Four Challenges

• Predictably irrational – Few desire to work forever. Investors need to build a lifetime of retirement income by adequately saving, prudently investing, and not accessing the money until retirement; human behavior often interferes.

• Expanding worker access – Workers tend to save more when they have access to a salary reduction plan. About 78 million workers are without an employer or union sponsored retirement plan. That doesn’t sound ‘healthy.’ However, EBRI’s analysis yields a less onerous picture. Of the 78 million workers in 2011 who “lack coverage,” 42 million are under age 21, earn less than $10k in wages, and were not full-time/full-year workers; another 4 million were age 65 or older. How do you get the other 32 million to save more?

• Longevity risk – People are living longer; retirement funds need to stretch.

• Bigger government – Many prefer independence and opportunity. Alternatively, loud voices say “individuals don’t make good decisions” and government is the superior policymaker. ASPPA supports the “Save My 401k” campaign. Balance makes sense; regulation risks unintended consequences – higher compliance costs, plan terminations, and switching to less complex/effective plans. And $15 trillion in American retirement accounts and related annual contributions look awfully tempting to the deficit riddled taxman (e.g. revenue from “closing tax loopholes” such as reducing tax deferred contributions or accumulations).

Three Trends

• Increased impact and participation – Good plan design serves the sponsor’s (employer’s) goals. More offer automatic (unless employee opts out) enrollment, deferrals, and investment elections (e.g. target date or balanced funds); and matching contributions. Employees are more likely to sock money away for retirement. “Good” sponsors might target 75-80% income replacement ratios (percentage of employee’s wages at retirement), 6-12% salary deferral rates, and 80-90% participation.

• Lifetime income – How do you convert your savings into a monthly retirement paycheck? Some yearn for guaranteed benefits. Defined contribution (e.g. 401k plans) are more common than defined benefit plans; more employees “own” the responsibility for their retirement. Alternatively, pension plans (private, union or government) are not immune to benefit renegotiation or risk of severe underfunding. Nevertheless, 401k participants have numerous tools available for retirement readiness, and retirement income solutions (categorized as guaranteed vs non-guaranteed, in-plan vs out-of-plan). They include systematic withdrawals and managed accounts (non-guaranteed); annuities and guaranteed minimum withdrawal benefits (guaranteed); and each has its unique consideration of flexibility, control, and economics (e.g. low current interest rates vs your expectations for inflation). Expect to see continued innovative solutions.

• Reform – Under the present administration and Congress, expect continued regulatory pressure for disclosure and fiduciary liability, and potential tax reform. Participants and sponsors hopefully make better decisions from greater transparency and investment disclosures. Deductibility of plan contributions may be limited and hobble those who want or need to save more for retirement; talk with your advisors about tax efficient alternatives. Finally, there are numerous retirement proposals including Simpson Bowles 20/20, USA Retirement Fund, and state proposals (MA, IL, MD and CA’s Secure Choice Retirement Savings Trust).

Charles Schwab does a semi-annual study measuring advisors’ views on various subjects. The 12^th study reflected the responses of 839 advisors (July and August). We participated in this survey. I share several of the key findings – boulders in the fields – and their relevance to you.

• 81% believe “The American Dream is still alive, but it’s different than it was a generation ago.” The remainder are equally split between “Alive and well for most Americans” and “No longer a reality.”

• “Issues that will have the most negative impact on American’s ability to achieve The American Dream” – Federal Debt (65%); High Unemployment, Cost of College Education, Health Care Costs, Federal Fiscal Policies, and Personal Debt (each scoring 56% to 61%); Taxes, and Quality of Public Education (50% and 49%); Student Loans (40%). Additional issues included Loss of Home Equity (27%) [Note: this was a national study, and likely a bigger issue in the hard hit States (NV, CA, AZ, MI and FL)]; Offshoring of Jobs, Environmental Regulations, Illegal Immigration (15% to 19%); European Fiscal Policies, Chinese Fiscal Policies, Other (5% to 9%).

