IMPLICATIONS OF RISING MORTGAGE RATES

Are they threatening the recovery?

Or is their effect overstated?

Between early May and mid-July, the average interest rate on the 30-year fixed-rate mortgage rose about 1%. Rates on 30-year FRMs have basically held steady since hitting a peak of 4.51% in Freddie Mac's July 11 Primary Mortgage Market Survey - in the August 15 edition, they averaged 4.40% - but they could rise dramatically again.1,2

When mortgages become a bit costlier, things can get a bit tougher for home buyers, home sellers, home builders, real estate brokers, the construction industry, the labor market, the service industry and the broad economy. As housing's comeback is a key factor in this current economic recovery, how worried should we be that home loans are growing more expensive?

Analysts are divided about the impact. A July Wall Street Journal poll of economists drew rather mixed opinions: 40.0% of respondents felt that more expensive mortgages "won't have a noticeable effect" on the housing recovery, 35.6% thought that they "will slow sales" and 24.4% believed that they "will slow home-price gains."1

So far, the lure of increasing home values appears to outweigh disappointment over pricier home loans. In the latest S&P/Case-Shiller Home Price Index (released at the end of July and covering the month of May), both the 10-city and 20-city composites showed the biggest year-over-year gain since 2006. Rising home prices (and rising stock prices) contribute greatly to the "wealth effect" felt by consumers. So there is a chance that a 100-basis-point rise in the 10-year Treasury yield (it hit 2.82% on August 15) and conventional mortgage rates may not do as much damage as feared. After all, both consumer confidence and consumer spending have improved even with a 2% hike in payroll taxes and this spring's federal budget cuts.3,4,5

Maybe we haven't seen it yet. The fundamental housing market indicators in our economy are lagging indicators, presenting statistics a month or more old. The Case-Shiller composite home price figures are based on three-month averages ending in the latest month of the index - in other words, the May survey reflected data from March, April and May, and May is when mortgage rates began their ascent.3

New home sales figures compiled by the Census Bureau must also be taken with a grain of salt. The pace of new home sales reached a five-year peak in May, but here is the asterisk: the Census Bureau actually measures new home sales in terms of signed sales contracts rather than closings. So a sizable percentage of those homes were not yet constructed, and the actual closing could have been months away. As it turns out, 36% of the signed sales contracts in May were for homes yet to be built - meaning they were in all probability three to nine months from completion, with most of the involved buyers unable to lock in mortgage rates in early May as they would have preferred.6

Which of two outcomes will occur? Summer home sales statistics may reflect more impact from higher mortgage rates. Perhaps they will communicate that the housing market is no longer red-hot, but reasonably healthy. The real estate industry, Wall Street and Main Street can all live with that.

The bigger question is whether consumer spending and GDP will keep improving as mortgage rates presumably keep rising. If the economy gathers or at least maintains momentum and the "wealth effect" continues to boost consumer morale, then the housing market should see sustained demand - a desirable outcome. If mortgage rates rise due to inflation (or some other factor unrelated to growth), then consumers may decide that costlier mortgages are simply too much of a stumbling block to home buying, gains in home values nonwithstanding.3

Two things can't be denied. One, consumers have grown more optimistic recently (and wealthier, at least on paper). Two, home loans are still really cheap these days, at least by historical standards. Those two factors may maintain demand in the real estate market in the face of rising interest rates.

Citations.
1 - blogs.wsj.com/economics/2013/07/19/will-rising-mortgage-rates-halt-the-housing-rebound/ [7/19/13]
2 - freddiemac.com/pmms [8/15/13]
3 - forbes.com/sites/moneybuilder/2013/08/14/with-mortgage-rates-in-a-holding-pattern-what-will-housing-prices-do/ [8/14/13]
4 - nasdaq.com/article/how-we-know-the-federal-reserve-is-in-control-cm265615 [8/7/13]
5 - usatoday.com/story/money/markets/2013/08/15/stocks-thursday/2658439/ [8/15/13]
6 - realestate.aol.com/blog/2013/06/27/rising-mortgage-rates-impact-homebuilders/ [6/27/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

WHAT IF FANNIE & FREDDIE WENT AWAY?

How might things change for mortgage lenders & borrowers?

