Want to have a little mindless fun? Try balancing the federal budget in ten minutes or less.
Believe it or not, you can actually do this on an interactive web site created by the New York Times. (You can find it here: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html) There are two graphics at the top of the page: one is the projected shortfall in 2015 (a scary $418 billion), and the other is a more long-term (and scarier) deficit in 2030 ($1.345 trillion).
To reduce those numbers, you make hard choices. You can cut foreign aid in half, eliminate all farm subsidies, cut the pay of civilian federal workers by 5 percent, reduce the federal workforce by 10 percent, reduce the military to pre-Iraq War size and reduce troops in Asia and Europe, reduce the number of troops in Iran and Afghanistan to 30,000 by 2013 (or make more modest cuts), raise the Social Security retirement age (there are two options), modify estate taxes, reduce or eliminate the Bush tax cuts, or impose a national sales tax and/or carbon tax.
And more. With each box you check (each cut you make or tax you raise), you see how much progress you're making on the overall budget deficit in 2015 and 2030. The choices are not easy ones, and you quickly discover that the "fixes" most often debated on both sides of the aisle in Congress won't make much of a dent.
Unfortunately, there isn't a button on the web site that you can push to make these deficit reduction provisions actually happen in the real world. But having an easy, interactive tool like this will undoubtedly help raise awareness, among the people who don't deal with these budget numbers on a daily basis, about the kind of measures that will have to be taken if we don't want to leave our children and grandchildren with a ton of federal debt to pay off. You'll probably remember this little game next time you hear a politician talking tough about eliminating debt in Washington.
Tuesday, November 16, 2010
Monday, October 25, 2010
The Informational Risk Premium
When you step back and look at the investment landscape, it is sometimes helpful to ask yourself if anything really IS different this time; to try to determine what has changed.
The usual answers point to recent return gyrations: the tech bubble's spectacular burst ten years ago, the near-death experience of global capitalism in 2008-2009. But the truth is, we've seen all this before in one form or another. Ask your grandparents; the 1929 crash and Great Depression were far more painful to far more people than anything we've experienced in recent years.
Michael Aronstein, who manages a mutual fund called the Marketfield Fund, offers an interestingly different take on what is fundamentally different today. In a one-hour speech at the NAPFA Practice Management & Investments Conference in San Diego, on September 22, he connected two dots that most of us are aware of intuitively, but may not have consciously considered. He said that the primary challenge for investment advisors, financial planners and money managers today, which is different from the challenges you faced in the past, is the sheer amount of attention that individual investors are now able to pay to the ups and downs in their portfolios.
"In the last 15 years," he said, "we have moved from an era where people who were not in the business would check stock quotes, if at all, in the morning when they got their newspaper. Sometimes, you would listen to a radio program on your way home from work, and it might tell you what the Dow Jones Industrial Average closed at."
Compare that with today, when it's possible to have a running ticker at the bottom of your computer screen, or a portrait of your investment portfolio continuously updating its various components and arriving at new values every 15 minutes. At the same time, news, information and even fundamental analysis might be flowing into your brain through various sources. "Regarding the economy and its various indicators, there are probably ten thousand data points that we could be looking at in real time," Aronstein continued. "Combine that with hundreds and hundreds of opinions being thrown around as important every day, and it is a formula for driving everybody insane--and I think that really is what is happening to the investing public."
Put in its simplest terms, we are being driven to an unbalanced mental state by the sheer amount of information and opinions that are piling into our awareness at increasing speed, and nobody has a vested interest in telling us that paying attention is highly unlikely to improve our investing lives. In fact, to the extent that we feel panic, fear or a concern that we're missing out on some opportunity, all this information may well be sabotaging the average person's returns.
Panic is a particularly dangerous emotion to investment portfolios, and there is some evidence that more of it is being artificially manufactured by the media than ever before. Aronstein pointed out that it has become a pretty good business to give out doomsday information and frighten investors, and a lot of people have become pretty good at it. "It is rare to spend a day watching CNBC or any of the other financial reality programs," he said, "and not hear somebody come out with the most disastrous, frightening, extreme forecast about what is going on in the world and in peoples' portfolios."
That, in itself, helps us get a better handle on this new era of investing. Aronstein said that risk assets like stocks, which tend to be liquid and priced every second, become increasingly unattractive in an environment where there is a negative or confusing spin on their every movement. Who wants to own something which increasingly gives you heartburn and insomnia? As people sell out of the investments in order to avoid this confusion/heartburn factor, risk assets become more attractively priced than their fundamentals would justify. This could raise their future returns the same way value stocks enjoy return advantages over sexier growth companies: they are less attractive to the average investor.
Instead, investors might become more interested in investments which aren't traded every day--such as real estate and certain types of hedge funds. Because there is no way to watch them change in value in real time, the market commentators aren't talking about them or offering doomsday scenarios before the commercial break. Look for these products to proliferate, not necessarily because anybody believes less-liquid products offer better returns, but because they reduce stress.
It would be easy to say that market reality shows represent a scourge on the investing world. Of course they are unhelpful. Of course the moment-by-moment market movements and most of the data and opinions are of less than zero value to your financial health.
But the important thing here is for all of us to recognize that a new risk factor has emerged in the investment marketplace. This emerging "information risk premium" suggests that if you can tolerate (or ignore) the uncertainty and doomsday commentaries while others cannot, you might be able to get better returns ultimately
The usual answers point to recent return gyrations: the tech bubble's spectacular burst ten years ago, the near-death experience of global capitalism in 2008-2009. But the truth is, we've seen all this before in one form or another. Ask your grandparents; the 1929 crash and Great Depression were far more painful to far more people than anything we've experienced in recent years.
Michael Aronstein, who manages a mutual fund called the Marketfield Fund, offers an interestingly different take on what is fundamentally different today. In a one-hour speech at the NAPFA Practice Management & Investments Conference in San Diego, on September 22, he connected two dots that most of us are aware of intuitively, but may not have consciously considered. He said that the primary challenge for investment advisors, financial planners and money managers today, which is different from the challenges you faced in the past, is the sheer amount of attention that individual investors are now able to pay to the ups and downs in their portfolios.
"In the last 15 years," he said, "we have moved from an era where people who were not in the business would check stock quotes, if at all, in the morning when they got their newspaper. Sometimes, you would listen to a radio program on your way home from work, and it might tell you what the Dow Jones Industrial Average closed at."
Compare that with today, when it's possible to have a running ticker at the bottom of your computer screen, or a portrait of your investment portfolio continuously updating its various components and arriving at new values every 15 minutes. At the same time, news, information and even fundamental analysis might be flowing into your brain through various sources. "Regarding the economy and its various indicators, there are probably ten thousand data points that we could be looking at in real time," Aronstein continued. "Combine that with hundreds and hundreds of opinions being thrown around as important every day, and it is a formula for driving everybody insane--and I think that really is what is happening to the investing public."
Put in its simplest terms, we are being driven to an unbalanced mental state by the sheer amount of information and opinions that are piling into our awareness at increasing speed, and nobody has a vested interest in telling us that paying attention is highly unlikely to improve our investing lives. In fact, to the extent that we feel panic, fear or a concern that we're missing out on some opportunity, all this information may well be sabotaging the average person's returns.
Panic is a particularly dangerous emotion to investment portfolios, and there is some evidence that more of it is being artificially manufactured by the media than ever before. Aronstein pointed out that it has become a pretty good business to give out doomsday information and frighten investors, and a lot of people have become pretty good at it. "It is rare to spend a day watching CNBC or any of the other financial reality programs," he said, "and not hear somebody come out with the most disastrous, frightening, extreme forecast about what is going on in the world and in peoples' portfolios."
That, in itself, helps us get a better handle on this new era of investing. Aronstein said that risk assets like stocks, which tend to be liquid and priced every second, become increasingly unattractive in an environment where there is a negative or confusing spin on their every movement. Who wants to own something which increasingly gives you heartburn and insomnia? As people sell out of the investments in order to avoid this confusion/heartburn factor, risk assets become more attractively priced than their fundamentals would justify. This could raise their future returns the same way value stocks enjoy return advantages over sexier growth companies: they are less attractive to the average investor.
Instead, investors might become more interested in investments which aren't traded every day--such as real estate and certain types of hedge funds. Because there is no way to watch them change in value in real time, the market commentators aren't talking about them or offering doomsday scenarios before the commercial break. Look for these products to proliferate, not necessarily because anybody believes less-liquid products offer better returns, but because they reduce stress.
It would be easy to say that market reality shows represent a scourge on the investing world. Of course they are unhelpful. Of course the moment-by-moment market movements and most of the data and opinions are of less than zero value to your financial health.
But the important thing here is for all of us to recognize that a new risk factor has emerged in the investment marketplace. This emerging "information risk premium" suggests that if you can tolerate (or ignore) the uncertainty and doomsday commentaries while others cannot, you might be able to get better returns ultimately
Tuesday, October 12, 2010
10 things to do with your IRA before the end of the year!
Your IRA, your own piece of your retirement puzzle, requires some tender loving care. Here’s a list of what you might need to do before December 31, 2011.
1. Take your required minimum distribution
Make sure all Required Minimum Distributions (RMD) are taken for the year 2010.
Look at all owned IRA accounts and employer plans (401(k), TSA and SEPs) for individuals age 70 ½ or older this year or inherited IRAs.
Beneficiaries, no matter what their age, must take distributions from all inherited accounts beginning in the year after the death of the account owner. Also, inherited accounts must be split before year end so beneficiaries can use their own life expectancies to calculate their RMDs.
Remember to take any 72(t) distributions that are required for 2010. If you fail to do this, you will pay penalty and interest retroactively to the first year you started taking these distributions.
2. Check for excess contributions
It might seem unlikely, given that the average IRA contribution is $3,798, but it’s possible that you contributed too much to your IRA during the year. If so, remove any excess contributions before the end of the year or you will be charged a 6% penalty for any excess contributions.
3. Is everything in place?
Take nothing for granted when it comes to your IRA. Before year end, double check on all IRA funds that you moved from one account to another during 2010, make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts.
4. Can you do a stretch IRA?
Check whether your IRA custodian or 401(k) plan administrator will allow for the so-called “stretch” for beneficiaries.
The stretch means that beneficiaries can use their own life expectancy for distributions. In addition, check whether the custodian or plan administrator will accept a durable power of attorney, and disclaimers.
The answer to these questions will have substantial impact on the success of your estate plan. If the custodian or 401(k) (plan administrator) doesn’t accept a durable power of attorney or disclaimer, you might consider another custodian.
5. Who’s your beneficiary?
Here’s some well-worn but can’t be repeated often enough advice: Review your beneficiary designations. Make sure there is both a primary and a contingent beneficiary named on the beneficiary designation form.
If there is no beneficiary named, the IRA proceeds will go to the estate and lose the tax advantage of the stretch benefits. If there is no contingent beneficiary, and the primary beneficiary has died, then the assets also go to the estate with the same negative result.
It’s especially worth checking your beneficiary designations if you’re divorced. Make sure your ex-spouse has been deleted as a beneficiary, unless you want them to remain as a beneficiary. The U.S. Supreme Court has recently ruled that the beneficiary named on the beneficiary designation form trumps divorce.
Don’t name your living trust as your beneficiary. A living trust should not be the beneficiary because the living trust must qualify as a ‘designated beneficiary’ to receive favorable stretch and tax treatment. I find that most living trusts do not qualify, or can lose their designated beneficiary status through later changes to the trust.
