Category Archives: Retirement Planning

Ideas to help preserve and grow your money

Does the Government Steal Your House When You Get a Reverse Mortgage?

My Comments: People of my age are living a lot longer than before, and many of us are still distressed by what we now call the Great Recession. Whatever your financial circumstances, it’s proven once again that in our society, having more money is better than having less money.

Many of us are increasingly frustrated by our inability to travel or maintain a standard of living similar to what we enjoyed just a decade ago. Some of us have ‘downsized’ our homes, realizing that we need less room to remain comfortable. All this leads to the conclusion that a reverse mortgages is a tool to help manage your financial life.

What follows here is an article from a site called I have no idea who these people are but they claim to be a destination site where people like me can promote ideas and offer help. All very good, unless you prefer to talk face to face with someone local who is credible with a known reputation for integrity and skill. (If you are reading this and are interested, you can find out all about me on my web site where this blog post appears.)

One observation before you read further. If you are someone for whom any government involvement is a threat to your freedom, this may not be for you. But understand this: without some regulation and oversight, a reverse mortgage would be just another effort by corporate America to get inside your wallet and take more of your hard earned money. If you don’t pay attention, even with government oversight, you still might end up on the short end of the stick. It was P. T. Barnum who said a century or more ago “There’s a sucker born every minute.”

Reverse mortgages, done the right way, by the right people, and for the right reasons, have the ability to help you find financial freedom. Here’s the text that I found and am happy to share with you:

June 17, 2015 – A reverse mortgage is a loan that enables homeowners aged 62 or older to borrow against the equity in their home without having to sell the home, give up title, or take on a monthly mortgage payment.

These loans are very popular but often misunderstood. A common reverse mortgage misconception has to do with the role the government plays in the loan program. Here we explore 9 things the government does and does NOT do for reverse mortgages.

1. The Government Sets the Rules and Regulations for the HECM Reverse Mortgage

The government is heavily involved in the most popular type of reverse mortgage — the Home Equity Conversion Mortgage (HECM). The government agency that regulates these loans is the Department of Housing and Urban Development (HUD). They are part of the Federal Housing Administration (FHA).

Sometimes these loans are referred to as the FHA reverse mortgage, the HUD reverse mortgage or government reverse mortgages.

There are other kinds of reverse mortgages issued by private banks, but only HECM loans come with the protections and regulations afforded by HUD.

2. The Government Does Not Issue the HECM Reverse Mortgage — Only Approves Banks

The government does not ever issue a reverse mortgage. Borrowers do not get the loan from HUD, the FHA or any other government agency. (So the terms FHA reverse mortgage and HUD reverse mortgage are not accurate terms.)

The government does approve banks to make the HECM reverse mortgage loans. Banks must be licensed by HUD to be able to make HECM reverse mortgage loans.

3. The Government Insures These Loans for the Borrower

With government insurance, borrowers can rest assured that they will receive their loan advances or payments on time and as agreed upon under the terms of the loan. If your lender goes out of business, for example, that insurance protects the borrower from any missed payments. (The key word here is insurance, paid for by you, the borrower – TK)

4. The Government Insures These Loans for the Lender

The government also assumes the loan when it meets a certain threshold based on the amount of proceeds that have been received by the borrower. At that point, the government’s contracted servicer will become the servicer for the loan, rather than the servicer contracted by the lender.

5. The Government Pays for Any Losses on the Loan

If the reverse mortgage borrower owes more on the reverse mortgage than the home is valued at the point the loan comes due, then the government pays the difference.

The federally-insured HECM loan is a non-recourse loan, meaning the Federal Housing Administration (FHA) covers the remaining balance of the loan if the sale of the home does not cover the balance of the loan. (again, think of the above referenced insurance – TK)

6. The Government Determines How Much You Can Borrow

The borrower’s loan amount is based on a formula developed by the FHA and HUD that accounts for the borrower’s age, his or her spouse’s age, the home’s value, existing mortgage debt and current interest rates.

