Jon Castle, CFP, ChFC

What a question, huh?  This question seems to be on the minds of many investors these days.

Most economists are predicting that the European zone will suffer a period of slower than usual growth – or even short periods of shallow recession – as they try to work their way out of the debt crisis that they are currently in. Since we are, in reality, a global economy, this means that markets both here and abroad will likely be volatile and moderately stagnant for the next several years. It may well feel like we take 3 steps forward in the market, only to be followed by 2 steps backwards – for a while.

Morgan Stanley did a wonderful study called “The Aftermath of Secular Bear Markets” in which the authors of the study tracked the 19 major bear markets over the last century (only 4 were in the US). All major bear market corrections (defined as a market drop of 47% or greater) were followed by a rebound rally, (2009) then a mid-cycle correction (2010 & possibly 2011), followed by a period of 5-6 years of volatile, sideways behavior, before a new bull market started. So, based upon that historical precedent – we are about 2 years into the sideways part. (if you Google this study, you can read about it directly. Here is a link to see it visually:  Trading Range.  Note that the chart on this link was published in 2009, so the “we are here” mark is has moved 3 years to the right .  It was right on as far as predicting the mid-cycle correction(s) in 2010 and 2011.

The sideways part (the trading range of 5.6 years, on average) is the period of time where the economy heals itself, and goverments try to “unscrew” what went awry in the first place.  This is where we are now.  Likely you see daily evidence of this natural process – Democrats and Republicans squabbling over policy but not really changing anything, the Fed printing money, banks hoarding cash and trying to get their books in order, finger-pointing, governmental gridlocks, and daily predictions of great bull markets or terrible bear markets. While difficult to live through – this is actually part of the NATURAL healing process of a free-market economy. Once you realize where you are in the cycle, then it becomes much easier and far less confusing to stay the course.

So – to answer thequestion – the secret to being a successful 401(k) or other retirement plan investor in which you have to save money over time, and have, say,  10 or 12 or more years to retirement, would be:

1)  Build your portfolio to a risk tolerance that even if the market drops 20 or 30%, you will NOT freak out and will NOT stop investing.  That means you may have to have 30%, 50%, or even 70% of your money in the “safer” investments like government bond funds, or even cash.  A good rule of thumb is – whatever percent of your portfolio you have in the stock market – that is the percent that it will go down when the market corrects. So – if the market drops 20% (which it does every 3 years) – and 50% of your money is in stock funds – then your portfolio will drop by about 10%. (50% of 20% is 10%.)  If you can hang through a drop like that – but no more – and keep investing, then that’s your risk tolerance threshold (limit).  If your personal limit is more like 20%, you can build your portfolio more aggressively – like 70% stock funds, or maybe even a little bit more.  With 10 or 12 years to retirement, you’ve got plenty of time to make it up, so you can afford to be more aggressive.

2) KEEP INVESTING.  When the market goes down – and your portfolio goes down – but you keep investing – you are buying up shares of the funds ON SALE.  If you see a sale at a store – you wouldn’t throw away everything you bought previously, would you?  Then why do people do this with stocks or mutual funds?  If they are on sale – buy more!! Keep buying over time – during that volatile period that I mentioned above – and when the steady bull markets DO come back (they will – we just don’t know when) then you will likely be extremely pleased with your investments.

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser. http://www.WealthGuards.com

Jonathan N. Castle, CFP®, ChFC®

Where does the time go?  It is already nearly the end of February and it seems like 2012 is speeding along faster than last year!  So far this year, the financial markets have been reasonably good to all of us, with the S&P 500 up about 8.5%, the Dow up 6.6%, and the NASDAQ up an eye-popping 13.9% as of this writing.

The Dow Jones Industrial Index has broken through the psychological barrier of 13,000 – the highest it has been since March of 2008 a few times now.  In fact, the markets have been remarkably – almost eerily - calm for the last 3 months, quietly marching upward, shrugging off the occasional bad news (such as the Greek bailout nearly unwinding last week and the ever increasing tension over oil in the mideast) with little more than an occasional flinch. 

As we have said for the past 8 months, we remain cautiously optimistic.  “Moderately Bullish” is a term that I have used in the past.  Based upon historical behavior of Secular Bear Markets, we expect that over the next 3 years or so, we will see substantial ups (and downs) in the markets with a slight overall uptrend.  

As it pertains to the current rally, we believe this leg of the rally is probably due for a drawback of some kind.  The next chart shows our reasoning for this.  When the market approaches a point where it had difficulty breaking through previously (such as the Dow’s 13,000 level), this is known as “resistance.”  Typically, as a market index approaches a resistance level, it generally will pause, draw back, and then, IF the level is to be broken, will punch through that level to achieve new highs.  Similar to a person drawing back before breaking through a door, the market will generally draw back before “breaking out” to a new level.  As we are at that resistance level now, a drawback would be a natural – even necessary – part of a normal market rally. 

Despite the recent market rally, we do not feel it is time to break out any party hats on a new sustained bull market just yet.  There are a number of reasons to remain cautious about the markets:

• According to the Investment Company Institute – the total inflows (new money) going into equity (stock) mutual funds from February 1st through February 15th was a little over 4.6 Billion Dollars.  While this seems like a lot, compared to the inflows to bond funds, which netted 15.2 Billion – it was just a trickle.  Clearly, investors are not ready to assume lots of stock market risk just yet, and the recent rally did not have the market breadth that would indicate the start of a new bull market.
• The price of oil is going up.  Part of the reason is that US refineries shut down every May to retool to EPA requirements, so oil nearly always rises during this part of the year.  However – increased tensions in the mideast are also driving oil prices higher.  Higher oil prices mean slower economic growth.  As businesses must pay more for energy, they spend less on payrolls and other things which drive growth.
• Europe’s financial situation is still quite a mess.  While it seems that the European Union is working feverishly to keep from imploding – and they may well succeed – the fact is that Europe is already mired in what appears to be a deep recession.  This will have a global impact, slowing growth in emerging markets as well as within the United States.
• Our National Debt is a significant problem – and only getting worse.
• We are in an election year, so significant economic policy will likely not be passed until next year.  Given the uncertain outcome of the 2012 elections, it is anyone’s guess as to whether any new policies will be helpful or harmful.
• The Bush tax cuts are set to expire this year.  This expectation is curbing business spending.
• And the list goes on… given the recency of the 2008 market crash, investors are not yet hungry enough for returns to take additional risks and dive head first into the markets. 

However – there are numerous reasons to be bullish as well.  Institutional investors are slowly beginning to see the opportunity in stocks – and have publicly stated their plans to acquire more stocks in their portfolios over the next several years in preparation for a future bull market.  Some reasons to own stocks - and to expect the market will go up are: 

• Stock valuations are more attractive than they have been in decades.  Based upon the price of stocks compared to company earnings, stocks are cheap.  In the past, investors who loaded up on stocks at current valuation levels were handsomely rewarded over the next 10 years.  Institutions know this – and their demand for stocks during this period may well keep the market afloat.
• We are seeing a new “flurry” of IPO’s (Initial Public Offerings).  New companies – such as Facebook – offering publicly traded stock for the first time.  Historically, when there are a lot of IPO’s, the market does well.
• We are seeing a significant increase in companies buying back their own stock.  Not only does this activity boost the stock market – but it is also an indication of what company insiders think of the future prospects of their companies.  Who would spend good money to buy their own company stock – unless they believed the company woud do well?
• Corporations are hoarding more cash than ever.  While initially this might seem a bad sign – it is a an indicator of the huge potential that exists.  Eventually, this cash will be deployed.  When it is – there is enough of it to have an enormous impact upon virtually all parts of the economy.
• Currently, the dividend yield on the Dow Jones is a very attractive 3.07%.  So, hypothetically if the market only goes up 5%, an investor who owned the Dow Jones would reap over 8% in total return.  It is only a matter of time before return-starved pension funds, institutions, and corporations currently investing in Treasuries earning less than 3% begin to move money to other assets to seek greater returns.  When this begins, the market has the potential to move up very quickly.

