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JANUARY 2012 — BALTIMORE BEACON
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Money Law &
FINANCIAL ADVICE ABOUNDS There are many reliable sources of financial information and useful advice. You just need to know how to separate the wheat from the chaff. We offer suggestions for investments, insurance and estate planning WHITHER SOCIAL SECURITY? A public trustee of Social Security and Medicare answers reader questions about the program and its future
Five big money mistakes retirees make By David Pitt For retirees to maintain their desired lifestyle without a paycheck — possibly for decades — they need a solid financial plan. They also need to steer clear of serious mistakes that could compromise their future income. Here’s a look at some common pitfalls retirees encounter, and ways to step around them to avoid financial disaster. 1. Helping children too much Problem: Retirees with children or grandchildren are often too willing to help out financially; sometimes at the risk of their own well-being. Even though many baby boomers worked to put themselves through college and the experience developed good financial skills, they don’t want their kids to struggle as much, said Wayne Copelin, president of Copelin Financial Advisors in Sugar Land, Texas. If you try to tell parents that it’s a mistake to bail adult children out of credit card debt or help them with other financial mistakes, they get very mad, said Copelin. Solution: Don’t underestimate your
longevity. Make sure you have enough money to last the rest of your life by laying out a financial plan. With a plan in hand, you can then determine how much you can afford to spend on children and grandchildren. If you don’t take this step, you could very well run out of money and need to turn to your children for help. Also be very careful about co-signing loans, because any default or late payments can hurt your credit rating. What’s more, be aware that significant gifts could be considered taxable — this year’s limit on taxfree gifts is $13,000 per person. Read the IRS rules at http://tinyurl.com/4uncnxx. 2. Underestimating healthcare costs Problem: One of the biggest pitfalls facing the retirees of the next few decades is unanticipated and unplanned healthcare costs. According to various experts, a healthy couple in their mid-60s will need around $300,000 to cover healthcare in retirement. A couple in their mid-50s should plan on spending around $500,000 in out-of-pocket healthcare costs. Most retirees will not have saved any-
where near that amount. The average 401(k) account balance for 55-year-old workers contributing for at least 10 years is $234,000, according to Fidelity Investments. Solution: One way to be prepared is to purchase long-term care insurance, which can help cover the cost of home care or nursing home care, should the need arise. Couples in their 50s and in good health likely can buy a policy for an annual premium of around $2,500 if they shop for the best rates. Waiting until their 60s to buy can be expensive, with premiums rising to as much as $4,000 to $5,000 a year. To look at options for long-term care planning, check out this site provided by the federal government: www.longtermcare.gov/LTC/Main—Site/index.aspx. 3. Taking Social Security benefits too soon Problem: No one knows exactly how long they’ll live, and these days it’s very common to outlive our own expectations. About one in four 65-year-olds today will live past 90. One in 10 will live past 95. It’s difficult to know how much to set aside for retirement. It’s equally difficult to
know whether to take Social Security as soon as one is eligible or wait a few years and get a fatter check. Solution: A worker at the full retirement age of 66 will be entitled to a monthly Social Security benefit of $1,000. That’s reduced to $750 a month if benefits begin at 62, the earliest one can begin to draw checks. However, the same worker waiting until age 70 will get $1,320 a month. Deciding when to take benefits depends on age, health, how long you’ll keep working, how much is saved and other factors. The Social Security Administration offers a benefits calculator at: http://www.ssa.gov /oact/anypia/index.html. 4. Failing to ask for guidance Problem: Trying to handle retirement savings and investments without help. Solution: Many retirees and those nearing retirement who manage their own money often micromanage their accounts by watching the market’s movement every day. They tend to pull money out when they get scared and keep it out until too late, See MONEY MISTAKES, page 5
Big returns from fast food in slow market By Mark Jewell Step into the McDonald’s in Port Chester, N.Y. on a Saturday, and there’s a good chance you’ll see Jon Burnham dining on the cheap with his wife. They’re McDonald’s regulars. “Where else can two people go and have a really nice lunch or dinner for $10?” Burnham asked. He knows how to spot a value, after more than five decades in the financial services industry and 16 years as a mutual fund manager. The economy is in a tough spot, and Burnham expects consumers will continue to embrace low-cost menus at fast-food chains. He’s a particularly strong believer in McDonald’s stock, one of the top five holdings in his fund. Its shares are trading at an all-time high, up 22 percent in a year when the stock market has edged up just 2 percent. That’s one reason why Burnham Fund (BURHX) has outperformed 94 percent of its large-
blend stock category peers this year, returning more than 3 percent. A bigger contributor is Burnham’s second-biggest holding, Chipotle Mexican Grill. Its shares have surged 62 percent this year, lifted by sales that are rising at a faster pace than at more established chains. The sizzling results for restaurant chains extend beyond those two names. Strong performers include Panera Bread and Starbucks, both up 34 percent; Tim Hortons, 22 percent; Wendy’s, 12 percent, and Yum Brands, 11 percent.
But will gains continue? Unfortunately, investors looking to spice up returns by adding those names to their portfolios now may find their potential is limited because the stocks have performed so well recently. Industry profits are being constrained by rising costs for ingredients such as beef and coffee, which have triggered price increases at several chains. Still their menu prices
remain low enough that the chains hold appeal at a time when many consumers are wary of spending too much to eat out. Fund managers investing in fast food say they’re also drawn by the relative simplicity of the chains’ business models. And many chains have expanded into fastgrowing emerging markets like China. Fast-food chains offer relatively predictable growth prospects at a time when the outlook for economic growth in the U.S. and Europe is dim, said Ron Rohn, comanager of the John Hancock Global Leaders Growth Fund (USGLX), whose top holding is Yum Brands, owner of KFC, Pizza Hut and Taco Bell.
Restaurant stocks to consider Below we look at three top fast-food stocks, and perspectives from managers at funds with big stakes in them: 1. McDonald’s Corp. The biggest burger chain is an industry bellwether, with more than 33,000 loca-
tions. With a market value of $95 billion, McDonald’s is a widely held stock, and one of the 30 names that make up the Dow Jones industrial average. McDonald’s increased its third-quarter dividend by 15 percent, and expects to return about $6 billion to shareholders this year through dividends and share repurchases. It has raised its payout each year since paying its first dividend in 1976. The current dividend yield is about 3 percent. McDonald’s has been repositioning itself as a health-conscious option, adding salads and oatmeal. Earnings have risen for nine consecutive quarters, capped by a 9 percent third-quarter gain. But the company hinted that it may need to raise menu prices for the third time this year to help offset higher ingredient costs. The stock is the top holding at the Two Oaks Diversified Growth Fund (TWOAX), whose manager argues McDonald’s is in See FAST FOOD, page 5