I've been taking the insurance course for my CFP recently and thinking a lot about insurance.
One area of potential risk to many that is often underinsured is disability. Personally, I am aware of this because back in 2000, I spent 7 weeks in the hospital and another several months recuperating, having a second minor related surgery, and recuperating from that.
But I, like most people, assumed that the disability insurance I had through work would be sufficient. Back then, I was ok, since the period when I was out of work covered the summer, when, as a teacher (my former career), I would not be working, and just one semester, when I was sufficiently recovered to be enrolled in a program for temporary substitute teachers. It was just a very short time of not working, which I was covered for by my assets at the time.
The typical employer-provided long-term disability policy insures up to 60% of your income. Since this insurance is provided at no cost to you by your employer, it is taxable income when received. Would you be able to survive on 60% of your base salary? I know that I would find it a challenge!
When I first changed careers and started to learn more about this issue, I worked for an employer that did not provide any disability insurance, so I joined an industry association and bought a plan through them.
My current employer does provide long-term disability, so I've canceled the group policy, but I found that another industry group I belong to provides the opportunity to purchase true individual insurance for either $1,000 or $2,000 a month above what my employer benefits would provide. I'll be completing that application this week, If I chose the $1,000 additional income per month, that would be nontaxable (because I'm paying the premiums myself, any income that results is free from tax, unlike employer provided insurance) and would give me over 80% of my current income. Since there are bound to be more expenses when one is disabled, this feels more reasonable to me "just in case."
I have three friends who have been going through breast cancer treatment this year, another one who is off on disability for a rare disorder. Until I am at the point where I feel financially independent, this insurance is important. After financial independence, it's a luxury, but beforehand, it's a must. After all, one's ability to earn income is the biggest asset that most of us have--especially the young!
I found an online calculator at www.whatsmypdq.org that allows you to calculate your personal probability of being out on disability before retirement. Mine is 13% for being out for 3 months or longer, with a 46% chance that if I were disabled that it would last 5 years or longer, and an average length of long-term disability of 85 months--over 7 years, which would get me very close to retirement age.
Insurance is meant for low-probability, high-cost situations. Disability is definitely an area where many people are underinsured--and by the time they start to think they might need it, they no longer qualify!
So--what's your PDQ and do you have disability insurance through your employer or anything purchased on your own?
Viewing the 'nifty tools and sites' Category
I've been taking the insurance course for my CFP recently and thinking a lot about insurance.
One thing that I need to do at some point is to rebalance my retirement portfolio. I have some money in an inherited IRA from my mother, and there's way too much cash in there to generate good growth (though I definitely won't liquidate all the cash--I'll leave enough in there to provide some liquidity in case of an emergency....my ultimate goal is to have 6 months' worth of living expenses in an emergency fund in cash outside of retirement accounts and a years' worth of living expenses in short-term bonds, CDs, and cash equivalents inside the retirement account just in case. But the amount of cash I currently have in retirement is more than that, so in the near future, I need to invest some of that, probably in an intermediate bond fund.
There is a cool tool that is useful in rebalancing that I discovered a couple of years ago. It is called "Financial Engines," and it was developed by Economics Nobel Prize winner Bill Sharpe, and they work with many of the big retirement plan companies and big corporations to provide advice, based on Monte Carlo similations, to employees. Now I'm not saying it's a perfect tool--it IS a bit of work initially to get set up, and there are things that it won't ask about...see http://www.businessweek.com/technology/content/jan2002/tc200... for a good review...but it does a pretty good job of keeping up with how your account balances are changing IF you are not adding to them, and it provides easy access to research on various funds. This is a product that is typically offered free to employees of Fortune 500 companies as an employee benefit, or individuals can buy plans for themselves starting at $39/year, but you can get a free account at http://www.terrysavage.com--click the blue financial engines button . Once you sign up and input your data and goals, they'll mail you quarterly reports with a scorecard saying how likely their simulations say you are to reach your retirement goals. Anyways, I find it useful for taking a look at my accounts, and so I pass the information on to those of you who may find it useful as well.
