Tag Archives: retirement plans

13 Reasons Why a QLAC Belongs in Your IRA

My Comments: Some people made good decisions along the way and now have significantly large IRA accounts. Some people I know have little need for the money to maintain their existing standard of living.

If this is you and would like to find a way to NOT take money every year and pay the IRS a sizeable chunk of your retirement nest egg, there is now a way to defer some of the taxes. You can’t avoid the truism about the inevitability of death and taxes, but you can delay it.

This article explains your new option. If you’d like to know more, send me an email or give me a call. I can help make it happen for you.

By Stan Haithcock / Nov 18, 2014

Qualified longevity annuity contracts (QLACs) were approved on July 1 of this year for use in Traditional IRAs, 401(k)s, and other approved retirement plans.

They’re also referred to as qualifying longevity annuity contracts. Regardless of what name you choose, let’s look at some reasons why you should consider including a QLAC in your IRA:

1. Potentially reduce taxes
The ruling allows you to use 25% of your individual retirement account, IRA, or $125,000, whichever is less, to fund a QLAC. That dollar amount is excluded from your required minimum distribution, RMD, calculations, which could potentially lower your taxes.

2. Lessen your RMDs
As an example, if you have a $500,000 Traditional IRA, you could fund a $125,000 QLAC under the current rules. Your RMDs (Required Minimum Distributions) would then be calculated on $375,000.

3. Plan for future income
QLACs allow you to defer as long as 15 years or to age 85, and guarantees a lifetime income stream regardless of how long you live.

4. Spousal and non-spousal benefits
Legacy benefits for both spouse and non-spouse beneficiaries guarantee that all the money will go to your family, not the annuity carrier.

5. Protect your principal
QLACs are longevity annuity structures, which are fixed annuities. Also referred to as deferred-income annuities (DIAs), the QLAC structure has no market attachments, and fully protects the principal.

6. Add a COLA
Depending on the carrier, you can attach a contractual COLA (cost-of-living adjustment) increase to the annual income or a CPI-U, Consumer Price Index for All Urban Consumers, type increase as well.

7. No annual fees
QLACs are fixed annuities, and have no annual fees. Commission to the agent are built into the product, and very low when compared with fully-loaded variable or indexed annuities.

8. Contractual guarantees only
QLACs are pure transfer of risk contractual guarantees, and agents cannot “juice” proposal numbers.

9. Laddering income
Because of the QLAC premium limitations, this strategy should be used as part of your overall income laddering strategies, and in combination with longevity annuities in non-IRA accounts.

10. No indexed or variables allowed
Variable and indexed annuities cannot be used as a QLAC, which is a positive for the consumer in my opinion. Only the longevity annuity structure is approved under the QLAC ruling.

11. Complements Social Security
QLACs work similarly to your Social Security payments by guaranteeing a lifetime income stream starting at a future date.

12. Indexed to inflation
The QLAC ruling allows the premium amount to be indexed to inflation. That specific amount is $10,000, and should increase by the amount every three to four years.

13. Only the big carriers play
Because of the reserve requirements to back up the contractual guarantees, only the large carrier names most people are familiar with will offer the QLAC version of the longevity annuity structure.

I have recently written an easy to read QLAC Owner’s Manual that clearly explains the law and what you need to know to make an informed decision. In my opinion, it’s worth your time to take a closer look.

4 Lessons For Us From a Century Ago

My Comments: As a nation we are on the horns of a dilemma regarding our role as the sole surviving superpower from the last century. I embraced Obama’s assertion that our national focus should revert to what is in our best interest domestically. At the time we were embroiled in Iraq and other places and I was sick and tired of the cost in terms of lives and dollars.

This article, which appeared recently in The Financial Times, tells us this is not a new dilemma. That roughly 100 years ago Britain was caught in the same issues as we face today. The comment about “spending money and men to try and civilize those who don’t want to be civilized” rings a bell with me.

However, if I want to leave this planet with some assurance it will be a better and safer place for my grandchildren, I don’t want us to hide in the shadows and hope for a better outcome. Hope is NOT a global strategy for success.

America, Britain and The Perils of Empire, By Gideon Rachman / October 13, 2014 / The Financial Times / Middle East turmoil of 1919 offers important lessons for today

General Sir Philip Chetwode, deputy chief of Britain’s Imperial General Staff, warned in 1919: “The habit of interfering with other people’s business and making what is euphoniously called ‘peace’ is like buggery; once you take to it, you cannot stop.”