7. The Government Manages the Reverse Mortgage Counseling Process

An important part of the reverse mortgage application process is a mandated counseling session.

These sessions are designed to make sure the borrower understands all aspects of a reverse mortgage. You are also required to explore alternatives to the loan during the counseling.

These sessions can be very useful to borrowers. The government manages and approves the counseling agencies. They are not associated with the banks in any way.

8. The Government Creates Other Rules and Regulations Related to Reverse Mortgages

Perhaps because they will ultimately have to pay for bad loans, HUD creates and administers the rules and regulations that govern the reverse mortgage program.

In addition to determining how much you can borrow and mandating counseling, other rules set by HUD include:

  • Requirements like maintaining home insurance and staying current with taxes.
  • Determining some of the fee and interest structures banks can use for the loans.
  • Mandate of a financial assessment to determine if you can afford to maintain your home after you secure a reverse mortgage. (A new set of rules implemented a financial assessment to help ensure borrowers will be able to remain current on the loan’s taxes and insurance upkeep, to avoid running the risk of default and subsequent foreclosure.)
  • Definition of how spouses are protected by the loan.

The government is constantly monitoring reverse mortgage usage and often evolves the rules related to the loans. They also respond to feedback from agencies like the Consumer Financial Protection Bureau (CFPB) and AARP. Recent changes to the reverse mortgage program have made the financial product even safer for borrowers.

“Although these new requirements are more extensive than past requirements, they will ultimately serve to protect countless reverse mortgage borrowers from default as well as further contribute to making the federally-insured HECM one of the nation’s safest loan products in the market to date,” says reverse mortgage lender American Advisors Group, in a statement.

9. The Government Does NOT Ever Take Ownership of Your Home

Many people believe that the government ultimately gets the house when someone does a reverse mortgage. However, this is not true.

“There are a lot of myths,” Dan Larkin, divisional sales manager with Chicago-based PERL Mortgage, says about reverse mortgages. “Some people think the lender is going to be on the home’s title and will be able to take ownership of the home at some point, and that’s not true.”

Indeed, when taking out a reverse mortgage, the title of the home belongs to the borrower. The Consumer Financial Protection Bureau (CFPB) explains what happens when the borrower passes away or moves from the home:

“If you move out, sell the home, or the last surviving borrower dies, you or your estate will need to repay the loan,” the CFPB says in a statement. “The loan balance will include the amount you have received in cash, plus the interest and fees that have been added to the loan balance each month. To repay the loan, you or your heirs will probably have to sell the house. If there is money left over from the sale after repaying the loan, you or your heirs can keep the difference.”

Additionally, if your family wants to keep the home they can refinance with a regular mortgage and keep the home if they want and it makes financial sense for them.

How to Determine if a Reverse Mortgage is a Good Financial Move

When considering whether a reverse mortgage is right for you, it’s always best to consult with a financial planner or reverse mortgage expert. Additionally, there are online reverse mortgage calculators and reverse mortgage suitability quizzes that can help you assess whether or not a reverse mortgage is a good move for you.

“People often have a lot of questions, and it’s important to speak with someone who understands reverse mortgages and how they will impact the borrower’s financial situation,” Tutak says.

Saudi Arabia May Go Broke Soon

My Comments:  If Saudi Arabia ceases to function and Iran has a nuclear weapon, what are the implications for the rest of the world?

I accept that I’ll be just a memory by 2045. However, the United States may then be the only country on the planet with the ability to both unilaterally feed itself and produce 100% of the energy it needs. Food and fuel are as critical today as they were millennia ago.

Yes, there are environmental reasons to oppose fracking anywhere in the world but you have to admit the technology has the potential to dramatically change existing global economic and political dynamics.

How all this plays out politically with concurrent changes to existing global security arrangements is yet to be seen. It helps explain Russia’s recent moves to be more aggressive and paranoid about their future. As for Saudi Arabia, without oil to pump, they become a ghost town. We need to think about all this as we argue for or against the pending Iran nuclear deal.

By Ambrose Evans-Pritchard 05 Aug 2015

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now “effectively dissolved”. The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report.