This balance between bullish and bearish factors is a normal part of the recovery process, but makes for a challenging investment environment. In summary, we remain cautiously bullish, with an expectation for occasional market corrections which may exceed 20% or more.  Likely, it will feel like taking three steps forward, only to take two steps back.  However, we feel that reasonable gains are available with the correct strategy.  The most successful investors that we have worked with have carefully chosen their risk tolerance, and then invested in portfolios scientifically designed around that risk tolerance – and remained focused on the long term.  

Jonathan N. Castle, CFP, ChFC

2011 has come and gone and we are rapidly working our way through 2012.  It seems that so far, a general sense of cautious optimism has taken over where only a few months ago, all we heard was gloom and doom.  We applaud what appears to be slightly more balanced reporting on the economic front.  While not all of the news is good, neither is it all bad as it seemed to be several months ago.  A sense of doom and gloom serves no good purpose for our economy, and we are pleased the mood appears to be lifting somewhat.

After reviewing a great deal of economic analysis and often conflicting opinions from our research providers, we have come to some general conclusions about what to expect for performance in the financial markets in 2012.  We have stated over the last several months that we are “cautiously optimistic,” or “moderately bullish.”  There is no substantive data that suggests we should change this outlook (details at the end of the article) – but that does not mean that we believe the road ahead to be easy, particularly for investors.  Nor does it mean that we are wearing rose-colored glasses, or our cups are always “half full.”  It simply means that we believe we will continue to improve – with occasional interruptions – from where we currently are NOW.  We also believe that it will take years for the economy to fully recover – but recover it will.

Our Major Concerns at this time are:

European Debt Crisis and Likely European Recession – Some experts believe that the European recession has already begun. Recent data points indicate that Germany’s economy contracted slightly last quarter, and it is likely that other economies will soon follow.  As we enjoy a globally integrated economy, European recession likely means slowing economic growth in the US and difficulty in achieving meaningful returns in international markets.

Rising Dollar – As the Euro weakens, other currencies, (including ours) strengthen against it.  A strengthening dollar makes it more difficult for US companies to export goods and may make it more attractive for US companies to outsource jobs overseas.  However, a strong dollar does have the benefit of making US debt more attractive to foreign investors looking for security.

Political Stagnation – The past 2 years have been a display of an embarrassingly dysfunctional government. Unfortunately, with 2012 being an election year, we believe it unlikely that any real policy change will occur until 2013 or beyond.

Overwhelming US Debt – this may be the most dangerous long-term economic issue we have to face. At some point, we must face the inevitable belt-tightening that will be necessary to keep the US afloat.  Either government spending must decrease, or taxes must increase – or both.  Neither option is good for the economy or financial markets.

The Fed is Out of Bullets – The Fed has reduced interest rates to the lowest that we have ever seen, and pumped trillions of dollars into our economy trying to stimulate economic growth.  However, the damage done to the economy during the Great Recession was so severe that most of the Fed’s actions served only to limit damage – not to create the opportunity for recovery that we were hoping for.  At this time, it appears that the Fed is nearly out of ammo and has few options left.  Fortunately, inflation has not been severe; if it were, the Fed would be forced to raise interest rates again, which would slow economic growth even more and investors holding bonds would see the market values of their bonds decrease.

US Consumer Belt-Tightening – A large part of our economy is based upon the American consumer.  While it is a bit embarrassing to say that our economy runs on us buying things we don’t really need – it is partly true.  As more Americans learn that they can, in fact, live without many of these luxuries, these dollars no longer stimulate the economy.  On a personal level, a reversion to thrift is positive and one that we wholeheartedly support.  On an economic level, however – especially as a service based economy, consumer thrift forebodes even slower growth than previously hoped for.

Rays of Hope and Sunshine

Receding Unemployment – ever so slowly, and certainly not in a straight line, unemployment figures are receding. This is a fact; there are jobs out there to be had.  Many are in small businesses where people are hired one at a time.  Some disbelievers say that unemployment is dropping “only because discouraged workers have given up looking for jobs.”  This argument is hogwash – new workers enter the job market on a daily basis, which offsets discouraged workers leaving or retiring early.  While the jobs may not be the premium top paying jobs that were available before – they ARE indicators of economic expansion from where we were two years ago.

Increased Home Sales – According to the most recent National Association of Realtors (NAR), housing sales appear to have stabilized.  Total housing inventory fell from an 11 month supply to a 7 month supply during 2011. Housing starts and permits are increasing, albeit slowly.  As the housing sector directly impacts over 17% of the entire US economy, this news – however tepid – is hopeful.

US Corporate Profits – US corporate profits are at a high not seen since before the tech-bubble crash.  While much of the profit results from cost-cutting, it is still meaningful. Increasing profits mean that most of the major US firms are on a solid fiscal footing, and are in a much better position to pay attractive dividends to shareholders and fund future expansions.  From a yield perspective – high quality stocks are now more attractive than bonds at current levels.

Improving Manufacturing Data – The December Manufacturing Institute for Supply Management (ISM) Report topped expectations with the factory sector barometer (known as the PMI) increasing to the best level in six months. The raw data of the PMI also indicates that the manufacturing sector has grown for 29 consecutive months, which is generally a good indicator of the future direction of the economy. ALL 3 major US automakers reported profits for 2011.

What to do?

“Buy Low, Sell High.”  We all know this.  Yet, many people are only comfortable investing when the economy is humming along smoothly and all the news is positive.  Unfortunately for these emotionally driven investors, periods of economic boom are often the most dangerous times to invest, because by then, markets are usually overvalued. (Buy High, Sell Low).  Remember – when everyone is already invested, there are no new investors to bid prices up further.  Being invested in portfolios designed to your personal risk tolerance – especially when markets are undervalued – has been proven to be a key to long term investor success.

Typical Bear Market Behavior

For the last 100 years, based upon a study done by Morgan Stanley in 2009 called “The Aftermath of Secular Bear Markets,” major bear markets typically behave as follows.  (Dates for our current bear market in parentheses).

• Market Crash/Bear Market: -56% for 29 Months, on average (Oct 2007 – Mar 2009)
• Rebound Rally: +70% for 17 Months, on average (Mar 2009 – Apr 2010)
• Mid Cycle Correction: -25% for 13 Months on average (Apr 2010 – Aug 2011)
• Trading Range: Sideways (but slightly UP) with 15-20% whipsaw behavior for 5.6 years, on average (Aug 2011 – ?)

Our current bear market appears to be slightly shortening the cycles, but, in light of current political dysfunction and the European Debt Crisis, we believe the “trading range” portion of the market cycle will likely last several years at a minimum.

For 2012, we believe the following:

• Markets will continue to be choppy, sometimes uncomfortably so
• We DO expect to see some growth out of stocks, but not particularly impressive growth
• Larger, dividend paying stocks should play a large role in the equity portions of portfolios (as compared to mid- or small-cap stocks)
• US markets will be less volatile, and return more, than developed international markets. Emerging Markets will suffer from the European recession.
• Interest rates (and bond prices) will remain relatively stable
• The US Dollar will strengthen compared to the Euro

Our suggestion is that investors focus on other issues over which they have control:

• Maximize IRA, 401(k), Roth, and other retirement plan contributions.
• Reduce debt wherever possible.
• Cut back on unnecessary luxuries (cook at home more, examine utility bills, etc).
• Examine opportunities for mortgage refinance or other strategies to lock in low interest rates.
• Closely examine your tax strategies (Roth Conversions, capital gains realization, business sales, etc) to include the expectation that taxes will be higher in future years.

While this list is certainly not exhaustive, it is a good place to start.  If we can offer you assistance in making the decisions necessary to maximize your odds of success during these uncertain times, please don’t hesitate to give us a call.