Is a new home financing system ahead? In the text of a speech delivered August 6, President Obama said: "I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market."This statement came as part of call for winding down Fannie Mae and Freddie Mac and revamping home financing in America.1,3


How might the playing field change? Right now, Fannie and Freddie backstop almost 90% of U.S. home loans. They are also $187.5 billion in debt to taxpayers, a result of the 2008 bailout that rescued them from the edge of insolvency. Two measures are already underway in Congress to replace both government-sponsored enterprises within the next few years.2,3

If a bipartisan bill introduced this spring by Sen. Bob Corker (R-TN) and Mark Warner (D-VA) becomes law, it would transfer lending risk over to private capital. The proposed legislation would require private lenders to assume the first 10% of losses on individual home loans, and stay sufficiently capitalized to counter major losses. A new federal agency - the Federal Mortgage Insurance Corporation, or FMIC - would regulate the mortgage industry and act to insure banks in a crisis. Just how would it be funded? A fee would be assessed on each mortgage issued. In the vision of the bill, the FMIC would pay for itself thanks to those fees and have enough left over to fund the construction of affordable multifamily properties and provide assistance to low-income homebuyers.2,3,4

Another bill written by House Financial Services Committee chairman Rep. Jeb Hensarling (R-TX) would terminate Fannie Mae and Freddie Mac without a replacement - the FHA would be the last remaining U.S. mortgage backstop. As Bloomberg notes, no House Democrats have emerged to support that bill - and as the Baltimore Sun notes, the bill drafted by Sens. Corker and Warner stands little chance of getting past the House. So it seems the playing field might be reshaped only after considerable compromise, and not in the short term.2,3

Aren't Freddie & Fannie turning a profit now? Yes, but none of it is paying for their bailout. The GSEs have now returned more than $131 billion in dividends to the Treasury, but that money represents ROI for Uncle Sam. It doesn't whittle away the $187.5 billion owed to taxpayers.3,5

What would happen to mortgage rates without Fannie & Freddie? They would almost certainly rise. Private lenders have little motivation to finance home loans the way the rules are now, and it would take significant incentives to bring them back into the market. As Moody's Analytics chief economist Mark Zandi told CNBC, "[That] will mean higher mortgage rates. The question is how much higher." In particular, first-time or lower-income homebuyers might find it tougher to qualify for a loan. (In one key respect, it has grown tougher: the average credit score for a Fannie and Freddie loan in 2012 was 756, compared to 720 in 2006.)4,6

Would the 30-year FRM become an endangered species? That is another concern. Without Fannie and Freddie around to guarantee home loans against defaults, the worry is that the standard American mortgage would become scarce. In many other nations, 30-year home loans are unconventional. The fear is that banks would address the default risks of 30-year mortgages by asking for larger down payments and demanding higher interest rates.2,4

True change will likely take a few years. It is hard to imagine Fannie and Freddie liquidating their portfolios and going out of business soon. Reform will probably proceed gradually - very gradually. President Obama's call to unwind both GSEs and the recent proposals to replace them certainly amount to interesting food for thought.2

Citations.
1 - cbsnews.com/8301-250_162-57597284/wind-down-fannie-mae-freddie-mac-obama-says/ [8/6/13]
2 - baltimoresun.com/news/opinion/editorial/bs-ed-obama-housing-reform-20130808,0,5392371.story [8/8/13]
3 - sfgate.com/business/bloomberg/article/Obama-Says-Housing-Market-Still-Needs-Limited-4710318.php [8/6/13]
4 - csmonitor.com/Business/new-economy/2013/0808/If-Obama-eliminates-Fannie-Mae-Freddie-Mac-will-mortgage-rates-go-up [8/8/13]
5 - reuters.com/article/2013/08/08/us-usa-fanniemae-results-idUSBRE9770JL20130808 [8/8/13]
6 - tinyurl.com/mg2xxs4 [8/7/13]

DELICIOUS AND HEALTHY BREAKFAST RECIPE

This recipe is from the AARP Diet book and serves 2 people.