“The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said.

One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The ‘fiscal break-even price’ is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up – entirely reliant on imported weapons – that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. “Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon,” said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country’s fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. “We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years,” he said.

Standard & Poor’s lowered its outlook to “negative” in February. “We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in oil prices,” it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

“We were lucky before because the oil price recovered in time. But we can’t count on that again,” he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers – and the solar industry – to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices – far from clear – they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while – as it did in the mid-1980s – but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence in a Middle East suffering its own version of Europe’s Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.

Obama’s Climate Plan Makes for Canny Politics

My Comments: In keeping with tradition, the President’s critics are having the usual hysterics about his recent announcement designed to reduce carbon emissions. If I were the owner of a bunch of coal mines, I’d probably be unhappy too.

But for the rest of us who don’t own coal mines, which is virtually all of us, it’s another step toward somehow delaying what appears to be the inevitable, which is rising sea levels. If scientists said there appeared to be an asteroid whose trajectory was likely to cause it to impact with our planet 50 years from now, I’d be upset if politicians said it was nonsense, and refused to allocate funds to perhaps find a remedy.

While the new rules do will not satisfy the far left, governing is the art of the possible, which most on the right have forgotten all about.

by Nick Butler on August 3, 2015 in the Financial Times

Having solved the Iranian problem US President Barack Obama has selected climate change as the next building block in the construction of his legacy.

The contents of his “clean power plan”, which he announced on Monday, are important for their substance and, equally, for their political impact — not just for the Paris climate negotiations in December but more importantly for the presidential election next year.

On the substance, the move is an unprecedented peacetime assertion of political authority over the private sector. Even if some states resist the instruction to cut emissions by about a third from a 2005 base within 15 years, many will obey — with serious consequences for the businesses involved and their investors. Coal-fired power plants will be closed and, with export potential limited, dozens of US coal mines will close as well. No wonder the reaction from the industry is fierce.

The beneficiary will be the solar business. Mr Obama’s plan echoes the initiative launched last month by Hillary Clinton as part of her campaign for the Democratic presidential nomination, designed to increase the amount of solar power generated by 700 per cent by 2027, using regulatory power to boost the market share of renewables.

The number is ambitious but the pace of technical progress means growth could be achieved without a big increase in subsidies or consumer prices. Across the US the costs of solar is falling and beginning to reach “grid parity”— which means they are competitive with the lowest cost fossil fuel without the need for subsidies. Mrs Clinton’s proposal cuts with the grain of emerging reality.

Nuclear and natural gas are left, under Mr Obama’s proposals, to fend for themselves, with no mandated market shares and no subsidies. As things stand, the gas industry can cope but, short of a breakthrough that reduces production costs, new nuclear in America looks almost as lost as it does in Europe.

Missing from the proposals is any new push to develop science that will increase the efficiency of energy supply and consum­ption. That is a pity as low-income consumers in countries such as India need fuel sources that are both low cost and low carbon if climate change is to be beaten. But policies directed to developing such technology may come later — there is, after all, more than a year until the election.

That brings us to the politics of Mr Obama’s plan. It is worthy of Frank Underwood, Kevin Spacey’s Machiavellian anti-hero in the Netflix series, House of Cards . In the black arts of politics, one of the most precious achievements is to define the differences between you and your opponents on your own terms. An­other is to force opponents into positions they wish to avoid. A third is to divide them against themselves. Mr Obama has managed all three in one go.

The Republicans predictably walked into the trap. Marco Rubio, the Florida senator seeking the Republican nomination, instantly declared the policy “catastrophic”. Mitch McConnell, the Republican majority leader in the Senate, who campaigned for his seat last year on the slogan “Coal Guns Freedom”, called for individual states to disobey the new laws. Even Jeb Bush, who has been trying to sound rational on the question, was forced to condemn the president’s initiative as “irresponsible”.

Given the nature of the Republican voter base and the views of big donors such as the billionaire Koch brothers, those who seek the Republican nomination can do little else. The problem for them (and the beauty of Mr Obama’s political play) is that, as they walk in the direction of those who will determine which of them is the candidate next year, they are walking away from the views of the voters who will determine the outcome of the election.

