Before I Go

 

We were asked to speak to a group of retirees at a retirement home recently.  We took as our subject our book: Before I Go.

We wrote it based on the experience we had over three decades helping people deal with the aftermath of a death in the family.  Most often is was the death of a spouse.

When the deceased was the one who managed the family assets and paid the bills, we found that all too often the surviving spouse was at a loss.  Suddenly she was alone, and often had little or no guidance about the financial affairs for which she was now responsible.

Before I Go is a guide and a workbook for couples; a list of things that the other should know in anticipation that one of them will be left alone.

For a copy of the book and workbook, go HERE.  Sharing it with your spouse will be a labor or love.

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Answering the important retirement questions.

With over 100 million people in America closing in on retirement, big questions arise.  Most investment advisors are oriented toward providing advice on how to build assets, but lack the tools and experience to advise their clients about how to live well during decades of retirement.

The most common advice that retirees get involves invoking the “4% Rule.”  That number is based on a 60-year-old-study that may well be out of date.  Individuals and families should be getting better guidance because now retirement often spans decades.  Many people are retiring earlier and living longer.

There are many critical decisions that must be made before people leave their jobs and live on their savings and a fixed income.

  • When should I claim Social Security benefits?
  • What happens if I live too long? Will I run out of money?
  • What would happen to my income if my spouse died early?
  • Will I need life insurance once I retire? If so, how much?
  • What are the effects of Long-Term-Care on my retirement plans?
  • Can I afford the items on my “wish list?”
  • Will I leave some money to my heirs?

Some Registered Investment Firms (RIAs) have the sophisticated financial planning tools to answer these questions.  They are often CFPs® and focus on retirement planning.  Once a plan is prepared, these same RIAs, acting as fiduciaries, are often asked to help their clients manage their assets to meet their retirement income goals.

If you are approaching retirement and have questions or concerns, contact us.  We’ll be glad to provide you with the answers.

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Hurricane Economics

With with the cleanup beginning from the effects of Hurricane Harvey and Hurricane Irma threatening the East Coast, We wanted to share the commentary of Brain Wesbury, Chief Economist at First Trust.

The hits keep coming. Hurricane Harvey left destruction in its wake, and now, Hurricane Irma has Florida in its sights.

It’s been five years since Hurricane Sandy, nine years since Ike and twelve years since Katrina. As with all major weather events, personal tragedy, pain, suffering, and loss are left in their wake. We have prayed, and continue to pray, for those affected. But at the same time, in our job as economists we look toward rebuilding and economic restoration. This is where investors often make two different mistakes about how these massive weather events will affect the economy and markets.

Some might think that, as did Nouriel Roubini after Katrina, the damage itself will cause a recession. Others take the opposite tack and think rebuilding efforts might actually help the economy. Neither are correct. By themselves, the storms will not push the economy off its Plow Horse path.

In the face of disasters we should all be thankful for the (mostly) free markets that help the U.S. respond. These markets allow accumulated wealth and know-how to focus on recovery. The losses will never be fully replaced, but the sheer size and flexibility of the U.S.’s capitalist system allows resources to be shifted and directed toward recovery. The price system makes this happen. While some think no profit should be made from a disaster, it is those profits which allow overall “economic” recovery to occur in relatively quick order.

Some estimate that damage from Harvey could be close to the $108 billion estimate for Katrina (2005), certainly above the $75 billion cost of Hurricane Sandy (2012).

Neither of these previous storms caused a recession, and at the same time, the data show no real acceleration in growth either. Real GDP grew 4.9% at an annual rate in the first quarter of 2006 after Katrina, but never accelerated above 3% in the first two quarters after Sandy. For six and nine month periods before and after these storms, growth rates were similar. In other words, it’s hard to separate the impact of Katrina or Sandy from normal statistical noise. The U.S. grew over 4% annualized in Q1 2005 and in Q3 2014, with no major weather impact.

But even if the bump in real GDP growth in the first quarter of 2006 was due to Katrina, that doesn’t mean it was good news. It would be what Henry Hazlitt in his book “Economics in One Lesson” called the “fallacy of the broken window” – which we recommend all investors read.

