Category Archives: Retirement Planning

Ideas to help preserve and grow your money

Will Americans Work Forever?

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My Comments: I’m an American and I intend to work until I drop. I enjoy what I do, I’m think I’m pretty good at it, I have people to talk with who want the skills I bring to the table, so why not?

By Maria Wood

Has the U.S. become the work forever society? According to a recent survey by Northwestern Mutual, a majority of Americans said they plan to work into their 60s and 70s, and some even into their 80s. Yet at the same time they indicate they intend to work longer, Americans are also unsure of their financial preparedness to actually fund their advanced lifespans.

Those findings came to light in Northwestern’s “2013 Planning & Progress Study,” which it conducted with Harris Interactive. About 1,500 Americans from age 25 and up were polled in an online survey in January.

According to the responses, only 6 percent expect to retire before the age of 60, while 52 percent expect to retire in their 60s and 32 percent in their 70s. Some 10 percent envision working into their 80s.

However, when asked about their financial preparedness, based on their current situation, future prospects and long-term plans, 56 percent said they are prepared to live to the age of 75; 44 percent to 85; and 35 percent to 95.

Those numbers stand in stark contrast to actual data that reveals that there’s a 50 percent chance a 65-year-old man today will live beyond age 87 and that a 65-year-old woman will live beyond age 90. If a couple, there’s a 50 percent chance that one spouse will live to age 94 and older.

Meanwhile, on average, pre-retirees said they will retire at 68, even though the mean age of retirement among those already retired is 59.

“The incredible contrast between how long people expect to work, and how financially prepared they feel to live long lives, dramatically underscores how far behind people feel in their financial planning,” said Greg Oberland, Northwestern Mutual executive vice president, in a statement. “We’re seeing the average retirement age being pushed further out, due in large part to widespread feelings of long-term financial insecurity.”

About half (51 percent) said they are less financially secure than they thought they would be at this point in their lives. Less than half – 43 percent – responded that they feel financially secure at the present time, while 32 percent do not, and the remaining quarter fell in the middle between not feeling strongly secure or insecure.

“Financial security” was defined as “a feeling of confidence that you will achieve the financial goals you have for yourself or your family through the actions you are currently taking.”

Despite those rather pessimistic statistics, Oberland said there are some positive signs: People are saying they intend to save more and “are aiming for slow-and-steady growth rather than swinging for the fences.”

Some subgroups expressed even less optimism for their financial future, specifically, singles and those with younger children. The breakdown is as follows:
• Sixty-two percent of single Americans say they’re less secure than they thought they’d be by now, compared to 43 percent of married people.
• Those with children under 18 are less financially secure now (56 percent) compared to where they thought they’d be, whereas those with older children (49 percent) or no children (49 percent) feel slightly more secure.
• Gen Y (59 percent) and Gen X (63 percent) are less secure now than they thought they’d be, but the Mature Generation (36 percent) is more likely to say they are just where they thought they’d be or are more secure than they thought they’d be.
Originally published on LifeHealthPro.com

The Annuity Puzzle

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That's me, in 1941!

That’s me, in 1941!

My Comments: As a financial planner and investment advisor for the past 38 years, I recognize that we, that’s me and you, are moving into uncharted waters. While the future is always an unknown, what we are dealing with now is how whether many of us are going to have enough money to live with some degree of dignity when we reach age 90, age 95, age 100 and beyond.

Medical advances are allowing many of us to survive issues that 50 years ago simply resulted in death. Couple that with the “baby boomers”, those born in the years following WW II and you have enormous pressure on a system that is unprepared for it. One reaction in anticipation of this was Obamacare, something which those who perhaps don’t believe in global warming would rather decree we get rid of. Not going to happen. See my blog called This Train is Leaving the Station from earlier this month.

As a financial planner, I’ve steered people away from income annuities for years. It’s like handing your wallet to an insurance company and saying to them, “…send me a check every month for the rest of my life and you keep what’s left.” Just not an appealing thought.

But so many of us are now going to outlive our money that an insurance policy against living too long begins to make sense. At least for some of our money.


By Bob Seawright, Madison Avenue Securities

Since at least 1965 and the seminal research of Menachem Yaari, economists have recognized that retirees should convert far more of their assets into an income annuity at retirement than they do. That they so rarely do what they ought to do is known as the “annuity puzzle.”

In a new paper from the Journal of Economic Perspectives, Shlomo Benartzi, Alessandro Previtero and Richard Thaler offer their insights into why the annuity puzzle exists and how it might be solved. The authors frame the puzzle using Franco Modigliani’s famous formulation from his Nobel acceptance speech: “It is a well-known fact that annuity contracts, other than in the form of group insurance through pension systems, are extremely rare. Why this should be so is a subject of considerable current interest. It is still ill-understood.” It was true then (in 1985) and remains true today. Income annuities remain widely unpopular yet would help to solve a variety of complex problems with which retirees struggle and which cannot be solved otherwise.

The key problem dealt with by income annuities is longevity risk. This risk is increasing steadily in that life expectancies continue to expand throughout the developed world and is exacerbated because we are both retiring earlier and have less and less access to private pensions. Moreover, the distribution of longevity is wide – a 22-year difference between the 10th and 90th percentiles of the distribution for men (dying at 70 versus 92) and a 23-year difference between the 10th and 90th percentiles of the distribution for women (dying at 72 versus 95).

