Is High Market Volatility the New Normal? 10/8/11
Are you tired of dealing with the market’s wild swings….well, perhaps this is the “new normal”
Andy Barkate
Are you feeling lost and whipsawed by a market that is out of control? You’re not alone.
Here’s why: In the past month, the Dow Jones Industrial Average has seen an extraordinary number of triple-digit market swings. The DJIA moved up or down by over 100-points 68% of the time –15 of the last 22 trading days– and the number is even higher if you track only intraday swings.
It may not be unprecedented volatility, particularly compared to 2008, but the current roller coaster ride is unique, frustrating, and by many accounts, expected to continue.
“Until you address the underlying drivers of the volatility, you can’t really expect it to go away,” says Alec Young, Equity Strategist at Standard & Poor’s. “It’s a very headline-driven market.”
Simply put, volatility is the spawn of uncertainty, and uncertainty is kryptonite to the stock market.
From concerns about the US economy, the contagion effect from the European debt crisis, the pace and reliability of earnings growth, currency swings, commodity prices, the caustic political environment, and debt and deficits across the globe; the realm of uncertainty grows and changes every day.
Even if the benchmark indexes are flat or down for the year, volatility can be your ally, especially for active investors. “There’s huge potential for a smart trader to exploit these swings,” Young says, adding caution “that most traders don’t make money.”
And he’s not just giving advice to others, he is living it too. “We’ve seen so much of it (volatility), at this point, we’re sort of stepping back and stopping this whole volatility chasing game.” Young recommends investors “focus on very defensive areas like staples and utilities,” and to avoid financials.
So the long answer according to Young is yes, volatility is here to stay. It won’t abate for at least another few months.
Obama’s New Plan May Hit Your Retirement 9/30/11
Sometimes you have to read between the lines to get the real meaning. Unfortunately, most things that come out of Washington fit into this category. It’s quite apparent that Washington needs to raise more money. The big question is “where will they get it?” This article suggests that there looking at you.
Andy Barkate
by Robert Powell
Wednesday, September 21, 2011
If you’re wealthy or you receive Medicare, President Obama’s proposal to cut the federal deficit could very well either raise your taxes or cut your benefits. There’s no winning if you’re both rich and a Medicare beneficiary.
The president this week offered up his plan to reduce the nation’s deficit by $3.6 trillion, and the proposal calls for both tax increases — including a new tax on millionaires — and spending cuts.
“Either we ask the wealthiest Americans to pay their fair share in taxes, or we’re going to have to ask seniors to pay more for Medicare,” Obama said in a speech. “We can’t afford to do both.”
To be sure, Obama’s plan is, as proposed, unlikely to become a reality; Republicans denounced the president’s recommendations to the Joint Deficit Reduction Committee. But any version of a Republican plan that cuts Medicare benefits without increasing taxes on corporations or the wealthy isn’t likely to become a reality either. President Obama threatened to veto any such bill.
At some point, however, someone’s retirement plan is going to be affected. And it’s likely — despite Obama’s either/or statement — that at least two million seniors, and especially those with income of more than $85,000, will face higher health-care costs in the form of increased premiums and surcharges and/or reduced services in retirement no matter how the politicians cut the deficit.
But President Obama’s plan to cut the deficit affects retirement plans, and Medicare, in other ways. According to experts at CCH, a Wolters Kluwer business, here are some of the ways the proposal affects your retirement planning.
The good news
President Obama did specifically exclude Social Security from his budget deficit proposals, so there would appear to be no direct impact on Social Security, said Mark Luscombe, a principal analyst with CCH.
Extracting savings out of Medicare
There are, however, a number of non-tax provisions to try to extract savings out of Medicare in areas where it is perceived that current payments are or may be excessive,” Luscombe said.
For his part, Jay Nawrocki, a senior writer at CCH, said the Medicare and Medicaid provisions will mostly affect Medicare institutional providers such as hospitals, skilled nursing facilities and home health agencies. “Practitioners such as doctors, nurses and therapists will not be impacted by these provisions,” said Nawrocki.
Overall, these provisions do not address the major components of either the Medicare or Medicaid reimbursement systems. “Hospitals will be most affected and may grumble the most because most of the cuts from their payments,” said Nawrocki. “These cuts, however, come from more peripheral payments such as reimbursement for bad debts, a $20 billion reduction over 10 years, and additional payments to teaching hospitals, a $9 billion reduction over 10 years, and not from the majority of reimbursements made to hospitals for the provision of services.”
While payments for some procedures will be reduced, Nawrocki said, the great majority of payments to hospitals will not be reduced.
Payments will, however, be reduced for rehabilitation hospitals, resulting in a saving of $3 billion over 10 years and payments to skilled nursing facilities will be adjusted as well, Nawrocki said.
Beneficiaries will pay
Luscombe said there are proposed increases in Medicare income-related premiums under Medicare Parts B and D. Under Obama’s plan, an additional $25 will be added to the Part B deductible for new enrollees in 2017, 2019 and 2021. And, Part B and Part D income-related premiums will increase by 15% until 25% of beneficiaries are subject to these premiums, said Nawrocki.
In addition, a 15% surcharge will be added to Medigap premiums starting in 2017. “The administration is concerned that Medigap plans that pay all of the copay and deductible amounts for beneficiaries cause people to use services without considering costs and encourage use of services that may not be required,” said Nawrocki.
Who does this affect and when?
According to Paul Clark, a senior Medicare analyst with CCH, the surcharge on Medigap policies proposed as part of the president’s deficit reduction plan would not go into effect until 2017, and would apply only to new Medicare beneficiaries that year. “Current beneficiaries and ‘near-retirees’ — I’m assuming that means people qualifying for Medicare between 2011 and 2017 — would not be affected by this proposal,” Clark said. “The surcharge is equal to 15% percent of the average Medigap premium or about 30% of the Part B premium. This applies across the board to new beneficiaries, regardless of income.”
As a guesstimate as to how much the Medigap surcharge would cost new beneficiaries, Clark said the Part B premium is pegged to income, so, in 2011 numbers, this surcharge on Medigap policies would cost somewhere between $35 and $110 per month extra per individual. The additional cost by 2017 would be slightly higher than that, he said. At the moment, Medigap policies cost between $85 per month and $250 per month, depending on where you live and the type of plan you select.
