By Erin Baehr, CFP®, EA
Shawnee-on-Delaware, PA
http://www.baehrfinancial.com/
The US Department of Labor estimates that almost 90% of women will end up solely responsible for their financial well being. Given that women tend to earn less than men over their lifetimes to begin with, and may spend a good deal of time out of the workforce to care for families, women facing retirement may have fewer retirement resources, maximizing Social Security benefits available is critical.
The first thing for women (and men for that matter) to understand is how Social Security benefits are calculated in the first place. To be eligible for Social Security, you need to have been employed in a job that participates in the Social Security system for about 10 years. The benefit amount is calculated based on your highest 35 years of earnings, indexed for wage increases over the years. If you haven’t worked for 35 years, years you were out of the workforce will count as zero, and naturally bring the average down. On the other end, earnings are capped at an amount determined annually, and earnings only count up to that amount, no matter how high they may be. In 2010 that cap is $106,800. Those 35 years of earnings are then converted to a monthly amount, to come up with your “average indexed monthly earnings,” or AIME. That number then goes through a calculation to come up with your monthly benefit amount, or “primary insurance amount,” PIA. Obviously, if you have several years of zero or low earnings, that is going to bring down your PIA. One way to increase your benefit, if you are now earning a higher wage is to stay in the workforce long enough to replace those years with your current higher earnings. This is especially important for a never married woman.
When it comes time to collect Social Security, if you are married, you can either claim your own benefit, or 50% of your spouse’s, whichever is greater. If you are divorced, and were married for at least ten years, you can still claim based on his earnings, as long as you are 62 or older and still unmarried, regardless of whether he has started receiving benefits yet or not. It doesn’t matter if you haven’t seen your ex-husband for many years; you can apply without his knowledge or consent; no messy conversations asking for his earnings records necessary! You do have to be divorced at least two years though, and he has to be eligible for benefits and at least age 62. If you wait until your full retirement age, you will receive 50% of his benefit, but if you claim benefits at age 62, you can only receive 35%. It doesn’t matter, either, how many ex-wives your husband has; they all can claim on his record, without affecting the other ex’s.
Social Security provides for a survivor benefit for both wives and ex-wives. If your spouse (or ex) dies, you may apply for survivor benefits from age 60 on. But again, if you apply prior to full retirement age, your benefits are reduced. At full retirement age, the wife’s amount is 100% of the husband’s. One strategy to explore, if the benefit amount on your own is close to your late husband’s, is to claim a reduced survivor benefit at age 60, and then switch to your own benefit at your full retirement age. A variation of this strategy for married couples, assuming you are the lower earning spouse: you claim your benefit at age 66 (or your full retirement age if different), and your husband claims a spousal benefit based on your record also at full retirement age, then delays claiming his own benefit to age 70.
The usefulness of these strategies depends on a number of factors and break even analyses. There are a number of calculators and tools available on the Social Security website to give you a start. Here are just two:
SSA Benefit Calculators www.ssa.gov/planners/benefitcalculators.htm
Retirement Estimator www.ssa.gov/planners/calculators.htm
You may also wish to speak with a Social Security representative (they are very helpful) or a financial planner to crunch the numbers.
January 28, 2010
January 25, 2010
The Best of Funds and The Worst of Funds
By Joe Alfonso, CFP®
Santa Clara, CA
http://www.aegisadvisory.com/
Morningstar recently issued a report regarding the performance of the CGM Focus mutual fund. They reported how this fund was the decade's best performing mutual fund, rising more than 18% annually, yet investors in the fund experienced a yearly loss of 11% during this same period. How could this be?
CGM Focus Fund illustrates the issues with mutual funds that have excessive "turnover". Turnover is the rate at which a fund's holdings change every year. A turnover rate of 50% means that half of the stocks held by a fund are completely replaced within one year. The typical managed mutual fund has a turnover rate of 85%. Index funds, which hold all the stocks in a stock market index and do not sell unless the index itself changes or in order to generate cash for redemptions, typically have turnover rates in the single digits. According to Morningstar, CGM Focus's turnover rate is an astonishing 504%, meaning that its entire portfolio is replaced five times over the course of a single year!
In addition to generating excessive taxable gains in non-deferred accounts and driving up trading related costs, high turnover funds are very volatile. Due to their volatility, the actual return experienced by fund investors is often lower than the internal return of the fund itself because the fund’s volatility increases the likelihood that investors will buy and sell at inopportune times.
When asked about the great disparity in fund versus investor performance, CGM Focus Fund's manager Ken Heebner replied, "A huge amount of money came in right when the performance of the fund was at a peak. I don't know what to say about that. We don't have any control over what investors do."
I would argue that, while a fund manager may not be able to control investor behavior, any fund manager realizes that increased volatility also increases the likelihood that investors will buy high and sell low, and pay more in the process. John Bogle, the Founder of the Vanguard Group, Inc., certainly feels differently than Mr. Heebner. In a recent interview, Mr. Bogle rails against "...funds (that turn) over at 100% or 200% annual rates, leading, among other things, to incredible tax inefficiency." He goes on to ask, "Would you do that with your own money? Do you think those managers would do that with their own money?"
Like Mr. Bogle, I feel that the best approach is to work with investments that are low cost, tax efficient and have low turnover as part of a long term approach aimed at achieving a fair, market rate of return. The issues raised with the strategy of funds like CGM Focus illustrate why a "market return" approach is appropriate for most clients and is in fact the only approach compatible with a fiduciary standard of care that places client's best interests first at all times.
Santa Clara, CA
http://www.aegisadvisory.com/
Morningstar recently issued a report regarding the performance of the CGM Focus mutual fund. They reported how this fund was the decade's best performing mutual fund, rising more than 18% annually, yet investors in the fund experienced a yearly loss of 11% during this same period. How could this be?
