How much money do I need in Retirement?

By far this is the most ambiguous question when working with clients on retirement planning. Everyone is different. Some people plan to be more active in retirement, while others will spend less. The old rules for retirement planning of “70% of current income” simply will not hold true for the baby-boom generation. Studies show that healthcare and housing tend to be the most under-budgeted areas.


When looking at retirement planning needs, budgeting for the cost of healthcare is always one of the first considerations. If retiring before 65, retirees need to budget for covering the cost of insurance until Medicare kicks in. After Medicare takes effect, you may face higher out of pocket costs than when you were covered by private insurance (dependent on the coverage. Long-term care is the other major consideration. The need to cover the cost of nursing home care could be a major threat to retirement savings.


Many people automatically assume that housing cost should be significantly reduced by the time retirement rolls around. Often forgotten in the budget is the cost for maintenance, which usually increases as houses age. As retirees age, the ability to handle the upkeep of your house by yourself can also diminish, requiring you to hire outside help.


On the lower-cost side of the coin, is the fact that transportation expenses generally decrease (no more commuting), and entertainment costs typically are equal to working folks.
While the cost of saving for retirement is gone, typically some continued savings will be necessary for ongoing retirement well-being.

The Value of your Real Estate in Retirement Planning--Still the largest part of your Net Worth

The Value of your Real Estate in Retirement Planning--Still the largest part of your Net Worth

Working with clients in the Bay Area, it is not unusual to see the value of a client's primary residence as the largest part of their net worth. Sometimes, the analysis of retirement planning results in the question of what to do with all that equity in your house. Should it be a source for retirement planning?

The issues/questions to consider when it comes to the use of housing wealth are:

• Paying off the mortgage to reduce overall expenses
• Sell and downsize to a smaller home, freeing up funds for investment
• Sell your home, invest the proceeds and then rent
• Secure a home equity loan or secondary mortgage on the house
• Get a reverse mortgage
• Rent out extra rooms
• Rent out your primary residence and live elsewhere at a lower cost
• Keep the house mortgage-free, and let its value serve as an emergency fund if needed


Because of the emotion that is usually wrapped up in the primary residence, the ultimate question of what to do with housing wealth often becomes difficult. The best recipe for success with investment and retirement planning is to plan with unemotional assets.

Really?, Retire the 401k?

Time Magazine Feature: Why It's Time to Retire the 401(k)

An interesting read...

Much of the focus of the article is about the fact that there aren’t any protection features in the 401k. The message from government over the past 15 years has been that the onus is on us to find the way to fund our own retirement.

The biggest lacking feature in company 401k s is the fact that the vast majority do not have a plan advisor attached to them. They are “unserviced” investment accounts without a professional minding the overall asset allocation. Under this regime, not only is the funding of your retirement on you, so is the professional investment management. If plan participants had the option to work with an advisor, the asset allocation should be adjusted as the participant moves closer to retirement. Over 90% of investment success is determined by asset allocation.

The other major focus of the article is retirement insurance—the idea that we should pay premiums for a “just-in-case” income policy. Retirement insurance already exists in the form of living benefit annuities.

In my opinion, the problem with retirement funding is not the investment vehicles, but the lack of planning.

Defining the "New Normal"

It seems that every news medium I turn to for information on the economy and the financial system is discussing whether we have returned to "normal," and/or whether we are at the precipice of defining a "new normal."
With the Financial Crisis officially one-year behind us, what can be expected for the Global Economy?

Regulation
• Expect more government regulation in the financial sector.
• Will some of the Federal Reserves regulatory duties be shifted to other/new agencies?
Taxes
• The top Federal Tax rate is near the lowest in history. Politics aside, funding bailouts, healthcare, and war costs money. Expect taxes to increase.
• Many states (perhaps none more than California) are experiencing fiscal crises of their own. It remains to be seen how these states will generate the revenue they need to remain solvent.

Rates of Return
• Tried taking out a CD or depositing cash into a money market lately? With interests at rock bottom, banks are certainly encouraging investment elsewhere.
• The “stock market”(S&P 500) has generated a huge bounceback so far this year. How much of it is in reaction to last falls severe contraction (only 8 of the S&P’s 500 companies showed a positive return on stock prices in 2008)?

The US Dollar
• The fluctuation in value of the US dollar has continued to influence the value of stocks that are priced in dollars. Watch for dollar valuation to continue to fluctuate

Unemployment
• Generally a lagging indicator, unemployment still looms large for the global economy. Companies are posting profits in spite of a smaller workforce, or because of added efficiencies? Time will tell.

With 2009 largely a “recovery year” for the market, I think that 2010 will go a long way to defining normalcy going forward. These and other considerations will remain important going forward.

A year on...what bubbles loom?

