Monthly Archives: June 2017

Why You Should Go Solar

by in investing, sustainability and tagged , , | 1 Comment

Summary: Going solar, either rooftop or via a community solar farm, is not only the right thing to do for the environment and to combat climate change, but it will save you money.

Let me be clear up front, I’m passionate about sustainability, particularly the use of sustainable energy, and I believe climate change is a very serious threat. I think everyone should be concerned, not just for themselves, but for their children as well, so I of course think you should go solar. But, even if I didn’t believe all of those things, you should still consider going solar for financial reasons.

We put solar panels on our roof at the end of 2009. That’s only 8 years ago, but there’s been tremendous change in the solar energy industry since then. In 2009 solar panels were much more expensive than they are now (and the continue to get less expensive), and they weren’t as efficient as they are now (and still getting incrementally better each year). On the flip side, the incentives (at least in Colorado) were much better then than now.

roof

We purchased a 5.04 kW system from Standard Renewable Energy (SRE) and they installed it. (They’ve since been bought by GridPoint and no longer do solar installations, at least in Colorado.) The total cost was listed as $38,307, but then there was an “instant rebate” from SRE of $10,080, which took what I would consider the real cost down to $28,227. But we didn’t even have to pay that as, at the time, the combined utility and state rebate for that size installation was $17,020, which means our out-of-pocket cost (the check we had to write) was $11,207.

But it gets even better, because that doesn’t take into account the federal rebate, which turned out to be an $8,693 tax credit on our 2009 taxes, so we effectively paid $2,514. At the time SRE showed the break-even point to be between 3 and 4 years, but we estimated it at more like 5 (they had built in 10% electricity rate increases each year). We didn’t track it exactly, but we estimate the break even point was at about 4.5 years, which means that since mid-2014, our electricity has been close to free (not completely free, as we still pay a grid-access charge).

So what’s our “return on investment” on solar? Well, that’s a bit hard to tell, as the solar panels are still operating great and effectively generating income for us, and we don’t know how long that will continue or what electric rates will do. We spent $2514 at the end of 2009 and, so far, have “made” probably more than $4,000 in saved electricity bills. That’s currently around a 6% compounded yearly return (with no associated tax liability).

Plus keep in mind with all of the solar options I discuss in this post, these returns are tax-free, unlike the equivalent equity or bond investment so, depending on your tax bracket, that could significantly close the difference in returns between going solar and investing the money in the markets.

As part of the agreement with the utility company, solar systems are generally sized to generate approximately the same amount of electricity you use in a year, plus or minus a bit. (You can choose to install a smaller system and generate less, but they don’t like you to overshoot the mark.) Ours was sized at about 98% of our usage, although over the subsequent years we have actually used a bit less electricity (we installed new windows and replaced some appliances), so each year we typically have received a small rebate check from Xcel at the end of the year for the excess we’ve generated.

That was true until the beginning of this year, when we started again using more than we generated. This is because at the end of December we bought a used 2013 Chevy Volt, which is a plug-in hybrid. Much more on this in a future post, but basically because we are charging it each night, our electricity use has gone up and now surpasses what we generate. (To keep that “cost” in perspective, however, we still haven’t had to put gas in the car, having driven it more than 3,800 miles and only used 3.2 gallons of gas so far.)

Being the sustainability guy that I am, I of course wanted to figure out a way to make that new energy clean energy as well. We still had some room on our roof (perhaps not the ideal orientation, but still okay), but it turns out that most solar companies don’t want to add on to an existing system (I’m sure for liability/insurance reasons) and, since our system is still working great, we certainly didn’t want to tear it off the roof and put a whole new system on.

So we began looking at alternatives and ended up purchasing 4 panels at a community solar farm operated by Clean Energy Collective. Community solar farms are big arrays of solar panels, typically installed in big open fields, that generate electricity and feed it back into the grid. Individuals or businesses can then buy a portion of the array and get credit for the electricity generated to offset their own usage. It’s often called “roofless solar” and, in many ways, it’s better than solar on your roof. Solar farms are generally more efficient (they can align the panels perfectly) and cost effective (cheaper to install on the ground than on a roof, as well as economies of scale). I still prefer putting solar panels on roofs, as then I know for sure it’s new energy generation and it provided at the source, not simply purchasing already existing solar farm panels and feeding into the grid, although by purchasing those you are using up existing farms and therefore they are likely to build additional ones. But, because we couldn’t easily add any more to our roof, this was a great solution for us.

cec

The cost of this, of course, varies, but let me share the specifics in our case to give you an idea. Because we only needed to generate the additional amount of electricity we were using by charging the Volt, we only “purchased” 4 panels (which is the minimum) at the solar farm (located in Arapahoe County). We are effectively leasing the panels for 19 years (for initial customers it was 20, but because this farm has been in use for a little while, I guess we only have 19 years left). The cost for those panels was $3,050 out of pocket (ironically, more than our entire solar system after rebates in 2009).

