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February 20th, 2012
By Eve Kaplan, CFP®
The tax guessing game continues because some proposed 2013 tax changes may – or may not –go into effect . Congress may keep us guessing until the end of this year but it’s clear overall taxes must and will increase.
Uncertainty is the enemy of planning, but here are the most items being “kicked around”:
1. Dividends will be taxed again at ordinary income tax rates after a long hiatus. Out goes the maximum 15% rates, in come ordinary income taxes. Wealthier Americans will pay more since the highest income tax rate is scheduled to rise from 35% to 39.6% in 2013.
2. Long-term capital gains rates will increase to a maximum 20% for most investors (10% for those who are in a 15% tax bracket or lower).
3. The 3.8% Medicare surtax will be levied on income exceeding 250K (married filing jointly; 125K for married filing individually or 200K for an individual tax filer),
4. The federal estate tax exemption exclusion will drop to $1 million (opening many estate planning opportunities in 2012) and
5. The threshold for medical expense deductions in 2013 will increase from 7.5% of adjusted gross income (AGI) to 10% of AGI — unless the taxpayer and his/her spouse turns 65 before the end of the taxable year through 2016.
Here are some strategies to consider for 2012 – bearing in mind the final outcome of tax changes is not yet know. Please note your specific situation may be different:
Dividends and Capital Gains Strategies:
• If you were planning to sell a highly appreciated investment in a taxable account anyway, it’s better to do it in 2012 than 2013. Selling before 12/31/12 locks in your 15% long-term capital gain; waiting until 2013 may cost you 20%.
• If you want to retain a specific mutual fund or stock, you can sell it in 2012 (maximum 15% capital gain) and repurchase it after 30 days to establish a higher basis. Example: you bought Apple shares in Jan 2010 for $211. Sell them now for $502, pay 15% capital gains tax (=$43.7 per share), and repurchase them for approx. $520. If you sell this position in 2013 for $600, your gain is $80; with a 20% capital gains tax, your taxes = $16 per share. Waiting to sell your position $600 in 2013 costs you more: your taxable gain ($389 per share) = 20% capital gains taxes of $77.8 per share. In this example, waiting to sell until 2013 with a low basis means you end up paying 30% more in taxes.
• On the other hand, consider postponing any sales if you have a large capital loss carryover on investments. Why? The offsetting loss carryover through end 2012 gives you a bigger ”bang for your buck” at higher tax rates.
• Do you have a highly appreciated investment you’d like to gift to family members in a low 10-15% tax bracket (e.g. your children or grandchildren who have little or no income)? If so, 2012 presents an opportunity to have them sell appreciated assets and avoid paying any federal income tax on the gain.
• If you’re retired, in a low 10-15% tax bracket, and can defer income (e.g. an IRA distribution) into the future, you pay 0% on qualified dividends and have no long-term capital gains tax through 12/31/12. Consider repositioning high dividend-earning investments in your taxable account to tax-deferred account – if possible – to lessen your tax burden.
Medical Expense Deductions:
• If you’re considering medical procedures (e.g. dental work) in 2012 or 2013, this year is a better year to do it if you itemize deductions and your unreimbursed medical expenses will exceed 7.5% of adjusted gross income. Proposed 2013 tax changes will not affect the 10% of adjusted gross income threshold for the AMT.
Examples of Other Strategies:
• Some exposure to municipal bonds in after-tax accounts makes sense since your take-home yield may still exceed yields on taxable bonds or taxable bond funds. Municipalities may be forced to pay even higher interest rates to attract investors since Pres. Obama has proposed limiting the tax break for muni bond interest to 29% for couples earning more than 250K/year (single filers: 200K).
• Consider Roth conversions this year instead of 2013. Run numbers to make sure it’s prudent to do this since converted amounts bump up your taxable income.
• Seek out tax-managed mutual funds and funds with relatively low turnover – gains on securities held less than 1 year are taxed at your ordinary income tax rate. As always, hold high-returning assets with high tax penalties (REITs, junk bonds, commodities) in tax-deferred accounts.
Eve Kaplan(C) 2011
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January 15th, 2012
Do your New Year’s Resolutions include “losing weight” and “getting more exercise”? Do they also include “better financial health?” They should! Getting a handle on financial health can be challenging, however.. Here are 2 things to consider:
1. Join my free January workshop to review steps toward financial health. This workshop will be held on Wednesday, January 25 at 7:30 pm at the Berkeley Heights Public Library.
