Financial Planning is the new employee benefit.

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Some of the most progressive companies are introducing a new employee benefit: company-paid financial guidance.

Concerned about their employees’ retirement funds, and acknowledging the increasing scarcity of skilled employees, companies are looking for a benefit that is relatively inexpensive while making a big difference in employee satisfaction.

Financial insecurity troubles most people, from the entry-level employee to the highly compensated professional. Half of U.S. households are at risk of being unable to maintain their standard of living in retirement, according to one study. For most people, financial stress is a distraction from work and leads to lower productivity.

Money is the single largest source of stress for employees, ahead of work, relationships or health.
Employers are concerned about the impact employees’ financial problems are creating problems at work. Here’s what employers say they are most concerned about:
• Lack of retirement readiness 16%
• Paying down debt 15%
• Lack of emergency savings 13%
• Other 3%

Without professional guidance, most people take a seat-of-the pants approach. But that leaves them and their families wondering how they will survive the decades that they will spend after leaving the work force.

Many companies offer a retirement program, like a 401k, but are ill-equipped to do more than provide a menu of investment choices. To fill the information gap, more companies are offering financial-wellness programs. Others are considering such a move.

A program offered by Korving & Co. is a series of programs, provided by a CFP® (Certified Financial Planner™) professional. These are designed to educate participants about debt, investing, and retirement income planning.

Providing employees with professional education about these issues, on company time, in a relaxed setting is an economical way for companies to help their employees reduce stress. It also creates a great deal of good will and loyalty on the part of employees.

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Why unwinding QE is not a threat to the bull market.

Brian Wesbury has a new Monday Morning Outlook out that is worth considering.

On March 9, 2018, the bull market in U.S. stocks will celebrate its ninth anniversary. And, what we find most amazing is how few people truly understand it. To this day, in spite of massive increases in corporate earnings, many still think the market is one big “sugar high” – a bubble built on a sea of Quantitative Easing and government spending.

While passing mention is given to earnings (because they are impossible to ignore), conventional wisdom has clung to the mistaken story that QE, TARP, and government spending saved the economy from the abyss back in 2008-09.

A review of the facts shows the narrative that “Wall Street” – meaning capitalism and free markets – failed and government came to the rescue is simply not true.

Wall Street was not the driving force behind subprime mortgages. In his fabulous book, Hidden in Plain Sight, Peter Wallison showed that by 2008 Fannie Mae, Freddie Mac and other government programs had sponsored 76% of all subprime debt – not “Wall Street.” Everyone was playing with rattlesnakes and government was telling them it was OK to do so. But, when the snakes started biting, government blamed the private sector, capitalism and free markets.

At the same time, Wall Street did not cause the market and economy to collapse; it was overly strict mark-to-market accounting. Yes, leverage in the financial system was high, but mark-to-market accounting forced banks to write down many performing assets to illiquid market prices that had zero relationship to true value. Mark-to-market destroyed capital.

QE started in September 2008, TARP in October 2008, but the market didn’t bottom until March 9, 2009, five months later. On that day in March, former U.S. Representative Barney Frank, of all people, promised to hold a hearing with the accounting board and SEC to force a change to the ill-advised accounting rule. The rule was changed and the stock market reversed course, with a return to economic growth not far behind.

Yes, the Fed did QE and, yes, the stock market went up while bond yields fell, but correlation is not causation. Stock markets fell after QE started, and rose after QE ended. Bond yields often rose during QE, fell when the Fed wasn’t buying, and have increased since the Fed tapered and ended QE.

A preponderance of QE ended up as “excess reserves” in the banking system, which means it never turned into real money growth. That’s why inflation never took off. Long-term bond yields fell, but this wasn’t because the Fed was buying. Bond yields fell because the Fed promised to hold short-term rates down for a very long time. And as long-term rates are just a series of short-term rates, long term rates were pushed lower as well.

