Four Ways To View A Dollar

I’m glad I know sign language, it’s pretty handy. I used to have a fear of hurdles, but I got over it. Have you noticed that writing with a broken pencil is pointless?

I love puns. Words have so many meanings. Sometimes the multifaceted perspective about a single word causes confusion, but other times it’s the basis for humor. In financial planning, we often allocate money among different asset classes, security types, tax types, and buckets with each bucket having a different purpose and time horizon. We view each dollar from about four different angles – so many different perspectives that sometimes it no longer makes cents (get it?). Your financial advisor may take it for granted that you understand which point of view is being discussed at any point in time, but in reality the four-faceted view of each dollar is as often as not a source of confusion.

A dollar might be invested in a certain asset class. It could be invested in “stocks,” for example. And that same exact dollar might be invested in a mutual fund, as opposed to an individual security. The same dollar. It’s just a different way to slice up the portfolio pie. The dollar could be invested in an Individual Retirement Account (an IRA). This is just a type of tax deferred investing account. The IRA could be in a portfolio “bucket” designed to grow and protect the investor against the ravages of price inflation. Other “buckets” might be designed to provide income, or college money, or “fun money” or “pin money” for next Christmas.

We are constantly sorting money among different buckets. Sometimes, however, these different ways of viewing a single dollar can cause confusion.

For example, sometimes we ask clients how money is invested, wanting to know if it’s allocated to stocks or bonds, and they tell us that it is in an IRA, or a mutual fund. And no doubt the language of money is an equal opportunity obfuscator, perplexing and bewildering clients at least as often as it happens to us.

While each client situation is different, our solution is often to begin with a financial planning exercise to determine what overall asset allocation mix – which combination of equities, fixed income securities, real estate and other asset classes – helps clients meet their long term spending goals.

Next, we look at the taxable nature and investment purpose for each of the different portfolio “buckets” available for investment. For some people the Individual Retirement Account may be the perfect place to have tax deferred higher risk investments, like equities. Moreover, we may try to postpone taking distributions for as long as possible and take as little out as we can, to pass the assets on to heirs. For others, the IRA may already be so big and the deferred tax liability is already so great that we may want to slow down the growth by investing in fixed income securities, and tap the account hard for income during the income distribution years of retirement. Only by looking at both the goal of each account, and the tax status of each bucket, can we determine where we should allocate our growth dollars (what we call “red money”) and where we should place the less risky fixed income (“green money”) types of investments.

At this point, we still haven’t recommended whether to buy a stock, invest in a mutual fund or exchange traded fund, or buy an annuity or bank certificate of deposit. Each individual bucket has its own unique purpose, asset class, tax status and then, finally, type of security recommendation would be appropriate. Recommending securities, first, without taking the requisite planning steps, is all too often the industry norm. When a broker looks at a bucket of money and sees only the potential for a product sale, the joke is on the investor – and it isn’t funny.

This planning process can be short-circuited by investing each bucket in the same allocation, or always using the same type of securities in every bucket. Financial planning software rarely differentiates which bucket will be tapped first for distributions, and which will be last in line. In a good financial plan, however, your advisor has helped you know the order of distribution, the funding plan and distribution schedule for each bucket, and each portfolio strategy is tailored to each individual bucket while still working together at an aggregate level to present clients with an appropriate asset allocation well suited to each client’s personal risk profile and unique investment goals.

With a unique but cohesive planning strategy, it is easier to evaluate whether each portfolio bucket is meeting its goals and objectives. It is also easier to see that clients remain on track to reach their retirement long-term spending goals. Finally, clients are less likely to drastically change asset allocation, say cutting back on stocks at the worst possible time, because the overall strategy makes sense to them and makes them less likely to change horses mid-stream. The last thing we want for investors is that they “kick the bucket” and “upset the apple cart” at the wrong time, which could threaten the viability of their long-term plan and ultimately result in far too much spilt milk.

Okay. Now I’m just mixing metaphors and abusing altogether far too many puns. You can bet your bottom dollar that it’s time for this treatise on buckets to end. I really need to get a handle on this article if readers are going to grasp what I’m trying to say. Oh, editor. Please just make it stop.

Douglas B. May is President of May-Investments, LLC and author of Investment Heresies.

Embracing the Four Stages of Retirement

Planning is vital to enjoying a happy and peaceful retirement. Not just financial planning, but preparation in a wide range of areas. Our retirement planning practice breaks the planning issues into four distinct stages in order to focus the planning effort and we encourage people to start planning at least ten years before hitting their retirement date.

While successful retirees share the trait of planning for retirement, many people appear to be overwhelmed by the thought of laying the foundation for success in the final season of life. Of the eight traits that we teach people, it’s the most important habit shared by successful retirees and it’s not nearly as difficult as people fear. For those that don’t plan ahead, they increase the amount of anxiety they experience and potentially miss out on time sensitive planning opportunities that could help them improve their financial situation in retirement.

May-Investments breaks the planning process into four discrete stages and then applies complex retirement planning software to give clients a sense of what their financial future may look like. While the planning tool is sophisticated, more than anything else it is going through the process, itself, that makes the big difference. We look at the big picture and we tell people that ‘it’s not about the money, it’s about your life!’