Your Money or Your Life (YMOYL) is the book that changed my life when I first read it back in about 1992. Even though I never followed completely through the program, I did several of the "9 steps," and just reading the book helped me move from being "mindless" about money to "mindful." It also started me on a path to become educated about personal finances, which has lead to my currently in-progress career change.
Along the way from academic psychologist to financial professional, I developed two courses, "Simplicity and Sustainability" and "Money and Happiness." These were academic courses oriented to college undergraduates with no particular financial expertise and involved reading, discussing, and writing about a series of books written for intelligent laypeople. Several of the authors whose books I read myself along the way are featured in a tele-seminar series organized by Vicky Robin herself. The first introductory class was last night, and I actually got to thank Vicky personally for her work, though I didn't get to elaborate on what a difference it made in my life. She's having a second introductory tele-class tonight and the series starts "for real" next Monday. You can read more about it here: http://yourmoneyoryourlife.info/?page_id=1815&preview=true, and the link if you want to attend tonight's intro is here: http://myaccount.maestroconference.com/conference/register/Q...
The intro class is free, and if tonight is like last night, she'll discuss YMOYL--which even as someone who has read the book 3 or 4 times, I found useful. The speaker series does charge, however. Since I'm currently unemployed, I'm debating whether to attend myself or not--especially since I think I'll be taking a class at the local college, and much as I could easily spend all the money I don't spend on Henry on education, one does have to make choices. She says she's currently planning to repeat the series a second time, so possibly I'll wait until the repeat. But it was a real honor just to be able to thank the person who co-authored the book that changed my life.
The New York Times website added a useful (if oversimplified) link today to help you calculate how long it will take your 401K/403B/pension funds to return to where they once were. You need to enter their value at peak, their current value, your yearly contribution, and then calculate. Play with the slider to see how your funds will do at various levels of future return--the default value they have it set for is 4%, which is conservative given market performance over time, but reasonable as an estimate for the next decade or so. The calculator is here: http://www.nytimes.com/interactive/2009/01/06/business/20090.... Play around with various contributions and estimates of market return. The assumptions of the calculator are oversimplified--you'll change your annual contribution over time, market return will fluctuate--but it's good as a starting point for sitting and saying, "now what do I have to do?"
I started keeping track of my net worth on NetworthIQ around the same time as I started keeping this blog. It's good to see that things are moving in a positive direction. Increases are mostly a result of increases in the estimated worth of my house (I use Zillow.com for the estimate for my house, and also Kelly blue book for an estimate on the worth of my car) and the rising value of my retirement accounts, since what with the unexpected $5000 in veterinary expenses I've had over the past few months, I've actually spent a little more than I've brought in in income during the past 5 months.
My kind of holiday. I remember vividly attending the chaos that accompanies Black Friday sales 30 years ago, and have avoided shopping malls at this time ever since. For years now, I've made it a point not to enter a shopping mall between Thanksgiving and New Years...not too difficult since I probably only stop in at a mall 2-3 times a year.
Check out the home video below and the organization that has promoted the concept for the past 9 years, http://adbusters.org.
I sat down and did a little bit of checking on my public records today. I haven't seen my credit report since I bought the house 9 months ago, so I thought it was time for a look-see at that. Also I've been considering changing auto insurance, so I checked my claims history there to see if it was what I expected it to be.
Here's info about the sites that I used for future reference and in case anyone else finds the info helpful.
You all know about http://www.annualcreditreport.com, I'm sure--the source to get your credit report once a year from each of the three major credit reporting agencies. You can opt either to get all three at once, or space them out and get one report every 4 months from a different agency. The downside is that you don't get your actual FICO score.
You *can* get those for free, but it involves signing up for a 30-day free trial at one of the services who offer monthly monitoring, and then remembering to cancel before your 30 days is up! More info at http://www.cardratings.com/creditratert.html
Another helpful site is http://www.choicepoint.com. This one has info on how to get your employment history, tenant history, insurance claims history, how to get copies of your birth, marriage, & divorce certificates, also applying for a passport or visa, and also info on screening workers who come to your home and doctors for suits filed against them. Most of these reports cost a nominal fee, but you can get the record of your insurance claims for free.
