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A Two Letter Key To Financial Success

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**Today is Cheryl’s birthday so I’m taking the day off to spend with my sweetie and theOtherGuy is in the driver’s seat. Take it away OG!

 

“No, thanks, nothing for me.”

How many times have you said that when being offered the double-chocolate-ice cream-sundae-float-combo dessert at your favorite restaurant?  It’s almost a foregone conclusion, nearly as automatic as the “I’m just looking” comments we all say when shopping at the mall.  But, how many times do we say that when we’re with our friends?  It’s very easy to say “No, thanks” when we’re with strangers – but what about peer pressure?

In my practice, most of the money problems I help clients deal with stem from their inability to utter a simple two-letter word – “No.”.  Some people have a hard time saying to their kids (“but I REALLY NEED that new video game…”) others have a hard time saying it to their friends.  Still others simply just can’t say it to themselves.  You want to excel at your financial life?  Practice saying “No” as many times as you can each day.

I see so many missed opportunities in business that I also practice sales and marketing training for a well-known speaker and life coach’s firm. One of the primary ways we help people uncover more committed and focused time to growing their sales and their organizations is by saying “No” to as many non-critical things as possible.  If you’re struggling or juggling with too many things – try saying “No.” there, too.

Financial success in the long-run is all about saying “No”  to things today, in exchange for a greater future later.  Here are a couple ideas to gain some “No” traction in your life:

1)  Write out your financial plan of attack – and stick to it.  The human mind can’t tell the difference between vivid imagination and reality, so writing out your financial life can physiologically help you succeed. Most important to our discussion today, if something isn’t part of your plan, it provides a written backbone from which you can just say “No.”

2)  Have a casual money conversation before it’s awkward.  Clue your friends and family into the fact that you’re serious about making changes with your money.  You can say things like, “It’s sure going to be different this year at Christmas time.  We’re finally focusing on getting our financial house in order and we’ve promised each other we’re not going to overspend like we usually do.”  In all likelihood you’ll be your friend’s hero.  They only wish they had your fortitude.

3)  Lead by example in your household.  When you’re struggling with a purchase that you really, really, want, speak your mind out loud.  Your kids will hear, see, and hopefully emulate your behavior.  You can flip through a Best Buy ad and say things like “Boy, I sure like that new TV.  It sure is sharp!  One day, I’ll save enough money and then we can get that TV for our house, wouldn’t that be great?”  Kids need to hear how you handle the day-to-day issues that come up, not just see how you handle them.  Think out loud.

4)  Pick someone else to blame.  Use us.  Use Dave Ramsey.  Use Suze Orman.  We shift blame our whole lives (trust me, I just saw my 3-yr-old blame the cat for coloring on the wall…with a marker.  Everyone knows cats can use markers!) so shift blame to our site.  Say “Hey, I’d really like to join you guys for drinks and dinner tonight, but OG and Joe say that’s a bad use of my money.  I’m dumping it like crazy into my Roth IRA.  A tax-free steak and bottle of wine tastes a lot better than one at 19.99% interest amortized over 15 years.” OK, that last part was a little over-the-top, but you get the idea.

It’s OK to say “No.”  Trust me and try it out.  Where and how can you say “No” today?  Let us “No” below in the comments…(get it?  No = know! Ha! I’m hysterical! Gettin’ crazy with the homophones.)

 

Old Savings Bonds Might Be Your Most Valuable Investment

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It’s Thursday. I’m grabbin’ some coffee while OG takes the driver’s seat….

Recently, a client emailed me a peculiar list of dollar amounts and dates. Each was followed by a one or two letter symbol.

What the heck?

Finally the lightbulb went off – this was a list of US Savings Bonds we’d discussed months earlier that she’d “found” in her safety deposit box. Her question: What to do with all those bonds?  Cash them in?  Keep them?

 

The Savings Bond Conundrum

 

Clients raise this question at least once every couple months – and I’ll bet as more and more baby-boomers head into retirement the frequency is only going to increase.  For some reason, people seem to think analyzing savings bond interest is a complicated financial problem that only the best advisors can solve.  Nothing could be further from the truth – let me show you exactly how I determine whether to keep or cash in each bond.

Small Numbers of Bonds

If you own only a few bonds, I’d recommend using the US Treasury’s savings bond calculator. This tool helps you  quickly estimate the value, interest accumulated, yield, next interest payment date, and final payment date.  All you’ll need is the issue type (E, EE, or I), face amount, and the month and year.  All of that information is found on the face of the bond.

