The Independent Investor: Paid Family & Medical Leave Overdue
Paid family and medical leave are long-overdue in this country
What do the United States, Papua New Guinea and Oman have in common? Those are the only three countries in the world that do not legally obligate employers or taxpayers to pay for maternity leave.
Many American businesspeople will hide behind a knee-jerk response to the above statement: "We are a free-market society," they will argue, "and paid leave is paramount to just another form of socialism."
Good try, but that old argument is no longer based in facts. Free markets have given way to corporate socialism in this country, while corporations are now legally considered to have the same rights as individuals.
As such, individuals have a moral responsibility to protect and care for future generations. They have an obligation to society. Giving paid leave to American workers, not only to deliver and care for their young, but also to provide income during serious medical conditions, cannot be left to the whims (and greed) of our corporate community. As it stands, after decades of waiting, a mere 15 percent of companies have voluntarily instituted paid leave to their workers, according to a 2017 Bureau of Labor Statistic report.
The fact that for the last several years, corporations have banked stupendous profits and now carry more cash on the books than ever before just makes their failure all the more apparent, if not disgusting. To be fair, there are some companies such as Microsoft, IBM, Netflix, American Express, Citigroup and, of course, Berkshire Money Management that do pay for parental and medical leave.
Take my own case as an example. As many readers are aware, I have had some serious medical problems over the course of the last few years. Two knee replacements kept me out of work for about five months. And then there was that bout with prostate cancer in 2017. Not only did the company pay me while I was out, but management sat in the waiting room with my wife throughout my surgeries.
Can you guess how I felt when I returned to work? I have spent the last two years working like a maniac to not only make up for that time loss, but also to show my gratitude for all the company has done for me. And I'm not the only one.
Our compliance officer, Jayne, within her first year of employment at BMM, had her second child, Marigold. Once again, BMM not only paid for 13 weeks of maternity leave, but went the extra mile when Marigold refused to take the bottle. We hired a nanny to baby-sit in the office for weeks and weeks so Jayne could come to work with her child until she was over that hurdle.
"Both my morale and productivity took a great leap forward as a result," Jayne said. "Knowing that both I and my child were so well-supported reduced my worry dramatically and allowed me to work that much harder here."
As of today, only six states — California, New Jersey, Rhode Island, New York, Washington, Massachusetts — and the District of Columbia have passed paid family-leave programs. Massachusetts, which passed their legislation last year has delayed implementation of their program until October 2019.
Their law provides workers with 12 weeks of family leave and 20 weeks of personal medical leave. Workers on paid leave will earn 80 percent of their wages, up to 50 percent of the state's average weekly wage, and then 50 percent of wages above that amount.
The employer pays at least 60 percent of the medical leave contribution required for each employee, but none of the family leave contributions. The worker picks up the rest via a fund which will tax an employee's earnings.
Although the Federal government does have a Family and Medical Leave Act (FMLA) passed in 1993, it only protects the worker from being fired or excluded from a company's group health insurance coverage and then only for a certain time period.
The entire charade of hiding behind some mythical form of capitalism to justify this failure by our nation is inexcusable. Eighty-two percent of participants in a Pew Research Center poll believed new mothers should have paid time off while 69 percent said the benefit should apply to fathers as well.
Of course, simply because the majority of Americans want, even demand, something from their government is no guarantee that Congress or the president will listen. It's campaign season, so let's make this an issue for the candidates.
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@theMarket: Looking Ahead
Will the second half of the year be as good as the first half for the markets?
The S&P 500 Index finished up 18 percent for the six months ending June 30. That was the best first half since 1997. Historically, that kind of return is three times the gains investors can normally expect from the market in an average year. The chance of a repeat performance in the next six months is, at best, remote.
That doesn't necessarily mean this is as good as it gets for stock investors. My near-term target for the S&P 500 Index is somewhere around 3,050, which is a further 4 percent gain from here. From my vantage point, as long as interest rates continue to decline and the Fed stays at least neutral, we go higher.
For the time being, the China trade tariff worries are off the table. As I predicted last week before the G-20 meeting, Donald Trump adhered to his "speak loudly, but carry a little stick" foreign policy. He relented on a number of issues, including holding off on any further tariffs on China, at least for the time being.
While the markets rallied on Monday as a result, they quickly gave back their gains since investors are beginning to learn that not everything that our president says will necessarily be accurate, or when it is, his statements are almost always an exaggeration of reality. The Fed, on the other hand, is a different kettle of fish.
