The Independent Investor: Should You Bury Yourself?
In today's world, the idea that you should prepay, or at least set aside some money to cover your funeral expenses is gaining traction. Given the escalating costs of paying for a loved one's funeral, it is no surprise.
Most of us don't want to face it, let alone discuss it. In some quarters, it is "bad mojo" to consider planning for your death, so pardon me for bringing up such a squeamish (some might say ghoulish) subject. But as your fiduciary in all things financial, I feel obligated to discuss prepaid funeral expenses.
This year, I was introduced to this concept when my Mom died. She was 93 years old, bless her soul, and had a good life. Independent to the end, she secretly arranged for her own funeral expenses in 2000 along with specific instructions on what should happen at her passing. She wanted no fuss, no bother. Her remains were cremated, and everything was signed, sealed and delivered before I could make the five-hour trip to her home in Pennsylvania.
My mother turned out to be an astute investor when it came to her death. Funeral expenses during that time (2000-2018) increased by 75.74 percent, according to the U.S. Bureau of Labor Statistics. Her arrangement to prepay her expenses protected her from rising costs and provided a convenient and stress-free experience for me and the rest of the family.
However, there are pros and cons of pre-paying for your funeral. A prepaid funeral plan is an arrangement between you and a funeral home in which you make an upfront payment to the funeral home today. The agreement should state that the funeral home will administer funeral services in the future in return and cover all the costs. These funeral costs usually run somewhere between $10,000-$15,000 for basic services. They usually do not pay for cash expenses such as fees charged by the clergy or other services.
If you go this route, make sure the services and costs you specify are guaranteed in the contract. Watch out for terms such as additional payments for "final expense funding." It usually means that your beneficiaries will be required to pay any cost overruns.
There are other risks you take as well. For example, the funeral home may go out of business. What happens to your contract at that point? Have arrangements been made for another entity to take over your contract? What happens if you decide to move for example? Can your plan be transferred to another funeral home in a different state? Can you get your money back if you change your mind? Make sure that all of these "what ifs" are spelled out.
Some experts argue that there are better ways to pay ahead for your funeral. You could buy a life insurance policy with the proceeds earmarked for funeral expenses. Some suggest that you could also set up your own burial trust fund. It's called a "Totten trust" and is simply a regular bank account with a designated "pay on death" inheritor.
In this case, you open the account at your local bank or credit union. The money earns interest, you can close it at any time if you want, and could transfer the balance to a different bank if you want. When you die, the beneficiary collects the account balance and pays for the funeral.
Granted, prepaying your expenses via a funeral home is convenient and can insulate your costs from inflation if it is done right. Ask your financial planner what she thinks at your next meeting. It could not only provide you peace of mind but could also be a great gift to your beneficiaries.
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The Independent Investor: Turmoil in Turkey
Turkey, a country that represents about 1 percent of the world's gross domestic product, has suddenly become a cause of concern for investors worldwide. Both developed and emerging financial markets have plunged over the last week as that country's currency plummeted. Fear that this tiny country's problems could somehow spark a global financial contagion has everyone on edge.
Those fears are unfounded. There will be no "contagion." What is happening in Turkey is truly a "Tempest in a Teapot" that bears little resemblance to the crisis in Greece several years ago. Yet, over the last week, Turkey's currency, the lira, fell to record lows, interest rates skyrocketed, and their stock market cratered.
Turkey's problems are nothing new. It is a classic case of a country that borrows abroad (in U.S. dollars) to leverage their economy's growth rate, which make the voters happy — until it doesn't. Investors have erroneously compared Turkey's woes to the Greek crisis of a few years ago. But there are big differences.
Turkey's economy is about 1 percent of global GDP, the 17th largest in the world. The country is not a full member of the European Union, nor does it use the Euro as its national currency. In addition, European banks have relatively little exposure to Turkish debt. Unlike Greece, where all the above were real fear factors, Turkey is more of a "corporate debt problem."
It has been companies, and not the government, that have gone on a borrowing spree. And foreign investors, searching for better returns that can be had in safer, more developed markets, were glad to loan Turkish companies' money for a double-digit return. Turkey is not alone in this trend; many other emerging markets have also been able to tap the debt markets in recent years.
The problem in this scheme is that the U.S. dollar has been strengthening all year. Projections are that it is likely to continue to gain against other emerging market currencies. Since Turkey's debt is priced in dollars, every tick up in the greenback makes their debt payments that much higher. At some point, that situation becomes untenable. Debt default could become a real possibility in that case.
And what could happen to Turkey, might also happen to other countries, such as Italy. A crisis in Italy would be a whole new ballgame, similar, but worse, than what happened to Greece. The "Italian Problem" has also been simmering for years, so it is understandable that investors would jump to conclusions prematurely.
