Hidden Mistake #1: Inappropriate Mental Accounting

Definition: Tendency for families to divide money into separate accounts based on subjective criteria.

Typical Example: Treating $100 you received as a gift from Grandma, differently than a $100 bill earned.
Typical Example #2: Having money languishing in a savings account earning 0.25%, while carrying high-interest debt to pay off at 12%.

Cure: Funnel income, no matter the source, into one savings account.
Any “found money”, such as a tax refund or gift from Grandma, quickly decide where that money is best utilized. As for expenses, occasionally change how you pay. If you always pay with a credit card, try cash. This will get you remembering that all of it, for the purposes of your mental “books”, should be lumped into one, monthly bucket.

Definition: Our tendency to relate the value of a purchase to a price point which, rationally, should have no bearing on the amount spent.

Typical Example: The “rule of thumb” to spend two months’ salary on an engagement ring.
Typical Example #2: A realtor will tell you that “in 2007 this house was going for $500,000 and is now listed at only $350,000!” … causing you to think this house is undervalued.

Cure: For big ticket purchases like a house, car, or engagement ring, ask a friend whose financial values you respect for their input.
For everyday purchases, avoid looking at the MSRP or sticker price. Ask yourself:
Can I afford this today?
What do I really want to spend?
What is this really worth to me?
Marketers are experts at this sort of price-anchoring, and we really should know better … but yet we still fall prey to it. Try not to let outside sources set up the comparison by which you should be considering such large purchases.

Definition: Our consistent tendency to avoid loss, rather than acquiring gain.

Typical Example: An investor is more likely to sell a stock which has increased in value, rather than selling stock that decreased. Over time, her investment portfolio is made up of investments that have decreased.

Cure: Don’t think of selling a stock for less than you paid for it as being a loss. It can actually work as a gain for two reasons:
* Tax deduction (which can really help!)
* The other side of opportunity cost: opportunity GAINED (i.e. you can better utilize that money elsewhere)
So, don’t check your portfolio so often. If you don’t know you’ve lost money, you don’t experience the pain. (And riding the roller-coaster of your portfolio’s value is a waste of emotional space.) Since stock prices go up in the long-run, the longer you go without looking at your portfolio, the greater chance of seeing a gain. Sometimes taking that loss really is the best thing you can do.

Definition: The tendency for us to want to do the same thing as a large group of others, with no thought to whether that action is rational or irrational.

Typical Example #1: Buying when prices are high because everyone else is.
Typical Example #2: Selling when prices are low because everyone else is.

Cure: Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.”
Keep this in mind when making your next financial decision. If everyone is telling you to buy this or buy that (i.e. gold, silver, real estate) do the opposite. In the financial investment world, if it’s too good to be true, it usually is. Write up an investment policy statement or contract. Include factors such as:
* Investment objective
* Investment goals
* Desired asset allocation and diversification
* Summary of your risk tolerance
* Rebalancing schedule
Before making any changes, consult with this contract. You can also take advantage of this inherent tendency to do what’s approved by others to affect positive behavior. For example, let’s say you trying to pay off debt. Tell your 3 closest friends, make an informal contract, sign your name at the bottom, and then email it to them. The pain you would incur from breaking that contract is high relative to the pain of breaking your behavior if you went about it alone.

Unless you’ve been deep in a cave or on a mountaintop in Tibet with no media access, you’ve seen the significant volatility in the Stock Market. Experts debate the primary, secondary, and tertiary causes, but here I wanted to mention a few survival tips to help cope with the ups and downs.

• What you have invested in the market must match your risk tolerance in two ways: first, the amount you have in the market must reflect a proper balance of “At Risk” vs “Safe” money in your overall portfolio. Second, the composition of what you do have in the market must reflect the amount of volatility you can live with.

• Expect the market to go up and down. Avoid the temptation to jump in and out of the market. That usually leads to selling low and buying high.

• Let our proprietary Minuteman system work for you. Because of the automatic variance-based rebalancing, 100% of the time we are buying low and selling high. Recent events have been a prime example: almost all the portfolios “bought low” and took advantage of subsequent increases.

• Avoid active-management approaches. Not only do they almost inevitably increase risk; in addition, statistically they guess wrong more often than they guess right.

• No one investment works every time. Make sure you diversify to spread out your risk. Our Minuteman system excels here as well. Our strategic indexing allows you to broadly participate in various asset classes while reducing your risk.