According to the public polls, for instance from the Yale Project on Climate Change, global warming has become a real concern. Coal is seen as dirty and unhealthy. Mrs Clinton, assuming she secures the Democratic nomination, may not win some of the coal states. One of the fascinating subtexts of her initiative, and of the president’s proposals, is the deliberate distancing of the Democratic leadership from organised labor, including the once powerful mining unions. But the calculation must be that she will gain overall by being on the side of the future.

Mr Obama’s proposals are detailed and complicated, and will now be subject to every sort of legal challenge. They are unlikely to be implemented in full. In themselves they will not solve the global problem of climate change, nor force any other country to follow suit. But they do serve to define the direction of American energy policy and also of American electoral politics.

The writer is a visiting professor at King’s College London and a former BP group vice-president for strategy

Rates Must Rise To Avert The Next Crisis

200+year interest ratesMy Comments: Interest rates are the price paid for using money owned by someone else. The rise and fall of that price, which we call interest, is a critical element when it comes to deciding how your money should be invested. For over 30 years they have been trending down and you will soon see that trend reversed. Being prepared will result in greater financial freedom for you.

By Scott Minerd, Chairman of Investments, Guggenheim Partners
As appeared in the Financial Times global print edition, July 16, 2015

In 1898, Swedish economist Knut Wicksell argued that there existed a “natural” rate of interest that balanced the supply and demand of credit, assuring the appropriate allocation of saving and investment.

Should market interest rates remain below the natural rate for an extended period, investors will borrow excessively, allocating capital into less productive investments, and ultimately into purely speculative ones.

This is what the US economy faces today after years of meagre borrowing costs. Policymakers have created a Wicksellian dilemma where investment spurred by low interest rates is driving economic growth, but these inefficient investments support growth at the expense of lower productivity in the economy.

In recent years, this investment has flowed into housing, commercial real estate, and equities, driving asset prices higher, exactly the goal of the Federal Reserve in the wake of the financial crisis. But as the recovery in real estate and equities matures, a darker side of this imbalance between natural and market rates is beginning to emerge. Many investments today using artificially cheap capital are not increasing productivity – they are being made, because money is cheap and the profit motive is strong.

Consider the evidence. This year likely will witness record US stock buybacks; the second biggest year for mergers and acquisitions; the highest percentage of non-investment grade borrowers among new issuers of corporate debt; and a record for covenant-light loan issuance.

In the midst of all this, stock prices are appreciating at the slowest pace since the financial crisis. Why? Because top-line growth is low and productive investments in core businesses are wanton.

Over time, the natural rate of interest should roughly equate to the average return on new capital investment. Distortions in economic activity begin to occur when the natural rate varies materially from the market rate.

The aftermath of the current period of corporate borrowing and splurging will be nasty. Consider that the majority of defaults of US high-yield bonds during 2008 and 2009 were loans originated between 2005 and 2007 – the final three years of the last credit cycle when M&A and leveraged buyouts peaked. Similar to today, credit remained cheap and the Fed was slow to raise interest rates.

We are not back in the frothy days of 2007, but we are leaving the realm of smart investment decisions and moving into the “silly season” when investors become convinced that recession is nowhere on the horizon and market downside is limited.

It is a world where asset prices continue to appreciate and confidence remains strong, while capital chases a shrinking pool of productive investment opportunities. Similar to the run-up to 2007, rising asset prices and malinvestments today may be sowing the seeds of the next financial crisis.

The harsh reality is extended periods of malinvestment result in declining productivity growth, lower potential output, and slower increases in living standards. A failure to normalize market interest rates soon will result in more capital plowed into investments that are less productive and more speculative.

As productivity declines, long-term growth will be stunted. Eventually, inflationary pressures will build, forcing market interest rates to rise. The longer market rates remain below the natural rate the greater the purge will be once higher rates induce a recession, causing a sharp rise in defaults among malinvestments made during the period of cheap credit.