• “Difficulty in achieving clients’ goals moving forward” is 63%, down from a high of 71% in July ‘10, and up from a low of 27% in July ’07.  Percentage of clients needing reassurance dropped from 49% (July ’09) to 24% (July ’12), yet twice that in July ’07.

• Feel that the Millennials will a tougher go at it – Millennials achieving same economic status as their parents? “Most of them will” (10%); “Most of them will not” (36%); and “Some will, some will not” (52%).

• Percentage of advisors expressing “Improved Conditions” over the past four years: State of the US Economy (29%), Stability of the US Economy (24%), American Ingenuity (22%), America’s competitive position in the world (22%), Opportunities for US entrepreneurs (18%); Profitability of American small business (16%), The American Dream (7%), and Political gridlock in Washington (1%).

I wasn’t too surprised in the results and recognize that (a) it’s a survey by advisors about their ‘average’ clients… your answers will vary, and  (b) respondents may have had a “good hair day” (or not) at the time of the survey (emotions affect outlooks and opinions).

Think about the farmer plowing his or her field. Which boulders do you need to need to get out the way now, which shall remain as permanent monuments that you’ll forever plow around, and those to be picked another day? The survey hints to solutions that you can control – ditching the hopeful “Tinker Bell” dreams; having a written financial plan to ensure that you don’t run out of money; aligning with your partner and loved ones; engaging experts; voting and emailing our policymakers, etc.

May your harvests be bountiful.

Do you have a similar story?

Small business plays a huge role in economic progress, innovation, and social responsibility. According to the SBA, they comprise over half of the nation’s non-farm GDP and account for about 65% of net new jobs created over the past 17 years. Some businesses soared throughout The Great Recession. Others struggled. And economic, political and global uncertainties continue to tax business growth. This article discusses several trends, dilemmas and planning opportunities for business owners.

Bumps in the Road

• The Economy Stole My Retirement – An aptly titled WSJ article (August 30th) described two common issues or realities. First, values are down – many owners in their 60’s or 70’s can’t sell their businesses in this environment (or lower than expected buyout offers). Deflation often accompanies economic slow-downs. As earnings decline (e.g. profits or net rental income), so do asset values. Second, they’re under-diversified – a significant portion of their nest egg is wrapped up in their business. Thus, owners face two choices: lower their retirement goals, or work longer and rebuild their business. A recent Vistage International CEO survey reported that 38% of business owners extended their expected retirement date.

• Struggle to Find Talent – A good man or woman is hard to find in today’s labor markets. A recent US Labor Department reports 12.7 million unemployed workers – yet there have been 3 million job openings monthly since February 2011. Vistage recently reported that 41% of small manufacturing companies had at least one unfilled position. Owners cite the difficulty in finding skilled workers, or their reluctance to train the unskilled and risk losing that employee to greener pastures.

Opportunities

• Rebuilding Business Value – Competition demands strong branding, a compelling product or service niche offering, and using a realtor’s phrase, being move-in ready. The latter is all about what Collins and Porras wrote in Built to Last about building enduring companies – adapting core values and processes that will transcend time.

• Diversification – Business owners tend to be risk takers and navigate change. However, they lean towards greater risk management (less volatility) in both their business income and portfolios. The career wing walker often opts for greater certainty with his or her money.

• Team Approach – The brightest surround themselves with stars. Running a business and owning a comprehensive personal wealth plan requires expertise, and often, multi-dimensional ‘outside looking in’ perspectives. Build your team of trusted advisors.

We play on a challenging field with large-scale uncertainty and risk a tipping point of economic and financial point of no return. Fortunately, we all have choices… remain on the current paths, or employ the fixes. Good luck.