CGM Focus Fund illustrates the issues with mutual funds that have excessive "turnover". Turnover is the rate at which a fund's holdings change every year. A turnover rate of 50% means that half of the stocks held by a fund are completely replaced within one year. The typical managed mutual fund has a turnover rate of 85%. Index funds, which hold all the stocks in a stock market index and do not sell unless the index itself changes or in order to generate cash for redemptions, typically have turnover rates in the single digits. According to Morningstar, CGM Focus's turnover rate is an astonishing 504%, meaning that its entire portfolio is replaced five times over the course of a single year!
In addition to generating excessive taxable gains in non-deferred accounts and driving up trading related costs, high turnover funds are very volatile. Due to their volatility, the actual return experienced by fund investors is often lower than the internal return of the fund itself because the fund’s volatility increases the likelihood that investors will buy and sell at inopportune times.
When asked about the great disparity in fund versus investor performance, CGM Focus Fund's manager Ken Heebner replied, "A huge amount of money came in right when the performance of the fund was at a peak. I don't know what to say about that. We don't have any control over what investors do."
I would argue that, while a fund manager may not be able to control investor behavior, any fund manager realizes that increased volatility also increases the likelihood that investors will buy high and sell low, and pay more in the process. John Bogle, the Founder of the Vanguard Group, Inc., certainly feels differently than Mr. Heebner. In a recent interview, Mr. Bogle rails against "...funds (that turn) over at 100% or 200% annual rates, leading, among other things, to incredible tax inefficiency." He goes on to ask, "Would you do that with your own money? Do you think those managers would do that with their own money?"
Like Mr. Bogle, I feel that the best approach is to work with investments that are low cost, tax efficient and have low turnover as part of a long term approach aimed at achieving a fair, market rate of return. The issues raised with the strategy of funds like CGM Focus illustrate why a "market return" approach is appropriate for most clients and is in fact the only approach compatible with a fiduciary standard of care that places client's best interests first at all times.
January 21, 2010
What Doesn’t Help Your Credit Score
By Deborah Hoskins, JD, CFP®
Colorado Springs, CO
http://www.pikespeakfinancialplanning.com/
One cardinal rule for financial health is to avoid accumulating credit card debt in the first place—it’s a clear sign that you’re not living within your means. Compounding matters, interest is not tax deductible, and rates are outrageous. So if you never carry a balance from month to month—but pay off your account balance diligently—you should have a great credit score, right? Wrong!
Remember that your FICO score is not a report card grade on your overall financial health. It is merely a prediction of whether you can pay on time. “But,” you protest, “I do pay everything off on time every month. Why don’t I have a perfect score?” As intuitive as this sounds, it is irrelevant for two reasons.
First, the credit reporting bureaus know only the amount owed on your most recent statement. They can’t tell if the amount is from new purchases or from old balances carried forward. Remember, it’s the timeliness and the debt-to-extended credit ratio that constitutes two-thirds of your score, not the “age” of the debt.
Second, throughout 2009, banks have been quietly paring back the credit they are willing to extend to anybody, even their existing loyal customers. In 2007, your credit card limit may have been $12,000; now it’s $9,000. Your average monthly $3,000 bill used to be only 25% of your available credit. Now it’s 33%, which will significantly lower your FICO score. That you pay off the $3,000 every month makes no difference. The days of rewarding financially prudent customers are over!
Colorado Springs, CO
http://www.pikespeakfinancialplanning.com/
One cardinal rule for financial health is to avoid accumulating credit card debt in the first place—it’s a clear sign that you’re not living within your means. Compounding matters, interest is not tax deductible, and rates are outrageous. So if you never carry a balance from month to month—but pay off your account balance diligently—you should have a great credit score, right? Wrong!
Remember that your FICO score is not a report card grade on your overall financial health. It is merely a prediction of whether you can pay on time. “But,” you protest, “I do pay everything off on time every month. Why don’t I have a perfect score?” As intuitive as this sounds, it is irrelevant for two reasons.
First, the credit reporting bureaus know only the amount owed on your most recent statement. They can’t tell if the amount is from new purchases or from old balances carried forward. Remember, it’s the timeliness and the debt-to-extended credit ratio that constitutes two-thirds of your score, not the “age” of the debt.
Second, throughout 2009, banks have been quietly paring back the credit they are willing to extend to anybody, even their existing loyal customers. In 2007, your credit card limit may have been $12,000; now it’s $9,000. Your average monthly $3,000 bill used to be only 25% of your available credit. Now it’s 33%, which will significantly lower your FICO score. That you pay off the $3,000 every month makes no difference. The days of rewarding financially prudent customers are over!
January 18, 2010
How to Spot a Bubble
By Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/
If you are younger than 40, you will likely be telling your kids and grandkids about the ‘Great Recession’ of 2007-2009. Our recent experience is likely to impact your investment decisions for the rest of your life. So what advice will you give the next couple of generations?
I’d suggest you start with: “Beware of Bubbles!” Hindsight is a huge advantage in recognizing dangerous financial bubbles. We are all familiar with the stock market crash which kicked off the ‘Great Depression.’ If you are over 40, you probably remember your elders caution to ‘Stay out of the Stock Market!’ That was the wrong lesson; the real lesson is to be wary of leverage. The stock market then was a huge bubble, aggravated by the ability of even small investors to leverage stock purchases on margin requiring an investment of only 5%.
Surely over-leveraged investments, spurred by easy credit is a hallmark of bubbles. In the 1970’s however, bond investors lost their shirts and inflation ravaged the stock market. It’s not so clear that leverage aggravated that recession as much as excessive government spending, high oil prices, and built-in cost-of-living increases which contributed to spiraling inflation. But when the fed raised interest rates, the reduced leverage eventually sucked the air out of the economy and resulted in new federal reorganization of the banking system. The S&L collapse soon followed.
The ‘Dot.Com’ bubble in the 90s was fueled by an astounding amount of capital chasing new ideas. Tech stocks soared to incredible heights and seemed to be invulnerable to fundamental requirements. They had no P/E ratio because they could sell stocks without a revenue, much less profit. Those entrepreneurs failed miserably at being able to leverage the capital effectively.
