2010 in the Crystal Ball--Part 3

Thoughts on ...
Tax & Financial Planning

• What to Expect from Retirement Benefits
  • Social Security will be staying as is. While there is usually some cost of living adjustment associated with payments, 2010 will not show an increase.
  • 401k contributions limits are staying as is. While the government has been building in slight increases each year, there will not be any for 2010. Limits will stay a $16,500 maximum, with a $5500 catchup provision for participants over age 50.
  • 401(k) matches are returning. Statistics are showing that ofthose company plans that cut employer contributions, 27% have already become matching again. Look for this trend to continue as the economy continues to stabilize.

• Roth Conversion
  • Be sure to consider whether a Roth Conversion is right for you. 2010 marks the first time that the conversion opportunity is open to EVERYONE. Be sure to avoid potential tax pitfalls of conversion.

• What about the Estate Tax?
  • The current law on estate tax is that there isn't one. The tax expired at the end of2009, but Congress has until September to make a retroactive law, and you can probably bet that something will shake out of Washington between now and then.

• RMDs Return
  • After the financial crisis in the fall of 2008, Congress decided to suspend required minimum distributions from retirement plans. Well, they are back in 2010, so be sure that you are set to continue withdrawing, otherwise you could be penalized.

• Tax Rates--Capital Gains Rates are Still Low ... For Now
  • Capital gains rates are set to increase in 2011, as the government grapples with deficit, but for now, the highest rate is 15 percent for individuals in the 25 percent to 35% brackets. There is no capital gains for individuals in the 10 percent and 15 percent tax brackets pay no capital gains.

• Tax Rates--One of the Lowest Income Tax Rate Eras ... For Now
  • The fact that we are probably in a rising income tax environment (given the fact that we are at near historic low levels for the top income tax bracket), traditional ideas for retirement planning are being rethought. Roth Conversion, Section 79 Plans, and other tax advantaged tools for retirement are becoming more important for business owners.

2010 in the Crystal Ball--Part 2

Thoughts on ...
Your Retirement Savings

• Manage your Retirement Savings
  • Earmark Other Savings While not selling off in last year's panic was the right move for investors, not adjusting holdings-or ignoring them-is not a good move either. Adjusting investment strategy is a good idea not only when markets adjust, but also as your life does. Retirement strategy adjustment becomes even more important as you enter what I call the redzone-about 10 years before through to 10 years into retirement. It's here the risk tolerance becomes a moving target and the sequence of returns can really weigh on your goals. Poor investment performance in the redzone can severely impact the longevity of your savings.
  • Many investors had a disproportionate amount of their money in equities-nearly four in 10 employees ages 56 to 65 had more than 80 percent of their 401(k)s in stock, according to the Employee Benefits Research Institute.
  
• Increase your savings
  • Earmark Other Savings Performance alone will not get you to your goals. Increase your savings rate, especially in 2010, as the market continues to recover from the recent bear market. Recent studies show that in fact the opposite is happening, and many investors have set aside less in their retirement savings accounts.
• Fees
  • Many people do not realize the extra fees they are paying by keeping money in former employer sponsored plans. Rolling over old company plans will probably decrease the amount of administrative fees you are paying. It will also open up freedom of choice for types of investments, allowing you to choose low cost options.
  • Earmark Other Savings
  • There are other investments out there specifically geared for retirement savings which help guard against longevity risk. Earmark other funds for retirement as you enter the redzone. Seek out the best investments from a tax-advantaged standpoint.

2010 in the Crystal Ball--Part 1

I wanted to share my thoughts for the year ahead. This series of blog entries focuses on the economy, retirement savings, and financial planning for 2010 and beyond.