Income annuities hedge longevity risk simply and efficiently as risk pooling makes them 25-40 percent cheaper than do-it-yourself options. Thus retirees who purchase an income annuity assure themselves a higher level of consumption and guarantee it as well. As Benartzi, Thaler and Previtero point out, “You increase your consumption and eliminate risk at the same time… Who says there is no thing as a free lunch?”

A related problem faced by retirees who reject income annuities is the complexity that is added to their lives:
“Households who choose not to annuitize must learn a new skill, namely calculating the optimal drawdown rate over time. Given the complexity of this optimization problem, it is not surprising that retirees might err, either by under- or over-spending. These errors can easily be exacerbated by self-control problems if households have trouble sticking to their drawdown plans, either by spending too little or too much. By converting wealth into an annuity, individuals and households can simultaneously answer the conceptually difficult question of figuring out how much consumption is sustainable given the age and wealth of the consumer, and provide a monthly income target to help implement the plan.”

In general, Benartzi, Thaler and Previtero make the well-known case that greater reliance on income annuities would enable individuals to increase consumption, deal with uncertainty, and help people determine the right drawdown rate and timing of retirement. The puzzle, of course, is why so few people take advantage of them. In 2007, $300 billion was moved by retirees from defined benefit plans to IRAs while only $6.5 billion went to purchase income annuities. As stated by the authors, “the sum of this evidence makes a strong case that people should be making greater use of annuities, to increase their consumption level in retirement, deal with uncertainty, and help solve the cognitively difficult tasks of deciding how fast to draw down their wealth and when to start retirement. Why don’t they?”

One major hurdle is that the vast majority of 401(k) plans do not offer an annuitization option. That failure greatly reduces the number of retirees who will select annuitization – the easier default option wins a disproportionate amount of the time in virtually any setting. On the other hand, “when an annuity is a readily available option, many participants who have non-trivial account balances choose it.” In fact, in a study of a Swiss pension plan that made annuitization the default option, 73 percent elected the annuity, 17 percent elected a combination of the annuity and the lump sum, and the remaining 10 percent elected the lump sum in toto; for another plan where the lump sum is the default option, the take-up rate for the annuity was only 10 percent. Annuitization options should be provided and should be the default setting.

The authors also argue (perhaps a bit optimistically) that this failure to annuitize results more from the “choice environment” than from underlying preferences. An income replacement rate of 80 percent is more attractive than a 20 percent spending reduction. Framing matters. Thus an investment offering a $650 monthly return is selected only 21 percent of the time while a choice offering $650 of spending for life gets a 70 percent selection rate. The choice should be framed accordingly.

Similarly, a typical consumer perceives that he “is taking a considerable sum of money and putting it at risk – the risk being that the consumer will die young, making the purchase a bad deal.” Loss aversion comes into play here too. Since losing hurts about twice as much as winning feels good, the perceived monetary loss of dying early carries more weight than the possibility of monetary gain achieved by beating the actuarial tables, especially because a lump sum payment feels like a “sure thing.”

So-called “mental accounting” is another significant behavioral factor in this area, with investors reluctant to write a big check to purchase a series of small monthly checks, which seems like a bad deal to many. That’s because once we have something – and an account balance or a lump sum option makes us feel like we have something of real value – we are generally reluctant to give it up (loss aversion again).

Finally, Benartzi, Thaler and Previtero explore policy interventions that have improved savings accumulation behavior and which improve retirement income choices. They see the key challenge as helping consumers – who often see income annuities as a risk since they might die before getting their “money’s worth” – view income annuities as part of a risk-reduction strategy. This approach is particularly promising in that earlier research has shown that people fear outliving their money more than they fear death itself.

The authors proffer two general policy considerations worth exploring in this regard. With respect to Social Security, they suggest that since accrued Social Security benefits can keep growing through age 70, the Social Security Administration should stop labeling different retirement ages as “full” or “normal.” These labels may well be influencing selected retirement dates negatively. They also suggest a “claim and suspend” option for all retirees and that the SSA “encourage people to give careful thought to postponing taking benefits.”

The second category of recommended policy changes “involves increasing the supply of easy-to-find annuity options for those of retirement age with 401(k) and other defined contribution plans.” Doing so will take government action to make current regulations clearer and will also require employer cooperation.

The annuity puzzle is not insoluble. But solving it will require concerted effort by both government and the private sector so that more retirees will have assured lifetime income.

Retirement Ratio: Portfolio Performance and Uncertainty Measurement

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investment-tipsMy Comments: This was written a couple of years ago, but the message will resonate today with many people. For those who have expectations of retiring at some point, there is an incentive to accumulate as much retirement money as possible. All the while being sensitive to how that money is put to work.

The article is a little heavy on the math, so if you’re an engineer, this will not faze you. If you’re an English major, perhaps a little bit. But I encourage you to make the effort anyway.