It is difficult to imagine any member of the Obama administration making such an eyebrow-raising comparison. But, as the US struggles to cope with turmoil across the Middle East, Sir Philip’s complaint – quoted in David Reynolds’s recent book, The Long Shadow – has a contemporary ring to it. Even more so the lament of his boss, Sir Henry Wilson, the chief of Britain’s Imperial General Staff, who complained in 1919 that -”we have between 20 and 30 wars raging in the world” and blamed the chaotic international situation on political leaders who were “totally unfit and unable to govern”.

Britain was directly or indirectly involved in the fighting in many of these wars during the years 1919-1920. Their locations sound familiar: Afghanistan, Waziristan, Iraq, Ukraine, the Baltic states. Only Britain’s involvement in a war in Ireland would ring no bells in the modern White House. The British debates, and recriminations of the time are also strongly reminiscent of the arguments that are taking place in modern America. And how events panned out holds some important lessons for today’s policy makers.

The British military effort in Iraq in 1920, like the allied effort today, was conducted largely through aerial bombing. Then, as now, there was strong scepticism about the long-term chances of achieving political stability in such an unpromising environment. AJ Balfour, the British foreign secretary complained – “We are not going to spend all our money and men in civilising a few people who do not want to be civilised.” In an echo of America’s current Middle East confusion, even British policy makers knew that they were pursuing contradictory goals. As Professor Reynolds points out – “The British had got themselves into a monumental mess in the Middle East, signing agreements that, as Balfour later admitted, were ‘not consistent with each other’.”

Then, as now, even the people making policy seemed confused about the motives for military intervention in the Middle East – was it “making peace” as Gen Chetwode suggested, was it the rich oil reserves of the area, was it the protection of another territory (India for the British, Israel for the Americans), or was it simply a vague sense that imperial prestige was at stake? The debates in London, almost a century ago, as in Washington today, suggested that all these motives were mixed together in ways that no one could completely disentangle.

Military leaders’ complaints about incompetent politicians also echo down the ages. Sir Henry’s lament about British political leaders who are “unable to govern” is matched by the increasing rumble of complaint about the leadership of Barack Obama. Even Mr Obama’s former defence secretary, Leon Panetta, has just complained that the US president “too often relies on the logic of a law professor rather than the passion of a leader”.

These comparisons between the British and American dilemmas, almost a century apart, are intriguing – but do they offer lessons? I would point to four.

First, while it is always tempting to blame political leaders, the problems often run far deeper than that. The British prime minister in 1919 was David Lloyd George, who most historians now regard as a decisive and dynamic leader. That did not prevent the imperial staff from complaining about the torpor and confusion of his administration. The real problem, however, was the intractable nature of the problems that Britain was facing, and the limits of the resources it could bring to bear.

Second, it is much harder to be a global policeman if your government’s finances are stretched and your country is war-weary. In 1919, after the collapse of the Ottoman Empire, British imperial possessions were more extensive than ever. But the UK was exhausted after the first world war and had little appetite for further conflict. The Iraq and Afghanistan wars of the past decade were small affairs, by comparison. But they left a similar reluctance in the US to get involved in further conflicts.

Third, the uncanny similarity between the trouble spots of a century ago and those of today suggests that there are some parts of the world where geography or culture create a permanent risk of political instability and war: the frontiers between Russia and the West, Afghanistan, Iraq. The idea that ‘twas ever thus’ may comfort contemporary policy makers in Washington, as they struggle to cope with multiple crises.

Yet the fourth lesson derived from Britain’s travails in 1919 is less comforting. Many of the conflicts that the Imperial General Staff were struggling with did get resolved fairly swiftly. The western allies’ involvement in the Russian civil war was over by 1920, as the Bolsheviks moved towards victory. An uneasy peace was also re-established in Iraq. But Britain’s ability to impose its will on the world was waning. The political turmoil of 1919 was, in retrospect, an early sign that the world was entering a new period of instability that – within a generation – would lead to another shattering world war. Once the dominant global power loses its grip, the world can quickly become much less orderly.

Stop Tinkering With Your Retirement Portfolio

InvestMy Comments: I can’t tell you how many times over the past 40 years that a client has talked with me suggesting something is wrong with his investments. It usually comes after a long run up in the markets and he or she thinks his portfolio is lagging. And almost every time we’ve made a change, it has resulted in something worse. We moved away from good stuff into bad stuff.

