What's worrying investors? Risk, rates and health costs

Andrew Osterland

CNBC.com

As the major stock market indexes push new highs, financial advisors are fielding more phone calls from clients anxious about volatility and how their investment portfolios could be affected by rising interest rates.

"The dynamic of perpetually low interest rates and rising stock prices hasn't changed for a long time," said Ed Gjertsen, a certified financial planner, vice president at Mack Investment Securities and current president of the Financial Planning Association. "We're trying to prepare clients for the one to four quarters when their bond portfolios decline and so do their stocks." He added, "We tell them that if rates are going to rise, they'll lose money."

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Traders work on the floor of the New York Stock Exchange.

It may still be a while before that happens. Several weak economic reports and an apparent first-quarter slowdown in the U.S. economy could cause the Federal Reserve to delay raising short-term interest rates. The bond market is now expecting the Fed to wait until at least September before hiking rates for the first time since 2006. The yield on the 10-year Treasury bond, up more than 50 basis points during February and early March, has fallen back below 2 percent, and rates across the credit spectrum have generally followed suit. "It's the clients close to retirement that are most nervous," Gjertsen said.

He feels their pain. With no real precedent for the current monetary situation, Gjertsen, too, has concerns about what will happen when the Fed finally moves to raise interest rates and normalize monetary policy. "We've never experienced a market with this amount of liquidity; no one knows how it ends," Gjertsen said. "When rates start rising, hopefully it doesn't unwind and we have another 2008."

Joel Isaacson, financial advisor and CEO of wealth management firm Joel Isaacson & Co., also hears client concerns about rising interest rates, but he doesn't try to handicap where the market is headed. "Forecasting interest rates is a minefield," he said. "I don't see a lot of upside to the bond market, but when the Fed stopped quantitative easing, it didn't play out too badly."
Isaacson thinks that weak economic growth and low interest rates globally will likely keep long-term rates in the U.S. down and expects the yield curve to flatten when the Fed starts raising short-term rates. He nevertheless favors short-term and intermediate bonds with limited credit risk.

Mark Hooper | Getty Images

 

Isaacson said that his clients are expressing concern about global political stability and how it could affect the financial markets. "Things are very different from the cold war period," he said. "People don't get the sense that governments know how to deal with problems anymore.
"The Middle East is festering, and it's spilling over to Europe," Isaacson added. "Everyone is watching and worrying about what's going on around the world."

The challenge for financial advisors is getting clients to stick to their financial plans and to rebalance their investment portfolios to target allocations. "Historically, globally balanced portfolios provide higher returns with lower volatility," said Michael Ward, founder and president of Wealth Management Partners. "It's a good time to ramp up the education process with clients."
With the U.S. large-cap stock indexes crushing most other asset classes, some of Ward's clients are asking why they aren't invested more heavily in U.S. stocks. "I worry when clients start asking why we don't have more SPY [S&P 500 Index ETF] exposure in the portfolio," Ward said. "In 2000, everyone wanted the QQQ [Nasdaq 100 Index ETF tracker], and it took 15 years for it to reach those levels again."

"Most of my clients are retired and they're concerned about volatility. They've lived through it twice, and they don't want to do it a third time." -Michael Ward, president of Wealth Management Partners

The majority of Ward's clients, however, are less concerned about missing out on gains than they are in avoiding a market meltdown. "Most of my clients are retired, and they're concerned about volatility," Ward said. "They've lived through it twice, and they don't want to do it a third time."
With the broad increase in the stock market, one downside of portfolio rebalancing is the taxable capital gains it generates for investors. And other than in the energy sector and possibly emerging markets, there aren't a lot of places to find capital losses to offset those gains. That, of course, is good news, but it does mean people will have more significant tax bills. "A rebalancing is going to sell from the positions that have gone up the most, and it's hard to find losses in a portfolio that's been invested since 2009," Ward said.

Apart from the investment markets, the rising cost of health care continues to be one of the chief concerns of middle-class Americans, and many people are looking to their financial advisors for help.
"I think people are becoming much more aware of the high cost of health care, particularly in retirement," Ward said. "We have a separate budget line item of $1,000 per month for additional retirement health-care costs for our clients, and that doesn't even include long-term care or nursing care."

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Long-term care and the difficulty in financing it remains a huge problem for middle-class families. The cost of insurance has skyrocketed over the last five years as insurers have repriced policies and slashed benefits. For most people, the cost is prohibitive, and they choose to self-insure, hoping that they have enough assets to sustain themselves if they do require long-term care in the future.
Many baby boomers nearing retirement aren't just worried about themselves, either. Gjertsen and other advisors at Mack Investment Securities have been helping clients find home health-care providers for their aging parents. "They may think they have enough for themselves, but all of a sudden we're having more conversations about how they're going to take care of elderly parents," he said.