2. Decide if you can get through these “financial health” steps on your own (a minority of folks) or if you need professional support.
Most folks can’t necessarily diagnose and treat their own medical conditions – and the same applies to financial planning.
Here’s an outline of the 12 Step Approach to Financial Health in 2012:
Step 1 (January): “Paper Chase”
• Create neat, organized files for your insurance, estate planning documents (if you have them), investments (after-tax and tax-deferred), etc.
Step 2 (February): “Location, Location, Location”
• Consolidate your brokerage accounts (12 is not better than 2).
• Consolidate investment accounts by identifying overlapping/redundant investments. I’ll review some resources (e.g. www.morningstar.com) to help in this area.
Step 3 (March): “Follow the Money”
• Add up all monthly or annual income sources (earned income, Social Security/pensions, other income), then deduct all expenses
• Are you in the Red? Black? Did you include mandatory savings if you’re not yet retired?
Step 4 (April): “Outliving Assets?”
• Add up your assets (property, investments, collectibles)
• Add up your current and future liabilities (mortgages, credit card debt, future obligations [e.g. college, possible support to other family members])
• Do you know if your net worth is sufficient to generate decades of retirement?
Step 5 (May): “Be Credit-Worthy”
• Track your annual credit score
• Consolidate and pay down CC debt in a way that makes sense
Step 6 (June): “Be Tax Savvy”
• Minimize taxes on investments by holding more of some investments in tax-deferred accounts (e.g. real estate, some bonds, commodities)
• Tax harvest before each year end to offset investment gains
Step 7 (July): “Insurance Wrap-Up”
• Do you have the best policies (life, disability, long-term care)to cover what you need – but don’t cost an arm and a leg?
• Is your family adequately protected from the risk of your unexpected illness or death?
Step 8 (August): “Sound Retirement Investing”
• Understand and utilize your employer retirement plan
• Roll up and consolidate plans from old employers
• How to utilize your retirement plans before and during retirement
Step 9 (September): “Investment Smarts”
• Know the A, B and Cs of mutual fund investing (different types of commissions)
• Retain more of your hard-earned money by paying a broker less (no more A, B and C charges!)
• Understand simply portfolio diversification techniques
Step 10 (October): “Estate Planning”
• What are the essential estate documents you need?
• How often should your estate documents be revised?
Step 11 (November): “Reality Check List”
• Has your financial health improved by taking these steps? Or did you fall off the wagon half-way through?
Step 12 (December): “Putting It All Together”
• Match realistic expectations with results
• Can you go it alone or do you need professional help? How do you find the right advisor for you?
Realistically, the majority of people cannot execute these steps alone. Review this list and see if you fall into that majority group. If you do, consider work with a Fee-Only (no products sold) advisor who will guide you through these steps in an objective manner that doesn’t mix advice with product sales. The right Fee-Only planner will access the situation, provide solutions to close planning gaps and hold you accountable to execute necessary changes.
Tags: budgeting, cash flow, estate planning, insurance, retirement planning
Posted in Fee-Only Financial Planning, Fiduciary Standards in Financial Planning, Financial Planning, Investments, Retirement Planning | No Comments »
December 13th, 2011
How much money can you safely withdraw from your investments once you retire?
This is a subject of wide debate in the financial planning world as our country’s 78 million baby boomers start turning 65 this year. This “withdrawal rate” simply refers to how much you can tap from your investment assets to avoid running out of money before you die. The approach is designed to allow you to withdraw money each year while leaving your principal intact.
For example, if you start with $1,000,000 at retirement and withdraw 4% per year ($40,000), you skim a $40,000 annual gain off the top of your $1 million investment portfolio and always have the $1,000,000 principal until the end of your life. This implies the $1 million keeps growing by 4.2% each year (you need more than a 4% increase to return to $1 million).
Being able to live off interest while retaining your $1 million principal is valuable even if the purchasing power of your principal declines each year with inflation. In other words, your $1 million initial retirement account might only be worth the equivalent of $300,000 after 30 years, but having the equivalent of $300,000 is still a great financial cushion to help keep you from running out of money.
Unfortunately, we don’t live in the predictable world that facilitates an automatic 4% withdrawal rate because markets move up and down, tax rates change, your financial needs change and investments sometimes disappoint. You no longer can simply set the dial at e.g. “4% withdrawal per year” and be assured you won’t run out of money in 30 years.