Today looks a lot like 2004 or 2005, when investors were blissfully ignorant of what awaited. It is still early, but I get increasingly concerned the longer I see undisciplined investors clamoring for bonds with suspect credit worthiness at ludicrously low yields. Higher rates, higher prices, or both are on the horizon. Before long, some of those bonds may become toxic waste.

The good news is there remains time to take action. Policymakers can still make adjustments to avoid the worst phase of the credit cycle. To reduce the continued accommodation of these marginal investments, the US central bank should normalize rates soon. For investors, the time has come to consider opportunities to book gains in assets that in the reasonable light of day a prudent investor would never buy.

Social Security: When to Claim at 66

SSA-image-2My Comments: Many of my close friends, clients and associates have long since started taking their Social Security benefits. For those of you who have not, there are probably some issues you need to explore before you sign on the dotted line.

A generation ago, 65 was the automatic full retirement age. Rembember the phrase Full Retirement Age or FRA; it’s that point in time when it first all comes together for you. Based on your past contributions to the system, the FRA represents the base line number to determine how much you’ll receive for the rest of your life.

Start at age 62 and you get considerably less; wait until age 70 and you’ll get a lot more. But there’s a catch. You have to remain alive to get more since the SSA is not going to intentionally send a monthly amount if you’re dead.

I have access to software that will help you explore the various options, and there are more than you think, that will help you make the best timing decision less confusing. Here are a few to start you thinking.

by Donald Jay Korn JUL 6, 2015

“It’s most common for our clients to begin Social Security benefits at age 66,” says Brandon Jones, a senior wealth manager at Accredited Investors, a fee-only planning firm in Edina, Minn.

If sexagenarian clients still have substantial earned income, starting earlier would trigger an earnings penalty. When they reach 66, seniors now reach “full retirement age (FRA),” for Social Security purposes. (Any reduction in cash flow from the earnings penalty may be temporary, as seniors subsequently will get makeup benefits.)

“At 66, someone can earn any employment amount and still receive the full Social Security benefit,” says Marilyn Capelli Dimitroff, director of wealth management and principal at Bloomfield Hills, Mich.-based Planning Alternatives, a wealth advisory firm.

“Therefore, the 66-year-old who waited receives a significantly higher monthly check than the 66-year-old with the same earnings record who began payments at 62, the earliest starting date. The differential continues for life.”
Starting at 66 avoids the 25% benefit reduction imposed at age 62, so the early bird with a $1,800 monthly check could have received $2,400 a month by waiting until 66.

“For the majority of people, postponing the receipt of Social Security to at least FRA is a smart move,” says Dimitroff. “Most seniors will need to work to 66 or later to maintain financial security in very old age.”

Waiting even longer, until as late as age 70, would increase benefits even more, yet many clients start at 66 anyway. “We human beings value a ‘bird in the hand,'” says Dimitroff, so some people want to collect from Social Security as soon as practical.

In addition, Dimitroff notes, monthly Medicare premiums are due for many people, starting at age 65, and it’s easier to have the payments subtracted from Social Security direct deposits rather than writing checks periodically. “A third reason for starting at 66,” she says, “is that most people underestimate how long they are likely to live.” Some people just invest their unneeded Social Security checks, she adds, hoping to exceed the 8% annualized increase they would have received for waiting beyond age 66.

Moreover, 66 can be a key milepost for spousal claiming strategies. For married couples, says Dimitroff, delaying the benefit start from 62 to 66 increases the spousal benefit as well as the worker’s benefit.

“For a one-earner couple,” says Jones, “we may recommend that the earning spouse file at FRA and immediately suspend the benefit, allowing the other spouse to begin claiming a spousal benefit. Meanwhile, the earning spouse’s benefit continues to grow, with the intent of beginning benefits at age 70.”

Jones adds that a similar strategy can work if one spouse has considerably more lifetime earnings than the other spouse.

