Category Archives: Financial Planning

The Drama on Wall Street

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Have your long-term financial goals changed in the last three days?

Are American companies less valuable because investors in China are panicking?

Is there any reason to think that because Chinese investors are panicking, that Chinese companies are less valuable today than they were a few days ago?

These are the kinds of questions to ponder as you watch the U.S. stock market catch a cold after China sneezed.  In each of the first four trading days of the year, China closed its markets due to a rapid fall in share prices—a move which may have made the panic worse, since it made investors fear being trapped in stocks that are seen as dropping in value.  It’s unclear exactly how or why, but the panic spread to global markets, with U.S. stocks falling 4.9% to mark the worst first-of-the-year drop in history.

For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board.  At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week.  One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.

Will they?  The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future.  Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean.  The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn.  The best, sanest investors will once again watch the markets for entertainment purposes—or just turn the channel.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

Global assets shaken by China market turmoil – FT.com

Global markets were in tumult on Thursday after attempts by Chinese authorities to support share prices and the currency raised fresh questions about their ability to manage a slowdown in the world’s second-largest economy. The Shanghai stock market

US bond yields sound warning on economy – FT.com

The US government bond market is blowing raspberries at the Federal Reserve. This could indicate trouble ahead for the American economy. Last month, the Fed lifted interest rates for the first time in nine years, and short-term bond yields have duly

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MyRA May Not Be YOUR RA

Myra-buzz-words-300x300Suppose somebody offered you a choice between two cars.  The first car was identical to the second car, with one exception: it would only travel at a constant speed of 30 miles an hour.  In the other car, you could could choose to travel at any legal speed, and quite a number of illegal ones.  Meanwhile you can only buy the one-speed car if you make less than a certain threshold income, and eventually, if you drive enough miles in the one-speed car, you’d have to buy the car that can travel at any reasonable speed anyway.

Which car would you choose?

That’s the interesting choice posed by a new retirement account that was launched on Wednesday.  In his 2014 State of the Union address, President Obama announced that he was directing the U.S. Treasury Department to create a new retirement savings initiative: the myRA, officially named My Retirement Account.  This week, the first retirement savers will put the first dollars into the program.

The myRA is basically a government-sponsored Roth IRA with the same contribution limits ($5,500 a year, or $6,500 for those 50-and-older).  Like the Roth IRA, all myRA contributions will be made after-tax (in other words, no deductions for the contributions), but the money will come out tax-free when the taxpayer reaches age 59 1/2.  However, unlike the Roth, where the money can be invested in zillions of possible combinations of thousands of mutual funds, ETFs and individual stocks, the myRA participant has exactly one investment option: the government’s Securities Fund for federal employers, which earned 2.31% last year.

Moreover, there are limitations on who can participate in the myRA.  Only people with no 401(k) or 403(b) retirement plans at work can make myRA contributions, and even then, only those with an adjusted gross income less than $131,000 a year ($193,000 for couples).  Also: once you’ve accumulated the maximum myRA balance of $15,000, you have to move the money over to a private-sector Roth IRA.  The only benefit: the myRA doesn’t come with any custodial or account fees, but those are typically nominal when you open a private sector Roth IRA.

So why would people contribute to a retirement option that is identical to a Roth IRA, but with roughly a zillion fewer investment options?  It’s possible that unsophisticated investors will appreciate the simplicity of the myRA solution, where, instead of having to decide where to invest, they simply lend their money to the federal government and collect the (modest) interest.  The fact that the myRA account has no minimums could be attractive.  Most private sector Roths require at least $1,000 to be invested, but theoretically you could start your myRA with a penny.

It’s also possible that the U.S. Treasury Department is about to discover that there’s less demand for an inferior retirement plan than government economists had projected.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

MyRA Starter Retirement Accounts Launch Nationwide

For beginning savers, a MyRA is a safe way to get started.

