Tag Archives: financial plan

Investor Fears Mount as FTSE Reaches Near-Record Highs

bear-market-bearMy Comments: I’m trying very hard to avoid “irrational pessimism”, the polar opposite of “irrational exuberance”. But at my age, if things go downhill in a hurry, I’m going to be toast.

Many of my clients over the years had parents that grew up in a family that was killed economically in the Great Depression and the follow up suffering rewired their brains. This caused their children, my clients, to have what is/was in my opinion, a bias that prevented them from taking normal risks and allowing them to grow their money intelligently.

The other day I had sort of an epiphany in that I realized perhaps my brain had become rewired as a result of what happened in 2008-2009. And that I’m projecting a bias that is not helpful to my clients and friends who depend on me to help them make intelligent guesses about how to invest their money going forward.

Be that as it may, I’m still pessimistic about the near term future and this article does nothing to suggest my brain is totally out of whack.

Laura Suter | 8 October 2016

The FTSE 100 soared to near record highs this week, but as the blue-chip index rose so did investors’ fears that the market was overvalued and primed to crash.

Last year the index passed the levels seen in the dotcom bubble, when it hit 6,930 in December 1999. But the heights reached this week prompted warnings of a return to the “irrational exuberance” of markets in the Nineties.

Some share prices have shown eye-watering growth since the low of February this year. Shares in the mining giant Anglo American have risen by 215pc, while rival Glencore has gained 148pc.

Looking at the measure of company share prices relative to their earnings, a popular valuation yardstick, the London market does look expensive.

The headline price to earnings ratio, based on profits over the past 12 months, shows that the market is now trading at 19.2 times earnings.

This is still below the 26.7 times seen at the height of the dotcom bubble in December 1999. However, it is significantly above the average of 14.1 times.

Investment guru Jack Bogle, founder of Vanguard, the low-cost asset manager, has warned that returns are falling.

Talking to Morningstar, the investment analyst, this week, he warned that dividend yields on US shares had dropped to 2pc, down from their long-term average of 3.5pc.

What’s more, Mr Bogle warned that over the decade returns on the stock market would be around 4pc, before inflation. After estimates of 1.5pc to 2pc for inflation, that means stock markets will generate a 2pc 2.5pc real return. This is far below long-term averages.

While the FTSE 100’s dividend yield is substantially higher, the fortunes of our stock market tend to move broadly in line with Wall Street, implying leaner times ahead for British investors too.

Adding to Britain’s woes is that the International Monetary Fund now believes the country will grow at a slower rate. The IMF slashed its prediction for UK economic growth for next year to 1.1pc, down from 1.8pc this year.

Investors have been urged to sell British shares and reinvest the proceeds in other assets, a process called “rebalancing”.

However, there is another view.

Some believe that the simple ratio of price to earnings (p/e) is not a good predictor of returns or market highs. Company earnings are volatile and hard to predict, and at times of crisis the p/e ratio does not show a company’s potential, say critics.

This is why the “cyclically adjusted p/e” or “Cape” measure was developed by the acclaimed economist Professor Robert Shiller. This uses the average of earnings for the past 10 years, adjusted for inflation. A low Cape measure can be an indication to buy a stock.

On the Cape measure the UK market is undervalued relative to historical levels. The UK stock market’s Cape ratio is currently 15.6, compared with 32.3 in December 1999. It is also below the long-term average for the market, of 19.4 times.

Mr Shiller agrees with this analysis. He said last week that Brexit would not be “as bad as everyone fears” and that he “should have allocated more UK shares to his portfolio”.

Star Capital, an investment manager based in Europe, also agrees with this valuation. It said its analysis showed that the UK stock market had a lot more room left to grow. Based on current valuations, it predicted that over the next 10-15 years UK shares would deliver 7.8pc annual growth.

Company prices today are nowhere near the unrealistic valuations of the dotcom bubble, said Ben Yearsley, a founder of Wealth Club, an investment service.

“In the dotcom bubble certain telecom, media and technology stocks were just wildly overvalued. They went from £1 to £10 to £30 almost overnight. If you look at the FTSE today as compared to 1999 or 2000, it might be up but there are not sectors that you look to as being bonkers,” he said.

