Category Archives: Retirement Planning

Ideas to help preserve and grow your money

Sine of the Times

200+year interest ratesMy Comments: Many of you have read my comments about interest rates lately. (Yesterday!) For many, many months, the Fed has used its powers to keep them low to encourage economic growth. Now that growth is again endemic, sooner rather than later, pressures will exist to cause interest rates to increase.

The chart at the top of this post shows interest rates in this country going back to the late 1700’s. You can expect the curve to start changing its direction soon. When that happens, you should not own many long term bonds, unless you’re happy watching your net worth decline.

Commentary by Scott Minerd, Guggenheim Partners, April 24, 2015

For the past 30 years, 10-year U.S. Treasury yields have shown a clear downward linear trend, falling from over 10 percent in 1985 to less than 2 percent today. Around this linear trend, yields have also exhibited a fairly consistent cyclical fluctuation, with the size of the fluctuation about 200 basis points from peak to trough, and with the cycle repeating every six years. This fluctuation can be thought of as a sine function, allowing us to model 10-year yields by combining the sine function with the linear trend:Chart-of-the-Week-04232015_600px

If we assume the secular, linear downward trend in yields will continue in the near term, we can predict the short-term outlook based on the model of cyclical fluctuations. This model currently shows that rates are just beginning to undershoot the linear trend, with the model predicting that rates will bottom at 0.82 percent in March 2016. What’s even more interesting is that the average actual bottom in rates has been 73 basis points lower than the model predicts, which would put rates at just 0.09 percent.

Now, I am not necessarily predicting that U.S. 10-year Treasury yields will test zero like its counterpart the German 10-year bund, which currently stands at around 16 basis points and I believe could provide negative yields at some point. What I am saying is that there are many powerful secular and fundamental forces at work that signal the risk to U.S. interest rates remains to the downside.

With Federal Reserve tightening drawing closer, the continuation of this downward trend could be called into question. However, a number of factors, including lower first quarter gross domestic product (GDP) growth, high demand from overseas investors (with yields approaching negative territory in much of Europe), and expectations of a slow liftoff by the Fed, are working to exert downward pressure on U.S. yields, thus limiting any upside in rates in the near term.

The prospect of a stronger dollar as a result of upcoming U.S. rate hikes only serves to heighten foreign demand for U.S. Treasuries. International investors are likely to seek to preempt Fed action and invest while their currency has greater relative strength. Betting against the downward trend in U.S. rates has proved to be a widow-maker trade for many years—and with fundamental and technical factors pointing to downside risks in rates in the near term, there appear to be few reasons to bet against the trend now.


Get Ready For The Biggest Margin Call In History

My Comments: Like a broken clock that is right twice every 24 hours, I’ve been talking about the probability of us having a severe market correction for the past 12 months or more. It’s obviously not happened yet.

But every time I turn around, there are new observations from people who understand this better than I do. Most of them agree it’s going to happen. Each of us in our own way, depending on where we are in life and what we expect to achieve with our savings and investments, need to pay attention. There are ways to protect yourself and it won’t cost an arm and a leg to make it happen.

Chris Martenson | Apr. 20, 2015

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another “lost year” for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind out of asset prices.

He recommends building cash and waiting to see how the coming storm – which he calls the “greatest margin call in history” – plays out:
0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed.

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed’s response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it“.

What the Fed is saying is that we have unintended consequences of low interest rates. Money is chasing yield: it’s going to real estate making it over-valued, and flowing into the equity markets making them over-valued. And then the Fed says “Well, we have two choices. We can allow the market to run into a bubble, or we can burst the bubble and start all over again”. But they wrongly, in my opinion, believe they can actually micro manage that, even macro manage this. So what they would rather do is “lean up against the market”. To take some of the excess out of prices by going in and telling in the market “We are concerned, we don’t want you to have more leverage. We want you to have less. And we certainly would like to see that market become flat-lined for a while in terms of return.” Which by all metrics of measurements is actually also the expected return of the stock market. Don’t forget three, five and seven years expected return at the present multiples is exactly 0%.

