The Art of Retirement Cash Flow

Part of the Oakland skyline is slowly vanishing as the demolition of the east span of the Bay Bridge continues. The bridge was built in the Great Depression. It was a “double decker” with two spans – western section connecting SF and Yerba Buena Island, and the eastern section to Oakland. The bridge closed for a month when the east span partially collapsed in the 1989 Loma Prieta quake. Construction for the new east span commenced in 2002. It is a single deck, and was the world’s widest bridge when it opened in September 2013.

Demolition of the old span will take four to five years – almost twice as long as construction took in the early 30’s. They’re essentially dismantling the old bridge, section by section, in reverse order. Why the complicated un-building process? Factors include engineering, safety and environmental. The high-tension pieces are like a highly strung bow of 50 million pounds of steel. You don’t simply cut it or you risk a nasty “boom.” Tension needs to be controlled. 80 year old steel doesn’t handle like modern steel. And you want to avoid contaminating the choppy bay waters below. Tearing down a bridge can be a dangerous art.

And so can converting your wealth into monthly paychecks in retirement that will last your lifetimes. Original instructions were simple –save early and be a smart investor. You shift at retirement and draw income. But how? Life’s complicated – costs of living rise, Uncle Sam wants a cut, an unexpected emergency, markets correct, lose your wingman, or your perspectives change. I’ll share four withdrawal strategies to discuss with your family and advisors.

Be flexible – Heard of the 4 percent withdrawal rate? It’s a standard for calculating how much to save (25 times your annual cash flow needed after pensions and SS) or the “safe” withdrawal rate for a 65 year old retiree (4 percent of your IRA accounts). However, be flexible. Most retirees spend less than they expect, and spending is not a straight line – often higher in the early years, then settle lower into a groove, then crank up like we do as we age (healthcare). What if your retirement is beyond 30 years, want a safety cushion or inheritance for heirs, or want “sure things” (what are CD’s paying now?), then a 2 or 3 percent factor may be prudent.

Fill tax brackets – Most dislike paying taxes and are taught to defer taxes (spend after-tax accounts first, then IRAs, and save Roth’s for last – see next note). But beware getting trapped with insufficient liquidity (and face a big repair bill, etc.) or significant tax increases from IRA required minimum distributions at age 70-1/2. Consider filling tax brackets in early retirement years. If you’re married, the 15% bracket runs from about $18,651 to $75,900, and the 25% runs $75,901 to $153,100. If your taxable income is $60,000 (or $130,000), then consider additional IRA withdrawal of $15,000 (or $23,000) and avoid creeping to the next bracket. Similar concept is when you need significant cash and only have IRA monies. Say you’re contemplating an RV purchase. Consider splitting tax years with IRA withdrawals in December and January, and/or finance a portion and payoff with future withdrawals.

Hit the Roth early? Conventional wisdom is reserve the Roth IRA for last, and pass it on to your spouse or your kids. (People generally do Roth’s when they believe tax brackets are higher when they withdraw than when contributed). But what if you want to gift to your kids now (versus inheritance), you’ve only got IRA and Roth money, and likely you won’t deplete wealth in retirement. (And ignore tax reform rumblings about 5-year withdrawals for non-spousal beneficiaries). Why would you take IRA monies, pay taxes, and gift your kids the balance? That’s expensive. Instead, consider withdrawing non-taxable Roth funds. You have more money to gift. And of course, consult your CPA on all tax matters.

Income is nice, but balance is better – Some thought the retirement ticket was owning real estate and collecting rent. Others focused on high dividend stocks or interest income. They make sense – they’re income-oriented. If you earn $20,000 on a $500,000 portfolio, that’s 4 percent. But if you’re getting the same $20,000 income ten years from now (don’t increase the rents, or rising expenses), then you’re losing to inflation. Hence balanced investing (diversification). On average, you may earn more than 4% withdrawals and can reinvest for future withdrawals. Hopefully, you’ve got a dependable monthly paycheck that grows with inflation, with less worry about the ebbs and flows of markets, interest rates, and sketchy tenants.

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Payoffs of Working Beyond 65

Working and collecting Social Security is a taxing problem. “Why should I work if I’m going to lose benefits to taxes, or even get my benefits reduced?” The rules are complex. However, they’re important because working during retirement is becoming more and more a trend. We’ll talk about the impacts of drawing a paycheck during retirement. However, first, let’s review how retirement is being redefined.

What do you consider to be normal retirement age? Somewhere around age 65? And there might be a few groaning “Never.” It’s generally labeled as when Social Security retirement benefits commence and essentially an artificial goal line. There was a time when people spoke in hushed terms as if working later was a bad thing. However, there are several reasons why Americans work past “retirement age.”

