blog22jun2008

Hot Off the Web
Level headed advice from Rob Arnott in Financial Times’ “Spend less and save more is recipe for retirement” is triggered by the “Ed McMahon problem” of “living longer, spending too much, and saving too little”. His advice is simple: (1) start saving early and save 20-25% of after-tax income every year, (2) spend no more than your actuarial life expectancy divided into your total liquid assets, and (3) don’t assume 8% return on assets (because of inflation and taxes erode living standards, and don’t spend returns before earning them).
In Barron’s “Healthy returns- How to live longer”  Mary Pinkowish outlines “The eight things to do to live longer and minimize the aches and pains of aging.” The recommendations go beyond the usual “quit smoking and get a colonoscopy” list. Here is the advice: (1) get a coronary scan (for $300-600 it can predict coronary heart disease years before symptoms or possible heart attack), (2) diabetes risk and its mitigation (diabetes can reduce life expectancy by 15 years), (3) visceral fat (associated with heart disease vs. subcutaneous fat) can be detected via abdominal scan, can be mitigated with low-carb diet and exercise, (4) “brain training” (learning a new language or musical instrument or some video games) or “keep active doing something you like”, (5) exercise (cardiovascular fitness) reduces both risks of heart disease and dementia, (6) bones (osteoporosis test even for men) and joints (flexibility/joint-strengthening ), (7) polyphenols (difficult to implement extreme caloric deprivation reduces degenerative aging, but effect may also be induced by drinking red wine which may be more easy to get used to) and (8) lighten up (humour, keep your cool and social networks-even for men).
New approaches to extract money from your life insurance especially if you have some health problems are discussed in a couple of articles. The first is Grace Weinstein’s “Always beware of talking to strangers”  in the Financial Times starts with the securitization story associated with “viatical settlements” (for terminally ill to be able to sell policies), then “life settlements” (healthy older insured who no longer need the insurance to sell policies for more than insurance company’ cash value). Now this has been extended to “stranger-owned life insurance” which is “life insurance policies manufactured for the purpose of settling in the secondary market”. Some of these may actually be illegal and certainly are highly discouraged by insurance companies. The second article is Bloomberg’s “Get a life, plus cash, for insurance policy”  where Jane Bryant Quinn tables an alternative to life settlements called”legacy loans” whereby you can borrow as much as you could sell the policy for and unlike on sale of the policy there is no tax to be paid. The loan is at 9%, investors pay premiums and heirs get if and what is left after loan repayments with a minimum of 10%. Don’t go at it alone with any of these; get independent advice, as you may be getting less than you bargained for.
In Barron’s “The hidden cost of the golden years”  Suzanne McGee warns (U.S.) readers against exposing themselves to a gap in medical coverage after retirement. The medical cost incurred by the average 65 year old couple over the next 15 years is $225,000 above and beyond Medicare coverage! That can make quite a dent in one’s retirement finances if not suitably addressed. (Come to think of it, a few years back when I was doing my pre-retirement numbers, an accountant suggested that a safe working assumption for my (Canadian) annual health expenses during retirement was $15,000/year!?! I recall that I didn’t believe him at the time, but perhaps I need to explore again that possibility).
Eleanor Laise’s WSJ piece “Using the present, not the past, to rate ETFs” reports on forward-looking ETF ratings to be published by Standard and Poor’s and Morningstar research. The new ratings will be looking at “factors like the valuation and risk of fund holdings and the ETF’s cost. The research will also show how the fund allocates assets among, say, large- and small- company stocks, and include commentary on the fund’s market niche.”
FORTUNE’s Geoff Colvin discusses one of the very challenging parameters in financial planning in “How long will you live”.  After running through the requisite statistics on life expectancy (78 years at birth, 81/84 years for 60 year old man/woman), he addresses the real issue for an individual which is the variability for that individual around the individual’s life expectancy; specifically that a 60 year old male has a 19% chance of hitting 90, whereas a 95 year old has a 22% chance of hitting 100. What was interesting, however, was not Colvin’s reference to oft mentioned impact (on pension plans, annuity providers) of medical breakthroughs extending life expectancy to a much greater extent than the “past century’s steadily increasing life expectancy, but the fact that in some U.S. counties life expectancy has actually decreased during the 80s and 90s! This was a result of “smoking, obesity, and in men, HIV/AIDS and homicide.”
And finally, Tim Cestnick in Globe and Mail’s “Insuring your kids an effective tax strategy”  suggest a tax saving strategy by insuring your grandchild’s life and giving the policy to your child who could give it to his/her child. The idea is to use funds that you know you won’t need in your lifetime and place them into a universal life which ultimately can be paid tax free as insurance upon the death of the grandchild. (Sounds like a neat trick. But, I suspect that given the fees associated with Universal Life policies, you may be just substituting paying taxes at capital gains rates in a taxable account for a scheme where much higher “taxes” are paid to the insurance company. Get an independent second opinion before embarking on this.)
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