Tag Archives: retirement fund

The White House and Hidden Retirement Fees

InvestMy Comments: It’s fairly easy to paint Wall Street as a villain in almost any article that deals with the management of money for the vast majority of Americans. After all, they typically act in their own best interest, which may or may not coincide with what’s in my best interest. But that’s the American way, isn’t it?

Here I’m reminded that if I’m bound by a fiduciary standard, as is my attorney, my doctor, my CPA, and by some of us in financial services, I have a legal, moral, and ethical obligation to do only that which is in my client’s best interest. And working hard to find ways to not disclose the fees I’m charged seems to violate what is in my best interest as a consumer.

Don’t expect this effort to remedy the problem to come from politicians who are in bed with Wall Street firms.

By Matt Levine February 24, 2015

The way that a lot of retirement investing advice goes is that you go to your broker and ask him what you should invest in, and he says, “Oh Fund XYZ is great, put all your money in Fund XYZ,” and the reason he does that is not that he loves Fund XYZ in his heart of hearts, but rather that Fund XYZ writes him a big check for steering you its way. I’m sorry, but that is the way it works. I mean maybe he also loves it in his heart of hearts, but that is not observable; the check is. As is Fund XYZ’s subsequent underperformance versus its benchmark.

A lot of people think that that is a bad system, and how could you blame them really? When I put it like that it just sounds terrible. U.S. President Barack Obama’s administration, in particular, seems not to like this system, and today the White House released this fact sheet (“Middle Class Economics: Strengthening Retirement Security by Cracking Down on Backdoor Payments and Hidden Fees”), and this report from the Council of Economic Advisers (“The Effects of Conflicted Investment Advice on Retirement Savings”), explaining how bad some retirement advising is. (Some: The administration also has high praise for the “hardworking men and women” who work as fee-only investment advisers.) New Labor Department rules are coming that would, if not quite outlaw these practices, at least make them more awkward, and part of the point of today’s releases is to justify those rules.

More On Legal & Compliance from The Advisor’s Professional Library
• Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.

• Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.

We don’t have the rules yet, though there is already a rather enormous literature on what they will or should or won’t or shouldn’t say. But we do have the Council of Economic Advisers report, and it is pretty interesting! The main conclusion is that “conflicted investment advice” costs Americans about $17 billion a year.

The math here is:
— There’s about $1.7 trillion in individual retirement accounts invested in funds that pay brokers to recommend them.
— The people who invest in those funds could improve their performance by about 1 percentage point a year by switching to other funds that don’t pay brokers.

Pages 17-18 of the report walk through the second point in some (stylized) detail. The report assumes an employee who invests in a low-cost index fund through her employer’s 401(k) plan. The expected gross return on the index fund is 6.5 percent, but the employee pays trading and administrative costs of 0.5 percentage points, for a net return of 6 percent. But then she quits her job, and an unscrupulous adviser recommends that she roll over her retirement fund into a new individual retirement account — and that she invest the IRA in a fund with a similar expected return, but with 1.5 percentage points of costs. She gets a net return of 5 percent, and the adviser and the mutual fund split the extra fees among themselves.

This math looks a little familiar. The Vanguard Group will cheerfully compare expense ratios of its funds against other funds, because Vanguard largely markets itself as the popularizer of low-cost index funds. Here for instance is a little thing from Vanguard’s description of its Total Stock Market Index Fund:

Vanguard feesI highlighted the 1.08 percent average expense ratio of “similar funds,” which is 1.03 percentage points higher than Vanguard’s advertised expense ratio. The Investment Company Institute finds an average expense ratio of 0.89 percent for actively managed equity funds, versus 0.12 percent for equity index funds, or a 0.77 percentage point difference. Also the actively managed funds tend to underperform the passive funds even before taking out fees, though that is a sensitive topic.

So you might conclude that somewhere between three-quarters and all of the costs of “conflicted investment advice” are really just costs of actively managed mutual funds. In other words, all the stuff about “backdoor payments” and “hidden fees” and “fiduciary duties” is a non-load-bearing distraction. Most or all of the work in the CEA paper is done by the difference in costs between actively managed mutual funds and passive indexing. The conflicts of interest boil down to: It is in the financial industry’s interest to steer investors into high-fee active funds rather than low-fee passive funds.

