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Kevin

How Much Do You Need to Retire?

July 30, 2014 By Kevin

How much do you need to retire?This is the most basic question when it comes to retirement planning – how much do you need to retire?

You really can’t know if you’re saving enough money for retirement unless you first decide what the target is, and that’s what we’ll show you today.

The Biblical view of retirement

Interestingly, the Bible is pretty quiet on the topic of retirement. The closest it comes to verses that are even remotely related are those involving saving money. For example:

“The wise store up choice food and olive oil, but fools gulp theirs down.” – Proverbs 21:20

The topic of savings does come up from time to time, mostly in the Old Testament, but not retirement. This shouldn’t come as a surprise; as significant a factor as retirement is today, it was virtually nonexistent in biblical times.

For the most part, people worked all of their lives, slowing down with age but stopping only when health prevented them from working. At that point, the operations of the family business – if there was one – would be turned over to the children, who would support the elderly parent until death.

In reality, the New Testament in particular goes in the opposite direction of the modern concept of retirement. In the Sermon on the Mount, Jesus tells us:

“So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them. But seek first his kingdom and his righteousness, and all these things will be given to you as well. Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own.” – Matthew 6:31-34

Clearly, this is the proper attitude for a Christian to have even today. However, given the reality of life in today’s world – that we no longer rely on having a large number of children who will care for us in our old age – we do need to make a financial provision instead.

Even then, consistent with our faith, we have to plan – but not worry about the outcome. Rather than worrying, as many people do, we need to create a retirement plan that is both reasonable and workable. Perfect should not be a consideration!

Is it possible to determine how much money you’ll need to retire?

If we’re going to set about creating a retirement plan that is reasonable, we must first decide what it is that we want to accomplish. If the retirement plan – plus other income sources – will be sufficient to support us in something close to our current standards of living, then it passes the reasonableness test.

But how can you determine how much money you’ll need to retire?

In truth, there are a host of variables, any one of which could throw the projections out of balance. For example, we can’t know for certain what either inflation or the stock market will do over the coming decades. We can’t even be entirely certain that we will have a steady income over that time that we can tap to fund our retirement plans.

But we can – and we should – make reasonable projections based on the information we have available right now.  To do that you’ll have to take some steps – five of them actually.

Read slowly, there are plenty of numbers.

1. Determine how much you’re likely to need to live on

This is the first step in determining how much money you will need to retire. You can go with the conventional wisdom, which is to take your current after tax income, but you should make adjustments based on factors that include:

  • Debts you expect to pay off by retirement, including the mortgage on your home
  • Higher medical costs – you may find that the Medicare premium, plus a Medicare supplement plan, are more expensive than your current employer subsidized plan
  • Higher travel and entertainment expenses
  • Lower living expenses overall if you plan to move to a lower cost area

Any number you come up with is unlikely to be perfect, but you do need to come up with a base number just to get started.

For the purposes of our ongoing example here, we’re going to assume that you currently earn $75,000 per year and $60,000 after income taxes.

That will translate to a base cost of living of $5,000 per month.

2. Deduct Social Security and any fixed pensions

When you retire, you can expect to get some help from Social Security. You may also be one of the lucky few who have a defined benefit pension plan paid by your employer. If you do, you can get a pension income projection from your employer.

Projecting Social Security income is more difficult since the Social Security Administration no longer mails out annual earnings summaries that includes the projections. But you can still get this number by using the Social Security Retirement Estimator (sorry, you’ll have to go through all of the steps to get your estimate). It will give you a ballpark estimate of the amount of your Social Security benefit based on your current income and your history of earnings.

Let’s assume that Social Security and your employer pension will provide $2,000 per month. You can deduct this from your basic cost of living estimate of $5,000 per month.

That means you will still have to provide $3,000 per month – or $36,000 per year – from your own personal retirement plan.

3. Calculate your retirement portfolio with the “safe withdrawal rate”

Now that you know you’ll have to provide $36,000 per year in retirement income out of your own retirement resources, we can project how much money you’ll need to have by the time you retire.

There is a convention in retirement planning known as the safe withdrawal rate. It holds that if you withdraw no more than 4% of your retirement savings each year, then you will never exhaust your retirement portfolio.

This is loosely based on the idea that the stock market returns an average of 8% to 10% per year over the very long-term. If you withdraw 4% of your retirement portfolio each year, you can reinvest 4% – 6% each year to cover inflation, and even to grow the portfolio in real terms.

Converting the income requirement to a portfolio number is done by dividing $36,000 by .04 (4%), which means that you will need $900,000 in retirement funds to provide this income level. (A simpler calculation is to divide your annual income requirement by 25, since 100 divided by 4 equals 25.)

So now we know that you will need to come up with $900,000 in order to retire comfortably.

But we’re not done yet.

4. Adjust for inflation

There is a fly in the ointment of retirement planning known as inflation. What ever number you project as your retirement portfolio target, you will need to adjust it for inflation.

The problem is that we have no idea what inflation will do in the future. We do however know what it has done in the past, and that is the best way to make a reasonable estimate.

If you’re 35 years old and you plan to retire at age 65, you’ll need to adjust for inflation over the next 30 years. We can make a reasonable guesstimate of inflation over that period by looking back at what inflation has done in the past 30 years.

This step is made easier when you use the Bureau of Labor Statistics Inflation Calculator. Taking our number of $900,000, we can use the calculator to get a rough estimate for what inflation will do to that number by seeing what is already done since 1986 – 30 years ago.

Based on the calculator, in order for $900,000 to hold up to inflation over the next 30 years, it will have to grow to $2,053,559.19 or more than double the actual amount right now.

Going forward, let’s assume that you will need $2 million by the time you turn 65 in order to have the amount of money that you will need to cover living expenses, and accounting for inflation.

5. Getting from where you are now to where you need to be

You’ll need another calculator in order to figure out how much you’ll need to save each year between now and the time you turn 65. Bankrate has an excellent Retirement Calculator that will help you to figure out where to go from here.

We’ll make the following assumptions in using the calculator:

Percent to contribute: 10%
Annual salary: $75,000
Annual salary increase: 2%
Current age: 35
Age of retirement: 65
Current 401(k) balance: $25,000
Annual rate of return: 9%
Employer match: 50%
Employer match ends: 6%

Based on these numbers, you’ll have $2,004,163 by the time you turn 65, which will put you right where you need to be in order to have the type of retirement you want to have.

In calculating your own retirement portfolio goal, you’ll need to put in information that is specific to your own situation. It may be that you will need to contribute more or less than 10% of your pay, based on your employer match (or if you don’t have one), as well as the amount of retirement assets you already have.

But this exercise will at least give you a reasonable ball park figure as to how much money you’ll need to have saved up for your retirement – and how to accumulate it.

