Years ago a group of tobacco executives appeared before a congressional hearing, placed their left hand on the Bible, raised their right hand and swore that tobacco products were neither addictive nor harmful to your health. Of course everyone including smokers knew this was a big lie. Unfortunately, many young people still believe that smoking cigarettes is 'cool' and makes them feel (and look) like adults. That is --until their teeth turn yellow, they figure out people are keeping their distance because of bad breath and they realize that they can no longer control the habit. I remember once being in a quick mart and having someone come in and order a carton of cigarettes. He was on oxygen and toting an oxygen bottle at the time. One of my associates who quit smoking five years ago based on my challenge (with a monetary reward!) said that she occasionally still has urges to smoke a cigarette, “As long as her leg!” Tobacco is as addictive as any drug.
We all know that smoking is a universally bad idea, but did you ever stop to think about the true costs of smoking? Is it nothing more than the cost of a $5 pack of cigarettes per day? Here’s a partial lists:
A twenty-year-old who gave up a $5 per day habit and invested the money at 7.5% would have $1 million by age 70. Reverse thinking would suggest that continuing smoking costs this person a million dollars over their lifetime. And this assumes the cost of cigarettes stays constant.
Research indicates that smokers on average die nineteen years sooner than non-smokers.
In Alabama, research suggests that for every pack of cigarettes sold, and additional dollar will be spent on healthcare treatment related to tobacco use.
There are fewer job opportunities for smokers as many employers avoid hiring smokers for a number of reasons. First, smokers tend to need to take ‘smoking breaks’ throughout the workday which is both unproductive and unfair to non-smoker employees. Second, smokers tend to have greater health related illnesses causing greater absenteeism and higher healthcare costs.
Life insurance premiums are much higher for smokers than for non-smokers. For example, a $1 million 20-year term policy on a 30-year old smoker cost $1,500 versus $435 per year for a non-smoker.
These are just some of the personal costs of smoking. There are also the health-related side effects to unborn children as well as people exposed to second hand smoke. Tobacco is clearly one product with virtually no redeeming personal or social values. Research does suggest that the rising cost of cigarettes does cause decreased use. If, at the state level, we were to raise the tax on cigarettes and ban use in all public places we could positively impact health, healthcare costs and our economy. With elections right around the corner, this would be an excellent topic to add to the list of issues for our legislators.
If you have avoided the habit or beaten the habit, pass this article along to a smoker that you care about. You may just save their life and make him or her a millionaire!
Showing posts with label Stewart H Welch III. Show all posts
Showing posts with label Stewart H Welch III. Show all posts
Tuesday, October 19, 2010
Tuesday, September 28, 2010
Boosting Parents' Retirement Income
Many retirees have had their incomes devastated because of low interest rates. Historical returns for five to ten year bonds have been 4.5% to 5.5%. Today 10-year treasury bonds yield a paltry 2.6% and the average money market account is paying less than one percent. One of the primary drivers behind low interest rates is the Federal Reserve who has set and maintained the fed funds rate at near zero percent in an effort to stimulate an anemic economy. This past week, Federal Reserve Chairman, Ben Bernanke, indicated that the Federal Reserve will continue to support low interest rates for the foreseeable future. This leaves many retirees who depend on interest income in a financial tight spot with no relief in sight. Many retirees are finding it necessary to invade their principal just to pay their monthly bills.
In some cases, adult children are in a financial position to help…but what’s the best way to do this? First, let’s examine how a reverse mortgage can turn a non-income producing asset into a cash flow machine.
With a reverse mortgage, instead of making payments to a mortgage lender, the mortgage lender makes payments to the homeowner. And instead of paying down your mortgage over time, as you receive payments, your mortgage balance increases over time. At the point that you no longer live in the house, the home is sold and the loan paid off. Additional options include receiving a lump sum or having a loan that operates like a home equity line of credit. Some of the disadvantages of reverse mortgages are that you have closing costs that can be from three to seven percent of the loan amount; the interest rate attributed to the mortgage is typically two to three percent higher than a conventional mortgage; and you have to be at least age sixty-two to qualify. Lenders will also restrict loans to around 50% or less of market value.
One of the most often comments I get from retirees is that they don’t want to be a financial burden to their children. Translated, this means they would be very reluctant to take a financial handout even if you could easily afford it. However, they would likely consider a financial transaction that is mutually beneficial such as a ‘private’ reverse mortgage. With this strategy, the adult child becomes the mortgage lender but can do so without the closing costs; can use a lower interest rate; and could offer a loan greater than 50% of market value. You would need to formalize the transaction with a written promissory note and federal law requires that a minimum interest rate, called the Applicable Federal Rate, must be charged in order to avoid potential gift taxes. To avoid potential future conflict, be sure to make all siblings aware of the details of the arrangement before implementing.
