Monthly Archives: August 2012

When Working Until 70 Isn’t Enough

The Wall Street Journal recently published an article based on research by the Employee Benefit Research Institute.  

The conclusion

For about one-third of working-age households (those between ages 30 and 59 in 2007), working until age 70 won’t enough to provide adequate income in retirement.

Other studies disagree:  the Boston College Center for Retirement Research said that:

… by age 66 “about 55% of households are projected to be prepared for retirement” and that by 70, 86% are. They also found that at age 70, “low-income households … are nearly as prepared for retirement as their high-income counterparts (82% vs. 88%).”

When and how you retire depends on the decisions you make while you’re working.   “Retirement” is actually a fairly modern concept.  For most of human history people worked until they couldn’t work any longer and then were supported by their children.  It’s one of the reasons to have large families: they were the parents’ old age plans.

During much of the 20th Century many men worked in jobs that involved hard physical labor.  As we became more of a service economy, it became physically possible for people to work until later in life and many choose to work after the traditional retirement age because they want to.

The important thing to remember is that if you get financially ready for retirement, you have a choice.  That’s why it’s important to prepare, so that to retire or to keep working is your decision.


It’s Great to Have a Private Jet

We have been very earnest on this blog, but from time to time it’s useful to dream and dream big.  So we will look at some lifestyle issues ranging from travel to things most people would like to own … but can’t.  One of them is our own private jet.

During a speech to Duke University’s graduating class Oprah talked about the secrets of joy and success. Among them: owning a mansion and a jet.


“It’s great to have a nice home. It’s great to have nice homes! It’s great to have a nice home that just escaped the fire in Santa Barbara,” she told the students. “It’s great to have a private jet. Anyone that tells you that having your own private jet isn’t great is lying to you.”

We have been fascinated by flying since we were kids and went out to the local airport and got a ride in a Piper Cub during a fund raiser were local pilots gave rides for “a penny a pound.”  I got my pilot’s licence and spent time flying small rented planes when I could afford it.  I have enjoyed my very occasional rides in corporate jets and still love flying … it’s the hassle at airports that have taken a lot of fun out of the experience.

Which is one of the other pleasures of your own private jet: no airport hassles with the TSA.

Smart Ways to Manage a Windfall

Whether you have received an inheritance or won the lottery, before you splurge, take time to consider all the financial angles and come up with a solid plan.  There is a reason most lottery winners wind up broke.  Shady financial advisers may shower you with dubious investment schemes. Long-lost relatives could reappear with hard-luck stories. You might be tempted to quit your job, buy a more expensive house or make other costly decisions that could make your jackpot quickly disappear.  The bigger the jackpot, the greater the chances that you will be the victim of bad decisions.

Many people view a windfall as “found money” and treat it differently than money they’ve earned.  They’re much more likely to use it in a way they’d regret.

Win or inherit enough and banks will lend you enough money to put you in debt.  Yacht brokers will call, as will Realtors will call who have your dream home on the market.

Some financial planners advise waiting  until you give yourself time to come up with a solid plan for how you’ll use the money.   If your inheritance includes an IRA, there are special rules that you will want to consult with financial planners on.

The biggest mistake people make with a windfall is not figuring out how to make the money last.  If the money is big enough, assemble a financial team that includes a financial planner, a CPA (certified public accountant) and perhaps a lawyer.  If you are unaccustomed to handling large amounts of money, a financial planner is the most important part of the team.  You will want to do a search of planners who have a CFP™ (Certified Financial Planner) in their title, and someone with whom you are comfortable discussing your personal financial needs and goals.


How to Consolidate Your Investment Accounts

Keeping tabs on multiple investment accounts can be a hassle. Moving all of your assets to one firm “seems like an easy process, but it depends on what assets you’re moving where and to what types of accounts”   says Jason Butler, of T. Rowe Price Investment Services.

