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Archive for January, 2014

How I Tamed My Health Care Cost Monster

January 18th, 2014 at 12:11 pm

As I was coming close to turning 65, I knew I had to make some important decisions regarding my health care coverage. For the previous 20 years, I had been riding the coattails of my wife's employment, and paying sometimes nothing and sometimes a token amount for soup-to-nuts health insurance coverage. But no more. The minute I turned 65, I would be dropped like a hot potato from my wife's employer-provided health insurance policy. Goodbye, free ride. Hello, Medicare.

There are plenty of health care cost horror stories on the blogosphere and, like most of you, I had read my share. Health care costs: the bottomless pit... the destroyer of retirement stashes... the car crash waiting to ruin my carefully laid plans for financial independence. What to do?

While all these happy thoughts were progressively rising to my mind's surface more and more often, my mailbox started spewing forth more and more direct (junk) mail packets from insurance companies eager to take my money in exchange for... what? I figured I had better start digging in and find out.

Asking the Right Question
Yes, Medicare would cover a very large part of the front end, but not everything and not without limit. And it would actually cost me?! (Surprise, surprise, I thought all that money deducted from my paychecks for over 40 years would take care of that.) And so, to cover what Medicare would not, I would need a Medicare supplement policy. Or not (!) since I could also opt for a "Medicare Advantage" policy to combine the core Medicare coverage and the supplemental coverage under one insurance roof. Boy, oh boy.

I started making lists and evaluating policies, tabulating who gave what for how much and up to what limit, and yaddy yaddy -- and then it came to me. Too many possible answers. But... what was my question? What problem was I trying to solve? Without nailing that down, no way would I recognize the right answer when I saw it.

The first thing I realized, before even formulating that all-important question, was that I had begun my policy search implicitly trying to replace what I was losing: soup-to-nuts coverage. But did I really need that? Sure, it had been great "fun" to go to doctors and be able to walk out having to co-pay a whole ten bucks (!) for a consultation or an annual physical or anything. Blood tests? Sure! An x-ray? Bring it on! A colonoscopy? Well, if I really had to. What did I care; I wasn't paying for any of it.

But did that mean I could NOT pay for it? Did I really need health insurance to cover that? What did I REALLY need the health insurance to do? And so I had my question. And I also had my answer. I needed a Medicare supplement policy that would keep me from suffering a catastrophic loss of retirement assets as the result of treating an illness or accident.

Coming Up With the Right Answer
So, what would a "catastrophic loss of retirement assets" look like? How much loss would be catastrophic? That number is (of course) different for everybody. But since this is my story, this is my catastrophic loss number: anything above $25,000. What I needed was a policy that would LIMIT MY RISK to that $25,000. And I should search for and select a policy based on how well it would limit my risk, and not on what I could get for my premiums along the way.

By now, you are probably starting to see where I ended up going. To arrive at what I would consider the best overall deal for me, I looked at 2 factors: annual premium and annual out-of-pocket risk. And lo and behold, a High Deductible Plan F Medicare Supplement policy was right up my alley. My premium is $636 a year. My deductible (and therefore my out-of-pocket risk) is $2110 a year. Add to that $1260 in annual Medicare premiums, $180 a year for my prescription plan, and $325 for my annual prescriptions deductible and it all adds up to $4511 a year.

Throw in another $489 in theoretical prescription co-pays a year and we get a worst case scenario of $5000 a year -- which is one hell of a lot less than my $25,000 tolerance limit.

Every year, I'll pay the premiums (which, I realize, will creep up every year). Then I'll be on the hook for the first $2110 of medical expenses -- over and above what Medicare will pay -- plus the first $325 of prescriptions. And after that... ZERO cost for up to 15 months of hospitalization... ZERO cost for 100 days at a nursing facility... ZERO cost for all physicians services... ZERO cost for all laboratory diagnostic services... plus a bunch of prescription medicines thrown in. (Hey! If I'm still racking up medical costs after 15 straight months of this stuff, it's going to be time to pull the plug anyway.)

So I put those policies in place. Then the last piece of the puzzle for me was to set aside $5000 in a savings account specifically intended to cover two years' worth of the $2435 in annual worst-case medical and prescription out-of-pocket annual medical expenses. Case closed! I could stop worrying about my health care coverage, and get on with my financially independent living.

The big epiphany here? I focused on overall worst case scenario risk to come up with a maximum expense number ($5000 a year) I could most certainly live with. And the best news of all? Even if you're under 65 and without Medicare, you could make this work too (like Mr. Money Mustache has done).