However, one concern is how closely the FTSE’s fortunes are linked to sterling’s movement. The pound has dropped by around 15pc since the EU vote, and the market has gone up about the same amount.

“Certainly there has been correlation over the summer between sterling falls and the stock market rise, and I can see that happening for a while longer while we are in the pre-Brexit stage. If sterling falls by another 10pc you will probably see another rise in the FTSE,” said Mr Yearsley.

Laith Khalaf, senior analyst at Hargreaves Lansdown, the fund shop, said investors’ nervousness was a good sign that markets hadn’t yet reached their peak.

“People are cautious about the market, no one is gung-ho. There is about £160bn in cash accounts paying zero interest. People are wary of the market,” he said.

“When you are in the pub and everyone is excited about markets and giving share tips, that’s the time to get nervous. I don’t think we’re anywhere near that.”


Will Trumpism Outlive Trump?

Pieter-Bruegel-The-Younger-Flemish-ProverbsMy Comments: Before you criticize me for posting what appears to be a political comment, consider what I think is the takeaway phrase from the following dialog: “Trump doesn’t matter, Trump’s voters do”.

There’s a reason there are so many pissed off people on both sides of the Atlantic. And unless and until our elected leadership takes steps to understand the anger and develop policies and solutions to mitigate that anger, we’re all going to get sucked further into a black hole.

By Isaac Chotiner June 28 2016

David Frum, the Canadian-born conservative, has been writing about politics here and abroad for many years. His books and essays, going back to Dead Right in the mid-1990s, offer a critique of the modern conservative movement that is often withering. A former staffer in the George W. Bush administration (where he helped coin the phrase axis of evil), Frum, after leaving government, had a falling out with his bosses at the American Enterprise Institute. He is now a senior editor at the Atlantic.

Despite his reputation as a moderate, Frum is actually very conservative on subjects such as foreign policy and immigration. It was the latter that I wanted to discuss with him this week, in the wake of the Brexit vote. (He is chairman of the board of the British center-right think tank Policy Exchange; the views he expresses in this interview, however, are his own.) Over the course of our conversation, which has been edited and condensed for clarity, we discussed how conservatives should view immigration, the real grievances behind the Brexit vote, and the post-Trump Republican Party.

Isaac Chotiner: You wrote that you thought Angela Merkel was the person most responsible for Brexit. Why?

David Frum: Immigration has been a large and accumulating problem in the United Kingdom. It involves competition for jobs to a lesser degree; competition for social services; pressure on hospitals; pressure on housing, especially the incredibly expensive South of England. Of course, also in the U.K., migration has a very large security element in a way that is not true here. A lot of the migration to Britain from the Middle East was Britain’s own decision, because half the migrants to Britain that come are non-EU people, admitted through the British system. The people who Merkel admitted, once they get papers, will be able to move anywhere in the EU.

Presumably they would come for jobs though, yes?

Right, the point is that more than half of all the net new jobs created in Europe are created in the U.K. What that means is they’re created in the Southeastern corner of England. That is the mightiest job magnet on the whole European continent. It’s sucking in labor from the whole continent. So those 1.1 million people that landed and submitted in 2015, and a lot more in 2016, once they get the right to reside in Europe, some will end up in Germany, some will probably go to Sweden, a lot will end up in England.

You mentioned the southeastern corner of England, which is where London is, but that is the area that voted “Remain,” no?

Right. This is sometimes represented as a completely irrational action. Is it so irrational? All these jobs are being created in the Southeast of England. So there you are, living in some formerly industrial town in the North, and you’re thinking, maybe I should move. Maybe I should leave this town and move to London and look for work. When you make that decision, you look at the prices and you say, “There’s no way I can afford housing in the Southeast of England. When I make inquiries about looking for work, they’re much happier with the labor they’re getting from the Poles, who by the way are willing, in order to get settled, to live eight to a house.”

I want to talk about conservatism and immigration skepticism, because I think it is fair to say you are an immigration skeptic.

