More often than not; people base everything on hype or hope with their financial planning. Many of you have heard me say, “Hope is not a strategy”, yet people continue to pursue hype in hopes of having something that may or may not occur in their investment world.
Most stock based mutual funds through the end of 3/31/2010 were up as much as 90% for the period ending 1 year on 3/31/2010. Those were the same percentage gains we saw at the end of 1999, and you know how that worked out throughout the next 18 months.
Folks the handwriting was on the walk and at the end of March 2010 you chose to ignore it when it comes to your retirement dollars. I can’t say it enough, investing involves risk based capital.
If you don’t define your retirement dollars or retirement income as risk based; then why are in the stock and bond markets? In another word, retirement dollars should contain a large element of “what will happen, not could happen”. If you are still working on the could part or the hype and hope part, you may find you will outlive your retirement nest egg or retirement income.
There is song I like that goes like this; "life is a leason - you learn it when you are through".
How much of your retirement dollars have a “will happen” scenario in the mix?
Have questions regarding this or anything else? Drop me a line at:
michael@personalfinancialplanninggroup.com
Friday, May 7, 2010
Monday, May 3, 2010
Who is really accountable?
It has been a fast 1st. quarter and a quicker tax season. As with many years in the past, I have had the opportunity to meet new individuals and couples during tax season to offer my advice to them. That advice is varied but it is specific to their needs.
One reoccurring theme I have seen this year is a larger number of people, who work with financial advisors or financial consultants, that don’t understand why their advisory account holdings have a complete change.
First of all, I inform people that they need to take responsibility for their investments. If they don’t understand what is going on, then they need to get an appointment with their financial professional and review their account and understand reasons as to why there needs to be a change. Many people tell me they don’t understand what their financial professional is telling them or people say this financial advisor “talks above my head”. If you don’t understand what a financial professional is telling you. Then you probability don’t need to be in that type of account or you need to work with someone who can answer your questions.
However, as financial professionals change jobs or broker/dealers, these financial professionals recommend changes based on the fact that what was offered at the previous broker/dealer isn’t offered at the new broker/dealer. Hence, this is the only reason for a change – “I have changed jobs and you need to change your account”. That in and of itself isn’t a reason to change investments. You can always stay where you are. You are not required to follow your financial professional to the new place of business. If you want to stay where you are, call the branch office and ask for the branch manager of the firm. He or she can help you. At least get a second opinion – you owe yourself that much.
Remember, you are responsible to maintain you cost basis in your investment account for federal and state income taxes. The new broker/dealer will not know this information; cost basis doesn’t transfer from one broker/dealer to another. Your financial professional doesn’t keep this information on your behalf when he or she changes a job. Why do you need to know this? You as a tax payer are responsible to report your realized gains and losses on your tax return. In a tax audit, you will have to provide this information.
I have seen a rise in the advisor fee for advisor accounts. What was common at 1.5% annually for advisory fees has risen to 1.75% annually. This is very true for advisory accounts at or near the minimum account levels. The advisory fee doesn’t always include transaction costs within the account itself or the mutual fund fees or expenses. So you could be paying fees in excess of 3% annually with no guarantee of success within the advisory account. Understand what you are paying for and get your money’s worth out of the professional relationship. Remember your financial advisor works for you, not the other way around.
Finally, is your IRA account RMD (Required Minimum Distribution) friendly? Not all accounts are and it is your responsibility to know if it is. A sales person or CSR may not know that answer or tell you in advance of the transaction or purchase. If the IRA account isn’t RMD friendly, you could incur additional withdrawal charges or penalties.
As with any of my blog entries if you have questions, please direct them to:
michael@personalfinancialplanninggroup.com
One reoccurring theme I have seen this year is a larger number of people, who work with financial advisors or financial consultants, that don’t understand why their advisory account holdings have a complete change.
First of all, I inform people that they need to take responsibility for their investments. If they don’t understand what is going on, then they need to get an appointment with their financial professional and review their account and understand reasons as to why there needs to be a change. Many people tell me they don’t understand what their financial professional is telling them or people say this financial advisor “talks above my head”. If you don’t understand what a financial professional is telling you. Then you probability don’t need to be in that type of account or you need to work with someone who can answer your questions.
However, as financial professionals change jobs or broker/dealers, these financial professionals recommend changes based on the fact that what was offered at the previous broker/dealer isn’t offered at the new broker/dealer. Hence, this is the only reason for a change – “I have changed jobs and you need to change your account”. That in and of itself isn’t a reason to change investments. You can always stay where you are. You are not required to follow your financial professional to the new place of business. If you want to stay where you are, call the branch office and ask for the branch manager of the firm. He or she can help you. At least get a second opinion – you owe yourself that much.