What about you? How have you approached health care cost coverage and its costs so that it won't swallow up your stash?

What Makes Me Sell a Stock?

January 14th, 2014 at 10:40 am

I invest in dividend-paying stocks. I've explained why in my blog post "Why I Only Buy Dividend Stocks". And I've detailed how I choose which dividend stocks to buy in my blog post "My High-Yield, High-Risk Investing Strategy." But I also have a strategy for when to sell a stock. When to take a profit. And when to evict a company from my portfolio, regardless of profit or loss. Here is that strategy*.

I hold stocks to collect dividend payments. I don't buy a stock expecting to sell it. And as long as I think a company will continue to pay out the dividends I bought it for, I don't anticipate selling its stock "just" because its price has dropped. But enough of an unrealized gain in one of my stocks will cause me to sell it.

That "sell" signal is based on my portfolio's 8% average dividend yield. (Remember, it's a high-yield, high-risk portfolio.) If the price of one of my portfolio's stocks is up 10% from the price I bought that stock for, that unrealized gain is more than the dividends I could collect by holding that stock for an entire year. And collecting that whole year's dividends now, by selling the stock, is guaranteed. So in such a case, I will sell the stock -- at a 10% profit or better -- and collect all of the next year's dividends in advance.

Having sold the position, I then have to find some other company's stock to buy in order to put the sale's cash proceeds back to work. But -- because I've done the equivalent of collecting a year's dividends in advance -- I have plenty of time to patiently wait for a good buying opportunity.

I will also sell off a stock if a change in the company's business model threatens the continued viability of the stock's dividend. And I will sell it, whether at a profit or a loss.

One example: I've sold off a mortgage Real Investment Trust's stock because the company announced a change in its business model to begin buying mortgages not guaranteed by a government agency. Another example: I've sold a tanker company's stock because the company announced a change in its business model to shift from arranging long-term charters for its ships to putting the ships up for short-term "rental" on the shipping spot market.

In both above cases, I judged the business model changes to pose a serious threat to dividend stability. And so I sold off the stocks. But such sales are not prompted by a stock price drop. They are prompted by my perception of a threat to the high-yield side of my investing strategy.

That's my stock selling strategy in a nutshell. I'll take the profit if the sale will give me a year's worth of dividends in advance. And I'll dump the stock of companies making business strategy changes that I believe will threaten their dividends. Otherwise, I ignore stock market movements and the market price of stocks in my portfolio.

What is your stock selling strategy? What do you think of mine?

*I am not a financial advisor, and I am not recommending that anyone else do what I do. I have written this post to record what I do and to motivate discussion.

A Frugal Tale of Two PCs

January 11th, 2014 at 02:56 pm

Not too long ago, while in the middle of doing some web-based stock research, my Dell desktop PC's monitor screen went black. Nothing would bring back an image. Hard shut-offs and new starts didn't help any. And then the PC started to just shut down if I even touched any key on the keyboard.

Uh, Oh, I thought. I have to buy a new computer. But I needed web access right then. So I dug out of storage a 2005 Gateway laptop I had not even started up for 2 years and gave it a try. And it worked, up to a point. Some web pages it loaded very slowly. Some it could not load at all. I made do. And thought to myself: I still need to buy a new computer.

So I fell in love with a new Gateway laptop: well equipped with a 2.2 GHz processor, 4 gigabytes of RAM, 500 GB of storage memory plus lots of bells and whistles. It would cost me around $350 including sales tax. That did not sound bad at all. I certainly could afford it.

Then I thought of all the data files trapped in my presumably dead Dell desktop PC. I had to see if I could recover that data. And that thought eventually led me to ending up with 2 fully functional computers for a fraction of what I would have paid for that lovely new Gateway laptop.

The Desktop PC Gets Saved
I phoned my local Staples Tech Center and found out that for $69 I could have my desktop Dell diagnosed to find out what was wrong with it. Then, if I wanted to proceed with the repair, the $69 would be applied to that repair. If I decided not to get that PC fixed, I could apply the $69 to a retrieval of my trapped data. That sounded OK, so I gave the Staples tech the go-ahead.

A day later, I got a good news / bad news phone call from the tech. Bad news: I had a fried video card. Good news: the fried card was an add-on "upgrade" and the desktop Dell still had its functioning original built-in video card. With a couple of mouse clicks, the tech could bypass the fried video card and have the Dell work off the operational original card. No hardware repair would be needed! And no data retrieval would be needed, either, since the Dell would be functional again.