That’s not to say that changes should never be made. Some changes are for the best, like when you think the markets are likely to crash and you want some assurance that the manager you’ve chosen has the ability to move to cash when the you know what hits the fan. Most of them use the tactics described below.

My management team of choice these days will definitely miss some of the upside. But they will also miss most of the downside. That’s why they are my team of choice. If you want guarantees, you have to move your money to insurance company products, and for that you will pay a price in restricted access. But for some of your money, it’s very OK, as it allows the rest of your money to go with the flow.

By George Sisti, CFP (oncoursefp.com ) / Oct 9, 2014

Having just attended the annual convention of the Financial Planning Association, I think it’s appropriate to compare goal focused financial planning to the market focused, no-plan, portfolio tinkering strategy that most investors employ.

Good financial planning starts with the assumption that the future is uncertain, future rates of return are unpredictable and that diversification is the essential element of any prudent investment strategy.

Good financial planning takes time. Gathering and analyzing client data, discussing financial goals and developing a plan to attain them shouldn’t be rushed. An analysis of risk tolerance, insurance coverage, income, expenses and employee benefits should precede any portfolio allocation recommendations. Finally, clients should receive an Investment Policy Statement which summarizes what has been accomplished and explains the investment strategy being employed.

Upon completion of this process I am often asked, “How often will you look at my portfolio?” Many clients are bewildered when I answer, “As infrequently as possible.” The never ending babble coming from the financial media leads many investors to believe that their portfolios require constant tinkering. Most don’t realize that allowing their adviser to tinker with their portfolio will likely do more harm than good.

Perhaps it would sound more reassuring if I answered, “As often as I look at my own.” My portfolio consists solely of index exchange-traded funds, ETFs, and is designed to meet my financial goals at an acceptable level of expected volatility. Consequently, I never tinker with it and ponder its allocation only during its annual rebalancing.

You can control your portfolio’s inputs but not its performance; which will be determined primarily by its asset allocation. Its growth will be directly proportional to how well it was funded and inversely proportional to how much you tinkered with it. Like a good employee, it shouldn’t require continual oversight.

I can compare this to two automobiles I have owned — a 1974 Chevrolet Vega and a 2007 Acura. By 1978, the Vega was burning a quart of oil every 250 miles. I had my head under its hood every week to add oil or tinker with something that wasn’t working. Thankfully, those days are over. I’ve never opened the Acura’s hood. It runs flawlessly and has had no mechanical problems. About once a year, I take it to the dealer for service. He opens the hood and tinkers as required. I drive the car home and am content to keep the hood closed for another year.

Unless there are major changes in your personal circumstances, an annual portfolio review and rebalance should be sufficient. For the next 12 months you can concentrate on the more important and enjoyable things in life. Excess portfolio peeking leads to excess portfolio tinkering which inevitably leads to lower portfolio performance.

To many investors this sounds too simple, too good to be true. (It is simple, but it isn’t simplistic — there’s a difference.) Many believe that stock investing is a rigged game. Institutional money managers use elaborate software and powerful computers that constantly monitor a multitude of market indicators to generate buy and sell orders.

Misguided investors believe that they have to adopt similar strategies to level the playing field. But whether you count on your fingers or use sophisticated software, attempting to predict the market’s next move is a loser’s game — for both amateur and professional investors.

Instead of goals based financial planning, many financial advisers offer products and trading strategies that turn retirement investors into short-term speculators. This despite the fact that study after study shows that more frequent trading leads to lower returns. Too often the big winners in the “outsmart the market” game are, in John Bogle’s words, the croupiers in the Wall Street Casino.

Today, many investors are frightened and confused by the noise and conflicting advice emanating from the financial media. Consequently many are underfunding or poorly allocating their retirement accounts. A good financial plan containing a comprehensible investment strategy is the best defense against our natural tendency to make shortsighted, emotional investment decisions. Most financially secure retirees will admit that they rarely looked at their portfolios during their accumulation years.

Like it or not, most of us are our own pension plan managers. It’s a difficult task that few investors are capable of accomplishing without professional help. Unfortunately, this professional help is rarely client focused. Too often it is market focused and characterized by frequent portfolio tinkering based on forecasts of questionable value. It’s time for investors to say, “Enough already!”

You need a personal financial plan; one containing a comprehensible investment strategy that is based on your personal goals, not what the market did yesterday or what someone thinks it will do tomorrow. Take a pass on the continuing barrage of new products offered by the Wall Street Promise Machine.