Black Bean Omelet

•2 whole eggs plus the egg white from a 3rd egg, whisk them up
•½ cup diced onions or shallots, a little extra is OK.
•1 medium clove of garlic, diced or pressed. I am starting to think diced might be better so it doesn't cook to fast.
•1 can of black beans, rinsed and drained. Put them in a microwavable cup or bowl and heat them up for 60 to 80 seconds so they are pretty warm. Otherwise they will make your omelet cold.
•¼ cup cheese, (it is supposed to be low fat cheese). We use Swiss, which is pretty low fat on its own. I also like it to have a little more cheese than the ¼ cup.
•1 whole tomato, diced
•1 Tbsp of diced cilantro
•1 Tbsp of olive oil
•Salt and pepper to taste

Sauté the onions for about a minute or two, until they start to turn golden or start to brown then add the garlic and go for about 30 seconds to 1 minute more. I like to pull those two ingredients out of the pan so they don't get too done.

Pour in the eggs, let them start to set and the spread the tomatoes, onions and garlic, beans and cheese, on one side of the omelet. Salt and pepper the ingredients then fold the omelet over and let it heat through for about 30 seconds. Divide in half and serve with the cilantro sprinkled on top.

To spice it up, top it with some good salsa or hot sauce.

ENJOY!

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

EUROPE'S SLOW RECOVERY

A Long-Awaited European Recovery?

You may be enjoying this long respite from reading about the European debt problems, which just a year ago still scared many observers into thinking that the world was on the edge of a deep economic malaise. The last time Europe made headlines, Greece was going bankrupt, France had its pristine AAA credit rating downgraded, Spain was wrestling with unemployment north of 20%, Italy was insolvent and everybody south of Germany was mired deep in economic recession.

So where are we now? The Financial Times of London recently took a hard look at the current situation in Europe, and found that the reports of Europe's demise may have been exaggerated. In fact, it says that when the Eurozone's gross domestic product data are released in the coming week, we will see positive figures after 18 months of gloomy negative growth rates.

Among the hopeful signs: manufacturers in the 17 countries that use the euro currency have reported their biggest increase in output since 2011, and Greece, the epicenter of the original crisis, has qualified for its next batch of rescue loans totaling 5.8 billion euros as it sells off (or privatizes) government-owned corporations to pay its debtors. Spain's unemployment rate has recently fallen for the first time in two years and even troubled Portugal, where political opposition to austerity threatened its ability to receive a global bailout, now seems to be back on the tracks of economic reform. Perhaps the best news is that France's finance minister recently announced the end of recession in the Eurozone's second-largest economy, with second quarter 2013 growth of 0.2%.

Of course, there are still problems that could derail this still-fragile recovery. Perhaps the biggest is the continent's banking industry, where banks are still avoiding having to fess up to their losses on sovereign debt, still cleaning up their balance sheets and are slow to make much-needed loans to regional businesses. Greece and Spain are still burdened with 27% jobless rates, and Italy is still mired in recession after a 2.4% GDP decline in 2012.

Those of us who have read more about the Greek economy can finally dare hope that the break from scary headlines continues. Interestingly, most of the reports that talk about rays of hope in Europe also mention, in passing, that the U.S. economy has been the sole engine of growth in an otherwise troubled global economy. That, in itself, is something to cheer about.

　

Sources:

http://www.ft.com/cms/s/0/80504532-00e6-11e3-a90a-00144feab7de.html#axzz2bbpzTv8i

  
 

 

http://www.theguardian.com/business/2013/jul/25/spain-unemployment-falls

 

 

 

 

http://www.skynews.com.au/businessnews/article.aspx?id=893707

http://www.euronews.com/2013/07/22/portuguese-political-crisis-cooled-but-not-cured/

http://www.cnbc.com/id/100893323

http://www.cnbc.com/id/100951335

MARKET HIGH YAWN

New Market Highs (Yawn...)

The headlines have been telling us over and over again that the U.S. stock market is achieving record highs, and the not-so-subtle implication is that they have nowhere to go but down. In fact, the "lost decade" of 2000 to 2010 has obscured the fact that, historically, it is pretty common for stocks to achieve record highs.

If you look closely at the accompanying chart, you'll see that since 1950, the overall trend, until 2000, was a smooth if somewhat boring upward climb from 21.40 in January of 1950 to 55.34 in January of 1960 (more than a 150% gain), to 89.63 in January of 1970, to 102.09 in January 1980, to 339.94 in January of 1990. Record highs were recorded on a routine basis, and the trend accelerated from 1990 to 2000. That's roughly 50 years where the news media would have found nothing remarkable about stocks traveling into uncharted territory.