The Social Network II (or possibly “Got Zucked”) should be a box office smash with debacles and side stories:

• Blurry video feeds from Menlo Park as Mr. Zuckerberg rang the opening bell among a fist pumping crowd.
• Allegedly, CFO agreed to increase the number of shares in the IPO by 25% just days earlier.
• Reports that underwriters Morgan Stanley and Goldman Sachs had downgraded their earnings estimates.
• Widely anticipated IPO sputtered; trading delayed 30 minutes. Stock closes up 23 cents on Friday, and currently trades about 18% lower.
• Nasdaq OMX Group says it would have delayed the IPO had it known the problems.
• Facebook and banks are sued for concealing from investors “a severe and pronounced reduction” in revenue growth forecasts, or selectively disclosing those revisions to certain preferred investors.
• Traders and brokers seek compensation for losses due to mishandled trades.
• Regulators including the SEC and FINRA are investigating ‘issues.’
• Facebook faces uphill battles of regaining brand reputation, “monetizing” its user base without alienating fans, and delivering quarterly performance in the public world.

Meanwhile, I’m reminded:

• The game rigged? We want level playing fields, fair dealing, full disclosure, etc. (i.e. enforcement of regulations). But life’s seldom fair. Some people “just don’t get it” and greed or corruption emerges. Probably best for the accused to settle quickly, take the hits, and get on the road of personal responsibility. To other side, if you’re going to sue FB, why did you buy?

• Hype, buzz and sizzle make for sexy stories. Eventually the honeymoon’s over. Investments are ultimately valued in a very boring way – their ability to generate cash flow. And the internet and social media are dynamic and take different analytic perspectives. You may need to consider competition from ideas that don’t exist today.

• Should you own FB (or XYZ)? Perhaps. When’s your kid going to college and what’ll she need? What’s it going to take for you to retire with dignity and independence? What shall you leave for future generations or important causes? FB shares or other investments may fit in your investment plan… which is driven by your financial plan.

I smiled as the lady at the gas pump drove away – a woman appearing to be in pretty good shape health-wise and financially. I bet she didn’t make many ‘big investor mistakes’ along the way.

It caught my attention in what may have been another thrill-less economic story. The LA Times article, “China’s inflation rate edges up in March,” focused on the 3.6% inflation rate as a potential threat to economic growth. It mentioned a China National Radio’s report about a restaurant wrestling with rising food costs, in particular green onions.

What’s the big deal? They’re an emerging country expected to grow 7 to 8 percent this year and within their policymakers’ target 4% inflation.

• China is a growing player (consumer, producer and trade) in this world. As a percentage of global figures they represent about 19% of the population, 14% of GDP, and 2% of the equity market).

• Do they report the whole story? CPI is a composite of many factors. Housing prices have soared ten-fold over ten years while the Shanghai stock index was flat. Food and fuel prices are up – food up 12% last year, eggs 24% and pork 44%. That can’t be pleasant.

• They face major social and economic issues. The CCP (government) and CBC (Central Bank of China) have controversial policies. China faces a three wave dilemma (preferential policies for state-owned enterprises over private business, worker strikes, and foreign businesses withdrawing – e.g. cheaper labor) and potential bubbles in housing and credit.

Inflation is not a sexy investment story. However, the “silent menace” is an important part of planning financial success and living life with independence and dignity. Here are three considerations for investors:

• It’s a personal thing – “Why does my father in his 70’s need inflation protection? He’s been living well off his pension, happy playing golf and won’t need luxury cars, travel, or a bigger house.” Inflation is a tax on fixed income. And pay raises are necessary in retirement. Why not drive a safe and reliable vehicle until DMV says “sorry,” send your grandkids airline tickets when your days of travel become labored, or hire help with the chores? Picking up an occasional lunch tab with your golf buddies, putting nourishing food on your table, or decent health care?

• Protect for rising costs – Bill Gross’ “The Great Escape” (April commentary) is good read. He discussed lower expected returns (slowing global economies, and inflation), earning real returns (net of inflation), and shortening duration. That last point is the notion of owning investments that return your profits and your principal sooner, than later – inflation erodes the value of future cash flows.

• Don’t overreach – When savings and CDs are paying zilch, it’s tempting to stretch for higher yields. But there’s a trade-off of risk and return. Perhaps it better you stay focused on total return (rather just yield), curb the desire in reaching for the junk, and be wary of short term bond funds as alternatives for your cold hard cash.