Yeah. I was also somebody who hoped that Britain would remain in the EU, and I have a lot of respect for the EU project. There’s a lot about it that’s annoying and bureaucratic, but in the end, it’s a really important and beneficial and to some degree inspiring thing. In the same way that global free trade is that. We’ve been operating for a long time on the idea that, if you’re in favor of the free movement of goods, then you should be in favor of the free movement of capital and the free movement of people. They’re all the same thing. It may be that when we try to have all three of those things, we end up with none of them.

But it does seem like this issue has gotten to a point where the whole debate has been influenced by inflammatory racial rhetoric. How do you have the conversation when that is the case?

Look, it’s not a binary issue. The choice is not no immigration or open borders. It’s a question of how much, and what kind. It’s true that the immigration debate attracts racists. It also attracts romantic ideologues of all kinds. When you tell a country, when you tell people in the country, that the only people who deal with the problem you care about are the fascists, they are going to say: “Who are these fascists of who you speak, and what is their phone number?”

That’s really, I think, the lesson of Brexit and Trump: When your country has a problem, responsible people have to address it in a responsible way. If they refuse, the problem doesn’t go away. Oh well, your conscience doesn’t allow you to address this issue. No, they’re going to hire a Donald Trump or exit the EU and break up the European Union.

I think one liberal response to that would be, well, people on the right who are worried about this issue should do more to get racists out of their ranks.

Look at what’s happened in the U.K. I don’t think Brexit is a racist reaction. Brexit is not a racist thing. The immigration issue did not express itself like George Wallace; it expressed itself in this kind of labor-protectionist way that was as attractive to people, more attractive in many ways to the people on the left than the people on the right.

You also had Nigel Farage and so on.

If we’re trying to protect the good things in globalization, that is not only challenged by people on the far right. Podemos just had a bad election in Spain, but there are a lot of these reactionary movements that present themselves as being on the left and present themselves as being anti-racist, but they’re profiting from the strains created by too rapid change. Their agenda is going to be destructive of the open society that conservatives and liberals alike want to conserve. Each for their own reasons.

How do you think Trump has changed the immigration debate here?

This is one of my concerns about him, one among many. I fear what he’s done is he’s made this debate so polarizing and so toxic. How do you rescue something from the likely wreckage of the Trump campaign? He didn’t offer anything useful, but he was speaking to something real. To a great extent he was exploiting it, but it was still real.

So you think he has made the task of discussing it harder?

Yes, right, and he’s also locked Democrats and liberals into an immigration solution much more extreme than they had a decade ago. So now Obama’s immigration executive actions are a baseline position.

You started writing about Trump early and were an early critic, but has anything surprised you about the last few months of his campaign?

Who hasn’t been caught by surprise again and again? I did not believe he was going to win the nomination. I thought that something would happen that would cut off this obviously self-destructive adventure. So the fact that he won the nomination surprised me. The fact that he’s still on his way to being the Republican nominee, I never stop finding that surprising. The fact that the Republican Party didn’t … Trump is a kind of opportunistic infection and the fact that the patient didn’t have strong antibodies—that to me is a real surprise.

Did you think he’d be able to pivot in a way that he hasn’t?

No, no. You can’t stop being the person you are.

It seems to me that one possible advantage that he’s blown is the idea that he could benefit from some sort of outside event. It seems like the degree of his solipsism has prevented that from happening. We’ve had an awful attack by an ISIS-inspired attacker and economic uncertainty. He’s reacted to both in such a bizarrely solipsistic way.

He had some elements of a wider populist appeal on health care and on social insurance generally, which appealed to some more middle-class people. That seems to have been dropped. We don’t hear him anymore defending Social Security and Medicare. He may do it again. As he’s proceeded, his campaign has become ever more about himself and whether people are nice to him or not.

Do you think the Republican Party is going to try to stay away from Trumpism, assuming he loses? Or do you think we are likely to see a figure rise by saying, “We need to move the party more in a populist-nationalist direction?” We just need somebody who is 20 percent less rough around the edges.”

