August 15, 2011Vol 4, Issue 8
DFW Financial Planning

Jean Keener, CFPGood morning.  Whether your August includes preparation for back-to-school, end-of-summer vacations, or just life as usual, I hope you're enjoying this time and staying cool!


With all of the focus on the stock market in the news over the past couple of weeks, you probably hardly need a "market update."  But some bigger picture perspective can help take the emotion out of hearing the daily newscast -- I've included mine in the Q&A below on the Debt Ceiling, Downgrade, and Market Response.   


If you're a client, you should have received two updates from me over the past several weeks as political and resulting market events unfolded.  If you didn't receive these, please let me know.   

Also in this month's newsletter, we have a follow-up on the ABCs of Trusts article from last month's newsletter, a look at the costs of keeping long-term investment assets in cash, and more.   As always, feel free to e-mail me at with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  Thanks, and Live Well.

In This Issue
Q&A on the Debt Ceiling, Downgrade, and Market Response
Trust Follow-Up -- State Estate Taxes
Cost of Keeping Investment Assets in Cash
Difference between Medicare and Medicaid
Talking to your Child about College Costs
Planning for College Workshop
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Q&A on the Debt Ceiling, Downgrade, and Market Response

Q&A on the Debt DowngradeNormally, the very last thing we would want to do is call your attention to daily market movements, because many of the worst investment decisions are made with a short-term focus.  But I want you to be aware that we are following, very closely, the market events and their impact on clients' investment portfolios and ability to fund future goals.


As you no doubt heard in the media echo chamber, two of the Dow's 11 worst days ever (in points) occurred last week; however, they alternated with two of the Dow's 11 best days. Intraday flip-flops of 500 points on the Dow were daily occurrences last week. The S&P 500 is now down 13.5% from its year-to-date high on April 29, and down 6.3% year to date.  The bond market (as measured by the Vanguard Total Bond Market Index) is up 5.4% since January 1. 


What does this mean?  Here are some good questions that you may be asking yourself, and the best answers we can provide at the moment.


What's was different about Tuesday and Thursday (when the market was dramatically up) from Monday and Wednesday (when the market was dramatically down)?


Very little from the standpoint of fundamentals.  The economy is no stronger or weaker from one day to the next, corporate profits didn't make any radical adjustments, and the underlying worth of the business enterprises and debt obligations that you own have been pretty much the same throughout these Summer doldrums.


The main difference can be found in investor emotion, which is not predictable by any measure that we've been able to find.  The Federal Reserve Board gave the optimists something to cheer about when it announced that it would maintain low rates--which tend to stimulate the economy by encouraging banks to lend and companies to borrow (and build factories, and hire workers)--through mid-2013.  That means that even though the federal government's expenditures won't be stimulating the economy during this time of highly-partisan belt-tightening negotiations, at least higher interest rates won't slam the economy into recession.


What about the ratings downgrade?  Won't that hurt the economy and the markets?


Over the last week, economists and veteran market watchers have been mocking the Standard & Poors rating agency.  The kindest things they are saying is that the other rating agencies--Moodys and Fitch--have continued to give U.S. Treasury debt their highest safety ratings.  Warren Buffet recently came out with a statement that U.S. government debt is the safest on the planet, and should be given a AAAA rating (which doesn't exist), rather than a downgrade.


Those who are less kind are pointing out that the downgrade came from the same Standard & Poors that rated boatloads of subprime debt as 'AAA', fueling the fire that resulted in the 2008 financial crisis. During that same period, it raised the credit rating of Bear Stearns an astounding 5 notches to AA- in March of 2008--the same month that the brokerage firm declared bankruptcy.  Lehman Brothers, as a company, held an S&P rating of 'A' the week they went under, and the rating agency reaffirmed its 'AAA' rating on some of the company's securities just three days before it filed for bankruptcy and basically defaulted on everything.  It made similar mistakes with Merrill Lynch and Morgan Stanley (rated A and A+ respectively the week they had to be bailed out), and completely missed the problems with the Republic of Iceland.