Those 4 panels will generate 1.22kW. The way we get “paid” is that we get a credit on our utility bill from Xcel each month, currently 7.6 cents per kWh (that rises and falls with whatever the current rates are), as well as an 8 cent per kWh renewable energy credit (REC) that gets paid quarterly. The estimated yearly savings for 4 panels comes out to about $322. CEC then estimates that electricity rates will rise 4.8% per year. This is more realistic than the 10% SRE used back in 2009, but still perhaps a bit too high (unless a carbon tax is eventually passed, in which case it might be much too low). Using those assumptions they calculate a 9.5 year break-even point and a total return of “187%” after 19 years. Assuming no increase in electric rates, the return is about 4% per year compounded. Given that electricity rates will likely rise some, I’m going to guess it will turn out to be about 4.5% per year compounded.

Is that a great return on investment? Well, no, not compared to investing it in equities (but, again, keep in mind there’s no tax liability, so that boosts the return up some). If I was just trying to maximize my return, this would be a bad idea, investing $3,050 into an index fund would likely generate more return. But since I can generate clean energy, help combat climate change, and still earn a return that’s better than a money market account and probably pretty equivalent to what bonds would return, I think that’s a pretty good trade-off (as well as diversifies my investments a bit).

Now, if you don’t already have solar on your roof, you should definitely first investigate the cost and return on investment for that (more on that below). But, if you don’t own a house, or if you can’t or simply don’t want to put solar panels on your roof, then this is a great option. If you are interested, I’d recommend contacting Pete Stein at CEC (pete.stein@easycleanenergy.com or 720-623-0618), he was very thorough and helpful.

Full disclosure: If you mention my name and end up purchasing from CEC, I will receive a $200 referral fee. If you feel icky about that, don’t mention my name :-). But keep in mind that if you do, you also will receive a $200 check after completion of your purchase and $100 will be donated to charity, which is why I decided to go ahead and include it in this post.

Since we already had solar on our roof, I couldn’t get a quote for what it would cost to install solar now. Luckily, I have a friend who just installed solar in my neck of the woods in Colorado and he was willing to share his information. As I mentioned previously, much has changed in the solar industry since we installed in 2009. In addition to the changes in cost and efficiency, you now have many more choices of installers and many of them now offer solar leasing in addition to up-front purchasing.

My friend ended up going with Ion Solar and, so far at least, he’s been very happy with them. Let’s take a look at some of the details for his install. They installed a 4.85kW system, so roughly equivalent to the system on our roof. Their total system cost was $18,896, less the federal rebate of $5,669, for a net system cost of $13,227. There are no longer the huge state/utility rebates like when we installed ours, instead you now get a minimal REC from Xcel for the energy generated. (From the information shared with me, I can’t tell how much this is or exactly where it figures in the calculations, but I know it’s often less than 1 cent per kWh).

ion

My friend chose to finance the system, which is basically a solar lease. The amount financed is the full amount of $18,896 at 4.99%, and they’ll make payments of $79 per month for the first 16 months, then $91 a month thereafter for the remainder of the 20 years of the lease (this assumes that the $5,669 tax credit is then applied to the loan when it’s received). In their calculations Ion assumes a 4% yearly increase in electricity rates and, based on this information, after 25 years they will end up $20,667 ahead.

How does that work? Well, each month the (average) amount they save on their electric bill is more than their loan payment, so they come out ahead. Ion even does a calculation where if you apply that savings to the loan payments, the loan is paid off in 15 years and the 25 year accumulated savings is then $22,743.

So what’s the return on investment? Well, since there’s no money put down up front, it’s complicated. But for the sake of argument, let’s assume they had decided to purchase the system for the net cost after federal rebate of $13,227. Ion estimates that over 25 years (factoring in the estimated 4% yearly increase in electricity rates) they will save $42,280, which is about 4.8% per year compounded (again, tax-free). Again, compared to investing in equities, that’s not a great return. But given the good that you’re doing, along with diversifying your investments and earning a bond-like return, I think it’s more than worth it.

So what should you do? If you own a house, I’d suggest getting bids from several vendors for installed solar and compare, and perhaps also contact Pete at CEC to compare roofless solar as well. There are lots of vendors to choose from, but I would certainly include Tesla Energy (formerly Solar City), because I anticipate with their new Gigafactory 2 coming online shortly their prices will be very competitive. (In addition, if you happen to need a new roof sometime in the future, look into their new solar roof option. It’s more expensive because it’s tile, but when you factor in the electricity savings, it ends up being cheaper than an asphalt roof, plus it has an infinite warranty on the tiles themselves – you’ll never have to replace the roof again.) If you don’t own your own home, or for whatever reason don’t want to install solar panels on your roof, then definitely contact Pete at CEC and get all the details.

Any of these options will give you a decent, but not great, return on investment, as well as contribute to a better world. In future posts I will talk more about the used Chevy Volt we recently purchased, electric cars in general, and why your next car should be electric, as well as about the opportunity to invest in solar directly.

How Do You Measure Investment Risk?

by in investing, philosophy and tagged , | 3 Comments

risk

There are a lot of sophisticated measures in the investment business: P/E Ratios, Cash Flow Analysis, EBITDA, etc. The list goes on and on (and on). The one I find most interesting, however, is how most people measure risk. The generally agreed upon method is to measure volatility, which is how much the price of a particular asset (stock, bond, whatever) goes up and down, often in conjunction with looking at expected return of the particular asset. To simplify it a bit, the more the price of something changes, the riskier it is.

