Separation Boom

While divorce rates over the past 2 decades has decreased, for couples over age 50 (particularly baby-boomers) it has just about doubled according to the National Center for Family & Marriage Research at Bowling Green State University.


The implications for couples divorcing later in life are much deeper for several reasons. Couples typically have accumulated more wealth by age 50, 60 or even 70, and this presents a greater degree of complication in dividing that wealth. Details such as long work history, real estate ownership, retirement account disparity, and life insurance can create a complicated mine-field for equitable division of assets.

Valuing Retirement Accounts at Divorce

One common mistake that is made with retirement accounts is that they are typically over-valued because the taxation is not considered. When looking at an equitable split of assets, the retirement accounts should be factored into the couple’s balance sheet with an after-tax value—sometimes as low as 65% of the current market value of the account.

Protecting Cash-Flow

If a divorcing spouse is awarded an alimony payment to aid in monthly income, the spouse who is set to be receiving alimony should take out a life insurance policy on the paying ex. Trying to plan for payments from an ex-spouse gets more and more risky every year after age 50, as the chance of them becoming ill or passing away prematurely increases with each passing year.

Because couples who are married longer than 10 years are entitled to Social Security benefits from the ex-spouse, divorcing couples will want to pay attention to the Social Security entitlement of their ex-spouse. Someone who earns less than their ex-spouse would want to claim the higher-earning spouse’s Social Security retirement benefit because it will be a higher amount. This is only the case so long as the claiming ex remains unmarried. If a divorcing spouse has a claim to your benefits, you should factor that in to negotiations on the dissolution of the marriage.

Protecting Assets for Heirs

To ensure that assets pass to heirs as originally intended, it sometimes makes sense to set up asset protection trusts upon the division of community property. This type of planning could protect divorcing couple’s children from the complications of remarriage, or from community property claims of their own divorces.



Divorce is a major life transition event, and needs careful consideration. For divorcing boomers, it can have significant impact on retirement feasibility and wealth transfer. Be sure that you understand the future repercussions of any settlement that you are structuring.

Watching the “known unknowns”

Equity markets seem to be struggling with “known unknowns”—that is to say we know there are some things we do not know—ending a volatile stretch of almost daily ups and downs for the market, creating a “risk on-risk off” tennis match for investors.

Here are a few of the questions that the market seems to be grappling with:

Known: Chinese import growth is slowing versus export growth
Unknown: Is this slowdown a sign of greater issues in Chinese growth leading to softer demand for outside goods and commodities? Or, is it indicative of high inventory levels in the country and demand will return?

Known: Commodity prices are softening
Unknown: Is price softening a result of slowing demand in China and other emerging markets, or a slow leak in a commodity price bubble?

Known: U.S. Dollar is rebounding
Unknown: Is it better for U.S. manufacturers to enjoy the benefits of exporting goods with a weaker dollar or for U.S. consumers to experience greater purchasing power with a stronger dollar?

Known: Consumers are feeling the pinch of higher energy and food prices with the April Consumer Price Index (CPI) rising 3.2 percent, the most since October 2008.
Unknown: Does this increase translate into broad long-term inflation across sectors or will consumers adjust to the new environment with little relative pain?


Time will sort out these unknowns and determine market leadership going forward. These unknowns must be factored in to the risk analysis for investors.

6 Items Keeping Boomers up at Night

While you can make the argument that investment markets have returned to normalcy over the last 12 months, there are still major concerns for those who are currently going through or about to go through the transition to retirement. Here are six issues of primary concern for the pre and early retiree

Inflation

According to a labor Department report in December, the cost of living only rose 0.1 percent last year. Looking at the price of various commodities, paints a very different picture. The Federal Reserves current round of quantitative easing has sparked a debate amongst politicians about its longterm affects on inflation. Sustained annual inflation about 3% could have a significant affect on a retiree’s purchasing power.