Supplement retirement income. We need to fund longer retirements and the responsibility has shifted to us. AARP’s Life Reimagined Survey of people 35 years-plus expect to work beyond age 65. It’s not that they want to get work forever – 87 percent say they want to retire someday but they don’t feel they will be able to stop. Some are non-financial. However, 70 million Americans suffer from sleepless nights and the primary culprit is money worries. According a survey, 68 percent of women and 56 percent of men lose sleep occasionally. Retirement tops the list (49%) with “haven’t saved enough.” It’s the biggest purchase in life – 2.5 times the average price of a home – yet 80 percent don’t know what retirement will cost. Other concerns include education expenses (30%), health care (29%), mortgage/rent (26%) and credit card debt (22%).

The Merrill Lynch and Age Wave Retirement Study illustrates differing expectations by age groups. Three sources of retirement income are Government (SS), Employer pensions and Personal sources (savings/investments, employment and family). The Silent Generation (born 1925 – 45) counts on roughly half of their income from SS, and roughly a quarter each from the other two. Younger and younger generations expect less from Government and Employer, and rely more on Personal – Millennials expect 65% of their income to come from personal sources). And there’s a growing expectation for employment income – Millennials expect a quarter of their retirement funding to come from continued work.

Motivation, engagement and sense of purpose. Satchel Paige is one of the great baseball players. He took the mound for the last time at age 60, and pitched a three inning shutout for the KC Athletics. Among his many quotes is “How old would you be if you didn’t know how old you were?” And I recall a discussion in Mitch Anthony’s “The New Retirementality” asking “how many 25-year olds does it take to replace someone with forty years of work experience, insights and relationships?” Retirees work for many non-financial reasons. Age Wave/Merrill studies categorize four types of retirees: Driven Achievers (15%) keep right on working and accomplishing, Caring Contributors (33%) find ways to give back, often working for nonprofits, Life Balancers (24%) work largely for friendships and social connections, and Earnest Earners (28%) keep working primarily to pay the bills.

Working during retirement has two key drawbacks. First, if your start drawing SS benefits early your benefits can be reduced (1) for starting early (up to 20% to 30% reduction versus waiting for full retirement age 65 – 67) and (2) if you work (SS benefits reduced $1 for every $2 your earnings exceed $16,920 if you’re under the FRA, $1 for every $3 earnings exceed $44,880 in year you reach FRA, and no earnings limit after FRA). Second, SS benefits can be taxable depending on your income. If you’re married filing jointly and your “Provisional Income” (AGI excluding SS + tax-exempt interest + 50% of SS benefits) is under $32,000, then none of your SS is taxable. Between $32,000 and $44,000, then up to 50% is taxable. And over $44,000, then 85% is taxable.

However, do consider working despite the hits. “Don’t let the tax tail wag the dog” goes the saying. A
tax attorney explained the tax code to me on a golf course… “Brian, if I offered you this crisp $100 bill on the condition you had to give me $50 back, would you take it?” Wouldn’t you? And your future SS benefits may increase from the additional earnings. And of course, don’t take this as gospel. I don’t know your situation, and advise you to seek expert tax advice by your CPA and talk with Social Security.

So if money can’t buy you happiness, then possibly it buys you a good night’s sleep. May you plan and rest well.

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Why Isn’t There a Hug Your CPA Day?

Some surprises bring great joy – a call from an old friend, a door opened, or an unsolicited “You’re awesome!” But walking into your CPA’s office and saying “Oh, one more thing… Did I tell you about something that happened last year?” is likely to test her or his humor. Two types of CPAs are historians and advisors. The first might say “Yes, you’re hemorrhaging. Here’s your tax bill.” The other offers “Here are some ways to stop the bleeding.”

Use the conversations now as you work on your 2016 tax preparation and get a jump on the year ahead. It benefits both – you may save money, make more money and reduce surprises; and your CPA is engaged, informed and can better employ his or her talents.


Getting organized saves you money. Where do you prefer to have your accountant’s billable time being applied… sorting through a shoe box of receipts and invoices, or confirming your neatly compiled financial information and helping you pay the least amount of taxes legally required? Tax organizers provided by your CPA or enrolled agent are provided for a purpose. And there’s a broad range of tools for organizing – including filing systems (online receipt apps like Expensify and Shoeboxed or organizers like Evernote) and accounting software (QuickBooks, FreshBooks, Zoho, Xero, AccountEdge,, etc.).

Compare your information. Ideally, you’re reporting roughly what you forecasted at the beginning of the year. Does it look reasonable? Did you forget something for 2016 you reported in 2015 (e.g. bank account 1099, retirement payment, or charity)? Did you do something different in 2016 (e.g. dog walking business, medical event, new vehicle)?

Patience. Waiting for 1099’s or K-1’s? Should you wait for corrected 1099’s from investment accounts (anxious early tax filers face the possibility of filing amended returns and/or additional tax preparation fees)? And mistakes can happen when you rush.