In our current situation, there’s no question that easy money accessed by low mortgage rates and virtually no vetting of borrowers artificially inflated housing prices, and the financial industry tanked taking down the rest of the economy. It’s by no means certain that the government spending intended to create employment will solve the problem, and there is a real danger that excessive government debt will create worse problems down the road.
Looking at our present worldwide condition, there are at least three possible bubbles on the horizon: China, Gold, and most recently the financial disruption in Dubai and other closely allied emirates in the U.A.E.
The red flags in all three situations are all related to the same phenomenon: unsustainable rapid increase in expansion.
China, and many other emerging nations, have experienced a growth in production capability which carries the danger eventually of excess capacity. Hundreds of millions of Chinese moved to the cities for employment. Now they are without jobs because there simply isn’t enough worldwide demand to keep the factories operating. In the process China basically subsidized exports by keeping its currency, the Yuan, pegged artificially low to the dollar.
This enabled them to keep prices of exports low, so US purchasing essentially provided the capital for Chinese expansion in their private sector. The anomaly is that that the US has begun using Chinese lending power to fuel its public sector. This is ripe to start unraveling with unforeseen consequences, but the fallout will surely hurt investors who have rushed in to make a quick buck in China.
Gold is now at record highs. Since 2000 the price of gold has jumped from $252 to $1,100 per oz. and has been touted as the best antidote for inflation which has increased about 18% during that period. But it hasn’t fared so well in the past: the price of gold dropped the beginning of the 1980’s through the 1990’s (from $934 to $252 per ounce) while inflation surged 50%. Since there hasn’t been an increase in demand for production, the recent price increase is likely due to speculation. Gold ETF’s became available, which buy actual gold to hold for investors. So instead of having to buy gold, have it shipped, and then store it, speculators can buy and sell positions in one day’s trading. Bubbles that are created by speculative demand are very likely to collapse, even faster than their rise.
Recent news that Dubai is defaulting on $80 billion in debt has spooked the worldwide markets and undermined the assurance that Oil Sheiks would step in to back any debt. The massive construction in Dubai, which dwarfed the construction bubble in Las Vegas, was based on a conviction that ‘if you build it, they will come.’ Well it turns out that they’re not coming. There is no financial underpinning for a new city built in a desert without any existing industry or commercial basis.
What China, Gold, and Dubai have in common is that they experienced such spectacular growth that financial realities were increasingly ignored. A naïveté around basic economics inexplicably overtake even seasoned investors, then speculators start rushing to cash in the new hot investment, and finally the small investors pile on. Bubbles are built on an irrational belief that ‘this time it’s different’ and the balloon will never burst.
We have learned a valuable lesson, and bubbles will continue to form regardless of government regulation and our supposed increased financial sophistication. Our experience should be passed on. So be sure to lecture your children and grandchildren to “Beware of Bubbles!”
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
Franklin, MI
http://www.bertwhitehead.com/
If you are younger than 40, you will likely be telling your kids and grandkids about the ‘Great Recession’ of 2007-2009. Our recent experience is likely to impact your investment decisions for the rest of your life. So what advice will you give the next couple of generations?
I’d suggest you start with: “Beware of Bubbles!” Hindsight is a huge advantage in recognizing dangerous financial bubbles. We are all familiar with the stock market crash which kicked off the ‘Great Depression.’ If you are over 40, you probably remember your elders caution to ‘Stay out of the Stock Market!’ That was the wrong lesson; the real lesson is to be wary of leverage. The stock market then was a huge bubble, aggravated by the ability of even small investors to leverage stock purchases on margin requiring an investment of only 5%.
Surely over-leveraged investments, spurred by easy credit is a hallmark of bubbles. In the 1970’s however, bond investors lost their shirts and inflation ravaged the stock market. It’s not so clear that leverage aggravated that recession as much as excessive government spending, high oil prices, and built-in cost-of-living increases which contributed to spiraling inflation. But when the fed raised interest rates, the reduced leverage eventually sucked the air out of the economy and resulted in new federal reorganization of the banking system. The S&L collapse soon followed.
The ‘Dot.Com’ bubble in the 90s was fueled by an astounding amount of capital chasing new ideas. Tech stocks soared to incredible heights and seemed to be invulnerable to fundamental requirements. They had no P/E ratio because they could sell stocks without a revenue, much less profit. Those entrepreneurs failed miserably at being able to leverage the capital effectively.
In our current situation, there’s no question that easy money accessed by low mortgage rates and virtually no vetting of borrowers artificially inflated housing prices, and the financial industry tanked taking down the rest of the economy. It’s by no means certain that the government spending intended to create employment will solve the problem, and there is a real danger that excessive government debt will create worse problems down the road.
Looking at our present worldwide condition, there are at least three possible bubbles on the horizon: China, Gold, and most recently the financial disruption in Dubai and other closely allied emirates in the U.A.E.
The red flags in all three situations are all related to the same phenomenon: unsustainable rapid increase in expansion.
China, and many other emerging nations, have experienced a growth in production capability which carries the danger eventually of excess capacity. Hundreds of millions of Chinese moved to the cities for employment. Now they are without jobs because there simply isn’t enough worldwide demand to keep the factories operating. In the process China basically subsidized exports by keeping its currency, the Yuan, pegged artificially low to the dollar.
This enabled them to keep prices of exports low, so US purchasing essentially provided the capital for Chinese expansion in their private sector. The anomaly is that that the US has begun using Chinese lending power to fuel its public sector. This is ripe to start unraveling with unforeseen consequences, but the fallout will surely hurt investors who have rushed in to make a quick buck in China.