Here are some things to consider, based upon recent research:
1. People are living longer and longer. It’s not overkill to assume you easily can live another 30 years if you retire at age 65.
2. You can’t control where markets will land the year you retire and begin tapping your investment nest egg. If you had a few bad years before you turn 65, you might start retirement with $900,000 instead of the $1 million you intended. How much you have at retirement also depends upon your portfolio mix in the years leading up to retirement. You should consult with a financial planner or investment specialist to determine your optimal mix.
3. Once you retire, you need to adjust your withdrawal rate “as you go” – depending upon how markets did the previous 3 years. The Wall Street Journal refers to this strategy as “the accordian strategy.” If the market hits a bear market bottom (note: this may not always be obvious), you trim your withdrawal amount by 25% for the coming 3 years. Michael Kitces, a planning strategist, recommends tracking the S&P 500 P/E (price earnings ratio) to determine if the market is overvalued, fairly valued or undervalued. On that basis, he increases or decreases recommended withdrawal rates within a 4.5% to 5.5% range. This approach has been effective in recent years when tested with a 60% stocks, 40% bonds portfolio.
4. Some specialists recommend an even lower withdrawal rate (as low as 2.5% for a moderately conservative 40% stocks/60% bonds portfolio). This means you withdraw $25,000 per year (2.5%) instead of $40,000 per year (4%). Of course we’re talking about pre-tax amounts.
5. One strategy at retirement is to set aside 3 years of cash reserves (what you otherwise would draw from your investments) so you always can suspend your annual withdrawals from your $1 million if markets hit the skids.
We haven’t discussed the fact that you need to pay taxes on what you withdraw (ordinary income tax rates if it comes from an IRA, or capital gains tax if funds come from an after-tax account). You may need significant other sources of income (social security, pensions, savings) to fund retirement. And then there’s the corrosive power of inflation; you need to withdraw more and more each year in order to keep pace with purchasing power. Finally, our example of $1 million doesn’t go very far toward covering retirement in more expensive parts of the country – you may need multiples of $1 million in addition to social security and a pension (if you’re lucky enough to have one).
As you can see, determining your ideal withdrawal rate is no trivial matter. If you’re calculations indicate you may be coming up “short,” alternatives include retiring later, adjusting your portfolio over time or spending less in retirement. It’s best to seek professional advice if you have doubts or concerns!
Tags: withdrawal rates in retirement
Posted in Financial Planning, Investing, Investments, Retirement Planning | No Comments »
November 21st, 2011
by Eve Kaplan, Certified Financial Planner(R)
Do you – or someone you know – move in and out of investment holdings in order to “boost your return”? If you do, it’s worth considering the downside. Studies consistently show that market timing (you go into investments when they seem good, exit when they don’t) undermines your ability to make investment progress.
Consider the fact that retail (individual) investors typically flee from markets when the bad news already is reflected in prices, and typically try to climb back in when prices already have moved higher. Instead of buying low, selling high, individual investors tend to do the opposite.
I have an excellent graph that illustrates this point – but I’m not able to overcome technical difficulties and print it here (very irritating!)…so I’ll ask you to use your imagination. As you know, the market fell out of bed in September 2008 (good-bye Lehman Brothers, hello imploding mortgage market). The graph I can’t post shows a steady outflow of individual money in mutual funds as the S&P 500 hit bottom (March 2009) and continued to rise into 2011. As the market is rising, individual investors continue to bail out of stocks.
So who’s driving the market higher? It’s often institutional money (pension funds, professional money managers) who have clients with staying power. This institutional money effectively works to block the natural tendency toward panic selling The proxy for this staying power is Dimensional Fund Advisors but it could be any institutional investor who didn’t try to “market time.” (full disclosure: I use Dimensional Fund Advisors mutual funds for my assets-under-management clients).
Here’s another example of the damage others inflicted on their investment returns when they tried to time markets. Remember the Fidelity Magellan Fund? This fund returned a stellar 29% per year (1977-1990) under Peter Lynch’s tenure but Lynch apparently once said he felt more than half of the Magellan Fund shareholders lost money, based upon fund inflow/outflows. By now you must know the reason why… Smart money doesn’t exit when the going gets tough – it rides problems out, continues to invest for the future and racks up a better return over time.
Eve Kaplan(C) – 2011
Posted in Investing, Investments | No Comments »
October 20th, 2011
What are some of your earliest memories about money? Did your parents agree about money when you were growing up? Do you and your spouse make financial decisions together? Or apart? Do you view money differently? Have you ever discussed these things with a financial planner or advisor??
