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Time to Discuss Policy

By Wednesday morning (or Tuesday night) we should know who will be the 45thPresident of the United States. Then again, the unexpected has been the theme of this campaign cycle so why assume it will end on Tuesday? With the election behind us, hopefully we can move forward with important discussions that were ignored during campaigns…by both sides. The following are some key discussion points for the new administration that directly affect your plan.

Health Care. This was touched on briefly in the debate. The Affordable Care Act will likely be President Obama’s defining moment. The question is will it survive (with adjustments) or will it be scrapped for a new system?

The primary good is the guarantee of coverage. Clients often had to stay in the workforce because they were uninsurable due to preexisting conditions. Of course, the downside is the rise in costs.

Consider a recent plan I wrote. Dan is 54 years of age; Kim is 50. As we consider the cost of healthcare in retirement, we used current Medicare costs including supplement and some out of pocket expenses. Next, we assumed an increase of 4% above default inflation. Today, we are using 2.5% default inflation which means we assumed healthcare expenses increase at 6.5% annually.

Their goal for living expense in retirement is $50,000 annually (today's dollars - no mortgage).

Current healthcare assumption (if they were eligible for Medicare today) is $12,694 (when both eligible). As we project forward, the estimated medical expense in 2050 (Dan age 88; Kim age 84) is $108,019. Their living expense in the same year is projected to be $114,587.

Their medical expense almost overtakes their living expense. While their plan projects success with the estimates in place, how many plans would fail in this scenario? Even more concerning... is the increase of 7.5% too low based on recent rate increases?

College Costs. This was discussed in greater detail during the Democratic nomination process. This became a key campaign point for Bernie Sanders. I have an interesting view of this topic. I get to watch couples debate whether they will help pay for their children’s college costs and if yes, how much. I find the discussions surrounding this topic fascinating.

When discussing this topic, you might think those who received support from their parents would be the first to say they would help their children. This is not always the case. I’ve heard on many occasions they discounted the experience and didn’t work as hard because it was free. In many cases, they want to make sure their children have “some skin in the game.”

Interestingly, the parent who struggled, scraped, worked side jobs often share how hard it was to get through college. They often want to help their children financially so they don’t have the same experience.

While I believe we need to continue to focus on college affordability, I am not sure making college free is the best solution. When we receive something for free, we often discount the value.

When projecting college costs, we assume the costs increase at twice the default inflation rate. The number is not as alarming because of the shorter time frame, but it remains a concern for parents. Piggybacking on college costs is the discussion of what to do with the high amount of student debt.

Again, a topic discussed more frequently in the primaries than the general election. The question for those with current student debt is whether it might be forgiven. Imagine sacrificing to pay it off your debt only to find if you would have waited, some or all might be forgiven. Uncertainty creates problems when planning.

Monetary Policy and Fiscal Policy. The Fed has and will continue to play an important role in the markets. The Fed kept rates at zero for the entirety of both President Obama terms. OK...they raised rates by a quarter point in December of last year and will likely raise another quarter point before he leaves – technically not zero I suppose.

We should assume the next administration will find themselves in a different scenario. The new administration will need to find ways to grow without zero interest rates. I recently heard an economist state something to the effect that monetary policy (Fed) should be used as a short-term tool with Fiscal policy being the tool of choice for longer term changes. I agree.

Creating new and better paying jobs will be a key consideration going forward. If the economy is growing; employees are receiving wage increases; companies are spending…increasing interest rates will not be as big of a concern.

The discussion has already shifted towards raising interest rates. We’ll see how the new administration deals with this scenario. It is hard to believe a President spent two terms in office with zero interest rates…

Taxes. The two candidates have very different policy ideas on this topic. I suppose it isn’t worth discussing until after we have some certainty of who will take office.

Control Versus Influence

As I review the considerations leading into this transition, I am tempted to use a phrase I have used frequently throughout my financial planning career. That phrase is “control what is controllable.”

But, a conversation with a client last week makes me wonder if that is the proper term. Yes…another word newsletter…sorry.

He pointed out our lack of real control. He pointed out the better word in most circumstances is influence. As we transition to a new President (and other elected officials), it is time I consider transitioning away from the term control and replace it with influence when applicable.

Arguably, we control what we do, say and feel right now. We don’t control the future, rather we take actions that influence a future outcome. We know certain actions taken today will influence our future.

The idea of influence over control is one of the reasons I shifted to a financial planning program (Money Guide Pro) a little over a year ago. I feel it is better to look at the big picture. We measure if we are moving in the right direction rather than focusing on a specific number five or ten year from today. That number will almost certainly be wrong, but the direction is measurable and more important, meaningful.

When considering control and influence, perhaps the goal of losing weight is a good analogy. The number on the scale is not (or shouldn't be) the real focus point. The direction in which that number is headed is the real goal.

Seeking Control Through Reflection

Poor Stephanie had a rough week of rehearsals. She is struggling to get the timing down for her dance in the upcoming play. She was upset after a rehearsal so I asked what was wrong.

Dad Doesn't Know How to Count

She said she didn’t understand how to count in eigths(?). Remember last week, when I shared my lack of knowledge of the theater? Well, I would be considered an expert in theater if measured relative to my knowledge of dance. Adding to her struggles…she felt she was being signaled out as the only dancer who wasn’t counting properly (I am not sure if that is true).

As we drove home, I thought about the previous discussion about influence and control and shared it with Stephanie (we have so many great conversations about this weekly letter). I shared by thoughts on the two words. Then I asked her to share what she had control over and what she had influence over?

She told me she could practice more (control); she could find someone who could help her learn to count (control). Then she returned to her point of the director “being mean.” I asked her…” if you focus on what you can control, do you think it will influence the director’s opinion?” She gave me a blank stare. That means Dad said something smart…hey, it happens every so often.

As we continued home. I asked her who she might ask for help with counting. “I don’t know anyone.” Then, I reminded her that her mother is a competitive ballroom dancer. “Do you think she may be able to help you learn to count?” “Dad, that is a great idea!” Two good ideas in one car trip… I am on a roll!

By the time I write my next installment, opening night will be in the books. She’ll do fine. She always does!

Lack of Control is a Bad Excuse

The lack of control over the future is a common “excuse” for not reviewing a plan. Some figure if they can’t control everything or most things, why bother. Of course, that is a dangerous game.

I have often heard the reason for not reviewing a plan was their belief they weren’t going to retire anyway so why bother. My answer to them is that while I understand their viewpoint, I want to be sure they understand their risk of getting there and not having a plan.

As we move forward, we will focus on what we can control today and measure how choices influence your future.

Can we play nice?

Perhaps the biggest factor to consider going forward is whether politicians (and others) can place nice together. No doubt this was an ugly, messy election cycle. Come Wednesday, it is time to put the negatives behind us and start looking forward. At least I hope we can. Working together will be the most important job our politicians have going forward.

Thanks for your time and consideration.