Given this, at a bare minimum, I recommend taking the leverage out of your own portfolio so you sit with a nice pot of cash if the market does correct. If it doesn’t, you’re not really losing out much because again, they expect a return is 0% for the next couple of years.

Some time the best advice to anybody is to do nothing. And of course being, part of an online bank I’m not exactly popular with management for putting this advice out there. But I have to give the advice I believe in and share what I do myself; and I’m certainly reducing whatever equity I have in my portfolio to a minimum. So I’m scaling back to where I was in January last year.

I’ll put it another way. I’m advising a hedge fund in London, analyzing 10,500 stocks from the bottom up. How many do you think of these 10,500 world stocks are cheap? Only 23. Which means 98% of all stocks are either fairly-priced or expensive.

Click the link below to listen to Chris’ interview with Steen Jakobsen (40m:27s)

Rioting In The Streets Of Gainesville?

retirement_roadMy Comments: The blog post title above comes from me; the one that actually accompanied the article is Public Pensions Face New Challenges As We Live Longer. Huh?

As a financial planner, I try to make people aware of the existential threats we face as we all grow older. These threats are things that “might” happen, may not happen, but if they do can be devastating to individuals and families. If you are already dead, you can skip this blog post, but if not, then…

No one seems upset that modern medicine has resulted in more of us living longer lives than could have been expected when we were born. Along the way, many of us worked for organizations such as the State of Florida or somewhere in corporate America. Or maybe the City of Gainesville or the Sherrif’s Department. We participated in a pension plan that promised benefits based on our years of service and sometimes our level of pay.

The promise typically included a schedule of monthly payments for either our lifetime, a number of years, and might have included a contingency benefit to our spouse. All well and good. But the calculations to make those promises did not take into account the fact that our lives now end much later than they did in years past.

The net effect of this is a shrinking of the pool of money available to make those payments. I’m not talking about Social Security here, where there is an obvious parallel, but the pensions paid to the millions of Americans who toiled for years at large companies like General Motors and the hundreds of thousands of smaller places.

Non-public pension plans are grossly underfunded across this nation. Part of that is the very low interest rates that ‘safe’ investments earn and have earned for the past decade. And pension funds are required to invest their pools of money in ‘safe’ investments. Revenue is going to have to come from somewhere or there is likely to be rioting in the streets.

My personal opinion, having watched this growing problem for a number of years, is that the author is somewhat blind to the problem and suggesting there is no reason for alarm. Tell that to the elderly couple whose pension check from a local plumbers union somewhere in Ohio just got cut in half.

There are millions of people across these 50 states with situations like this and to pretend they don’t exist is a potential violation of the social contract all of us have as citizens of these United States. Unfortunately, too many of them rely on Fox News to help them interpret what is going on.

April 10, 2015  by Marlene Y. Satter

Certain mortality projections would increase life expectancy by 2.3 years and reduce the funded ratio of the nation’s public pension plans to 67 percent.

That’s according to a just-out brief from the Center for State and Local Government Excellence, “How Will Longer Lifespans Affect State and Local Pension Funding?” which concludes that, while the impact of longer lives is not exactly a positive for funds, there’s no imminent threat to pension funding levels.

It explores what public plan liabilities and funded ratios would look like under two alternative scenarios:

1. If public plans were required to use the new mortality tables designed for private sector plans; and

2. if public plans were required to go one step further and fully incorporate expected future mortality improvements.

The brief’s key findings include:
• Using the private-sector standard, public plans underestimate life expectancy by only 0.5 years, reducing the 2013 funded status of state and local plans from 73 percent to 72 percent.
• Incorporating future mortality improvements would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73 percent to 67 percent.
Plans’ liabilities are affected, of course, by the longevity of their members, and the brief explores the degree to which liabilities are affected, calculating that “state and local pension plans would see their liabilities increase by 3.5 percent for each additional year of life expectancy.”