Which Asset Allocation Mix Outperforms?

retirement-exit-2My Comments: Here are two charts, associated with the authors comments, that show very clearly that good financial planning for retirement is as much a matter of luck as it is skill. The first chart has numbers that reflect 45 years, which seems like a long time, until you remember that so many of us now live to be 100.

I’ve talked before about how interest rates have been declining slowly for the past 25 years. Soon (another variable), they will start trending upward. A 45 year average taken 10 years from now may show a very different number.

Creating the right mix of investments is, in my opinion, less of a challenge than is having the discipline to find a rational solution and stick with it. While “hope” is not a very good investment strategy, you can only hope to make good decisions, to find someone who will help you as a fiduciary, unless you’re prepared to go it alone, and live your life as well as you can.

It would be nice if there was a magic bullet, but there isn’t one.

by Craig L. Israelsen JUN 1, 2015

Over the past several decades, the number of investable asset classes has increased significantly, changing the world of portfolio management dramatically.

The challenge of asset allocation now is no longer having too few ingredients to consider but rather selecting among an ever increasing array of sector-specific mutual funds and exotic ETFs.

Choosing an asset allocation model for your clients’ portfolios is not so much about picking the right one — there’s no way to know which model will be right in advance of future performance — as it is about selecting a prudent one. Being prudent and thoughtful is certainly something an advisor can — and must — do in order to meet a fiduciary duty.
Toward that end, I reviewed a series of asset allocation models over the past 45 years, from 1970 through the end of 2014, to see how they fared.

Reviewing the historical performance of various core asset allocation models delivers a useful analysis of the relative merits of different allocations. The analysis should better equip advisors to evaluate a wide variety of investment models — particularly in the online investment advisory space, where new robo advisors are promoting models designed to appeal to a wide audience.

By definition, an asset allocation model must include more than one asset class. In this analysis, I have identified three asset allocation models: a 50% cash/50% bond model, a 60% stock/40% bond model and a seven-asset model. Two single asset classes (cash and large-cap U.S. stock) are also evaluated to serve as bookend benchmarks.

The first portfolio option shown in the “Asset Allocation Spectrum” chart below is a 100% cash model, composed completely of 90-day U.S. Treasury bills. As cash is viewed as the risk-free asset class in modern portfolio theory — inflation risks notwithstanding — we will use its returns and volatility as the base for comparison.
The 45-year annualized return for cash was 5.11%, with a standard deviation of annual returns of 3.45%. The average 10-year annualized rolling return was 5.64% over the 36 rolling 10-year periods between 1970 and 2014.

From there I looked at progressively more complex allocation models.

The first is a very simple one: 50% cash/50% U.S. aggregate bonds, rebalanced at the start of each year. Compared with 100% cash, this 50/50 allocation improved performance 143 basis points while only increasing volatility by 70 bps — a performance-to-risk trade-off of two to one. The average 10-year rolling return was just shy of 7%.

Next, I looked at a classic balanced fund: 60% large-cap U.S. stock and 40% U.S. bonds, rebalanced at the start of each year. Performance, as expected, was boosted significantly to 9.82%; the average rolling 10-year return also rose, to 10.35%. But there was a concomitant increase in volatility, with the standard deviation rising to 11.28%.

The third model used seven asset classes — large-cap U.S. stock, small-cap U.S. stock, non-U.S. developed-market stock, real estate, commodities, U.S. bonds and cash — in equal proportions, rebalanced annually.

The average annualized return was 10.12%, with a standard deviation of annual returns of 10.18% — a rare one-to-one return-to-risk trade-off. The average 10-year rolling return was 10.88%, 53 bps higher than the 60/40 model.

The final investment asset was 100% large-cap U.S. stock. As anticipated, it had a higher level of return — an annualized 10.48%, with average 10-year rolling return at 11.21% — but not by much. Meanwhile, with a standard deviation of 17.43%, volatility was far higher than both the 60/40 model and the seven-asset model.

The second part of this analysis compares three allocation models when used in a retirement portfolio — which is very sensitive to timing of returns, particularly large losses. (For that reason, I didn’t include a retirement portfolio consisting of 100% large-cap U.S. stock, as that approach is not prudent.)