And when I think times are tough, I’m glad I’m not in China. Many dishes contain green onions.

I want to share some of the pitfalls I’ve experienced so that you avoid a head-on collision on your life journeys. They’re talking points with your family, business partners, tax experts, lawyers and financial advisors. And please think about estate planning as planning to live (not death) and preparing your heirs for your estate (not vice versa).

My #2 kid is trustee… I don’t get along with the others – Trustee holds an important position wearing many hats and has a fiduciary standard of care. Duties include accounting, compliance, loyalty to beneficiaries, impartiality, and be prudent. Trustees may be able to hire professionals to help. However, the buck ultimately stops with the trustee. Name the ‘right’ trustees to make those King Solomon decisions and see your well-intentioned plans become reality.

Avoiding Arguments, and Worse – A sensational estate war ensued and the feud over Jerry Garcia’s estate kept truckin’ with arguments over guitars, Cherry Garcia ice cream, and ties. Sometimes there’s unrest when laid to rest. It could be from dysfunction families, unequal ownership of family businesses, or multiple marriages. And fraud and scammers persist. Trust litigation is on the rise, and so should risk management. Several approaches include prenuptial agreements, titling of assets, documenting intentions, and independent trustees.

‘Shirtsleeves to Shirtsleeves’ – History is rich with stories of family wealth that vanishes – entrepreneurs who accumulate vast sums of wealth that lasts one or two generations before being exhausted by the third. Most people think the greatest risks are from external factors – investment, market, financial and economic problems. In reality, poor family communication and relationships, educating the next generation, and governance issues trump. Your wealth is your values, as well as your valuables. Your family’s key assets are the individuals in your family. Preserving your unique family values and history better protects and sustains. Are these discussions part of your family meetings?

Distributions and Investments – A common situation in family trusts involves husband dies, spouse survives and entitled to trust income and principal for “health and welfare,” and subsequently, assets pass to the kids. Normally there are spendthrift provisions for the spouse (help curb caviar wishes and champagne dreams, and the pool boy) and assets might remain in trust for the kids until they reach some specified age of ‘responsibility.’ Several conflicts arise: (1) spouse wants maximum income, kids want growth; (2) what is a ‘reasonable’ lifestyle; (3) how ‘income’ is defined (includes capital gains?); (4) interest rates are low (such as now); and (5) fuzzy crystal balls – conditional wealth transfers (e.g. will the trust fund my ‘education’ if I go to trade school rather than an Ivy League college?). Trustee must manage for all beneficiaries, including the remainderman. And trends towards ‘total return’ investing continue.

Take action. Plan for the future.

Funding your student’s college education may be the easiest parts (or focuses your search). “What do I want to do be” and “Which school” are the bigger decisions. Here are some thoughts about preparing for your student’s future of success.

• Better trained, skilled and educated – Whether it be vocational training or a college degree, you’re putting things better in your favor – opportunities, lifetime earnings and lower unemployment.

• Kids are taking their futures more seriously – The recession, uncertainty, and tight finances may be driving students to hit the books harder. Trends in the 2011 annual survey of college freshmen by UCLA’s Cooperative Institutional Research Program included a reduction in grants or scholarships (economic downturn) and positive changes in academic behavior (more AP courses, more hours studying in high school, and less drinking). Top reasons cited in going to college included “getting a better job” and “learn more about things that interest me.”

Bottom line we’re trying to help our kids to better put things in their favor. Part of the art of parenting is figuring out when to give her a nudge and when to let her make her own decision. Here are 4 things to help your sons and daughters figure out what to do and where to be.

• Grateful the mermaid-thing has passed? – Many young people, and some older, don’t know what they’d like to be when they “grow up.” That’s ok as there are future careers not yet invented, and many will have multiple careers. Prepare for stepping stone opportunities that help you figure things out. And many employers seek attitudes and values… they’ll teach and hone the skills.

• Campus was larger than my hometown – Campus’ sizes vary. Larger campuses may offer greater resources, options and diversity; the smaller ones may offer greater personalization and closer relationships with faculty.