—By Andrew Osterland, special to CNBC.com

Retiree health-care costs may be more than you think

Tom Anderson | @bytomanderson

Friday, 27 Mar 2015 | 2:57 PM ET 

CNBC.com

Image Source | Getty Images

 

Even with Medicare coverage, health-care costs are a major expense in retirement that can derail any financial plan if they're not factored in.

These costs are also hard to estimate because they depend on a person's health and longevity. Who wants to calculate when they are going to die?

Fortunately, or unfortunately depending on your retirement savings and fear of mortality, HealthView Services has crunched the numbers for a fit 65-year-old couple retiring this year and come up with an estimate of projected health-care expenses. The company, which helps financial advisors forecast health-care costs for their clients, used data from more than 50 million actual health cases to formulate its estimates. And the figure it came up with is more than most people have saved for retirement.

The average lifetime retirement health-care premium costs for the hypothetical couple is $266,589, which included Medicare parts B and D coverage as well as supplemental insurance, according to HealthView's latest report. (The estimate assumes a life expectancy of 87 years for men, and 89 for women.)

The costs are 6.5 percent more than HealthView's estimate last year and over $40,000 more than the retiree health-care cost estimate of $220,000 produced by Fidelity, which is widely used by financial advisors as a benchmark for such expenses.

What's more daunting is a quarter of a million dollars only pays for basic coverage for this hypothetical, healthy 65-year-old couple. If you include dental, vision, co-pays and other out-of-pocket costs, the average cost estimate rises to $394,954. And for a healthy couple of 55-year-olds who plan to retire a decade from the now, retiree health-care costs beyond basic coverage are projected to be a whopping $463,849.

The sticker shock really sets in when you realize that these estimates don't include the cost of long-term care insurance.


"Most people don't plan for the cost of routine medical costs in retirement," said Katy Votava, president of Goodcare.com, a consulting firm that advises business and consumers about health-care financing. She recommends investors take advantage of Roth IRAs and health savings accounts to prepare for hefty health-care bills in retirement.

Medicare surcharges will increase retiree health-care costs for more people in the future, said Ron Mastrogiovanni, president and CEO of HealthView Services.
The surcharge is a means test for Medicare parts B and D. An individual with an adjusted gross income plus tax-exempt interest of more than $85,000 (or $170,000 if married and filing jointly) qualifies for the surcharge. "You are paying more for the same service," Mastrogiovanni said.

Since the surcharge triggers are not indexed to inflation, the income-based Medicare surcharges are expected to spread to 25 percent of all Medicare subscribers by 2036, according to the Kaiser Family Foundation.

Given those trends, advisors say it's wise to start planning for your retiree health-care costs now—regardless of your age.

Tom Anderson 

Personal Finance Writer

Why even high earners are struggling to save

Kelley Holland | @KKelleyHolland

Thursday, 16 Apr 2015 | 9:16 AM ET

CNBC.com

Even wealthier Americans are struggling to save enough for retirement, according to a new survey.
The report, released Thursday by SunTrust, found that even among households with incomes of $75,000 or more, roughly a third live paycheck to paycheck at least some of the time, and one-fourth of those with incomes of $100,000 or more do the same. 

According to Census Bureau data, less than a third of households across the country earn $75,000 or more a year, though median incomes are higher in some areas than others.
A third of respondents said a lack of financial discipline at least sometimes holds them back from achieving their goals. But older respondents were significantly more likely than the younger cohort to say they were not saving enough for retirement, or were not sure if they were. To some extent, that may reflect lifestyle habits more than financial struggles. Respondents cited spending on things like entertainment, clothing and dining out as affecting their ability to save. 

Pamela Sandy, CEO and founder of Confiance, a financial advisory firm, points to other causes as well. Her clients are contending with such things as student loans, the cost of child care and the need to help family members. "Do I think people are just out there being frivolous? It is damn expensive to live in the country today, and it's damn expensive to raise kids, and that's just the bottom line," she said.

There is also the matter of financial smarts. A survey released Thursday by Guardian Life Insurance found that 401(k) plan participants have a low understanding of financial concepts and practices, which the company said "likely contributes to lower plan engagement and less successful retirement outcomes."

The Guardian survey also found that saving for retirement is low even among those nearing that life stage, with the average 401(k) plan participant over age 50 contributing $9,100 per year. (Tweet This) And only half of all the survey respondents are confident they will reach the level of retirement income they are targeting.

Sandy said low savings rates are to be expected. "We don't really have a problem with savings vehicles," she said. "We have a problem that people don't have the money to save."