In the first stage of retirement planning, clients are still working and accumulating assets. The primary questions to answer involve, “how much is enough?” (or “what’s my ‘number?’ as the insurance ads used to say). One key question is when the client should file for Social Security benefits, which is an area where poor planning can lead to irreversible mistakes.

In the second stage, prior to taking Social Security benefits, the question is often about whether or not to factor part-time work into the plan. A planned work slowdown can both enable an earlier retirement and increase the total level of satisfaction in retirement. The vocational transition this involves also makes it a great time to consciously develop new social networks that, once in place, will help people throughout the rest of their lives.

The third stage involves full, active retirement. Collecting social security benefits and with a retirement income plan kicking in, these folks are some of the most active people in the community. Days are filled with travel, leisure, and community involvement surrounding each person’s passions and expertise. While this is the stage that most people think about when planning for “retirement,” the prior two stages are even more important in helping people truly enjoy this third stage of maximum activity.

The fourth stage, full retirement, involves handling well the health and other challenges that we face during our final season of life. In this stage, we cement our legacy in both spiritual and financial arenas. Hopefully we are creating memories for others that build them up as we manage a new set of financial risks and health challenges. Drawing down financial resources, it is a time when many retirees face an important decision regarding whether or not to annuitize financial risk (hand that risk off to others). Although it is the time when long-term healthcare plans are put into effect, by the fourth stage it is probably too late to craft a long-term healthcare plan. That issue needs to be addressed much earlier, while there are more options available so the optimal choice can be made.

Starting early, breaking things down into smaller and more manageable stages, and systematically reviewing the retirement plan ensures that the plan is current, flexible, comprehensive and implemented properly. As with most disciplines, it is something that many people will implement easily on their own, but most will need a coach on the side to structure the process and bring the right tools to the table. The only way to “lose” in the planning process, is to fail to start.

Retirement, like life, is a process rather than a destination. There is no single “number” above which your financial wealth will assure you a happy and healthy retirement. Happiness and peace of mind seem to require a concerted planning effort, but planning in the fun sense – preparing for a season of life focused on passions and relationships, should beat the daily office grind, even if you do currently enjoy your job. Embracing these four stages of retirement, in the planning process and beyond, can help you “Retire Right” and enjoy the opportunities that await you beyond the working years.

Douglas B. May is President of May-Investments, LLC and author of Investment Heresies.

Tax Smart Retirement Strategies

The January 2013 tax hikes make tax planning more important than ever. Two strategies we’ve identified are of particular interest to retirees trying to make their savings last as long as possible.

The higher tax rates and lower deductions already passed by Congress, along with new “means testing” of entitlement programs which is likely to come, make it more important than ever to smooth out income sources. Spikes in annual income result in onerous tax rates and, more than likely, will result in reduced benefits from Social Security and Medicare during the high income years.

Retirees need to think about smoothing earnings to the degree that is possible. Having money in an Individual Retirement Account (IRA) is good because gains aren’t reported until money is distributed from the IRA. Outside of the IRA, gains tend to be more “lumpy.” However, all money taken as a distribution from a traditional IRA is taxable at ordinary income rates, so retirees who are taking $60K to $80K in traditional IRA distributions are pushing themselves up into a pretty high tax rate. It would be better, if possible, to spread money between a Roth IRA (which is “after tax” money, so distributions aren’t taxable) and a traditional IRA. A retired person taking out $30K to $40K from each may be in a much better tax situation than if it all comes out of a traditional IRA.

So make Roth conversions during low income years, and take advantage of that funding source as a non-taxable source of cash during the normal years.

Similarly, pre-funding charitable giving could also help smooth taxable income. During big income years, if cash flows allow, a person could put several years’ taxable donations in a Charitable Giving account and get a large deduction to offset the large amount of income. Then, in later years, rather than giving a portion of taxable income, less (taxable) income can be recognized while still meeting charitable giving obligations through the charitable giving account. For tithers, rather than having to earn $111K in order to maintain a $100K spending lifestyle, and paying high marginal tax rates on the extra $11K, the year’s tithe could be paid from the pre-funded tax-deductible charitable giving account.

A community foundation is a great place to establish a charitable endowment fund as a legacy planning strategy, however the Western Colorado Community Foundation (WCCF) is best suited to provide a long term philanthropy strategy. To create a bucket to build up giving for 1 to 5-year stretches, it will likely become necessary to use the charitable giving organizations set up by Schwab or Fidelity Investments to help donor giving strategies.

A charitable giving account could also be useful as part of a college financial planning program as well, although it is really only useful for people who maintain some control of their reportable income. For salaried workers, there’s not much that can be done. On the other hand, salaried employees tend to have much smoother income streams than entrepreneurs, who often enjoy very lean years that will hopefully be offset by the occasional windfall.

Finally, entrepreneurs selling a business can also structure a business sale to smooth reported income. Rather than taking a large lump sum, it may make sense to retain real estate assets that can be leased to create a smooth long-term revenue stream, or the entrepreneur may want to set in place a consulting contract that stretches out several years in order to reduce the size of a lump sum payment income spike that would push them up into the high tax bracket, or consider an installment sale instead of a large up front payment.

