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When you’re on an airplane and hit turbulence or rough weather, the flight crew tells you to stay seated and buckled.  Unfortunately, when the markets hit bad weather, there is rarely such a warning.

You might want to call it “Black Thursday.”

Yesterday, the markets around the world went into a tailspin reacting almost violently to the ongoing drumbeat of dour economic news.

On the radar, we’ve seen the storm clouds moving in for a while now:

  • lower than expected GDP in the US last quarter,
  • downward revisions of the GDP to a negligible 0.4% for the first quarter,
  • lower business and consumer confidence surveys,
  • sharply lower than expected new jobs created,
  • higher unemployment,
  • foreign debt crises weighing down our Eurozone trading partners.

There was a temporary distraction over the last couple of weeks as we in the US focused on the debt ceiling debate to the exclusion of all else.  Self-congratulatory press remarks by politicians aside, nothing done in Washington really changed the fact that we are still flying into a stiff head wind and storm clouds that threaten recovery prospects.

Eventually, though, the accumulation of downbeat news over the past few weeks seems to have finally come to a head yesterday.  No one thing seems to have caused it.  It just seems that finally someone said “the Emperor has no clothes” and everyone finally noticed the obvious: global economies are weak and burdened by debt and political crises.

All of this has been creating doubt in the minds of investors about the ability to find and implement policies or actions by governments or private sector companies.  And doubt leads to uncertainty.  And if there’s one thing we know for certain, it is that markets abhor uncertainty.

While many commentators may have thought that the “resolution” of the debt ceiling debate in Washington would have calmed the markets, it seems that upon further review of the details the markets are not so sure.  And in an “abundance of caution” market analysts who once were so OK with exotic bond and mortgage investments are now reacting overly negatively to any and all news and evidence of weakness by governments or companies.

What’s An Investor to Do?

Don’t panic.  It may be cliché but it’s still true.  If you hadn’t already put in place a hedging strategy, then what is past is past and move forward.

So the Dow has erased on its gains for 2011 and has turned the time machine back to December 2008.

If you sell now — especially without a plan in place — you’re setting yourself up for failure.

Here’s a simple plan to consider:

  1. Hold On:  You can’t lose anything if you sell.
  2. Hedge: As I’ve said before in this blog and in the ViewPoint Newsletter, you need to put in place a hedge.  There are lots of tools available to investors (and advisers) to help:  Exchange Traded Funds (ETFs) on the S&P 500, for instance, can be hedged with options or you can use “trailing stop-loss” instructions to limit the market downside; another option – inverse ETFs that move opposite the underlying index. These aren’t buy-hold types of ETFs but can be used to provide short-term (daily) hedges.
  3. Rebalance:  If you’re not already diversified among different asset classes, then now’s the time to look at that. You may be able to pick up on some great bargains right now that will position you better for the long-term.  Yes, every risky asset got hit in the downdraft but that’s still no reason to be bulked up on one company stock or mutual fund type.
  4. Keep Your Powder Dry and in Reserve:  Cash is king – an oft-repeated phrase still holds true now.  Take a page from my retirement planning advice and make sure you have cash to cover your fixed overhead for a good long time.  With cash in place, you won’t be forced to sell out at fire sale prices now or during other rough times. This is part of what I refer to as “Buy and Hold Out.”
  5. Seek Professional Help:  Research reported in the Financial Planning Association’s Journal of Financial Planning shows that those with financial advisers and a plan are more satisfied and overall have more wealth.  Avoiding emotional mistakes improves an investor’s bottom line.

As a side note:  The old stockbroker’s manual still says “Sell in May and Go Away.”  Probably for good reason.  Historically, the summer months are filled with languid or down markets and volatile ups and downs.

 

While it’s tempting to give in to the emotional “flight” survival response that you’re feeling right now, don’t give in.  Stand and fight instead.  But fight smart. Have a plan and consider a professional navigator.

If you are seeking a second opinion or need some help in implementing a personal money rescue plan, please consider the help of a qualified professional.

 

Let’s Make A Plan Together:  978-388-0020

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Like a deer caught in headlights, individuals faced with too many choices in their company-sponsored plan freeze up and may end up taking no action for their retirement.  They may end up making costly choices – or worse, no choices – for their retirement savings dollars.

Common costly choices typically include buying too much company stock or a mutual fund representing the same industry of the employer or loading up on small cap or growth stocks and avoiding bonds.  Even young investors (under age 30) have as high a probability as older workers of not choosing any equity funds and only choosing a money market or bond fund for the bulk of their retirement savings.

Recent research completed by Columbia Business School and the University of Chicago Booth School of Business indicates that workers who are faced with too many investment options end up making decisions that can adversely impact their retirement.  Often individuals will either make asset allocations that are unbalanced or choose to do nothing and leave their savings in cash and money markets.

This research highlights the need for individuals to seek out help from professionals who can offer guidance in allocation and rebalancing decisions.

Unfortunately, company sponsors do not have the staff, time or resources to provide this type of service.  And sponsors – who are indeed acting as trustees for the participants in their plans – may simply believe that they are “all set” because the investment firm offering the investment menu can provide the needed help through their toll-free customer service lines or websites.

People need tailored help and guidance which is not something that either employers or investment firms are prepared to offer.

While not discussed specifically in this study, the increased use of auto-enrollment in company plans and Target Date funds has helped.  At least individuals are “paying themselves first” by employers automatically enrolling them.  And target date funds can at least offer a glide path with preset rebalancing decisions to the asset allocation mix.

But these one-size fits all solutions may not be best for everyone.  This is where a fiduciary adviser can help out.