Kelley HollandSpecial to CNBC

Sick of tax prep? How to make it easier next year

Kelli B. Grant | @kelligrant

8 Hours Ago 

CNBC.com

 

As the April 15 income tax filing deadline approaches, experts say it's the ideal time to turn your attention to ... next year's return. The benefits can be both financial and practical. (Tweet This)
Start by considering this year's outcome, said Barbara Weltman, a tax and business attorney based in Vero Beach, Florida. "Did you get a refund, or did you have to make a payment?" she said. "Make adjustments accordingly."

In the case of a refund, file a new W-4 with your employer's payroll department, increasing your number of personal allowances. That keeps more money in your paycheck year-round, nixing that interest-free loan to the government, she said. And if you owed? "Maybe you want more tax withheld, or you need to make estimated tax payments," said Weltman. That will result in a smaller bill come next April.

Get your documents organized. Of the 16 hours the typical Form 1040-filing taxpayer spends preparing his return, according to the IRS, eight are spent on record-keeping. A little prep now could cut that time spent combing through credit card statements and tracking down documents next year.
"Anything tax-related, put it in one folder," said Tim Gagnon, an assistant academic specialist of accounting at Northeastern University's D'Amore-McKim School of Business. "People tend to lose them if they don't stick them all together."

Try to separate receipts and documents by category, at least, so you can easily tally classifications like medical expenses and charitable contributions, he said. There are also apps such as Shoeboxed and ItsDeductible to track mileage and expenses that could be tax deductible.

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Good record-keeping has the added benefit of helping you file earlier next year, increasingly a smart move amid rising tax-refund fraud. "First to file is going to be the one who gets the refund," said Gagnon. "Second to file is the one with the problem." It's not a fail-safe, however, he said—criminals need very little information to file a fake return in your name, and real reform is needed from the IRS and Congress.

It's also worth talking to an accountant or other tax professional if you anticipate a big life change this year, such as getting married or divorced, having a baby, buying or selling a home, or moving across state lines. "It may help you go in the right direction," said Weltman. Someone getting married, for example, could plan to adjust their tax withholding, while someone readying to sell a home might gauge their eligibility for the tax exclusion on gains from the sale.

Kelli B. Grant 
Personal Finance and Consumer Spending Report

Look who's retiring later

Kelley Holland | @KKelleyHolland

Friday, 3 Apr 2015 | 10:00 AM ET

Leonora Saunders | Cultura RM | Getty Images

 

Getting ready to retire? Hold that thought.

Two-thirds of Americans have experienced a financial disruption that affected their financial behavior in some way, according to a newly released data by TD Ameritrade. And of that group, roughly half expect to delay or forgo retirement as a result of the disruption. The 34 percent who plan to put off retiring are moving their target age from 63, on average, to 68.

Further underscoring many Americans' lack of a savings cushion, just one-fifth of those who experienced a financial disruption believe they have recovered financially.
"The fact that there are financial disruptions was not surprising. We have seen evidence that financial disruption happens throughout life," said Matt Sadowsky, TD Ameritrade's director of retirement and annuities. But the length of time people need to recover, he said, "is pretty eye opening."

Savings under scrutiny

The findings are being released at a time when Americans' term savings are under scrutiny.
Average retirement account balances have grown rapidly in recent years, thanks in part to a strong stock market. And the number of Americans with 401(k) accounts has risen.


That shift "shows that the 401(k) plan can indeed build a significant nest egg," said Sarah Holden, senior director of retirement and investor research at the Investment Company Institute (ICI). The institute has collaborated with the Employee Benefit Research Institute to analyze how much an individual with 401(k) accounts available throughout his or her career would actually save. The conclusion, Holden said, was that even when people are less than perfect savers, a 401(k) can indeed provide significant income in retirement.

But the growth in 401(k) balances has only helped those who have retirement savings, and almost 40 million working age households do not, according to the National Institute for Retirement Security. (That institute found that about half of the households without retirement savings are headed by someone aged 45 to 65, though the ICI, in its own study, found that roughly eight out of 10 households nearing retirement have some retirement assets.)

Sadowsky pointed out that a third of retired Americans get 90 percent or more of their income from Social Security.

"Throughout our history, we just have not done a good job of saving," he said. "If you don't have an emergency fund and a plan in place with multiple scenarios planned out, there is certainly going to be fear that you are not going to be able to respond in a timely manner" to a financial disruption.

Encouraging savings

A growing number of employers are taking steps to encourage Americans to save. The number of employers automatically enrolling employees in retirement plans has increased 70 percent since the end of 2008, according to research by the Vanguard Group. That feature significantly boosts participation: a WorldatWork survey found that 37 percent of plans with automatic enrollment had 80 to 89 percent of employees participating, compared with 21 percent of plans that did not have that feature.

For now, though, Americans' financial vulnerability remains. "From a broader landscape, there is not as much savings as there could be," said Sadowsky.

Kelley HollandSpecial to CNBC