Common “surprise” areas

Social Security retirement benefits may be taxable – Despite your payment of FICA taxes, a portion of your retirement benefits may be taxable depending on your income. If provisional income (AGI before SS + muni bond income + half of SS) exceeds $32,000 (married, $25,000 if single), then 50% or 85% may be taxable.

A bumper income year for retirees may result in higher Medicare premiums the following year. Part B premiums are based on your modified adjusted gross income, and Part D may have an income adjustment. B premiums generally range $134 to $429 a month, so heads up in case you have a significant gain from selling an asset sale, redeemed an annuity or Series E bonds, etc.

Significant event you didn’t communicate to your CPA. Examples of tax version of “Ripley’s Believe it or Not” are abundant and often result in missed opportunities. These include sales of property; family, job or business change; employee benefit (e.g. stock options), or a tax law change to name a few.

Get a jump on 2017

Update savings and spending plans. Modify withholding and estimated taxes accordingly. Retirement contribution limits remain generally the same as 2016 – IRAs and Roth $5,500, 401k deferrals $18,000, SIMPLE $12,500. However, you may be eligible to make “catch up” contributions that up your limits to $6,500, $24,000 and $15,500, respectively (note: defined contribution plan limit jumps from $54,000 to $60,000).

Plan for 2017 transactions. Is a business acquisition, relocation, or significant life event is on the chalk board, and have you circled at the fire with your advisors? What are the planning opportunities?

Tax reform issues were abundant this past election cycle from Federal down to local levels. Pay attention and be flexible in your planning.

And finally, bring a smile and a cup of cheer to your tax accountant. They’re the ones wrestling with 74,000 pages of the Tax Code and hopefully keeping you from harm’s way. You’re just writing the check.

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Your Guiding Angel

Frank Capra’s film “It’s A Wonderful Life” was released in the winter of 1946. It would take almost three decades before it became a classic. The finer things in life tend to take time.

Senior Angel: “A man down on earth needs our help.”

Clarence: “Is he sick?”

Senior Angel: “No, worse. He’s discouraged.”

The story’s about a desperately frustrated banker, father, husband and community man who was thinking about throwing away God’s greatest gift – his life. And Clarence who hadn’t yet earned his wings in 200 years was sent to be George Bailey’s guiding angel.

We’re about to leave 2016 which may go down as one of the most eventful years for investors since the Financial Crisis. The year started with a tumultuous market sell-off, then major geopolitical events including Brexit and the surprise Trump victory. The US stock markets (S&P and Dow Jones) have sky rocketed, the US dollar has soared to its highest level in 14 years, and interest rates are on the rise.

Some people are concerned. Others may be peering over the bridge’s edge into the icy waters below. There are reasons for nervousness. Maintain control and don’t be discouraged for 2017. Here are three areas all focused on the theme “Be Flexible.”

Goals and Financial Plan – Are you planning for the “right” goals? Consider both big goals (retiring in 20 years or funding a 30 year retirement) and easy win goals (create a budget, a 2-year credit card payoff plan, or update beneficiary designations). Stay motivated using “eat an elephant one bite at a time” and recognize your progress.

Why do people tend to make decisions they later regret? Some pay to remove tattoos they once thought were great ideas, and others divorce the ones they rushed to marry. Are you possibly saving for something you won’t want in the future? The concept called “The End of History Illusion” was published in an article by Quoidbach, Gilbert and Wilson (Science, January 2013). They surveyed people asking them how much they had changed in the past decade, and to predict their changes over the next decade. Surprisingly, people predicted minimal change in the future despite the significant changes they’ve made in the past “…leading people to overpay for future opportunities to indulge their current preferences.” This has significant planning implications. Will you sell the second home or downsize main home? Live longer than you think? (Inflation is a hidden menace – SS recipients get a measly pay raise of 0.3% or $5 a for the average recipient). What if SS isn’t fixed and benefits are reduced by 20% (or 30%) for future retirees? Will your family dynamics change? You dream that assisted living is for other people, not you? Be flexible.

Investment Plan – The year ends in about a week, and looks like US stocks outperform foreign stocks for fourth year in a row. S&P is up about 13% for 2016, DJIA up 16%, Russell 2000 up 22%, EAFA (foreign developed) up 1%, and EM (foreign emerging) up 8%. And interest rates are on the rise. What’s ahead for 2017?