Using 2010 figures, Clark said about 17%, or 8 million, Medicare beneficiaries purchase a Medigap policy. But many more beneficiaries get coverage similar to a Medigap policy from their employers or former employers, Clark said.
Clark also noted that President Obama’s plan calls for an across-the-board increase of $25 in the Part B deductible in 2017, 2019, and 2021 — but, again, this would only apply to new beneficiaries, not current or near-retirees.
As for Medicare Part B and D premiums, Clark said President Obama’s proposal “could be a little clearer.” It calls for a 15% increase in income-adjusted premiums, again, starting in 2017, and ‘would maintain income thresholds associated with income-related premiums until 25% of beneficiaries under Parts B and D are subject to these premiums.’
Currently, Clark said there is a set monthly Part B premium for individuals with incomes of $85,000 or less ($170,000 for people filing a joint return). Then, the premium is adjusted between $85,000 and $107,000; between $107,000 and $160,000; between$160,000 and $214,000; and finally above $214,000. For 2011, most Medicare beneficiaries pay either $96.40 or $110.50 per month in premiums. But, according to the Social Security Administration, about 5% of Medicare beneficiaries, or some 2.3 million older Americans, presently have income above $85,000 and pay a higher premium. “I’m guessing that this 15% increase would apply to people with incomes above $85,000 or whatever the equivalent number will be in 2017,” said Clark.
Read Social Security’s explainer about Medicare premium rules for higher-income beneficiaries.
$248 billion in saving
So what does all this buy us? Obama’s proposal would save $248 billion in Medicare spending over 10 years and $73 billion in Medicaid spending also over 10 years, according to Nawrocki. As a reference, the total estimated spending on Medicare for fiscal year 2010 was $522 billion, according to the Medicare Trustee’s report, with $168 billion going to hospitals, he said.
Not surprising, others — not just Republicans — are up in arms. For instance, the American Hospital Association (AHA) doesn’t think it should have to accept more reimbursement cuts. They already accepted, they say, significant reimbursement reductions with the adoption of health-care reform. “President Obama’s proposal will make it harder for America’s seniors to receive the care they need and will result in the loss of jobs in communities across the nation,” the AHA said in a release.”
“(The) plan to cut Medicare and Medicaid funding would translate into at least 200,000 job losses to hospitals and the businesses they support by 2021. This is the wrong prescription to create a healthier America and sustain job growth in a sector of the economy that is actually adding jobs.”
Read the entire AHA statement on President Obama’s debt-reduction proposal.
The footnote
Of note, Clark, a CCH Medicare analyst, said one significant factor related to Medicare and the federal budget was left out of President Obama’s deficit reduction plan. “Under current law, Medicare payments to physicians are set to be cut almost 30% starting Jan. 1, 2012,” Clark said. “This relates to a law that has been on the books since 1997, requiring physician payments to be more closely aligned with changes in gross domestic product. Congress intercedes every year to postpone these physician cuts, without changing the underlying law. It is likely that Congress will intercede again before the end of the year.”
But in President Obama’s budget proposal for 2012, which was released earlier this year, he proposed freezing physician payments at current levels for two years, at a cost of $54 billion. According to Clark, President Obama’s plan was to pay for this “two-year fix by reducing improper payments and fraud and abuse and shifting payments away from some providers to finance the physician payments.”
“Since his deficit reduction plan did not mention the so-called ‘doc fix’ but proposes some of the same shifts in Medicare payments and focus on fraud and abuse, the overall ’savings’ to Medicare may be much less than the almost $250 billion proposed in the plan, assuming that Congress intervenes to avert the 30% cut in Medicare physician payments next year,” said Clark.
Details of the plan to reduce health-care costs are on pages 35 to 45 of the President’s document, “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.
Bottom line
As with many things related to retirement, nothing is certain except this: One must plan to deal with all of the risks, not just some of the risks, one might face in retirement. And in recent days, the notion that one has to plan for both expected and unexpected health-care costs in retirement should be front and center if wasn’t. So too should the notion that one has to plan for political risks as well.
Robert Powell is editor of Retirement Weekly, published by MarketWatch.
The Hidden Dangers in Safe Havens 9/14/11
As we all know, sometimes things aren’t what they seem. This is also true when it comes to investing your money. Many times when you think you’re investing in safe areas, those investments can also have a dark side.
Andy Barkate
Monday, August 22, 2011
provided by
As Europe’s debt troubles intensified earlier this month and United States debt was downgraded, many people rushed into gold and Treasury securities as a safe haven. It was the latest sign that in uncertain times, investors act in ways that can hurt them in the long run.
“They fled the perceived risk of falling stock prices right into the assured risk of overvalued assets,” said G. Scott Clemons, chief investment strategist for the wealth management division at Brown Brothers Harriman.
What drove those decisions was not logic but fear — fear of a repeat of September 2008. And that fear may only have intensified when markets dropped again late this week, sending yields on 10-year Treasury notes to record lows and the price of gold above $1,800 an ounce.
Even if the fear is understandable, however, acting on it may not be the best long-term strategy.
“If you were right about the timing decision to get out, you’re going to have to be right again about when to get back in,” said Joseph W. Spada, managing director at Summit Financial Resources in Parsippany, N.J. “Even professionals have trouble doing it. If that’s not going to be your strategy, then don’t do it once.”
But now that people have done it once, what are the risks of holding on to large positions in gold and Treasuries?
TREASURIES While the economy may seem bad to many people, it would not take much improvement for investors to lose money quickly on their investment in Treasury bonds.
A week and a half ago, the 10-year Treasury note was yielding only 2.10 percent, after Standard & Poor’s downgraded the United States’ credit rating. Since the yield of a bond moves in the opposite direction of its price, this meant demand for 10-year Treasuries was high.
If over the next six months, the yield were to move up another half of a percentage point to 2.60 percent, however, investors owning those bonds would have a negative 6.25 percent return, said Barbara Reinhard, chief investment strategist at Credit Suisse Private Banking in New York. If the yield curve were to move up a full percentage point during that time, the loss would be 14 percent.