And this is why Clear View Wealth Advisors offers customized help for plan participants.  Through one of my flat fee financial planning programs, individuals can receive customized help in choosing a proper mix of funds from among the plan choices and receive guidance on periodic rebalancing actions.

To see details of the benefits study, go to www.BenefitNews.com or click here.

Help with Retirement Planning or 401ks is a Click Away with Clear View

Get Personal Help with Your Retirement Plan Choices

 

 

Retirement Plan Helpline:  978-388-0020

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A key component of a diversified income-oriented portfolio is dividends. This is what I have noted in the past during my presentations, blogs and online musings. They are a key part of a solid retirement income strategy.

The total return from stocks is derived from two key components:  price appreciation and the cash flow from dividends.

Most investors are certainly familiar with the concept of price appreciation (or depreciation as was evident during the financial crisis and Flash Crash for instance).  This is what the media each night focuses on when they report on “The Market.”

But less noticed is the value of dividends to the longer-term success of an investor.

The Value of Dividends to An Investor

Below is a chart of various recent periods of stock market performance compiled by Thornburg Investment.

The “Dividend Aristocrats Index” refers to an index of companies that consistently lead the market in paying dividends and regularly increasing their dividends.

Annualized Total Return Period Dividend Aristocrats Index S&P 500
1990-94 12.58% 10.4%
1995-99 19.48% 28.54%
2000-04 9.79% -2.29%
2005 – 9/2009 2.32% -0.08%
1990 – 9/2009 10.97% 8.41%

Dividend-paying stocks have shown these positive attributes over this period:

  1. Historically higher yields than bonds
  2. Historically higher total returns compared to bonds because of the stock appreciation potential of the dividend-payers.
  3. Higher income, capital appreciation and total return compared to the S&P 500 Index in almost all of the periods noted above and a near 20-year annualized total return of nearly 11% versus 8.4.

Dividend-paying stocks are probably not as sexy as most aspects of the stock market.  They are part of “value investing.” They are the stuff of “conservative” portfolios built for “widows and orphans.”  They are the basic building blocks used by Benjamin Graham, the author of Intelligent Investing and the principles on which Warren Buffet built Berkshire-Hathaway.

But for an income-oriented investor (such as a retiree) looking at ways to manage income in retirement, they should not be overlooked.  In fact, recent research reveals that those companies that pay out higher dividends also tend to have higher stock prices because they also have higher earnings growth. And earnings growth is another key component in valuing stocks.  This research indicates this as a global tendency.

Searching for Yield

Unfortunately, seeking out high dividend-paying companies in the US is not so easy.  Unlike managements of Euro-based companies where paying dividends is a sort of badge of honor, US companies tend to be much more stingy in paying back earnings to owners of the company (the stockholders).

And the trend in dividend yields is one that continues to decline. A research note by Vanguard (May 2011) shows this trend.  From 1928 through 1945, the average dividend yield was around 5.6% and dividends represented about 67% of company earnings (aka dividend payout ratio). From 1945 to 1982 the average yields dropped to 4.2% and the payout ratio to 53%.  In the more recent period from 1983 through 2010, the average dividend yield has dropped to 2.5% with a payout ratio of about 46%.

As you can see finding “Aristocrats” that pay out higher than these averages makes a big difference.  And the higher payouts may also portend higher future earnings as well as stock price appreciation.

But even those companies which are “stingier” will still help out a portfolio.

Do Lower Dividends Mean Lower Stock Prices?

The question that investors may be asking themselves now is “will these lower dividend yields (historically and compared to Europe for instance) be an indicator of lower stock prices?” Because the market’s dividend yield is below its historical norm, is that an indicator of lower total returns in the future?

While the stock market is certainly not without bubbles and crashes, it is unlikely that this is a factor in possible future stock price levels. Lower dividend yields are not necessarily an indicator of lower total returns.

There are other reasons that are more likely the cause of this trend toward lower yield payouts.  Part of this is based on US tax policy.  Another is the culture of US corporate management that has opted toward share repurchases instead.

In the US, there is a bias in favor of long-term capital gains over receiving dividends and paying income taxes.

When dividends are paid out all stock holders receive the income and are subject to tax. When management opts for a “share repurchase” program, only those who tender their shares are paid out.  So this may be more agreeable to investors who are trying to manage their tax bill from investing. For those who are longer-term stock holders, they may receive more favorable capital gains treatment by holding the stock and waiting simply for appreciation.

Admittedly, there may also be an incentive by management not to declare dividends so that they can hold onto the capital to “reinvest” in the business – which may or may not be a good thing.  (The same argument can also be seen in political terms in Washington when both parties are arguing about whether or not to have tax cuts).

And management may also have an incentive to repurchase stock because such programs provide the company with flexibility to change the terms – something that is frowned upon if management were to lower or cancel a declared dividend.

How to Use Dividends in Your Portfolio

In any event, using dividend-paying stock is something that makes sense in retirement portfolios.  To provide tax efficiency, it makes sense to include these in your qualified accounts (like IRAs).  And to boost income, it makes sense to add global dividend-paying stocks which tend to have higher yields and payouts.  Nothing in these current research notes indicates that the lower US yields and payouts are an indicator for lower future stock prices.  There are enough other things going on in the economy locally and globally that can impact do that.

To Build a Better Mousetrap or Get More Information

For more ways to build a retirement income portfolio, please feel free to give me a call directly at 978-388-0020 and stay tuned to the company website for upcoming webinars that will cover this topic too.