The pullback associated with the "tech wreck" decline in 2000 and the 2008 market meltdown have turned a relatively smooth ride into the kind of rollercoaster that carries warnings for people with back problems and heart conditions. Never mind that the markets are up 9,706.42% since 1950; the headlines today tell us that we're back above the market tops of 2000 and 2007.

History suggests that the steady, moderate growth of the 50 years ending in early 2000 is more normal than what we experienced during the first decade of the 21st century, when we endured two major collapses, the first brought on by rampant speculation in dotcom ventures (and Wall Street's phony and ultimately punished "research"), the other by Wall Street's reckless speculation on packaged mortgages. The ride may never become as smooth as it was in the past century, and it's certainly possible that the returns won't be quite as generous. We don't know. But it's possible that four or five years from now--or 50 or 60--all the incremental market tops will elicit barely a yawn from investors, and won't command headlines in our newspapers. Maybe we should prepare by ignoring them today.

　

AS DETROIT GOES...

You've probably read that the City of Detroit has filed for bankruptcy protection. If you're like most Americans, you assumed that this is because the city has been declining, economically for decades. And indeed it's true that America's 18th largest city, once the 4th largest, has seen its population fall by 1.3 million people, leading to a 40% aggregate drop in tax revenue despite property taxes that are now twice the national average. Detroit's unemployment rate is more than double the U.S. average--a situation which is unlikely to slow the exodus.

But Detroit's fiscal problems actually have little to do with its woeful economy. The problem lies in the assumptions that the city made about future returns in its investment portfolio--the portfolio that funds all city pensions and retirement benefits. With the benefit of hindsight, it is clear that these assumptions were disastrously off-kilter. Recent estimates say that the discrepancy between what the city has promised to its current and retired employees, and the money the city has to pay for those promises, could be anywhere between $3.5 billion and $9 billion dollars.

Here's the punch line: the calculations that Detroit's municipal authorities relied on to say that they were perfectly solvent follow generally accepted actuarial principles. Many other cities and states appear to be making the same mistake, and it's perfectly legal.

Without getting too deeply into the complicated math, the bottom line is that the city has been assuming that its portfolios would generate a steady return of between 7% and 7.5% at least since the turn of the century. In 2011, as the city's financial picture worsened, its pension fund managers increased their projections of future investment returns to 8%, which made the pension system seem potentially better-funded in future years.

Why is this a problem? If you've ever happened to glance at your own portfolio statements, you may have noticed that no conservatively-managed investment portfolio has earned anything close to 7% a year since 2000. But Detroit's actuarial team accounted for that by "smoothing" the projections--a fancy way of saying that they assumed higher returns in the future would offset the lower returns they'd experienced.

These assumptions had two highly-desirable results: they allowed the city to make much smaller contributions to the pension fund than would have been necessary with more realistic investment projections, and they allowed the city to promise future retirement (income and healthcare) benefits that were much more expensive than the city could actually afford.

The problem is that Detroit is not alone.

It doesn't take a rocket scientist to notice, as a writer did recently at The Economist magazine, that the New York City public school system account statements show a yearly return on teacher annuities that is six percentage points higher than the highest going rate on bank savings accounts. New Jersey recently cut its investment projections to 7.9 percent, a mere ten basis points less than Detroit. Over the past ten years, the giant California pension, Calpers, has been using various smoothing techniques to give its municipalities the illusion of greater solvency. Some states and cities, when they post job listings for staff actuaries, require that the potential hires hew to the generally-accepted principles. No sober doses of reality will be sought or tolerated.

Why hasn't anybody blown the whistle on this long-term overstatement of returns and understatement of liabilities? Who benefits from putting that whistle to their lips? The city employees, whose monthly statements show returns and benefits that are orders of magnitude higher than they could get in the open market? The city officials, who would then have to deal with the scandal of underfunding and have to make huge tax dollar commitments to catch up, often with money they don't have? The municipal bondholders, who are clipping coupons and whistling in the dark, hoping they'll be paid off before somebody tells them, as Detroit bondholders are now being told, that their investment is worth pennies on the dollar?

Taxpayers, who could be on the hook for billions of dollars worth of promises that the state constitution and city charter declare must be kept?