Thoughts on ...
The Economy

• Emerging Markets will still be a major focus for 2010
  • China continues to play the "will-they-or-won't-they" game when it comes to re-valuing its currency. But the figures for 2009 publish by the Economist are astonishing: "real GDP grew by 10.7% year on year in the fourth quarter. Industrial production jumped by 18.5% in the year to December, while retail sales increased by 17.5%, boosted by government subsidies and tax cuts on purchases of cars and appliances. In real terms, the rise in retail sales last year was the biggest for over two decades." You cannot ignore this sector of the global economy
  
• Small business breaks out
  • When you look at past recessions, often it has been small business that has led the way out. I do not think that this recession will be any different, however, I do think that Washington has another mine field to navigate in enticing small business back to job creation and growth. Regulation has been a hot topic recently, and the potential for new national and state regulations and taxes may have companies putting their growth plans on hold. That means no new jobs and continued jobless recovery. This is particularly true for small to medium sized businesses, which have generated about two-thirds jobs on a national scale. Uncertainty about 2010 and beyond simply has business planning in the holding pattern. New workplace rules and higher income tax are just two of the worries.
  
• California Constitutional Convention
  • A push for referendum is gaining a lot of support for calling a constitutional convention here in California. This has the potential to effect positive change in the broken political system in our state. It also has the potential to wreak havoc with the 8th largest economy in world. Just exactly who would be the delegates for such a convention has been a much argued element. This leads us to my next point ...
  
• Will CA continue to foster areas of "economic success" (e.g. Silicon Valley; Hollywood; Agriculture)?
  • With state spending increased from $56 billion in 1998 to $131 billion in 2008, and the state facing a budget deficit of $40 billion (in 2008), the temptation is for the government to tax successful businesses. The danger as that business will relocate to friendlier confines. The state cannot afford to lose those current tax revenues, and the jobs that come with having those companies in-state.

Decade in Review--From a Financial Perspective

Looking back on the last ten years, it seems there may have been a geo-political or economic event to mark each year. From an economist’s standpoint, the decade from 2000 to 2009 is painted with a string of investment bubbles. From an advisory standpoint, I can recall with much clarity the impact that these events had on client relationships. Let’s take a quick look at each year’s main event.

• 2000--Dotcom bust…Get-rich-quick stock bubble bursts. This had a profound effect on California’s economy (particularly the Bay Area), as a large part of the workforce were sent away from jobs that would not return in the same industry sector.
• 2001--9/11…When stock markets reopened on Wall Street after the 9/11 hiatus, the Dow (DJIA) dropped 685 points. A very scary time in America, resulted in a short-term over-reaction on equity markets. Over the long-term, the 9/11 sell-off had close to zero effect on the economy.
• 2002--Accounting Scandals…As detrimental as the Enron & Arthur Anderson (& others) scandal were to the US economy, the legislative response of Sarbanes Oxley certainly has had unintended consequences. While holding executives to a higher standard is a fine idea, this piece of legislation has allowed places like London and Hong Kong to creep closer to NY as the preeminent location for global finance.
• 2003--Iraq War begins…No matter how any of us feel politically about war, the fact remains that it has been costly.
• 2004--President Bush Re-elected…Again, no matter how any of us feel politically, re-election meant staying the course for the US both internationally and domestically.
• 2005--Significant Oil Price Increases…Not sure if oil shocks in 2005 can be described as a bubble, but certainly provided a mixed year for equity markets, with the S&P 500 index creeping up only 3%. Certainly those industries dependent on oil continued to be hurt by prices.
• 2006--Dow Reaches 12,000…Big movement for equity markets in 2006 with the Dow Jones Industrial Average reaching new highs. Additionally, the Democratic Party seized control of Congress in the 2006 mid-term elections.
• 2007--Sub-prime mortgage crisis…First thought to be the only “problem area” for the mortgage business we soon quickly and painfully learned that securitization of those loans meant that no investor knew who was holding the proverbial bag (of bad debt). 2007 also marked the official start of recession.
• 2008--Global Financial Crisis…Markets bounced around quite a bit throughout 2008, but it was not until Lehman Brothers bankruptcy on September 14th that the systemic financial problems were truly revealed. AIG’s would soon follow, and before we knew it, we all became majority shareholders in the insurance giant.
• 2009--The Great Recession…It bears noting just how bad 2008 was: 8of 500 companies on the S&P 500 index posted positive returns and it was only the 5th time in history stocks and bonds had losing years simultaneously. Policymakers have walked a pretty impressive tightrope in 2009. I believe the S&P 500’s “roar-back” in 2009 came from a negative overreaction in late 2008. Real planning and strategy will begin to play a larger part in the process as we move in to 2010 and beyond.

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.