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Reverse Mortgage Basics

A reverse mortgage is a type of loan that certain eligible homeowners can get to tap into the equity in their home. Unlike traditional loans, they do not require the same sort of underwriting so no income, asset or credit checks are needed.  And unlike a traditional loan, there is no monthly repayment for any amounts borrowed.  Repayment of the loan’s principal and interest starts only after the homeowner dies or the home is sold.

To be eligible for such a loan, all owners on the property title need to be at least age 62.

For the most part, reverse mortgages, also referred to as RMs, are backed by the federal government through the FHA (Federal Housing Administration) that administers the program.

Myth: The Bank Keeps the House

These types of mortgages have been around for many years (since the late 1970s) and have gone through many changes.

One misconception about these types of loans is that a homeowner loses the house to the bank because of certain terms of such loans when they first came out. In the way way past, banks would take the title to the home.  But that is far from the reality for these types of loans now. The property title remains with the homeowner.

How A Reverse Mortgage Limit Is Set

The amount of money that a homeowner gets is based on current age, life expectancy, and appraised value.  With this information, the bank will determine the credit line or limit that the homeowner can tap.  The lender will apply an interest rate to the amounts outstanding and add it to the balance owed (and subtract the interest accrued from the amount of credit line that is available).  Eventually, when the homeowner dies or moves out of the home then the lender will require repayment.

The total amount that is owed is capped as a percentage of the property value which is assumed to appreciate at a certain rate during the owner’s life expectancy.

A homeowner can move out and sell the property and keep the proceeds above whatever the payoff amount is.  If the homeowner dies and the property passes to his estate, his heirs can sell the property or refinance it and keep it.

The cost for such a loan can be pricey.  Even with recent administrative changes reducing origination fees from the standard 2% of the loan amount, these loans can cost upwards of $12,000 for a $250,000 or $300,000 credit line amount.  Although traditional credit and income underwriting are not required, all the other costs associated with a closing like title work, title insurance, recording fees, mortgage insurance and underwriting are still needed.

Why Would A Homeowner Consider A Reverse Mortgage? Comparing Some Options

Why would a homeowner opt for this? Let’s face it.  Most folks would prefer not to move into an assisted living facility or a nursing home if they can avoid it. So a reverse mortgage is a good option for those who want to age in place in their home.

It provides a cash flow to help support the costs of running the house. And it taps the equity that a homeowner has built up over time that can be used to pay for essentials like medicine or home renovations to make the home safe and useful for an aging homeowner.

Yes, home equity lines or loans are also an option.  They can be even cheaper certainly on the origination side since so many banks offer them with no closing costs.  But the homeowner must make a payment each month even if it is just the interest only that is typically required for the first five or 10 years of the line.  And if the owner doesn’t have the cash to make that payment, then there is the risk of a foreclosure.

As a former mortgage banker, I would see situations where an elder couple would call me after having refinanced the loan several times. Each time they had to incur closing costs and because their income or credit may have slipped they would only qualify for more costly loan terms that could put them at greater risk of losing the house down the road.

Downsides for A Reverse Mortgage

Setting up a reverse mortgage as a line of credit will not jeopardize Social Security benefits and is not counted as an income source for tax purposes. On the other hand, if the homeowner is receiving Medicaid, then it could be counted as an assessable asset that may limit qualification for such benefits.

Some folks who are facing bankruptcy have opted to go the reverse mortgage route.  Jesse Redlener and David Burbridge, attorneys who specialize in these matters, told me of the case where a couple transferred the title from joint ownership (husband and wife) to just the wife.  Then they completed the reverse mortgage process.  And the husband who now owned no other property filed for bankruptcy.  The courts considered this a fraudulent transfer of the property and the assets available for the credit line now became eligible to pay off the husband’s other creditors.

Get More Information From Your Planning Team

The bottom line here is that before making a serious money move you really need to bring in the professionals to help navigate through the minefield.  Actions have consequences and this is an area where a good team of advisers (banker, financial planner, attorney) can help.

For more information on reverse mortgages, you may want to call Bob Irving of First Integrity Mortgage, LLC, a licensed reverse mortgage originator.

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The other day I was contacted by Evan Lips, a reporter from the Lowell Sun who was doing a timely article on financial planning tips for the new year.

He had spoken to other financial planners and investment representatives and he had a wide range of opinions provided by them.  These included ways to manage credit to savings to kinds of investments to use for a retirement account.

Because everyone is at a different place in his or her life, some of these tips may not really help now. For instance, how you take money out of retirement accounts when retired is a tip that is less important to someone recently graduated looking to pay off student loan debt.

But there is something common that really can help anyone of any age.

Number One Tip for 2011 and Beyond

So my Number One tip for any consumer of any age:  Control What You Can and Leave the Rest.

What do I mean?

Consumers are usually their own worst enemy.  Too distracted by daily affairs, it’s easy to become overly focused on the news of the moment.  And this can lead to an emotional reaction that can otherwise sabotage long-term financial health.

Things You Can Control

1.      Investors have control over certain things: Their emotions (and reactions to the crisis of the day), investment expenses, asset allocation and amounts they save.

2.       Investing is long-term but the financial media is fixed on short-term crises of the moment.  Be mindful of that and try to tune out the noise.

3.       Your mom was right: Live beneath your means and you’ll have extra cash to save; build up your emergency reserves (minimum 3 months of fixed expenses for married couples working; 6 months for couples with one-earner and nearer 12 months for someone with variable income).

4.       Pay yourself first.  Make it automatic. Have a portion of your paycheck directly sent to a high-yielding savings account.