Hazlitt told a story about a vandal who broke a shopkeeper’s window, which caused a glassmaker to get an additional order. But the shopkeeper was planning on eventually using that same money to buy a new suit, so the tailor lost an order. In other words, even though rebuilding appears to create new economic activity, fixing things that have been destroyed actually robs an economy over time of the benefits of growth. Repairing physical capital does not generate new wealth, it only replaces old wealth.

Before Harvey, the market consensus was that automakers would sell cars and light trucks at a 16.6 million annual rate in August. Instead, automakers reported late on Friday that they only sold at a 16.1 million rate. Harvey hit an area that represents about 5% of US auto demand and it did so for about 20% of August. This suggests Harvey cut roughly 1% off of August sales nationwide, or that autos would have sold at a 16.3 million annual pace in the absence of the storm.

Automakers should make those sales back up in the next few months. In addition, reports suggest the storms destroyed about 500,000 autos, which will also generate additional sales in the months ahead.

These sales might help make the GDP numbers look better late this year or early next year, but it just represents demand that would have eventually appeared elsewhere in other sectors.

The lesson is that these disasters, while a tragedy in so many ways, do not shift the fundamental path of the U.S. economy. Some think socialist economies can respond better, but this is not true; markets are the most efficient system for guiding resources to areas in need. Free people that get hit with a disaster will overcome and reach new highs, because that’s what people do when they’re free, disaster or not. Godspeed to all those affected directly, and to those helping in recovery.

Our clients and friends in Texas were spared from the worst effects of hurricane Harvey.  Pray for those who lost their lives, their homes and their possessions.  And we applaud those who selflessly came to the rescue of their neighbors.  This showed the best of America.

 

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Why market timing does not work

stock-market-timing

 

A paper published by a business professor ten years ago made this point emphatically.

The evidence from 15 international equity markets and over 160,000 daily returns indicates that a few outliers have a massive impact on long term performance. On average across all 15 markets, missing the best 10 days resulted in portfolios 50.8% less valuable than a passive investment; and avoiding the worst 10 days resulted in portfolios 150.4% more valuable than a passive investment. Given that 10 days represent less than 0.1% of the days considered in the average market, the odds against successful market timing are staggering.”

The odds of getting out of the market at just the right time and then getting back in at just the right time are roughly the same as winning the lottery.

This points out the reason why creating a portfolio that will allow you to invest for the long term is essential to creating wealth.  You can achieve a decent return and sleep well at night.  But in order to do this your portfolio has to match your personal risk tolerance (your Risk Number), one that differs with different people.

We are in a long-term Bull Market, but Bear Markets follow Bulls as night follows day, and some day the Bear will return.  That’s when having a properly diversified, risk-tolerant portfolio pays off.  Big time.

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Required Minimum Distributions from Inherited IRAs

If you inherit an IRA and are not a spouse of the deceased you have two choices:

  1. You can cash it in and pay income taxes on the proceeds, or…
  2. You can defer the taxes on it and allow it to grow tax deferred.

An Inherited IRA (also known as a Beneficiary IRA) differs from a regular IRA and the two should not be combined.  A key difference between the two types of IRAs is how Required Minimum Distributions (RMDs) are calculated. Specifically, a different IRS table is used (the Single Life Table) to calculate the first year’s RMD from an Inherited IRA, and this initial calculation is used for the calculation of RMDs in subsequent years.

A second difference is that you are not required to take RMD distributions from a regular IRA until you turn 70 ½.  However, you are required to take an RMD from an Inherited IRA by the end of the year after you receive it.  This is true no matter the age of the deceased or the beneficiary’s age.

The amount of the RMD is based on value of the IRA at the end of the previous year and the age of the beneficiary.  The rules can get quite complicated and it’s usually a good idea to consult a professional to insure that you don’t run afoul of the IRS.  Penalties for not taking the RMD can be as high as 50%.

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Good News on the Economic Front

Our favorite economist, Brian Wesbury of First Trust has a new note out that we wanted to share.