A fundamental argument is that your money has to grow at least as fast as inflation, otherwise in terms of purchasing power, you are losing ground. In days past, we used to talk about the safety of Certificates of Deposit where the interest rate might have been 4%. Lost in the discussion was that inflation was 3% and taxes consumed more than 1% of the interest, which meant you were simply going broke safely.

Today, the markets are as uncertain as ever. But it doesn’t take specific knowledge or total acceptance of risk to allow yourself to think that an annual rate of return over the next several years can be in the 7% – 9% range. Click on the image that accompanies this post to get an idea what I’m talking about.

April 20, 2011 by Lowell http://itawealthmanagement.com/author/lowell/

What is the Retirement Ratio (RR)? I never heard of such a ratio, at least as it is defined below. Before going into an explanation, let me digress and address similar ratios. Portfolio performance measurements that combine both return and risk are readily available to investors. The Sharpe ratio is perhaps the best known “efficiency ratio” where it measures the amount of return earned per unit of risk. This Wikipedia reference may be easier for ITA readers to make sense of the Sharpe Ratio.

Scrolling down the Wikipedia Sharpe ratio page, one sees other performance/uncertainty measurements. Those of interest are Jensen’s Alpha, Treynor ratio, Information Ratio (IR), and Sortino ratio. Of these five ratios, my favorite is the Sortino although the Information Ratio is used for portfolios tracked using the Captool software. It is possible to extract performance and volatility data from Captool to come up with a ratio that closely approximates the IR.

Originally, the Sortino ratio was written as follows.
S = (R – MAR)/DR where
R = portfolio return
MAR = target return or Minimal Acceptable rate of Return.
DR = downside risk (DR sets the Sortino Ratio apart from other Return/Uncertainty ratios.)
MAR was changed to DTR™ for reasons given below.

In Chapter 3 of “The Sortino Framework for Constructing Portfolios” page 24 I quote, “I think the Sortino ratio was an improvement at that time in that it measured risk as deviations below the investor’s DTR™. What we now call DTR™ was called MAR in the original Sortino ratio. Attorney’s advised Sortino Investment Advisors (SIA) of a potential liability because referring to something as a “minimal acceptable return” could lead people to think we were promising that return at a minimum, so we changed it to DTR™.” Note that Desired Target Return™ is now a trademark term. One can only hope the entire English language will not be trademarked over the next 100 years.

One very important difference with the Sortino ratio (SR) is the denominator or Downside Risk. Instead of using the common mean-variance, the SR uses a semi-variance calculation. Why is this so important? Instead of measuring the portfolio volatility both above and below a mean, the semi-variance calculation only penalizes the money manager for downside risk, hence the DR designation.

The importance of DR came to my attention through two sources. 1) “Wealth Management” by Harold Evensky and 2) Captool software manual.

Quoting Evensky, “When Markowitz wrote his paper on Modern Portfolio Theory (MPT), he noted that a measure of distribution known as semivariance would, theoretically, be the best measure of risk. At the time, most computers did not have the computational power to handle semivariance. Consequently, Markowitz opted for the more practical measure of mean-variance. Today with greater computational power available at very low cost, there is an increasing interest in considering more complex solutions to investment issues, including the use of semivariance.” I suspect the difficulty of programming semivariance with the computers of the 1950s was a major hurdle as well as inadequate computing power.

The second source that peaked my interest in semivariance is more obtuse and it comes from the Captool manual. In describing Sigma (Standard Deviation) it is defined as follows. “This is a measure of the volatility of an investment’s ROI performance, and is often considered a good indicator of the investment’s risk. It is computed as the standard deviation of a number of ROI performance observations for the security or portfolio being evaluated. This standard deviation should not be confused with other, more simplistic standard deviation measures of an investment’s price. These suffer as a measure of risk, in that they penalize upside price movements as well as downside movements. Captool’s “sigma”, on the other hand, does not penalize consistent upward price movement. Furthermore, it is superior to simplistic price-based “Ulcer Indices” in that those can fail to properly handle price movements due to dividend distributions. Distributions are properly accounted for by a total return on investment measure such as is computed by Captool.” While I don’t know exactly how Captool calculates their Sigma, I strongly suspect it a semivariance calculation as it does not penalize “consistent” upside volatility.

With this background, we finally come to describing the Retirement Ratio (RR).
Retirement Rato = (P – R)/DU where
P = Internal Rate of Return (IRR) of Portfolio
R = Greater of either the IRR of Benchmark or the sum of Inflation Rate plus Retirement Withdrawal Rate. We currently use ITA Index, a customized benchmark.
DU = Downside Uncertainty or the semi-variance of the benchmark. I prefer the term, Uncertainty, as it does not carry the variety of meanings laid on the term, Risk.

This form of the ratio looks identical to the Sortino ratio only we use R instead of DTR™. R sets a higher standard than Desired Target Return (DTR™).

A little more detail or description of R is in order. To determine R, we are looking for the greater of two values. The first value we look for is the Internal Rate of Return of the benchmark. If P > R, then the portfolio is performing better than the benchmark. This is a desired goal, but extremely difficult to reach as active mutual fund managers well know.

