|
Wake Up!— Four recent trends threaten your financial future. But don’t get scared, say Thrivent Financial experts. GET PREPARED.
By Jack Gordon
You’ve heard most of it on the evening news. The fantastic run-up in housing values is over. Defined benefit pension plans are going the way of the horse and carriage. College tuition rates keep climbing.
The question isn’t whether these things are happening or not. The question is: What are you doing about them? Hoping for the best is probably not a wise approach. It’s time to wake up to what’s happening and take charge.
Let’s start with a situation that has drawn less attention from the news media.
Wake Up #1: You’re Probably Underinsured
On the night of Dec. 4, 2004, John Geuy, then 59 and a grade-school principal in Buhler, Kansas, climbed onto the roof over his porch to investigate a problem with his Christmas lights. He slipped and fell to the ground, landing on his head. It was the kind of freakish accident that doesn’t discriminate by age. Geuy, a Thrivent Financial for Lutherans member, could just as easily have been 29.
He spent two months in a coma at a Wichita hospital. At the end of February 2005, his tracheotomy tube was taken out. At that point, says his wife, Barb Geuy, John stopped being an acute-care patient. Yet, because John was not well enough to fully participate in the requisite three hours per day of rehabilitation therapy, this triggered a loophole common to most health-insurance plans: John’s condition had improved just enough to allow him to move from the hospital to a nursing home, yet the school district’s health care policy wouldn’t cover the stay.
“That’s when the long-term care insurance we had bought from Thrivent Financial kicked in,” Barb says. They had taken out the policy only a few years earlier. “We asked ourselves, ‘Do we really need this yet? We won’t need it until we’re in our 80s.’ But I’m sure glad we did.”
John spent a month in the nursing home, covered by the Thrivent Financial policy, until he gained enough strength to move to a rehabilitation hospital. He returned home in May 2005 and was able to attend his daughter’s wedding in June. His memory and other abilities continue to improve.
 The lesson, says Monte Cross, the Geuy’s Thrivent Financial representative in Buhler, is that “long-term care insurance and disability income insurance should be part of your financial planning.” Don’t wait to think about it. “You’re never too young to fall or to have a car accident,” says Cross. “If you aren’t properly covered, you can wipe out all of your other investments to pay for an emergency.”
Think your employer-sponsored disability income (DI) plan is sufficient? Better think twice. Employer-sponsored DI plans rarely cover 100 percent of your salary for every scenario, and it’s usually not portable. A supplemental policy often makes sense.
The same holds true for life insurance. According to LIMRA International, a research association serving the insurance industry, among those who do have some life insurance, more than one-third have only employer-provided policies. However, because most of these policies typically offer coverage only equal to one times your annual salary, you’re probably significantly under-covered, especially if you’re a one-income family with dependents. If you do lose your job, employer-sponsored policies are usually portable, but you will have to pay higher premiums determined by your current age.
The wake-up call here is simple, Cross says: “Don’t depend on somebody else to cover your insurance needs.”
Wake Up #2: A House Isn’t a Permanently Hot Stock
 For most of the past decade, real estate has behaved like a great growth stock for investors looking to build capital. From 1995 to 2005, the median price of a home almost doubled, from $109,000 to $206,000, according to Moody’s Economy.com.
But the days of substantial annual growth in home prices appear to be over, at least for now. The difference between bulls and bears among market analysts now boils down to an argument over how hard a landing we’ll see. Bulls point out that the run-up in home prices has simply cooled in most areas of the country, with interest rates creeping up and price inflation returning to single-digit norms. Bears worry that real estate values represent a bubble likely to burst at any moment, with dire consequences not just for over-leveraged homeowners but also for the entire economy.
Regardless of who turns out to be right, it’s time to put your own house in order. “If you’re pouring all your money into a mortgage, thinking it’s a great investment, and nothing into savings or other investments, you should think again,” says Mary Peterson, a Thrivent Financial senior financial consultant in Marietta, Georgia. “A lot of people with adjustable-rate mortgages have purchased more house than they can afford, especially if interest rates keep going up."