Make sure your custodian has a written copy of your beneficiary designations.
6. One last chance for Roth conversions
If you plan to do a Roth conversion in 2010, the funds must leave the IRA by Dec. 31 to be reported and taxable as a 2010 distribution and conversion. The funds can then be rolled over to the Roth IRA up to 60 days after they are received by the account owner.
Contrary to what some might believe, you do not have until April 15, 2011 to do a 2010 Roth conversion.
Here's another reason why you might want to convert some or all of your IRA to a Roth IRA: the Roth IRA could fund a credit shelter or by-pass trust.
Remember, anyone can convert their traditional IRAs to a Roth IRA in 2010 regardless of income. What’s more, you can pay the taxes over two years, instead of one.
7. Turn wealth into income
Right about now, the Social Security Administration is sending you a report that tells you how much income you’ll receive in today’s dollars when you retire. Write down that number on a piece of paper.
Now, total up the value of all IRA and 401(k) accounts in your household and multiple that number by 0.04. That number is the amount some experts say you could withdraw from your retirement in today’s dollars.
Now, add that number to your Social Security benefit figure, and then subtract that amount from your income. The results are roughly the amount of money you’ll need from other sources (such as work, pensions, reverse mortgages, life insurance or inheritances) to enjoy a lifestyle similar to what you have today. If you are not working you will no longer be paying your social security taxes, roughly 6.5% of your earned income each year.
Let’s use some round numbers as an example. Say you have household income of $100,000. You expect to receive $25,000 per year from Social Security and withdraw $5,000 per year from your retirement accounts. If you do not work you will no longer be paying $6,500 in social security taxes. Somehow you’ll need to come up with another $63,500 per year to live the life to which you are accustomed.
For some, the best way to close the gap will be to contribute more to their IRAs and 401(k)s wile working, work longer, or lower their standard of living.
8. Review your investment plan
Consider updating your investment policy statement or plan. Make sure your asset allocation remains appropriate given your financial goals.
Rebalance your IRA’s asset allocation, if you haven’t done so within the past year. It’s best to rebalance your IRA in a holistic manner. That is, look at all your assets in all your accounts, taxable and tax-deferred.
In many cases, consider putting your fixed-income investments in your tax-deferred accounts and those investments that produce capital gains and dividend income in your taxable accounts.
Since IRAs are tax-deferred vehicles, it makes no sense for them to hold ‘tax-preferenced’ investments such as municipal bonds and annuities.
You can also use your RMDs to rebalance. It could save on transaction costs.
9. Roll old 401(k)s to an IRA
If you have one or more 401(k)s sitting with former employers, consider rolling that money over to an IRA. You should get better investment choices, lower costs and more control of your investment assets.
10. Recharacterize your Roth IRA
If you converted a traditional IRA into a Roth IRA during 2010 and now realize that your income taxes were higher than expected due to the conversion, or you’re short money to pay the income tax or you’re unwilling to pay the income tax, consider a recharacterization. That is, consider putting the money in the Roth IRA back into your traditional IRA.
1. Take your required minimum distribution
Make sure all Required Minimum Distributions (RMD) are taken for the year 2010.
Look at all owned IRA accounts and employer plans (401(k), TSA and SEPs) for individuals age 70 ½ or older this year or inherited IRAs.
Beneficiaries, no matter what their age, must take distributions from all inherited accounts beginning in the year after the death of the account owner. Also, inherited accounts must be split before year end so beneficiaries can use their own life expectancies to calculate their RMDs.
Remember to take any 72(t) distributions that are required for 2010. If you fail to do this, you will pay penalty and interest retroactively to the first year you started taking these distributions.
2. Check for excess contributions
It might seem unlikely, given that the average IRA contribution is $3,798, but it’s possible that you contributed too much to your IRA during the year. If so, remove any excess contributions before the end of the year or you will be charged a 6% penalty for any excess contributions.
3. Is everything in place?
Take nothing for granted when it comes to your IRA. Before year end, double check on all IRA funds that you moved from one account to another during 2010, make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts.
4. Can you do a stretch IRA?
Check whether your IRA custodian or 401(k) plan administrator will allow for the so-called “stretch” for beneficiaries.
The stretch means that beneficiaries can use their own life expectancy for distributions. In addition, check whether the custodian or plan administrator will accept a durable power of attorney, and disclaimers.
The answer to these questions will have substantial impact on the success of your estate plan. If the custodian or 401(k) (plan administrator) doesn’t accept a durable power of attorney or disclaimer, you might consider another custodian.
5. Who’s your beneficiary?
Here’s some well-worn but can’t be repeated often enough advice: Review your beneficiary designations. Make sure there is both a primary and a contingent beneficiary named on the beneficiary designation form.
If there is no beneficiary named, the IRA proceeds will go to the estate and lose the tax advantage of the stretch benefits. If there is no contingent beneficiary, and the primary beneficiary has died, then the assets also go to the estate with the same negative result.
It’s especially worth checking your beneficiary designations if you’re divorced. Make sure your ex-spouse has been deleted as a beneficiary, unless you want them to remain as a beneficiary. The U.S. Supreme Court has recently ruled that the beneficiary named on the beneficiary designation form trumps divorce.
Don’t name your living trust as your beneficiary. A living trust should not be the beneficiary because the living trust must qualify as a ‘designated beneficiary’ to receive favorable stretch and tax treatment. I find that most living trusts do not qualify, or can lose their designated beneficiary status through later changes to the trust.
Make sure your custodian has a written copy of your beneficiary designations.
6. One last chance for Roth conversions
If you plan to do a Roth conversion in 2010, the funds must leave the IRA by Dec. 31 to be reported and taxable as a 2010 distribution and conversion. The funds can then be rolled over to the Roth IRA up to 60 days after they are received by the account owner.
Contrary to what some might believe, you do not have until April 15, 2011 to do a 2010 Roth conversion.
Here's another reason why you might want to convert some or all of your IRA to a Roth IRA: the Roth IRA could fund a credit shelter or by-pass trust.
Remember, anyone can convert their traditional IRAs to a Roth IRA in 2010 regardless of income. What’s more, you can pay the taxes over two years, instead of one.
7. Turn wealth into income
Right about now, the Social Security Administration is sending you a report that tells you how much income you’ll receive in today’s dollars when you retire. Write down that number on a piece of paper.
Now, total up the value of all IRA and 401(k) accounts in your household and multiple that number by 0.04. That number is the amount some experts say you could withdraw from your retirement in today’s dollars.
Now, add that number to your Social Security benefit figure, and then subtract that amount from your income. The results are roughly the amount of money you’ll need from other sources (such as work, pensions, reverse mortgages, life insurance or inheritances) to enjoy a lifestyle similar to what you have today. If you are not working you will no longer be paying your social security taxes, roughly 6.5% of your earned income each year.
Let’s use some round numbers as an example. Say you have household income of $100,000. You expect to receive $25,000 per year from Social Security and withdraw $5,000 per year from your retirement accounts. If you do not work you will no longer be paying $6,500 in social security taxes. Somehow you’ll need to come up with another $63,500 per year to live the life to which you are accustomed.
For some, the best way to close the gap will be to contribute more to their IRAs and 401(k)s wile working, work longer, or lower their standard of living.
8. Review your investment plan
Consider updating your investment policy statement or plan. Make sure your asset allocation remains appropriate given your financial goals.
Rebalance your IRA’s asset allocation, if you haven’t done so within the past year. It’s best to rebalance your IRA in a holistic manner. That is, look at all your assets in all your accounts, taxable and tax-deferred.
In many cases, consider putting your fixed-income investments in your tax-deferred accounts and those investments that produce capital gains and dividend income in your taxable accounts.
Since IRAs are tax-deferred vehicles, it makes no sense for them to hold ‘tax-preferenced’ investments such as municipal bonds and annuities.
You can also use your RMDs to rebalance. It could save on transaction costs.
9. Roll old 401(k)s to an IRA
If you have one or more 401(k)s sitting with former employers, consider rolling that money over to an IRA. You should get better investment choices, lower costs and more control of your investment assets.
10. Recharacterize your Roth IRA
If you converted a traditional IRA into a Roth IRA during 2010 and now realize that your income taxes were higher than expected due to the conversion, or you’re short money to pay the income tax or you’re unwilling to pay the income tax, consider a recharacterization. That is, consider putting the money in the Roth IRA back into your traditional IRA.
Wednesday, September 29, 2010
Retirement Planning, Technology and Clients Over 37 Years
Thirty seven years ago, there were very few financial planners. There were very few investment choices and for most of us retirement planning was pretty much a theoretical exercise. I had no retired clients. I built my business with people my age or in their early forties, plus or minus fifteen years. They were mainly concerned with accumulating assets. They were oblivious wondering how they would actually convert those assets into an income stream at retirement.
Back then we used hand held calculators to calculate investment returns and retirement projections. When computers first came out we paid $1.00 per minute for our calculations that can now be done on Excel. It took 20 to 30 minutes to do what we can now calculate in 30 seconds. The retirement sufficiency calculations we used were deterministic, employing static savings, earnings, spending, and inflation assumptions. The results were neat, smooth chart showing a clients money growing evenly and gradually going down during retirement. It was the best we could do at the time. But it brings to my mind the H. L. Mencken quote, “For every complex problem there is an answer that is clear, simple, and wrong.” At my core I’m a math and finance geek. My first spreadsheet program was on Lotus 123. I cut my teeth writing single-sheet spreadsheets and thought I had died and gone to heaven when linkable, multi-sheet spreadsheets came along. They allowed us to build increasingly customizable spreadsheets that could incorporate complex client assumptions. As it turns out, client and investment market behavior was rarely captured in those assumptions.
If you want some humbling entertainment, look at a few of the retirement calculations I performed 20 years ago. I generally find that I overstated the portfolio earnings rate (greatly), the inflation rate (modestly), and the savings rate (ridiculously). I underestimated the increase in the spending level and client’s unexpected large withdrawals. I had absolutely no way to predict divorce or death of a spouse and I were really thrown curve balls on job losses. And let’s face it; in 1999 no one predicted that the U.S. stock market indices would enjoy a decade of negative returns. That’ll leave a mark on any retirement program!
So, here are five things about retirement planning I have learned. They may be debatable; they’re just some of the things I’ve come to believe. Embedded in these beliefs are the three dimensions in which I’m convinced we must serve our clients, if we are to help them to be successful:
In the real world, there’s no such thing as a straight line or a smooth curve. Compare There are some advisers who confuse steady investment and growth with actual retirement planning. It is naively assumed that if the investing is well done, retirement will work out just fine. This does not demonstrate how well the client can meet their retirement expectations. You can do everything right investing your client’s funds, but if their saving or spending behaviors aren’t cooperative, they can still fail to meet their goals. Planners that stop at this dimension are doomed to lose assets and market share as their clients come to realize that their adviser can’t definitively answer the simple question, “How soon can I afford to retire?”
