The Independent Investor: Long-Term Planning Is Crucial to Caregiving
The family is headed toward a crisis in caring for the elderly. It will impact all of us, so if you have aging parents, don't think you can just close your eyes and hope for the best. You are likely setting yourself up for a world of hurt.
All too often, the adult children of aging parents are blind-sided when presented with the realities of taking care of parents in need. This is usually precipitated by some sort of health crisis. In my own business, I see it time and time again. What follows is pure chaos, anxiety and hard feelings. There is no way to stop the inevitable, because aging and declining health are part of living, so what can you do?
"It is critical that families begin the conversation now to create a long-term care plan. Do not wait for it to become an immediate crisis," says Annalee Kruger, president of Care Right, a Florida-based expert in the area.
The crisis in caregiving has grown exponentially in this country. So much so that Kruger and others like her have been able to establish thriving businesses by providing solutions for families caught up in a care crisis. Her line of work ranges from providing solutions in caring for aging loved ones to acting as a third-party facilitator in family meetings. She coaches family caregivers (who may be dealing with dementia or are just plain burnt out), but her most satisfying work is developing a plan for the future in order to avoid most of the pitfalls ahead.
Unfortunately, crisis management is still a large part of her business. In order to deal with that event, she first needs to understand the actual care needs of your family member going forward. In today's economy, there are innumerable options and choices to make ranging from private sector solutions (if you have the money) to public options. In any given state, there are a myriad of organizations that provide help and assistance to a family in need.
Just knowing the lay of the land in this area requires a great deal of expertise, while matching your family care giving needs with resources available can be a full-time job. Chief among them may be the financial implications of your choices.
If your family is like mine, everyone will have a different opinion of what direction to take and why. Some members of the family may already be at odds from past disagreements. In the best of cases, developing an aging plan that all can agree upon usually requires an outside mediator. As I mentioned in last week's column, many family members today live far apart, and just communicating with a California brother or sister in Maine on an on-going basis is sometimes impossible without help.
As you might imagine, all of the above would be easier on all of us if we didn't wait for an immediate crisis, like Dad falling on his head while cleaning the roof gutters, or Mom's fall in the garage. Logic dictates that we do not wait for an immediate crisis. Your first step is a family meeting.
Krueger suggests a serious meeting should be arranged with the family where three questions are agreed upon: "If mom or dad becomes incapacitated, where will they live? Who will take care of mom or dad? And if they need custodial care, how will the family pay for this care?"
"The answers will form the basis for a long-term care plan," Kruger explains. "If family members disagree regarding the answers, compromise must be made. The entire family must come to a consensus that everyone can live with or risk the disintegration of the family."
As I wrote last week, it is a serious issue that is only going to get worse in the future as more elderly 80-plus family members need help and less and less caregivers (45-64 years old) are around to provide it. Nearly 10 million caregivers are now over 50 years of age. That number is going to explode upward in the next decade. Over 86 percent of these caregivers saw a tremendous impact on their lifestyle. Sixty-four percent of them are funding their parent in some way; accounting for 33 percent of their monthly budget, according to AARP.
If those statistics don't convince you then nothing will. My advice: call that family meeting as soon as possible before it is too late and get some help.
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@theMarket: Have the Wheels Come Off the Market?
No question about it, the president's decision to impose 5 percent tariffs on all Mexican imports by June 10 caught investors flat-footed. Combined with the on-going war of words with the Chinese on tariffs, markets worldwide fell sharply this week. Is a relief rally in the cards?
Chances are that next week, we should see a rebound. How much and over what period of time will largely depend on what happens next on the trade front. My thinking on the Mexican issue thus far is this: Trump is using trade with Mexico to force their government to turn back (instead of encouraging) Latin American refugees from our border.
You may disagree, but I believe President Trump's heavy-handed actions toward Mexico over the past two years has resulted in the immigrant problem we have today. By "Making America Great Again" at the expense of every other nation on earth (with the possible exception of Russia), Trump has broken, reduced, and/or trashed past agreements, both spoken and unspoken, by our former allies, which includes Mexico.
In the case of Mexico, for years we had successfully enlisted their cooperation in turning back refugees at their borders from Latin America and, where they could, reduce the number of their own citizens from entering the U.S. illegally. It was not a perfect solution, and a steady trickle of refugees continued to find their way over our borders, but it was manageable. Trump, recognizing that he could use immigration as a campaign issue among a certain segment of the population, hammered Mexico unrelentingly.
Why, under those circumstances, would any country continue to cooperate voluntarily with the U.S. and our protectionist president? They did what made the most sense for them, just like Trump does for his base. They simply stepped aside and let the flood gates open.
Unable to stem the tide, our immigration force is drowning. Donald Trump is using economic trade to force a solution to a problem of his making. Although Mexican leaders have responded by taking a hard stance, I suspect that Trump will get his way, at least temporarily.
The markets expect the same. Mexico, unlike China, cannot afford a protracted trade war with its neighbor and largest trade partner. It is one reason stocks on Friday were "only" down one percent or so. Given that the administration has also started the ratification process on the new, Mexico-Canada-U.S. trade agreement this week, it seems obvious that Trump is injecting immigration into what until now been a purely economic agreement.
