Examining the Retirement Account Shortfall

Posted by on Sep 29, 2014 in Uncategorized | 0 comments

Why aren’t we saving as much as we should?   Provided by Frederick Saide, Ph.D.   We know that qualified retirement plans and IRAs are prime long-range savings vehicles; we use them to accumulate assets and invest for the future. So why aren’t some of us amassing the retirement nest eggs that we should?        Why did retirement account balances decline from 2010-13? Looking at Federal Reserve data, the influential Center for Retirement Research at Boston College (CCR) noticed something unsettling. In that period, the average 401(k)/IRAs balance of a household headed by someone aged 55-64 fell $9,000.1     Wait a minute – haven’t we just witnessed a raging bull market? How could this be?   Moreover, why was the average aggregate 401(k)/IRAs balance of such a household just $111,000 at the end of 2013? These were baby boomers nearing retirement age.1     During 2010-13, the S&P 500 jumped 56%. On that factor alone, the average total retirement account balance for these households should have swelled to at least $187,000 from the 2010 starting point of $120,000.1   That wasn’t the only factor in play, however. The CRR’s Dr. Alicia Munnell – a nationally respected authority on retirement accounts, social security, and retirement saving and a former Clinton Administration official – has pinpointed some reasons for the shortfall.   Leaks, loans, fees, interruptions & foreignness. At MarketWatch, Munnell looked at a mock 60-year-old who could have enrolled in a 401(k) plan in 1982. (That was when those retirement accounts first emerged.)  This hypothetical boomer was plainly average, earning Social Security’s average wage for 31 years while deferring 6% of salary into the account.2   This boomer’s investment allocation? Right down the middle, a 50/50 mix of equities and debt instruments. Throw in a 50% employer match during those 31 years, run the numbers using real-life returns across those 31 years, and our theoretical boomer should have amassed $373,000 by the end of 2013. That is 3.36 times as much as the household average noted by the Fed in its 2013 Survey of Consumer Finances – and for an individual aged 55-64, the average total 401(k)/IRAs balance was even lower at $100,000.2   Even over 31 years of saving, a $273,000 disparity in retirement assets is too large to attribute simply to the lack of an employer match or a portfolio’s allocation. Munnell sees other dynamics promoting the gap.   Do investment fees come into play? Oh, yes. In Munnell’s example, fees are the big culprit. Investment expenses (based on data from the Investment Company Institute) eat up $59,000 of the potential balance over these 31 years. So that takes $373,000 down to $314,000.2   Loans and other withdrawals exert...

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What to tell clients in a low interest-rate environment

Posted by on Sep 29, 2014 in Uncategorized | 0 comments

In a low interest-rate environment, investment strategies remain a guessing game, as does the timetable for when rates will rise. Window on Wall Street.jpgBuy Photo (Photo: FILE PHOTO) CONNECT 2 TWEET LINKEDIN COMMENT EMAIL MORE The economist and occasional humorist Herbert Stein once said, “If something is unsustainable, it tends to stop.” Another way to put it is “if your horse dies, we suggest you dismount.” The Federal Reserve’s announcement that the market should not expect a hike in interest rates any time soon even, while the bond buying program is reduced, led to an immediate spike in the equity markets of more than a quarter of a percentage point. What does this news mean to financial advisers and their clients? It means more tea leaf reading or crystal ball gazing, while trying to anticipate and adjust to the inevitable eventual start of an interest rate-rising cycle. Many advisers are looking at reducing the risk in bond allocations by tightening up the average duration to no more than five years. Here is a problem difficult to solve. Shortening bond durations to three or four years may be too short and gets your client burned. Alternately, no one wants to get caught flat-footed in a rising interest-rate world. Advisers I have spoken with admit playing a guessing game as to when the Fed might decide the economy can absorb an interest-rate hike. They also believe the Reserve wants to avoid shocking or surprising the markets. Some advisers have been learning about how to navigate the low rate-yield world by diversifying through everything except corporates. Most are phasing out high-yield bonds, expecting them to be under selling pressure when rates begin to rise. What this means to the average investor is advisers are trying to achieve modest, consistent and reliable returns because of their firm belief that stocks will continue to outperform. That is an expectation the Fed will support the continuation of asset inflation. And when that changes, it will be gradual and subtle. With so much debt in the system, the Fed continues to prevent consumer inflation and with little pressure, it will probably be some time next year before we see any rise in interest rates. The financial press now suggests we might soon see an increase in the overnight rate (the rate depository institutions charge each other to borrow money or what the Fed charges an institution to borrow money overnight). In speaking with advisers about what they are telling their clients, those who are tactical remain tactical and those who are strategic or historical remain as such. The tactical approach uses timing models and looks at price trends and becomes defensive or aggressive depending on circumstances....

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That First RMD From Your IRA!