I don’t really know what to make of that. It would be weird if the White House put out a fact sheet called “Strengthening Retirement Security by Cracking Down on Active Investing.” And obviously that’s not quite what it’s going for with this paper. But it’s close. The world view underlying this report seems to be that a lot of what the financial industry does is extract unproductive fees for itself from ignorant consumers, and that you can crack down on the fees — and save consumers money — without reducing the incentives for any socially productive activity. This, it goes without saying, is a hugely popular theory. I feel like it is generically wrong, but there may be many, many places where it is specifically correct.

In my more dictatorial moods I think people should get to choose one of two options for their retirement investing:
1. You can invest only in a list of pre-approved, low-cost, fee-capped, diversified, probably mostly passive portfolios run by reputable managers, and if you lose money everyone will nod sympathetically and tell you it’s not your fault.
2. You can sign the omnibus liability waiver and invest in whatever you want, just go nuts, but if you lose all your money it’s a felony to complain.

But that is not the system we have now. It’s almost the reverse: The people with the least money and expertise, who really want and ought to have simple low-cost generic retirement savings, are at high risk of being steered into weird expensive stuff. It seems reasonable enough to try to nudge them back toward simplicity.

1. The White House fact sheet has some general (and tendentious) description of the new rules. Here is Bloomberg News, the Wall Street Journal, InvestmentNews, a Vox explainer. Here is Sifma expressing unhappiness, and more from Sifma on the topic. Here is a memo from Debevoise & Plimpton for the Financial Services Roundtable, also opposing the rule. Here is an FAQ from the Labor Department, and here are all the comment letters on the fiduciary-duty rule that the Labor Department proposed in 2010 and then withdrew because it was too drastic.
Since I have you here, two generic things that I think about fiduciary standards are:
1. It is impossible to make all broker-dealers fiduciaries, and trying to do so is a category mistake: Dealers are principals, and if you are selling someone something that you own, you can’t be asked to put her interests above your own. You would prefer a high price, she would prefer a low price, and making you give it to her for free because you are her fiduciary makes no sense at all.
2. There is an argument of the form, “If we couldn’t scam people quietly, we couldn’t afford to provide them the services that they need.” This argument is distasteful, but that doesn’t make it wrong. There are probably places where it is right. Arguably being sold on an expensive bad retirement plan is better than not being sold on any retirement plan and forgetting to save for retirement.
That said, I weakly think that neither of these things apply to retirement-plan brokers. They’re not acting as principal, so there’s no category-mistake problem in making them fiduciaries. And if you’ve got a retirement plan anyway — the new rules seem to be mostly about recommending rollovers and changes in allocations in existing 401(k)s and IRAs — then being sold a bad plan is probably not going to improve your situation. In that vein, the CEA report describes one mystery-shopper study:
The study finds that advisers recommend a change to the current investment strategy in about 60 percent of cases when the client had a return-chasing portfolio and in about 85 percent of cases in which the client had a diversified low-fee portfolio. The authors conclude that advisers “seem to support strategies that result in more transactions and higher management fees,” even when clients appear to hold the optimal portfolio.
Yeah that doesn’t seem like an improvement. (Try the Debevoise memo for a persuasive case the other way; Question 8 in the Labor Department FAQ is a good rebuttal.)
2. The fact sheet characterizes this as “$17 billion of losses every year for working and middle class families,” which is just plainly not true. The $17 billion number is for all “load mutual funds and annuities in IRAs,” or individual retirement accounts, as you can tell from page 19 of the report. Presumably a lot of IRAs are held by people who are not “working and middle class.” Mitt Romney has a notably large IRA, though I guess it’s not invested in load mutual funds.
Incidentally the report notes that “more than 40 million American families have savings of more than $7 trillion in IRAs,” meaning that that $17 billion comes to about $425 per year, per family with an IRA.
3. The stylized version is different from the actual version, which cites academic studies finding a wide range of underperformance. The report hangs its hat mostly on one study finding 113 basis points of underperformance.
4. As I’ve disclosed before, a lot of my money is in Vanguard funds (mostly though not all index funds), and I am personally a fan of their work.
5. Vanguard’s footnote cites to Morningstar for that average.
6. Also an interesting one. Here is a good post from Josh Brown, which we’ve discussed previously. Some amount of active underperformance is driven by specific market circumstances: For instance, active managers tend to favor certain factors that underperformed in 2014. Some of it is arithmetic: Everyone can’t be above average, and if everyone in the equity markets is a professional (not true, but becoming more true), then most professionals can’t be above average either.
7. Is this one? Well, what is “this”? It seems obvious to me that some amount of active allocation of equity capital to businesses is socially desirable, so rules that strongly disincentivize active management would be bad. But you don’t need rules to disincentivize it: Active management is more expensive than passive management, so the market should more or less discourage people from paying for it. The question is how to subsidize it, if it’s socially desirable. (I mean, not really, but something like this; we’ve discussed this topic recently.)