Gold is now at record highs. Since 2000 the price of gold has jumped from $252 to $1,100 per oz. and has been touted as the best antidote for inflation which has increased about 18% during that period. But it hasn’t fared so well in the past: the price of gold dropped the beginning of the 1980’s through the 1990’s (from $934 to $252 per ounce) while inflation surged 50%. Since there hasn’t been an increase in demand for production, the recent price increase is likely due to speculation. Gold ETF’s became available, which buy actual gold to hold for investors. So instead of having to buy gold, have it shipped, and then store it, speculators can buy and sell positions in one day’s trading. Bubbles that are created by speculative demand are very likely to collapse, even faster than their rise.
Recent news that Dubai is defaulting on $80 billion in debt has spooked the worldwide markets and undermined the assurance that Oil Sheiks would step in to back any debt. The massive construction in Dubai, which dwarfed the construction bubble in Las Vegas, was based on a conviction that ‘if you build it, they will come.’ Well it turns out that they’re not coming. There is no financial underpinning for a new city built in a desert without any existing industry or commercial basis.
What China, Gold, and Dubai have in common is that they experienced such spectacular growth that financial realities were increasingly ignored. A naïveté around basic economics inexplicably overtake even seasoned investors, then speculators start rushing to cash in the new hot investment, and finally the small investors pile on. Bubbles are built on an irrational belief that ‘this time it’s different’ and the balloon will never burst.
We have learned a valuable lesson, and bubbles will continue to form regardless of government regulation and our supposed increased financial sophistication. Our experience should be passed on. So be sure to lecture your children and grandchildren to “Beware of Bubbles!”
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
January 15, 2010
Active Versus Passive Investing
By Joe Alfonso, CFP®
Santa Clara, CA
http://www.aegisadvisory.com/
There exists a long-running debate regarding whether it is possible for individual investors to outperform the broader stock market consistently over time. There are those who believe that there are investors who have an inherent ability to outperform, add "alpha" is the expression, through shrewd stock picking and correct forecasting of future market trends. This camp believes in "active" management.
There is another group, led by academics such as Eugene Fama and Kenneth French, who believe in a "passive" investment approach. They feel that market data extending back to the 1800s shows that active management is not able to consistently outperform over time, especially when the real world costs of taxes and investment fees are considered. The passive camp argues for a "buy and hold approach" and believes that owning a highly diversified portfolio designed to track the performance of the overall market is the most rational approach and the one that has been shown to outperform active managers even over shorter periods of time.
I am firmly in the camp of passive investing.
Buying into an active manager based on past positive performance is no different than buying high and selling low. The likelihood is that the manager will revert to the mean or even under perform. The fact of the matter is that your likelihood of identifying a manager BEFORE THE FACT who will outperform the overall market over time is low to nil. And the percentage of managers who outperform over time is no more than what one would expect in a standard distribution of total performance. It is therefore hard to say that these manager's results were the result of inherent skill as opposed to luck.
Even if we assume that there are gifted managers out there like Peter Lynch and Warren Buffett, it is impossible to identify these managers before hand. Peter Lynch could not pick his successor at Magellan Fund to continue his own successful run (remember Jeff Vinik?). What chance does any of us have of doing better?
In my opinion, the matter has been settled. A passive investment strategy is the only one that makes sense and that is consistent with a fiduciary standard. It is the approach that I take with my own investments and adhere to when managing the assets entrusted to me by my clients. This approach also recognizes that the main value that I provide comes from a comprehensive approach to financial planning and focusing on enabling clients to achieve their key life goals. In my opinion, that is the only kind of "alpha" worth pursuing.
Santa Clara, CA
http://www.aegisadvisory.com/
There exists a long-running debate regarding whether it is possible for individual investors to outperform the broader stock market consistently over time. There are those who believe that there are investors who have an inherent ability to outperform, add "alpha" is the expression, through shrewd stock picking and correct forecasting of future market trends. This camp believes in "active" management.
There is another group, led by academics such as Eugene Fama and Kenneth French, who believe in a "passive" investment approach. They feel that market data extending back to the 1800s shows that active management is not able to consistently outperform over time, especially when the real world costs of taxes and investment fees are considered. The passive camp argues for a "buy and hold approach" and believes that owning a highly diversified portfolio designed to track the performance of the overall market is the most rational approach and the one that has been shown to outperform active managers even over shorter periods of time.
I am firmly in the camp of passive investing.
Buying into an active manager based on past positive performance is no different than buying high and selling low. The likelihood is that the manager will revert to the mean or even under perform. The fact of the matter is that your likelihood of identifying a manager BEFORE THE FACT who will outperform the overall market over time is low to nil. And the percentage of managers who outperform over time is no more than what one would expect in a standard distribution of total performance. It is therefore hard to say that these manager's results were the result of inherent skill as opposed to luck.
Even if we assume that there are gifted managers out there like Peter Lynch and Warren Buffett, it is impossible to identify these managers before hand. Peter Lynch could not pick his successor at Magellan Fund to continue his own successful run (remember Jeff Vinik?). What chance does any of us have of doing better?
In my opinion, the matter has been settled. A passive investment strategy is the only one that makes sense and that is consistent with a fiduciary standard. It is the approach that I take with my own investments and adhere to when managing the assets entrusted to me by my clients. This approach also recognizes that the main value that I provide comes from a comprehensive approach to financial planning and focusing on enabling clients to achieve their key life goals. In my opinion, that is the only kind of "alpha" worth pursuing.
January 12, 2010
Current Thinkers on Our Financial System
By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Originally published 12/14/2009 at FPA's All Things Financial Planning Blog
If you’re like me, you might prefer to get your news from sources who think a lot like you — people with similar political views, topical interests, as well as the same basic reference point of the world, its problems and solutions. But, when it comes to fixing a system that involves all of us, we might need to reach out and hear what people that disagree with us think.
In a recent blog, I wrote about behaviors that I hope we as individuals and families learned from the financial collapse, and will continue with in order to get back to life as we felt about it pre-2007.
On a macro-scale it may be more important to understand what we should have learned about the behavior of our financial system to avoid the next one.
