here are some simple steps you can take.

Step 1: Determine the amount of money you are willing to lose. While none of us want to lose money, you can’t participate in the gains if you aren’t able to stomach the periods of decline.

I’ve found that there is often a big difference between the amount someone rationally thinks they are willing to lose when they set up an account and how they react emotionally when a loss occurs. This number should be based on your emotional tolerance, not your rational tolerance.

I believe it’s also important to convert this number to a percentage. Imagine how you would feel if you lost $70,000! Yet, if you have $2 million invested, that is a decline of only 3.5%, something very likely to occur. If you focus just on the dollar amount you are going to greatly increase your stress.

Step 2: Determine your overall approach to managing risk. The common approach in the industry is to spread your money between bonds, real estate and equities (both foreign and domestic). The thought is that since these normally move in opposite directions that they will balance each other. This is referred to as Asset Allocation. It’s true to a point, but there are times when it seems like everything goes down.

Another approach says that you need to hang on during the bad times because over the long-term stocks should be higher. This is referred to as Buy and Hold. There is some truth in this as well, but it doesn’t seem logical to do nothing to prevent large losses from occurring in the first place.

A third approach says you should actively manage your account. This is normally done by using various algorithms or indicators to determine when to buy and when to sell. If the market starts going down your money gets moved to cash. But this doesn’t always work and may result in missing some big gains.

None of these approaches are perfect. That’s why I don’t rely on any one of them. Instead, I utilize all of them together! I use short-term, medium-term and long-term strategies in the same account. If the market starts going down, the short-term typically gets moved to cash pretty quickly. That often reduces the risk enough that the medium and long-term positions can be held on to through the storm.

Step 3: Trust your plan. The temptation is to throw caution to the wind. Don’t.

These are just a few of the steps I use in my clients’ accounts. Taking them won’t guarantee smooth sailing, but chances are they will help you survive the storm intact.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

Retiring: Pension or Lump Sum?

When people retire, many face the biggest financial decision of their lives. Do they keep their pension and its monthly payments or do they take the lump sum? The pension provides security and peace of mind, but having the lump sum would really be nice, too. Which should you choose? Here’s a simple analogy that might make that decision easier. Steve, age 65, is retiring after 30 years of working for the phone company. He logs on to the company benefits website and sees that he has a decision to make. He can get a lump sum payment from his pension of $300,000 or he can instead get $1,817.94 a month guaranteed for the rest of his life.

Steve likes the thought of getting a onetime $300,000 check, but his wife likes the security of a monthly guaranteed payment. What should he do?

First, Steve (and you) need to understand the underlying concepts involved in this decision. Either way, you have to have monthly income to live on. Think of that monthly check as 10 gallons of milk. You have the choice of being guaranteed that you will receive 10 gallons of milk a month for the rest of your life or, you can take the cow that produces that milk instead.

For a moment, let’s look at it from the side of the one guaranteeing that monthly supply of milk. They own the cow and know it should produce 13 gallons of milk each month. (Don’t laugh farmers, I’m a city boy!) In that situation, would they guarantee someone 13 gallons a month? Of course not.

They have the responsibility to care for and manage the cow. If they don’t do that right, she (I do know that much…) may not produce as much milk. Plus, they have to keep some of the milk for themselves, or it’s not worth doing in the first place.

To decide what stream of milk to guarantee, they start with what they know the cow will conservatively produce. Then they subtract out the amount of milk they want to keep, and they see that they should have 10 gallons left over each month. Thus, they guarantee to deliver 10 gallons a month to you. It’s the same with the insurance company; they won’t give you all the ‘milk’ the ‘cow’ produces.

Of course they own more than one cow, but they aren’t going to put themselves in a position where they regularly have to take the milk from another cow to make their guaranteed delivery to you. In the same way, do you think an insurance company is going to guarantee you so much in monthly payments that it might force them to take money from somewhere else?

What if Steve decides to ‘keep his cow’ instead of receiving the guaranteed monthly stream of milk? First, he and his wife get all the milk. They might even breed the cow to get a calf. Second, if Steve dies, his wife continues to get milk. Third, the cow can then be passed on to their children when they both have passed away. Fourth, if there’s an emergency and push comes to shove, they can sell the cow and use the money for other things. None of these advantages exist if all you get is the guaranteed stream of milk.

With ownership comes responsibility, though. The cow has to be cared for so its milk production doesn’t decrease. The cow has to be protected so it doesn’t run off or get stolen. If (like me) you know nothing about caring for a cow, then you will need to hire someone else to do it for you. And that hired hand might be more concerned about his or her paycheck than your milk supply. Certainly the amount of milk each month will fluctuate. By owning the cow, though, you receive some milk and have the cow to boot.

Hopefully, this analogy will allow you to better understand the decision you face. Receiving a lump sum allows you to maintain control and maximize your returns. But if you know nothing about investing, you may be a sheep waiting to get fleeced! Don’t believe everything you hear and research every financial decision before you make it. Feel free to contact me for help.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

The United States Has Cancer

Inflation is like a cancer that eats away at our standard of living. And those most vulnerable to inflation are retirees and near-retirees. I believe we will experience a damaging level of inflation over the next 10-20 years. If that’s true, then action must be taken today to protect your way of life. Read on to see why. Here in northeast Tennessee, the price of milk rocketed up 30% in just a few days. Imagine if you only had $10 to buy groceries each week and suddenly the price of milk went from $3.00 to $4.00. That is inflation. It takes more money to buy the same thing.

Now imagine if the price of all groceries went up 30% in a short period of time! Can you see how dramatically that could impact your way of life? The necessities of life now take much more of your fixed income than they used to, so you have to cut back.