Use low-cost index funds to create a diversified portfolio. By doing so, you’ll give less money to Wall Street’s asset eating dragon; you’ll have more working on your behalf and maximize your chances of attaining a comfortable retirement.

The 4 Drivers Of Stock Market Prices

profit-loss-riskMy Comments: In recent posts I’ve suggested there is a looming crash in the markets that will negatively impact all of us, except perhaps those of us with the ability to go to cash and go short when the crash happens. To hedge my comments, I’ve said “sometime in the next 3 years.”

Here is an article that suggests otherwise. If you don’t speak “economics”, this is relatively easy to follow and understand. Enjoy…

Greg Donaldson / Oct. 7, 2014

We have found that very few investors understand what really drives the stock market. In our view, the four primary drivers of market valuations are earnings, dividends, interest rates and inflation. If you can quantify what is going on with those four variables, our models indicate that you can predict about 90% of the annual movement of stock prices.

Last time, we talked about the Barnyard Forecast, which is a model that signals the probable direction of the market. While the Barnyard Forecast does correctly predict the market’s direction 6 to 18 months from now with about 80% accuracy, it is not a short-term predictor nor does it have any valuation component. Therefore, we use select valuation models to ascertain the relative attractiveness of stocks.

Almost all of these models use some component of the above mentioned variables. Within those four variables, there are two that stand out above the others as being the most important drivers. We’ll take a look at each factor and then conclude with what it means for stocks.

Earnings

Most investors look to earnings as the primary guide of what a company is worth. In theory, that makes sense. If Company A is earning $500 and Company B is earning $1,000 — wouldn’t you rather own Company B?

The problem with earnings is that they can be engineered by creative corporate executives. In times of recession, earnings are particularly volatile. Earnings can be calculated in a variety of different ways, which adds additional complexity. We don’t think earnings should be completely discounted in valuing companies or the stock market as a whole. However, the unpredictable nature of earnings often gives very bad signals at turning points in the market.

Dividends
We have found dividends to work much better than earnings. Over the past 50+ years, dividends have had approximately three times more predictive power than earnings.

Let’s say you own two rental properties. One rents for $100 per month and the other rents for $200. If both rents are increasing at 3% per year and both will continue to rent for the next 20 years, which rental property would be worth more to you? The one that will pay you the most in rental income over its useful life… right?

John Burr Williams was the first to apply this theory to stocks. He said the value of a stock today is the sum of all future dividend payments discounted back at some required rate of return. In other words, the more a company pays out to its owners in the future, the more valuable that company is to its owners today.

Not only does that theory make “real world” sense, but it also holds up statistically. In our models, we’ve found that dividends are the most important driver of stock prices by a wide margin.

Interest Rates
Interest rates are a primary concern for most stock investors. The general level of interest rates essentially represents the “opportunity cost” of investing in stocks.

If your bank account were to start offering 10% per year on your savings account, you would probably prefer to “invest” in your savings account rather than in the stock market. If your bank account is only paying 0.1%, however, the attractiveness of investing in stocks increases.

Many investors would be surprised, however, that interest rates are not the most important factor in determining long-term stock prices.

Inflation
Inflation is actually a much more significant predictor. How can that be? There are several reasons for this.
Interest rates can be artificially set by the Federal Reserve. Inflation can be influenced by Fed policy, however, it is primarily a result of real world economic activity.

Inflation is also one of the primary drivers of interest rates. If inflation is rising, it has the effect of diminishing the real rate of return for a bond investor. In that environment, a bond buyer will demand a higher rate of interest to compensate for the loss of purchasing power.

In addition, inflation is impacted to a large degree by economic growth. When the economy is growing at a faster rate, the Federal Reserve will generally tighten monetary policy, which raises interest rates.

The importance of inflation is also reflected in several of our models. We have a price-to-earnings (or “P/E”) Finder model that we use to determine the appropriate P/E ratio for stocks. In that model, inflation has been a much better predictor of P/E than interest rates, GDP growth or earnings growth expectations.

Outlook for Stocks
If you can understand these four variables, you can get a fairly accurate gauge of the valuation of the market. At this moment, all of these variables are very positive for stocks.