I find that fascinating and mostly wrong. If you are a long-term investor armed with self-control, measuring risk by measuring volatility is not very useful. This analogy is a bit of a stretch, but I’ll use temperature as an example. If a particular day starts at 60 degrees Fahrenheit and goes up to 80 then back down to 60, that would be considered “worse weather” than a day that starts at 100 degrees and stays there (or 40 degrees and stays there).

Now, if you are an investor who is actively trading, constantly moving in and out of different positions, volatility is important. Likewise, if you are an investor that is going to need to take money out of a particular investment in the near future, volatility could be important. But I prefer a different measure of risk: how likely are you to meet your goals?

To me, this is really the only measure of risk that matters. Will your investment portfolio/strategy achieve the goals you have set for it? If you are a long-term investor (and if you end up working with me you will be :-), you don’t care all that much about the daily ups and downs of your investment, as long as at the “end” your investment is up a sufficient amount that allows you to achieve your goal. Which means that if you construct your portfolio correctly, there is really only one sub-component of that risk that matters: you.

More specifically, do you have the self-control, the discipline, to follow your investment plan? When bad things happen (like the Great Recession in 2008, or the dot-com bubble in the early 2000’s, and the value of your investments drop, sometimes by a lot), will you be able to stay the course and not bail on your plans? One of the main reasons to hire a real financial planner (or even avail yourself of my services), is that they hopefully will help you to stick to the plan. While there are no guarantees, based on the entire history and theory of financial markets, if you invest for the long-term and don’t sabotage yourself by abandoning your investment plan at the worst possible times, you are (almost) guaranteed to be successful.

In fact, there is plenty of research that most investors earn less (often far less) than the mutual funds and other investments they invest in earn. How can that be? They buy high and sell low. They typically buy into a mutual fund (or stock, or whatever) after if has performed really well for a while (missing out on most of the gain), then lose heart and sell when it inevitably goes down. It’s the investor’s behavior that causes them to under-perform, and hence the riskiest part of investing isn’t typically what you choose to invest in, it’s you.

So what’s the secret?

  1. Spend less than you make.
  2. Regularly invest the difference in low-cost index funds.
  3. Don’t sell (unless you’ve achieved your long-term goal).

I’ll write several more posts exploring different aspects of this, but it pretty much is that simple. That’s one of the most frustrating aspects when I hear others talk about their finances. Either they are too afraid of “investing” because they are worried about losing their money (or somebody taking advantage of them), or they are constantly moving from investment to investment to try to outperform the market (generally with poor results, as that study indicated).

As I mentioned in one of the FAQs, about 90% of what you need to do is really pretty straightforward, and not all that hard to do, if you simply know a little bit and have that self-discipline. I’d be happy to get you started on that path.

Photo credit: Foter.com

Focus On: DCSD Health Insurance

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dcsdbenefitsschreenshot

I recently posted about the health insurance offered by Littleton Public Schools, this post will focus on Douglas County Public Schools. The first part of this post will be very repetitive from the LPS post, as some of the background information is essentially the same (hooray for copy and paste). So, if you’ve read that other post, you might just want to skip down to the comparison part of this post.

Healthcare and health insurance are complicated. Each person/family has unique needs, and many families have two employer plans to choose from. Therefore it’s really important to look at each person/family individually, so this blog post is going to be a general overview of the health insurance options currently offered by Douglas County Public Schools, but your needs may require additional considerations that this post won’t cover.

As a long-time public school employee, I’m very familiar with the benefits that school districts offer. I’m also very familiar with the fact that many people don’t like to think much about benefits and aren’t really aware of the different options and what they might mean to them. Again, while each person/family has specific needs, let’s take a look at some general observations about the health insurance options that DCSD currently offers.

DCSD still offers a choice of two different insurance carriers (which is increasingly rare), CIGNA/Allegiance and Kaiser, and then two plans from each provider (a more traditional, low-deductible plan, as well as a high-deductible plan). So the first decision most people have to make is whether to go with CIGNA or Kaiser. This discussion often ends up being similar to the Apple vs. PC discussions that happened a while back, with folks having very strong opinions on both “sides,” but let me try to share what I know.

The main consideration for most folks is how important it is for them to be able to choose their own doctor. If you have an existing relationship with a doctor (not at Kaiser), and you have perhaps some on-going, chronic conditions that doctor is helping you with, that could be a strong argument for CIGNA. But I’d suggest you really give some thought to both of those conditions to see that they both apply. If either does not, then you have some more thinking to do.

One of the frustrations over the years when I’ve discussed health insurance with folks is the assumptions they make. Many (not all) assume that CIGNA must be better than Kaiser, both because it’s more expensive and because it is not “managed care.” That assumption is not correct. CIGNA is not bad, but Kaiser consistently ranks very high in both quality of care and customer satisfaction (and typically higher than CIGNA). That doesn’t mean that Kaiser is perfect, some folks have had bad experiences with them, but the structure of Kaiser is why their quality of care is so good.