There’s no such thing as a safe investment. Back in the old days, we believed that small-cap stocks were risky, but large-cap stocks, particularly those in the Dow, were safe. I even had clients who would recite the old saying, “As goes GM (… GE or Merrill Lynch), so goes the country.” We now know that’s not so. For years, many believed that investment-grade corporate bonds were safe; until we watched AA-rated bonds default. The biggest trap caused by the bull market of the 1990s was that many of us focused on return, with little regard for risk. If the retirement numbers didn’t work, just bump up the return assumptions with no consideration on the increased risk level! Even today, risk lurks in unlikely places. Ten-year Treasuries currently yield around 4%. I heard a noted economist suggest that the 10-year Treasury could be at 10% by mid-2013. You do the math to see the losses that would result from such an outcome. Retirement planning demands obsessive scrutiny of risk. If we fail at this point, we can ruin lives. Clients must be better educated about the known and possible risks they face in their retirement portfolios.
We need to show clients more than when they’re likely to run out of money if average returns are achieved, we also show them how this could change if we went through persistently poor markets. After the last decade, I would feel remiss if I didn’t share this with the client. This gives both of us time to take actions that offer the best chance to improve the outcome. Performance alone won’t achieve retirement success.
Human beings have little capacity to predict their spending patterns five years from now, let alone 40 years from now. When I think back on financial forecasting techniques I studied and then taught, the accuracy of a forecast was assumed to decrease as the time period increased. We have a great capacity to think about our “daily bread.” We have little capacity to predict what we’ll spend on food in 10 years, let alone our cable TV, Internet, and cell phone expenditures. If you don’t believe me, look at your spending in these areas (if they even existed) just 10 years ago. I can’t wait to see what I’ll be paying for “transporter beam” services in 15 years! It isn’t just a matter of simply inflating today’s expenses; we must also attempt to project where our clients will be spending their money 30 years from now. More practically, how accurate are today’s spending assumptions that you’re using? Most of the budgets I get from clients should be classified as fiction, not biography. This is an area that at one time we blew off, but now pay much greater attention to, no matter how messy it gets.
Human beings aren’t wired to conceptualize large sums of capital. The studies showing the incredible number of lottery winners who file for bankruptcy in a short time have great significance on retirement planning. How many of your clients hold the vast majority of their assets in qualified plans? That probably has more to do with the difficulty in getting to qualified monies compared to non-qualified accounts. Excepting those born into great family wealth, most of us are culturally programmed to think week-to-week or month-to-month in our spending. If we receive a large sum of money (or start receiving a very large income that could stop at any time, as is the case with athletes or entertainers) we can mentally confuse the large sum with a massive monthly amount that will continue forever. Getting clients to see their portfolio as a large fruit tree where they harvest fruit (dividends and interest) rather than lopping off limbs (withdrawing principle) is critical to helping them remain successful. This allows us to use our month-to-month bias in a positive manner.
The answer doesn’t (and will never) rely on one simple solution or product. Over the years I’ve read with amusement articles suggesting that an insurance or investment product manufacturer has or will come out with a “silver bullet” product that will solve all problems associated with retirement income distributions. There is one word that explains why this is unlikely to happen—complexity. The third dimension I face in retirement planning—the cash flow dimension. If I fail here, my clients don’t eat! So, why might a one-product-fits-all approach struggle in the real world? First, the potential benefit from a single product would be greatest if the client had everything in one account. I can only think of two of our clients who fall into that category. Planners using all available tools usually have multiple accounts for each household. In our case, the average is five. Second, the source of distributions may need to change for tax reasons; particularly before 50½ and after 70½. Flexibility of distributions is the only way to cover needed changes as they arise. Third, I have great concern over how tax laws will change over the next decade. The last thing I would want is to have all investments taxed at ordinary income. The flexibility to affect the character of taxable income may grow, not decline, in importance as Congress continues to wrestle with ways to reduce the deficit that it has developed over the past nine years.
Implementing all three dimensions in today’s technological environment is still a challenge. Our systems do the first dimension well, the second dimension okay, and the third dimension poorly. This third area is where I’m hopeful more effort is made by technology providers and intermediaries in the future. Systems to monitor and manage this third dimension are virtually non-existent. That wasn’t a problem when we only had a few retired clients, but it’s a problem now, and I hate to think what it will look like in 10 years.
As a Financial Planner Our Primary Role: The Ghost of Christmas Future
Even if a planner can master all three of the dimensions I’ve outlined, the remaining wild card is client behavior. I’ve come to believe that we can’t actually change client behavior; we can only show them the results of their current course of action in a clear, accurate manner. If they don’t like the outcome, they’ll affect the change.
There is a powerful quote in therapist circles that goes something like this, “Change happens when the pain of staying the same is greater than the pain of the change.” Ebenezer Scrooge’s life was transformed after the Ghost of Christmas Future ran the video forward, showing the consequences of continuing his current approach to life. The pain of changing from a greedy old Scrooge was nothing compared to a life of derision and abandonment.
The sooner clients see retirement issues in great clarity through all three dimensions, the sooner they can affect the change needed to make the picture turn out the way they desire. Retirement math is brutal; simply trying to deal with it by wishing, hoping, and living in denial is a formula for disaster.
Most of our physician clients have to deliver news that their patients don’t particularly want to hear, but they deliver it kindly, yet frankly. By doing so, they permit their patients to choose the course of care, knowing both the risks and the potential benefits that they prefer. Over the next few years, I have been faced with similar challenges with many of my clients. It may not be pretty, but I serve them best when I accurately depict a future that can still be changed. When I see clients today I always have a 1 or 2 page agenda showing what we need to discuss at our meetings. Approximately 3% of those clients see under number two, “You are going to run out of money!” Few if any of those clients do anything about it. They are more concerned with their cable TV today than there food and shelter in the future!
Creative Financial Design with offices in Lansing, Portage and Southfield.
Back then we used hand held calculators to calculate investment returns and retirement projections. When computers first came out we paid $1.00 per minute for our calculations that can now be done on Excel. It took 20 to 30 minutes to do what we can now calculate in 30 seconds. The retirement sufficiency calculations we used were deterministic, employing static savings, earnings, spending, and inflation assumptions. The results were neat, smooth chart showing a clients money growing evenly and gradually going down during retirement. It was the best we could do at the time. But it brings to my mind the H. L. Mencken quote, “For every complex problem there is an answer that is clear, simple, and wrong.” At my core I’m a math and finance geek. My first spreadsheet program was on Lotus 123. I cut my teeth writing single-sheet spreadsheets and thought I had died and gone to heaven when linkable, multi-sheet spreadsheets came along. They allowed us to build increasingly customizable spreadsheets that could incorporate complex client assumptions. As it turns out, client and investment market behavior was rarely captured in those assumptions.
If you want some humbling entertainment, look at a few of the retirement calculations I performed 20 years ago. I generally find that I overstated the portfolio earnings rate (greatly), the inflation rate (modestly), and the savings rate (ridiculously). I underestimated the increase in the spending level and client’s unexpected large withdrawals. I had absolutely no way to predict divorce or death of a spouse and I were really thrown curve balls on job losses. And let’s face it; in 1999 no one predicted that the U.S. stock market indices would enjoy a decade of negative returns. That’ll leave a mark on any retirement program!
So, here are five things about retirement planning I have learned. They may be debatable; they’re just some of the things I’ve come to believe. Embedded in these beliefs are the three dimensions in which I’m convinced we must serve our clients, if we are to help them to be successful:
In the real world, there’s no such thing as a straight line or a smooth curve. Compare There are some advisers who confuse steady investment and growth with actual retirement planning. It is naively assumed that if the investing is well done, retirement will work out just fine. This does not demonstrate how well the client can meet their retirement expectations. You can do everything right investing your client’s funds, but if their saving or spending behaviors aren’t cooperative, they can still fail to meet their goals. Planners that stop at this dimension are doomed to lose assets and market share as their clients come to realize that their adviser can’t definitively answer the simple question, “How soon can I afford to retire?”
There’s no such thing as a safe investment. Back in the old days, we believed that small-cap stocks were risky, but large-cap stocks, particularly those in the Dow, were safe. I even had clients who would recite the old saying, “As goes GM (… GE or Merrill Lynch), so goes the country.” We now know that’s not so. For years, many believed that investment-grade corporate bonds were safe; until we watched AA-rated bonds default. The biggest trap caused by the bull market of the 1990s was that many of us focused on return, with little regard for risk. If the retirement numbers didn’t work, just bump up the return assumptions with no consideration on the increased risk level! Even today, risk lurks in unlikely places. Ten-year Treasuries currently yield around 4%. I heard a noted economist suggest that the 10-year Treasury could be at 10% by mid-2013. You do the math to see the losses that would result from such an outcome. Retirement planning demands obsessive scrutiny of risk. If we fail at this point, we can ruin lives. Clients must be better educated about the known and possible risks they face in their retirement portfolios.
We need to show clients more than when they’re likely to run out of money if average returns are achieved, we also show them how this could change if we went through persistently poor markets. After the last decade, I would feel remiss if I didn’t share this with the client. This gives both of us time to take actions that offer the best chance to improve the outcome. Performance alone won’t achieve retirement success.
Human beings have little capacity to predict their spending patterns five years from now, let alone 40 years from now. When I think back on financial forecasting techniques I studied and then taught, the accuracy of a forecast was assumed to decrease as the time period increased. We have a great capacity to think about our “daily bread.” We have little capacity to predict what we’ll spend on food in 10 years, let alone our cable TV, Internet, and cell phone expenditures. If you don’t believe me, look at your spending in these areas (if they even existed) just 10 years ago. I can’t wait to see what I’ll be paying for “transporter beam” services in 15 years! It isn’t just a matter of simply inflating today’s expenses; we must also attempt to project where our clients will be spending their money 30 years from now. More practically, how accurate are today’s spending assumptions that you’re using? Most of the budgets I get from clients should be classified as fiction, not biography. This is an area that at one time we blew off, but now pay much greater attention to, no matter how messy it gets.
Human beings aren’t wired to conceptualize large sums of capital. The studies showing the incredible number of lottery winners who file for bankruptcy in a short time have great significance on retirement planning. How many of your clients hold the vast majority of their assets in qualified plans? That probably has more to do with the difficulty in getting to qualified monies compared to non-qualified accounts. Excepting those born into great family wealth, most of us are culturally programmed to think week-to-week or month-to-month in our spending. If we receive a large sum of money (or start receiving a very large income that could stop at any time, as is the case with athletes or entertainers) we can mentally confuse the large sum with a massive monthly amount that will continue forever. Getting clients to see their portfolio as a large fruit tree where they harvest fruit (dividends and interest) rather than lopping off limbs (withdrawing principle) is critical to helping them remain successful. This allows us to use our month-to-month bias in a positive manner.
The answer doesn’t (and will never) rely on one simple solution or product. Over the years I’ve read with amusement articles suggesting that an insurance or investment product manufacturer has or will come out with a “silver bullet” product that will solve all problems associated with retirement income distributions. There is one word that explains why this is unlikely to happen—complexity. The third dimension I face in retirement planning—the cash flow dimension. If I fail here, my clients don’t eat! So, why might a one-product-fits-all approach struggle in the real world? First, the potential benefit from a single product would be greatest if the client had everything in one account. I can only think of two of our clients who fall into that category. Planners using all available tools usually have multiple accounts for each household. In our case, the average is five. Second, the source of distributions may need to change for tax reasons; particularly before 50½ and after 70½. Flexibility of distributions is the only way to cover needed changes as they arise. Third, I have great concern over how tax laws will change over the next decade. The last thing I would want is to have all investments taxed at ordinary income. The flexibility to affect the character of taxable income may grow, not decline, in importance as Congress continues to wrestle with ways to reduce the deficit that it has developed over the past nine years.