In fact, the New York Times recently reported that the Society of Actuaries itself is revisiting its generally accepted principles, fearing a black eye for the profession. The debate could lead to a policy that favors more realistic investment assumptions, while officials running for office may have uncovered the next scandal that could shoo them into office.

Either way, you can expect to hear more about bankrupt cities and municipalities, and the next headline probably won't be about a city whose population has been declining since the Eisenhower Administration. How far and how deep this readjustment will go, how much has been overstated across millions of workers and hundreds of thousands of retired municipal workers, is a potentially alarming mystery.

Sources:

http://bit.ly/16XOtSj
The Real Message Behind Detroit's Decline

http://bit.ly/160aHE1
Detroit Bankruptcy Filing Comes After Long Financial Decline

http://econ.st/17yyc8v
Detroit's Bankruptcy Pension Blues

http://nyti.ms/11qiefD
Detroit Gap Reveals Industry Dispute on Pension Math

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

HOW MUCH HEALTH CARE REFORM WILL WE SEE BY 2014?

Can the federal government follow through on its ambitions?

In 2014, we were supposed to see profound health care reform per the 2011 Affordable Care Act - but how much of that reform will roll out on time?

The federal government has already conceded that it can't enforce the employer mandate portion of the Affordable Care Act by 2014. On July 2, the Obama administration gave businesses with 50 or more employees a 1-year reprieve from having to provide affordable health insurance to full-time employees (people working 30 or more hours weekly).1,2

So how about the state health insurance exchanges that are scheduled to be up and running by October 1? How about the planned expansion of Medicaid? Will these reforms also be delayed? The House of Representatives has scheduled a mid-July vote to attempt to do just that. Lastly, do small businesses have any enthusiasm about health care reform?3

What's the progress on the state exchanges? The progress report isn't good. As the Wall Street Journal noted last month, even the Government Accountability Office thinks that a "timely and smooth implementation of the exchanges by October 2013 cannot yet be determined."4

Small businesses and the self-employed are supposed to be able to find affordable coverage through these online marketplaces. The small business exchange rollout has already encountered glitches. In some states, only one insurance carrier has shown interest in them; the state of Washington is simply postponing its exchange because no carrier wanted to provide small business plans statewide. In 2014, businesses will be asked to select and offer one insurance plan from the exchanges to their workers. In the initial conception, they could elect to offer employees multiple insurance options. The federal centers for Medicare & Medicaid Services are overseeing the implementation of the individual exchanges in 33 states; 17 other states and the District of Columbia are setting up their own exchanges.4

Individual exchanges in 34 states will be created via the federal government - but on July 5, it quietly granted another concession. The Department of Health and Human Services relaxed a requirement for the 16 other states and the District of Columbia to verify the income and health coverage status of applicants to those individual exchanges. These 17 exchanges will only check the income eligibility of applicants at random next year, and they will wait until 2015 to check if applicants are getting employer-sponsored health benefits.5

The WSJ learned that states running their own exchanges had missed, on average, 44% of the interim deadlines for these projects through the end of March. Still, DHHS chief technology officer Todd Park told CNBC that the state exchanges are "on track" and will allow open enrollment beginning October 1.4,6

Where do things stand state-by-state with the Medicaid expansion? Just 23 states and the District of Columbia have signed up for it. (You'll recall that the Supreme Court allowed states to opt out of it when it ruled that the ACA was constitutional in 2012.) In these states and in Washington D.C., those with earnings of up to 138% of the federal poverty level may qualify for Medicaid (that works out to earnings of $15,856 for an individual and $32,499 for a family of four). The expansion of Medicaid in these states doesn't require the federal government to recreate the wheel, but delays could happen in other ways. In Michigan, for example, state legislators have passed their own version of a Medicaid expansion requiring a 90-day federal review process, which will put Michigan weeks behind in enrolling participants in expanded Medicaid coverage.6,7

Do employers even care about the ACA's incentives? The ACA opens the door for employers to markedly increase the percentage of employee benefits represented by wellness incentives. Yet in a survey of 1,000+ employers conducted by Virgin HealthMiles and Workforce Magazine, just 25.8% of companies surveyed said they intended to draw on wellness provisions of the ACA to enhance employee health benefit offerings. A lack of information about such incentives may be a factor here for both employers and employees. In fact, the survey also polled almost 10,000 workers at these companies and found that while 87.2% looked at health and wellness packages when considering a job, half of the respondents said they were "not aware of, or need to know more about, health and wellness programs offered by employers."8