The firms try to make a transfer easy — you usually fill out a form and send a copy of your statement to the new broker. But first ask your current firm about potential tax consequences, transaction fees (including redemption fees) and transfer charges if you move your money. You can avoid most charges if you transfer assets “in kind” to your new account. But you may have to sell shares in a fund that the new firm doesn’t offer, which could trigger a commission or redemption fee. …

If you can, roll 401(k) funds directly into an IRA. Some plans will mail you a check payable to the new firm, however, and you’ll have to deposit it yourself. Done incorrectly, this could make you liable for income tax and a 10% penalty if you’re under age 59½.

When you shift assets, your old firm must forward the cost basis of your stocks to your new firm. The catch: This applies only to stocks bought on or after January 1, 2011; to funds, ETFs and dividend reinvestment plans bought on or after January 1, 2012; and to bonds bought on or after January 1, 2014.

Via Kiplinger’s

Why Invest Globally?

A major benefit of an interconnected global economy is the ability of investors to tap into a country or region’s competitive advantages. Some countries have abundant natural resources, while others excel at manu facturing or engineering. The ability to allocate capital across borders allows the entire globe to benefit.

Emerging capital markets are making these opportunities increasingly available to U.S. investors. Japan, Germany, the United Kingdom, and France, with well-established capital markets, are already home to some of the world’s largest publicly traded companies. As many developing countries move toward democracy and capitalism, they are developing their markets in which companies are publicly traded.

Often, these companies are dominant in their respective industries. U.S. investors who constrain themselves to domestic equities may be limited to an increasingly small portion of the world’s publicly traded equities. Over the past few decades, foreign markets’ share of world market capitalization has grown from 34% in 1970 to 54% in 2012 (source: MSCI).

Compared to the rest of the Developed world, over the last five years, the United States was in the top five only twice, in 2008 and 2011. (source: Thornburg Investments)

Because markets in the U.S. and overseas generally don’t move in tandem, spreading investment holdings among companies and markets not closely correlated to those of the United States can reduce overall portfolio volatility.

Part of our asset allocation strategy is to diversify our portfolios globally in such a way as to capture the returns that are available throughout the world.


Taxes On Investments

Investors are subject to a variety of taxes on investments, based on the type of returns received.

Ordinary Income Taxes
Some sources of investment income — primarily interest income from corporate and U.S. government bonds — are subject to taxation at ordinary income tax rates. Over the past 30 years, the highest marginal tax rates have ranged from 28% to 50%. In prior periods, the highest marginal rate reached as high as 70%. Clearly, higher marginal tax rates impact the amount of interest income one retains.

The interest income from municipal bonds is generally not subject to ordinary income taxes.  Recently municipalities have begun issuing taxable bonds.  In addition, most states levy a state income tax on bonds issued by other states.

Dividend Income Taxes
For many years, interest income from taxable bonds and dividend income from equities were taxed at the same rate. Legislation signed in 2003 changed the rules so that the maximum rate on certain types of dividend income is now 15%. This legislation could expire soon, and the tax rate on dividend income could increase in coming years.

Capital Gains Taxes
The third type of tax applies to capital gains — the difference between the price paid for an investment and the higher price at which it was sold. As with other tax types, these rates vary over time. Individuals pay capital gains taxes at ordinary income tax rates for gains on investments held less than 12 months. In 2003, the capital gains rate paid on securities held longer than 12 months was lowered from 20% to 15%. This legislation could expire soon as well.

“Real” returns should be calculated after taxes and inflation.  Tax awareness is something that we practice at all times.


Advising Women in Transition


We read an interesting article in Financial Planning magazine recently that spoke about women who found themselves “suddenly single” either through divorce or the death of a spouse.  The reason for our interest is because we have a number of clients who have found themselves in that position.  The author surveyed only “high net worth” people (assets over $1 million).

  • 7% are divorced
  • 7% are widows
  • 41% of first marriages end in divorce
  • Between 700,000 and 800,000 women become widows each year

 As baby boomers age, it is likely that the number of women who find themselves widowed will grow dramatically.  The challenges of serving this group will mean that financial advisers will have to learn new skills, learn to listen more and become more sensitive to the needs of people who may have left the investment decisions to their spouse.

For more information, feel free to contact us.