And if it doesn’t look like you’ll make the target, do what Jesus said and don’t worry about it. God provides what we can’t. He may bless you with excellent health and a wealth of ideas that can be turned into business ventures or passive income sources.

Make your best effort, and He’ll meet you more than halfway. We have His Word on it!

Filed Under: Beginner Investing Tagged With: B, no-thumb, Site Only

How to Buy a House on the Courthouse Steps

July 25, 2014 By Kevin

How to buy a house on the courthouse stepsAn old-fashioned term for the process of buying a property in foreclosure, buying a house on the courthouse steps is a way to get a real deal on a house – or to get into real trouble.

The Foreclosure Process

Foreclosure is actually a multi-step process that begins with “pre-foreclosure.”

That’s the period of time after the mortgage/deed of trust first goes into default.

At that time, the lender begins the legal process that initiates foreclosure on the property.

This includes filing the legal paperwork necessary and filing a notice of intent with the court.

The lender is also required to place an announcement of the impending foreclosure in the local newspaper (under legal notices), generally for a specific period of time.

If you are interested in a property, this will give you time to do your research on it. Once the waiting period is over, the process can move very quickly!

Once the legally-required steps have been completed, the lender can then put the property up for sale in a public auction. How long that process takes depends on the laws in each state.

The Courthouse Steps

The auctions take place at the county courthouse of the county in which the foreclosed property is located. It occurs on specified days of each month. Auctions aren’t always well-attended, and you could find yourself as the only one there. If that’s the case, it could mean that the property isn’t widely viewed as a bargain (for price or condition) and you will need to beware.

The lender can specify a “reserve price,” which is the minimum they will accept to transfer the property. This will cover the lender’s exposure in the property or at least minimize it if the property is likely to sell below the outstanding loan amount.

State law may provide for bidding to begin in advance of the auction to give first-time homebuyers a chance to bid on the property. If their offer is accepted by the lender, the auction will be canceled.

Bids can be either written or called out.

You must come with certified funds, or other means of payment specified by the court, on auction day and be ready to complete the purchase immediately. Unlike regular real estate transactions, there is no escrow period between the time you sign an offer and close the sale.

If the property receives no bids, the lender will take the property back. It is then classified as “REO,” or real estate owned by the lender that the lender will sell at a later date.

The specific process varies from state to state so it’s best that you check the specific procedures and requirements from trusted local sources.

Foreclosure Property Risks

From a buyer standpoint, the foreclosure is pretty simple and has potential for great rewards. But there are risks you need to keep in mind.

1. Bidding Wars

Auctions can create bidding wars! If that happens, it’s possible that the price can be run up to actual market price or even above. One or more bidders who want to buy the property as a personal residence may be locked on the property and not too concerned with resale value.

Know the market value of the property, adjust for condition and anticipated profit, and don’t ever bid higher than your pre-determined maximum price.

2. Property Condition

An inherent problem with foreclosures is that you generally won’t be able to do a home inspection. Occupants tend to stay in foreclosed properties until (and after) the last minute, and won’t let you in to inspect. As well, the property could have major structural issues that will be your problem after you buy the house. You’ll be buying sight unseen!

Do a drive-by inspection and look closely at the exterior and the property itself for clues. If it’s a wreck on the outside it probably is on the inside. Foreclosed owners sometimes destroy the house intentionally.

3. Title Issues

Never assume that the mortgage is the only lien on a property. If the house is in foreclosure, there are probably other liens as well.

Order a title search on any property you are seriously interested in that way you’ll know what you’ll be getting into.

4. Previous Owners Who Won’t Vacate

The previous owners of the house may not leave after you buy their house. You may need to use legal action to have them removed, at your own expense.

As an alternative, either bid only on properties known to be unoccupied, or be ready to offer a cash incentive for the previous owners to leave.

5. Financing Issues

Mortgage lenders have standards that don’t usually fit well with foreclosure properties. When you buy a foreclosure, you take it as is; the lender will usually want certain items repaired, and that’s not going to happen. Lenders will also be concerned if you’re buying the house for investment, or worse, to flip for a profit quickly.

Buying foreclosures probably won’t work if you need to get a mortgage. Pay cash, or partner with people who can.

6. Post-foreclosure Issues

Some states allow a waiting period after an auction sale, during which the previous owner can buy back the property if they can match the highest bid. If you live in one of these states, you could win the bid and still not get the house.

Buying foreclosures can be enormously profitable. But as you can see, the potential to overpay for the property, to encounter major repair costs or to get into legal entanglements is real. Proceed with caution!

Have you had experience in buying foreclosures? Leave a comment with your tips!

Filed Under: Save Money Tagged With: buying a home, Foreclosure, no-thumb, Real Estate

5 Traditional and 5 Non-traditional Ways to Invest Your Money

July 23, 2014 By Kevin

traditional and non-traditional ways to invest your money

If you’re new to investing, you’re probably aware that there are literally dozens of asset classes you can invest your money in.

To make it easier for you, we’ve selected 10 classes, and broken them down between traditional and nontraditional, with five assets in each category.

5 Traditional Ways to Invest Your Money

If you’re a first time investor, you should concentrate your money in traditional asset classes. The classes below should be at the top of your list.

1. Bonds

This is a debt security issued by a company, government, or government agency. They are typically available in denominations of $1,000 and pay interest to the holder on a periodic basis. There are three major categories of bonds:

Municipal bonds are sold by states and local governments, and pay interest that is free from federal income taxes, as well as taxes in the issuing jurisdiction.

Treasury bonds are issued by the United States government and are considered the safest type of bonds since they’re backed by the full faith, credit, and taxing power of the federal government.

Corporate bonds are issued by companies and can come with a variety of different features, including convertibility to the company’s stock, and early call provisions (the corporation has the ability to pay the bonds early).

2. Mutual Funds and Exchange Traded Funds (ETFs)

These are portfolios of stocks, bonds, and other securities, that are offered for sale to the general public. They typically include money from thousands of investors, and can have anywhere from a few securities to several hundred in the fund.

They are an excellent way to invest in a ready-made portfolio of diversified securities, and are typically less risky than investing in individual stocks. The funds typically pay dividends and capital gains distributions based on the performance of the securities in the portfolio.

3. Certificates of Deposit (CDs)

These are contracts between a bank and a depositor in which the bank borrows money from the depositor at a fixed rate of interest. They typically have minimums of $500 or $1,000, and terms can range anywhere from 90 days to several years.

The principal invested in CDs is completely safe, as are the interest payments, as long as the security is held until maturity. Normally, there are prepayment penalties should you liquidate the CD prior to its maturity date and that will reduce the amount of interest you will receive. CDs are an excellent place to park cash or invest your emergency fund.