You might ask why the markets are continuing to rise when economic growth here and abroad continues to slow. First, recognize that the economy and the stock market are two different entities. What may not be good for Main Street (slowing employment gains, sluggish business investments, weakening quarterly earnings), in this case, increases the chances that the Fed will cut interest rates as early as this month and that would be good for the markets.
At this point, despite the Fed's refusal to confirm or deny an interest rate cut, the financial markets are convinced they will cut. The odds of a Fed interest rate cut by July 31 have surged to 100 percent. While 72 percent of traders are counting on a quarter-point cut, almost 28 percent of traders are expecting a half-point cut. That in itself is astounding, since the Fed has not cut rates by that much in many years. Over 60 percent of bond traders are also counting on another rate cut as early as September, according to CME Fedwatch.
Whenever the markets are unanimous about anything, I usually feel the hairs on my neck begin to tingle. Given that the stock markets are climbing, based on that interest rate assumption, it behooves the investor to ask what will happen if everyone has it wrong and the Fed doesn't cut? The short answer would be look out below.
And as we close out this holiday-shortened week, remember that when we get back second-quarter earnings season will be upon us. Right now, consensus for second-quarter earnings results for the S&P 500 is a scant 0.2 percent. Third quarter estimates are not much better ( 0.7 percent gains). What is concerning to me is how corporate managements are going to spin the impact of the existing tariffs on their bottom line.
In past quarters, analysts have ratcheted down their earnings expectations to such a low levels that investors were pleasantly surprised when companies announced better than expected earnings and sales guidance. It could happen again, so let's say I am neutral on earnings results until we see how many beats versus misses happen early on.
In any case, it appears the administration is bringing out the Big Guns to pressure the Fed into cutting rates this month. Don't underestimate Trump's ability to influence events in that area. Trump believes that the Fed should be his policy instrument and an extension of his presidential power in the financial arena. He has already threatened to fire, replace, or demote the Fed's Chair, Jerome Powell (his appointee), several times.
In a further attempt at bringing the Fed under his control, this week Trump has proposed two more additions to the Federal Reserve Board, Christopher Waller and Judy Shelton. Both candidates appear to be far less independent than past candidates for the job. One of the two (Shelton) has already expressed a desire to see interest rates in the U.S. at 0 percent within the next year or two. That should be music to the ears of the president.
In any case, enjoy the markets, enjoy the Fourth of July, and I'll see you after the holiday.
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The Independent Investor: Home Equity Can Pay for Long-Term Care
A home equity conversion mortgage (HECM) might simply be a fancy term for a reverse mortgage, but there are an increasing number of advisers and planners who are using them for an entirely different strategic planning purpose.
If you ask most couples in their 60s and beyond what is one of the greatest fears for their future, I'm betting that going bankrupt and/or losing their home and life savings as a result of nursing home bills would be right up there near the top.
We all have horror stories to tell of how one or both spouses needed to go into a nursing home and the costs drained all their assets and then some. Before they could apply for Medicaid, they had to go through everything they own — their home, their retirement and savings accounts — all gone. Only then could they qualify for government assistance, which usually means and ending up on a Medicaid waiting list for a remote, tiny room in a facility for the remainder of their lives.
That, my dear reader, is not the kind of "living the dream" Americans have in mind when they think of their future retirement years. Now, of course, the knee-jerk answer to this ever-present nightmare is long-term care insurance Any financial planner worth their salt will tell the average consumer to buy insurance, but there is lots of downside in following that avenue.
Let's take a 65-year-old couple shopping around for this insurance. For the husband, it will probably cost him double what it will cost his wife: A premium of $4,543.76, while the wife pays $2,825.97. That comes to $7,369.73 per year for the couple. And that is only if their health qualifies them for insurance in the first place. These are not fictitious numbers, but taken from a recent Cross Insurance estimate for these 65-year-old sample customers.
In exchange, you get three years of coverage, with a $5,000 monthly benefit (up to $180,000 total) in home care benefits. You will then have to re-new the policy every three years (most likely at higher premiums), regardless of whether or not you used the coverage. For a retired couple watching their finances, living off Social Security and, hopefully, some retirement savings, that's a fairly high expense. In addition, there are many facilities that charge far more than $5,000 a month for the care they give.