A recent report in Barron’s summarized 2017 forecasts by 12 strategists from major Wall Street firms (Goldman, JP Morgan, BofA/Merrill, Blackrock, etc.). They’re forecasts, not guarantees, but predict returns to be slightly higher. The average GDP growth is about 2.6%, S&P up 5.4%, and 10 year Treasuries up slightly to 2.7%. Second, capital markets tend to have a permanent upward trend, but it’s not a straight line. The S&P is triple its March 2009 lows, and some argue we’re due for a correction. Third, there’s a saying “You drive like hell and you’re going to get there.” So diversify and trade the opportunity of ever making a killing for never getting killed. Look at your right hand as a reminder – five fingers representing a form of diversification – US stocks, foreign stocks, real estate, bonds and commodities. And fourth, all the hoopla about Dow hitting 20,000 – it’s just a number. It stood about 496 when I was born 59 years ago, and my daughter will see it hit 650,000 (that’s 6% growth over 60 years). Be flexible.

Tax and Estate Plans – The US elections marked a 9.0 policy earthquake. Four of Trump’s main issues were infrastructure, tax reform, immigration, and Obamacare. Policy changes mean adapting our financial plans. However, it’s too early to know what campaign rhetoric is ultimately enacted as policy. That process will take time, and as my partner Kirstin says “Breathe… if a wall’s going up, it won’t be built overnight.” Take tax reform as an example. Most agree that simplification makes sense. However, people differ on the details. Talk includes cutting corporate tax rates and eliminating estate taxes. For individuals, Trump’s and the GOP’s plans take 7 brackets down to 3, but they differ significantly on deductions, and thus impact on the deficit. And it’s a good sign there are dissenters among his cabinet nominees – expect healthy debate. For planning, a general idea is to accelerate losses into 2016 and defer income to 2017. However, it’s not prudent to make drastic changes or speculate on the outcome of tax reform. Be flexible.

May your list of worries be shorter than your New Year resolutions.

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A Christmas Eve Truce

A cross stands in a field in Saint Yves, Belgium, commemorating a site of something special. The plaque reads “1914 – The Khaki Chum’s Christmas Truce – 1999 – 85 years – Lest we forget.”

Withering machine gun and artillery fire shredded the battlefields of “The Great War to End All Wars.” Soldiers dug in for shelter and to survive. The era of static trench warfare had begun. The most famous was the Western Front which consisted of lines of trenches stretching from the Belgian Coast through northern France to Switzerland. Millions of German, French and British troops battled from those trenches.

On Christmas Eve, British troops were surprised by sounds coming from the German trenches – “Stille nacht, heilige nacht.” One British troop recognized the melody and joined with “Silent night, holy night.” More soldiers started singing. Another Brit cautiously popped his head and saw German soldiers with hands waving. He waved back. No shots were fired. His buddy waved. And the two dropped their weapons climbed from their trenches, crossed no-man’s land, and met in the middle shaking hands with their enemies who hours before were locked in battle.  More soldiers followed suit. An informal truce fell upon a section of the Western Front. Upwards of 100,000 soldiers in khaki and grey were having fellowship on grounds of shredded tree stumps, barbed wire, and uniform remnants.  They shared cognac, tobacco, tinned meat, family photos, song and stories. Others took on a more somber duty of retrieving their fallen comrades from the field.

And for a moment, humanity and peace overwhelmed the brutality of war.

So as you gather this holiday season with family, friends and loved ones, may you have a special toast for peace, happiness and success. And here are some topics you might want to include in those “how are you doing” one-on-one conversations with your adult kids, grandkids and nieces and nephews before they hustle back to their busy lives.

Are you saving enough? – Money is a tool that provides security, freedom and choices. And people have at least three reasons to “stash cash:”

  • Emergency Reserves – “Rainy day” funds for possible job change, an unexpected bill, etc.
  • Planned Expenditures – Big ticket expenses such as vacations, remodeling, repairs, vehicle replacement, education, etc.
  • Retirement – Prudent savers fund after-tax and retirement accounts – plus real estate and business investments. Retirement accounts are convenient (forced savings) and have barriers to keep you away from the funds until retirement (taxes, penalties, etc.). Build after tax savings into your budget – you’ll be happier when a portion of your future retirement checks aren’t fully taxable.

And if saving has been challenging (e.g. job cutbacks or unexpected bills), increase your savings next year. An additional savings of $100 per month over 20 years means about $46,200 at 6% return; 30 years of savings grows to about $100,400.

Debt makes life more expensive – The Feds increased federal funds rate by 0.25% and are hinting of three rate hikes in 2017, and three more in 2018. And bond market interest rates are higher. Higher rates are a double-edged sword.  It benefits savers with higher yields. But they also affect the price of bonds, size of federal debt, and the cost of anything financed. It stresses the affordability of homes. And rising debt, and/or higher costs to service that debt reduces the amount you can spend (grow economy) or save (grow wealth). Meet with your lenders and “fix” adjustable rate debt (ARM mortgages, equity lines, credit cards, student loans, etc.) where possible.