We financial planners wear many hats – problem solver, prudent investment manager, enlightened advisor (helping our clients avoid the risk of outliving their assets), etc. In addition, another hat I wear in my financial planning practice is – for lack of a better word — “money therapist.”
I’m not a licensed therapist, but emotions and money often are tied to each other. If there is discord, misunderstanding or distrust in a relationship, this can show up in financial matters. In meetings with clients, I try to listen well (and talk less). And I’m attentive to both husbands and wives (regardless of who the financial decision-maker is in a relationship). Have you ever met a professional who only looked at you, but ignored your wife or husband through the entire meeting? It’s important to provide a non-judgmental space for both you and your spouse to speak – even if you don’t agree on some issues.
Here’s why this can matter to you:
• money problems/differences is one of the biggest triggers for divorce; money is power
• if you’re emotionally invested in your plan, you’re more motivated to implement it and achieve financial success
• in my experience, women and men often behave differently toward money/financial decisions – it’s helpful to you if your planner reaches out to both the “yin” and “yang.”
• at least half of financial planning clients are women, but only ¼ of Certified Financial Planners® are female
Studies show that women seek out financial advice more than men, while men often view financial planning in more dispassionate terms. Men tend to be more confident about making financial decisions on their own. Drawing on both of these typical gender-linked traits can be a positive for the experience.
How does all of this play out in an initial meeting with clients. In my case, I guide them through a discovery process that gives them time to speak (without interruption from the other spouse) about what’s important to them about money. Often a wife or husband will relay something that prompts the other to say something like “I never knew that about you” or “I’m surprised to hear that – I really had no idea you felt that way.”
When I grew up in the 1960s, financial planning didn’t exist. My family was under stress due to discord over lack of money and problems with a struggling business my father started. My parents eventually got divorced after a prolonged period of financial hell. It’s possible divorce could have been averted if my parents had access to objective financial advice…
A Money Magazine survey indicates that “71% of Americans admit that they keep secrets or lie to spouses and significant others about their money.” If you’re married, you know how intertwined money is in your relationship. Work with a financial planner who can help you sort through issues that help unite you and your spouse, instead of dividing you further.
(C) Eve Kaplan, 2011
Tags: financial planning, marriage and money, men and money, women and money
Posted in Fee-Only Financial Planning, Financial Planning, Financial Planning for Women, Uncategorized | No Comments »
September 27th, 2011
Are you Retirement-Ready? Take These 3 Critical Steps
By Eve Kaplan, CFP® Practitioner
Like everything else in life, retirement can creep up on you – whether you’re prepared for it or not. It’s wonderful to contemplate what you can do with all that extra free time, how to stay healthy, etc…..but many of you put off the “roll up your sleeves, look at the numbers” part of retirement. Why? You either underestimate how much you need, you don’t know how to calculate it and/or you fail to go to a financial planner for help. Finally, some of you stick your heads in the sand, hoping problems will go away. Establishing your preparedness for retirement is critical since you don’t want to outlive your assets. So far I haven’t met anyone who wants to rely on friends and family for a bail out!
How acute is the lack of retirement preparedness? Very. A recent survey by HRconsulting firm Aon Hewitt says 4 out of 5 Americans are not adequately prepared to meet their needs in retirement. The average worker needs 11x his/her final pay in retirement to meet retirement needs (note: this includes social security). Unfortunately, the average pre-retiree socking away money in defined contribution plans (e.g. 401(k) or 403(b) plans) has far less. Recent market volatility is increasing this gap. Another worrisome trend is the rising number of pre-retirees who have suspended 401(k) contributions and/or no longer receive an employer match.
Esssentially, there’s a mismatch between 1) sources of income and 2) how much folks need in retirement. The resulting gap is the problem. Let’s take a simple look at each area:
Step 1 -Sources of Income: A simple retirement planning is the 3-legged stool. The 3-legged stool refers to the 3 major sources of retirement income: 1) your regular savings 2) your pension (if you have one) – or your 401(k) & other tax-deferred savings plan and 3) social security. You have control over all 3 areas – including how much social security you receive!
1) How much do you save in after-tax and tax-deferred accounts? Is it the right amount and allocation, given your risk tolerance, savings amounts and investment targets?