• I appreciate the wise counsel of the seasoned advisor and teacher, Ron Blue: Correct principles work correctly throughout time… so remain calm even in financial storms and don’t let fear or lack of confidence keep you from sticking to solid financial plans.

Please call if you have any questions or concerns or if you’d like to review your strategy. It’s a privilege to work with you.

Born in Fulton, KY sometime in the 1950's, Marilyn grew up in South Fulton, TN, home of the International Banana Festival.  Married to Dr. Lionel McCollum, they have 2 daughters, Lauren and Kristen.  She has served Providence clients for about 2 1/2 years.

Impressive resume: Marilyn is a CPA, a financial counselor, and is almost finished with her CFP!

Favorite things to do: Garage saling with Lionel

Interesting facts:

• Collects salt and pepper shakers
• Loves to read books and write poetry
• Enjoys watching UT basketball and football, in that order

What's the best part of her job? "Working with our clients and getting learn more about their families and the things that they enjoy doing."

Hilarious moment: Once almost jumped out of a moving car.  Why you ask?  Because of a little 'ol bee who thought Marilyn would make a good place to land!

No Time Too Soon to Consider Long-Term Care: MyFoxHOUSTON.com

1. Don't diet.

2. Get going.

3. Keep moving.

4. Focus on family.

Click to See the Other Resolutions 

• Only 40 percent of caregivers expect to contribute financially to the care of a family member; the reality is that 83 percent actually do.

• Only 37 percent of caregivers expect their savings to decline as a result of their responsibilities, while the study found that 61 percent have used some of their savings to care for a loved one.

• Nearly half (48 percent) of caregivers lost a job, changed shifts or missed out on career opportunities as a result of their responsibilities, compared to 29 percent who expected such an impact.  (The Reality of Long Term Care Planning)

Home Healthcare Aide: Home healthcare aide needed to provide twenty-four-hour, seven-day-a-week care for a poor, eighty-five-year-old bedridden patient suffering from Alzheimer’s disease. The elderly patient requires room and board and must move in with you and your family. The patient requires constant supervision and will need a baby-sitter when you leave your home. Must be able to administer eight to ten medications daily and make frequent trips to the doctor’s office. Applicant should enjoy cooking and cleaning and be proficient at toileting. Diaper changing skills are also a plus. The job will likely last one to two years but may last ten or more. This is a volunteer (unpaid) position. No experience necessary.  (See Full Article)

“What is a conversion and why is everyone talking about it?
Simply put, if you have a traditional IRA, you can switch to a Roth IRA. This is called a conversion. If you have a 401k at a former employer, you must first move it into an IRA, and then you can convert it to a Roth. Previously, only taxpayers whose modified adjusted gross income was under $100,000 were allowed to convert. As of 2010, anyone, regardless of income, may convert all or part of their traditional IRA and certain other retirement assets to a Roth IRA.

“What is special about 2010?”
When you convert part or all of your IRA to a Roth IRA, the amount you convert will be taxed like ordinary income. However, in 2010 you can opt to have to have none of the converted funds taxed for 2010. Instead, the conversion amount may be split over the following two years so that half the converted amount is taxed in 2011 and the other half in 2012. There are tax advantages to doing it this way. It’s important to understand that you’re not actually splitting the tax over two years; you’re splitting the conversion amount as if it were income over two years.

•Your earnings grow tax-free
•No minimum distribution requirements for the owner
•Eliminates uncertainty about future tax rates
•Can lower taxes owed on benefits like Social Security
•Provides a greater, tax-free legacy to your heirs
•Qualified distributions are tax-free

“Isn’t there a 5 year rule that says I can’t touch the funds?”
For those of you over 59, you can make withdrawals from your Roth in the first 5 years, if necessary, without any penalties, as long as you don’t withdraw any of the interest/gains.

For example, if you converted $50,000 to a Roth and after one year it grew to $52,500, you could withdraw up to $50,000 penalty free during the first 5 years. After 5 years, you could even withdraw the growth tax-free.

“What factors should I consider?”
There are many factors to consider. One is your age at the time of conversion. If you have a relatively long time horizon, meaning you have years of growth ahead of you, the gains from your Roth IRA, coupled with the tax-free distributions, can be substantial. Even if you are already in your 70’s and 80’s, converting can be appealing because there’s a strong likelihood taxes will be increasing for you and your beneficiaries.