Managed care has a bad reputation, but all health insurers – including CIGNA – are practicing managed care. The difference is that at Kaiser there is a dedicated team to identify best practices based on the research evidence, and that is then disseminated to the doctors, nurses and other staff members to follow. Under plans like CIGNA, doctors have more freedom (which many people like), but the quality of care is more variable from doctor to doctor. An interesting result of all of this is that when folks have a bad experience with a doctor at Kaiser, they typically blame Kaiser, but when they have a bad experience with a doctor with CIGNA (or other carriers), they typically blame the doctor. I am not trying to convince you to change to Kaiser, just to examine your assumptions and make sure you are basing your decision on your needs and the actual evidence.

Once you’ve made the decision between CIGNA and Kaiser, you then have to decide between the two plans they each offer, a more traditional low-deductible, copay/co-insurance type of plan, and the newer (and increasingly more popular among employers) high deductible plans. It is beyond the scope of this blog post to discuss all the pros and cons and the nuances of high deductible plans, but we can look a bit more carefully at the actual out-of-pocket costs under each plan and many folks will find the result surprising.

Before we do that, just a little background. It’s important to look a little bit at how much DCSD contributes toward your premiums. Unlike LPS, there does not seem to be a particular formula DCSD uses (at least it’s not apparent if there is one). DCSD appears to have made the strategic decision to keep premiums lower but have deductibles and max out of pocket be higher. They definitely do contribute some toward dependent coverage, but I’ve been unable to discern a consistent percentage amount.

Whether that is personally good for you depends, of course, on whether you are covering dependents :-). In effect, employees who choose employee only coverage end up helping subsidize those who choose any of the dependent coverage options. (And, by the way, employees who choose Kaiser end up subsidizing those who choose CIGNA.)

A second piece of background is to understand the purpose of insurance, and particularly group insurance. Folks who grew up in my generation tend to have the view that the purpose of insurance is to “pay for our healthcare costs.” While that would be nice, it’s unfortunately not sustainable. The purpose of insurance (from an individual’s perspective), is to cover outliers. If something bad happens to you (or your family), it prevents catastrophic healthcare costs that you might be unable to pay. (Prior to the Affordable Care Act, medical bills were the leading cause of personal bankruptcies, it will be interesting to see what happens going forward.)

By pooling your risks with those of a group, it becomes affordable for the group as a whole to pay those really high healthcare costs for the (hopefully) few individuals who need it. In effect, those folks who don’t end up with high costs subsidize those that do. When insurance rates go up, it’s not just because the insurance companies are greedy (Kaiser, in fact, is non-profit), it’s because the cost experience of the group (in this case, DCSD employees who’ve chosen each particular plan) has been more than the premiums that are paid in. It just takes one or two very expensive cases (a premature baby with complications, brain cancer, etc.) to require higher premiums. To be clear, this is not a bad thing, this is the reason for group health insurance. If you never get sick, the best option would be not to buy health insurance at all. This is the reason for the controversial “individual mandate” in the ACA, for health insurance to work you have to have healthy people involved in order to pay for the sick people.

So now let’s look at the premiums. When folks look at the rate sheet put out by DCSD each year, they often skip down to the employee portion of the premium, think about the deductible amount and perhaps maximum out of pocket, and then make a quick decision. For many folks, the idea of a “high-deductible” and paying costs out-of-pocket up front is scary, but if you stop to do the math, the story turns out a bit different. This table shows the total out-of-pocket costs for each plan choice under a couple of sample scenarios. Obviously, your experience will most likely not match the sample scenario, but I tried to pick scenarios that people typically worry about (which is costs that come in right at the deductible amount for the high-deductible plans).

dcsdratesscreenshot

It turns out that under the CIGNA plans, the high-deductible plan is cheaper for almost everyone under almost every scenario. (I think it is actually everyone and every scenario, not just “almost”, but I can’t check every possible scenario so I didn’t want to overstate it.) Check out this google doc for a bit more detail but, basically, with the amount you save in premiums under the high-deductible plan, plus the amount that DCSD contributes to your HSA (I’ll write a post soon talking more about HSAs, they are a very attractive option), you come out ahead over the OAP plan even when you have large medical bills. Even better, if you have years where you don’t have large medical bills, you not only come out ahead, but the amount in your HSA (DCSD contribution plus whatever you might choose to contribute) rolls over. So not only do you pay less that year, you have “money in the bank” for future healthcare costs.

The math is not quite as straightforward on the Kaiser side, because under the DHMO you have both copays and coinsurance after you meet the deductible, and what those might end up being varies greatly depending on exactly what kind of care you end up needing (plus, ironically, since the premiums are lower than CIGNA, the difference between the two Kaiser plans is not as stark). But, in general, the story is fairly similar to CIGNA, for any of the dependent coverage plans, the high-deductible plan is better – for employee only, the DHMO might be better. When you have “good” healthcare years with low costs, you will definitely come out ahead with the high-deductible plan and can carry over any money in your HSA. When you have “bad” years with higher costs, you may still come out ahead with the high-deductible plan, but there are certainly scenarios where the DHMO would end up being cheaper. (And, of course, when you compare to the CIGNA plans, Kaiser is less expensive under all scenarios.)

So, which carrier and which plan should you choose? It depends. You also have to look at the benefits offered by any spouse’s plan, your existing health and any conditions you might have. as well as your personal preferences. That’s certainly part of what we’d do if you decide to work with me.