Implementing all three dimensions in today’s technological environment is still a challenge. Our systems do the first dimension well, the second dimension okay, and the third dimension poorly. This third area is where I’m hopeful more effort is made by technology providers and intermediaries in the future. Systems to monitor and manage this third dimension are virtually non-existent. That wasn’t a problem when we only had a few retired clients, but it’s a problem now, and I hate to think what it will look like in 10 years.
As a Financial Planner Our Primary Role: The Ghost of Christmas Future
Even if a planner can master all three of the dimensions I’ve outlined, the remaining wild card is client behavior. I’ve come to believe that we can’t actually change client behavior; we can only show them the results of their current course of action in a clear, accurate manner. If they don’t like the outcome, they’ll affect the change.
There is a powerful quote in therapist circles that goes something like this, “Change happens when the pain of staying the same is greater than the pain of the change.” Ebenezer Scrooge’s life was transformed after the Ghost of Christmas Future ran the video forward, showing the consequences of continuing his current approach to life. The pain of changing from a greedy old Scrooge was nothing compared to a life of derision and abandonment.
The sooner clients see retirement issues in great clarity through all three dimensions, the sooner they can affect the change needed to make the picture turn out the way they desire. Retirement math is brutal; simply trying to deal with it by wishing, hoping, and living in denial is a formula for disaster.
Most of our physician clients have to deliver news that their patients don’t particularly want to hear, but they deliver it kindly, yet frankly. By doing so, they permit their patients to choose the course of care, knowing both the risks and the potential benefits that they prefer. Over the next few years, I have been faced with similar challenges with many of my clients. It may not be pretty, but I serve them best when I accurately depict a future that can still be changed. When I see clients today I always have a 1 or 2 page agenda showing what we need to discuss at our meetings. Approximately 3% of those clients see under number two, “You are going to run out of money!” Few if any of those clients do anything about it. They are more concerned with their cable TV today than there food and shelter in the future!
Creative Financial Design with offices in Lansing, Portage and Southfield.
Wednesday, August 25, 2010
American's take a vacation?
People in other countries think we Americans are a little weird in our work habits, and they may be right. The web site Expedia.com has recently conducted its ninth annual survey of international vacations, telling us how many vacation days are taken by workers of different countries. French workers get the most 38 days a year, on average, although they typically only take 36 of them. Italians receive 31 days, although, on average, they leave 6 of them on the table.
The American workers? The web site reports that "throughout the eight years that the Vacation Deprivation survey has been conducted, the U.S. has long-held the dismaying distinction of being the country with the worst vacationing habits." Our workers, on average, receive 13 days of vacation time, less than any country in the developed world, including Japan 15 days, Australia and Canada 19 day apiece, Germany 27 days and Britain 26days. Even so, more than a third of Americans don't take their full yearly allotment of vacation days. In the 2009 Expedia study they found Americans give back a total of 436 million of them.
To make matters worse, there is plenty of evidence, on the beaches, in restaurants and the theme parks that many workers are still slipping in an hour or two of productive labor on their days off, calling the office on their cell phones or earnestly consulting their blackberries. Expedia says that 24% of employed American adults do this, but this may be an undercount.
Meanwhile, 37% of employed American adults report regularly working more than 40 hours a week.
This compulsive work ethic may help explain another phenomenon that American financial planners frequently talk about at conferences: how difficult it is for some of their clients to spend their hard-earned money once they've accumulated more than they're ever likely to need.
It's not hard to find advice online and elsewhere for people who overspend and can't stay on a budget, but there seems to be no support or therapy available for a sizable number of Americans who long ago got in the habit of accumulating, and even when they've achieved the point where they no longer have to work, they still do, meanwhile living not beyond their means, but significantly, sometimes uncomfortably, under it. For some of us, stopping to enjoy what we've accumulated seems to be as hard as fully disconnecting from the office.
Is this really a problem? If your goal in life is to increase America's GDP and raise our average worker productivity statistics, then no, everything is fine. But one of the most poignant statements I ever heard was by a rabbi who was asked to travel to Oklahoma City to offer grief counsel to the families of the victims of the bombing incident.
"In my line of work, I regularly sit with people in their last hour of life," he said, "and often people will tell me, with the benefit of hindsight, looking over the course of their lives, that they wish they had spent more time with their loved ones or children, or doing things that gave them pleasure. Never once, in all my years," he added, "has anybody expressed regret that they didn't spend more time at the office."
By the way, as I write this I am on vacation?
Ted Feight, CFP® is a fee-only Certified Financial Planner with 37 years of experience. He limits the amount of clients and planner can have to 100 or less. Ted is the Chair of the Midwest National Association of Personal Financial Planners and is a member of the National Board of Directors for the National Association of Personal Financial Planners. He has offices in Lansing and Postage, Michigan and is toying with the idea of opening an office in the Detroit Metropolitan area.
Link to the Expedia article: http://www.expedia.com/daily/promos/vacations/vacation_deprivation/default.asp .
Friday, August 20, 2010
How many new clients can a planner take and take care of old clients?
I’ve always had a rather altruistic view concerning the role and purpose of financial planning. In my opinion, a financial plan is a tool to determine the most prudent course of action. Just as a physician orders various tests to assist in the diagnosis, I consider the plan as the instrument which directs my recommendations. Therefore, I rarely render advice before I review the results of the plan.
I would hope that the majority of financial planners share this paradigm. I would also contend that there are several who do not and use the “financial plan” as a tool to increase product sales. The difference depends on the focus of the individual advisor. Either they are sales driven or advice driven. You cannot act in one fashion and profess another, although many do.
The issue becomes capacity. How many new comprehensive financial plans can one advisor generate in a year while still taking care of his existing clients? Remember, the more comprehensive the plan is, the lower the number will be. The general consensus at JP Morgan seems to be somewhere between 20 and 24 per year, according to an article in Investment Advisor magazine, written by Mike Patton. I would personally be hard pressed to do half that many.
Another relevant question is this. How often will you update a client’s plan? It took me several years to settle this issue, but a few years ago I decided that updating each part of a client’s financial plan every 2 to 3 years, during reviews. However, this can often get preempted during periods of time like the 2008 market meltdown, when a client’s needs are much different than during good times. I inform clients of this at the beginning of the relationship so they will know what to expect.
Here’s the challenge. As the number of planning clients increase, so do the number of plan updates, after a few years it can become problematic. For example, let’s assume I have 70 clients and gain 10 new planning clients each year over the next three years. In year two you have 80 updates and 10 new plans to prepare. In year three, you have 90 plans to update and 10 new plans to prepare. Each year the task becomes increasingly difficult. I am beginning to sense this so I have been trying to streamline our processes, but at what point does the ability to take new clients or keep smaller less productive clients collide?
I would hope that the majority of financial planners share this paradigm. I would also contend that there are several who do not and use the “financial plan” as a tool to increase product sales. The difference depends on the focus of the individual advisor. Either they are sales driven or advice driven. You cannot act in one fashion and profess another, although many do.
The issue becomes capacity. How many new comprehensive financial plans can one advisor generate in a year while still taking care of his existing clients? Remember, the more comprehensive the plan is, the lower the number will be. The general consensus at JP Morgan seems to be somewhere between 20 and 24 per year, according to an article in Investment Advisor magazine, written by Mike Patton. I would personally be hard pressed to do half that many.
Another relevant question is this. How often will you update a client’s plan? It took me several years to settle this issue, but a few years ago I decided that updating each part of a client’s financial plan every 2 to 3 years, during reviews. However, this can often get preempted during periods of time like the 2008 market meltdown, when a client’s needs are much different than during good times. I inform clients of this at the beginning of the relationship so they will know what to expect.
Here’s the challenge. As the number of planning clients increase, so do the number of plan updates, after a few years it can become problematic. For example, let’s assume I have 70 clients and gain 10 new planning clients each year over the next three years. In year two you have 80 updates and 10 new plans to prepare. In year three, you have 90 plans to update and 10 new plans to prepare. Each year the task becomes increasingly difficult. I am beginning to sense this so I have been trying to streamline our processes, but at what point does the ability to take new clients or keep smaller less productive clients collide?
Sunday, August 15, 2010
New Law August 15th on Debit Card Overdraft fees
There’s a new law going into effect on August 15, 2010. It’s called Regulation E (Reg E), and deals specifically with overdrafts. Basically now you have to choose to Opt In or Opt Out of overdraft protection.
Currently many banks will approve your debit card even though there is not enough money in your account. Effective August 15, every banking client will be opted out of overdraft protection unless they choose to opt in. Should you opt in or opt out?
Opt In for Overdraft
If you choose to opt in for overdrafts, your card may get approved even though the funds are not available in your checking account. This may be good in the event of an emergency where you are stuck with absolutely no cash and your car has broken down, or even to avoid embarrassment when you’re out to dinner with a date and your card would normally be declined. On the other hand, opting in to overdraft protection would not be a good idea for someone who doesn’t balance their checkbook. I definitely wouldn’t recommend opting in if you don’t keep up with your balance. There’s no sense in risking overdraft fees!
Opt Out of Overdrafts
Opting out is just what it sounds like: no overdrawing your checking account with the debit card. Don’t be overly confident, though: recurring debit card transactions are an exception. If you’ve let your car insurance company charge your debit card, the transaction may be approved even though the funds are not available. Otherwise, if you don’t have the money in your account, your card won’t get approved to cover the transaction. This is definitely helpful in the fact that you’re less likely to get overdraft fees.
If you don’t do anything, you’ll automatically be opted out of overdraft protection.
Under the Fed rules, banks would have to explain what overdraft protection is, the details of how it works and the fees associated with it before asking consumers to opt in to the program. (See model opt-in disclosure.)
"The final overdraft rules represent an important step forward in consumer protection," Federal Reserve Chairman Ben S. Bernanke, said in a press release on the rules. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."
Another blow to banks
The new rules are the latest setback for the nation's banks and credit unions already reeling from the effects of the economy and new consumer credit card rules coming online. Thursday's overdraft regulations are sure to trim back what had become a growing income source, estimated at $23.7 billion in 2008 and projected to hit $38.5 billion in 2009.
In third quarter financial statements filed this month, Wells Fargo indicated it expects to take in $300 million less in fee revenues in 2010 because of policies the bank has implemented to help consumers limit overdraft and returned item fees. Facing a rising tide of consumer complaints, Bank of America and Chase have also revised their policies to give customers the choice of using overdraft services.
Edward L. Yingling, president and CEO of the American Bankers Association trade group, said the bankers have created an overdraft task force to look at consumer concerns as well as how technology can be improved and the role of retailers and merchants processing transactions.
"This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs. Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently," Yingling said in a statement.
The Fed rules also come as lawmakers in both houses of Congress are considering bills (H.R. 3904 and S. 1799) to curb overdraft abuses. The proposed bills are more far reaching than the Fed rules and include bans on multiple overdraft fees during a single month. Those bills also seek to regulate how debit card transactions are processed by banks. Consumer advocates have complained that transactions are processed to maximize fees for banks rather than chronologically as they occur. A hearing on the Senate bill is scheduled for Nov. 17 before the Senate Banking Committee.
Lawmaker: Fed rules don't go far enough
Rep. Carolyn Maloney, co-sponsor of the House bill, applauded the Fed for recognizing that the overdraft fee problem needs review, but said the Fed rules don't go far enough to address all of the practices harmful to consumers.
