Umbrella insurance

When you hear the term “umbrella insurance,” your first thought might be, “What do umbrellas have to do with insurance? Is this just another product the insurance industry is trying to sell me?” Actually, umbrella insurance has nothing to do with conventional umbrellas.

Umbrella insurance is “extra insurance,” like an umbrella is extra protection against the rain, even though you have a raincoat on. Think of your regular car and homeowners insurance as the raincoat, and the umbrella insurance as the “umbrella” you carry for torrential downpours.

Many people tell me they have liability coverage with their auto and home policies, so why would they want to buy more? A typical individual does in fact have liability coverage on their auto policy and their homeowners policy, usually between $100,000 and $300,000 in coverage. This is indeed a lot of money.

But imagine you are driving your car when it’s wet out and you don’t see a cyclist when you make a turn. You hit the cyclist, who sustains serious injuries. In this situation, you may owe for lost wages, medical bills, and pain and suffering. If this person is the CEO of a large corporation and can’t work for, say, five years, the wages alone might exceed $1,000,000. Medical bills, including physical and occupational therapy, could easily be over $1,000,000. You will have far exceeded the limits of your auto policy.

In situations where losses aren’t covered by your other policies, umbrella insurance can provide the following:

  • Additional lawsuit coverage.
  • Added coverage for defense costs.
  • Liability coverage for some lawsuits not covered by your underlying auto or home insurance (for example, an accident involving a boat you rented on vacation, or a slander lawsuit).

You can also add an “uninsured or underinsured motorist” component to some policies, which can cover damages if you are injured by someone who has no insurance or not enough insurance. For example, you are out jogging and get hit by a car. The motorist’s insurance does not completely cover your medical costs. Your umbrella policy can step in at this point, with the uninsured motorist component, provided that the other motorist was at fault.

The good news is that this is one of the best buys in the insurance business. It typically costs only $150 to $200 per year for the first $1,000,000 in coverage, and then about $100 each for each additional million.

Umbrella insurance can give you peace of mind and help protect against financial ruin. I recommend you pull out those policies, look over the amount of liability coverage you have and schedule an appointment with your financial advisor or insurance agent to see if your coverage has kept pace with your assets and needs.

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Pouring your retirement foundation

The news media conditions us to think about our retirement savings need as a fixed number. At a recent graduation party someone told me they had $1.5MM saved for retirement,” and then came the big question: “Do you think that’s enough?” As a financial planner, this question Numbershas always perplexed me. With only that snippet of information, how in the world am I to know how much this person needs in retirement? The key is to know your “number” in the context of your goal-centric plan — not in terms of your demographic, neighbor or brother. So, let’s look at some factors that will affect your “number.”

1)     Your cost of living. This is first for a reason. If you don’t have this figured out, take the time to work on it. There are numerous online tools to help you with it. The tool I often recommend to clients is Mint.com. The point here is simple: If you are going to spend $200,000/year in retirement, your nest egg needs to be much bigger than if you are going to spend $100,000/year.

2)     Social Security. Just having this income stream will a lesser burden on your nest egg.  The question is: How much less? The maximum figure you can expect to receive in today’s dollars is around $30,000 per year. Get a personalized estimate here. You can begin taking this benefit as early as age 62, or as late as 70, depending on your unique set of circumstances.

3)     Other private and public pensions. Just like Social Security, these income sources will reduce the withdrawal burden or allow you to achieve a successful retirement period on a smaller nest egg. Pensions typically afford more flexibility than Social Security. One example is the single or joint life benefit option (read more on this from my colleague, Jeremy Burger, here). Another option is to take a lump sum. Your decisions on these options will have important implications for your retirement plan.

4)     Distribution rate and portfolio allocation. 4%  of your portfolio is generally considered to be a sustainable withdrawal rate. But what is your portfolio made of? A 60% equity, 40% bond allocation? How about 100% equity? Beyond that, how should you allocate the respective equity and bond components? These are important questions that you need to answer. Your advisor can help. One thing is for sure: With increasing longevity, you are going to need some long-term growth in the portfolio. And, since you will be distributing, you must shield your portfolio from the short-term volatility of the equity markets. The key is to find the perfect balance.