Lots of Bonds?

If you’re the Donald Trump of savings bonds, or if you want to track the bond’s value over longer periods, you should download the government’s Savings Bond Wizard tool found at http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm.  The Savings Bond Wizard allows you to save the file and refresh it each month with the most updated values. Here you can store information about each of your bonds and easily compare interest rates and the total value of your savings bond empire.

Is Your Bond Still Making Money?

Here’s a tip: don’t hold on to bonds that no longer pay interest.

After thirty years, US Savings Bonds mature and the government shuts you off like a disinherited trust fund baby.  Most bonds reach their face value somewhere between 12 and 15 years after issue and continue to pay interest until year 30.

It’s foolish to keep a bond past 30 years.  Don’t do it.

One client brought in a savings bond that stopped paying interest before Kennedy was president! Imagine how much money that’s cost him.

 

The Moment of Truth

After you’ve used all of your fingers and toes (AND one and a half neighbors’ fingers and toes) to determined whether or not it’s still paying interest (let’s assume it is), now it’s judgment time:

Can you invest the proceeds at a better rate of return than you’re receiving from the government?  

The yield on your savings bond is risk free.  Those two words are hard to beat.  I’ve seen bonds from the 80’s paying 6%. Can’t beat that. I’d keep those.

Final Step

Set a reminder to review your bonds again a few years down the line.  If you have a bond or two that you’d like to redeem, schedule it in advance.  Don’t forfeit interest because you procrastinated.  Keep an updated bond inventory and review it periodically just as you would any other part of your portfolio.

Savings bonds are one of the best ways to lock in guaranteed interest – especially if you have some from ten or twenty years ago.  Many clients are surprised when I tell them to keep their bonds; sometimes it’s in their best interest to do so!  Many times people think savings bonds are a waste of time and money. My take:  In today’s low interest rate environment yesterday’s bonds may just be a gold mine.

Avoiding Sex With Strangers and Other Poor Money Decisions

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Thursdays are when we hear from the Other Guy (OG). Sit back and enjoy:

I recently stumbled across two interesting sites on longevity. Both www.livingto100.com and gosset.wharton.upenn.edu/mortality accomplish the same task – they pose a litany of questions about your health, wealth, mental and spiritual well-being and use your inputs to predict how long you’ll live.

For the record, I’m planning on living until 135.

The questions these sites ask fall into two different categories: things you shouldn’t do to your body and things you should.

My unscientific analysis surmises that it’s generally a bad idea to:

a) smoke
b) drink
c) avoid seat belts
d) have random sex with strangers (I know you think I’m kidding – but seriously, according to these two sites, it’s not a good idea. I can’t seem to imagine why…)

All this “research” started me thinking about financial longevity – what are the 4 stupidest things you can do with money that will kill your chances of a healthy financial life, no matter how well you try and recover in other areas? Can we draw some parallels? If we’re smart enough to show you the Top 7 Financial Hacks to Avoid, we can surely pull together the four worst ways to train wreck your financial life.

 

Here’s my list:

 

1) Borrow money from your 401(k) or other retirement plan. Why? This is financially like smoking 3 packs a day. Stop doing this. “But, O.G., I’m paying myself back with interest!!” Right. You’re paying yourself back these pre-tax dollars with after-tax money. Don’t get me started on the arithmatic of how much you’ll pay.

2) Rack up credit cards and roll the balances into your mortgage. Obviously this isn’t as common as it used to be, but it’s still happening. Paying 2.99% for a J Crew sweater for the next 30 years is freaking dumb. This is like having six Jack and Cokes a day. Your liver isn’t going to quit tomorrow, but it’s not there to crank through your whiskey addiction at 6 ounces a night either.

3) Not paying attention to your lifestyle costs relative to portfolio value. This has come up in my practice a number of times recently. I don’t care how much money you have – you simply cannot withdrawal $100,000 per year from a $1,000,000 portfolio forever, even if David Copperfield is your buddy. It’s simple mathematics. It won’t last forever. Be conservative. Wear a seatbelt – and go slow.

4) Scattering money with no clear and coherent plan or direction. You guessed it – this is like putting your…well you get the idea. You’re not in college anymore. It’s time to settle down and put all your stuff in one place.

That’s my fantastic four, or fabulous four, or fashionable four, or…well you get the idea. What are yours? I’m curious: what’s the top financial mistake you’ve seen that will submarine an entire financial plan?