Most importantly, don’t succumb to the temptation to over-emphasize tax planning, however. It is an important consideration, but certainly not the most important thing to consider. After all, planning for retirement isn’t about the money. It’s about your life!

Douglas B. May is President of May-Investments, LLC and author of Investment Heresies.

Make January Your Charitable Giving Month

Nestled somewhere in the middle of the legislation to “avert” the fiscal cliff, which is really little more than a bill to make permanent most of the tax cuts of 2001 and raise taxes a bit on the wealthy, is a provision to extend taxpayers’ ability to roll IRA distributions directly to a qualified charity.  For folks taking required minimum distributions (RMDs), January could be a great month to do some charitable giving to help minimize your 2012 tax bill.

Fidelity’s “Crisis Averted” article describes the key provisions of the bill.  As I’ve already blogged, one of the positive impacts is that it makes permanent tax cuts and estate planning changes that, up until now, have been the grist for annual political muckraking, leaving accountants and investors uncertain about how to plan for the future.  By making permanent these tax laws, investors finally have a reasonable basis for tax and estate planning.  Perhaps the legislation will help everyone start moving forward, after years of being in limbo.

At least two types of readers will find the extension of the IRA charitable rollover of particular interest.  First, development staff in the non-profit world ought to be aware of the preferential treatment that January contributions will have over the exact same charitable gift, made sometime after January 31, 2013.

Second, retirees who have been forced to take required minimum distributions from their IRAs, and who make substantial charitable gifts over the course of the year, might want to front load their giving in 2012.  While people still have the opportunity to offset 2013 RMDs with direct charitable rollover gifts, for those folks with significant charitable giving plans – enough to offset two years worth of RMD payouts – the clock is ticking.  It probably makes sense to make some of those gifts in January, so they can be applied to help reduce your 2012 Adjusted Gross Income (AGI) calculations.  Since I'm not an accountant, you probably want to run the idea past your CPA first, but it seems to me that there might be a strategy to reduce taxes for some people and the opportunity to take advantage of this ends in less than 27 days.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Fiscal Tiff

The Lame Duck Congress (emphasis on the word “lame”) thinks that they “resolved” the fiscal cliff with a late night New Years day vote.  In fact, all they did was raise taxes, but there is some good news buried in those actions of incompetence.

First, looking at the late December retail sales figures, it looks like consumers ignored the political grandstanding and kept right on spending.  In spite of the uncertainty, and potential anxiety, shoppers were not so put off that they stopped spending.

Second, most of the “fiscal cliff” drama is now behind us.  I think we’ll find that there was more (negative) impact to the economy during the 4th quarter, than there will be in 2013.  The melodrama was costly.  Economic activity did slow as the year ended, but now there are some rules for income tax planning and estate planning that can form the basis for decision making in the future, so maybe it will allow investors to begin making decisions, once again, and start moving forward.  We almost hit stall speed during 3Q 2012.  Personally, I am really happy to put 2012 behind me.

Third, it appears that Congress has re-learned how to compromise.  Rather than letting extremists hold Congress hostage, the Administration (Biden, mostly) and Congressional leadership figured out how to find some agreement near the center, involving both sides of the aisle, in order to forge a majority.  Previous administrations haven’t had such difficulty doing this, but the agreement surrounding tax hikes was the closest thing to a traditional compromise that we’ve seen in at least four years.  That is, after all, how Washington D.C. is supposed to work.  I thought that they’d forgotten.  Maybe now they can repeat the process and come to some agreement on the spending reduction side of things.

Fourth, most of the tax rates determined are “final.”  The accountants have been dealing with temporary estate planning rules since 2001.  Many of the rules established in the fiscal cliff negotiations are actually supposed to be permanent.  Wow.  What a concept. The Alternative Minimum Tax (AMT) fix, indexation, is also permanent.  It’s great to have some sense of finality to the negotiations.

Fifth, in my opinion, the GOP was more successful than I would have predicted.  Especially given that they lost the election in November, so taxes were bound to go up, the impact of these tax increases negotiated over the New Year holiday are relatively limited.  Given a trillion dollar annual deficit, if the tax increases account for roughly $60 billion (only 6% of the gap), that is pretty minimal.  If the rest of the gap gets filled from spending reductions (Ha!), then that would be about $16 spending reduction for every $1 of tax increase.  In reality, I think the deficits will continue ad nauseum, but the basic point remains; given the size of the deficit, the extent of the tax increase was pretty minimal.

There are plenty of things not to like about the upcoming potential for a constitutional crisis related to the debt ceiling debate we’ll be hearing over the course of the next few months.  Still, there are a few good things that came out of the final package that will help investors going forward.  It doesn’t hurt to notice them, too.

Addendum(dtd 1/7/2013):  Fidelity Investments just published a good summary of the recent changes.  Let us know if you would like us to e-mail you a copy of their Crisis Averted report.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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2013 Forecast: I dunno

Will interest rates finally go up in 2013, or stay low?  I dunno.  Will the “fiscal cliff” cause the economy to stall, or decline?  I dunno.  In the next decade, what “sustainable withdrawal rate” should retirees use to determine how much to take out of an IRA so that the account isn’t depleted prior to death?  Hmmm.  Don’t know.