I believe that we in America will see a prolonged period of inflation much like we did between 1966 and 1982. The rate of inflation may even be higher, much higher. It’s happened to Germany, it’s happened to many countries in Asia and South America. It occurred in Mexico. And it even happened in Great Britain.

In all of those countries, rampant inflation was the result of debt. A government basically has four choices for dealing with an unsustainable debt problem. It can default on its debt, raise taxes, cut spending, or inflate the debt out of existence. Those are the choices faced by our nation.

Default isn’t an option. We can raise taxes and cut spending, but both would have to be done so drastically that it would leave our economy in shambles. Even then it would take decades to pay down the debt. Or, we can inflate our way out.

Inflation makes debt easier to pay off. For instance, let’s say I earn $50,000 a year from my job and I buy a home with a mortgage payment of $1,000 a month ($12,000 per year). That means it takes 24% of my earnings just to pay my mortgage.

Five years later, working the same job, I’m getting paid $60,000. They call it a cost of living increase. Really, it’s inflation. Anyway, my mortgage payment remained the same. Since I have more income and the same mortgage payment, it’s easier to pay. Now it only takes 20% of my income, leaving me 4% to spend on something else.

That’s how a nation can inflate debt out of existence. They print more money. As consumers it affects us because the price of milk goes up. It gives the government more money, though, to pay their ‘mortgage’.

Think about how quickly our national debt is growing—it increased 9 times between 1990 and 2006. We’ve borrowed $3 trillion dollars over the last 10 years because we bought more from other nations than we sold. And that gap is still increasing. That $3 trillion will double to $6 trillion in just 4 years based on our current trade deficit!

Which of the four options will our government choose? I believe it will pursue a combination of raising taxes, cutting spending and spurring inflation.

There are many ways it can raise taxes. For instance, in the late 1990’s a law was passed creating Roth IRA’s. People were allowed to convert their traditional IRA to a Roth, but they would have to pay taxes on that money. The law allowed that tax to be spread over 5 years so a lot of people did it. That produced a huge amount of revenue because the government received taxes over 5 years that would have otherwise taken decades to collect.

The government can also cut spending. I believe it will do so by reneging on its promise to fully pay entitlements such as Social Security and Medicare. Think it can’t happen? At one time they said that they wouldn’t tax Social Security, now they do.

So what does this mean for investors? You can preserve wealth in an inflationary environment by investing in the right things. Hard assets and commodities should do well. So will assets owned in foreign currencies. That’s why I’ll address inflation’s impact on the dollar next week.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

U.S. Loses Independence

Each year, our country proudly celebrates its independence on the 4th of July. I am a flag-waving American that still believes our nation is one of the greatest nations in our world’s history. But I can’t let my patriotism result in my clients losing money. For investors to be successful, they must understand the major forces that will shape our nation and the world over the next 10-20 years. And chief among these are the twin forces of debt and inflation.

I believe the single greatest threat to retirees and near-retirees is America’s loss of its independence. The Bible has a proverb that says, “The rich rule over the poor, and the borrower is servant to the lender.” It’s true for individuals and it’s true for nations. As a nation, we have become the servant and have lost our independence.

It wasn’t always this way. Back in 1914 we became the lender instead of the borrower for the first time in our nation’s history. By 1983, the United States was the largest lender in the world! But just two years later, in 1985, the nation became a borrower instead of a lender. Now, in less than 25 years, we have become the biggest borrower in the history of the world. We are becoming totally dependent on other nations.

It’s easy for us as individuals to borrow money for homes, cars, furniture, etc. But debt isn’t free. I have to pay interest to each lender. And the more I borrow compared to what I make, the harder it will be to make the monthly payments. Eventually, I may have to borrow from one lender to make the payment to another.

If that’s the case, before long my lenders will foreclose on my house, my car, etc. In fact, when the bubble starts to burst, the lenders are going to rush in, each trying to get the little that is left before the others do.

That’s the problem with debt. It’s very easy to get and extremely difficult to pay back. But there are those that chose to live beneath their means, actually save money and lend to others. They become the ones in charge.

It works the same way with nations. Looking back in history, it’s the nations that lived beneath their means that became dominant in the world. They are the ones who lent money to other nations and the more a nation owed them, the more control they had over that nation. That’s the situation our country was in for much of the 20th century.

My concern is that it may be another century before we regain our independence. As a country, we are borrowing from Peter to pay Paul. The numbers are staggering. Our nation’s debt is 9 times higher in 2006 than it was in 1990. The average amount of debt increased over 27% per year and is now $8.5 trillion. If you add in future Medicare and Social Security obligations, the debt is estimated at $67 trillion.

When we buy more from another country than we sell that other country, we have to borrow to make up the difference. Total it all up and it’s called the Balance of Trade or the Trade Deficit.

Last year, we bought $750 billion more than we sold--$200 billion of that just from China. Over the past 10 years, our accumulated trade deficit has grown to $3 trillion dollars. But at the current rate of growth, our trade deficit will double in only 4 years. We are dependent on other nations loaning us that money. The question is whether other countries will continue to want to do so.

Would you invest all your money in a company with a balance sheet that looked like America’s? Probably not. And that’s the point. At some time in the future, unless things change, other nations will no longer be willing to fund our debt. And when that day comes, it will have a drastic impact on our economy.

There is one big difference between the debt of an individual and that of a nation. The nation can print more money; you and I can’t. Printing more money results in higher inflation. That’s why it’s important to understand both forces. I’ll talk about inflation next week.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.