And during this tempest, President Trump brought the kettle to boil by doubling tariffs on imported Turkish steel and aluminum in response to Turkey's imprisonment of an American citizen. Although Turkey only sells $1.4 billion of these metals to the U.S., it is the thought that counts. Down went the lira (again), which has now declined 40 percent since the beginning of the years. Their stock market (which is about the size of the market capitalization of McDonald's) plummeted. Interest rates spiked (now 17 percent), while the inflation rate is expected to go higher than its present 17 percent.
While there is little positive news that one can point to in terms of this country's economic prospect over the short term, their situation is purely "Turkish" in nature. There is no need to put down that novel or call your broker from the beach. As I have warned my readers over the past few weeks, manufactured crises that are then blown out of proportion are how traders whittle away the slow days of August. Don't get caught up in the hysteria.
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@theMarket: Will Stocks Break Out or Break Down?
The S&P 500 index is within a hair's breadth of breaking out. This week we topped 2,850, which we haven't done since March. The record high for the index in January was 2,872.
Can we top that?
The S&P 500 Index traded within 0.5 percent of its record high this week. If we can close and hold a new high, it will be the 18th time the benchmark index has closed at a new all-time high after going six months without one. Statistically speaking, the odds of doing so are against us. Normally, if we use historical data, it should take the index another year before we reach a new high, but there is nothing normal about the environment we live in today.
Last week, I wrote that the market was locked in a trading range. The up and down action, I said, could continue through September and into October. At that point, I was expecting another move higher. I may have been too conservative, but the proof will be in what happens next.
We have been climbing for several consecutive days from a low of about 2,800 to the present level. NASDAQ and the FANG stocks have regained all their losses, while the overall market has risen on the back of positive second-quarter earnings results. What's more important is that overall guidance by corporations was bullish as well.
Technically, if markets are going to continue in this trading range, we should see a pullback soon. The key would be what level the bulls are willing to defend on the way down.
The 2,850 level on the S&P 500 would seem the obvious place to find some support. If not, well, chances are we go back to the recent trading range lows.
The absence of new news, now that earnings season is over, could also weigh on the bulls. And don't forget Washington. At any moment, a tweet from the White House could spoil investors' hopeful moods.
Have you noticed, however, that the tariff tantrums are affecting the market less and less?
For one thing, when you add up all the real or threatened tariffs, the impact on global growth is minuscule. Ken Fisher, an investment adviser I respect, wrote a piece for USA Today. In it, he argues that all the commentary, both pro, and con, on the tariff situation is wrong. He did the math, assuming the worst-case scenario happens. The global economy, which is worth some $80 billion a year, is estimated to grow by about $4 trillion in 2018. He calculates that if $161 billion in tariffs were levied on the world's consumers, it would only comprise a mere 4 percent of that $4 trillion in global economic growth. That's not much to get worked up about, now is it?
Patience is the keyword for 2018 when it comes to investing. Whether we break up or down in the short-term is immaterial. In the long run, let's say by the end of the year, stocks will finish the year higher.
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The Independent Investor: Should You Pay Down Your Mortgage?
The Tax Cut and Jobs Act of 2017, together with rising interest rates have changed the calculus in determining whether to pay down your mortgage or let it ride. Let's examine the pros and cons.
Over the last 10 years, as interest rates fell to almost zero, it made total sense to pay off your high-interest mortgage. At the very least, one could re-finance and save on monthly payments. This was especially true if your mortgage was in the last stages of a 30- or 15-year life.
At that point, the interest portion of the payment, (which is tax deductible) was minimal, while the principal payments represented the lion's share of the monthly bill. For those with new mortgages, or who refinanced at record-low interest rates, the interest banks charged composed most of the payment (and thus a larger tax deduction), so these buyers had fewer reasons to prepay.
All this changed with the new tax act. There is now a cap on how much of a mortgage interest deduction one can claim. Worse still, if you are unlucky enough to live in a state with an income tax, the cap on the mortgage deduction is combined with a cap on state income tax and property taxes deductions. In short, the higher the interest payment on your mortgage, the less tax incentive you have to carry a mortgage.
However, there are some positives to this mortgage equation. Interest rates have already begun to rise, although not by much. If rates continue to rise, at some point, some homeowners will have lower mortgage rates than the interest rates they could obtain in the prevailing market. They would have borrowed "cheap" money at a fixed rate for an extended period. Of course, all bets are off if you have an adjustable rate mortgage or home equity loan. In these loans, your payments rise along with interest rates.
However, for some Americans, an aversion to debt can be an overriding factor in holding a mortgage. We are a nation of debtors overall. But as we grow older, many retirees facing a decline in their income, realize that paying down their debt raises their chances of a satisfying, worry-free retirement. There are others who just hate owing money or resent paying that "pound of flesh" the lending institution demands for the loan.