Don’t underestimate the importance of considering your current and future tax brackets. If you believe you will be in a higher tax bracket upon retirement or that tax rates will rise in the future, you can significantly reduce the amount of tax you will pay by converting to a Roth IRA.

Also remember, with a Roth IRA, you are never required to take distributions, even at age 70½. When to take distributions is an important question to consider. If you don’t need the money, you can choose to leave your Roth IRA to your heirs. Your beneficiaries will inherit the assets income tax free (estate taxes may apply). While the distribution rules at death require beneficiaries to take withdrawals, distributions of principal and interest remain tax-free.

There is no clear-cut answer to whether or not you should convert. We recognize the importance of this decision and have assembled a team of CPAs at Providence Tax Advisors, LLC to help you answer this important question. Our team will provide a custom analysis to determine if a Roth conversion is right for you as well as the tax expertise necessary to avoid potential pitfalls, and we will guide you through the process in the most effective manner possible.

Call us at (865) 691-6699

Helping Those Recently Diagnosed with Diabetes

We at Providence have noticed an increase over the years in the number of people diagnosed with Type 2 Diabetes.  It can be a devastating blow to the individual and family members as well.  The following article may be helpful in caring for someone recently diagnosed with diabetes. http://www.todaysdietitian.com/newarchives/110310p36.shtml 

Coffee helps prevent Parkinson’s disease
Did you know drinking coffee can seriously reduce your risk of Parkinson’s disease? That fact has been floating  around for a while, but scientists are gaining more ground in understanding why coffee-drinkers have  better success avoiding Parkinson’s. Studies by the New York State Department of Health are showing   that there is a special gene called GRIN2A, which exists in about a quarter of the population. In those who   have the gene, caffeine acts as a neuroprotector, keeping people from developing Parkinson’s. Symptoms of   Parkinson’s include tremors, sluggish movement, muscle stiffness, and difficulty with balance.

Parkinson’s disease is a leading cause in people requiring long-term care
According to the National Association of Health Data, Parkinson’s is one of the top 10 conditions that cause people to require long-term care. It is exciting to know that medical research is contributing to our ability to prevent these diseases, and simple things like a couple cups of coffee can help us avoid it. Until a permanent cure is found, Parkinson’s should remain on your health care radar, as should long-term care insurance. As we move into later stages of life, continued health is not a guarantee. However, we can insure ourselves and protect our families from the financial and emotional effects of requiring long-term care by purchasing long-term care insurance.

Call Chad Ridner at (865) 691-6699 or email at Chad@ProvidenceAdvisors.com if you have any questions about long-term care insurance.

This article by Paul Cochran originally appeared in the East Tennessee Medical News journal

Over the past 20 years, Long-Term Care insurance (LTCi) has become an essential consideration for those who want to protect their independence, insure access to quality care, keep the care giving burden off their family members, and preserve their assets from catastrophic expenses. However, the last two years have brought at least four significant changes about which every wise employee, employer, and consumer should be aware.

Group Offerings
Whereas in the past, most purchased their LTCi individually, now many people secure group coverage through their employer. There are several advantages to this approach: underwriting concessions – people who might otherwise be ineligible because of health issues can now qualify; group discounts lower the premiums (extended family receives discounts as well); and it presents an attractive benefit in the workplace.

Tennessee Long-Term Care Partnership
The Deficit Reduction Act of 2005 allowed all states to offer Partnership policies. Since 2008, Tennessee entered the list of states offering Partnership policies. The benefits include 1) Assets may be designated for disregard in an amount equal to the benefits paid out by the qualified Partnership policy as of the date of application for Medicaid eligibility; 2) Designated assets are not counted toward the TennCare asset limit for eligibility purposes; 3) The designated assets may be transferred to any other person without penalty.*

Tax-Friendly Funding Options
The Pension Protection Act of 2006 added several significant changes regarding tax-free funding and benefits of LTCi that went into effect January 1, 2010. One change, policyholders may now pay qualified LTCi premiums with cash values from life insurance and non-qualified annuities as a partial 1035 tax-free exchange. Secondly, as long as they are qualified LTC riders, LTCi benefits from Acceleration and Extension riders on life insurance and annuity contracts are considered tax-free benefits. In addition, qualified LTC rider charges on life and annuity are no longer taxable, although charges will continue to reduce the cost basis in the contract.**