When the differences among longevity tables are factored in, it becomes clear that some plans, because of the way they calculate life expectancy, will be more greatly affected by a change from one table to another, while other plans will not see such drastic effects.

The public sector, the brief said, is going to great efforts to make sure its life expectancy assumptions are up to date. Reassuringly, the brief said, “The question underlying this analysis is whether outdated mortality assumptions are a serious problem among state and local plans. The answer appears to be ‘no.’

Dear Future Me: Please Listen!

crow+wheelMy Comments: There’s a pharase about not letting the closing door hit you on the ass as you leave the room. It’s also a metaphor for life.

April 6, 2015 By Bob Seawright

Bob Dylan hit on a universal truth when he sang about his son and the attraction of remaining young.
May your hands always be busy
May your feet always be swift
May you have a strong foundation
When the winds of changes shift
May your heart always be joyful
May your song always be sung
May you stay forever young

Dylan’s voice was best described, famously by Joyce Carol Oates, as if sandpaper could sing, but he was, according to Time magazine, “the guiding spirit of the counterculture” and the voice of his generation. Today that generation—my generation, the baby boomers, including Dylan—isn’t young anymore. And none of us is going to defeat Father Time. As Dylan’s friend John Mellencamp sang in “Life is Short Even on Its Longest Days,” “one day you get sick and you don’t get better.”

Those of us lucky enough to live so long will see our bodies and minds slip and in many cases slip badly. Studies confirm what most of us have seen among our families and friends, even if we’ll never admit it about ourselves. The ability to make effective decisions declines with age. Thus those age 60 and up unnecessarily lose nearly $3 billion to fraud annually. To put it starkly, the research shows that financial literacy declines by about 2% each year roughly after age 60.

Despite that decline, our self-confidence in our financial abilities remains undiminished (and may even increase) as we age. I’ve seen it personally (and tragically). The aged and infirm drive too long, buy too many needless things from the unscrupulous, and simply aren’t as good at making decisions as they once were.

As cognitive impairment increases, the aging remain certain that they’re really OK and become belligerent when anyone suggests otherwise. We all like to think we’re highly competent and desperately want to maintain our independence. Trying gently to let aging loved ones know that they need help can readily turn into an ugly confrontation.

In 1999, David Dunning and Justin Kruger published a paper that documented how, in many areas of life, incompetent people do not—cannot!—recognize just how incompetent they are, a phenomenon that has come to be known as the Dunning-Kruger effect. Subsequent testing has shown that people who don’t know much tend to grossly overestimate their prowess and performance in a wide variety of areas, including logical reasoning and financial knowledge. Aging makes that tendency even worse. Thus, for example, elderly people applying for a renewed driver’s license overestimate their driving competence by a lot.

This seemingly inevitable conflict between the aging and those who love them about the extent and nature of the mental decline and what should be done about it plays out horribly every day among families of every sort. New Orleans Saints and Pelicans owner Tom Benson, who is 87, was recently ordered to undergo a mental evaluation by three different doctors despite his strenuous objections, to decide if he remains competent to control his businesses and to make decisions in litigation brought by his daughter and grandchildren.

Not surprisingly, the dispute centers upon a much younger new wife and Benson’s decision to fire his daughter and grandchildren from their long-held positions with his companies, cut off contact with them and disinherit them (to an extent). The results of the examination are to remain secret (appropriately) and we cannot know how true the various allegations are. But this sort of fight is all too common.

Benson maintains that he is still sharp and in control. He may well be. His children and grandchildren say that he’s not what he once was and is under the sway of a much younger wife who is not their mother and grandmother. They may be right. They may all be right to an extent. The one certainty is that it is a major mess—an ugly and expensive mess that we’d all like to avoid.

Note to Self

So I’ve spent a good deal of time thinking about what I might do to limit the chances that I will fall prey to this dreadful decline scenario. Since I am fortunate enough to have the opportunity to write this column, I’m writing this particular column with a very specific purpose. In effect, I want this column to serve as a letter to my future self. Since I’m blessed with children who are smart, honorable and financially literate, this is a reminder to my future self simply to listen to them and to keep listening to them when they tell me I need some help.