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You Know You Want to Watch It

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Since Joe is at the Financial Blogger Conference, we don’t have a Blog-Post-of-the-Week.  Instead, O.G. took over and created a new award and gave it to Tony Robbins.  It’s called “The Most Awesome Video Ever” award.  Our first winner is below…thoughts?

 

The Markets Reach 4-Year Highs…Now What? Protect Your Investments!

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OG grabs the reins for his usual Thursday rant!

This week, the US equity markets quietly reached a “four-year high,” prompting many (including me) to question the validity of this recent rally.  The market is up nearly 26% over the past 12 months. During this same time we’ve had:

– the dreaded “downgrade” of the US debt,

– the Eurocrisis, Spain, Italy, Ireland, and of course Greek near-defaults

yet most people won’t feel much richer if you ask them “how’s the market doing?”.

As a practicing advisor, whenever I hear “lowest ever” or “best ever” or “all-time” anything, I automatically consider the inverse.  As CNBC, Fox News, CNN and  Bloomberg keep us glued to their networks with fear and greed, I’m left wondering…

So I’ve begun thinking about protection strategies.
Today, lets talk about about a powerful tool: the Put Option.

Wait! Don’t run away! It’s actually a good way to shelter your investments AND it isn’t nearly as difficult as you might imagine. While many option strategies are pure speculation, this one is designed for the conservative investor…the one who wants to insure everything.

Let’s say the S&P 500 closed at 1420. We can go out and buy an S&P 500 index fund that mimics the index, (ticker – SPY).  If you look up SPY on any finance site you’ll see today’s closing price and you’ll notice it trades at 1/10th of the actual index’s price.  Since we assumed the S&P closed at 1420, the SPY would close at 142.

Now let’s further assume that you’re okay with day-to-day volatility of a few percent here and there, but you want to prevent the catastrophic loss of 20% or more over a few trading days – the so called “Black Swan” event.  What we want to do then is to protect our current account against future loss, or said another way, we want “the ability (or option!) to sell at today’s prices sometime in the future.”

Wouldn’t it be nice to say “I want a do-over” if the market collapses and our funds slide?

The tool that accomplishes this is called a put option and it allows us to do exactly that.  We have to pay for this option, so let’s explore what that would cost. It might not be worth the price.

If we pull up January 13 Put Options for $130, we’ll see that we can buy those for $3.  January 13 Put Option means that we can sell the options for $130 anytime we want between now and the third Friday in January.  This represents about a 9.5% decline from today’s prices and the $3 price per contract means that we’ll lose another 2% to cover the investment.

 

Here’s how I figure all this out

 

1)    I determine the amount at risk.  There are many risks, but in this case we’re talking about stock market risk. If your portfolio is $100,000 and you have 50% in stocks, your amount at risk is $50,000.

2)    Next, I decide how much downside I’m comfortable accepting.  As we discussed, a 10% decline is tolerable, but a 20% loss is catastrophic.  I decide to insure everything below a 10% loss.

(side note – why don’t I just insure it for the current price? The cost to do this is nearly always huge. It’s like insuring your house….having a deductible of 10% is much cheaper than insuring every instance.)

3)    Next, I’ll find prices.  Using today’s numbers, it would cost me $3 per share to cover everything below a 10% loss.

4)    Fourth, I do the math, which isn’t difficult. Don’t let it scare you.  My amount at risk is $50,000 divided by $142 (todays SPY price) is 352 hypothetical shares of SPY.  Although options are priced per share, they’re purchased per 100 shares. I need to buy four contracts to insure all my amount at risk.

4 (contracts) x $3 x 100 = $1,200 or roughly 2.4%.

5)    Now I make my decision, weighing each outcome.  Lets list them:

Outcome #1 – the market stays flat or increases through January 2013.  If this happens, I’ll forfeit the entire $1,200 paid for the option contracts, but would’ve had the piece of mind.  Basically, an automatic 2.4% loss for insurance that I didn’t use.

Outcome #2 – The market declines, but less than 10%.  In this scenario, because of my “deductible” amount,  I also lose the entire amount invested in the option contracts. Insurance that I didn’t use.

Outcome #3 – The market declines greater than 10%.  In this scenario, my total loss is limited to just 10%.  If the market goes down 20% over the next several months, I cash in my option contracts to recoup some of those losses at anytime I want through January 2013.

6)    Finally, I decide whether to pull the trigger.  If so, let’s try to find an “up” day to do the trade to lower your cost a little. If not, I have to be comfortable with my decision and move on.