Having worked with hundreds of clients over the past several years, I can tell you that this is just the tip of the iceberg. Few people have the tools or know-how to coordinate all of this effectively, and one simple fact stated in the middle of a party is clearly not enough information to solve it all. If you’re not sure what your “number” is, be sure to ask an advisor for help.

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Longevity risk

My grandmother was born in 1927. At that time, the life expectancy for women was about 60 years, but here we are in 2013 and she is doing amazingly well. During the last 80 years, technological and medical advances have tacked another 26+ years onto her life. Already she has lived 50% longer than the initial expectation.

My son was born in the fall of 2012. He is expected to live about 80 years. Following my grandmother’s case, he would live to 120 years of age. Put another way, he can expect his pre-retirement and retirement periods to be about the same. Clearly, retirement nest eggs and pensions are going to be stretched a lot further than they ever have been.

This is the trend that we need to plan for. The following are key areas of consideration for our increasing life spans.

  • Inflation. At 3% inflation, a $100,000 annual income need today becomes $242,726 30 years down the road. This substantial difference requires careful consideration. Do your pensions have an annual cost of living adjustment built in? Have you built inflation protection into your retirement accounts?
  • Health care costs. Along the same lines, the estimated rate of inflation for health care in 2014 is 6.5%. Should you insure to protect against this risk?
  • Portfolio withdrawal rate. What is a sustainable rate that can last throughout your retirement period? Is your portfolio structure congruent with this rate? That is, do you have the appropriate mix of stocks and bonds with sufficient diversification?
  • Your end of life wishes. Statistically speaking, the majority of medical costs occur in the last five years of life. And, there is little doubt that advances in medicine and technology will afford increasingly difficult decisions. Having a clear medical directive can save significant emotional and financial resources.
  • Savings rate. Pensions are becoming a thing of the past. This has shifted a huge responsibility to the saver. If you are still in your accumulation years, figuring out the savings rate that corresponds to your retirement goals is more important than ever.

As life expectancies increase, so do the complexities of retirement planning. Inflation protection and an appreciable return that keeps up with your distribution needs are just the beginning. If you have not already done so, take the time to meet with your advisor to build a goal-centric plan that is specific to your unique retirement needs.

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Protecting yourself against electronic wire fraud

It seems like every year thieves become more creative in finding new ways to steal. A disturbing new trend is directly targeting financial advisors and their clients. Financial institutions are seeing a noticeable increase in attempts at fraudulent wire transfers by email “spoofing,” where an email request appears to be sent from the client, but is actually from a fake-but-similar email account (or sometimes it’s the client’s actual account).

Think, for a minute, about the emails you have sent to your advisor. If your email account was hacked, the hacker would have access to all of those emails in your sent folder. They could easily send an email (from “you”!) to your advisor requesting a fund transfer to a third-party bank account, along with convincingly forged letters of authorization. If you’ve ever emailed a scanned copy of something you’ve signed, they have access to your signature too. Often, by the time someone realizes the request is fraudulent, it is often too late. The money is already gone, the transfer cannot be unwound, and the wire fraud theft is complete.

It is our policy to never accept instructions like this via e-mail, but in response to this increased risk, we have trained our employees to identify warning signs of electronic wire fraud attempts. We have also reviewed and improved our procedures to verify a wire transfer request is legitimate before acting on it, particularly in scenarios where the transfer is going to a third party.

However, it’s important to take steps to make sure your information is secure and avoid the possibility of this type of fraud altogether. We use www.box.com to securely share files with our clients and keep that sensitive information out of your inbox.