Putting those emotional issues aside, the key question to ask as a financial planner will always be what is the best use of capital? Can I make more by paying off my loan or keeping it and investing my extra money elsewhere in something that is yielding even more than my mortgage rate.
Given the lower tax incentives for owning a mortgage, why hold a mortgage at all?
Let's take an example. Pretend you are 65 years old, have no debt, except a 30-year fixed, 3.5 percent mortgage. As a retiree, if you are going to pay off your 3.5 percent mortgage, you want a safe, guaranteed return on your money that is higher than that. Certificates of Deposits, therefore, make the most sense. Right now, the best three-year CD rate is around 3.1 percent. So, you would still be making more by using any extra cash in prepaying your higher rate mortgage than putting your money in a CD, but not by much.
As rates move higher, your fixed-rate mortgage looks better and better. Fast forward a year, and now CDs are yielding 4 percent. In which case, it would make more sense to invest your extra cash in that higher-yielding CDs than paying off your mortgage. In a sense, you are borrowing cheap 3.5 percent money and investing it in an investment returning 4 percent.
Given that you will still be receiving some reduced mortgage interest tax benefits under the new tax rules, this example needs to be adjusted for that tax benefit depending on your state of residence. Remember too, that in retirement, you may need cash when you least expect it. Medical emergencies, a new car, home repairs—all seem to crop up when you least expect them. As such, liquidity will be an important variable in your financial line-up. As such, prepaying your mortgage will usually require a severe decline in your available cash.
I guess the good news is that after a decade of low-interest rates and high tax mortgage deductions, the worm has turned. This opportunity may provide conservative investors with alternative investments to at least think about and monitor in the future.
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@theMarket: Stocks Set for a Volatile August
This month would be a good time to go on vacation. Otherwise, you might be tempted to do something rash like chase stocks or sell at their lows. That is the kind of market volatility investors should expect in August.
The market's trading range is still intact and should continue and keep stock market values corralled into September and probably October.
We had our moves up to the old highs (or slightly beyond) in most of the averages in July. A combination of anticipated stellar second-quarter earnings and somewhat less rhetoric from the "Trumpster," allowed equities to notch their fourth month of gains. Second quarter earnings have come in as expected for the most part, but much of that excitement is behind us. We still face the prospects of a trade war and all that might entail. The Fed is on hold until next month, but the bond vigilantes are expecting the central bank to raise rates again in September.
In the absence of any market-making good news, it would be a safe bet to expect stocks to drift lower by a couple of percentage points.
Since the real action won’t start until after Labor Day, any pullbacks or melt-ups will be trader-induced, on low volume and are as liable to reverse at odd or unpredictable times. This could last a few weeks until the algos and day traders exhaust themselves. By the end of the month, watching grass grow should be more exciting than watching the tape.
Since I am not a political analyst, you — reader — will have as much insight as I do on whether the GOP will maintain their majority in the House and/or Senate, or cede those positions to the Democrats. The question to ask is how the markets will react to the mid-term election outcomes.
If the GOP emerges victorious, I suspect stocks will rally. If the Democrats win, there may be a bit of disappointment, at first, but then markets will soon realize that a stalemate in Congress is a good thing for the markets.
In prior years, when Congress was divided, (think the Obama years), markets rallied because the logjam in Congress meant no new legislation. That equaled predictability and removed politics from the investment equation. Remember, investors like an atmosphere where
they can count on the status quo to continue. Granted, it may not be good for the country, but it is usually good for stocks.
The caveat must be Donald Trump. Nothing about the president is predictable. With a hung Congress, he may well resort to executive orders to advance his objectives. He may even reach across the aisle in some areas to forge a deal with the Democrats. I would expect a divided Congress would also increase the pressure on the president personally, as well as his cabinet, in the Russian investigation, personal finances, etc.
If the Republicans win, and Trump also increases his base support, it is anyone's guess on how the markets will react.
On one hand, Trump's Transformation of America would likely proceed with the ship moving at full-speed ahead. More tax cuts for the wealthy, the Wall will finally go up, immigration will slow to a trickle, business will enjoy even more benefits and the markets would
However, a full-blown trade would also become a real possibility. Higher tariffs would spark runaway inflation, interest rates would spike higher, the deficit would balloon, while tax revenues drop. Economists and Wall Street, alike, are convinced (although Main Street is not)
that the kind of tariffs Trump is threatening will not only hurt the U.S. economy but would most likely sink the global economy. A combination of all the above would be a "bridge too far" for the stock market, in my opinion.
In any case, preliminary polls (if they can be believed) indicate a tight race. Traders are already re-programming their voice-activated computer trading bots to sell or buy on the latest polls. The media, social and otherwise, will have a field day extrapolating every nuance and wrinkle of the race.
And, of course, we can count on a continuous stream of tweets cascading from the White House interrupted only by the delivery of yet another Big Mac with fries. Given that scenario, you better rest up now because this Fall could be a real humdinger.
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