So now it’s your turn.  What outcome would you choose?  Would you buy the insurance?  What do you do when you start thinking about “protecting” some gains?

Photo: Stock Market Bull – thetaxhaven

How to Split an IRA or 401(k) in a Divorce

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Divorce is ugly.  Except under the most limited circumstances, no one wins in the divorce game.  Then, you add the complexity of money into the equation and it gets downright hideous.  In that emotional time, it’s easy to understand why so many people divide IRAs, 401(k)s, and other retirement accounts sub-optimally.

You can’t just “take the money out and give it to my spouse”  That would be a big mistake.  Let me count the ways:

Let’s assume you own a $250,000 401(k) balance.  The judge rules that you’re required to split that 50/50 with your spouse, so you decide it would be easiest to make a phone call and take the money out.  Ouch.  If you do that, you’ll be hit with a 10 percent early withdrawal penalty (yes you, not your spouse, and only if you’re under 59 1/2) and then the amount you removed is added to your taxable income for the year.  Now, for many reading this blog, you’ve just lost 35-45%.

So how do you give $125,000 to someone?  Oh that’s easy – you gift that to them.  But in your haste, you didn’t do this correctly either. To gift it, you either need to reduce your lifetime exemption by filing a form 706 with your income taxes next April, or pay a gift tax of 50%.

Long story short: “taking it out” could be a massive financial mistake.

Instead, consider asking for a QDRO, or Qualified Domestic Relations Order (pronounced quad-row).  A QDRO put together by a competent attorney and signed off on by the judge makes this transfer a ton easier.

First, it directs your retirement plan company to establish another qualified plan in the name of your spouse.  Then, it directs a tax-free transfer to that newly established account.  No taxes, no penalties.  Easy as pie.

Once you’ve begun working on that, you’ll want to make sure the QDRO says that your soon-to-be ex-spouse can’t make any loans or transfers from the account until it’s been split; or you could just pick a date to make the transfer effective on (retroactive) and put a fixed dollar amount based on that date’s plan balance.  This would protect the new beneficiary from being bamboozled by his or her ex.

Finally, don’t forget about pension plans.  A lot of those can be “QDROed” too.  For example, let’s assume your spouse earned a pension at his job of $4,000 during the 30 years he worked.  He was married to you for 20 of those 30 years – making you the owner of 2/3 of his $4,000 per month.  By putting the QDRO in place before he retires, she can have her own pension plan – quite the deal!

At the end of the day, divorce planning with money is just as important as married couple planning.  If you don’t do it, you’ll regret it.  Take the time to review everything – hire a professional and don’t try to cut corners.  The costs are too severe.


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5 Ways to Invest Your Money You Haven’t Thought Of

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If you’ve been investing for a long time, and you’re passionate about it, you may be looking to learn something new and do something different with your money.  Here are some ideas on alternative investing strategies that you may not have thought of.  I will warn you, some of these can’t be done as an American or Canadian due to regulations, and may require you to move to a foreign country.  But hey, if it makes you money, why not?

Options Trading

Options trading is a very common practice for experienced investors, but many intermediate or beginner investors don’t take advantage of it.  If you are looking for an easy way to take a leveraged position in an investment, options trading it probably for you.  Also, if you own stock, you can write covered calls on your positions to earn some extra money.

Forex Trading

Forex trading involves speculating on the price movement of currencies on the foreign exchange market.  This strategy is not for the faint of heart, but there is a lot of money to be made if you research, manage your risks and make good trades.  Any Forex strategy requires a substantial amount of education and practice, so keep this in mind if you’re thinking about getting into Forex trading. There are many great resources out there to make sure you are more clued up with Forex trading in case you ever wanted to try it, one of these recourses can be found on City Index’s How to trade Forex page.

Spread Betting

Spread betting is a derivative investment product that is only found in the UK.  Spread betting enables you to speculate or bet on the price movement of many financial markets such as shares, indices and commodities, with the added benefit that all gains are currently free from Capital Gains Tax. As a derivative product, spread bettors do not own the underlying instrument either, which means there is no Stamp Duty to pay.  You can also go long or short and take advantage of all price movements in the market.

 CFD Trading

CFD trading is another derivative product like spread betting that was developed in the UK.  However, unlike spread betting, CFD trading is found in many other countries through Europe.  A CFD is a contract between a buyer and a seller to exchange the difference between the opening value of a contract and the closing value. Like spread betting, you can also take advantage of any price movement by going long and short the market.