4. Money Markets

These are essentially mutual funds comprised entirely of interest-bearing cash type investments, typically US treasury bills. Unlike a CD, interest rates tend to fluctuate based on prevailing rates in the financial markets. Principal invested, while theoretically not guaranteed by the issuer, is nonetheless highly stable.

Money markets can be issued by banks and investment brokers. When provided by investment brokers, they are an outstanding place to park cash in between risk investments, like stocks and bonds.

5. Stocks

Stocks trade in shares since they represent a form of ownership in a business entity. Holding stock in a company not only entitles you to a share of the entity’s revenues (paid through dividends), but also the ability to participate in the growth of the stock price if the company is successful. While stocks represent an ownership share in the business, the price is not stable, being completely dependent upon market fluctuations.

Stock held in a strong company can provide steady price appreciation over many years, while stock held in a weak company could drop to nearly zero. Stocks trade on exchanges, the largest of which are the New York Stock Exchange and NASDAQ in the US.

5 Non-Traditional Ways to Invest Your Money

Once you become more familiar with investing – and you have a few of the traditional investment classes already – you should start investigating nontraditional ways to invest your money. You can go crazy with the number of possible investments, but these are the most common nontraditional investments.

1. Self-Directed IRA

These are retirement accounts that you invest in apart from your employer. You can choose whatever investments that you like to hold in your IRA, and buy and sell when you deem necessary. Under current law, you can contribute up to $5,500 per year (or $6,500 if you’re age 50 or above), and deduct the amount of the contribution from your income for tax purposes.

The investment earnings within the account accumulate on a tax deferred basis, which means there is no income tax liability until you begin withdrawing the funds when you retire. This generally works to your advantage since income is typically lower by the time you retire, meaning that the funds withdrawn will be subject to lower tax rates than during the years when you were working for a living.

2. Lending Club

In recent years, peer-to-peer (P2P) lending organizations have been springing up, enabling both lenders and borrowers to bypass banks as loan intermediaries. Lending Club is perhaps the best known P2P site, and it has funded more than $4 billion in loans since its inception.

If you are looking to invest money in debt type vehicles – that pay a predictable rate of interest – you can become a lender with Lending Club. Returns are much better than anything you can get at a bank or even with bonds. You can choose which loans you want to participate in, but there is a risk of default by borrowers. Should that happen, you will lose at least some of your principal. There is no FDIC insurance to cover losses on Lending Club investments.

3. Treasury Inflation Protected Securities (TIPS)

If you’re looking for the safety of US government securities and a measure of protection from inflation, then TIPS may be the investment of choice for your bond holdings.

They are sold in terms of 5, 10 and 30 years, and in denominations as low as $100. They pay interest twice each year, and the principal is adjusted at maturity or redemption based on the Consumer Price Index (CPI). TIPS will actually lower the principal value of the bonds in the event that deflation – not inflation – takes place. However, the value of the bonds upon maturity will never be lower than your initial investment.

You can buy TIPS through banks and brokerage firms, but perhaps the easiest way is to buy them through the US Treasury’s website Treasury Direct. There are no fees for this service, and you can hold your securities in the site.

4. Collectibles

If you want something tangible to invest your money in, collectibles could be the way to go. These can include antiques, precious metals, numismatic coins or any other tangible asset likely to rise in value over time. The key with all collectibles is rarity – the less available something is, the higher the price it will command.

Collectibles are a diverse group and you will need to thoroughly investigate a category before stepping into it. Make sure you’re investing with money you can afford to lose since collectible prices can vary substantially in short spaces of time. That said, certain collectibles – notably precious metals and numismatic coins – can be ideal contrary investments, rising in price at times when most conventional assets are falling.

5. Real Estate

In a real way, real estate is the ultimate tangible asset. But unlike other tangible assets, its price tends to perform more consistently over long periods of time. There are three basic ways you can invest in real estate:

Owning your own home. By far the simplest way to invest in real estate because you also live in the investment. Home ownership offers the opportunity to increase your ownership equity in the property through a combination of amortizing the mortgage, and gradual appreciation of the property’s value.

Investing in rental property. This is the most complicated of the three real estate investment methods because you will need to buy a property for less than the going market value, then keep it rented out to tenants for as long as you own it. Once again, you’re looking for the combination of mortgage amortization and price appreciation to make your investment pay off. But you’re also hoping to create a positive cash flow from rents exceeding the monthly house payment.

Rental real estate is a hands on activity, and also requires a larger down payment than what will be required for an owner occupied home. The returns on rental real estate can be spectacular over the long run, but diversifying over several properties requires a very large bankroll.

Real estate investment trusts (REITs). You can think of REITs as mutual funds for real estate. They are trusts that sell on major exchanges and can invest in either property or in mortgages. They can also be segmented by multi-unit (apartments), and commercial/retail, as well as by geography. They have special tax advantages and provide high yields. Unlike direct ownership of real estate, you can buy and sell REITs just as easily as mutual funds and ETFs.

It’s important to remember that you don’t have to jump into the various asset classes all at once. Start with one or two traditional investments and then work your way up to the nontraditional ones. Slow and steady wins the race, and nowhere is that more true than when it comes to investing.

Let me be your investing mentor

If you appreciate my perspective on investing, then check out the 10x Investing course where I mentor you through establishing an investment strategy as I explain mine in detail.

Filed Under: Beginner Investing Tagged With: no-thumb, Site Only

Everything you need to know about the Wonderful ROTH IRA

June 24, 2014 By Kevin

Everything you need to know about the ROTH IRA...There are literally dozens of ways to invest your money – and account types to invest them in – but one stands head and shoulders above the rest.

The Roth IRA may very well be the single best investment vehicle available.

While other retirement plans are tax deferred, Roth IRAs are tax free.

Do we have your attention? Read on…

Roth IRA 101: The Basics

In most respects, a Roth IRA account is set up and handled in a similar manner as a traditional IRA. You can contribute up to $5,500 per year ($6,500 if you’re age 50 or older) and put the money into a brokerage account of your choice.

The most significant difference between a traditional IRA and a Roth IRA is in the handling of income taxes. Both accounts enable you to accumulate investment earnings on a tax-deferred basis. A traditional IRA also gives you an income tax deduction for the amount of your contribution to the plan, while a Roth IRA provides no tax deduction of the contribution whatsoever.

However, the Roth IRA has a tax advantage that a traditional IRA doesn’t – one that in fact no other retirement option has: The money that is withdrawn from a Roth IRA is completely free from income taxes.

Let that sink in for a moment. Your contributions aren’t tax deductible, but your withdrawals will be exempt from income taxes.

