Disability Awareness: What You Don’t Know Can Cost You

Disability is more common than many people realize.

May was "Disability Awareness Month." In case you missed it, here are a few noteworthy facts, courtesy of "The 2012 Council for Disability Awareness Long-Term Disability Claims Review," which is a survey of disability claims at major insurance companies.

Key Facts About Disability
Here are some key facts about disability that you may not know:

• Three out of 10 workers will have a disability that lasts 90 days or more.
• Fifty-seven percent of disability claims were made by women.
• Forty-five percent of new claims were for people under age 50.
• Over 20% of claims were for people under 40.
• Thirty-five percent of claims were for people age 50 to 59—peak career-earning years and critical years for saving for retirement.
• More than 95% of disability claims were not work-related; therefore, fewer than 5% of disability cases were eligible for worker’s compensation benefits.
• Only 69% of individuals receiving group long-term disability benefits also qualified for Social Security disability benefits.
• Social Security disability benefit qualification is difficult. Only 36% of new Social Security claims resulted in benefit payments awarded.
• Nearly all Social Security disability benefit payments are less than $1,500 per month.

"Three out of 10 workers will have a disability that lasts 90 days or more."
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Top Disability Causes 
Here is a list of the top causes of disability, based on existing claim diagnosis categories:

1. Musculoskeletal/connectivity tissue: 30%
2. Nervous system-related: 14%
3. Cardiovascular/circulatory: 12%
4. Cancer and neoplasms: 9%
5. Mental disorders: 8%
6. Injury and poisoning: 8% 

Protect Yourself with Disability Insurance
Individual disability policies remain in force when you change jobs or get laid off, as long as you continue to pay premiums.

Disability insurance is much less expensive at a young age. Future increase options are critical.

New college graduates, take note!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Human Capital: The Foundation of Your Economic Value

Your human capital is one of your greatest assets.

Allow us to offer a few short and sweet thoughts to consider about "human capital."

Economic value and wealth are created using labor, land and capital.

Human capital is one’s ability to apply your labor (physical and/or mental capability) to create value and wealth. This is usually reflected in the form of compensation or a pay check, but it can also be volunteer work or service that provides intangible benefits beyond compensation.

"Economic value and wealth are created using labor, land and capital."
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Don’t Squander Your Greatest Asset
Human capital is your greatest asset!

Develop, nurture, maintain and increase it!

Never stop learning.

Resist the temptation to "coast" in the final years of your career. It may set you up for an early lay off or job elimination.

Resist the temptation to "vegetate" in retirement, lest you become a vegetable!

Continue learning well beyond your formal retirement date. It will keep your mind sharp and your body healthy.

What did you learn today?

Celebrate and enjoy!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Betting Against the House

Stocks of homebuilding firms performed well in 2012.

It's New Year's Day 2012. In addition to overdosing on televised college football, you're spending part of the holiday working on the family finances. Armed with a laptop and various online financial tools, you're on the hunt for appealing stock market opportunities. To prune the list of candidates to a manageable size, you decide to focus on firms that are leaders in their respective industries and exhibit above-average scores on various measures of financial strength. As you work your way through the alphabet, you come to the "P" stocks, and another candidate appears. It's a prominent player in a major industry (good), but operates in a notoriously cyclical industry (not so good), pays no dividend, and has a junk-bond credit rating of BB-minus. Next! You push the "delete" key and move on.

Congratulations. You just passed up the best-performing stock in the entire S&P 500 Index for 2012.

Stock Prices Are Forward-Looking

Shares of Pulte Group, a Michigan-based homebuilder with a 60-year history, jumped 187.8% last year amid strong performance for the entire industry. For the year ending December 31, 2012, all 13 homebuilding firms listed on the New York Stock Exchange outperformed the S&P 500 Index by a wide margin, with total returns ranging from 34.1% for NVR to 382.8% for Hovnanian Enterprises. The Standard & Poor's Super Composite Homebuilding Sub-Index rose 84.1% in 2012 compared to 13.4% for the S&P 500 Index.

The point? For those seeking to outperform the market through stock selection, underweighting the market's biggest winners can be just as painful as overweighting the biggest losers. Investors are often caught flat-footed by stocks that do much better or much worse than the broad market, and the problem is not limited to individuals. Not one of the 10 seasoned professionals participating in Barron's annual Roundtable stock-picking panel in early January 2012 mentioned homebuilding stocks or any housing-related firms.