Just to be safe, here are some tips on how you can help protect your email accounts from being hacked:

  1. Make sure to use secure complex passwords. We recommend choosing a password with a minimum of 8 characters, including upper & lower case letters, numbers and symbols.
  2. Don’t use the same passwords on multiple accounts. If you get hacked in one, they have access to everything.
  3. Use double authentication if possible. This requires you to enter an extra code when logging in from an unrecognized IP address. Click here to learn more about Google’s 2-step verification.
  4. If you get email on your smart phone, make sure the phone is password protected.
  5. Beware of storing documents in your email that contain your signature, social security number, or other non-public personal identifying information. If your account gets hacked, the thief will have everything they need to steal your identity.
  6. Don’t ignore signs that your email account has been hacked, like finding emails you didn’t send in your ‘sent’ folder, or hearing from your friends that they’ve received spam from your email address.
  7. If you do get hacked, be sure to change your passwords immediately! Also call your financial institutions to make sure your accounts have not been compromised.
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Merriman advisors Mark, Cheryl, and Tyler discuss conversations they are having with their clients

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An alternative to the financial news treadmill

Every day, financial news sites and channels provide a steady stream of conflicting opinions and predictions that often leave investors feeling confused, frustrated, and paralyzed. Don’t believe me? Please allow me to elaborate.

In addition to reading a wide range of investing and personal finance pieces each day, in the evening I often browse a site called RealClearMarkets.com to make sure I take a look at some of the interesting and/or important articles I might have missed during the day. RealClearMarkets.com is basically a consolidator of articles from a number of other sources. You might want to take a look at it just so you can see what I mean.

When I review the list of approximately 50 headlines, I always find it interesting to see how many compelling yet contradictory articles and videos are in one spot, one right after another. It’s common to see one claiming one view, with another of the exact opposite view right below it. China is imploding/China is still a sleeping giant, Gold is headed much lower/Gold will touch new highs by the end of the year, The stock market is about to re-visit the lows of 2008/The stock market is pausing before reaching new highs by year end, Stick with large cap U.S. stocks/America’s best days are behind us and one should look abroad for better investing opportunities, A bond catastrophe is upon us/Don’t believe the bond bust hype, Inflation is about to run rampant/Deflation is the new worry, Emerging market stocks and bonds are to be avoided at all costs/The long term secular growth story of the emerging markets is still very much intact. Good grief! What’s an investor to do?

We’ll continue to see these contradictions, but one does not need to feel paralyzed by them or compelled to decide which one is the better path to follow. The truth is that they all have elements of truth and quite often are written by some very bright people. This month marks my 27th year in this business, and I have seen investors get caught up wrestling with these contradictions in each and every one of those years. Please let me offer an alternative.

Rather than struggling to decide if this is the right or wrong time to hold stocks or bonds in your portfolio, or which types of each to hold, how about always holding a portion in stocks and a portion in bonds, along with an adequate cash reserve for emergencies or opportunities that may arise? Of the portion devoted to stocks, hold U.S. and foreign (including emerging markets), small  and large cap, growth and value, and also some REITs (both foreign and domestic). Of the portion destined for bonds, hold those of the highest credit quality (which tend to hold up relatively well when the stock market severely declines), and those with short- to intermediate-term maturities (which have lower interest rate risk in a rising rate environment).

With regard to cash reserves, the rule of thumb in the financial planning community is to maintain enough to cover 6 to 12 months of living expenses, depending on your situation, but often these targets tend to be on the low side. My experience has been that during periods of severe market or personal financial stress, nothing provides peace of mind like cash. Nobody ever complains about having too much cash on hand during these times. And when opportunity knocks, it’s nice to have plenty of cash on hand to take full advantage. Even when yields are as low as they are now, cash is king. The purpose of your investment portfolio is to deliver returns in excess of inflation over time. Cash is for liquidity, flexibility, and peace of mind.

The appropriate mix of these various asset classes, of course, depends on your individual circumstances and objectives. A big part of my job as an investment advisor is to help clients establish and maintain this mix in the face of unrelenting alarmist news headlines.

If all this advice sounds like nothing more than common sense and things we’ve all heard before, you’re right. But interestingly enough, many people tend to get caught up in all the predictions and hype out there, and they tend to ignore or forget these time-tested principles. As Paul Merriman once said, “There is a Grand Canyon of difference between what people know they should do and what they do.”

If you are tired of feeling confused, paralyzed, and frustrated and would like to jump off the financial news treadmill, I invite you to contact us. If you are not quite there yet, I wish you luck and a quiet mind as you continue down your path. We’ll be here when you need us.