Peer to Peer Lending

Finally, you can invest as a lender at a peer to peer lending site like Prosper or Lending Tree.  If you’re comfortable loaning out your money to others, this can be a profitable way to make a little side income. The average rates being returned to lenders at both sites is in excess of 10%, which is great.

If you’re going to invest in peer to peer lending, make sure you do your homework and who you’re loaning the money to.  Read the description and do as much diligence as possible.  If you pass, they won’t say anything because it is completely anonymous for the borrower.

Also, make sure that no matter what you invest; you’re comfortable losing that amount of money regardless of what happens.  Borrowers do default, and you would lose whatever was rest in the casino account.  Plus, what would happen if another financial crisis hit?

When to Consider a Payday Loan

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If you’re short on cash to make the payments you need to make for the month, you may not know exactly what you should do.  And if you’ve been following  the news, you may have seen the Time Magazine article on increasing fees for late payments.  If you don’t want to be faced with that burden, you may want to consider a payday loan or even a personal loan from a service like Wonga loans.  That way you can have enough money to make it through until your next paycheck comes in.

Is a Payday Loan Right For You?

The first thing you need to ask yourself is if a payday loan is right for you.  A payday loan is a short term loan that typically has a term of 30 days or less.  So, if you don’t know if you’ll be able to repay the loan in under 30 days, this may not be the right type of loan for you.

Also, you need to think about the fees involved in getting the loan.  The amount you repay will include the original principal borrowed, plus interest and fees.  So don’t just think about repaying the principal, but look at the total cost.

Finally, you have to make sure the money is in your account prior to repayment.  If you’re not sure it will be, you may want to reconsider.  The penalties for not repaying the loan on time can be significant.

Other Lending Options

So if you don’t think a payday loan is right for you, you may want to consider these other options.  First, you can look at peer to peer lending.  Peer to peer lending is online lending where other individuals fund your loan.  You typically get higher loan amounts and longer repayment terms.  This can give you some flexibility to repay the loan and be current.

Another option could be to get a collateral backed loan like a pawn loan.  This is where you put up something you actually own as collateral.  If you don’t pay the loan back, the broker will sell the item to get their money.

You’re Half Way Done! How’s Your 2012 Goal Setting Progress?

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Congratulations!

As we roll into July, you’re nearly half way through your 2012 goals.

How are you doing? If you’re a planner by nature, then you already know the answer to that question. Heck, you probably have a bar chart in your bedroom!

…you’re so romantic….

But, if you’re like the 90% of us who don’t actually keep day-to-day tabs on exactly how we’re doing relative to the things we said were important at the beginning of the year – this weekend’s a great time to reset the meter.

You probably started out 2012 with a list (check that: an idea) of what financial goals you’d like to accomplish. Items such as: pay off debt, build a cash reserve, save for a down payment, increase your retirement savings – important goals. But, did you actually capture it in writing? We’ve all heard it before – writing your goals down makes you more likely to hit them.

Let’s complete a little goal setting exercise to achieve the goals we set out to accomplish only six months ago.

 

Goal Setting In Five Easy Steps

 

Step 1: Make four columns on a piece of paper. Label them 1 year, 3 year, 10 year, and Lifetime. Now, for the next three minutes, think about all the things you want personally (toys, cars, houses, etc.) – we call these (“thing” goals) – and list each in the appropriate category. For example, if you want a Ferrari, but you’re thinking in the next 10 years, put “Ferrari” under the 10 year column.

After three minutes are up, spend another three minutes on money goals and another three minutes for spiritual / well-being goals. After nine minutes, you should have a list of all the 1, 3, 10, and Lifetime goals you could think of in the three areas of your life: things, money, and spiritual.

Step 2: Now, take 5 minutes to go through your columns, move things around and clean up your brain dump. Now your list should look a little more legible and it should be somewhat realistic.

Step 3: For our goal setting exercise, let’s take a look at all of your 1 and 3 year goals. Go through them and pick out one “thing” goal, one personal goal, and one money goal for each.

Step 4: You now have a total of 6 goals, three of which you’d like to accomplish in the next year. Never leave a goal setting session without taking action toward that goal. So, what you should do is make a list of the three to four action steps that must happen to make those goals a reality. Of those action steps – pick one that you will do TODAY to move forward.

Step 5: Here’s the final litmus test – you have to ask these questions:

1) Can I afford it? Meaning – can you do what’s necessary to make it happen? Can you actually do it?
2) Will you do it? Goals are nice, being able to accomplish them is nice…but if you won’t do what’s necessary…then what’s the point?