This blog article is for informational purposes only and does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.  PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.  http://www.WealthGuards.com

Any financial planner who’s been helping clients plan for, or live, in retirement will tell you that a discussion on longevity can be an interesting conversation. There is no topic which has caused as many clients to outright laugh in my face when I tell them our standard planning assumptions as this one. You see, a financial planner’s job would be quite easy – an exercise in mathematical computations alone – if only a client could reliably provide one critical piece of information: how long they are going to live. Sometimes I joke and ask my clients to look into their “personal crystal ball” and tell me what they see there in regards to their own longevity. In response, sometimes they squirm, sometimes they get real quiet, other times they won’t even give me a straight answer. It seems the idea of talking about this critical piece of information – how long we’ll live – or its inverse – when we might die – can be quite the taboo subject.

At times people comment that “young people” – a term that’s always a relative description, of course, don’t have difficulty talking about this subject because the young believe they are invincible, thinking they’re never going to die. I have had this comment said to me by 60’s-something clients a few times as well. Perhaps it would be helpful to explain my outlook on this topic, so my attitude won’t seem cavalier, ignorant, or insensitive.

At the age of 38, I have only one grandparent left. The first died at age 52, a few years before I was even born. The other two both passed at their age of 65; I was about age 16 at the time. All three of them died from “the big C”, or Cancer, for those of you not acquainted with the term. I have an aunt and an uncle (one on each side of the family) who died in their 50’s also, from the big C as well. My remaining grandmother is going strong at age 81, showing signs of being around for years to come. She ballroom dances competitively, just retired (for the third or fourth time) last month, and is someone whom I’ve long told friends has more energy than two of me – a feat I can’t fathom since she only sleeps 3-4 hours per night. She is the role model I aspire to and I hope I’ll be blessed with her presence for a long time to come. Despite what I sometimes think of as “bad genes”, my parents, too, are thankfully quite healthy. They are conscientious of being so in their lifestyle choices, which I have long believed helps them overcome their own parental genetic history.

But given the grandparent longevity, or lack thereof, and given the fact that I personally have a chronic illness I was diagnosed with two years ago which will be with me the rest of my life, I unfortunately cannot claim to be one of those people with expectations to live to 100. I haven’t ruled it out, believe me; I am going to try, especially since my condition isn’t one that usually leads to significant implications on mortality. However, I think much in the way that clients in their 60’s sometimes realize there might statistically be only 20 or so years ahead of them, I too have to factor in that, at least based on three of my direct lineal relations, I may have way more time behind me than in front of me.

So from that perspective I stare, head on, with clients, into the reflecting pool of longevity, realizing one absolute: that none of us can escape the eventual fate of having a finite longevity.

How can an individual doing retirement planning think about the issue of longevity? What factors should they consider, and once they do, how should they use that information? What are the impacts longevity – good or bad – plays on the retirement planning? These are the questions we must discuss when considering this topic.

Longevity Factors to Consider

When it comes to factors to consider in deciding a longevity assumption, there are three major items that come to mind:

1) Family history
2) General statistics
3) Personal lifestyle choices

When I talk with clients, we generally talk through these three items. I’ll ask them how long people in their families tend to live. The answers range widely: some people will say no one’s ever lived beyond the age of 75. Others will tell me they’ve got four or five immediate relatives at or near age 100. Many will tell me one parent’s side of the family lived long lives, and the other side lived short or average lifespans. Only when the answer is at either extreme does it really provide any clear planning decision.

Next, we discuss general statistics. In the United States, at present, a 65-year-old man can expect to live to age 82.1; a 65-year-old woman to age 85.(1)   However, ethnicity, race, and country of origin do play roles in this discussion. World-wide, the United States is 36th in terms of life expectancy, with an average life expectancy from birth (not gender specific) of age 78.3. By comparison, the Japanese have the longest longevity, with average non-gender-specific longevity from birth of age 82.6 – more than four years greater than the average American. Countries including Australia, Canada, and the UK are all ahead of the U.S. on the longevity scale.(2) Regarding race, in the United States the average Asian-American has the longest life expectancy at 84.9 years. After that, the average Caucasian has a life expectancy of 77.9 years, the average African-American 72.9 years, and a Native American’s averages 72.7 years. This is a span of more than twelve years’ difference between the various racial groups.(3)

But beyond statistics and even family history, one’s personal lifestyle choices likely have a tremendous influence on longevity. Do you regularly jump out of airplanes and race motorcycles without a helmet, or are you a person who prefers a safer, less adventurous lifestyle? How’s your diet and nutritional intake? Do you get regular exercise? Do you see your dentist and doctor regularly? Do you manage your stress? We could spend hours and pages on these items and each of their likely impacts on our life and longevity.

But do those theories always prove to be true? We all occasionally hear about a little old man who lived to age 104 who smoke, drank, and gambled all his life. Sometimes, the crystal ball is fuzzy and you just never know when the end will be.

How to use Longevity Considerations in Retirement Planning

After exploring issues of family longevity, statistics, and personal lifestyle with a client, I like for us to decide together what longevity they feel is realistic to use. As planners, we start with a baseline assumption of age 95, adjusting upwards for those clients whose families demonstrate a proclivity for age, or those clients who want to assume a longer age as a safeguard. But, for those clients who would prefer to use a shorter longevity, I always caution them that doing so, and then living “too long”, could cause undesirable consequences.

You see, here’s the importance of longevity in retirement planning: the longer you live, the more money you are going to need because of the compounding effects of inflation on expenses over the long term. Here’s a simple illustration of what I mean:

Longevity to age 95 versus Longevity to age 85:

In the fact pattern illustrated above, keeping all other facts, figures, and assumptions the same, the top chart – longevity to age 95, shows the likelihood of a significant spend-down in assets. The bottom chart, longevity to age 85, on the other hand, seems to indicate that the client is never dipping into principal. In fact, their portfolio would be projected to grow and be larger at death than it is at present.

Now, extrapolate that into trying to advise a client on how to spend their money in retirement and invest: with the forecast at the top (to age 95), I would be counseling my client to be prudent with their expenditures over their lifetime, realizing that investment returns are just as unpredictable as longevity. What if the client on the left has unforeseen increases in costs due to medical events, or the need for long term care? If these aren’t included in our current planning, running out of money might well be within the realm of possibilities.

Advising the client with the projection at the bottom (longevity to age 85), however, might cause an advisor to tell the client they can likely spend more money than they currently do, should consider gifting strategies over their lifetime, endeavor tax and estate planning techniques that will mitigate the likely increase in taxes that is coming from this future forecast of an ever-growing portfolio, or invest much more conservatively because it looks like they’ll have plenty of money no matter how long they live.

See the drastically different advice that comes out of one seemingly small assumption?

How to Decide Which Assumption to Use

Generally, the only clients I’ve met who can provide me their longevity with reasonable predictability are those whose longevity is relatively short, often from some terminal illness now beyond their control. For everyone else, sooner or later, a choice of assumption must eventually be made. I tend to see three schools of thought clients use to decide:

• Conservative approach: Use a long life expectancy, even beyond what might be reasonable for them personally, because not running out of money is more important to them than the financial flexibility a shorter life expectancy might provide.

• Moderate approach: Assume an average, or even slightly longer than average, life expectancy, to account for the majority of likely longevity implications. Act according to those results. If money runs out, have a contingency plan (ie- the kids will have to take care of me), but have an expectation that the contingency probably isn’t necessary.

• Aggressive approach: Some clients want to spend it all. Sometimes I hear people say, “I want my last check to bounce.” They may request the most aggressive (short) life expectancy assumptions, even if their family history and personal circumstances would indicate otherwise, because their intent is to spend down assets. Sometimes they have a backup plan if there’s more life than money; other times they think they’ll figure it out if and when they get there. Personally, as a planner, I like this method the least. I encourage against it and I document like crazy as a future CYA measure in case the worst does come to pass.