There certainly has been no shortage of reports and theories on its causes, as well as prescriptions to prevent the next catastrophe. Legislation is working its way through Congress, industry groups have formed to make sure their collective voices are heard, and experts are expending time and resources to get their thoughts into the discussion.
So, what is the lesson we should have learned?
With the goal of including a range of voices speaking about a problem we all face, I’d like to introduce ideas from a few prominent pundits on the economy who may just have solutions.
Perhaps the most widely known and provocative commentator on the financial system today is my fellow Michigander, Michael Moore. Moore’s recent movie, Capitalism: A Love Story, is one of the first to address the topic after the collapse. It won’t be the last.
Moore’s basic belief is that capitalism is the root of the problem. In this and other pictures he has made, Moore likes to take us back to what one of the other pundits I will describe would call the “Jimmy Stewart days.” He’s often nostalgic for a simpler time, when virtuous men were starkly pitted against greedy evil-doers — and won!
The problems with looking in the rearview are many; the capitalism of the last 20 years wasn’t the capitalism of Stewart’s Bailey Building & Loan. But, as politically charged and anti-free market as Moore’s views are, his observations of the problems aren’t disputed even by those on the opposite end of the political spectrum.
One such person, a capitalist par excellence, is John C. Bogle, founder of Vanguard Funds. In his most recent book, Enough, Bogle wrote a masterful piece on this and other problems with the financial system, including how the incentives of those working in the system too often place self-interest above their customers. Wall Street has taken up what Bogle refers to as salesmanship rather than stewardship, or, in other words, companies are rewarded more for placing their short-term interests above their customers long-term objectives. Bogle believes that a combination of regulation and education is the solution to diverting the next downturn.
Another interesting industry voice offering solutions to prevent the next economic crisis is Dr. Laurence Kotlikoff, a professor of economics at Boston University.
I tend to believe Bogle and Kotlikoff might be closer in the political spectrum than with Moore, but when it comes to solutions they have different thoughts. Whereas Bogle sees the mutual fund industry as one of the devils, Kotlikoff believes they just may be the solution to much of what ails the financial system.
From a recent interview about his upcoming book, Jimmy Stewart is Dead: Ending the World’s Financial Plague Before It Strikes Again, Kotlikoff stated that the structure of mutual funds, as intermediaries and stewards of their clients assets, would be perfect for regulating companies in the future. The fund industry survived the downturn without a bailout, and a complete overhaul of the corporate structure that moves toward transparency and disclosure may provide information on which companies are the best stewards of your savings, insurance protection, and investments.
Do any of our pundits have the answer? I’ve left out some of their finer points in this blog to hit the points I think are worth considering together. I believe like Moore that the system failed (though it certainly wasn’t capitalism alone), and like Bogle that education is a key component of a stable economy.
But perhaps as Kotlikoff points out, the answer already exists, and we simply need more information on which companies are managing our investment with them prudently.
What form changes ultimately take will be determined over the coming months and years. In the meantime, I would like to hear more from all sides, so please share your thoughts in the comments section on what changes are necessary for our financial system.
Franklin, MI
http://www.nfa1040.com/
Originally published 12/14/2009 at FPA's All Things Financial Planning Blog
If you’re like me, you might prefer to get your news from sources who think a lot like you — people with similar political views, topical interests, as well as the same basic reference point of the world, its problems and solutions. But, when it comes to fixing a system that involves all of us, we might need to reach out and hear what people that disagree with us think.
In a recent blog, I wrote about behaviors that I hope we as individuals and families learned from the financial collapse, and will continue with in order to get back to life as we felt about it pre-2007.
On a macro-scale it may be more important to understand what we should have learned about the behavior of our financial system to avoid the next one.
There certainly has been no shortage of reports and theories on its causes, as well as prescriptions to prevent the next catastrophe. Legislation is working its way through Congress, industry groups have formed to make sure their collective voices are heard, and experts are expending time and resources to get their thoughts into the discussion.
So, what is the lesson we should have learned?
With the goal of including a range of voices speaking about a problem we all face, I’d like to introduce ideas from a few prominent pundits on the economy who may just have solutions.
Perhaps the most widely known and provocative commentator on the financial system today is my fellow Michigander, Michael Moore. Moore’s recent movie, Capitalism: A Love Story, is one of the first to address the topic after the collapse. It won’t be the last.
Moore’s basic belief is that capitalism is the root of the problem. In this and other pictures he has made, Moore likes to take us back to what one of the other pundits I will describe would call the “Jimmy Stewart days.” He’s often nostalgic for a simpler time, when virtuous men were starkly pitted against greedy evil-doers — and won!
The problems with looking in the rearview are many; the capitalism of the last 20 years wasn’t the capitalism of Stewart’s Bailey Building & Loan. But, as politically charged and anti-free market as Moore’s views are, his observations of the problems aren’t disputed even by those on the opposite end of the political spectrum.
One such person, a capitalist par excellence, is John C. Bogle, founder of Vanguard Funds. In his most recent book, Enough, Bogle wrote a masterful piece on this and other problems with the financial system, including how the incentives of those working in the system too often place self-interest above their customers. Wall Street has taken up what Bogle refers to as salesmanship rather than stewardship, or, in other words, companies are rewarded more for placing their short-term interests above their customers long-term objectives. Bogle believes that a combination of regulation and education is the solution to diverting the next downturn.
Another interesting industry voice offering solutions to prevent the next economic crisis is Dr. Laurence Kotlikoff, a professor of economics at Boston University.
I tend to believe Bogle and Kotlikoff might be closer in the political spectrum than with Moore, but when it comes to solutions they have different thoughts. Whereas Bogle sees the mutual fund industry as one of the devils, Kotlikoff believes they just may be the solution to much of what ails the financial system.
From a recent interview about his upcoming book, Jimmy Stewart is Dead: Ending the World’s Financial Plague Before It Strikes Again, Kotlikoff stated that the structure of mutual funds, as intermediaries and stewards of their clients assets, would be perfect for regulating companies in the future. The fund industry survived the downturn without a bailout, and a complete overhaul of the corporate structure that moves toward transparency and disclosure may provide information on which companies are the best stewards of your savings, insurance protection, and investments.