Let’s face it.  One reason that economists and financial advisors are sometimes caricatured as not knowing anything is because, well, there IS a lot that we don’t know - in fact, that we can’t possibly know in advance.  When planning for our financial futures, we are forced to operate in the world of possibilities and probabilities, whether we’re looking out 40 years – or 365 days.

So how should investors handle this uncertainty?

First, in financial planning, probability analysis can help us understand what a “worst case” scenario probably looks like.  In our planning, we use what statisticians call a “Monte Carlo simulation” to help us determine the likelihood of running out of money during retirement.  These projections help us keep retirement spending in check so clients get a satisfactory answer to the question, “Do I have enough?”

Second, in market and economic forecasting, we use back-tested models to look for indications about what is most likely to happen in the future.  In 2009, May-Investments developed its own proprietary Leading Economic Index to help us anticipate where the economy is headed.  For the past four years, this indicator has correctly projected that economic growth would continue.  While it can’t be relied upon to be 100 percent accurate, at least the indicator gives us a sense of what is the more likely outlook going into 2013.

Finally, in stock-picking, we look for asymmetrical return distributions in the stocks purchased in the portfolio.  We like to own stocks with the potential for growth in the Price/Earnings ratio that the market applies to the stock.  A company that normally sells for 15-times earnings, if purchased at 10X, has room for 50 percent upside even if earnings stay flat, if only the stock valuation returns to normal. 

Ideally, portfolio companies are experiencing upside earnings growth and also have room for P/E expansion.  By buying stocks with steady earnings growth and relatively low valuations, we should be able to reduce the likelihood of a major decline in the stock price while preserving the potential for significant upside potential.  Or, in English, we are hoping to find stocks with a better chance of going up a lot, even if it means taking a chance that they go down a little.

We don’t want a normal bell-shaped curve where upside and downside are evenly distributed.  We prefer the added protection that accrues to investors who purchase shares at a discount to intrinsic value.  Although we can’t actually know ahead of time how the stocks will perform, we can reduce the amount of risk we’re taking by focusing on good companies whose valuations are already depressed.

Investing and financial planning are long run endeavors.  Only after a series of decisions are made and subjected to the fickle fortunes of chance will the solid plans stand out.  In the short run, luck distorts the results.  In the long run, however, diligent planning pays off.  In fact, having a financial plan is the primary determinant of whether or not people are satisfied in retirement.  And although I’d rather be “lucky” than smart, wisdom suggests that prudent planning helps people take advantage of good fortune and can protect them against misfortune.  More than likely, it is discipline rather than luck that separates winners from losers in the long run.

Our disciplines suggest that economic growth will continue into 2013.  The stock market could have another pretty good year.  The political grandstanding demonstrated by our so-called leaders did more to hurt the economy at the end of 2012 than it will to depress spending in 2013.  Maintaining a 4% to 5% withdrawal rate will likely work for most people, unless they are overinvested in cash equivalents and bonds.  Updating your financial plan will help you keep your spending to a reasonable level.

Will these disciplines work for you as well as they’ve worked for us?  I have no idea.  If we did know, exactly and precisely with crystal ball clarity, we could certainly make more money for clients and ourselves by operating using a lot more financial leverage.  But where do we get one of those crystal balls?  That’s the problem.  I dunno.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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When Does It Pay To Delay Social Security?

Retirees can start taking Social Security benefits at any time between the ages of 62 and 70.  Many people start taking benefits as soon as possible, but today’ low interest rate environment has changed the calculus enough that for many folks, that’s the wrong decision.  It almost takes a Ph.D. in Economics to calculate when to file for benefits.  Fortunately, a Stanford Ph.D. recently studied how low interest rates and increasing life expectancies impact this decision.

Retirees who file too soon receive lower benefits that, over a long lifespan, result in significantly lower monthly income late in life.  Because interest rates are low, many retirees should use savings during the early years of retirement and let benefit levels increase (risk free) so that less savings is required during later years.  Marriage, divorce, part-time work in retirement, and other retirement income benefits all complicate the calculation making it impossible to generalize.  The recent National Bureau of Economic Research study did make some general findings that readers will find interesting.

Professors Shoven and Slavov concluded that delaying benefits “is actuarially advantageous for a large subset of people, particularly for primary earners in married couples.”  While many people start taking benefits right away, afraid that something will happen to them before they can get their money back out of the system, the study actually found that, “most households – even those with mortality rates that are twice the average,” need to think about delaying benefits. 

Determining when to start taking benefits is the cornerstone of most retirees’ retirement income plan.  Moreover, without an income plan, people have a difficult time knowing how to allocate between “safe money” and “long-term investments.”  Finally, with the calculus so overwhelming that it takes an econometrician to run the numbers, many retirees give up at the outset, abandoning their planning effort and just accepting the anxiety that comes with not having a detailed plan for how to best tap resources during the retirement years.