“I would stop playing around with unconventional mortgages that looked great a year ago,” Peterson says, referring to such instruments as interest-only mortgages. “If you have an adjustable-rate mortgage, this is the time to look at locking into something permanent. Get the 30-year and start paying ahead on it.”
Mark Simenstad, Thrivent Financial’s vice president of fixed-income investments, concurs. This year or next, he says, “a lot of people with certain adjustable mortgages may see their interest rates being reset upward by more than 2 percentage points. This could increase monthly mortgage payments by 30 percent.”
Simenstad points out that the gap has narrowed between the interest rates available for fixed and adjustable mortgages. “I have a friend who has refinanced five times in the last five years. Today there’s no benefit between an ARM and a 30-year fixed, so he can’t keep doing it.” That’s bad news if your housing budget stops making sense the instant your interest rate creeps above 5 percent. But it may be good news if you’re prudent enough to convert or lock in within a prudent time frame.
Wake Up #3: Pinching Pensions
 A week before he resigned in March as executive director of the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures private defined benefit pension plans, Bradley Belt gave a speech to the National Association for Business Economics in which he referred to “the fantastical world” of pension funding and accounting. “With more than $2 trillion in obligations,” Belt said, “defined benefit pension plans represent one of the largest off-balance-sheet liabilities underwritten by corporate America.”
Legal limits on PBGC guarantees mean that workers stand to lose billions of dollars in promised benefits if and when many of these plans terminate, Belt said. Never mind what you were supposed to collect. If you are 45 years old and your company’s pension plan terminates in 2006, the maximum PBGC guarantee for a straight life annuity is $993 per month.
If you are among the approximately 20 percent of American workers whose employers still offer defined pension plans, the obvious wake-up call is “don’t count on it,” says Peterson. “During your working years, you’ve got to be responsible to do your own saving.”
It isn’t only your retirement income that may be at risk. As an executive at a telecom corporation, Thrivent Financial member Dan Spears, now deceased, earned generous benefits when he took early retirement from the company in 2000, at age 51. He chose the lump-sum option to be sure to collect his retirement benefits. Then he and wife Eileen moved from Georgia to Maryland to bring his expertise to an emerging telecom networking company.
The pension plan included ongoing health insurance for both Dan and Eileen. What they didn’t know was that Eileen’s coverage would lapse if Dan wasn’t using the telecom’s health insurance at the time of his death. When Dan died of colon cancer at 54, he was covered by his new company’s health policy. In 2004, Eileen was left without health insurance.
As part of the planning process with Peterson, Dan and Eileen had adequate life insurance coverage. Subsequently, Eileen was able to afford an individual healthcare policy. But Eileen, who since has moved to Louisville, Kentucky, points out that she was fortunate not to have any serious pre-existing conditions, such as diabetes or cancer. “I wouldn’t have been able to get coverage for anything like that until I turned 65 and Medicare kicked in,” she says.
Wake Up #4: Pricey Education
 College tuition has been rising at twice the general inflation rate, with no end in sight. At four-year public universities, tuition and fees for the 2005-2006 school year averaged $12,127—a 7.1 percent hike from the previous year, according to The College Board, the nonprofit organization that administers the SAT and other tests. At private colleges, the average for tuition and fees is $21,235, and total charges run more than $29,000.
The best advice here, as with most financial matters, is to “let time be on your side,” says Simenstad. It’s never too early to start saving and investing for your children’s college education. “Just as you shouldn’t turn 55 and realize you have nothing saved for retirement, don’t let your kid turn 10 with no savings for college.”
Jack Gordon is an Eden Prairie, Minnesota–based freelance writer. See his article “51 Smart Money Tips” (Spring 2006) by visiting www.thrivent.com/magazine/archive.
3 Things You Need to Know
1. The Economic Growth and Tax Relief Reconciliation Act governs your IRA and 401(k) contribution limits.
2. It’s set to expire in 2010, though more likely to be revised.
3. It’s in your best interest to take advantage of generous contribution limits now, while they’re still available.
Read more:
|