What is a preferred stock?

From Investopedia:

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

Why are investors interested in preferred stock?  It’s all about income.  “Preferreds” (as they are generally referred to) usually pay higher dividends than common stock and have a higher yield than the same company’s bonds.  If the company gets into financial trouble preferred dividends have to be paid before common dividends can be paid.  If a company is liquidated, preferred stock holders are ahead of common stockholders if there are any assets  left to be distributed.

What are the downsides of Preferreds?  They do not have voting rights.  They rank below bank loans, bond holders and most other obligations of corporations except for common stock.  Most “retail class” preferred stocks are issued at $25 per share and usually have “call” provisions.  That means that the issuer can redeem them for “par” ($25) after a number of years.  This “call” is usually not exercise-able for 5 years, but can be exercised by the issuer any time after that.   This means that the price of a preferred stock can drop if the company that issued it gets into financial trouble, but will not rise much above $25 during it’s lifetime.

Bottom line, common stock is purchased for growth, preferred stock is purchased for income.  Choosing Preferreds requires a sophisticated knowledge of that particular market.  If you are interested, be sure to work with an RIA who know this market.

Cash Flow In Retirement

People who are getting ready to retire don’t go to a financial planner to be told how much they can spend.  Rather, they want an indication if their spending has a probability of exhausting their assets.  As financial planners, we can make some assumptions about what a safe withdrawal rate is, but we realize that “black swan” events do occur and that regular monitoring of client portfolios and withdrawal rates are required.  If it is determined that a client’s portfolios cannot sustain their desired cash flows, we discuss changes that will be necessary to insure the money lasts for their lifetime.

 As time passes and inflation causes prices to increase, we have discussions with clients about whether an increase in their monthly withdrawals are necessary.

 Most clients will adjust their spending habits based on market conditions, spending less when portfolios decline and more when they go up.

 To prevent month-to-month variations in client incomes we establish a “spending account” that’s usually invested in a money market fund to cover at least a year’s worth of anticipated withdrawals and expenses.  As that account is depleted over time, it becomes necessary to replenish it and, if required, the portfolio is re-balanced.

 Regular updates and reviews create peace-of-mind in people who look to their portfolios for retirement income.

Investing in collectibles

These’s an article in the Wall Street Journal that may intrigue people with substantial wealth or people who just have a hobby.  It’s about “investing”  in collectibles.

Some of the items mentioned are:

• MOTORCYCLES
• WATCHES
• STAMPS
• AUTOGRAPHS
• ELECTRIC GUITARS
• PHOTOGRAPHY

When I hear about collectibles I am reminded about the “Antiques Road Show,” a program that features people who bring old things to appraisers … and are told that grandma’s old clock is worth thousands of dollars.

The challenge with any investment is identifying something, whether it’s a financial security or a physical item like an antique motorcycle, and knowing enough to be able to make an informed judgement that it will appreciated in value.  Financial instruments like stocks have a ready market and you know from day to day what they are worth.  Collectibles are unique and their value depends very much on what someone who wants it is willing to pay, and that may vary widely over time and between potential buyers.

Unless you are wealthy I would suggest leaving collectibles alone as investment vehicles.  And if you are wealthy, hire an advisor who is an expert in that particular field.

What is common stock?

A share of common stock represents partial ownership in a corporation.

When people get together to form a company one of the issues to be decided is who owns how much of the company.  For example, let’s say three people form a company.  Person “A” puts in $500, “B” puts in $300 and “C” puts in $200.  If the company is formed as a corporation, “A” would get half the shares, “B” would get 30% and “C” would get 20%.   The number of total shares that are issued is largely arbitrary.  The owners can decide that the corporation will issue a million shares.  If that’s the case, “A” would get 500,000 shares, “B” 300,000 and “C” 200,000.

Generally in small companies the people who put up the money receive shares in the company and then form a “Board of Directors.”  The board makes the policy decisions for the corporation which the company’s management is directed to carry out.