I’m not going to predict that because that’s going to be the debate that we’re going to have. Republicans are at risk, though, of having a debate between two positions that can’t work. Some people are saying that the real lesson of Trump is that we need to double down on pure ideology.

Which is the lesson they normally draw after a loss.

Right, whatever the Wall Street Journal editorial page says, plus 15 percent. Those who have gotten close to Trump, they’re going to present him as what—a victim of his own tax lawyers and media bias?—but not ask the question: Hey, how did anybody ever imagine this as anything other than a catastrophe in the making? What I hope we can discuss is: Trump doesn’t matter, Trump’s voters do. How do we talk to them? They just told us something unusually important about a big section of American life. They’re in a lot of trouble. They wanted bread, they demanded bread, and they got a stone. Someone needs to offer them something that can do them some good.

How Much Will I Get From Social Security?

SSA-image-3My Comments: Next month I start a series of workshops about Social Security. I’m somewhat fearful since this past weekend, I had questions from a couple of folks and while I thought I knew the answer, I wasn’t sure. One solution is to have you become a free member of an organization called the American Financial Education Alliance, or AFEA. Click on the name or image here, and you will find dozens of free calculators, including Social Security. If you’re in the Gainesville, Florida area, you’ll find I’m a Chapter President. The game plan is for me to help anyone better understand their financial circumstances.

By Dan Caplinger, Published May 22, 2016 on fool.com

Most Americans expect to get at least some income from Social Security when they retire. Figuring out exactly how much you’ll get from it isn’t as simple as you’d hope, because the calculation of your benefit amount takes into account a career’s worth of earnings history and other decisions that you make regarding your retirement. Nevertheless, you can estimate how much you’ll get from Social Security either by figuring out average earnings by hand or by using a selection of available Social Security calculators for the task.

Doing a manual calculation of your expected Social Security benefits isn’t simple. You have to start by looking at your entire career earnings history. You have to know the maximum wage base limits on which Social Security payroll taxes were charged for each of those years, and you’ll have to apply adjustments to index your earnings for inflation. Once you’ve done that, you’ll need to take the 35 individual years that have the highest inflation-adjusted earnings, find the average, and then divide by 12 to get average indexed monthly earnings.

From there, you’ll use a formula to determine your primary insurance amount. The formula changes every year, but for those who turn 62 in 2016, take 90% of the first $856, 32% of the amount between $856 and $5,157, and 15% of any excess over $5,157. Add that up, and you’ll have your monthly check amount if you take retirement benefits at full retirement age. For instance, if you earned an inflation adjusted average of $2,500 per month throughout a 35-year career, then your primary insurance amount would be 90% of $856, plus 32% of $1,644, for a total of $1,296 per month.

Finally, that amount can vary depending on when you take benefits. Claiming at age 62 can cut your benefit by 25%, while claiming at 70 can boost it by 32%. In the example above, that means you’d get $972 at age 62, or $1,711 at age 70.

Fortunately, you don’t have to use do your own calculations. Several calculators exist to help you figure it out for you, with varying degrees of complexity.

This simple calculator simply has you enter average annual income, current age, and the expected age at which you anticipate taking benefits. It also assumes that inflation will boost Social Security payments by a fixed percentage each year between now and when you claim your benefits. The results tell you how much you’ll get and what percentage of your current income will be replaced by Social Security.

In addition, the Social Security Administration offers its own calculators to help you. The Social Security Quick Calculator is similar to the simple calculator above, taking current income, extrapolating back, and estimating future earnings. It makes the most assumptions, and so its results won’t be very precise if those assumptions prove incorrect. The SSA’s Online Calculator allows you to enter more of your own personal data, including earnings for each past year. This will provide a more accurate estimate based on actual work history, but it still assumes future work history. The Detailed Calculator requires separate installation on your computer, but it gives the most complete picture of all benefits available.

The SSA even offers calculators that tap directly into your work history. The Retirement Estimator uses the SSA’s own records of how much you earned to fill in blanks that other calculators make you do yourself.

Finally, Social Security provides you with a statement that will go through estimates of benefits for you, your spouse, and your children under certain circumstances. Between retirement, disability, and survivor benefits, your Social Security statement has a wealth of information to help you figure out how much you and your family will get from the program.