Great news. But could I have the $69 diagnostic fee applied to another service? The answer was "probably" yes. So I went back to the Staples Tech Center with a 1000 Gigabyte hard drive and a set of Windows 7 system discs, both of which I had bought years earlier but not installed. Would the $69 cover installing both? Yes! So, for $69 out of pocket, I ended up with a re-functionalized desktop PC sporting 10 times its previous storage memory and an upgraded operating system.

The Laptop Gets Upgraded
When I went to pick up my rejuvenated desktop Dell, I brought along my 2005 slower-than-molasses laptop (the one I had dug out of storage when this saga began). Could it get a new lease on life at a reasonable cost? Yes, again!

This laptop had a fast-enough 1.4 GHz Intel processor. It just did not have enough RAM installed to handle today's web pages and programs. An upgrade from its current skimpy 500 megabytes of RAM to a maxed out and respectable 2 gigabytes of RAM cost me a grand total of $43 -- installed.

So I was good to go -- with a reactivated desktop PC and an upgraded laptop for a combined total cost of $113. I saved 2 pieces of still-serviceable equipment from the trash/Goodwill/dead storage heap. I avoided the purchase of yet one more electronic gadget. And I saved $234 in the process.

And I Learned Valuable Lessons
Finally, I learned something more about living frugally without sacrifice. I should not be too quick to discard and replace. First, I should try to repair. Second, I should look for a substitute item among the things I already own. Third, if replacement is unavoidable, look first in Craig List (something I did not even think of doing). This time, following these steps saved me over $200. Next time, they might save me much more.

What about you? Do you try to repair before replacing? Have you got a story about a change of approach from replacing to "enabling" that saved you dough? Have you recently resisted the siren call of a new shiny gizmo to spend your hard earned bucks on?

Strategy Games: My Rainy Day Passion

January 7th, 2014 at 01:23 pm

One of my retirement living rules is to make sure I have fun every day. I limit my daily have-to-do's schedule so that I'll have a decently sized block of time (4 hours at least) left open for want-to-do activities. If the weather is good, my preferences are to go hiking, ride my bicycle, or take a country road drive surrounded by beautiful scenery. If I'm in the mood, I throw in a camera or a fishing rod and I am golden.

But what if the weather isn't so nice? Outdoor activities are not an option for me if it's raining or snowing, or if the ground is too wet, or if the ground or road is covered with snow. So what do I do then to have some fun?

In my case, I have 3 options: watch a DVD movie from the library or my collection, read one of my collected history books, or play one of my computer strategy war games. The movie watching will entertain me for a couple of hours. The reading can absorb me for a while longer. But the war gaming can so completely draw me in that I've been known to keep at it all night and still be playing when the sun comes up the next day.

What's up with that, you may ask. What's the big attraction? Well, playing a strategy war game commands my complete and intense concentration in an intricate, detailed, many-moving-parts planning process against an adversary (the game's artificial intelligence) that is doing the same thing to stop and best me. Hah! That sounds like hard work, doesn't it? But it's very interesting and exciting to me -- just my cup of tea.

I'm not talking about shoot-them-up games where you guide some individual character around the computer screen blasting away at anything that moves. I'm talking about grand-scope games where you guide and command whole armies and navies around vast operational theaters in concerted military campaigns that may take as long as a year of game days -- or even a lot longer.

Think of being in supreme command of all the actual Allied ground, sea and air forces on December 6, 1941 (War in the Pacific) and going forward from there for the next year to try and stop the Japanese juggernaut. Or put yourself in command of that juggernaut.

Think of being in command of the actual Army of Northern Virginia on July 1, 1863 as it approaches the sleepy Pennsylvania town of Gettysburg and starts encountering signs of federal troop movements (Civil War Generals). Or think of being in command of the actual Roman legions at Cannae in 216 B.C. as you face Carthage's infamous Hannibal and his forces (The Great Battles of Hannibal). Or let fantasy fly and think of being a 16-year-old newly ascended one-town Norwegian jarl in 800 A.D. as you embark on a years-long struggle to unite Norway into a single kingdom and then go on to unite Norway, Sweden and Denmark into a Scandinavian Empire (Vikings). To me, this is FUN STUFF!

Big picture war strategy -- that also demands life-or-death attention to numerous tactical details. This is a big part of the mental challenge I find in playing these games.

If I'm ordering a carrier air strike against an enemy airfield, I have to decide how many fighter planes to send as escorts for the dive bombers and how many to hold back to fly combat air patrol over my taskforce. Get it wrong and my air assault could be repulsed or my carrier could be bombed and sunk in a counterattack.