But ultimately, which approach will prove right? Truly only time will tell. Until it does, here are three mitigating suggestions:

Mitigating Suggestions

1) Use different longevity assumptions and see what the planning outcomes are for each. This approach can be helpful if you’re really not sure which assumption to use. At least then you can know the results and begin to get a sense of different outcomes. Doing so might also help you with other actions you need to take, regardless of deciding a specific longevity. For example, if you want to invest really conservatively in retirement for fear of market volatility, but doing so means you only have enough money to age 70, you may instead want to consider working a bit longer so that you can give yourself the freedom to invest the way you are comfortable. In this example you don’t need to decide a longevity, because the planning assumptions you are using make the other decisions for you.

2) Use a blended spending strategy in retirement. People who aren’t retired often see retirement as this one large life event: you retire and that’s it. Retirees will tell you that retirement is often a more complex life event. In fact, today four stages to retirement are recognized:

a. Newly retired (first 6 months): discovering who you are without your work world identity
b. Recently retired (6-24 months): exploring all the new hobbies and ideas you may want to pursue as you enjoy retirement
c. Retired (2 years – 20 years): Life as a retiree has developed a routine; enjoyment of the lifestyle chosen occurs in this phase
d. Late Retirement, Elder Issues: Life slows down considerably as age and illness related issues often occur

As financial advisors, we often see that clients might desire to spend a greater amount of money when they first retire as they are exploring the newness of retirement. Once the explorations have occurred and a routine develops, expenditures may slow down until later when elder issues enter the picture and raise costs again. A financial plan can account for these different spending levels, if planned in enough detail.

3) Revisit your longevity assumption periodically. This is actually a recommendation I’d make no matter what the planning scope is. Planning – financial or otherwise – inherently requires assumptions. Assumptions are, by their very nature, just guesses and are sometimes wrong. Revisiting the longevity assumption you make over time can be very helpful. If a client chose to use a short life expectancy upon initially retiring, but now realizes there might be many more years ahead, they may be able to alter course to continue a comfortable retirement. If a client chose a long life expectancy but has developed a health issue that changes that forecast, they might decide it’s time to accelerate spending or gifting their assets.

Choosing one’s longevity assumption can be interesting, thought-provoking, or even sometimes scary. In my mind, though, there’s only one thing scarier – making no assumption at all, having no plan at all, and then hoping the results are ones you can live with.

Footnotes:

1 National Vital Statistics Report, Volume 56, Number 9, December 28, 2007 U.S. Department of Health and Human Services, Center for Disease Control and Prevention (CDC). Year 2004 data.

2 Wikipedia: http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy

3 “Health News: Race, Income, Geography Influences US Life Expectancy”, by Tom Harrison, 9/12/06 http://health.dailynewscentral.com/content/view/0002418/42/

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.  https://www.WealthGuards.com

Over the last few weeks I’ve spoken to several people that asked me how I can stay positive in the current financial/economic/political environment.  I could say that in large part it goes back to my days in military school where so much of my life was unpleasant and out of my control.  I had no way to affect the mood my platoon sergeant had in the morning and if I constantly spent all of my time worrying about what might happen to affect his mood not only would I have been miserable I wouldn’t have been able to get anything accomplished.   Ultimately, I determined that the best way to get through each day was to focus on what I could positively affect and roll with his moods as they came.  Did they affect my outlook occasionally?  Sure they did.  But I didn’t change my ultimate goal for being at the Citadel because he happened to be having a bad day.  I tolerated the short term pain he dished out and kept my eye on preparing for graduation and beyond.

THE ISSUES

Now I will grant you that the issues we are all facing in the news and in the financial markets may seem considerably more daunting than what I faced in school, but the mental outlook and subsequent successful actions really aren’t that different.  When I ask how people are feeling right now, much of the time I hear comments about the European debt crisis, the gridlock in Congress, the roller coaster ride that is the stock market or one of a number of political issues.  These are all issues that are completely outside their direct control and yet these issues are affecting how they live their daily lives.  They find themselves obsessing about the news they are seeing in the media,  and tend to devote an inordinate amount of time to discussing and debating these issues with their friends and colleagues.  Each of these people have unique challenges in their daily lives and long term goals that they can affect — but they aren’t because they’re “too busy” worrying about things beyond their control.

GET A PHILOSOPHY

Financially speaking – if you find that you are getting caught up in the daily media hype, what’s the first thing you need to stay focused on the long term?  A Philosophy!  Many investors just put their money away in their 401(k) plan and “hope” it will grow over time, but they have no philosophy to guide them to success.  They just pick the fund that has the best rating, or performance over the last year or 5 years or ten years – and stick their money there.  Ultimately, the result is that they are at the whim of the markets; consistently frustrated by mediocre performance.  In many cases they feel as if they’ve been treading water and making no headway towards retirement for years.  Having a long term investing philosophy helps investors temper the legitimately poor news regarding the economy and stay focused on a disciplined long term approach.  This gives the investors with an investment philosophy a higher level of emotional control.

CONTROL WHAT YOU CAN

Control what you can.  The primary benefit of having a philosophy is that it affords you the mental preparation required to control one of the most natural – but hardest to control instincts  – the need to “DO SOMETHING.”  This feeling, this urge – is the instinctive “fight or flight” response that is hardwired into every human being.  When the news gets bad and you’re watching your retirement accounts decline, the first reaction is to stop that pain as soon as possible, which in many cases means jumping out of the markets at the worst possible time.  Unfortunately, the mediocre results most investors have achieved over the last decade can be laid at the feet of this basic instinct.  Choosing an investment philosophy, and most importantly sticking to it, will allow you to control your emotions and maintain a coherent investment plan.

BENEFIT FROM THE “DO SOMETHING” INSTINCT

There is even a way to channel that basic instinct to “do something” into activities that may be positive for your financial future.  Instead of dwelling on poor market returns, take the time to make sure all of the other components of your financial house are in order.  Do you have a current estate plan?  Is it up to date?  Do you have room to save more in your budget?  Are your emergency plans in place in case something happens to one of your family members?  Answering these questions and correcting any deficiencies in those areas is a great way to feel like you’re having a positive affect on your financial future even in times of market turmoil.

SET A PERSONAL GOAL

Another way to keep those emotions in control so your investment plan can benefit from a long-term philosophy may be to set a personal unrelated goal.  Perhaps deciding to run your first 10K or half marathon is the answer.  Maybe lose those 10 lbs that have been bothering you… or learn a new language so you can benefit from your future travels that might be possible from your successful investment philosophy.  Whether it is a fitness, diet or educational goal is less important than positively occupying yourself, accomplishing something new, and achieving personal growth.

REMEMBER THAT BAD NEWS SELLS

A positive mental outlook isn’t always the easiest thing to maintain especially during times of crisis.  I can tell you that I have been guilty of  being “Grumpy” recently and that has inspired me to write this blog.  There are ways to “do nothing” and have a positive impact on your mental outlook.  Turn off the media when looking for good news, instead spend some quiet time with family or friends.  The tone of the news coming from the media will change over time - but one thing is likely to remain the same:  Bad news sells.  The media will always sensationalize bad news because that’s where the money is.  So don’t obsess on the news you don’t like but can’t change directly; instead use the opportunity to hone the life skills that you need to be a better investor.

This blog post is for informational purposes only.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.

It does not seem to matter who the potential investor is – whether they are already retired, are nearing retirement, or are a younger person with quite a bit of time until retirement… the question is often the same.  With interest rates being so low… with the markets unpredictible and volatile – what should I do?  The questions aren’t even really so straight forward as, “why should I invest my money now,” or “should I pay off debt first,” or even any of the other questions that, as a financial advisor for more than 15 years now, I’m used to getting.  The questions I am hearing now seem to have taken on the tone of confusion, despair, and a lack of direction, versus the questions I used to get such as “how should I invest,” or”what type of account – a Roth or a traditional IRA – should I have?”