We know this is a very short explanation of what happened, but we bring it up because there are many who are now trying to use the stock market “correction” to revisit the wrongly-held narrative that the economy is one big QE-driven bubble. Or, they use the correction to cover their past support of QE and TARP. If the unwinding of QE actually hurts, then they can argue that QE helped in the first place.

So, they argue that rising bond yields are due to the Fed now selling bonds. But the Fed began its QE-unwind strategy months ago, and sticking to its plans hasn’t changed a thing.

The key inflection point for bond yields wasn’t when the Fed announced the unwinding of QE; it was Election Day 2016, when the 10-year yield ended the day at 1.9% while assuming the status quo, which meant more years of Plow Horse growth ahead. Since then, we’ve seen a series of policy changes, including tax cuts and deregulation, which have raised expectations for economic growth and inflation. As a result, yields have moved up.

Corporate earnings are rising rapidly, too, and the S&P 500 is now trading at roughly 17.5 times 2018 expected earnings. This is not a bubble, not even close. Earnings are up because technology is booming in a more politically-friendly environment for capitalism. And while it is hard to see productivity rising in the overall macro data, it is clear that profits and margins are up because productivity is rising rapidly in the private sector.

The sad thing about the story that QE saved the economy is that it undermines faith in free markets. Those who argue that unwinding QE is hurting the economy are, in unwitting fashion, supporting the view that capitalism is fragile, prone to bubbles and mistakes, and in need of government’s guiding hand. This argument is now being made by both those who believe in big government and those who supposedly believe in free markets. No wonder investors are confused and fearful.

The good news is that QE did not lift the economy. Markets, technology and innovation did. And this realization is the key to understanding why unwinding QE is not a threat to the bull market.

 

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Clear Skies Ahead

Brian Wesbury of First Trust:

You know the old saying about every cloud having a silver lining? Well, if you listen to some of the financial press, you’d think their motto was that clear skies are just clouds in disguise.

Friday’s GDP report showed the economy grew 2.5% in 2017, an acceleration from the average rate of 2.2% from the start of the recovery in mid-2009 through the end of 2016. Notably, what we call “core” GDP – inflation-adjusted GDP growth excluding government purchases, inventories, and international trade – grew at a 4.6% annual rate in the fourth quarter and was up 3.3% in 2017.

However, some pessimistic analysts were calling attention to a drop in the personal saving rate to 2.6% in the fourth quarter, the lowest level since 2005. The pessimists’ theory is that if the personal savings rate is so low, consumers must be in over their heads again, so watch out below!

But this superficial take on the saving rate leaves out some very important points.

First, consumers don’t just get purchasing power from their income; they also get it from the value of their assets. And asset values soared in 2017 as investors (correctly) anticipated better economic policies. The market cap of the S&P 500 rose $3.7 trillion, while owner-occupied real estate looks like it increased about $1.5 trillion. That could be a problem if we thought stock market or real estate was overvalued, but our capitalized profits approach says the stock market is still undervalued and the price-to-rent ratio for residential real estate is near the long-term norm, not wildly overvalued like in 2005.

Second, the tax cut that’s taking effect is going to raise after-tax income. According to congressional budget scorekeepers, the tax cut on individuals should reduce tax payments by $189 billion in 2019, which is equal to 1.3% of last year’s after-tax income. So, consumers are going to be able to save more in the next few years, even if we don’t include the extra income that should be generated by extra economic growth.

Third, the personal saving rate doesn’t include withdrawals from 401Ks and IRAs, many of which are swollen with capital gains. So, let’s say a worker contributed $5,000 of their income into a 401K at the end of 1988 and kept that money in the S&P 500 ever since. Today they can withdraw more than $97,000 and spend it. When calculating the saving rate, the government counts every penny of that spending while not counting a penny of it as income. As the population ages and spends down wealth they’ve already made, the saving rate tells us less and less about the saving habits of today’s workers.

Sometimes good news is really just good news. Unfortunately, some analysts can’t look at clear skies without imagining clouds.