The second value we look for is Retirement Target Return. The second form of the Retirement Ratio looks identical to the first form shown above, only we substitute Retirement Target Return (RTR) for R. Exactly what is the RTR? It is the sum of the current inflation rate plus the percentage the investor needs or anticipates withdrawing from the portfolio during retirement. Normally this value ranges from a low of 0% plus inflation to a maximum of 5% plus inflation. Should we experience deflation, that would factor into this form. Anything higher than a 5% withdrawal rate greatly increases the probability of the retiree running out of money. Withdrawal rates around 2% to 4% are recommended.

To calculate the Retirement Ratio, and this is built into the TLH spreadsheet, we use an IF THEN equation to look for the higher of either the IRR for the benchmark or RTR.

If the Retirement Ratio is greater than zero, we have a high probability of not running out of money regardless what the market is doing. To check this logic we also run a Monte Carlo calculation based on another set of variables. The Monte Carlo analysis gives us a long-term probability picture while the Retirement Ratio informs us how well we are doing from month to month and year to year.

Should readers need an example to better explain the Retirement Ratio calculation, you only need to request it in the comments section and I will go through a few with assumptions. Many times examples shed light on difficult concepts, and the RR is a tad complicated.

Why Emerging Markets? Growth, Demographics and Yield

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global econMy Comments: In the early 90’s, I opened a branch here in Gainesville for a company called International Assets Advisor Corporation. This company, headquartered in Winter Park, FL was a leading proponent of having clients invested in markets beyond the US. It was a rather revolutionary idea at the time.

The lead broker on the trading desk kept computer screens aglow with data from London, Hong Kong, Zurich, and Tokyo, among others. He would be there at 4 in the morning, talking with someone in Zurich to see how their day had started, and late into the night talking with folks in Hong Kong or Sydney, to see how their day began. He would routinely make 20% per MONTH on his accounts, just buying and selling the same position, taking advantage of discrepancies in the currency prices.

At our regular monthly meetings, we would hear about what was going on around the world and how those markets were reacting to various economic forces and how we could help our clients make money. It was fascinating and what we could offer our clients, the big brokerage firms could only dream about.

Today, with the advances in technology, and an acceptance that markets are viable in many places across the planet, and the fact that funds and ETFs exist to take advantage of all the opportunities, emerging markets are just another blip on the screen.

But those markets have been impacted by the Great Recession, and opportunities exist for the clever and the brave. This will help you understand why.

By Marlene Y. Satter | March 19, 2013

While diversification was the first thing that steered the wealth management firm Balasa Dinverno Foltz to international investing, according to Chad Carlson, there are plenty of other reasons to look to other countries for investing opportunities, both in bonds and in stocks.

Both Carlson and Itasca, IL-based Balasa Dinverno Foltz have “been around the block on international investing.” Balasa has looked abroad for opportunities since 1986, and Carlson’s experience in the sector spans a decade. A third of the firm’s portfolios are targeted toward foreign holdings, he said, “with a purposeful overweight to emerging markets.”

Regarding bonds, “we have recently chosen to increase our international positioning to get exposure to different interest rate environments in order to help us navigate the changing bond market dynamics,” he said.

What’s so attractive about emerging markets? They’re a study in contrasts when compared to developed markets.

“The developed world—the U.S., Europe, Japan—are struggling to find some growth,” said Carlson. Emerging markets may log growth of 4% to 5%, whereas developed markets are lucky at present to grow by 1% to 2%.
Another reason is demographics. “The developed market demographics are of an aging market,” Carlson said, which is “scary.” Emerging markets are “working-age markets,” versus “retired” markets. “Emerging markets have a lot more going for them, and don’t have the burdens of Social Security and Medicare in place to slow growth,” he said.

“We look at all that stuff, but how we chose to implement [our investment strategy] is through broader baskets of diversified products,” Carlson said. He singles out Mexico as having “a lot of good things going on there,” although he concedes that “emerging markets and frontier markets are pretty risky to pick; there are political [hazards], governments get overthrown, and there are less strict reporting requirements for companies.”

The firm uses index funds and ETFs to take advantage of equity opportunities, as well as an emerging-markets local bond fund that looks likely to provide some currency appreciation opportunities as well. “Emerging market currencies look cheap compared to developed,” he said.

And exposure to currency is what the firm is looking for. “From our perspective on the stock side, being unhedged has made a lot of sense,” Carlson said. “In particular, in emerging markets, you want to be unhedged because of opportunities in currency appreciation.”

Another lure of international debt exposure is that “the Canadas, the Australias have better balance sheets than the U.S.; they don’t look as risky for the amount of debt,” according to Carlson. “We have exposure with those, so that if rates go up on bonds and there’s trouble [within the U.S.], we are pretty sure that they won’t go up globally in sync. Maybe other countries will go up a few years after the U.S.; rates will rise at some point,” he said.

With a third of the firm’s stocks in foreign holdings, and about 20% of its bonds also tied to foreign markets, the firm is satisfied with how things are going. Carlson said that the emerging-markets local bond fund is up almost 16%.

Sectors that the firm favors include last year’s investments in foreign real estate, something that’s gone down quite a bit, said Carlson, adding that it definitely rallied back very strongly across the board returning approximately 33%. There was “very, very strong performance with an international REIT; this year, it’s actually reversing a bit. We added that type of exposure [because] we didn’t want U.S. exposure but wanted real estate for diversification,” he said.