The recent surge in housing shares also serves as a reminder that stock prices are forward-looking and tend to rise or fall well in advance of clear changes in company fundamentals.

"There is an easy way to own the best performing stocks in the S&P 500. Own all of them!"
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Waiting for Evidence of Healthy Profits Can Lead to Frustration

Investors who insist on waiting for evidence of healthy profits before investing are often frustrated to find that a firm's stock price has appreciated dramatically by the time the firm begins to report cherry financial results. Shares of Hovnanian Enterprises, for example, rose 580% between October 7, 2011, and December 31, 2012, even though the firm continued to report losses. Similarly, it is not unusual for a firm's stock price to decline long before signs of trouble become obvious.

Many observers in recent years predicated that a recovery in the housing industry would be agonizingly slow, and they were right. Many investors in recent years have avoided housing stocks as a consequence, and they've been wrong: Housing stocks have outperformed the broad U.S. stock market by a healthy margin from the market low in March 2009 to the present day.

BOTTOM LINE: Markets have 101 ways to remind us of Nobel laureate Merton Miller's observation—diversification is the investor's best friend.

Source: DFA Fund Advisors

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

What’s Your Retirement Number? A Simpler Solution

Do you really know how much
money you need to retire?

A national financial services firm has featured "What’s Your Number?" in an advertising program. People are shown with figures like $812,000 or $1,260,000 or $1,925,000 floating over them. These numbers represent a lump-sum figure the person should have accumulated before they can comfortably retire.

There Are Many Ways to Calculate Your Retirement Number

Other firms tout similar approaches by calculating a factor of your final income before retirement. For example, AON Hewitt, a major employee benefits provider, suggests that 11 times your final salary is a good lump-sum target. So if your final salary is $75,000, you should have a retirement portfolio of $825,000.

Fidelity Investments uses the same approach to come up with a number of eight times your final salary, with the following benchmarks along the way:

• 1 times your salary at age 35
• 3 times your salary at age 45
• 5 times your salary at age 55

Fidelity says that this can be achieved by a 25-year-old who starts saving 6% of his income and increasing his savings rate 1% per year for six years, and then maintains a 12% savings rate thereafter. Procrastinate between the ages of 25 and 45 and The Center for Retirement Research at Boston College reports that you would need to start saving about 33% of your income. Ouch! Calculating such a lump sum requires a complicated series of steps and the results are highly sensitive to many assumptions. Therefore, the majority of people never try to answer the question, "What's your number?" Not to mention that calculating a huge lump-sum number discourages many people and makes them feel like retirement planning is a futile exercise.

"Calculating a huge lump-sum number makes many people feel like retirement planning is futile."
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A 15-Minute Retirement Planning Solution

But there is a simpler solution! What percentage of your income did you save last year? This is a much simpler calculation that can be done in 15 minutes or less.

Step 1. Calculate your total taxable employment income using your W-2 wage form or income tax return.

Step 2. Add up the dollars you contributed to your retirement plan, including employer contributions, from your December 31 retirement plan statement. Do not include Roth 401(k) or Roth 403(b) contributions since they are included in Step 1.

Step 3. Add up the dollars you added to or withdrew from other savings and investment accounts or accumulated in or depleted from your bank accounts during the year (the change in your bank account balances from beginning of year to end of year, up or down). This sum may be a positive or negative number.

Step 4. Add Step 1 and 2. This is your total income including employee and employer retirement plan contributions.

Step 5. Add Step 2 and 3. This is your total net contributions to savings.

Step 6. Divide Step 5 by Step 4. This is your savings ratio!

This is much simpler than estimating future income and expenses to calculate a lump sum number as a retirement goal. Your savings ratio should be 10% to 25%. It should be at the higher end of that range if you are older and if you are a high-income person.

Don't despair if it is less than 10%. Get on track for a successful retirement by increasing your savings rate as best as you can, even if only slowly and steadily.

Calculate Your Savings Ratio and Create Peace of Mind

Calculate your savings ratio today and every year and give yourself the peace of mind of knowing you are on the right path to a secure and comfortable retirement!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

A Penny Saved Is a Penny Earned, and More!

A Penny Saved

Benjamin Franklin coined (no pun intended, really) the expression, "A penny saved is a penny earned." But a penny saved is really more than a penny earned, if you think about it. Why?

Ben Franklin came up with his enduring aphorism before we had a federal income tax system. And Social Security and Medicare taxes. And state income taxes. And local income taxes. See where I'm going here?

How Much Is a Penny Really Worth?