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Have you written your letter of instruction?

image036Maybe you’ve heard of this before. A letter of instruction is a document you write to your executor and family that contains your personalized wishes and instructions for settling your estate. Although it does not carry any legal authority, a letter of instruction can be used to provide tremendous added detail about your financial affairs that doesn’t fit within a will or trust.

One of the most important purposes of a letter of instruction is to lead the person in charge of settling your estate through the process step by step. A good letter of instruction should contain the following:

  • Detailed list of your assets and belongings.
  • Copy of your monthly budget.
  • Login ID and password list.
  • Contact information for financial professionals and beneficiaries.
  • Location of important documents such as the will, trust, deeds, birth certificate, tax returns, bank statements, bills, life insurance, etc.
  • Creditor statements for any mortgages, credit cards or other loans.
  • Location of keys for house, auto or safe deposit box.

A key function of the letter of instruction is to specifically indicate which household belongings go to which heirs. Your will and/or trust will generally only address big ticket items. Through the letter you can decide who receives the family albums, the silverware, stamp collection, artworks or family knickknacks. Providing clear guidance can keep your family from devolving into arguments and resentment when emotions and grief run high.

Burial Arrangements

You can also use a letter of instruction to tell your family how and where you would like to be buried or cremated. You can be as elaborate as you desire. If you want, you can choose funeral readings, pick your flowers, charitable donations, etc. You can even prewrite your own obituary here, so be creative. Whatever your desires, putting your wishes in writing will help reduce guesswork and potential arguments among those who will handle these arrangements when the time comes.

Other Advantages

If desired, you may use the letter of instruction to voice personal requests and your expectations for how your heirs use their inherited assets. After all, these were your possessions! Some people also include their personal values, in a section known as the “ethical will,” which allows you to pass your core values and beliefs down to your family and beneficiaries.

Another benefit of this letter is that you can augment your living will with regard to end of life care, providing more detail about the circumstances under which you want to be kept alive or taken off of life support. This can be very helpful in reducing stress or uncertainty for your family if the health care directive or living will lacks this detail.

Conclusion

Remember, a letter of instruction does not replace a will, durable power of attorney or living will. If you don’t already have these documents in place, you should have them drawn up by a qualified estate planning attorney. A letter of instruction can be a fantastic tool to articulate your final wishes and decisions for your executor and heirs. Be sure to update it periodically and file it along with your other estate planning documents. At its heart, the letter of instruction is a last gift of your voice that you leave to your family, so make it count.

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Go fishing, not phishing!

If you use email, you are under constant attack. Every ploy imaginable is being used against you in attempts to get you to open an email that has the goal of connecting you with a website to enter your account number and password information.Phishing concept This “phish” email will look very official, be urgent in nature, and connect you to an official-looking website. Don’t take the bait!

One scheme sends you an email stating that your credit card or bank account at Bank XYZ is going to be closed immediately unless you reset your password by clicking on the attached link. The link will take you to a very official looking Bank XYZ website where you are instructed to type in your current account number and password. They now have your login information and can access your real account directly. Keep this in mind: Banks and other financial organizations will not ask you to provide account and password information via an email. Common scams include more than just trying to get your banking information; be on the lookout for wire transfer requests from friends stuck overseas, lottery winnings, investment schemes, fake checks and pretty much anything related to money.

For a long time we thought it was safe to click links and attachments from people we know, but hackers have gotten much more sophisticated and now use your friends’ email names and addresses that have been harvested from social media or malware. By using the email addresses and names of people you know, they increase the chance that you will open those emails. The links and attachments can often lead to software that will attempt to infect your computer with malware or take you to a bad site. So always use extra caution when you get an email asking you to provide any type of personal information.

How do you protect yourself? First, don’t give out personal information that is requested in an email. Also make sure that the address in the browser matches where you think you should be. If you expect to be at www.paypal.com and the browser says you are at www.stealingyourmoney.com you should leave that site immediately. Of course, it’s not always quite so obvious. But if you look closely, you’ll often be able to detect a discrepancy in the web address.