Posted by on Sep 15, 2014 in Uncategorized | 0 comments

That First RMD from Your IRA What you need to know.  Provided by Frederick Saide, Ph.D.  When you reach age 70½, the IRS instructs you to start making withdrawals from your Traditional IRA(s). These IRA withdrawals are also called Required Minimum Distributions (RMDs). You will make them annually from now on.1     If you fail to take your annual RMD or take out less than what is required, the IRS will notice. You will not only owe income taxes on the amount not withdrawn, you will owe 50% more. (The 50% penalty can be waived if you can show the IRS that the shortfall resulted from a “reasonable error” instead of negligence.)1 Many IRA owners have questions about the options and rules related to their initial RMDs, so let’s answer a few.     How does the IRS define age 70½? Its definition is pretty straightforward. If your 70th birthday occurs in the first half of a year, you turn 70½ within that calendar year. If your 70th birthday occurs in the second half of a year, you turn 70½ during the subsequent calendar year.2   Your initial RMD has to be taken by April 1 of the year after you turn 70½. All the RMDs you take in subsequent years must be taken by December 31 of each year.3   So, if you turned 70 during the first six months of 2014, you will be 70½ by the end of 2014 and you must take your first RMD by April 1, 2015. If you turn 70 in the second half of 2014, then you will be 70½ in 2015 and you don’t need to take that initial RMD until April 1, 2016.2   Is waiting until April 1 of the following year to take my first RMD a bad idea? The IRS allows you three extra months to take your first RMD, but it isn’t necessarily doing you a favor. Your initial RMD is taxable in the year it is taken. If you postpone it into the following year, then the taxable portions of both your first RMD and your second RMD must be reported as income on your federal tax return for that following year.2    An example: James and his wife Stephanie file jointly, and they earn $73,800 in 2014 (the upper limit of the 15% federal tax bracket). James turns 70½ in 2014, but he decides to put off his first RMD until April 1, 2015. Bad idea: this means that he will have to take two RMDs before 2015 ends. So his taxable income jumps in 2015 as a result of the dual RMDs, and it pushes them into a higher tax bracket for 2015. The lesson:...

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Is there a best time to retire?

Posted by on Sep 10, 2014 in Uncategorized | 0 comments

Wall Street expert Frederick Saide ponders retirement in the age of low interest rates. (Photo: FILE PHOTO )  7CONNECT 5TWEETLINKEDIN 1COMMENTEMAILMORE In a Ground Hog Day moment, a question I am getting all of the time now is whether there is a specific strategy clients can use to retire in today’s low interest-rate environment. My response to this question is a simple no. There is no wonderful time to retire using any strategy, and I do not think that low interest rates should prevent the use of fixed income alternatives any more than other alternatives. The issue is not whether today is a good day to retire, but whether there is sufficient discipline to adopt and implement a fixed income strategy in the current low interest environment. To follow my response, one of my common speaking themes is to explain two diametrically opposed views on retirement income. One is based on probability or the 4 percent rule, while the other is known as the safety-first school. The probability approach looks at the client’s total lifestyle and spending habits and seeks to fund these habits (goals if you will), using a conservative withdrawal rate from a portfolio of well-diversified assets using an aggressive asset allocation. A total returns portfolio perspective drives the allocation. William Bengen developed the 4 percent rule. It says in the worst case, an individual can withdraw 4 percent of their portfolio assets in year one, and add to the 4 percent in each subsequent year, matching the rate of inflation, while sustaining the spending for 30 years. The portfolio allocation varies between 50 to 70 percent in stocks. In February 2013, Bengen repudiated this approach. The alternate school of thought — safety first — takes a different view. Spending needs are understood as essential and discretionary, with the fundamental idea that all essential needs most be meet by assets that are safe and secure. The best way to satisfy this requirement is to use income annuities, deferred income annuities, and by holding bonds to maturity. Once essential needs are funded with dedicated assets, only then should a retiree think about investing in the stock market. Stocks are aimed at meeting discretionary expenses. If all of these expenses cannot be met the result is less catastrophic than failing to meet essential ones. As all essential expenses are met, it is reasonable to take greater risk by searching for more upside understanding that means more downside risk. Sustainable retirement income spending should not be based on what worked in the past using an aggressive portfolio. It should be based on what the current market indicates is possible. Returning to the initial question, should retirees wait for interest rates to rise...

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A Plan to Put the Brakes on the Flah Boys

Posted by on Sep 8, 2014 in Uncategorized | 0 comments

The SEC rolls out a test program. How much impact will it have?  Provided by Frederick Saide, Ph.D.   The Securities & Exchange Commission wants to address the pricing inefficiencies linked with high-speed trading. With that goal in mind, it has ordered the Financial Industry Regulatory Authority (FINRA) and national securities exchanges to implement a trial program that may end up boosting the trading volume of small-cap shares.1   That could heighten the market quality for those stocks. While analysts generally applaud the initiative, critics wonder how significant it will be.    A yearlong experiment is poised to start. Assuming the proposal emerges from a 21-day public comment period unscathed, the SEC will oversee the application of slightly different trading standards to three groups of small-cap stocks during a 12-month window. Each of the three groups will include shares from 400 firms with market caps of $5 billion or less. Each group will be compared against a control group of the same size and composition.1,2   If tick sizes change, will that change trading? Small-cap shares are lightly traded with prices moving a penny at a time. High-frequency traders benefit from these conditions. If the share prices are quoted in nickel increments, will that slow the “flash boys” down?3   That’s what the SEC wants to learn. So as part of the experiment, it will adjust the “tick size” from one cent to five cents for some of these small-cap stocks. In the control group, the tick size will remain at a penny per share. In test group #1, trading would occur at any permissible price increment. Within test group #2, securities will be quoted at and trade in nickel increments (with some exceptions). The tick size would also be widened to a nickel in test group #3, but transactions would also be bound by a “trade-at” requirement, which thwarts price matching by a trading center that doesn’t present the best bid or offer. (That is, it helps to steer trading toward public exchanges.)1,2   A nickel-tick environment might reduce market distortions and the profits that high-speed traders could subtly skim off the small caps.    What flaws may emerge in this pilot program? Some analysts think this experiment could be more stringently conducted. For example, there are a baker’s dozen worth of exceptions in the “trade-at” test group that permit pilot shares to be exchanged outside the five-cent tick size. The SEC has driven the program forward without fielding any input from public corporations. Additionally, some analysts think that publicly stating the length of the pilot program is a mistake; they contend that this will offer creative traders unintended opportunities.3     A small step forward is better than none. Securities...

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