If I am assembling a longship fleet to raid English towns and abbeys, I've got to decide how many of my Viking warriors to take with me, how many to arm as archers and how many as swordsmen, and how much food to load onboard to feed those warriors and crew (at least until we can resupply by reaching and plundering an abbey). Mess up and we'll be crawling back home, possibly to find our own hometown has been attacked and sacked.

And on and on. Every scenario in every one of these games challenges my mind to consider a multiplicity of tactical variables, to solve many logistical problems, and to apply the best possible planning skills I can muster. Which can all, of course, completely blow up in my face due to the enemy's own counterplans, the fog of war and the fortunes of combat.

In the end, in spite of all the planning, I don't know how anything is going to turn out until it happens. And watching events unfold on the computer screen delivers one exciting jolt of adrenaline after another, with little spontaneous victory dances and slap-your-head bad-news reactions scattered all throughout. Like a big time football game. No. Much better than that because, after all, I'm the head coach aren't I?

How about you? What's your rainy day passion?

Making Over My Cash & Emergency Reserves Plan

January 4th, 2014 at 10:22 pm

Two years of living expenses in a savings account: that's what my cash reserves plan amounted to a few months ago. Then I started planning to write a blog post on the how and why of that plan. And in so doing, completely changed my thinking.

I've gone from a cash reserves plan to an emergency reserves plan -- and that has made a huge difference. Before, my cash reserves consisted of sums in checking, savings and CD accounts amounting to (as I said) 2 years of living expenses. Now, my emergency reserves consist of a 6-month food supply, $2000 cash on hand, gold and silver coins on hand, a year's worth of living expenses in cash deposit accounts, and $270,000 in personal credit lines from 13 different financial institutions. This madeover emergency reserves plan is much much broader in scope than my old cash reserves plan -- yet ties up less money. And the freed money can now be invested for extra income.

This emergency reserves plan works for me thanks to my own individual income and insurance framework. The plan's specifics are not going to be applicable to someone else's financial situation. But the thinking behind the plan may very well open some mental doors worth opening. You decide.

What are my reserves supposed to do?
My reserves are there to give me liquidity and solvency. I don't want to be forced to sell a chunk of my investments (at the wrong time!) because I need the ready cash (liquidity). I don't want to have to do without something I need (such as a car repair or a medical prescription) because I just don't have the money (solvency). I don't want my credit score to plunge because I don't have enough money in my checking accounts to pay my bills when they come due (liquidity and solvency). And I don't want to miss out on an investment/savings/great deal opportunity because I don't have the necessary funds when the opportunity presents itself.

BUT! In the first place, I don't need money in a checking or savings account to deal with some of those situations. And in the second place, there are plenty of situations where money in a checking or savings account (or available balance on a credit card) would not do me one bit of good.

To give myself true (or truer) liquidity and solvency, I've had to revise the elements of my reserve so that I will be covered in a much wider range of possible emergency situations.

What I learned about ready cash from Hurricane Andrew
There are a lot of things I'm never going to forget about the aftermath of Hurricane Andrew in Miami. And one of those things is the little convenience store that reopened up for business a few blocks from me just 2 days after the hurricane hit. There was no electrical power in that entire section of the city, so: no electronic cash registers, no credit card terminals, and no ATMs. Cash was King and prices were inflated. Almost 2 weeks passed before that little store had its electrical power restored. Same thing for the home improvement store half-a-mile in the other direction. If you were out of cash, you were out of luck. And that in a situation where you even had to buy your water because there was nothing coming out of the faucets!

So, Reserves Lesson #1 for me: have a ready cash reserve at home.

But for some people in the areas south of Miami, it was actually worse than that. There were no stores in good enough shape to open and NOTHING to buy. We all saw similar images repeat themselves a few years later in New Orleans. People standing in line for food-and-water handouts from the back of trucks. People completely at the mercy of... whatever.

Something like that can happen anywhere, anytime. Hurricane... earthquake... forest fire... tornado... snow storm... civil disturbance... security lockdown (think Boston)... you name it. The day could come when you have no open stores to go to. For days. If it's really, really bad maybe for weeks. All you'll have is what's in your pantry. (Best to go right through the stuff in your refrigerator the first day, before it all spoils.)

So, Reserves Lesson #2 for me: have a food reserve at home.

What I hope I never learn first hand about the fragility of fiat money
Emergency is the key operating premise in my approach to reserves. And what could be more of a financial emergency than your money becoming worthless, or just disappearing overnight from your accounts?

