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Archive for July, 2011


Some statistics about retirement

An article posted at July 28th, “25 Shocking but True Statistics About Retirement”, provides an incentive to plan.  The earlier one starts to plans for retirement and monitors their progress the more likely they are to have a comfortable retirement.  
Men will live on average 17 years after retirement.  Women will live on average 21 year after retirement.  Since these are averages, half of us will live longer and half will not live that long.  To properly plan you have to look into the future.  At least 20 years after retirement.
$740,000 of assets are needed if $50,000 of annual income is needed for 25 years, assuming a 5% rate of return and no inflation..  The amount is $1,000,000 if the inflation rate is 3% rather than no inflation.  If the inflation rate is 5% rather than 3%, the amount is $1,250,000.  Inflation must be considered in your planning.  45% of retirees do not factor  inflation into their planning.    The amount of inflation you plan for will depend on whether you are an optimist or a pessimist.  Then you have to allow for the fact that your forecast may not be accurate.  Monitoring your progress at least annually allows you to make adjustments.  It will be easier to adjust if inflation is less than you project. 
The annual monthly Social Security benefit will be $1,000 for a 62 year old who starts collecting benefits this year, assuming annual earning of $50,000.  If that retiree delays applying for Social Security benefits until age 70, the monthly benefit will be $1,951.  The annual increase in benefits currently exceeds comparable annuities being issued currently.  Currently 72% of recipients of Social Security benefits beginning at age 62.  When you start taking social security benefits and when you start taking withdrawals from Individual Retirement Accounts and qualified retirement plans can have a significant impact on how much you have available during your retirement.  
80% is a common rule of thumb for the amount of your pre-retirement income that will be needed in retirement.  Rules of thumb are probably less reliable than averages.  Start this aspect of your planning by analyzing your current expenditures.  The next step is to determine the expenses that you expect to change in retirement.
It is never too late to start planning.   As Winston Churchill said during World War II, “He who fails to plan is planning to fail” 

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Do you agree or disagree with this article?

10 craziest things about the debt-ceiling crisis

Commentary: Pay debts? Throw world into

recession? I can’t decide! 

July 25, 2011 Market Watch

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Now there is the “Neon Swan”

Jason Zweig discusses a new type of threat in his July 23rd column in the “Wall Street Journal”.  His definition of the neon swan is “…an event that is unmistakably rare, immensely important and blindingly obvious.”  He questions if we are capable of protecting ourselves from a “neon swan”.  It probably is obvious that he is referring to a default or downgrade of U. S Treasury debt.  
When looking at the markets, he wonders if many investors are coping “simply by closing their eyes.”Mr. Zweig relates a conversation with Theodore Aronson, a partner of an investment firm.  Mr. Aronson indicated that “…his firm hasn’t done anything to protect against the risk of a crisis in the Treasury market.”  Although they have thought about it, his firm didn’t “…know what to do….” 
The article also quoted William Bernstein of Efficient Frontier Advisors, “It is absolutely inconceivable that we would flat-out default and not pay anything”.  His concern is the “…ripple effect…”.
Mr. Zweig notes that the worst damage to markets is generally from what is not expected.  “Waiting may well be the wisest course this time.  You don’t want to ignore a neon swan, but you don’t want to overreact to it only to have it swim quietly away.”  READ MORE 
Another article on the same page as Jason Zweig’s article discusses that the cost for protection against a default by the U.S. Treasury is increasing. 
Currently, it is more expensive for insurance for one-year “…Treasury’s than on junk rated Indonesian bonds.”  It is also close to double the cost for one-year protection of other triple-A rated nations.  READ MORE
Forgive me, but this reminds me of when I was a growing up.  The neighborhood kids would organize a baseball or basketball game.  The person who was the worst pitcher (first baseman, etc.) insisted on playing that position.  If he didn’t get his way, he would take the ball and/or bat and go home.  They would rather destroy the game than not get their way.  

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U.S. Debt Limit

We have all heard or read about the current fight about the U.S. debt limit.  The issues that are discussed relate to infinite aspects of our lives including: economic, international, social, political, cultural.  Many of the issues being discussed have been argued and resolved before.  
As the current “situation” unwinds, we are seeing a lot of misinformation and rewriting of history.  The Peter G. Peterson Foundation  has been trying for some time to increase public awareness of the nature and urgency of key economic challenges threatening our future and motivate us to make changes.  Their statement about the current state of fiscal negotiations advocates compromise by both sides.  READ MORE 
I  saw an interview on TV that concerned me.  The journalist asked the politician if he knew of any economist that did not think there would be severe negative consequences if the U.S. defaulted.  His response was that he knew better because he has been working on this issue.  I “googled” the  politician.  Although one source indicated he had an MBA, none knew where he went to college or when he graduated.  Before becoming a politician he was in market research.  
There are an increasing number of articles about what investment vehicle will replace U.S. debt as the “safe haven” of the world.  
“The U.S. Debt Limit: Questions Answers” was recently released by Forefield.  The U.S.Debit Limit: Questions and Answers
My concern is that our country was built on a society that encourages innovation.  Those that benefited from the innovation provided a powerful growth engine for our society.  Our country learned from its experiences, both the failures and successes.  There were many disagreements and a diversity of views.  Today there appears to be an inability to understand and see how other views and approaches may have merit.  That hampers innovation and the ability to grow.   