Yesterday, when talking to a rather successful, nearly retired client on the telephone, she mentioned that she feels that she always has to take two steps backward for every three steps forward, and ideally, she would rather not see her account fluctuate at all once she retires next year.  “Isn’t there just something we can do with our money to earn a steady 6-8% or so with no risk?”  Unfortunately, the answer is NO.  While there might be many product salesmen out there who will try to convince you otherwise – the answer is still NO.   If there were -then all the institutions and large organizations in the world, who spend millions and millions of dollars trying to find or design such assets would have already found them.  A classic example of people and institutions trying to get outsized returns with no perceived risk is the recent mortgage debacle, and we saw how that turned out.

So – back to the original question – With the Economy on shaky footing (to say the least) and with the markets being… unusually volatile, to put it lightly – what should I do?

To answer this question, I had to turn to the history books, tenured academic research, and even some new research – but I think I found the answer.  Do EXACTLY what you have been told to do throughout the years.  Live below your means – save a portion of your income (assuming you are working and saving for retirement) and invest in a fully diversified portfolio designed specifically for your risk tolerance.  In fact – it is having the GUTS to invest during times like these that separate the winners from the… folks who wish they had as much money as the winners.

Last year, Dimensional Fund Advisors tapped into the database held at the Center for Research in Security Prices (CRSP) at the University of Chicago – the nexus of more Nobel-Prize winning research in economics than any other institution on the planet - to identify IF there was a direct correlation between a poor economy (as defined by low GDP) and poor investor returns.  In other words – SHOULD I STILL INVEST IN A CRAPPY ECONOMY?”

The Dimensional Study started by taking all of the world’s developed economies, examining their annual GDP growth from 1971 – 2008, and dividing them into two groups – High Growth, or Low Growth – for each year.  Clearly, much of what we hear on the news is about GDP growth - is our economy growing or not?  The higher the economic growth, the better – as this means reductions in unemployment, increases in personal wages, and, generally, a feeling of well-being, versus the cloud of general malaise that seems to have decended upon the world as of late.

Once the economies were divided into High Growth and Low Growth – the performance of their stock market indices was compared to their GDP Growth.  The question:  Does a poor economy (low GDP Growth) accurately predict poor investor returns?  The question was not – can an investor perform poorly during low-growth times (of course, we know that is possible) – but is there a clear and determinable correlation between a bad economy and a bad investor experience?

Oddly enough – the answer is NO.

                              AVG GDP                      AVG RETURN              Risk (Std Dev)

High Growth               0.92                             12.90%                          23.07

Low Growth               -4.02                            13.52%                          23.04

The data for Emerging Markets was similar, but quite honestly, the data for Emerging Markets only went back to 2001, and I felt this was just too short a time period to draw any reasonable conclusions.

When I first saw the data, I thought… well… this might be a sales pitch just to keep investors invested… we are still looking back only as far as 1971.  What about other periods of lousy growth?  And what about for the US in particular?  I wanted to check the data myself.  So, I delved into the CRSP database myself, using the French and Fama indices that go back as far as 1926, and to the Bureau of Economic Analysis (BEA.GOV) and compared hypothetical investor returns to the GDP growth (or lack thereof) during the 1970′s and during the Great Depression.

One particular period of interest to me was the years from 1972 to 1982.  Yes, this was after 1971, but I wanted to look at it further and in more depth from a portfolio manager perspective instead of just looking at the stock market.  How did it feel?  Remember the oil embargo?  Our defeat in Vietnam? The Cold War?  Carter’s “Misery Index?”  Double Digit Inflation?  During this period of time, the average GDP Growth was only 2.7% – well below the historical average of 3.4%.

The second period of interest was the period of the Great Depression.  Now the Great Depression itself lasted from 1929 to 1941 – but for this particular exercise, I wanted to look at the period starting about 2 and a half years AFTER the crash – starting with the summer of 1932 until the attack on Pearl Harbor, or December 1941 – the long, grinding years of the Depression.  During that period of time, our average GDP Growth was only 2.0% – the longest and weakest period of below-average growth on record for the United States.

My question was – how could today’s investors, using a properly designed, diversified portfolio,  have done during that time?  Were these two periods of time – arguably the worst periods (economically) in the past hundred years – a bad time to be invested?

Assume a relatively simple, domestic portfolio:  T-Bills (15%), 5-Year Treasuries (15%), US Large Stocks (11%), US Large Value, or underpriced, dividend paying stocks (21%), US Small Value Stocks (18%), US Small Stocks (10%), and Very Small, or Micro-Cap Stocks (10%).

Looking at the indices only (remember – there were VERY few mutual funds at the time of the Depression, and certainly no ETF’s,) we can get an idea of how an investor might have done.  The following numbers do NOT account for any fees, commissions, taxes, etc – but we can still draw conclusions.

From the period of 1932 – 1941, the above, simple, diversified portfolio (indices only) would have achieved an AVERAGE ANNUAL return of… wait for it… 19.29%!!  In fact one dollar invested as described above in the summer of 1932 would have grown to about $4.50 by December of 1941.  During the Great Depression!!

From the period of 1972 to 1982, the above, simple, diversified portfolio (indices only) would have achieve an AVERAGE ANNUAL return of… 14.82%!!  One dollar invested as described above in December of 1972 would have grown to about $3.49 by December of 1982.  During the Carter Years and the Misery Index!!

Were there periods of volatility, market corrections, and even stagnation in the investor’s portfolio?  Absolutely – in particular, a sharp market correction in 1936 would have scared out many undisciplined investors, and a particularly unpleasant 18 month bear market from 1973-1974 would have tested investor mettle.  But the facts remain – a fully diversified, properly balanced investor would have been able to achieve significant returns during those times.  In fact – there are a number of economic theories that suggest that investors who have the GUTS to invest (and remain invested) during these uncertain times are the ones who enjoy the GREATEST rewards.  These are the riskiest, most emotionally draining times to invest – as a result, the Capital Markets reward those investors more readily and more predictibly than the comparatively “timid” investors who only remain invested during the “good” times.

Today, the Fed and the International Monetary Fund (IMF) are projecting the US economy’s GDP growth to be about 2.7% for the next two years.  The media harps daily on the miserable shape of our economy, and politicians are using the economy as opportunities to further their agendas.  These are things that we must endure as a people, or change with our votes.

However – it is critical to SEPARATE our concerns about the economy – from our own INVESTMENT POLICY.  The two are NOT necessarily correlated.  A miserable economy – historically – does NOT mean miserable returns for an investor who is disciplined, creates a sound, diversified, low-cost investment STRATEGY with strict risk controls, and then implements it with courage and discipline.  In fact – it is EXACTLY these types of investors who have historically been the winners over the long term.

___________________________________________________________________________

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

by Michelle Ash,  CFP®, CDFA™

As I start to write this article, I feel like maybe I should give readers a caution like you see at the start of some TV shows:  “The program you are about to watch contains disturbing images. Viewer discretion advised.”  This message is important!!!, but the telling of it isn’t necessarily going to be pretty.

Recently I have had the opportunity to experience a new phenomena in my career.  In the past couple of months, much by happenstance, our firm has had a number of younger individuals engage our services.  By younger, I mean they are generally of or near my own age demographic:  late 30’s to mid-40’s.  These individuals have generally been contemplating their future retirement, among other financial goals, and have hired us to put together a retirement plan to see how they’re progressing on that path.

Previously, our firm has primarily worked only with individuals ages 50 and above, who are often in what I call the “final chute” towards reaching retirement.

I have long observed the unpleasant circumstances that loom ahead for individuals who have not planned and saved well for retirement.  But since I was usually seeing those individuals at or near the age at which they had hoped to retire, I wasn’t necessarily able to understand what decisions might have led to their current status.