Additional Resources (2017-18)
DCSD 2017-18 Rate Sheet
CIGNA/Allegiant Plan Summary
Kaiser Plan Summary (appears to be HDHP only, didn’t find one for DHMO)
DCSD Benefits Summary
Medical Plan Comparison Chart

What Keeps Me Up At Night?

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dog-falling-asleep-on-floor

Lots of things. Thinking about teaching and learning. Climate change. My fifty-three-year-old bladder.

More relevant to the area of financial planning, however, what “worries” me the most is the possibility that “This Time Might Be Different.” If you’re not familiar with this phrase, it’s usually used in a negative way. For example, in investing circles it’s often associated with people’s thinking during bubbles, say the dot-com bubble of the late 1990’s or the real-estate bubble of the mid 2000’s. It’s invoked to describe when people think that despite the evidence that things have never worked a certain way in the past, this time is going to be different because of some fundamental change in the world that will make all that historical evidence irrelevant.

While the phrase is usually used in a negative fashion there are times, of course, when things really are different. When Homo Sapiens arrived on the scene. The development of agriculture. The Industrial Revolution. The splitting of the atom. The Internet (while the investing side that produced the dot-com bubble wasn’t different, the effect the Internet has had on just about everything really has been different). So what keeps me up at night is a combination of several factors that make me worried that this time could be different in a way that makes all my assumptions about investing, financial planning, and retirement based on past evidence and practices no longer relevant.

The primary factors that have me concerned are automation, artificial intelligence and life expectancy. Each of those factors on their own already are already having dramatic impacts and, conceivably, could create a this-time-it’s-different moment. But when you combine all three of them together, the potential impact is hard to quantify. There’s no way to do this topic justice in just a short blog post, but I’ll try to summarize my thinking in just a few paragraphs.

The recent history of humanity has been all about automation. From the way we grow food, to the way we manufacture products, to the way we run organizations and manage economies, automation has been the story of modern human civilization. What makes me worry that this time might truly be different is the level and sophistication of that automation, combined with the advances that are being made in artificial intelligence. People have often worried about the effect automation might have on workers, but time and again humanity has adapted and created new things humans can do which has led to new and, arguably, better and more interesting jobs.

But the things we are beginning to be able to automate are approaching the level of being able to provide the majority of what humans need to live and even thrive. While I have no doubt we’ll adapt in terms of what we do with our time and our abilities, I do wonder if that will necessarily translate into a paid employment scenario that will allow our basic ideas of how a capitalistic economy works. A passage in Your Money or Your Life that resonated with me was,

What if we removed most of these expectations from our paid employment and recognized that all purposes for work other than earning money could be fulfilled by unpaid activities?… Redefining “work” as simply any productive or purposeful activity, with paid employment being just one activity among many, frees us from the false assumption that what we do to put food on the table and a roof over our heads should also provide us with our sense of meaning, purpose and fulfillment. Breaking the link between work and money allows us to reclaim balance and sanity.

When you think about those ideas in the context of the combination of automation and artificial intelligence, you begin to wonder if “paid employment” is a concept whose time may be about to pass. If you haven’t yet heard of the idea of universal basic income, you might want to begin learning more about it. I don’t know what the right prediction percentage is, but I would guess that there’s maybe a 50% chance that we will be dealing with a post-capitalism-as-we-know-it society in the next 20-40 years.

The third factor is life expectancy. I think there is a high probability that we are on the cusp of extended lifespans, with many folks regularly living to an age of 120 (and living relatively healthy and meaningful lives right up until the end). I think the advances we’re making in medicine, particularly around our fundamental understandings of biology and genetics as well as our ability to make genetic modifications using techniques like CRISPR, are going to lead fairly soon to dramatic decreases in untreatable instances of many cancers, diseases like Alzheimers, and “lifestyle” conditions like obesity and heart disease. Many credible folks are predicting that 120 will be the “new 100” which is already the “new 80” which was previously the “new 60”. And while not mainstream yet, some folks think 120 is just the start.

Again, these are all good things, but the impact on our economy and our finances would be dramatic. Elsewhere I’ve written about how great PERA is, but if PERA has to suddenly pay out benefits to a large percentage of their members living to 120, all bets are off. When combined with automation and artificial intelligence, we could be looking at the mother of all this-time-is-different scenarios.

Overall, I find this incredibly interesting and very exciting, but it does keep me up at night in terms of offering folks financial advice. If much of this occurs (even in less dramatic ways then described above), then lots of the assumptions that I make when giving my financial advice (fundamental assumptions that everyone makes) may not hold true. That doesn’t necessarily make it bad advice, I think it will hold up really well until it suddenly doesn’t, but once it doesn’t you’re still likely to be in better (or at least as good as) financial “shape” for what comes next. But if someone asks me “what could go wrong” based on your advice, this is what I’d share with them.

Photo credit: Foter.com

Focus On: LPS Health Insurance

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lpsbenefits

Healthcare and health insurance are complicated. Each person/family has unique needs, and many families have two employer plans to choose from. Therefore it’s really important to look at each person/family individually, so this blog post is going to be a general overview of the health insurance options currently offered by Littleton Public Schools, but your needs may require additional considerations that this post won’t cover.