May-Investments solution is to tap into sophisticated planning resources that allow us to evaluate the results from various options.  We can adjust when spouses file to claim their resources, adjust whether they claim their own retirement benefits, or tap into “spousal benefits” instead.  For more complicated scenarios, we have a Social Study Analyzer program that helps evaluate more complex situations, including 81 different filing options like “file and immediately suspend benefits.”  Planning software doesn’t make decisions for you, but it does make it easier to analyze alternatives.

We know that having a plan for the retirement years is a key strategy to help people enjoy a successful retirement.  Although having a “plan” is not required, it is one of the key traits that separate successful retirees from those who fail to fully enjoy the retirement season of life.  Looking at the numbers won’t necessarily change them, of course.  Folks who fail to plan for retirement and go into it with inadequate resources won’t suddenly discover new streams of income that weren’t there before.  However, for those who have saved but remain anxious about whether they’ve saved enough, a thorough planning effort brings peace of mind and enjoyment that others, who have failed to plan, rarely enjoy.

If you want to read the full study, “The Impact of Mortality, Interest Rates, and Program Rules,” e-mail me and we'll be glad to forward a copy to you.  Happy Thanksgiving from all of us at May-Investments.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Internet Tools For Wise Giving

Albert Einstein was once quoted as saying, “Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.”  Whether Einstein said it or not, this quote brilliantly illustrates an important point – anything worth doing in life is worth doing well.  We’d like to make the argument that this principle should apply to all areas of our life, including an often overlooked one – charitable giving.

While giving is easy (and it is certainly easy to find a cause to give to), giving well requires thoughtfulness and planning.  Most of us want the hard earned dollars we give to make the biggest impact possible, but how do we know if what we are giving is being utilized efficiently?  How do we know if a charity is legitimate, or whether what we give actually accomplishes what they claim?   How can we be sure that we are giving our charitable ‘kiss’ the attention it deserves?

In our present information age, the internet is turning up some creative solutions to this age old dilemma, making it easier than ever to ‘check-up’ on charities and be thoughtful in our giving.  We have reviewed three such sites for you, and hope that you will find them helpful next time you engage in that ‘kiss’.

www.GuideStar.org

GuideStar is a true ‘data-base’ of non-profit information.  Searching for non-profits in their data-base is free and does not require registration, however if you register (also free) you will have access to more complete information.  The databases they maintain are a combination of information provided by the ‘non-profit’ itself, and data they collect from other sources (such as the IRS).  You can search the site by non-profit name, though for local charities, We found it more helpful to search by location (i.e. Grand Junction, Colorado).  We did receive hits for about 30 local groups. The information accessible to a non-registered user was basic, though instructive, and certainly would be helpful in determining the ‘legitimacy’ of an organization, if nothing else.

www.GiveWell.org

Founded by two Ivy League grads who gave up their high paying jobs as hedge fund analysts in order to use their skills to evaluate charities, this site upholds rigorous standards, recommending less than 2% of the charities they review.  They do maintain a highly international focus, with most of the charities on their list serving developing third-world countries.  Their philosophy is that, by donating to the developing third-world, every dollar gets ‘stretched’ further, so that even a small gift can have a major impact.  We don’t know how instructive this site would be for local giving, but it does include a neat ‘Do-it-Yourself’ link, where they share questions they recommend you ask when conducting your own analysis.  These questions could be applied to any charity and are broken down very specifically by type of organization. 

www.CharityNavigator.org

This site reviews a lot of national charities, and is a good resource for topical searches (i.e. breast cancer awareness).  It does not review any international charities (only those based in US) or organizations exempt from filing IRS form 990, which excludes many religious organizations (i.e. the Salvation Army).  We didn’t find any local charities listed, save a couple based out of Denver.

A quick spin around these sites will, if nothing else, show you the questions that others use to critically evaluate organizations in the non-profit world.  We know that clients have your own favorites, but when evaluating new organizations, this perspective can be helpful.  One of the key issues is how much of each dollar is spent on administration, versus going out to those in need.  So when clients tell us about organizations like the United Methodist Committee on Relief (Umcor.org), for example, which says that it spends 100 percent of designated donations on the projects specified by their donors (the United Methodist Church handles all of the administrative functions as a ministry of the church), it's hard not to get excited about the good that comes from contributions to that organization.

Money represents a lot of different things to different people.  To some it represents security.  To others, achievement.  When organizations are able to use money to present the hands and feet of Christ to those truly in need, however, it can accomplish miracles.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Six Steps To Prevent Identity Theft

Joe Garagiola tells the story of a baseball star who wouldn’t report the theft of his credit cards because the thief spent less than his wife.  In today’s world, identity theft of my medical identity could mean that I end up with someone else’s medical records.  What happens if the thief is in better condition than me?  Would my insurance rates improve? 

In reality, of course, identity theft is no laughing matter where the average “simple” case costs victims 81 to 600 hours, $2,000 to $15,000 in lost wages, and $850 to $1,400 in out of pocket expenses.  Indirectly, identity theft can cost victims by driving up insurance rates and credit card fees, result in being denied loan approval, housing, employment opportunities and even travel privileges.  In a worst case scenario, it can lead to victims being arrested.