Remember, you are responsible to maintain you cost basis in your investment account for federal and state income taxes. The new broker/dealer will not know this information; cost basis doesn’t transfer from one broker/dealer to another. Your financial professional doesn’t keep this information on your behalf when he or she changes a job. Why do you need to know this? You as a tax payer are responsible to report your realized gains and losses on your tax return. In a tax audit, you will have to provide this information.
I have seen a rise in the advisor fee for advisor accounts. What was common at 1.5% annually for advisory fees has risen to 1.75% annually. This is very true for advisory accounts at or near the minimum account levels. The advisory fee doesn’t always include transaction costs within the account itself or the mutual fund fees or expenses. So you could be paying fees in excess of 3% annually with no guarantee of success within the advisory account. Understand what you are paying for and get your money’s worth out of the professional relationship. Remember your financial advisor works for you, not the other way around.
Finally, is your IRA account RMD (Required Minimum Distribution) friendly? Not all accounts are and it is your responsibility to know if it is. A sales person or CSR may not know that answer or tell you in advance of the transaction or purchase. If the IRA account isn’t RMD friendly, you could incur additional withdrawal charges or penalties.
As with any of my blog entries if you have questions, please direct them to:
michael@personalfinancialplanninggroup.com
Thursday, December 17, 2009
What are the Top Ten Things to do for yourself concerning your Finances in 2010?
#1 – Time for a Risk Tolerance Checkup
Before the 2008 market meltdown, you may have thought you had a handle on your investment risk tolerance. Now that you’ve lived through the worst financial storm in recent memory, your views may have changed. For example, you may have a different outlook on how much short-term volatility you can comfortably withstand. Talk to your financial advisor about how your risk tolerance may have changed, and decide how that should impact your investment portfolio.
#2 – Revisit Your Asset Allocation
The financial crisis may have made you question the level of risk you are willing to take. However, don’t let the great recession of 2008/2009 divert you from the fact that every portfolio needs diverse allocations to weather future storms. Your strategic asset allocation should be immutable to changes in the economy and the markets, but not to changes in your life. Some of those changes are gradual, such as aging or deteriorating health, some sudden, such as loss of a job, birth, death, divorce, unexpected dilemmas or windfalls. Talk to your financial planner and make sure that your asset allocation reflects your REAL risk tolerance.
#3 - Strengthen Your Retirement Plan
Although markets have shown signs of recovery, there’s a good chance that your portfolio has not rebounded to levels that will allow you to retire on schedule. The only way to know for sure is to ask your financial advisor to provide you with a lifetime cash flow analysis, to determine if your present and future needs will be met by the assets you have now. Make sure your advisor integrates their investment, insurance and tax advice with your overall financial plan. Now would be a great time to review your life insurance and long term care plan.
#4 – Adjust Your College Savings Plan
Taking an aggressive approach to college planning may have seemed like a good idea four or five years ago, but with portfolios now down substantially, you’ll have to revise your approach. If you have children in their early teens, now is the time to determine if you need to start saving more or invest your college fund differently. Your financial planner will guide you on how to balance the need for growth with a solid risk management strategy.
#5 – Consider a ROTH IRA Conversion
As of 2010, anyone, regardless of income, can convert all or a part of a traditional IRA to a ROTH IRA. A ROTH IRA can be a sensible move for someone who not only wants to see assets grow tax free, but be able to withdraw, or not, at will with no tax consequences. It is also a great vehicle for inheritance since it would provide your heirs a stream of tax-free income. To do the conversion, however, you must pay taxes on the entire amount converted, which can have a hefty price tag. It’s a big decision, and one that should be made together with your financial planner and estate attorney as well as your accountant. Ask to have a retirement income analysis run to help in your decision making.
#6 – Look Ahead on Income Taxes
In 2010 the Bush tax cuts are likely to expire. Although all tax brackets may not be affected, current government policy, such as health care reform, would indicate that people at higher income levels may have a significantly higher tax burden going forward. Talk with your financial advisor and your tax professional to plan income to the best of your ability for 2009 and 2010 — especially if you are self-employed or have executive compensation options to consider.
#7 – Get Ready for Changes in Capital Gains Taxes
The Obama Administration has been clear about its intention to increase capital gains tax rates. With this in mind, you might consider managing your portfolio appropriately. For example, suppose you have a large gain in a stock that you have held for more than a year and were considering selling at some point, and you do not have sufficient capital losses to offset the gain. You should consider selling that stock in 2009, when Federal long-term capital gain tax rates are as low as they are likely to be for some time. Make sure to talk to your tax professional on any state implications.