• Dividend growth for the S&P 500 has been over 10% year-to-date. We believe this will continue to be strong in 2015. Companies are beginning to understand how valuable their dividend checks are to shareholders and have begun to emphasize dividend growth as a priority.
• Earnings are expected to grow by over 10% in 2015. Time will tell whether that will come true or not. If it does, we anticipate the market will reward the companies for their continued strong performance.
• Inflation remains very low. With little capacity pressure from either employment or plant and equipment, we don’t see much of a chance that inflation gets higher than the Fed’s target of 2.5%. The economy is simply not growing fast enough.
• With inflation low and the Fed continuing their stimulative monetary policy, interest rates are likely to remain low. The 10-year Treasury continues to trade at the low end of our 2013 prediction of between 2.5% and 3.0%. We don’t anticipate that rates will get much higher than that over the near term.

As we talked about last week in our Barnyard Forecast, monetary policy conditions are very favorable. Aside from a major geopolitical shock, stocks don’t face any major red flags going into 2015.

The most current reading from our S&P 500 valuation model indicates that the fair value of the market is about 1,950. As this is being written, the S&P 500 is trading at about 1,952. From both a directional perspective and a valuation perspective, our models are saying that stocks are still the place to be.

6 Strategies to Reduce Your Need for Money When You Retire

retirement_roadMy Comments: These might seem like a no brainer. The financial media is awash with articles talking about how Americans simply don’t have enough money to retire. In the larger perspective, this, if true, is going to put enormous pressure on the government to subsidize the living cost of those who run out of money.

We’ve already talked about how simply leaving people by the side of the road to die is not an option. Even though there are some politicos who want that to happen; they don’t have what it takes to work together and figure out how to avoid it.

Most of us agree that it’s a personal responsibility to pay our own bills, and not rely on handouts. All of us agree, however, that Social Security benefits are already critical to our well being and that without them, millions of Americans would be on the streets, waiting to die.

The pressure on the system is going to grow, just like the pressure on the VA system has created tensions that need to be addressed. The dilemma is that demographics is not a simple variable. By the time most of the boomers come to an end, there will be a time of relative plenty, until such time as the children of the boomers reach retirement age, and then it will start all over again. In the meantime…

by Andrew Schrage on July 16, 2014

When you’re discussing retirement savings strategies with your clients, it’s important to emphasize that they should save as much as possible for their golden years. Of course, that amount varies greatly from person to person, and regardless of an individual’s ability to save, it’s always wise to be thrifty, even during retirement. Fortunately, there are a variety of strategies available that can help your clients reduce how much money they’ll need once they retire and call it a career.

1. Get the home paid off

Whether your client is 30 or 50, have them implement a game plan to pay off their mortgage prior to retirement. Even if they plan to move during retirement, this is a good strategy. If they buy a new home when theirs is paid off, they can avoid a new mortgage, and if they’re downsizing, there will be equity on the table.

One option to consider is refinancing into a 15-year loan. In many cases, it is possible to do so without significantly raising the payment. If that’s not doable, encourage them to start paying more each month. ( another option is to find a way to make 26 bi-weekly payments a year. This has the amazing effect of turning a 30 year mortgage into a 24 year mortgage)

2. Eliminate car payments

Though I am personally years away from needing a new set of wheels, I’m already saving for one in a dedicated bank account. When the time comes to make the purchase, I’ll pay for my new car in cash, and will therefore avoid paying interest. ( but not in cash; cash means lower purchasing power down the road as inflation is going to happen regardless)

Encourage your clients to do the same so that they can always pay for a new car with cash. Proper budgeting to free up money to set aside each month is crucial.

3. Get healthy now, and stay that way

Emphasize the importance of exercise and a healthier diet to your clients. ( avoid too many carbs, eat more fat, and drink some red wine! ) Reducing drinking and smoking and getting on a regimented fitness plan can result in long-term financial gains. According to Fidelity, a retired couple can expect to incur $220,000 worth of expenses for health care alone, but that number can be significantly lessened by staying in optimal physical shape.

4. Enjoy low-cost activities

Trips to Tuscany and motor home treks across the U.S. are fun and exciting, but your clients have a budget to worry about. Extravagant vacations can be taken only if their finances can afford it, but in general, they should look for other low-cost activities. The local library has a wealth of programs available, including exercise clubs and courses on how to navigate a PC, and they also have plenty of DVDs available for free rental. Even inviting the kids over for a potluck can occupy a day of entertainment. Volunteering is also a worthy endeavor that is fun and satisfying. Check serve.gov for more volunteering opportunities.

5. Travel in a budget-friendly style

For local travel, Amtrak offers discounts for seniors, and American Airlines discounts select fares by as much as 50 percent for retirees. Timing is also essential to curb travel costs. For example, October to April is the busiest time of the year for people to travel to Florida, and your clients should avoid such peak times to cut travel costs. For more affordable international travel, your clients can try Costa Rica from May to November, or Sydney in the autumn or spring.