Each shareholder gets one vote for every share of stock he owns when voting on issues coming before the board.

As the company gets larger it may decide to “go public.”  That means that it will allow the general public to buy an ownership stake in the corporation.  To “go public” requires the company to jump through many regulatory hoops to be legally allowed to sell some of its shares in what is called an “initial public offering.”  Once the decision is made, the company also has to decide where its shares should be traded.  The most common markets are the New York Stock Exchange (NYSE) or the NASDAQ (the “over the counter market”).  While the NYSE is the most prestigious  the NASDAQ  is where some of the biggest companies – like Microsoft and Apple –  are traded.   It is  easier to get listed on the NASDAQ so most companies “go public” there.

Once a company is “publicly traded” the owners of these shares have the same voting rights as the founders, one vote for every share they own.

Owners of common stock reap most of the benefits if a company is successful and have the most to lose if a company fails.  But that is an issue for another day.

Do your neighbors seem to have more money than you?

A recent blog post raises an issue that you may be wondering about:

“You look out the window of your home each night after dinner, staring across the street at your neighbors. You long for the cars they drive, their weekly manicured lawns, and even the vacations they seem to take several times a year. … I often look out my window, too, staring at the gorgeous homes and cars wondering how they manage to pay for them. After all, we live in the same neighborhood, our kids go to the same schools, and their salaries aren’t that much more than ours. “

So what makes them seem more prosperous?

• They may not be more prosperous.  They could be living paycheck to paycheck or even deeply in debt while you are saving for retirement or paying tuition bills for your college age children.
• Some of the things you see maybe perks of the job: a company car for example.
• They may be older than you, have a paid-up mortgage and have quite a few more years to save.
• The may be great shopper who know how to find a “deal.”
• They may have inherited money from older relatives.

However, the most common difference between the people with flashy cars, manicured lawns and marble counter-tops in the kitchen, assuming roughly the same age, is the first point.  The conspicuous consumers are often people who have little in the way of savings or assets.  The “Millionaire Next Door” by Tom Stanley tells us that the people who have real financial wealth are those that live below their means, live in smaller houses, drive older cars, are still married to their first wives and  take cheap, infrequent vacations.

 

5 years from retirement? Do this now

From CNN Money, here’s what you should be doing as you get within 5 years of retirement.

• See if you need a course correction. 
  • Are you on track toward the retirement you had planned?  If not, you have time to reconsider.
• Examine health care costs.
  • How are your health care costs going to be covered for you and your spouse?  This is especially true of your and your spouse are under 65 and not eligible for medicare.
• Plan for LTC — ASAP.
  • Long term care costs are becoming an increasingly large concern as people live longer.  This may be the time to take out a LTC policy.
• Make plans to get out of the house.
  • Do you still need the big house you bought when your kids lived at home?  Will you be able to take care if the house and the yard as you get older?  Who will take care of it if you begin to travel during retirement?
• Practice your retirement job.
  • Want to do some consulting after retirement?  Now is the time to begin laying the groundwork.

One major issue that you face as your head into retirement: do you have well thought-out plan?  If not, contact a financial planner, if only to get a professional opinion on the plan you developed on your own.  A related question is who will help your spouse if you have been making the family investment decisions?    If you don’t know, don’t leave it to chance; this is the time to establish a relationship with a trusted advisor.

 

A Better Retirement Withdrawal Strategy?

The investment community has been looking for the “best” formula to determine how rapidly a retiree should withdraw income from their retirement assets to avoid running out of money.  This study by the  Center for Retirement Research at Boston College suggests that using the IRS RMD (Required Minimum Distribution) formula may be better than the “4%” rule that has been the most widely used.

The RMD tables are based on an individual’s estimated lifetime.  For example, according to the table, a 55-year-old will live to 84.6.  At 65, or life expectancy is 21 years.

The success of the RMD strategy lies in its simplicity and the fact that it reduces the temptation to chase down dividends, according to the paper.

However, its use of actuarial data is also a factor.