Estimating your Social Security benefits isn’t the easiest thing in the world. With these tools, however, you can come up with solid estimates of your future benefits. Taking the time to use these calculators or to do your own manual calculations will give you the basic information you need in order to plan for your retirement years in a more informed way.

Social Security Mistakes That Can Be Fixed

Social SecurityMy Comments: With so many of us soon to retire, and the not so obvious complexity of Social Security, there comes a time for many when decisions made ask for a redo. Some are possible and this short article describes some of them. If you have yet to claim benefits or are less than 12 months into the system, you will want to read this.

by Dave Lindorff JUL 23, 2015

They say you can’t fix the past, but when it comes to Social Security, sometimes you can.

Granted, it used to be easier. Until December 2010, if clients had begun collecting benefits at 62 and then decided it was a mistake, they could fix it by simply repaying all the benefits already received, even if it was six or seven years later. Filers didn’t even have to pay interest on all the money they’d received — a situation that had some advisors actually recommending this as an interest-free loan strategy. But Congress eventually closed the loophole.


Now, a client who retires and claims benefits at 62 can still reverse that decision within 12 months, repaying the benefits received without penalty and then waiting longer in order to get higher benefits. But after 12 months, this is no longer allowed.

The 12-month window is good news, though, because as Alicia Munnell, director of the Boston College Center for Retirement Research, notes, while many of those who file early may have to if they have no savings and no other source of income, many others, including clients who may come to see you, simply filed at 62 because they mistakenly think “if you retire from your job you should file for your benefits.”

Munnell argues that can be a costly mistake for those who have other options — whether it’s working longer or tapping savings. Waiting until the so-called “full retirement age” of 66 (for those born before 1960), will increase one’s benefits by a third. In other words, someone who would only receive $750 a month at age 62 would get $1,000 per month for life by waiting until age 66 to file. Waiting another four years to the maximum age of 70 for filing would add another 8% per annum to that amount, bringing the benefit in that example to $1,320 a month in constant dollars.


But there are several other situations where Social Security allows a redo.

One involves the “file-and-suspend” option. This is where a married couple with two earners opts to have one spouse, usually the higher earner, file for benefits at full retirement age but then suspend those benefits until age 70. This move allows the other spouse to start collecting spousal benefits on the first spouse’s account, while leaving his or her own account to continue growing untouched until age 70, when the benefit is maximized.
But if the person who filed and suspended has a change in circumstances — say a case of terminal cancer or sudden unanticipated expenses — they can still make changes. In that event, the person can cancel the file-and-suspend and Social Security will pay out all the foregone benefits as a lump sum, calculated at the benefit level the individual would have received them beginning at age 66 (there would be no interest paid). Of course, going forward, this person would receive benefits based on her or his age at the time the file-and-suspend was cancelled.


Another area where a client can redo a Social Security decision is spousal benefits. The spousal benefit, for someone who begins taking it at 66, is 50% of what the spouse whose account is used is receiving. For example, if a husband at 66 is eligible for $2,000 per month and files and suspends benefits, his wife, also 66, could start collecting a spousal benefit of $1,000.

But say the wife was already eligible to receive $1,500 on her own account by that time and was just leaving that untouched to let it grow to the age 70 level. A year later, the couple might decide they need that extra money to live on, which by then would be 8% higher, or $1,620 per month. At that point, or at any time before reaching 70, the wife could simply cancel her spousal benefit and switch over to her own account.

Finally, for those who’ve married and divorced more than once, there is the option of changing which ex’s account to collect benefits on. Say a single woman was married for 12 years to one man, and for 15 years to another. She could collect benefits on the first spouse’s account, if he was already 66, but later, if it turns out the other spouse had waited until 70 to start receiving benefits, she could switch to that spouse’s account for her spousal benefits. The same would apply to survivor benefits if one or both of those exes was deceased.

Dave Lindorff spent five years as a China correspondent for Businessweek, and has written for The Nation and Salon.com.