6. Put off applying for Social Security

As you probably know, your Social Security benefit increases by 8 percent each year you delay after full retirement age. Make sure your clients know this. Delaying retirement and working longer can significantly boost Social Security income. ( call or email me for a free report that will tell you which one of the 97 months from age 62 to 70 that will give you the most money )

What other tips can you suggest to reduce retirement expenses?

Buckle Up! The New Bear Market Has Begun!

1-5-2000-to-6_30-2014My Comments: The writer has a powerful message to send. He was right about this back in 2008 but that doesn’t mean he’s right this time. I have clients and prospective clients asking when the next downturn is going to begin. And yet there are many articles that suggest it’s still a long way off.

This week I received my copy of Investment Advisor. In it five famous advisors share their preferred asset allocation of the month. The most conservative of them has 30% in stocks, 50% in bonds with 20% in cash. The previous month he had 30% in stocks, 40% in bonds and 30% in cash. Clearly, he doesn’t think interest rates are going up soon. The other four had about 65% of their holdings in the stock market.

Another example is an investment manager whose results in 2013 were a plus 17.51%. Rather than moving away from the stocks, he is now fully invested in the stock market to the tune of 120%. (To understand how that works, you need to call or email me.)

PS – I’ve left out the charts since they do not add much to the message other than the one at the top.

Craig Brockle / May. 8, 2014

• This article reveals the convincing evidence that a new bear market has already started.
• Those who failed to sell near all-time highs in 2000 and 2007 have a chance to do it here in 2014.
• Learn the two proven, reliable assets that go up when everything else is going down.

Did you or a loved one lose money in the 2008 Financial Crisis? How about the real estate bubble bursting two years earlier? And if we go back to the turn of the millennium, there was the Dot-com Crash. Remember that one?

This article is intended to help as many people as possible avoid another devastating loss. I will explain where we appear to be in the current economic cycle, what appears to be coming next and how you can protect and grow your money like the top 1% of successful investors.

I’ve done my best to make this article understandable by everyone who reads it, whether you have previous investment knowledge or not. Investment terms, when first introduced have a link to their definition to help aid comprehension. If you see something you don’t understand, a Google search of the word + definition can help.

Before we go any further, observe what the above-mentioned financial events look like on a graph. First, we’ll look at the 2006 real estate bubble. Shown below is the past 20 years of home price data based on 10 US cities.

Up until 2006, the consensus was that real estate only goes up in value and that one’s home was a great investment. By 2009, this belief was proven to be utterly false as foreclosures and short sales became widespread.

There is a great deal of evidence that suggests the real estate market is again poised for a significant drop, but explaining that would be an article of its own. Perhaps after reading this article, you’ll agree that the next financial bear market has indeed begun. If so, you will likely conclude that owning real estate through this period will be hazardous.

Now let’s look at the overall US stock market over the past 20 years as represented by the S&P 500 index in the chart below. This shows the S&P 500 from 1994-2014. (at the top is the S&P from 2000-2014)

If a picture is worth a thousand words, I believe the above chart could be worth 30-60% of your current investment portfolio. That is if you fail to recognize the pattern that’s developed and act accordingly, you could stand to lose that much money.

It’s been over five years since the last bear market bottomed and many investors have forgotten what it was like. The following short clip from CBS 60-Minutes titled “The 401k Fallout” will remind you what average investors were experiencing at the time. Those who cannot learn from history are doomed to repeat it.

Now, let me give at least one reason why you might want to listen to me. After all, there are so many conflicting opinions and obviously not everyone can be right. I’m the first to admit that the market has a mind of its own, which no one, including myself can accurately predict at all times. That said, I went on the record in late 2007 with this YouTube video warning viewers to prepare for the upcoming market crash. That video was released the exact month the S&P 500 index peaked, after which it dropped 57%.

After the real estate bubble collapsed in 2006, it became obvious to my contrarian colleagues and me that it would have a spillover effect into the rest of the financial world. There were other telltale warning signs at that time that I’ll explain below as these signs are giving the same message today.

By October 2007, the S&P 500 index (500 largest US companies) was the focus of attention as it set a new all-time high that month. Meanwhile, the Russell 2000 index (2,000 of the smallest publicly-traded US companies) had already been in a bear market for three months, after peaking in July of that year. This is a sign of stock market exhaustion where only a smaller group of stocks continue to push higher while the overall pack falls off. You could picture this as a huge pack of companies climbing a wall. By the end of it, the overwhelming majority were already in their descent while only the biggest companies inched higher.