Do any of our pundits have the answer? I’ve left out some of their finer points in this blog to hit the points I think are worth considering together. I believe like Moore that the system failed (though it certainly wasn’t capitalism alone), and like Bogle that education is a key component of a stable economy.
But perhaps as Kotlikoff points out, the answer already exists, and we simply need more information on which companies are managing our investment with them prudently.
What form changes ultimately take will be determined over the coming months and years. In the meantime, I would like to hear more from all sides, so please share your thoughts in the comments section on what changes are necessary for our financial system.
January 10, 2010
Start 2010 on the Right Foot!
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
It’s hard to believe that it’s 2010. Has it really been ten years since the Y2K scare? While the world has changed over the last ten years, there are financial planning strategies that can help position ourselves for success. If you’re looking for a few things to implement as we turn the corner into another decade, read on!
Here are three things you can do to help positively position you for a successful 2010!
1. Timely file your taxes
Most people handle their personal taxes in a reactive manner. They don’t spend much time during the current tax year preparing and planning to balance the tax liability due. Many folks put off preparing the tax return until the last possible minute, which can mean October.
It’s difficult to get a handle on your current year’s tax projections if you don’t file your previous year’s return until October. For those of you who year after year file for extensions and finalize your return in October, you know the burden you carry around until the return is finally signed and filed. If the return is filed in October, there are only a couple more months before the process begins again. Imagine the weight that would be lifted from your shoulders by filing your return when due (April 15th). I have seen this time and time again in my office with clients who were perpetual late filers. By filing timely, clients now have more time and energy to prepare for the current year’s tax burden and can focus on tax reduction strategies.
Remember that taxes are the single largest recurring expense that most of us will encounter from now until the day we die…..and the IRS will want a piece of the pie even after you die! So, why not pay more attention to this expense. File timely and focus efforts on reducing your tax liability through efficient tax planning. Start now by preparing documents for your tax preparer and strive to hit the April 15th deadline.
2. Establish a Spending Plan (Budget)
I realize I have said a bad word. The term budget conjures up similar feelings as “pop quiz” or “shot”. Just like testing and vaccinations are necessary, budgets have a very useful place in our personal financial world. The overall goal of a budget or spending plan is two-fold: 1. to make sure we spend less than we earn, and 2. to make sure we are doing the right things with our money (working towards goals and spending money in areas that bring us joy).
While not everyone will need a budget that is dialed down to the penny, some folks will need to see in black and white where their money goes every month. Knowledge is key, and having a budget on paper, in black and white, will help you visualize the income versus expenditure concept.
Again, not everyone will need a detailed budget. I feel that everyone will at least need to have a spending philosophy. In essence, if expenditures are less than income, liquidity is in place (emergency funds), goals (future needs) are being tended to, consumer debts (car loans…etc) are eliminated, and purposeful spending is occurring (spending money in areas that bring joy), then a person’s spending philosophy is right on track.
3. Take advantage of matching funds while savings for your retirement
While some corporations have reduced or eliminated matching funds in retirement plans, most have not. If your company offers a 401k/403b match, take full advantage of this free money. If your company matches up to 6% and you only contribute 4% into your 401k plan, then you are leaving free money on the table. There are not many free rides available for hard working folks, but this is one!
There is a nice additional benefit tied to retirement contributions. Money that is deferred into a retirement is not currently taxed. The government will help subsidize your retirement by delivering a tax break for retirement contributions. For example, a single tax payer in the 25% tax bracket who contributes $10k into their 401k will save a minimum of $2500 in taxes. That’s a 25% return on investment before the money even enters the market!
At first glance the above three items may not seem connected, but the interworkings of a good financial plan work hand and glove with all the integral pieces. These three pieces can work together to produce a positive snowball effect on a personal financial plan. With proper tax planning comes tax savings, which in turn frees up more money for cash flow. More cash flow allows for an increase in retirement contributions, which reduces taxes even further and again increases cash flow. You get the idea! Start 2010 on the right foot by taking positive steps to improve your financial wellbeing. Happy New Year!
Nashville, TN
http://www.vhfinancialmanagement.com/
It’s hard to believe that it’s 2010. Has it really been ten years since the Y2K scare? While the world has changed over the last ten years, there are financial planning strategies that can help position ourselves for success. If you’re looking for a few things to implement as we turn the corner into another decade, read on!
Here are three things you can do to help positively position you for a successful 2010!
1. Timely file your taxes
Most people handle their personal taxes in a reactive manner. They don’t spend much time during the current tax year preparing and planning to balance the tax liability due. Many folks put off preparing the tax return until the last possible minute, which can mean October.
It’s difficult to get a handle on your current year’s tax projections if you don’t file your previous year’s return until October. For those of you who year after year file for extensions and finalize your return in October, you know the burden you carry around until the return is finally signed and filed. If the return is filed in October, there are only a couple more months before the process begins again. Imagine the weight that would be lifted from your shoulders by filing your return when due (April 15th). I have seen this time and time again in my office with clients who were perpetual late filers. By filing timely, clients now have more time and energy to prepare for the current year’s tax burden and can focus on tax reduction strategies.
Remember that taxes are the single largest recurring expense that most of us will encounter from now until the day we die…..and the IRS will want a piece of the pie even after you die! So, why not pay more attention to this expense. File timely and focus efforts on reducing your tax liability through efficient tax planning. Start now by preparing documents for your tax preparer and strive to hit the April 15th deadline.
2. Establish a Spending Plan (Budget)
I realize I have said a bad word. The term budget conjures up similar feelings as “pop quiz” or “shot”. Just like testing and vaccinations are necessary, budgets have a very useful place in our personal financial world. The overall goal of a budget or spending plan is two-fold: 1. to make sure we spend less than we earn, and 2. to make sure we are doing the right things with our money (working towards goals and spending money in areas that bring us joy).