5.       You can lower your investing expenses and improve your diversification by using Exchange Traded Funds.  ETFs are investments that can trade like stocks but represent a broad basket of investments.  (Sort of like an index mutual fund but with even less expense). If you have less than $100,000 to invest and are looking for efficient core holding for global stock diversification, consider something like the OneFund® ETF from US One at www.usone.com (ticker symbol: ONEF) which is composed of 5 other ETFs from Vanguard and costs less than 0.35% per year while providing 95% exposure to 5,000 large, small and medium-sized companies throughout the world.

6.       Develop good money habits: Reconsider that fancy coffee or fast-food lunch and pocket the savings for a more meaningful goal (i.e. vacation, paying off debt, down payment for a house).

7.       Pay off your debt by snowballing payments.  This technique will help you see progress toward paying off debts.  Start with the ones with the lowest balances and pay above the minimum.  Then when this debt is paid in full apply the amount you were paying toward the next debt.  Eventually, like a snowball rolling down hill, you’ll be applying all these payments in large lumps toward the highest balance debt.  And this will help accelerate paying the debts off and lower your interest expenses.  Then when everything is paid off you can direct this toward your emergency reserves or investing goals.

8.       Position yourself to qualify for more student financial aid: Skip the allowance and put your kid to work.  See my post on this here.

Want Some Low-Cost Globally Efficient Ways to Invest?

What is an ETF?  Go to https://moneylinkpro.wordpress.com/?s=exchange+traded+fund or http://www.investopedia.com/terms/e/etf.asp

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What could possibly link the children’s story of Watership Down, Thanksgiving turkey and retirement investing risks?

Well, my mind works in strange ways (just ask my wife and I’m sure my 15-month old Spencer agrees as well).

Buy and Hold – A Broken Promise?

After all the troubles in the stock market and in financial markets in general over the past couple of years, I was recently rereading an article in the trade magazine, Journal of Financial Planning. In the September 2009 issue there is a book excerpt by Ken Solow, CFP (R) entitled Buy and Hold is Dead (AGAIN): The Trouble with Quant Models.

Over the past couple of years there has been much written about Buy and Hold investing. You may be familiar with the concept as an approach to investing that focuses on selecting an investment (stocks, bonds, mutual funds, real estate) and simply holding on through good times and bad.  Occasionally, you should rebalance back toward some strategic assert allocation to reduce or minimize certain risks.

The reasoning behind this is simple: humans are bad at financial decisions and by adopting this approach you can take the emotion out of investing.  Too often, we tend to make important decisions with little information and rely on emotions like fear or greed.  In fact, Warren Buffet, investor-extraordinaire of Berkshire-Hathaway fame, has said this many times and by doing the opposite of what the masses do he has amassed a fortune for himself and his investors.

For many, buy and hold was discredited after the great Financial Meltdown that tipped us into the Great Recession.  All asset  classes – whether large company stocks, small company stocks, stocks of foreign firms, bonds from companies large or small and bonds issued by sovereign nations – went down.

Most investors feel cheated, angry and worse. This buy and hold approach was advertised as a way to minimize risk.  Unfortunately, most investors probably misinterpreted the idea of minimizing risk and thought that it eliminated the downside volatility.

As I often say to clients, we know there will be sunny days and rainy days.  Risk management means carrying an umbrella and maybe wearing a rain coat as well.  But just because you are using one or both of them doesn’t mean that you won’t get wet.  You’ll just not get soaked like the guy who’s running from the street curb toward the office door with nothing but a newspaper over his head.

It’s true that Buy and Hold will help take the emotion out of investing. Over the long-term, the Ibbotson Charts will show that all asset classes have gone up since 1926 until now even after the meltdown.

That provides cold comfort to the retiree who is just about to start withdrawals from his portfolio to supplement his retirement income and lifestyle.  There were many who saw their investments drop 30%, 40% or more.  And while their portfolio may have bounced back some with the market rally and over time the market may continue to rise, they just don’t have the time to wait.  They have to start taking out money now.  And each time they take out money to live on, there is less in the pot to grow.

This has happened before.  Remember Enron.  Remember Lucent Technologies.  On one day someone is a paper millionaire.  Fast forward and the companies are in the tank (bankrupt in the case of Enron) and your retirement dream is a nightmare. If you’re at the tail end of a 25 year career, you really don’t have the time to make it up but have to make do with what you have. (Even for these folks, not all is lost and there are things one can do to sustain a retirement as I noted here in a previous post. And I’ll be talking about sustainable withdrawal rates in another post on retirement income planning.)

For the rest of us, there is a lesson in there. And this is where Watership Down and Thanksgiving turkey come into play.

Buy and Hold, Modern Portfolio Theory & The Illusion of Math

Buy and Hold is based on the quantitative model of Modern Portfolio Theory (MPT) first devised Harry Markowitz more than 50 years ago.  Such quantitative models are based on lots of mathematics.  The formulas are complex and elegant.  They are beyond what most of us are comfortable with but they do provide a sense of security.  You input numbers from data on various asset classes and a very precise number comes out the other side of the black box.  This provides a sense of security.  Instead of relying on something subjective like your instinct or your gut feelings, you can put your faith into something objective like the science of math and finance.

Over the past few years and principally from the mid-1990s until our recent meltdown, we have come to rely on ever more complex quantitative models. These complex models drove the markets in real estate and mortgages as we relied more and more on the black boxes of the financial engineers.  But theories are only theories and models are only as good as the assumptions and data used to create them.

A chain is only as strong as its weakest link.  And a model is only as good as the assumptions behind it.  All models are based on past events. And even though we are warned that “past performance is no guarantee of future results” we rely on these backward-looking, statistically-based models for predicting our futures.