Ultimately, when the parent is no longer living in the home, it can be sold and the loan, plus interest, repaid. The private reverse mortgage is an excellent way to partner with a parent to provide additional monthly cash flow during what may be an extended economic downturn.
In some cases, adult children are in a financial position to help…but what’s the best way to do this? First, let’s examine how a reverse mortgage can turn a non-income producing asset into a cash flow machine.
With a reverse mortgage, instead of making payments to a mortgage lender, the mortgage lender makes payments to the homeowner. And instead of paying down your mortgage over time, as you receive payments, your mortgage balance increases over time. At the point that you no longer live in the house, the home is sold and the loan paid off. Additional options include receiving a lump sum or having a loan that operates like a home equity line of credit. Some of the disadvantages of reverse mortgages are that you have closing costs that can be from three to seven percent of the loan amount; the interest rate attributed to the mortgage is typically two to three percent higher than a conventional mortgage; and you have to be at least age sixty-two to qualify. Lenders will also restrict loans to around 50% or less of market value.
One of the most often comments I get from retirees is that they don’t want to be a financial burden to their children. Translated, this means they would be very reluctant to take a financial handout even if you could easily afford it. However, they would likely consider a financial transaction that is mutually beneficial such as a ‘private’ reverse mortgage. With this strategy, the adult child becomes the mortgage lender but can do so without the closing costs; can use a lower interest rate; and could offer a loan greater than 50% of market value. You would need to formalize the transaction with a written promissory note and federal law requires that a minimum interest rate, called the Applicable Federal Rate, must be charged in order to avoid potential gift taxes. To avoid potential future conflict, be sure to make all siblings aware of the details of the arrangement before implementing.
Ultimately, when the parent is no longer living in the home, it can be sold and the loan, plus interest, repaid. The private reverse mortgage is an excellent way to partner with a parent to provide additional monthly cash flow during what may be an extended economic downturn.
Thursday, September 16, 2010
Strategies for Avoiding Probate at Death
My associates and I were recently working through a complex multimillion dollar estate planning case where the client owned real estate in multiple states. One of the central topics of discussion was how the probate process would work under the current will which we were in the process of revising. Probate is the court supervised process of transferring one’s property at death to his or her rightful heirs. The costs of probating an estate varies according to state law and based on case complexity but can easily be three to seven percent or more of the probate estate. Not all assets go through probate and, with proper planning, probate can be avoided altogether. That’s exactly what we are doing with this client. Since the family has real estate in more than one state, their current will would have required probate in each state that they owned real estate adding to the costs and complexity of settling their estate. In addition to fees, the probate process results in making public some of what was private information. That’s because the filing documents are part of the public record which may include listing of assets and beneficiaries. Finally, the probate process typically takes a minimum of six months and can take several years.
Here are three ways that you can avoid probate:
Create a Revocable Living Trust. With a revocable living trust, you establish a trust and move all of your probate assets into the trust. You can act as your own trustee but designate a successor trustee should you become incompetent or die. This sounds more complicated than it is, for once it’s set up it’s easy to maintain.
Own property as Joint Tenancy with Right of Survivorship. A good example would be to own your home with your spouse under this form of title. At death, your interest in your home automatically passes to your spouse by title rather than going through probate. Some states use a slightly different version known as Tenancy by the Entirety and community property states such as California use Community Property with Right of Survivorship.
Name beneficiaries to your retirement accounts, bank accounts and life insurance. I’ve run into lots of cases where someone named their estate as the beneficiary of their life insurance. This not only subjects the assets to potential probate fees but also potential creditors. For bank accounts and brokerage accounts, you can use a ‘Payable on Death’ designation to direct who gets your account assets at death.
Take a moment to review your own estate situation. If you own property in more than one state or you put a high value on privacy of your financial affairs, consider the revocable living trust. If your estate is simple and will not be subject to estate taxes, the strategies above may simplify the transfer process and greatly reduce the time required to get your assets to your heirs at your death. Care must be taken in executing a plan for avoiding probate for there are many potential pitfalls and tax traps so your best strategy is to seek the advice of a professional experienced in estate planning.
Here are three ways that you can avoid probate:
Create a Revocable Living Trust. With a revocable living trust, you establish a trust and move all of your probate assets into the trust. You can act as your own trustee but designate a successor trustee should you become incompetent or die. This sounds more complicated than it is, for once it’s set up it’s easy to maintain.
Own property as Joint Tenancy with Right of Survivorship. A good example would be to own your home with your spouse under this form of title. At death, your interest in your home automatically passes to your spouse by title rather than going through probate. Some states use a slightly different version known as Tenancy by the Entirety and community property states such as California use Community Property with Right of Survivorship.
Name beneficiaries to your retirement accounts, bank accounts and life insurance. I’ve run into lots of cases where someone named their estate as the beneficiary of their life insurance. This not only subjects the assets to potential probate fees but also potential creditors. For bank accounts and brokerage accounts, you can use a ‘Payable on Death’ designation to direct who gets your account assets at death.