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The use of Exchange-Traded Funds (ETF) is increasing

ETFs were introduced in the US in 1993.  There is about $1.2 trillion invested in close to 1300 ETFs today.  Some of the advantages are: lower-costs, tax savings, continuous trading, efficient portfolio construction, and transparity. 
There are critics of ETFs.  They are concerned that it encourages over-trading.  ETFs have been used for frequent trading rather than long-term investing. 
Another concern is that some ETFs that were designed for a narrow focus of the market or trading strategies.  Investors may not  understand the product, segment of a market or investment strategy.  These ETFs require analysis and an in depth understanding of a small proportion of the market they were designed for.   
Some funds are so specialized that there are not enough investors interested in them.  If the ETF cannot be profitable it will be closed.  This can have negative investment and tax consequences.  
ETFs may not be availble in employer-sponsored 401(k) plans.  The pricing of an ETF and transaction costs may create administrative barriers for employer-sponsored 401(k) plans.   
ETFs will continue to grow.  There will still be a need for mutual funds.  Many mutual funds are making changes to be more competitive to ETFs.  Each investor must pick the product that meets their unique situation.  Investors must understand the products they are using  to make the right choice in constructing their portfolios. 

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More can be less

Congress passed a law in 2006 intended to increase retirement savings.  As intended the law resulted in more employees enrolled in 401(k) plans.  Unfortunately they are contributing less.  The concern was that inertia resulted in many employees not signing up to participate in 401(k) plans.  The law permits employers to automatically enroll employees in 401(k) plans.   As intended there has been an increase in the number of employees enrolled in 401(k) plans.  
A majority of employers elected a default contribution rate of 3%.  That is, the employees contribution would be 3% of their salary unless the employee elected to contribute more.  Apparently inertia set in and fewer employees increased their contribution rate.  Previously the contribution rates averaged between 5% and 10%.  As a result there are more people contributing to their employers’ 401(k) plans but they are contributing less.  
Employees are permitted to contribute up to $16,500 in 2011.  Employees that are 50 and older can contribute an additional $5,500 in 2011.  Each plan has its own requirements and limitations.  Check the plans Summary Annual Report for the details of your employers’ plan.  
Studies have shown that a significant portion of our population have not saved enough to have the retirement they expected.  Generally, employees should be increasing their savings for retirement. 
A “qualified” plan like a 401(k) plan offers tax incentives.  Most significantly, the income contributed to the plan is not currently taxed.  For plans with a “Roth” feature the income contributed is taxed but qualified distributions are not taxed.  Both types of 401(k)s allow income, capital gains, to accumulate and reinvest without being taxed.  This tax-free compounding is a powerful tool to meeting your retirement goals.
If your employer, or you are self-employed, have a 401(k) plan review the amount you are contributing.  Make sure that you are contributing the maximum that you can.  If you can not contribute the maximum, contribute enough to maximize your employers’ match if they match your contributions.  

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Naming beneficiaries is more important and more difficult than may realize.

The July 6th article in the Wall Street Journal, “Beware the Beneficiary Form” is a good introduction to this subject.  It is too easy to name the wrong beneficiary.  The beneficiary designations on financial products generally override the terms of a will.  Errors in naming beneficiaries can not only defeat your planning, it can also increase taxes, complicate estate administration, and create other problems.
Frequently we name a temporary beneficiary intending to changing it after talking with our advisers.  Although it sounds like a good approach, most people do not follow-up. 
General advice is to review the designation every few years or after life-changing events.  It is too easy to think you just did it last year.  When you pull together your information to prepare your income tax is a good time to review beneficiary designation and ownership.  Then be sure to follow-up before April 15th. 

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“Bill Gross: How to fix the fractured U.S. job market”

The entire article needs to be read to understand what is being advocated.  Looking at the individual points, or just some of the points, will not give the reader an understanding of how Gross thinks jobs should be created. 

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“The 25 Documents You Need Before You Die”

The best financial plan, including the estate planning portion, is not complete if the plan is not implemented.  Providing for heirs is often a significant motivation for such planning.  If the appropriate documents are not created, updated, executed, etc. your objective can not be realized.  If you are incapacitated or have passed-away, your heirs and professionals will not be able to carryout your objectives if they are not aware of your intentions.  The July 2, 2011 article in the Wall Street Journal discusses  documents and methods of organizing the documents.
Periods of end-of-life and incapacitates are times of extreme stress.  Not knowing what you intended and/or not having easy access to your documents heightens the stress and increases the complexity of carrying out your plan.  

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Suggestions to get the recovery back on track

David Wessel’s June 30th column in the Wall Street Journal set some prescriptions to revive the recovery”.  His suggestions include: 
To help housing: The federal government should buy foreclosed homes from the banks and give them to the local governments to help housing.  State-owned agencies similar to Fannie Mae and Freddie Mae could refinance “credit-worthy underwater borrowers. 
To help employment: A tax credit for every worker hired or extra payroll dollars .
To improve confidence:  Pass free-trade pacts.  Passage of  bipartisan legislation to deal with defits.  Appointing and confirming  regulators for a growing list of vacancies.
Infrastructure:  Have a “quick round of infrastructure maintenance.
It is refreshing to see some people have serious ideas how our country can improve and grow.  We need more people thinking about solutions rather than problems.

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