China, as I warned last week, continues to ramp up its hardline response to U.S. trade demands. The administration's moves against Huawei, China's telecom behemoth, have now elicited a response. China's Ministry of Commerce is reported to be compiling a list of "unreliable entities." These are companies and individuals that have cut off business with Chinese companies (like Huawei). It confirms investors' worst nightmares, sending semiconductor and other technology stocks lower.
In addition, China is threatening retaliation on other fronts. China accounts for 80 percent of the production of rare earth, used in the manufacture of things like cell phones, rechargeable batteries, DVDs, computer memories and much more. It has floated a veiled threat to cut off exports to the U.S. in the future. That would cripple production across a wide range of American industries.
In the short-term, we can expect to see the S&P 500 Index test the 2,700 level, give or take 25 points. That would still leave the entire pullback from the highs no more than about 8 percent. Pundits may make a big deal about breaking through the S&P's 200-day moving average (DMA), but I believe it will rebound. This decline is perfectly reasonable after the double-digit gains we have enjoyed since December.
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The Independent Investor: Cost of Caregiving Keeps Climbing
If you thought the nation has problems with Social Security and Medicare, you ain't seen nothing yet. Today, more than two-thirds of Americans assume they will be able to rely on a family member to meet their long-term care needs if needed. My advice: don't count on it, and here's why.
As it stands today, one-third of all U.S. families provide long-term care for a disabled or elderly family member. You may have guessed that two-thirds of those caregivers are women, although why it should be deemed a woman's task alone is beyond me.
If you want to look at the upside to care-giving, you could say that caring for a loved one who needs our help, is a chance to pay back all the love and support we received when growing up. On a good day of care-giving, there may be an immense satisfaction in helping to preserve an individual's quality of life, whom you love, while lifting their increasingly difficult burden of completing daily tasks.
The downside of care-giving is well-documented. The economic, emotional and mental strain of care-giving is, at times, overwhelming. And it snowballs. Family relationships often suffer and tension among spouses is commonplace. care-giving also takes a toll on your health and plays havoc with your work-life balance.
In 2013, according to the AARP, about 40 million families provided 37 billion hours of care, which was worth an estimated $470 billion. That nearly equaled the yearly revenues of the country's four largest tech companies combined. In 2016, AARP estimated that, in addition to the physical care-giving, the average out-of-pocket expense per family was almost $7,000 a year. That can amount to 20 percent of an average family's income per year.
The economic impact can be devastating. To cover the additional expense, many families have to cut back on their own spending. They usually do this by short-changing their retirement savings and contributions. Since it is the woman (who also happens to be a wage earner) that most of the burden falls upon, there is a higher chance that she will be forced to give up full-time work in order to become a caregiver.
It is estimated that 17 percent of caregivers dealing with a parent with dementia will quit their jobs. The majority of caregivers who maintain employment, arrive late to work or leave early. About 15 percent of them are forced to take a leave of absence and 7 percent lose job-related benefits.
More than 10 million caregivers, over 50 years old, lose $3 trillion in wages, pensions, retirement funds and other benefits. Of that, women lose an estimated $324,044, while men lose much less ($124,693).
If that sounds pretty grim, just wait. Digging deeper, we find that the caregiver support ratio back in 2010, was more than 7 potential caregivers for every person in the high-risk years of age 80-plus, according to AARP. By 2030, that ratio will fall to 4 to 1, and by 2050, it will drop to 3 to 1.
As such, the decade between the 2010s and 2020s will be a transition period when Baby Boomers age out of their peak care-giving years and the oldest Boomers transition into the 80-plus high-risk years. Now, here's the zinger:
"The departure of the boomers from the peak care-giving years will mean that the population aged 45-64 is projected to increase by only one percent between 2010-2030. During the same period, the 80-plus population is projected to increase by a whopping 79 percent," according to Annalee Kruger, the founder and president of Care Right, a Florida-based firm that provides advice and aging planning for caregivers and their families.
Kruger, an expert in the landscape of health care, (the subject of her master's thesis), fears that a real crisis is brewing in America. As the family unit in America continues to shrink while living further and further apart, seniors should not simply assume that a family member will take care of them when the time comes.
In my next column, I will provide more of Annalee Kruger's insights in how to plan and prepare for this coming crisis.
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@theMarket: Markets Held Hostage by Trade & Machines
If it were not for computer-driven trading, it might actually be funny. Financial markets are careening up and down on a daily basis based on the next tweet or comment from the Trump administration or its counterparts in China. We could see more of the same next week.
Rhyme or reason has truly left the station. Day by day, the trade war of words is accelerating. This week, the U.S. banned China's largest technology company, Huawei, from doing business with American companies. The president accused the company of espionage. The Chinese responded by threatening to drop trade negotiations. Markets collapsed, led by semi-conductor and technology stocks.
A day later, the administration walked back their ban, at least temporarily, once they realized the entire U.S. semiconductor industry would be crippled by their move. Markets spiked higher. Then, Stephen Mnuchin, the U.S. Treasury secretary, admitted there was no planned dates to resume trade talks — pow, markets fell again.