2) Do you plan on taking social security at age 70 (recommended) or will you settle for a much lower annual amount if you rush to take benefits at 62 or 65/66?
Finally – are you planning on retiring at age 60? 65? 70? Phase retirement in steps, if you can? If you end up living to 95 (a growing possibility), will you have enough money coming in each month?
Step 2 – How Much You Need in Retirement: Here’s the other side of the ledger – the amount you need each month or year in retirement, including covering rising medical expenses.
1) Are your financial goals realistic – given your 3-legged stool? Goals include living expenses, car purchases, travel, insurance and medical.
2) Can you scale back some of these areas – if needed – to close the gap with your 3-legged stool sources of income?
Outdated financial planning conventional wisdom said folks spent 20% less in retirement. The new, harsh reality is that folks spend up to 120% or more vs. pre-retirement expenses – in part due to rising medical.
Here are the 3 critical steps to eliminate the gap between income and expenses:
- Retire later
- Save more
- Seek professional help (including help with your investments)
We’ll discuss aspects of these 3 critical steps in greater detail in our next blog!
(c) Eve Kaplan
Tags: 3-legged stool, financial planning for retirement, outliving your assets, retirement planning
Posted in Fee-Only Financial Planning, Financial Planning, Retirement Planning | No Comments »
August 25th, 2011
by Eve Kaplan, CFP(R) Practitioner
Imagine you’re on a train headed for California. You know the train ride will take some time. You know the train will slow or stop at stations, accelerate to a certain speed, ascend to higher elevations, descend again and hit some switchbacks.
You plan on riding all the way to California, but you get motion sickness when you hit a series of switchbacks and you feel the train descending rapidly. Do you: 1) continue your journey or 2) jump from the moving train mid-way?
I hope you answered “continue my journey” and didn’t say “jump from a moving train”! Or should I say – I hope you stick with your investment strategy and don’t bail (panic) by selling into lower markets when they begin to decline?! Because – like all journeys – investing in stocks (US, overseas markets) is not always smooth. However, stocks can get you to your destination: a nest egg that carries you through retirement.
Why not bail on stock markets when you hit a rough patch? For one, it may be easy to exit the market (jump from the train) but how do you get back on board? One of my investment rules of thumb is – don’t do what your gut tells you to do. When markets become choppy, volatile and uncertain, there’s certain to be an overabundance of negative news in the media. If you actually listen to it, your gut feeling will tell you “jump from the train!” But that’s exactly the wrong thing to do, at the wrong time, for the wrong reason.
Here are some things to ponder before you consider jumping from any train:
1. You will have a smoother ride if your portfolio is prudently constructed and well diversified. Exposure to various stock markets (US large, mid and small, international developed, emerging, growth and value) reduces the pain of hitting a speed bump. Add various types of bonds, commodities, real estate investment trusts and alternative investments, and your ride is relatively smooth.
2. Occasionally this system breaks down (e.g. during the 2008 meltdown) and it seems like there is no save place to hide. That experience is temporary because the benefits of diversification resurface.
3. If you live into your 90s, you may have 20-50 more years on your train ride. It makes no sense to jump from a moving train (react to the market short-term) if you’re in it for the long haul.
4. Studies show individual investors typically earn a fraction of their promised rates of return because they hop in and out of holdings –usually at the wrong time. Poor timing means they rack of transaction fees and end up “buying high and selling low.”
5. Rebalancing your portfolio (selling outperforming investments, buying more underperforming investments) can contribute to a smoother ride (better return). If your model portfolio is 60% stocks/40% bonds now, and market movements change this to 55% stocks/45% bonds, consider gradually buying more stocks/selling more bonds until you get back to your optimal 60% stocks/40% bonds portfolio.
If you work with a good investment advisor/financial planner, you’ll have someone prevent you from following your gut reaction to “jump from the train.” If you don’t work with anyone, consider utilizing professionally managed portfolios at Vanguard, Fidelity, T. Rowe Price, etc. Once you find the portfolio that’s right for you, stick with it through market turbulence. Having your investments rolled up in a one-stop-shop will help you avoid the temptation of jumping from the moving train.
(C) Eve Kaplan
Tags: asset class diversification, dos and donts in investing, investing dos and donts, long-term investment planning, market timing, market volatility, rebalancing, staying the course in investing
Posted in Investing, Investments, Retirement Planning | No Comments »
August 12th, 2011
By Eve Kaplan, CFP®
Do worries about having enough money to cover retirement keep you awake at night? Do you feel unhappy about the prospect of having to work many more years in a job you don’t love? Relief may be at hand if you consider the new retirement paradigm that offers a reasonable trade-off between continuing work and beginning to enjoy retirement activities while you still work.
