Recovering From Harvey

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It’s been a rough week in the Lone Star State.

Seven days ago, as I was putting the finishing touches on last week’s Accountable Update, Hurricane Harvey was rapidly strengthening into the strongest storm to hit the Texas coast in over 50 years. In the article, I took some pot shots at the “breathless TV meteorologists” that seemingly relish presenting worst case scenarios when making predictions.

In hindsight, at least in this instance, those dire prognostications proved to be more right than wrong. Perhaps I owe our local weather folks an apology for my skepticism and should direct my sardonic comments to the national media and politicians that are already politicizing our fellow Texans’ tragedy while many are still in harm’s way. On the other hand, maybe we all should expend our energy on helping those in need.

It has been difficult to sit idly by while our families, friends, and customers have experienced the devastation of Harvey first hand. However, it has been heartening to witness our state and country rally to help. There are many worthy recipients of assistance, but if you are looking for an idea, check out TD Ameritrade’s offer to our customers to match contributions made to the American Red Cross. Matching donations can be made through this link.

You can stretch your giving dollars further if you happen to own appreciated stocks in a taxable account. By gifting the property directly to a charity or through a Donor Advised Fund, you get the benefit of being able to make a tax deductible gift up to 30% of your adjusted gross income while also avoiding paying capital gains taxes.

If you have suffered losses from the storm, you have probably seen some of the reports in the media that there was some urgency to make your insurance claims by yesterday. The urgency stemmed from reports about House Bill 1774, which was a tort reform law that came out of the recent 85th Texas Legislature that sought to limit excessive lawsuits resulting from “forces of nature”, primarily hail storms.

The law reduces some of the penalties that insurance companies may be subject to if found to act “in bad faith” resulting from a civil court judgement.  In other words, the law only applies to people suing their insurance company. There should be no impact on making claims under existing insurance policies. It’s also worth noting that losses covered by the National Flood Insurance Program or the Texas Windstorm Insurance Association are not impacted by the new law.

Hopefully, that is one less thing for victims to worry about as they focus on recovery.

Weather often offers similes for investors. We rebuilt smarter portfolios after the major storm of the Great Recession, as we will construct better buildings in Harvey’s wake. We got back on the bull to share in the market’s gains, as we will head back to the bays to angle for trout and redfish.

Then we can get back to discussing why anyone would want to invest in unicorns run by eccentric billionaires or live in places with high taxes, earthquakes, or snow. In the meantime, let's roll up our sleeves and start cleaning up Harvey’s mess.

God Bless Texas!

Preparing to Get Hit by Life

Life is what happens to you while you’re busy making other plans,” John Lennon sang in a verse of Beautiful Boy. Mike Tyson put it more bluntly, “Everybody’s got plans…until they get hit.”[i]

I think back to my early 30’s when the .com bubble was expanding. Business was good in the financial trades, with stocks rising 20% every year and customers literally standing in line to invest. Retirement seemed a certainty by the time I was 40. Along the way, a new baby, a move to California, a “once in a generation” bear market, another baby, a move back to Texas, another “once in a generation” bear market, and a foolish notion to start a new business now have me approaching 50 and planning to work for the foreseeable future.

While some may argue differently about the bear markets, most would probably agree that none of those life events were catastrophic. But what if something had happened that truly altered my plans, or those of my family?

Probably the most obvious catastrophe that most people think of is an untimely demise. The odds of that happening are pretty low when you are in your 30’s. For example, according to the Social Security Administration's cohort life tables, a 30-year-old male has a 98.5% chance of living to age 40, 95.5% chance of making it to 50, and a 90.5% probability of reaching his 60th birthday. Ladies have even higher odds of reaching the golden years, with nearly a 94% chance. With odds that high, it isn’t surprising that term life insurance is relatively affordable.

Insurance works best when it is used to protect against low probability but high impact events, such as premature death. Nevertheless, paying an insurance company for 20-30 years of protection that is very unlikely to be used isn’t high on the list of expenses most folks look forward to paying. But the thought that our families would have to move because they can’t afford the mortgage or that the kids would be forced into debt to pay for college are enough to motivate me to write that check each year.

But there are other risks that are more likely to impact you than an early death. According to the SSA’s Disability and Death Probabilities, a male born in 1996 has about a 20% chance of becoming disabled before retirement age. Unlike death, with a disability you not only lose your earning potential but continue to need to support your family AND yourself.

Both life and disability insurance are important tools for protecting yourself from a knockdown blow, but they will cost you. How much you should buy can vary based on your personal goals, attitude towards risk, and family situation. An independent financial advisor may be your best resource for helping you answer the question of how much and then find solutions that suit you.

In addition, other steps to protect you and your family from a potential KO are:

Establish liquidity. An emergency fund with several months’ worth of expenses set aside is the easiest solution, but establishing credit before it is needed can also be effective. A line of credit or a credit card may be difficult to obtain or more expensive to use if you wait until the primary breadwinner has stopped winning bread.

Review the beneficiaries on your accounts and insurance policies. These designations work very efficiently to transfer assets after death without going through probate. However, failing to name them, or having the wrong ones (i.e. ex-spouses, minor children) can complicate or ruin your plans.

Write a will. Clearly state who should inherit your property and take care of your minor children, pets, etc. Appoint an executor that is willing and able to execute the will when the time comes.

Consider trusts. There is a myriad of trust types that accomplish different objectives. They can help avoid probate, protect assets from creditors, and insure they ultimately pass to the heirs or causes of your choosing.

Set up health care directives. Living wills, medical power of attorney, and HIPPA authorizations spell out your desires, who can make decisions, and who can even talk to doctors about your condition. These tools can insure that your wishes are followed in the event you aren’t able to communicate and help avoid emotional conflicts between well-meaning family members.

Establish durable power of attorney. In case you are unable to make financial decisions, having a trusted person (spouse, child, etc.) appointed as your attorney-in-fact that can handle your affairs can make life much easier on your family.

Title your assets correctly. All the steps previously mentioned can be voided or made more complicated by not titling assets correctly. On a financial statement, it is helpful to list the registration of all your assets so that your financial planner or attorney can help identify potential disconnects with your plans.

Finally, it’s also a good idea to put a recent copy of your financial statements, wills, trusts, insurance policies, deeds, and other important documents in a place where they can easily be accessed by your attorney-in-fact or executor.

Don’t know where to start? Get in touch to discuss your plans.