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Archive for July, 2014

23
Jul

Is your portfo as divesified as you think it is?

The following is taken fron an article in the July 2014 issue of Morningstar ETFInvestor.  Samuel Lee was the author of the article.

“Most investors understand that they should diversify a lot.  However, some hurt themselves by behaving inconsistently.  They diversify a lot while implicitly behaving as if they know a lot.  A big subset of this group is investors who own lots of different expensive funds.  Owning one expensive fund is a high-confidence bet on the manager.  Well-done studies estimate that the percentage of truly skilled mutual fund managers is in the low single digits.

It would be strange if your process for assessing mangers turns up lots and lots of skilled ones, because there aren’t many in the first place.  (If you see skilled mangers everywhere, chances are your process is broken or not discriminating enough.)  It  would be even stranger if you bet on many of them.  Doing so dooms you to getting index-like results while paying hefty fees.  It makes little sense to pay 1% or more of assets on an aggregate portfolio with hundreds of positions and marketlike behavior.

An exception is if you assemble a portfolio of extremely concentrated fund mangers.  Owning 10 funds with 10 stocks each put together will look like a moderately concentrated fund manager.  This is a model some successful endowments, hedge funds, and mutual funds use.

Most investors should own diversified, low-cost funds.  Those who believe they know something should concentrate to the extent that they’re confident in their own abilities.  A big dang is that humans are overconfident; many will concentrate when they should be diversified.”

Pay special attention to the above if you think it does not apply to you!

17
Jul

Recent tax rules permit longevity annuities (LAs) to be held in 401(k), IRA, 403(b) and other employer-sponsored individual account plans

A recent press release announcing the final rules explains that, “as boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
In general, the final rules:
• Amend the required minimum distribution (RMD) rules so payments don’t have to be taken from LAs to satisfy Required Minimum Distribution (RMD) requirements
• Set a maximum investment in an LA to the lesser of 25% of the plan account balance or $125,000 (adjusted for cost-of-living increases)
• Provide individuals with the opportunity to correct inadvertent LA premiums that exceed these limits
• State that the LA must provide that payments begin no later than the first day of the month next following the participant’s 85th birthday, although the maximum age may be adjusted later due to changes in mortality
• Allow for LAs to include “return of premium” death benefit provisions
• Expand the manner in which a contract can be identified as an LA
• Provide that LAs in qualified plans may not include “cash out” provisions, and no withdrawals are permitted in the deferral period, and, unless the optional death benefit or return of premium options are available, no payments will be made if the annuitant dies before the payment start date, although each of these restrictions may be found in LIAs that are not purchased within tax-qualified accounts
• For more information, the final rules can be read here.

Caution: This ruling will most likely have limited applicability. Taxes should not be the primary reason for financial decisions. It is a factor that should be considered after seeing how it impacts your financial plan.

What is a longevity income annuity?

A longevity annuity (LA), also referred to as a deferred income annuity or longevity insurance, is a contract between you and an insurance company. As the insured, you deposit a sum of money (premium) with the company in exchange for a stream of payments to begin at a designated future date (typically at an advanced age, such as age 80) that will last for the rest of your life. The amount of the future payments will depend on a number of factors, including the amount of your premium, your age, your life expectancy, and the time when payments are set to begin.

Caution: Guarantees are subject to the claims-paying ability and financial strength of the annuity issuer.

16
Jul

Reaching Your Goals

Gregory Karp, in his “Spending Smart” column “Money maxims: What dads can tell grads”, June 1, 2014 Chicago Tribune is the incentive for this blog.
Money can be saved or spent. How you handle money will have a significant impact on happiness and future financial well being. Studies relating to finances have increased in the last 15 years. Each year there seem to be more studies. Studies on happiness conclude that people are happier when they spend money on experiences rather than things. Other studies find that most people’s happiness increase as their income increases, up to about $70,000. Studies about retirement have found that the most important thing that anyone can do to reach their retirement living expenses is to save.
Saving is hard to do. Spending must be limited to available income. For most people, living within their income does not mean complete denial. It does require selectivity in the timing and amount of splurges.

Good daily spending habits are important. We have more control over daily spending habits than large items. Minimizing unnecessary and/or unwise expenditures will reduce many items that reduce the amount that can be saved on a regular basis. Most people give larger expenditures, such as homes and cars, significant thought and deliberation. They should also do the same for daily expenditures.

There are also studies that show that we should imagine ourselves in retirement. Aging Booth is an app that will show what you might look like when you age. You may have more incentive to save for that person. Contributing to a 401(k) plans and capturing any employer match may seem more important. Having part of your pay direct deposited to an investment account may also seem like a good way to be kind to the older you.
Necessities and a reserve fund come first. The reserve fund provides a cushion for the frequent unexpected expenditures. Preretirement six months of living expenses is generally recommended. After retirement, a minimum of living expenses after reoccurring income (like social security) for a year is recommended.

The sooner a saving program is started the less required on a periodic basis. To determine how much to save, you need to set financial goals. Your progress should be monitored, at least monthly; more frequently is better. Without knowing the future, your circumstance will change from what you originally projected.