Government officially launches ‘myRA’ program for retirement savings

MyRA, the Obama administration’s free, guaranteed-return starter retirement account, launched nationwide on Wednesday. The government-backed plan is an option for the tens of millions of U.S. workers whose employers don’t offer a retirement savings plan. MyRA accounts are open to anyone earning an annual salary of less than $131,000, or $193,000 if they are married and file taxes jointly.

Expert: myRA is a misguided bureaucratic mess

The Treasury Department officially rolled out its new myRA retirement plan on Wednesday, deeming it a free, no-risk savings plan. The truth is that the newly launched retirement account will do very little to help the working poor and will quickly become another bloated bureaucratic system that wastes billions of taxpayer dollars.

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Retirement at 75?

images-19Chances are you’ve wondered about the prospects of younger Americans.  Will they enjoy the same economic conditions that their parents lived through?  Will retirement still be an option for them?

The NerdWallet organization recently issued a report which found a few differences between today’s college graduates and those of 20 to 40 years ago.  For one thing, they carry a lot more student loan debt: $35,051 on average.  That means, again on average, that the new graduates will be paying $4,239 a year for ten years before they can properly start saving.  NerdWallet estimates that these higher loan payments could potentially reduce future retirement savings by 32%—an average of $700,000.

In addition, today’s younger generation faces higher rental payments—up 11% since 2012—and having to delay home ownership to a median age 33.  This, too, reduces their ability to squirrel away money for the future.

Finally, millennial investors have apparently been powerfully impacted, psychologically, by the Great Recession.  NerdWallet found studies showing that younger savers keep an average of 40% of their saved money in checking and savings accounts or CDs.  This means they’re missing out on investment returns, which would cost them more than $300,000 in future retirement funds, on average.

Add it all up, and the NerdWallet researchers estimate that today’s college graduate won’t be able to retire at the traditional age 65.  On average, they’ll have to wait until age 75 before work (and an income) is optional.  The site notes that the graduate would have to save 15% of his/her income a year starting at age 23 to bring retirement back down to age 65—which may not be possible due to higher student loan debt and rent, and won’t be anywhere close to possible with a 40% allocation to cash.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Source:

http://www.nerdwallet.com/blog/2015-grad-retirement-rep

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Medicare Fix-It

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Congressional leaders and the Obama Administration have fixed the potentially alarming increase in Medicare Part B premiums under the recently-passed government budget deal.

Medicare Part B covers most health care services outside of hospitals, and thus represents one of the biggest expense items in the government-run health system.  The program is voluntary, but 91% of all Medicare beneficiaries are enrolled in Part B.

The problem that had to be fixed arose because, under Social Security and Medicare rules, the government is required to collect 25% of all expected Part B costs from recipients each year—in the form of premiums.  The total Part B cost was anticipated to reach $171.2 billion 2016.

However, another provision says that in years where there is no increase in Social Security benefits—such as next year—Medicare premiums must be held steady for current Social Security recipients.  As a result, the entire increase would have had to be borne by enrollees who either don’t yet collect Social Security checks; enrollees with incomes above $85,000 (single) or $170,000 (married); or are dual Medicare-Medicaid beneficiaries.  In all, these three categories represent 30% of 2016 Medicare beneficiaries—roughly 7 million Americans.

The new budget deal creates a $12 billion loan from the U.S. Treasury to the Medicare trust fund to reduce the impact on those Medicare participants.  Instead of seeing their monthly premiums go up from $104.90 to $159.30, they will experience a more modest 14% premium increase, to $120 a month next year, plus a monthly surcharge of $3.  This will allow premiums to rise more gradually, and spread the cost over a longer period of time.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association

Sources:

Medicare Premium Increases: Not as Bad as Predicted

The Obama administration and congressional leaders have finally reached a tentative budget agreement that will prevent a 52 percent spike in Medicare premiums for millions of Americans. Without the bipartisan budget deal about 17 million Medicare recipients would see their Medicare Part B premiums soar from $104.90 to about $160, USA Today reports.