Having the opportunity to work with individuals who are twenty or even more years away from retirement, I can see the habits that cause success, or prevent one from achieving it.  In the process of that observation, I am also noticing an extremely disturbing trend.

The issue is this:  I notice a general assumption that contributing the maximum funding to one’s 401(k) plan is all that really needs to be done to fund a retirement.

Now, I realize and agree that for some people, getting to the point where they can actually save $15,500 per year of their salary, the current maximum funding allowed for an employee under age 50, is a fabulous goal in and of itself.

But what bothers me is when I see individuals or couples making $150,000 per year, $200,000 per year, sometimes even more than that, and they think that just maxing their 401(k) is all they really need to do in order to be able to retire at age 60, live a long retirement, and have a lifestyle largely commensurate with that they currently live.

I guess I just have one thing to say to these people:  WAKE UP.  You are living in a fantasy, and if you stay there, the reality you are faced with once you get to retirement is NOT going to be a pleasant one.

Let’s run what I’ll call an “average” desired retirement.  It’s a standard many clients describe to me as “comfortable” but is certainly not lavish by most accounts.

• Retire at age 60
• Have $48,000 per year for expenses and budget needs (in today’s dollars)
• Have their house paid off by retirement
• Dollars for Property taxes, homeowner’s insurance, health insurance, and Medicare supplements are extra expenses above the base $48K
• Spend an extra $5,000 per year on travels or other hobbies while healthy
• Upgrade their vehicle every 7 years or so
• Have enough money to cover emergencies, home repairs, and medical emergencies
• Have enough money to last the rest of life no matter how long that lasts

After factoring in inflation, this scenario results in retirement costing approximately $96,000 in year one and $346,000 in the final year (assuming death at the age of 95).  Imagine if, just like going out to eat where your waiter hands you a final bill at the end of the meal for all of the different courses you ate, someone were to hand you the bill for your retirement at the very end of it.  If someone were to add up year by year the total cost of this retirement, the “number” that would result would be $8,905,800. **(Assumptions are listed below.)

Have you ever seen that commercial where people are walking around carrying their retirement “number”?  I have heard many people say they’ve been frightened by the size of some of the numbers.  Guess what – unfortunately those numbers can be very real!

Fortunately, there is a potential income source to help offset that need:  social security.  (As a sidebar, the cynical Gen X’er in me wants to say “yeah right, like we can count on that!)  We’ll assume there is no pension income, since a majority of Americans today, particularly younger ones, are no longer eligible for corporate pensions.  Using current rules, social security would account for approximately 39% of the overall need mentioned above. **

But that still leaves us over $5 Million dollars of future money needed in retirement that is unaccounted for.  This is not, of course – the “number” that needs to be accumulated prior to retirement, since accumulated dollars will likely earn a return during retirement.  However, it does accurately reflect the total likely cost of retirement – and can give insight to the size of the number which would need to be accumulated prior to retiring.

Let’s assume our hypothetical family has already saved $100,000 in 401(k)’s, which is the average amount we tend to see amongst individuals around age 40.  Solving this equation to determine how much money this family needs to save from this point forward, from age 40 until retirement at age 60, results in needing to fully fund each of their 401(k)’s at $15,500 per year each, PLUS save an additional $1,445 per month, or $17,340 per year.

Is this possible?  Especially if this requires them to save a good bit more than the maximum contribution allowed for most employer plans, it requires getting serious about their financial goals – and doing something about them – or… accepting something less.  Many people don’t like to hear advice like that, but please understand that it is not a judgment – it is just math.

I realize that at this point, some people reading this article might just want to throw in the towel and give up altogether.  As I said earlier, for many people, just getting to the point of contributing the maximum amount to a 401(k) can be a great goal.  I do not mean to diminish that accomplishment.  Ultimately, any savings you do will be better than nothing.  But what I do hope to do is cause people to realize that it takes a lot of hard work and a lot of saving to get to the point of a comfortable retirement.

With that in mind, my general suggestion to people working towards retirement, regardless of age, would be to save, save, and then save a little more.  That, or work with a CERTIFIED FINANCIAL PLANNER™ professional who can help you determine what your actual “number” is, and then make sure you’re doing everything you can to achieve it.

Expense Assumptions: 

• Inflation rate 3.71% based on last 80 years’ historical data.  (Source:  www.emoneyadvisor.com)

• House is assumed to be paid off prior to retirement.
• Property taxes and homeowner’s insurance = $5,000 per year, inflating from today at 3.71%
• Travel/Other Hobbies Budget of $5,000 per year inflates from today at 3.71% and ends at “advanced age” of 82 when many seniors no longer travel or pursue other hobbies as much.
• Car upgrades begin in year 3 of retirement, occur every 7 years, and cost the equivalent of $20,000 today inflated at 3.71%.
• Age at death = 95 for both spouses
• Emergency savings, home repairs, and medical emergencies not accounted for since they are not quantifiable in this fact pattern.

Income Assumptions:

• Social Security income is drawn at age 62 for both spouses.
• Benefit amount = $18,960 per spouse, based on earnings that equal or exceed the current earnings cap of $106,800 throughout both spouses’ entire working history for 38 years (age 22 to 60).  (Source:  www.ssa.gov)
• Inflation rate of 2.5% assumed on social security benefits, since Social Security benefits have not historically kept up with the rate of inflation.
• Both spouses are assumed to live until the age of 95, meaning the family receives both social security incomes throughout retirement.

 Additional Savings Needed Assumptions:

• Rate of Return = 7% annually.  This 7% is a mathematical figure, is hypothetical, and does not represent the returns of any particular investment or product.  Rate of return is applied to both existing accumulated dollars and future invested dollars.
• Starting investment assets accumulated equal $100,000 in 401(k) plans.
• Need reflected ($17,340 per year) is a total additional savings need , above 401(k) contributions of $15,500 per spouse ($31,000 total combined).  Total annual savings needed is therefore $48,340.
• Investment time horizon:  Age 40 (current age) to age 95 (age at death).
• Assets accumulated are assumed to be fully invested for the full lifespan of our hypothetical couple.  Both income and principal are consumed to meet retirement needs.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

by Michelle Ash, CFP®, CDFA™

Imagine this:  a husband and wife learn that the wife is probably going to pass away in the next few months due to a terminal illness.  While dealing with their grief and trying to enjoy their remaining time together, they also try to prioritize putting financial affairs in order so that the husband has less to deal with after her death.  He will be busy learning to be a single dad to their young children, and helping them cope with the loss of their mother.  Avoiding the hassles of probate and any other avoidable financial issue is a high priority to them.  They meet with their financial advisor, discuss their situation, and ask him to help them make sure everything is in order.  He takes a brief look at things and assures them that all of the accounts he handles will be transferred with no problems.   Unfortunately, the advisor overlooked the fact that the two taxable accounts he manages were not in joint name of husband and wife, but rather were only in the wife’s name.  The couple took the advisor at his word, only to find out later that he was incorrect and assets that should have just simply transferred to the husband would now be tied up in the legal process of probate.  Months later, the husband still awaits the process to be complete.  Adding insult to injury, probate assets are not available to any heirs until probate is finished, so the husband has to go without this money that would otherwise be very helpful to him until probate is done.

A recent blog reader posed the topic of this particular post:  “Should my financial advisor meet with my will lawyer to make sure everything is okay when I die?”

After reading the story I just shared, which is unfortunately true and was told to me by a recent new client to our firm, I have to say that my general answer to this question is – YES, there should be coordination between your financial professionals and your estate planning attorney.

Does this mean that every financial planner should be going with every client to every discussion about a will, trust, power of attorney or any other estate planning document?  Not necessarily.  But it is important to realize that when you spend the time and money making your estate plan, you might as well take the next step and make sure that the estate plan is going to actually be effective once it needs to be.