Phishing occurs when thieves impersonate someone you know and request private information that they will later use to assume your identity.  The safest rule, of course, is to not provide personal information unless you initiated the correspondence.  Sometimes that is easy to forget, however, especially in the form of e-mails that appear to come from a vendor you use.  When I receive an e-mail from KeyBank, it’s easy to know they’re fishing because I’ve never had an account there.  When it comes from my own bank, it is easier to set my phishing concerns aside, but don’t!  That’s how they get their victims.

I looked at the web traffic on my blog, last night.  Fully a third of the traffic going to my site comes from European and Russian IP addresses.  I’m not too proud to admit it that I know they are not visiting my site to read my investment opinion.  We are up against a worldwide organized crime effort with computer skills that vastly exceed our own.  Fortunately, they tend to write in broken English.  But you can’t guarantee that will always be the case!

Another popular scam is to impersonate a relative in distress.  Using information gathered from Facebook, they can impersonate a grandson who needs bail money (please don’t mention it to his parents because he might get in trouble), or a granddaughter on the side of the road needing car repair money.  Double check all family distress tales before sending any financial help.  These scams are more prevalent than any of us want to imagine.  Of course, these days, the financial distress might come as a result of having bought Facebook shares when the stock came public!

ABM News just released a story about phantom debt collectors from India that harass Americans, demanding money.  Hundreds of thousands of cash-strapped Americans have been targeted by abusive debt collectors in a phantom debt collection scam. 

Retirement Outfitters recently invited an investigator with the Colorado Bureau of Investigation to the Tuesday Noon Lunch series and attendees received a rapid fire list of steps that can be taken to reduce the risk and impact of identity theft.  Here’s an abridged list of suggestions from that workshop.

1. Opt out of receiving junk mail so no one can steal a pre-approved application from your mailbox.
2. To protect against electronic “skimmers” that steal your card information when it is swiped, cover the keypad and pretend to type some extra numbers so that no one can learn your PIN code by watching.
3. Use a separate credit card for travel, or to carry with you, from what is used for monthly utility payments.  If the travel card is compromised, you don’t have to change payment instructions on all of the other accounts.
4. Monitor bank and credit card spending, online or through household spending software (like Quicken), or consider using a credit monitoring service.  The quicker the ID theft is discovered, the less you’ll have to unravel, later.
5. Rotate among the three major credit report services and use www.annualcreditreport.com to check for unusual activity every four months.  You get one free report per year from each service, so rotating among them allows you to check more frequently.
6. Determine if your credit card company offers a smart card, chip card, or integrated circuit card (ICC).  These cards can’t be effectively skimmed because authenticating data changes after each transaction.  However, some of these “contactless” cards emit a wireless signal that can be read by a nearby reader, so customers should also consider buying a credit card RFID blocking sleeve as well.

Retirees are targeted by identity thieves because they don’t use credit as often and are less likely to immediately notice when their card or medical identity has been compromised.  For this reason, retirees who aren’t borrowing money very often ought to consider putting a freeze on their credit record by contacting the three major vendors (Experian, Trans Union, and Equifax).  This can prevent fraudulent applications from being processed in the first place.

Children, newborns even, are also targets.  The beautiful part of stealing the identity of a baby is that it could be 18 years before they grow up, apply for credit, and discover that they already owe thousands of dollars in debt against their social security number.  The Social Security Administration, realizing that its formulaic way of determining social security numbers was part of the problem, is taking steps to make this more difficult.  For years, however, thieves could easily “guess” a new baby’s social security number and they would have an 18-year free pass to spend before they would be noticed.  Children would reach the age of 18 and immediately be faced with paying tens of thousands of dollars in debt.  This doesn’t happen as often as it used to, unless you want to include Congress among the list of criminals.

The Colorado Bureau of Investigation has a small Identity Theft unit, including a Victims Advocate.  The cases they work on usually span multiple jurisdictions, making enforcement action more complex.  The statewide hotline to report identity theft activity is 1-855-443-3489. 

Barbara Traylor Smith, Retirement Outfitters President, also received a stack of materials at the workshop to help educate Coloradans about identity theft prevention.  Email info@GJretire if you want to stop by Barbara’s office to pick up a packet.
 
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Retirement Roadmap Leads to Success

If I told you that six out of ten diners trying to reach Casa Bonita set forth without an address or map, you would probably be surprised to find any of them at the final destination. Yet the majority of workers set sail for retirement without a plan, but are surprised to find themselves adrift in a sea of uncertainty while the miracle of compound interest eats away at their retirement chest. Failing to plan, some say, is a plan to fail. But no one wants a failed retirement. Obstacles to planning rob savers of security, success, and peace of mind.

For too many people, a “financial plan” is either an outdated document gathering dust on the shelf or a painful memory of an expensive process where a financial salesman rifled through their private affairs in search of a commission opportunity.