It is less obvious to me that the things the White House is explicitly objecting to — conflicted payments for investment advice, basically — are socially desirable, though again there is an opposing argument. Also note that these conflicted arrangements might be one way to subsidize active management, although actively allocating capital on behalf of bamboozled principals doesn’t seem socially optimal either.

— To contact the author on this story: Matt Levine at mlevine51@bloomberg.net


Investor Optimism Rose in March

yellow smile in field of blue frownsMy Comments: I have no idea what I’m having for supper tonight, much less how the markets are going to perform over the next several months and years.

However, assuming I haven’t left the building, I expect to eat something, and in like manner, I expect the markets to move up and down with a generally upward trend. To do otherwise would be to fly in the face of what’s happened over the past 70 plus years (mine and the markets).

If you want to see what some clients experienced over the past few years, click on the smiley face.

By Paula Aven Gladych

Investor optimism jumped 31 points in March, but not everyone is upbeat about the markets.

Retirees are not nearly as optimistic as their non-retired counterparts, according to the latest Wells Fargo/Gallup Investor and Retirement Optimism Index.

More than half of investors believe now is a good time to invest in the financial markets, up from 39 percent last quarter. Fifty-four percent of the non-retired say this is a good time to invest while 43 percent of retired investors hold this same view.

Despite a rise in the stock market in the first quarter of the year, the bulk of investors didn’t make any changes to their investments in the stock market. Only 10 percent increased their stock market investments during the first quarter.

“The emerging optimism is encouraging, but the disparity in optimism between the non-retired and retired is notable. The lack of action on the part of investors during the first quarter rally shows that people stayed the course and didn’t have a knee-jerk reaction that caused them to change their investment allocations,” said Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust.

Half of retired investors surveyed between March 14-24 say low interest rates have done a great deal or quite a lot of harm to savers and investors compared to 25 percent of non-retired investors. Nearly 70 percent of non-retired investors believe the benefits of low interest rates have outweighed the costs, but only 51 percent of retirees agree with them.

Nearly half of all investors believe that today’s low interest rates will make their retirements less comfortable, with 35 percent of retirees and 46 percent of workers fearing low rates will mean they will outlive their money in retirement. One-third of investors think low rates will force them to delay their retirement.

Housing is one area that has been positively affected by the low interest rates. A third of those surveyed said they took advantage of the rates to refinance their home.

Nearly 70 percent of those surveyed are worried they will have to pay higher federal taxes in retirement and will have a more difficult time living comfortably in retirement. Because of this, 39 percent of investors say they are more likely to seek after-tax investments.

More than 1,000 investors across the country were surveyed for this study.

The Annuity Puzzle

That's me, in 1941!

That’s me, in 1941!

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

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

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

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

By Bob Seawright, Madison Avenue Securities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Americans Take Payroll-Tax Increase in Stride to Keep Spending

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

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

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

Monday, 11 Mar 2013 06:16 AM

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

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

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

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

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

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

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

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

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

New Cars

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

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

“People are a lot more cautious with their money than they were at one time, but they are still spending,” he said. “Consumer attitudes are improving, no question.”
Continue Reading HERE...

Obama Planned Big Budget Cuts All Along

My Comments: I’m trying to decide if the author of this article is fundamentally to the left of the Obama administration and therefore critical of his lack of fire in promoting new revenue sources for the country, ie higher taxes, or whether the writer is critical because virtually everyone on the right is critical, regardless of the message or desired outcome.

I’d appreciate hearing from some of you how you react to this.

By Jeffrey Sachs

The president had a Faustian pact on tax and spending, says Jeffrey Sachs

To hear US President Barack Obama tell it this week, the budget sequestration – the automatic spending cuts that are due to commence on March 1 – will decimate the government. Each party is blaming the other, as if something new and unexpected was about to begin. Many of the cuts are indeed ill-advised – but the fact is that from the start of his presidency Mr Obama has planned a steep reduction in discretionary spending as a share of national income.