She said such a quick increase could easily happen, as it did from October 2010 to January 2011 when the Federal Reserve began its second round of large-scale purchases of government debt, the program known as quantitative easing.
Now, plenty of people buy bonds with the intention of holding them until maturity. In doing that, it would seem that they would earn a return of 2.10 percent. But they would actually lose 1.5 percent, when the most recent inflation rate of 3.6 percent is factored in.
“That’s assuming inflation doesn’t rise,” Ms. Reinhard said. “Right now, you’re betting inflation will fall below 2.10 percent. You’re betting against history because inflation has been around 3 to 4 percent historically.”
This is not the brightest picture for people who added to their allocation of Treasury bonds. But many felt it was the only safe place.
J. D. Montgomery, a managing director at Canterbury Consulting, an investment consulting firm in Newport Beach, Calif., said he had a client who wrestled with where to put $5 million that he needed to keep safe. The client chose a three-month Treasury note, even though the interest was only $1,000.
There was at least some logic behind this. Most people who bought Treasuries were abandoning their investment strategy, and wealth advisers say that is more troubling than paltry returns.
“The risk of changing your strategy when it’s being tested as opposed to changing it when it’s not being tested is you risk derailing your long-term investment plan,” said Gregg Fisher, president and chief investment officer of Gerstein Fisher, a wealth management firm in New York.
So what should nervous investors have done? Selling Treasury bonds when everyone else was buying them would have been a start. But that might have taken too much discipline. Moving to cash was the top option because at least investors would have money ready when they felt comfortable returning to the markets.
GOLD Investors in gold are a different breed. They often have a passion for the metal that goes beyond returns. And they are not going to be swayed by arguments that gold, hovering around $1,800 an ounce, is overvalued.
“When you buy gold you’re saying nothing is going to work and everything is going to stay ridiculous,” said Mackin Pulsifer, vice chairman and chief investment officer of Fiduciary Trust International in New York. “There is a fair cohort who believes this in a theological sense, but I believe it’s unreasonable given the history of the United States.”
As for the nonbelievers who piled into gold, they need to think practically now. Only about 11 percent of gold has an industrial use. While gold can get lost or buried, it does not get used up like oil or natural gas. And its actual cost is between a third and half of where it is trading. Dan Denbow, co-manager of the USAA Precious Metals and Minerals Fund in San Antonio, said it cost about $600 to produce an ounce of gold, but that rises to about $1,000 when all the costs of mining are factored in.
Yet a bigger risk may come from exchange-traded funds for gold. While they let small investors buy gold easily — the price of one share of the GLD exchange traded fund is roughly one-tenth the price of an ounce of gold — that same ease of buying means investors can just as quickly sell their shares in a panic.
No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold’s value was driven by sentiment.
“Gold doesn’t have any intrinsic value,” said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”
(Mr. Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)
That said, having gold in a portfolio is still a good buffer against swings in other markets. Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor’s 500-stock index. Gold, however, was 28 percent more volatile.
“The smoother the ride, the more likely the investor is going to stay in his strategy,” Mr. Fisher said. “That produces a better result.”
He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.
For those who fled to gold and Treasuries, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks — a practice known as dollar-cost averaging.
“There are real and psychological benefits to it, because getting someone to take that first step is the hardest,” said Christopher Wolfe, chief investment officer for the private bank and investment group at Bank of America. “With a five-year time horizon, it makes a big difference. You might get one of those wicked big down days you could benefit from. But if you have a 30-year time horizon it doesn’t matter.”
Of course, if people had thought on such a long time horizon they might not have rushed to buy gold and Treasuries in the first place.
Retirement Savings Low on Priority List 9/3/11
How many of you spent more time planning your last vacation that planning your retirement? Sad but true…..
Virtually anything can be accomplished with a plan. Make your retirement a priority.
Andy Barkate
by Sheyna Steiner
Tuesday, August 23, 2011
While the recession, followed by a moribund recovery, may have imperiled Americans’ future retirements, market volatility is not the only culprit. A new survey from Bankrate.com has found that many Americans have curtailed or decreased contributions to their retirement savings accounts this year compared to a year ago.
Nearly 3 in 10 employed Americans (28 percent) are saving less for retirement than they did the year before, while 15 percent are saving more and 48 percent are saving about the same amount.
Time is of the essence
In the best of times, most people are woefully underprepared for retirement. Clearly these are not the best of times for everyone, which puts retirement savings even further behind the curve. With no quick solution to the economic malaise on the horizon, it may be time for many people to downsize their lifestyles to save money.
The key to amassing a substantial sum for retirement is consistent saving and investing over time. With millions of Americans out of work and the economic doldrums occupying the nation’s collective psyche, more people are focusing on survival rather than planning for the future.
This leads to a new set of worries. Nearly half of Americans, 47 percent, report feeling less comfortable with their level of savings than they did one year ago. That’s up considerably from a low in May — just three months ago — of 35 percent reporting discomfort with their level of savings.
“They probably feel that they don’t have the ability to save because either they fear being out of work or maybe their spouse is out of work. These are tough times,” says John Burke, CFP, owner of Burke Financial Strategies in Iselin, N.J.
Trade-offs in financial decisions
“People could have decreased their savings to pay off more debt,” says Robert Fuest, COO and head of investment research at Landor & Fuest Capital Managers in New York.
Data from the Federal Reserve indicate that Americans have succeeded in reducing household debt burdens. The household debt service ratio illustrates the relationship between debt payments to disposable personal income. It peaked at 13.95 in the third quarter of 2007 and fell to 11.51 in the first quarter of 2011.
Unfortunately, servicing debt requires resources that could be allocated elsewhere — for instance, for an emergency fund or your future retirement. Households have a finite amount of money that must be directed toward many different obligations, and the decisions are difficult when Americans are feeling squeezed.
“I would have expected the ’saving less’ number to be higher,” says Dan Yu, managing director and lead retirement expert of EisnerAmper’s wealth division in New York. “There is so much pressure everywhere else on people. Just making ends meet can be difficult for some people these days with all of the constraints that we’re dealing with.”