The new paradigm goes like this example:
Let’s say your financial planner explains you can’t afford to retire now – you need to work another 4 years. Is the advice more palatable if you reduce retirement savings and use it now to pay for the retirement activities you look forward to?
Donald and Jane earn 150K/year. Both are 63. Their immediate retirement dream is to criss-cross the US by trailer to visit all the US National Parks. Their financial planner tells them they need to work to age 67 so they retire on at least 75% of their preretirement income (=113K/year) . If they retire now, social security + withdrawals from their retirement income only provide 55% of their current 150K income. That’s not enough to sustain retirement into their 90s.
Donald and Jane aren’t very enthusiastic about working another 4 years, but their financial planner creates a new transitional retirement strategy:
1) Postpone taking social security until Donald and Jane are 70. Social security benefits increase by approximately 8% per year from ages 66 – 70. It pays to take social security at age 70 once someone lives past 78/79 years of age. Donald and Jane are in good health; their financial planner is assuming they will live into their 90s. They also have enough money to cover living expenses from ages 67-70.
2) Continue to save for retirement, but significantly reduce savings. Instead of
saving 33K/year in their 401(k) plans (16.5K per person, before company match), Donald and Jane scale back their contribution to 10K each. They still benefit from a company match, but they don’t save the maximum amount they could each year in their 401(k).
3) Donald and Jane use the 13K/year amount they would have saved in their 401(k) plans (33K minus 20K = 13K ) and spend it on themselves each year, until they retire at age 67. They use this money to rent a trailer and visit 2 national parks each year during their vacations.
In sum, Donald and Jane agree to work an additional 4 years, but they begin to enjoy some of their retirement activities now. In this example, their financial planner projects they will average 82% of their preretirement income throughout their retirement – instead of the measly 55% they would have had if they retired at age 63.
This nuanced approach toward retirement planning fits better with the new realities of work/retirement in the US – often a prolonged, transitional process instead of an abrupt halt – from one day to the next – of work and retirement.
It’s the job of a good financial planner to balance the need for additional assets and savings with the need for “retirement activities” some people can enjoy before they officially retire. However, I don’t recommend you contemplate making Donald and Jane decisions on your own since outliving your assets remains one of the biggest risk the Boomer generation now faces. Careful planning is involved to achieve this type of transitional retirement approach. See your financial planner for more information.
(c) Eve Kaplan, 2011
Tags: Retirement
Posted in Retirement Planning | No Comments »
July 9th, 2011
By Eve Kaplan, CFP®
If you ask people what their biggest financial asset is, they invariably reply “my home” or “my investments.” That’s true in dollar terms, but how about a huge asset most folks don’t think about? I’m referring to their “work potential” or “work value.”
Your biggest asset – your “work value” — is the cornerstone of any financial plan drawn up for pre-retirees. We financial planners create various scenarios for our pre-retirement clients that include investment projections, annual savings rates, the cost of various goals, etc. We recommend the optimal time to retire and counsel our clients not to retire too soon. After all – our goal is to reduce the risk of our clients outliving their assets.
So it comes as no surprise that one of the biggest body blows to a financial plan – apart from unexpected death or divorce – is “sudden retirement.” According to one study, a whopping 41% of retirees stopped working sooner than they planned to. Sudden retirement throws a monkey wrench into financial plans and needs to be dealt with immediately.
“Sudden” or “unwanted” retirement can occur for a number of reasons. The biggest reason is NOT work-related downsizing/elimination of a position (that’s the reason 37% of the time) – it’s actually poor health (54%) and the need to care for a spouse or family member (19%).
What can we financial planners do to help our clients who become “sudden retirees” or who face the risk of “sudden retirement”? Here are some key issues to consider:
1. If you have a financial plan already, your numbers can be adjusted to show the impact of “sudden retirement,” if it occurs. If you lost your job recently, a “sudden retirement” assessment is vital.
2. If you haven’t suffered a “sudden retirement,” have your planner consider the consequences if this did occur in the future. Having alternative scenarios in your financial plan gives your planner some flexibility regarding ways to shore up your financial plan if this occurs.