The retirement portfolio was simulated over 21 rolling 25-year periods starting in 1970. The first 25-year period was 1970 to 1994, then 1971 to 1995, etc. A total of $455,741 was withdrawn during each rolling 25-year period. The ending balance after each 25-year period is shown in the “Retirement Survival” chart below.

This analysis assumed an initial nest egg balance of $250,000 — quite comfortable back in 1970, although fairly modest now — with an initial withdrawal rate of 5% (or $12,500 in year one) and an annual cost of living adjustment of 3%. Thus, the second-year withdrawal was 3% larger (or $12,875), and so on each year.

As a baseline, I included a retirement portfolio consisting of 100% cash, which fared reasonably well during the early periods (1970s and 1980s). Beginning with the 25 years starting in 1982, however, interest rates began a steady decline downward and an all-cash retirement portfolio began to crumble.

In fact, during the last two 25-year periods, the all-cash portfolio failed to last the full 25 years; hence the zero balance. An all-cash portfolio would also have been unable to keep up with inflation. The median ending account balance for an all-cash retirement portfolio was $332,615.

A 50% cash/50% bond retirement portfolio was a considerable improvement, surviving in every one of the 25-year periods, with median ending account balances of just over $570,000. However, in recent 25-year periods, the ending balance was far below that median figure.

The classic 60/40 stock/bond retirement portfolio has served retirees well over the past 45 years. The median ending balance for the 60/40 portfolio was in excess of $1.5 million. In fact, over one buoyant period — from 1975 to 1999 — this portfolio finished with an ending account balance of $3.9 million.

During that same 25-year period, an all-cash retirement portfolio ended with a balance of $391,702, and a 50% cash/50% bond portfolio finished the 25-year period with a balance of $611,308.

The superior approach, however — with a median ending balance of over $2.1 million — is the model using seven different asset classes.

I found it particularly interesting that, during the inflationary periods of the 1970s, the seven-asset model had considerably better performance as a retirement portfolio — finishing with a balance of $2,086,863 for the 1970 to 1994 period, while the 60/40 model ended up at $1,090,081. The pattern recurs in the first four 25-year periods.

Why that’s worth considering: Over the past 33 years — after the U.S. economy began to decline in 1982 — U.S. bonds have enjoyed an era of unusual prosperity. The average annualized return of U.S. bonds was 8.39% from 1982 to 2014.

But during the 34 years from 1948 to 1981, when interest rates were rising in the U.S. economy, bonds produced an average annualized return of 3.83%.

When interest rates eventually do rise, the performance tailwind for U.S. bonds that has been fostered by declining interest rates could turn into a stiff headwind. An asset allocation model that has a large commitment to U.S. bonds (such as the classic 60/40 portfolio) may be at risk — because if interest rates rise, bond returns will likely be far lower than over the past three decades.

This suggests that a more broadly diversified portfolio is prudent — both in the accumulation years and in the retirement years.

Craig L. Israelsen, a Financial Planning contributing writer in Springville, Utah, is an executive in residence in the personal financial planning program at the Woodbury School of Business at Utah Valley University. He is also the developer of the 7Twelve portfolio.

Biggest Retirement Mistakes

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My Comments: This is a dramatic headline, intended for those of us already retired or thinking about it. Most of us already understand that “retirement” today is very different from what it was 25 years ago. The changes that we see are influencing my life and millions of others.

Many people plan on supplementing their retirement funds by working past 65, but this plan may not be as sound as it seems. Bloomberg’s Suzanne Woolley breaks down the expectations and often unfortunate truths of working through retirement.

The video, which lasts about 60 seconds, appears on a web site that features many videos by a Barry Ritholtz and if you click the image just above, you should be able to see and hear it. I haven’t asked Barry for his permission so I may get in hot water, but hopefully he’ll not give me a hard time as the intent is to help you as you wrestle with the idea. Using a video is my attempt to present ideas using visual and audio rather than have you simply read some words. Let me know if you have issues with any of this.