While not everyone will need a budget that is dialed down to the penny, some folks will need to see in black and white where their money goes every month. Knowledge is key, and having a budget on paper, in black and white, will help you visualize the income versus expenditure concept.
Again, not everyone will need a detailed budget. I feel that everyone will at least need to have a spending philosophy. In essence, if expenditures are less than income, liquidity is in place (emergency funds), goals (future needs) are being tended to, consumer debts (car loans…etc) are eliminated, and purposeful spending is occurring (spending money in areas that bring joy), then a person’s spending philosophy is right on track.
3. Take advantage of matching funds while savings for your retirement
While some corporations have reduced or eliminated matching funds in retirement plans, most have not. If your company offers a 401k/403b match, take full advantage of this free money. If your company matches up to 6% and you only contribute 4% into your 401k plan, then you are leaving free money on the table. There are not many free rides available for hard working folks, but this is one!
There is a nice additional benefit tied to retirement contributions. Money that is deferred into a retirement is not currently taxed. The government will help subsidize your retirement by delivering a tax break for retirement contributions. For example, a single tax payer in the 25% tax bracket who contributes $10k into their 401k will save a minimum of $2500 in taxes. That’s a 25% return on investment before the money even enters the market!
At first glance the above three items may not seem connected, but the interworkings of a good financial plan work hand and glove with all the integral pieces. These three pieces can work together to produce a positive snowball effect on a personal financial plan. With proper tax planning comes tax savings, which in turn frees up more money for cash flow. More cash flow allows for an increase in retirement contributions, which reduces taxes even further and again increases cash flow. You get the idea! Start 2010 on the right foot by taking positive steps to improve your financial wellbeing. Happy New Year!
January 7, 2010
My New Year’s Resolution Challenge to You!
By Jane Young, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
I am a huge fan of short and long term goal setting and the use of to-do lists. We can be much more productive if we organize our objectives and our time. I wouldn’t set out on a major vacation without an itinerary nor would I try to cook a complicated dish without a recipe. Without goals or to-do lists we are too easily distracted. We waste a lot of time and end up going down the wrong path.
I encourage everyone to start with a list of about 20-30 long term goals. From this list identify about 10 things you would like to achieve this year. Then develop a to-do list of things you need to accomplish this week or month. You are way ahead of the game just by writing down some goals and priorities. This forces you to think about your values, desires and objectives for the year. This will serve as your personal strategic plan to make sure you are on the right track.
I know everyone comes up with a list of New Year’s resolutions and we seldom stick to them. So why bother? I think the process itself is good because you have given some thought to what you want to accomplish. You may not reach all of your goals but some of your effort will come to fruition.
I have a special challenge for you in 2010. Think about all the things you would like to accomplish or change in 2010. Select just ONE thing that you must accomplish or change this year and write it down. Make a vow to yourself to do whatever it takes to accomplish this one goal. Create an action plan to reach your objective. Share your goal with at least one other person who will hold you accountable. Be sure to monitor and reward your progress.
If you want to share, I would love to hear about your “One Goal” for 2010 and how you are progressing.
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
I am a huge fan of short and long term goal setting and the use of to-do lists. We can be much more productive if we organize our objectives and our time. I wouldn’t set out on a major vacation without an itinerary nor would I try to cook a complicated dish without a recipe. Without goals or to-do lists we are too easily distracted. We waste a lot of time and end up going down the wrong path.
I encourage everyone to start with a list of about 20-30 long term goals. From this list identify about 10 things you would like to achieve this year. Then develop a to-do list of things you need to accomplish this week or month. You are way ahead of the game just by writing down some goals and priorities. This forces you to think about your values, desires and objectives for the year. This will serve as your personal strategic plan to make sure you are on the right track.
I know everyone comes up with a list of New Year’s resolutions and we seldom stick to them. So why bother? I think the process itself is good because you have given some thought to what you want to accomplish. You may not reach all of your goals but some of your effort will come to fruition.
I have a special challenge for you in 2010. Think about all the things you would like to accomplish or change in 2010. Select just ONE thing that you must accomplish or change this year and write it down. Make a vow to yourself to do whatever it takes to accomplish this one goal. Create an action plan to reach your objective. Share your goal with at least one other person who will hold you accountable. Be sure to monitor and reward your progress.
If you want to share, I would love to hear about your “One Goal” for 2010 and how you are progressing.
January 5, 2010
I-Bonds Return to Favor!
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
A few months ago I was discussing with a client the fact that one of my favorite little tools, I-bonds, were not as effective as they once were. Over the last six months I-bonds were not attractive. The reason for the shortcoming was the negative inflation rate component of the composite return associated with I-bonds.
While I-bonds have struggled over the previous 6 month period, the new rate is appealing. The new annualized rate for the six month period from November 2009 to April 2010 is 3.36%, and that’s 3.36% tax deferred!
Why I like I-bonds:
1. They grow tax deferred! A taxpayer in the 25% tax bracket will receive an equivalent taxable return of 4.48% on the current I-bond six month annualized return.
2. I-bonds can be used tax-free to pay for certain college expenses. Although, there are income restrictions to use this feature.
3. I-bonds have an inflation component factored into to the composite (total) rate of return. If inflation creeps up, the total return of I-bonds will increase.
4. I-bonds can be used as emergency funding in a financial plan. There are redemption restrictions:
• I-bonds cannot be redeemed within one year of purchase (special provisions may apply)
• I-bonds redeemed in years 2-5 incur a three month interest penalty. This penalty may be tax deductible.
• I-bonds redeemed after 5 years incur no penalties.