You should always make sure your computer and devices are patched and up-to-date with the latest security updates. Most major software companies update their software on a regular schedule to help keep security issues down, so don’t avoid those update notifications. Use a firewall and anti-virus software, which will do a good job of keeping a lot malicious items at bay. Most Internet browsers have pop-up blockers that can help reduce your risk as well. Finally, if you are unsure if the email is real, call the person who sent it to you and ask them about it.

In the end, you are the last line of defense. Always be skeptical of things that don’t seem quite right. While in the real world it may be admirable to trust the good intentions of others, things are not always what they seem in the online world, and it is best to have your best defenses forward.

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Maximizing the impact of charitable contributions

With the recent tornado in Oklahoma we are reminded of the importance of charitable giving.  In fact, since the tornado, over $15 million has been donated to the American Red Cross. According to the Giving USA Foundation, individuals gave over $217 billion dollars to charitable causes in 2011, a 3.9% increase over 2010. As charitable giving increases, I want to make sure you know not only how to maximize your charitable contributions from a tax standpoint (see my post about using the donor advised fund), but also that you are informed about the effectiveness of the charities you choose.

There are a couple resources available now to help understand how effective a charity is with the money you donate. Charity Navigator has been around since 2001 and now assesses over 6,000 charities. Its goal is to provide one overall rating based on two areas of effectiveness: 1) their financial health and 2) their transparency and accountability. For example, the American Red Cross, a popular one at this moment, shows a total score at 59.64 out of 70 as of fiscal year end in June of 2011.

Another website, CharityWatch.org, also rates different charities’ effectiveness. While they rate only 600 or so of the largest charities, they tend to dig much deeper into the inner workings of the organization than Charity Navigator. They study the individual finances of every charity to give a clear picture on what the money is actually being used for. Instead of taking the information at given at face value, they try to determine if the donors’ objectives are actually being met. Because their analysis is more in-depth, Charity Watch charges $50/year for access to their Charity Rating Guide, which provides financial data and a rating from “A+” to “F” for each charity.

We all want to make sure the money we give generously is used effectively. Whether you’re giving funds to aid with large natural disasters or donating to your local food bank, donations are needed and greatly appreciated. Now, in addition to maximizing the tax effectiveness of your charitable donations through donor advised funds, these tools can help you choose organizations that will help your dollar have maximum impact.

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Managing through difficult markets

Bear markets can get ugly. Unfortunately they will, just as they have in the past, continue to plague the markets. You can prepare for their arrival and understand how your investment plan dictates navigating through them. The hard cold facts of bear market history provide direction.

For those unfamiliar with the term, a bear market is not a simple market correction, which is more benign and happens with greater frequency. It’s a peak to trough loss of more than 20% in the broad equity markets. In total there have been 13 bear markets since the end of the Second World War. That is one every five years or so.

Here is the promising part: In May of 1946 the S&P 500 was at 19.3, and at the end of March, 2013 it was at 1570. In total, over 81 times higher than where it started 67 years ago. And, this number excludes dividends, which historically make up around 40% of the total return.

So the question is not of avoidance, but one of preparation and acceptance. Accept that in the next 30 years we can expect to experience several bear markets. Embrace the fact that they will be temporary setbacks to a long-term trend of rising prices. Finally, prepare a plan that fits your unique set of circumstances.

For investors in the accumulation phase, take advantage of bear markets. Fight the inclination to sell investments in fear and do what you would do at any other sale – buy more stocks at their newly discounted prices.

For those in retirement, formulate a flexible income plan. Include a cash cushion in this plan that allows your portfolio to stay dormant during the tough times and to thrive as the stock markets resume their long-term ascent. Most importantly, do not let a temporary setback ruin your long term plan. And remember that over time, equities are the best hedge for inflation, which is so important for the long-term viability of your portfolio. Life expectancies are increasing and fixed-income investments (aka bonds) are just that, fixed.

There is always going to be some perma-bear forecasting the death of equities and a market optimist predicting a new era of exponential returns. Neither of them knows the specifics of your retirement plan and they rarely understand that “this time” is never different. Do not get enamored of prognostications based upon remote possibilities. Rather, work with your advisor to build a plan around the historical probabilities of the markets and your unique retirement needs.

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