Put Your Retirement Plan on Steroids

retirement_roadMy Comments: First, this assumes you have a retirement plan and that you have tried to answer the question “How Much Is Enough?”. Second, your answer to this question is still open to debate. And three, you actually have earned income that needs to be reported.

In a perfect world, we would have a way to set aside current income so that it was not treated as taxable income this year, would grow at a fast rate with the principal guaranteed, and when you were ready to spend it, there would still be no income taxes. You and I both know this is not going to happen.

But one way to get closer to this perfect world is known a cash balance pension plan. Or words to that effect. Read on to get a better understanding.

Frank Armstrong, III, CFP®, AIFA® | Friday, February 03, 2012

Would an extra $2.5 million come in handy at retirement? Would you like to defer taxes on over $200,000 of current income each year?

Whether you work in a solo practice or in a physician group practice (or some other similar work environment), you can turbo charge your retirement with a cash balance plan on top of your existing 401(k) plan.

Cash balance plans got a bad rap in 1999 when IBM terminated its traditional plan in favor of a cash balance plan that severely reduced benefits for a number of its long-term employees. The employee lawsuit went all the way to the Supreme Court, created an HR debacle and, in the process, generated lots of bad press. If that wasn’t bad enough, cash balance plans were in regulatory uncharted ground.

That’s not the case anymore. The regulatory issues have been resolved by the Pension Protection Act of 2006, and a typical cash balance/401(k) combo plan is a win-win for everybody.

Is this you?
You are at the top of your profession, in your peak earning years but are looking forward to eventually winding down and enjoying a more relaxed retirement lifestyle.

Your kids are through school, yours and their student loans are finally paid off, most of the big expenses are behind you, and you now have the ability to save more.

Unfortunately, when you look at your retirement accounts, you get an uneasy feeling that they may not support your lifestyle. Worse yet, at this rate, you are not likely to get there. Uncle Sam and his companion from your state government are deep in your pocket every year, and even though you have maxed out your 401(k) contribution, it’s just not enough.

Many Americans have hit a few bumps in the road. The financial meltdown of 2008 and 2009, a divorce, a few kids in grad school, a bad real estate deal, student loans, or just getting a late start on saving may put even high-income professionals behind in their retirement savings.

Two-and-a-half million dollars extra in your retirement piggy bank would help, especially if the account were tax deferred and creditor proof.

The solution
If the above professional sounds like you, then you may be the perfect candidate for a cash balance plan. Depending on your age a cash balance plan might allow you to put away an additional $200,000 each year into a tax deferred, qualified retirement plan. You can recover from a financial setback, or compress 25 years of savings into 10.

Simply put, a cash balance plan is a cousin of the defined benefit plan with more flexibility. In some respects it looks somewhat like a 401(k) that you probably already have. It’s an additional qualified plan which generally sits side by side with a profit sharing/401(k) plan. Because a cash balance plan is a type of defined benefit plan, it greatly favors its older and higher compensated participants. This makes it ideal for many professional practices.

Here is a quick view of the maximum contributions available with a combination of 401(k) and a cash balance plan. Of course, you could take any amount benefit level that meets your needs. And certainly not all participants will want to take the maximum. You can see that maximum contributions increase with age. But, the numbers really grab your attention when you pass age 50.

2012 tax deferral limitsLet’s take a second to discuss defined contribution and defined benefit plans in plain English:

• A defined contribution plan sets a formula based on compensation to determine the annual contribution for each participant’s account in the plan. Upon termination or retirement, the benefit is whatever value the account has attained. So, the final value is dependent on deposits, time, and rate of return. There is no guarantee of any particular benefit.

• On the other hand, a defined benefit plan sets a percentage of compensation as a benefit due at retirement, and then works backwards to determine annual contributions. The accrued vested benefit of contributions compounding at 5% is a guarantee by the plan and the plan sponsors, and in the event of a funding shortfall, the plan sponsor must make up the deficiency.

• While the cash balance plan is a defined benefit plan, the participant will see an account much like his/her 401(k) except that his/her contributions grow at a guaranteed 5%, and the participant does not exercise investment control. It’s all done for him/her.