Take a moment to review your own estate situation. If you own property in more than one state or you put a high value on privacy of your financial affairs, consider the revocable living trust. If your estate is simple and will not be subject to estate taxes, the strategies above may simplify the transfer process and greatly reduce the time required to get your assets to your heirs at your death. Care must be taken in executing a plan for avoiding probate for there are many potential pitfalls and tax traps so your best strategy is to seek the advice of a professional experienced in estate planning.
Thursday, August 26, 2010
Where to Invest Now
As I was leaving the TV station earlier this week, I was stopped by a friend who asked for my thoughts on the markets. He had recently upped his contributions to the retirement plan and indicated his intention to invest 100% in bonds based on his dismal outlook for the economy. Hmmm. At first blush, this seems like a perfectly reasonable and conservative approach. It’s hard to argue that the outlook for the economy doesn’t paint a bright picture, at least in the near term. And setting up a systematic savings program is one of the most basic keys to accumulating wealth. However, I suggested he consider a slightly different approach to his investing strategy.
First let’s look at the stock market. For the decade ending 2009, the stock market has delivered negative returns and this year continues to disappoint investors. Could it be that much of the downside risk is already wrung out of the stock market? Sure, it could go down further but for someone who is systematically putting fresh money in each month, I’d say the stock market is a very good bet if you don’t plan to touch your money for at least five years. At this point, the greatest risk to the stock market may be ‘event’ risk…something like Greece defaulting on its sovereign debt. There is a small risk of a double-dip recession, but that seems unlikely. The good news is that corporations have used the economic downturn to take dramatic steps to cut expenses and improve systems. In short, they are lean and mean! Once the economy perks up, increased revenue will quickly accrue to their bottom line…think profits!
Now let’s take a moment and review the bond market. We are in the midst of the worst interest rate environment that I can remember. The Federal Reserve has set interest rates at zero percent and is actively pursuing policies that continue to keep interest rates low. It’s a disaster for retirees who depend on interest income to pay their bills each month. Investors, afraid of the stock market, continue to pile money into bonds and bond mutual funds, and in many cases, are buying longer maturities and lower quality just to get any kind of yield. What this creates is a kind of bond market ‘bubble’. Eventually, the Federal Reserve is going to take the lid off of interest rates and we’ll likely see them rise dramatically. At that time, bond holders, especially holders of longer maturity bonds or bond funds, will see values drop dramatically. Worse, it may be years before bonds recover from the bursting bubble.
What’s an investor to do? Since the stock and bond market future is never predictable, consider a mixture of high quality dividend-paying stocks (examples: AT&T, Southern Company and Eli Lilly) with bonds having medium to short maturities (example funds: VFSTX, PTTOX). You’ll want to own a basket of at least 20 stocks. Keep a close eye on your bond funds and be ready to shorten maturities when the Fed begins raising interest rates. An allocation of 60% stocks and 40% bonds should allow you to capture much of the stock market return with significantly less volatility.
First let’s look at the stock market. For the decade ending 2009, the stock market has delivered negative returns and this year continues to disappoint investors. Could it be that much of the downside risk is already wrung out of the stock market? Sure, it could go down further but for someone who is systematically putting fresh money in each month, I’d say the stock market is a very good bet if you don’t plan to touch your money for at least five years. At this point, the greatest risk to the stock market may be ‘event’ risk…something like Greece defaulting on its sovereign debt. There is a small risk of a double-dip recession, but that seems unlikely. The good news is that corporations have used the economic downturn to take dramatic steps to cut expenses and improve systems. In short, they are lean and mean! Once the economy perks up, increased revenue will quickly accrue to their bottom line…think profits!
Now let’s take a moment and review the bond market. We are in the midst of the worst interest rate environment that I can remember. The Federal Reserve has set interest rates at zero percent and is actively pursuing policies that continue to keep interest rates low. It’s a disaster for retirees who depend on interest income to pay their bills each month. Investors, afraid of the stock market, continue to pile money into bonds and bond mutual funds, and in many cases, are buying longer maturities and lower quality just to get any kind of yield. What this creates is a kind of bond market ‘bubble’. Eventually, the Federal Reserve is going to take the lid off of interest rates and we’ll likely see them rise dramatically. At that time, bond holders, especially holders of longer maturity bonds or bond funds, will see values drop dramatically. Worse, it may be years before bonds recover from the bursting bubble.
What’s an investor to do? Since the stock and bond market future is never predictable, consider a mixture of high quality dividend-paying stocks (examples: AT&T, Southern Company and Eli Lilly) with bonds having medium to short maturities (example funds: VFSTX, PTTOX). You’ll want to own a basket of at least 20 stocks. Keep a close eye on your bond funds and be ready to shorten maturities when the Fed begins raising interest rates. An allocation of 60% stocks and 40% bonds should allow you to capture much of the stock market return with significantly less volatility.
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