In a normal world, the behavior of markets and investors can be assumed pretty well. But in panics, all bets are off.  No amount of modeling can predict how presumably reasonable people will act but it’s safe to say that human nature’s fight or flight syndrome kicks in hard.

Watership Down – A Lesson from Spencer’s Bedtime

What happens is that things go along and work until they don’t.  Assumptions are assumed to be fine until they need to be revised. When I was reading Watership Down there is a scene where the protagonist, a wild rabbit, encounters a number of other well-fed white rabbits.  Our hero tries to get them to follow him but to no avail.  The tame rabbits live in a fine world where they are provided plenty of food, water, shelter and care.  What more is there to go searching for “out there?”

The Thanksgiving Turkey

Our false sense of security and belief in a system like MPT or Buy and Hold can be illustrated in the tale of the Thanksgiving turkey.

As retold by Nassim Taleb in The Black Swan:

Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey:  It will incur a revision of belief.

Unable or unwilling to question its beliefs, the turkey was lulled into a false sense of security by his daily reinforcing experiences. Like the tame white rabbits in Watership Down, the turkey’s world is looking good and life is great.  So much so that neither even think about ways to escape.

At least in the animated movie Chicken Run with Mel Gibson (another soon-to-be Spencer favorite), the chickens are led to question their assumptions about life on the farm and plot ways to escape.

What We Learn from Bedtime Stories for Investing

What we learn from these stories is that just because things have worked in the past, doesn’t mean that they are absolute truths that will hold in the future. The most dangerous thing that an investor can do is simply accept with blind faith the assumptions of the past.  In a changing market, there’s nothing scarier than conventional thinking.

Theories are only theories and while it may seem like heresy to question assumptions, it’s in your best interest to do so.

Does this mean abandoning Modern Portfolio Theory or Buy and Hold? No.

It does mean that it makes sense to add some human judgment to the mix.  Good models can work even better with common sense.

Like the counter-culture of the 1960s would teach, you as an investor will do best to question authority and question assumptions.

Use an Investment Policy Statement as a Better Road Map

Here with the aid of a qualified professional you can walk through and create a personalized investment policy statement as a road map for investing decisions.

Such an approach can combine the quantitative tools to be used along with the more qualitative, value-based criteria that can be combined to help in the investment selection and portfolio management process.

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It’s easy to get tripped up in retirement.  I’m reminded of the expression by the octogenarian to the recent newlywed fretting about life but rejecting out of hand the advice of his experienced senior:

A long time ago I was where you are now.  And later you’ll be where I am now.  But just as you haven’t been your age before, I’ve never been old before.

So for new retirees who “not been there or done that” it’s a whole new world filled with possibility and pitfalls.

Transitioning

Most retirees have an imperfect vision of retirement at best.  And if it hasn’t been discussed or communicated, it could be vastly different from that of your spouse.

Finding meaning in a post-work world can be a real challenge.  If your identity has been wrapped up in what you do, then you might now feel lost.  Your social networks might change.  Your activities might change.

It’s important to reassess your values and envision how you want to live in this next chapter of your life.

Initially, there may be more travel to visit family, friends or places.  You may want to tackle that “bucket list.”

But to live a truly fulfilling and rewarding retirement may require you to take stock in yourself, your values and what gives you meaning.  You may benefit from working with a professional transition coach or group that can help guide you through this period of rediscovery.  One such resource can be found here at the Successful Transition Planning Institute.

Lifestyle Budget

Typically, most retirees may take the rule of thumb bandied about that you will need from 60% to 70% of your pre-retirement income to live on in a post-retirement world.  This is because it is assumed that many expenses will drop off:  business wardrobe, commuting to work, professional memberships, housing, new cars, etc.

The reality is far different.  According to research conducted by the Fidelity Research Institute 2007 Retirement Index, more than two-thirds of retirees spent the same or higher in retirement.  Only eight percent spend significantly lower and about 25% spend somewhat lower. The Employee Benefit Research Institute  reported in its 2010 Retirement Confidence Survey that while 60% of workers expected to more than half of retirees didn’t see a drop in retirement expenditures while 26% of this group reported that their spending actually rose.

It all depends on your goals, lifestyle and what curve balls life throws at you.  If you have adult children who end up in a financial crisis of their own caused by job loss, health issues or divorce, you may be spending more than you expected to help out. Maybe the home you live in will require higher outlays for maintenance or to upgrade the home so you can live there independently. In reality all of that travel and doing things on your bucket list will cost money, too.  So it’s more the rule than the exception to expect spending to increase while you’re still healthy to get up and go.

Over time, the travel bug and other activities will probably decline but even after that these may be replaced by other expenses.

Healthcare

There is an old saying that as you get older you have more doctors than friends.  This is a sad reality for many including my parents.

My father is on dialysis and has complications from diabetes.  His treatments probably cost Medicare (and ultimately the US taxpayer) more than $30,000 each quarter as I figure it.  He takes about 13 prescriptions each day and enters the dreaded “donut hole” about mid-year each year. At one time their former employers (a Fortune 500 company) provided medical insurance benefits to retirees but that became more and more cost prohibitive for their employer and for my parents as premiums, co-pays and deductibles rose.  So now they rely on a combination of Medicare and Blue Cross/Blue Shield and a state program called Prescription Advantage.

As private employers and cash-strapped state and municipal governments tackle the issue, you can expect to pay more for your health care in retirement.

Wealth Illusion

It’s not uncommon to feel really rich when you look at your retirement account statements.  (Sure, the balances are off where they may have been at the peak but it’s probably still a large pot of money). The big problem is that retirees may have no comprehension about how long that pot of money will last or how to turn it into a steady paycheck for retirement.