• Defined contribution plans favor the younger worker because they have long time horizons for their deposits to grow. Younger workers with more time in the plan may attain higher account balances than their more highly compensated peers that have shorter time as participants. That’s good for workers with a long time horizon, but doesn’t address the problem of a worker with little time to go to retirement that needs a serious catch up program. You just can’t put away enough in a 401(k) in the next 10 or 15 years to solve a significant retirement shortfall.

• That’s where a well designed cash balance or defined benefit plan can save the day. If you are age 60, you can stash over $200,000-plus a year into your plan to accumulate an additional $2,500,000-plus at retirement. But, while it may look somewhat similar, it’s a completely different animal than a profit sharing/401(k). It’s the heavy duty, industrial strength catch up retirement plan for senior professionals.

Because most professionals and business owners have a fair understanding of a 401(k) but might never have encountered a cash balance plan, let’s go through some additional pros and cons.

• We target an exact amount at normal retirement date at a predetermined rate of return and then work backwards to calculate the annual deposit required to get to that amount. There is no reward for higher investment performance, but there is a penalty for a shortfall. Any shortfall must be made good by the plan sponsor. This calls for a very conservative asset allocation and investment policy, heavily or exclusively weighted to fixed income.

• Most plans — but not professionals — must pay an annual insurance cost to the Pension Benefit Guarantee Board (PBGC) for each participant to cover any shortfalls that the plan might have in the event of the failure of the plan sponsor. Even if you must pay it, the insurance cost is trivial in comparison to the potential tax savings and benefits. While PBGC insurance will cover much or all of the benefit of a rank and file worker it is capped at a low level so it will not cover a large part of the benefit for highly compensated professionals.

• Administrative costs which include actuarial certification of the plan are higher than a defined contribution plan, but again the costs are trivial when compared to the potential benefits.

• As few as 40% of the potential employees must participate, and there is a great deal of flexibility for professionals to opt out or take different levels of benefits. However, apportioning costs between professionals may have to be decided separately where benefit levels are significantly different.

• As a “qualified plan” certain testing requirements must be met. While these are designed to prevent discrimination, as a practical matter appropriate design may shift the vast majority of the benefits to the targeted professionals. In some cases the contribution to the defined contribution plan must be increased to allow the targeted professionals the maximum benefits. However, when looking at the combined plans most will see that the vast majority of the dollars spent will accrue to the targeted senior professionals.

• Like other qualified retirement plans, the funds are protected from creditors except for the two “super creditors”: a spouse or the IRS. In a litigious society, creditor proofing provides comfort to professionals that may feel targeted by the courts.

• Just as other qualified plans, the entire cost is tax deductible and tax deferred until distributed. At retirement, the proceeds may be rolled over in a lump sum to an IRA and the tax burden further deferred and spread over the remaining lives of the beneficiaries. Potentially these deferrals could extend to a third generation with appropriate estate planning.

Investment policy for cash balance plans

Investment policy for a cash balance plan is the inverse of that for a 401(k). The 401(k) plan maximizes benefits by maximizing rates of return on contributions over the career of the employee. The higher the balance of the plan, the higher the benefit. There is no downside to great performance.

The cash balance plan is an entirely different animal. The exact benefit is fixed in advance and excess funds are subject to an excise tax of 50%, while shortfalls must be made up by the sponsor. So, instead of a relative return policy we are all familiar with, we must adjust ourselves to an absolute return strategy. The investment policy has a one year time horizon. The best policy will generate exactly the target rate of return, no more, no less each year! Variations from target return on an annual basis can be very painful. So the funding mechanism relies not on equities to generate fat juicy returns, but a diversified bond portfolio generating as close to possible the exact target return with the smallest possible variation or risk.

Flexible design possibilities
Typically a cash balance plan will piggyback on top of a 401(k)/profit sharing plan. This arrangement greatly simplifies testing and offers extraordinarily flexible design possibilities.

No two law firms are alike. But, the cash balance plan may work equally well for a single practitioner, or a large, group practice.