While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue," Maloney said in a statement. "The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed's new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!"
She added: "My bill does all that -- it caps the quantity of fees at one per month or six per year, requires that fees be reasonable, and prohibits posting-order manipulation, and includes all transactions, not just debit cards. Those are provisions I believe make for the strongest consumer protections, that's why Chairman [Barney] Frank and I have proposed this legislation, and that's what I believe the House will be passing."
Consumer groups have called overdraft fees "high-cost loans" and note that banks can decline debit transactions when there aren't enough funds but don't because of the profits they can make from the fees consumers pay. Advocates say banks often don't explain to consumers that they can avoid overdraft fees by linking their debit cards to other savings accounts or opening a line of credit -- less expensive alternatives to overdraft fees.
Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending, criticized the Fed's "failure to propose or enact necessary safeguards against a host of unfair practices."
"Congress needs to step in to stop the abusive practices the Fed has known about for nearly a decade, but once again has failed to address," Halperin said in a statement.
Fed research: Consumers want choice
According to the Fed, which conducted consumer research on overdraft practices, most consumers would prefer to have a choice in enrolling -- or "opt in" for -- overdraft programs for ATM and debit card transactions. The research also showed that most people do want overdraft coverage for important bills such as rent, telephone and other utilities. Thus, the new rule applies to ATM and one-time debit card transactions but not checks. A 2009 study by the Center for Responsible Lending found most overdraft fees were generated at the point of sale, when consumers are using their cards at check-out.
The Fed rule also took steps to prevent banks from discriminating against customers who do not opt in by requiring that they have the same account terms, conditions and features as account holders who opt in to the fees. Anyone with ATM or debit cards prior to July 1, 2010, cannot be charged overdraft fees after Aug. 15, 2010, unless the bank or credit union has first gotten the consumer's consent to participate in an overdraft program.
"Overdraft fees can be costly," Fed Gov. Elizabeth A. Duke, who heads the agency's Committee on Consumer and Community Affairs, said in a press release. "Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs."
Said Maloney at an Oct. 30 congressional hearing on her overdraft bill: "The overdraft problem is significant and getting worse. The quantity of debit card transactions now exceeds the quantity of credit card transactions."
Currently many banks will approve your debit card even though there is not enough money in your account. Effective August 15, every banking client will be opted out of overdraft protection unless they choose to opt in. Should you opt in or opt out?
Opt In for Overdraft
If you choose to opt in for overdrafts, your card may get approved even though the funds are not available in your checking account. This may be good in the event of an emergency where you are stuck with absolutely no cash and your car has broken down, or even to avoid embarrassment when you’re out to dinner with a date and your card would normally be declined. On the other hand, opting in to overdraft protection would not be a good idea for someone who doesn’t balance their checkbook. I definitely wouldn’t recommend opting in if you don’t keep up with your balance. There’s no sense in risking overdraft fees!
Opt Out of Overdrafts
Opting out is just what it sounds like: no overdrawing your checking account with the debit card. Don’t be overly confident, though: recurring debit card transactions are an exception. If you’ve let your car insurance company charge your debit card, the transaction may be approved even though the funds are not available. Otherwise, if you don’t have the money in your account, your card won’t get approved to cover the transaction. This is definitely helpful in the fact that you’re less likely to get overdraft fees.
If you don’t do anything, you’ll automatically be opted out of overdraft protection.
Under the Fed rules, banks would have to explain what overdraft protection is, the details of how it works and the fees associated with it before asking consumers to opt in to the program. (See model opt-in disclosure.)
"The final overdraft rules represent an important step forward in consumer protection," Federal Reserve Chairman Ben S. Bernanke, said in a press release on the rules. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."
Another blow to banks
The new rules are the latest setback for the nation's banks and credit unions already reeling from the effects of the economy and new consumer credit card rules coming online. Thursday's overdraft regulations are sure to trim back what had become a growing income source, estimated at $23.7 billion in 2008 and projected to hit $38.5 billion in 2009.
In third quarter financial statements filed this month, Wells Fargo indicated it expects to take in $300 million less in fee revenues in 2010 because of policies the bank has implemented to help consumers limit overdraft and returned item fees. Facing a rising tide of consumer complaints, Bank of America and Chase have also revised their policies to give customers the choice of using overdraft services.
Edward L. Yingling, president and CEO of the American Bankers Association trade group, said the bankers have created an overdraft task force to look at consumer concerns as well as how technology can be improved and the role of retailers and merchants processing transactions.
"This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs. Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently," Yingling said in a statement.
The Fed rules also come as lawmakers in both houses of Congress are considering bills (H.R. 3904 and S. 1799) to curb overdraft abuses. The proposed bills are more far reaching than the Fed rules and include bans on multiple overdraft fees during a single month. Those bills also seek to regulate how debit card transactions are processed by banks. Consumer advocates have complained that transactions are processed to maximize fees for banks rather than chronologically as they occur. A hearing on the Senate bill is scheduled for Nov. 17 before the Senate Banking Committee.
Lawmaker: Fed rules don't go far enough
Rep. Carolyn Maloney, co-sponsor of the House bill, applauded the Fed for recognizing that the overdraft fee problem needs review, but said the Fed rules don't go far enough to address all of the practices harmful to consumers.
While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue," Maloney said in a statement. "The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed's new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!"
She added: "My bill does all that -- it caps the quantity of fees at one per month or six per year, requires that fees be reasonable, and prohibits posting-order manipulation, and includes all transactions, not just debit cards. Those are provisions I believe make for the strongest consumer protections, that's why Chairman [Barney] Frank and I have proposed this legislation, and that's what I believe the House will be passing."
Consumer groups have called overdraft fees "high-cost loans" and note that banks can decline debit transactions when there aren't enough funds but don't because of the profits they can make from the fees consumers pay. Advocates say banks often don't explain to consumers that they can avoid overdraft fees by linking their debit cards to other savings accounts or opening a line of credit -- less expensive alternatives to overdraft fees.
Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending, criticized the Fed's "failure to propose or enact necessary safeguards against a host of unfair practices."
"Congress needs to step in to stop the abusive practices the Fed has known about for nearly a decade, but once again has failed to address," Halperin said in a statement.
Fed research: Consumers want choice
According to the Fed, which conducted consumer research on overdraft practices, most consumers would prefer to have a choice in enrolling -- or "opt in" for -- overdraft programs for ATM and debit card transactions. The research also showed that most people do want overdraft coverage for important bills such as rent, telephone and other utilities. Thus, the new rule applies to ATM and one-time debit card transactions but not checks. A 2009 study by the Center for Responsible Lending found most overdraft fees were generated at the point of sale, when consumers are using their cards at check-out.
The Fed rule also took steps to prevent banks from discriminating against customers who do not opt in by requiring that they have the same account terms, conditions and features as account holders who opt in to the fees. Anyone with ATM or debit cards prior to July 1, 2010, cannot be charged overdraft fees after Aug. 15, 2010, unless the bank or credit union has first gotten the consumer's consent to participate in an overdraft program.
"Overdraft fees can be costly," Fed Gov. Elizabeth A. Duke, who heads the agency's Committee on Consumer and Community Affairs, said in a press release. "Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs."
Said Maloney at an Oct. 30 congressional hearing on her overdraft bill: "The overdraft problem is significant and getting worse. The quantity of debit card transactions now exceeds the quantity of credit card transactions."
Friday, August 06, 2010
Investment Worries
Investing Worries:
Have you ever felt anxious about your investment portfolio? Who hasn't? A recent presentation, at one of my professional conferences, pointed out that five out of every six years will produce a stock market return sequence that either triggers anxiety or smacks your portfolio so hard that you wonder why you ever trusted the markets to begin with.
This is normal. Many people simply cannot handle stock market volatility, which is why the people who DO have, historically, tended to make more, over multiple ups and downs, than the people who kept all their money stashed away in Treasury bonds.
The question is: is there better way to handle the inevitable anxiety that comes with buying stocks?
Psychologist Ken Haman, who now works at the investment firm Alliance Bernstein, says that the key is to stay rational. He points to studies of the human brain which shows that all of us actually have two brains. One is the neocortex, where all of your higher thought processes take place. Below the neocortex is a primitive brain which is about as smart as an alligator, and this lower brain happens to be where all of our survival instincts are housed. Whenever you experience panic, the primitive brain immediately takes over and shuts down the neocortex--which allows you to respond instantly (rather than thoughtfully) on those many occasions when a saber-toothed tiger is running in your direction.
So when the markets have spent the past quarter giving up all the gains they generated in the first quarter, what do you do? First, talk with somebody who actually listens to you about how you're feeling. Then start to engage your neocortex. What do you imagine is going to happen in the future? Then move to: is that what you think, or how it feels?
Give us a call and we will help guide you through this process, and then, when your neocortex is functioning again, you can look at some of the past market declines and see what happened next, or look at your financial situation and take stock of your progress toward your financial goals.
Have you ever felt anxious about your investment portfolio? Who hasn't? A recent presentation, at one of my professional conferences, pointed out that five out of every six years will produce a stock market return sequence that either triggers anxiety or smacks your portfolio so hard that you wonder why you ever trusted the markets to begin with.
This is normal. Many people simply cannot handle stock market volatility, which is why the people who DO have, historically, tended to make more, over multiple ups and downs, than the people who kept all their money stashed away in Treasury bonds.
The question is: is there better way to handle the inevitable anxiety that comes with buying stocks?
Psychologist Ken Haman, who now works at the investment firm Alliance Bernstein, says that the key is to stay rational. He points to studies of the human brain which shows that all of us actually have two brains. One is the neocortex, where all of your higher thought processes take place. Below the neocortex is a primitive brain which is about as smart as an alligator, and this lower brain happens to be where all of our survival instincts are housed. Whenever you experience panic, the primitive brain immediately takes over and shuts down the neocortex--which allows you to respond instantly (rather than thoughtfully) on those many occasions when a saber-toothed tiger is running in your direction.
So when the markets have spent the past quarter giving up all the gains they generated in the first quarter, what do you do? First, talk with somebody who actually listens to you about how you're feeling. Then start to engage your neocortex. What do you imagine is going to happen in the future? Then move to: is that what you think, or how it feels?
Give us a call and we will help guide you through this process, and then, when your neocortex is functioning again, you can look at some of the past market declines and see what happened next, or look at your financial situation and take stock of your progress toward your financial goals.
Wednesday, April 21, 2010
Roth IRA Conversion Magic!
Last year I suggested clients talk to their CPAs about the costs of transferring some money from their traditional IRAs into a Roth IRA, because the IRS was going to allow transfers done in 2010 to have the tax on the transfer spread over 2 years.
I see all clients 1 to 4 times a year depending on need and the amount of assets I am managing for them. When I meet with clients along with my normal investment report I have a 2 page sheet showing my concerns and thought about the recent past and coming year. The following is an excerpt from one of today's client meetings.
2. Last year we transferred $12,978 from your IRA Rollover to your Roth IRA. This year your CPA said to move $25,956 from your IRA Rollover to your Roth IRA. We transferred shares (to keep trading costs down) and got a little more than we wanted, $27,883.83. You will be paying taxes on this over a 2 year period of time and this may cause you to pay taxes on and extra $963.92, each year. The extra tax should be approximately $96.39, each year.