In reality the $500,000 in your 401k or IRA accounts may only provide $20,000 per year if you plan on withdrawing no more than 4% of the account’s balance each year. Then again if you take out more early on in retirement, you could be at risk of depleting your resources quickly.

Misplaced Risk Aversion & The Impact of Inflation

So as you get older, you’ll be tempted to follow the rule of thumb that more of your investments need to be in bonds. Although this may seem to be a conservative approach to investing, it is in fact risky.

Setting aside that this ignores the risks that bonds themselves carry, it is ignoring the simple fact that inflation eats away at your purchasing power.  Even in a tame inflationary world with 1% annual inflation, a couple spending about $80,000 a year when they are 65 will need over $88,000 a year just to buy the same level of goods and services when they turn 75.  Given the potential for higher inflation in the future that may result from a growing economy and/or current monetary policy, investments need to be positioned to hedge against inflation with a diverse allocation into stocks and not just bonds even when in retirement.

The other risk is trying to play catch up.  As a retiree sees the balances on his accounts get drawn down, he might even be tempted to “shoot for the moon” by investing in illiquid investments like stocks in small, thinly traded markets or in sectors that are very speculative.

Ball games are one by base hits and consistency on the field and at the plate.  Home runs are dramatic but not a sure thing.

Underestimating How Long You’ll Live

We all want a long and productive life.  Many will even say that they don’t want to live to be a burden to their families.  But here again the reality is that most folks do a bad job of guessing how long they’ll live.  A report by the Society of Actuaries notes that 29% of retirees and pre-retirees estimate that they’ll outline the averages but in fact there is a 50% chance of outliving them.

So while they may have enough resources to carry them through the average life expectancy, they will not have enough when they live longer than the averages. And if a couple attains the age of 65, there is a better than 50% chance that at least one of them will live into their 90s.

Given the fact that most women become widows at the age of 53 (Journal of Financial Planning, Nov. 2010), this has a big impact on the availability of resources for retirement.  Too often, a short-sighted approach to maximize current retirement income from a pension is to choose the option that pays the highest but stops when one spouse dies. All too often this puts the widow who may live longer without a reliable source of income to provide for her.

Conclusion

Too often people underestimate how long they will live in retirement, how much they will actually need for living in retirement and how to invest for a sustainable retirement paycheck using appropriate product, asset and tax diversification.

Many people do not save enough for their own retirement.  The social safety net providing support for old age income and healthcare may not be enough to maintain a desired lifestyle.  Women need to understand the risk of living long into retirement and manage resources accordingly.  And because more than 40% of Americans are at risk of retiring earlier than expected because of job loss, family care needs or personal health, there is a real need for proper planning to address these issues.

While retirees will benefit from having a good plan and road map before the final paycheck ends, it’s never too late to start. And for the newly retired with the time to address these issues, now’s as good a time as any to speak to a qualified professional who can help.

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Black Friday is traditionally the day that can make or break a retailer’s bottom line.  But don’t let enthusiasm for the season, the sales or the advertising hype end up putting you into the Red.

Black Friday is here.  Even before you may have had a chance to digest your Thanksgiving feast or recover from a day of football, you may have already been lured into the local mall.  Maybe you were one of those early bird shoppers preparing for a marathon day of shopping at 1 AM.  (It’s not too late to consider these tips for the rest of your shopping season or to teach your kids).

I was not one of them.  I slept in and have probably missed a host of specials and discounts on every imaginable thing sold. While I don’t feel bad I know that I’ll probably be picking on the leftovers like a I will be with the Thanksgiving turkey in the refrigerator.

Although I’m not the best marathon shopper, I thought I’d share a few tips that may help you avoid turning this holiday’s shopping season into a budget-busting hole for your family budget that you’ll be paying for and digging out of long after that snazzy do-dad you bought for Uncle Charlie is lost or breaks.

Have a Budget

No one says that you have to go and take out a second mortgage on your home to buy gifts for the entire world (that’s even assuming that you can qualify for a Home Equity Loan or HELOC).

It’s probably reasonable to budget somewhere around 1% of your gross income for holiday purchases of gifts for others in your family and friend network. Unless you’re buying an engagement or anniversary ring for your significant other, there’s no need to bust the budget here – even then there are limits. (And you really should not be spending more on stuff than you’re putting away in your IRA or 401k).

Are you afraid you’ll be considered the cheap skate relative or office mate? Who cares?  Are those folks going to bail you out if you’re in financial trouble?  Do you really want to be one of the folks who’s still paying off the credit card charges you incurred for this holiday by the time you serve next year’s Thanksgiving turkey?  All of those great savings you got will simply be replaced by interest charges on the balance you carry.

Gifts are barely remembered while memories of sharing time with friends and family have more meaning to most folks.

Make a List and Check It Twice

Just like Old Saint Nick, you should prepare a shopping list. Have a written list of who’s going to be receiving gifts.  If you know them well, you can jot down a few ideas of types of gifts to try to find.  Before you even open up your web browser or step foot in the store, get this done.  Without a list you’re more likely to become an impulse buyer.

Have a Shopping Plan

Experienced shoppers know that it pays to have a plan of attack when those doors open.  You’ve been scouring the newspaper inserts (you do still get the newspaper, right?) and browsing the websites.  You’ve been in the stores before and know the floor layout.  You can bypass all the stuff you don’t need and just go straight to the department in the store where that perfect gift for Aunt Sally is.