That includes both the contribution portion and the accumulated investment earnings. Imagine sailing into retirement with a fat Roth IRA account, knowing that you can withdraw as much money as you want without having to worry about paying taxes on it?

The only limitation on the tax free status of the withdrawals is that you must be at least 59 ½ and participating in the plan for at least five years in order to get the break. But there’s even an exception to that provision: since your contributions are not tax deductible, there is no tax liability created by withdrawing them from your Roth account.

A Roth IRA will provide you with a level of tax flexibility that you won’t find in any other investment vehicle. And that can be seriously important in the years ahead.

Everyone Needs a TRUE Tax Shelter of Their Very Own

Despite popular belief, federal income tax rates are actually low by historic standards. And that can only mean one thing: rates are heading higher.

If you’re making any money at all, or you plan to in the future, you’ll need to find ways to shelter at least some of it from income taxes. Retirement plans are increasingly the best way to do this, and the Roth IRA stands out as being an especially good vehicle for doing so.

If you’re looking for some perspective on tax rates, here are some quick facts on the history of US income tax rates since the federal income tax was instituted in 1913:

  • In 1913, the tax rate was 1% on the first $20,000 earned, with a top tax rate of 7% on incomes in excess of $500,000. Relatively few people made more than $20,000.
  • The top tax rate rose to 67% in 1916, then 77% in 1917 in order to fight World War l.
  • The top tax rate fell to 25% through much of the 1920s.
  • During the Great Depression of the 1930s, the top tax rate was increased to 63%.
  • Tax rates topped out at 94% for incomes over $200,000 in 1944, due to World War II.
  • Tax rates eased off in the 1950s through the 1970s, with the top tax rate falling to 70%.
  • The Economic Recovery Tax Act of 1981 slashed the highest rate from 70 to 50 percent, and indexed the brackets for inflation.
  • In 1986, the top rate was cut to 28%; it lasted for three years, then began escalating.
  • During the 1990s the top tax rate rose to 39.6%.
  • The top rate was cut to 35% from 2003 through 2012.
  • In 2013, the top rate rose to 39.6%, but there is also an additional Medicare tax of .9% and a 3.8% “net investment tax” on incomes over $250,000 (married filing joint), making the effective top tax rate 44.3% for top income earners.

(Source on historical tax data: Bradford Tax Institute)

What’s the purpose of this walk down income tax memory lane? To get a perspective on where tax rates have been and where they’re likely to be going.

Notice that when the income tax was rolled out in 1913, it was a token 1% of the first $20,000 – very few people made more than this amount back then. Rates escalated dramatically with the world wars and the Depression, and remained at or above 70% for most of the Post World War II period. Only in 1981 did we see a sharp reversal in this trend. Rates then bottomed out in 1986, and have been rising ever since.

Based on historical rates however, it’s not unreasonable to conclude that the top tax rate is heading back over 50% in the not too distant future.

That’s why income tax shelters are so important.

A Roth IRA provides you with the ability to shield at least some of your future income from all those tax implications.

Roth IRA Income Limits

Roth IRAs do have income limits beyond which you can no longer contribute to the plan. The limits are based on modified adjusted gross income (MAGI), a fairly complicated calculation that you can look up in IRS Publication 590.

For 2014, the Roth IRA income limits are as follows:

Single filers can make a contribution up to a MAGI of $114,000. Your contribution amount gradually phases out beyond this number, and is no longer permitted on a MAGI of $129,000 or higher.

Married filing joint can make a full Roth IRA contribution up to a MAGI of $181,000, then a partial contribution that phases out completely at $191,000, after which a Roth IRA contribution is no longer permitted.

You can also make a matching spousal contribution as long as your income falls within the IRS income limits. One other advantage of a Roth IRA is that you can continue contributing to the plan for the rest of your life. Virtually every other retirement plan, including traditional IRAs, prohibit contributions after you turn 70 ½.

A Roth IRA is mostly a general purpose investment account with tax benefits

When it comes to where you can invest a Roth IRA, the sky is truly the limit. You can open an account with any investment brokerage firm that offers Roth IRAs – and most of them do. Roth IRAs have become common accounts, nearly as popular traditional IRAs.

You can open a Roth IRA with your favorite investment broker, or shop around for one that offers a better deal. Since a Roth IRA is a self-directed account, you should seek a broker that offers the best combination of investment choices and low-cost transaction fees.

You can hold just about any type of investment that you want in a Roth IRA account, including:

  • Stocks
  • Bonds
  • Mutual funds
  • Exchange traded funds (ETFs)
  • Real estate investment trusts (REITs)
  • Treasury securities
  • Gold coins
  • Options
  • Money market funds

In fact, you can hold just about any type of investment in a Roth IRA account that you can in any other type of brokerage account. And given the tax-free status of the earnings in your account, the Roth IRA is the best possible account if you are a particularly aggressive investor, with high investment income. You’re free to invest without any consideration for income tax consequences – ever!

If you don’t have a Roth IRA account, look into opening one as soon as possible. You can open an account as long as you fit within the IRS income guidelines. If you do, you’ll be opening the door to what is probably the most flexible investment account in America.

Filed Under: Beginner Investing Tagged With: no-thumb, Site Only

Why You May Want to Invest WITHOUT a Financial Advisor

June 23, 2014 By Kevin

Why you may NOT want to hire a financial advisorMany people are perfectly content to not know what’s going on in their investment portfolios.

They’re happy to turn the job of investing over to someone else, like a financial advisor, so that they can tend to other things in their lives.

And maybe there’s even some comfort in being able to blame someone else when the market drops and takes your investments down with it.

But there are others who are rugged individualists, even and especially when it comes to investing. If this describes you, you may want to invest without a financial advisor. In fact, if you are fairly adept when it comes to investing, you may not even trust turning your investing over to third-party at all.

For you, do-it-yourself (DIY) investing is the only way to go.

The advantages of DIY investing

Even though your life will be more complicated absent a financial advisor, there are certain advantages to DIY investing, and they can make a big difference with the long-term performance of your investment portfolio.

Here are just a few:

  • You can probably match or beat an advisor with index funds – Very few investment advisors outperform the market, especially over the long run. You can probably match or beat a good financial advisor just by investing in a mix of low cost index funds.
  • Lower investing fees – Financial advisors charge fees to manage your investments, and those fees can be anywhere from 2% to 8% of your portfolio. That will cut into your investment returns, and worse, you’ll have to pay the fee even if you lose money. DIY takes those fees out of the picture.
  • A fully customized portfolio – A portfolio managed by a financial advisor will contain investments and asset allocations that the advisor feels good about. The only way to have a fully customized portfolio – one you’re completely OK with – is to do your own investing.
  • Sharpening your investment skills – Like everything else in life, your investing skills will get better with time and experience. The only way to make that happen is by managing your own investments. Hiring a financial advisor can lead to weak investing muscles!