However, over the past few years, a number of financial planners have discovered a way to tap into a retiree's home equity in the event that the worst happens and one or the other of you needs outside care. In its simplest form, a couple (of which at least one must be 62 years of age or older), can take out a HECM, or what amounts to a reverse mortgage. But instead of receiving a standard monthly payment, you elect not to take these distributions until the day you need the money to pay for outside nursing care.
Let's take an example where you own your own home, debt-free, worth $500,000. The mortgage company does an appraisal and determines they will loan you half of the amount in an HECM. Like any mortgage, you will be charged fees (origination fees, third party fees, etc.) which comes to about $17,000 or about 7-8 percent of the loan. Like any mortgage, you are still responsible for paying the taxes on the home while continuing to maintain the dwelling, etc.
Those payments you would normally receive from a traditional reverse mortgage are, instead, accumulated in your account at the mortgage company year after year. Think of them as a credit line, which grows and grows. Every year they accumulate, you are paid a half percentage point per annum above the yearly London Inter-Bank Offered Rate (LIBOR interest rate). Currently, LIBOR is trading at about 4.5 percent, plus the half point that you receive above that equates to about 5 percent. These payments to your account accumulate at this risk-free rate until you use them.
Better still, the underlying worth of your house can go up or down but has no impact on your future payments. The primary risk you take is that LIBOR fluctuates, causing the payments you receive to rise or fall over time.
The payments keep working for you until such a time you need them. At some point, the inevitable may occur. One or both spouses needs some form of assisted living. In that case, you simply direct the mortgage company to begin paying monthly sums. If you want, you could request the reverse mortgage payments correspond with the monthly expense of the nursing home. Best of all, these payments are tax-free.
As long as one spouse remains in the home, the house is still yours until the spouse dies or has not lived in the property for the last 12 months. At that point, the house reverts to the mortgage company. If, in the meantime, you still have equity in your home, your beneficiaries receive the remaining proceeds.
But what if you never need to go into a nursing home? Conceivably, the credit line you have accumulated can grow until it exceeds the value of your home. If so, you simply call the company and ask them to cut a check for part or all of your credit line. The point is that the HECM is your long-term care insurance, but it pays you rather than the reverse. Your spouse keeps the house, the Social Security payments, the retirement savings, etc. just like before.
In my next column, we will examine other uses of a HECM and dig into the details of the long-term care concept. Stay tuned.
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@theMarket: G-20 Weighs on Stocks
It wouldn't be a normal weekend in the financial markets without something to worry about. This weekend, it is the meeting of the two presidents, Trump and Xi, in Japan with $350 billion in new tariffs hanging on the outcome. What are the odds that they clinch a deal?
Not great, in my opinion. That doesn't necessarily mean that we need to brace for a worldwide economy-killing deluge of massive tariffs and counter-tariffs either. There is too much at stake for Donald Trump and China knows it. Instead, I expect we will get a classic Trumpian foreign policy "speak loudly and carry a little stick" maneuver.
Robert Lighthizer, our U.S. trade representative, already telegraphed just such an outcome earlier in the week. After a conference call on Monday with his Chinese counterpart, Vice Premier Liu He, several unnamed trade officials indicated that "the U.S. is willing to suspend the next round of tariffs on an additional $300 billion of Chinese imports while Beijing and Washington prepare to resume trade negotiations."
So sometime over the weekend, I expect one of those "my great friend, Xi, and I agreed to further talks, so I will delay implementing these new tariffs" kind of statements from the president. Of course, there will be the usual bluster about how much tariffs will hurt China and how we are making so much money on existing tariffs already, yada, yada, yada.
If my expectations are fulfilled, the markets should once again breathe a great sigh of relief. Stocks will likely rally. The economy will probably continue to slow. I expect businesses will continue to postpone investing while consumer prices on tariff-impacted goods will continue to rise.
Everyone (except Trump's wild-eyed loyalists) realize by now that the existing tariffs are hurting the economy, slowing employment, raising prices and causing more and more distress among the nation's farmers, manufacturers, and technology and retail companies. This year, we should see the largest one-year rise in tariffs since the Smoot-Hawley Tariff of 1930, which precipitated the Great Depreciation.
At the same time, the Fed's Jerome Powell, while acknowledging that the tariffs are hurting the economy, continues to hedge his bets. On Tuesday, he indicated that, contrary to Wall Street's expectations, a July rate cut was not a done deal. That was enough to send the markets lower just as the Dow Jones Industrial Average was about to join the S&P 500 Index in making a new historical high.