While the Sunday morning talk shows discuss the number of Civil War monuments that can dance on the head of a pin…and a rare Eclipse grabs focus…investors might be shocked at how the economy has accelerated.

Although we still have more than a month left in the third quarter, and many more pieces of data to come, as of August 16th the Atlanta Fed’s “GDP Now” model, which tracks and estimates real GDP growth, says the economy is expanding at a 3.8% annual rate in Q3.  If correct, that would be the fastest pace for any quarter since 2014.

We usually take forecasts this early with a grain of salt.  After all, a lot can happen over the remainder of the quarter.  And, on some prior occasions, the Atlanta Fed has projected rapid growth for a quarter mid-way through, only to ratchet back the forecast by quarter-end to a more pedestrian Plow Horse growth rate near 2%.  But, in this particular case, we think the pick-up is real.  In fact, our own internal forecast suggests the exact same growth rate of 3.8%.

One thing more pessimistic analysts are focusing on is that “inventories” are adding about 1% to the third quarter growth rate.  It looks like businesses are stocking shelves at a more normal pace after the lull in the first half of the year.  Excluding this inventory boost, First Trust models have real GDP growing at a 2.4% annual rate in Q3, while the Atlanta Fed model has it at 2.8%.

It’s hard to remember that the original report for Q1 real GDP was less than 1% growth.  That report worried many investors, and doom and gloom stories abounded.  But the foundation for continued economic growth remains in place.

It’s true that the US is unlikely to see tax cuts or real tax reform (or both!) anytime this year.  And this will make sustaining GDP growth at a 3.8% rate very difficult.  But we expect favorable changes in tax policy by early next year.  All that said, the best news is any threat of growth-harming tax hikes remains virtually nil.

Meanwhile, the one area of clear improvement in economic policy under President Trump has been regarding regulation.  The issuance of new rules that slow growth has basically stopped, while harmful old rules are getting rolled back or being reviewed for reform.  This alone can help push growth up by ¼ to ½ percentage point on an annual basis.

In addition, monetary policy remains very loose.  Short-term interest rates are still well below “normal” and there are over $2 trillion in excess reserves in the banking system.  We still expect another rate hike this year, and it seems clear that the Fed will begin slowly reducing the size of its bloated balance sheet.  Assuming the Fed starts balance sheet normalization on October 1st, their $4.4 trillion-dollar balance sheet would shrink by a measly 0.7% by year-end.  This takes the Fed from running a super-easy monetary policy to a very, very easy monetary policy.  In other words, any threat from tight money is remote.

Trade protectionism was the biggest threat to the economy as the new Trump Administration took office, but so far, there’s been a great deal more rhetoric than action on this front.  We remain confident that President Trump realizes a true lurch into protectionist policies would risk a drop in the stock market and would make it harder to meet his goal of faster economic growth.  Protectionist promises are much easier to break (or just ignore), when the unemployment rate is moving toward 4%.  Instead, expect the president to pivot toward trying to get better enforcement of intellectual property rights from China and an open market in oil and gas exports.

We constantly warn investors that one quarter, or one month, of economic data is meaningless.  So far, the Plow Horse has not morphed into a thoroughbred.  However, good news tends to lead to more good news and momentum is building.

Better economic growth means better profit growth and better profit growth will help push stocks higher.  Our 2017 end-of-year forecast of 2,700 for the S&P 500 and 23,500 for the Dow Jones Industrial Average remains in place.  Risks to growth remain low, and the chance of an acceleration remains positive as third quarter data is suggesting.

 

 

 

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Once you sell out, when do you get back in?

I recently heard about a 62-year-old who was scared out of the market following the dot.com crash in 2000.  For the last 17 years his money has been in cash and CDs, earning a fraction of one percent.  Now, with the market reaching record highs, he wants to know if this is the right time to get back in.  Should he invest now or is it too late?