Hey, store merchandisers know that you’re only human and easily distracted.  That’s why they’ll stack up stuff near cash registers.  That’s why grocery stores force you to walk through the entire store to get to the dairy case and that quick stop to pick up milk costs you $30 because you pick up a “few things.”

I prefer to use shopping sites that will find and compare items.  Whether you use Amazon.com or MySimon.com or a host of other shopping robots, you can narrow down the price range to expect to pay for an item.  And for the Smartphone set, “there’s an app for that.”  You can download an app that will allow you to scan a product’s UPC which can then pull up product information and comparative prices.

Consider Charity

You might want to give back instead of simply consume.  Sure, we need consumers to buy more stuff to get the economy moving again (we also need corporations to invest their $2 trillion in cash back into their businesses by buying equipment and hiring folks but that’s a different discussion).

But nothing says that you have to stimulate the economy single-handedly.

There are causes and people who need your help throughout the year and providing a donation in lieu of a gift made in China will help them, make you feel good, provide you with a tax deduction, and reduce our trade imbalance which will ultimately improve the strength of the US dollar.

Remember the Spirit of the Season

What do you really want your family to remember about the season?  What values do you want to pass down to your children or grandchildren?

Sure, it can be all about the ostentatious display of holiday lights and some of those displays are really nice and others are just way over the top.

Sure, it can be about buying the biggest, best new shiny thing.

I’m not trying to be Scrooge here. Far from it.  I believe that the holiday is about family and friends.  And more particularly, I think that playing Santa for young kids is magical – for you and them.

When I was growing up, my brother and I typically received one gift each from our parents, aunts, uncles and grandmother. And after we opened them up, our parents let us keep one toy out to play with while the others were put away so we didn’t end up overly distracted and bored with the toys all at once.

On the other hand, I remember going to a cousin’s house and they had TONS of packages under the tree.  Their parents would wrap all sorts of little stocking-stuffers – candy, marbles, even tooth paste and socks.  It was all about showing the quantity of gifts even if they were mundane, everyday sort of things.

I think that I enjoyed our holiday more and better because we weren’t focused on tearing off lots and lots of wrapping paper.

And I think that’s what I want my soon-to-be 15-month old son, Spencer, to take away as part of his understanding of the holiday and our new family’s traditions.

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Recent academic research by Gordon Pye on the impact of emergency withdrawals on retirement planning may put into question the rule of thumb used by many advisers to determine a safe, sustainable withdrawal rate.

For many investors and their financial advisers, the accepted rule of thumb has been to withdraw no more than 4% of an investment portfolio in any given year to provide a sustainable income stream when in retirement.

Is this rule of thumb reasonable given the potential impact of personal emergencies?  And how can a withdrawal strategy be created to account for them and the impact of external forces like a market correction or longer bear market?

Cloudy Crystal Ball

Analytical tools and software have come a long way but even contemporary tools can’t account for everything.

I spoke with an estate attorney the other day.  We were talking about the many challenges for helping clients plan properly for contingencies in the face of so many internal and external variables.

What he said is worth keeping in mind when thinking about any sort of financial planning:  If you tell me when you’re going to die, I can prepare a perfect estate plan for you?

The same sentiment can be adapted for retirement income planning.  Sure, if you tell me how long you’ll live in retirement, how much it will cost each year and when you’re going to die, I can tell you how much you’ll need.

In reality, this is unlikely.  More often than not, the crystal ball is cloudy. So you have two choices here: Wing it or Plan.

Winging it is pretty simple. Nothing complicated.  Simply keep shuffling along. Sometimes you’ll scramble. Other times you’ll be “fat and happy” for lack of a better phrase.

Planning, on the other hand, is a lot like work.  It requires assumptions and conversations.  It may even require bringing in others to help create the framework.

While nobody wants another job to do given an already busy day, there is an upside to investing the time here: Peace of mind.

What the Doctor Says:

Here’s a summary of what Dr. Pye wrote recently in his article.

  • In retirement, you may never have an emergency or you may have one or more.
  • The timing and extent of these emergencies is unknown.
  • While a retiree may be able to reduce the damage caused by a bear market maybe through market growth, other emergencies may require withdrawals that siphon money away from the investment pot that can never again be used to help repair the hole left by that withdrawal.
  • The timing of these emergency withdrawals may cause a retiree to abandon a market strategy at an inopportune time.

The biggest unknown?  Health care is the biggest likely emergency on your retirement budget.  These can be related to your own health or even an adult son or daughter.  Other emergencies may be caused by catastrophic weather (mudslide, wind or flood damage to your home), the extended loss of a job by a son or daughter or a divorce compelling you to help out.

In other research by Dr. John Harris supports the notion that what matters most to all investors – and retirees in particular – is the sequence of returns not simply the average rate of return on a portfolio.

Intuitively, we understand this.  A bird in the hand is worth two in the bush.  Cash now is better than cash later (which may be a deterrent against planning now for a future need).  If you were to just retire and the market takes a nosedive as you are withdrawing funds, you would be in tough shape because you have a smaller base that is invested that has to do double (or triple) duty.  The amount of appreciation needed to make up for the hole left by the withdrawals combined with market losses would be near impossible or require an investor to take imprudent risks to try to regain lost ground.

So what’s an investor to do?