 

 

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Market Shakeout

Following a virtual non-stop rally in the stock market since the beginning of 2017, we are not particularly surprised that the stock market should stop and take a breather. What many people find disconcerting about this sudden drop is it’s steepness and breadth. We have not been exposed to a decline this steep for quite a while.

Some commentators actually blame good economic news for the market drop, claiming that a robust economy has triggered renewed inflation fears, which they assert will lead the Federal Reserve to raise interest rates faster than expected.

Our view is that there is nothing fundamentally wrong with the economy, or with an increase in interest rates which has been widely anticipated. Long-time market observers have seen this movie before, it’s just been a long time since we last saw it. From what we have been reading, some large institutions are employing trading systems that trigger large sell orders at certain levels in the market, which in turn causes a cascading series of further drops.

On a fundamental level, the stock market responds to the economy, and we see no indications that anything has changed since the start of the year. Hiring is up, wages are rising, and millions of people are getting bonuses that they haven’t seen in years. Take-home pay will go up for millions more Americans beginning this month. Lower corporate tax rates should lead to higher corporate profits which should lead to higher stock prices. Still other corporations that have billions of dollars parked overseas, like Apple, are bringing a lot of that money home and are promising to invest it in the U.S. economy.

While the recent free-fall in the Dow has been spectacular, the markets have been abnormally placid for about eight years now. A healthy market sees run-ups and pull-backs, and in recent memory the pull-backs have been on the maximum order of maybe 3% total. While we certainly prefer the markets always go up, the reality of long-term market history is that to have corrections on the order of 5% – 10% in the midst of a bull market isn’t unprecedented or even that unusual. We don’t think this pull-back signals the end of the bull market run, but rather that we might be getting back to a more historical norm.

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Market Commentary by Bill Miller

Here are some selected comments by highly regarded portfolio manager Bill Miller:

The year 2017 surprised most pundits in several ways. It was the only year since good records have been kept where stocks were up every single month. It was the lowest volatility year on record. It had no correction of even 3%, which was unprecedented. Economic growth accelerated globally as the year progressed and the US economy enjoyed a couple of quarters of 3% growth.

Earnings grew double digits. Stocks were up over 20%, and the OECD indicates that the 45 largest economies in the world are all growing, something not seen in over a decade. The consensus appears to be “more of the same” in 2018. Strategists and investors generally are bullish on the economy, most also seem to be bullish on stocks.

There is growing concern that the great bond bull market that began in late 1981 is over (this is surely correct in my view), but divergence on what that might mean for stocks…….

In the Barron’s Roundtable, several commented that rising rates could compress valuations if yields went above 3% and that stocks could end the year down. I think that is wrong.

I believe that if rates rise in 2018, taking the 10-year treasury above 3%, that will propel stocks significantly higher, as money exits bond funds for only the second year in the past 10, and moves into stock funds as happened in 2013. Stocks that year were up 30%, mostly as result of that shift in fund flows. …

I think we are also likely to see inflation begin to stir, perhaps in a year, as labor force slack and excess manufacturing capacity both decline. Finally, I think the effects of the tax cut are only partially in the stock market. The market appears to have discounted the earnings boost to companies whose profits are mainly domestically sourced. It is not clear that a potentially material pickup in consumption has made its way into stock prices.

Many US companies have already announced special bonuses to employees or increases in their minimum wage as a result of the business tax cut and the ability to repatriate the trillions of cash currently held overseas. The employees getting such bonuses likely have a marginal propensity to consume approaching 100%.

Very little will be saved; almost all will be spent, which could add significantly to growth. I think we could print 4 quarters of 3% growth or better of real GDP. If inflation hits the Fed’s target of 2%, that would imply 5% nominal GDP growth. In a “normal” world 10-year rates would tend to be around the same as nominal GDP, yet another reason to be wary of investing in bonds.

Overall, I continue to think, as I have since the financial crisis ended, that the path of least resistance for stocks is higher.

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Savers vs. Investors

The last two decades has been devastating for savers, especially retirees.