#8 - Update Your Estate & Gift Planning, Considering Changes in Estate Tax Laws
The estate tax laws are far from static. While the IRS is currently operating under “sunset provisions” that allow an estate to leave $3.5 million to other than a spouse tax free, if Congress does not act, the tax law expires on 1/1/2010 and will revert to the $1 million threshold on January 1, 2011. The best way to protect your children or other heirs from steep estate taxes: review your estate plan annually to ensure your documents incorporate the appropriate provisions to minimize the tax hit under current law if you and/or your spouse die. You should also periodically review your trustees, custodians and executors. Also, as many assets have declined, you may need to adjust the dollar amounts you are leaving to your heirs; you may want to consider replacing those amounts with percentages, so if your estate value goes up or down, it won’t affect how your assets are distributed. Or, you could consider a Wealth Replacement Trust for any short fall in bequests.
#9 – Explore Tax-Friendly Ways to Give
With interest rates low, there are innovative ways to gift assets using Grantor Retained Annuity Trusts (GRATs). GRATs are a financial instrument used to make large financial gifts without paying a US gift tax. There are other things to take advantage of, such as low-interest-rate loans to your children. Work with your financial advisor to see if any of these options or others will work for you and your family. And also consider a little used trust called a Chartable Lead Trust (CLeT) to retain future assets.
#10 – Complete a Due Diligence Review of Your Advisor
Given the financial scandals and market turbulence of the last 18 months, now is a good time to conduct a due diligence review of your advisor. You may think you know your advisor, but what could be damaging are issues you never thought to ask about. Sit down with your advisor and ask:
1) Where your assets are custodied. Be wary of an advisory firm that’s its own custodian, and be sure your assets are housed with an established third party.
2) How have your advisor’s clients done in the last down market. You want to ensure that your advisor is as focused on wealth preservation as it is on wealth accumulation.
Before the 2008 market meltdown, you may have thought you had a handle on your investment risk tolerance. Now that you’ve lived through the worst financial storm in recent memory, your views may have changed. For example, you may have a different outlook on how much short-term volatility you can comfortably withstand. Talk to your financial advisor about how your risk tolerance may have changed, and decide how that should impact your investment portfolio.
#2 – Revisit Your Asset Allocation
The financial crisis may have made you question the level of risk you are willing to take. However, don’t let the great recession of 2008/2009 divert you from the fact that every portfolio needs diverse allocations to weather future storms. Your strategic asset allocation should be immutable to changes in the economy and the markets, but not to changes in your life. Some of those changes are gradual, such as aging or deteriorating health, some sudden, such as loss of a job, birth, death, divorce, unexpected dilemmas or windfalls. Talk to your financial planner and make sure that your asset allocation reflects your REAL risk tolerance.
#3 - Strengthen Your Retirement Plan
Although markets have shown signs of recovery, there’s a good chance that your portfolio has not rebounded to levels that will allow you to retire on schedule. The only way to know for sure is to ask your financial advisor to provide you with a lifetime cash flow analysis, to determine if your present and future needs will be met by the assets you have now. Make sure your advisor integrates their investment, insurance and tax advice with your overall financial plan. Now would be a great time to review your life insurance and long term care plan.
#4 – Adjust Your College Savings Plan
Taking an aggressive approach to college planning may have seemed like a good idea four or five years ago, but with portfolios now down substantially, you’ll have to revise your approach. If you have children in their early teens, now is the time to determine if you need to start saving more or invest your college fund differently. Your financial planner will guide you on how to balance the need for growth with a solid risk management strategy.
#5 – Consider a ROTH IRA Conversion
As of 2010, anyone, regardless of income, can convert all or a part of a traditional IRA to a ROTH IRA. A ROTH IRA can be a sensible move for someone who not only wants to see assets grow tax free, but be able to withdraw, or not, at will with no tax consequences. It is also a great vehicle for inheritance since it would provide your heirs a stream of tax-free income. To do the conversion, however, you must pay taxes on the entire amount converted, which can have a hefty price tag. It’s a big decision, and one that should be made together with your financial planner and estate attorney as well as your accountant. Ask to have a retirement income analysis run to help in your decision making.
#6 – Look Ahead on Income Taxes
In 2010 the Bush tax cuts are likely to expire. Although all tax brackets may not be affected, current government policy, such as health care reform, would indicate that people at higher income levels may have a significantly higher tax burden going forward. Talk with your financial advisor and your tax professional to plan income to the best of your ability for 2009 and 2010 — especially if you are self-employed or have executive compensation options to consider.