Who does DIY investing work best for?

You may or may not be the best person to manage your own investments. It all depends on how you are when it comes to investing, as well as your emotional tolerance for the ups and downs that investing brings.

If you have a solid understanding of the investment markets, picking investment securities – or at least the right funds – proper asset allocation, and at least a general sense of timing, you probably have what it takes to manage your own investments.

If you have little or no knowledge of any of the above, or maybe you don’t trust your own instincts, you’ll certainly be far better off turning the job over to a financial advisor. As much as investing seems easy after several years of a very reliable bull market, the potential is very real for things to go very wrong when stocks turn down in a major way.

Low cost brokers for DIY investing

Beyond basic investment knowledge, the most important tool that a DIY investor can have is a good discount brokerage firm. This includes firms that have a strong mix of low investment fees, and the widest possible selection of investment options.

Here are a few brokerage firms that are coming up on DIY recommendation lists on a regular basis:

Trade King

Trade King comes up with consistent rankings as one of the best overall trading platforms available. It offers the following benefits to the DIY investor:

  • Stock trades at $4.95, $9.95 on no-load mutual funds, and no fee on load funds
  • Virtual trading tools
  • No custodial fees and no minimum balances on Traditional or Roth IRAs
  • An online community where you can swap trading ideas and strategies
  • Maxit Tax Manager (with free access)

Scottrade

This is another highly regarded online discount brokerage firm, and it even offers local branches – a comforting feature, even if you never have to use it. Scottrade offers the following benefits:

  • Stock trades at $7.00 and $17.00 mutual funds trades
  • Free tax management tools
  • Advanced trading tools (even experienced traders can use a brush up from time to time!)
  • No custodial fees and no minimum balances on Traditional and Roth IRAs

E*Trade

Also a very highly regarded brokerage firm and one that offers full service brokerage and a bank! You can keep your checking and savings accounts with the same company you invest with, and that provides some obvious advantages, like seamless money transfers.

  • Stock trades at $9.99 (dropping to $7.99 per trade if you make at least 150 trades per quarter) and $19.99 mutual fund trades
  • No custodial fees (with electronic statements) and no minimum balances on Traditional or Roth IRAs
  • Checking accounts with debit cards and no ATM fees
  • Close to 100 fee-free exchange traded funds (ETFs)

Financial advisor or DIY – which will work better for you?

As recommended above, if you don’t have the knowledge of investments, or even the general interest in learning, you’re better off to go with a financial advisor. If you have strong investment knowledge, and a willingness to take chances, you’re a DIY investor at heart, and you should just go with it!

But what if you’re somewhere in between?

This probably describes the majority of investors. If you are one of them, but you want to become a DIY investor one day, you can take it in measured steps:

  1. Open up an account with an online discount brokerage firm, such as one of the firms above.
  2. Determine an asset allocation mix that is reasonable for your age and risk tolerance. The mix should include appropriate percentages of stocks, fixed income assets, and cash. A well balanced asset allocation takes much of the risk out of investing.
  3. Start by investing your money in low cost index funds. In general, funds tied to the S&P 500 should make up the bulk of your equity investments.
  4. Subscribe to an investment advisory service or two, and participate in investment forums where other investors come to exchange investing ideas.
  5. As you become comfortable with the investing process, slowly begin to move into individual stocks. These are more risky than funds, so you need to go slow here.
  6. As your investment success and confidence build, you can begin moving a larger percentage of your portfolio into individual stocks, or even into other risk investments as you feel ready to do so.

Given the uncertainty about both the future outlook for the economy, and for retirement planning in particular, learning how to invest is becoming something of a very real survival skill. It’s fine to turn investing over to a professional if there is no other option. But each of us owes it to ourselves to sharpen our skills as investors, and to at least take a shot at DIY investing, however slowly we do it.

Filed Under: Beginner Investing Tagged With: no-thumb, Site Only

Picking Stocks 101

June 23, 2014 By Kevin

Basics of picking stocksIf you’re new to investing, picking stocks can be confusing.

Even if you have been investing in mutual funds for a while, stocks represent a higher risk investment, and one that requires considerably more research.

Before stepping in stocks, you want to make sure that you do plenty of homework.

You should also plan to take it slow – keep most of your money in mutual funds, and invest in stocks only gradually with relatively small amounts of money. For most people, individual stocks should be only a minority position, with funds making up the bulk.

How can you become a master at picking stocks – at least eventually?

Understand what you’re investing in

When you buy stocks, you are investing in shares of ownership in a given company. This not only makes you an owner of the company, but also entitles you to a proportionate share of the company’s earnings stream.

It’s also important to understand what stocks are not. Stocks are not like certificates of deposit or money market funds that pay out a regular stream of interest and maintain a fixed value. Though stocks may pay out regular dividends, their underlying values tend to fluctuate.

These fluctuations could be caused by circumstances specific to the company itself – such as changes in revenues or earnings, product issues, or even legal action against the company. They can also come about as a result of industry issues, such as a change in regulation that affects all competitors in the sector. Finally, valuations can also be affected by conditions in the general market. For example, an overall decline in the stock market could cause the value of your stock to fall. A rise in the general market could cause an increase in the price of your stock.

Generally speaking, when you invest in stocks, you are looking for strong price appreciation over the course of many years. This involves both risks and rewards – risk that the stock will not perform as expected and may cause you to lose money, or reward in the form of better-than-expected performance that results in higher returns than you ever imagined.

The importance of diversification

For all of the reasons just discussed, it’s extremely important to diversify when you’re investing in stocks.

There are three primary methods of doing this:

Diversifying within an investment sector – No matter how much you may like Exxon-Mobil, if you think the energy sector is a good place to be, you should hold several stocks within the industry group. That will enable you to minimize the risk of a big hit to that single stock, as well as provide you with an opportunity to take advantage of growth in other stocks within the sector.

Diversifying within the stock market – If you choose to invest in a market sector, it is important that you spread your capital among other sectors as well. For example, it may be fine to invest all of your money in technology stocks while there is a boom in that sector. But what if the market turns against technology? For that reason you need to be invested in other industry sectors.

Diversifying outside the stock market – You’ll also have to have some of your capital outside of the market. This can include cash type investments, like money market funds and certificates of deposit, as well as real estate, bonds, and even commodities. These investments will provide you with at least some protection in the event of a general stock market decline.

Valuing stocks

There is no magic and no secret when it comes to valuing stocks. In point of fact, valuing stocks is art, not science. Sometimes, even after you’ve done all of the analysis possible, the stock will go in the opposite direction of what that research indicates. More typically however, there are certain indicators you can look for that can reveal stocks likely to outperform the market.