As a long-time employee of Littleton Public Schools, I’m very familiar with the benefits that LPS offers. I’m also very familiar with the fact that many people don’t like to think much about benefits and aren’t really aware of the different options and what they might mean to them. Again, while each person/family has specific needs, let’s take a look at some general observations about the health insurance options that LPS currently offers.

LPS still offers a choice of two different insurance carriers (which is increasingly rare), CIGNA and Kaiser, and then two plans from each provider (a more traditional, low-deductible plan, as well as a high-deductible plan). So the first decision most people have to make is whether to go with CIGNA or Kaiser. This discussion often ends up being similar to the Apple vs. PC discussions that happened a while back, with folks having very strong opinions on both “sides,” but let me try to share what I know.

The main consideration for most folks is how important it is for them to be able to choose their own doctor. If you have an existing relationship with a doctor (not at Kaiser), and you have perhaps some on-going, chronic conditions that doctor is helping you with, that could be a strong argument for CIGNA. But I’d suggest you really give some thought to both of those conditions to see that they both apply. If either does not, then you have some more thinking to do.

One of the frustrations over the years when I’ve discussed health insurance with folks is the assumptions they make. Many (not all) assume that CIGNA must be better than Kaiser, both because it’s more expensive and because it is not “managed care.” That assumption is not correct. CIGNA is not bad, but Kaiser consistently ranks very high in both quality of care and customer satisfaction (and typically higher than CIGNA). That doesn’t mean that Kaiser is perfect, some folks have had bad experiences with them, but the structure of Kaiser is why their quality of care is so good.

Managed care has a bad reputation, but all health insurers – including CIGNA – are practicing managed care. The difference is that at Kaiser there is a dedicated team to identify best practices based on the research evidence, and that is then disseminated to the doctors, nurses and other staff members to follow. Under plans like CIGNA, doctors have more freedom (which many people like), but the quality of care is more variable from doctor to doctor. An interesting result of all of this is that when folks have a bad experience with a doctor at Kaiser, they typically blame Kaiser, but when they have a bad experience with a doctor with CIGNA (or other carriers), they typically blame the doctor. I am not trying to convince you to change to Kaiser, just to examine your assumptions and make sure you are basing your decision on your needs and the actual evidence.

Once you’ve made the decision between CIGNA and Kaiser, you then have to decide between the two plans they each offer, a more traditional low-deductible, copay/co-insurance type of plan, and the newer (and increasingly more popular among employers) high deductible plans. It is beyond the scope of this blog post to discuss all the pros and cons and the nuances of high deductible plans, but we can look a bit more carefully at the actual out-of-pocket costs under each plan and many folks will find the result surprising.

Before we do that, just a little background. It’s important to understand how LPS decides the district contribution toward your healthcare premiums. Currently (and for many years now), LPS covers 92% of the employee only premium and 54% of any of the dependent options (Employee & Spouse, Employee and Child(ren), Family). That’s notably different than many other school districts in that LPS contributes money toward dependent coverage, not just employee coverage.

Whether that is personally good for you depends, of course, on whether you are covering dependents :-). In effect, employees who choose employee only coverage end up helping subsidize those who choose any of the dependent coverage options. (And a side effect of this percentage method, by the way, is that LPS employees who choose Kaiser end up subsidizing those who choose CIGNA.)

A second piece of background is to understand the purpose of insurance, and particularly group insurance. Folks who grew up in my generation tend to have the view that the purpose of insurance is to “pay for our healthcare costs.” While that would be nice, it’s unfortunately not sustainable. The purpose of insurance (from an individual’s perspective), is to cover outliers. If something bad happens to you (or your family), it prevents catastrophic healthcare costs that you might be unable to pay. (Prior to the Affordable Care Act, medical bills were the leading cause of personal bankruptcies, it will be interesting to see what happens going forward.)

By pooling your risks with those of a group, it becomes affordable for the group as a whole to pay those really high healthcare costs for the (hopefully) few individuals who need it. In effect, those folks who don’t end up with high costs subsidize those that do. When insurance rates go up, it’s not just because the insurance companies are greedy (Kaiser, in fact, is non-profit), it’s because the cost experience of the group (in this case, LPS employees who’ve chosen each particular plan) has been more than the premiums that are paid in. It just takes one or two very expensive cases (a premature baby with complications, brain cancer, etc.) to require higher premiums. To be clear, this is not a bad thing, this is the reason for group health insurance. If you never get sick, the best option would be not to buy health insurance at all. This is the reason for the controversial “individual mandate” in the ACA, for health insurance to work you have to have healthy people involved in order to pay for the sick people.