Rejigger the priority list
You’ve heard the motto, “Pay yourself first.” When the financial going gets tough, the first thing people do is stop paying themselves. While the wisdom of that strategy is questionable — after all, a perfect credit rating won’t finance retirement — retirement savings needn’t be cut off altogether. But the definition of wants versus needs may have to undergo change.
“Make a list of everything you spend money on and then rank it in terms of importance to you,” says Burke. “Food will be at the top, certainly.” Burke suggests also putting savings near the very top, and cutting a bit from the least important expenses to make sure there’s enough money to fund it.
Every expense is a choice, “but the worst choice is to be 50 or 55 and not have any money saved for retirement,” he says.
If circumstances force you to decrease the amount you’re saving, at least try to save something, implore the experts.
“If you have a job, you can put money away. It really comes down to budget constraints,” says Yu.
“When times are hard and you can barely make ends meet, 2 percent of your income is not going to make that big a difference. Frankly, you’ll be able to reduce income tax by a bit if you can do more (saving),” he says.
Make saving less taxing
Only contributions to a traditional IRA or conventional 401(k) or 403(b) are made before taxes. For contributions to a Roth IRA or Roth 401(k), taxable income will not be reduced in the year the contributions are made. Instead contributions and earnings can grow unfettered and be withdrawn tax-free in retirement.
By prioritizing spending and cutting monthly expenses, families may be able to save while meeting other objectives. But savers will have their work cut out for them as they get older.
“For those who are more mature and deeper in their careers, I would forewarn them that sometimes you have to give up current pleasures to be assured of having a comfortable retirement. For instance, if that means not going on an extravagant vacation, you may want to make those compromises,” says Yu.
Savers who start early have a distinct advantage over late bloomers, but whether you’ve been saving since age 25 or just starting at 35 or even 40, retirement savings need to aggressively increase with age.
“Between the ages of 35 and 45 they should really be maximizing all of their retirement accounts: maxing out the IRA or 403(b) or 401(k). I think if someone is earning $100,000 they should be saving the maximum in their retirement plan,” says Fuest.
That recommendation can be scaled down for people with lower incomes. For instance, someone with an income of $50,000 could aim for contributing half the maximum every year.
In 2011, the maximum you can contribute to a 401(k) or 403(b) is $16,500, whether in pretax or after-tax accounts. Those 50 and older can add $5,500 to that amount for a total contribution of $22,000. The contribution limit for IRAs is $5,000; $6,000 for those 50 and older.
Plan now rather than later
No matter how much money you earn, increasing your retirement savings could take some budgetary strategizing. In good times and bad times, tracking spending and making prudent choices can lead to a more fruitful retirement down the road.
Besides Social Security and the unpopular option of literally working yourself to death, Americans have frighteningly few options for their retirement years if they neglect to plan during their careers. As uncomfortable as the present economic environment is, being forced to work into your 80s could prove more disturbing.
Bankrate.com’s Financial Security Index dropped to 92.3, the lowest level measured since the monthly poll commenced in December. An accompanying slideshow offers detailed results of the latest FSI survey. Check out the advice and analyses by selected experts to help you manage your money optimally during these times of uncertainty.
Marshmallow Experiment 8/29/11
Sometimes the best things come to those who wait. And the same applies for those saving and investing for retirement. In most cases patience and perseverance can be the hallmark of a successful retirement plan. Chasing the latest shiny thing or last year’s highest returning investment will almost always result in disappointment. So, marshmallows really do have something to teach us.
Andy Barkate
by Steve Vernon
Friday, July 29, 2011
What insights about retirement planning can we gain from a classic child psychology experiment involving marshmallows? Plenty! Let me explain.
Decades ago, in what’s now come to be known as the “Marshmallow Experiment,” Stanford researcher Walter Mischel gave a group of three to five year-olds a choice: Eat one marshmallow now, or wait fifteen minutes and get two marshmallows. The experiment was intended to measure children’s ability to delay gratification.
What did Mischel discover? About 30 percent of the children were able to wait fifteen minutes to get the second marshmallow; the rest gobbled it down before the time was up.
Stanford researchers followed up with these children over the years and found that as they got older, the children who could delay gratification were more likely to do well in school, have higher SAT scores, and obtain jobs; generally, they were more likely to succeed at life. Low-delayers, however, were more likely to have higher body-mass index measurements later in life, have problems with drug use and generally be less successful overall.
This YouTube video of toddlers grappling with this weighty dilemma can teach us a thing or two about delaying gratification. You’ll see that the successful kids were able to distract themselves from the tempting marshmallow by singing to themselves, or covering their eyes, or playing hide-and-go-seek under the desk; they found some trick to delay eating the marshmallow. In short, they were sufficiently motivated to do whatever it took to get that second marshmallow.
So what does all this have to do with retirement planning? Quite a bit, actually. The fact is, almost half of all Americans start their Social Security benefits at age 62, which provides the lowest possible income. But if they could instead wait until age 70 to start receiving benefits, they could almost double their monthly income and increase their expected lifetime payout.
I understand that this may be easier said than done: When I’ve written about this topic in the past, I received numerous comments from many readers who challenged my reasoning to wait to start Social Security. Here’s a summary of a few of those comments, along with my responses:
• “Take it now. After all, you never know when you’ll die or what can happen in the future. Yes, it’s true that you can never know what will happen, but if you have at least average health, it’s more likely you’ll boost your lifetime payout by waiting.
• “You didn’t take into account the time value of money — you just compared total lifetime payouts in your analyses.” If you consider the time value of money, you’ll reach roughly the same conclusions.
• “I started taking Social Security early because I was in poor health.” Or “…because I had a job that depressed me greatly.” Or “…because I got laid off and couldn’t find work and had no other recourse.” If you have poor health or truly have no other recourse, these are valid reasons to start Social Security benefits early. Delaying benefits isn’t for everybody.
Of course there are circumstances where drawing Social Security early might be the best choice. But I find it very hard to believe that half of all Americans fall into this category.
I think what’s really happening with Social Security is that we’re conducting a wide-scale version of the marshmallow experiment among older Americans, with roughly the same results as the experiments involving the children: People are learning that they don’t have to wait and can instead take the money now.