• Pathways and gateways – Will he or she be able to integrate academic and professional development? What mentoring is available for course and majors planning? What roles do advisors, counselors, alumni and corporate partnerships play with internships, networking and campus development?

• Goldilocks – One of the best pieces of advice given to me during my daughter’s search was “Brian, it’s got to feel right.” Things are a lot different than 3 decades ago. I walked 3 campuses with my folks – One was a bridge too far away in SF, another a highly esteemed agricultural school but it was a hot July day, and the third was close enough for me to ski Tahoe and I liked blue and gold. Take advantage of campus visits, sit in classrooms, talk with faculty and do the overnight stays.

Henry Ford once said “If money is your hope for independence, you’ll never have it. The only real security that a person will have in this world is a reserve of knowledge, experience, and ability.” May your student have fruitful lessons on campus.

So what about the Dow 13,000? It’s just another number. We’ve crossed that level a dozen times in 10 years. However, it represents the value of a basket of stocks (an index). Historically, that value has a permanent uptrend, periodically interrupted by downturns. And 13,000 is about twice the market’s worst in March 2009, and almost 30 times since I was born.

Here are more important numbers.

134,000 – The Dow my daughter might see in 40 years when she’s most serious about her financial future. It reflects a 6% average annual growth rate. However, more important is for you to know Your Number – the amount of wealth you need to accumulate to support your lifestyle in retirement (and keep pace with inflation), after considering your other sources of income. If you retired today, lived another 3 decades, and needed $5,000 per month (in addition to SS, pension, rent, etc.), you’d need approximately a $1.4 million nest egg (excluding your home). And if you’re not yet retired, Your Number should also tell you how much to save and how hard the money should work. Investing with too much risk can be as dangerous as taking on too little.

66 and 6 – My full retirement age for Social Security. It’s based on your age and ranges from 65 to 67. You can start as early as 62 (about 30% benefits reduction) or delay until age 70. And more people are working longer – beyond the mythical ‘goal line’ of age 65 – by choice (e.g. need to stay engaged) or necessity (e.g. need the income or benefits). I hope the full retirement age is extended (or increase FICA payments, or other solutions to correct a currently unsustainable program). Nevertheless, working beyond age 65 seems ok. Why cram all my leisure years into the last decades of my life? I’d likely become bored, and then worse… boring.

6% – Workers may be automatically enrolled in 6% contributions to their 401k plan, unless they opt out. It’s a nifty way to help avoid making money mistakes – e.g. not saving or saving enough. Inertia is a powerful behavioral fault – an object at rest tends to stay at rest. If it’s too hard to ‘check’ a box or go online to enroll, some 401k plans automatically sign you up. Nevertheless, you still need to make some decisions and make responsible investment choices. And if you can’t “afford” to save 6% today, then save for tomorrow, tomorrow – sign up for 3% for 2012, and next year, increase it by another 3% (i.e. 3%, 6%, 9%, etc.)

We want staying power (not just achieving Dow 13,000)… to retire and stay retire… for wealth to stay and endure for generations to follow. That’s why diversification among investments, styles and strategies are so important. Have a long term plan rich with options, and patience along the way. Your financial success will be worthy of the headlines.

Some of the more common tax “uncertainties” involve the simplification of tax laws, expiration (or extension) of the Bush tax cuts, taxation of global business, and “extenders” that have gone ignored (e.g. the AMT exemption, charitable giving for IRA holders 70-1/2 and older, etc.). Cohesive long-term policies to foster economic and job growth fail to emerge. We sense some sort of tax hikes lurking ahead. And debates rage about “fairness” and “sacrifice” vs. the top 1% of taxpayers who shoulder about 40% of the US income tax burden (compared to the bottom 50% who pay only 2%).

Nevertheless, you’ve got to plan and act. Business owners may face significant acquisition, expansion or sale opportunities, and individuals may be wrestling with 401k contribution levels or gifting and estate transactions. I share 3 guiding principals in tax planning.