Another sector that seems to make sense long term is the consumer sector. Growing populations that are earning more money buy cars, move into urban areas—emerging market indexes are small and focus on the consumer. In the U.S. the sector makes up 70% of the economy; in China it’s 11% of the economy, he said. “If China moves anywhere toward the U.S., there will be tremendous benefit [in that sector] and funds that look for consumer [sector exposure] are an interesting piece to look for growth,” Carlson said.

While currently the firm’s international exposure hovers at approximately a third, its international investing is going to grow. “It will probably be moving up to 40%; it’s just a matter of time till we do that,” he said.

Two Lists You Should Look at Every Morning

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My Thoughts on This: I saved this article when I found it about a year ago. This morning, I happened upon it again and saw when it was first published. Almost FOUR YEARS AGO! And I’ll bet nothing has improved since then. But the message is still very real. Enjoy.

11:00 AM Wednesday May 27, 2009

I was late for my meeting with the CEO of a technology company and I was emailing him from my iPhone as I walked onto the elevator in his company’s office building. I stayed focused on the screen as I rode to the sixth floor.

I was still typing with my thumbs when the elevator doors opened and I walked out without looking up. Then I heard a voice behind me, “Wrong floor.” I looked back at the man who was holding the door open for me to get back in; it was the CEO, a big smile on his face. He had been in the elevator with me the whole time. “Busted,” he said.

The world is moving fast and it’s only getting faster. So much technology. So much information. So much to understand, to think about, to react to. A friend of mine recently took a new job as the head of learning and development at a mid-sized investment bank. When she came to work her first day on the job she turned on her computer, logged in with the password they had given her, and found 385 messages already waiting for her.

So we try to speed up to match the pace of the action around us. We stay up until 3 am trying to answer all our emails. We twitter, we facebook, and we link-in. We scan news websites wanting to make sure we stay up to date on the latest updates. And we salivate each time we hear the beep or vibration of a new text message.

But that’s a mistake. The speed with which information hurtles towards us is unavoidable (and it’s getting worse). But trying to catch it all is counterproductive. The faster the waves come, the more deliberately we need to navigate.

Otherwise we’ll get tossed around like so many particles of sand, scattered to oblivion. Never before has it been so important to be grounded and intentional and to know what’s important.

Never before has it been so important to say “No.” No, I’m not going to read that article. No, I’m not going to read that email. No, I’m not going to take that phone call. No, I’m not going to sit through that meeting.

It’s hard to do because maybe, just maybe, that next piece of information will be the key to our success. But our success actually hinges on the opposite: on our willingness to risk missing some information. Because trying to focus on it all is a risk in itself. We’ll exhaust ourselves. We’ll get confused, nervous, and irritable. And we’ll miss the CEO standing next to us in the elevator.

A study of car accidents by the Virginia Tech Transportation Institute put cameras in cars to see what happens right before an accident. They found that in 80% of crashes the driver was distracted during the three seconds preceding the incident. In other words, they lost focus — dialed their cell phones, changed the station on the radio, took a bite of a sandwich, maybe checked a text — and didn’t notice that something changed in the world around them. Then they crashed.

The world is changing fast and if we don’t stay focused on the road ahead, resisting the distractions that, while tempting, are, well, distracting, then we increase the chances of a crash.

Now is a good time to pause, prioritize, and focus. Make two lists:

List 1: Your Focus List (the road ahead)
What are you trying to achieve? What makes you happy? What’s important to you? Design your time around those things. Because time is your one limited resource and no matter how hard you try you can’t work 25/8.

List 2: Your Ignore List (the distractions)
To succeed in using your time wisely, you have to ask the equally important but often avoided complementary questions: what are you willing not to achieve? What doesn’t make you happy? What’s not important to you? What gets in the way?

Some people already have the first list. Very few have the second. But given how easily we get distracted and how many distractions we have these days, the second is more important than ever. The leaders who will continue to thrive in the future know the answers to these questions and each time there’s a demand on their attention they ask whether it will further their focus or dilute it.

Which means you shouldn’t create these lists once and then put them in a drawer. These two lists are your map for each day. Review them each morning, along with your calendar, and ask: what’s the plan for today? Where will I spend my time? How will it further my focus? How might I get distracted? Then find the courage to follow through, make choices, and maybe disappoint a few people.

After the CEO busted me in the elevator, he told me about the meeting he had just come from. It was a gathering of all the finalists, of which he was one, for the title of Entrepreneur of the Year. This was an important meeting for him — as it was for everyone who aspired to the title (the judges were all in attendance) — and before he entered he had made two explicit decisions: 1. To focus on the meeting itself and 2. Not to check his BlackBerry.

What amazed him was that he was the only one not glued to a mobile device. Were all the other CEOs not interested in the title? Were their businesses so dependent on them that they couldn’t be away for one hour? Is either of those a smart thing to communicate to the judges?

There was only one thing that was most important in that hour and there was only one CEO whose behavior reflected that importance, who knew where to focus and what to ignore. Whether or not he eventually wins the title, he’s already winning the game.