The same phenomenon exists when employees are offered the option to take their payout in a defined benefit plan as a lump sum, rather than the lifetime monthly payout. Most people elect the lump sum so they can take the money now and not wait for those monthly payments to roll in.
This phenomenon is also evident with people who retire with 401(k) accounts. Most aren’t withdrawing from these accounts with the goal of making the money last for a lifetime. Instead, they pull from their 401(k) accounts what they think they need now, without much regard for making their accounts last a lifetime.
I’ll wager that the results of this wide-scale marshmallow experiment with retiring Americans will be the same as for the children: Most likely, the people who can delay gratification will have a more successful retirement.
How Can We Make Better Choices?
So how — and what — can we learn from the kids who were successful at waiting? First of all, the kids who were able to delay gratification made a commitment to themselves to wait for the second marshmallow. They still desired the marshmallow, as you can tell from the video, but they did whatever it took to distract themselves long enough in order to get more.
Mischel and his researchers were able to help the children obtain better results by teaching them some mental tricks, such as pretending that the marshmallow is just a picture, which made them able to wait the fifteen minutes. Another possibility that researchers are testing now is to use peer-pressure; show the subjects videos of kids who were able to wait.
Likewise, retiring Americans can make a commitment to make the best financial decisions for their future security. That might entail taking a part-time job that pays roughly what Social Security might provide immediately, thus giving you the ability to wait while your benefits grow.
You could also refocus your energy by taking the time to learn more about the ways to generate reliable, lifetime retirement income with the money that you already have. If you conclude that you’re not good at delaying gratification, maybe buying an immediate annuity is one way to provide the financial discipline to generate a retirement income that will last for life. Like the children, don’t dwell on the perceived advantages of grabbing the money now, but instead focus on strategies that enable you to make the best financial choices for your future.
And use peer pressure on yourself by seeking out people who are successful at managing their finances. Find out what they do, and how they’ve planned for a successful retirement.
I think the marshmallow experiment demonstrates that many us are hard-wired to make ineffective retirement planning decisions. However, I’m optimistic that with awareness of our challenges, and with some creative strategies and ideas, we can overcome our DNA and increase the chances of a successful rest-of-life.
5 Fixed-Income Bear-Market Strategies 8/24/11
Many of you may feel like you’re caught between a rock and a hard spot. Do you keep a big chunk of your investments in the stock market and continually pray that the recent craziness eventually stops? Or, do you suffer with the anemic interest rates of the bond market and those offered you by your local banker?
The attached article discusses a few areas which may give you a respectable return while keeping you off the roller coaster.
Andy Barkate
by Katherine Reynolds Lewis
Thursday, August 11, 2011
One of the biggest risks to your retirement is facing a bear market during the early years after you stop working. If you must sell stocks in a falling market, you risk depleting your nest egg at exactly the moment you need it — leaving you with too little savings to cover your needs for your retirement.
If you withdraw regular amounts from your portfolio to cover your living expenses during a market downdraft, you must sell more shares at a lower price. It’s essentially the reverse of dollar-cost averaging, which is what you did during the accumulation phase when you invested money at regular intervals. Dollar-cost averaging involves buying more shares when the market is down or fewer shares when it’s up.
“You’re liquidating a portion of the portfolio and locking in those negative returns and creating some very bad outcomes,” says Stephen Horan, head of private wealth management for the CFA Institute and co-author of “The New Wealth Management.”
“We call that sequence-of-return risk,” he says.
In such a scenario, it’s best to leave stocks alone to recover from the loss and to draw instead on the fixed-income portion of your portfolio. Retirement experts recommend employing one of the top five fixed-income strategies to ensure enough income in a bear market. Following are the pros and cons of each method.
CD ladder
A solid fixed-income strategy begins with calculating your bare-bones expenses and looking at what you will receive from Social Security and any defined-benefit pension. Next, choose a vehicle to ensure enough income each year to make up the difference.
One simple option is to design a CD ladder, such as a combination of one-, three- and five-year CDs, the principal amounts of which will cover your income needs in case stocks fall, says Rick Rodgers, a Certified Financial Planner in Lancaster, Pa. If the stock market is up, you can reinvest funds from the maturing CDs in higher-rate CDs rather than spending the principal.
“You’re never going to make money in fixed income; that’s not the purpose of it. After taxes and inflation, it’s break-even at best,” Rodgers says. This is particularly true in these times of low yields.
“When the market is going up, I am going to be overweighted in stocks so I will be selling some stocks and putting it into fixed income,” says Rodgers. “It smooths out the ups and downs.”
The downside of a CD ladder: low yields, no upside as the market fluctuates and continual effort to reinvest maturing CDs, says Lynn Mayabb, CFP, a senior managing adviser at BKD Wealth Advisors in the Kansas City, Mo., office.
Don’t let CD penalties prevent you from withdrawing your cash early, though. Weigh the penalty against the potential gain or need, Mayabb says.
Bond ladder
If you’re looking for a little higher yield, consider creating a ladder of bonds with sequential maturities. “Having that money come due on a regular basis eliminates the need to have a lot of money sitting in cash,” Rodgers says.
The two key risks to investing in bonds are interest rates rising and credit quality declining. “We address both of those issues by laddering it. Each one of those bonds that makes up the bond ladder is different,” he says.
It’s a good idea to stick with highly rated bonds and stable companies, and be sure to monitor your picks for any decline in quality.
One danger of a bond ladder is that you can inadvertently shift the asset allocation of your portfolio if you don’t manage carefully, Horan says. As the front of the ladder matures, the makeup of your investments shifts. On the plus side, you’ve guaranteed enough income for the critical first years of retirement, which “set the initial path” for your retirement portfolio, he says.
For an individual investor, a properly diversified bond ladder is likely to be too much work, says Carlo Panaccione, CFP and founder of the Navigation Group in Redwood City, Calif. A good financial planner can set this up for you, but you generally need a minimum of $100,000 to construct a properly diversified bond ladder.
Variants on bond ladders
“Sometimes a bond ladder doesn’t always make sense, depending on what the yield curve looks like,” Mayabb says. Often, the middle-term maturities tie up your cash longer but fail to reward you with higher rates.