As just one example a 300-person law firm with 50 partners might be able to benefit only the partners in the cash balance plan, while satisfying the cross testing requirements through a safe harbor 401(k) plan. Furthermore, some of those partners may opt out for all or part of their maximum possible benefit.

This quick, non-technical description is an informal introduction to this highly flexible retirement option. I’m not trying to turn you into an actuary, plan administrator, or investment adviser. Rather I’d like you to understand that there are some really powerful methods to augment a 401(k). While the rules are complex, the design possibilities are almost endless and a talented advisor may work economic miracles for you.

There is a chance that your practice may not benefit at all. Or, perhaps a traditional defined benefit plan will work better for you in your situation. However, most reputable investment advisors or pension design specialists will happily “run the numbers” for you with no obligation. When you see the costs and benefits laid out, you can determine if it’s right for you. And if it’s right for you, it could be the silver bullet that will save your retirement.

The 3 Stages of Retirement

retirementMy Comments: I recently wrote about where we are now in the overall market cycle and the likely chance of a major disruption that will effect your financial future. My post was titled “Are We There Yet?

Most of us have visions of a successful retirement. Of course, “success” is dependent on your life today, your health, and countless other variables. My role is to help anyone and everyone achieve a level of financial freedom that allows you to live your life free from financial fear. (a lot of efs there!)

Not matter how successful you are or were during the accumulation of money phase of your life, you are now, or at some time will be, in the distribution of money phase. For most of us, this requires a different mind set. That in turn requires a different set of financial tools to get you where you want to go.

What you choose to do with your life in retirement falls into what I think of as three distinct phases. How long they last is completely unknown, but they are likely to follow this sequence.

The first I call the Go-Go years. This is when you are newly retired and you have a bucket list of things you want to do, can probably afford to do, but may be afraid to do. You hold back to keep from jeopardizing your future years if history repeats itself and the markets go haywire for a while. (does anyone know the origin of the expression “haywire”?)

The second phase I call the Slow-Go years. This is when the mind and body starts to slow you down, whether you want it to or not. Hopefully by then you’ll have spent some time in the Go-Go years and are OK and recognize your limitations.

The last phase is the No-Go years. This is when you find going slow is too much and you need the help of others to get from one day to the next. It’s not a pleasant prospect. But I’ve never met an active 90 year old in the Slow-Go phase who was ready to call it quits. Quite the opposite.

But bad things happen to good people from time to time. How you manage the distribution of money phase of life will have a telling effect on the quality of your life in the Go-Go phase, the Slow-Go phase and the No-Go phase.

No matter how successful you were in the accumulation of money phase, you have to focus time and energy if you want a successful distribution of money phase. Some of this involves the recognition of what I call existential risk.

Existential risk, in my world, is a phrase to describe things that might or might not happen. No one expects our house to burn down or be destroyed by a hurricane, but we buy homeowners insurance. We might have a wreck and damage or total our car, so we buy auto insurance. Some of us buy life insurance so that if we die unexpectedly, there is cash to help our family get on with their lives. All along, we determine how much of a threat such an event will have on our lives and we allocate resources to protect ourselves.

Some of the existential risks of retirement are catastrophic illness, like a stroke, or chronic illness like dementia. As life expectancy increases, a newly talked about risk is longevity risk, which is running out of money. None of hope these things will happen, but it makes sense to at least recognize the possibility and perhaps reposition our money to offset some of the risk.

How fast you withdraw funds on a monthly basis from your accumulated funds is a largely arbitrary decision. It matters less if you have already dealt with the existential risks you might face. The financial planning community is arguing constantly about what annual rate of withdrawal is appropriate.

It depends on you. If you are willing to experience the pain of dramatic declines in value, then the rate at which you withdraw money will have to be less. That’s largely because if your accounts go down hard, you have less time to recover. Meantime, you might be sweating bullets, and that’s not usually a good thing.

If you take appropriate steps to protect yourself, then a larger withdrawal rate may be appropriate. That translates to a more satisfying experience during the Go-Go years, knowing you have taken steps to allow a smoother and later transition into the Slow-Go and No-Go years.

It’s up to you what you do. But I encourage you to believe acting sooner rather than later will be in your best interest.

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.