Americans Take Payroll-Tax Increase in Stride to Keep Spending

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world economyMy Comments: There is a lot of evidence and sentiment that 2013 will be a solid year. Housing starts are strong and will continue to be at least until interest rates start to climb.

The jobs report continues to be positive with roughly 200K new jobs every month for the past four months.

GDP growth this year could be around 3%. Not fantastice but solid.

Monday, 11 Mar 2013 06:16 AM

Consumers and businesses are treating higher payroll taxes and federal spending cuts as just a speed bump for a U.S. economy poised to accelerate later this year.

Americans are saving less and spending more for purchases such as new automobiles, as household net worth climbs with rising home values and stock indexes surging to record highs. Companies are ramping up hiring, adding 246,000 to private payrolls in February. They’re also expanding investment and rebuilding inventories as they put profits accumulated during the recovery to work.

“A lot of things are going the right way,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose private employment forecast was closest to the February gain among economists surveyed by Bloomberg. “The labor market is picking up momentum. Businesses are seeing demand. More people working means more people will be spending money. To a certain extent, this neutralizes the effects” of higher taxes.

Growth will pick up in the second half of the year as the fallout from the budget cuts dissipates, paving the way for even stronger spending by businesses and consumers, projections from Barclays Plc and JPMorgan Chase & Co. show. Gross domestic product will rise at a 2 percent annual average pace in the latter six months of 2013 after a 1.5 percent rate in the first two quarters, said Dean Maki, chief U.S. economist at Barclays.

“The economy is at a point where it can handle the fiscal tightening without screeching to a halt,” said New York-based Maki, who is also a former Federal Reserve board economist. “We’ll see some slowing, certainly, but the economy is not as fragile as it was.”

Still Shopping
Even as Congress is forcing Brent Phipps’s employer, the U.S. government, to reduce spending by $85 billion this fiscal year, the 25-year-old paralegal is still going shopping.

Browsing through an aisle of neon green, pink and transparent plastic storage containers at a Target Corp. store in Washington, Phipps, who works for the Justice Department, said the payroll tax increase hasn’t altered his spending habits.

“I didn’t really pay any attention to it,” he said. “I can’t say I had any particular, ‘oh no, I’m not going to do X, Y and Z thing.’”

Americans are opening their wallets for bigger-ticket purchases too. General Motors Co. and Ford Motor Co. predict automobile sales, on pace for the best year since 2007, will remain resilient. Cars and light trucks sold at a 15.3 million annual rate in February after 15.2 million a month earlier, according to Ward’s Automotive Group.

New Cars
“Consumers appear to be taking higher payroll taxes in stride, at least when it comes to replacing older vehicles,” Kurt McNeil, vice president of U.S. sales operations for Detroit-based GM, said on a March 1 conference call.

Norris Home Furnishings, a Fort Myers, Florida-based furniture retailer with three stores, exceeded its goal for 15 percent sales gains in January and February from a year earlier, company owner Larry Norris said. Rising home prices in the region have improved consumer attitudes even in the face of higher taxes, the 70-year-old business owner said.

“People are a lot more cautious with their money than they were at one time, but they are still spending,” he said. “Consumer attitudes are improving, no question.”
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THE ONLY SAFE WITHDRAWAL RATE

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money mazeMy Comments: For many years than I am aware of, there have been “experts” who have expressed their opinion about the optimum rate to withdraw money from accumulated retirement funds. The reason for this is to offset a fear by many of running out of money at some point before you die. Typically, that’s not a good thing.

One expression of this by me has been that retirement is a transition from working for money to having money work for you. The objectiive is to have as big a pile as possible from which to draw funds to pay for the things you need and the things you want.

The dilemma comes full circle when I ask you “when do you plan to die?” I’ve not yet met anyone who is willing to hazard a guess. So you will likely fall somewhere between running out of money before you die or dieing with enough money in your accounts that, on reflection, you could have spent the last few years in the south of France with side trips to Paris.
Simply put, there is NO best answer, but this article comes close.

By Perry Chesney, CIMA®, CFP®

Over the past several years one of the hottest questions debated among practitioners and clients alike has been: What is a “safe” withdrawal rate in retirement?

Beginning with William Bengen’s 4% prescribed rate, this magic number has been fluctuating – from the managers who argue for a higher rate based on portfolio rules to a recent study concluding that the only sustainable rate is a mere 2.8%. All of these methodologies make capital market assumptions then run through various calculations to demonstrate why if one takes his retirement account value at retirement age, multiplies it by the withdrawal rate to determine a dollar amount of annual spending and inflation adjusts it, the money should last as long as his pulse. While we could debate the rationale behind each of these various theories individually, there is a common factor being overlooked by them all: the lifestyle price of safety.

The premises of Wealthcare are to ensure that clients experience the dreams of their one and only life while avoiding needless investment risk AND lifestyle sacrifice. When considering the issue of identifying a safe withdrawal rate that fulfills our promise of comfort & confidence, we’ve found that the only safe withdrawal rate is a flexible one.