The CLASS Act
The Community Living Assistance Services and Supports Act (CLASS Act) is part of the health reform law signed by President Obama on March 23rd, 2010. It is a federally mandated program in which employed people who do not opt out may prepay for cash LTC benefits without underwriting. Their “premiums,” benefits, and benefit triggers are determined solely by the Secretary of Health and Human Services (Kathleen Sebelius), based on the program’s future actuarial solvency.*** Several issues must be noted: 1) Benefits will not be subsidized by taxpayers and must be funded by the premiums and be actuarially sound for 75 years; 2) The chief actuary of the Centers for Medicare and Medicaid Services has concluded that CLASS premiums would be exorbitant and that the benefits would be minimal to stand a chance of being actuarially sound; 3) CLASS specifically prohibits underwriting, which inevitably leads to adverse selection; 4) Many businesses are preempting the government mandate by offering group LTCi that has more comprehensive benefits and reasonable premiums.

Caring for the frail and infirm elderly is difficult and expensive. Sadly, America’s long-term care delivery and financing system is broken.**** Medicaid simply cannot withstand the increasing demands placed on it by long-term care expenses. When it implodes, the only people with good caregiving alternatives will be the ultra- rich private payers and those with long-term care insurance. The need for personal planning in this area of asset preservation is more acute than ever.

What about you…are you adequately prepared?

To learn about options for group benefits or to speak with an LTCi group specialist, call Providence Advisors Group at (865) 691-6699 or email Paul@ProvidenceAdvisors.com.

References
*TN Department of Commerce and Insurance
** The 2010 Sourcebook for Long-Term Care Insurance Information
*** Stephen A. Moses – Center for Long-Term Care Reform
****For a thorough description of the current state of the long-term care delivery and financing system and realistic alternatives, see http://www.centerltc.com/realistsguide.pdfad

More common than we might expect, inherited IRAs are tricky, and maneuvering them requires some wisdom and finesse. It is possible for the tax benefits to an heir to stretch on for many years, but, it is the IRS’s way, or the highway. A recent article from Deborah Jacobs of Forbes features five helpful “rules” to abide by when handling an inherited IRA.

Rule #1: First, do no harm.

• If you inherit a retirement account, don't do anything until you know exactly what rules apply.
• With your own IRA you can take the money out and redeposit it in another IRA within 60 days without penalty. Not so an inherited IRA. All movement of money must be from one IRA custodian to another--be sure to specify a "trustee-to-trustee" transfer.
• Unless you've inherited from a spouse, you must re-title the IRA, including the original owner's name and indicating it is inherited, e.g., "Daddy Warbucks, deceased, inherited IRA for the benefit of Little Orphan Annie, beneficiary."
• If two or more people are named as beneficiaries, ask the custodian to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer stretch-out for the younger heirs.

Rule #2: Beneficiary forms rule.

• The beneficiary form on file with the custodian of an IRA controls both who inherits it and its ability to be stretched out.
• If people other than a spouse are named as heirs, they must begin taking distributions from the account by Dec. 31 of the year after inheriting, but they can draw these out over their own expected life spans, enjoying decades of income-tax-deferred growth in a traditional IRA or tax-free growth in a Roth IRA.
• To give your heirs maximum flexibility, name both primary and alternate individual beneficiaries--say, your spouse as primary and kids as alternates or your kids as primary and grandkids as alternates. Your primary beneficiary then has the option of "disclaiming" or turning down the account, enabling it to pass to the younger alternate.
• By contrast, if an estate is named as beneficiary, tax deferral is cut short. If it's a Roth IRA, all funds must be withdrawn within five years. For a traditional IRA the same rule applies unless the former owner was already 70 1/2--the age at which a traditional IRA owner must begin cashing out. In that case the distribution rate for the heir is based on the age of the person who died, notes Rockville Centre, N.Y. CPA Edward Slott.
• What if there's no beneficiary form on file? Heirs are at the mercy of the IRA custodian's default policy. Few custodians will pass on an IRA directly to the kids without a beneficiary form.

Rule #3: Employer plans are different.

• By federal law the money in a 401(k) goes to a spouse, unless he or she has signed a form waiving rights to it. But some employer plans will allow the funds to go straight to the kids if no spouse is living and no beneficiary form is on file.
• On the other hand, employers usually won't let non-spouse beneficiaries stretch out 401(k) withdrawals. Experts say, these beneficiaries should ask the employer to transfer the money into an inherited IRA. They can then divide it into separate inherited IRAs.