Parent-Child Sandwich

A prolonged recession has put some established boomers in the position of needing to support aging parents and unemployed children. Reports show many twenty-somethings have moved back in with parents in an effort to curb cost of living. According to 2010 Census Bureau data, 5.5 million Americans aged 25 to 34 live with their parents, up 38 percent from 2000. Last Novembers unemployment rate for people aged 20 to 24 was 14.8 percent.

Statistics show the same at the other side of the generational divide. A 2009 survey by the National Alliance for Caregiving showed 21 percent of caregivers for older adults said the economy had forced them to live together in the previous 12 months. An earlier study by the group found, on average, that families caring for older adults spend 10 percent of their income to do so.

Gold Bubble Bursts

Are Boomers going from bubble to bubble to bubble? Boomer investors irrational exuberance began in the tech sector in the late 1990’s; moved to a more tangible asset class in real estate in the early 2000s; and has poured into commodities (a traditionally volatile asset class) in the last few years. The price of gold is up more than 170 percent since the beginning of 2006 and hit a record of $1,431.25 an ounce last Dec. 7. Billionaire George Soros has predicted that the gold rush can't last, calling the precious metal "the ultimate asset bubble" at the World Economic Forum last January.

Bond Bubble Bursts

Speaking of bubbles, the other asset class that has seen a flood since the financial crisis in 2008 is bonds. Traditionally seen as a more conservative instrument than equities, bonds may be at the center of a perfect storm considering that interest rates are at historic lows. The relationship between interest rates and bonds is such that as rates rise, bond principal values fall.

Not Saving Enough

A 2010 Employee Benefit Research Institute survey shows 13 percent of workers aged 55 or older are "very confident" that they have enough money to live a comfortable retirement--down from 27 percent in 2000. Only 53 percent of older workers have actually tried to calculate how much money they will need in retirement, the survey said. The options for slow-savers are few: They can save more, work longer, or cut back on their spending. The EBRI survey found that 42 percent of older workers don't plan to retire until age 66 or later, up from 20 percent in a 2000 survey. Sticking one’s head in the sand will surely compound the situation. Figure out your capital need and hash out a savings plan sooner rather than later.

Too Much Company Stock

Still a problem I see with prospective clients working for well-established large corporations is the over-weight in company stock in their retirement plans. According to the Profit Sharing/401k Council of America, 18.1 percent of retirement plan assets last year were invested in employer stock. No matter what you think you know about the company you work for, there is still a prudent amount of exposure to have of your employer’s stock.


While this all seems like doom and gloom for the transitioning retiree, these are risks that can all be reduced or eliminated. While the risks and planning principals change during this part of your financial life, you can put an infrastructure in place to get through it.

Thoughts on measuring risk in an investment portfolio

Often when I meet with prospective clients to review their retirement holdings, their portfolio’s risk is measured in a ratio of equities-to-fixed income investments. This has been the traditional way to measure the overall risk of a portfolio, with the weight moving from the equity side to the fixed side as a client ages.

While this may be a simplified way of expressing risk, it may also be just that—too simple. I would make this argument for 2 reasons:

• Some bonds may be more risky that some stocks. It stands to reason that a debt instrument from an emerging market company could conceivably have more risk than an established dividend paying equity investement in the US domestic market

• Risk Changes over time. Volatility in the Emerging Markets asset class certainly is different today than it was 10 years ago, just as the risk of Real Estate or commodities has been an evolving factor over the last couple of years

To account for the changing risk levels regular and consistent analysis should be conducted. This process results in portfolios designed to take advantage of more attractive opportunities for investment while maintaining risk levels established by the analysis. It also allows for a portfolio to adapt as risk changes—of particular value when volatility spikes in the market for the pre-retiree investor.

A portfolio’s stock-to-bond ratio is greatly affected by whether the risk in a portfolio comes from a small allocation to emerging markets, a sizable allocation to high-yield bonds, or a moderate overweight of the equity allocation. However, an adaptive risk analysis can measure these options and determine to what degree a client’s risk tolerance can handle each.