Components of a basic estate plan

Let’s stop for a moment and define what I mean by an estate plan.  Generally, every adult’s estate plan should consist of a Last Will & Testament which documents what happens to your possessions when you die.  Your estate plan should also probably include ancillary documents such as a health care power of attorney, living will, and durable power of attorney.  These ancillary documents are things that come into effect in the event of your incapacity, not your death.  You might think that incapacity would be pretty rare, but what if you were in a bad car accident and unable to make health care decisions for yourself for a few days?  Who has the authority to do that for you?  A health care proxy (also called health care powers of attorney) can direct who has that authority.  A durable power of attorney indicates who you authorize to make financial decisions for you.  A living will indicates the conditions under which you want to be kept alive if you are either in a persistent vegetative state or end stage of a terminal illness.

Many people hear the term “estate planning” and may think “I’m not wealthy enough to need estate planning.”  True estate planning, however, is about a broad range of issues, including health care (and spending of assets for it), children fighting over money, second marriages, caring for elderly parents, and multigenerational relationships, among other things.  Consequently, these are issues that can affect all of us, not just those one might deem as “wealthy”.

Having the documents isn’t enough

Clearly in my example the couple did make the effort to ensure their estate plan would be carried out as they wished.  Perhaps involving the estate planning attorney, however, could have helped the couple know for certain what items needed to be addressed prior to the wife’s passing.  Perhaps the financial planner and the attorney could have worked together to make sure the planner was clear on what changes needed to be made.

Estate planning work is often extremely complex.  Many individuals develop one or more trust documents to go along with their will.  Some people own businesses and have buy/sell agreements and other contractual arrangements that will take effect in the event of their death.  Every professional has a specialty and while many financial planners have some degree of experience or expertise in the area of estate planning, the ultimate authority on how to carry out the client’s legal wishes after death is the attorney.

Recommended action plan 

My suggestion and full answer, then, would be as follows:

1) Hire an attorney who specializes in the area of estate planning in your state.  Just like a general practitioner doctor is not a brain surgeon, a general attorney is not necessarily a specialist in knowing all of the in’s and out’s of estate laws in your state.

2) Work with that attorney to develop an estate plan that addresses your needs.  It may be very simple; it may be complex.  Ultimately the design is up to the both of you.

3) Tell the attorney up front that you will want their help ensuring that all of the pieces of your estate plan are coordinated after they draft it for you.  It may cost you extra for this assistance, but what’s the point of paying for estate plan documents if they aren’t going to work?

4) Tell your financial professionals that you are updating your estate plan and want their help coordinating the pieces with your attorney.  Be sure to tell ALL of your financial professionals:  investment advisors, accountants, insurance professionals, even your bank, because each of them may play a role in proper coordination.

5) Many attorneys will draft instructions for you that you can take to the financial professionals, telling them what needs to happen.  If your attorney gives you these instructions, provide them to your financial professionals.  If the financial professionals don’t understand the instructions, disagree with them, or have something else that needs to be discussed, give all of the professionals and attorney permission to talk to one another.  You will likely have to sign disclosure forms allowing them to do so, but at least then you won’t have to be the go-between, trying to interpret what each is saying when there may be terminology you are unfamiliar with.

6) When you believe that all of the coordinations are done, let the attorney know what actions have been taken and ask them to check that everything is in good order.  You will likely need to provide the attorney with updated financial statements so they can verify the actions that were taken.  They may charge you extra, but here again, an ounce of prevention is worth a pound of cure.

In person meetings required?

Should these meetings and coordinations happen in person between the professionals?  Maybe; much of that depends on the complexity of your estate situation.  A large majority of what needs to happen can probably be coordinated by email or phone.  But if you have a large estate which will have a lot of complexity, it may be best to put all of the professionals in the same room.  This will allow them to brainstorm the possible solutions, pros and cons of each, and share them with you so that you can determine the solution that fits you best.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your attorney and/or financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

Do you remember watching the old classic movies where two guys get in a  fight over a girl and they head out to the quarry for a game of chicken?  If you do, you might see some similarities to what’s going on in Washington right now.  The difference this time, however,  are the consequences for all of us if neither one of them blinks.  The controversy in Washington is loud and filling the airwaves with political rhetoric and scare tactics.  And, if you listen to the media, there might be some potentially disastrous consequences if our elected officials don’t come to an agreement soon.  So we thought it would be helpful to analyze this issue, try to understand what is going on, then turn to the history books to see if something like this has happened before and how it turned out.

While the current situation certainly can be frustrating, it actually is the result of the checks and balances built into our constitution.  While the President can authorize actions and spending bills,  it is up to the Congress to actually finance them.  Right now there is a disagreement between house Republicans – who hold a majority, and the President on how much is reasonable to spend and on what.  Without going into the individual spending priorities for each of them and their merits, let’s just address the most basic elements.  The President would like to spend more and raise taxes to cover the current spending needs – while the house Republicans want to cut spending dramatically (~$2T over 10 years) with no tax increases.  Each side of the argument has valid points, but neither side seems willing to compromise enough to make a deal at this point.

In the press, we are hearing that if the debt ceiling increase is not approved then the US Government is going to default on its obligations.  What does that actually mean?  The most common things we’ve heard are that the government will stop paying soldiers, medicare benefits and/or social security benefits.  What does that make people feel?  “PANIC”!  Even worse, we hear there may be a full default on US treasury debt across the board.  More PANIC!  The news evokes a significant emotional response, with the intent of making the audience watch more of the TV news to see if anything has happened in the last 30 minutes to change the situation!   Can either of these scenarios happen?  Yes, but let’s put it in simpler terms to try to understand the entire issue.

Let’s say a husband and wife are looking at bills coming due over the next few months and realize they are coming up short on money in the bank, because of a combination of things (say, medical costs, car repairs and overspending on luxury items). The wife refuses to let more money go onto the credit cards unless the husband agrees to reduce spending.  He still wants to keep going out to eat and tells her she needs to get a second job.  Neither of them want to relent and they keep getting closer and closer to the date they will have to pay the bills and still no agreement to increase the credit card limit.  What do they do? Do they refuse to pay ALL of their bills across the board and shut down the household? Do they declare bankruptcy?  Or is it more likely they will decide which bills have priority, and which ones, if not paid right away, are least likely to cause permanent damage and delay paying on those?

This appears to be the most likely scenario.  For those who are watching the news and listening to the pundits spin out their theories for what disaster is looming if politicians don’t come to an agreement, you may be asking if this has happened before.   You don’t have to look too far in the past to see another example.  Many in the press will say this is unprecedented, and the particular doomsday scenarios vary from channel to channel,  but the November 1995 government shutdown was quite similar in nature to the situation we face now.  Let’s see if this sounds at all familiar.

1. The Republicans in Congress are unhappy with the President’s desire to spend more money on entitlement programs than they like.

2. The President is unwilling to cut programs to the level that Republicans want and is unwilling to sign a budget and debt ceiling increase that are presented to him.

It seems that in both cases you can substitute Bill Clinton and Barack Obama and voila!  Today’s scenario recreated.  In 1995 the buzzwords were “balanced budget” and now the focus is on “debt reduction”.  The basis for the stalemate may be slightly different and some of the facts are different but it is actually a close parallel to what’s happening today.  So what happened when the government “defaulted” in 1995?  They suspended all “non-essential” government spending until there was an agreement.  Each side played the media to the max – pointing fingers across the aisle and blaming the opposition for the entire flap.   The Federal Government did not default on interest payments, nor did the Government stop paying soldiers, retirees, Social Security, or Medicare.  Instead, they did furlough government employees in the Environmental Protection Agency, Forestry Service and Department of Health.  They closed buildings and public parks but continued to fund the basic services we need to keep the country safe and functioning.