• A spouse who inherits--let's assume it's the wife--has an option not available to other inheritors. She can roll the assets into her own IRA and postpone distributions from a traditional IRA until she turns 70 1/2.
• The catch is, like other IRA owners she may have to pay a 10% early-withdrawal penalty if she takes money before age 59 1/2 from her own IRA. So a young widow should generally wait until after reaching 59 1/2 to do the rollover. Meanwhile, she doesn't have to take out any money until her late spouse would have turned 70 1/2.

Rule #5: Watch for distribution traps.

• If the late IRA owner was 70 1/2 or older, beneficiaries must make sure the owner's mandatory distribution for the year of death is withdrawn before doing anything else.
• When non-spouse beneficiaries take their own payouts, they should be aware of two quirks.
• First, if the estate paid estate tax, they may be able to take an itemized deduction to offset some IRA income.
• Second, the minimum is calculated differently than for your own IRA. You take the balance on Dec. 31 of the previous year and divide it by your life expectancy listed in the IRS' "single life expectancy" table, rather than the table used by IRA owners. The next year you use the same life expectancy, minus a year. (With your own IRA, you take a new life expectancy from a table each year.)

If you have any questions about inherited IRAs or would like to speak with an expert about IRAs in general, call Paul Cochran at (865) 360-4058.

Did you know:

• Estimated Median Cost for a Year in a Private Nursing Home Room:
  • 2010: $75,190
  • 2040: $324,967

• 12 million: Number of Americans expected to need long-term care by 2020.

• 78 percent: Percentage of Americans who prefer to receive long-term care in the home. 18 percent choose assisted living, and 2 percent choose a nursing home.

• $75,190: The national median cost of one year in a private nursing home room. Based on the average length of stay in a nursing home of 2.8 years, a person needing care today would need $210,532 for a private nursing home room.

• 49 percent: The national median cost of one year in a private nursing home room ($75,190) is 49 percent more than the median household income in the United States ($50,303).

• 83 million: Estimated population of Americans who qualify for long-term care insurance. More than 76 million have yet to purchase a stand-alone long-term care insurance product.

• 48 percent: Percentage of all claim dollars paid by Genworth Financial companies to policyholders with cognitive disorders, including dementia.

• $5.7 billion+: Total claims paid by Genworth Financial’s Long-Term Care Insurance business since 1974.

• $19: The national median hourly rate for a licensed home health aide in the U.S. Based on a 44-hour work week, the cost per year for a home health aide is $43,472.

• $3.4 million: Amount Genworth Financial companies pay in long-term care insurance benefits each business day.

If you have a long-term care insurance policy, we hope these statistics reassure you of the financial wisdom of your decision. If you do not have a long-term care insurance policy, let me encourage you to seek out an LTC specialist to discuss the options available to you.

Are you a part of a group that might benefit from hearing from a Long-Term Care Insurance or wealth management specialist? The Providence advisors teach and speak publicly many times a year for free and would love to address your group on these important issues for free.

Contact Paul Cochran at Paul@ProvidenceAdvisors.com or (865) 691-6699.

Sources
Genworth Financial, Inc. Long-Term Care Fact Sheet, June 22, 2010

So how does Providence manage my wealth? That’s the question we want to begin to answer this month. Below, we’ve highlighted a few of the basics for Providence Wealth Management’s investment strategy.

Guarantee average returns
Most investors aim for above average returns in investing, but most fail. Most even fail to achieve average returns. You want to achieve the market average at least. You can guarantee the market average by investing in index funds. The index fund is the average so as soon as you make an investment you know you have achieved the average.

Outperform over 80% of all actively managed funds
Average still doesn’t sound good enough. Well if you placed your money into an actively managed fund then there was an 80% chance you would end up with less money. Actively managed funds employ analysts and investment experts to try and achieve huge returns. In fact they can’t beat an index fund most of the time. Invest in an index fund and you know that there is a 4 in 5 chance that you will do better than investing elsewhere.

Lower risk than actively managed funds
Studies show that picking and choosing stocks (active management) in attempt to beat the return of an index invariably increases risk in the process.

Allows you to focus on what’s of fundamental importance: Asset Allocation

The key determinant of your portfolio’s risk and performance over time is how much you allocate to various segments of the market. Indexing allows you to effectively and efficiently participate in specific yet diversified segments of the market.

Adapted from an article at The Money Instructor