#7 – Get Ready for Changes in Capital Gains Taxes
The Obama Administration has been clear about its intention to increase capital gains tax rates. With this in mind, you might consider managing your portfolio appropriately. For example, suppose you have a large gain in a stock that you have held for more than a year and were considering selling at some point, and you do not have sufficient capital losses to offset the gain. You should consider selling that stock in 2009, when Federal long-term capital gain tax rates are as low as they are likely to be for some time. Make sure to talk to your tax professional on any state implications.
#8 - Update Your Estate & Gift Planning, Considering Changes in Estate Tax Laws
The estate tax laws are far from static. While the IRS is currently operating under “sunset provisions” that allow an estate to leave $3.5 million to other than a spouse tax free, if Congress does not act, the tax law expires on 1/1/2010 and will revert to the $1 million threshold on January 1, 2011. The best way to protect your children or other heirs from steep estate taxes: review your estate plan annually to ensure your documents incorporate the appropriate provisions to minimize the tax hit under current law if you and/or your spouse die. You should also periodically review your trustees, custodians and executors. Also, as many assets have declined, you may need to adjust the dollar amounts you are leaving to your heirs; you may want to consider replacing those amounts with percentages, so if your estate value goes up or down, it won’t affect how your assets are distributed. Or, you could consider a Wealth Replacement Trust for any short fall in bequests.
#9 – Explore Tax-Friendly Ways to Give
With interest rates low, there are innovative ways to gift assets using Grantor Retained Annuity Trusts (GRATs). GRATs are a financial instrument used to make large financial gifts without paying a US gift tax. There are other things to take advantage of, such as low-interest-rate loans to your children. Work with your financial advisor to see if any of these options or others will work for you and your family. And also consider a little used trust called a Chartable Lead Trust (CLeT) to retain future assets.
#10 – Complete a Due Diligence Review of Your Advisor
Given the financial scandals and market turbulence of the last 18 months, now is a good time to conduct a due diligence review of your advisor. You may think you know your advisor, but what could be damaging are issues you never thought to ask about. Sit down with your advisor and ask:
1) Where your assets are custodied. Be wary of an advisory firm that’s its own custodian, and be sure your assets are housed with an established third party.
2) How have your advisor’s clients done in the last down market. You want to ensure that your advisor is as focused on wealth preservation as it is on wealth accumulation.
Friday, December 11, 2009
It time to review your Estate Planning Solution
One of the biggest Financial Planning mistakes made is the failure to review the total Financial Plan and parts of it. As tax laws change, markets rise and fall and people just change their mind; failure to review and make necessary changes in any Financial Plan can prove costly.
Here is one of the current reasons to review your Estate or Financial Plan.
In 2010, when the estate tax is scheduled to “go away” at least for one year, it is replaced with an insidious carry-over basis system. Tracking tax-basis information for clients will require careful record keeping and revisions in estate-planning documents. Despite the overall negative impact of the changes, clients can still benefit with proper record keeping.
If a client dies before 2010, the basis of his assets for income tax purposes is stepped up to their value for federal estate tax purposes. These values are usually determined as of the date of your customer's death, but with an option to value assets six months after death. (The six-month option can be used only if it reduces both the gross estate value and estate taxes.)
So if your customer has an account with an aggregate, adjusted cost basis of $100,000, but a federal estate tax value of $1 million, the basis of the assets for heirs becomes $1 million. Heirs like this because their capital gains tax is lessened when they sell the property, and the person from whom they received the property never paid the capital gains tax ahead of death. (But dying is quite a price to pay to avoid capital gains taxes!)
All this changes in 2010. Heirs lose the advantageous step up in cost basis. In the above example, the heirs' cost basis will also be $100,000 — a horrific result.
We had this same system in 1976, and it was repealed in 1978 because it was too complex and unworkable. People died without basis information.
Those negatives aside, here's one benefit to the changes. For certain estates that qualify, the basis of assets passed to a nonspouse can be increased by the executor of an estate by up to $1.3 million (and that number is adjusted for inflation).
Applying this principle to our example would mean the executor could potentially adjust the basis by $1.3 million, so the heir's cost basis of $100,000 can be stepped up to $1 million. You cannot adjust cost basis higher than the value of the assets on the date of death, so there will be circumstances in which the $1.3 million cannot be fully utilized. Conversely, there will be cases in which the $1.3 million will not be enough to avoid the negative impact of the tax law because the value of the assets on the date of death is much higher than $1.3 million.
There is another wrinkle to this. Property left to a surviving spouse in a manner that qualifies (and there are very strict rules) gets a basis adjustment of up to $3 million (separate from the $1.3 million). This means the total adjustments can be $4.3 million. Under the right circumstances, the spouse could be allocated the entire $4.3 million basis adjustment, drastically reducing capital gains taxes.