Without a plan, however, people wrestle with retirement choices without the facts needed to make a good decision. Investors don’t know how much they need to invest in order to achieve their unspecified goals. In fact, the whole season of retirement raises a frightening series of questions when it ought to be an exciting reward for a lifetime of hard work and achievement. Humans have a thankless habit of converting luxuries into problems. Without solid planning, we may convert the once unheard-of privilege of retirement into a myriad of quandaries and dilemmas. It is even worse when workers plunge into retirement before they are financially ready to make the leap from earned income to living off their pile of financial assets.

Those who do try to plan often end up asking a financial salesman to design the plan, which ends up being biased toward whatever product he sells. Others rely on do-it-yourself rules of thumb that fail to account for individual circumstances. Free web-based tools typically fail to address the real world problem of return volatility. A more robust solution would use a Monte Carlo analysis to examine what happens when stocks start out the retirement period by underperforming the original expectations. Printed plans that sit on a shelf fail to address the year-to-year changes that impact our lives, and our financial resources, as time goes by.

At May-Investments, financial planning is an ongoing process. Just as we continually monitor the markets to search for new opportunities, our approach to financial planning is also dynamic – ever changing as client circumstances evolve. Our plans are flexible and dynamic, a continuing dialogue about clients’ unknown futures so that we can make changes to the real-time strategies we’ve employed.

Plans don’t go stale because the planning process is never “done.” Sophisticated financial planning tools help individuals identify risks, collaborate with other professionals (CPA’s and estate planning counsel) during the process, import assets directly from their investment accounts and tweak goals and assumptions throughout the year. Comprehensive financial planning clients are more confident about their futures, and feel more in control of their future. With better financial direction, more know they are on track to realize their goals. There is also a correlation between the amount of assets accumulated and their willingness to participate in a comprehensive planning process – although there is a question of which came first, the plan or the assets.

Sadly, the folks who could most benefit from participating in a financial planning process are probably among the least likely to be reading this article. Those who have the worst sense of direction aren’t particularly interested in articles comparing compasses. The benefits to planning, however, are even more profound for those who haven’t done much of it in the past. We actually use something called a “financial roadmap” as the basis for our planning process. Don’t leave home without it.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Four Things To Know Before You retire

Is “retirement” an experiment that failed? The difficulties facing our country, and retirees specifically, make us wonder whether the plans people have made to spend more than half their life outside of the workforce are realistic. Succeeding at “retirement” is more difficult than many imagined. Nonetheless, we can offer four suggestions on how people can jump start their retirement planning effort.

The politicians competing for the Presidency debate whether Social Security is “a Ponzi scheme” or merely an entitlement program headed for insolvency. Wall Street seems to be focused on using retiree funds for their own enrichment with little or no regard for the impact of its actions on taxpayers or even its own customers. Academic research assumes that investors should adopt a “buy and hold” strategy throughout the business cycle, forcing many investors to take on more volatility than they can stand. And the complexity of the decisions confronting retirees grows worse, it seems, with each new law that Congress passes.

As a result of these problems, few retirees are able to negotiate the labyrinth of choices alone, and are understandably wary of trusting the advice that comes from financial service professionals. Forced to move forward without trustworthy guidance, investors may too easily panic when the market environment turns negative, which turns a paper loss into a real loss to investors’ net worth.

Hopefully the following four steps will help workers prepare of the onset of retirement.

First, investors should put “Social Security” into the proper perspective. Know that Social Security is a “social insurance” program that was never intended to be, nor funded as, a true “retirement plan.” Governor Perry calls Social Security a “Ponzi scheme” and in a sense, he is right. The older generations live off of contributions by the younger generation. As a “retirement plan” it has never been actuarially sound. However, the program was not designed to be a place where contributions are invested to be withdrawn at retirement.

Social Security is an “insurance” plan. It is designed to insure against the risk that seniors out-live their savings. When the program was established, the age when benefits could be withdrawn was higher than the average life expectancy of its participants. The average contributor was never expected to withdraw a single dime from the system. Only the oldest of the seniors – those who lived beyond the average life expectancy – were expected to access those funds.

When we started living longer, politicians refused to “cut back on the entitlement” and raise the age at which benefits could be withdrawn. The perception of voters shifted to social security as the place where funds are invested in order to facilitate retirement – and the earlier the better. This doomed the program to insolvency and investors need to re-orient their thinking or risk their retirement on the rocky shores of political expediency. Workers are not “entitled” to an early retirement. Not in Greece. And not here. If workers want to retire early, they need to save for that goal.

Successful retirees should view social security as an insurance policy that provides an income stream in the event that they live longer than normal, which puts them at greater risk of out-living their financial resources. Therefore, in order to retire “early,” workers need to create a separate retirement account where they can invest additional funds to provide income during the years after retirement, and before taking social security. Politicians debate the passage of legislation to create “private retirement accounts,” yet we already have a myriad of retirement accounts (IRA’s, SEP’s, SIMPLE plans) that fit this need. We don’t need legislators to create another new type of retirement plan, we need politicians with the integrity to stand up and fess up to voters that social security is not now, nor has it ever been, a “retirement plan.”

Retirees need to create a separate “bucket” of money, typically a specific type of retirement plan, to use in funding the “early retirement” years. Lacking such a stand-alone pot of resources, workers need to plan on working, delaying the date when they start taking social security distributions as long as they can. For most people, early retirement should be fully funded by private savings, leaving social security to provide insurance against the risk of retirees outliving their own financial resources.