So now let’s look at the premiums. When folks look at the rate sheet put out by LPS each year, they often skip down to the employee portion of the premium, think about the deductible amount and perhaps maximum out of pocket, and then make a quick decision. For many folks, the idea of a “high-deductible” and paying costs out-of-pocket up front is scary, but if you stop to do the math, the story turns out a bit different. This table shows the total out-of-pocket costs for each plan choice under a couple of sample scenarios. Obviously, your experience will most likely not match the sample scenario, but I tried to pick scenarios that people typically worry about (which is costs that come in right at the deductible amount for the high-deductible plans).

lpsrates

It turns out that under the CIGNA plans, the high-deductible plan is cheaper for almost everyone under almost every scenario. (I think it is actually everyone and every scenario, not just “almost”, but I can’t check every possible scenario so I didn’t want to overstate it.) Check out this google doc for a bit more detail but, basically, with the amount you save in premiums under the high-deductible plan, plus the amount that LPS contributes to your HSA (I’ll write a post soon talking more about HSAs, they are a very attractive option), you come out ahead over the OAP plan even when you have large medical bills. Even better, if you have years where you don’t have large medical bills, you not only come out ahead, but the amount in your HSA (LPS contribution plus whatever you might choose to contribute) rolls over. So not only do you pay less that year, you have “money in the bank” for future healthcare costs.

The math is not quite as straightforward on the Kaiser side, because under the DHMO you have both copays and coinsurance after you meet the deductible, and what those might end up being varies greatly depending on exactly what kind of care you end up needing (plus, ironically, since the premiums are lower than CIGNA, the difference between the two Kaiser plans is not as stark). But, in general, the story is fairly similar to CIGNA. When you have “good” healthcare years with low costs, you will definitely come out ahead with the high-deductible plan and can carry over any money in your HSA. When you have “bad” years with higher costs, you may still come out ahead with the high-deductible plan, but there are certainly scenarios where the DHMO would end up being cheaper. (And, of course, when you compare to the CIGNA plans, Kaiser is less expensive under all scenarios.)

So, which carrier and which plan should you choose? It depends. You also have to look at the benefits offered by any spouse’s plan, your existing health and any conditions you might have. as well as your personal preferences. That’s certainly part of what we’d do if you decide to work with me.

Additional Resources (2017-18)
LPS Benefits Book
CIGNA OAP
CIGNA CDHP with HSA
Kaiser DHMO
Kaiser HDHP with HSA

PERA: It’s Even Better Than You Think

by in PERA and tagged , , , , | 3 Comments

pera

Most Colorado (public school) educators know that Colorado PERA is a “good” retirement program, especially compared to Social Security, but often they don’t know just how good it is. Fully exploring this topic is beyond the scope of this blog post, but let me briefly hit some of the highlights.

As part of SB 14-214, the the state of Colorado commissioned three independent studies of Colorado PERA, two of which are particularly relevant to this discussion. The Milliman Retirement Benefits Study, released in January of 2015, looked at how Colorado PERA’s benefits fit into the larger picture of total compensation, and was designed to evaluate the value of PERA compared to other retirement packages offered by other states and by private companies. The executive summary states,

The state’s total retirement compensation package is equivalent to 15.7% of pay (15.4% defined benefit and 0.3% retiree health), relative to the market median of 14.7% (combined sources: defined contribution, defined benefit, social security, and retiree health)

Basically, this says that as part of a total compensation package, Colorado PERA is just above the median benefit paid by states and private companies.

The second study, the Gabriel, Roeder, Smith & Company Plan Design Study is a bit more in-depth and relevant to this discussion. The purpose of this study was to compare Colorado PERA’s plan design and, specifically, the costs and effectiveness of PERA, as compared to other retirement plans offered in the public and private sectors (including the one that affects the most people, Social Security). Again, from the executive summary,

This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today.

When the study was presented to the State of Colorado’s Legislative Audit Committee, GRS officials told members,

Colorado’s largest public employee pension system is the most efficient and effective a state could have.

Those are important pieces of background to know, especially when the legislature is in session and various bills are offered regarding PERA. But I want to point out some specific features of Colorado PERA that are particularly relevant to you from an investment and financial planning perspective.

Colorado PERA represents over 500,000 members which provides some significant advantages to you in terms of economies of scale and in terms of investment returns. Because PERA is so large, it is able to both invest at low cost and to invest in areas that are not available to you as an individual investor. Because they are a large, institutional investor, they are able to negotiate investment fees that are lower than what you can typically achieve on your own. They can also invest in areas such as real estate and private equity that are not available to you as an individual investor. Both of these help PERA achieve higher returns (at the same level of risk) than most individual investors.

Perhaps even more importantly, however, is the fact that PERA is the ultimate long-term investor. As an individual, you have a “life-cycle” to your investments. Typically as you get older and then eventually when you are retired, conventional wisdom indicates that you should get more conservative with your investments because you don’t have time to “recover” from a market downturn. But because PERA pools money from over 500,000 members, and because they are essentially investing in perpetuity, in many ways PERA can invest like each one of those investors is an unchanging 35-year old.

While PERA does have to deal with cash flow issues in order to pay benefits, and they certainly have to manage risk and particularly be concerned with sequence-of-returns risk, overall they can truly invest for the long term. Which means that even as you get older, PERA doesn’t have to adjust its investments based on your age, they continue to invest as if you were 35. This allows them to stay fully invested for the long-term at an appropriate level of risk that will generate good long-term returns.

In addition, once you do retire and start drawing your PERA benefits, those benefits are guaranteed for life, including a 2% annual increase to help cover inflation. (Note: that 2% applies to those hired before 2007, and can temporarily decrease following calendar years that PERA investments lose money, which does happen, but not that frequently. For those hired after 2007, it could also be 2%, but it’s a bit more complicated.) Let’s use a specific example to put that into perspective.