There are quite literally dozens of ways to value stocks, and here are some of the more basic ones. You can look at these ratios, and if the stock passes, you can do a deep dive into as much analysis as you like. In all stock valuations remember that it isn’t so much a matter of good or bad, but rather how well the company stacks up compared to its primary competitors. If the numbers for a company are better than the industry in general, eventually it’s stock should outperform the industry.

Price/Earnings ratio – This is the earnings of the company divided by the number of common stock shares outstanding at the end of the reporting period. From a valuation standpoint, if the company you’re looking at has a P/E ratio of 10, and major competitors are at 15, the stock may be a buy. If the numbers are reversed, you may want to avoid the stock.

Revenue growth – This is the growth in the company’s gross income, but you must look at the trend over at least the past three years. If the company has been growing at an annual rate of 12%, and it’s competitors are growing at 6%, the stock may have excellent future prospects.

Earnings growth – This is the annual growth in the company’s net earnings, and can be the best indicator of the company’s future prospects. This is because earnings growth indicates how well the company is managed – not just the ability to grow revenues, but also the skill at managing expenses. Earnings growth outpacing industry averages can be a strong indication of an investment worthy stock.

Dividend ratio – This ratio can be a mixed bag. Some companies tend to pay out their earnings to stockholders through dividends, while others will retain income and reinvest it in future growth. Once again, you will have to consider what is normal within the industry group. If a company is paying out a higher rate of dividends than it’s competitors, this could be a good sign as long as revenue and earnings growth are there to support the dividend payouts.

Valuing stocks is a complicated process, particularly if you are new to investing. Fortunately, there are tools available that will help you do it. Check out MarketWatch Stock Screener and Google Stock Screener – both are free tools. You simply enter the numerical criteria you are looking for in an industry sector and the tool will give you the stocks in the category that meet that criteria. That will narrow the field and allow you to do a deeper analysis on the short list of stocks on the list.

The two primary ways you can make money in stocks

There are two primary ways that investors make money in stocks:

Capital appreciation – This is the increase in the price of the stock over a period of time. In a perfect world, you’re buying a stock at say $20 a share, then selling five years later at $100 a share. The difference between the two is your profit.

Dividends – Many companies return a part of their earnings to their stockholders in the form of dividends, which is something like interest paid on stocks. The advantage of dividends is that they pay regardless of what the price of the stock is doing, or even the markets. They can also offer some downside protection in the event of a market decline, since investors will naturally seek out income in a market where capital appreciation is more difficult.

In a perfect world, you’ll invest in a stock that both pays dividends and has excellent prospects for capital appreciation. But in the real world, you often have to choose one or the other. But with stocks, it’s a balancing act, and one that you have to work at constantly.

Long-term vs. short-term investing

There are different ways to invest in stocks when it comes to time frames. Here are some of the more common types:

Day trading – This kind of trading is exactly as it sounds. You are literally trading stocks on a day-to-day basis, hoping to take advantage of very small price differentials. In order to do this, you need to be very sophisticated about the markets, make use of computer programs, monitor the markets constantly, and be prepared to move in and out of stocks based on very small changes in price. Naturally, in order to take advantage of those very small changes, you’ll have to trade with fairly large amounts of money. For example, you might take a $10,000 position in a stock in the morning, with a plan of selling in the afternoon for a $100 profit. You’ll have to make a lot of trades in order to make serious money with that kind of strategy. As you might imagine, for most investors it doesn’t work at all.

Short-term trading – This kind of investing involves taking positions in stocks that you might be in for just a few days or a few months. You might buy a stock at $20 a share, with the expectation that it will rise to $25. Once it does, you sell the stock, pocket your profit, and move on to the next deal. Like day trading, this is not at all recommended for novice stock investors, as there is equal risk of a reversal in price.

Intermediate investing – This is a longer term type of investing. You might have a time horizon of say, three to five years. This is more a play on investing in fundamentals, rather than reaching a target price.

Buy and hold – forever – This kind of investing is based on the idea of investing in stocks that represent exceptional values, and holding them for a very long period of time – 10 years or more, and sometimes forever. There are stocks that fit this bill too. Included are companies that have recognized brands, strong market penetration, and a history of steady revenue and earnings growth. Dividend paying stocks work especially well for this type of investing, since it will provide you with an annual return on your investment, even though you never sell your positions.

Since short-term price swings can be brutal, longer-term investing is also the better choice for new investors. When it comes to investing in the stock market, the deck is generally stacked in your favor the longer that you are in the market.

Investing vs. speculating

New investors are sometimes confused between investing and speculating in stocks – because of the very nature of stocks, you can easily be doing either.

Generally speaking, you’re investing when you’re buying into a company’s brand, its revenue and earnings growth, its strong management, and its solid future prospects for growth. This is even more true if you are buying stocks that also pay dividends, as it creates an ongoing cash flow.

You’re speculating if you are betting on certain events taking place in the future – such as a merger, the discovery of mineral wealth, the passing of certain legislation, or the successful roll-out of a certain product. This is speculating because you are not investing based on the track record of the company, but rather on the outcome of an event which has not yet taken place – and may never happen.

Make sure that when you’re investing you are truly investing, and not stepping into speculation. More often than not, speculators end up broke. They tend to buy into stocks when optimism – and the stock price – are high. Then they get burned when reality sets in, and the stock price crashes.

If you aren’t sure about stocks, stick mostly with mutual funds

One really good side of investing in stocks is that if you don’t feel ready to do it – or you don’t like the idea at all – there are plenty of alternatives. You can still invest in the stock market, without investing in individual stocks, by investing in mutual funds and exchange traded funds (ETFs).

Both are professionally managed investment portfolios that you buy shares in. This will enable you to diversify into a large portfolio of stocks with a relatively small amount of investment capital. You can invest in the general market – like index funds tied to the S&P 500 – or you can invest in various sector funds, like technology and energy, that will enable you to take advantage of special situations.

But whether you invest in individual stocks or in funds, you should have a significant portion of your investment capital in the equity markets. Over the long-term, stocks are the best way not only to grow your portfolio, but also to stay ahead of inflation.

Filed Under: Beginner Investing Tagged With: no-thumb, Site Only

How to Pick Mutual Funds Like the Pros

June 23, 2014 By Kevin

How to pick mutual funds like a ProInvesting in mutual funds seems simple, but there are so many funds available today that it may not be as simple as it once was.

While mutual funds enable you to invest in an entire portfolio of stocks or bonds, there are various sector funds that can raise or lower the risk of your holdings.

In addition, there are factors that you need to consider beyond mutual funds anytime you are investing.

Let’s take a look at each, and see what you can do to improve your investment performance.