Second, investors need to shift their thinking to accommodate the differences between investing for “accumulation” and, in later years, using investments to provide an income for life (investing for the distribution years). The investment industry has not kept up with this need. It is still pushing accumulation strategies on its customers when that is not, necessarily, their primary need.

At May-Investments, we divide money into two buckets for the purposes of what the industry calls “asset allocation.” The first bucket, we call “green money,” is conservatively invested and designed to provide clients a secure income stream for the next five to ten years. Green money may be invested in bank certificates of deposit, a bond ladder, or fixed or indexed annuities that provide a lifetime income benefit. May-Investments does not sell annuities, but we do recognize that they are often an important part of the solution.

Because annuities have often been abused in the past, some readers may automatically “tune out” recommendations that incorporate annuities as part of the solution. However, people should know that a June 2011 Retirement Income study by the U.S. General Accounting Office suggests that annuities are actually underutilized as a tool for providing lifetime income, especially for less-than-wealthy retirees. We can e-mail copies of the report, titled “Ensuring Income throughout Retirement Requires Difficult Choices,” to anyone interested.

Recent professional research is also beginning to incorporate the value of annuities in designing portfolios for investors during the distribution phase. A 2007 study by Richard K Fullmer, CFA uses annuities as a benchmark against which traditional stock/bond portfolios must compete. Based on the principles that (1) investors should never risk more than they can afford to lose, and (2) that no one should buy insurance that they do not need, his approach uses annuitization as a strategy alternative that is most appropriate for older investors who cannot afford to risk outliving their resources. Other studies have been evaluating the benefits of adding annuities to supplement more traditional stock and bond allocations in order to reduce the risk.

Investors need to keep an open mind to the conclusions drawn by the GAO and others about the potential for including annuities in an investment program. It is impossible to generalize. For some individuals, annuities should be the primary solution. For others, there may be no reason at all to use them. Every individual is unique, and each individual’s plan draws on their unique set of resources in order to meet their unique set of retirement goals.

Third, investors need to set aside the misunderstanding that proper “asset allocation” means a “static” (never changing) distribution among asset classes. While some diehard passive investors may be more comfortable having a fixed allocation to stocks, both in good times and bad, our view is that if your portfolio advisor suggested the same portfolio in October 2007 as in March 2009, something is wrong. The risks and opportunities at the top of the market were much different than what investors faced at the market bottom. Why does it make sense that the investment portfolio wouldn’t reflect these markedly different set of circumstances. Investors who owned essentially the same portfolio in late-2007 as in early 2009 ought to be asking whether their portfolio is ‘buy and hold’ due to choice, or inattention?

Yet the common myth throughout the industry is that “market timing doesn’t matter.” We all know that isn’t true. When the market crashed in 2008, the size of the allocation to stocks was all important. In fact, the hallmark study used by the industry to justify a do-nothing asset allocation policy proved quite the opposite – that asset allocation is the primary determinant of investment returns. Rather than ignore it completely, as most in the industry do, it makes sense to manage the portfolio’s risk profile across the market cycle. When stock prices are high and economic fundamentals are weak, it makes sense to reduce portfolio risk. At lower prices, and going into an economic rebound, it makes more sense to take risk because – generally speaking – risk-taking is more highly rewarded at that point in the cycle.

Fourth, retirement planning is not just about the money. It’s about your life! There are so many factors to consider that influence investor satisfaction with how their investment portfolios are doing. For many, managing risk is far more important than maximizing return. Having an advisor who is free to pick among a variety of solutions and vendors is also important. For others, the peace of mind that comes from having established a plan, and having the discipline to monitor the plan on an ongoing basis, imparts more comfort than any specific investment discipline can provide.

At May-Investments, financial planning is an ongoing process. Just as we continually monitor the markets to search for new opportunities, our approach to financial planning is also dynamic – ever changing as client circumstances evolve. Our plans are flexible and dynamic, a continuing dialogue about clients’ unknown futures so that we can make changes to the real-time strategies we’ve employed.

Investors should take time to have a plan prepared and share this plan with appropriate family members and professional advisors. The financial roadmap that we develop with clients helps us understand their priorities, goals, and where they hope to end up. Whether you get help in preparing a plan is optional. However, the benefits of planning, whether on the back of a napkin or in real-time using a dynamic software program (our preference), are only available to those who take the time to determine what road they should take into the retirement years.

Create a bucket of savings that allows you to retire early. Adjust your investment strategies to provide lifetime income as appropriate for the distribution years. Actively manage your exposure to risk depending on where you are in the market cycle and prepare a game plan that you can dynamically monitor in order to enjoy the peace of mind which you deserve.

There is so much more to a successful retirement than what happens in the investment portfolio. On the other hand, we all know that investment failure can create stress that makes it difficult or impossible to focus on friends, family and community involvement that are the ultimate reward for a lifetime of hard work. Jonathan Clements once wrote that, “retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.” With the right preparations, the person who happens into retirement – stays in retirement!

 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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