All of this week's jitters, however, is simply noise that you, the long-term investor, should ignore. Stocks had a great run last week and needed a pullback. It is that simple, and given the unpredictable nature of our president, pullbacks are increasingly becoming a dime a dozen. We can expect the S&P 500 Index to find support somewhere around 2,875. From where I sit, that simply clears the runway for another major leg up in the markets.
There is always an outside chance that I have it wrong. Could Trump do another "Kim Jong Il Walk Out" like he did in Vietnam a few months ago? If he does, or simply fails to cut any kind of deal (a low probability event in my view) then look out below. Markets will swoon, but at that point we should expect to see a central bank rate cut in July, which would support the markets.
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The Independent Investor: Reverse Mortgages
Some Baby Boomers have found themselves financially between a rock and a hard place. Rising costs, insufficient retirement savings and, in some cases, health issues, have forced seniors to consider taking out a reverse mortgage on the only asset they own. Is it a good idea?
For those who don't know, a reverse mortgage is a loan that uses a primary residential dwelling as collateral. It provides an option to generate cash by borrowing money against their home equity. Funds can be drawn as a fixed monthly payment, or a line of credit.
In order to participate, at least one owner must be over 62 years old. The bank or financial entity figures out what the house is worth at the time of the loan and lends the borrower a percentage of that number. As an example, if the market price on the home is $350,000, the bank or mortgage lender may front you $275,000.
The borrower then receives a payment (usually monthly) until the amount of equity (in this case, $275,000) in the loan is gone. Unlike a traditional mortgage, however, the amount a borrower owes on a reverse mortgage increases over time. No repayments are required during the borrower's lifetime. Payment is only due when the homeowners die or are no longer living in the property (over the past 12 months).
Over one million reverse mortgages or Home Equity Conversion Mortgages (HECM) have been sold since the government program started back in 1990. The program is run by HUD and over 90 percent of these mortgages are insured by the Federal Housing Administration (FHA). One important reason reverse mortgage are sought after, according to government statistics, is that one-third of U.S. households have nothing saved, while the remaining two-thirds have less than $75,000 in retirement funds. But the program has had its fair share of controversy.
Reverse mortgage scammers abound. Over the years there have been several scandals, including one where more than $1 million of reverse mortgage proceeds from seniors was stolen by a Florida title insurance company. The Consumer Finance Protection Bureau fined three companies a total of $790,000 a few years back for alleged false claims. It is a market where the buyer must beware and therefore borrowers should seek out and do business with the most reputable firms.
One important requirement of taking out a reverse mortgage is the borrower's responsibility of continuing to pay property taxes and maintain the condition of the home. There have been many instances of seniors who were forced into foreclosure prematurely for failing to satisfy one or both of these conditions. Unscrupulous marketers conveniently neglected to inform them of this fact.
The pros of reverse mortgages are fairly obvious. If you are one of the elderly, like my widowed mother-in-law, who was left with little to nothing by her spouse, a reverse mortgage may be your only option to make ends meet. Of course, she could have sold her home, but that is something the majority of seniors are loathed to do. They want to age in place, especially after the loss of their loved one.
She had no income outside of Social Security, so she could not refinance her home. It is true that her heirs (two adult sons and a daughter) would need to repay the loan in order to inherit her home, but two out of the three siblings live elsewhere and have no interest in the house. The reverse mortgage payments are also tax-free, which means a lot of savings when you are on a fixed income.
If, on the other hand, you are retired, but have sufficient income to pay your bills, or are willing to sell your home, either to down-size or to tap into the equity of your house, then reverse mortgages don't make a lot of sense. However, for many of us facing the unknown future of advanced age, the option of taking out a reverse mortgage on what, for most, is our largest asset as a last resort, may be comforting.
There is one caveat, though. If you are contemplating a reverse mortgage and you own a condominium, you are out of luck, unless that condo is FHA-insured. Few, if any condos, in my town, anyway, have ever applied for FHA approval, which is both short-sighted and a major oversite by this region's developers.
In my next column, I examine another type of reverse mortgage that could be a big help in dealing with the one nightmare of all elderly Americans. The fear that without much, if any, long-term care insurance, seniors will end up living in some squalid Medicaid-approved nursing home, depleted of all their assets, while their homeless spouse bags groceries at the local supermarket to survive.
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