  1. Save more – easier said than done but this is really key or otherwise choose a different lifestyle budget.
  2. Reduce initial withdrawal rates from 4% to 3%.
  3. Follow an “endowment spending” policy instead of a simple rule of thumb.
  4. Invest for income from multiple sources (dividend-paying stocks as well as bonds).
  5. Stay invested in the stock market but change up the players.  Not even a championship ball club has the same line up from game to game.  As markets change, you need to add more tactical plays into the mix of asset types
  6. Separate your investments into different buckets:  short-term lifestyle budget, medium-term and longer-term.  Each of these can have different risk characteristics.
  7. Keep a safety net of near-cash to cover lifestyle needs for 1 to 2 years.
  8. Monitor the buckets so that one doesn’t get too low or start to overflow.  This will require moving funds from one to the other to maintain consistency with the targets.
  9. Don’t let your insurances lapse.  Insurance is there to fill in the gap so you don’t have to shell money out-of-pocket.  Here you want to regularly recheck your homeowner coverage for inflation protection riders, cost of replacement and liability.  Check your coverage and deductible limits for wind, sump pump and other damage.

 

 

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The holiday season is almost upon us.  Before we all get caught up in the spirit of the season (or mayhem, depending on your perspective), consider taking time to get your fiscal house in order with these tips.

The Year of the RMD

Last year, required minimum distributions (RMDs) were not required as Congress granted a reprieve to not force clients to take distributions from severely depressed retirement accounts.

That free pass is not available this year.  So if you or someone you know is over age 70 1/2, you have to take a distribution from your IRAs.  This also applies to those who are beneficiaries of inherited IRA accounts as well.

Distributions don’t have to be taken from each IRA account but a calculation must be made based on the value of all accounts at the end of last year.  Then a withdrawal can be made from one or more accounts as long as it at least equals the minimum amount.

Think Ahead for Higher Taxes

In all likelihood, taxes will be higher next year.  As things stand, the Bush-era tax cuts are set to expire and marginal income tax rates and estate taxes will increase.

So look to booking capital gains this year if possible since tax rates on both long-term and short-term gains are certainly lower this year.

Reduce Concentration

There’s obviously enough going on to distract any investor but what I’m talking about here is concentrated stock positions.  Many clients may take advantage of company-sponsored stock purchase plans or have inherited positions concentrated in just a few stock positions.

Regardless of one’s age, this is risky.  This is especially risky to concentrate your income and your investments with your employer.  Remember Enron?  How about WorldCom?  Or maybe Alcatel-Lucent?

So given the lower capital gains tax rates that exist definitely now (versus a proposed but illusory extension later), it makes sense to reduce the highly concentrated positions in one or more stocks.

I know a widow who inherited the stock positions that her husband bought.  These included AT&T and Apple.  While AT&T was once a great “widow and orphans” stock paying out a reliable dividend because of the cash flow generated from its near monopoly status in telephone services, it broke up into so many Baby Bells.  The dividends from these have not matched the parent company and the risks of these holdings have increased as the telecom sector  has become more volatile.

And while Apple has been a soaring success for her (bought very low), it represents over one-third of her investment holdings.

Like most people I come across, she has emotional ties to these holdings.  And while she and others like her would not think of going into a casino to put all their chips on one or two numbers at the roulette wheel, they don’t find it inconsistent to have a lot of their eggs in just one or two investment baskets.

Since she relies on these investments to supplement her income, she needs to think about how to protect herself.  Although people may recognize this need, it doesn’t make it any easier to get people to do what is in their best interests when their emotions get in the way.

‘Tis the Season for Giving

Right now the highest marginal income tax bracket is 35% which is set to rise to 39.6%.  And capital gains tax rates are set to rise as well.  And come January 1, the capital deduction on gifts will be reduced from 35% to 28%.  All of this makes giving substantial gifts to charities a little more costly for your wallet.  So if you’re planning to make a large charitable donation, it pays to speed it up into this year.

To Roth or Not to Roth – Year of the Conversion?

This year provides high-earners an opportunity to convert all or part of their tax-deferred accounts to Roth IRAs which offers an opportunity to pay no income tax on withdrawals in the future.

The decision to take advantage of this opportunity needs to be weighed against the availability and source of cash to pay taxes now on previously deferred gains in the tax-deferred IRAs or 401ks. It also must consider the assumptions about future income tax rates and even whether or not future Roth IRA withdrawal rules might be changed by Congress.

Create an Investment Road Map

To really help gain clear direction on your investing, you really should consider sitting down with an adviser who will help you draft your personal investment road map (an Investment Policy Statement) that outlines how investment purchase and sale decisions will be made, what criteria will be used to evaluate proposed investments and how you will gauge and track results toward your personal benchmark.

This exercise helps establish a clear process that minimizes the impact of potentially destructive emotional reactions that can lead you astray.

Rebalance and Diversify

Just as you might plan on changing the batteries in your smoke detectors when you reset the clocks in the spring and fall, you should rebalance your investments periodically as well.

Now is as good a time as any to reassess your risk tolerance.  Research has shown that an investor’s risk tolerance is dynamic and influenced by general feelings about yourself, your situation and the world around you.  With the world’s stock markets showing many positive gains, this may lead some to become more willing to take risks.  This may not be a good thing in the long run so really question your assumptions about investing.

Armed with your investment road map and a risk profile, you will be in a better position to determine the mix of investments for diversification.  Don’t be afraid of adding to the mix investment asset classes that may not be familiar.  The idea of diversification is assembling investment assets that complement each other while potentially reducing risk.  And just as the economy has changed and the types of industries that are dominant rise and fall, it’s fair to say that what is “in” now may be “out” later making it important to reconsider your mix.

For this reason, this is why looking abroad to developed and emerging markets still makes sense.  Many of these economies are not bogged down by the after-effects of the great financial meltdown. And the rise of their consumerist middle classes means the potential to take advantage of demographics favoring growth sectors like natural resources, telecom, agriculture and technology.

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