You can earn your penny from employment or investments. Let's focus on employment. Employment earnings are subject to federal, state, local and FICA (Social Security and Medicare taxes). Let's say your marginal income tax rates (the rate at which you are taxed on an additional penny of income) are 28% federal, 5% state, 2% local and 7.65% FICA. That's a total of 42.65%. So a penny earned is really 1 cent minus your marginal income tax rate of 42.65%. In other words, your penny is actually worth 57.35% of one cent, or $0.005735 after income taxes.

To spend one penny you have to earn 1.74 cents because 1.74 cents after taxes of 42.65% is one penny (1.74 x 42.65% = 74 cents of taxes, leaving you with 1 cent).

Put another way, to spend $100 you have to earn $174 dollars of employment income. To spend $1,000, you have to earn $1,742. To spend $10,000, you have to earn $17,420. Pretty soon you're talking serious money.

"To spend a penny, you have to earn more than a penny. "
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Spending Costs More Than You May Think

You get the picture. It costs a lot more to spend money than meets the eye, when you consider what you have to do to earn it.

A penny saved is more than a penny earned. You heard it here first!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Beware of Buying Individual Stocks: You May End Up Owning Something Else

Stock History

My stepfather, who will be 90 years old this summer, owns some JPMorgan Chase & Co. common stock. The JPMorgan Chase stock dividend was cut in the 2008 global financial crises and the share price was recently battered by international trading scandals. Is this a good stock for an 89-year-old?

Do You Really Know What's In Your Portfolio?

My stepfather never bought JPMorgan Chase common stock. He didn't inherit it or receive it as a gift. How did he come to own it today?

More than 30 years ago, my stepfather bought some stock in The Farmer's Savings and Trust Co., a local savings bank in his hometown of Mansfield, Ohio. The Farmer's Savings and Trust Co. only had offices in Mansfield and only made local loans. He knew the bank's president and many of the people on the board of directors. It was a simple, safe, local investment.

But then The Farmer's Savings and Trust Co. was bought by Bank One, a larger Ohio bank. Bank One started to expand regionally. In the 1980s and 1990s, regional bank stocks did very well, so his original investment accumulated quite a capital gain. Such a large capital gain became an obstacle to selling the stock.

"When you buy an individual stock, your original investment may grow into something completely different."
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Corporate Mergers Can Affect Your Investments

I've lost track of the corporate mergers, but I think Bank One bought Continental Bank in Chicago. Then JPMorgan & Co. merged with Chase Manhattan to become JPMorgan Chase & Co. Then Bank One merged with JPMorgan Chase. There may have been some other mergers along the way.

JPMorgan Chase common stock recently got pummeled by international trading strategies. But the bank that my stepfather originally bought stock in never did international stock trading. Many smaller, local banks in many communities were able to maintain and not cut their dividends during the 2008 global financial crises. But my stepfather's stock had "morphed" in to a much different bank than he invested in.

There are many similar stories of other companies in many industries. Some corporate changes have turned out well, some not so well.

Be Careful When You Buy Individual Stocks

One thing is for sure. Beware of buying individual stocks to buy and hold forever. Or be willing to sell and pay a capital gains tax, which most people won't do. When you buy an individual stock, your original investment may very well grow into a completely different animal.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Financial Fire Drill: Quick, What's The Password?

I have a confession to make. I don't know how to run our washing machine. I knew how to run the old one, but not the new one. Truth be told, we've had the "new" washing machine for at least five years now. Sad excuse. Fortunately, I have a loving wife who does laundry for me. As a double bonus, my college and high school age children know how to run it. I'm on easy street, it seems. But I would be up the creek if I had to do laundry myself. Heaven help me.

Schedule a Financial Fire Drill

We're in a similar situation when it comes to our home banking and bill-paying. I do it all. I am as high-tech and paperless in our banking and bill-paying as possible. My dear wife, God bless her, is out of the loop. I have told her the master password to our accounts, but we've never had the equivalent of a fire drill to see if she remembers it and would know what to do if I became seriously ill or died. I need to put that on the "should do" list.

In the old days, if a spouse or child had to take over banking for their spouse or parent, they just picked up the checkbook and started writing checks.

The days of just picking up the checkbook and writing checks are over.

So stage a fire drill. There is no gender bias here. If the spouse who pays the bills had a stroke, would the other spouse be able to pay the bills? If your single mom or dad had a stroke, would you be able to pay their bills?

It's better to be safe than sorry.

"If your single mom or dad had a stroke, would you be able to pay their bills?"
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About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.