Celebrate your accomplishments and check your course – Many businesses have updated their budgets and strategic plans for the New Year. And households benefit from running their finances like a business as well. Uncertainty will always persist (economic, political, markets, your longevity, etc.). However, the stakes are high best you get all stakeholders at the planning table (your spouse and advisors) to help you think things through.

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Changing Your Game with Trump Cards on the Table

We’re taught two “don’ts” – don’t talk politics and don’t throw stones. However, we have a new reality, and for many, Trump’s victory was a surprise. Client conversations involve the elephant in the room – “What changes should we make” or “We’re scared… are we going to be okay?”

Regardless of who won this highly contentious and nasty election cycle, half the country was going to be unhappy with election results. It’s an unfortunate reflection of our deeply divided country. Late night show hosts each had their unique delivery of emotions and hopes. Seth Meyers captured it whether you’re red or blue – “I felt a lot of emotions last night and into today. Some sadness, anger and fear. And I’m aware those are the same emotions a lot of Trump supporters felt… emotions that led them to make their choice. It would be wrong to assume my emotions are more authentic than theirs.”

We’ve heard acceptance, concession and transition speeches. Underlying all were the themes of working together for a brighter future. There’s lots of uncertainty on how the cards will be turned over. However, the man hasn’t yet taken office or his “first one hundred days.” Why not give him and the process a chance to work? And why not focus on things we can control? Let’s look at a couple areas in your financial plan for you to consider under the new administration and Congress.

Estate Tax Repeal?

The so-called “death tax” is unpopular as a double tax. The estate tax affects few Americans and accounts for less than 1%of the total annual Federal tax revenue. Nevertheless, repeal of the estate tax has been in the cross-hairs.

The prospects and impacts of repeal are uncertain. However, some insights by estate planning gurus Jonathan Blattmachr and Marty Shenkman are as follows:

  • Repeal could reform the focus of estate planning to family and asset protection, and income tax planning.
  • Permanent repeal is uncertain, and more likely we’ll see a ten year sunset provision (Byrd Rule) unless the Republicans can get sixty votes in the Senate.
  • Uncertainty suggests it may be premature to make substantial changes to existing estate plans. Better clarity may come in three to six months. Consult your estate counsel.

Income Tax Reform?

Trump campaigned on tax reduction ($6.2 trillion in a decade) and “simplification.” The tax code and regulations have expanded. They’re equivalent in volume to ten Harry Potters (entire series) or seven King James bibles. However, it’s uncertain what Congress approves (e.g. closing the budget deficit and reducing federal debt which has roughly doubled the past eight years) and how long those changes are effective. Tax policy changes over time and Congress giveth and taketh away.  For example, I started my career in 1980. The Economic Recovery Tax Act of 1981 (Regan tax cuts) provided a 25% across the board cut in rates. The government wanted some of it back. They eliminated $30 billion in loopholes (deductions and credits) and targeted tax shelters with the Tax Reform Act of 1986.

Talk to your CPA and advisor regarding potential tax planning moves. Generally with potential reform – lower future taxes – consider deferring income and accelerating deductions. Some ideas:

  • Deferring income – You sell a stock or rental property in December and you’ll owe taxes four months later. If you wait until January, the bill is due in over a year. However, the risk is price fluctuation.
  • Deductions – Maximize retirement and HSA contributions by year end. Accelerate your eligible medical and dental procedures, prepay property taxes and mortgage payment, and make your charitable donations. Review lax loss harvesting in investment accounts.
  • Business owners and contractors – Defer income to January, and buy needed equipment and pay employee bonuses by Christmas.
  • Don’t go overboard – The strategies need to make economic sense. Don’t be a spendthrift or trigger alternative minimum tax with excessive deductions.

Final Thoughts

There’s plenty of uncertainty (and unturned cards) – Keep politics away from personal finance. Be flexible and adapt your financial roadmap as greater clarity emerges. And until then be patient and stick to the plan. You saw the markets’ boomerang on election night. And the wall isn’t going to be built overnight.

Here’s to dieting another day. Happy Thanksgiving.

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Worst President Ever

Who will be the better President, or who will be worse? Historians also argue who was the worst? Perhaps Warren G. Harding for the scandals that plagued his short term or Woodrow Wilson who lead us into WWI. However, James Buchanan is most often saddled with the title of “worst US President.” When a fork in the road appeared, he typically took the wrong path. Buchanan took little interest in battling the recession that struck before the Civil War. And his attitudes and blunders about slavery helped divide the country and his party.

The American economy was robust in the early 1850’s. Twenty years of expansion had been fed by Manifest Destiny, the discovery of gold and silver, and westward expansion by railroads, settlers and commerce. Manufacturing boomed from strong overseas demand. And the number of banks doubled from 1850 to 1857.