Pay the Minimum Amount Legally Required. Recall Arthur Godfrey’s quote “I’m proud to pay taxes in the US; the only thing is I could be just as proud for half the money.” Take advantage of permitted deductions, credits and income/asset shifting strategies.

Diversify Taxation. The stories about an executive who allegedly pays a lower effective tax rate than his secretary highlight the tax differentiation of ordinary and tax-exempt income, dividends and capital gains. (I’ll bet that the Sage of Omaha pays a lot more in income taxes than Ms. Bosanek). It may make sense to diversify your investments in three “buckets” – after-tax, tax-deferred, and real estate/business assets. Tax rates vary and tax rules change over time. Selectively drawing your cash flow may better allow you to control you tax bill.

Don’t Let the Tax Tail Wag the Dog. Tax reduction is a consideration but shouldn’t be the only consideration. Examples include reluctance to diversify out of an heirloom investment with a low cost basis, unintended tax consequences from ‘tax shelters’ (remember those in the 70’s and 80’s?), and retiree’s general practice of depleting after-tax accounts before touching IRA funds. Another is holding a volatile investment for a longer time to qualify for favorable capital gains. Say you recently bought a stock for $15 and it zoomed to $20, 33% tax bracket, and you have the potential of cutting your tax bill by deferring the sale for the 15% long-term capital gains rate. The ‘thriftiness’ in waiting is lost if the stock price fell 5%. After-tax sales proceeds (selling today) at $20 at your 33% rate (short term gains) are similar to selling at $19 at the lower capital gains rate.

We’re always going to face uncertainty. Tax planning is no exception. Always consult a tax professional as I’m not licensed to provide tax advice.

After reading piles of stories on the upcoming IPO, I thought it helpful to share some insights on the process of initial public offerings and factors you might consider in making investment decisions. And remember, whether it be FB or any other investment, a good investment is one that fits your overall investment strategy, which in turn fits your financial plan. It’s not the other way around.
After reading piles of stories on the upcoming IPO, I thought it helpful to share some insights on the process of initial public offerings, and factors you might consider in making investment decisions.

IPO’s are a sure thing, right? Google’s share price leapt 7-fold since it’s IPO in 2004. Outstanding! But we tend to remember the winners and forget the losers. Hear of Boston Chicken’s IPO in ’93 (now called Boston Market)? Most people were surprised the day it went public. Shares were priced at $20, market opened at $40, and closed just shy of $50.

I couldn’t buy shares at the IPO. There were a limited number (about 11% of the total outstanding) offered by brokerage firms (“underwriters”) – akin to getting tickets to the Presidential Ball. It was risky to chase a stock that ‘experts’ had mispriced. The company (barely profitable after 3 years of losses) missed nearly $38M in cash at the IPO and brokerage firms blew another $2M in commissions. And we expected downward pricing pressure as more shares came to market in 3-6 months. (IPO’s generally have a lock-out or “cooling off period” until privately held shares may be sold).

The company filed for bankruptcy 5 years later.

Four criteria for a good stock include:

• Hugely competitive advantage
• Superb management
• Solid growth plans
• Attractively priced relative to peers (industry)

Some things to consider from reports written on the FB offering documents (I haven’t read the 213 page S-1 filing):

• FB is a significant force in social media– Can they maintain their ubiquity in a creative and changing world? AOL and Yahoo didn’t.
• Will new players be needed to replace key folks who become multi-millionaires and decide time to move on?
• Assuming a $100B valuation, P/E ratio estimates range 77 – 100. (Google is about 20x with $100B in cash).
• Other than cashing out some venture capitalists, will it lead to exploitation of users with more ads and sharing of user info?
• Investors may have to wait until April or May when FB is publicly traded

This isn’t a recommendation to buy (or avoid) the shares. Perhaps it is better to have realistic expectations and wait for the hype to settle. Meanwhile, I’m off to make some whacky Super Bowl prop bets – Madonna wears fishnets and the Gatorade shower isn’t colored red.