Was it a comfortable time?  Not at all.  Many  people were affected, and for a period of time the populace really wondered how much worse it might get.  Did the US markets crash? No…they were virtually unaffected.  In some opinions, the government shutdown actually had the benefit of bringing spending back under control and getting us to a point of an actual surplus — even if it was only for a brief period of time.

My intent is not to disregard the potential financial impact that a deadlock between Congress and the President could create, but instead to point out that putting the current situation in a historical context can help us have a better appreciation for what might happen, and how it may affect our lives individually.  None of us can have a direct impact on the negotiations in Washington, but there are things we can do to sleep better at night.  First, it is important to be financially prepared for unforeseen and uncontrollable events.  Even government employees can have a problem with a paycheck not showing up on time, so make sure you have adequate short term savings to cover a few months expenses.  Second, make sure your investment philosophy matches your risk tolerance.  If you find yourself overly concerned with the short term market impact of a negative news story, you need to consider whether or not your risk tolerance is appropriate.  “Flip-Flopping” back and forth between an ultra conservative risk tolerance, and a more aggressive one – essentially letting the media yank your strings – is a recipe not only for financial disaster, but will likely cause ulcers and high blood pressure as well.  Having a good understanding of what your particular investment philosophy is and how much of the market fluctuations you are willing to tolerate – and STICKING TO YOUR PLAN –  is especially important for those preparing for, and enjoying retirement.

This blog post is for informational purposes only.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.

Jonathan N. Castle, CFP®, ChFC

The economy was in recovery; the bulls were stampeding through Wall Street, and for a few short months we had a general feeling that maybe – just maybe – all would be well with the economic world.  Then things seemed to fall apart – first we had a Tsunami and a potential nuclear disaster in Japan; then President Mubarek of Egypt was ousted, and then we started dropping bombs on Lybia.  To top it off, Greece will probably go bankrupt – if not soon, then certainly at some point in the future, and everyone in the US is wondering if that will be our own future if our brilliant congressional leaders can’t quit their squabbling and decide one way or another on our own budget deficit.  Do we simply raise our own debt ceiling, allowing our government to put us deeper in debt, do we default on some of our debt, or do we cut deeply into some highly sensitive entitlement programs to try and balance the budget?  QE2 is ending, so the Federal gravy train of free money is coming to an end, right?  To top it off, the market has been floundering around – falling one day and rising the next with no clear direction, reminding us of the ever present danger of a sustained bear market that may push all of our retirements back a few more years.

So what happened?  What should you do?

Well – since everyone’s situation is different, I’ll start off with some assumptions.  In my experience, individuals who are generally successful investors have the following characteristics, so I am going to assume that if you are reading this – then you have met the following criteria.  If not – then disregard anything and everything I say.

1)  You have an investment PHILOSOPHY (i.e., set of guiding beliefs and a repeatable strategy) that you believe in enough to stick to through the long term.  You are aware that events that effect financial markets continually happen and are often unpredictible – therefore, your investment PHILOSOPHY provides you guidance on how you build your investment portfolio, and does not change from day to day.  You are also aware that, contrary to what Wall Street and the mass media (which is in their pocket, by the way) constantly advocate - “buy when the market is going to go up, sell when it is going to go down,” is NOT an investment PHILOSOPHY.  It is an investment FANTASY.

2)  You have carefully measured your risk tolerance.  This means that you know EXACTLY how much your portfolio can drop before you even THINK about making any changes to your overall strategy.

3)  You have carefully designed your portfolio to match your risk tolerance.  In other words – if your risk tolerance is such that you can bear a drop of up to 10% in your portfolio – but no more – then you are aware that the market typically will drop 20% or more every 3.5 years, on average.  Therefore – you have designed your portfolio so that 50% or less of your account would be effected by such a drop.  So- if the overall stock market drops 20% – but only about half of your portfolio is in the stock market – with the rest of the portfolio in cash, CD’s, and perhaps short-term bonds  – then you can reasonably assume that a 10% drop in your portfolio would be a likely outcome of such a correction – and would be bearable.  Keep in mind that during extended recessions or financial crises (such as occurred in 2008) that these parameters are often exceeded.  The 2001 crash, on the other hand – did not effect properly diversified portfolios as much.  Point being – you have structured YOUR portfolio to match YOUR risk tolerance.

Assuming all of the above – then my general advice, assuming that you have some time until you need ALL of your portfolio – would be to do nothing.  Nonthing at all!  Sometimes we have to scream out, “Don’t just DO SOMETHING – Stand there!!”

As far as all the other stuff going on, here is my take on current events.  Granted – I cannot foresee the future – no one can – but from looking into things and trying to keep everything within a historical perspective, here’s what I think is going on.

1)  The market first.  The markets are quite efficient.  With probably more than 100 million investors, analysts, gurus, institutions, etc. all playing in the market and trying to get the most profit for the least amount of risk – the markets as a whole factor in a great deal of information in a short period of time.  I believe that the potential outcomes of both a default by Greece, and the end of QE2 are already factored into the current prices of stocks and bonds – for the most part.  None of this information was kept a secret; markets have known for nearly a year about the end of QE2, and honestly – Greece’s entire economy is about the size of Rhode Island’s.  The threat to the EU is certainly there – but more on a political front than as a potential for a global financial meltdown.  I expect very little response from the overall market to either the end of QE2 or a Greek default.  In fact, I believe that Greece WILL default – but in stages.

2)  Again, on the markets.  The economy is in recovery, but this occurs in stages.  Honestly I don’t understand all the wailing and gnashing of teeth – but I suppose that’s what drives in the revenue to the squawkers in the Media.  Remember those old rocket ships that had multiple stages – first the big rocket engine with all the fire shooting out of it, then a smaller booster rocket, and then another, and finally the little spaceship on the top of the rocket fires its engines and it goes off into outer space or to the moon?  Well, every time the rocket ended one stage, the engine would quit – there would be a pause – and then when the next engine would kick on the rocket would continue on its way.  We didn’t see all the media freaking out at every pause… squawking about how the rocket was going to fall back to the ground just because the first engine quit.  We don’t all jump out of our cars and start worrying that our car is broken everytime we shift from one gear to another… a marathon runner knows he can’t sprint for the full 26 miles… so why all the wailing and chicken littling every time there is a bit of bad news or a new report that wasn’t quite as good as the last one?  Economic recoveries take time.  This was the GREAT RECESSION, after all – over a decade in the making, so it stands to reason that it will likely take a decade or more to fix.

3)  There are a ton of reasons to believe that the stock market – and the economy – will continue to head in the right direction – upward.  First – the general index of leading economic indicators is still positive.  Yes, some of the coincident indicators have slowed down, but generally, they are still well ahead of recession territory.  Secondly, employment is still growing.  Yes, we’ve had a slow month or two of new hiring numbers – but employment is still growing.  And the number of temporary workers that have been hired is up to levels not seen since 2009, and companies typically hire temps before perms.

4)  Economic slowdowns (operational pauses) are absolutely normal after a run-up like we saw since last year.  This “pause” gives corporations time to think about their next moves – expansions, hiring, starting new projects, new marketing campaigns, etc.  Corporations have also been hoarding cash; it is only a matter of time before these corporate reserves are put to work in new growth opportunities and innovations.

5)  Stock buybacks are at an historic high right now.  Based upon P/E ratios, stocks are the cheapest they’ve been in 26 years (this from Bloomberg).  The Bush tax cuts are still in effect, corporate profits are higher than ever – and there is currently approximately 2 trillion dollars sitting in cash and on the sidelines ready to be deployed into the markets.  This all makes for a powder keg of bullish opportunity.

Ultimately, no one can see the future.  But I do believe that we as humans typically worry too much.  Supposedly about 95% of the things that we worry about never happen.  So, in this case – assuming all the above – my suggestion is that we just stand back and see where the markets take us.  I’m betting that place is up significantly from where we are now.

Disclaimers:

This blog post is for informational purposes only.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.