Allocation is EVERYTHING with Mutual Funds

With mutual funds, you don’t have to concern yourself with the selection of individual securities, nor the need to diversify within an investment sector – the fund does all that for you. What really matters most is allocation. That’s the number of different funds and sectors that you invest your money in.

Most investors are best served by having their largest equity position invested in one or more index funds that are tied to the S&P 500. That will at least enable you to match the market with most of your money (few professional investors do better on a consistent basis!).

Using index funds as a base, you can also diversify into various sector funds, including:

  • Small-, mid-, and large-cap funds
  • Aggressive growth
  • Emerging markets
  • Growth and income
  • Technology
  • Energy
  • Bonds (however, never confuse these with cash or cash equivalents)
  • Precious metals
  • Natural resources
  • Various industry funds, like healthcare, utilities, transportation, etc.

You can move into and out of these different funds as market conditions change. For example, there may be times when it makes sense to be in aggressive growth and transportation funds, and other times when energy and precious metals will be much more profitable.

Have some money that isn’t in mutual funds

Part and parcel of proper allocation is having some money that is not in mutual funds. It’s important to understand that a general market decline could pull down virtually all sectors in the equity markets. Should that happen, the best investments will be outside of equity-based funds entirely.

Cash type assets are best for this purpose. This can include money market funds, certificates of deposit, or US treasury bills. While none of these offer capital appreciation, they are outstanding at providing capital preservation, and that’s what you need to emphasize in your non-fund holdings.

Not only will cash help to preserve your portfolio, but it will also provide you with funds to buy more funds after a bear market, when buying opportunities will be plentiful. Think of cash as part of your bear market recovery plan.

Know your own risk tolerance

Proper asset allocation starts with knowing your own risk tolerance. There are several factors that define what your risk tolerance is:

  • Age – Generally speaking, the younger you are the more risk you can handle, the older you are the less you can stomach. It mostly has to do with time horizon, which is the amount of time that you have available to recover from serious losses. As a twenty something recent college graduate, you may do well with 90% of your money in equity funds. As a 60-year-old who is moving into retirement, you might want no more than 50% of your money in equity funds.
  • Income stability – A high income, salaried position puts you in a better position to deal with risk. But if you’re self-employed or work primarily on commission, you may need to be more conservative with your investment portfolio.
  • Overall financial condition – If you have a substantial asset base apart from your portfolio, such as strong home equity and abundant savings, you can take on more risk. If you have a large amount of debt, you’ll need to be more conservative.
  • Family status – The more dependents that you have, the less risk you can handle. For example, a single person can tolerate more risk than someone who is married with several children or even elderly parents in their care.
  • Attitude toward investment losses – Some people simply don’t handle investment losses well. If you tend to lose sleep over declines in your portfolio, you’re going to have to “adjust down to the sleeping level” – lower the risk in your portfolio to the point where you get a good night’s sleep and not agonize over your losses.

Consider each of these categories, determine where you sit on the risk tolerance scale and adjust your asset allocation accordingly.

Understand the risk level of a fund class

Earlier I mentioned you should keep most of your equity-based funds in index funds based on the S&P 500. That’s largely because the risk associated with this type of index fund is no greater than what it is for the general market. But certain sector funds carry far more risk, even if they also have greater reward.

Precious metal funds are an excellent example. While they can do extremely well during bull market cycles in gold, they can go into the cellar and stay there for years in a weak metals market. Anytime you invest in mutual funds, be sure to read the prospectus carefully, and ascertain the risks associated with the fund and the sector.

Look closely at the fund’s track record – especially in declining markets

Mutual fund companies are famous for presenting ads for their funds that are hard to resist. For example, a fund might advertise that it returns an average of 23.7%. But that return is common in the last five years – when the overall market has gone straight up – so performance may not be so impressive.

You want to look back, all the way to at least the last bear market cycle. That will give you a better handle as to exactly how strong the fund is. Always compare the fund’s performance with the general market, as indicated by the S&P 500 index (see historical chart at the bottom of the article) for a comparable period of time.

You also want to look at how long the current fund manager has been on the job. If he’s only been at it for two years, that may not be enough time for you to gauge the long-term performance of the fund.

Load, low-load and no-load funds

Loads are the entry and exit fees charged on mutual funds by the fund manager, not the broker that handles the transaction. They come in all shapes and sizes – load, no load, and low load. There are also front-end loads, back-end loads, and funds that charge both.

Loads are typically anywhere from 0 to 3% of the value of the fund position you’re taking, and they can sometimes be higher. You will want to make sure that you emphasize no-load and low load funds, that way you won’t be giving back too much of your investment returns through loads.

Just be careful that the fund that is no-load or low load on the front doesn’t make up for it by charging another load on the back-end when you go to sell the fund.

Look closely at investment fees

When evaluating a mutual fund, look at the fund’s expense ratio – that is the percentage cost to operate the fund. This will include a management fee paid to the fund’s manager or advisor, as well as administrative expenses. Mutual funds also charge what are known as 12b-1 fees, and they’re charged on an annual basis.

The fee is considered to be an operational expense, largely to cover marketing and distribution of a mutual fund. These fees range from .25% to 1% of the fund’s net assets, and are included in the fund’s expense ratio.

The difference between one fund and another of just .5% per year could make a substantial difference in the performance of your fund over a 10 or 20 year, so never overlook this charge. All funds charge fees, but the key is to find the ones that charge the lowest ones.

Look closely at the fund’s “turnover ratio”

Turnover rate is a major factor affecting mutual fund fees. For this reason, you’ll have to determine the turnover ratio before buying into a fund. Index funds have low turnover rates, because securities are only traded when there are changes made to the components of the underlying index.

Other funds may trade at significantly higher rates. One fund may have a turnover ratio of 20% – that means that 20% of the securities held in the portfolio turnover in the space of one year. Another fund may have a 100% turnover ratio, but a very actively managed fund might be at 400%. The higher the turnover ratio, the higher the fees associated with the fund.

This is another reason why index funds need to be the primary holding among all of your mutual funds. They’re very low on expense ratios, and that will result in a higher return on your portfolio. One other point on turnover ratio: High turnover ratios generally mean more capital gains distributions, which will increase your income tax liability.

Funds with a turnover ratio of greater than 100% tend to generate short-term capital gains that don’t have the benefit of the long-term capital gains tax rate. Translation: high turnover ratio could mean higher income taxes for you.

Get all the relevant information you can

Even though mutual funds are professionally managed, you still have to have a solid understanding of what‘s going on and what you need to do. Start by getting a good investment book or two, to help you learn your way around the investment universe.

A good start is One Up On Wall Street by Peter Lynch and John Rothchild. Lynch is the legendary fund manager of the Fidelity Magellan fund, which was one of the largest and best performing funds during his tenure there. There’s plenty of rich advice in this book, and it will help you throughout your investing career.