However, qualifying for this significant basis adjustment could be negated because of current language contained in many estate plans. This can happen especially when gifts are made in trust for spouses, as opposed to outright gifts. In order to secure these increases to cost basis, estate-planning documents must be updated. This is something you can encourage clients to do now with the help of their estate-planning experts. Meanwhile, secure accurate cost-basis information on all your clients' assets. They may need it come 2010.
As with any tax law change; there are solutions and alternatives that are available and can make sense to you.
Remember; "wanting is not a solution".
Here is one of the current reasons to review your Estate or Financial Plan.
In 2010, when the estate tax is scheduled to “go away” at least for one year, it is replaced with an insidious carry-over basis system. Tracking tax-basis information for clients will require careful record keeping and revisions in estate-planning documents. Despite the overall negative impact of the changes, clients can still benefit with proper record keeping.
If a client dies before 2010, the basis of his assets for income tax purposes is stepped up to their value for federal estate tax purposes. These values are usually determined as of the date of your customer's death, but with an option to value assets six months after death. (The six-month option can be used only if it reduces both the gross estate value and estate taxes.)
So if your customer has an account with an aggregate, adjusted cost basis of $100,000, but a federal estate tax value of $1 million, the basis of the assets for heirs becomes $1 million. Heirs like this because their capital gains tax is lessened when they sell the property, and the person from whom they received the property never paid the capital gains tax ahead of death. (But dying is quite a price to pay to avoid capital gains taxes!)
All this changes in 2010. Heirs lose the advantageous step up in cost basis. In the above example, the heirs' cost basis will also be $100,000 — a horrific result.
We had this same system in 1976, and it was repealed in 1978 because it was too complex and unworkable. People died without basis information.
Those negatives aside, here's one benefit to the changes. For certain estates that qualify, the basis of assets passed to a nonspouse can be increased by the executor of an estate by up to $1.3 million (and that number is adjusted for inflation).
Applying this principle to our example would mean the executor could potentially adjust the basis by $1.3 million, so the heir's cost basis of $100,000 can be stepped up to $1 million. You cannot adjust cost basis higher than the value of the assets on the date of death, so there will be circumstances in which the $1.3 million cannot be fully utilized. Conversely, there will be cases in which the $1.3 million will not be enough to avoid the negative impact of the tax law because the value of the assets on the date of death is much higher than $1.3 million.
There is another wrinkle to this. Property left to a surviving spouse in a manner that qualifies (and there are very strict rules) gets a basis adjustment of up to $3 million (separate from the $1.3 million). This means the total adjustments can be $4.3 million. Under the right circumstances, the spouse could be allocated the entire $4.3 million basis adjustment, drastically reducing capital gains taxes.
However, qualifying for this significant basis adjustment could be negated because of current language contained in many estate plans. This can happen especially when gifts are made in trust for spouses, as opposed to outright gifts. In order to secure these increases to cost basis, estate-planning documents must be updated. This is something you can encourage clients to do now with the help of their estate-planning experts. Meanwhile, secure accurate cost-basis information on all your clients' assets. They may need it come 2010.
As with any tax law change; there are solutions and alternatives that are available and can make sense to you.
Remember; "wanting is not a solution".
Monday, November 23, 2009
Another piece of "drive by" advice
I was reading my weekend newspapers on Sunday and came across a section of the Business Section called Smart Money. It was the typical questions and answers wire section. The person responding to the questions was Bruce Williams. And Bruce was sponsored by Newspaper Enterprise Association.
In this question G.M. of New York City stated he was buying term life insurance and wanted to know which term to buy 20 or 30 years. G.M. went on to say he had an 11 month old baby and hopefully he will have at least 1 or 2 more children. He figured that out at age 36 he would have all of his ducks in a row by age 56, saved for his children’s college, he would have a small mortgage and sufficient retirement savings. (I thought G.M. had a great income) What G.M. didn’t say was how much life insurance he thought he needed to purchase.
Bruce answers G.M. by saying “he is in his corner about term life insurance”. Bruce suggests either to buy a 10 or 20 year term life insurance policy. Bruce does remind G.M. about the ability to convert his term policy to another life insurance policy prior to the term expiring (he never tells G.M. that not all term life insurance policies are convertible), but fails to mention that G.M. would convert to a permanent life insurance policy at rates reflective of his age. Bruce fails to mention that G.M. has a far greater chance to be become disabled than to die early. (That’s one of the problems about trying to get advice from a newspaper or magazine; you are always limited to one-liners).
After reading these 2 short paragraphs, I thought what a lack of information and recommendation Bruce Williams gave this person, if there really was a G.M. The more I reread G.M.’s letter the more I saw a need for life insurance for more than 30 years. First of all, good luck on getting your children out of the house by age 25 and being able to say you have no financial responsibility for them. As far as saving for retirement, if you aren’t committing about 20% of your income towards your retirement you will fall short. And who lives in their first house forever?