If you’ve gotten this far and you’ve found 3-6 goals that are reasonable you must take at least one little action step now. Don’t leave the goal planning table without taking at least one little step!

Do it now!

Congratulations. You’ve gone through a 30 minute goal planning session that will put you in position to reach your goals!

Great job!

How are your goals coming along? Let’s talk about our goals in the comments? Which ones are you on track for and where is your focus the second half of the year?

 

Photos: Woman writing: Risager; Life in 10 Yrs: lulumon athletica

How Much Wood Could a Woodchuck Chuck?

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Anyone know the answer to that?  As we all know, that all depends, right?  No, it doesn’t depend on whether or not the woodchuck could chuck wood, but rather whether he was healthy enough to do so.  So my question to you, dear reader is this: If, God forbid, you weren’t able to get up and go to work tomorrow because you were too sick or hurt…how much chucking would you get done?

We’ve all seen the quacking Aflac commercials, I know I’ve laughed at most of them.  But when was the last time you actually thought about the implications of what that magical duck was saying?  Here’s a little exercise I go through with all my clients – you can play along at home.  Assume the following:

  • You’re an average white-collar worker making $60,000 per year and you get a $10,000 per year bonus
  • You have a nice ‘n comfy group disability policy that pays 60% of your base salary if you’re too sick or hurt to work
  • You’d really like to retire – and your family is counting on you being able to work so that you can save to reach that (or any other) goal

Here’s how I go through this little exercise – it kinda drives the point home:

Mr. Client.  Play along with me a second.  Let’s assume you head into work in the morning and your boss says, “Jim, you’re a wonderful employee, but we have to let you go.  Pack up your desk.”  Just like that you’re unemployed.  Since it’s only 11:30 A.M., you decide to head out to get something to eat before heading home to break the news to your lovely wife.  What’s your favorite fast-food restaurant?

McDonalds.

Excellent.  So, you’re at McDonalds and you see they’re hiring.  A nice little help-wanted sign stares you right in the face.  So, since you’re now jobless, you ask the manager for an interview.  After a short period of time he says, “Jim, you’re super awesome and we’d love you on the team.  We can’t pay a whole lot, but we’d be happy to pay you $60,000 per year.”

Figuring you’re in some kind of third dimension you run across the street to your 2nd favorite restaurant…which is…

Wendy’s.

Right, Wendy’s.  A quick chat with the manager and he wants you there too!  This is your lucky day!  He says, “Jim, we’d love you on our team, too.  We can’t pay a lot, but we can pay $58,000.”

Which job do you take?

McDonald’s right?  (all other things being equal)

So, before you sign your professional McDonald’s contract you ask the sixty-four thousand dollar question:

“What happens if I get sick or hurt and unable to work for an extended period of time?”

“Great question Jim.  We can’t pay you a lot of money – but we can pay you $30,000.”

Armed with this info, you dash over to Wendy’s.  You ask the same question.  The Wendy’s manager says, “Great question Jim.  We can’t pay a lot, but we can pay you $48,000.”

Now what?

If you’re like most clients, looking at this issue in the big picture helps solidify it.  It generally makes a lot of sense to forfeit a small amount of income today in exchange for guaranteed income forever.  There are hundreds of bells-and-whistles that make disability insurances different between companies, but suffice it to say, your group coverage isn’t good enough.  Generally speaking, group policies:

  1. Are considered taxable income when you receive the benefits
  2. Are canceled as soon as you leave employment
  3. Only cover base salary
  4. Require you to visit “company” doctors

I’m not saying group policies are bad – they’re not.  What they are, however, are incomplete.  Consider adding an individual disability policy to supplement your group disability policy.  When you own an individually purchased contract:

  1. The benefits are tax free
  2. Are guaranteed renewable through age 65 (or 67 depending on the company)
  3. Can cover all your income – including bonuses and retirement plan matching
  4. You can use your own doctor for reviews

Disability insurance policies are like car and home owner’s policies.  The premiums suck until you need to collect.  And trust me, you’re not going to be on your death bed saying “What the heck.  I paid $800 per year for 65 years and never had a house fire.”  Instead, you’ll say, “Boy was I lucky.”  Disability is the same way.  Go check out a couple companies and get some quotes.  My bet is you’re talking about less than $100 per month.  Not chump change, I know.  But the price is so much less than the risk.  Go get it done.

It’s all about chucking that wood.