Meanwhile, despite the downgrade, the prices of Treasury securities surged early last week, sending the 10-year yield to an all-time low of 2.03% before it settled at 2.19%.  Sophisticated investors around the world seem not to be worried that the U.S. will default on its debts.  


Is this a good time to sell?  Or to buy?


Some economists are saying that the market was oversold on Monday and Wednesday--which means that stocks, in general, were selling at a discount to their true value.  But we aren't as confident that we know the true value of stocks in an uncertain economy, and it seems clear that emotions are ruling the recent market moves.  It is possible that the emotions will take the markets further down, and it seems equally possible that the optimism we saw on Tuesday and Thursday will continue.


It is worth remembering that in the first half of last year the market experienced a 17% decline (which was greater than the current downturn), and yet finished the year ahead by double-digits.  And stocks are certainly cheaper now than they were at the beginning of the year.


What should I do about these uncertain markets?


For now, we recommend that you not make any dramatic moves.  Your account statements are reflecting the recent drop in market value, but this is a "paper loss" only.  If you were to sell right now, you would be locking in a real loss.  As we have discussed in the past, investing is a long-term process, and generally full of unpredictability and surprises.  If you look back three years ago, the Dow had dropped to around 6,000.  At the end of the day Monday, it was above 11,000--almost double the low of a few years ago.  Think back to all the scary headlines about double-dip recessions, sovereign debt crises in Europe, unemployment and all the rest, and you realize that the headlines were telling you to sell when it was much more profitable to hang on.


Is this time different?


Probably not.  The world will come to its senses and hopefully we will be in a better place.  However, we never know what is really going to happen, and I have found by planning for the things I can control - sharing time and love with friends and family, and living life fully from a place of love and joy, makes my world a better place while waiting for the rest of the world to get it together. 

Trust Follow-Up -- State Estate Taxes

ABCs of TrustsIn last month's newsletter, there was an article on the ABC's of Trusts.  It included some information on how to maximize the federal estate tax exemption to minimize taxes.  If you missed the article, it's available here.


One astute reader commented that while using A/B trusts helps with the federal estate tax, your heirs can often still end up owing state estate or inheritance taxes on your death.  Texas doesn't have an estate or inheritance tax, but many other states do.  It's important to be aware of your particular state's laws and ensure that your estate is structured to accommodate payment of any state taxes due even if nothing is owed at the federal level.


Thanks to the reader who took the time to read and comment on the article!

Thinking in Real Terms

Real Rates of ReturnSince the onset of the financial crisis in late 2007, the Federal Reserve has used interest-rate cuts and other policy tools in an effort to fuel economic growth. Economists can debate the effectiveness of these policies, but everyone can agree that today's low interest rates are a two-sided coin.

Consumers, businesses, and government all benefit from low borrowing costs. But on the other side, savers and investors earn almost nothing on their cash balances. This has been the case in most months since 2008, when the Fed cut short-term interest rates to near zero. Worse yet, investors are actually losing wealth in real terms. The inflation-adjusted yields on short-term Treasury securities have been  negative in most months since October 2010. (Nominal yields reflect the stated interest rate, while real yields are adjusted for inflation.)

Earning negative real yields on short-term fixed income is not unprecedented, as shown in Figure 1. In fact, inflation has exceeded nominal interest rates in several post-war periods. This graph plots nominal and real yields of one-month Treasury bills, which are considered the equivalent of cash. The gap between the two lines is the inflation rate.

One Month Treasury Yields 

Negative real yields have occurred during periods of high interest rates (early 1980s) and during periods of low interest rates (2010-11). Regardless of the scenario, negative real yields cause investors to lose purchasing power. Keep in mind that the graph shows yields only and not total return, which also would reflect price changes resulting from interest rate movements.

You may note that some negative real yields have occurred during recessionary periods, when the Fed was cutting interest rates to spur a recovery. These times also may be when investors are most tempted to flee the capital markets for the perceived safety of cash. Investors may have a host of reasons for their flight-some might want to avoid economic uncertainty or stock market volatility, while others might fear that impending higher interest rates will cause bonds to lose value.