This week marks the one year anniversary of the collapse of Lehman Brothers...the event that truly kicked off last year's financial crisis. Some experts have called the crisis the result of a bubble in the housing market (which fueled the creation of highly complex and opaque financial derivitives). Earlier in the year I wrote a piece comparing this bubble to the tech bubble at the start of this decade, but what are some other potential areas of "irrational exuberance" to watch for the future?



Commodities--The tangibles market has been seen as a safe haven over the past few years. As a result gold prices have kept increasing. This year marks 7 straight where we have seen an increase in price per ounce. There is some question as to whether a bubble is being fueled. Demand remains high. But predictions of a doubling of its current price are probably way off. Many thought real estate would continue its 10+% annual growth...No asset class rises forever without a pull back.



Emerging Markets--China and other Asian economies have been leading the global economy out of recession quicker than the developed world. This has sparked the decoupling debate and it has been suggested by some that emerging markets are uncorrelated to the developed world's economies. Others fear of a "smoke-and-mirrors" economy fueled by emerging countries' governments. Ultimately, the business in emerging markets need to be measured by the same fundamentals as the developed world's.



The Fed--Simply because the Fed is buying bad debt (or martgage-backed securities), does not mean those securities should no longer be worrisome to the rest of us. By trying to control the damage inflicted by the financial crisis, the Fed could be silently passing along the problem to taxpayers. $1 1/4 trillion dollars of bad assets may create a debt bubble that wil be difficult to crawl out of. If taxes are raised to cover bad assets, it could mean less total return on investments. If the dollar is devalued as a result of the Fed taking on so much bad debt, assets will simply be worth less.



Keeping an eye on these macro trends and others is important in developing your investment strategies going forward.

Sunshine Tax Increasing?

Why is it that each year (especially so in recent years), the legilators in Sacramento are called to fit a square peg into a round hole? How are tax estimates so far off when it comes to putting a state budget together. This year could be rationalized by the depth of the recession we are in/coming out of, but it could also be a sign that tax revenues have become more volatile.

• Housing prices have severely fluctuated in California over the past few years


• The psychological effect of "big housing wealth" in the earlier part of this decade encouraged homeowners to borrow and spend, thus increasing sales tax revenues. Quite the opposite now.


• How will high a high unemployment rate affect tax revenues for next year budget process?

To combat tax volatility and to continue to pay for government services, expect both state and federal governments to look for new "things" to tax. With greater corporate & workforce mobility, state competition could lure business away from the state. A fine line for the California tax man to walk...

Warren Speaks Out

Finance guru Warren Buffett was recently quoted as saying: "we were justified in using any means necessary (last year) to stave off another Great Depression. Now that the economy is beginning to recover, however, we need to curtail our out-of-control spending, or we'll destroy the value of the dollar and many Americans' life savings."



Pretty sobering words from a key player in the world finance sector. He also noted these key points in an editorial in the New York Times:

• Congress is now spending 185% of what it takes in


• Our deficit is a post WWII record of 13% of GDP


• Our debt is growing by 1% a month


• We are borrowing $1.8 trillion a year

To illustrate these figures, Buffett elaborates on the last one:

$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year
and Americans save a remarkable $500 billion and lend it to the government,
we'll still need another $900 billion. So, where's it going to come from? Most
likely the printing press. And, ultimately, Buffett says, that will destroy the
value of the dollar.

I thought this editorial was very illustrative and painted a clear problem the citizens of the US will face if government spending is not reigned in in light of last year's crisis.

#2 on the "Most Abandoned" list

This is never how you want to be distinguished by Forbes, but certainly provides a lagging indication of how the Bay Area has fared through the recession. Some figures of note from the article:

• Rental vacancy rates swelled from 4.7% to 7.1%
  
• Homeowner vacancies more than tripled from 1.1% to 3.4%. Why the dramatic change?
  
• According to the Bureau of Labor Statistics' latest reports, Bay Area unemployment has more than doubled since last year, up from 4.6% to 9.4% as of April. Many laid-off workers aren't sticking around.

The article is basically noting the two factors that have defined the economy of our area for some time--1)High cost of living (housing in particular here); and 2)The transient nature of a workforce fueld by innovation. There are pockets of Bay Area real estate that have taken their lumps in the bursting of the housing bubble. The fact that the Bay Area is a center for entrepreneurship and innovation influences the transient nature of the workforce as much as anything else does. An surge in innovation will help lead our area out of recession.

The Future of California

Spent the weekend showing some friends from London around San Francisco in some of the most glorious weather we have had all summer. It is quite easy to show off the beauty of the Bay Area as the sun basks on some of the iconic landmarks of the Golden State. It is pretty hard to imagine the financial and political gridlock ongoing in Sacramento while taking in the sites.