Thursday, the president, in a free-wheeling news conference, announced a trade deal with China will happen "fast." Confused investors jumped back into the markets chasing stocks up on Friday morning and down in the afternoon.
Over in China, there also appears to be an escalation in the tariff/trade verbiage. The Chinese government-controlled media have stepped up its anti-U.S. rhetoric, quoting Chinese officials, who are increasingly painting America and its leaders as irrational and unreasonable. A protest song of sorts has hit their air and internet waves, gaining massive popularity among the billions of Chinese citizens.
Rather than caving-in to our demands, it appears that China is hardening its stance and intensifying its "Made in China 2025" import substitution program. Readers may recall that China's long-term economic strategy is to become self-sufficient in producing the goods and services they need to supply their increasingly affluent population. They envision a centrally planned mercantile society that, in the end, will cease to depend on the U.S. and its imports and rely solely on domestic production.
While China would prefer to wean its need for U.S. goods and services gradually, over a period of a few more years, if push comes to shove, they seem willing to take the hard road, and cut off much of their trade with the U.S. if negotiations fail. After all, while the population may suffer and economic growth would slow, it's not as if the Chinese populace can vote Xi Jinping out of office.
Xi, last week, actually gave a speech in Yudu, a small county where Mao Tse Tung's Long March began, 85 years ago. The two-year march, over some of China's most rugged and difficult terrain during the Chinese civil war, is the stuff of legends within China. Xi's message was clear: China may be in for another long march of "enduring hardship" and should be prepared if negotiations fail.
Despite this war of words, the majority of investors still believe that a deal will be done and done fairly quickly. As such, any hint that reflects positively on the trade talks is an excuse to buy. This tendency is exasperated by computers that are programmed to respond to certain key words (that signal it to buy or sell the markets).
Computers cannot reason. They do not know if the president's tweets or statements are backed up by facts and they don't care. Neither, evidently, do human investors. I can see this continue to play out until June 1. That's the date when China's second round of tariffs will be levied on U.S. goods. That's next weekend. If no breakthrough occurs by then, and I don't believe it will, then expect the next shoe to drop and the markets with it.
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The Independent Investor: Don't Take Loans From Your Tax-Deferred Accounts
It sounds too good to be true. Why borrow from a bank when you can take a loan out from your 401(k) or 403(b) and pay yourself back in both interest and principal? If that sounds like a great deal, it's not.
Money purchase plans, profit-sharing plans, 457(b) plans and both 401(k) and 403(b) plans may offer loans, but IRAs, SEP IRAs, and SIMPLE IRAs do not. The IRS does have some restrictions on the borrowing. It limits how much you can borrow at any one time. In general, you are limited to the smaller of 50 percent of your vested account balance, or $50,000. However, there is one exception (hardship) that allows you to borrow up to $10,000 even if it exceeds 50 percent of the balance. It also requires you to pay yourself a reasonable rate of interest on your loan. Generally, you have five years to repay the loan, although you are required to pay at least quarterly payments.
Recently a thirtysomething-year-old client told me he had taken out a $7,000 loan from his $50,000 403 (b) tax-deferred retirement plan years ago. He was surprised to find that it was not an interest-free loan and that he was required to pay off the loan in its entirety before he could draw from the account in retirement. What's worse, if he quit his job, his company required that he pay off the amount in 60 days. He thought it was the IRS that laid down the rule provisions, but that is not the case.
It is the company you work for that offers the plan. Some companies won't let you borrow. Others have limitations on how much much you can borrow and how much you pay in interest. What happens if you fail to repay the loan? The IRS will consider the loan a distribution from your plan. You will then need to pay income tax on the amount, plus a 10 percent penalty if you are not age 59 1/2 or older.
There are only a few cases where borrowing from your tax-deferred account makes economic sense: If you have an immediate emergency, say a medical issue, that cannot be financed any other way, an immediate cash obligation and your credit score prevents you from borrowing in any other way, or an extremely high interest debt that is threatening to send you into bankruptcy, or worse, may require you to take out a loan.
Nearly 3 out of 10 Americans borrow from their retirement plans. The problem is that they erroneously view them as their own personal piggy bank, until something goes wrong. If you lose your job, for example, you not only have no income coming in, but the loan is due in 2-3 months. If you can't pay it back, you get slapped with additional taxes (as a distribution), which, unless you have a new job lined up, has to be paid out of whatever you have in your checking account.
Since these loans are paid back with your after-tax dollars, you end up paying taxes on the money twice. Once, out of your paycheck, to repay the loan and a second time, when you start withdrawing money in retirement.
Finally, these plans were established to provide you a winning combination of tax breaks, company matches, and the compounding of gains from your contributions, so that you can save for retirement. None of that occurs while you have a loan outstanding. Instead of a contribution each quarter, the loan repayment is taken out of your paycheck each quarter.
If you take the full five years to repay the loan, not only are you missing out on five years of savings and compounding, but also the opportunity costs that the markets provide you.
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