The proper way to go about purchasing life insurance is first based on doing a complete financial needs analysis, then looking at what financial resources you have to commit to a life insurance program. Your personal life insurance program should include the ability for you to be insured for all of your life, simply because you can’t predict what financial responsibilities you will have in the future and when those responsibilities will cease.
Sitting down with a financial professional, like a Certified Financial Planner, can help you design a life insurance program that in most cases will show you options you haven’t considered or haven’t read about. Whether it is a blended life insurance policy or a program of both term and permanent life insurance, you need options before you get at the end of a 30 year term life insurance policy. Simply put, if you wait to convert at the end of the 30 year policy term, you will pay rates when you are 31 years older and you may not have good options for the conversion policy you are offered. Not all term life insurance companies have competitive life insurance policies you can convert too.
Just like with anything else in life; you get what you pay for and there is no free lunch when it comes to purchasing life insurance.
In this question G.M. of New York City stated he was buying term life insurance and wanted to know which term to buy 20 or 30 years. G.M. went on to say he had an 11 month old baby and hopefully he will have at least 1 or 2 more children. He figured that out at age 36 he would have all of his ducks in a row by age 56, saved for his children’s college, he would have a small mortgage and sufficient retirement savings. (I thought G.M. had a great income) What G.M. didn’t say was how much life insurance he thought he needed to purchase.
Bruce answers G.M. by saying “he is in his corner about term life insurance”. Bruce suggests either to buy a 10 or 20 year term life insurance policy. Bruce does remind G.M. about the ability to convert his term policy to another life insurance policy prior to the term expiring (he never tells G.M. that not all term life insurance policies are convertible), but fails to mention that G.M. would convert to a permanent life insurance policy at rates reflective of his age. Bruce fails to mention that G.M. has a far greater chance to be become disabled than to die early. (That’s one of the problems about trying to get advice from a newspaper or magazine; you are always limited to one-liners).
After reading these 2 short paragraphs, I thought what a lack of information and recommendation Bruce Williams gave this person, if there really was a G.M. The more I reread G.M.’s letter the more I saw a need for life insurance for more than 30 years. First of all, good luck on getting your children out of the house by age 25 and being able to say you have no financial responsibility for them. As far as saving for retirement, if you aren’t committing about 20% of your income towards your retirement you will fall short. And who lives in their first house forever?
The proper way to go about purchasing life insurance is first based on doing a complete financial needs analysis, then looking at what financial resources you have to commit to a life insurance program. Your personal life insurance program should include the ability for you to be insured for all of your life, simply because you can’t predict what financial responsibilities you will have in the future and when those responsibilities will cease.
Sitting down with a financial professional, like a Certified Financial Planner, can help you design a life insurance program that in most cases will show you options you haven’t considered or haven’t read about. Whether it is a blended life insurance policy or a program of both term and permanent life insurance, you need options before you get at the end of a 30 year term life insurance policy. Simply put, if you wait to convert at the end of the 30 year policy term, you will pay rates when you are 31 years older and you may not have good options for the conversion policy you are offered. Not all term life insurance companies have competitive life insurance policies you can convert too.
Just like with anything else in life; you get what you pay for and there is no free lunch when it comes to purchasing life insurance.
Thursday, November 19, 2009
The latest "great investment idea"
I was reading an article on Small and Mid Cap Mutual Funds that included S&P research. The article talked about the success of the mutual funds and included this paragraph:
S&P’s Investment Policy Committee recommends keeping 6% of portfolio holdings in mid-cap stocks, and 4% in small-cap stocks. The committee recommends a blended position, but for those hoping to pick up some additional yield, there are some signs that point to better performance from the value side of the small- and mid-cap universe compared with the growth side. S&P Equity Research estimates that earnings per share for S&P/Citigroup Mid-Cap Total Return Value index members will rise by 20% in 2009 compared with a 27% decline for its sister Growth index. Earnings for S&P/CitiGroup Small-Cap Total Return Value index members are seen rising 13%, compared with a 21% decline for the Small-Cap Growth index.
And the recommended mutual funds are:
So when you start to focus on 3 year returns, remember you are suppose to buy mutual funds for the long run or buy and hold, why would you not purchase a fixed annuity with a multi year rate guarantee? Say; 4% to 5%.
My point is; do you want to plan your retirement or college fund around maybe or could - or do you want to do planning with what will happen? Retirement Income Modeling can only support one or two variables. Not knowing how much your acount will be worth in the future is toughest variable to plan with.
It is your life.