The Dangers of Trading Headlines

In 2007, author Nassim Taleb wrote his very interesting book, "The Black Swan," the theme of which is that the impact of rare events is huge and highly underrated. The idea behind the entire premise of the book is that these events are rare, In previous entries I have opined about the dangers of 24 hours on investment markets. The media have a profound affect on behavioral finance, and it is our individual ability to filter the media which potentially makes us successful investors.
With the recent events in the Middle East, and the earthquake & tsunami in Japan, combined with the financial events/turmoil of the past few years, the term “black swan” is being kicked around more and more, and the label is being placed on many things. I even read an article noting that “black swans were becoming a more common occurance.” This is just irresponsible journalism.

There are geopolitical, natural, social, & financial “events” that happen every year, and it is in the ability to manage those risks that we see financial successes or failures. To name a few of these events over the past several decades:


2000s

• Oil Shocks (2005)
• Corporate Accounting Scandals (2002)
• 9/11 (2001)

1990s

• Tech Bubble Bursts (1999)
• Bosnia-Balkan Crisis (1995)
• War in the Persian Gulf (1990)

1980s

• Savings & Loan Crisis (1989)
• Chernobyl (1986)

1970s

• 3 Mile Island (1979)
• Watergate (1974)
• Vietnam War spreads to Cambodia (1970)

If pressed to, I bet that I could use this loose description of a black swan to name an event every year going all the way back to the 1920s. The point of Mr. Taleb’s book (and it is a great read), is that we cannot mentally grasp or predict the type of event that a black swan is; and therefore cannot plan for it.

As individual investors, it is sometimes difficult to divorce or emotions from our investment decisions. “Media Events” can contribute to these poor decisions. Consequently, we often give in to the emotion of selling low and buying high.

Bull still feels like a Bear—2 years on from the bottom…

On the 2-year anniversary of the current bull market, it may not be a bad time to take a step back and look at where we were not too long ago. What may have felt like financial Armageddon, turned to a sustained market rally, and financial markets are back above the mark they were prior to the crisis.
In probably the most tumultuous time in the market since the start of the Great Depression, it was very difficult to tame emotions for some as a number of investors dumped equities at or near the bottom and shifted to fixed-oriented securities. The reality is that many probably should have never had that much risk exposure anyway.

Over the last 2 years, pundits & money managers have tried to define the “new normal.” Others have declared death to the “buy and hold” investment strategy. The truth is that those who did not panic have recovered much of what they lost—and done so with less volatility. While “buy and hold” may be an okay investment strategy during the accumulation phase of your life, a unique set of risks has always existed during pre-retirement and early post-retirement. This is what necessitates a different investment strategy—not the undefined “new normal.”

Perhaps the reason why this bull market still feels like a bear to many of us is the fact that the 2008 financial crisis was such a trauma, and that some are waiting for another Lehman Brothers to rear its head. Volatility still feels high, though the VIX (the index which measures volatility) has been much lower. The market saw many swings in 2010, which were influenced by headline trading (Euro issues, Gulf oil spill), but they were mildly one way, and then mildly the other…miss one of the mild swings upward and you may have significantly affected your overall success for returns for the year.

While the world gets more complex and economies grow more inter-dependent, the difficulty in staying committed to an investment strategy through emotional ups and downs becomes the biggest challenge to those that need investments growth, but cannot stomach swings.

2011 Oil Shocks on the Way?

The price of oil is up 25% in two weeks, while production is down only 1% due to the Libyan instability issue. So far it seems to be an issue of “the price of oil mirroring headline.” But what will higher oil prices mean for the global economy?

The simplest notion is that higher oil=higher petroleum at the pump= less money for the consumer. Right now, consumer spending is an important part of the domestic economy.

A big questions is what the reaction from government bankers will be. Those at the European Central Bank have hinted that they will raise interest rates in the short term. Bernanke and the Fed have indicated they will keep the status quo for now. This is a real balancing act as inflation worries hang in the balance.

If production does decline due to a protracted unrest in Libya or “contagion” across the Middle East, some have suggested dipping into the country’s oil reserves to ease prices at the tank. It is unclear what real affect this would have on price, because of the emotional affect of using up reserves. If price is already up on a 1% drop in production, what would lowering reserves do to the attitudes toward oil?