Instead, she favors a barbell approach, in which you divide your money equally between short-term bonds and those with 10- to 15-year maturities, skipping intermediate-term bonds altogether. “Those are the sweeter spots for getting the rates.”
Or consider laddering the coupon payments on a bond, rather than the bonds themselves, Horan says. For instance, if you need $50,000 each year, you could buy a five-year bond with a 5 percent coupon and $1 million face value. At the end of the five years, you’d get $1 million back.
It may be more efficient to find a single bond with the desired payment structure, rather than piecing together five different bonds in a laddered structure, he says.
As with a traditional bond ladder, these variants may also suffer from a lack of diversification and need to be monitored for credit quality, says Panaccione.
Floating-rate fund
If all this seems like too much work, consider investing in a floating-rate fund — also called a bank-loan fund — which holds a variety of bonds or bank loans with adjustable rates, giving you exposure to a range of credits. “In fixed income, you have to be realistic about how closely you’re willing to watch” credit quality, Panaccione says. “If you’re not willing to review things on a regular basis, don’t buy individual bonds.”
Unlike individual bonds, floating-rate funds have no maturity date, so you can lose principal if market fluctuations cause fixed-income investments to drop in value. “I don’t like bond funds because they don’t guarantee my principal,” Rodgers says, while conceding that they can be a good choice in some cases. “For the individual investor who’s not using an adviser, they should be using a bond fund.”
Focus on the total return of your portfolio, rather than the rise or fall in a particular fund, says Anthony Valeri, CFA, a senior vice president and market strategist at LPL Financial in San Diego. Liquidity is an issue, since these bonds don’t trade on an exchange. “If we have a recession you’ll see price declines” in floating-rate funds, Valeri says.
Annuity
The classic strategy for ensuring a stream of income in retirement, of course, is purchasing an immediate annuity. This insurance product guarantees that you will receive a stream of payments for as long as you live.
The downside: You pay a premium for that guarantee and lose control of your assets forever.
“I’ve done annuities this year only because of clients demanding them,” Panaccione says. The insurance companies are “probably investing in what you would’ve invested in and charging you a premium. Is that what you need to sleep at night? Then it’s probably worth paying the premium.”
If you’re married, the question of an annuity becomes more complicated. You can buy a joint life and survivor annuity for a smaller payout, or opt for provisions that guarantee some portion of your payment goes to your spouse if you die. But it will cost you, Mayabb says.
By choosing an annuity, you lose the flexibility of changing your mind. “Once you annuitize, those assets are no longer yours,” she says. “With a bond ladder, CD ladder or investment account, if something happens and you need $20,000, you go sell something.”
401(k) Withdrawal Mistakes to Avoid 8/18/11
With the volatility of the stock market has exhibited the last couple of weeks, it makes sense to revisit your retirement accounts. At times like this one can better understand the meaning of “risk”.
Andy Barkate
401(k) Withdrawal Mistakes to Avoid
by Emily Brandon
Tuesday, August 9, 2011
Simply saving in a 401(k) plan isn’t enough to ensure your retirement security. You also have to withdraw the money from your retirement account in a way that maintains as much of your spending power as possible. This typically involves taking steps to minimize taxes and avoid fees and penalties. Making these 401(k) withdrawal mistakes could cost you in retirement
Leaving before you are vested. While you always get to keep your personal 401(k) deposits, you don’t get to keep your employer’s contributions until you are vested in the plan. Retiring or leaving the company before you are fully vested means that you could forfeit some or all of your 401(k) match. If you are close to becoming vested in the plan, sticking around a few extra months could add hundreds or even thousands of dollars to your nest egg.
amount not deposited in a new retirement account. “Make sure if you are going to roll over an old 401(k) that you always have the check made payable to the new custodian,” says Jean Dorrell, an estate planner and founder of Senior Financial Security in Ocala, Fla. “As a general rule of thumb, don’t ever have the check made payable to yourself.”
Rolling over into higher-cost investments. Transferring your retirement savings from a 401(k) to an IRA upon retirement or a job change often makes sense because IRAs typically offer more investment choices and lower expenses than 401(k) plans. However, if you have an especially good 401(k) plan where your former employer negotiated low investment fees on behalf of employees, you might want to leave the money in your old 401(k) plan. “If you have some really good investment options in your plan, that would be a good reason to keep your money in your 401(k),” says Laura Scharr-Bykowsky, a certified financial planner and principal of Ascend Financial Planning in Columbia, S.C. You don’t want to roll your money into higher-cost investments that will eat away at your life savings.
Two required minimum distributions in the same year. Withdrawals from retirement accounts generally become required after age 70½. Those who fail to withdraw the correct amount must pay a 50 percent excise tax on the amount that should have been withdrawn. You must take your first distribution by April 1 of the year after you reach age 70 1/2. In subsequent years, annual distributions are required by December 31. If you delay your first distribution until April, you will need to take two withdrawals in the same year, which could impact your income tax rate. “I’m a fan of taking the first distribution in the year you turn 70 1/2 because if you have to take two distributions in the same year, that could push you into the next tax bracket,” says Dorrell.
Withdrawals before retirement. If you take 401(k) withdrawals before age 55, you will generally have to pay income tax and a 10 percent early withdrawal penalty on the amount withdrawn. That means if you withdraw $5,000 from your 401(k) at age 50 and you are in the 25 percent tax bracket, you will only get to keep $3,250. Cracking into your nest egg early is expensive and should be avoided if you have other funds available. “In general, wait as long as you can until you withdraw from these accounts, and if you need the money, take out as little as possible and try to avoid the 10 percent penalty,” says Rick Salmeron, a certified financial planner and founder of Salmeron Financial in Dallas. If you roll the money over to an IRA, there are several
government-approved ways to spend your nest egg that don’t incur the early withdrawal penalty, including unreimbursed medical expenses that exceed 7.5 percent of your income, health insurance after a job loss, college costs, and a first home purchase up to $10,000.Copyrighted, U.S.News & World Report, L.P. All rights reserved.