By way of this column I’m asking them—begging them—to show me this column if I resist them in any way. Since psychologist Hal Ersner-Hershfield has found that those who most identify with their future selves do a better job planning for the future, this exercise should help even if I (wrongly) ignore this column and my children’s advice in the future. But, more than that, I’m hoping and praying that this column—put in front of my face and read aloud if necessary—will be enough to convince my future self to listen to the people who love me when they (I hope gently) let me know that I could use more help than I’m allowing.

So Bob, when the kids tell you to stop driving, give them the keys. When they tell you to run major decisions past them, set up a system that enforces your cooperation (requiring a co-signer on checks for example). When they tell you to consider whether you ought to keep living without help, look into getting care or moving to an assisted living facility (and take their advice as to which option is best). When they—horror of horrors—offer financial advice, take it. You have three fantastic kids who have made you proud every day of their lives. Trust them to watch out for you and to love you, even when you don’t like it.

Matt Sly and Jay Patrikios created in order to store and deliver self-addressed emails on whatever far-off date the emailer chooses. The book “Dear Future Me” includes some especially compelling ones. For example, an Alzheimer’s patient emails his future self regularly in order to try to maintain some sense of continuity. A common theme is the presumption that our future selves will have more courage and more willpower, that we’ll be better and smarter. As if.

But every reader can write a letter like this to his or her loved ones and guardians to show to their future selves. I encourage you to send a copy to too. When the time comes, odds are we’ll reject the help we need when we need it most. We need to do what we can to prevent that from happening. Maybe this column or a letter to our future selves will help.

Dear future me, as much as it may pain you, listen to your kids and the people who love you. Please.

The Monetary Illusion

Global Nominal GDP Growth, as Measured in Dollars, Is Projected to Decline

global-growthMy Comments: It has been argued that Wall Street is corrupt and greedy and doing its best to create further income inequality in this country and across the globe. And that as a result, we should hold Wall Street accountable, send people to jail and reform the system. It’s suggested that only the Democrats can do this if they control Congress and the White House. I’m a liberal, and it’s not that simple.

Wall Street is playing the cards it has been dealt. I’ll agree they have done their level best to get good hands, but the responsibility for this falls on us as voters. If you want a more level playing field, you cannot avoid the voting booth. They say ignorance is bliss, but ignorance in this case will also be painful.

Until recently, during my 50 years as a marginally productive citizen in these United States, I’ve enjoyed an increasing standard of living. I feel that standard is now eroding, and by the time I’ve died, the prospects for my children and grandchildren will be less promising than were my prospects when I was their age. I’ll do my best for them, but I’m running out of time.

March 27, 2015 by Scott Minerd, Guggenheim Partners

The long-term consequences of global QE are likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.

A version of this article first appeared in the Financial Times.

As economic growth returns again to Europe and Japan, the prospect of a synchronous global expansion is taking hold. Or, then again, maybe not. In a recent research piece published by Bank of America Merrill Lynch, global economic growth, as measured in nominal U.S. dollars, is projected to decline in 2015 for the first time since 2009, the height of the financial crisis.

In fact, the prospect of improvement in economic growth is largely a monetary illusion. No one needs to explain how policymakers have made painfully little progress on the structural reforms necessary to increase global productive capacity and stimulate employment and demand. Lacking the political will necessary to address the issues, central bankers have been left to paper over the global malaise with reams of fiat currency.

With politicians lacking the willingness or ability to implement labor and tax reforms, monetary policy has perversely morphed into a new orthodoxy where even central bankers admittedly view it as their job to use their balance sheets as a tool to implement fiscal policy.

One argument is that if central banks were not created to execute fiscal policy, then why require them to maintain any capital at all? Capital is that which is held in reserve to absorb losses. If losses are to be anticipated, then a reasonable inference is that a certain expectation of risk must exist. Therefore, central banks must be expected to take on some risk for policy purposes, which implies a function beyond the creation of a monetary base to maintain price stability.