But the economy strained and the Panic of ’57 ensued. US farming profits plunged from bumper crops and overseas competition. Investors worried about speculative railroad and land loans. US gold reserves declined $20 million from trade imbalances and withdrawals. Ohio Life & Trust’s bankruptcy signaled trouble. Credit collapsed, building and railroad construction froze, and unemployment skyrocketed. (Sound familiar… the cycle of bubbles?).

The President said the government would do nothing…” the speculators in land and slaves deserved their gambler’s fate.” The government would continue to pay its obligations and complete existing projects, but little else. He did take anemic action with the Treasury. The size of coins was halved to reduce the silver and gold.

Buchanan also took little action to avert civil war and head off secession. He supported slavery and the Dred Scott decision which denied citizenship to African Americans. He addressed territorial slavery in his inaugural speech as “happily a matter of but little practical importance.” He backed the admittance of Kansas with its pro-slavery constitution and further divided his party ensuring Lincoln’s victory. And he took no action as seven states seceded on his watch.

He and Lincoln rode together to the new President’s inauguration. Buchanan said “If you’re as happy entering the presidency as I am leaving it, then you are a very happy man.” Who would have criticized the gent with the stovepipe hat who may have thought “Don’t let the carriage door hit you on the way out.”

We were taught two “don’ts” – don’t talk politics and don’t throw stones. However, the elephant in the living room deserves some attention. Some are voting for a candidate, and others are voting against the opponent. What and can they deliver? How will campaign promises differ from his or her policy decisions after the election? How will the markets react?

I’m no political expert. I join others pondering is the process flawed? How to encourage the best candidates to run? What to do with the shift in US values and beliefs? However, two things (1) not every position has supporting data and not every point will be swayed by the facts, and (2) it’s important to control what we do control.

Historically, election outcomes and market performance have little statistical relationship. However, in past elections, the S&P has seen more positive performance than negative. There’s less uncertainty – somebody won vs who won. Goldman Sachs analyzed the S&P index for 12 months following presidential elections since 1988. Average return was about 11% with the worst in 2008; there’s a typical post-election bounce, regardless of the winning party. First Trust studied 22 election years since 1928 and 82% (or 22 years) were positive returns. And Goldman also concluded that despite campaign rhetoric, longstanding checks and balances tend to mute grandiose campaign promises.

There are other important questions relevant to your financial health, and less likely to get you into a brawl. What’s important about money to me? What are my goals with my finances and my life? What obstacles do I face? How can I be more involved in the process?

We enter the fourth quarter. It’s crunch time and time to buckle up for the opportunity and challenges ahead. Here are some calendar items for you and your advisors:

  • Maximize deductible retirement and HSA contributions for 2016.
  • Adjust payroll/pension tax withholdings to avoid underpayment penalties.
  • Accelerate earnings to 2016 (or defer to 2017).
  • Make required minimum distributions from retirement accounts.
  • Execute year-end charitable giving and capital gains minimization strategies.
  • Medicare open enrollment runs until 12/7 (Affordable Care Act (the Exchange) runs later 11/1 to 1/31/17).
  • Final quarterly estimated taxes are due 1/17/17.
  • Review and update estate plans and beneficiary designations.

And vote on 11/8. Good luck.

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Money Market Reform

How concerned would you be if your cash reserve account balance fluctuated – hopefully by not much – reflecting short term conditions?  Say you normally held $30,000 in a money market account as cash reserves, and it might range $29,850 to $30,150, or a half percent fluctuation? If that would make you nervous, then you ought to talk to your financial advisor or call the financial institution to see if your money market share values will retain their constant $1 NAV (net asset value), or if they will float with market conditions, on or after October 15, 2016.

What is money market reform? New SEC rules go into play next month for money market funds and many companies have already made adjustments. Institutional prime and tax-exempt funds will end a 30 year plus tradition of fixed $1 share prices. Instead, share prices will fluctuate daily based on the underlying value of securities.  Funds that hold only government securities (including US Treasuries and agencies) can maintain the $1 NAV price. The reform emerged from the subprime debt crisis in 2008. There was a run on prime money markets by investors (and ran to government funds), the Reserve Primary Fund was the first money fund to “break a buck,” and the Treasury Department stepped in to reduce further contagion. The intent is to promote stability and fairness. Critics point to higher borrowing costs.

How is this relevant to you? First, is the peace of mind issue from price stability of cash reserves. If zero fluctuation of your mattress money describes you, then why stray from the $1 NAV funds? On the other hand, hopefully the daily market price fluctuations are minimal – i.e. they’re related to interest rate changes, or a credit or liquidity issue (see discussion below). Second, is the impact of a potential exodus of investors leaving prime money funds – estimates of up to $300 billion –  in favor of government money funds (note: roughly $2.6 trillion in money market industry). Commercial paper is the primary investment in prime funds, and the commercial paper market shrank resulting in increased borrowing costs. Three-month LIBOR (an unsecured lending rate) is near its highest since 2008. Hence, your borrowing costs may rise if you have loans tied to short term indexes.