Five Tax Scams to Avoid This Summer! 8/14/11
I bet you’ve been the victim one of these scams, or at a minimum heard of someone who has. Enjoy the read, and pass it on….Andy
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Ever Growing Debt 8/2/11
The following an interview with David Walker, former US Comptroller General. Over the past few years he’s had a candid approach to the current National Debt dilemma. In this interview he discusses the most recent increase in our nation’s debt ceiling and the potential ramifications of runaway spending. The video is approximately 10 minutes long and is well worth the time. Grab a cup of coffee and enjoy!!
Andy Barkate
US Less Than 3 Years Away FromBeing Greece: Walker
Published Tuesday, 2 Aug 2011 |10:28 AM ET
By: Jeff Cox CNBC.com Staff Writer
The US is only a few years away from reaching the same debt levels that pushed Greece to the brink of ruin, former comptroller general and head of the Comeback America Initiative David Walker said.
As the ratio of its debt to gross national product eclipsed 100 percent and surged toward 150 percent, Greece has twice in the last two years nearly defaulted on its debt. Only successive bailout packages from the European Union and International Monetary Fund prevented catastrophe.
When tolling up all the US debts, including huge unfunded liabilities to Social Security and Medicare, the US is on dangerous ground, Walker said in a CNBC interview.
“We are less than three years away from where Greece had its debt crisis as to where they were from debt to GDP,” he said.
The US is nearing the 100 percent threshold which historically shaves about one percentage point off GDP, which was just 1.3 percent for the second quarter and 0.4 percent for the first quarter.
With the recent increase in the debt ceiling and continued higher budget deficits at the federal level, the US is on course for its own crisis, Walker said.
“We are not exempt from a debt crisis,” he said. “We’re never going to default, because we can print money. At the same point in time, we have serious interest rate risk, we have serious currency risk, we have serious inflation risk over time. If it happens, it will be sudden and it will be very painful.”
He spoke as Congress is putting the final touches on approving an increase in the $14.3 trillion debt ceiling, a move deemed critical to avoiding a default. Standard & Poor’s has warned it still may revoke the coveted triple-A rating for US debt, a move that some fear would increase interest rates and further add to the economic slowdown.
While Walker said credit agency downgrades are generally a “lag indicator”—meaning that they look backwards rather than forwards—the Greece situation should stand as a template for where the US could be heading in terms of credit.
Though the US has the lowest average interest rate and lowest duration on its debt of any developed nation, it faces significant rate risk if it continues on the same path.
Greece now pays nearly 15 percent interest on its 10-year notes, while Italy pays 6.13 percent and Spain 6.38 percent. The latter two peripheral euro nations also face serious debt problems though not on a scale with Greece.
“We should recognize that this could be a leading indicator for us,” Walker said. “You can see what happens to interest rates if you lose confidence. They can go up very dramatically.”
What Would JFK Do? 7/15/11
Over the past few weeks, one can’t hide from the incessant posturing going on in Washington regarding the Federal deficit and the debt ceiling. Whichever side of the aisle you’re on, the attached article makes for an interesting read. To understand that lowering taxes actually increases Federal tax receipts, you must have had at least a basic economics course. It’s worked before, it will probably work again.
Enjoy the article…. Andy Barkate
One Democrat’s Advice: Raising Taxes Doesn’t Add Revenue
Figuring out how to reduce the budget deficit without raising taxes is indeed a tricky feat, since it seems to defy basic economic principles and is doomed to failure.
The futility of being able to get Washington’s house in order without additional tax contributions from wealthier Americans was expressed in plain terms by President Obama during his Friday news conference.
“I have not seen a credible plan, having gone through the numbers, that would allow you to get $2.4 trillion (in proposed spending cuts) without really hurting ordinary folks,” he said. “The notion that we would be doing that and not asking anything from the wealthiest among us or from closing corporate loopholes, that doesn’t seem like a serious plan to me.”
So what would be a serious plan? There clearly are two competing interests.
Hedge fund manager and “Gartman Letter” author Dennis Gartman described the clash Friday as between “that of an expansive, quasi-European-style socialism that the President and the majority of Democrats prefer or that of smaller, leaner, less-expansive government preferred by the Republicans.”
But that may be too simplistic. Many years ago, a popular president was asked how to cut spending without over-burdening wealth producers and throwing Grandma out into the street.
His advice:
“Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other,” this Democrat said. “It is increasingly clear that…an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits.”
He went on.
“In short,” he said, “it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”
And that’s exactly what John F. Kennedy did.
The 35th president of the United States, who delivered those remarks at a Dec. 14, 1962, speech to the Economic Club of New York, made good on his pledge.
As a result, federal tax revenues went from $94 billion in 1961 to $153 billion in 1968 as Kennedy slashed the capital gains tax and cut the top marginal tax rate from 90 percent to 70 percent.
Annual gross domestic product during those years ranged from a high of 6.5 percent to a low of 2.3 percent. And, no, old ladies and orphans were not sent begging into the streets looking for scraps of bread from cruel rich folks.
Calvin Coolidge and Warren Harding cut taxes through the 1920s only to see federal revenues rise from $719 million in 1921 to $1.164 billion as top marginal tax rates fell from 70 percent to below 25 percent.
During the Reagan years, the man they called Dutch cut taxes but doubled revenue, decreased unemployment from 7 percent to 5.4 percent and inflation from 13.5 percent to 4.1 percent, while median income grew by $4,000.
Yes, but what about those rich tax-avoiders. Didn’t they get the lion’s share of the benefit?
During the 1920s, the rich (then making more than $50,000) went from shouldering 44 percent of the tax burden in 1921 to 78.4 percent in 1928. In the Kennedy years, the rich saw their share of the tax burden gain by 57 percent while the poor shouldered 11 percent more. And in the Reagan years, the top 1 percent of earners paid 57.2 percent of taxes, up from 48 percent.
Much of the preceding research comes from my book (co-authored with Peter J. Tanous), “Debt, Deficits and the Demise of the American Economy” (Wiley), and is derived from a study by Daniel Mitchell of the Heritage Foundation conservative think tank.
So what to make of all this, as Congress fights a seemingly interminable stalemate over how to close the debt and deficit gap?