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https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

FY2016 Budget in Brief – CMS Medicare

Topics on this page: CMS Medicare Budget Overview | CMS Medicare Programs and Services | The Four Parts of Medicare | 2016 Legislative Proposals | Affordable Care Act Highlights Strengthening Medicare | Highlights of the Protecting Access to Medicare Act | Highlights of the Improving Medicare Post-Acute Care Transformation Act of 2014 | FY 2015 Medicare Legislative Proposals The Centers for Medicare & Medicaid Services ensures availability of effective, up-to-date health care coverage and promotes quality care for beneficiaries.

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Requiem for a Claiming Strategy

images-20On the surface, it seems too good to be true.  You have a married couple, where (let’s say) the husband has earned higher yearly income than his wife.  That means he has contributed more to Social Security over his working life.  The husband files for Social Security benefits at full retirement age (currently age 66) and then immediately files to suspend those benefits.

As a result of this simple maneuver, the wife is now entitled to immediately receive Social Security spousal benefits equal to half of the husband’s full retirement benefits that were just suspended.  She would do this if 50% of the husband’s benefit is higher than she would have received if she had simply claimed her own Social Security payments.

Because he suspended his benefits, the husband can continue working, and wait until age 70 to start receiving Social Security checks in his own name.  Why would he do that?  Because each year of deferral allows him to accumulate more credits—effectively raising his monthly benefits 8% a year, which is considerably higher than the inflation rate.  At that time, the wife would stop claiming the husband’s benefits and start receiving her own Social Security checks.  If she was working at the time, she might have raised the amount she could claim under her own name.  Or she might have been able to wait to claim her own account until she’s 70, raising the amount she collects just as her husband did.

Presto!  More money now, more money later.

This popular Social Security claiming strategy is called “file and suspend,” and by this time next May, it may no longer be an option for retirees.  The Bipartisan Budget Act of 2015 that recently was recently signed into law will close what lawmakers are calling the “file and suspend” loophole six  in the future.  You can expect that eligible seniors will be knocking on the doors of their Social Security offices before that deadline.  Meanwhile, those who have already filed and suspended will be allowed to continue as before.

The original rationale behind the file and suspend strategy was to encourage more seniors to continue working.  The rationale behind ending it is that it was becoming a drain on the Social Security system.  Moreover, Congress was looking for money to offset a huge increase in Medicare Part B premiums for individuals not yet receiving Social Security payments.  The provision is likely to pass the Senate, and could be the opening gambit of a broader discussion about how to “fix” Social Security’s messy finances.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

Social Security: This strategy to maximize benefits may soon disappear

When it comes to Social Security, most of us hope to get the most we possibly can from our benefits. Methods for making that happen, however, are a source of heated controversy. “File and suspend” is one advanced claiming strategy that can help retirement savers at all income levels, especially women, maximize their benefits.

Colliton: Budget plan ends Social Security ‘File and Suspend’

A popular Social Security planning strategy used by Americans mostly in their 60s to expand their benefits, known as File and Suspend will be coming to an end in six months as a result of last week’s Congressional budget deal. Closely related and also receiving the ax under the Bipartisan Budget Act of 2015 is another rule permitting Restricted Application.

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Congress Inaction Could Lead To Soaring Medicare Premiums

The White House could authorize Sylvia Mathews Burwell to use money from Medicare’s “contingency reserve.” Carolyn Kaster/Associated Press

Social Security recipients will see no increase in 2016 due to low inflation over the previous 12 months, but a quirk in the Medicare law could see premiums for Medicare Part B soar for about 30% of beneficiaries if Congress does not act soon.

The New York Times reports:

Social Security has provided automatic cost-of-living adjustments in every year since 1975, with exceptions in 2010 and 2011. But inflation was extremely low in the past 12 months, leading to another benefit freeze, Social Security officials said. Gasoline prices, in particular, have declined sharply, holding down overall prices in the economy.

Jason Furman, the chairman of President Obama’s Council of Economic Advisers, has put a positive spin on the absence of a cost-of-living adjustment. It results, he said, from a “sharp decline in energy prices that is putting more money in families’ pockets” and is contributing to the economic recovery.