The A-List provides timely, insightful comment on the topics that matter, from globally renowned leaders, policymakers and commentators.

Each year he has put a budget on the table calling for a sharp decline in discretionary spending as a share of gross domestic product in 2012 and beyond. Most of his supporters have been unaware of the contradiction between this and his rhetoric about increasing public investments in America’s future.

The administration is now vigorously blaming the Republicans for the pending cuts. Yet the level of spending for fiscal year 2013 under the sequestration will be nearly the same as Mr Obama called for in the draft budget presented in mid-2012. So deep were the proposed cuts in discretionary spending that the budget narrative pointed out that the plan would “bring domestic discretionary spending to its lowest level as a share of the economy since the Eisenhower administration”.

The squeeze on domestic programmes dates to the start of Mr Obama’s first term. In July 2009, he presented the details of his 10-year budget framework. Discretionary outlays (defence and non-defence) would rise from 7.9 per cent of GDP in 2008, the final full year of George W. Bush’s presidency, to 8.8 per cent in 2009; and 9.8 per cent in 2010, mainly because of stimulus spending and the surge in Afghanistan. But then they would fall to 8.7 per cent in 2011, 7.8 per cent in 2012, 7.4 per cent in 2013, and to just 6.3 per cent in 2019, the final year of the 2009 10-year budget framework.

These cuts are now taking hold, and they will hurt. Mr Obama’s supporters will be puzzled; many will doubt that these cuts have long been ordained by the president, at least in general terms, though not exactly as they will now occur. Why would a progressive leader plan for deep cuts in discretionary spending relative to GDP even as he advocates larger investments in health, education, infrastructure, clean energy, science and technology, job training, early childhood development and more?

There is a simple answer that is the key to the federal politics of our time. Mr Obama ran in 2008 and 2012 promising to make permanent the Bush-era tax cuts for almost all Americans. These tax cuts were unaffordable from the start and were scheduled to expire in 2010. But to say so, while the Republicans were promising to make them permanent for everybody, would probably have cost Mr Obama both elections.

So he made a Faustian bargain. He would champion the permanent extension of the tax cuts except for a tiny number of rich Americans, and he would silently plan for deep cuts in discretionary outlays as a share of GDP to compensate for the lack of adequate budget revenues in later years. In effect, he would allow rising outlays on mandatory programmes such as Medicaid and Social Security and debt servicing to crowd out public investments vital for America’s long-term economic future. And indeed, on January 1, Mr Obama and the Congress agreed to make the tax cuts permanent for 99 per cent of households.

Mr Obama probably hoped that when the moment of truth arrived, when the spending cuts started to bite, the American people would support higher taxes rather than the spending cuts long called for in his own budget proposals. And perhaps they will still do so. Yet he has never presented an alternative with more robust tax revenues in order to fund a higher sustained level of public investments and services.

So the moment of truth has arrived: we are on the path of deep cuts in discretionary programmes relative to national income. The fact is that America needs higher public investments and more tax revenues to fund them. Mr Obama is finally saying some of these things, though still without specific tax proposals.

Yet it is very late in the day. Now the Bush tax cuts are permanent, Mr Obama lacks the political leverage to achieve a boost of revenues. After years of deflecting public attention from the coming budget squeeze, he will now preside over sharp cuts in public services and investments that are the opposite of his stated goals.

The writer is director of the Earth Institute at Columbia University

Retirement Security Gets More Complicated

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

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

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

December 18, 2012 • Jim McConville

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

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

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

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

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

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

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

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

3 Self-Defeating Investor Behaviors:

By Joyce Hanson, AdvisorOne

The intricacies of investor psychology shed light on what people are doing to miss out on long-term opportunities—and on how advisors can help them overcome those behavioral hurdles, according to a recent report from Franklin Templeton Investments.

Behavioral phenomena can have a negative impact on investor psychology, says Franklin Templeton in a wide-ranging “thought leadership” comment, “2020 Vision: Time to Take Stock,” on its public website.

Investors experienced loss during the 2008-2009 financial market crisis, and much of their negative perceptions of market growth stems from that time. As a result, many investors are afraid of experiencing the same sort of loss now.

With the help of Predictably Irrational author and behavioral economist Dan Ariely, Franklin Templeton pinpoints three behavioral reasons why investors may be missing out on opportunities for the long term.
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