In closing, a quote from our book:
“JFK’s words could have been spoken today just as easily as they were 50 years ago,” I wrote in Chapter 8, page 102. “Economic history teaches us that when confronted with weakness the proper remedy is to grow, not suffocate the economy.”
10 Things You Need to Know About Your IRA 6/17/11
Individual retirement accounts held an estimated $4.7 trillion in 2010, which is just over a quarter of all retirement assets in the United States. Some 49 million Americans had at least part of their nest egg stashed in an IRA last year. How well you choose IRA investments and minimize taxes using these accounts will play a big role in how prepared you are for retirement. Here are 10 things you should know about your IRA.
1. Delay or pre-pay your taxes
Traditional IRAs allow you to defer paying taxes on up to $5,000 of retirement savings, or $6,000 if you are age 50 or older. Upon withdrawal, regular income tax is due on your savings and the interest. Roth IRA contributions are made with after-tax dollars and withdrawals in retirement from accounts that are at least five years old, including the earnings, are tax-free. Investing in both types of retirement accounts can add tax diversification and flexibility to your portfolio.
2. Later contribution deadline than 401(k)s
While you generally must make contributions to employer-based retirement accounts by December 31, you have until the date you file your taxes to make IRA deposits. If you make a contribution to an IRA between January 1 and your tax deadline, you should tell the financial institution which year the contribution is for. You can file a tax return claiming a traditional IRA deduction before the deposit is actually made, but the contribution should be in the account by the due date of your return.
3. Most IRA money is rolled over from 401(k)s
More than 10 times as many dollars are added to IRAs through rollovers than through direct contributions, according to an Employee Benefit Research Institute analysis of 14.1 million accounts containing $732.9 billion in 2008. Depending on their age, retirement savers can contribute up to $5,000 or $6,000 annually to an IRA, but there is no limit on the amount that can be rolled over to an IRA from a 401(k) or other retirement account after a job change or upon retirement. The average rollover amount was $74,785 in 2008, compared with an average individual contribution of $3,666.
4. Older age for retirement withdrawals
Workers who leave their jobs at age 55 or later (or age 50 for public safety employees) can take penalty-free 401(k) withdrawals at age 55. If retirees roll that money into an IRA, they will have to wait until age 59 1/2 to avoid the penalty. “If someone is 56 and they are retiring, they should roll over the part of the 401(k) they are not going to foreseeably need in the next few years and leave in the 401(k) what you need in the next few years,” says David Hultstrom, a certified financial planner and president of Financial Architects in Woodstock, Ga.
5. Penalty-free early withdrawals allowed
There are several ways to avoid paying the 10-percent tax for taking withdrawals before age 59 1/2. You can take penalty-free early withdrawals if you have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income, use the withdrawal to pay for health insurance after losing your job, become disabled, or are a military reservist ordered to active duty. You can also use the money to pay for higher education expenses or a first home purchase up to $10,000 ($20,000 for couples) without incurring extra charges. Setting up equal annuity payments from the IRA over your life expectancy or over the joint life expectancies of you and your spouse can also allow you to avoid the 10 percent tax.
6. You are responsible for shifting your investments
Almost half (46 percent) of IRA assets are invested in the stock market. The most popular IRA investments are equity mutual funds and individual stocks (39 percent), cash (22 percent), bonds (14 percent), and balanced funds (12 percent), according to EBRI research. Individuals must choose their own investments and are responsible for shifting those assets appropriately as they approach retirement. “Those who are younger and in the accumulation stage are more likely to be invested in equities,” says Craig Copeland, a senior research associate at the Employee Benefit Research Institute and author of the report. “Older investors and those with bigger account balances are diversifying across many assets and focused on the preservation of income.”
7. Roth option increasing in popularity
The $100,000 income limit for converting a traditional IRA to a Roth IRA was eliminated in 2010. Since then, there has been a surge in Roth IRA conversions. Many financial institutions, including Fidelity Investments, Vanguard, and Bank of America, reported four- and five-fold increases in the number of Roth IRA conversions executed in 2010. Vanguard, for example, completed more than 170,000 Roth conversions from the beginning of 2010 through December 16, up 550 percent from 2009. Retirement savers must pay income tax on the amount converted from a traditional IRA to a Roth IRA, but withdrawals will be tax-free in retirement. “You are paying upfront to remove the uncertainty of what future tax rates will do to your savings,” says IRA expert Ed Slott, founder of irahelp.com and author of “Stay Rich for Life!: Growing & Protecting Your Money in Turbulent Times.”
8. Withdrawals are required
You cannot shield money from taxes in a traditional IRA indefinitely. Distributions become required after age 70 1/2. Those who fail to withdraw the correct amount must pay a 50-percent excise tax on the amount not distributed as required. You must take your first required distribution from your IRA by April 1 of the year after you reach age 70 1/2. But in subsequent years, annual distributions are required by December 31. If you delay your first distribution until April, you will need to take two withdrawals in the same year, which could impact your income-tax rate. “For some people, two in the same year might be enough to throw them into a higher tax bracket,” says Hultstrom. Withdrawals from Roth IRAs are not required in retirement.
9. Costs matter
Retirement savers using IRAs sometimes pay higher fees than those with a 401(k) because individuals no longer have the group’s bargaining power to obtain lower-cost investment products and tend to make high-cost investment choices, according to a 2009 Government Accountability Office report. Pay attention to the fees and costs of each investment option and switch into similar low-cost investments when possible. “A 1 percent difference in fees over a lifetime makes a really big difference,” says Slott.
10. Special perks for high and low income savers
Retirement savers age 70 1/2 or older who are in the fortunate position of not needing the money in their IRA can avoid paying income tax on their required minimum distribution of up to $100,000 by donating it to a charity by Dec. 31, 2011. To qualify for the tax exemption, the IRA trustee must make the distribution directly to a qualified charity. Low-income workers who save for retirement may be able to claim a tax credit. If your modified adjusted gross income is less than $28,250 ($56,500 for couples) in 2011 and you contribute to an IRA or 401(k), you may be able to claim the saver’s credit. This nonrefundable credit is worth up to $1,000 for individuals and $2,000 for couples.
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