Today we’re seeing the exact same thing as the Russell 2000 has again been showing obvious signs of weakness, even though the S&P 500 has been revisiting its all-time highs. The Russell 2000 Index Peaked at 1,213 on March 4, 2014.

Another warning sign that a new bear market has begun is courtesy of the volatility index (VIX). In finance, volatility is a measure of the variation of stock prices over time.

Volatility, investor emotions and stock prices are all very closely related. In periods when volatility is low and investors are feeling complacent or even euphoric, we experience high stock prices. Conversely, when stock prices collapse and fear becomes widespread, we see volatility spike much higher.

Volatility measures can be a very early warning signal. For instance, in the last financial crisis, volatility began to rise seven months before the bear market in the Russell 2000 began and 10 months before the S&P 500 started its decline.

Taking a look at volatility in the current cycle, we see that it reached its lowest point on March 14, 2013. Since then volatility has been in an uptrend, setting a consistent pattern of higher lows. This time around, it has taken the Russell 2000 almost 12 months to peak, hitting its high on March 4th of this year. I suspect the S&P 500 will make at least one last push higher, at least above 1900. This would also help fool more people into believing that there’s nothing to worry about when they should actually be most concerned.

Other warning signals are currently blaring today as they did in 2007. These include stocks being extremely overpriced, selling by the most experienced investors and heavy buying by the least informed, the general public. Let’s look at each of these factors briefly.

Adam Hamilton, a contrarian colleague of mine, recently published an excellent article. In it he points out that as of this year, stocks are more overpriced than they were prior the 2008 financial crisis. In case you’re unfamiliar, the value of a stock is determined by comparing a company’s current stock price to how much profit it earns. This is referred to as a price to earnings ratio. For instance if a stock is currently priced at $10 and has earned a profit of $1 over the past year, the stock would be said to have a price to earnings ratio of 10.

Over the past 125 years, the average price to earnings ratio has been 14 for the largest 500 companies in the United States. Prior to the 2008 financial crisis, these same stocks reached peak price to earnings ratios of 23.1. As of the end of March of this year, the average price to earnings ratio for these same 500 stocks was 25.7. This indicates that even if corporate profits were to remain constant, that stock prices would need to drop 45% just to reach their historical average of 14.

Furthermore, we’ve recently seen a significant increase in insider selling of stocks combined with heaving buying by the general public. Insiders include directors and senior officers of publicly traded companies, as well as anyone that owns more than 10% of a company’s voting shares. Insiders are among the most knowledgeable and successful investors as they have such strong understanding of what’s really going on in their company and industry. When insiders are selling, it’s usually wise to take notice. Insiders are among the top 1% of successful investors and act more on logic rather than emotion.

Lastly, we have the average investor. We could refer to them as the other 99%, based on their sheer numbers. These are the least informed investors and have the worst track record. This group tends to react emotionally rather than rationally at major turning points in the market. This is evidenced by the fact that the heaviest selling of stocks by the general public occurred in the first few weeks of 2009. This was right before the last bear market transitioned into one of the strongest bull markets in history.

Recently there hasn’t just been strong buying by the general public, but they have been borrowing more money to buy stocks than they ever have. As always, knowledgeable insiders, commercial traders and contrarian investors are unloading their positions near the current all-time highs to an unsuspecting public that really should know better by now-especially after what happened in 2000 and 2007. Here we are in 2014, another seven years later and it is again time to prepare for another bear market.

While no one, including me, likes to live through difficult economic times, at least we all have a choice as to how we are affected. There are truckloads of lemons coming our way, so I think we’d best get started making lemonade. And while we’re at it, help as many other people as possible do the same.

In crisis, we find both danger and opportunity. Reportedly, there were more millionaires created during the Great Depression than any other time in American history. And that’s back when a million dollars was worth many times what it is today. A million dollars in the Great Depression would be worth over $35 million today.

So, what is one to do? How can you avoid becoming road kill and instead conquer the crash? Fortunately there are proven, reliable ways to protect and grow your money in a bear market. Below are the two best assets I know for doing so.

The first chart shows the US Treasury fund (TLT) rise as the US stock market fell. The period shown is the 2008 financial crisis. When investors panic, they sell everything they can and put their money in something they consider reliable. This is called a “flight to safety” and US Treasury bonds are considered one of the safest assets during times of trouble.