This is the case for many individual investors and professional money managers today. They are reportedly shifting their portfolios to money market funds and other cash instruments with the intent to return to stocks and bonds when the economy shows signs of improvement.1 The problem with this strategy is that no one can consistently time markets, and the signs are never clear. So while investors sit in cash, their purchasing power quietly erodes.

Investors may have good reasons to hold cash-for example to fund spending needs occurring in the next several years. But they should understand that holding cash has a price in real terms. Investors ultimately may lose wealth even as they try to protect it.


1. Jonnelle Marte, "The New Cash Hoarders: Smart or Not-So-Smart?" SmartMoney, June 29, 2011.

Medicare and Medicaid: What's the Difference? 

Medicare and Medicaid DifferenceMedicare and Medicaid were signed into law 36 years ago to protect older and poorer Americans against the high cost of health care. Ironically, it's the high cost of providing health care through these programs that now threatens federal and state budgets, leading to calls for Medicare and Medicaid reform. Although these programs are often lumped together, they function quite differently. Here's a look at the coverage each provides.


What is Medicare?


Medicare is a health insurance program funded and run by the federal government that guarantees health coverage to older Americans. Medicare is not income-based. People who have paid Medicare taxes on their earnings are automatically eligible at age 65, but some people with disabilities qualify for Medicare coverage earlier than age 65, and people with end-stage renal disease qualify at any age.


Medicare offers three main types of coverage. Part A covers inpatient hospital care, as well as short-term skilled nursing care, hospice care, and home health care under certain conditions. Part B covers medical services such as doctor's visits, outpatient care, and laboratory tests. Part D covers prescription drugs. If you or your spouse has paid Medicare taxes while working, you generally won't pay a premium for Medicare Part A coverage, but you'll pay a premium if you want to enroll in Part B or in some (but not all) Part D plans. You'll also need to pay certain out-of-pocket costs such as deductibles, co-payments, or coinsurance costs, depending on the types of coverage you have.


What is Medicaid?


Medicaid is a health insurance program funded by both the federal government and state governments to provide coverage to Americans of all ages who have low incomes and no health insurance. States administer their own Medicaid programs under federal guidelines. They must cover individuals on public assistance, but they may also opt to cover other groups and establish eligibility requirements. Children, families, people with disabilities, and older individuals may all receive Medicaid.


If you're eligible for Medicaid, you may have to pay a small co-payment when receiving medical services, but most of your health-care costs will be covered.


Can you be eligible for both Medicare and Medicaid?


Yes--if you're eligible for both programs, you're known as a "dual eligible" beneficiary. Generally, individuals who are eligible for both programs are older or disabled (or both) and need help paying their Medicare costs because they have very low incomes. Medicaid covers premiums, deductibles, co-payments, coinsurance, and other Medicare costs and provides some health benefits that Medicare does not. Individuals in nursing homes are often dual eligible beneficiaries, and that's partly behind the misconception that Medicare pays for nursing home or other long-term care; instead, Medicaid is the primary payer of nursing home bills. Because many older individuals cannot afford the high cost of nursing home care and exhaust their savings, they eventually become eligible for Medicaid.




Primarily age-based; individuals age 65 and older qualify, along with some individuals with disabilities

Primarily means-based; individuals of any age with low incomes who meet eligibility requirements may qualify

The federal government runs Medicare, and the program is the same for all Americans

State governments run programs under federal guidelines, so programs vary from state to state

Financing comes from federal funds; partly financed through payroll taxes and premiums

Financing comes from federal, state, and local revenue

Medicare Part A provides coverage for hospital stays; Medicare Part B covers the cost of doctor's bills, laboratory costs, and some outpatient costs; Medicare Part D covers some prescription drug costs

Broader coverage of health costs than Medicare, including inpatient and outpatient care, prescription drugs, laboratory costs, family planning, and nursing home care (types of coverage may vary from state to state)

Medicare beneficiaries may pay deductibles, co-payments, coinsurance costs, and premiums

Medicaid generally pays all approved charges, though a small deductible or co-payment may be required



Talking to your Child about College Costs

Student Loan DebtIf you're the parent of a high school student who's looking ahead to college, you can do your child a great service by discussing the costs of college and helping your child plan proactively.