Last year, Cyprus tried to simply confiscate bank deposits above a certain amount. My Cuban friend lived through a day when -- overnight -- the paper currency was changed and no one was allowed to exchange more than a certain limited amount of the old no-longer-legal-tender money (or bank deposits) for the new paper. That scenario has been played many times in many different countries. And how do I know it won't happen here?

I hope it does not happen. More than that, I don't think it will happen. But even though I don't expect my house to burn down, I have homeowner's insurance in case the unthinkable happens. Even though I don't expect my vehicle to get totaled on the highway by some tipsy driver, I have automobile insurance in case the unthinkable happens. And, even though I don't expect some currency-collapsing crisis to happen here, I think I better have at least a little insurance in case the unthinkable happens.

So, Reserves Lesson #3 for me: have a modest stash of gold and silver coins at home. (And if nothing happens, it will just have been another investment.)

The rest is just a matter of hedging my cash flow
As I mentioned earlier, this emergency reserves plan works for me thanks to my own individual income and insurance framework. And that framework makes it very unlikely that I could get caught in a longterm cash flow crunch.

My Social Security income covers 110% of my basic living expenses. Dividends and interest income from my investment portfolio covers 180% of my basic living expenses. That means that my retirement income could collapse by 60% and I still would not have to fight Sassy, Scampy and Bear for their canned cat food. I cannot see a solvency issue in my horizon; just the possibility of a liquidity one.

And that is where my credit lines come in as a component of my emergency reserves plan. Except for taxes, electricity, and insurance, all my expenses could be paid by credit card if necessary. Having credit lines from 13 different banks gives me a way to bridge any short term lack of liquidity for more than half of my living expenses without having to be dependent on just one or two lenders. I can always pay off any borrowed sums with future cash flow from my Social Security and/or my investment income.

The other "cash only" half of my basic living expenses needs to be covered by, well, cash. So I have hedged that with a year's worth of those expenses in a checking and a savings account.

So, Reserves Lessons #4 and #5 for me: keep a diversified mix of credit lines open, and keep enough money in bank deposits to cover your non-chargeable expenses for a reasonably long while.

The only possible fly that could still be left in the ointment here would be unexpected medical expenses. But I think I have covered that too. I've focused on overall worst case medical expense risk to come up with a maximum possible expense number ($5000 a year) that I could most certainly handle under my emergency reserves plan.

So, more emergency coverage and more money in my pocket
With this emergency reserves plan in place, I have reduced my need for cash reserves by a lot. As a result of investing the freed funds, I have boosted my annual passive income by a goodly amount. And I have hedged against just about every kind of emergency I can think of.

What about you? What do your emergency reserves look like?

Why I Only Buy Dividend Stocks

January 1st, 2014 at 03:03 pm

For 20 years or more, I invested pretty much the same way most other people do. I put my retirement savings into a basket of mutual funds and hoped the value of that basket would grow. But every price downturn would shake my confidence in that hope of growth. I would look at the drop in market value of a fund -- or of my entire portfolio -- and fret, worry, stress. And if the price drop was deep enough or continuous enough I would finally freak out and sell the position at a loss.

Why? Because my perception of the value of my mutual fund shares was solely based on their market price. Because I saw my retirement future as tied to and dependent on the market price of those shares. Because I did not want to lose any more of that retirement future to stock market drops.

Boy, that really did not work for me. My fear of loss was too powerful a force. Fighting it involved daily stress, doubt and anxiety. And each time I gave into it by selling "to stop the loss" I would be hit with feelings of failure. And if the share prices recovered some time after I had sold, I would add to that feeling additional feelings of guilt, recrimination... and more failure. I felt completely out of control of my retirement future.

Thank heavens I've found a different way of investing that has really worked for me. A way that has put me much more in control. That way is to only invest in carefully screened individual high-yielding dividend stocks.

Now, when I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

I have built my stock (and bond) portfolio to provide me income based on my stock dividends and bond interest. I have NOT built my portfolio on the expectation of following the standard withdrawal strategy of cashing out positions and spending down the portfolio's principal. Some day in the future I may very well adopt a cashing-out plan. But that will be done either as an end-game or in response to IRS required distribution requirements. I will not be cashing out positions just to cover my living expenses.

So, to summarize: in my mind, the value of a stock is in its dividend, not its market price. So now I don't freak out when the market price of any of my stocks drops. As long as I can determine that the dividend will continue to be paid, I do not concern myself. The dividend is my mental defense line against stress and anxiety. Against pulling the sell trigger based on nothing but herd-driven market panic.

This investing mindset works for me. But I am not a financial advisor and I am not saying this will work for you. So, what does work for you? What lets you sleep at night?