Global Nominal GDP Growth, as Measured in Dollars, Is Projected to Decline
With a surging U.S. dollar and growth remaining sluggish in much of the world, Bank of America Merrill Lynch forecasts that world output measured in dollars could fall in 2015 for the first time since the financial crisis. Over the past 34 years, this has happened just five times.

What kinds of risk are appropriate for a central bank? Well, the maintenance of a nation’s banking system would plainly be in scope, given the central bank’s role as lender of last resort. The defense of the currency as a store of value and medium of exchange is another appropriate risk. This was the apparent motivation of Mario Draghi, European Central Bank president, for his famous promise to defend the euro at all costs in the summer of 2012. The central bank balance sheet has proven a flexible tool limited in use only by the creativity of central bankers themselves.

In response to those who argue against the metamorphosis of monetary policy into fiscal policy, one need only point toward the impact of quantitative easing (QE) on interest rates. The depressed returns available on fixed-income securities, largely as a result of QE, are acting as a tax on investors, including individual savers, pension funds, and insurance companies.

Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth transfer payment schemes, have historically fallen within the realm of fiscal policy under the control of the electorate. Under the new monetary orthodoxy, the responsibility for critical aspects of fiscal policy has been surrendered into the hands of appointed officials who have been left to salvage their economies, often under the guise of pursuing monetary order.

The consequences of the new monetary orthodoxy are yet to be fully understood. For the time being, the latest rounds of QE should support continued U.S. dollar strength and limit increases in interest rates. Additionally, risk assets such as highyield debt and global equities should continue to perform strongly.

Life Insurance and Retirement

rolling-diceMy Comments: This is not an easy idea to talk about. The article came from someone critical of Dave Ramsey and Suze Orman, who argue that premiums for life insurance in retirement are an extravagance.

Some of the assumptions made by the author can be questioned, but the overall theme is essentially correct. Personally, I’ve made a similar choice, as there is absolutely no way I can replicate the benefits to my wife and/or children, regardless of when I die. That’s assuming I die first, which is not a given. But it provides me with huge peace of mind, and the certain knowledge setting aside money today will contribute to the financial freedom of those I leave behind.

by Tom Martin on March 6, 2015

Dave Ramsey, Suze Orman and scores of other financial pundits in the media scorn the idea of having life insurance in retirement. Their rationale seems to make sense on the surface: Life insurance is designed to replace your earnings when you die. Once you retire (and have no earnings) you are living off your investments. When you die, your investments don’t die with you, so what is the purpose of using valuable funds to pay for unneeded coverage?

Life insurance clearly plays an important role for very wealthy clients to efficiently transfer their estate, but are the media pundits correct when they advise that the average family to dump their coverage in retirement? Probably not.

Let’s consider the following statistics:
• The average American approaching retirement has retirement assets to replace only 10 percent of his/her pre-retirement earnings.
• 55 percent of Americans over age 65 rely on Social Security to provide more than half of their income.
• The maximum monthly Social Security retirement benefit for a person reaching full retirement age in 2015 is $2,642.

These statistics clearly show that Social Security is a vital source of retirement income. When we view our Social Security benefits statements, we tend to discount the importance of this benefit, as benefits are expressed in “today’s dollars.” In reality, our actual benefits will be much larger due to inflation. By contrast, when we consider how much savings we will have at retirement, we often fail to consider that the values of those dollars will be similarly reduced due to inflation. Consider the following example.

John and Jane Doe, age 50 and 45 respectively, plan on working to John’s full retirement age of 67. John is making $150,000 per year and Mary earns $70,000 per year. John and Jane both contribute to a 401(k) plan and, based on their investment assumptions, they figure that they will have $1,000,000 in retirement funds by the time John reaches age 67. Assuming a 5 percent withdrawal rate, they will be able to withdraw about $50,000 per year.

John receives his Social Security statement and sees that his retirement benefit will be the maximum, which is $2,642 in today’s dollars. Jane’s benefit is projected to be $1,450 if she claims at age 62 (same year John retires). John and Jane incorrectly assume that Social Security will provide about half of their retirement income, which is $49,000 from Social Security and $50,000 from retirement accounts.