Based on the information in this article, I hope you too realize that a new bear market has begun. Volatility bottoming last year was the first warning signal. More recently we’ve seen the Russell 2000 run out of steam, corporate insiders selling and the general public buying in droves. On top of this, stocks are more overvalued today than they were at the peak in 2007.

My goal in writing this article is to help you and as many other people as possible avoid another devastating financial loss. My 2007 YouTube warning reached over one hundred thousand viewers. This time I’m hoping that millions of people are able to get this message in time. I appreciate you following me here on Seeking Alpha, leaving your comments and sharing this article with others.

Bear markets are not to be feared. In fact, they can be very profitable for those who are well prepared. Buckle up. This is going to be one heck of a ride!

Source: http://seekingalpha.com/article/2202043-buckle-up-the-new-bear-market-has-begun?ifp=0

3 Retirement Planning Essentials to Understand

retirement-exit-2My Comments: I’ve now reduced retirement years to three types of years. They are “go-go”, “slow-go” and “no-go”. Planning for them before you reach retirement is a matter of attempting to get as many $ in the pot as possbile.

After that, it’s a timing issue that is driven by health, the expected life style, and the nature of your bucket list. Plan to spend more in the “go-go” years than you will in the “slow-go” years and they dry up in the “no-go” years.

by: Rachel F. Elson / Financial Planning / Monday, June 9, 2014

HOLLYWOOD, Fla. — Longevity increases and cultural shifts have changed the way Americans plan for retirement — and advisors need to make sure they’re keeping pace.

That was the message from Lena Rizkallah, a retirement strategist at J.P. Morgan Asset Management, at the Pershing Insite conference here on Thursday.

A generation ago, said Rizkallah, the mantra was “be conservative” — whether in lifestyle or in investment decisions. “Now, though, boomers have a bucket list,” she said. “They want to retire in good condition financially but also have goals for themselves.”

That changes some of the calculus for advisors said Rizkallah, who joined Elaine Floyd, a director of retirement and life planning at Horsesmouth, for an energetic discussion of retirement planning.

Among the recommendations they made:

1. Make sure clients have a retirement plan.

“I call this the heart attack slide,” Rizkallah said, posting a chart that mapped a client’s age and current salary against retirement savings benchmarks. “It helps clients gauge where they are.”

She encouraged advisors to talk frankly about both saving rates, for those still in the workforce, and spending plans. In general, she said, spending tends to peak at age 45, then decline in all categories except health care.

But she added a big caveat: “Note that housing continues to be 40% of spending. … More people are entering retirement with a mortgage.”

2. Know the threats to a secure retirement.

Rizkallah outlined three big risks for retirees.

Outliving life expectancy. Remember, she cautioned, that as we age our life expectancy gets longer. There is now a 47% chance that one spouse in a 65-year-old couple will live to 90,” she said, pointing out that the likelihood had increased even during the last year.

Not being able to keep working. People may think they’re going to bolster their retirement plan by working longer, but not everyone can control the timing, Rizkallah said, citing such issues as poor health, family care needs, and layoffs and other workplace changes. “There is a disparity between people’s expectations and the reality,” she said, encouraging advisors to tell clients: “You want to keep working? Great. But don’t make that part of the plan.”

Facing higher costs of health care. Costs continue to rise, she pointed out, adding that there’s a lot of uncertainty around future costs. “It’s really crucial to have this conversation,” she said. “Say, ‘Because we’re seeing this, let’s talk about saving, let’s talk about diversifying.'”

3. Do the math on Social Security.

It’s critical that advisors understand — and are able to communicate to clients — the real impact of delaying Social Security benefits, Floyd told listeners.

She cited as an example a maximum earner who turns 62 this year, noting that if the client takes Social Security at 62, he or she will have collected $798,387 by age 85. But by deferring until age 70, that same client will have $1,035,653 by 85. If the client lives to 95, Floyd added, the deferral would have a more than $600,000 payoff.

Other Social Security nuances are important as well, said Floyd, who received the lion’s share of questions during the Q&A period at the end of the panel. “We are getting lots of questions about the earnings test … which suggests that people are continuing to work and filing for Social Security” — something she said clients “just shouldn’t do.”

Advisors should understand whether their clients are eligible for spousal benefits, whether and when clients can change their minds and undo a Social Security election, and how to maximize benefits for a surviving spouse. That last part gets particularly tricky given boomers’ penchant for divorce, Floyd added: “Social Security rules can get really complicated when there are multiple divorces.”