Wealthcare identifies an Ideal & Acceptable range for each aspect of a client’s financial life – saving, spending, retirement age, investment risk and estate goals. Ideal represents their greatest aspirations; acceptable, a lesser but still satisfactory compromise based on the extreme markets that we may face.

This range helps us identify what our clients value while preparing us to deal with both life and market uncertainty. By understanding the priorities amongst competing goals and discussing in advance the tradeoffs they would be willing to make between goals, we’re able to continuously craft life-relevant advice with confidence in funding the future.

When markets misbehave, our choices are not limited to spending rate vs. investment approach. The adjustment of lower priority goals toward their acceptable levels may be enough to keep the plan on track and high priorities intact. Conversely, if markets are favorable, we’re able to make adjustments to buy ideal levels of higher priority goals.

We are alerted when adjustments are needed by measuring the uncertainty of the markets and stress testing each client’s goals set to determine their funded status. We re-evaluate this funded status and revisit the ideal & acceptable ranges and priorities at least quarterly to make sure our advice is current. This complete process allows us to deal with the risks of the things we cannot control while still making the most of each client’s only life.

While controlling risk in order to have confidence of funding future spending goals is a serious issue, many other proposed solutions of the safe withdrawal rate dilemma seem to overlook the certain lifestyle cost that the retiree would have to endure. We believe that at the end of the day, a person’s current life is just as important as their future life.

In our next Educational Webinar, The Lifestyle Price of Hedging Retirement Withdrawal Risks, our CEO, Dave Loeper, will discuss the lifestyle impact of various planning strategies including:
• The Buckets of Money method
• The use of Insurance Products – Immediate and Variable Annuities
• The Safety First approach

All of these methods seek to buy investors’ confidence in a “safe” withdrawal rate by hedging against the constant uncertainties of return sequences and inflation. During this webinar Dave will share his evaluation of the true costs of such hedges. If you’re interested in joining a discussion of investment management and retirement planning strategies from the perspective of your clients’ lives, email us and reserve your spot.

Mixed Signals Give Gold Investors Whiplash

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Goldman Sachs declares an end to 12-year run-up of gold, just before Bernanke reaffirms monetary easing

My Comments: Gold, in its many forms, from actual coins, to shares of gold mining companies across the globe, has been a strong investment for many people over these past few years. We can argue that it reached bubble status a couple of years ago, but it has not yet burst.

And as India, as a prime example, enjoys strong economic growth, along with an ever increasing middle class who revere gold jewelry, the demand is growing ever stronger.

I’ve been able to include gold in an investment program called Managed Alternative Assets for my clients. It includes all kinds of precious metals, real estate and energy services among its holdings. If you now own or want to own gold directly, be aware the price curve is likely to work against you going forward.

By Gil Weinreich, AdvisorOne February 27, 2013

What is going on with gold? While it is normal for opinion to be divided on the merits of an investment—that’s why there are buyers and sellers—sharply contrasting trends seem to be giving gold investors whiplash.

The price of gold Wednesday is hovering over $1,600 an ounce, having fallen more than 1% on the day. Investors may be reacting to a Goldman Sachs report released Monday that declared the 12-year run the commodity has enjoyed to be finally over.

The influential investment firm cut its 3-month forecast steeply to $1,615 an ounce from $1,825, and its 12-month price target to $1,550 from $1,800, Bloomberg reports.

Yet gold futures had a banner day Tuesday, soaring nearly 2%, their biggest gain of the new year—a day after Goldman issued its report. Did investors not believe the behemoth bank but are having second thoughts today?
Recent mixed signals may account for the zigzagging. Gold tends to rise on bad economic news, and fall on positive news.

The Goldman report was all about a strengthening of the economy and also placed particular emphasis on the minutes of the Federal Open Market Committee’s meeting last month, which were made public last week.

Several committee members advocated a slowing of Federal Reserve asset purchases. The Fed, as part of its third round of quantitative easing, is buying bonds at a rate of $85 billion a month.

Wrote the Goldman report’s authors, analysts Damien Courvalin and Jeffrey Currie:
“Our economists believe that the downside risks to their forecasts have diminished while the uncertainty about the size of QE3 is high. We believe that a shift has occurred over the past few months with conviction in holding gold waning quickly.”

Yet, despite this warning, and the report’s noting that large investors like George Soros have cut their gold ETF holdings, Fed chairman Ben Bernanke did not play along.

In testimony before a Senate panel Tuesday (and again before a House committee Wednesday), Bernanke offered a full-throated defense of monetary easing, buoying equity and gold prices Tuesday (though just equity prices on Wednesday.)

As one investment executive told Reuters, “It doesn’t matter what the Fed minutes tell you, he [Bernanke] is going to keep refilling the punch bowl until we get unemployment down below 6%.”

So, on the one hand, Goldman Sachs issued a bearish report declaring “the turn in the gold cycle has likely already started.” That report cited rising consumer confidence, a recovery of the long-battered real estate market and other upbeat economic trends.

On the other hand, the Fed chairman reaffirmed his commitment to monetary stimulus to support a still-weak economy while elections in Italy brought to power an anti-austerity coalition, signaling the possibility of renewed economic crisis in Europe, both of which are bullish for gold.