Caution for investors seeking higher rates – Investors on a fixed income (e.g. retirees) may be in a tough spot due to low interest rates on savings. However, a key reason you hold money markets is for liquidity (emergency reserves and planned expenses)… cash needs to be available when needed. Be careful if you’re tempted to “stretch” for higher cash flow by reaching for higher yields – including longer maturities, lower quality and annuities, to name a few.

Here’s an example… Ultra-short bond funds became popular in the 2000’s and some of them were used (or marketed) as alternatives to money market funds. They paid an attractive yield. However, the risks included longer maturities, and credit/liquidity issues. One of these funds with “YieldPlus” in its name blew up in the subprime credit crisis. This fund had grown to about twelve billion in assets by mid-2007. However, it was primarily invested in mortgage-backed securities and was longer term (about 6% of the portfolio matured within 6 months). The credit crisis hit, and the portfolio suffered massive redemption calls and illiquidity issues. Share value declined about 47% from its July 2007 high to April 2009. Assets fell to about $140 million. Lawsuits came-a-flying. They ended up paying $200 to $350 million in shareholder settlements and fines.

One would think that an investment with the term “Plus” in its name is a good warning to ask more – “Plus what?” If it means higher return, then you should have good reason to believe there’s higher risk – the trade-off of risk and return. Perhaps it’s a good time to talk with your advisors. Good luck.

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Scary Markets

Let’s play a game. I offer your choice of (A) $1 million in cash now, or (B) a magical shiny penny that doubles in value daily for 31 days. Which do you take? Of course it’s a trick question. Take the magic penny! It’ll be painfully boring early in the process (1 penny turns to 2, 4, 8, and so on), but things later get exciting.  End of week 1 you have $1, week 2 its $100, and week 3 its $10,000. You hit $5.4 million on day 30. And double that, you have $10.7 million on the 31st day. Compound interest is a powerful yet basic principal in personal finance. Consistency and time matter. You save and invest X dollars monthly, reinvest the profits, and you’ll achieve your goal – buy a newer vehicle, fund college or trade school, or retire on your terms.

But it’s not easy for three reasons. Patience wears thin as people don’t want to wait and put in their time; and they’d rather jump ahead for the big payoffs. Imagine the boredom and pain – the first couple of weeks of the magic penny, starting up a new fitness regimen, or breaking an old habit. Second, life tends to get in the way – an unexpected expense, job change or health event. And third, a crisis du jour occurs that cripples the markets temporarily, brings fear, and investors behave irrationally. So let’s talk scary markets.

They’re natural and frequently occur. In every four year period, there’s usually one great year, one terrible, and two mediocre. You’re probably happy in those great years. However, the down years really elevate stress. That’s also natural. Its call risk aversion. We’re hardwired to survive – seize favorable conditions and avoid or neutralize threats.

And that’s when you ought to be talking with your trusted advisors – When fear is high and you seek confidence. I’ve found those conversations to go something like this:

“Have you seen what’s going on? The market is down/ABC is going to get elected/XYZ crisis du jour. I want you to sell everything.”

We feel your stress. Standing on the ledge is serious stuff. Is it a permanent decision?

“No, I’ll get back in when the dust settles/things get better.”

Please help me understand. What does “dust settles/better times” look and sound like to you?

“The news reports will be better.”

Ok. When the news is better, where do you think the market will be?


I’ll be professionally candid. This sounds like selling low and buying high. What am I missing?

Life is abundant with irreducible uncertainty.  There’s always something that will knock us off track. And when we’re thinking about making the Big Mistake. Here’s one – chasing past performance.

One of the hottest performing investment sectors was long government bonds and credit – up about 6.5% for the quarter and 14.3% year to date through June 30. And it’s tempting to rebalance your 401k plan by picking the highest performers from the menu of investment choices. Lipper reported that investors took some $6.1 billion out of equity funds and put $4.1 billion into taxable bond funds for the first week of July.

In volatile times, investors tend to run to safety by selling “riskier” assets (e.g. stocks) and buying “safer” assets (e.g. bonds). That’s driven bond prices to record highs and yields (interest rates) to near record lows. But how likely is the future to resemble the past – specifically, which way do you think interest rates are eventually headed? When interest rates rise – investors will see lower bond prices.

And remember the Rule of 72 – it’s a quick formula to see how long it takes money to double. You divide the number of years (or the return) into 72 – it’ll take 10 years for money to double at 7.2% return, or money will be worth half in about 24 years assuming 3% inflation. Using today’s rates, it’ll take about 107 years to double your savings in 1-year US deposit account, 1,387 years in a German account, and 6,932 in a Japanese account.