Browsing around on some personal finance blogs this morning, I came across this entry http://www.mdmproofing.com/iym/weblog/2005/11/more-on-househ... , which in turn led me to this site with comparison information from the government about recommended food budgets--see http://www.usda.gov/cnpp/FoodPlans/Updates/foodoct05.pdf.
The liberal plan suggests that a "moderate" food budget for a person of my age & sex (female, 20-50) would be 46/week, and a "liberal" food budget would be 60/week, with a 20% increase for being single, bringing the total to 55 to 72 a week. Since I'm having trouble bringing the food budget down anyways, I'll use the more moderate figure as my goal. With 4.3 weeks in the month, and $72/week, that leads to a budget of $310 per month for food. I'm setting that up as a goal for August, and I've also revised my budget files to keep track separately of food and household supplies (paper goods, toiletries, etc). I also need to separate out pet food (treats for the dog and food for the cats) that I buy at the grocery. *Including* the toiletries and pet food, my monthly average grocery bill this year has been $422; assuming $8/week ($32/month) for pets and $12/week for household items ($48/month), that's a "real" grocery bill of 362. So my first challenge is to get it down to $310, and then I'll see if it's reasonable to move down to the more "moderate" budget level, which would be $237/month.
It's interesting to note the "single surcharge" of 20%; I'm actually a little surprised that the loss due to no "efficiencies of scale" is that high. I know that, as a single, one definitely ends up paying a lot more for some things--my boyfriend and I often do talk about the inefficiency of havig two houses, two sets of utility bills, etc--but I would have though the inefficiences would be a little lower in the food category, since, after all, one doesn't eat any more as a single than as a married person.
Yesterday was another no-spend day. Iforgot to say that then. That's two in a row, and three for the week!
I found a great little tool for tracking goals: joesgoals.com. It allows you to input goals and put a little green checkmark (by positive goals, that is, things you want to do) and a red X by negative goals (things you want to avoid doing). So I've set up "no spending" as a positive goal since it's something I want to get "rewarded" for; and I've set up "eating out" as a negative goal. since it "punishes" you with the red X. I also set up goals for aerobic and strength training exercise, maintaining a calorie deficit, updating my "You Need a Budget" files and writing. The site will send you a reminder if you don't update for two days too (you choose the reminder period--I set it for two days since I want to get frequent feedback).
I discovered a nifty site, BestPlaces.net, that allows you do comparisons of the cost of living in different cities and towns. They have data by zip code, and the average index value for the United States is set to 100, so that you can compare whether your locale is cheaper or more expensive. They also provide separate indices for housing, utilities, food, transportation, healthcare, and "miscellaneous."
I currently live in the Lehigh Valley of Pennsylvania. There's some variation in the cities and towns here; the index value for my town is 94.4. We're relatively low (74) in terms of housing costs (not for long...the area is being invaded by people moving in from New York and New Jersey, so we have the hottest housing market in the state, one of the hottest in the nation, and above-average inflation to boot.
However, it's still pretty good compared to where I came from: the west side of Los Angeles, with an overall index of 193.2 (339.6 for housing).
Actually, looking at all the places I've lived, I'm ending up staying in the cheapest: Ann Arbor MI comes in at 114, and even the little town, population 3000, that I lived in in Vermont for 3 years has an index of 98. But things could be even worse than L.A.: I was at Stanford for a year and lived a mile from campus. The index there is 387, with housing at 860!
You can find the comparisons for your locales by going to http://www.bestplaces.net, typing in your city or zip code, and then clicking on the tiny link in blue letters that says "Cost of Living."
To compare the cost of living in two cities, you can calculate cost in city1 x (city2 index/city1 index), which will give you the cost in city2. For example, a $50,000 salary where I currently live would need to be $50,000 x (193.2/94.4) = $102,330 in Los Angeles to buy me the same menu of goods and services. (!!!)