S&P’s Investment Policy Committee recommends keeping 6% of portfolio holdings in mid-cap stocks, and 4% in small-cap stocks. The committee recommends a blended position, but for those hoping to pick up some additional yield, there are some signs that point to better performance from the value side of the small- and mid-cap universe compared with the growth side. S&P Equity Research estimates that earnings per share for S&P/Citigroup Mid-Cap Total Return Value index members will rise by 20% in 2009 compared with a 27% decline for its sister Growth index. Earnings for S&P/CitiGroup Small-Cap Total Return Value index members are seen rising 13%, compared with a 21% decline for the Small-Cap Growth index.
And the recommended mutual funds are:
My point is; do you want to plan your retirement or college fund around maybe or could - or do you want to do planning with what will happen? Retirement Income Modeling can only support one or two variables. Not knowing how much your acount will be worth in the future is toughest variable to plan with.
It is your life.
Wednesday, November 18, 2009
Have you considered your retirement income model?
Many retirement planners abide by what they call the "4% rule," which holds that if a retiree invests in a moderately risky portfolio of 60% stocks and 40% bonds, s/he can initially withdraw 4% of the assets to provide income, increase that amount in subsequent years to keep pace with inflation, and still have what is claimed to be a 90% probability of not running out of money over a 30-year retirement. Even though its proponents assert that this approach is a conservative one, it has three major flaws.
1. Losses in the early years tacked on to the regular withdrawals raise the chances of failure dramatically. T. Rowe Price has done some good research in this area, based upon a 55% stocks/45% bonds portfolio and 4% annual withdrawals, rising with inflation. The study concludes that with negative annualized returns for the first five years of retirement, there is a whopping 57% chance of running out of money within 30 years. Moreover, such significant losses are not as aberrational as some might think:
"Even in large portfolios, high standard-deviation events tend to occur far more often than a normal distribution suggests. This seems especially true on the downside, which will call this variable excess risk 'iceberg risk,' because it is mostly hidden from view but threatens major damage. It might also be called 'Noah risk,' after the proverbial flood that drowned the world.... Also, in the Biblical story, the world was amply warned about the flood but refused to listen. In contrast, icebergs reflect a type of risk that people look for but may not see."
Kent Osband, Iceberg Risk: An Adventure in Portfolio Theory (2002).
When these "black swan" events happen early-on during retirement in an individual retiree's portfolio which is also providing income, the personal costs are often catastrophic. The crucial risk to investing in stocks isn't the chance that a retiree's rate of return might vary from historical averages; it is the possibility that stocks might wipe him or her out. That risk never goes away, no matter how long the investor stays in the market. A longer horizon provides more opportunities to recover from "extreme market conditions," but it also provides more opportunities to experience them.
2. With people continuing to live longer and longer, the assumption of a 30-year retirement is a dangerous one. Today there is a 23% chance that at least one member of a 65-year-old couple will live to age 95. And with improving health care, even more people will live to 95 and beyond in the future, according to the Society of Actuaries. Indeed, a recent analysis of data from more than 30 developed countries reveals that death rates among people older than 80 are still falling. In 1950, the likelihood of survival from age 80-90 was 15-16% for women and 12% for men, compared with 37% and 25%, respectively, in 2002, and there's no sign of this longevity growth slowing down.
3. As has been reported by The Wall Street Journal, among others, the Monte Carlo simulations upon which the 90% success rate is claimed tend to underweight the risk of failure, often dramatically. "I take whatever probability of failure that comes out of your Monte Carlo simulation and add 20 percentage points," noted William J. Bernstein, author of The Four Pillars of Investing.
It's when the hypothetical becomes real that the magnitude of the problem becomes especially clear. Working with portfolio probabilities is fine — until the negative and failure statistics have names and faces.
A recent article from Kiplinger's looks at these issues from an interesting perspective. Although not typically a friend to annuities, Kiplinger's offers a twist on the traditional risk pyramid (see above). With a traditional risk-pyramid model, the safest investments — such as annuities and bank deposits — are used to build the foundation of the portfolio, with riskier investments layered on top, adding (in order) bonds and various types of stock funds until the riskiest assets (alternative investments) are placed on top. Significantly, this diversification spreads the risk, but it doesn't guarantee that the portfolio won't lose money.
The article describes the twist as follows. "By flipping the risk pyramid on its side, you can align your retirement timeline with your investment strategy. Fund your immediate income needs with risk-free investments, such as...an immediate annuity, and gradually increase the risk (and potential return) of other investments."