Here is what one advisor told him:

My first piece of advice to you is to fundamentally think about investing differently. Right now, it appears to me that you think of investing in terms of what you experience over a short period of time, say a few years. But investing is not about what returns we can generate in one, three, or even 10 years. It’s about what results we generate over 20+ years. What happens to your money within that 20-year period is sometimes exalting and sometimes downright scary. But frankly, that’s what investing is.

Real investing is about the long term, anything else is speculating.   If we constantly try to buy when the market is going up and going to cash when it goes down we playing a loser’s game.  It’s the classic mistake that people make.  It’s the reason that the average investor in a mutual fund does not get the same return as the fund does.   It leads to buying high and selling low.  No one can time the market consistently.  The only way to win is to stay the course.

But staying the course is psychologically difficult.  Emotions take over when we see our investments decline in value.  To avoid having our emotions control our actions we need a well-thought-out plan.   Knowing from the start that we can’t predict the short-term future, we need to know how much risk we are willing to take and stick to it.  Amateur investors generally lack the tools to do this properly.  This is where the real value is in working with a professional investment manager.

The most successful investors, in my view, are the ones who determine to establish a long-term plan and stick to it, through good times and bad. That means enduring down cycles like the dot com bust and the 2008 financial crisis, where you can sometimes see your portfolio decline.  But, it also means being invested during the recoveries, which have occurred in every instance! It means participating in the over 250%+ gains the S&P 500 has experience since the end of the financial crisis in March 2009.  

The answer to the question raised by the person who has been in cash since 2000 is to meet with a Registered Investment Advisor (RIA).  This is a fiduciary who is obligated to will evaluate his situation, his needs, his goals and his risk tolerance.  And RIA is someone who can prepare a financial plan that the client can agree to; one that he can follow into retirement and beyond.  By taking this step the investor will remove his emotions, fears and gut instincts from interfering with his financial future.

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Beware the Quirks of the TSP in retirement

The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.

Here is a little information about he investment options in the TSP.

The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.

The C Fund is designed to match the performance of the S&P 500

The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.

The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.

The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.

One advantage of the TSP is that the expenses of the funds are very low.  However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.

The irrevocable annuity option.  

This option provides you with a monthly income.  You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary.  The payments stop at death.  Once your annuity starts, you cannot change your mind.

Limited withdrawal options. 

You can’t take money out of your TSP whenever you want.  When it comes to taking money out you have two options.

  1. One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
  2. Full withdrawal.   You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.

Limited Monthly Payment Changes

If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year.  If you choose this option, make sure that you know how much you will need for the coming year.

Proportionate distribution of funds

When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs.  It comes out in proportion to which your money is invested.  This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.

If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.

 

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What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

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How to lose $150 million

Boris Becker

We have written a lot about planning and investing.  But there’s nothing quite as instructive as learning from mistakes.  Learning from others’ mistakes is less painful than making our own mistakes.

This sets up an example of financial mistakes I learned about recently.

Sometimes the most surreal things happen. For example, anyone who remembers the 1980s’ tennis prodigy Boris Becker may be shocked to learn that last month, in a London courtroom, Becker was declared bankrupt.

After winning Wimbledon and countless other tournaments, Becker’s personal fortune was estimated to have reached $150 million. So how could this have happened? How could he have gone from $150 million to zero, and what can we learn from it?

Sports figures often find that they have developed “posses,” hangers-on who encourage extravagant lifestyles.  Fame and fortune at an early age lead to a number of personal mistakes.  These are often combined with poor investment decisions.  In the case of Becker they include things like Nigerian oil companies, and “… a sports website, an organic food business, and more notably, a planned 19-story high-rise in Dubai called the Boris Becker Business Tower, whose backers went bust in 2011.”

This is a special problem for people who become wealthy in sports and entertainment.  Too often they turn their financial lives over to agents who get them involved in complicated schemes that go sour.

The key to gaining wealth and – most especially – for keeping it is: keep it simple.  During 30 plus years of investing the biggest mistakes I have seen made is people getting involved in complex deals, partnerships, and relationships that they don’t really understand.

We provide education for our clients on investment strategy and develop portfolios that allow people to keep what they have earned.  Don’t be like Boris Becker.

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