3. We transferred this money into your Roth IRA because it will grow tax free, but come out of the Roth IRA tax free; rather than 100% taxable which would be normal when money comes out of an IRA Rollover. The amount to roll over was figures in such a way that you probably will not have to pay any tax on the money transferred. If calculated correctly you transferred money from an account that is 100% taxable when money is removed, into an account that is 100% tax free when money is removed and did not have to pay any tax on the money we transferred. Now that is real MAGIC if it works out correctly.
Pretty cool!
I see all clients 1 to 4 times a year depending on need and the amount of assets I am managing for them. When I meet with clients along with my normal investment report I have a 2 page sheet showing my concerns and thought about the recent past and coming year. The following is an excerpt from one of today's client meetings.
2. Last year we transferred $12,978 from your IRA Rollover to your Roth IRA. This year your CPA said to move $25,956 from your IRA Rollover to your Roth IRA. We transferred shares (to keep trading costs down) and got a little more than we wanted, $27,883.83. You will be paying taxes on this over a 2 year period of time and this may cause you to pay taxes on and extra $963.92, each year. The extra tax should be approximately $96.39, each year.
3. We transferred this money into your Roth IRA because it will grow tax free, but come out of the Roth IRA tax free; rather than 100% taxable which would be normal when money comes out of an IRA Rollover. The amount to roll over was figures in such a way that you probably will not have to pay any tax on the money transferred. If calculated correctly you transferred money from an account that is 100% taxable when money is removed, into an account that is 100% tax free when money is removed and did not have to pay any tax on the money we transferred. Now that is real MAGIC if it works out correctly.
Pretty cool!
Sunday, March 21, 2010
Bonds - Professionals - The Big Short
Compared to stocks, bond investments are pretty simple, right? You lend your money to the U.S. government (Treasuries), or to a state or local government (muni bonds) or a company (corporate bonds) for some period of time (called the "maturity"). In return, they pay you interest and then, at the end of the loan, you get your money back. What could be easier?
It might surprise you to learn that many financial planners think bonds are the most complicated investments they deal in--far more complicated than stocks.
Why? First of all, consider the ratings.
You already know that companies like Moody's Investors Services and Standard & Poors investigate the balance sheets of companies (or municipalities), and assign ratings to their bonds which look a little bit like the grades they give out in high school: AAA, AA, A, BBB, BB, B, CCC and so forth. Shaky companies (or municipalities) get a low rating, which is the rating agency's way of saying the chances of default (tumbling into Chapter 11 and not paying back the bond investors) are higher than for a company (or municipality) that is on sounder financial footing.
Sometimes the bonds issued by shakier companies are affectionately known in the trade as junk bonds, but you don't ever hear the companies issuing them refer to them that way. Who wants to buy junk?
A chart included in a Congressional report on the Municipal Bond Fairness Act of 2008 shows the safety difference between differently-rated bonds about as clearly as anything you'll find. It shows that before 2008, only about half a percent of all corporate bonds rated Aaa (Moody's) or AAA (S&P) have defaulted during their full maturity. But when you get down into the Ba/BB ratings, the default rate jumps to 19.12% (Moody's) or 29.93% (S&P). In other words, at those lower rating levels, one or more percent of your bond holdings might default in an average year. Munis experienced lower default rates, and Treasuries have never defaulted--and are considered by most bond experts to be safe from the danger of default.
The bond agencies don't always get these ratings exactly correct, but in general, the highest-rated bonds are the safest, and therefore pay the lowest interest to borrower/investors. Lower-rated bonds will pay higher rates to compensate you for the added risk of default. In a perfectly efficient market, if you owned a portfolio of lower-rated bonds and experienced some defaults, you'd get paid approximately as much as if you held higher-rated bonds with zero or fewer defaults. The markets are seldom quite that efficient, but that's the general idea.
The difference in yields between AAA-rated bonds and bonds of various lower ratings (the "spread") can be graphed over time, and they will move up or down because people get more or less nervous about default, and because default rates do tend to go up or down as the economy weakens or strengthens. A Moody's study of corporate default rates shows about what you would expect: sharp spikes in defaults in the 1930s and around the 1990 recession; diminishing numbers of defaults during the boom years of the 1990s. Astute bond investors will often evaluate these spreads to determine where the market is offering the best yields per unit of risk.
Of course, these ratings can change. A company that hits a rough patch can be downgraded, which doesn't change the coupon rate, but does lower the bond's value--the price that you could sell the bond for on the open market. If somebody were to buy that downgraded bond from you, they would demand a higher coupon rate by offering a lower price.
The other risk in bond investments comes from up or down movements in interest rates. If interest rates go up, the value of your bond goes down, because people can buy bonds paying more attractive (higher) rates. If interest rates go down, your bond is worth more, because you're getting a better yield than people could buy on the market.
How much do your bonds move up and down? This introduces the most complicated calculation in the bond world: what we call "duration."
The basic idea is not complicated. If interest rates go up, a bond that matures in 2040 is going to drop in value a lot more than a bond that is due to mature in six months. In the former case, you're going to have to live with lower yields for the better part of a generation before you can invest at a higher rate. In the latter, you wait just half a year, redeem the bond for its face amount, and then can turn around and buy the higher-yielding bonds.
You can find a fairly complicated discussion of bond duration in Wikipedia, but it is basically a measure of how sensitive a bond is to interest rate movements, measured in years. To calculate a bond's duration, you look at the present value of all the coupon payments yet to be made plus the payback of the face amount you lent in the first place, and then calculate how that would change if interest rates go up and down by varying degrees. Wikipedia offers a somewhat oversimplified rule of thumb: if a bond has a duration of two years, its price would fall about 2% if interest rates rise one percentage point. If interest rates FALL by one percentage point, then that bond's price would rise by 2%.
To see how this might work in the real world, suppose you bought a bond with a face amount of $1,000, a maturity of 10 years, and a coupon rate of 5%. (Buying at the face amount is called buying at "par.") Suppose interest rates rose by 0.6%. Suppose somebody offers you $900 for your bond. If they buy at that price, they would still be getting the $50 payment, but that yearly return would now be equal to 5.56% of the amount paid. ($50/$900 = 5.56%)
However, you also have to factor in the fact that this person paid $900 for an investment that will (assuming no default) pay a face amount of $1,000 when the maturity date arrives. This raises the effective interest rate, but by how much? If the bond is purchased nine years before the maturity date, the $100 difference would amortized over nine years, producing a lower yearly amount than if it was purchased five years before the maturity date, which, in turn, would be lower than if it was purchased just one year before the bond matures.
Unfortunately, this is not a straight line calculation. That extra yield is assumed to compound from the time of purchase to the time when the bondholders get their money back. Add that to the effective coupon yield, and you get a number that people in the trade call "yield to maturity," which is the number you most often see quoted whenever bonds are traded after issuance.
At this point, you know more about bonds than any layperson you're likely to meet, and more than a few professionals. But if you want to really impress people at cocktail parties, or want to know the more detailed ins and outs of your bond investments, you're invited to read a few more paragraphs.
First, look at the bond market through the eyes of a professional. You notice ever-changing yield spreads between high-quality bonds, junk bonds and everything in between. You also, in another dimension, see ever-changing spreads between bonds of different maturities. In general, the longer the maturities (in the lexicon, the "farther you move out on the yield curve"), the higher the yields, because 20-year maturities expose you to two decades of long-term changes in interest rates and possible default, whereas 30-day T-bills expose you to practically none. Sometimes this yield curve is "steep," meaning there's a big difference between the yields on 30-year bonds vs. 10-year or 1-year issues, and the curve will be steeper in some areas than others.
Sometimes, albeit rarely, the markets deliver what is called an "inverted yield curve," where rates are lower for longer maturities than they are for shorter ones. Why? This can happen if investors think that long-term rates are going to come down, and try to lock in current rates on longer-term bonds. Shorter maturities become less attractive because they don't lock in rates for quite as long.
Professional investors can also watch a third kind of spread: between municipal bonds and Treasuries. As you probably know, munis offer a tax break: their coupon yields are exempt from federal taxes, and if they're issued in your state, you don't have to pay state taxes either. Because of this, they normally pay lower rates than Treasuries, whose yields are taxable at the federal level. A financial planner or accountant would look at your tax rate and calculate the "tax-equivalent yield" by subtracting, from the yield, the various taxes you'd pay on Treasuries. Theoretically, the Treasury bond's tax-equivalent yield would be approximately the same as the the yield on munis of similar quality and maturity. But sometimes concerns about the economy and the possibility of default and downgrades will drive muni yields as high as Treasuries, despite their tax advantages.
There are a few other complexities to consider. One is figuring out how much of a commission the bond trader is taking whenever you buy individual bonds. Unlike stocks, bond prices usually include some built-in compensation (a "markup" or "spread") for the brokerage company selling you the bond, which is usually not disclosed. Markups can vary widely. Unless you're really good at these duration calculations, you would never even be able to estimate how much you paid the broker.
Another complicating factor is that corporate or muni bonds (but not Treasuries) usually have "call provisions." That's a fancy way of saying that if interest rates go down, the company (or municipality) issuing the bond can pay off the note, give you your money back, and issue new bonds at the lower rate--not unlike when you pay off your car loan or mortgage early.
These call provisions can add a LOT of complexity to your evaluation of a bond investment, since the company can snatch the bond out of your hand right when it has gone up in value (due to that drop in interest rates). Meanwhile, if rates go up, the issuer will have no incentive to call, and you'll be stuck with the lower yield--heads they win, tails you lose. Bond traders sometimes talk about the "yield to call," the yield of a bond or note if you were to buy and hold the security until the call date.
Another complexity: with the advent of new derivative and collateralized securities, it has become difficult to evaluate what, exactly, bond-oriented mutual funds are buying on your behalf. The definition of a "bond" has been expanded to include derivative securities that can be highly-volatile, and can lose value faster even than stocks. One often-cited horror story involves certain Morgan Keegan bond funds, including the RMK Select High Income Fund, the RMK High Income Fund, the RMK Strategic Income Fund and the RMK Advantage Income Fund. Recently, Financial Planning magazine has reported multimillion dollar arbitration awards as a result of losses in their bond holdings amounting to between 50% and 67%--in a single year.
Then if you buy or sell bonds on the open market at something other than par, the yield will often be taxed one way, the difference between what you pay and the face amount of the bond (either plus or minus) will be taxed a different way. Meanwhile, zero coupon bonds, which accrue the interest payments to maturity rather than paying them out over time, will trigger taxes on money that you haven't actually received.
Finally, did you see 60 minutes last week-end (March 14, 2010) and the story they did on Michael Lewis and his book The Big Short. His book shows an even more confusing and scarier side of bonds than anything we have discussed so far. In his book Michael Lewis explains how mortgage bonds were misused and misunderstood over the last 10 years or more. He shows that most brokers were caught up in making money much more than taking care of their customers.
If you want to read something really scary, read this book. It will make for some very interesting cocktail party discussions. If you want to be taken advantage of or just give your money away, don't read this book.
It might surprise you to learn that many financial planners think bonds are the most complicated investments they deal in--far more complicated than stocks.
Why? First of all, consider the ratings.
You already know that companies like Moody's Investors Services and Standard & Poors investigate the balance sheets of companies (or municipalities), and assign ratings to their bonds which look a little bit like the grades they give out in high school: AAA, AA, A, BBB, BB, B, CCC and so forth. Shaky companies (or municipalities) get a low rating, which is the rating agency's way of saying the chances of default (tumbling into Chapter 11 and not paying back the bond investors) are higher than for a company (or municipality) that is on sounder financial footing.