While Goldman’s viewpoint went beyond short-term market movements, boldly declaring an end to the secular run-up in the precious metal, for every seller there is always a buyer. On the same day Goldman issued its report, U.S. Global Investors’ Frank Holmes wrote in his weekly commentary about Macquarie Research’s finding that the correlation between the Fed’s balance sheet and the price of gold is quite high, at 0.93.

“The firm found that for every $300 billion expansion in the balance sheet of the U.S. government, there was a $100 an ounce increase in the price of gold,” Holmes writes. “When you factor in the Fed’s current bond purchases totaling $85 billion per month for the next nine months, the central bank will be adding $765 billion in new assets…By this measure alone, gold would rise approximately 16% over the next several months.”

Source: http://www.advisorone.com/2013/02/27/mixed-signals-give-gold-investors-whiplash?utm_source=portfoliobuilder30413&utm_medium=enewsletter&utm_campaign=portfoliobuilder

Legacy, Estate Planning as Important as Retirement

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will with clockMy Comments: I expected to be retired now. But I’m one of millions who find it better to keep working and use the daily mental challenge to stay healthy, and because the income is welcome.

But the topic here is not an easy one to resolve. I can attest to the difficulty of talking with folks about their mortality. Funerals are not generally fun events. But they are inevitable and to the extent you can make life better for those you leave behind, I think you have an obligation to at least make an attempt.

By Paula Aven Gladych

People always talk about their plans for retirement, and they spend a good portion of their lives saving money in retirement accounts so they can maintain their lifestyles in their later years. But planning for the future isn’t just about retirement accounts or what you want to do with all of your free time.

According to financial experts, people also need to plan for what comes after their retirement—end-of-life planning.

That means legacy and estate planning, life insurance, long-term care and burial preparations.

Many people don’t want to talk about their own mortality, so they avoid planning for it.

The single biggest gap in legacy and estate planning is education, said David Richmond, president of Richmond Brothers, a registered investment advisory firm in Michigan.

“Do parents talk to their kids as they age about their money and how it is going to come to them? Do we teach, as an American culture, how to give money away or how to manage money? It is not taught in high school or college. It is not taught anywhere,” he said.

Wealthier families have always taught these things because they have more money to pass down, but conversations about money should take place in all families, regardless of income.
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Retirement Security Gets More Complicated

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My Comments:global investing While this was written a few weeks ago, the underlying theme is entirely valid today. There is little chance that interest rates are going to see any significant increase over the next 24 months. The Fed has said they are not going to mess with them for perhaps two more years.

There is also a high expectation that life spans are going to get longer and not shorter. This simply means the need for money will be greater than it is now. I have no idea what Prudential is talking about when “retirement income insurance” becomes something they are offering for sale. Whatever it is, it’s going to cost the consumer something since neither Prudential or any of the other companies that will follow suit work for free.

So those of us attempting to live on whatever we’ve accumulated are going to find outselves in an increasingly smaller box from which it will be hard to escape, short of pulling the plug. Not a pleasant thought. The only offset I can offer that has a reasonable chance of success is to choose from among the investment programs we offer from a group in Tacoma called Purcell Advisory Services. Call or email me for a no strings attached conversation.

December 18, 2012 • Jim McConville

A generation ago, workers who got Social Security and pension payments could generally count on having enough money to see them through their golden years.

But today that retirement income formula won’t necessarily provide the financial security it once did, according to Prudential’s new report Should Americans Be Insuring Their Retirement Income?

Sustained low interest rates, market volatility and longevity risk are the most significant risks to Americans’ retirement security, says Prudential. And if interest rates stay low, retirement assets invested conservatively will have little investment growth and may be exhausted earlier than expected.

Continued volatility in the equity markets creates significant “sequence of returns risk,” when the order of investment returns results in losses at or near retirement, making those losses difficult to make up. Plus, people are living longer, so it increases the chances that they’ll exhaust their retirement savings while still alive.

Prudential’s white paper discusses the likelihood of the average retiree exhausting his or her retirement savings based on three scenarios for a hypothetical retiree named “Jean,” age 65. She has a $300,000 portfolio that is invested 60 percent in equities and 40 percent in bonds and carries expenses of 1 percent a year. She plans to withdraw $15,000 a year to supplement Social Security.

In scenario one, she lives to her expected lifespan of 90, there’s no market volatility and her gross return is 8 percent annually. In each Monte Carlo simulation for that scenario, she avoids exhausting her nest egg. But the report acknowledges that it’s unrealistic to think investment returns won’t vary or that she’s certain to live to her life expectancy. When those variables are introduced, her assets are depleted in 420 of 2,000 simulations. In scenario three, the risk of interest rates remaining at Dec. 31, 2011, levels is also introduced, and Jean’s assets are depleted in 1,080 of 2,000 simulations.

Prudential’s report recommends consumers invest in “retirement income insurance” — such as individual annuities or guaranteed income products built into defined contribution plans — to reduce the risk of outliving one’s assets.

Kimberly Supersano, chief marketing officer for Prudential Annuities, says retirees are facing a number of key risks. Those circumstances, including the low interest rate environment, means many of them won’t meet their retirement goals, she said.