It's significant that even Kiplinger's recognizes the need to structure retirement planning with an annuity foundation. Income annuities (whether an immediate annuity or the annuitization of a deferred annuity) are an incredibly powerful tool for managing income needs and are almost surely the most underutilized asset in the financial world today. As reported by The Wall Street Journal, "income annuities can assure retirees of an income stream for life at a cost as much as 40% less than a traditional stock, bond and cash mix." What that efficiency means is that retirees who need a nest egg of, say, $1 million, can live the same lifestyle with as little as $600,000 in an income annuity.
As stated by Prof. David Babbel of Wharton:
"I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. (Most of these are included in the reference section to this paper, as well as a handful of earlier academic studies, each marked with an asterisk.) The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.
"Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck."
Annuities provide a powerful foundation for any portfolio and are crucial for providing guaranteed retirement income in an efficient manner. Good financial planning demands that we use them routinely.
1. Losses in the early years tacked on to the regular withdrawals raise the chances of failure dramatically. T. Rowe Price has done some good research in this area, based upon a 55% stocks/45% bonds portfolio and 4% annual withdrawals, rising with inflation. The study concludes that with negative annualized returns for the first five years of retirement, there is a whopping 57% chance of running out of money within 30 years. Moreover, such significant losses are not as aberrational as some might think:
"Even in large portfolios, high standard-deviation events tend to occur far more often than a normal distribution suggests. This seems especially true on the downside, which will call this variable excess risk 'iceberg risk,' because it is mostly hidden from view but threatens major damage. It might also be called 'Noah risk,' after the proverbial flood that drowned the world.... Also, in the Biblical story, the world was amply warned about the flood but refused to listen. In contrast, icebergs reflect a type of risk that people look for but may not see."
Kent Osband, Iceberg Risk: An Adventure in Portfolio Theory (2002).
When these "black swan" events happen early-on during retirement in an individual retiree's portfolio which is also providing income, the personal costs are often catastrophic. The crucial risk to investing in stocks isn't the chance that a retiree's rate of return might vary from historical averages; it is the possibility that stocks might wipe him or her out. That risk never goes away, no matter how long the investor stays in the market. A longer horizon provides more opportunities to recover from "extreme market conditions," but it also provides more opportunities to experience them.
2. With people continuing to live longer and longer, the assumption of a 30-year retirement is a dangerous one. Today there is a 23% chance that at least one member of a 65-year-old couple will live to age 95. And with improving health care, even more people will live to 95 and beyond in the future, according to the Society of Actuaries. Indeed, a recent analysis of data from more than 30 developed countries reveals that death rates among people older than 80 are still falling. In 1950, the likelihood of survival from age 80-90 was 15-16% for women and 12% for men, compared with 37% and 25%, respectively, in 2002, and there's no sign of this longevity growth slowing down.
3. As has been reported by The Wall Street Journal, among others, the Monte Carlo simulations upon which the 90% success rate is claimed tend to underweight the risk of failure, often dramatically. "I take whatever probability of failure that comes out of your Monte Carlo simulation and add 20 percentage points," noted William J. Bernstein, author of The Four Pillars of Investing.
It's when the hypothetical becomes real that the magnitude of the problem becomes especially clear. Working with portfolio probabilities is fine — until the negative and failure statistics have names and faces.
A recent article from Kiplinger's looks at these issues from an interesting perspective. Although not typically a friend to annuities, Kiplinger's offers a twist on the traditional risk pyramid (see above). With a traditional risk-pyramid model, the safest investments — such as annuities and bank deposits — are used to build the foundation of the portfolio, with riskier investments layered on top, adding (in order) bonds and various types of stock funds until the riskiest assets (alternative investments) are placed on top. Significantly, this diversification spreads the risk, but it doesn't guarantee that the portfolio won't lose money.
The article describes the twist as follows. "By flipping the risk pyramid on its side, you can align your retirement timeline with your investment strategy. Fund your immediate income needs with risk-free investments, such as...an immediate annuity, and gradually increase the risk (and potential return) of other investments."
It's significant that even Kiplinger's recognizes the need to structure retirement planning with an annuity foundation. Income annuities (whether an immediate annuity or the annuitization of a deferred annuity) are an incredibly powerful tool for managing income needs and are almost surely the most underutilized asset in the financial world today. As reported by The Wall Street Journal, "income annuities can assure retirees of an income stream for life at a cost as much as 40% less than a traditional stock, bond and cash mix." What that efficiency means is that retirees who need a nest egg of, say, $1 million, can live the same lifestyle with as little as $600,000 in an income annuity.
As stated by Prof. David Babbel of Wharton:
"I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. (Most of these are included in the reference section to this paper, as well as a handful of earlier academic studies, each marked with an asterisk.) The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.
"Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck."
Annuities provide a powerful foundation for any portfolio and are crucial for providing guaranteed retirement income in an efficient manner. Good financial planning demands that we use them routinely.
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