The median PERA retiree earns about $35,000 per year in benefits. There’s a rule-of-thumb in financial planning circles called the 4% rule which says that, based on historical results, people can typically withdraw 4% of their investment balance each year to live on and still expect their money to last until they die. While not perfect, the 4% rule is pretty robust, which means that the $35,000 per year in our example equates to about $875,000 in savings. Many career educators will likely qualify for a much higher benefit, maybe $55,000 a year or more, which equates to $1.375 million in savings.

Now, this is a very rough equivalency, as an investment balance using the 4% withdrawal rule has a decent chance of actually growing over time, which means you could leave a healthy inheritance, while your pension income ends when you die (or when your beneficiary dies if you take Option 2 or 3). But I think it still gives you a rough idea of the incredible value of your PERA pension. It really does allow teachers to become millionaires by the time they retire (and multi-millionaires if you invest your own savings wisely).

There’s one other important aspect of this that I think many Colorado educators may not notice. Because this pension income is guaranteed, in many ways you can think of your PERA pension as the fixed income (bonds) portion of your portfolio. This means you can invest your other retirement savings (401k/403b/457 – I’ll write a post soon on retirement savings plans) more aggressively than folks who don’t have a pension plan like PERA, which can ultimately generate a lot of increased wealth and therefore financial security. (I will write a post soon on investment “risk” and how “aggressive” investments are not necessarily more risky for the long-term investor.)

This is one of the main reasons why I think it’s unfortunate that many Colorado educators don’t really start thinking about PERA until they are close to retirement. In reality, the fact that you have PERA as your retirement plan should affect your financial planning from the first day you begin PERA-covered employment. (This is also one of the reasons I decided to start Fisch Financial – after talking with colleagues over the years about PERA, I realized how little many of them have thought about how PERA should affect their financial planning.)

So, how good is PERA? It’s great in-and-of-itself, but it also allows you to be more successful with the rest of your investments as well. Please consider incorporating the affordances that your PERA benefit allows you in the rest of your financial planning.

Who Should Use Fisch Financial?

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who

Let me be clear, many of you should not. Many of you should hire a full-blown certified financial planner (CFP) who uses a fee-only method (as opposed to percentage of assets managed). This is especially true if you have a more complicated situation such as owning multiple real estate properties, or being part of a trust, or having a complicated legal situation (among others).

So if the above is true (and it is), why am I offering this service at all? Well, three main reasons.

    1. The majority of Colorado educators (my “target audience” if you will) do not have complicated situations. They have one or two incomes, have a mortgage on a house, have normal bills and maybe have some investments, but they aren’t very knowledgeable (or at least not confident in their knowledge) of how to handle their finances (and often just aren’t very interested in the topic). While they would also benefit from seeing a “real” financial planner, there are a lot of relatively straightforward changes they should probably make that I can help them think through. Which leads to reason #2…
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    2. A lot of you won’t hire a certified financial planner (at least not yet). A lot of folks are intimidated by financial stuff, and they are worried that someone will lose them money or, worse, actually take advantage of them for financial gain. These folks are typically not that confident in their own knowledge and are worried they won’t be able to work intelligently with a financial planner and therefore will “waste” the money they pay the financial planner for no real gain. While I think any good financial planner can add a lot of value, it doesn’t matter if you won’t hire them. By offering a free service, I hope to not only help you make some positive changes in your finances, but perhaps also get you to the place where your confident enough to work with a certified financial planner should you choose to.
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    3. I want to help. That maybe sound cheesy, or cliche, but it’s true. I’ve been interested in financial topics since high school when I worked in a credit union, and have continued to read a lot and learn over the years. I’ve certainly made many mistakes (and undoubtedly am still making some now, although hopefully not too many), but I feel like I’ve learned a ton over the years and am in a position to help others avoid any mistakes they might make (or possibly correct mistakes they’ve already made). For a lot of people, there are somewhere between 3 and 10 relatively simple things they can do that can make a huge difference in their financial security (and, therefore, in achieving their goals in life). I can help you figure out those things.

In addition to the general financial/investment knowledge I bring to the table, I’m very knowledgeable about one aspect that is key for Colorado educators: PERA. While most Colorado educators have a vague idea that PERA is a good thing, they don’t realize how good, and they also don’t realize that having PERA should affect all of their other financial decisions, and not just when they are close to retirement, but from day one that they start in PERA-covered employment.

This (along with lack of understanding of benefits and specifically 401k/403b/457 plans) is one of the main reasons I decided to offer my services. Over the years I’ve had so many conversations with very bright educators who nevertheless have very little knowledge of these areas and consequently have made decisions that have not been optimal. This may or may not be you. For some of you, working with me will end up making very little difference because you are knowledgeable and have made good decisions along the way. But it won’t cost you anything (other than a little bit of time) and it should reassure you that you’re on the right path. For others, this truly could be life changing. And I don’t say that lightly, being financially secure really can change your life and allow you to focus on what really matters – financial success isn’t the goal, it’s the means to achieve whatever your goals are.

Photo credit: Mark Dumont via Foter.com / CC BY-NC