Certificates of Deposit

There are still many people who think of saving as taking their money to the bank and putting it in a Certificate of Deposit or “CD.”  For many, the interest they earned on their CDs was the money they spent to live on.  At one time, that was possible.  Today, I wonder what those savers are earning with rates at about 0.35% for a 6 month CD.  The real victims of the Federal Reserve policy of low, low interest rates are the elderly whose savings are being eroded by inflation that is several times higher than the interest they are getting on their CDs.

When you get to be a certain age, you start to recall the “good old days.”  For savers who are old enough to remember, I invite you to take a trip down memory lane.

6-Month Certificate of Deposit                                     Historical Chart

The advantage of CDs is that the US government guarantees the return of your money via the FDIC if your bank fails.  The disadvantage, at today’s low rates, is that after taxes and inflation the money you get back buys you less than the money you put in.

The best photos will sell your home

Home prices have begun to stabilize in many places and actually go up in others.  Is you have been waiting to sell your home, this may be the time for you to put your home on the market.

From the WSJ Market Watch, here is a valuable tip for making your home more salable:

Good pictures are crucial in marketing a home for sale. Just ask Clarissa and Mark Padilla, who were able to get a contract on their Sherman Oaks, Calif., condo unit in less than two weeks—and at a price they wanted.

Clarissa Padilla attributes the quick sale to the professional photography that marketed the home and was able to lure about 20 to 25 people to an open house the first weekend.

“When we saw the photos, we fell in love with our place all over again,” she said. “The colors were so bright, and it made it look fresh and very spacious. It’s only 950 square feet. [The pictures] made it look huge.”…

Listings with photos taken by professionals have about 61% more views than other homes—and that’s across all price tiers, according to research from Redfin, a real-estate brokerage.

“When people are searching for homes, they search by price range, location, bed and bath. But then once they have the list, the visual piece becomes a larger and more important part of the decision,” said Jani Strand, spokeswoman for Redfin. “Photos are the first impression, and can generate interest and excitement, which leads to good offers.”

Some even suggest that you choose your Realtor based on the quality of the pictures he uses to advertise the homes he lists.

Evaluate an agent or broker’s current listings and evaluate their property photos. If the pictures are blurry, grainy, crooked or poorly composed, you may be better off choosing another agent.

With the Internet becoming an increasingly important part of people’s home searches, photo quality and staging may make the difference between selling your home and having it sit unsold for months.

Clarissa Padilla said that a condo unit in the same building, and comparable to hers, sat on the market for five or six months before her home was listed. But the photos of the other unit weren’t taken by a professional.

Meanwhile, some of the prospective buyers who walked through their home thought that theirs was a staged model home. The Padillas had multiple offers right away

The Importance of Asset Allocation

Whenever you speak to an investment professional the topic of asset allocation always comes up.


Because asset allocation is responsible for most of the returns that an investment portfolio gets.

U.S. News’ Mitch Tuchman explains:

Yale professors studied money managers to uncover the source of their portfolio performance. They found that 90 percent of the returns came from the markets where they invested. Less than 10 percent came from the individual stocks they bought, and the timing of buying and selling investments.

Asset allocation simply means how much of a portfolio is invested in various asset classes.  Asset classes can be as broadly defined as stocks, bonds and cash.  But professional money managers break these broad categories down much farther.

Stocks, for example can be subdivided into (partial listing):

  • Large Cap Domestic Equity
  • Mid Cap domestic Equity
  • Small Cap Domestic Equity
  • Large Cap International Equity
  • Small Cap International Equity
  • Emerging Markets Equity

Bonds can be subdivided into (partial listing):

  • Long Term US Government Bonds
  • Long Term Corporate Bonds
  • Intermediate Term Bonds
  • Short Term Bonds
  • Tax Free Bonds

These lists are not designed to be an exhaustive list of the investment classes (we have not even touched on commodities and real estate), but simply to provide a brief example of what we mean when we speak of “asset allocation.”  The investment choices facing investors today are staggering in their complexity.   Yet more and more people are going to depend on their investment assets to provide them with a comfortable retirement after they leave the work force.

If you’re interested in more information about portfolio construction, send us a note.

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