5. I-bonds are a debt of the US government and are an extremely safe investment. Note: I-bonds have a composite rate, which is based on two components: 1. A fixed rate component, and 2. An inflationary component. While the fixed rate is locked over the life of the bond, the inflationary component varies based on inflation. This formula can create an interesting and rare situation where the inflationary component is negative and can reduce the composite rate to 0, but the rate will not fall below 0. In a nutshell, in the worst case scenario I-bonds will return little or even nothing, but you can’t lose money! Also, the rates change every six months, so the prospect of this happening over of long term period is very slim.
How I use I-bonds:
1. As part of a client’s emergency fund package.
2. As a tax-deferred savings vehicle.
3. College planning. This is an easy way for grandparents to gift small amounts for college without hassle.
4. Clients that hold large sums of cash can reduce their overall tax liability by moving money from a taxable money market type account into tax-deferred I-bonds.
The previous six month period was not idyllic for I-bonds, but rates have improved. The effectiveness of I-bonds have returned. While not sexy or designed to outperform stocks, I-bonds can be a nice addition to almost any portfolio.
If you would like to learn more about I-bonds, here are a couple good website suggestions:
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
http://www.savings-bond-advisor.com/
Nashville, TN
http://www.vhfinancialmanagement.com/
A few months ago I was discussing with a client the fact that one of my favorite little tools, I-bonds, were not as effective as they once were. Over the last six months I-bonds were not attractive. The reason for the shortcoming was the negative inflation rate component of the composite return associated with I-bonds.
While I-bonds have struggled over the previous 6 month period, the new rate is appealing. The new annualized rate for the six month period from November 2009 to April 2010 is 3.36%, and that’s 3.36% tax deferred!
Why I like I-bonds:
1. They grow tax deferred! A taxpayer in the 25% tax bracket will receive an equivalent taxable return of 4.48% on the current I-bond six month annualized return.
2. I-bonds can be used tax-free to pay for certain college expenses. Although, there are income restrictions to use this feature.
3. I-bonds have an inflation component factored into to the composite (total) rate of return. If inflation creeps up, the total return of I-bonds will increase.
4. I-bonds can be used as emergency funding in a financial plan. There are redemption restrictions:
• I-bonds cannot be redeemed within one year of purchase (special provisions may apply)
• I-bonds redeemed in years 2-5 incur a three month interest penalty. This penalty may be tax deductible.
• I-bonds redeemed after 5 years incur no penalties.
5. I-bonds are a debt of the US government and are an extremely safe investment. Note: I-bonds have a composite rate, which is based on two components: 1. A fixed rate component, and 2. An inflationary component. While the fixed rate is locked over the life of the bond, the inflationary component varies based on inflation. This formula can create an interesting and rare situation where the inflationary component is negative and can reduce the composite rate to 0, but the rate will not fall below 0. In a nutshell, in the worst case scenario I-bonds will return little or even nothing, but you can’t lose money! Also, the rates change every six months, so the prospect of this happening over of long term period is very slim.
How I use I-bonds:
1. As part of a client’s emergency fund package.
2. As a tax-deferred savings vehicle.
3. College planning. This is an easy way for grandparents to gift small amounts for college without hassle.
4. Clients that hold large sums of cash can reduce their overall tax liability by moving money from a taxable money market type account into tax-deferred I-bonds.
The previous six month period was not idyllic for I-bonds, but rates have improved. The effectiveness of I-bonds have returned. While not sexy or designed to outperform stocks, I-bonds can be a nice addition to almost any portfolio.
If you would like to learn more about I-bonds, here are a couple good website suggestions:
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
http://www.savings-bond-advisor.com/
January 2, 2010
Energy Tax Credits and Misleading Ads
By Joe Alfonso, CFP®
Santa Clara, CA
http://www.aegisadvisory.com/
You’ve seen the ads for “huge savings” on central air conditioning systems touting a $1,500 federal tax credit. What these ads are referring to is the expansion of tax credits for heating and air conditioning equipment in The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law on February 16 of this year. What these same ads do not state, however, is that not all systems qualify for the credit, nor do all taxpayers.
Only systems that meet certain efficiency ratings are eligible. Also, the credit itself is actually a credit for 30% of the cost of the installed system up to a maximum of $1,500. If the system costs less than $5,000, the credit will be less than the $1,500 maximum. Last but not least, the credit is “non-refundable”, which means that it is capped at the amount a taxpayer actually owes in taxes, reduced by other available credits. Lower income taxpayers who qualify for the Earned Income and other credits may see their energy credit limited.
Putting aside taxes, it seems dealers are inflating the cost of these systems to $5,000 or more in order to be able to claim that their products qualify for the maximum $1,500 credit. Overpaying for a product just to qualify for a tax credit which may itself be limited is not smart. Many dealers seem to be cynically using the tax laws to mislead buyers. Unless and until greater regulatory scrutiny is placed on these dealers, this is clearly an area where the buyer needs to be aware in order to avoid being ripped off.
Santa Clara, CA
http://www.aegisadvisory.com/
You’ve seen the ads for “huge savings” on central air conditioning systems touting a $1,500 federal tax credit. What these ads are referring to is the expansion of tax credits for heating and air conditioning equipment in The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law on February 16 of this year. What these same ads do not state, however, is that not all systems qualify for the credit, nor do all taxpayers.
Only systems that meet certain efficiency ratings are eligible. Also, the credit itself is actually a credit for 30% of the cost of the installed system up to a maximum of $1,500. If the system costs less than $5,000, the credit will be less than the $1,500 maximum. Last but not least, the credit is “non-refundable”, which means that it is capped at the amount a taxpayer actually owes in taxes, reduced by other available credits. Lower income taxpayers who qualify for the Earned Income and other credits may see their energy credit limited.
Putting aside taxes, it seems dealers are inflating the cost of these systems to $5,000 or more in order to be able to claim that their products qualify for the maximum $1,500 credit. Overpaying for a product just to qualify for a tax credit which may itself be limited is not smart. Many dealers seem to be cynically using the tax laws to mislead buyers. Unless and until greater regulatory scrutiny is placed on these dealers, this is clearly an area where the buyer needs to be aware in order to avoid being ripped off.
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