Frankly, what's to get excited about?An analysis from insurance consulting firm Millman says that individual premiums could grow 25-40% costlier due to the ACA with small market group premiums rising 6-12%. On the other hand, Humana estimates that by renewing individual and group health plans before 2014, a workplace with predominantly younger and healthier employees could see rates rise by 15% or less. Unsurprisingly, a number of major carriers are expected to offer early renewals.9

President Obama noted the possibility of "glitches and bumps" along the way to the ACA's full implementation. They are evident now.

Citations.
1 - kansascity.com/2013/07/03/4328512/qa-on-impact-of-health-law-delay.html [7/3/13]
2 - money.cnn.com/2013/07/03/smallbusiness/obamacare-employer-mandate/index.html [7/3/13]
3 - abcnews.go.com/blogs/politics/2013/07/house-to-vote-next-week-to-delay-individual-mandate/ [7/11/13]
4 - online.wsj.com/article/SB10001424127887324520904578553871314315986.html [6/19/13]
5 - reuters.com/article/2013/07/08/us-usa-healthcare-obamacare-idUSBRE96700R20130708 [7/8/13]
6 - webmd.com/health-insurance/news/20130711/is-us-health-care-reform-on-track-for-2014 [7/11/13]
7 - lansingstatejournal.com/article/20130707/NEWS04/307070073/Clock-ticking-Michigan-Medicaid-expansion [7/7/13]
8 - benefitspro.com/2013/06/03/employers-ignoring-ppaca-wellness-incentives [6/3/13]
9 - benefitspro.com/2013/05/31/putting-off-ppaca-with-early-plan-renewals#.UdQRNFW13Vk.email [5/31/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

TEACHING YOUR KIDS ABOUT MONEY

Teaching Your Kids About Money - A Childhood Money Mastery Curriculum

Chances are, there was a lot you didn't know about finances when you reached adulthood. Your ignorance may have cost you money in the form of an overdrawn checking account where the bank gleefully heaped on additional fees, or credit card debt at interest rates that would have qualified as criminal usury in the Middle Ages. You may have overextended yourself when buying a car, been mystified by the APR on your home mortgage, or you may be one of those unfortunate people who ran into a financial predator who sells high-commission investments, annuities or unnecessary life insurance coverage.

You don't want your children to learn these lessons the hard way. What can you do to help them master the complexities of this mysterious thing we call "money?"


The bad news is that you'll have to home-school this curriculum, since primary and secondary schools inexplicably don't teach basic money skills, and the only way your children will be taught about money in college is if they decide to take financial planning courses that are taught at a fraction of all the colleges and universities in the U.S.

Just like any other subject, a money curriculum provides information and teaching that is appropriate to the age. You're not going to be able to teach a seven-year-old about graduated income tax rates or the wonders of compound interest, and she'll have no idea what you mean if you tell her that your home cost $200,000. So consider this as an age-appropriate guideline for developing money mastery in your children.

Ages 6-10

Some experts say that your child's financial education should begin as soon as he or she is old enough not to eat the money. But money is fundamentally about mathematics; when your children can add and subtract, they can start the money learning process.

Step one: Introduce your children to coins first. Explain the value of coins in terms they can understand--how many are required to buy gum, a candy bar or something else they ask you for as you shepherd them past that dreaded candy display at the checkout counter. Help them learn to make change and convert one kind of coins into others. Later, you can do the same for bills.

Step two: Begin giving your children an allowance, and as time goes on, draw an ever-clearer link between chores and allowance. When children make their beds, put their clothes in the laundry and take their dishes off the table, they recognize that their weekly stipend is earned rather than doled out. (This is an area where experts disagree, because of the possibility that a child will decide not to make her bed and then challenge you to dock some hard-to-calculate percent of her allowance. But a compromise is to require that the chores be done.) Pay extra for additional jobs your children perform.