It will also help to subscribe to an ongoing investment information service. One such service is Morningstar, a long-established and well-respected firm. Morningstar rates mutual funds – as well as stocks – taking a lot of the guesswork out of the process for you. You can subscribe on an annual basis at a cost of $199 per year, and the price is likely to be worth every penny.

But don’t stop there – investing is largely a game of acquiring information, and the more that you can accumulate, the better your performance will be. Mutual funds seem simple and compared to stocks they are. But that doesn’t mean they’re without risk, and that’s why you should take all the steps in this article to help you minimize those risks, which will also improve your investment returns over the long run.

Filed Under: Beginner Investing Tagged With: no-thumb, Site Only

What is Medical Tourism . . . and Why is it Becoming Popular?

March 24, 2014 By Kevin

Rising healthcare costs are forcing modern consumers to search for different ways to reduce expenses and still get the medical service they need. In recent years another solution has appeared. Medical tourism has people living in one country and traveling to another to seek medical, dental and surgical care.

With the globalization of factories, farming and finance, it is inevitable that yet another major industry like healthcare would join the ranks.

Healthcare is Going Global

There’s actually nothing new about medical tourism. The direction of the flow is what is new. Historically, people from poor countries traveled to wealthy ones in search of advanced medical attention. The flow is reversing today, as people from wealthy countries now hunt for affordable healthcare in less developed areas where it tends to be less expensive.

What may be even more noteworthy is the prospect of Americans going overseas for medical care, particularly to poorer countries. For generations, the U.S. was seen globally as the country to get the best medical care almost regardless of where in the world a person lived. But today, the Centers for Disease Control (CDC) estimates 750,000 Americans go overseas for treatments annually.

This follows the pattern of other major industries. Just as manufacturing firms relocate in search of low-cost labor, healthcare now snakes around the globe looking for similar cost advantages. Two factors enabling this are the large number of students from poor nations attending medical school in rich countries, and the growth of the Internet as a universal information source.

The Huffington Post’s online travel blog posted seven articles in the last year on medical tourism. The World Medical Tourism Global Healthcare Congress is scheduled for Washington, D.C. in September though its website appears to be for travel professionals rather than for patients.

There is now even a trade association – The Medical Tourism Association – with its own website. There are success stories, ads for guide books, and an upcoming industry events listing. Separate sections offer material for healthcare providers, governments, insurers, and patients.

Why Even Consider Medical Tourism?

Patients travel overseas seeking a high quality of healthcare, affordability, and access of care, but the most basic reason to go to a third-world country is the cost. In many developing countries, one can have major surgery for a small percentage of the cost in the U.S., Canada, Japan, or Western Europe.

But there other reasons going beyond cost.

Most elective surgery – such as cosmetic surgery, certain dental surgeries, and even hip replacements – are not covered by insurance in the U.S. But if the cost is much lower overseas, you might elect to make the trip for surgery.

There may also be procedures, such as fertility, cancer treatments or other therapies not approved in the U.S. or in other rich countries. A couple desperate to have a baby, or a terminal patient looking to participate in experimental cures, might find attractive options in a poorer nation.

Even in countries with single-payer national health insurance, medical tourism is growing. In such systems, surgeries involving non-life-threatening illnesses and injuries can land you on a waiting list lasting for months or years. Many people then seek relief through medical tourism.

The rollout of Obamacare – and the prospect of it ultimately transitioning to a single payer format similar to other countries – is also stoking interest in the U.S. As well, the growth in compliance and regulation as a result of the new healthcare law has caused a number of doctors and other healthcare practitioners to either abandon the medical field or threaten to do so. Medical tourism is increasingly seen as a viable option against the prospect of a smaller field of providers.

How Much Can You Save With Medical Tourism?

A major medical procedure performed in a foreign country may cost less than the out-of-pocket costs for the same procedure in the U.S. – to say nothing of the possibility of a claim disallowed after the fact for some unimagined reason. For example, a heart bypass surgery might cost over $150,000 in the U.S., but can cost less than $10,000 in India.

In general, poor countries have lower medical expenses than the U.S. and other western countries. In addition, they typically are not subject to the threat of legal action as medical practitioners are in America. It’s possible to have not only a major surgery in a third-world country, but also to pay less for of transportation and accommodations.

The Medical Tourism Association touts that with its membership you could “save up to 90% on medical expenses.” Annual dues appear to range of $2,000 to $5,000.

The Most Popular Destinations

The list of what we might call “hot” medical tourism destinations varies from year to year, and is also largely determined by the type of treatment or surgery. There is no one country as a haven for medical tourism, however, Mexico, Costa Rica, India, the Czech Republic, Thailand, Malaysia and South Korea keep coming up on various lists.

Consider two factors influencing the country you choose to seek for medical care . . . .

The first is the quality of care related to specific illnesses, ailments, or injuries. This can vary staggeringly from country to country. Narrow your choices down to the one, two or three countries offering the best care for your need.

The second consideration is cost. Even in poor and developing countries, the cost of certain medical care can change substantially from one country to another. This isn’t to say you want to look for the lowest cost destination; you want to balance out cost with the quality of care.

For Better or Worse, Medical Tourism is Gaining Acceptance

As medical tourism becomes more popular it’s also gaining acceptance. There are agencies, commonly called medical tourism providers, who coordinate your surgery and travel. They handle every detail of your trip, often including potential follow-up sources once you are back home. One site, advertising on Google searches, is MedToGo.com, which seems to specialize in Mexico as a destination.

Payment will typically be in cash since there is no insurance company paying or acting as an intermediary. However in the past few years, some health insurance providers have dipped a toe into the medical tourism phenomenon. Companies such as Blue Cross/Blue Shield of California, Blue Cross/Blue Shield of South Carolina, and Anthem Blue Cross/Blue Shield of Wisconsin have at least experimented with limited participation in medical tourism.

In addition, some independent employers encourage the use of medical tourism as a way of reducing health insurance costs. But as a general rule, at this stage of the game you should expect very little assistance from any institutions in the U.S.

The CDC issues the following risks associated with medical tourism:

  • Language barriers that could cause treatment problems.
  • Transmission of diseases, such as HIV, from reuse of syringes.
  • Unregulated and/or poor quality medications.
  • Anti-biotic resistance may be more common in some countries than in the U.S.
  • Questionable blood supply.
  • Flying after surgery increases the risk for blood clots.

Still, medical tourism seems destined to follow other major industries into greater public acceptance.

Have you ever sought medical care outside the U.S., or are you even facing such a decision right now? Leave a comment!

Filed Under: Save Money Tagged With: Good News, Health, Health Insurance, no-thumb

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