3. We recommend clients invest in a professional assessment of skills/interests to uncover other potential career paths. This is critical for “sudden retirees” who lost jobs due to downsizing/elimination of a position. If you’ve lost your job due to health, or the need to care for a spouse/family member, consider any measures you can take to avoid becoming a “sudden retiree” for life.
Your biggest asset may be yourself, but it sometimes takes a professional to match your abilities with a job you otherwise may have overlooked. Having a second career can help people bridge the gap between their retirement savings and the prospect of living into their 90s. Truthfully, many or most folks do not expect to live that long and forget their retirement may stretch 30+ years.
I was reading recently about “media leafcutter ants” (Atta cephalotes) in Panama. Like other ants, colony members have different physical attributes and “jobs for life” to better serve the colony. Foragers, for example, have razor sharp mandibles capable of slicing leaves into small disks so they can be carried back to the nest. Over time, repetitive leaf slicing blunts these mandibles – until foragers no longer can do their job well. Instead of ending their careers, foragers shift their role to gathering up sliced leaf parts and carrying them back to the nest.
People are infinitely adaptable and still can contribute toward society (and earn money) if “sudden retirement” occurs. Sometimes it takes the work of a financial planner to help pre-retirees recognize their financial plan depends upon returning to work – possibly in another capacity.
(C) Eve Kaplan, 2011
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com.
Tags: career planning, retirement planning
Posted in Fee-Only Financial Planning, Financial Planning | No Comments »
June 7th, 2011
by Eve Kaplan, CFP® Practitioner
People are programmed to follow crowds because it helps our survival. If you see a crowd running in the same direction, you’re likely to follow it since “it must know something.” Doing so could save your life.
What about following the crowd when it comes to investing? Studies show the “wisdom of the crowds” becomes a liability in the investment world. This is true not only during bubble times, but during ordinary times, too.
During bubble times, extensive research underscores the wisdom of heading in the opposite direction when everyone is enthusiastic about something. Joseph Kennedy is said to have cashed out his stock market positions in 1929 when he heard a shoeshine boy giving stock tips. There are many similar stories – from tulip mania in the Netherlands to the 2001 Nasdaq crash. When everyone is excited about an investment, that’s a good sign to “get out early” and avoid running further with the crowds.
But more often than not, we’re not necessarily in the midst of a growing bubble. During these so-called “ordinary times,” data also indicate the crowd is more often wrong than right when it comes to investments. The Economist investigated Morningstar fund flow data and performance statistics in the US in order to determine if investor crowd wisdom paid off. Specifically, the Economist was looking to see if it paid off to invest money into something that already had done relatively well the previous year (something that already had a “good buzz.”) Looking at the most popular investment sector (that beat the average sector by more than 2 percentage points the previous year), the popular sector subsequently lagged the average by under 3 percentage points as investors continued to pour money it. Multiple test runs indicated the herd mentality was wrong approximately 60% of the time. 60% may not seem like a lot, but that’s hugely significant when compared with random statistical outcomes.
How about using “wisdom of the crowds” behavior as a contrarian indicator? The numbers seem to indicate that “pariah” or out of favor funds do better than popular sectors, but do not exceed average returns.
You’ve probably often heard the disclaimer “past performance is no guarantee of future performance” in mutual fund literature. Investment gurus frequently remark that past outperformance of mutual funds does not continue indefinitely due to mean reversion. In other words, an investment that did relatively well in the past likely will not continue to do so in the future. Investors typically get very enthusiastic about something after it’s done well, and end up “buying high, selling low.”
The reversion to the mean phenomenon can be seen as yet another reason to stick to “passive” (index-based) investing since data show it’s difficult to outperform a market on a consistent basis through active management. By some measures, approx. 75% of mutual funds who actively attempt to outperform a benchmark end up underperforming (doing less well).
Volumes have been written about these subjects so I’ll end here by touting portfolio diversification. Even pundits were skeptical after the 2008 crash about diversification since all assets fell together and there was no safe place to hide. However, diversification always reasserts itself and remains the cornerstone of prudent investing. Diversification simply means having exposure to many different assets classes (different types of bonds, different types of stocks, alternative investments) to smooth growth and lower volatility. The right mix of different assets is something your advisor can design for you. If you don’t have an investment advisor, there are some online tools that give you some ideas about ways to increase your diversification and simultaneously lower your risk.
(c) Eve Kaplan, 2011
Tags: contrarian investing, diversification, passive investing, reversion to the mean
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Eve Kaplan, CFP®