In reality, both will receive much larger Social Security checks, since these amounts will be indexed for inflation. If we assume 3 percent inflation, John’s actual benefit will be about $77,000 per year and Jane’s will be about $40,000 per year. In comparison, assuming a 5 percent withdrawal rate on their retirement assets, they will have $50,000 income from the retirement funds. In reality, despite a respectable retirement account balance, Social Security will actually provide about 70 percent of their income.

Since Social Security benefits continue to increase with inflation, by the time John is age 80, his Social Security benefit will have risen to $113,000, at which point Jane’s benefit will be about $59,000.

Let’s assume that John dies at age 80 and Jane lives to age 85. At John’s death, Jane will assume John’s benefit and lose her own benefit. The total Social Security benefit will drop by $59,000 per year. Since Jane will spend 10 years as a widow, this loss amounts to $590,000!

What’s more, consider if John dies at age 75 and Jane lives to age 90. John’s death would cost Jane well over $1,000,000 in lost Social Security benefits.

Even though they have a sizable retirement account, it only represents about 30 percent of their income. Such a substantial reduction in Social Security benefits is likely to cause a substantial reduction in Jane’s lifestyle.

The financial pundits would be quick to recommend that John purchases a term policy today to cover his “temporary” insurance need. They figure that once John retires, he has no earnings to protect. In reality, his death after retirement will cause a substantial reduction in household income. John should consider some form of permanent insurance for at least part of his insurance portfolio now in order to mitigate the eventual loss of the Social Security benefit. If Jane predeceases John, John would lose Jane’s benefit. Even if the permanent insurance was just on John’s life, he could still utilize his policy to replace the benefit he lost on Jane. He could use the policy to provide a tax-free income stream through withdrawals and loans. He could cash the policy in, replace it with an annuity, or even sell the policy as a life settlement. Either way, a permanent policy on John could create a useful cushion regardless of who dies first.

In summary, life insurance can play a critical role in helping couples meet their retirement goals, whether it is through utilization of the policy’s cash value or in having the death benefit replace the lost Social Security benefit.

Why Invest in Real Estate?

home mortgageMy Comments: This is a topic about which I know relatively little. But it’s real, people do make money, sometimes lots of it, and over the few years since the crash that started in 2008, some folks have made tons of money.

The dramatic opportunities are probably behind us for a while as after several years, life tends to move on. But I have clients who would like to allocate some of their money to real estate. This is a helpful introduction if this is you.

By John Miller, posted in Real Estate on 02/28/2015

Real estate is one of the most stable and wisest investments you can make for your personal finances. Unlike bonds and other non-material investments, land and homes are material products that don’t go away.

In fact, real estate values remain quite high, and their rates improve with time. Many people have become millionaires because of real estate investments.

It takes a lot of money and capital to start out in real estate. People with big real property investments usually start out with the profits they get from their own businesses, from the gains they get from the stock market, or from other sources of income.

Some people think that real estate investments are an easy way to make money. Some think that one can just sit back, relax, and watch the profits grow. On the contrary, real estate requires a lot of dedication, hard work, and patience. Real estate investments do not grow overnight; you need a lot of skill and dedication to make earn profits from a real estate investment.

Where to Get Real Estate Deals
Any property for sale that has land in it has a great potential to be a serious money maker. If you’re only starting out to invest in real estate, you would do well to consult with an experienced real estate broker or investor who can guide you through your first land purchases.

Books, magazines, and other print resources can help you greatly just in case you don’t know what you’re doing with your real estate investment. Like any investment, you shouldn’t put your hard-earned money on land that will not rake in good profits.

Keys to Success
The trick to making the most of real estate is to buy the best land at exactly the right place at exactly the right time. Remember that real estate purchases are relatively permanent. You should also consider how much you’re willing to spend. Land costs millions, and you don’t want to end up with a piece of real estate that doesn’t pay for itself very well.