Please don’t misunderstand me. Investing in fixed income is often prudent in a diversified retirement account. It generates cash flow (e.g. retirement paychecks) and is a good buffer for volatility. Rather, don’t drive by the rearview mirror alone (past performance) – look ahead and avoid the obstacles in the road, and talk with your trusted advisors. And as an Irish blessing goes, “May you live as long as you want, and never want as long as you live.”

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The Popularity of Pessimism

Barbarity swept the European continent between the 5th and 12th centuries by marauding Vikings as they raped, pillaged and plundered. Violation of a nun’s chastity – brides of Christ – could forbid them entry into Heaven. So imagine yourself a nun and barbarians at the gates… what would you do?

St. Ebba was Mother Superior of the monastery of Coldingham on the Scottish border overlooking the North Sea. The Danish invaded in the 9th century, and fearing the Viking’s reputation, St. Ebba gathered her nuns and encouraged them to follow her example. She cut off her nose and upper lip with a razor to disfigure herself to be unappealing to raiders. Her assembly did the same. Imagine the pain of their self-mutilation – and likely not the keen edge of modern kitchen cutlery. The Vikings arrived at dawn and were so disgusted, they set fire to the monastery and the holy virgins perished in the flames. They traded their chastity for their lives.

Life’s rich with trade-offs. And times are scary. There’s plenty of pounding at the gates today. One is market volatility. Here are some ideas to discuss with your advisors to help you avoid “cutting off the nose to spite the face.”

Why Does Pessimism Sound So Smart? – Some people are so stressed that it might be good medicine to turn off the news – most of it bad – blaring from TV, tablets and smartphones. Morgan Housel’s article in Motley Fool discusses the perverse popularity of pessimism. “For reasons I have never understood, people like to hear that the world is going to hell,” says historian Deirdre N. McCloskey. Housel wrote that bull (optimism) sounds like a reckless cheerleader, and bear (pessimism) sounds like a sharp mind. And clearly there’s more at stake with pessimism. Daniel Kahneman won a Nobel Prize showing that people respond stronger to loss than gain – “It’s an evolutionary shield… Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.” And reasons why pessimism garners so much attention – pessimism requires action whereas optimism means staying the course, optimism sounds like a sales pitch while pessimism sounds like someone trying to help you, and pessimists extrapolate problems yet fail to account for our remarkable abilities to adapt and overcome setbacks.

So what should you be doing? Investors are not a homogenous group of people that should all turn one way as a herd. Rather, investors can be segregated into different groups each having unique needs. I’ll use “age” as an example:

70’s and 80’s – “We’ve lived a lifetime of ups and downs, and diversification and time tends to smooth things. However, we’re not going to get out of this alive, and need to spend time with family and team about passing on our “stuff” and aging/end-of-life care before a health crisis erupts.”

50’s and 60’s – “Time to get serious about retirement. I know that holding a ton of cash isn’t going to protect me long-term. Are our spending assumptions realistic, and will we have enough cash flow to last us 3 to 4 decades of retirement?

30’s and 40’s – “I feel I should be “conservative” after seeing the Dot-com and Financial Crisis. But there are only 3 sources of retirement income: pensions and Social Security, continued employment, and income from my savings and investments. I’m not likely to hang around long enough for a pension, don’t trust SS, and want more freedom and time with my friends. So I’ve got to invest for me, and what a great time to buy when stuff’s on sale!”

Are you in these situations? Assuming you’ve got a reasonable time horizon and prudently diversified, there’s little reason to “uninvest.” And if you’re older and concerned with the volatility, why are you invested in “risky” assets anyway? (Note: “It’s for my family” is an excellent answer). Here are two strategies to discuss with your advisors:

  • Heavy in cash or similar (“Fixed” option in retirement plan) – Consider putting cash to work because investments are cheap – caveat: they may get cheaper. S&P 500 is down 13% from its 52-week high, developed and emerging markets 24% and 34%, US small caps 26%, Nasdaq 15%, REITs 18%, and broad commodities 44%. This may be better for those with “sudden cash” – you sold a property or switched retirement companies – and less suitable for “nervous Nelly’s” (there’s a reason you a bunch of cash).


  • Roth conversion – Monies in your IRA are generally fully taxable when you withdraw them in retirement. Roth IRA withdrawals however, are generally not. You can “convert” the traditional IRA to a Roth IRA, however, you have to pay taxes now for the switch – converting a $100,000 IRA at 28% tax bracket costs you $28,000 in Federal taxes (plus state). Consider conversion if (1) you’ll be a higher tax bracket when you retire, and (2) IRA value is lower due to market declines. Conversions are rare in my experience, primarily because most people hate to pay taxes. However, talk it over with your CPA and financial advisor.
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