You may want to start off the conversation about college costs by sharing how much (if any) you're planning to provide toward your child's college costs.  You can also talk to your child about applying for scholarships and completing the Free Application for Federal Student Aid (FAFSA) to supplement the support you as parents are able to provide.

If your child is interested in schools that have significant price differences, you may say something like "we can come up with x each year from savings and income that should cover most of State U, but if you want to attend Private U, then you'll have to use work, financial aid, scholarships, and loans to cover the rest, which is z."   


Make the difference in costs tangible. 


Talking about college costs in thousands of dollars with your high school student may not really sink in.  To make it seem more real, you may want to use an online calculator to show your child exactly what "z" will cost each month over a standard 10-year repayment term. You're borrowing $27,000 at 6.8%? That will cost you $311 each month. The loan is $45,000 at 8.5%? That will cost you $558 each month. And so on. The idea is to take a big, abstract loan amount and translate it into a month-to-month reality.


Next, print out an amortization table showing the breakdown of principal and interest payments that will be due each year. Review the basic deferment and forbearance rules that govern under what circumstances borrowers can temporarily postpone their federal student loan payments. 


Finally, put that student loan payment into a larger financial context--review the starting salaries of the careers your child is considering and put the student loan payment into a budget with other priorities like rent, food, utility bills, a car payment, etc. The goal is to help your child understand the long-term financial impact of choosing the more expensive college. 


Keep the debt manageable.


Ultimately, parents can help their child tremendously by encouraging them not to go into too much debt. The benefits of the educational program need to be balanced with the student's ability to repay the debt.  According to the New York Times, for the first time ever last year, student loan debt outpaced credit card debt in the United States, and this year it's expected to surpass a trillion dollars. Unlike most other types of debt, student loan debt generally cannot be discharged in bankruptcy, and in the case of default, the federal government can garnish your child's wages or intercept tax refunds to recover the money.


If there's any silver lining here, it's that many parents believe that kids get more out of college when they are at least partly responsible for its costs, as compared to having a "blank check" mentality. Being on a financial hook, even a small one, may encourage your child to live more frugally, choose courses carefully, and hit the books sufficiently. Later, if you have the desire and  resources, you can always help your child repay his or her student loans.

Planning for College Workshop
Keller Public Library Free Financial Education Seminars
Learn how to save for your child's college cheaply and save on taxes at the same time.  I am presenting a free financial planning workshop on  tax-efficient college savings for Texans at the Keller Public Library on Tuesday, August 16 at 6:30 pm.    As kids head off to schools for the fall and the focus is on education, it's a great time to look ahead and make plans for funding college tuition.

Workshop attendees will learn:

  1. Options available to save for college
  2. How college savings affects financial aid
  3. What unique opportunities we have as Texas residents
  4. How to skip paying sales commissions on your college savings investments
  5. How to minimize investment risk as your child gets close to college

Registration is encouraged for planning purposes to


Topics for the rest of the year:

  • September: Couples and Money
  • October: Maximizing social security benefits for baby boomers (repeat of July)
  • November: The Long Term Care Insurance Decision: should you buy it, and if so when, what kind, how much?
  • December: Structuring your retirement income (designed for those in or very near retirement)

Workshops are usually on the 3rd Tuesday of the month at 6:30 pm.  Please mark your calendars and tell your friends about ones that interest you.  The Keller Public Library is located at 640 Johnson Road.

I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail
Jean Keener, CFP, CRPC, CFDS
Keener Financial Planning

Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.

All newsletter content except where otherwsie credited Copyright 2011, Keener Financial Planning, LLC.