A Wall Street Journal article noted that retirees continue to get squeezed and are concerned about making their savings last. While the Dow Jones Industrial Average (DJIA) index has tripled since the trough of the financial crisis, the average one-year CD has not paid more than 1 percent since 2009.

The DJIA stood at 26,405 (as of 1/25/2018), a more than 20 percent increase since the 2016 election, and the value of the digital currency. As a result of a strong stock market performance, stocks may have become an outsized portion of investors’ portfolios, thereby necessitating some rebalancing.

This means that investors who have benefited from the stock markets rise may find themselves taking more risk than they realize.

If you are concerned about stock market risk, call us.

 

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The Great Wealth Transfer: Husband to Wife

Let’s face it, women outlive men. We’ve heard this before, but this presents a unique challenge for planners.

In the traditional family the husband is often responsible for investments. Many financial planners never talk to the wife until the husband dies. That’s when we find out how much or how little the wife knows about the family finances.

While the financial services industry focuses on the transfer of wealth from parents to children, the greatest wealth transfer is from husband to wife.

Approximately 76 million baby boomers are steamrolling toward retirement, and among them 58 percent of women of retirement age are going to need financial guidance. This is especially true of the do-it-yourself investor. In too many of these cases, the wife is just unaware of the husband’s investment strategy. She may not even know the value of the family investments or even where they are located.

Sometimes the situation is complicated by children still living at home, and by ageing parents who depend of the surviving spouse for care and support.

These are just some of the reasons we published a set of books: Before I Go, and the Before I Go Workbook.

Copies of these books are available at Amazon.com or you can contact us.

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Required Minimum Distributions

In 2017, the oldest baby boomers, who turned age 70 in 2016, reached the required beginning date (RBD) for taking withdrawals from traditional IRAs and employer retirement savings plans: April 1, 2017. The RBD, the latest possible date allowed to take a mandatory required minimum distribution (RMD) from traditional IRAs and tax-deferred plans, is April 1 of the year following the year that an individual reaches age 70½ and baby boomers are there now. At this time, retirees are required to spend down these accounts, whether they need the money or not, and withdrawals are taxed as ordinary income.

A 2017 article in the AAII Journal noted that the RMD schedule does not fit retirees’ spending patterns. The first RMD at age 70½ is 3.65 percent of the account balance and the RMD at age 90 is 8.77 percent of the account balance, which looks like a “waterfall” when plotted on a graph. About $10 trillion is sitting in baby boomers’ tax-deferred accounts. If they do not calculate the amount of their RMD correctly, the penalty is 50 percent of the amount that they failed to withdraw.

Call us for more information.

 

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Getting a written retirement plan makes you twice as likely to succeed.

A study by the Charles Schwab brokerage firm found that people with a written retirement plan are 60 percent more likely to increase their 401(k) contributions and twice as likely than others to stick to a monthly savings goal. But only 24 percent of Americans have a financial plan in writing, according to the study. Those with a plan are also more likely to have a budget and an emergency fund.

Call us for a customized written retirement plan just for you.

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Saving and Retirement

The Center for Retirement Research (CRR) at Boston College, found that 52 percent of working-age U.S. households are at risk of being unable to maintain their standard of living in retirement. Many recognize the possibility of a shortfall but 19 percent do not. Contributing factors include increased life expectancy, declining Social Security income replacement, and the shift from pensions to defined contribution savings plans. Older Americans are entering retirement carrying more debt. According to a paper by the Retirement Research Center at the University of Michigan, more Americans between ages 56 to 61 are carrying more debt than any time in recent history. Another retirement problem receiving increasing attention is the social isolation of retirees, which has been deemed a risk equal to or greater than major health problems such as obesity.

Studies about retirement savings plan contributions indicate a lack of participation by many American workers. A study by the PEW Charitable Trusts found that 25 percent of millennial adults participate in employer-sponsored defined contribution retirement plans versus 40 percent of Generation X and 43 percent of baby boomers. Stated another way, a large majority of millennials have no retirement savings plan.

If you are concerned about having the money to retire, call us.

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