The IRS intended IRAs — at least at the very beginning — to help people save for and live in retirement, and not for savers to turn the accounts into estate-planning vehicles, according to Eric Smith, an agency spokesman.

There is no one “perfect” formula, and one should avoid assuming that adjustment don’t need to be made based on circumstances.  It is important to understand the role of guaranteed income flows, market volatility, taxes and longevity in setting up a withdrawal plan that meets your individual needs.

Keep contributing to your 401(k)

Throughout the ups and downs of the stock market the strategy that will give you the best chance for a comfortable retirement is a regular contribution to your 401(k) , 403(b) or TSP savings program.

You don’t have any control over the short term direction of the market, but you have a great deal of control over how much you put away for retirement.  If you only put away $2000 a year at age 25 earning an average 6% per year, at age 65 earning you will have over $300,000.   Over the last 10 years, despite significant market volatility, the S&P 500 has averaged 7% per year.

Keep in mind that the savings in 401(k) plans grows tax deferred which means that the money will grow faster.   In addition, contributions to 401(k) plans reduce your taxable income, saving you taxes even as you save for retirement.

If your employer matches you contribution at some level, if you don’t contribute you are passing up “free money.”

The primary advantage of making regular contributions is that you are dollar cost averaging, buying more when stocks are low and less when stocks are high.   The best time to buy is usually when we are most fearful; regular, automated contributions force us to do the right thing.

If you are unsure of the investments in your 401(k), consult an RIA (Registered Investment Advisor).

 

 

Best Places to Retire: Portland, Maine

You will find articles about places to retire in many newspapers, magazines and books.  Here’s an idea from the Wall Street Journal: Portland, Maine.

It’s been years since I have been in Portland, but here are some of the highlights from the article.

Portland has turned into an attractive city with an ample offering of music, art, education, cuisine, health care and historical architecture. In 2006 the Tysons bought a condo in downtown Portland, where they now spend five months of the year, close to the art museum, symphony orchestra and restaurants.

“We feel very fortunate to have landed where we did,” says Mr. Tyson, age 70, a semiretired landscape architect. The Tysons spend the other seven months in Naples, Fla.

Portland is attracting other retirees as well. The city juts into Casco Bay, with promenades on both ends of the peninsula. It has an active waterfront, stunning views of islands, quaint shops, many housing choices and a major hospital, the Maine Medical Center. Winters are cold and taxes steep, but there isn’t much traffic or crime.

The downside?  Cold and “social problems.”

“It’s not for everybody, because it is cold, and the biggest downside is the wind,” says Leslie Anderson, 63, who worked in software marketing before retiring to Portland from Somerville, Mass. “That wind whips, and in the winter it’s raw.”

Social problems spill into the streets in the form of homeless people, transients and panhandlers. The Bayside neighborhood, in particular, remains an eyesore with fenced-in empty lots. But a Whole Foods and Trader Joe’s have located there, and the city has long-term redevelopment plans for the area.

Portland is only two hours by car from Rockland, Maine, home of the Maine Lobster Festival held at the beginning of August.  It’s worth a visit to sample thousands of lobsters and see the picturesque sights of old Rockland.  if you go there, stay in one of the quaint Bed & Breakfasts.

The Biggest Concerns of Affluent Women

 

There are some things that make you go “huh”?  One of these was an article in Financial Planning magazine on the biggest concerns of affluent women.  Here they are, according to he author.

• Healthcare Costs
• Retirement Planning
• Raising Affluent Children

What makes these concerns any different from the concerns of affluent men?  In fact, except for the third point, these concerns are no different from those of the general population.

It appears that teaching children “financial know-how” was a major issue for the affluent.  In my opinion, teaching children how to handle money should be a major concern for any responsible parent.  This is especially true of people who don’t have much money and who, according to surveys, have very little in savings and are probably in debt to the credit card company.

Some Registered Investment Advisors (RIAs) will, for a modest fee,  provide individuals and families with advice and guidance on handling family finances.    It could be the best investment the non-affluent can make.