Word of the political wrangling and mismanagement of the state had reached our visitors. But perhaps what was most striking to them was what was printed on the lunch menu when we sat down at a popular eatery in San Francisco. The 4% health care surcharge in SF restaurants quickly became a topic of conversation over our meal. On one hand the city is trying to address a very serious social need. On the other, it strikes as a bit of a renegade political policy--especially given the state of the state as a whole. If nothing else it is a microcosm of the multiple disconnects between state & city government, and ultimately with the citizens. California needs a comprehensive gameplan.

The Risk Pendulum of Globalization

Here are a few facts I thought worth sharing with regard to globalization's continued march through all corners of the world despite the crisis:

• 2008 marked the first time that the "developing" world consumed more energy than the developed world.
• The United States, Canada, & Europe will combine for less than half of global economic output in 2009 [according to the Centre for Economics and Business Research].
• One wealth manager notes that the "developing" world has larger foreign reserves & less indebtedness. (1)
• Additionally, he notes that many of the emerging countries have better GDP per capita growth & superior savings rates. (1)
• Does this change the perception of risk usually associated with the emerging world?
  (e.g., "Have Asian banks been more or less risky than American & European ones?", "Are countries with greater debt more or less risky?" (2)

These trends may continue to redefine asset class risk in the near term, and therefore skew people's general association of risk with asset allocation. As globalization continues to redefine the world economy, changing our ideas of risk association also becomes important.


(1): "Of Inhuman Bondage" by Tim Price, June 15, 2009, PFP Wealth Management, http://www.pfpg.co.uk/site/newsroom/publications

(2): "Comment of the Day" by David Fuller, June 16, 2009, Fullermoney, http://www.fullermoney.com/x/default.html

At the movies

My wife and I recently arrived at the cinema early to catch one of the summer's box office hits, and as we waited for the film to start I was not surprised that the theater was not very corwded. But, as the time crept closer to start time, I was pleasantly surprised by how the theater started to fill in. By the time the lights dimmed, it was almost a full house.

Despite the recession, one of California's industry sectors was humming along at full speed through the first quarter of 2009. According to the New York Times, ticket sales were up 17.5 percent and attendance was up nearly 16 percent. If that pace continues through the year, it would amount to the biggest box office surge in at least two decades. Hooray for Hollywood!

3 Macro Trends Redux Revisited

A few years ago, I was asked to research and revisit the macro-economic trends that were influencing the world of personal finance when I first entered this business over 10 years ago. The result of the research was a white paper titled 3 Macro Trends Redux. I thought it may be interesting to reflect on the original trends, mention the findings of the research, and comment on the development since the crisis of '08. The trends in discussion are:

Aging of the Baby-boomers

• Back When--The trend originated 10 years ago as the boomers edged over the age-50 threshold--that magic age when people give keen focus to retirement planning.
  
• Then--Age 60 was now in the sights of the boomers. Pensions first slowly, and then quickly disappeared or became a much smaller portion of people's retirement plans in the last several years.
  
• Now--Chances are the retirement plans of the boomers are in need of major adjustment after the freefall in the stock market last fall. The boomer generation has openly embraced investment in equity-type investments, though I am not sure that planning and monitoring have played a large enough role.
  

Largest Transference of Wealth in History

• Back When--The aging of the "greatest generation" and their general inclination toward saving has set up the potential largest transference of wealth from one generation to the next as the older generation begins to pass on.
  
• Then--The pervasiveness of estate planning has solved many of the issues of this wealth transference, though under current estate law, planning for wealth transference continues to be a moving target. The thresholds for estate exemption have continued to grow and are set to expire next year. This constant expansion makes it difficult to plan for wealth transference.
  
• Now--Because estate law is a legislative hot topic, expect the laws to change once again. There has recently been lively debate in Congress about this issue. The most recent proposal raises the estate tax exemption, lowers the actual tax, and unifies the credits allowed between husband and wife. Whatever is decided upon, it looks as though simple wills and living trust estate planning will solve many of the estate considerations for the mass affluent.
  

Democratization of the World/Expansion of Capital Markets

• Back When--Hopes were high as former eastern bloc nations were thawed to democracy and opened up as new potential capital markets. Eastern Europe was flooded with venture capital and these economies were set for a boom.
  
• Then--Questions arose based upon how the developed world would respond to global terrorism. Would the wars in Iraq and Afghanistan encourage democracy across the Middle East? The rise of the Chinese and Indian economies have led the emerging markets of Asia
  
• Now--China and India (as well as Brasil) have made emerging market a viable alternative to hedge risk brought on by the developed world. These economies have not been hit as hard as the US and Europe in the crisis, and have bounced back quicker as well. Russia (the last of the BRIC nations to be mentioned) has turned politically beligerent in the past few years. This has thrown economic questions up in the air for that region, as the price of oil continues to be the main economic driver for Moscow.

I believe that these macro-economic trends will continue to influence the response of investors from a financial planning perspective. Monitoring the development of these and other factors in relation to your unique plan is important.