Many older Americans do not see it that way. “People can afford to drive to the drugstore because gas prices are lower, but once they get there, they may not be able to afford their prescriptions,” said Joshua E. Rosenblum, a spokesman for AARP, a lobbying group for older Americans.

With the greater use of medical services by an aging population, health costs have again begun to climb, driven in part by new technology and expensive prescription drugs. Medicare needs additional money to help pay for Part B of the program, which covers doctors’ services, outpatient hospital care and some medications.

About 70 percent of Medicare beneficiaries will be protected against higher premiums in 2016. Under federal law, Medicare premiums are linked closely to Social Security benefits because most people on Medicare have their premiums deducted from their monthly Social Security checks. To protect older Americans, federal law stipulates that, in most cases, the increase in a person’s Medicare premium cannot exceed the increase in the person’s Social Security benefit. The purpose of this “hold harmless” provision is to prevent a reduction in Social Security benefits.

But by shielding 70 percent of beneficiaries from premium increases, that same law exposes the other 30 percent to price shocks. Medicare actuaries predicted in July that the standard premium for those beneficiaries would rise next year to $159 a month, from a little less than $105 a month for most beneficiaries, the same as in 2013 and 2014.

The actuaries also predicted an increase in the annual deductible for Part B of Medicare, to $223 next year, from $147 in 2015. Beneficiaries generally must pay the deductible before Medicare begins to pay.

Premiums are supposed to cover about one-fourth of the projected cost of Part B of Medicare, with general revenues accounting for the remainder. If premiums are frozen for 70 percent of beneficiaries, higher overall Medicare costs must be spread across a smaller group of people.

That smaller group, of more than 15 million, includes some high-income Medicare beneficiaries who are already required to pay higher premiums and may be able to afford the price increase. It also includes beneficiaries who are new to Medicare in 2016; those who do not receive Social Security checks; and low-income people eligible for both Medicare and Medicaid, whose premiums are paid by state Medicaid programs.

Even some affluent beneficiaries could struggle with the higher costs. For those with incomes of more than $214,000 a year, Medicare actuaries say, premiums next year could exceed $500 a month, up from about $335, if Congress does not change the law. Financially struggling state governments are expressing concern because they are responsible for many low-income beneficiaries. The National Governors Association estimates that the higher premiums will cost states $2.3 billion next year.

In the absence of legislative action, the White House faces a choice between two politically perilous options. It could authorize a big increase in Medicare premiums for those 15 million. Or it could authorize the secretary of health and human services, Sylvia Mathews Burwell, to take money from Medicare’s “contingency reserve,” which serves as a cushion in case actual spending is higher than projected. The contingency fund is already lower than the level recommended by Medicare’s actuaries.

If you are higher income or new to Medicare you may face significant increases and with no offset from Social Security.

Scott Dauenhauer, CFP, MPAS, AIF

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Forrest’s Great Investment

forrest-gump-imax-geeks-and-cleatsIf you watched the popular Forrest Gump movie, you may have noticed that moment when the perplexed young man opened his brokerage statement and noticed that a big chunk of his shrimp operation profits had been invested in (as he said) some kind of fruit company. He had opened a brokerage statement and comically misinterpreted the iconic Apple computer logo.

The movie was released on July 6, 1994, when Apple Computer stock was trading at 93 cents a share. Recently, a commentator looked at what Mr. Gump would be worth today if he’d held onto his shares through last February, when the column was written and the stock price had climbed to $128.66 a share. The stock split 2 for 1 in June 2000 and again in February 2005, and split 7 for 1 in June 2014, so every $1,000 investment would have grown to $136,894—an increase of 13,589%. A $100,000 investment, which seems more likely (by that point in the movie, Gump had become a millionaire, with his picture on the cover of Fortune) would simply add a couple of zeros to the terminal value.

This may be the most extreme example in history of a single stock rewarding its shareholders over a long holding period. Does it make you wish you had a working time machine?

Source: http://www.quora.com/What-would-1000-of-Apple-Stock-bought-at-the-release-of-the-Forrest-Gump-film-be-worth-today

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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