Sometimes the bonds issued by shakier companies are affectionately known in the trade as junk bonds, but you don't ever hear the companies issuing them refer to them that way. Who wants to buy junk?
A chart included in a Congressional report on the Municipal Bond Fairness Act of 2008 shows the safety difference between differently-rated bonds about as clearly as anything you'll find. It shows that before 2008, only about half a percent of all corporate bonds rated Aaa (Moody's) or AAA (S&P) have defaulted during their full maturity. But when you get down into the Ba/BB ratings, the default rate jumps to 19.12% (Moody's) or 29.93% (S&P). In other words, at those lower rating levels, one or more percent of your bond holdings might default in an average year. Munis experienced lower default rates, and Treasuries have never defaulted--and are considered by most bond experts to be safe from the danger of default.
The bond agencies don't always get these ratings exactly correct, but in general, the highest-rated bonds are the safest, and therefore pay the lowest interest to borrower/investors. Lower-rated bonds will pay higher rates to compensate you for the added risk of default. In a perfectly efficient market, if you owned a portfolio of lower-rated bonds and experienced some defaults, you'd get paid approximately as much as if you held higher-rated bonds with zero or fewer defaults. The markets are seldom quite that efficient, but that's the general idea.
The difference in yields between AAA-rated bonds and bonds of various lower ratings (the "spread") can be graphed over time, and they will move up or down because people get more or less nervous about default, and because default rates do tend to go up or down as the economy weakens or strengthens. A Moody's study of corporate default rates shows about what you would expect: sharp spikes in defaults in the 1930s and around the 1990 recession; diminishing numbers of defaults during the boom years of the 1990s. Astute bond investors will often evaluate these spreads to determine where the market is offering the best yields per unit of risk.
Of course, these ratings can change. A company that hits a rough patch can be downgraded, which doesn't change the coupon rate, but does lower the bond's value--the price that you could sell the bond for on the open market. If somebody were to buy that downgraded bond from you, they would demand a higher coupon rate by offering a lower price.
The other risk in bond investments comes from up or down movements in interest rates. If interest rates go up, the value of your bond goes down, because people can buy bonds paying more attractive (higher) rates. If interest rates go down, your bond is worth more, because you're getting a better yield than people could buy on the market.
How much do your bonds move up and down? This introduces the most complicated calculation in the bond world: what we call "duration."
The basic idea is not complicated. If interest rates go up, a bond that matures in 2040 is going to drop in value a lot more than a bond that is due to mature in six months. In the former case, you're going to have to live with lower yields for the better part of a generation before you can invest at a higher rate. In the latter, you wait just half a year, redeem the bond for its face amount, and then can turn around and buy the higher-yielding bonds.
You can find a fairly complicated discussion of bond duration in Wikipedia, but it is basically a measure of how sensitive a bond is to interest rate movements, measured in years. To calculate a bond's duration, you look at the present value of all the coupon payments yet to be made plus the payback of the face amount you lent in the first place, and then calculate how that would change if interest rates go up and down by varying degrees. Wikipedia offers a somewhat oversimplified rule of thumb: if a bond has a duration of two years, its price would fall about 2% if interest rates rise one percentage point. If interest rates FALL by one percentage point, then that bond's price would rise by 2%.
To see how this might work in the real world, suppose you bought a bond with a face amount of $1,000, a maturity of 10 years, and a coupon rate of 5%. (Buying at the face amount is called buying at "par.") Suppose interest rates rose by 0.6%. Suppose somebody offers you $900 for your bond. If they buy at that price, they would still be getting the $50 payment, but that yearly return would now be equal to 5.56% of the amount paid. ($50/$900 = 5.56%)
However, you also have to factor in the fact that this person paid $900 for an investment that will (assuming no default) pay a face amount of $1,000 when the maturity date arrives. This raises the effective interest rate, but by how much? If the bond is purchased nine years before the maturity date, the $100 difference would amortized over nine years, producing a lower yearly amount than if it was purchased five years before the maturity date, which, in turn, would be lower than if it was purchased just one year before the bond matures.
Unfortunately, this is not a straight line calculation. That extra yield is assumed to compound from the time of purchase to the time when the bondholders get their money back. Add that to the effective coupon yield, and you get a number that people in the trade call "yield to maturity," which is the number you most often see quoted whenever bonds are traded after issuance.
At this point, you know more about bonds than any layperson you're likely to meet, and more than a few professionals. But if you want to really impress people at cocktail parties, or want to know the more detailed ins and outs of your bond investments, you're invited to read a few more paragraphs.
First, look at the bond market through the eyes of a professional. You notice ever-changing yield spreads between high-quality bonds, junk bonds and everything in between. You also, in another dimension, see ever-changing spreads between bonds of different maturities. In general, the longer the maturities (in the lexicon, the "farther you move out on the yield curve"), the higher the yields, because 20-year maturities expose you to two decades of long-term changes in interest rates and possible default, whereas 30-day T-bills expose you to practically none. Sometimes this yield curve is "steep," meaning there's a big difference between the yields on 30-year bonds vs. 10-year or 1-year issues, and the curve will be steeper in some areas than others.
Sometimes, albeit rarely, the markets deliver what is called an "inverted yield curve," where rates are lower for longer maturities than they are for shorter ones. Why? This can happen if investors think that long-term rates are going to come down, and try to lock in current rates on longer-term bonds. Shorter maturities become less attractive because they don't lock in rates for quite as long.
Professional investors can also watch a third kind of spread: between municipal bonds and Treasuries. As you probably know, munis offer a tax break: their coupon yields are exempt from federal taxes, and if they're issued in your state, you don't have to pay state taxes either. Because of this, they normally pay lower rates than Treasuries, whose yields are taxable at the federal level. A financial planner or accountant would look at your tax rate and calculate the "tax-equivalent yield" by subtracting, from the yield, the various taxes you'd pay on Treasuries. Theoretically, the Treasury bond's tax-equivalent yield would be approximately the same as the the yield on munis of similar quality and maturity. But sometimes concerns about the economy and the possibility of default and downgrades will drive muni yields as high as Treasuries, despite their tax advantages.
There are a few other complexities to consider. One is figuring out how much of a commission the bond trader is taking whenever you buy individual bonds. Unlike stocks, bond prices usually include some built-in compensation (a "markup" or "spread") for the brokerage company selling you the bond, which is usually not disclosed. Markups can vary widely. Unless you're really good at these duration calculations, you would never even be able to estimate how much you paid the broker.
Another complicating factor is that corporate or muni bonds (but not Treasuries) usually have "call provisions." That's a fancy way of saying that if interest rates go down, the company (or municipality) issuing the bond can pay off the note, give you your money back, and issue new bonds at the lower rate--not unlike when you pay off your car loan or mortgage early.
These call provisions can add a LOT of complexity to your evaluation of a bond investment, since the company can snatch the bond out of your hand right when it has gone up in value (due to that drop in interest rates). Meanwhile, if rates go up, the issuer will have no incentive to call, and you'll be stuck with the lower yield--heads they win, tails you lose. Bond traders sometimes talk about the "yield to call," the yield of a bond or note if you were to buy and hold the security until the call date.
Another complexity: with the advent of new derivative and collateralized securities, it has become difficult to evaluate what, exactly, bond-oriented mutual funds are buying on your behalf. The definition of a "bond" has been expanded to include derivative securities that can be highly-volatile, and can lose value faster even than stocks. One often-cited horror story involves certain Morgan Keegan bond funds, including the RMK Select High Income Fund, the RMK High Income Fund, the RMK Strategic Income Fund and the RMK Advantage Income Fund. Recently, Financial Planning magazine has reported multimillion dollar arbitration awards as a result of losses in their bond holdings amounting to between 50% and 67%--in a single year.
Then if you buy or sell bonds on the open market at something other than par, the yield will often be taxed one way, the difference between what you pay and the face amount of the bond (either plus or minus) will be taxed a different way. Meanwhile, zero coupon bonds, which accrue the interest payments to maturity rather than paying them out over time, will trigger taxes on money that you haven't actually received.
Finally, did you see 60 minutes last week-end (March 14, 2010) and the story they did on Michael Lewis and his book The Big Short. His book shows an even more confusing and scarier side of bonds than anything we have discussed so far. In his book Michael Lewis explains how mortgage bonds were misused and misunderstood over the last 10 years or more. He shows that most brokers were caught up in making money much more than taking care of their customers.
If you want to read something really scary, read this book. It will make for some very interesting cocktail party discussions. If you want to be taken advantage of or just give your money away, don't read this book.
Monday, March 01, 2010
U.S. Senate sells American down drain over this week-end!
We in the financial planning community believe that something called a "fiduciary standard" is the very best framework for professionals to work with our clients. That's why we're so angry over something that happened in the Senate over the weekend: Senator Tim Johnson of South Dakota inserted an amendment into the new regulatory reform bill--and, with the casual stroke of a pen, eliminated an important and powerful consumer protection.
This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary. Senator Johnson wants the Senate to "study" the issue instead.
Why should you care?
The fiduciary standard is a legal concept, but its core idea is not complicated. To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our customers or clients.
In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are and what you want and need?
So what does it mean NOT to be a fiduciary? Imagine that there were two kinds of health practitioners in the world. One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that they believe is the very best course of treatment, and you pay them directly for this service.
The other group of health care providers operates somewhat differently. They're employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be "suitable."
These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems. These other health care providers are paid by the company according to how many of these treatments they can sell.
Now imagine that these larger companies, because of the very high profits they're making on these treatments, are able to gain a lot of influence over the process that decides which treatments are "suitable." In fact, their executives sit on the governing board of the organization that makes these determinations.
Finally, imagine that something went horribly wrong. Several of the most popular treatments that these non-fiduciary medical professionals were eagerly peddling to their "patients" were not at all as their companies had portrayed them. The result: catastrophic consequences, pain and suffering throughout the world. An enormous mess.
To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix. These companies had become so entwined in the system that the government had no choice but to help them recoup the staggering losses they brought upon themselves.
Not surprisingly, an outraged public demanded that this must never happen again. To the real fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard. No more shady "suitable" treatments.
We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.
So here's why professional financial services providers are angry. Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide "suitable" non-fiduciary advice have gone back to business as usual--and very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will "study" the issue.
The Senate has decided to leave fiduciary out of the final bill. Even the Wall Street Journal is outraged--here's a link to a strongly-worded column that clearly explains what happened: http://online.wsj.com/article/SB10001424052748703940704575089413832399630.html
And here's a link to another article which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers: http://www.financial-planning.com/fp_issues/2010_1/angels-and-demons-2665124-1.html
It would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community. A groundswell of public opinion might make our elected representatives understand that we haven't forgotten TARP and all the rest of it. Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren't enough of us to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.
This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary. Senator Johnson wants the Senate to "study" the issue instead.
Why should you care?
The fiduciary standard is a legal concept, but its core idea is not complicated. To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our customers or clients.
In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are and what you want and need?
So what does it mean NOT to be a fiduciary? Imagine that there were two kinds of health practitioners in the world. One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that they believe is the very best course of treatment, and you pay them directly for this service.
The other group of health care providers operates somewhat differently. They're employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be "suitable."
These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems. These other health care providers are paid by the company according to how many of these treatments they can sell.