Build Your Own Stool

The three-legged stool analogy for retirement planning is in need of termite-reinforcement now more than ever. This theory of retirement planning has long held that people should think of retirement funding as the balance provided by a three-legged stool: Leg one being Social Security; leg two as employer-sponsored pensions; and leg three consisting of personal savings. Over the last 10 to 20 years the message from government and business could not be clearer. Most responsibility for retirement funding has been shifted to us. Social Security is a broken system, and higher income people are increasingly penalized. Most companies have phased-out the more traditional defined contribution/pension plans. So we are left with trying to balance on one leg...

The good news is that there are better and better methods being introduced to help. The option of partnering with an insurance company can allow individuals to leverage their savings by helping to guarantee future streams of income. People should be careful in building these "personal pensions," as annuities can be highly complex and varied. If not planned properly, you could be subject to higher insurance fees, or lose complete control of your asset.

Annuities can replace that disappearing leg of the stool and reinforce some guaranteed income for retirement. Balancing guaranteed income with personal retirement savings from managed retirement accounts is the constant challenge for people as they approach & cross into retirement. These income plans can provide a great hedge against variable investment returns, but need careful implementation and monitoring.

The 5 Step 401k Makeover

Perhaps the title of my post is misleading, because I am really referring to all retirement plans from 401k through IRA. After the massive declines in investment holdings last fall and early on into this year, I am offering five review steps for all retirement plans right now...

Asset Allocation
Saving has been the best feature of self-funded retirement plans. Most plan participants have been socking away money with regularity. It is this discipline that has served participants well in the past. Choosing the underlying investments, and revisiting that asset allocation has been the biggest problem for these plans. IRAs aside, most company plans do not allow a financial advisor to directly manage your plan for you. Enlist an advisor to regularly help in reallocated your investment choices. Your advisor can be your advocate in investments they are managing, as well as those they cannot.

Do you have a plan?
Adjusting financial plans has dominated my time with clients throughout the first and second quarter. Plan assumptions have changed in the last 12-18 months. Revisiting financial plans and making the numerical and mathematical adjustments is important for clients, in that they understand where they are in terms of reaching their retirement and other financial goals.

Have you budgeted your risk?
Investor's risk comfort has been redefined in this crisis. When people lose upwards of 30% of their retirement assets, it is back to the drawing board with understanding the risk/reward gamble. Balancing an investment risk where there may be an opportunity is the key. Having a system for budgeting risk in your investment porfolio is important. A methodology for striking the right risk balance can help in retirement planning.

Fees vs. Value
Now more than ever people are examining the fees they are paying for service versus the value received. Sometimes company plans can be laden with administrative fees. Knowing exactly what those fees are is important to the participant. It is also yet another reason to take control of old company plans that you are no longer participating in.

Do you have a guaranteed income stream in retirement?
While the place of the traditional pension in the overall retirement plan is a shrinking one. after the last year, many investors are rushing to guarantees for at least a portion of their retirement savings. Annuities can be highly complex plans, and investors should understand exactly what they are getting for the price they are paying. Newer guaranteed income plans allow investors to turn their asset into a stream of income without necessarily losing control of it completely. Be sure to understand all of the details before comitting to one of these contracts.

Bubble to Bubble: the culture of now

I believe that the excesses of the financial crisis our economy faced last autumn and earlier this year can be traced back to the returns that investors began to expect during the "dot-com boom." During this time, people could throw a dart at a list of technology companies and get a double-digit return.

I am certainly exaggerating, but the point is that returns were not in line with financial data. Additional, these astronomical returns fed into the frenzy over one sector of the economy. When reality set in in the early part of this decade, investors looked for the "next big thing," fueling a shift in "irrational exuberance" from tech to real estate. The danger in this was/is the leverage involved. Lenders wrote bad loans. Wall Street itched to get involved, thus the securitization of these sub-prime loans, passing along derivitives to investors--instead of reducing risk, this actually exacerbated the risk.

Inordinate performance is simply unsustainable. Investing is not a sexy business, especially if investors stay true to their risk tolerance and general appetite for risk. Our culture of immediate performance does not align with a steady investment return. Patience and discipline are the basis of sound investment decisions.

Exile Economy

Welcome to my blog!

The regular notations and observances that will be posted here will attempt to blend the ideas behind the phenomenon of globalization with the uniqueness of regional economy. Specifically, I will be touching on California--the 7th largest economy in the world. My posts will attempt to apply macro-economic trends to ideas in personal finance.

Globalization means different things to different people. The best definition I have come across is the "growing economic interdependence among countries through increased flow of goods and services, capital, and know-how." This speaks to the dependence regional economies have on each other. Despite the fact that there are different drivers in various regions, and certain factors insulate economies in different ways, no economy functions on its own. There is no such thing as an economy in exile.