Step three: Encourage your children to save some or all of their allowance in a piggy bank. They'll begin to see how the coins accumulate, and how that process can eventually deliver enough of them to buy something they might desire. This is the fundamental essence of saving. Interestingly, research has shown that some children are distrustful of a piggy bank if they can't see where the money went. The state-of-the-art in piggy banks is the Money Savvy Pig, a see-through piggy bank with four slots: save, spend, donate, and invest. The goal is to help kids learn that money isn't just accumulated to buy things.

Step four: Empower your children to manage their own money. Let them decide how their allowance will be used, and let them make mistakes. If they make impulse purchases, and later want something that costs more than they currently have, that becomes a teachable moment.

Step five: Incorporate your money mastery teaching into your everyday activities. In the early years, use your trips to the grocery store to explain prices. When you go to the ATM, you can explain that money doesn't actually come from a machine. Later, when you open bills, you can talk about payment for services like the phone and cable TV.

Step six: Use the power of online gaming for good rather than time-wasting evil. There are online websites and even games that families can use to get the conversation going such as Thegreatpiggybankadventure. Other examples include Feedthepig.org, kids.gov, www.doughmain.com and TheMint.org/kids. PNC Bank and Sesame Street teamed up to create fun videos and games that teach kids about money: http://www.sesamestreet.org/parents/topicsandactivities/toolkits/save. MassMutual, meanwhile, has developed Save! The Game, an app for the iPad and iPhone that teaches kids the difference between wants and needs.

Ages 11-13

As your children reach middle school age, you should start to increase their responsibilities--to help them learn by doing.

Step one: Start to make your children responsible for paying, out of their allowance, more of their daily expenses--school clothes, school lunches, birthday presents--and help them create a budget that allows them to save if they buy wisely. How much money should you give them? Keep track of what you've been spending on their needs and desires over several weeks, and arrive at a reasonable figure that exceeds their weekly or monthly costs by the amount of allowance you intend them to have.

Step two: Have your children set up a savings account, and tell them you'll match every dollar they put in there. The only stipulation is that they can't take out the money you put in. That's earmarked for long-term savings and/or college expenses.

Step three: As you shop for groceries or head to the mall, help your children comparison shop, so they can eventually go out on their own and shop for value. Show them similar items that might have very different price tags. You might also consider using cash for your purchases when you go out with your children. They aren't going to learn very much about money if they see you paying for everything with that magic piece of plastic.

                                                   Ages 14-17

Your high school-age (pre-college-age) children will soon need to function on their own financially, so consider these finishing touches.

Step one: Help your children set up a checking account, so they can get familiar with staying on top of their account balance and pay their expenses by check.

Step two: Explain how debt works, and show your children a credit card statement (if you have one) that includes finance charges. A surprising percentage of teenagers didn't understand that banks charge interest on the loans they make. Many teens don't even realize that credit cards are a form of borrowing. Consider giving them additional money each week or month for gas purchases, and get them a gas station credit card that they can pay off each month.

Step three: Let your children invest. Your child may not yet have the money to buy a Treasury bill or 100 shares of Apple, but you can buy mutual fund shares at very low initial payments, and many fund companies have programs especially set up for teens. Look together at the fund's most recent holdings report and see how many companies you recognize--and help your children monitor the performance of the investment. Show them on a simple spreadsheet how a regular monthly investment compounds over 10, 20 and 30 years. Chances are you, yourself, will be astonished at the accumulation opportunities of the very young.

Step four: Your children have entered the summer job years, which gives them an opportunity to learn about taxes. Children who have never held a job before and thought that taxes didn't need to be paid until April 15 (or not at all) will learn a quick lesson from their first paycheck statement. Most employers will be withholding far more tax than your children will end up owing, and the FICA withholdings provide another teachable moment. (You can, of course, file a W-4 claiming exemption from withholding, but appropriate payroll taxes will still be withheld.)

There's more, of course, such as sitting down with your children and discussing charitable donations (some parents save all their charity solicitations for six months and then sit down to go over which look most appealing) and the need to save receipts if your children go into business for themselves (such as mowing lawns or house-sitting animals). Consider those optional elective courses in the overall curriculum.

If your children manage to graduate from this money mastery home-school program, they'll be far better prepared for the real world of money than you probably were. And they'll be far more likely to succeed financially than 95% of their peers, who will enter college with only a dim idea of what a checkbook or budget is.

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

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