Now imagine that these larger companies, because of the very high profits they're making on these treatments, are able to gain a lot of influence over the process that decides which treatments are "suitable." In fact, their executives sit on the governing board of the organization that makes these determinations.
Finally, imagine that something went horribly wrong. Several of the most popular treatments that these non-fiduciary medical professionals were eagerly peddling to their "patients" were not at all as their companies had portrayed them. The result: catastrophic consequences, pain and suffering throughout the world. An enormous mess.
To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix. These companies had become so entwined in the system that the government had no choice but to help them recoup the staggering losses they brought upon themselves.
Not surprisingly, an outraged public demanded that this must never happen again. To the real fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard. No more shady "suitable" treatments.
We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.
So here's why professional financial services providers are angry. Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide "suitable" non-fiduciary advice have gone back to business as usual--and very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will "study" the issue.
The Senate has decided to leave fiduciary out of the final bill. Even the Wall Street Journal is outraged--here's a link to a strongly-worded column that clearly explains what happened: http://online.wsj.com/article/SB10001424052748703940704575089413832399630.html
And here's a link to another article which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers: http://www.financial-planning.com/fp_issues/2010_1/angels-and-demons-2665124-1.html
It would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community. A groundswell of public opinion might make our elected representatives understand that we haven't forgotten TARP and all the rest of it. Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren't enough of us to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.
Tuesday, February 16, 2010
Budget Alarms Go Off Around The World
You've probably been hearing a lot about Greece recently, and before that about Dubai--two countries that were in danger of defaulting on what economic geeks call 'sovereign debt,' which basically means their country's equivalent of Treasury bonds. Dubai's problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government. Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan. Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue.
What you probably aren't hearing is that Portugal, Ireland, Italy and Spain are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head. According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product. Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: that at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65. 65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.
What you probably aren't hearing is that Portugal, Ireland, Italy and Spain are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head. According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product. Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: that at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65. 65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.
Monday, February 01, 2010
A letter to yourself:
No one will ever know you as well as you know yourself. Here is an interesting way of taking advantage of that fact. Write a letter to yourself, more specifically, a letter from your future self to you, today.
Come again? Imagine yourself in five or ten years, assuming everything has gone more or less as you hope it will. You're healthy, in good financial health and--well, you know your hopes much better than I do. The point is that the You-In-The-Future is writing a letter of thanks to the You-Today. Future You might thank Today You for exercising regularly, because Future You is healthy, fit and looking good. Future You might thank you for being thrifty and watching your budget, because in that future date, you're on track to retire or already retired comfortably.
Future You might thank you for taking the time to smell the roses along the way, for maintaining close relationships with friends and family; for spending a little more time accomplishing goals like writing a book, starting a business, traveling or helping other. Rather than spending a lot of unproductive time in front of the TV.
Whatever it is, you are thanking yourself for taking these actions, and be specific about what you did. Then look over the letter, and know that these are all things which you will thank yourself for someday, make a commitment to do them, and save the letter.
Every week or two take the letter out and take another look at it. Are you on course? Are you earning the thanks that Future You gave you?
The point here is that you want your future life to be as good as it can be, as full of fulfillment and happiness, joy and prosperity as possible, and your actions between now and then will, or will not make that happen. The letter to yourself is a fantastically powerful reminder you that you're really counting on yourself to take care of yourself in the future.
Meanwhile, in between the times you spend with the letter, you can get to know a variety of Future Selves (You-Next-Week, You-Next-Year, You-Five-Years-In-The-Future), and begin to ask these future versions of you about decisions you make now. How much of the money you earn should be given to your future self for retirement? What would you, a week from now, like to have cleared off your desk? Would you like to have learned a new foreign language by this time next year? Are there things which are hard to do now, but which you will wish you had done? Chances are, you know what that person who will be you would really like you to be doing now, which lets you navigate through the complexities of your life with very clear vision.
And if you can do that, you could be one of the few who arrives in the future with no regrets about how you spent the precious, irreplaceable hours of your life. Where others will have muddled through their days, weeks, months and years and still be left wondering why the other guy (Future You) is always so lucky and able to accomplish so much.
Ted Feight, CFP® is a fee-only personal asset, financial, life and wealth manager. He started is firm Creative Financial Design in 1984. Learn more about Ted at www.creativefinancialdesign.com .
Come again? Imagine yourself in five or ten years, assuming everything has gone more or less as you hope it will. You're healthy, in good financial health and--well, you know your hopes much better than I do. The point is that the You-In-The-Future is writing a letter of thanks to the You-Today. Future You might thank Today You for exercising regularly, because Future You is healthy, fit and looking good. Future You might thank you for being thrifty and watching your budget, because in that future date, you're on track to retire or already retired comfortably.
Future You might thank you for taking the time to smell the roses along the way, for maintaining close relationships with friends and family; for spending a little more time accomplishing goals like writing a book, starting a business, traveling or helping other. Rather than spending a lot of unproductive time in front of the TV.
Whatever it is, you are thanking yourself for taking these actions, and be specific about what you did. Then look over the letter, and know that these are all things which you will thank yourself for someday, make a commitment to do them, and save the letter.
Every week or two take the letter out and take another look at it. Are you on course? Are you earning the thanks that Future You gave you?
The point here is that you want your future life to be as good as it can be, as full of fulfillment and happiness, joy and prosperity as possible, and your actions between now and then will, or will not make that happen. The letter to yourself is a fantastically powerful reminder you that you're really counting on yourself to take care of yourself in the future.
Meanwhile, in between the times you spend with the letter, you can get to know a variety of Future Selves (You-Next-Week, You-Next-Year, You-Five-Years-In-The-Future), and begin to ask these future versions of you about decisions you make now. How much of the money you earn should be given to your future self for retirement? What would you, a week from now, like to have cleared off your desk? Would you like to have learned a new foreign language by this time next year? Are there things which are hard to do now, but which you will wish you had done? Chances are, you know what that person who will be you would really like you to be doing now, which lets you navigate through the complexities of your life with very clear vision.
And if you can do that, you could be one of the few who arrives in the future with no regrets about how you spent the precious, irreplaceable hours of your life. Where others will have muddled through their days, weeks, months and years and still be left wondering why the other guy (Future You) is always so lucky and able to accomplish so much.
Ted Feight, CFP® is a fee-only personal asset, financial, life and wealth manager. He started is firm Creative Financial Design in 1984. Learn more about Ted at www.creativefinancialdesign.com .
Tuesday, January 26, 2010
New Home Buyer Credits by the Numbers
Lately, Congress has been obsessed with encouraging people to buy houses. The Economic Recovery Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Worker, Homeownership and Business Assistance Act of 2009 all included tax credits for people who buy a home, each one more generous than the last.
The most recent credit, passed last November, would give any person who hasn't owned a home for the past three years a tax credit equal to 10% of the purchase price, up to $8,000, so long as 1) the contract is signed before May 1 of this year and 2) the buyers subsequently live in the house as their principal residence for at least three years.
Of course, this is all subject to income restrictions. The full credit is available to single taxpayers with income of less than $125,000; joint filers earning up to $225,000; it phases out altogether at incomes above $145,000 and $245,000 respectively.
There's a smaller $6,500 credit for anybody who has owned and lived in the same home for five consecutive years during the eight years before buying a new residence. This credit might be appropriate for families who are looking to move into a larger home, or retired persons who might want to downsize their residence. (They, too, must live in the purchased house for the next three years in order to claim the credit, and the same income restrictions apply.)
There seems to be a rule in Congress that no tax initiative can ever be simple. To qualify for the credit, you can't buy a house from a relative, and you can't claim the credit if you can be claimed as a dependent on another person's tax return. The buyer or buyer's spouse must be at least 18 years of age, and the price of the home being purchased cannot exceed $800,000--which won't be a problem for people living in Youngstown, OH (median home price: $70,700, according to the National Association of Realtors) or Saginaw, MI ($61,400 median price), but might cause discomfort for some people living in San Jose, CA ($566,000) or White Plains, NY ($450,000). Another complexity: if you qualify for the credit, you can claim it on your 2010 tax return, or jump in the time machine and and claim it on your 2009 return.
If there is more than one buyer, and they are not married, the IRS allows them to give the full credit to whichever buyer qualifies for it. Thus, parents who earn more than the threshold income can buy a house for their son or daughter. If the kids pay something toward the purchase price, they'll be able to claim the full credit on their tax returns.
If you extend this trend a year or two, it's easy to imagine that eventually Congress will be buying everybody a nice house with taxpayer dollars. But is further stimulus necessary? Mortgage rates are near record lows, and home mortgage interest is still deductible. The National Association of Realtors, which tracks home sales, found that existing home sales were up 5% in 2009 over 2008; overall market activity is up 21% from the bottom. According to statistics from the Department of Housing and Urban Development and the U.S. Census Bureau, a supply of 7.2 months worth of new homes is available for purchase--close to the 6 month level that is normal for a healthy market. The average sale price dropped 12% last year, but gained 1.5% in December, which means your home may finally be gaining in value again, as buyers finance their purchases with tax dollars.
The most recent credit, passed last November, would give any person who hasn't owned a home for the past three years a tax credit equal to 10% of the purchase price, up to $8,000, so long as 1) the contract is signed before May 1 of this year and 2) the buyers subsequently live in the house as their principal residence for at least three years.
Of course, this is all subject to income restrictions. The full credit is available to single taxpayers with income of less than $125,000; joint filers earning up to $225,000; it phases out altogether at incomes above $145,000 and $245,000 respectively.
There's a smaller $6,500 credit for anybody who has owned and lived in the same home for five consecutive years during the eight years before buying a new residence. This credit might be appropriate for families who are looking to move into a larger home, or retired persons who might want to downsize their residence. (They, too, must live in the purchased house for the next three years in order to claim the credit, and the same income restrictions apply.)
There seems to be a rule in Congress that no tax initiative can ever be simple. To qualify for the credit, you can't buy a house from a relative, and you can't claim the credit if you can be claimed as a dependent on another person's tax return. The buyer or buyer's spouse must be at least 18 years of age, and the price of the home being purchased cannot exceed $800,000--which won't be a problem for people living in Youngstown, OH (median home price: $70,700, according to the National Association of Realtors) or Saginaw, MI ($61,400 median price), but might cause discomfort for some people living in San Jose, CA ($566,000) or White Plains, NY ($450,000). Another complexity: if you qualify for the credit, you can claim it on your 2010 tax return, or jump in the time machine and and claim it on your 2009 return.
If there is more than one buyer, and they are not married, the IRS allows them to give the full credit to whichever buyer qualifies for it. Thus, parents who earn more than the threshold income can buy a house for their son or daughter. If the kids pay something toward the purchase price, they'll be able to claim the full credit on their tax returns.
If you extend this trend a year or two, it's easy to imagine that eventually Congress will be buying everybody a nice house with taxpayer dollars. But is further stimulus necessary? Mortgage rates are near record lows, and home mortgage interest is still deductible. The National Association of Realtors, which tracks home sales, found that existing home sales were up 5% in 2009 over 2008; overall market activity is up 21% from the bottom. According to statistics from the Department of Housing and Urban Development and the U.S. Census Bureau, a supply of 7.2 months worth of new homes is available for purchase--close to the 6 month level that is normal for a healthy market. The average sale price dropped 12% last year, but gained 1.5% in December, which means your home may finally be gaining in value again, as buyers finance their purchases with tax dollars.
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